Principal Issues: (1) Whether subsection 15(2) applies when a Canadian corporation is owned an amount from a related foreign corporation who acts as a financing corporation for the corporate group. (2) If so, would CRA accept, in the context of a cash pooling arrangement, that a corporation uses a monthly average for its balance of amounts receivable/payable and apply the FIFO method for the purpose of subsections 15(2) and (2.6)?
Position: (1) and (2) question of fact.
Reasons: (1) There is no administrative policy that would prevent the CRA from applying subsection 15(2) to a cash pooling arrangement. (2) In the context of a cash pooling arrangement, the CRA applies the same principles than with any other types of transactions that could be subject to subsection 15(2).
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 19 Centralized cash management
Centralized cash management (cash pooling) is now one of the best practices for multinational enterprises.
The CRA has already pronounced in the past that subsection 15(2) applies to amounts receivable by a Canadian corporation from a related foreign corporation that acts as a financing corporation for the global group.
The number of transactions between Canadian corporations and related foreign corporations acting as a finance corporation has grown tremendously in recent years. As a result, it is now common practice in large multinationals for balances owing or receivable by the Canadian entity to vary by several million dollars each day or several times a week, more or less, depending on the flow of monetary transactions between them.
It becomes difficult in practice to track each of these transactions to determine whether an amount has been repaid for the purposes of subsection 15(2.6).
Questions to the CRA
(a) Taking into account the scope of the practice of centralized cash management for large multinationals, is CRA still of the view that s. 15(2) applies where a Canadian corporation has a balance receivable from a related foreign corporation which performs the role of the financing corporation for the global group?
(b) If affirmative, would CRA be prepared to accept a corporation using a monthly accounting of balances receivable or payable in the context of centralized cash management, and using a concept of first-in first-out (the “FIFO” method) in applying ss. 15(2) and 2.6)?
CRA Response to Q.19(a)
Centralized cash management arrangements can take on diverse forms and be structured in numerous manners. Each of these arrangements creates specific legal relations. It is in the light of the particular facts and documents of each case, that it is possible to establish the tax consequences arising from such an arrangement.
Having said that, the CRA is not presently in a position, as an administrative matter, to set aside the application of subsection 15(2) in a file involving centralized cash management where the conditions of that provision are otherwise satisfied.
CRA Response to Q.19(b)
Subsection 15(2.6) constitutes one of the exceptions to the application of subsection 15(2). Subsection 15(2.6) provides that subsection 15(2) does not apply to loans or indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which they were made or arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments.
It is a question of fact to determine if a repayment was or was not made as part of a series of loans or other transactions and repayments. In this regard, we refer you to the commentary already made on this subject by the CRA, especially in Interpretation Bulletin IT-119R4 [f.n. Canada Revenue Agency, Interpretation Bulletin IT-119R4 (archived), Debts of Shareholders and Certain Persons Connected With Shareholders, August 7, 1998.] In the past, the CRA has already indicated that certain centralized cash management arrangements could involve the existence of a series of loans or other transactions and repayments.
That being said, in the presence of a centralized cash management arrangement, the CRA currently applies the same principles and methods as those which are usually utilized when the application of subsections 15(2) and (2.6) arises in a file.
Furthermore, the CRA will generally consider that a repayment of a loan or indebtedness for the purposes of subsection 15(2.6) can have taken place by virtue of a set-off of two debts where for legal purposes such set-off results in the extinguishing of the debtor’s obligation. In such a case, all the circumstances of the case must be analyzed and the intentions of the parties respecting set-off must be clear and unequivocal.
In addition, in the context of subsections 15(2) and (2.6), unless the facts indicate otherwise, the CRA generally accepts that repayments are applied to loans or indebtedness utilizing the “first in first out” method. Furthermore, the CRA has already indicated that if the the nature or terms of each loan are different, it is most appropriate for the debtor to indicate which loan or indebtedness is repaid by the repayment.
In finishing, it is of interest to observe that, in certain circumstances, the taxpayer’s making of an election provided by subsection 15(2.11) could constitute an alternative to the application of subsection 15(2).
Urszula Chalupa
(613) 670-9015
October 9, 2015
2015-059562
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-119R4 (archived), Debts of Shareholders and Certain Persons Connected With Shareholders, August 7, 1998.