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: How to convert a capital dividend account ("CDA") into a corporation's functional currency?
Position: In this case, July 1, 2011 to June 30, 2012 is Canco's last Canadian currency year. Therefore, the taxpayer must convert the balance in the CDA on June 30, 2012 using the relevant rate quoted by the Bank of Canada at noon on June 30, 2012.
Reasons: 261(7)(h)
XXXXXXXXXX
2012-047126
Angelina Argento
September 20, 2013
Dear XXXXXXXXXX,
Re: Conversion of a Capital Dividend Account ("CDA") Balance into Functional Currency
We are writing in response to your email dated November 29, 2012 wherein you ask how a Canadian corporation's ("Canco's") CDA should be converted from Canadian currency into US dollars, where the corporation has a June 30th year end and in December, 2012 has validly filed an election to use the US dollar as its functional currency?
Our Comments
Written confirmation of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable tax services office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.
Pursuant to paragraph 261(3)(b) of the Income Tax Act ("Act"), a corporation must file an election to determine its "Canadian tax results" in its elected functional currency with the Minister in prescribed form and manner on or before the day that is six months before the end of the taxation year in respect of which the election is to apply. Canco qualified for and made a valid functional currency election sometime in December, 2012 in respect of its taxation year ending June 30, 2013. Therefore, pursuant to paragraph 261(5)(a), Canco is required to determine its "Canadian tax results" for its taxation year ending June 30, 2013, in US dollars.
Pursuant to paragraph 261(7)(h) of the Act, in applying the Act to a taxpayer for a particular functional currency year, any Canadian dollar amount that arises in a taxation year prior to the taxpayer's first functional currency reporting taxation year that is relevant in determining the taxpayer's "Canadian tax results" for the particular functional currency reporting year is to be converted from Canadian dollars into the taxpayer's elected functional currency using the "relevant spot rate" for the last day of the taxpayer's last Canadian currency year.
Pursuant to paragraph 261(5)(b) of the Act, any Part III tax due by Canco (pursuant to subsection 184(2) of the Act) in the event it makes a capital dividend election in excess of its CDA balance, is relevant in determining Canco's "Canadian tax results". Since the CDA balance is relevant in determining whether Canco will incur a Part III tax liability, Canco must maintain its CDA in its elected functional currency. Assuming that Canco has at all times maintained its normal 12 month taxation year, Canco's last Canadian currency year would be from July 1, 2011 to June 30, 2012. Therefore, Canco must convert the balance in the CDA on June 30, 2012 using the relevant spot rate on that date.
Paragraph (a) of the definition of "relevant spot rate" in subsection 261(1) states as follows:
"relevant spot rate" for a particular day means, in respect of a conversion of an amount from a particular currency to another currency, (a) if the particular currency or the other currency is Canadian currency, the rate quoted by the Bank of Canada for noon on the particular day (or, if there is no such rate quoted for the particular day, the closest preceding day for which such a rate is quoted) for the exchange of the particular currency for the other currency, or, in applying paragraphs (2)(b) and (5)(c), another rate of exchange that is acceptable to the Minister"
Therefore, in the above case, Canco should convert its CDA balance on June 30, 2012 from Canadian currency into Canco's elected functional currency (in this case, US dollars) using the rate quoted by the Bank of Canada at noon on June 30, 2012.
We trust these comments to be of assistance.
Yours truly,
Olli Laurikainen, CPA, CA
For Director
International Division
Income Tax Rulings Directorate
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