A cash pooling agreement (the “first contract”) stipulates that no interest is payable to a financial institution when the combined bank balance of all three corporations in the group (Corporations A, B and C) is positive. The "second contract" between Corporations A and B provides that where no interest has been charged by the financial institution to Corporation B, respecting its use of its line of credit, because of this cash pooling arrangement, then Corporation B is required to pay to Corporation A the equivalent of the interest that would otherwise have been paid by it to the financial institution but for the first contract. A similar contract (also, the "second contract") exists between Corporation A and Corporation C. Are the second contract amounts paid by Corporation B or C deductible under s. 20(1)(c)? CRA responded:
[I]t does not appear that amounts paid by Corporation B and /or Corporation C to Corporation A would constitute interest. …
… [I]t cannot be considered … that the amounts payable by Corporation B and/or Corporation C under the second contract could represent consideration for the use of an amount of capital (or a right to the amount of capital). …
[In addition t]he contractual relationship between Corporation A and Corporation B, on the one hand, and Corporation A and Corporation C, on the other hand, … does not appear to us to create a lender-borrower relationship between those corporations, so that subparagraph 20(1)(c)(i) cannot be applicable.