CRA indicates that expenditure limits of associated CCPCs should be converted into a functional currency based on the spot exchange rate at year end

The annual “expenditure limit” of CCPCs (which is gradually reduced as the total of their taxable capital employed in Canada (“TCEC”) increases above $10 million) must be allocated between them. When the associated CCPCs of the taxpayer report their Canadian tax results in Canadian dollars, and the taxpayer reports its Canadian tax results in its elected functional currency, how will the TCEC of the associated corporations be converted into the functional currency?

Although CRA indicated that one possible interpretation would require the associated CCPCs to so convert each component of their TCEC computation (which “would be administratively burdensome”), it concluded:

The day the TCEC of the associated corporation is considered to “arise” for the purposes of determining the conversion rate according to paragraph 261(5)(c) is the last day of the taxation year of the associated corporation for which it is computed because that is the day when the amount of the TCEC is determined pursuant to section 181.2 (hence when an amount relevant to computing the Taxpayer’s Canadian tax results is created).

CRA further stated:

If prior to the date of this letter the Taxpayer was consistently using a different method for converting the TCEC of its associated corporation in its elected functional currency and claimed additional ITC which would not have been available if the Taxpayer used the conversion method put forward in this letter, the CRA will not challenge the computation for those periods.

Neal Armstrong. Summary of 25 November 2024 External T.I. 2023-0974111E5 under s. 261(5)(c).