Cross-border Cash Pooling Arrangements

Cash pooling is a popular technique used by many multinational corporations as a cash management method.  Caution must be exercised by Canadian companies using this technique as the Canadian tax laws relating to this are complex.

Subsection 15(2) of the Income Tax Act can apply when a non-resident corporation is connected with a shareholder of a Canadian resident corporation and the non-resident corporation becomes indebted to the Canadian resident corporation in a taxation year.

If the loan is not repaid, the amount of the loan will be included in the non-resident borrower’s income and treated as a dividend subject to Canadian withholding tax.  One exception to this rule requires that the loan be repaid by the end of the taxation year following the taxation year in which the loan is made, and that it is not a part of a series of loans and repayments.

In the context of a cash pooling arrangement, CRA has taken the position that the repayments exception noted above might not be met, because the automatic daily cash sweeps are considered to form part of a series of loans or other transactions and repayments. Consequently, a dividend and withholding taxes may apply.

This measure will likely affect some Canadian Corporations with foreign multi-national corporations. Should you require any further information, please contact your Crowe BGK advisor.

About the Author:

Assane Diop, CPA, CGA, M. Tax, is a Tax Specialist at Crowe BGK

Connect with him: [email protected]