Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
whether non-interest bearing loans made by a foreign affiliate that is a regulated foreign bank to its subsidiaries as a way of financing them other than by way of capital are considered assets used in its banking business for the purpose of making the determination of whether the banking business is conducted principally with persons the affiliate does not deal at arm's length for the purposes of the investment business definition.
Position:
No
Reasons:
Such loans would generally be viewed as having been made for the purpose of enhancing the dividend potential from holding the shares of the subsidiaries. The dividends from such shares constitute income from property. Therefore the loans would not be viewed as assets of the banking business.
TAX EXECUTIVES INSTITUTE
1996 ANNUAL CANADIAN TAX CONFERENCE
FOREIGN AFFILIATES - INVESTMENT BUSINESS - ARM'S LENGTH TEST
In order to qualify for exclusion from the definition of "investment business" under paragraphs (a) and (b) of the definition in subsection 95(1), the business in question must, inter alia, not be a business "conducted principally with persons with whom the affiliate does not deal at arm's length".
Consider a case where a foreign affiliate which is a regulated foreign bank carries on a business in the course of which it makes interest bearing loans to arm's length non-residents (the Banking Business). The affiliate also holds shares of other regulated foreign banks operating in the same or other foreign jurisdictions. In connection with this holding company function, the foreign affiliate may make non-interest bearing loans (the "NAL Loans") to its banking subsidiaries in order to capitalize them with other than with equity. Would the NAL Loans be considered assets used in the non-arm's length portion of the affiliate's Banking Business in making the determination of whether that business is conducted principally with persons with whom the affiliate does not deal at arm's length?
DEPARTMENT'S POSITION
One of the factors relevant in making the determination of whether a particular business of a foreign affiliate is conducted principally with persons with whom the affiliate does not deal at arm's length, is what proportion the total assets of that business are employed in the part of the business conducted with such persons. However, only assets used in the business under consideration would be enter into this calculation.
In the circumstances described above, the dividend income of the affiliate from shares held by the affiliate in subsidiary companies would be considered income from property. As the NAL Loans are made interest free to the subsidiaries in order to capitalize them with other than equity, they would appear to be in place to indirectly enhance such income from property. Accordingly, the NAL Loans would generally not be viewed as assets of the foreign affiliate used in carrying on its Banking Business and would not be relevant in the determination of whether such Banking Business was conducted principally with persons with whom the affiliate does not deal at arm's length.
Prepared by: Olli Laurikainen
Date: April 24, 1996
File: 961375
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