28 May 2025 IFA Roundtable

This provides the text of written questions that were posed, and summaries of the CRA oral responses, at the CRA Roundtable held on May 28, 2025 at the International Fiscal Association (Canadian Chapter) conference in Toronto. The presenters from the Income Tax Rulings Directorate were:

Ina Eroff, Acting Manager, International Division

Yves Moreno, Director, International Division

The questions were orally presented by Jill Winton (Stikeman Elliott) and Melissa Dorsaint (RSM Canada). We have employed our own titles.

Q.1 - DST administration

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?

Preliminary Responses

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?

Eroff: Filing of DST returns is done through the CRA application programming interface using a JSON schema.

Prior to filing your DST return for the first time, you must undergo a certification process. Instructions to facilitate the certification and filing, as well as the filing schema, have been provided to taxpayers via email since early April 2025 as part of the certification process. Information about filing DST has also been available on Canada.ca since early April.

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?

Eroff: There is only one filing for calendar years 2022 to 2024.

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?

Eroff: In the event that the multilateral convention on implementing Pillar One, Amount A is adopted, then the national DSTs will have to be removed, and the CRA, as the administrator of the national Canadian DST, will be prepared to adjust the filing and compliance requirements should the government decide to transition from DST to Pillar One, Amount A.

For now, taxpayers are subject to DST compliance requirements until further legislative action is taken and CRA is closely monitoring developments at the OECD in respect of Pillar One, Amount A and will be providing further updates as the situation evolves.

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?

Eroff: The taxpayers electing to use the simplified method for computing their digital services revenues for 2022 or 2023 should make that election in the filing schema for 2024. That schema provides a field for that simplified election, so there is no requirement for a separate form.

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?

Eroff: Yes, CRA will release a new form that will allow for a DST Notice of Objection, and it is expected to be released prior to the first reassessments at issue for the DST returns due June 30th, 2025.

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

Eroff: There is no need for a form to apply for a refund of payments made in error on a DST account. The CRA will consider the request for refunds submitted through the business enquiries line, My Business Account or by correspondence.

Q.2 - GMTA administration

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?

Preliminary Response

Eroff: Before addressing CRA’s implementation of the Global Minimum Tax Act, 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. The implementation of the GMTA is led by Pillar Two Implementations Section of the International Tax Operations Division of the International and Large Business Directorate. The International Large Business Directorate coordinates the development of required forms, of IT system updates, and is playing a role in the implementation of the administrative requirements of the GMTA.

The Pillar Two Implementations Section is actively involved in other aspects of the implementation of GMTA, including participation in OECD discussions, developing training material, and planning the Globel Minimum Tax program.

Yes, CRA will introduce a registration requirement, which is projected for late 2025. Currently, information about Global Minimum Tax is available at Canada.ca, and information about filing or registering for GMT program account will be available on Canada.ca, which will be released in phases projected for this summer in contemplation of the GMT program account registration in the fall.

There will be various options available for registering a GMT program account; for example, a business registration online portal for resident businesses and a non-resident registration web form on Canada.ca for non-resident businesses.

Q.3 - Cash pooling and s. 15(2.17)

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?

Preliminary Response

Moreno: There are two main types of cash-pooling arrangements: physical and notional. Physical cash-pooling involves actual transfers of cash within accounts in the cash pool; notional cash-pooling does not – there can be positive and negative balances as long as the overall balance is zero or positive.

For physical cash-pooling, s. 15(2) and s. 214(3)(a) might apply where a non-resident shareholder, parent, or somebody connected to the shareholder, received a loan from a Canadian entity. Where those provisions apply, withholding would be required on the amount of the deemed dividend.

There is an exception in s. 15(2.6) where there is a repayment within one year after the year of the loan, and the repayment was not part of a series of loans or other transactions and repayments. In such case, any remitted withholding amount would be refunded. However, the key to s. 15(2.6) is the existence of a series. The automatic cash sweeps that occur as part of a physical cash-pooling arrangement would likely be considered to form part of such a series, which would make s. 15(2.6) unavailable.

For notional cash-pooling, the existence of a loan is determined on a case-by-case basis, looking at the terms of the arrangement. This is where the back-to-back loan rules come into play, and s. 15(2.17) might deem a loan to exist for the purposes of s. 15(2) and s. 214(3)(a) where certain conditions are met. Conversely, under s. 15(2.19) there might be a deemed repayment. Those provisions determine when that might happen. Even where there is a deemed repayment under s. 15(2.19), there also would have to be no series for the Part XIII tax to be refundable.

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, repayments, and other transactions.

Here is an example to illustrate the back-to-back loan rules in ss. 15(2.16) and (2.19). The example illustrates how CRA will apply the causality test in s. 15(2.16), and whether it is reasonable to conclude that the non-resident in an overdraft position would be in that position because of the dividend deposited by the Canadian.

In this example, we have the snapshot of a one-month period in a notional pool. The bank would typically require the overall balance to be non-negative:

	Canco	Forco1	Forco2	Balance
1 Oct	$0	$10	$(5)	$5	Canco is not in the pool, so from Canada's perspective nothing happens.
5 Oct	$5	$10	$(5)	$10	Canco deposits $5 in the account. There would be no deemed loan under s. 15(2.17) because, here, Forco2 is $5 in overdraft, but Forco1 notionally covers that overdraft.
15 Oct	$5	$10	$(15)	$0	Forco2 withdraws $10, triggering an application of the rules to create a deemed loan, because it is reasonable to conclude that the $15 overdraft from Forco2 is made possible by the $5 balance of Canco - i.e., Forco1's positive balance is insufficient to cover Forco2's overdraft.
20 Oct	$5	$15	$(15)	$5	This $5 increase for Forco1 does not trigger anything in the provisions.
25 Oct	$0	$15	$(15)	$0	Canco's $5 withdrawal results in a deemed repayment of the deemed loan on October 15th. Bear in mind that this is probably part of a series of transactions so that, even though there is a deemed repayment, there might not be a refund of the withholding tax that was remitted.
26 Oct	$10	$15	$(15)	$10	Canco deposits $10. S. 15(2.17) would not apply, on similar reasoning to October 5th - Forco1's positive balance notionally covers Forco2's overdraft.
27 Oct	$10	$10	$(15)	$5	Forco1 withdraws $5. This triggers another deemed loan from Canco, similar to October 15th. Here there would be a $10 deemed loan.
28 Oct	$5	$10	$(10)	$5	These two events trigger a refund, as with October 25th.
29 Oct	$5	$10	$(3)	$12	[This row appeared on the slide but was not discussed. Presumably, no consequence under s. 15(2.17) or (2.19).]

Another exception to the application of the joint application of ss. 15(2) and 214(3) is the PLOI election under s. 15(2.11). The election must be jointly filed by the Canadian resident and its non-resident parent.

In a typical cash-pool there would obviously be more participants and transactions.

CRA Compliance Programs Branch will announce the details of a simplified PLOI election on CRA's website.

Q.4 - S. 231.1 requests

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?

Preliminary Response

Moreno: The CRA has been drafting a communique that will be posted shortly on the CRA website. The objective of that exercise is to outline, simplify, and standardize the CRA information-gathering policy.

Two key provisions here are ss. 231.1 and 231.2, providing the CRA different powers to request information. Under s. 231.2, CRA may require the disclosure of information related to the administration and enforcement of the Act through a written notice. That power will be reserved for obtaining records of financial institutions, information on behalf of treaty partners, and information about unnamed persons.

S. 231.1 is a provision that, among other things, allows CRA to require the person to provide all reasonable assistance to answer all proffered questions verbally or in writing and to communicate with the CRA on request.

The communique will clarify the use of s. 231.1 as the primary information power used by CRA officials to request information, documents, access, and reasonable assistance. It will state that CRA remains committed to balancing information-gathering powers with fairness, transparency, and efficiency, that CRA officials should exercise judgment when carrying out their compliance activities, and to generally seek the appropriate amount of information necessary to validate the conditions of the application of the provisions that are relevant to the taxpayer or any other person under the Income Tax Act.

These remarks also apply to the provisions’ counterparts in the Excise Tax Act.

The communique will clarify that 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.

Taxpayers and other persons are legally obligated to comply with all information gathering powers granted to the CRA officials.

Taxpayers are also expected to have full access to the information pertaining to their obligations or entitlements under the Income Tax Act or the Excise Tax Act. To the extent that these obligations are not met, the CRA will exercise the powers under the Income Tax Act or Excise Tax Act to enforce compliance with tax laws and maintain the integrity of the tax system.

Openness, transparency, and cooperation by the taxpayers or the 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 tax compliance burden whenever possible.

Q.5 - Allocation 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 tax to that country on income which the Income Tax Act (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?

Preliminary Response

Eroff: Under the FAT definition, the phrase “that may reasonably be regarded as applicable” contemplates the reconciliation of multiple items, permanent or temporary, that result from the fact that FAPI is computed under the Canadian rules and foreign tax is paid on income computed under foreign tax rules.

In the situation described in the question, CRA would consider it reasonable to compute FAT by multiplying the total amount of foreign tax paid to the foreign jurisdiction by the foreign affiliate for its taxation year by a fraction:

• the numerator of which is the net income of the foreign affiliate for the taxation year computed under the foreign tax laws from the activities that generate FAPI for Canadian income tax purposes (the “FAPI business”), and
• the denominator of which is the total net income of the foreign affiliate computed under the foreign tax law.

Thus, for the purposes of computing the numerator of the fraction – the net income of the foreign affiliate from the FAPI business – it is necessary to first identify the activities that would form part of FAPI business and, when that is reasonably determined, then the gross income under the foreign tax rules from that FAPI business is to be computed, with that amount then being reduced by the total amount of deductions that are allowed under the foreign tax law and claimed by the foreign affiliate in the taxation year that may reasonably be regarded as directly applicable only to the FAPI business; this amount should also be reduced by the prorated amount of deductions (again allowed under the foreign tax law and claimed by the foreign affiliate) that would not reasonably be regarded as applicable to either the FAPI business or any other income-generating activities, such as overhead or head office expenses.

The amounts for the purposes of determining those deductions, and allocating them among the various streams of income, the same approach is applied in respect of amounts which arose prior to foreign affiliate becoming a foreign affiliate of Canco or after. Preacquisition amounts and pre-acquisition loss carry-forwards would be allocated consistently with post-acquisition amounts for the purposes of computing FAT.

In computing net income from the FAPI business, that income is divided by the total income of the foreign affiliate to get a fraction. That fraction is multiplied by the total foreign tax paid by the foreign affiliate to arrive at the amount of foreign tax that may be regarded as applicable to FAPI – that figure is then converted into Canadian dollars pursuant to s. 261.

This question did not contemplate any tax credits to reduce the tax liability of the foreign affiliate in the foreign jurisdiction, so that they were excluded that from the answer above. If there are any foreign tax credits that are available in the foreign jurisdiction to the foreign affiliate, this formula may have to be modified or may require a case-by-case approach.

The approach described is consistent with our prior positions on the computation of FAT. However, the taxpayer may make a request to the Rulings Directorate if the taxpayer is in a situation where another approach seems more reasonable.

Q.6 - Opening UCC under Reg. 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?

Preliminary Response

Moreno: We have US LLC that acquired an asset back in 2017, and US LLC becomes a foreign affiliate of Canco when FAH acquires all the membership units in US LLC. US LLC is disregarded for US tax purposes as it is a sole-member LLC. As the question points out, CRA indicated in the past that the earnings in respect of a US LLC would be computed following Regulation 5907(1)(a)(iii) in the definition of earnings, using Canadian principles.

US LCC was not a foreign affiliate of Canco from 2017 to 2023, and became a foreign affiliate of Canco on January 1^st 2024 when its membership interests were acquired by Canco, and indirectly by FAH.

In the circumstances, the “earnings” as defined in Reg. 5907(1)(a)(iii) are 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, and the affiliate were resident in Canada.

That has to be read in conjunction with Reg. 5907(2.03), which was introduced in 2013 and applicable to taxation years after 2011. Reg. 5907(2.03) was introduced to provide for any discretionary deductions to be maximized. Reg. 5907(2.03) basically provides that the determination of the earnings is to be made as if the affiliate had claimed all deductions up to the maximum amount deductible in computing the income or loss from the business for that year.

There was some related history. Reg. 5907(2.03) was introduced in 2013 and applicable to 2011, and there was a change in position from the CRA going from the earnings having to be determined under 5907(1)(a)(i) of the definition of “earnings” following the foreign tax rules, to being determined under Reg. 5907(1)(a)(iii). There was a period of time between 2013 and 2016 where the CRA came up with a couple of positions clarifying how the income was to be determined. We will work with the current position, which is that the Canadian rules are to be followed.

The interpretive issue raised by this question is really the determination of the UCC opening balance and determining the earnings. When the computation of earnings commences on January 1^st, 2024, what is the UCC opening balance for purposes of determining those earnings? Again, that has to be determined as if US LCC had been a Canadian resident and had been also carrying on business in Canada for the year.

The Explanatory Notes to Reg. 5907(2.03) clarify that its purpose was to prevent the earnings from being inflated by not claiming full deductions where the deductions are discretionary, which is the case for CCA.

In the circumstances described in this scenario, and for the purposes of computing the income of US LCC under Part I of the Act for the purposes of determining its earnings under s. 5907(1), the position of the CRA is that the opening balance of UCC would be the lesser of capital cost and fair market value.