Section 261

Table of Contents

Subsection 261(1) - Definitions

Canadian Tax Results

Administrative Policy

26 May 2016 IFA Roundtable Q. 3, 2016-0642111C6 - PUC of Shares of a FC Reporter

deemed dividend calculation for shareholder not part of Cdn tax results

CRA considered that a Canadian corporation (“Issuer”) which has the U.S. dollar as its elected functional currency nonetheless is required to keep track of the paid-up capital of its shares, so that if it issued U.S.$100,000 of shares when the Canadian dollar was at par and redeemed those shares when their Canadian-dollar equivalent was $125,000, there would be a resulting deemed dividend to its shareholder (assuming the shareholder was not a functional currency tax reporter) However, there would be no Part VI.1 tax, as that would relate to the tax results of the corporation rather than its shareholder.

If the shareholder also was a Canadian corporation that also had the U.S. dollar as its effective functional currency (“EFC”) for the relevant period, the deemed dividend would be determined in U.S. dollars so that no deemed dividend would arise, e.g., for Part IV tax or dividend refund purposes. However, Issuer would still be required to produce its information returns in respect of the shareholder based on calculations using Canadian dollar amounts.

If the shareholder was a Canadian corporation with the euro EFC and Issuer had a U.S. dollar EFC, Issuer would maintain its PUC in US$ for the purposes of determining its Canadian tax results (“CTRs”), and in C$ for all other purposes of the Act. Shareholder would have to maintain that PUC balance in € for the purposes of determining its CTRs.

If, rather than redeeming, Issuer returned capital to Shareholder in the amount of US$100,000 thereby invoking subsection 84(4), the same analysis would apply in determining whether amount paid by it on the reduction of capital exceeded the PUC reduction in respect of the class of shares owned by Shareholder.

The maintenance of legal stated capital in a foreign currency does not change any of these answers as PUC is fundamentally a C$ tax concept, absent functional currency considerations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) Canadian corporation with a USD functional currency can be subject to Part XIII withholding obligations on its USD prefs resulting from FX fluctuations 127

Elected Functional Currency

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

One-time election

1.11 ... A taxpayer need not make an election every year as the language of the requirement described at s. 262(3) is such that, for example, the second functional currency year of the taxpayer would also be covered by an election made within the first 61 days of the taxpayer’s first functional currency year.

1.12 Once a taxpayer has elected to use a particular foreign currency as its functional currency, the requirement described at s. 262(3)(d) prevents the taxpayer from subsequently changing to a different foreign currency. This condition also prevents a taxpayer that has revoked a prior functional currency election from filing a new functional currency election.

Functional Currency

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

One-time requirement

...The requirement to have a functional currency need only be met for the first tax year to which the taxpayer intends the functional currency rules to apply.

Primacy of financial accounting

1.15 ... In general, the primary currency condition will be met where that currency is its functional currency for financial accounting purposes. 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.

Touchstone of most significant business

1.16 In some instances, a corporation may carry on two distinct lines of business which have different currencies for financial reporting purposes. In such a case, 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.

1.17 It is possible to maintain shareholder resolutions in a currency other than the taxpayer’s elected functional currency without affecting the validity of the taxpayer’s functional currency election. ...

28 November 2010 Annual CTF Roundtable, 2010-0385891C6 - Functional Currency Tax Reporting - CTF 2010

Subco in Cdn-dollar group must use foreign currency in business transactions and "presented" financial statements

A Canadian public company (Canco), which carries on business primarily in Canada, incorporates Subco to hold its shares of a U.S. controlled foreign affiliate and to assume control of the financing of the affiliate, which will occur in U.S. dollars. Subco maintains its records and books of account in US dollars. Is Subco precluded from reporting its Canadian tax results in US dollars because its financial results are consolidated with those of Canco, whose reporting currency is the Canadian dollar?

CRA indicated that satisfaction of these two conditions was required:

1) The US dollar is the business currency of Subco (that is, the primary currency in which its transactions occur). In this respect, we expect that Subco would raise its capital in US dollars and derive the majority of its revenues in US dollars.

2) Subco's balance sheet and income statement are prepared in US dollars for the purposes of presenting the financial condition of the corporation to its shareholder and, where applicable, its creditors.

Respecting the second condition, CRA stated that "financial reporting must be the primary reason that the books and records are maintained in a qualifying currency," so that maintaining them in a qualifying currency without this purpose is not sufficient.

Articles

Eric Bretsen, Heather Kerr, "Tax Planning for Foreign Currency", 2009 Conference Report (CTF), C. 35.

Removal in new definition of principal business and consolidated financial statement requirements (pp. 35:32-33)

The new definition removed the requirements relating to "principal business activities" and "consolidated financial statements." The former requirement was arguably not significant in terms of establishing whether or not a taxpayer could qualify because the threshold for a qualifying business activity (which was left undefined) was presumably low enough that any sort of business activity would suffice. ...

The removal of the term "consolidated financial statements" from the definition of "functional currency" was significant because it also served to remove the reference to GAAP financial statements. The removal of the reference to GAAP arguably provides greater latitude in interpreting the term "functional currency" and perhaps broadens the circumstances in which a taxpayer is entitled to elect under section 261.

Relevant Spot Rate

Administrative Policy

GST/HST Memorandum 3-6 Conversion of Foreign Currency July 2018

CRA policies on FX dates and rates in GST/HST context

ETA s. 159 provides that the consideration for a supply expressed in a foreign currency shall be converted using the exchange rate on the day the tax became payable “or such other day as is acceptable to the Minister.” CRA has replaced P-222 by significantly more detailed commentary in Memorandum 3-6 on various FX issues.

In picking an FX rate, the registrant may use:

  • the day the consideration for the supply is paid
  • the day the foreign currency is acquired (as to which CRA provides a simplistic example of the day on which a money order for US$1,000 is acquired, with Canadian funds, to pay a USD invoice in that exact amount)
  • an average rate of exchange for the month in which the tax becomes payable (as to which CRA provides an example in which only two USD invoices were rendered in a month, showing that this method can be used even if it would be practicable to be more precise)

CRA provides a somewhat broad list of the acceptable sources for determining the exchange rate to use:

  • the source used for an actual conversion (that is, the source where the foreign currency was exchanged for Canadian dollars)
  • the source the person typically uses for actual conversions (for example, if a US company regular exchanges currency with a local US bank, it can use that bank as its source of FX rates)
  • a Canadian chartered bank
  • the Bank of Canada
  • the CBSA rate used for purposes of converting the value for duty of imported goods

An example of an unacceptable source is a commercial database service.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 159 529

27 April 2017 Internal T.I. 2017-0684831I7 - Changes to relevant spot rate

consistent use of Bloomberg, Thomson Reuters or OANDA FX spot rates generally is acceptable

What will CRA accept as “another rate of exchange that is acceptable to the Minister” under the relevant spot rate definition? CRA responded:

  • The Minister will generally accept a rate quoted by another source [rather than the daily rate quoted by the Bank of Canada] provided it is:
    • widely available;
    • verifiable;
    • published by an independent provider on an ongoing basis [e.g., Bloomberg L.P., Thomson Reuters Corporation and OANDA Corporation, whose rates are "generally acceptable"]; …
    • used in accordance with well-accepted business principles;
    • used for the preparation of the taxpayer’s financial statements; and
    • used consistently from year to year by the taxpayer. ...
  • The Bank of Canada rate will still be required in respect of a taxpayer transitioning into or out of income tax reporting in its elected functional currency in accordance with subsections 261(7) or 261(12)... .
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(7) must use Bank of Canada rate on conversion 102

S5-F4-C1 - Income Tax Reporting Currency

Potential CRA acceptance of average rate

1.6 ... [I]t may be possible to use an average exchange rate to convert certain items of income.

10 October 2014 APFF Roundtable Q. 9, 2014-0538631C6 F - 2014 APFF Roundtable, Q. 9 - Currency conversions average foreign exchange rate

use of spot rates for capital property

When asked to comment on the exchange rate to use for interest, dividends and capital gains, CRA stated, after referring to the reference in the definition to "another rate of exchange that is acceptable" (TaxInterpretations translation):

[A]n average rate of exchange could qualify in this regard. However, we do not accept using an average exchange rate respecting the calculation of capital gains and losses. Thus…all amounts expressed in a foreign currency before being taken into account in the calculation of such gains or losses (namely, the adjusted cost base, the proceeds of disposition and the expenses of the disposition) must be converted into Canadian dollars in accordance with the "relevant spot rate" for the day or days when they arose. This result accords with the principles elaborated…in Gaynor.

Tax Reporting Currency

Administrative Policy

9 March 2016 Internal T.I. 2015-0612501I7 - ITA 261(21) anti-avoidance

non-resident parent would have Canadian dollar as tax reporting currency

CRA considered that s. 261(21) did not apply to deny an FX loss sustained by a Canadian subsidiary (“Holdco”) of a non-resident parent (“Parent”) on hedging agreements it entered into with Parent to hedge its FX exposure on a U.S. dollar loan it had made to a Canadian subsidiary of Holdco which, unlike Holdco, had the U.S. dollar as its reporting currency, given that any of Parent's Canadian tax results would have been determined in Canadian dollars.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(20) - Paragraph 261(20)(b) s. 261(21) cannot apply to an FX hedging contract between a Canco which has the Canadian dollar as its functional currency and its parent which uses another currency 260

Subsection 261(2) - Canadian currency requirement

Cases

Ferlaino v. Canada, 2017 FCA 105

exercise price translated on exercise date

The former Director of Taxes at a large Canadian corporation argued unsuccessfully that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise. Scott JA considered this approach to be contrary to s. 261(2)(b), stating (at paras. 5-6):

The taxable transactions in this appeal occurred when the appellant exercised his stock options… .

Only then was the appellant required under paragraph 261(2)(b)… to calculate his reportable benefits by converting at once all relevant amounts, being the exercise price, along with the fair market value of the shares at the time the appellant exercised his options, using the exchange rate applicable on the date of the exercise.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) exercise price of employee stock options should be translated at the exercise-date spot rate 181

Canada v. Agnico-Eagle Mines Limited, 2016 FCA 130

on conversion of USD convertible debenture, the repayment amount arose at the conversion time

The taxpayer ("Agnico-Eagle") issued US$143M of convertible debentures (the equivalent of Cdn.$230M) and they were mostly converted into shares at a time their principal was the equivalent of Cdn.$170M, so that in CRA’s view Agnico-Eagle made a s. 39(2) gain of Cdn.$60M. According to Ryer JA (at paras. 103-104), the s. 39(2) gain was to be computed by comparing the fair market value of the shares when issued (using the current market price) of around Cdn.$280M, with the Cdn.$230M issuance amount, so that on a mechanical application of this formula Agnico-Eagle would have instead sustained a s. 39(2) loss of around Cdn.$50M. (However, he stated at para. 77 that his decision was limited to the question whether there was a s. 39(2) gain.)

He found that the amounts for which the debentures were repaid on the conversion dates was to be determined on the basis that the amounts of the repayments "arose" on those dates.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) conversion of a U.S.-dollar convertible debenture resulted in no FX gain based on the appreciation in the underlying shares 323

Korfage v. The Queen, 2016 TCC 69 (Informal Procedure)

pension income deduction arose when each pension payment was received, translated at annual average

On his retirement from a U.S. employment in September 2000, the taxpayer (a Canadian resident) elected under the terms of his pension plan to convert the pension amount he was thereafter entitled to receive into Canadian dollars at an exchange rate of 1.47. Under Art. XVIII, para. 1 of the Canada-U.S. Treaty, he was entitled to exclude from his Canadian income the amount of his monthly pension payments which would be excluded from his U.S. taxable income if he were a resident of the U.S. The Code would have excluded the portion of each payment which was treated by it as a return of his investment. This amount was U.S. $12,024 per annum, which was computed by amortizing his investment cost in U.S. dollars on a straight-line basis over his actuarially expected remaining life. For his 2010 taxation year, the taxpayer claiming a deduction of $17,677 CAD from his pension income, using the exchange rate of 1.47.

In rejecting this claim, Lamarre ACJ concluded that the exempt amount arose each month under Code s. 72(b)(1) when the benefit payment was received by the taxpayer, stating (at paras. 21-22):

[T]he provision states that gross income does not include “that part of any amount received . . . which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date)”. Thus, although the cost or investment in the Plan is measured as of the retirement date, the excluded amount is determined as of the date of receipt.

Having determined that the exempt amount arises on the date of receipt of each benefit payment, I conclude that the Minister’s use of the annual average exchange rate for 2010 was appropriate for converting the deductible amount. … The Minister has discretion in the application of an appropriate exchange rate…and chose to use the annual average exchange rate for 2010 of 1.0562.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18 deduction for U.S. pension income deduction translated at exchange rate for year of receipt 138

See Also

Agnico-Eagle Mines Limited v. The Queen, 2015 DTC 1008 [at 43], 2014 TCC 324, aff'd 2016 FCA 130

U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate when the conversion price was set

In 2002, the taxpayer ("Agnico") issued US-dollar denominated debentures which were convertible at the holders' option into common shares at a conversion price of U.S.$14 per share (or a conversion ratio of 71.429 per each U.S.$1,000 debenture). In December 2005 Agnico issued a notice of redemption for all outstanding debentures, which prompted the conversion of over 99% into common shares before the date specified for redemption. The balance of 0.8% of the debentures were redeemed, with the taxpayer exercising its right to satisfy the redemption price for each debenture by issuing common shares whose number was computed by dividing U.S.$1,000 by a heavily discounted share value.

The Crown took the position that gains were realized under s. 39(2) on conversion, as the U.S. dollar had depreciated substantially relative to the Canadian dollar between the debenture issuance and conversion.

In rejecting one of Agnico's arguments that s. 39(2) did not apply because the fair market value of the shares issued was higher than the debentures' principal amount, Woods J found (at paras. 47, 50) that, applying Teleglobe, "the amount paid out by Agnico is the amount for which the Common Shares were issued" and that "it is necessary ... to search for the consideration as agreed by the parties and as reflected in the stated capital account." Although Agnico had not added any specific dollar amount to its stated capital account, the common shares were issued on conversion because of a commitment to issue them at a price of U.S.$14 per share or U.S.$1,000 per debenture, so that this was the agreed consideration for their issuance.

How then should U.S.$1,000 be translated into Canadian dollars? She stated (at paras. 58, 61-63, 67):

Subsection 261(2) requires that the relevant amounts be translated into Canadian dollars at the spot rates when the amounts "arose."

...

In my view, the appropriate translation date should be when the consideration for the Common Shares was received by Agnico. ...

...[T]he appropriate translation date in this particular case is the date that the Convertible Debentures were issued. This is when the true consideration for the issuance of the Common Shares was received by Agnico. ...

...Suppose convertible debentures are issued for $1,500, [and] the principal amount ... is $1,100 ... . [T]he true consideration [for the shares on the debenture conversion] is $1,500. ...

...[T]he equivalent of $1,588 [the Cdn$ equivalent on that date of U.S.$ 1,000] per [Agnico] Convertible Debenture was received on issuance of the Convertible Debentures and the same amount was paid for the extinguishment of the Convertible Debentures on the conversions. There is no foreign exchange gain.

Agnico's alternative argument (at para. 43), that s. 51(1) "provides that on a conversion ... there was no transaction that could give rise to a gain," was not considered.

Conversely, given that the Debentures' terms "make it clear that the Common Shares issued on redemption are in satisfaction of the Redemption Price which became due and payable on the date of redemption" (para. 73), the amount the taxpayer paid on redemption was based on the Canadian dollar equivalent of such amounts at that time, so that Agnico realized s. 39(2) gains on redemption.

Other locations for this summary
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) U.S. dollar principal of a convertible debenture should be considered on conversion to have been settled at the historical exchange rate when the conversion price was set
Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence expert opinion on domestic law excluded 31

Ferlaino v. The Queen, 2016 TCC 105 (Informal Procedure)

exercise price of employee stock options to be translated at the exercise-date spot rate

Smith J rejected arguments of the taxpayer that the computation of his s. 7(1)(a) benefits on exercising options on the shares of the listed U.S. parent ("UTC") of his employer should depart from the norm by translating his exercise price using the much higher exchange rate at the time of option grant, rather than the rate (of around par) at the time of exercise. He then stated (at para 87):

“[T]he day on which the particular amount arose” for the purposes of paragraph 261(2)(b) was when the Appellant exercised his stock options, that is, the date on which he acquired the UTC shares and simultaneously disposed of them.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) exercise price of employee stock options to be translated at the exercise-date spot rate 201
Tax Topics - Income Tax Act - 101-110 - Section 110 - Subsection 110(1.5) - Paragraph 110(1.5)(a) purpose of satisfying exe4rcise price test 249

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Pre-acquisition FX

1.50 ...Generally, the relevant spot rate on the date of acquisition should be used to convert the amount to Canadian dollars. However, payments on account of the purchase price made before the date of acquisition should be converted to Canadian dollars using the relevant spot rate on the dates of such payments. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 204
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

20 November 2015 External T.I. 2014-0539951E5 - Foreign Currency Denominated Dividends

U.S.-dollar dividends are translated on a cash rather than accrual basis

A U.S.-listed corporation, which has not filed a s. 261(3) election, periodically declares and pays dividends in U.S. dollars. Can it make eligible dividend designations under s. 89(14)? CRA responded:

[A] mere receivable arising as a result of a declaration of the dividend should not result in an “amount received” by a taxpayer such that there would be no income inclusion [citing Banner Pharmacaps]. Accordingly… the amount of a dividend does not arise until it is considered to be received, and is thus included in income. This typically occurs when the dividend is actually paid, which is also the time at which an eligible dividend designation is required to be made pursuant to subsection 89(14).

As such, the portion of the dividend that is designated as an eligible dividend under subsection 89(14) is a portion of the amount of such dividend converted in Canadian dollars using the relevant spot rate for the day the dividend is paid…[being] generally, the rate quoted by the Bank of Canada for noon on that day.

As such, the portion of the dividend that is designated as an eligible dividend under subsection 89(14) is a portion of the amount of such dividend converted in Canadian dollars using the relevant spot rate for the day the dividend is paid. The expression “relevant spot rate” is defined in subsection 261(1) and means, in respect of the conversion of an amount from a particular currency into another currency for a particular day when the other currency is Canadian currency, generally, the rate quoted by the Bank of Canada for noon on that day.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(14) U.S.-dollar dividends translated at spot rate on payment date 41

24 November CTF Annual Roundtable, Q.10

foreign-currency debt to Canco translated at historical rate for thin cap purposes

Where a specified non-resident shareholder of a Canadian corporation (“Canco”) makes a foreign currency loan to Canco, what foreign exchange rate should be used to determine the amount in Canadian dollars of determining the amount of the “outstanding debts to specified non-residents” at any particular time? CRA responded:

Provided a taxpayer did not make a functional currency election under subsection 261(3), subsection 261(2) requires that Canadian currency be used in determining the Canadian tax results of the taxpayer and an amount expressed in foreign currency be converted to Canadian currency using the relevant spot rate for the day on which the particular amount arose. Since in the situation described, the amount of the debt arose when the loan was issued, the foreign currency amount of the loan should be converted to Canadian dollars for purposes of the computation in subsection 18(4) using the relevant spot rate for the day on which the loan was issued.

9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 5, 2015-0588981C6 F - Foreign currency stock market transactions

CRA considers that NYSE stock trades should be translated at the noon exchange rate on the settlement date

As CRA considers that shares sold on a stock exchange are disposed of on the settlement rather than trade date, it considers that the U.S. dollar proceeds received on a sale on a U.S. exchange should be translated into Canadian dollars using the noon exchange rate for the settlement date.

10 June 2014 Ministerial Correspondence 2014-0529961M4 - Capital gains on property in foreign currency

translation on capital property disposition

On the sale of capital property in foreign currency, the proceeds of disposition are converted using the exchange rate at the time of the sale, the adjusted cost base is converted using the exchange rate at the time the property was acquired, and outlays and expenses are converted using the exchange rate at the time they were incurred. "This method was confirmed… in…Gaynor…91 DTC 5288…and…codified in [s.] 261(2)… ."

4 June 2014 External T.I. 2014-0517151E5 - S. 17.1 and debt denominated in foreign currency

prescribed interest on foreign currency PLOI translated at spot rate when loan made

A non-resident corporation owes a foreign-currency denominated amount to a CRIC which is a pertinent loan or indebtedness (a "PLOI"), as defined in s. 15(2.11) or 212.3(11), and the CRIC has not made a functional currency election pursuant to s. 261(3). How is the s. 17.1 income inclusion computed in Canadian dollars under the A-B formula? After referring to the reference in s. 261(2)(b) to "the relevant spot rate for the day on which the particular amount arose," CRA stated:

The moment the PLOI arose is the moment the indebtedness has been created. Therefore, the prescribed rate of interest [referenced in A]… will be applied to the principal of the loan converted in CAN$ using the relevant spot rate at the time the indebtedness has been created. …

Element B of the formula is the amount actually included in the CRIC's income on account of the interest with respect to the PLOI. …The moment such an inclusion arises is the moment the interest is received or becomes receivable… .Therefore, provided subsections 12(3) and (4.1) ITA do not apply, such amount will be converted into CAN$ using the relevant spot rate at that time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 17.1 - Subsection 17.1(1) prescribed interest on foreign currency PLOI translated at spot rate when loan made 186

14 January 2011 External T.I. 2004-0098601E5 - Foreign currency borrowings and ss 214(7) and (8).

principal amount converted at historical rate

In our view, pursuant to subsection 261(2) of the Act, the discount and yield tests set out in paragraph 214(8)(c) of the Act for a non-convertible, non-exchangeable, foreign currency denominated obligation are to be carried out by converting each of 'the amount for which the obligation was issued' and the 'principal amount' into Canadian currency using the relevant spot rate for the day of issue. Therefore, in our view, fluctuation in the value of a foreign currency affecting the Canadian dollar value of [the obligation], originally issued without a discount, would not result in the obligation being an excluded obligation under paragraph 214(8)(c) of the Act.

Articles

Chris Van Loan, Peter Lee, "Agnico Eagle Mines Limited v. The Queen", International Tax, Wolters Kluwer CCH, No. 80, February 2015, p.1.

Amount paid by Agnico for the extinguishing of its debentures was fond to be U.S.$1,000, being the amount for which the common shares were issued (p. 5)

[t]he Court found that "[t]he Indenture and the Prospectus [for the Debentures] clearly contemplate that the Common Shares are to be issued for US$14.00 per Common Share, which is equal to US$1,000 on a per Convertible Debenture basis …" And, further, "... in accordance with Teleglobe, this is the amount paid by Agnico for the extinguishment of the Convertible Debentures on the conversions.

Court found that the translation date therefore should be this issuance date (p. 5)

[T]he Court held that the translation date should be the date when the consideration for the common shares was received by Agnico. The court then stated:

The conclusion that I have reached is that the appropriate translation date in this particular case is the date that the Convertible Debentures were issued. This is when the true consideration for the issuance of the Common Shares was received by Agnico.

Strictly speaking, it is difficult to understand how consideration for the issue of the shares could have been received when the Debentures were issued, since at that time there was no binding agreement by Debenture holders to acquire shares. However, the Court's reasoning appears to be that the corporation received the funds for which the Debentures and (indirectly) the common shares were issued when the Debentures were issued and that no new funds were received by Agnico when the Debentures were converted.

Mosely v. Koffyfontein instead found that the consideration paid for shares on debenture conversion is to be determined at that conversion time, not the debenture issuance date

The UK Court of Appeal's decision in Mosely v. Koffyfontein [fn. 21 [1904] 2 Ch. 108] casts some doubt, arguably, …[on] the validity of the Agnico decision itself. The factual background of the case was described as follows in a recent company law text by Ferran and Ho: "The Court of Appeal analyzed a proposal to issue convertible debentures at a [20%] discount to their par value [of £100] where the debentures could immediately be converted into fully paid shares having a par value equal to the par value of the debentures." [fn: 22: E. Ferran, L.C. Ho, Principles of Corporate Finance Law 2nd ed. (Oxford: Oxford University Press, 2014), at page 88.] The issue of the debentures was challenged on the basis that they could be used as a device for issuing shares at a discount, and the UK Court of Appeal granted an injunction prohibiting the issue of the debentures.

Vaughan Williams L.J. stated in the decision that, in a normal case, "the immediate consideration for the issue of shares to a debenture-holder demanding such allotment in exchange for, or in satisfaction of his debenture, is clearly the surrender of his debenture, and the mere fact that the debenture was purchased at a discount of 20 per cent [does not imply that the shares were issued at a discount]." Effectively the Court concluded that, provided the debentures were not a mere device to avoid the prohibition on issuing shares at a discount, shares issued in exchange for exchangeable debentures with a face value of £100 are considered to have been issued for consideration of £100, not the £80 paid for the debentures. However, on the specific facts of the case, the conversion feature of the debentures was considered to be a mere device to circumvent the prohibition on the issuance of the shares at a discount, and hence the issuance of the debentures was improper.

Ferran and Ho, in the same passage quoted above, add that "Cozens-Hardy [one of the judges on the Court of Appeal panel who concurred with Vaughan-Williams LJ. in separate reasons] expressly left open the question of a debenture issued at a discount to its par value which conferred a right at some future date to demand a fully paid share in exchange for the par value of the debenture. [... In this] case, the discount can be explained because it represents the investors' return without which they would (presumably) have demanded a higher rate of interest."…

The clear implication of this case is that, absent colourable circumstances, the consideration paid for shares on the conversion or exchange of debentures is to be determined at the time the obligation to repay is extinguished, and not when the debentures are issued. Since there was no suggestion whatever in the Agnico case that the conversion feature was a device to circumvent basic rules of corporate law it is difficult to reconcile Tax Court's decision in Agnico with the UK Court of Appeal's decision in Mosely v. Koffyfontein.

Janette Y. Pantry, Soraya M. Jamal, "The Thin Cap Rules: Revisiting the Foreign Exchange Anomaly", Corporate Finance, 2011, p. 1934

Discussion of effect of s. 261(2)(b) on the thin capitalization rule.

Patrick Marley, Amanda Heale, "New Foreign Currency Rules: Are They Functional?", International Tax, CCH, December 2007, No. 37, p. 7.

Paragraph 261(2)(b)

See Also

9189-7397 Québec Inc. v. Agence du revenu du Québec, 2018 QCCQ 4692

USD contract price that was paid for in instalments as the work was performed was to be translated with each payment

On April 29, 2008, the taxpayer (“ST Productions”) entered into a contract with a film producer (“Troublemaker”) to produce special effects for a film production for a contract price of $U.S.6,000,000 (subject to downward or upward adjustments based on changes in costs), to be paid in eight payments over the period from May 2, 2008 to November 30, 2008. On May 6, 2008, ST Productions subcontracted all this work to another company (“Hybride”) whose sole director was the husband of the sole director of ST Productions on essentially the same terms except that the contract price was U.S. $5,999,000. ST Productions made the stipulated scheduled payments during 2008. Hybride issued an invoice dated March 31, 2009 for the work performed by it. There was no adjustment to the contract price.

In claiming its film production services credit, ST Productions took the view that its expenditure under its contract with Hybride arose (“a pris naissance”) under Taxation Act, s. 21.4.17(b) (the equivalent of ITA s. 261(2)(b) on March 31, 2009 (when the USD/Cdn. Exchange rate was 1.2645) rather than as the payments were made (for which the average exchange rate was under 1.10).

After noting that ST Productions could not have been surprised that the final costs paid coincided with those enumerated in the contract from the outset (para. 71), Massol JCQ stated (at paras. 77-78, 80-81, 83-84, TaxInterpretations translation):

[D]id the expense arise at the time of the currency exchange or at the time of the completion or advancement of the work?

The plaintiff’s case that resort should be had to the date of the completion of the work is not supported by any element of the evidence. …

The percentage-of-completion method takes into account the work effected as it occurs.

It should be considered that the method to be adopted, if one must be adopted, is the latter method. ...

Given that the evidence did not establish any amount being paid with the final invoice, it appears logical to affirm that the foreign currency conversion arose at the time of each due date as reflected by the payments.

In other words, each actual payment by ST Productions to Hybride crystallized the applicable conversion so as to serve for purposes of the claimed tax credit … .

Administrative Policy

27 November 2018 CTF Roundtable, Q.14

accrued interest under both ss. 20(14)(a) and (b) is translated at the transfer date spot rate

What foreign exchange rate is applied to the accrued interest on an FX-denominated debt to which s. 20(14) applies?

CRA indicated that in applying ss. 261(2)(b) and 20(14), it is the amount of foreign currency interest accrued at the time of transfer that is translated using the day of the transfer. Therefore, the accrued interest converted to Canadian dollars, using the relevant spot rate for the date of transfer, is what is used in determining both the transferor’s income inclusion under s. 20(14)(a), and the transferee’s deduction under s. 20(14)(b). That spot rate is appropriate from the transferor’s perspective as the day the accrued interest is computed and the rights thereto disposed of, and also from the transferee’s perspective as the day on which it acquired the right thereto.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(14) accrued interest translated on transfer date 51

Subsection 261(3) - Application of subsection (5)

Forms

T1296 "Election, or Revocation of an Election, to Report in a Functional Currency"

[F]or tax years that begin after July 12, 2013, the election to report in a functional currency must be filed within the first 61 days of the tax year to which the election applies. If the tax year starts prior to July 13, 2013, the election must be filed at least six months before the end of the tax year to which the election applies.

Subsection 261(5) - Functional currency tax reporting

Paragraph 261(5)(a)

Administrative Policy

2016 Ruling 2016-0629011R3 - PUC reinstatement under 212.3(9)

cross-border PUC of both lower- and upper-tier CRICs computed both in Cdn$ and U.S.$ where lower-tier CRIC had U.S.$ EFC

A majority of the common shares of a Canadian public corporation (Pubco) were held by foreign holdcos (ultimately controlled by Foreign ‘Parent) directly or through “Canholdcos.” Most of Pubco’s assets were investments in foreign affiliates, and the paid-up capital of the various “cross-border classes” of shares (being the Pubco shares held directly by a foreign holdco and the shares held by the foreign holdcos in the Canholdcos) had been previously reduced under s. 212.3(7) as a result of Pubco investing in an offshore Finco which, in turn, financed a large development project of an indirect offshore subsidiary of Pubco (Opco).

Under the ruled-upon transactions, Opco borrowed U.S. dollars to repay some of the Finco loans (directly and by way of repaying loans from Forco 2). Finco, in turn, inter alia paid dividends on its common shares and “distributions” on its mandatorily redeemable preferred shares to Pubco (the “Finco Distributions”). CRA ruled that the Finco Distributions were receipts of property described in s. (B) of variable A of the s. 212.3(9)(b)(ii) formula, i.e., they restored the cross-border PUC held in Pubco and in the relevant Canholdcos on the basis that Pubco had received equivalent property as dividends on the shares of the subject corporation (Finco).

However, Pubco had previously elected under s. 261(3) for the U.S. dollar to be its elected functional currency. CRA indicated that the PUC of the cross-border classes for both Pubco and the Canholdcos should be computed at the same time in U.S. dollars (on the basis that the entries to the PUC accounts for the cross-border classes held in the Canholdcos were relevant to the Canadian tax results of Pubco) and also in Canadian dollars (see also 2016-0642111C6). CRA then ruled that the full restoration of the cross-border PUC was dependent on the total amount of the Finco Distributions being no less than the previous net grinds to the PUC of the cross-border classes of shares computed both in Canadian and U.S. dollars.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(18) - Paragraph 212.3(18)(c) - Subparagraph 212.3(18)(c)(v) exclusion where (10)(f) corp on-subscribes proceeds in FA investments 168
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(9) - Paragraph 212.3(9)(b) - Subparagraph 212.3(9)(b)(ii) - Variable A - Clause (b) PUC restoration where borrowed money dividended up only to the level of a lower-tier CRIC, with cross-border PUC of both lower- and upper-tier CRICs computed both in Cdn$ and U.S.$ where lower-tier CRIC had U.S.$ EFC 599

S5-F4-C1 - Income Tax Reporting Currency

Election not relevant to other tax-payer's results

1.21 ...[I]t is only the Canadian tax results of the taxpayer electing into the functional currency regime that are within the scope of the functional currency rules. To the extent that certain tax attributes of the electing taxpayer are relevant in determining the Canadian tax results of other taxpayers, those attributes have to be determined in Canadian dollars. This might be the case, for example, where the paid-up capital of an electing taxpayer is relevant in determining the amount of a deemed dividend to its shareholder.

11 July 2013 Internal T.I. 2012-0471111I7 - functional currency

In response to a query as to the basis for CRA's conclusion that s. 261(11)(d ) (which applies only to taxes that are computed "for the particular taxation year") applies to a Part III tax assessment pursuant to s. 184(2) (which arises "at the time of the election" and does not relate to a particular taxation year), CRA stated:

...an amount of Part III tax payable by a taxpayer which arises as a consequence of an election in respect of a dividend payable in a taxation year is an amount of tax payable "for the particular year" for the purposes of paragraph 261(11)(d)....

In response to the question:

Since paragraph 261(11)(e) applies "for the particular taxation year", whereas, pursuant to subsection 83(4), the penalty for a late-filed form T2054 is calculated based on the number of months ending on the day on which the election is made, how does a functional currency reporter compute the penalty imposed by subsection 83(4) in Canadian dollars?

CRA stated:

Canco's liability for the late filed capital dividend election will be the lesser of the two Canadian dollar amounts (i.e. the amount in paragraph 83(4)(a) computed in Canco's functional currency and converted into Canadian dollars) and the amount in paragraph 83(4)(b) computed in Canadian dollars.

20 September 2012 Internal T.I. 2012-0453071I7 - functional currency

Where Canco (a Canadian resident corportion) has elected a functional currency (i.e. other than the Canadian dollar), it would be permitted to have its shareholders' resolutions denominated "in a currency other than its elected functional currency, without affecting the validity of its functional currency election in Canadian dollars." However

Canco must maintain its capital dividend account in its elected functional currency and must report all amounts on Form T2054 [the capital dividend election form] in its elected functional currency.

Articles

Geoffrey S. Turner, "New and Improved Functional Currency Proposals", International Tax, No. 43, December 2008, p. 1.

Subsection 261(6) - Partnerships

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Applies automatically to single-and multi-tier partnerships

1.34 ... [A]lthough the partnership is treated as if it had made a functional currency election itself, the application of subsection 261(6) is automatic and does not require any action on the part of the partnership. Note also that the provision applies to multi-tiered partnerships. ...

Transition where staggered year-ends

1.35 It will not always be the case that partnership income allocated to an electing taxpayer will be computed using the functional currency regime. Similar issues can arise in reversionary situations.

Example 2

Facts

A taxpayer’s first functional currency year commences January 1, 2015. The taxpayer is a member of a partnership whose normal fiscal period end is October 31st.

Analysis

The income of the partnership for purposes of determining the income allocated to the taxpayer will not be computed using the functional currency regime until its fiscal period beginning on November 1, 2015. The taxpayer's income or loss from the partnership for the fiscal period ending October 31, 2015 would be determined in Canadian currency then, pursuant to paragraph 261(5)(c), would be converted to the electing taxpayer's elected functional currency based on the days the relevant amounts are considered to arise.

22 April 2013 External T.I. 2012-0471831E5 - Functional currency reporting for partnerships

election by corporate partner

In response to a query concerning the functional currency reporting requirements for partnerships where a corporate partner has made an election under s. 261(3) and a submission that the "corporation should bear the responsibility of complying with the information requirements in subsection 261(6) of the Act, notwithstanding that the information relates to the financial results of the partnership," CRA stated:

CRA requires that the required information be filed with the Partnership Information Return [T5013] as it is prescribed information for purposes of that return. As a partnership consists of a relationship between partners, we would expect that the partners of a partnership would come to a mutual understanding to ensure compliance with the reporting requirements....

Subsection 261(6.1) - Foreign affiliates

Administrative Policy

26 April 2017 IFA Roundtable Q. 4, 2017-0691211C6 - App of s. 261(21) to loan with FA

application of s. 261(21) to upstream USD loan to Cdn$ indirect parent

S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income, to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is a FA. Suppose that FA, a U.S. subsidiary of Cansub which has elected to have the U.S. dollar as its functional currency, makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub).

CRA considers that any FX loss realized by Parent on maturity of the loan would be denied by s. 261(21) given that the loan made by FA was on FAPI account – even if Parent had entered into a cross-currency swap to hedge its U.S.-dollar exposure under this loan and thus realized a (supposedly) offsetting gain on the swap.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(20) application of s. 261(21) to deny a hedge of a U.S. dollar loan 158

S5-F4-C1 - Income Tax Reporting Currency

Staggered year ends / FAPI only

1.39 Note that, similar to where a functional currency taxpayer holds an interest in a partnership, it is possible for a taxpayer and its foreign affiliate to have different tax reporting currencies where they have different tax year-ends. It is also important to note that paragraph 261(6.1)(b) deems only the foreign affiliate’s FAPI in respect of the functional currency taxpayer, along with any amount that is relevant in determining its FAPI, to be its Canadian tax results for the purposes of applying section 261.

Subsection 261(7) - Converting Canadian currency amounts

Administrative Policy

27 April 2017 Internal T.I. 2017-0684831I7 - Changes to relevant spot rate

must use Bank of Canada rate on conversion

What exchange rate will CRA permit a taxpayer to use as the “relevant spot rate” as an alternative to the Bank of Canada daily exchange rate? CRA indicated that the rates quoted by Bloomberg L.P., Thomson Reuters Corporation and OANDA Corporation would be “generally acceptable” as satisfying its criteria of being widely available on an ongoing basis, verifiable, and market-recognized, subject to conditions respecting consistency.

CRA then stated that:

The Bank of Canada rate will still be required in respect of a taxpayer transitioning into or out of income tax reporting in its elected functional currency in accordance with subsections 261(7) or 261(12)….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(1) - Relevant Spot Rate consistent use of Bloomberg, Thomson Reuters or OANDA FX spot rates generally is acceptable 135

S5-F4-C1 - Income Tax Reporting Currency

No discretion to use other than spot rate

1.22 ... Subsection 261(7) provides that ... carried-forward amounts are to be converted from Canadian dollars to the taxpayer’s elected functional currency using the relevant spot rate for the last day of the taxpayer’s last Canadian currency year. Note that for these conversions the definition of relevant spot rate does not allow for any CRA discretion to accept a rate other than the Bank of Canada noon rate.

Paragraph 261(7)(h)

Administrative Policy

2 March 2017 External T.I. 2016-0633981E5 - Retained Earnings and Functional Currency Election

no gain or loss recognized on election/retained earnings not converted

Canco’s 2014 financial statements were reported in U.S. dollars (USD) in the consolidated financial statements of its U.S. parent.. Canco made a valid election under s. 261(3)(b) to report its income in USD effective the start of its 2015 taxation year, and purportedly converted its retained earnings (“R/E”) at the December 31, 2014 relevant spot rate. The resulting “R/E for Canadian income tax purposes [were] less than its R/E for financial statement purposes… .” On this basis, Canco intends to report a one-time foreign currency loss in 2015 of this difference. Is this approach correct?

In rejecting this approach, CRA first indicated:

[W]hile an electing corporation may have been calculating its financial statements in its elected functional currency, section 261 does not refer or rely on these amounts in converting CAD Year Amounts or amounts related to CAD Year Debts to the corporation’s elected functional currency.

As well, there is nothing in section 261 to provide for any adjustment to amounts to reconcile them with what the amounts would have been had the corporation always reported its income under the Act in its elected functional currency. Instead, conversions are made as of the time the conversion takes place using the relevant spot rate at that time. As such, no immediate income consequences result.

and later stated “that not recognizing any gain or loss on the making of a functional currency election is consistent with our understanding of the tax policy.”

Turning specifically to the R/E, it first noted that s. 261(7)(h) referred to the conversion of an amount “that is relevant in determining the Canadian tax results,” and stated:

[F]or determining a taxpayer’s [thin cap] limitation…the R/E used would be the opening R/E taken from the corporation’s USD financial statements used for financial reporting. As such it is our view that R/E in Canco’s last Canadian currency year is not relevant in determining the Canadian tax results for its first elected functional currency taxation year and, consequently, is not to be translated pursuant to paragraph 261(7)(h)… .

20 September 2013 External T.I. 2012-0471261E5 - conversion of CDA into functional currency

conversion of CDA as a result of election

How should the capital dividend account of a Canadian corporation ("Canco") be converted from Canadian currency into US dollars, where Canco has a June 30th year end and has validly filed for its 12-month year commencing July 1, 2012 to use the US dollar as its functional currency? CRA stated:

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.

As Canco's last Canadian currency year ended on June 30, 2012, it must convert the balance in the CDA on June 30, 2012 using the "relevant spot rate" on that date as defined in s. 261(1).

Subsection 261(8)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

No netting

1.24 ... [T]here is no provision in section 261 that allows for the netting of amounts payable to, and receivable from, another taxpayer.

Subsection 261(9)

Paragraph 261(9)(a)

Administrative Policy

7 October 2016 APFF Roundtable Q. 17, 2016-0652781C6 F - Functional currency and acquisition of control

exclusion of pre-transition debts from s. 111(4)

Where a taxpayer with an elected functional currency (e.g., the USD) has an accrued FX loss on a debt obligation owing in another foreign currency (e.g., the euro), an s. 111(4)(e) election made following an acquisition of control of the taxpayer will not affect the FX gain which would be realized under s. 261(10) re a pre-transition debt, so that it is only changes in the euro/USD exchange rate occurring from the beginning of the taxpayer’s first "functional currency year" up to the acquisition of control that would be subject to ss. 111(4) and (12).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(4) - Paragraph 111(4)(e) FX gains or losses on pre-transition debts not affected 223
Tax Topics - Income Tax Act - Section 40 - Subsection 40(10) exclusion of pre-transition debts 147

Subsection 261(10)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Overview

1.28 Subsection 261(10) ... causes the accrued income, capital gain, loss or capital loss in respect of a particular pre-transition debt to be attributed to the taxpayer at the time a payment is made against the principal amount of the debt. The amount attributed is based on the proportion of the amount of the payment to the total principal amount of the debt at the time of transition.

Integration with s. 39(2)

1.31 Where subsection 261(10) deems a taxpayer to make a gain or sustain a loss (that is, where the pre-transition debt is on account of capital), subsection 39(2) then applies to deem there to be a capital gain or a capital loss, as the case may be, from the disposition of currency.

Gain or loss after reversion

1.32 Note that subsection 261(10) also deems a taxpayer to have income, a capital gain, a loss or a capital loss where the taxpayer has reverted to reporting its income in Canadian currency and a payment is made in respect of a pre-transition debt still outstanding after the reversion. Such a debt would be both a pre-transition debt and a pre-reversion debt.

Subsection 261(11) - Determination of amounts payable

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Overview

1.53 ... In summary, paragraphs 261(11)(a) and (b) provide the following:

  • instalment obligations under paragraph 261(11)(a):
    • A functional currency tax reporter’s instalment obligations under the estimated method are determined by taking either 1/12 or 1/4, depending on which instalment regime they are under, of the taxpayer's estimated EFC taxes payable for the year and converting this amount to Canadian dollars using the relevant spot rate for the day on which each instalment is due.
    • The taxpayer's instalment obligations under the first instalment base method or second instalment base method are based on the taxpayer’s CAD taxes payable for its previous tax year, or previous two tax years, as the case may be. For these purposes, the CAD taxes payable are the aggregate of the taxpayer’s instalments payable and remainder of tax payable for the relevant base year, as determined in Canadian dollars using the rules of paragraphs 261(11)(a) and (b).
  • remainder of taxes payable under paragraph 261(11)(b):
    • The computation of a functional currency tax reporter’s remainder of taxes payable starts with a conversion of each of the taxpayer’s Canadian dollar instalment obligations to the taxpayer’s elected functional currency using the relevant spot rate for the day on which each of the instalments was due.
    • The total of the required instalments, as expressed in the taxpayer’s elected functional currency, is then deducted from the taxpayer’s actual EFC taxes payable for the year.
    • The difference, if any, is then converted to Canadian currency using the relevant spot rate for the taxpayer’s balance-due day.

Paragraph 261(11)(a)

Administrative Policy

21 January 2015 Internal T.I. 2014-0540631I7 - S.261 and loss carryback request

CRA applies most favourable instalment method in assessing for carried-back losses of a functional currency reporter

Canco, whose elected functional currency ("EFC") has been the U.S. dollar, deducted non-capital losses from subsequent years in computing its taxable income for Years 1 and 2. Where an amount is deducted under s. 111(1)(a) for a particular taxation year in respect of a subsequent year's non-capital loss for a subsequent taxation year, (a) which instalment method should be used, and (b) should previously applied non-capital losses from subsequent years be considered, in recalculating a functional currency reporter's taxes payable (or refund) for the particular taxation year?

Q. a

CRA noted that ss. 261(11)(a) and (b) incorporate the initial computation of the taxes payable as determined in the reporter's EFC ("EFC Taxes Payable") in order to determine the reporter's ultimate taxes payable in CAD ("CAD Taxes Payable"), and that they contemplate the use of any of the instalment methods described in s. 157(1)(a)(i) ("Estimated Method"), 157(1)(a)(ii) ("First Instalment Base Method"), or 157(1)(a)(iii) ("Second Instalment Base Method"). Furthermore, in computing the reporter's remainder of taxes payable, each of its required CAD instalment payment obligations are converted to its EFC at the applicable spot rates for the instalment due dates, with the total of the required instalments, as expressed in the EFC, then deducted from its EFC Taxes Payable for the year and with the difference, if any, converted to Canadian dollars at the spot rate on the balance-due day. After noting (following I.G. Rockies Corp, 2005 DTC 289) that "a corporation may opt for whichever instalment method under paragraph 157(1)(a) that it wishes, regardless of the instalment method that is deemed by subsection 161(4.1) to have been used for purposes of computing the corporation's interest in respect of unpaid or late instalments," CRA stated that "a corporation's functional currency election…does not hinder its ability to choose…[an] instalment method under paragraph 157(1)(a)," stated that it "will not consider the use of either the First Instalment Base Method or the Second Instalment Base Method where a reporter's Total EFC Instalments [the total required instalments, as converted to the EFC] using the respective instalment method exceed the reporter's EFC Taxes Payable for the year," and that it was appropriate "that each assessment of the CAD Taxes Payable of a functional currency reporter…[use] the instalment method that gives rise to the least amount of CAD Taxes Payable" – so that when re-determining the CAD Taxes Payable for a particular taxation year as a result of a s. 111(1)(a) deduction of a subsequent year's loss, the same instalment method that was originally used for the particular year is not required to be used to recalculate the CAD Taxes Payable.

Q. b

CRA noted that although s. 161(7) ensures interest and penalties are computed without regard to reductions in taxes payable resulting from application of subsequent years' losses, "no similar provision exists that would exclude such a deduction from the determination or redetermination of a taxpayer's actual instalment obligations, nor from the determination of the remainder of taxes payable in respect of a taxation year under paragraphs 157(1)(a) and (b)," and concluded:

[T]here is no provision…that would, in re-determining a functional currency reporter's CAD Taxes Payable for a taxation year as the result of a loss carried back to that year, prevent consideration of each prior amount of a loss that was previously applied in that year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 157 - Subsection 157(1) - Paragraph 157(1)(a) instalment method of a functional currency reporter after loss carryback 33

Subsection 261(12) - Application of subsections (7) and (8) to reversionary years

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Double conversion

1.43 Note that tax attributes that originate in a Canadian currency year of the taxpayer and that are unused at the time of reversion will be subject to a double conversion. The first conversion is into the taxpayer’s elected functional currency using the relevant spot rate for the last day of the taxpayer’s last Canadian currency year. The second conversion is back into Canadian currency using the relevant spot rate for the last day of the taxpayer’s last functional currency year.

Overview

1.45 ... The effect of these rules is to convert the issuance and principal amounts, as determined in the currency in which the debts are denominated, to Canadian currency using the relevant spot rate for the last day of the taxpayer’s last functional currency year.

13 February 2013 External T.I. 2011-0430921E5 F - S. 261 - Loss carry-back & loss carry-forward

conversion to U.S. dollar and back again changed non-capital losses

The taxpayer elected in its December 31, 2009 taxation year to adopt the U.S. dollar as its functional currency in accordance with s. 261(2), and revoked that election in its December 31, 2011 taxation year in accordance with s. 261(4). The U.S. dollar to Canadian dollar exchange rates were 1.1 on December 31, 2008 and 1.2 on December 31, 2010.

A loss of Cdn.$1,200 which the taxpayer incurred in its 2008 taxation year would be converted under s. 261(7) to U.S.$1,090 (Cdn.$1,200/1.1) as the amount of such loss for its 2009 and 2010 functional currency years, and would be converted under s. 261(12) to Cdn.$1,309 (U.S.$1,090*1.2) for its 2011 and subsequent reversionary years.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(15) carryback of non-capital loss following revocation of functional currency election to functional currency year 91

Subsection 261(14)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Integration wtih s. 39(2)

1.50 As is the case with subsection 261(10), where subsection 261(14) deems a taxpayer to make a gain or sustain a loss in respect of a pre-reversion debt that is on account of capital, subsection 39(2) will then apply to deem a corresponding capital gain or capital loss from the disposition of currency.

Subsection 261(15) - Amounts carried back

Administrative Policy

13 February 2013 External T.I. 2011-0430921E5 F - S. 261 - Loss carry-back & loss carry-forward

carryback of non-capital loss following revocation of functional currency election to functional currency year

The taxpayer elected in its December 31, 2009 taxation year to adopt the U.S. dollar as its functional currency in accordance with s. 261(2), and revoked that election in its December 31, 2011 taxation year in accordance with s. 261(4). The U.S. dollar to Canadian dollar exchange rates were 1.1 on December 31, 2008 and 1.2 on December 31, 2010.

A loss of Cdn.$1,309 which the taxpayer incurred in its 2011 taxation year and wished to carry back to 2008 would be converted to U.S.$1,090 (Cdn.$1,309/1.2), and then to Cdn.$1,200 (U.S.$1,090*1.1), so that the amount carried back to 2008 would be Cdn.$1,200.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(12) conversion to U.S. dollar and back again changed non-capital losses 99

Paragraph 261(15)(a)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Summary of base case

1.57 Paragraph 261(15)(a) applies in situations where the loss year is a functional currency year and the taxpayer wishes to carry back some amount of those losses or credits to one or more Canadian currency years. In this case, the loss amount, as well as any amounts of that loss that are claimed in a functional currency year, must be converted to Canadian dollars using the relevant spot rate for the last day of the taxpayer’s last Canadian currency year. In effect, the net unapplied amount of the loss or credit from functional currency years is converted to Canadian dollars.

Subsection 261(16)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Summary of base cases

1.61 Where the subsidiary’s tax reporting currency is the Canadian dollar – either because it has never elected into the functional currency regime or it has reverted to Canadian currency – the subsidiary is deemed to be a functional currency tax reporter with the same elected functional currency as its parent. This deeming rule applies for the tax year that includes the commencement time and each of its subsequent tax years, if any. As a result:

  • the subsidiary's tax year that includes the commencement time will be its first functional currency year;
  • the immediately preceding tax year will be its last Canadian currency year; and
  • subsections 261(7) to (10) will operate to convert its Canadian currency tax attributes and its pre-transition debts into the parent’s elected functional currency.

1.62 Where the subsidiary’s tax reporting currency is not the Canadian dollar ... the parent is reporting in Canadian currency. ... [T]he subsidiary is simply deemed to have revoked its functional currency election. This means its tax year that includes the commencement time is its first reversionary year and subsections 261(12) to (14) operate to convert its elected functional currency tax attributes and its pre-reversion debts into Canadian dollars.

Subsection 261(17)

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Alignment with wind-up rules

1.65 Subsection 261(17) is designed to align the tax reporting currency of each predecessor corporation with that of the new corporation for the purposes of the transfer of the tax attributes of the predecessors to the new corporation. This alignment is achieved by reference to the rules in subsection 261(16)... .

Subsection 261(18) - Anti-avoidance

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Avoidance of prohibition

1.69

Example 3

Facts

Canco elects to report its Canadian tax results in U.S. dollars commencing with its 2008 tax year. In 2010, it decides to revoke that election and revert to the Canadian dollar as its tax reporting currency for its 2011 and subsequent tax years. As a result of the revocation, Canco is prohibited by subsection 261(3) from making another functional currency election in the future.

Scenario 1

Canco incorporates Cansub, and transfers all of its property to the new corporation. Cansub then elects to report its Canadian tax results in U.S. dollars.

Scenario 2

Canco incorporates Cansub. Canco and Cansub amalgamate to form Newco. Newco then elects to report its Canadian tax results in U.S. dollars.

Analysis

In each of these scenarios, the CRA would consider issuing a direction under subsection 261(18) that would require either Cansub or Newco, as applicable, to report its Canadian tax results in Canadian dollars.

Articles

Eric Bretsen, Heather Kerr, "Tax Planning for Foreign Currency", 2009 Conference Report (CTF), C. 35.

Carve-out for commerical transactions

Although this provision is now a broadly applicable anti-abuse rule, it contains a dual-step carve-out for commercial transactions where, first, the currency planning was not a main purpose and, second, the CRA would not direct the tax results to be determined in a different currency. In situations where a Canadian parent company whose functional currency is the US dollar transfers, say, a Canadian-dollar asset to its wholly owned subsidiary (which has not made a functional currency election), it is advisable to obtain a ruling from the CRA to be sure that the Canadian dollar will be respected for the purposes of computing the Canadian tax results. Subparagraph 216(18)(c)(i) refers to a "functional currency year" for the transferor. Therefore this anti-abuse rule will not apply to a transfer where the transferor has not made a functional currency election, because the transferor would otherwise not have a functional currency year. This result is consistent with the policy intent of the version in the original rules.

Subsection 261(20) - Application of subsection (21)

Administrative Policy

26 April 2017 IFA Roundtable Q. 4, 2017-0691211C6 - App of s. 261(21) to loan with FA

application of s. 261(21) to deny a hedge of a U.S. dollar loan

S. 261(6.1) deems a foreign affiliate, for purposes of computing foreign accrual property income, to have an elected functional currency that is the same as that of the Canadian taxpayer of which it is a FA. Suppose that FA, a U.S. subsidiary of Cansub, which has elected to have the U.S. dollar as its functional currency, makes a U.S.-dollar loan to Parent (which has the Canadian dollar as its functional currency and is the parent of Cansub) and Parent hedges this U.S. dollar exposure by entering into a Canadian-U.S. dollar cross-currency swap with a bank. If Parent realizes an FX loss on the maturity of the loan to it, would this loss be denied under s. 261(21)?

CRA responded that s. 261(21) would apply in these circumstances, mainly because the loan is on FAPI account, and therefore within the scope of s. 261(6.1), so that FA would have a tax-reporting currency of the U.S. dollar.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(6.1) application of s. 261(21) to upstream USD loan to Cdn$ indirect parent 139

6 December 2011 TEI-CRA Liason Meeting Roundtable Q. 4, 2011-0426981C6 - Functional Currency Reporting

CRA confirmed its position respecting the example (first raised at the May 2011 IFA Roundtable), that where a parent with a Canadian dollar functional currency has lent in Canadian dollars to a US dollar functional currency subsidiary, a foreign exchange loss realized by the subsidiary on repayment of the loan will be denied under s. 261(21), noting that this accorded with the words of s. 261(20) and an example in the Finance Explanatory Notes.

Articles

Eric Bretsen, Heather Kerr, "Tax Planning for Foreign Currency", 2009 Conference Report (CTF), C. 35.

Loss denial arising where U.S. commercial paper issued through U.S. sub (pp. 35:42-43)

Canco…uses the Canadian dollar as its functional currency. Canco has a wholly owned Canadian subsidiary, Cansub, that (under the applicable GAAP) uses the US dollar as its functional currency. Canco issues US-dollar commercial paper and loans the same to Cansub in US dollars. Canco is perfectly hedged from both a book and a tax perspective. Assume that on maturity the Canadian dollar has appreciated relative to the US dollar so that Canco has an inherent loss on the US-dollar loan to Cansub and a gain on the commercial paper.

In this case, it is reasonable to say that the relevant fluctuation occurred during the accrual period. Thus, Canco's currency loss on the loan to Cansub will be deemed not to have occurred, resulting in an unsheltered gain on the settlement of the commercial paper. While there is clearly no abuse of the functional currency rules in this example, the absence of a purpose test results in an adverse outcome.

Paragraph 261(20)(b)

Administrative Policy

9 March 2016 Internal T.I. 2015-0612501I7 - ITA 261(21) anti-avoidance

s. 261(21) cannot apply to an FX hedging contract between a Canco which has the Canadian dollar as its functional currency and its parent which uses another currency

In order to hedge a U.S.-dollar Loan made by it to its Canadian subsidiary (Opco, whose tax reporting currency was the U.S. dollar), Opco (whose reporting currency was the Canadian dollar) entered into a Hedging Agreements with its non-resident Parent. When the Loan to Opco was settled at a gain, Holdco realized foreign exchange losses on settlement of the Hedging Agreements.

In finding that Holdco and Parent did not have different tax reporting currencies, sot that this condition in s. 261(20) was not met, CRA stated:

If Parent had Canadian tax results for the taxation years in that period, subsection 261(2) would require that Parent’s Canadian tax results be determined in Canadian currency, as Parent is not eligible as a non-resident to make a functional currency election. As a result, Parent’s tax reporting currency for those taxation years would be Canadian currency, the same tax reporting currency as Holdco. Alternatively, if Parent did not have any Canadian tax results for the taxation years in which the Hedging Agreements were outstanding, it would not have had a tax reporting currency for those years.

In going on to find that s. 261(2) could not be applied on the basis that the Hedging Agreements were part of the same specified transaction as the Loan, CRA stated:

[T]he gain or loss in respect of the settlement of the hedging arrangement and the gain or loss in respect of the settlement of the liability are nevertheless still taxed as separate transactions. In our view, the same principles apply for purposes of subsection 261(21)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(1) - Tax Reporting Currency non-resident parent would have Canadian dollar as tax reporting currency 78

Subsection 261(21) - Income, gain or loss determinations

Administrative Policy

S5-F4-C1 - Income Tax Reporting Currency

Automatic application of loss denial

1.72 ... The rule applies to deny a loss to the taxpayer where the loss can reasonably be considered to be attributable to a fluctuation in the value of the taxpayer’s tax reporting currency relative to the related corporation’s tax reporting currency during the period in which the loss accrues. There is no purpose test; the rule applies automatically.

2015 Ruling 2014-0561001R3 - Functional currency election

S. 261(2) not applicable to FX hedging with NR affiliates who are not subject to Canadian tax

underline;">: CanULC financial reporting. CanULC, is a wholly-owned subsidiary of Pubco (a U.S. public company), which reports its consolidated financial results to the public markets in USD and requires its subsidiaries worldwide (including CanULC) to maintain their accounts and report financial results in USD. CanULC does not independently report its financial results externally other than for Canadian tax purposes, and its financial statements approved by its Board are denominated in USD.

CanULC's commodites' trading business

CanULC trades commodities (both with related and unrelated parties), usually in USD and sometimes in CAD. While the substantial majority of its operating and administrative expenses are incurred in CAD, management estimates that these only represent XX% of the total expenses of that company. With one exception, it has issued its shares for USD. Its employees are experienced in trading commodities but not currencies.

FX hedging with U.S. sister (A-Co)

Where the settlement currency of its commodity contract is CAD, CanULC generally enters into a currency hedging transaction with A-Co (a direct U.S. subsidiary of Pubco) to purchase (or sell), in USD, the approximate amount of CAD that it will receive (or have to pay) on the settlement date of the Commodity Contract.

Inter-affiliate back-to-back FX hedging through CanULC

B-Co1 (an indirect wholly-owned subsidiary of Pubco) and B-Co1's wholly-owned subsidiary, B-Co2, are resident in Country B but have the USD as their reporting currency for Country B tax purposes), and engage in commodity trading. Where they enter into a Commodity Contract to be settled in CAD, they generally enter into a currency hedging transaction with CanULC to purchase (or sell), in USD, the settlement amount of CAD they will receive (or have to pay). Upon entering into a Currency Hedging Transaction with either B-Co1 or B-Co2, CanULC would generally enter into a back-to-back currency hedging transaction with A-Co, thereby offsetting, in turn, the CAD exposure assumed by it.

Proposed transactions

CanULC will file a s. 261(3) election to report its Canadian tax results in USD for the specified taxation year. It will continue to enter into commodity and hedging contracts as described above.

Rulings

S. 261(5) will apply to CanULC in respect of its taxation year beginning on XX, provided that USD remains the primary currency in which CanULC maintains its records and books of account for financial reporting purposes throughout that taxation year. For the purposes of determining CanULC's income, gain or loss in respect of the currency hedging transactions with A-Co, B-Co1 and B-Co2 (including the back-to-back currency hedging transaction with A-Co), s. 261(21) will not apply to deem each fluctuation in value referred to in s. 261(20)(c) not to have occurred, including for hedging transactions entered into before the election.

Respecting the second ruling, the summary states:

[S.] 261(21) will not apply for the purpose of determining the electing corporation's income, gain or loss in respect of its proposed currency hedging transactions with related, non-resident corporations to the extent that the other related, non-resident corporations are not subject to tax under the Act on any amount included in their respective Canadian tax results.

Articles

John Lorito, Trevor O'Brien, "International Finance – Cash Pooling Arrangements", 2014 Conference Report, (Canadian Tax Foundation), 20:1-33

CRA relief where a cash pool head account has no presence in Canada and Canco has elected (p. 24)

Assume Canco…has elected to compute its Canadian tax results in US dollars. Canco is a wholly-owned subsidiary of USCo… the parent company of a multinational group and owns all the shares of BVCo, a corporation resident in the Netherlands. The multinational group has… a physical cash pooling arrangement wherein BVCo will be the head account holder.

Although BVCo may have no tax presence in Canada, as a non-resident corporation is unable to make a functional currency election, if BVCo were to be required to compute its Canadian tax results in a currency, that currency would have to be the Canadian dollar. As a result, for purposes of determining whether subsection 261(21) may be applicable to transactions entered into between Canco and BVCo under the cash pooling arrangement, it would appear that Canco and BVCo could be treated as being required to compute their Canadian tax results in different currencies. If this were to be the case and BVCo were to enter into a non-US dollar denominated transaction with Canco under the cash pooling arrangement, subsection 261(21) could require any income, gain or loss realized by Canco to be adjusted.

However, based on comments from the CRA, it would appear that subsection 261(21) should not be applicable to transactions entered into between a Canadian resident corporation and a related non-resident where the non-resident does not have a taxable presence in Canada…. [Citing 2014-0561001R3 above]

See description of cash pooling under s. 15(2.3).