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.