2024-1007631C6 IFA Q3 Cash Pooling and Notifiable Transactions

Principal Issues: Whether the Notifiable Transaction rules apply in the context of the cash-pooling scenarios described.

Position: See responses below.

Reasons: See below.

Author: Patel, Komal
Section: 237.4, 18(4), 18(6), 18(6.1), 212(3.1), 212(3.2), 15(2), 15(2.16), 15(2.17)

2024 IFA Annual Conference
CRA Roundtable

Question 3: Cash Pooling Arrangements and Notifiable Transactions

Subsection 237.4(4) requires an information return to be filed in respect of a “notifiable transaction”. Subsection 237.4(1) defines a “notifiable transaction”, at any time, to mean:

(a) a transaction that is the same as, or substantially similar to, a transaction that is designated at that time by the Minister under subsection (3); and

(b) a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated at that time by the Minister under subsection (3).

Designated transactions effective November 1, 2023 include certain transactions relating to “Back-to-back arrangements” (referred to herein as “the Designated Transactions”), as follows:

Thin capitalization

Non-resident 1 (NR1) is a relevant non-resident in respect of a taxpayer. NR1 enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer. The taxpayer files, or anticipates filing, its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules.

Part XIII tax

A non-resident person (NR1) enters into an arrangement to indirectly provide financing to a taxpayer through another non-resident person (NR2). If interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax. The taxpayer’s income tax reporting reflects, or is expected to reflect, the assumption that the interest it pays in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.

Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.

With respect to the questions below, assume a Canadian taxpayer is a participant in a global cash pooling arrangement (“the Cash Pooling Arrangement”) involving an arm’s length non-resident intermediary. The other participants of the Cash Pooling Arrangement are non-resident entities with which the Canadian taxpayer does not deal at arm’s length. Under the terms of the Cash Pooling Arrangement, total amounts borrowed by participants cannot exceed total amounts deposited by other participants.

a) Assuming that the Canadian taxpayer is a debtor under the Cash Pooling Arrangement, is the Cash Pooling Arrangement a “notifiable transaction” if at least one non-resident participant of the Cash Pooling Arrangement resides in a jurisdiction that is subject to a higher Canadian withholding tax rate on interest than the rate applicable on interest paid by the Canadian taxpayer to the intermediary?

b) Would the Cash Pooling Arrangement be a “notifiable transaction” if it is not expected, at the time that the Canadian taxpayer first becomes a participant in the Cash Pooling Arrangement, that the Canadian taxpayer would eventually be a debtor under the arrangement (i.e., where it is reasonably expected that the Canadian taxpayer would only be a creditor under the arrangement)?

c) Do the answers to questions (a) and (b) depend on whether the Cash Pooling Arrangement is physical or notional?

d) Assuming the Canadian taxpayer is expected to solely be a debtor under the Cash Pooling Arrangement, would the Cash Pooling Arrangement be considered a “notifiable transaction” if the Canadian taxpayer withholds (and undertakes the relevant compliance) at the rate of withholding tax that would be applicable as a result of the application of the back-to-back loan rules in subsection 212(3.2)? In other words, would a filing requirement exist if no reduction in withholding tax rates is expected to be achieved?

e) Where the Cash Pooling Arrangement is a “notifiable transaction”, would a filing requirement exist if the Canadian taxpayer’s participation in the arrangement commenced prior to November 1, 2023?

f) If the Cash Pooling Arrangement is a “notifiable transaction”, please confirm that a single reporting to describe the arrangement is sufficient, and in particular, separate reporting would not be required in respect of each borrowing (potentially on a daily basis) by the Canadian taxpayer under the arrangement.

g) In respect of a Cash Pooling Arrangement that is a “notifiable transaction”, would a professional services firm be required to report the arrangement if the firm is not/was not involved in the set-up of the arrangement and only undertakes compliance services based on debt, interest and withholding figures provided by the taxpayer?

CRA Response

Question a)

The following general comments should be read keeping in mind that cash pooling arrangements can take various forms depending on the parties involved and the terms of the relevant agreements.

The “notifiable transaction” rules can be found in section 237.4 of the Act.

Under subsection 237.4(3) - Designation of notifiable transactions:

The Minister may designate for the purposes of this section, with the concurrence of the Minister of Finance, in such manner as the Minister considers appropriate, transactions or series of transactions.

Subsection 237.4(1) defines “notifiable transaction”:

notifiable transaction, at any time, means

(a) a transaction that is the same as, or substantially similar to, a transaction that is designated at that time by the Minister under subsection (3); and

(b) a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated at that time by the Minister under subsection (3).

Subsection 237.4(2) states:

(2) Interpretation – Substantially similar — For the purposes of the definition notifiable transaction in subsection (1), the term "substantially similar"

(a) includes any transaction, or series of transactions, in respect of which a person is expected to obtain the same or similar types of tax consequences (as defined in subsection 245(1)) and that is either factually similar or based on the same or similar tax strategy; and

(b) is to be interpreted broadly in favour of disclosure.

Further to subsection 245(1),

tax consequences, to a person, means

(a) the amount of income, taxable income or taxable income earned in Canada of the person under this Act,

(b) the tax or other amount payable by, or refundable to, the person under this Act, or

(c) any other amount that is, or could at a subsequent time be, relevant for the purpose of computing an amount referred to in paragraph (a) or (b);

Subsection 237.4(4) provides that an information return in prescribed form and containing prescribed information in respect of a “notifiable transaction” must be filed with the Minister by

(a) every person for whom a tax benefit results, or for whom a tax benefit is expected to result based on the person's tax treatment of the notifiable transaction, from

(i) the notifiable transaction,

(ii) any other notifiable transaction that is part of a series of transactions that includes the notifiable transaction, or

(iii) a series of transactions that includes the notifiable transaction;

(b) every person who has entered into, for the benefit of a person described in paragraph (a), the notifiable transaction;

(c) every advisor or promoter in respect of the notifiable transaction; and

(d) every person who is not dealing at arm's length with an advisor or promoter described in paragraph (c) and who is or was entitled, either immediately or in the future and either absolutely or contingently, to a fee in respect of the notifiable transaction.

The obligation to notify under paragraphs 237.4(4)(a) and (b) make reference to the existence of a tax benefit, defined under subsection 245(1) to mean:

(a) a reduction, avoidance or deferral of tax or other amount payable under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty,

(b) an increase in a refund of tax or other amount under this Act, and includes an increase in a refund of tax or other amount under this Act as a result of a tax treaty, or

(c) a reduction, increase or preservation of an amount that could at a subsequent time

(i) be relevant for the purpose of computing an amount referred to in paragraph (a) or (b), and

(ii) result in any of the effects described in paragraph (a) or (b);

The key elements of the Designated Transactions are:

a) Financing is provided by a non-resident (NR1) to a taxpayer through a non-resident intermediary (NR2); and

b) One of the following:

i) The thin capitalization segment involves the taxpayer filing, or anticipating filing, its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules under subsection 18(4) (i.e., a tax benefit in the form of a reduction, avoidance or deferral of tax).

ii) The Part XIII segment involves the taxpayer reporting, or anticipating reporting, that the interest paid in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1 (i.e., a tax benefit in the form of a reduction, avoidance or deferral of tax).

Although a Cash Pooling Arrangement is not specifically mentioned in the Designated Transactions, the arrangement may meet the conditions noted therein as outlined above.

It is noteworthy that CRA document 2015-0614241C6, in the context of a notional cash pooling arrangement, concluded that the deposit balances of non-resident cash pool participants would be considered “intermediary debts” for the purposes of the back-to-back loan rules in subparagraphs 18(6)(c)(i) and 212(3.1)(c)(i) with the result that the back-to-back loan rules in those provisions would be engaged if their other conditions were met. This is consistent with example 4 of the explanatory notes to subsection 18(6) which relates to a notional cash pooling arrangement.

In the Cash Pooling Arrangement outlined in this question, the Canadian taxpayer may, depending on the terms of the Cash Pooling Arrangement, be viewed as having an amount outstanding as or on account of a debt or other obligation to pay an amount to an “intermediary”, in which case the payment of interest to the intermediary could result in the application of subsection 212(3.2) where the conditions of subsection 212(3.1) are met and the application of subsection 18(6.1) where the conditions of subsection 18(6) are met.

The conditions described in the Designated Transactions do not differentiate between a situation where the back-to-back loan rules do not apply based on the requirements noted therein and a situation where the back-to-back loan rules were ignored. Accordingly the Designated Transactions identify situations that fall within the conditions of (b)(i) or (ii) above. The statement in the preamble of the Designated Transactions that notification is required in order to collect additional information on the basis that the transactions described “have the potential for tax avoidance or evasion” is to be read from the perspective that the existence or absence of misuse required in subsection 245(4) does not inform whether a transaction is notifiable under section 237.4.

Entering into the Cash Pooling Arrangement involving a non-resident participant is a “notifiable transaction” as defined under subsection 237.4(1) where the taxpayer files or is expected to file or report on the basis that the debt or other obligation owing by the taxpayer, and the interest paid thereon, is not subject to the thin capitalization rules and/or the interest is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.

Question b)

If at the time that the Canadian taxpayer accepts the terms of the Cash Pooling Arrangement it is reasonably expected that the Canadian taxpayer will only be a creditor in respect of the arrangement on the basis that its cash balance is expected to remain positive, the Cash Pooling Arrangement would not be considered a “notifiable transaction” at such time as the arrangement (1) would not involve the Canadian taxpayer indirectly obtaining financing through another non-resident as described in the Designated Transactions and (2) would not be “substantially similar” to such Designated Transactions as the “tax consequences” applicable to the Canadian taxpayer as a debtor of the Cash Pooling Arrangement are not the same or similar to the “tax consequences” applicable to the taxpayer as a creditor of the Cash Pooling Arrangement (as a creditor, subsections 15(2.16) and (2.17) might be relevant). However, if the Canadian taxpayer becomes a debtor in respect of the Cash Pooling Arrangement at a future time, the arrangement may become a “notifiable transaction” at that time.

Question c)

Although cash pooling arrangements are generally categorized as either physical or notional, the underlying arrangement must be evaluated based on the parties involved and the terms of the relevant agreements.

It is generally understood that in a typical physical cash pooling arrangement, the cash balance of a company’s bank account is periodically swept to a centralized header account usually belonging to a related non-resident entity. The cash movements usually create intercompany loans between the header and the other participants. Based on this general understanding of how a typical physical cash pool may operate, it would appear that implications under subsection 18(4) and paragraph 212(1)(b) could result where a Canadian resident company participates as a debtor.

It is also generally understood that in a typical notional cash pooling arrangement, movement of cash does not occur such that each participant retains its funds and no intercompany loans are created. Furthermore, we understand that in a typical notional cash pool an arm’s length bank tracks the credit balances and debit balances of participating companies and generally requires the group to maintain an overall balance of at least zero. Subsections 18(6) and 212(3.1) could apply to notional cash pools where a Canadian resident company participates as a debtor.

In light of the fact that variations exist of typical notional and physical cash pooling arrangements, one must consider the terms of the particular arrangement in order to determine whether such arrangement meets the descriptions and tax benefits outlined in the Designated Transactions and listed in the response to question (a).

A cash pooling arrangement, whether physical or notional, is also a “notifiable transaction” if it is “substantially similar” to the Designated Transactions. Subsection 237.4(2) provides that this term “includes any transaction, or series of transactions, in respect of which a person is expected to obtain the same or similar types of tax consequences (as defined in subsection 245(1)) and that is either factually similar or based on the same or similar tax strategy” and is to be “interpreted broadly in favour of disclosure”.

While the back-to-back loan rules in subsections 18(6) and 212(3.1) may apply to a notional cash pooling arrangement based on the typical terms of such arrangement as described above, it could be possible that such rules also apply to a physical cash pooling arrangement that includes a back-to-back component. As such, the responses to questions (a) and (b) may apply to both physical and notional cash pooling arrangements that are considered “back-to-back arrangements”.

Question d)

It is assumed that the Canadian taxpayer files or is anticipated to file its income tax return on the basis that the debt or other obligation owing by it is subject to the thin capitalization rules under subsection 18(4). If so, the Cash Pooling Arrangement would not be a “notifiable transaction” based on the thin capitalization segment of the Designated Transactions summarized in question (a) above.

The Part XIII segment of the Designated Transactions reflect situations where the interest on the debt or other obligation is not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by the taxpayer to NR1. This condition would also not appear to be met.

Since neither the thin capitalization segment nor the Part XIII segment are met, the Cash Pooling Arrangement would not be a “notifiable transaction”; hence a filing requirement under subsection 237.4(4) would not arise.

Question e)

As provided in subsection 237.4(1) a “notifiable transaction” at any time, means

(a) a transaction that is the same as, or substantially similar to, a transaction that is designated at that time by the Minister under subsection (3); and

(b) a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated at that time by the Minister under subsection (3).

      [Our Emphasis]

As stated in footnote 2 of the November 2, 2023 Mandatory Disclosure Rules Guidance, if a person enters into a series of transactions that straddle the effective date of designation, the reporting requirement will be triggered with the first transaction entered into after the effective date of designation that is part of a series of transactions that is the same as, or substantially similar to one that is designated at that time by the Minister.

Where the Cash Pooling Arrangement is otherwise a “notifiable transaction” a reporting obligation would arise upon the first transaction that occurs after November 1, 2023 that is part of the Cash Pooling Arrangement, which could include the payment of interest.

Question f)

The definition of “notifiable transaction” in subsection 237.4(1) is broad such that it may include a number of transactions that are part of the same arrangement. Paragraph (a) of that definition includes “a transaction that is the same as, or substantially similar to, a transaction that is designated” under subsection 237.4(3). Paragraph (b) of that definition includes “a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated” under subsection 237.4(3).

Question (f) is premised on the Cash Pooling Arrangement being a “notifiable transaction”. This would be based on paragraph (b) of that definition and the Canadian taxpayer’s participation in the Cash Pooling Arrangement being the same as or substantially similar to a series of transactions, as described in the Designated Transactions, for purposes of section 237.4 (as noted in subsection 237.4(16)).

Subsection 237.4(10) states:

(10) Clarification of reporting transactions in series — For greater certainty, if subsection (4) applies to a person in respect of each transaction that is part of a series of transactions that includes a notifiable transaction, the filing of the information return by the person that reports each transaction in the series is deemed to satisfy the obligation of the person under subsection (4) in respect of each transaction so reported.

In the context of a Cash Pooling Arrangement that is a “notifiable transaction”, the filing of an information return under subsection 237.4(4) by a person in respect of the earliest transaction in the series of transactions forming the Cash Pooling Arrangement will satisfy the person's reporting obligation in respect of each transaction that is part of the series. Such filing must describe the nature of subsequent transactions (both recurring and non-recurring) that are part of the Cash Pooling Arrangement.

Question g)

Subsection 237.4(4) provides the list of persons required to file an information return and includes in paragraph (c) “every advisor or promoter in respect of the notifiable transaction”.

Subsection 237.4(1) provides that “advisor”, in respect of a notifiable transaction, “means each person who provides, directly or indirectly in any manner whatever, any assistance or advice with respect to creating, developing, planning, organizing or implementing the notifiable transaction, to another person (including any person who enters into the notifiable transaction for the benefit of another person)”.

The question indicates that the firm has not been involved at any time in the “set-up of the arrangement”. This response is written on the understanding that the question assumes that the professional services firm was not involved in “creating, developing, planning, organizing or implementing” the actual Cash Pooling Arrangement itself.

The question goes on to indicate that the professional services firm “only undertakes compliance services” using figures provided by the taxpayer in respect of the Cash Pooling Arrangement. The question is therefore whether such services would amount to providing “directly or indirectly in any manner whatever, any assistance or advice with respect to creating, developing, planning, organizing or implementing the notifiable transaction”. Although it is not possible to provide conclusive views without a precise description of the types of services provided, the following general comments might be relevant.

The actual or anticipated filing position in respect of the Cash Pooling Arrangement is a central element of the Designated Transactions. Should the compliance services referred to in the question be the preparation of the annual tax return of the taxpayer using figures provided by the taxpayer, these services might involve a professional obligation to recommend or validate the taxpayer’s filing positions in respect of the Designated Transactions. Although this obligation might be based on professional obligations dictated by sources other than the Income Tax Act, such obligation could result in the professional services firm providing “directly or indirectly in any manner whatever, any assistance or advice with respect to creating, developing, planning, organizing or implementing the notifiable transaction” and could result in the professional services firm having a reporting obligation under paragraph 237.4(4)(c).

If the compliance services referred to in the question do not include an obligation to review the income tax implications of the Cash Pooling Arrangement, the professional services firm would not appear to be acting in the capacity of an advisor.

Lastly, we note that subsection 237.4(5) provides that the filing obligations that would otherwise be imposed upon employees of an employer, or upon partners of a partnership, in respect of a “notifiable transaction” under paragraph (4)(c) or (d) does not apply if an information return is filed by the employer, or by the partnership, in respect of the “notifiable transaction”.

Komal Patel
2024-100763
May 15, 2024

Response prepared in collaboration with:
Gillian Godson & Pierre Girard
Specialty Tax Division, Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Richard Archambault & Joseph Armanious
Tax Avoidance Division, International and Large Business Directorate
Compliance Programs Branch

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