Functional Currency

Question 1

General rule regarding reporting currency

Answer 1

Canadian tax results must be in Canadian dollars.

Question 2

How does currency reporting impact businesses?

Answer 2

The reporting in Canadian dollars may distort company results that conduct business operations and report in a foreign currency

Question 3

Explain functional currency rules

Answer 3

Functional currency rules allow certain taxpayers to file Canadian tax returns in qualifying functional currency

Question 4

Why have functional currency?

Answer 4

Removes earning distortions caused by FX gains/losses

Question 5

Explain the general subsection 261(2) rule

Answer 5

All amounts required to be determined under the provisions of the Act are to be determined in Canadian currency.

Question 6

What is subsection 261(3) of the Act

Answer 6

Where the conditions described are satisfied and an election is filed, a Canadian corporation is permitted to determine its “Canadian tax results” in its “elected functional currency”

Question 7

What are the conditions for the functional currency exception?

Answer 7

In a tax year, 1. TP is a Canadian resident corporation, 2. has elected that ss. 261(5) apply to it in the year, 3. utilizes a functional currency election; 4. has not previously filed another ss 261(5) election; 5. has not revoked a functional currency election that year.

Question 8

What is the application of the functional currency on a year-to-year basis?

Answer 8

Once a functional currency is elected it must be applied consistently from year to year. The corporation must never have used functional currency reporting in any previous year. As such, a functional currency election is a “one time election”

Question 9

Describe, in general terms, subsection 261(5) of the Act

Answer 9

Provides the rules for converting Canadian currency amounts for purpose of functional currency reporting. Canadian tax results determined using the elected functional currency.

Question 10

What is the rate used for the election?

Answer 10

Generally the relevant spot rate on the day the amount arose

Question 11

What does ss 39(1) of the Act provide for Fx gains/losses?

Answer 11

Provides that a taxpayer’s gain/loss from the disposition of a property. No bifurcation between fx and economic component.

Question 12

What does ss. 39(1) of the Act not apply to?

Answer 12

Does not refer to the disposition of liabilities.

Question 13

How are gains/losses determined under ss 40(1) of the Act provide for?

Answer 13

Gain/loss is equal to the taxpayer’s proceeds of disposition minus the taxpayer’s ACB.

Question 14

What does ss 39(2) of the Act provide?

Answer 14

Taxpayer must have made a gain and sustained a loss in a tax year as a result of fluctuation in value of a currency relative to the Canadian currency. Does not apply to ss. 39(1) transactions (taxpayer shares).

Question 15

What is the treatment of fx gains/losses on a loan receivable?

Answer 15

SS 261(2) - convert using relevant spot rate on date amount arose. SS 39(1) is used to compute the gains/loss on disposition of property.

Question 16

What is the treatment of fx gains/losses on a loan payable?

Answer 16

SS 261(2) - convert using relevant spot rate on date amount arose (same as receivable). SS 39(1) does not apply, but ss 39(2) is used to compute the gains/loss on disposition.

Question 17

What factors influence the ability to claim fx capital losses

Answer 17

Fx capital losses limited by suspended and loss denial rules; if the income earning purpose of disposed of debt is not met; and if loss suspended if property continues to be owned by corporate group

Question 18

What triggers the fx loss denial rules within a group and the impact?

Answer 18

1. transfer of property within affiliated group within 60 days; 2. loss deemed nil and realized only in subsequent triggering event; but 3. does not apply to disposition of excluded property

Question 19

What are the 3 issues to determine for the treatment of fx gains and losses?

Answer 19

1. What is the denomination of the loan; 2. is that property excluded property; and 3. what is the computation of the fx gains/loss

Question 20

What there three types of loans that trigger fx gain/loss rules?

Answer 20

1. loans between FAs; 2. loans between canco and FA;and 3. loans between FA and related group

Question 21

Do Canadian domestic rules apply to the tax result of FAs for gains and losses?

Answer 21

Yes, specific FA rules and Canadian domestic rules need to be considered to determine the calculation of gain/loss from settling fx loans; claiming losses and whether there is FACL/FAPI.

Question 22

What section is the main computational rule for FAs for gains/losses?

Answer 22

Paragraph 95(2)(f)

Question 23

What does 95(2)(f) provide, generally?

Answer 23

That FA must be treated as if it were a Canadian resident for capital gain/losses and must use Canadian domestic rules for computation.

Question 24

What does 95(2)(f.11) provide?

Answer 24

Applies to capital gains/losses of FA that are treated as Canadian resident.

Question 25

What computations require FA to be a Canadian under 95(2)(f)?

Answer 25

1. capital gains/losses, taxable capital gains. allowable capital losses from disposition of property; and (2) income/loss from property, from a business other than active business, from non-qualifying business.

Question 26

What is the purpose of paragraph 95(2)(f.1)?

Answer 26

Ensures that FAPI and surplus balances exclude income or capital gains/losses that accrued while the FA was owned by an unrelated party other than a “specified person/partnership”

Question 27

What provision includes the definition of a specific person or partnership?

Answer 27

SS 95(1).

Question 28

What is the definition of a specified partnership?

Answer 28

Includes: 1. taxpayer; a Canadian resident that does not deal at arm’s length with the taxpayer; 2. an FA or specified person/partnership of the taxpayer; 3. a partnership, a member of which is a specified person/partnership of the taxpayer; 4 and excludes a designated acquired corporation.

Question 29

What is a designated acquired corporation?

Answer 29

Defined in 95(1) to address FA acquisition where a Canadian acquireco is made to acquire an arm’s length acquisition of a FA and then amalgamated.