2015-0590061E5 Money Services Business

Principal Issues: (1) Whether an entity which carries on a money services business (MSB) is a Canadian Financial Institution ("CFI") for purposes of Part XVIII of the Act and the Canada-US Intergovernmental Agreement. (2) Will the Part XVIII Guidance provided by the Canada Revenue Agency be updated to further clarify the treatment of entities carrying on a MSB in the context of the IGA and Part XVIII?

Position: (1) Depends, question of fact; (2) No intention at this time

Reasons: (1) Wording in the Act; (2) N/A

Author: Teow, Christina
Section: Subsection 263(1), Canada-US Intergovernmental Agreement

XXXXXXXXXX.                              

                                                    2015-059006
                                                    Christina Teow

September 10, 2015

Dear XXXXXXXXXX:

Re: Whether an Entity is a Canadian Financial Institution as defined in Subsection 263(2) of the Income Tax Act and the Canada-US Intergovernmental Agreement

This is in reply to your letter of October 23, 2014, regarding the definition of “Canadian Financial Institution” in subsection 263(2) of the Income Tax Act (the “Act”).

You have asked whether an entity which carries on a money services business (“MSB”), is a “Canadian Financial Institution” as defined under subsection 263(2) of the Act and the Canada-US Intergovernmental Agreement (the “IGA”) (endnote 1). Canco is a Canadian-based business that provides payment processing services to payors such as peer-to-peer money transfer services and payroll-like bulk payment services. Each account balance is maintained in a non-interest bearing, pooled bank account owned by Canco for the benefit of its customers. Funds may remain in an account with Canco for an indeterminate amount of time. You indicate that Canco has complied with the requisite due diligence and reporting requirements and has registered with the US Internal Revenue Service.

Lastly, you ask if the Canada Revenue Agency (“CRA”) intends to amend the CRA Part XVIII Guidance (the “Guidance”) (endnote 2) to expand current wording regarding MSB-type activities in the context of the definition of “Depository Institution”.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

A financial institution must be a “Canadian financial institution” (“CFI”) under Part XVIII for it to have potential reporting obligations under that Part. Two conditions must be met: it must be a “CFI” under the IGA and it must be a “listed financial institution” as defined in subsection 263(1) of the Act.  Assuming the aforementioned conditions are met, a CFI that complies with the requisite due diligence and reporting requirements and registers with the US Internal Revenue Service in accordance with the IGA generally will be eligible to be treated as a “registered deemed compliant” foreign financial institution for the purposes of US foreign account reporting legislation (commonly referred to as FATCA).

In accordance with subparagraph l(l) of Article 1 of the IGA, a CFI means “(1) any Financial Institution that is resident in Canada, but excluding any branch of such Financial Institution that is located outside Canada, and (2) any branch of a Financial Institution that is not resident in Canada, if such branch is located in Canada”.  In accordance with subparagraph 1(g) of Article 1 of the IGA, the term “Financial Institution” includes a “Depository Institution”. In accordance with subparagraph 1(i) of Article 1 of the IGA, a “Depository Institution” is any entity “that accepts deposits in the ordinary course of banking or similar business.” Paragraph 3.7 of the Guidance provides clarifying language regarding the definition of “Depository Institution” in the context of certain activities characteristic of a MSB, stating the following:

Facilitating money transfers by instructing agents to transmit funds (without financing the transactions) is not seen as the acceptance of a deposit and an entity will not be considered to be engaged in banking or similar business or a depository institution because of this activity alone.

Whether or not a particular entity which carries on a MSB would be considered a Depository Institution as defined in subparagraph 1(i) of Article 1 of the IGA is a question of fact and beyond the scope of this request. At this time, there is no intention of expanding on the aforementioned wording in the Guidance. The definition of “financial institution” in subsection 263(2) of the Act modifies the definition in the IGA by including a second condition, that the entity must be a “listed financial institution” as defined in subsection 263(1). Whether or not a particular MSB is one of the entity types listed requires the analysis of all the facts and circumstances at hand, and accordingly such a determination is beyond the scope of this request.

We trust that our comments will be of assistance.

Yours truly,

G. Moore
For Director
Partnerships and Corporate Financing Section
International Division
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1  Agreement between the Government of the United States of America and the Government of Canada to Improve International Tax Compliance through Enhanced Exchange of Information under the Convention between the United States of America and Canada with Respect to Taxes on Income and Capital signed February 5, 2014 and in force date June 27, 2014

2  Canada Revenue Agency Guidance on enhanced financial accounts information reporting: Part XVIII of the Income Tax Act dated December 22, 2014

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015