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: Whether cash transfers, made within a corporate group subject to a Central Banking Arrangement, satisfy the criteria for offset presentation under GAAP, and as such, should be reflected in a balance sheet pursuant to subsection 181(3) of the Act.
Position: Whether transactions are required to be reflected in financial statements presented in accordance with GAAP remains a question of fact. However, where cash transfers are reflected in a balance sheet presented in accordance with GAAP, the net amount resulting from the operation of the Central Banking Arrangement will represent the carrying value of that item for Part I.3 purposes.
Reasons: The netting of assets and liabilities is generally permissible in situations where there exists a legal right of offset, and where the relevant parties intend to act upon that right.
May 19, 2009
Calgary TSO - Audit Division Income Tax Rulings Directorate
220 - 4 Ave SE, Rm 130 Financial Sector & Exempt Entities Harry Hays Building Division
Calgary, Alberta Robert Demeter, CGA
T2G 0L1 (613) 952-1505
Attention: Tom Olsen 2009-031331
XXXXXXXXXX
Part I.3 Implications, Central Banking Arrangement
This is in response to your request for interpretation initiated on March 10, 2009. In support of your request, you have provided us with copies of documents entitled "Central Banking Agreement" ("CBA") made between XXXXXXXXXX (the "taxpayer"), XXXXXXXXXX (the "participants"), and the XXXXXXXXXX (the "bank"). You are seeking our views on the appropriate application of Part I.3 to consolidated cash balances of the taxpayer for its taxation year ending XXXXXXXXXX , having regard to the application of this agreement.
The CBA entitles the bank to establish separate "transfer accounts" on behalf of the taxpayer and each participant in consideration of their respective operating accounts with the bank. The CBA also provides for the establishment of a "group account" to be held by the taxpayer. At the end of each day, the bank determines an amount that offsets the actual cash balance in each taxpayer and participant operating account(s). The respective amounts are posted to each transfer account to cancel out each entity's actual cash balance, with an offsetting, aggregate entry posted to the taxpayer group account. In this way, the group account reflects the net, overall cash position of the taxpayer and participants at the end of each day.
Based on the information that you provided, you have suggested that the taxpayer and participants have not recorded the relevant cash transfers made pursuant to the CBA in their financial statements as of the taxation year ended XXXXXXXXXX . You have asked whether these transfers should be considered as part of the determination of relevant amounts for the purposes of Part I.3 of the Income Tax Act ("ITA"). Further, you have asked us to confirm that the relevant amounts for Part I.3 purposes must be determined as of the end of the taxation year of the taxpayer.
Our Comments:
Based on the terms of the CBA, the agreement provides for legally valid transfers of funds held with the bank between the taxpayer and the participants. The parties to the agreement intend to enable the bank, taxpayer and participants to consolidate the cash balances of the corporate group maintained at the bank at the end of each day, such that the taxpayer has full liability for any amount owing by the participants to the bank, and full entitlement to any amount owing by the bank to the participants. The taxpayer's liability to the bank, or the bank's liability to the taxpayer, in respect of the agreement would thus be the aggregate amount of the taxpayer's transfer, group and operating accounts that are subject to the CBA.
In our view, where Generally Accepted Accounting Principles ("GAAP") require entries to record the cash transfers realized in application of the CBA at the end of the taxpayer's taxation year, any asset or liability accounts resulting from group or transfer account balances subject to the CBA may be offset against other cash account balances similarly subject to the CBA. In other words, the net balance of all accounts the taxpayer holds with the bank that are subject to the CBA would be reported as a single, aggregate balance on the balance sheet. We believe that current Section 3861 of the CICA Handbook, which replaced prior Section 3860, may provide authority to allow the offset of asset and liability accounts resulting from cash transfers made pursuant to the CBA for reporting purposes.
It is a longstanding position that an amount must be reflected on the balance sheet, including the notes to the balance sheet, if it is to be included in a corporation's Part I.3 capital. For support in this regard, refer to the Tax Court of Canada decision in PCL Construction Management Inc. 1 and Rulings document E2001-0106227.
Where the balance sheet reflects an amount that was computed by offsetting asset and liability accounts, thereby netting amounts, the CRA's view is that the net amount may be used for capital tax purposes provided that the amount is presented in accordance with GAAP. For further discussion in this regard, see paragraph 8 of the CRA Interpretation Bulletin IT-532.
You have stated that the taxpayer did not record the cash transfers that result from the operation of the CBA as of the end of its taxation year. On this basis, it is not clear to us that the taxpayer's balance sheet has been prepared in accordance with GAAP, as required pursuant to paragraph 181(3)(b) ITA. As such, we recommend that the taxpayer be asked to provide confirmation from their auditors that the balance sheet has, in fact, met this requirement, or to consider appropriate adjustments.
Where adjustments are recorded by the taxpayer to reflect cash transfers pursuant to the CBA, we would expect that an offsetting entry would be presented as an advance to/from each respective participant, as the case may dictate. For example, in the case of a participant's overdraft balance being settled by the taxpayer, we would expect the
taxpayer's balance sheet to reflect an offsetting advance receivable from the participant, which may qualify for inclusion in the taxpayer's investment allowance pursuant to paragraph 181.2(4)(b) ITA. Similarly, where a participant's positive cash balance is transferred to the taxpayer, we would expect the taxpayer's balance sheet to reflect an offsetting indebtedness payable to the participant, which may be included in the taxpayer's capital pursuant to paragraph 181.2(3)(c) ITA.
Similarly, we would expect that the impact of the cash transfers and resulting inter-company advances would be reflected in the balance sheet of each participant, which would impact their respective amounts of taxable capital pursuant to subsection 181.2(2) ITA.
Finally, as noted, we understand that the CBA effectively results in cash transfers being realized between the taxpayer and participants at the end of each day. Therefore, all taxpayer and participant cash balances subject to consolidation under the CBA, as relevant to the determination of amounts for the purposes of Section 181.2 ITA, would be established as of the end of the taxpayer's taxation year, being XXXXXXXXXX .
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
F. Lee Workman
Section Manager
For Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES
1 2000 DTC 2624, Para. 25
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