2017-0682631I7 Subsection 15(2.6) - Series of Loans

Principal Issues: Whether the automatic daily cash sweeps that occur as part of a physical cash pooling arrangement should be considered to form part of a "series of loans or other transactions and repayments".

Position: Likely.

Reasons: See below.

Author: Ng, Tania
Section: 15(2), 15(2.6)

                                                                                      February 27, 2018

HEADQUARTERS                                                        HEADQUARTERS
Large Business Audit Division                                       Income Tax Rulings
International and Large Business Directorate               Directorate
Legislative Application Section                                      Tania Ng
Attention: Jennifer Mann                                                (519) 200-8908                             
 

                                                                                       2017-068263

SUBJECT: Series of Loans or Other Transactions and Repayments – Subsection 15(2.6)

This memorandum is in reply to your letter dated January 6, 2017, wherein you requested our comments as to whether the automatic daily cash sweeps that occur pursuant to a physical cash pooling arrangement are considered to form part of a series of loans or other transactions and repayments for the purposes of determining whether the exception in subsection 15(2.6) is applicable.

Unless otherwise stated, every statutory reference herein is to the Income Tax Act (Canada) (the “Act”).

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Our understanding of the facts is as follows:

1.    XXXXXXXXXX (“Parentco”) is a XXXXXXXXXX corporation.  Parentco is a direct shareholder of XXXXXXXXXX (“Finco”).

2.    XXXXXXXXXX is a direct shareholder of the taxpayer under audit, XXXXXXXXXX. (“Canco”).

3.    Canco operates as a XXXXXXXXXX in XXXXXXXXXX.

4.    Canco entered into a financial agreement with Finco (referred to herein as the “Financial Arrangement” or “Cash Pooling Arrangement”), which established a revolving credit facility (the “Credit Facility”) and a deposit facility (the “Deposit Facility”).

5.    The Financial Arrangement is essentially a cash pooling arrangement and serves to finance Canco’s general operations (primarily working capital).  The use of such intercompany arrangements also serves to avoid the administration and costs of establishing bank lending/deposit facilities in each country and minimize global borrowing needs. Under the Financial Arrangement, funds were automatically transferred to and from Finco by way of daily cash sweeps.  The movement of funds between Canco and Finco, which was governed by the Deposit Facility and the Credit Facility, were accounted for as intercompany loans.

6.    The Deposit Facility was entered into by Canco (as the depositor) and Finco. XXXXXXXXXX. The Deposit Agreement also includes the terms of repayment and provides, generally speaking, that repayment can either occur on Canco’s demand or through the automatic cash sweeping mechanism of the Financial Arrangement.

7.    The Credit Facility was also entered into by Canco (as the borrower) and Finco. XXXXXXXXXX.  The Credit Agreement also includes the terms of repayment and provides, generally speaking, that repayment can either occur whenever Canco wishes to make repayments, or through the automatic cash sweeping mechanism of the Financial Arrangement.

8.    The Credit Facility and Deposit Facility were updated automatically on a daily basis to reflect Canco’s net cash position (i.e., receipts less disbursements). XXXXXXXXXX.  The interest income or expense calculated on the net balance was recorded in Canco’s books on a monthly basis.

9.    Finco has both a Canadian dollar and XXXXXXXXXX dollar loan receivable/payable account.  In the XXXXXXXXXX taxation years, Canco was continuously in a payable position in the XXXXXXXXXX dollar loan account.  In the Canadian dollar loan account, Canco’s position fluctuated as follows for each of the XXXXXXXXXX taxation years:

PERIOD                         CANCO’S NET POSITION
XXXXXXXXXX               Loan receivable (net lender)
XXXXXXXXXX               Loan payable (net borrower)
XXXXXXXXXX               Loan receivable (net lender)

The Canadian borrowing/depositing facilities reflect Canco’s cash flow cycle. XXXXXXXXXX.

10.   For taxation years ending in XXXXXXXXXX, Audit established that at year-end in the Canadian dollar account, Finco owed Canco approximately $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively.  In the XXXXXXXXXX dollar account, Canco owed Finco approximately XXXXXXXXXX$XXXXXXXXXX, XXXXXXXXXX$XXXXXXXXXX and XXXXXXXXXX$XXXXXXXXXX, respectively at year-end.

11.   In XXXXXXXXXX, the interest rates used for calculating the interest on the loan payable to Finco (referred to as “Treasury” in the charts below) were higher than the interest rates used for calculating the interest on the loan receivable from Finco.  The spread between the lending and borrowing rates was approximately XXXXXXXXXX percent.  The following illustrates the lending and borrowing rates used as examples for the first quarter of XXXXXXXXXX:

                                                 CAD to Treasury            Treasury to CAD

                                                    Deposit                        Borrowing LIBOR
Month       1 Month LIBOR          LIBOR - XXXX%          XXXX
XXXX        XXXXX                      XXXX                           XXXX

                                                 CAD to Treasury            Treasury to CAD

                                                       Deposit                     Borrowing LIBOR
Month       1 Month LIBOR             LIBOR - XXXX%       XXXX
XXXX        XXXX                            XXXX                        XXXX

Based on the above facts, you are asking us to consider whether the daily cash sweeps which automatically occur as a result of the cash pooling mechanism under the Financial Arrangement should be considered to form part of a series of loans or other transactions and repayments for the purposes of determining if the exception in subsection 15(2.6) would apply.  We note that Audit has asked you to consider whether subsection 15(2) should apply to Finco in respect of the intercompany loans from Canco by virtue of Finco being connected to its parent company, such that subsection 212(2) would apply to deem a dividend be paid to Finco, thereby requiring Canco to withhold tax on the dividend pursuant to paragraph 214(3)(a).

As you know, there are various exceptions to the application of subsection 15(2) found in the Act.  However, as you have only requested our comments in respect of whether the daily cash sweeps are considered to be a series of loans or other transactions and repayments, the following comments will be limited to a discussion of whether the exception in subsection 15(2.6) could apply to the above set of facts.  We have not considered, nor does this memorandum contain any comments in respect of the other exceptions to subsection 15(2).

OUR POSITION

Based on our 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.  If 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).

ANALYSIS AND DISCUSSION

Overview of Subsection 15(2) and Subsection 15(2.6)

Generally speaking, shareholders are taxable on amounts received from a corporation.  Subsection 15(2) includes amounts received from certain corporations or partnerships in the form of loans or debts in the income of a shareholder, or a person or partnership connected with a shareholder.  Subsection 15(2) is intended to prevent a shareholder or a person or partnership connected to a shareholder from avoiding tax by receiving property from the corporation in the form of a non-taxable loan or debt, rather than as a taxable dividend or other taxable amount.

Based on our understanding of the facts as outlined above, it is apparent that the amounts received by Finco from Canco pursuant to the Cash Pooling Arrangement (i.e., the amounts that are recorded as intercompany loans) fall within the purview of subsection 15(2) and such amounts should be included in Finco’s income unless there is a specific exception, such as subsection 15(2.6), that is applicable.  Essentially, subsection 15(2) would not apply to include an amount received by a shareholder in the form of a loan or indebtedness if repayment is made within the stipulated two year-end window, unless the repayment was part of a “series of loans or other transactions and repayments”.

XXXXXXXXXX

“Series of Loans or Other Transactions and Repayments”

In order to determine whether a repayment is part of a series of loans or other transactions and repayments, all the relevant facts and circumstances must be taken into consideration.  The courts have provided some guidance in determining whether a repayment should be considered to form part of a series of loans or other transactions and repayments for the purposes of subsection 15(2.6).

The Tax Court of Canada has been asked to examine situations in which shareholders received loans from their wholly-owned corporations.  These loans are usually recorded on a running shareholder loan account that is cleared or reduced by the declaration of dividends or bonuses, which typically occurs on a regular basis.  Joel Attis v. MNR (endnote 1) involved a taxpayer who started up a nightclub business in a personal corporation.  The taxpayer initially advanced significant sums to the personal corporation, but subsequently began to draw amounts from the corporation for personal reasons.  For the taxation years in question, the taxpayer’s indebtedness to the corporation at year-end was repaid in full by the payment of offsetting bonuses and dividends early the following year.  The taxpayer argued that subsection 15(2) should not apply because the exception in subsection 15(2.6) applied as all loans were repaid in full within the time period prescribed.  The Minister argued that the taxpayer could not rely on the exception in subsection 15(2.6) because the new advances in the following year made any repayment part of a series of loans or other transactions and repayments.

In coming to the conclusion that subsection 15(2) did not apply in Attis, the Court stated the following:

I do not think that it can be seriously contended that the second requirement to the effect that the repayment was not made as part of a series of loans or other transactions and repayments is not met where the repayments in question are made by a number of repayments of bonuses and dividends.  Parliament could not have intended that the indebtedness of a shareholder be caught by the general language of subsection 15(2) of the Income Tax Act providing for its inclusion in the income of a taxpayer where such indebtedness is repaid by a series of payments of bonuses and dividends which in turn must be included in a taxpayer’s income by virtue of the specific provisions of the Act referred to earlier.  The provisions of subsection 4(4) of the Act make it clear that “unless a contrary intention is evident” no provision in Part I of the Act shall be construed so as to require the inclusion of an amount more than once in computing a taxpayer’s income for a taxation year.

The case of Uphill Holdings Ltd. et al v. MNR (endnote 2) involved a similar fact pattern and the same conclusion as the Attis case.  The Uphill case involved a situation where dividends were paid and credited to a shareholder loan account in Year 2 to repay the balance on the account at the end of Year 1.  Based on the facts presented, the Court held that the declaration of dividends that were applied to offset the outstanding loans in the running shareholder loan account were considered repayments which did not form part of a series of loans or other transactions and repayments and as such, the exception in subsection 15(2.6) applied.  What is noteworthy about this case is that, unlike the Attis case, the dividends in Uphill were paid out of the corporation’s capital dividend account and thus not taxable to the borrower.  Despite the fact that the amount of the dividend would not be included in the income of the taxpayer, the Court still found that the exception in subsection 15(2.6) applied and no amounts would be included in the income of the taxpayer under subsection 15(2).  After the Attis and Uphill decisions, the Tax Court of Canada revisited the issue of whether a repayment is part of a series of loans or other transactions and repayments in Diane Meeuse v. The Queen. (endnote 3)  In Meeuse, the taxpayer borrowed $20,000 from a corporation of which her husband was the sole shareholder and repaid the amount half a year later in August 1987.  In the same year, she also used a car owned by the corporation as a trade-in towards $12,000 of the purchase price of a car for her own use.  A year later, on August 31, 1988, she borrowed $20,000 from the corporation to construct a storage building and on January 10, 1989 she repaid the entire indebtedness of $32,000 using funds that were derived from the sale of her home.

In determining whether the transactions undertaken by the taxpayer in Meeuse formed part of a series of loans or other transactions and repayments, the Court considered whether this prohibition against a series of loans or other transactions and repayments has a purpose that should be taken into account and stated the following:

I do not think a mere succession of loans is sufficient to constitute a series without more.  This, I think, is a mechanical and simplistic interpretation of paragraph 15(2)(b) [now subsection 15(2.6)] of the Income Tax Act that ignores its purposes.  It must be borne in mind that the purpose of subsection 15(2) is to prevent corporate funds to be paid out to shareholders or persons connected with them otherwise than by way of a dividend under the guise of loans.  Where a loan is made to a shareholder and is repaid near the end of the expiry of the year mentioned in paragraph 15(2)(b) [now subsection 15(2.6)] and then immediately a similar amount is re-loaned to the shareholder after the year-end, and this process is repeated year after year it is obvious that this rolling forward of the obligation constitutes a perpetual deferral of the tax obligation and defeats the purpose of subsection 15(2).  Where we have a bona fide borrowing for a genuine business purpose a repayment of the funds from an independent source and an unrelated subsequent borrowing for a wholly different purpose I do not think that this is the type of abuse at which the concluding words of paragraph 15(2)(b) [now subsection 15(2.6)] are aimed.

It must be recognized that a finding that the repayment of a loan is part of a series of loans and repayments has serious implications to a taxpayer who is in effect punished by being unable to deduct a repayment of a subsequent loan taxed under subsection 15(2) and forming part of a series in a later year under paragraph 20(1)(j).  For this reason a Court should be reluctant to adopt the sweeping interpretation of the word “series” urged by the respondent where one that is more consonant both with the ordinary and accepted meaning of the term and with the scheme of the Act as a whole is available. (emphasis added)

It is evident from the case law that notwithstanding the apparent breadth of the phrase “series of loans or other transactions and repayments” in subsection 15(2.6), the courts have given it a somewhat more restrictive interpretation.  While the Attis, Uphill and Meeuse decisions are not recent, (endnote 4) their consideration of the purpose of the “series of loans or other transactions and repayments” test found in subsection 15(2.6) still remains relevant, particularly when you consider that in interpreting subsection 15(2.6), we should be taking a unified textual, contextual and purposive approach.

The decisions of the Tax Court in Attis and Uphill led to the position that was presented by the Income Tax Rulings Directorate (the “Directorate”) at the 1994 Tax Conference by Michael Hiltz.  This position was later adopted in Interpretation Bulletin IT-119R4 Debts of Shareholders and Certain Persons Connected with Shareholders (August 7, 1998) (“IT-119R4”):

Whether Repayment is Part of a Series of Loans or Other Transactions and Repayments

28. It is a question of fact whether or not a repayment of a loan is part of a series of loans or other transactions and repayments.  In most cases, when there are only a few loans or other transactions and a few repayments made during a taxation year of a lender, there is no such series.  However, when only one loan or other transaction and one repayment occur in each taxation year of a lender, a series of loans or other transactions and repayments may still be in evidence.  This could occur, for example, when a repayment is of a temporary nature, such as a loan that is repaid shortly before the end of the year and the same amount, or substantially the same amount is borrowed shortly after the end of the year.  Such a repayment of a temporary nature is not considered to decrease the loan balance in applying subsection 15(2) and paragraph 20(1)(j) to a series of loans or other transactions and repayments (see 34-36).

29.  Persons affected by subsection 15(2) may have loan accounts, drawings accounts, or other similarly named accounts that contain several charges for loans, payments made to third parties on behalf of the shareholder, advances against future salaries, rents or anticipated dividends or other charges, and one or more repayments.  If a shareholder has an account with a number of these features (a running loan account), all of the relevant factors will be considered to determine whether a series of loans or other transactions and repayments exists.  Bona fide repayments of shareholder loans that result from, for example, the payment of dividends, salaries, or bonuses, are not part of a series of loans or other transactions and repayments. (emphasis added)

The courts have been asked to consider the application of subsection 15(2.6) (formerly paragraph 15(2)(b)) in certain situations, and have, as a result, provided some guidance with respect to what considerations should be made when determining whether a repayment is part of a series of loans or other transactions and repayments.  However, the courts have never been asked to consider whether subsection 15(2.6) is applicable where a cash pooling arrangement has been established.  The Directorate, on the other hand, has been asked to consider whether a series of loans or other transactions and repayments exist for the purposes of subsection 15(2.6) in situations where the taxpayer is participating in some sort of cash pooling with related non-resident entities.  We have also been asked to comment on the applicability of subsection 15(2) and subsections 90(6) – 90(15) (endnote 5) to cash pooling arrangements or instances where centralized cash management is implemented.  Before discussing the various positions published by our Directorate, it would be helpful to take a closer look at what a cash pooling arrangement entails.

Cash Pooling Arrangements

Cash pooling or centralized cash management is increasingly being used by multinational corporations (hereinafter referred to as “cash pooling arrangements”).  Typically, these types of arrangements are entered into by individual members of a corporate group in order to maximize the availability of internal sources of cash, manage regional or national liquidity, or to simplify bank account structures and minimize overall bank transaction costs.  Generally speaking, there are two types of cash pooling arrangements: (1) physical or actual cash pooling; and (2) notional cash pooling.

Economically, the two types of cash pooling arrangements are equivalent, however, they are mechanically different and thus may be treated differently for tax purposes.  Generally speaking, this is because under notional cash pooling arrangements, the cash balances of members of the arrangement are not actually transferred to another entity (i.e., each member of the arrangement retains their own balances for tax purposes).  Under a physical cash pooling arrangement, similar to the one described in this request, the balances of the members of the arrangement are physically transferred to a separate legal entity that acts as the financing corporation.  This movement of cash creates intra-group balances between the members of the cash pooling arrangement and the entity that is acting as the financing corporation.

We have been asked in the past to consider various cash pooling arrangements and to comment on the tax consequences of this type of cash management.  Despite the numerous requests, our Directorate has not adopted any general positions in respect of cash pooling arrangements.  Instead, we have analyzed each particular arrangement based on the underlying facts.  In the process of determining the tax consequences of a particular cash pooling arrangement, the Directorate has consistently taken the same approach, which is to break the cash pooling arrangement down into its constituent parts and applying the provisions of the Act on the basis of the underlying legal rights and obligations or relationships. It is only in light of all the facts, circumstances and documentation in each specific case that it is possible to establish the tax consequences arising from such an arrangement.  In other words, the term “cash pooling arrangement” does not connote a specific meaning to the CRA.  See the response to Question 19(a) from the October 9, 2015 APFF Roundtable (document number 2015-0595621C6).

As such, in order to analyze the tax consequences of a physical cash pooling arrangement, we would need to break it down into the individual transactions and apply the provisions of the Act accordingly.  In order to do so, we would need to consider how physical cash pooling arrangements usually works.  Typically, in a physical cash pooling arrangement, each member’s bank account is set to a target balance, which is often zero.  Amounts in excess of the target balance are physically transferred or swept into the master account of the cash pool leader, or the financing corporation.  Such amounts are re-characterized as loans from that particular cash pool member to the financing corporation pursuant to which the financing corporation would be charged a rate of interest.  In contrast, where a cash pool member is in a deficit cash position, the process works in reverse: the deficit is funded by a transfer of cash (sweep) from the account of the financing corporation to the cash pool member and would be treated as an intercompany loan from the financing corporation to the cash pool member pursuant to which the cash pool member would be charged a rate of interest by the financing corporation.

For the purposes of subsection 15(2.6), the CRA will generally consider that a repayment of a loan or debt could have occurred in the presence of a set-off when, for legal purposes, such compensation results in an extinguishment of the obligation for the debtor. (endnote 6)  In such cases, all the surrounding facts and circumstances would have to be analyzed and the intention of the parties as to repayment should be clear and unequivocal.  Furthermore, unless the facts indicate otherwise, the CRA generally agrees that repayments are applied to unpaid loans or debts based on the first-in, first-out (“FIFO”) method.  See the response to Question 19(b) from the October 9, 2015 APFF Roundtable (document number 2015-0595621C6) and paragraph 27 of IT-119R4.

The following is a discussion of certain of the instances where the Directorate has been asked to comment on whether loans and repayments/set-offs made under the umbrella of a cash pooling arrangement constitute a “series of loans or other transactions and repayments”.

In technical interpretation 2003-003391, the Directorate was asked to consider a situation which involved a Canadian corporation entering into a physical cash pooling arrangement with its foreign parent corporation.  Similar to the current request, this cash pooling arrangement was intended to allow the Canadian corporation to meet its working capital requirements (i.e., to maintain a positive working capital and operating cash flow position).  Any borrowings pursuant to the cash pooling arrangement were meant to have terms no longer than 6 months and would be refinanced on maturity if needed.  The cash pooling arrangement also provided that when the Canadian corporation had excess cash, it would lend such amounts to its foreign parent corporation, though when it was set up, it was expected that the Canadian corporation would always be a net borrower.  For legal and certain accounting purposes, it was stated that the amounts owing to and from the Canadian corporation would be treated as separate obligations even though they would be netted in the Canadian corporation’s financial statements.

In this file, we took the position that there would likely be an income inclusion under subsection 15(2) as it was clearly expected that the foreign parent corporation would receive loans from the Canadian corporation from time to time.  We then considered whether loans and repayments between the foreign parent corporation and the Canadian corporation under the cash pooling arrangement would constitute a “series of loans or other transactions and repayments” for the purposes of subsection 15(2.6) and stated the following:

Since the loans from Parentco would not offset any loans from Canco for the purposes of determining the applications of subsection 15(2) and 15(2.6), it is similarly our view that the loans from and repayments to Parentco could not be considered in determining whether there is a “series of loans or other transactions and repayments” for the purposes of subsection 15(2.6).  The loans to and repayments from Parentco would stand alone in determining whether such a series exists.

You have taken the view that if subsection 15(2) applies, there would also be a series of loans or other transactions and repayments for the purposes of subsection 15(2.6) because the cash pooling arrangement specifically contemplates that there would be loans and repayments on an ongoing basis.  It is not entirely clear whether you are just referring to the loans to and repayments from Parentco, or to all transactions carried out pursuant to the cash pooling arrangement.  In any event, the application of subsection 15(2.6) will depend on the specific facts and for the purposes of this letter we have accepted your characterization.

In coming to this conclusion, we were mindful that the determination of whether a series is present is very fact specific and it was not clear to us that the transactions described would necessarily form part of a series even though all the loans and repayments would occur under the umbrella of the cash pooling arrangement.  Furthermore, we believed that an argument could be made that in the event the Parentco made a bona fide repayment of each loan under the cash pooling arrangement, no series would arise.

There were a few other instances where the Directorate was asked to consider a cash pooling arrangement, however, the views that we have expressed have remained conservative and we have refrained from saying much beyond our position that it is a question of fact whether a repayment is part of a series of loans or other transactions and repayments, which can only be decided after a thorough review of all the relevant facts, circumstances and documentation. (endnote 7)

We have received ruling requests in the past where we were asked to provide a ruling that subsection 15(2) would not apply to loans made pursuant to a cash pooling arrangement.  In ruling 2007-0241991R3, we were asked to consider whether subsection 15(2) would apply to a particular loan, XXXXXXXXXX.

XXXXXXXXXX we ruled that subsection 15(2) would not apply XXXXXXXXXX; however, we stated very clearly that the ruling was limited only to the single loan described in the request:

While it is our understanding that the series of transactions described in the letter will be repeated on an annual basis, the above rulings are in respect of the loan described in this request only and does not cover any other loans that may be made in the future.  We have taken a similar approach in other ruling requests. (endnote 9)

The concept a bona fide repayment of a loan being sufficient to “break” a series was expanded further in document 2013-0491061R3, which was a ruling request dealing with the upstream borrowing rules found in subsections 90(6) to 90(15).  The upstream borrowing rules are drafted using the same language as subsection 15(2) and 15(2.6) (in fact, these provisions were modeled after subsections 15(2) and 15(2.6)) XXXXXXXXXX. (endnote 10)  After examining all the relevant jurisprudence and the Directorate’s various comments previously published, we concluded that it is not only the repayment of a loan with the proceeds of dividends and/or bonuses and salaries that prevents a further loan being considered part of a series.  Provided an intervening event could be identified, it is possible to “de-link multiple loans”.  Previously we had considered the declaration of a dividend to be such an event.  XXXXXXXXXX.

In ruling 2013-0505181R3, we were asked to consider whether a series of XXXXXXXXXX loans and repayments XXXXXXXXXX constituted a series of loans or other transactions and repayments. XXXXXXXXXX.

XXXXXXXXXX.

Based on our review of the facts, we ruled that XXXXXXXXXX loans XXXXXXXXXX did not form a series of loans or other transactions and repayments. XXXXXXXXXX.

Application to the Facts

Based on the above, we are of the view that there is a respectable argument that the automatic daily cash sweeps occurring as a result of the cash pooling mechanism under the Financial Arrangement would form part of a series of loans or other transactions and repayments for the purposes of subsection 15(2.6).

XXXXXXXXXX

XXXXXXXXXX. Moreover, we have not been made aware of the existence of any intervening events that could de-link loans or “break” the series of loans and other transactions and repayments. As such, the facts in this situation can be distinguished from previous situations we have considered where we found that a series of loans or other transactions and repayments did not exist, or had been broken. XXXXXXXXXX.

CONCLUSION/RECOMMENDATION

Based on our 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 inter-company loans from Canco to Finco.  If 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).

We trust the comments we have provided are helpful.

Yours sincerely,

Stéphane Prud'Homme, LL.B, M. Fisc.
Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 92 DTC 1128 (T.C.C.) (“Attis”).

2 93 DTC 148 (T.C.C.) (“Uphill”).

3 94 DTC 1397 (T.C.C.) (“Meeuse”).

4 The Attis, Uphill and Meeuse decisions were rendered prior to the enactment of subsection 248(10) which contains an extended definition of the meaning of “series of transactions or events”.  While the test in subsection 15(2.6) is different – a “series of loans or other transactions and repayments” vs. a “series of transactions or events” test, given the similarities, some of the principles established by case law under both the common law “series of transactions or events” test and under the extended meaning of series pursuant to subsection 248(10) could inform how broadly we should interpret the “series of loans or other transactions and repayments” test.

5 The upstream loan rules found in subsections 90(6)-90(15) are in part modeled after subsections 15(2) and 15(2.6).  In particular, paragraph 90(8)(a) includes a number of exceptions to the upstream loan rules (including, an exception for amounts repaid within a prescribed period of time unless a repayment is part of a “series of loans or other transactions and repayments”) XXXXXXXXXX, any analysis or discussion of the interpretation of these rules is relevant to the discussion of subsections 15(2) and 15(2.6).

6 The comments on set-offs are drawn from one of our responses to the Roundtable Q&A at the 2013 CTF Conference (document 2013-0508141C6). XXXXXXXXXX.

7 For example, see technical interpretation 2008-0267271E5 where the Directorate was asked to consider whether the repayment of intercompany loans under the terms of a particular physical cash pooling arrangement would be considered part of a series of loans or other transactions and repayments for the purposes of subsection 15(2.6).  We concluded that the issue was a question of fact and did not provide our views on the particular transaction described in the request.

8 See Docherty v. M.N.R. 91 DTC 537, where the Tax Court of Canada held that despite the fact that the financial statements did not reveal any of the transactions of lending and repayment of loans involving the taxpayer, nor was there any agreement as to the right of set-off with respect to amounts owing to the shareholder and amounts owing from the shareholder, the amounts could be set-off for the purposes of subsection 15(2) … of the Act, because the intention of the taxpayer and the company was to set off the two amounts.  In particular, Judge Brule stated as follows: ‘There does not seem in law a requirement for a written contract in order to effect a set-off.  The Court must determine the intention of the parties and the nature of the obligations imposed on them by reference to credible evidence …’ XXXXXXXXXX.

9 See ruling 2007-0241041R3.

10 XXXXXXXXXX, support for this can be found in the Department of Finance’s Explanatory Notes to subsection 90(8).

11 XXXXXXXXXX.

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