CRA discusses when a cash pooling arrangement may be a notifiable transaction

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 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.

On the other hand, 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 pooling arrangement, it would not be a notifiable transaction: as there was no financing of the taxpayer, different provisions than in the designated transaction would be potentially engaged, e.g., s. 15(2.16) or (2.17).

Furthermore, even if the Canadian taxpayer was participating as a debtor in the arrangement, it would not be a notifiable transaction if it was reporting on the basis of any relevant application of s. 18(4) and it withheld and remitted tax on the basis of any application of the back-to-back rules, so that no reduction in withholding tax rates was achieved.

CRA also indicated that since the cash pooling constituted a series of transactions, if it constituted a notifiable transaction:

• the reporting obligation would arise on the first transaction to occur after November 1, 2023, e.g., an interest payment; and
• the filing in respect of one element of the series would satisfy the filing requirement in respect of the whole series, provided that the filing describes the nature of the subsequent transactions, and whether they are recurring or not.

Whether there was a requirement for a professional services firm to report if the cash pooling arrangement was a notifiable transaction but it was not involved in the set-up of the arrangement and only undertook compliance services based on debt, interest and withholding figures provided by the taxpayer would turn on the reporting position of the taxpayer (for example, is it filing on the basis of the application of s. 18(4), and is there withholding and remitting as if the financing had come directly from NR1?) and on whether the firm had a professional obligation to validate or advise the client on the actual filing position or on the application of the Act to the client’s cash pooling arrangement.

Neal Armstrong. Summaries of 15 May 2024 IFA Roundtable, Q.3 under s. 237.4(2), s. 237.4(4) and s. 237.4(1) - advisor.