Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: If a Canadian subsidiary enters into a cash pooling arrangement with its non-resident parent corporation, will it have an income inclusion under section 15?
Position: Likely.
Reasons: There is no basis for distinguishing this situation from others where loans are made to shareholders.
XXXXXXXXXX 2003-003391
T. Cook
February 17, 2004
Dear XXXXXXXXXX:
Re: Interpretation Request
We are writing in reply to your letter of July 31, 2003, in which you requested our opinion regarding the application of subsection 15(2) of the Income Tax Act (the "Act") in the following circumstances:
? Canco is a corporation resident in Canada for purposes of the Act and is part of a related group of corporations (the "Group").
? Parentco owns all the issued and outstanding shares of Canco. Parentco is a non-resident of Canada for purposes of the Act.
? Parentco operates a cash pooling arrangement to manage the global cash flow requirements of the Group. Parentco also coordinates global financing requirements and operates a central treasury for the Group. It is anticipated that Canco will participate in the cash pooling arrangement.
? Under the cash pooling arrangement, Canco would borrow from Parentco to meet its working capital requirements and for asset acquisitions. These borrowings would generally be short term (e.g., six months) and refinanced as needed on maturity. Canco would pay interest on these borrowings and withhold any Part XIII tax required.
? Canco would also lend funds to Parentco from time to time when Canco has excess cash. This would be temporary in nature (daily or weekly) and Canco would receive interest on any amount lent.
? It is anticipated that under the cash pooling arrangement, Canco would be a net borrower from Parentco at all times. In its financial statements, Canco would only report the net amount owing to Parentco.
Your view is that subsection 15(2) is not meant to deal with the situation described above, and that subsection 15(2) would not apply, notwithstanding that amounts would be advanced to the non-resident shareholder from time to time. Should subsection 15(2) apply, you accept that there would be a series of loans or other transactions and repayments for purposes of subsection 15(2.6) of the Act; we do, however, have some comments on the application of subsection 15(2.6) in this context.
Your letter describes factual situations involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in respect of particular circumstances other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.
Subsection 15(2) provides, in part, that:
Where a person (other than a corporation resident in Canada) ... is
(a) a shareholder of a particular corporation,
...
and the person ... has in a taxation year received a loan from or has become indebted to the particular corporation ..., the amount of the loan or indebtedness is included in computing the income for the year of the person[.]
As your letter recognizes, Parentco is both a shareholder of Canco and a person other than a corporation resident in Canada. Under the cash pooling arrangement, it is clearly expected that Parentco would receive loans from Canco from time to time. Therefore, subsection 15(2) would apply on its plain wording to a cash pooling arrangement such as the one described above.
You have raised two points that suggest to you that a cash pooling arrangement of this nature would be outside the contemplation of subsection 15(2). Firstly, at all times Canco would be a net borrower and as such Parentco would never be indebted to Canco in the sense required by subsection 15(2). This is evidenced by the fact that only the net amount owing would be shown in Canco's financial statements. Secondly, you have highlighted the commercial nature of this arrangement - it is intended to facilitate the effective management of the Group's global cash flows.
It is our view that subsection 15(2) would apply to a cash pooling arrangement such as the one described above, even after considering these two points. With respect to your first point, we recognize that there is case law that has used a "netting" approach in applying subsection 15(1) of the Act in certain situations (see Youngman v. The Queen (1990), 90 DTC 6322 (F.C.A.), and Donovan v. The Queen (1996), 96 DTC 6085 (F.C.A.)). Subsection 15(1), however, materially differs from subsection 15(2). Subsection 15(1) requires the conferral of a "benefit" on a shareholder while subsection 15(2) only requires the existence of a debt or loan owed by a shareholder. The term "benefit" invites the use of netting in certain circumstances (e.g., if a corporation sells property to a shareholder, the "benefit" would likely be the difference between the property's value and the amount paid by the shareholder). No similar concept is implicit in subsection 15(2) - it just requires the existence of a debt or loan, the amount of which is included in the shareholder's income unless it meets certain condition (e.g., it is repaid within a specified period).
Our review of the jurisprudence on subsection 15(2) (and its predecessor, subsection 8(2) of the Income Tax Act, R.S.C. 1952) suggests that the better view is that debts between a shareholder and a particular corporation do not generally offset for purposes of determining either:
? whether a shareholder has "become indebted to" or "received a loan from" a particular corporation in the first place; or
? whether that indebtedness or loan has been repaid.
See for example, Johnston's Estate v. M.N.R. (1964), 64 DTC 204 (T.A.B.), Bass v. M.N.R., [1967] Tax A.B.C. 6, and New v. M.N.R. (1975), 75 DTC 206 (T.R.B.). These cases support the proposition that in order for a debt or loan to have been repaid for purposes of section 15 there must have been a genuine repayment of the loan or indebtedness in the form of money or money's worth. The same rationale would have to apply in determining whether there is a debt or loan in the first place. In the type of cash pooling arrangement you have outlined, the loans to Canco would not appear to represent a genuine repayment of the loans from Canco as required by subsection 15(2). On Canco's financial statements the amounts owing to and from Parentco would be netted, but our understanding is that this netting would not result in the actual discharge of any obligation.
Similarly, the netting you have referred to can be distinguished from the types of repayment accepted by the Tax Court in Uphill Holdings v. M.N.R. (1992), 93 DTC 148 (T.C.C.) and Attis v. M.N.R. (1992), 92 DTC 1128 (T.C.C.). In those cases, payments of bonuses and dividends to shareholders were accepted as valid loan repayments. Finally, as a matter of statutory interpretation, subsections 15(2.2) to (2.6) of the Act contain a number of specific exclusions to subsection 15(2), but none of those exclusions suggest that netting debts is a proper basis for excluding a particular loan or debt from the ambit of subsection 15(2).
This view of subsection 15(2) is consistent with our position on section 80.4 benefits as set out in paragraph 14 of IT-421R2 Benefits to individuals, corporations and shareholders from loans or debts:
Where a shareholder or employee owes money to a corporation, a benefit may be calculated during the time the debt is outstanding. Generally, no netting or offsetting of any accounts "due to" or "due from" the shareholder or employee will be deemed or considered to have taken place so as to eliminate the calculation of a benefit during a particular period. It will only be after the actual cancellation of the liability by a payment or by an adjustment in the accounting records that such amount will no longer be subject to the calculation of a benefit under section 80.4.
With regard to your second point, we simply note that the debt or loan being of a non-commercial nature is not a prerequisite for the application of subsection 15(2). In Fontana v. M.N.R. (1981), 81 DTC 803 (T.C.C.), the Tax Court specifically rejected the notion that benefit or advantage to the shareholder is a prerequisite for the application of subsection 15(2). Therefore, it is our view that the loans made by Parentco to Canco have no role in determining whether Parentco has "become indebted to" or "received a loan from" Canco for purposes of subsection 15(2), or whether a particular loan or indebtedness has been repaid for purposes of subsection 15(2.6).
A separate issue is whether the loans and repayments made between Parentco and Canco under the cash pooling arrangement would constitute a "series of loans or other transactions and repayments" for purposes of subsection 15(2.6). Since the loans from Parentco would not offset any loans from Canco for purposes of determining the application of subsections 15(2) and 15(2.6), it is similarly our view that the loans from and repayments to Parentco could not be considered in determining whether there is a "series of loans or other transactions and repayments" for purposes of subsection 15(2.6). The loans to and repayments from Parentco would stand alone in determining whether such a series exists.
You have taken the view that if subsection 15(2) applies, there would also be a series of loans or other transactions and repayments for purposes of subsection 15(2.6) because the cash pooling arrangement specifically contemplates that there would be loans and repayments on an ongoing basis. It is not entirely clear whether you are just referring to the loans to and repayments from Parentco, or to all transactions carried out pursuant to the cash pooling arrangement. In any event, the application of subsection 15(2.6) will depend on the specific facts and for purposes of this letter we have accepted your characterization.
Assuming this characterization is correct, Canco and Parentco may be able to avail themselves of the administrative position with respect to shareholder loan accounts set out in paragraphs 34 to 36 of Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected with Shareholders. If, in the context of all the relevant factors and again assuming your characterization is correct, the repayments by Parentco of the loans from Canco are bona fide, the income inclusion for Parentco would be based on the amount outstanding to Canco at the end of Canco's taxation year (see paragraph 34 of IT-119R4). The example in paragraph 36 of IT-119R4 makes it clear that bona fide repayments of a shareholder loan account can be made by means of other than salaries, bonuses and dividends. Given the importance of audit protocols in situations such as the one you have set out, you may wish to contact the responsible local Tax Services Office to see if they can offer any more specific guidance.
We trust that these comments will assist you.
Yours truly,
Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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