11 July 2013 Internal T.I. 2012-0471111I7 - functional currency

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: 1. What is the basis for our conclusion that paragraph 261(11)(d ) of the Act (which applies only to taxes that are computed "for the particular taxation year") applies to a Part III tax assessment pursuant to subsection 184(2) (which arises "at the time of the election" and does not relate to a particular taxation year)? 2. Given the difference in wording between paragraph 261(11)(e) and subsection 83(4), how does a functional currency reporter compute the penalty imposed under subsection 83(4) in Canadian dollars?

Position: 1. An amount of Part III tax payable by a taxpayer which arises as a consequence of an election in respect of a dividend payable in a taxation year is an amount of tax payable "for the particular year" for the purposes of paragraph 261(11)(d) of the Act. 2. A functional currency reporter must compute the amount in paragraph 83(4)(a) in its functional currency and convert that amount in Canadian dollars using the Bank of Canada noon spot rate for the day on which the late filed capital dividend election is made. The penalty will be the lesser of the amount in paragraph 83(4)(a) converted into Canadian dollars and the amount computed in paragraph 83(4)(b) using CAN $500.

Reasons: 1. Paragraph 261(11)(d) 2. Paragraph 261(11)(g)

July 11, 2013

Doug Schober Angelina Argento
Programs Officer
Special Elections and Returns
T2 Processing & Assessing Programs Section
ABSB/BRCPD/BRD

2012-047111

Functional Currency Reporting

We are responding to your email query wherein you refer to CRA Document No. 2012-0453071I7 (footnote 1) and ask the following questions:

1. What is the basis for our conclusion that paragraph 261(11)(d) of the Act (which applies only to taxes that are computed "for the particular taxation year") applies to a Part III tax assessment pursuant to subsection 184(2) (which arises "at the time of the election" and does not relate to a particular taxation year)?

2. Since paragraph 261(11)(e) applies "for the particular taxation year", whereas, pursuant to subsection 83(4), the penalty for a late-filed form T2054 (footnote 2) is calculated based on the number of months ending on the day on which the election is made, how does a functional currency reporter compute the penalty imposed by subsection 83(4) in Canadian dollars?

Our Comments

Interaction of subsection 184(2) and paragraph 261(11)(d)

If the full amount of the capital dividend declared exceeds the corporation's capital dividend account balance (as defined in paragraph 89(1)(b)), a penalty tax will be imposed under subsection 184(2) of the Act equal to ¾ of the excess amount of the dividend. In particular, subsection 184(2) provides as follows:

"Tax on excessive elections — Where a corporation has elected in accordance with subsection 83(2), 130.1(4) or 131(1) in respect of the full amount of any dividend payable by it on shares of any class of its capital stock and the full amount of the dividend exceeds the portion thereof deemed by that subsection to be a capital dividend or capital gains dividend, as the case may be, the corporation shall, at the time of the election, pay a tax under this Part equal to 3/4 of the excess."

Paragraph 261(11)(d) provides as follows:

"Notwithstanding subsections (5) and (7), for the purposes of applying this Act in respect of a functional currency year (referred to in this subsection as the "particular taxation year") of a taxpayer,

(d) amounts of tax that are payable under this Act (except under this Part and Parts VI, VI.1 and XIII.1) by the taxpayer for the particular taxation year are to be determined by converting those amounts, as determined in the taxpayer's elected functional currency, to Canadian currency using the relevant spot rate for the day on which those amounts are due".

In our view, an amount of Part III tax payable by a taxpayer which arises as a consequence of an election in respect of a dividend payable in a taxation year is an amount of tax payable "for the particular year" for the purposes of paragraph 261(11)(d) of the Act.

Interaction of subsection 83(4) and paragraph 261(11)(e)

Pursuant to subsection 83(2), a capital dividend election must be filed on prescribed form T2054 with the Minister of National Revenue by the earlier of the day on which the dividend becomes payable and the first day on which any part of the dividend is paid. Subsection 83(3) permits the late filing of the election and will deem the election to have been made on time (i.e. on the earlier of the day on which the capital dividend becomes payable and the first day on which any part of the dividend is paid), if the taxpayer satisfies the conditions specified therein, one of which is to estimate and pay the late-filing penalty specified in subsection 83(4) as follows:

"Penalty for late filed election — For the purposes of this section, the penalty in respect of an election referred to in paragraph (3)(a) is an amount equal to the lesser of

(a) 1% per annum of the amount of the dividend referred to in the election for each month or part of a month during the period commencing with the time that the dividend became payable, or the first day on which any part of the dividend was paid if that day is earlier, and ending with the day on which that election was made, and

(b) the product obtained when $500 is multiplied by the proportion that the number of months or parts of months during the period referred to in paragraph (a) bears to 12."

Subsection 83(4) computes the penalty as being the lesser of two amounts, one of which uses Canadian currency. In our view, the amount in paragraph 83(4)(a) must be computed in Canco's elected functional currency and then converted into Canadian dollars using the Bank of Canada noon spot rate for the day on which the late filed capital dividend election is made, since this is the date on which the late filing penalty is due. Whereas, the amount in paragraph 83(4)(b) must be computed using CAN $500 (as required therein). In other words, the amount in paragraph 83(4)(b) is not to be computed in Canco's elected functional currency. Paragraph 261(11)(g) provides that all amounts payable under the Act are to be paid in Canadian dollars. Therefore, Canco's liability for the late filed capital dividend election will be the lesser of the two Canadian dollar amounts (i.e. the amount in paragraph 83(4)(a) computed in Canco's functional currency and converted into Canadian dollars) and the amount in paragraph 83(4)(b) computed in Canadian dollars.

Also note that paragraph 261(11)(e) is not relevant in your case. Paragraph 261(11)(e) provides that if a particular amount that is determined in a taxpayer's elected functional currency is deemed to be paid at any time on account of an amount payable for a functional currency year of the taxpayer (e.g., a refundable investment tax credit), the particular amount is to be converted to Canadian currency using the relevant spot rate for the day that includes that time. No amount determined in Canco's functional currency is deemed to be paid at any time as a result of the late filed capital dividend election. In other words, as a result of the late filed capital dividend election and the payment of the late filing penalty, there is no amount that is determined in Canco's elected functional currency that is deemed to be paid at any time on account of an amount payable for a functional currency year, therefore paragraph 261(11)(e) is not relevant.

We trust these comments will be of assistance.

Olli Laurikainen, Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 In particular, you refer to the following comments made in CRA Document No. 2012-0453071I7:
"… any amount that is relevant in determining Canco's (a Canadian resident corporation) Canadian tax results (which includes any Part III tax in the event it makes a capital dividend election in excess of its capital dividend account balance) must be reported on its T2 return in its elected functional currency. Therefore, it is our view that Canco must maintain its capital dividend account in its elected functional currency and must report all amounts on Form T2054 in its elected functional currency. However, any Part III tax payable by Canco should be converted into Canadian dollars using the Bank of Canada noon spot rate on the due date."
2 Form T2054 "Election in Respect of a Capital Dividend under Subsection 83(2)".