12 January 1996 Internal T.I. 9600016 - PART I.3 - CASH CONCENTRATION ACCOUNTS

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:

The effect of Cash Concentration Accounts on Part I.3 tax where non-resident corporations are involved.

Position TAKEN:

Cash concentration accounts represent legally effective transfers between a parent and it's wholly-owned subsidiary companies. Where such transfers are reflected on corporate balance sheets then these amounts are relevant to the determination of the Part I.3 tax base; capital, investment allowance etc. Loans/advances with non-resident corporations are eligible for an investment allowance regardless of whether such non-resident corporations are exempt from Part I.3 tax.

Reasons FOR POSITION TAKEN:

Jurisprudence, legislation (181(3) & 181.2(4)) & previous opinion #952924

			January 12, 1996

Large Business Audit Division	Income Tax Rulings and
Jim Pearson		Interpretations 			Directorate
Chief		G.J. Donell
(613) 957-8953
Attention:  Claude Englehart
			960001

Cash Concentration Offset Accounts

We are writing in response to your recent fax to us, dated December 21, 1995, in which you have asked for our comments on the memorandum (the "memo") you wrote to Mr.Carl Lehman of the Hamilton T.S.O. concerning Cash concentration offset accounts ("concentration accounts") and their implications to Part I.3 of the Income Tax Act (the "Act"). Although not specifically addressed in your memo, you have also asked for our views where non-resident corporations are party to the general agreement concerning concentration accounts.

"Concentration Accounts"

We recently responded to an inquiry concerning concentration accounts and Part I.3 tax from XXXXXXXXXX. We were asked whether we would consider, for purposes of Part I.3 of 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. We have included a copy of that correspondence for your information.

Mr.Lehman's Part I.3 audit concerns appear to stem from the fact that the parent's capital tax base is reduced. This situation arises where there are participating corporations that are in an overdraft position.

It is our view that where the concentration account transfers create legally effective obligations and where the balance sheet of a corporation, prepared in accordance with GAAP, reflect those intercompany obligations that the 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).

The concentration accounts effectively eliminate overdrafts on a company-wide basis by the transfer of subsidiary bank account balances to the parent. In effect the parent steps into the banks shoes and becomes the subsidiary's creditor. The subsidiary's capital position does not change since they remain the recipient of loans and advances. Provided the parent is not a financial institution it would, as creditor (assuming that the above mentioned requirements for Part I.3 recognition have been met) be permitted an investment allowance since it has used its funds to make the loan or advance to another corporation that is, presumably, not a financial institution. The overall impact upon the parent is a reduction in its capital tax base equal to the net overdrafts that it has assumed. We would point out that the same result would be obtained where a parent makes commercial loans to its subsidiaries however GAAR may have application depending upon the specific facts surrounding the loan transaction(s).

"Non-Resident Corporations"

Subsection 181.2(4) states that,

"The investment allowance of a corporation (other than a financial institution) for a taxation year is the total of all amounts each of which is the carrying value at the end of the year of an asset of the corporation that is...

(b) a loan or advance to another corporation (other than a financial institution)...

other than...indebtedness of, a corporation that is exempt from tax under this Part (otherwise than because of paragraph 181.1(3)(d)).

Paragraph 181.1(3)(d) provides that,

"No tax is payable under this Part for a taxation year by a corporation...(d) that neither was resident in Canada nor carried on business through a permanent establishment in Canada at any time in the year..."

An investment allowance is therefore provided with respect to a loan or advance where the debtor is a non-resident corporation (other than a financial institution) not carrying on a business in Canada through a permanent establishment. In summary the change in the capital tax base of both the parent and its subsidiaries appear to be identical irrespective of whether the subsidiaries are or are not resident in Canada.

We trust that the above comments are of assistance to you. Should you require additional assistance please do not hesitate to contact us.

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Enclosures