CRA indicates that generally accumulated “other comprehensive loss” recognized under IFRS or US GAAP does not reduce retained earnings for thin cap purposes

In the course of finding that a Canadian subsidiary that prepared its financial statements only under U.S. generally-accepted accounting principles was not required to reduce its retained earnings for thin cap purposes by the amount of a separately reported OCI debit balance (i.e. an accumulated other comprehensive loss) in those financial statements, the Directorate stated:

We understand that under US GAAP, OCI is a component of equity that is presented separately from retained earnings and paid-in capital … . IFRS similarly requires that OCI be presented as a separate component of equity and not included in retained earnings. …

However, since the Taxpayer’s financial statements are prepared using GAAP of another country, the CRA could question the appropriateness of reporting any specific item as OCI, rather than retained earnings, where such treatment deviates from the treatment under Canadian GAAP (including IFRS) and such deviation has a significant impact on the amount of deductible interest under the thin capitalization rules.

Neal Armstrong. Summary of 19 January 2018 Internal T.I. 2017-0721641I7 under s. 18(5) – equity amount – (a)(i).