Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the Canadian tax results in respect of a particular taxation year are to be determined using the US currency as the taxpayer's elected functional currency.
Position: Yes.
Reasons: Provided that the US currency remains the primary currency in which the taxpayer maintains its records and books of account for financial reporting purposes throughout the taxation year, the requirements of subsection 261(3) are otherwise satisfied.
XXXXXXXXXX
2011-042163
XXXXXXXXXX , 2012
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
We are writing in response to your letter dated XXXXXXXXXX , as revised on XXXXXXXXXX , seeking an Advance Income Tax Ruling on behalf of the above-named taxpayers. We also acknowledge the additional information provided in our subsequent communications (XXXXXXXXXX ).
We understand that, to the best of your knowledge and that of the aforementioned taxpayers, none of the issues involved in this request are:
(i) dealt with in an earlier return of Canco, Cansub, or a person related to them;
(ii) being considered by any tax services office or taxation centre in connection with a tax return previously filed by Canco, Cansub, or a person related to them;
(iii) under objection by Canco, Cansub, or by a person related to them;
(iv) before the courts; or
(v) the subject of a ruling previously considered by this Directorate.
DEFINITIONS
In this letter, the following terms have the meanings specified below:
“Act” means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) C. 1, as amended to the date hereof and, unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause refers to the relevant provision of the Act;
“CAD” means Canadian dollars;
“Canco” means XXXXXXXXXX, a corporation formed on XXXXXXXXXX , under and governed by the Canada Business Corporations Act;
“Cansub” means XXXXXXXXXX , a corporation formed on XXXXXXXXXX under the Business Corporations Act XXXXXXXXXX;
“CRA” means the Canada Revenue Agency;
“FAPI” means foreign accrual property income, as this term is defined in subsection 95(1);
“First Taxation Year” means the taxation year of Cansub that will end no later than 53 weeks after the date of incorporation of Cansub, and no sooner than XXXXXXXXXX ;
XXXXXXXXXX means XXXXXXXXXX a corporation formed under and governed by the laws of XXXXXXXXXX ;
XXXXXXXXXX means XXXXXXXXXX , a corporation formed under and governed by the laws of XXXXXXXXXX ;
“IFRS” means International Financial Reporting Standards;
XXXXXXXXXX ;
“XXXXXXXXXX Holdco 1” means XXXXXXXXXX an entity formed under and governed by the laws of XXXXXXXXXX ;
“XXXXXXXXXX Holdco 2” means XXXXXXXXXX an entity formed under and governed by the laws of XXXXXXXXXX ;
“XXXXXXXXXX Holdco 3” means XXXXXXXXXX an entity formed under and governed by the laws of XXXXXXXXXX ;
XXXXXXXXXX ;
“Proposed Transaction” means the transaction described in paragraph 23 below;
“XXXXXXXXXXCO1” means XXXXXXXXXX , a corporation formed under and governed by the laws of XXXXXXXXXX ;
“XXXXXXXXXXCO2” means XXXXXXXXXX , a corporation formed under and governed by the laws of XXXXXXXXXX ;
“XXXXXXXXXXCO3” means XXXXXXXXXX , a corporation formed under and governed by the laws of XXXXXXXXXX ;
“USD” means United States dollars;
“XXXXXXXXXXGAAP” means XXXXXXXXXX generally accepted accounting principles;
“XXXXXXXXXX Parent” means XXXXXXXXXX , a corporation formed under and governed by the laws of XXXXXXXXXX ;
“XXXXXXXXXX Parent Group” means the multinational group of entities owned directly and indirectly by XXXXXXXXXX Parent; and
XXXXXXXXXX
FACTS
1. XXXXXXXXXX Parent is traded on the XXXXXXXXXX and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX . The annual audited consolidated financial statements of XXXXXXXXXX Parent, that are prepared for its shareholders, are expressed in USD.
2. XXXXXXXXXX
3. XXXXXXXXXX CO1 is a wholly-owned subsidiary of XXXXXXXXXX Parent and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX .
4. Canco, a wholly-owned subsidiary of XXXXXXXXXX CO1, is incorporated and resident in Canada for purposes of the Act and the XXXXXXXXXX ; its head office is located at XXXXXXXXXX and its business number is XXXXXXXXXX .
5. Canco files its tax return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Canco’s taxation year-end is XXXXXXXXXX .
6. Canco is the XXXXXXXXXX Parent Group’s largest operating company in Canada, providing XXXXXXXXXX services within Canada. As Canco’s revenues and expenses are primarily earned and incurred in Canadian dollars, Canco maintains its records and books of account for financial reporting purposes in Canadian dollars, and prepares its financial statements in Canadian dollars.
7. Canco’s management team has identified the following financial reporting uses for Canco’s books and records:
a) to consolidate its results with XXXXXXXXXX Parent; and
b) to file its Canadian income tax return.
8. Canco’s financial statements are not used by any non-XXXXXXXXXX Parent Group user other than for tax return purposes. Occasionally, Canco’s Canadian financial statements are requested from an outside vendor. However, when these requests occur, the vendors are directed to the consolidated XXXXXXXXXX Parent financials.
9. Canco’s financial statements are prepared in accordance with XXXXXXXXXX GAAP and IFRS, which historically have not differed significantly. As such, Canco’s financial statements are directly used in the consolidation of XXXXXXXXXX Parent’s financial statements in accordance with XXXXXXXXXX GAAP.
10. Canco has never filed a functional currency election under subsection 261(3) of the Act in any prior taxation year.
11. Canco is consistently profitable and generates annual cash flow in excess of what is required to maintain its existing business operations.
12. Cansub is a XXXXXXXXXX subsidiary of Canco, and is incorporated and resident in Canada for purposes of the Act, the XXXXXXXXXX and theXXXXXXXXXX . Its head office is located at XXXXXXXXXX , and its business number is XXXXXXXXXX .
13. Cansub files its tax return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office.
14. XXXXXXXXXX CO2 is a XXXXXXXXXX subsidiary of XXXXXXXXXX CO1 and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX .
15. XXXXXXXXXX CO3 is a XXXXXXXXXX subsidiary of XXXXXXXXXX CO2 and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX .
16. XXXXXXXXXX is a XXXXXXXXXX subsidiary of XXXXXXXXXX CO3 and is incorporated and resident in XXXXXXXXXX for purposes of the Act.
17. XXXXXXXXXX is a XXXXXXXXXX subsidiary of XXXXXXXXXX CO3 and is incorporated and resident in XXXXXXXXXX for purposes of the Act.
18. XXXXXXXXXX Holdco 1 is incorporated under and governed by the laws of XXXXXXXXXX . The registered office of XXXXXXXXXX Holdco 1 is established in the XXXXXXXXXX and general meetings of the shareholders are held at least annually in the XXXXXXXXXX . The board of managers of XXXXXXXXXX Holdco 1 is currently comprised of XXXXXXXXXX managers, each of whom is a citizen and resident of XXXXXXXXXX . The authorized and issued share capital of XXXXXXXXXX Holdco 1 consists of XXXXXXXXXX owned by XXXXXXXXXX , XXXXXXXXXX owned by XXXXXXXXXX owned by Cansub.
19. All future dividends to be declared by XXXXXXXXXX Holdco 1 will be payable to its shareholders in proportion to their share ownership (XXXXXXXXXX) at the relevant time.
20. XXXXXXXXXX Holdco 2 is a XXXXXXXXXX subsidiary of XXXXXXXXXX Holdco 1 and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX .
21. XXXXXXXXXX Holdco 3 is a XXXXXXXXXX subsidiary of XXXXXXXXXX Holdco 2 and is incorporated and resident in XXXXXXXXXX for purposes of the Act and the XXXXXXXXXX .
22. XXXXXXXXXX Holdco 1, XXXXXXXXXX Holdco 2 and XXXXXXXXXX Holdco 3, all investment holding companies, use the USD as their functional currency for both financial reporting and XXXXXXXXXX tax purposes.
PROPOSED TRANSACTION
23. Cansub will file an election with the Minister pursuant to subsection 261(3) in the prescribed form and manner, on or before the day that is six months before the end of its First Taxation Year. Pursuant to this election, Cansub will use the USD as its functional currency for Canadian tax purposes.
24. The management of the XXXXXXXXXX Parent Group has decided to use Canco’s cash resources to participate in the group’s global growth plans. For this purpose, Canco created Cansub to invest in XXXXXXXXXX shares of XXXXXXXXXX Holdco 1. The use of a separate entity, inter alia, allows Canco to separate its foreign holding company activities from its active operations, facilitating the global use and investment of excess cash from Canco operations without involving or detracting from Canco’s primary business of XXXXXXXXXX services in Canada.
25. Under this plan, the activities of Cansub will be restricted to additional investments in XXXXXXXXXX shares of XXXXXXXXXX Holdco 1, which will be exclusively denominated in USD, and which will continue to be financed with USD received from Canco as capital contributions or share subscriptions. In respect of these activities:
a) Cansub will receive USD from Canco as capital contributions or share subscriptions;
b) Cansub will subscribe for XXXXXXXXXX shares of XXXXXXXXXX Holdco 1 using USD, and the XXXXXXXXXX Holdco 1 XXXXXXXXXX shares will be denominated in USD;
c) Cansub will receive any and all dividends from XXXXXXXXXX Holdco 1 in USD;
d) Cansub has a USD bank account;
e) Cansub will not have a Canadian dollar bank account. Cansub’s expenses will be paid by Canco or another XXXXXXXXXX Parent Group entity on its behalf and Cansub will reimburse the payer in USD. Expenses are not anticipated to be significant.
As such, Cansub is expected to have limited, if any, economic exposure to the Canadian dollar. It is anticipated that all of Cansub’s revenue, capital inflows, expenses, assets and liabilities will be denominated in USD.
26. The financial statements of Cansub will be used for the following purposes:
a) to consolidate results with XXXXXXXXXX Parent; and
b) to file its Canadian income tax return.
27. Cansub’s financial statements are not anticipated to be used outside of the XXXXXXXXXX Parent Group, other than for tax reporting purposes.
28. Canco will account for its investment in Cansub at historical cost. As such, Canco will not require Cansub’s financial statements to carry out its own financial reporting. The financial statements of Canco will be consolidated directly with XXXXXXXXXX Parent. Similarly, the financial position and results for Cansub will be consolidated directly with XXXXXXXXXX Parent.
29. The records and books of account of Cansub will be maintained in USD, given the underlying USD activities of Cansub. Cansub’s financial statements will be prepared in accordance with XXXXXXXXXX GAAP and IFRS. As such, Cansub’s financial statements allow for direct consolidation with XXXXXXXXXX Parent.
30. Cansub will not revoke its functional currency election pursuant to subsection 261(4) of the Act, and will not file another election under paragraph 261(3)(b) of the Act at any time in the foreseeable future.
31. XXXXXXXXXX Holdco 1 will use the USD generated by Cansub capital contributions and share subscriptions to fund additional capital injections in XXXXXXXXXX Holdco 2.
32. In the past, XXXXXXXXXX Holdco 2 has been used to directly or indirectly acquire XXXXXXXXXX % of the shares of selected active businesses operating outside of Canada and XXXXXXXXXX from arm’s length persons. These targeted acquisitions have been strategic to the XXXXXXXXXX Parent Group’s global service offerings by expanding the geographical coverage of the XXXXXXXXXX Parent Group’s business services, and are expected to be held as long term investments of the XXXXXXXXXX Parent Group.
33. XXXXXXXXXX Holdco 1 may from time to time hold USD denominated cash until such time as cash is required by XXXXXXXXXX Holdco 2 for additional targeted acquisitions, international growth opportunities are funded, or other cash needs arise within its subsidiaries. Once USD funds are contributed to XXXXXXXXXX Holdco 1 by its shareholders, the funds will be committed for use in global acquisitions, growth or operations, and will only be returned to the XXXXXXXXXX Holdco 1 shareholders in exceptional circumstances.
34. Any interest income earned by XXXXXXXXXX Holdco 1 on uninvested funds, temporarily held by XXXXXXXXXX Holdco 1 pending the completion of a targeted acquisition or other purposes outlined in paragraph 33, would be FAPI, a portion of which would be required to be included in Cansub’s income for tax purposes pursuant to subsection 91(1).
35. Targeted acquisitions of XXXXXXXXXX Holdco 2 and XXXXXXXXXX Holdco 3, as necessary, are not anticipated to be businesses with a particular common currency.
36. XXXXXXXXXX Holdco 3 has been used, and may be used again in the future, to hold minority interests in future acquisitions where a jurisdiction requires more than one shareholder under the relevant corporate law.
37. Outside of the interest income earned by XXXXXXXXXX Holdco 1, as described in paragraph 34 above, the principal source of income for XXXXXXXXXX Holdco 1, XXXXXXXXXX Holdco 2, and XXXXXXXXXX Holdco 3 is expected to be future dividends received directly or indirectly from targeted acquisitions which are expected to be active businesses. As such, the future sources of income of XXXXXXXXXX Holdco 1 are expected to include only dividends deemed received from the exempt surplus of XXXXXXXXXX Holdco 2, or FAPI as described in paragraph 34 above.
PURPOSE OF THE PROPOSED TRANSACTION
38. The purpose of the proposed transaction is to enable Cansub to use the USD as its functional currency beginning in its First Taxation Year.
39. The use of the USD as the functional currency of Cansub is expected to minimize income distortions that would arise, which would not reflect the actual foreign exchange risks inherent in the conduct of Cansub’s activities, if Cansub were to use the Canadian dollar to compute its Canadian tax results.
RULING
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, and purpose of the proposed transactions, and that the proposed transaction is completed in the manner described above, our ruling is as follows:
A. Subsection 261(5) will apply to Cansub in respect of its First Taxation Year provided that the USD remains the primary currency in which Cansub maintains its records and books of account for financial reporting purposes throughout that taxation year.
The above-noted ruling is based solely on the facts, additional information and proposed transaction described above, and is subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts, proposed transaction or additional information described herein.
The ruling is based on the Act, the XXXXXXXXXX and the XXXXXXXXXX in their present form, and does not take into account any proposed amendments to the Act, the XXXXXXXXXX or the XXXXXXXXXX which, if enacted, could have an effect on the ruling provided herein.
Yours truly,
XXXXXXXXXX
Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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