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.
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.
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:
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.
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:
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:
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 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.