CRA finds that for thin cap purposes the unconsolidated balance sheet must reflect the same accounting standards applied in the consolidated financials
The Canadian thin cap rules provide that a Canadian corporation’s equity amount includes its retained earnings at the beginning of the year in question “except to the extent that those earning include retained earnings of any other corporation.” A Canadian subsidiary, which prepared its consolidated financial statements in accordance with IFRS, also prepared its unconsolidated financial statements for its tax return purposes using IFRS, but applied IFRS 9 (re fair value accounting) in those statements but not in its consolidated statements. The effect was to boost its equity amount by the increase in the fair market value of its investment in subsidiaries (with that increment estimated to equal their net income for the relevant years).
In rejecting this approach, the Directorate stated:
[C]onsistency between the consolidated financial statements and unconsolidated financial statements… is expected… [in order] to avoid the use of financial statements as a tax planning tool…. [T]he Taxpayer should not be able to adopt IFRS 9 in the unconsolidated financial statements… until the time the Taxpayer adopts the same standard in its consolidated financial statements.
Neal Armstrong. Summary of 23 November 2016 Internal T.I. 2015-0618511I7 under s. 18(5) – equity amount – (a)(i).