Tax Insights: Cross-border cash pooling arrangements ─ Recent developments

November 02, 2018

Issue 2018-41

In brief

Cash pooling is a powerful treasury management tool. However, Canadian multi-national enterprises and foreign multi-nationals with Canadian subsidiaries (MNEs) are unable to take full advantage of this tool due to restrictive Canadian tax rules, leading to sub-optimal treasury management practices. Cash pooling arrangements have become the focus of many global tax authorities, with each taking a different approach.

The Canada Revenue Agency (CRA) has recently issued a technical interpretation relating to the application of the shareholder loan rules to cross-border cash pooling arrangements, and is significantly increasing its audit activities on these arrangements. In Canada, these arrangements could, among others, be subject to the shareholder loan rules in subsection 15(2) of the Income Tax Act (the Act), unless the arrangement qualifies for an exception to the rules.1 If any of the exceptions are not met, the Canadian entity’s intercompany receivable balances with related non-resident corporations (as part of a cash pooling arrangement) will be deemed a dividend and subject to withholding tax.

This Tax Insights addresses recent developments relating to cross-border cash pooling arrangements. It also discusses PwC’s Cross-Border Cash Pooling Coalition, a new collaborative coalition that will engage with the Department of Finance and the CRA to help find workable solutions for these arrangements in Canada.

In detail

CRA’s position

CRA technical interpretation 2017-0682631I7 (February 27, 2018)

Technical interpretation 2017-0682631I7 responds to a taxpayer’s query on whether the automatic daily cash sweeps that occur as part of a physical cash pooling arrangement are considered to form part of a series of loans and repayments for the purpose of determining if the subsection 15(2.6) repayments exception applies.

The taxpayer was a Canadian entity (Canco) that entered into a financial agreement (a cash pooling arrangement) with a related non-resident entity (Finco). The cash pooling arrangement was implemented to finance Canco’s general operations (primarily working capital), as well as to avoid the administration and costs of establishing third-party bank lending and/or deposit facilities in each country, and therefore minimizing global borrowing needs. The movement of funds between Canco and Finco were accounted for as intercompany loans.

The CRA concluded that transactions occurring as part of a physical cash pooling arrangement are likely to be considered a series of loans and repayments and therefore reductions to amounts receivable would not meet the subsection 15(2.6) repayments exception.2 The CRA has taken a somewhat narrow view of what constitutes a “series of loans and repayments” in the context of cash pooling.

Recent CRA audit activities involving cross-border cash pooling arrangements

The CRA has started to focus on cross-border cash pooling arrangements. The following highlights recent positions the CRA has taken in the course of audits:

  • amounts received by a related non-resident head account holder in a cash pool from a Canadian entity member of the cash pool (as part of a cash pooling arrangement) are subject to the shareholder loan rules in subsection 15(2) of the Act
  • the ordinary business and bona fide arrangement exception is generally not met because:
    • there is a lack of evidence that a Canadian entity loans money to either arm’s length parties or other members in the corporate group, and thus it is the CRA’s view that the Canadian entity’s ordinary business is not the lending of money
    • the terms of cash pooling deposit agreements do not generally include a fixed or specific date for the foreign company to repay the loan, and the CRA’s position is that a demand loan is not considered a bona fide arrangement for repayment
  • the repayments exception is generally not met because the automatic daily cash sweeps are considered to form part of a series of loans or other transactions and repayments
  • the PLOI election exception will only be met if there is documentary evidence that an election was made;3 the CRA takes the position that each loan requires a separate election, so if the election is filed late, there can be multiple late filing penalties4
  • there will be no refund of the withholding tax paid on the amount of a loan deemed to be a dividend when the loan is repaid if the repayment is part of a series of loans and repayments5

International tax authorities

At the international level, other authorities such as the United Kingdom’s Her Majesty’s Revenue and Customs6 (HMRC), as well as the Organisation for Economic Co-operation and Economic Development (OECD), appear to recognize the business purpose of cross-border cash pooling arrangements and have focused their attention on how best to share the benefits from these arrangements through transfer pricing considerations.

OECD Working Party No. 6 discussion draft on financial transactions

The OECD Working Party No. 6 recently released a discussion draft on financial transactions. The section on cash pooling focuses primarily on the transfer pricing implications of cash pooling and how the benefits can be effectively shared among associated members of an MNE.

For cash pooling, the OECD discussion draft sought input on:

  • the situations in which a cash pool leader would be allocated risks for lending within the MNE group, rather than for providing services to cash pool participants coordinating loans within the group without assuming risks on those loans
  • the three possible approaches that are described in the discussion draft for allocating cash pooling benefits to participating cash pool members, along with practical examples of its application, specifically:
    • are there circumstances in which one approach would be most suitable?
    • does the allocation of group synergy benefits suffice to arrive at an arm’s length remuneration for the cash pool members?
    • is the allocation of group synergy benefits the approach used in practice to determine the remuneration of the cash pool members?
  • other approaches that may be relevant to remunerate cash pool members

PwC Cross-Border Cash Pooling Coalition

PwC is working with organizations as part of a cross-border cash pooling coalition to engage with senior officials at the Department of Finance and the CRA on cash pooling arrangements. The coalition’s goals are to: 

  • help these agencies better understand cash pooling arrangements 
  • facilitate an open dialogue on these arrangements
  • explore potential solutions so that these arrangements will be feasible (from a tax perspective) in Canada

This is an opportunity for taxpayers to work collaboratively with legislators and tax administrators to find a workable solution for these arrangements in Canada.

The takeaway

The CRA’s view that cash pooling arrangements are tax-motivated is different than the approach that many other jurisdictions and the OECD are taking. Because the CRA is increasing its audit activity in this area, we encourage you to carefully review your company’s current and contemplated cross-border cash pooling operations and seek advice on the best approach to resolve any issues that may arise.

We also encourage taxpayers to join the PwC Cross-Border Cash Pooling Coalition so that they are involved in the discussions being held with the Department of Finance and the CRA, thus ensuring that their particular situation can be resolved.

 

1. Shareholder loan rules - Subsection 15(2) can apply to include amounts in income for tax purposes where a person (other than a corporation resident in Canada) that is a shareholder of a particular corporation or “connected” with such shareholder receives a loan from or becomes indebted to a Canadian corporation. There are three notable exceptions to this rule:
- subsection 15 (2.3) ordinary business and bona fide arrangement exception - the debt arose in the ordinary course of the creditor’s business or the loan was made in the ordinary course of the lender’s ordinary business of lending money, and bona fide repayment arrangements were made at loan inception
- subsection 15 (2.6) repayments exception - the loan is repaid within one year after the end of the taxation year in which the loan was made, and the loan is not considered to be part of a series of loans and repayments
- subsection 15 (2.11) “pertinent loan or indebtedness” (PLOI) election exception - an election has been made to consider the eligible loan to be a PLOI
2. CRA technical interpretation 2017-0682631I7 states that based on the CRA’s understanding of the facts, “the Cash Pooling Arrangement appears to be structured in a manner that results in automatic daily cash sweeps which produce a ‘rolling forward’ of the intercompany loans from Canco to Finco.” It further states, “[i]f that is the case, we believe that a respectable argument could be made that the automatic daily cash sweeps constitute a series of loans or other transactions and repayments and as such, the exception under subsection 15(2.6) should not apply as it would otherwise result in a perpetual deferral of the inclusion under subsection 15(2)."
3. The PLOI election can be filed up to two years late.
4. CRA Views 2013-0483751C6.
5. Subsection 227(6.1) of the Act provides for a refund of the withholding tax paid on the amount of the loan deemed to be a dividend by virtue of paragraph 214(3)(a) if the taxpayer on whose behalf the tax was paid, repays the loan or indebtedness and the repayment is not part of a series of loans or other transactions or repayments.
6. HMRC has publicly stated that it views cash pooling arrangements as business driven and not tax motivated. The HMRC focuses on transfer pricing issues regarding how the benefit of cash pooling arrangements should be shared.

 

Contact us

Peter van Dijk

National Tax Policy Leader, PwC Canada

Tel: +1 416 687 8204

Angelo Bertolas

Senior Advisor, PwC Canada

Tel: +1 416 687 8546

Ken Buttenham

Partner, PwC Canada

Tel: +1 416 869 2600

Yufei Ho

Senior Associate, PwC Canada

Tel: +1 416 869 2472

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