28 May 2025 IFA Roundtable - Written Response

IMPORTANT NOTE: The following questions and answers are not official and are subject to change until they are published by the Canada Revenue Agency.

Presented by:[1] Yves Moreno, Director, International Division, Income Tax Rulings Directorate, Canada Revenue Agency

Ina Eroff, Manager, International Division, Income Tax Rulings Directorate, Canada Revenue Agency

Unless otherwise stated, all statutory references in this document are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the “Act” or “ITA”), or the Income Tax Regulations, C.R.C., c.945 (the “Regulations”), as appropriate, as amended to the date hereof.

Q.1 - Digital Services Tax (DST) Act

Canada’s new Digital Services Tax (DST) Act received Royal Assent on June 20, 2024 in Bill C-59 and came into force as of June 28, 2024. DST is a 3% tax that applies to in-scope revenue that exceeds a group’s first $20 million of in-scope revenue for a given year, provided they meet certain thresholds. DST applies annually starting in 2024 with retrospective application to the 2022 calendar year. The most recent deadline that passed was the requirement for certain entities to register for DST with the CRA by January 31, 2025, while the first actual filing of the returns and remittance of tax for the 2024 year (as well as the retrospective years 2022 and 2023) is due June 30, 2025. Can the CRA shed some light on the following administrative uncertainties concerning the DST?

1. Will the CRA release a schedule to facilitate the DST filing or will the filing be via an XML schema similar to the Digital Platform Rules?

2. Will taxpayers need to submit three separate filings for the June 30, 2025 filing deadline to account for the filing of 2022, 2023 and 2024 returns, or will there be a special first year of application submission?

3. Given the recent update by the Co-chairs of the Inclusive Framework released January 13, 2025, including reporting on the progress of a final Pillar One package, is the CRA prepared for cancellation of the existing filing requirements and adoption of Pillar One starting as early as 2025?

4. Will the CRA release a new form to allow for the election for a simplified Canadian digital service revenues calculation for 2022 and 2023 under subsection 12(2) of the DST Act?

5. Will the CRA release a new form to allow the filing of a Notice of Objection as permitted under section 72 of the DST Act?

6. Will the CRA release a new form to allow for refunds of payments in error under section 60 of the DST Act?

CRA Response

Sub-question 1

Filing of DST returns is done through the CRA’s Application Programming Interface (API) using a JSON schema. Before filing a DST return for the first time, taxpayers need to undergo a certification process. Since early April 2025, instructions to facilitate certification and filing, as well as the filing schema, have been provided to taxpayers by email as part of the certification process. Information about the DST filing has also been available on Canada.ca since early April 2025.

Sub-question 2

Taxpayers are required to submit only one filing that covers calendar years 2022 to 2024.

Sub-question 3

In accordance with the existing DST legislation in Canada, the first DST payment/filing deadline is set for June 30, 2025. In the event the Multilateral Convention to implement Pillar One, Amount A, is adopted by the Inclusive Framework on BEPS (IF), it will require national DSTs of participating IF jurisdictions to be removed.

The CRA, as the administrator of the Canadian DST, will be prepared to adjust filing and compliance requirements accordingly should the government decide to transition from DST to Pillar One, Amount A. The CRA is closely monitoring developments at the OECD in connection with Pillar One, Amount A. Taxpayers remain subject to DST compliance requirements until further Canadian legislative action is taken. The CRA will issue guidance as the situation evolves.

Sub-question 4

Taxpayers electing to use the simplified method for calculating Canadian digital services revenue for 2022 and/or 2023 must indicate the election directly in the DST filing schema for 2024. The schema will include a field for the simplified method election. In other words, there is no need for a separate form nor for a letter attached to the schema to elect to use the simplified method.

Sub-question 5

The CRA will release a new form to allow the filing of a Notice of Objection as permitted under section 72 of the DST Act. The DST objection form is expected to be made available before the first assessments are issued for DST returns due by June 30, 2025.

Sub-question 6

There is no form required for refunds of payments made in error on DST accounts. The CRA will review all requests for these refunds received through the Business Enquiries line, My Business Account, or by correspondence from an authorized owner/representative.

Q.2 - Global Minimum Tax Act

The first filing due date under the Global Minimum Tax Act (i.e., June 30, 2026) is quickly approaching. Can the CRA provide an update on the activities of the new Specialty Tax Division responsible for implementing Pillar Two in Canada. Several other jurisdictions have put in place registration requirements in preparation for Pillar Two compliance. Does the CRA anticipate putting in place separate registration requirements under the Global Minimum Tax Act, ahead of the first filing due date?

CRA Response

Before addressing the CRA’s implementation of the Global Minimum Tax Act (GMTA), we note that within the Income Tax Rulings Directorate, the DST and Global Tax Section of the Specialty Tax Division provides technical interpretations of the GMTA. Implementation of the GMTA, however, is led by the Pillar Two Implementation Section (PTIS) of the International Tax Operations Division (ITOD) within the International and Large Business Directorate (ILBD) of the Compliance Programs Branch.

ILBD is coordinating the development of necessary forms, IT system updates, and playing a key role in the implementation of the administrative requirements of the GMTA. PTIS is actively involved in other aspects of the implementation, including participation in OECD discussions, developing training materials, and planning the global minimum tax (GMT) program.

The CRA will introduce a registration requirement which is projected for late 2025. Information about the Global Minimum Tax is available on Canada.ca, including where to send your general questions and how to request a technical interpretation. Information on the registration process and form filing will be released in phases on Canada.ca. The information on CRA registration requirements is expected for this summer, in preparation for GMT program account registration in the fall. Various options will be available for registering a GMT program account, for example, the Business Registration Online portal for resident businesses and the Non-resident Registration Webform on Canada.ca for non-resident businesses.

Q.3 – Cash Pooling

In a multinational notional cash pooling arrangement, there may be a number of participants in the pool and each participant’s deposit or overdraft balance in the pool may fluctuate frequently. If a Canadian resident corporation (taxpayer) is a participant in the pool, the conditions in subsection 15(2.16) may be met in respect of the taxpayer’s deposit in the pool. Where the conditions of subsection 15(2.16) are met, subsection 15(2.17) deems the taxpayer to have made, for purposes of sections 15 and 80.4, one or more loans to one or more non-resident participants. In light of the frequent fluctuations in the balances of all pool participants, the application of subsection 15(2.17) may result in numerous deemed loans that may be subject to subsection 15(2).

The CRA has previously provided some positions on cash pooling. Are there more recent developments in the area that the CRA can share?

CRA Response

The CRA noted the following in document 2015-0595621C6:

Cash-pooling arrangements can take various forms and structures. Every arrangement creates its own specific legal relationships. The tax consequences of such an arrangement can only be established when all the facts, elements and documents relevant to a case are known.

Where a taxpayer makes a loan to a non-resident of Canada that is a shareholder of the taxpayer (or is connected with the shareholder), subsection 15(2) combined with paragraph 214(3)(a) of the Act generally provides that the taxpayer is deemed to have paid a dividend to the non-resident, equal to the amount of the loan or indebtedness. The deemed dividend is subject to withholding tax under subsection 212(2) at 25%, possibly reduced under a treaty. There are a few exceptions to this general rule, two of which (subsections 15(2.6) and (2.11)) are discussed below.

Subsection 15(2.6) provides that subsection 15(2) does not apply to a loan or indebtedness that is repaid within one year after the end of the taxation year of the taxpayer in which the loan or indebtedness arose, where it is established by subsequent events or otherwise, that the repayment is not part of a “series of loans or other transactions and repayments”. As was pointed out in CRA document 2017-0682631I7, the automatic cash sweeps that occur as part of a physical cash pooling arrangement would likely be considered to form part of a “series of loans or other transactions and repayments”.

The 2016 introduction of the back-to-back shareholder loan rules in subsections 15(2.16) to (2.192) of the Act have raised questions regarding the application of these rules, and consequently subsection 15(2), to notional cash pooling arrangements involving a taxpayer and its foreign parent and/or non-resident corporations connected with the foreign parent for purposes of subsection 15(2). Where the conditions of subsection 15(2.16) are met, subsection 15(2.17)[2] deems all or a portion of the taxpayer’s deposit in the notional cash pool to be indebtedness owing to that taxpayer by one or more non-resident participants. Subject to subsection 15(2.6), non-resident withholding tax may apply to such deemed loan. Subsection 15(2.18) sets out the conditions required for there to be deemed repayment of a deemed loan under subsection 15(2.19).

As noted in the explanatory notes to subsection 15(2.19), “As in the case of any repayment of a loan to which subsection 15(2) has applied, a deemed repayment under subsection 15(2.19) is not sufficient to qualify for relief under subsection 15(2.6), paragraph 20(1)(j) or subsection 227(6.1); these provisions set out additional requirements – in particular, that it must be established that the deemed repayment was not part of a series of loans or other transactions and repayments.”

The anticipated frequent and ongoing movements in the account balances of participants to a notional cash pooling arrangement would likely be considered to form part of a “series of loans or other transactions and repayments”.

The following hypothetical example is intended to illustrate the application of the rules in subsections 15(2.16) to (2.19) only. The example provides a snapshot of transactions undertaken over a one month period under a notional cash pooling arrangement that involves only a Canadian resident corporation (the Taxpayer), two non-residents (Forco1 and Forco2) and an arm's length bank (the Bank). The terms of the notional cash pooling agreement require the overall balance (aggregate deposits[3] and overdrafts) to be at least zero.

1. On October 1st, Forco1’s balance was a credit of $10M; Forco2’s account balance was a debit of $5M; and the Taxpayer’s account balance was $0. The overall balance was a credit of $5M.
2. On October 5th, the Taxpayer made a deposit of $5M into its account.
3. On October 15th, as a result of a withdrawal, Forco2 increased its debit balance by $10M, bringing the overall balance to $0.
4. On October 20th Forco1 made a deposit of $5M to its account.
5. On October 25th the Taxpayer withdrew $5M from its account, bringing the overall balance to $0.
6. On October 26th the Taxpayer made a deposit of $10M to its account.
7. On October 27th Forco1 withdrew $5M from its account.
8. On October 28th, the Taxpayer withdrew $5M from its account, bringing its account balance to $5M and thereafter Forco2 made a deposit of $5M into its account.
9. On October 29th Forco2 made a deposit of $7M into its account.

The cash pool balances can be summarized as follows:

The tax consequences under subsections 15(2.16) to (2.19) are, subject to subsection 15(2.6), as follows:

1. On October 1st, 2024, there are no tax consequences as the Taxpayer is not a participant of the notional cash pool.

2. On October 5th, 2024, the requirements under subsection 15(2.16) would not be met as all of the overdraft (debit) account balance of Forco2 was permitted to remain outstanding because of Forco1’s deposit.

3. On October 15th, 2024, the requirements under subsection 15(2.16) would be met because it is reasonable to conclude that the withdrawal of $10M by Forco2 (resulting in an overdraft account balance of $15M) was permitted in part because of the Taxpayer’s $5M credit account balance. As such, subsection 15(2.17) would deem the Taxpayer to have made a loan to Forco2 of $5M.[4]

4. On October 20th, 2024 there are no tax consequences.

5. On October 25th, 2024, the requirements under subsection 15(2.18) would be met because the amount owing by the Bank to the Taxpayer is repaid as a result of the withdrawal. The deemed repayment under subsection 15(2.19) in respect of the subsection 15(2.17) deemed loan to Forco2 would be $5M.[5] Therefore, the October 15, 2024 deemed loan to Forco2 is repaid in full.

6. On October 26th, 2024, the requirements under subsection 15(2.16) would not be met as all of the overdraft (debit) account balance of Forco 2 was permitted to remain outstanding because of the deposit of Forco1.

7. On October 27th, 2024, the requirements under subsection 15(2.16) would be met because it is reasonable to conclude that Forco2’s overdraft of $15M was permitted to remain outstanding in part because of the Taxpayer’s $10M account balance. As such, subsection 15(2.17) would deem the Taxpayer to have made a loan to Forco2 on October 27, 2024 of $10M.[6]

8. On October 28th, 2024, the requirements under subsection 15(2.18) for a deemed repayment are met twice, first upon the Taxpayer’s withdrawal and thereafter upon Forco2’s deposit. With respect to the Taxpayer’s withdrawal, the deemed repayment under subsection 15(2.19) in respect of the October 27, 2024 subsection 15(2.17) deemed loan to Forco2 would be $5M.[7] With respect to Forco2’s deposit into its account, the deemed repayment under subsection 15(2.19) in respect of the October 27, 2024 subsection 15(2.17) deemed loan to Forco2 would be nil.[8] This results in a subsection 15(2.17) deemed loan to Forco2 balance of $5M.

9. On October 29th, 2024, the requirements under subsection 15(2.18) for a deemed repayment are met as a result of Forco2’s deposit. The deemed repayment under subsection 15(2.19) in respect of the October 27, 2024 subsection 15(2.17) deemed loan to Forco2 would be $2M,[9] leaving an outstanding 15(2.17) deemed loan balance to Forco2 of $3M.

Another exception to the application of subsection 15(2) is where the loan or indebtedness is a pertinent loan or indebtedness (PLOI) as defined in subsection 15(2.11). The PLOI exception requires the taxpayer and its non-resident parent corporation to file a joint election. A deemed interest income inclusion is required in regards to the taxpayer. Further to the above example, we note that a typical notional cash pool would involve a larger number of participants and a higher volume of fluctuations in the accounts, possibly resulting in many deemed loans to many non-resident participants in multiple jurisdictions. The CRA has developed a simplified PLOI election in respect of deemed loans that arise under subsection 15(2.17). The CRA’s Compliance Programs Branch will provide additional details on the simplified PLOI election through the CRA’s website.

Q.4 - Requests for documents under section 231.1

IFA members have noticed the use of the phrase, “all documents and records relating to advice…received, decisions made…”, has become more common by the CRA, often appearing in audit initiation letters and standard audit queries. Would the CRA be willing to review this practice and consider providing guidance on its appropriate use for field auditors?

CRA Response

The CRA will be releasing updates to its information gathering policies in the form of a new communique, which will be published on Canada.ca later this year. The intent of the new communique is to simplify, standardize, and clearly outline a consistent information gathering policy for all CRA audit programs.

The new communique will clarify the CRA’s policy on the use of sections 231.1 of the ITA and 288 of the Excise Tax Act (ETA) as the primary information gathering powers used by CRA officials to request information, documents, access, and reasonable assistance. The use of requirements issued under sections 231.2 of the ITA and 289 of the ETA will generally be reserved for obtaining records held by financial institutions, information on behalf of treaty partners, and information about unnamed persons.

Taxpayers and other persons are legally obligated to comply with all information gathering powers granted to CRA officials and are also expected to have full access to the information pertaining to their obligations or entitlements under the ITA and ETA. To the extent these obligations are not met, the CRA will exercise the powers under the ITA and ETA to enforce compliance with tax laws and maintain the integrity of the tax system.

The CRA remains committed to a balanced use of the information-gathering powers through fairness, transparency, and efficiency. CRA officials should exercise judgement when carrying out their compliance activities and should generally seek the appropriate amount of information necessary to validate the conditions of application of the provisions that are relevant to a taxpayer or any other person under the ITA or the ETA.

When evaluating the need for information, it is necessary to consider the purpose and scope of the compliance activity, and the relevancy and the reasonableness of the documents and information being sought. The type and volume of information required is informed by the scope of the compliance activity and is subject to change depending on the facts and circumstances of each particular case.

CRA officials should explain in general terms within the information gathering correspondence or during meetings the compliance issue and why the documentation and information sought may be relevant in determining the obligations and entitlements of a taxpayer or any other person. Taxpayers and their representatives are encouraged to discuss information requests with CRA officials if they have any questions.

Openness, transparency, and cooperation by taxpayers and CRA officials will facilitate the efficiency and effectiveness of compliance activities, which allows CRA officials to provide taxpayers with earlier tax certainty and to reduce the compliance burden whenever possible.

Q.5 – Computation of FAT

Subsection 95(1) defines foreign accrual tax (FAT), in part, as the portion of any income or profits tax “that may reasonably be regarded as applicable” to any amount of foreign accrual property income (FAPI) included under subsection 91(1) in computing a taxpayer’s (Canco) income for a taxation year in respect of a particular foreign affiliate (FA).

FA carries on a business in a foreign jurisdiction and pays income or profits tax to that country on income which the Act segregates into income from a business other than an active business and active business income.

The definition of FAT requires a determination of what portion of the foreign tax paid “may reasonably be regarded as applicable to” FAPI of FA. If a proration of the foreign tax between the two streams of income of FA is required in order to determine FAT, how should deductions available under the foreign tax law (which effectively reduce the amount of the foreign tax of FA) be allocated to make that proration?

Would foreign deductible amounts be allocated to the two streams of income on the same basis regardless of whether they arose in the taxation years before FA became a foreign affiliate of Canco (the “pre-acquisition amounts”) or after?

CRA Response

The phrase “may reasonably be regarded as applicable” in the definition of FAT contemplates the reconciliation of a wide range of temporary and permanent differences that can result from FAPI being computed pursuant to the provisions of the Act and the amount of the foreign taxable income being determined in accordance with foreign tax law.

In the generic scenario described in this question, the CRA generally considers it reasonable to determine FAT applicable to the amount of FAPI of FA for a taxation year of FA by multiplying the total foreign tax paid by FA to the foreign country for a taxation year of FA by the fraction that the amount of the net income from the activities generating FAPI for Canadian tax purposes (the “FAPI Business”) represents of the total net income of FA for the taxation year of FA, both as computed under foreign tax law. A formulaic approach appears adequate.

To compute the net income of FA from the FAPI Business for purposes of establishing the numerator of that fraction, FA’s activities that generate FAPI first need to be reasonably identified.

Once those activities are identified, the second logical step requires the determination of the following amounts:

A - the amount of gross income from the FAPI Business for the taxation year computed under foreign tax law.

B - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year that may reasonably be regarded as directly applicable only to the FAPI Business.

C - the amount of gross income from all sources for the taxation year computed under foreign tax law that is subject to foreign tax.

D - the total amount of deductions allowed under foreign tax law and claimed by FA in the taxation year which are not directly allocable to either the FAPI Business or to other income-generating activities, multiplied by the ratio of A over C (or allocated between the two streams of income on other reasonable grounds).

Once those values are determined, the formula to compute the net income of FA from the FAPI Business becomes: A – B – D. The resulting amount divided by the total net income of FA for the taxation year determines the fraction which, applied to the amount of total foreign tax paid by FA, determines the amount of foreign tax “that may reasonably be regarded as applicable” to FAPI in that taxation year (i.e. the FAT). The amount determined pursuant to this formula is converted to Canadian currency pursuant to section 261.

The approach described above is consistent with prior CRA statements in Technical Interpretations 9719055 and 2002-0134201I7, as well as our prior position on the allocation of foreign tax credits in Technical Interpretation 5021-4. Should a taxpayer be in a situation where a different approach is viewed by the taxpayer as reasonable, a request can be made to the Income Tax Rulings Directorate of the CRA for a determination as to whether or not that approach would be viewed as reasonable by the CRA in those circumstances.

The approach above applies regardless of whether the amounts deducted by FA in the taxation year arose in a taxation year before it became a foreign affiliate of Canco or after. Pre-acquisition amounts, including loss carryovers, are allocated consistently with the postacquisition amounts when determining amounts B and D above. This response does not address an allocation of tax credits that may be available to FA in the foreign jurisdiction since the hypothetical scenario does not contemplate FA using tax credits to reduce its foreign tax liability. The allocation of tax credits may require modifications to the above formula or a case-by-case determination.

Q.6 – Application of Regulation 5907(2.03)

With respect to a foreign affiliate that is a (single member) disregarded US limited liability company (US LLC), the CRA’s position is that the “earnings” or “loss” from carrying on an active business for a particular taxation year of the affiliate is required to be computed pursuant to subparagraph (a)(iii) of the definition of “earnings” in Regulation 5907(1), with any modifications required for purposes of computing a loss. Regulation 5907(2.03) provides that the determination of the “earnings” or “loss” of an affiliate under the definition in subparagraph 5907(1)(a)(iii) is to be made as if the affiliate had, in computing its income or loss from the business for each taxation year that is the particular year or a preceding taxation year that ends after August 19, 2011, claimed the maximum amount of deductions available under the Act.

Assume that US LLC was formed in 2017 by a regarded US corporation (USP). US LLC has a December 31st taxation year end. It acquired and used depreciable assets in the operation of its active business carried on in the US in 2017 and all subsequent years. All US LLC’s membership interests were acquired by an arm’s length foreign affiliate (FAH) of a Canadian resident corporation (Canco) on January 1, 2024. What would the UCC of US LLC’s depreciable assets be on January 1, 2024 for purposes of computing US LLC’s “earnings” or “loss” in accordance with regulation 5907(2.03) for its 2024 and subsequent taxation years? Would CCA under the Act be considered to have been claimed for taxation years that ended before US LLC became a foreign affiliate of Canco?

CRA Response

US LLC was not a foreign affiliate of Canco during its 2017 to 2023 taxation years. For purposes of the Act, US LLC became a foreign affiliate of Canco on January 1, 2024, and as such the computation period of surplus balances commences on January 1, 2024.

CRA document 2016-0669761C6 states that “earnings” from a US active business of a US resident, single member LLC that is disregarded for US tax purposes and that is a foreign affiliate of a corporation resident in Canada should be computed in accordance with subparagraph (a)(iii) of the “earnings” definition in Regulation 5907, which reads as follows:

5907(1) “earnings” of a foreign affiliate of a taxpayer resident in Canada for a taxation year of the affiliate from an active business means

(a) in the case of an active business carried on by it in a country,

(i) […]

(ii) […]

(iii) in any other case, the amount that would be the income from the active business for the year under Part I of the Act if the business were carried on in Canada, the affiliate were resident in Canada and the Act were read without reference to subsections 12.7(3), 18(4), 18.2(2), 18.4(4), 80(3) to (12), (15) and (17) and 80.01(5) to (11) and sections 80.02 to 80.04,…

Regulation 5907(2.03) reads as follows (emphasis added):

(2.03) The determination — under subparagraph (a)(iii) and paragraph (b) of the definition “earnings”, and paragraph (b) of the definition “loss”, in subsection (1) — of the earnings or loss of a foreign affiliate of a taxpayer resident in Canada for a particular taxation year from an active business is to be made as if the affiliate

(a) had, in computing its income or loss from the business for each taxation year (referred to in this paragraph as an “earnings or loss year”) that is the particular year or is any preceding taxation year that ends after August 19, 2011,

(i) claimed all deductions that it could have claimed under the Act, up to the maximum amount deductible in computing the income or loss from the business for that earnings or loss year, and

(ii) made all claims and elections and taken all steps under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, to maximize the amount of any deduction referred to subparagraph (i); and

(b) had, in computing its income or loss from the business for any preceding taxation year that ended on or before August 19, 2011, claimed all deductions, if any, that it actually claimed under the Act, up to the maximum amount deductible, and made all claims and elections, if any, and taken all steps, if any, under applicable provisions of the Act, or of enactments implementing amendments to the Act or its regulations, that it actually made.

Regulation 5907(2.03) was enacted on June 26, 2013, effective for taxation years of foreign affiliates that end after August 19, 2011. Although not relevant to this question but in the interest of completeness, CRA document 2017-0691201C6 discusses the computation of the earnings of foreign affiliates that are disregarded US LLCs for taxation years that ended on or before November 29, 2016.

The interpretative issue raised by this question is the determination of the undepreciated capital cost (UCC) balance on which CCA will be claimed by US LLC under paragraph 20(1)(a) of the Act to determine its 2024 “earnings” from its active business in accordance with subparagraph (a)(i) of Regulation 5907(2.03).

The Explanatory Notes to paragraph (a) of Regulation 5907(2.03) indicate that the rule in 5907(2.03) to force maximum deductions to be taken in computing the foreign affiliate’s “earnings” under Canadian tax rules is meant to prevent taxpayers from purposely inflating surplus by choosing not to take discretionary deductions under the Act.

In the circumstances described (involving an arm’s length acquisition of all the US LLC’s interests by FAH), for purposes of computing the income of the US LLC under Part I of the Act as if the business was carried on in Canada and US LLC was resident in Canada, the UCC of its depreciable assets on January 1, 2024 would, in the context of applying Regulation 5907(2.03), be equal to the lesser of the capital cost and the fair market value of those assets on that date.