Non-resident Parentco and its subsidiaries, including Canco, have a notional cash pooling arrangement that has been established with an arm’s-length financial institution (the “Bank”) not resident in Canada, under which the Bank has the right to offset overdraft balances of any pool participants against deposit balances of other pool participants without prior notice. In the absence of this set-off ability, the Bank could be required to treat the overdraft balances as non-performing loans for regulatory purposes. Canco has an overdraft balance on its pool account and has overdraft interest charges owing to the Bank. Does the Bank’s right to offset the deposit balances of other pool participants against Canco’s overdraft balance constitute a “specified right” within the meaning of subsection 18(5)? CRA responded:
[T]he deposit balances of the non-resident pool participants would be considered “intermediary debts” for the purposes of subparagraphs 18(6)(c)(i) and 212(3.1)(c)(i), with the result that the back-to-back loan rules would be engaged, provided its other conditions are met. We find support for this position…in the Department of Finance Explanatory Notes…which contain an example that seems…exactly on point.
…[Given] that such notional cash pooling arrangements would be caught under subparagraphs 18(6)(c)(i) and 212(3.1)(c)(i), it is not necessary to consider the possible application of the specified right rules contained in subparagraphs 18(6)(c)(ii) and 212(3.1)(c)(ii).