9 January 1996 Ministerial Correspondence 952924A - CASH CONCENTRATION ACCOUNTS & PART I.3

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE

CORRESPONDENCE SUMMARY

Principal Issues:

1.Whether the daily transfer of bank account balances (credit or overdraft) from subsidiary corporations to an account of the Parent corporation under a "Mirror accounting system" are recognized as loans and advances for purposes of Part I.3 tax?

2.Whether the intercompany obligations created under a "Mirror accounting system" are eligible for an investment allowance where they are not reflected on the annual financial statements?

Position TAKEN:

1.Yes as long as the transfers are reflected on a corporate balance sheet prepared in accordance with GAAP.

2. No.

Reasons FOR POSITION TAKEN:

1.Subsection 181(3). Bank account transfers between corporations, related or otherwise, are considered as loans and advances. It is noted that it is a question of fact as to whether financial statements are prepared in accordance with GAAP.

2.Subsection 181(3).

 				952924
XXXXXXXXXX             	G. Donell

Attention: XXXXXXXXXX

January 9, 1996

Dear Sir:

Re: Paragraph 181.2(4)(b) and Group Concentration Accounts"

This is in reply to your letter of November 1, 1995 in which you have asked us whether we would consider, for purposes of Part I.3 of the Income Tax Act (the "Act"), the legal obligations created between a parent corporation and its wholly-owned subsidiary corporations as a result of a cash management system referred to, by the Banks, as a mirror accounting system.

It is our understanding that a mirror accounting system is a cash management system designed by the banks to reduce overdraft and other related charges by alleviating the need for monitoring overdraft accounts among a group of related corporations consisting of a Parent corporation and one or more wholly-owned subsidiary corporations in situations where some of the corporations regularly experience overdrafts while others maintain credit balances. Under this system each of the participant corporations would continue to manage their banking functions through separate operating accounts, however at the end of each day the balance of each of those operating accounts (overdraft or credit balance) would be transferred to a single account called a "Group concentration account" legally held in the name of the Parent corporation. Transfers would be indirectly accomplished by an offsetting entry to a mirror account. Therefore the actual balance of each of the operating accounts would be composed of the operating account (which would continue to indicate the balance as if the mirror accounting system did not exist) plus the offsetting balance of the mirror account. The net operating account balance would therefore be nil at the end of each day.

In the Ontario Appeal decision of Arthur Andersen Inc. v. TD Bank, 17 O.R. (3d), 363 daily bank transfers from subsidiary corporations to a concentration account under a mirror accounting system were considered to be legally effective.

Subsection 181(3) of the Act requires that amounts reflected in a corporation's balance sheet in accordance with generally accepted accounting principles ("GAAP"), be used to determine the values of the various components of Part I.3 tax of the Act. We have not previously encountered a "mirror accounting system" and are therefore unclear as to the appropriate accounting treatment to be accorded the intercompany obligations in accordance with GAAP notwithstanding the legal effect of such transactions. It is our view that where the balance sheet of a corporation, prepared in accordance with GAAP, reflect the intercompany obligations that these obligations would be considered as loans and advances for purposes of subsections 181.2(3) and (4) of the Act. Where it is determined, for purposes of GAAP, that the intercompany obligations should not be reflected in the balance sheet then no amount with respect to these obligations would qualify for an investment allowance as a loan or advance pursuant to paragraph 181.2(4)(b).

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch