The CRA list of notifiable transactions includes a non-resident (NR1) entering into an arrangement with a non-resident (NR2) to indirectly provide financing to the taxpayer who would file on the basis that it was not subject to the thin capitalization rules; or on the basis that the interest it pays under the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.
A Canadian taxpayer is a participant in a global cash pooling arrangement (the “Cash PA”) involving an arm’s length non-resident intermediary. The other participants in the Cash PA are non-resident entities with which the Canadian taxpayer does not deal at arm’s length, and the total amounts borrowed by participants cannot exceed total amounts deposited by other participants.
If the Canadian taxpayer is a debtor under the Cash PA, is the Cash PA a “notifiable transaction” if at least one non-resident participant resides in a jurisdiction that is subject to a higher Canadian withholding tax rate on interest than the rate applicable on interest paid by the Canadian taxpayer to the intermediary?
- After noting that the definition of “substantially similar” in s. 237.4(2)(a) encompasses situations that are either factually similar, or informed by the same tax strategy and can be expected to yield similar tax consequences, CRA indicated that although the designated transaction does not specifically describe a cash pooling arrangement, such a cash-pooling arrangement would be substantially similar to a designated transaction.
Would the Cash PA be a “notifiable transaction” if it is reasonably expected, at the time that the Canadian taxpayer first becomes a participant, that it would only be a creditor under the arrangement?
- CRA indicated that this would not be a notifiable transaction: as there was no financing of the taxpayer, different provisions would be potentially engaged, e.g., s. 15(2.16) or (2.17).
Do the answers depend on whether the Cash PA is physical or notional?
- CRA indicated that with a physical arrangement, the transfer of cash would be in the form of loans, which might attract the application of the s. 18(4) or 212(1) withholding provisions; and a notional cash pooling arrangement might attract the application of the back-to-back loan rules in s.18(6) or 212(3.1).
Assuming the Canadian taxpayer is expected to solely be a debtor under the Cash PA, would the Cash PA be considered a “notifiable transaction” if the Canadian taxpayer withholds (and undertakes the relevant compliance) at the rate of withholding tax that would be applicable as a result of the application of the back-to-back loan rules in subsection 212(3.2) (so that no reduction in withholding tax rates is expected to be achieved)?
- CRA first assumed that s. 18(4) was taken into account, so that there would not be a notifiable transaction on that basis. Now, turning to Part XIII, the circumstances were different from the designated transaction, and this would not be a notifiable transaction on that basis since the taxpayer was already withholding and remitting.