| 24(1) | 5-9653 |
| M. Sarazin | |
| (613) 957-2125 |
Attention: 19(1)
July 27, 1990
Dear Sirs:
Re: Subsection 18(6) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter dated February 19, 1990 in which you requested our views on the application of subsection 18(6) of the Act to the following situation.
A group of related companies have combined their banking facilities into a "pooled" bank account for their mutual benefit. Each of the companies will deposit or withdraw funds from the account on a daily basis. The companies with a negative balance will be charged interest and the companies with a positive balance will earn interest. One of the companies is proposing to borrow funds from a related non-resident person and this particular company has sufficient retained earnings and capital to exempt itself from the application of subsection 18(4) of the Act. The loan will be for a determined period of time, at a competitive interest rate without any restrictions on how the funds are to be used. The borrowed funds will be deposited into this "pool" bank account and the funds will be loaned to the related companies which require financing to cover their daily shortfall in funds.
It is your opinion that it would not be possible to trace the flow of the borrowed funds to any particular company once the funds have been pooled. Since there are daily, weekly and monthly changes in companies that owe funds to the "pool" bank account, it could not be shown that the funds had been borrowed on the condition that they should be reloaned to a particular person therefore exempting the companies from the application of the provisions of subsection 18(6) of the Act.
It appears that the interpretation you seek relates to specific taxpayers and therefore we bring to your attention Information Circular 70-6R dated December 18, 1978 issued by Revenue Canada, Taxation and the related Special Release thereto. Interpretations or comments with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Nevertheless, we can offer the following general comments.
Where a particular corporation which is part of a group of corporations negotiates a loan whereby the proceeds are used by the group of corporations and not only the particular corporation, it is our view that the determination of whether the provisions of subsection 18(6) of the Act would apply can only be made once all of the relevant facts are reviewed. The lack however, of an express condition in the original loan agreement that the funds be reloaned to another corporation or group of corporations would not preclude the application of subsection 18(6) of the Act.
Yours truly,
T. Harris for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch