CRA does not permit a s. 261 functional currency different from the GAAP currency, and will consider applying the s. 261(18) avoidance rule to de facto 2nd elections

5 September 2016 - 11:57pm

Comments of CRA in its new Folio on the s. 261 functional currency rules include:

“Where applicable financial accounting standards require a taxpayer to report its accounts in Canadian dollars, the taxpayer will not have a functional currency simply because it maintains its records and books of account in a qualifying foreign currency.”
“[Where] a corporation…carr[ies] on two distinct lines of business which have different currencies for financial reporting purposes…the corporation may still make a valid election to determine its Canadian tax results (from all activities) in a particular foreign currency if that currency is the functional currency of its most significant business.”
Where a Canco which has revoked its functional currency election, avoids the prohibition (under s. 261(3)) against making a second functional currency election by, for example, rolling down all its property to a new Canadian sub which reports its Canadian tax results in U.S. dollars, or if it amalgamates with a sub and Amaclo makes a fresh election, “the CRA would consider issuing a direction under subsection 261(18) that would require either Cansub or [Amalco], as applicable, to report its Canadian tax results in Canadian dollars.”
The loss denial rule in s. 261(21) applies automatically, i.e., no tax avoidance purpose is necessary.

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