Section 237.4

Application of NT-2023-05 (re B2B arrangements) to cash pooling arrangements

NT-2023-05. Back-to-back arrangements

In the context of a cross-border [physical or notional] cash pooling arrangement involving a Canadian taxpayer, non-arm’s length non-residents, and an arm’s length intermediary, assuming that the Canadian taxpayer is a debtor and at least one non-resident member of the pool resides in a jurisdiction with a higher interest withholding tax rate than the rate applicable to the intermediary, the arrangement would be a notifiable transaction [described in NT-2023-05] and results in a filing requirement where:

1. 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, or
2. the taxpayer reports or is expected to report that the interest it pays in respect of the arrangement is subject to the lower rate of withholding tax applicable to the intermediary.

A filing generally is not required where the Canadian taxpayer participating in the cash pooling arrangement is solely a creditor … .

[T]he filing of Form RC312 by a person in respect of the earliest transaction in the series of transactions forming the cash pooling arrangement will satisfy that person’s reporting obligation in respect of each transaction that is part of the series.

Straddle transactions of FX-trading partnership (NT-2023-01)

A taxpayer buys an interest in a partnership which, immediately prior thereto, had realized the gain legs on straddle transactions in FX forward contracts (with such gain allocated to the selling partner) – and with the loss legs then being realized and allocated to the taxpayer.

Use of corporate beneficiary to avoid 21-year deemed disposition (NT-2023-02)

A trust (“Old Trust”) that is approaching its 21st anniversary transfers its property under s. 107(2) to a resident corporate beneficiary (“Holdco”) which is held by “New Trust” - or that is held by non-resident beneficiaries of Old Trust, where the distributed property is not described in any of ss. 128.1(4)(b)(i) to (iii).

Alternatively, Old Trust and Holdco hold shares of Opco, with Holdco in turn held by New Trust, and Opco redeems its shares held by Old Trusts for a note, with Old Trust allocating the resulting s. 84(3) dividend to Holdco on an s. 112(1)-exempt basis.

Manipulation of bankrupt status (NT-2023-03)

A debtor is assigned into bankruptcy, its debt is settled with no “forgiven amount” arising due to the exception in (i) of the definition, and the debtor then files a proposal resulting in the bankruptcy being annulled.

Reliance on s. 256.1 purpose tests (NT-2023-04)

One of the following transactions is engaged in, and the taxpayer takes the position that the “attribute trading” rules in s. 256.1 do not apply because the “one of the main reasons” or “one of the reasons” tests in ss. 256.1(2), (4) or (6), respectively, is not satisfied:

• Aco acquires shares of Lossco so as to exceed the 75% of FMV threshold but without an acquisition of control;
• Profitco and a person not dealing at arm’s length with it (Aco) acquire shares of Lossco such that Profitco (which does not control Lossco) would satisfy the 75% of FMV threshold if the acquisition of Lossco shares by Aco was ignored; and
• Lossco acquires Profitco.

Back-to-back arrangements (NT-2023-05)

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, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate). 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.

Draft s. 237.4 provides a requirement for taxpayers, advisors and others to report transactions to CRA that are designated by CRA pursuant to draft s. 237.4(3) with the concurrence of Finance as transactions of a notifiable type. Although s. 237.4(3) is stated to be effective January 1, 2022, the substantial penalties applicable under draft s. 237.4(8) (subject to the due diligence defence under draft s. 237.4(12)) do not apply to transactions entered into before Royal Assent. The transaction types set out so far are:

• A corporation holding assets that are or will become investment assets continues from Canada to the corporate laws of a foreign jurisdiction, so that it ceases to be a “Canadian corporation” and a CCPC (and so that it is not subject to additional tax under ss. 123.3 and 123.4).
  • Alternatively, it issues special voting shares, redeemable for a nominal amount, or options to acquire a majority of its voting shares, to a non-resident person or a public corporation so as to avoid CCPC status.
• A taxpayer seeks to avoid the s. 18(19) straddle-transaction rules by acquiring a partnership interest in a partnership that had an accrued loss and gain on the two legs of an FX straddle, with the closing of such acquisition being immediately preceded by the closing out by the partnership of the gain leg so that such gain is allocated to the vending partner pursuant to s. 96(1.01) – and with the loss leg realized after the acquisition and allocated to the taxpayer.
• With a view to effectively extending the 21-year period under s. 104(4):
  • Canadian resident trust (“Old Trust”) transfers capital property or land inventory to Holdco (which is held by a new Canadian resident trust (“New Trust”) and is also a beneficiary of Old Trust) on a tax deferred basis under s. 107(2); or
  • A trust having non-resident beneficiaries transfers property (other than as described in s. 128.1(4)(b)(i), (ii) or (iii)) to a corporation (Holdco) of which such beneficiaries are shareholders and which also is a trust beneficiary, so that there is an indirect transfer out to the non-residents; or
  • Opco is held by Old Trust, one of whose beneficiaries is Holdco (also Canadian-resident), which is a beneficiary of Old Trust and whose shares are held by New Trust. Opco redeems its shares held by Old Trust for a promissory note or cash, and Old Trust distributes and designates the resulting s. 84(3) dividend under s. 104(19) so that Holdco receives the s. 112(1) deduction and receives high-basis assets.
• There is a temporary assignment of a debtor into bankruptcy to avoid a forgiven amount under the exception in (i) of the forgiven amount definition, with the bankruptcy then being annulled, for example, upon a court approval of a proposal.
• There are various listed transactions which are aimed at identifying situations where taxpayers rely on “one of the main reasons” or a “one of the reasons” tests in ss. 256.1(2), 256.1(4), and 256.1(6) not being satisfied so as to conclude that the “attribute trading” rules in s. 256.1(3) or 256.1(6) do not apply to transactions or events that would otherwise have satisfied all of the other conditions enumerated within those provisions.
• 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, with the taxpayer filing on the basis that the thin capitalization rules do not apply to it or that the interest paid by it directly to NR1 is not subject to Part XIII tax (or subject to a reduced withholding tax rate).
  • 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.

Notifiable Transactions

Due diligence - notifiable transactions – no reporting

• “A person who obtained the tax benefit would generally meet their due diligence obligations by asking their advisors about potential reporting obligations that might arise from the transactions (and being informed by their advisors that no such reporting obligations will arise on account of the transaction being a notifiable transaction or substantially similar to a notifiable transaction).”

Notifiable Transactions

Reasonable expectation to know – no reporting

• Only advisors who know or are reasonably expected to know of their reporting requirements are required to file – for example, this generally would not extend to “more junior employees and those who have limited roles that do not give them visibility of the broader transaction or series as well as the associated tax treatment and tax benefit” even if their employer did not file.