CRA will apply the instalment method that minimizes the Canadian-dollar taxes payable of a functional currency reporter when it assesses for carried-back losses

Where a Canadian corporation uses an "elected functional currency" (e.g., the U.S. dollar) for purposes of computing its Canadian tax liabilities, it nonetheless computes its instalment obligations under the first instalment base method (s. 157(1)(a)(ii)) or second instalment base method (s. 157(1)(a)(iii)) based on its ultimate taxes payable in Canadian dollars for its previous taxation year or previous two taxation years, as the case may be (although instalments under the estimated method (s. 157(1)(a)(i)) effectively are computed in U.S. dollars). The remainder of its taxes payable for a year is computed by converting each of its required Canadian dollar instalment payment obligations into U.S. dollars at the applicable spot rates for the instalment due dates, with the total of the required instalments (expressed in U.S. dollars) deducted from its U.S. dollars payable for the year and with the difference converted to Canadian dollars at the spot rate on the balance-due day. A result of this is that where the corporation has carried back non-capital losses from subsequent years in computing its taxable income for, say, Years 1 and 2, the choice of instalment method for Year 1 or 2 may affect the Canadian dollar quantum of its adjusted tax liability for Year 1 or 2.

CRA considers that when in these circumstances it reassesses Years 1 and 2 to give effect to the carry-backs, it generally should use the instalment method that minimizes the Canadian dollar taxes payable – i.e., the same instalment method that was originally used for Year 1 or 2 is not required to be used in this recalculation.

Neal Armstrong. Summary of 21 January 2015 Memo 2014-0540631I7 under s. 261(11)(a).