International Finance Qualifying Activities
Activities for financial institutions: loans and deposits, foreign exchange, securities dealing, managing investments, letters of credit, trade finance
Loans and Deposits
- Loans and deposits in any currency to or from a non-resident (loans must be arm’s length)
- Purchase and sale of debt and equity for non-resident affiliates
- Guaranteeing payment of a debt, if all borrowers are non-residents
- Using a non-resident broker, such as an investment banking affiliate, to underwrite Canadian issues to be sold to non-residents
- Using a non-resident broker, such as an investment bank affiliate, to underwrite non-resident issues to be sold to residents or non-residents
Securities Dealing (financial institutions and registered securities dealers)
- Dealing in securities as principal for the purpose of managing the financial risk of a non-resident
- Dealing in securities as agent for a resident for securities not listed on a Canadian exchange
- Dealing in securities as agent for a non-resident
Foreign Exchange Dealing (financial institutions and corporations whose primary business is foreign exchange)
- This activity can be transacted for, or on behalf of, a resident or non-resident.
Letters of Credit (financial institutions only)
- Issuing and accepting letters of credit or handling documentary collections in respect of a transaction where not more than one party is resident in Canada (arm’s length only)
Trust Business (financial institutions only)
- Trustee of a non-resident trust, guardian of the estate of a non-resident minor, or executor of an estate of non-residents
Managing Currency Risk
- Managing foreign exchange of a non-resident
Managing an Investment Portfolio
- For a non-resident: Managing foreign or Canadian investments
- For a resident: Managing securities issued by a non-resident and not listed on a Canadian exchange
- Accounts are receivable from a non-resident and purchased without recourse
- Collecting trade accounts receivable from non-residents, either affiliates or customers, for a non-resident
- Administrative activities directly related to a financial activity of a non-resident financial business
Case Study #1
- A Parent Co, a Korean company, has located A Bank Co in Vancouver.
- A Bank Co is a wholly owned subsidiary operating as A Parent Co’s North American regional office.
- A Bank Co is a Schedule II Bank in Canada under the Bank Act as administered by the Office of the Superintendent of Financial Institutions.
- A Bank Co is incorporated in Canada with a fixed place of business in British Columbia.
- A Bank Co carries on a number of activities including foreign exchange, letters of credit where only one party is situated in Canada, and providing financial advice to non-residents.
- A Bank Co also provides administrative and back-up information technology services to its affiliates outside Canada (A Sub Co).
- A Bank Co is eligible to apply for registration under the International Business Activity Act (IBAA) since it will be carrying on an “international business”, was incorporated in Canada and has a permanent establishment in British Columbia.
- A Bank Co will be required to become a member of AdvantageBC Society in order to remain registered.
- The provision of financial advice to non-residents and letters of credit where one party to the transaction is a non-resident are qualifying international activities.
- Dealing in foreign exchange for a resident or a non-resident is a qualifying international activity.
- The provision of administrative services directly related to the financial activities of an affiliate is a qualifying international activity.
- The provision of services, equipment and premises as back-up for business continuance of US affiliates is a qualifying international activity.
- A Bank Co is carrying on a qualifying business through a fixed place of business in British Columbia.
- A Bank Co will be eligible to claim a refund of its provincial corporate income taxes paid in respect of its international business. (In 2012, B.C.’s corporate tax rate is 10%.)
Case Study #2
- A Parent Co decides to cover its insurance needs with a wholly owned subsidiary and establishes a captive insurance company, A-Captive Co.
- A Captive Co is located in British Columbia and licensed under the Insurance (Captive Company) Act.
- A Parent Co has affiliates in Canada, as well as globally, which carry on active business in the US, Asia, and Europe.
- A Subsidiary Co’s insure their risk with A-Captive Co, paying $2 million in premiums.
- A Captive Co registers with the Province of British Columbia as an “international business”.
- A Captive Co is entitled to a full refund on provincial tax paid on corporate income on international qualifying business (In 2012, B.C.’s corporate income tax rate is 10%).
- A Captive Co is carrying on a qualifying business: insuring property outside of Canada is a qualifying activity.
- As a registrant in the International Business Activity (IBA) program, A-Captive Co can claim a refund of provincial corporate income taxes paid on income earned from insuring non-resident affiliates. (Income earned on insuring affiliates in Canada would be subject to federal and provincial tax.)
- A Co is required to become a member of AdvantageBC in order to remain registered.
- A Parent Co’s affiliates can generally deduct premiums paid to A-Captive Co as long as there is 1) bona fide transfer of risk; 2) the amount of the premium meets ‘reasonableness’ tests.
- Since A-Captive is located in British Columbia, no Canadian federal excise tax applies.
- The foreign affiliates may be subject to premium taxes; the actual tax will vary based on the location of risk.
- Captive Co can deduct loss reserves according to the rules in the Income Tax Act (Canada)
- Captive Co can flow earnings in the form of dividends to its parent free of tax.