On October 25, 2011, the Office of the Superintendent of Financial Institutions (OSFI) released notice of Ruling No. 2011-2 (the Ruling) in which OSFI considered whether the undertaking of certain activities in Canada in support of a foreign bank’s1 credit card program would constitute the engagement in, or carrying on, by the Foreign Bank, directly or through a nominee or agent, of business in Canada for the purposes of the Bank Act.  The Act provides that a foreign bank shall not, by itself or through a nominee or an agent,2 engage in or carry on any business in Canada except as permitted by Part XII of the Act.3

In the Ruling, OSFI concluded that the undertaking of certain activities (as described further below) in Canada in support of the Credit Card Program would not, in themselves, cause the Foreign Bank to engage in or carry on business in Canada for the purposes of the Act.  OSFI also found that the provision of certain services related to the Credit Card Program (including services that would facilitate the processing, clearing and settlement of credit card transactions) by a third party Canadian credit card issuer (the Canadian Card Issuer) under an agreement with the Foreign Bank, as well as the Foreign Bank’s occasional customer support visits to Canada, would not in themselves constitute separate profit-making activities for the Foreign Bank, but would merely be more efficient ways for the Foreign Bank to fulfill obligations that it undertook from outside Canada.  OSFI stated that the Ruling was consistent with past rulings, including OSFI’s view regarding the activities of the payment agent in Ruling 2007-01 entitled Business in Canada – Access to the Canadian capital market.4


Background

In this case, the Foreign Bank proposed to extend the Credit Card Program that it offers to its US corporate clients to include the Canadian affiliates of those clients.  The Foreign Bank had no (and would continue to have no) office or other establishment in Canada. The Foreign Bank would, from outside Canada, negotiate, execute and deliver the Credit Card Program agreements.5 In certain cases, representatives of a Canadian affiliate of the US client would participate in Credit Card Program negotiations from Canada, but in all cases, the participating representatives of the Foreign Bank would be outside Canada. Further, the Foreign Bank would not promote the Credit Card Program in Canada, and all of the Foreign Bank’s decisions relating to the Credit Card Program, including credit granting decisions, would be made outside Canada.

Moreover, under a proposed extension of the Credit Card Program, employees of the Canadian affiliates of the US clients would receive Canadian dollar credit cards (the Canadian Cards) produced and issued by the Foreign Bank from outside Canada. To efficiently fulfill its obligations relating to the Canadian Cards, the Foreign Bank proposed to enter into an arrangement with a third party Canadian Card Issuer under which the Canadian Card Issuer would facilitate the processing, clearing and settlement of Canadian Card transactions. As a part of this arrangement, the Foreign Bank would make deposits in accounts with the Canadian Card Issuer to settle its payment obligations arising from the Canadian Card transactions, and would have these same accounts used to receive payments from the Canadian Card holders. The Foreign Bank also contemplated occasional visits to Canada by its representatives to explain the features of the Credit Card Program to employees of the Canadian affiliates of the Foreign Bank’s US clients.

All other services relating to the Credit Card Program, including the production and issuance of account statements based on information received from the Canadian Card Issuer and the reception and processing of requests for Canadian Cards, would be performed outside Canada by the Foreign Bank itself.

Analysis

The Act provides that a Foreign Bank shall not, by itself or through a nominee or an agent, engage in or carry on any business in Canada except as permitted by Part XII of the Act.  In making a determination as to whether a Foreign Bank is engaging in or carrying on business in Canada, OSFI generally assesses the facts and circumstances of each case against factors comparable to those considered by judicial bodies in interpreting the concept of “carrying on business in Canada” under other statutes such as the Income Tax Act, keeping in mind that policy considerations under other statutes may not be the same as under the Act.

In the Ruling, OSFI considered the following factors to be relevant to its determination:

  • Where the elements leading to the formation of the Credit Card Program agreements would take place. The Foreign Bank would, from outside Canada, negotiate, decide to enter into, execute and deliver all Credit Card Program agreements.
  • Where the operations would be carried out.  The Foreign Bank had no, and would continue to have no, office or other establishment in Canada.
  • Where the services would be delivered and paid.  All Credit Card Program services relating to the Canadian affiliates of the US clients of the Foreign Bank would be performed outside Canada, other than:
    • the processing, clearing and settlement services provided to the Foreign Bank by the Canadian Card Issuer in respect of Canadian Card transactions with the use of the Foreign Bank’s funds on deposit with the Canadian Card Issuer;
    • the reception by the Canadian Card Issuer of Canadian Card payments from Canadian affiliates of the U.S. clients of the Foreign Bank; and
    • the occasional visits to Canada by representatives of the Foreign Bank to explain features of the Credit Card Program to employees of the Canadian affiliates of the US clients of the Foreign Bank.
  • Where the Program would be marketed.  The Foreign Bank would only promote the Credit Card Program outside Canada.
  • The relationship between the activities carried on in Canada (including by the Canadian Card Issuer under agreements with the Foreign Bank) and those carried on outside Canada. The activities described in 3(a) and (b) above, which would be carried out by the Canadian Card Issuer, would merely be to assist the Foreign Bank in fulfilling obligations it undertook entirely in the context of its credit card business outside Canada. The activity described in 3(c) above would be a customer support function of an occasional nature related to those obligations.

Conclusion

In the Ruling, OSFI concluded that the undertaking of the activities in Canada described above by the Foreign Bank in support of the Credit Card Program would not cause the Foreign Bank to be deemed to engage in or carry on business in Canada for the purposes of the Act.  The related services of the Canadian Card Issuer in respect of the Credit Card Program, including the provision of deposit and servicing accounts by the Canadian Card Issuer, as well as the Foreign Bank’s occasional customer support visits to Canada, were viewed by OSFI as merely being more efficient ways for the Foreign Bank to fulfill obligations that it undertook from outside Canada.  None of these related services would in themselves constitute separate profit-making activities for the Foreign Bank, and as a consequence OSFI found no need to examine whether the Canadian Card Issuer was acting as the Foreign Bank’s agent or nominee.

Although Rulings are technically restricted to their specific circumstances, the Ruling provides a measure of guidance to Foreign Banks seeking to extend certain programs to Canadian affiliates of their foreign and multinational clients, in particular those clients seeking to rationalize and streamline financial service provider offerings.