2014 Ruling 2013-0505181R3 - 15(2.6) Series of Loans and Repayments

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: Where a consolidated group of corporations participate in a notional cash pooling arrangement, do four short term loans (e.g., four days each) made over the course of a year by a Canco to its non-resident parent corporation constitute a "series of loans and or other transactions and repayments" as referred to in subsection 15(2.6) when each such loan is of an amount equal to the amount Canco has on deposit with an arm's length bank as part of the notional cash pooling at the time the loan is made and the loans are made for the purpose of satisfying financial reporting requirements that enable the non-resident parent's consolidated group to report the notional cash pooling arrangement on its consolidated balance sheet on a net basis?

Position: No.

Reasons: The "series of loans ... and repayments" referred to in subsection 15(2.6) is intended to prevent, by temporary repayment, a deferral of the recognition as income of amounts that are advanced as loans, rather than paid to the borrower as dividends, fees, bonuses or other amounts that would be included in the borrower's income. The four 4-day loans made in this case are not for the purpose of deferring the recognition of the loaned amounts as income, and the repayment of each loan in this case is not temporary.

XXXXXXXXXX
2013-050518

Attention: XXXXXXXXXX

XXXXXXXXXX, 2014

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided to us in your emails and phone calls, the last of which was dated XXXXXXXXXX.

This letter is based solely on the Facts, Proposed Transactions and Additional Information described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information, and any references thereto are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of the above-noted taxpayer none of the issues involved in this advance income tax ruling are:

(i) in an earlier tax return of the above-noted taxpayer or of a related person;

(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayer or of a related person;

(iii) under objection by the above-noted taxpayer or by a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") or the Income Tax Regulations (the "Regulations").

Our understanding of the Facts, Proposed Transactions, Purpose of the Proposed Transactions and Additional Information is as follows:

Definitions

In this letter, unless otherwise stated, the following terms have the meaning specified below:

a) "ASC" means Accounting Standards Codification;

b) "Auditors" means XXXXXXXXXX;

c) "Canco" means XXXXXXXXXX, a corporation resident in Canada for purposes of the Act;

d) "GAAP" means Generally Accepted Accounting Principles;

e) "Group" means the related group of corporations comprised of Parentco, Canco and the majority of Parentco's non-resident subsidiary corporations;

f) "Excess Cash" means, at any particular time, the cash of a Member in excess of its working capital and operating cash flow requirements at that time, as determined by a local finance team reporting to management of the particular Member;

g) "foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

h) "IAS" means International Accounting Standards;

i) "IFRS" means International Financial Reporting Standards;

j) "Loans" means the loans made by Canco to Parentco as described in the Proposed Transactions;

k) "Member" means a corporation that is a member of the Group;

l) "Non-resident Bank" means XXXXXXXXXX;

m) "Notional Cash Pool" means the Group's multi-currency account structure with Non-resident Bank described in 6 to 8 below;

n) "Parentco" means XXXXXXXXXX, a corporation that is resident in XXXXXXXXXX for the purposes of the Act;

o) "Proposed Transactions" means the transactions described in 14 to 18 below;

p) "Pubco" means XXXXXXXXXX, a XXXXXXXXXX public company;

q) "related group" has the meaning assigned by subsection 251(4) of the Act; and

r) XXXXXXXXXX.

Facts

1. Canco was incorporated on XXXXXXXXXX and has a taxation year end of XXXXXXXXXX. Canco's mailing address is XXXXXXXXXX. Canco files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office at XXXXXXXXXX. Canco's Business Number is XXXXXXXXXX.

2. Canco carries on an active business XXXXXXXXXX in Canada. Canco maintains a bank account with a local Canadian bank for the retention of its working capital and operating cash flow requirements. Canco generally realizes Excess Cash from its operations which are deposited in its account with Non-resident Bank as described in 6 to 8 below.

3. Parentco, a non-resident of Canada for the purposes of the Act whose ultimate shareholder is Pubco another non-resident of Canada for the purposes of the Act, owns all the issued and outstanding shares of Canco. Parentco's other subsidiary corporations forming the Group are all non-residents of Canada. No Members are foreign affiliates of Canco and Canco has no subsidiaries.

4. Parentco and a number of the non-resident Members have cash shortages from their operations which are funded by deficits in their accounts with Non-resident Bank as described in 6 to 8 below.

5. Non-resident Bank deals at arm's length with the Members.

6. To manage the global cash flow requirements of the Group and to reduce aggregate interest costs, the Group maintains a multi-currency account structure with Non-resident Bank (the "Notional Cash Pool"). The Notional Cash Pool is facilitated by each Member having a bank account with Non-resident Bank. Excess Cash, if any, of each Member is determined regularly and is transferred from the Member's local bank account to their account with Non-resident Bank. The reverse is also true in that, if a Member of the Notional Cash Pool has working capital needs, funds from that Member's account with Non-resident Bank are transferred to their local bank account. The Members' account balances with Non-resident Bank, therefore, fluctuate on a regular basis and may be in a deficit position at any particular time.

7. The ownership of each Members' account balance with Non-resident Bank, whether Excess Cash (i.e., asset) or cash shortage (i.e., liability), legally remains with that Member at all times. No cash is swept or loaned to Parentco or any other Member as the result of the Notional Cash Pool and no cross-guarantees are utilized.

8. Each Member earns and receives interest income from (or incurs and pays interest expense to) Non-resident Bank based on their respective account balance in the Notional Cash Pool. However, interest income (or expense) is calculated by Non-resident Bank on a notional basis from the net cash position of all the accounts in the Notional Cash Pool. The net position is used to apply a single interest rate to all accounts regardless of whether the account is long or short cash. The Non-resident Bank provides favourable rates based on this full interest compensation mechanism.

9. Parentco's consolidated financial statements, in conformity with the financial accounting standards of its country of residence, are prepared in accordance with IFRS. For the purposes of IFRS, Parentco's ability to report the Group's net cash position of the accounts in the Notional Cash Pool, rather than reporting the aggregate of the Members' accounts reflecting Excess Cash as an asset and the aggregate of the Members' accounts reflecting a deficit as a liability, is permitted by IAS 32 paragraph 42, which states:

"A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

(a) currently has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity shall not offset the transferred asset and the associated liability (see IAS 39, paragraph 36)."

10. Pubco's consolidated financial statements are prepared in accordance with XXXXXXXXXX. For the purposes of XXXXXXXXXX, Pubco's ability to report the Group's net cash position of the accounts in the Notional Cash Pool, rather than reporting the aggregate of the Members' accounts reflecting Excess Cash as an asset and the aggregate of the Members' accounts reflecting a deficit as a liability, is permitted by ASC 210-20-45-2 (revised 01-Jul-2009), which states:

"A debtor having a valid right of setoff may offset the related asset and liability and report the net amount."

More specifically, ASC 210-20-45-1 provides that:

"A right of setoff exists when all of the following conditions are met:

(a) Each of two parties owes the other determinable amounts.

(b) The reporting party has the right to set off the amount owed with the amount owed by the other party.

(c) The reporting party intends to set off.

(d) The right of set off is enforceable at law."

Furthermore, in connection with (c) above, ASC 210-20-45-5 states that:

"Acknowledgment of the intent to set off by the reporting party and, if applicable, demonstration of the execution of the setoff in similar situations meet the criterion of intent."

11. Canco made several short-term loans to Parentco during XXXXXXXXXX.  Each short-term loan made was of an amount equal to Canco's Excess Cash on deposit with Non-resident Bank on each date such loan was entered into. For example, Canco made a loan to Parentco on XXXXXXXXXX in the amount of $XXXXXXXXXX which was repaid in full XXXXXXXXXX days later on XXXXXXXXXX, together with interest thereon.

12. The non-resident Members made/received several short-terms loans to/from Parentco during XXXXXXXXXX. Each short-term loan made/received was of an amount equal to the non-resident Member's Excess Cash on deposit, or deficit in their account, as the case may be, with Non-resident Bank on each date such loan was entered into. For example, on XXXXXXXXXX:

(a) those non-resident Members having Excess Cash on deposit with Non-resident Bank, each made a loan to Parentco of an amount equal to their Excess Cash on deposit with Non-resident Bank at that time and each loan was repaid in full XXXXXXXXXX days later on XXXXXXXXXX; and

(b) those non-resident Members having a deficit in their account with Non-resident Bank, each received a loan from Parentco of an amount equal to the deficit in their account with Non-resident Bank at that time and each loan was repaid in full XXXXXXXXXX days later on XXXXXXXXXX.

13. Canco has been advised by the Auditors that the Notional Cash Pool satisfies the requirements of IAS 42.32(a) and ASC 210-20-45-1(a), (b) and (d), and that the short-term loans described in 11 and 12 above satisfy the requirement of IAS 42.32(b) and ASC 210-20-45-1(c), thereby allowing Parentco's and Pubco's consolidated financial statements to report the Group's net cash position of all the accounts in the Notional Cash Pool as a single entry.

Proposed Transactions

14. On or about XXXXXXXXXX, Canco will make a loan to Parentco of an amount equal to its Excess Cash on deposit with Non-resident Bank on each such date. Each of the Loans will be unsecured and to be repaid at the end of four (4) days, together with interest thereon.

15. Parentco will repay each of the Loans to Canco on or before its due date.

16. Each of the Loans will be documented by a deal confirmation communication produced automatically by Parentco's treasury management system detailing the parties involved (Canco and Parentco), the 4-day term (settlement and repayment dates), the interest rate, and the amount of the Loan. In each case, interest will be calculated at the applicable Interbank Offered Rate as published on the Bloomberg-terminals used by Parentco's treasury department.

17. Each of the Loans will be executed by Canco approving a transfer of the loaned amount to Parentco resulting in the loaned amount being drawn down from Canco's account with Non-resident Bank and being deposited to Parentco's account with Non-resident Bank.

18. Each of the Loans' repayments will be executed by Parentco approving a transfer of the loaned amount, together with interest thereon, to Canco resulting in the loaned amount, together with interest thereon, being drawn down from Parentco's account with Non-resident Bank and being deposited to Canco's account with Non-resident Bank.

Additional Information

19. On or about XXXXXXXXXX, Parentco will:

(a) receive loans from a number of non-resident Members of amounts equal to their Excess Cash on deposit with Non-resident Bank on each such date; and

(b) make loans to a number of non-resident Members of amounts equal to the deficits in their accounts with Non-resident Bank on each such date.

Each of these loans will be unsecured and to be repaid at the end of four (4) days, together with interest thereon.

20. The Members' accounts with Non-resident Bank will remain active at all times and, therefore, the account balances may fluctuate during the four (4) day period described in 14 and 19 above.

Purpose of Proposed Transactions

21. Parentco and Pubco are of the view that a company reporting a net balance of cash and cash equivalents is regarded by the readers of financial statements as a demonstration of the company's competence in the management of its funds. Whereas, reporting both assets and liabilities implies weak financial management. For this reason, Parentco and Pubco are of the view that off-setting assets and liabilities (where applicable) has a positive impact on how shareholders and financial institutions value a company.

22. The Proposed Transactions will be undertaken for the purpose of permitting Parentco and Pubco to prepare consolidated financial statements in accordance with IFRS and XXXXXXXXXX, respectively, on a basis that reports the Group's net cash position of the accounts in the Notional Cash Pool.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Purpose of the Proposed Transactions and Additional Information, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

The making of each of the Loans together with the repayment of each of the Loans will not, in and of themselves, be considered a series of loans or other transactions and repayments for the purposes of subsection 15(2.6) of the Act. As a consequence thereof, subsection 15(2) of the Act would not, if Part I of the Act were applicable to Parentco, apply to the Loans and paragraph 214(3)(a) of the Act will not apply to deem amounts equal to the amounts of any of the Loans to be paid to Parentco as a dividend.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Proposed Transactions are completed prior to XXXXXXXXXX.

Comment

Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions and Additional Information described herein other than that specifically described in the ruling given above.

Without limiting the generality of the foregoing, nothing in this ruling letter should be construed as implying that the CRA is giving an opinion that the deposit by Canco with the Non-resident Bank as part of the Notional Cash Pool is not subject to subsection 17(2) of the Act or that subsection 245(2) of the Act would not apply to redetermine the tax consequences thereof.

With regards to the application of subsection 245(2) of the Act, it is not clear that the ongoing deposits by Canco with the Non-resident Bank coupled with the ongoing deficits of Parentco and a number of the non-resident Members in their accounts with Non-resident Bank do not result directly or indirectly in an abuse having regard to the provisions of the Act read as a whole, more specifically, having regard to subsection 15(2) and paragraph 214(3)(a) of the Act. To this end, a copy of this letter is being sent to the Aggressive Tax Planning Division of the Compliance Programs Branch of the CRA.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate