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: Effect of amalgamation on the reporting currency of predecessor corporations
Position: See letter
Reasons: See letter
XXXXXXXXXX
2010-037067
D. Boychuk
(613) 948-5274
November 30, 2010
Dear XXXXXXXXXX :
Re: Functional Currency Tax Reporting
This is in response to your letter of June 9, 2010 in which you asked for our comments on the application of the functional currency tax reporting rules in section 261 of the Income Tax Act (the "Act") in the hypothetical scenario described below.
1. Aco and Bco are taxable Canadian corporations. The taxation year end of both corporations is December 31. The "functional currency" of Aco and Bco, as that term is defined in subsection 261(1) of the Act, is United States dollars (US$).
2. Aco owns all the shares of Bco which it acquired on December 31, 2007 for US $1,000.
3. Bco owns non-depreciable capital property ("Property") which it purchased on December 31, 2007 for US $1,000.
4. Aco and Bco each filed an election described in subsection 261(3) of the Act to report their Canadian tax results for their 2008 and subsequent taxation years in US$.
5. The relevant spot rate on December 31, 2007 for the conversion of US$ to CDN$ was US $1.00 = CDN $0.99.
6. As of December 31, 2007:
- the stated capital and paid-up capital ("PUC") of the Aco shares was CDN $1,990;
- the adjusted cost base ("ACB") of the Bco shares to Aco was CDN $990; and
- the ACB of the Property to Bco was CDN $990.
7. During 2008, Bco sold one-half of the Property for US $500. The proceeds from the disposition of the Property were used to fund a return of PUC to Aco which used the money to return PUC to its shareholders. The relevant spot rate for the day on which the Property was sold and the proceeds distributed as a return of PUC was US $1.00 = CDN $0.98 (CDN $1.00 = US $1.02).
8. Aco and Bco amalgamated on January 1, 2009 to form Amalco. Amalco did not file a subsection 261(3) election to determine its Canadian tax results in a currency other than Canadian currency. Therefore, in the absence of subsection 261(16) of the Act, Amalco had a different tax reporting currency in its first taxation year than Aco and Bco had for their last taxation year.
9. The relevant spot rate on December 31, 2008 for the conversion of US$ to CDN$ was US $1.00 = CDN $1.22.
10. As a result of the amalgamation, Aco and Bco were deemed by paragraph 261(16)(b) of the Act, to have filed, at the time that is six months and one day before the beginning of their last taxation year (i.e., six months and one day before 2008), a notice of revocation described in subsection 261(4) of the Act.
You have asked us whether the notice of revocation that is deemed to have been filed by Aco and Bco has any effect given that 2007 was a Canadian currency year of each of these corporations and, if the deemed filing of the notice of revocation is not effective, how is the ACB of the Property acquired by Amalco and the PUC attached to the shares of Amalco to be determined.
Our Comments
Please note that it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain an advance income tax ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments which we trust will be of some assistance.
Interaction between subsections 261(4) and 261(16)
Subject to the possible application of subsection 261(18) of the Act (discussed below), paragraph 261(16)(b) of the Act will apply to deem Aco and Bco to have filed, at the time that is six months and one day before the beginning of their last taxation year, a notice of revocation described in subsection 261(4) of the Act. Subsection 261(4) provides, in part, as follows:
A taxpayer may revoke its election under paragraph (3)(b) by filing, on a day that is in a functional currency year of the taxpayer (other than its first functional currency year), a notice of revocation in prescribed form and manner.
Paragraph 261(16)(b) does not simply deem the taxpayer to have filed a notice of revocation on a particular day but to have filed a notice of revocation "described in" subsection 261(4). In this respect, we note that subsection 261(4) applies if the notice of revocation referred to in that subsection is filed on a day that is in a functional currency year of a taxpayer (other than its first functional currency year). Thus, it is reasonable to consider that a notice a revocation "described in" subsection 261(4) is a notice that is filed on a day that is in a functional currency year of a taxpayer (other than its first functional currency year). Accordingly, the effect of paragraph 261(16)(b), in the hypothetical scenario described above, is to deem a notice of revocation to be filed on a day that is in a functional currency year of Aco and Bco (other than their first functional currency year).
Pursuant to paragraph 261(3)(e) of the Act, Aco and Bco are not eligible to report in a currency other than Canadian currency in their 2008 taxation year if a revocation under subsection 261(4) applies to that year. Since a revocation applies for that year by reason of paragraph 261(16)(b), the election made by Aco and Bco to report in US$ for 2008 will not be effective and each of Aco and Bco will be required to report their 2008 Canadian tax results in Canadian currency.
Subsection 261(18)
Subsection 261(18) of the Act would apply to require Amalco to report its Canadian tax results in US$ if it could reasonably be considered that one of the main purposes of the transfer of property from Aco and Bco to Amalco (which is considered, pursuant to subsection 261(19) of the Act, to have occurred immediately before the amalgamation) is to: (1) change, or enable the changing of, the currency in which the Canadian tax results in respect of the transferred property would otherwise be determined; and (2) the Minister of National Revenue directs Amalco to determine its Canadian tax results in US$.
Assuming that subsection 261(18) applies and Amalco is required to determine its Canadian tax results in US$ for its first taxation year, paragraph 261(16)(b) would not apply to Aco and Bco since the tax reporting currency of Amalco and the predecessor corporations (Aco and Bco) would be the same.
Summary
Assuming that subsection 261(18) does not apply, the PUC of the Amalco shares, immediately after the amalgamation, will be CDN $1,500 [$1,990 - $490] and the ACB of the Property to Amalco will be CDN $495 [$990 (original cost) - $495 (cost attributable to the portion of the Property that was sold prior to the amalgamation)].
We trust that our comments are of some assistance.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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