29 August 2011 Internal T.I. 2011-0397071I7 - Interest on instalments

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. Is it acceptable to convert a particular currency into another currency by dividing the amount by a Bank of Canada exchange rate?
2. How will interest on late instalment payments be computed where a taxpayer chooses an instalment payment option in paragraph 157(1)(a) that is not the method that gives rise to the least amount of instalments of tax for the year as stated in subsection 161(4.1)?

Position: 1. Yes
2. The Minister is bound to respect the choice of option that a corporation makes in calculating the payment of taxes to be remitted in monthly instalments. Should the corporation be deficient in making such remittances, interest may be assessed. However, the calculation of interest should be limited to the monthly amount required based on whichever allowable method in the circumstances gives rise to the least total amount of such parts or instalments of tax for the year.

Reasons: 1. It is our opinion that in most cases, dividing the Bank of Canada rate would be acceptable.
2. Per legislation and supported by jurisprudence (I.G. Rockies Corp. v The Queen).

									August 29, 2011

	Canada Revenue Agency					HEADQUARTERS
	Assessment and Benefit Services Branch		Income Tax Rulings
	Business Returns Directorate	  				Directorate
	750 Heron Road, E09-4038				M. Gauthier
	Ottawa, ON, K1A 0L5					(613) 948-1143

	Attention: Kathleen McCaffrey				2011-039707

Conversion of amounts and interest on instalment payments

We are writing to you in reply to your email dated February 18 and March 18, 2011 in which you request our opinion on two separate questions.

QUESTION 1

Is it acceptable to convert a particular currency into another currency by dividing the amount by a Bank of Canada exchange rate? This question relates to the currency conversion for a functional currency reporter. You indicated that in reviewing XXXXXXXXXX 's calculations, you noticed a difference in how they convert Canadian dollar ("CAD") instalments into American dollar ("USD") instalments. They are using the USD to CAD Bank of Canada rate and dividing, instead of the CAD to USD rate and multiplying. Since your calculations are done using multiplication, you are asking if it is acceptable to convert a particular currency into another currency by dividing the amount by a Bank of Canada exchange rate.

COMMENTS

The Bank of Canada provides the rate to convert a particular currency into another currency (the "to rate"). Similarly it will also provide the inverse of that rate in order to convert from that other currency back into the particular currency (the "from rate"). Alternatively, you could divide by the "to rate" if you wanted to convert from the other currency back into the particular currency.

There may be a rounding difference depending on whether you use division or multiplication because the Bank of Canada rates are rounded to four decimal places. The rounding difference could represent an advantage or disadvantage to the taxpayer depending on the facts of the particular scenario.

For example, assume that we want to convert $1 million in American currency into Canadian currency. The Bank of Canada rates are 1 American Dollars (USD) equals 0.9855 Canadian dollars (CAD) (the "to rate") and 1 CAD equals 1.0147 USD (the "from rate"). If we multiply by the "to rate" of 0.9855, we arrive at an amount of $985,500 CAD. If we divide by the "from rate" of 1.0147, we arrive at an amount of $985,512 CAD.

Generally, amounts are converted at the relevant spot rate. The "relevant spot rate", as defined in section 261, means, in respect of a conversion of an amount from a particular currency to another currency, the rate quoted by the Bank of Canada for noon on the particular day for the exchange or another rate of exchange that is acceptable to the Minister.

It is our opinion that in most cases, dividing the Bank of Canada rate would be acceptable. However, in some foreign countries, currency conversion is controlled by the state and may have different rates for purchases of currency as opposed to sales of currency. It may not be appropriate to use division in such a case, as the difference may be significant.

QUESTION 2

In your March 18th e-mail, you refer to a letter submitted to CRA by XXXXXXXXXX dated XXXXXXXXXX . You provided us with a copy of this letter. You refer specifically to comments on page XXXXXXXXXX of their letter under the heading XXXXXXXXXX , wherein XXXXXXXXXX states the following:

XXXXXXXXXX

Your question was the following: "We are not exactly sure what they are saying in XXXXXXXXXX paragraph on page XXXXXXXXXX . If they want to advise us of what instalment base option they are choosing, then based on the I.G. Rockies judgement, we feel we are obligated to do our calculations based on that option. Do you agree?"

COMMENTS

According to paragraph 157(1)(a) of the Act, a corporation is required, subject to certain exceptions, to pay either of the following amounts as instalments:

(i) on or before the last day of each month in the year, an amount equal to 1/12 of the total of the amounts estimated by it to be the taxes payable by it under this Part and Parts VI, VI.1 and XIII.1 for the year,
(ii) on or before the last day of each month in the year, an amount equal to 1/12 of its first instalment base for the year, or
(iii) on or before the last day of each of the first two months in the year, an amount equal to 1/12 of its second instalment base for the year, and on or before the last day of each of the following months in the year, an amount equal to 1/10 of the amount remaining after deducting the amount computed pursuant to this subparagraph in respect of the first two months from its first instalment base for the year.

Where a taxpayer is required to pay an instalment of tax and has failed to pay all or any part thereof, subsection 161(2) of the Act states that the taxpayer shall pay interest at the prescribed rate on the amount that the taxpayer was required to pay. The amount of interest that is required to be paid for the purposes of subsection 161(2) is determined in accordance with subsection 161(4.1) that provides in part as follows:

... where a corporation is required to pay a part or instalment of tax for a taxation year computed by reference to a method described in subsection 157(1), the corporation is deemed to have been liable to pay on or before each day on or before which subparagraph 157(1)(a)(i), (ii) or (iii) requires a part or instalment to be made equal to the amount, if any, by which

(a) the part or instalment due on that day computed in accordance with whichever allowable method in the circumstances gives rise to the least total amount of such parts or instalments of tax for the year, computed by reference to

(i) the total of the taxes payable under this Part and Parts VI, VI.1 and XIII.1 by the corporation for the year, determined before taking into consideration the specified future tax consequences for the year,
(ii) its first instalment base for the year, or
(iii) its second instalment base and its first instalment base for the year,

Please note that pursuant to subparagraph 161(4.1)(a)(i), interest is assessed based on the total of the taxes payable for the year and not based on the estimated taxes used for the purposes of subparagraph 157(1)(a)(i) of the Act. In other words, a taxpayer cannot reduce his interest liability on late instalments by low balling his tax estimate for the year as interest may be computed on the deficiency. For the purposes of our interpretation, we will assume that the estimated taxes are equal to the actual taxes payable.

In order to understand the taxpayer's request, it seems necessary to understand I.G. Rockies Corp. v The Queen (2005 DTC 289). In I.G. Rockies , the taxpayer chose to make his instalments pursuant to subparagraph 157(1)(a)(iii) or Option 3. We will refer to the three options available in subparagraphs 157(1)(a)(i), (ii) and (iii) as "Option 1", "Option 2", and "Option 3", respectively. Due to the fact that the taxpayer's second instalment base was nil, no payments were required for the first two months, and 10 payments of $2 million for a total of $20 million in instalment payments for the year were required in the months following. Alternatively, the taxpayer could have chosen Option 1, which would have required 12 equal payments of $1.5 million for a total of $18 million in instalment payments for the year or Option 2 which would have required 12 equal payments of approximately $1.66 million, for a total of $20 million in instalment payments for the year.

In I.G. Rockies, CRA assessed interest on the first two missing payments of $1.5 million required under Option 1 on the basis that subsection 161(4.1) requires a corporation to make instalments using the option that gives rise to the least total amount of tax for the year. Justice Teskey ruled against CRA's basis for assessment and stated that "a corporation can choose any one of the three options in subsection 157(1) and if used correctly and on time, then that is the end of the matter". In other words, a corporation is able to choose any instalment method available in subparagraph 157(1)(a), and as long as it makes the required payments on time, it is generally not liable for interest. We agree with this decision because the taxpayer was, under Option 3, not required to make any payments on the last day of the first two months of the year. Consequently, no payments for the first two months were late and interest could not be assessed. In other words, the taxpayer had, at that time, not failed to make any instalment for the purposes of subsection 161(2).

For the purposes of the payment in the third month, when the taxpayer was five days late in making its $2 million payment, the judge ruled that interest should be assessed, but not on the $2 million amount required by Option 3 but rather on the $1.5 million amount required for the third payment in Option 1 which in his opinion represented "the payment required under the method that gave rise to the least amount of tax for the year for the corporation. We also agree with this decision because according to paragraph 161(4.1)(a), the taxpayer would only be deemed to be required to pay the instalment that would be due in accordance with whichever method gives rise to the least amount of instalments for the year, which would be the $1.5 million payment under Option 1.

In addition, for the twelfth and final payment, I.G. Rockies had made a total of two nil payments and nine payments of $2 million for a total of $18 million but had not made the final payment in the twelfth month. The judge ruled that that taxpayer had no liability to pay any amount of instalments above the $18 million required by Option 1 since the method that gives rise to the least total amount of instalments for the year was $18 million under Option 1. We agree that there should not have been any interest assessed beyond that amount as the taxpayer would have satisfied his minimum required instalment payment obligation.

To summarize, the Minister is bound to respect the choice of option that a corporation makes in calculating the payment of taxes to be remitted in monthly instalments. Should the corporation be deficient in making such remittances, interest may be assessed. However, the calculation of interest must be limited to the monthly instalment amount required based on whichever allowable method in the circumstances gives rise to the least total amount of such parts or instalments of tax for the year.

To answer your question, it seems to us that XXXXXXXXXX and its Canadian affiliates are seeking confirmation that they can choose any of the three methods available pursuant to paragraph 157(1)(a). It would appear that you can confirm this. Interest should thus not be assessed in respect of instalments provided the instalments are not late. However, if an instalment payment is late, then the taxpayer should be charged interest, but only on the late instalment amount based on the least total tax method mentioned in subsection 161(4.1). You may wish to discuss the XXXXXXXXXX request with the XXXXXXXXXX representative. You may also wish to clarify that if the Option 1 method is chosen, interest may be charged on late instalments based on the actual amount of taxes for the year as provided for in subparagraph 161(4.1)(a)(i) of the Act. As for the request by XXXXXXXXXX to come to an understanding with CRA, it does not seem necessary for XXXXXXXXXX to advise CRA in writing of the instalment base chosen, as the taxpayer can choose either method available pursuant to paragraph 157(1)(a). However, you may want to discuss this with the representative as well and the method that is used for computing interest. Please note that although we agree with the decision in I.G. Rockies, it is not precedent setting jurisprudence and we are not bound to follow it as it was rendered under the informal procedure.

If you need further assistance or wish to discuss any part of this opinion, please feel free to call Michel Gauthier ((613) 948-1143) or Alain Godin ((613) 957-2745).

Alain Godin
Section Manager for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency

FOOTNOTES

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

1 I.G. (Rockies) Corp. [2005] 2 C.T.C. 2052 (TCC)