9 May 1994 CICA Roundtable Q. 10, 9410890 - LARGE CORPORATION TAX - FOREIGN EXCHANGE GAINS/LOSSES

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.

Please note that the following document, although believed to be
correct at the time of issue, may not represent the current

Position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut
ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether foreign exchange gains and losses on long-term debt decrease or increase capital for purposes of the large corporation tax (Part I.3).

Position TAKEN:

Where the foreign exchange gains or losses are accounted for currently the net effect is that the change in retained earnings equals the change in the underlying debt with the result that there is no change upon "taxable capital". Deferred foreign exchange gains, reported as a deferred credit, is currently treated as a "reserve" and is therefore included under paragraph 181.2(3)(b). There is however no provision in the Act that would allow an adjustment to be made with respect to a deferred foreign exchange loss either through "capital" or as an "investment allowance".

Reasons FOR POSITION TAKEN:

Legislation and previous positions.

Revenue Canada Round Table
94 ALBERTA Conference

Question 10

PART I.3 TAX - FOREIGN EXCHANGE GAINS AND LOSSES ON TRANSLATION OF F/S

In calculating taxable capital for purposes of the Large Corporations Tax, the taxpayer's financial statements must reflect generally accepted accounting principles (GAAP). Inasmuch as it is GAAP in Canada to reflect foreign currency fluctuations on long-term debt, does the Department agree that the weakening of the Canadian dollar against the U.S. dollar will have no effect on taxable capital in that the weaker Canadian dollar will require U.S. denominated debt to be restated at a higher amount, while the resulting foreign exchange loss is a charge against earnings for the year thereby resulting in lower retained earnings? That is, what goes up must go down.

Department's Position

Subsection 181(3) of the Income Tax Act (the "Act") requires that the amounts reflected in a corporation's balance sheet be used to determine the carrying value or any other amount in respect of "capital", "investment allowance", "taxable capital employed in Canada" or "taxable capital" for purposes of calculating Part I.3 tax. Generally the accepted authority for GAAP in Canada is the CICA handbook, which specifically in section 1650 thereof, provides guidelines for the accounting of foreign exchange gains and losses that are to be followed in the preparation of the financial statements. Fluctuations between Canadian currency and the currency of U.S. or other foreign countries must be reflected on the annual balance sheet under these guidelines. The translation of foreign denominated debt will vary depending upon whether the debt has a fixed or ascertainable life ("long-term") extending beyond the end of the following fiscal year (CICA 1650.20 and .23). Foreign exchange gains and losses are brought into income or loss in the current year to the extent that they are not long-term and are required to be deferred and amortized over the remaining life of the debt where they are long-term. Foreign exchange losses on U.S. denominated debt will reduce both retained earnings and increase the amount of the debt by equal amounts for purposes of Part I.3 tax where the debt is not "long-term". Foreign exchange losses on long-term debt, however will result in an increase in the amount of debt to reflect the change in currencies thereby increasing capital for purposes of subsection 181.2(3). There is however no provision in the Act which permits an adjustment to capital in respect of the amount of deferred foreign exchange losses reported on the balance sheet. We would note that the Department believes there is some support for the position that the deferred unrealized foreign exchange gains reflected in the balance sheet constitute a reserve, akin to deferred revenue, which would be required to be included in capital pursuant to paragraph 181.2(3)(b). This matter is currently under reconsideration by the Department and has been brought to the attention of the department of Finance.

Author: Gary Donell
File: 941089
Date: May 9, 1994