Words and Phrases - "financial service"

The taxpayer held a Barbados subsidiary (“CCG”) through nine (mostly wholly-owned) Barbados international business corporations (the “IBCs”). The main business activity of CCG was to borrow money from the IBCs and use those funds primarily to for project or corporate finance purposes, either by lending the funds to arm’s length borrowers or acquiring debt obligations of arm’s length third parties and, in both cases, holding those debt obligations to maturity. Thes activities required the taxpayer to be licensed as a trust and finance company under Part III of the Financial Intermediaries Regulatory Act (Barbados), subsequently the Financial Institutions Act (Barbados) (the "FIA").

The taxpayer treated the income of CCG as active business income, so that the interest income earned by the IBCs was treated as active business income under s. 95(2)(a)(ii). The Crown viewed the interest income of CCG as deemed property income under s. 95(2)(l) (thereby giving rise to foreign accrual property income), but conceded that CCG did not have an investment business.

In rejecting the argument of the taxpayer (at para. 80) that the phrase “which for the purpose of this paragraph includes the earning of interest on indebtedness” merely “expands or confirms the type of income from the business of trading or dealing in indebtedness that is included in income from property, but it does not modify the word ‘business’ or expand the meaning of the words ‘trading or dealing in indebtedness,” Owen J concluded (at para. 120) that, having regard to the text and syntax (and contrasts with other provisions), that “the parenthetical modifies the phrase "'trading or dealing in indebtedness’.” Accordingly, the interest income of CCG qualified under the preamble of s. 95(2)(l) as income from trading or dealing in indebtedness (para. 136).

However, the Crown had conceded that CCG came within s. 95(2)(2)(l)(iv), and Owen J went on to find that CCG also came within the exception in s. 95(2)(2)(l)(iii). This partly turned on whether CCG was a "foreign bank," whose Bank Act definition included a foreign-incorporated company that:

(c) engages, directly or indirectly, in the business of providing financial services and employs, to identify or describe its business, a name that includes the word “bank”… [or]

(e) engages, directly or indirectly, in the business of providing financial services and is affiliated with another foreign bank.

As the business of a corporation (CIT Bank, or "CTIB") which was a U.S. subsidiary of the indirect U.S. parent of the taxpayer:

…included the taking of deposits and the provision of credit, this is sufficient to conclude that CITB was using the word bank to identify or describe its business. … (para 147)

Respecting the “financial services requirement in para. (c), he stated (at paras. 149-150):

“[F]inancial services” include services in respect of the management of money, the provision of credit, banking and investment, or any combination of these activities.

… CITB engaged directly or indirectly in the business of providing financial services in the form of the provision of credit and the taking of deposits. Accordingly...CITB was a foreign bank...under paragraph (c)… .

In finding that para. (e) applied to CCG as CITB’s affiliate, Owen J stated (at paras. 153, 156):

…CCG was engaged directly or indirectly in the business of providing financial services in the form of the provision of credit to arm’s length third parties.

… [P]aragraph (e) of the definition of “foreign bank” in the Bank Act does not require CCG to be licensed as a bank under the laws of the foreign country, nor does it require CCG to carry on a banking business as such. …

In finding that the business of CCG as a foreign bank also was “regulated,” as required by s. 95(2)(2)(l)(iii), Owen J stated (at paras. 162, 165):

… [T]he employees of CCG filed monthly and quarterly reports with the Central Bank and regularly met with officials of the Central Bank. As well, CCG was subjected to two audits by the Central Bank and paid an annual fee to the Central Bank to maintain its licence under Part III of the FIA. …

… [T]he regulatory requirements in the FIA were both enforced and satisfied.

Accordingly, the FAPI assessments of the taxpayer should be reversed.