Principal Issues: [Tax Interpretations translation] Could the financial statements of a Canadian public corporation subsidiary prepared under IFRS be used for the election under ITR subsection 5907(2.1)?
Position: Only in the case of financial statements prepared in accordance with the law of the country in which the corporation resides.
Reasons: Wording of the Regulation.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 54
Surplus calculation and IFRS
Subsection 5907(2.1) of the Income Tax Regulations ("ITR") allows corporations to make an election in the calculation of surpluses of a foreign affiliate to consider the amount deducted as the cost of capital property instead of applying the tax depreciation of the country to that capital.
Where a corporation elects under ITR subsection 5907(2.1), it may use the amount deducted in respect of the cost of capital property in computing the income or profits for the year in the financial statements prepared in accordance with the law of the country in which the foreign affiliate resides.
Public corporations will be required to use IFRS in Canada shortly and, in so doing, they will need to obtain from their subsidiaries financial statements prepared in accordance with IFRS to be consolidated. However, some of those subsidiaries may be required to also prepare financial statements in accordance with local accounting principles in preparing tax returns or for regulatory or other purposes.
Question to the CRA
Could the financial statements prepared in accordance with IFRS by a subsidiary of a Canadian public corporation be used with respect to the election under ITR subsection 5907(2.1)?
CRA Response
International Financial Reporting Standards ("IFRS") will replace Canadian generally accepted accounting principles currently in effect as an acceptable set of standards in the CICA Handbook for publicly accountable enterprises in their annual and interim financial statements for fiscal periods beginning on or after January 1, 2011. Most private corporations will also have the option of using IFRS. As stated in the Income Tax Technical News No. 42, issued on May 31, 2010, the CRA is of the view that financial statements based on IFRS would be an acceptable starting point to determine income for Canadian tax purposes.
With respect to the surplus accounts of a foreign affiliate of a corporation resident in Canada, Part LIX of the ITR provides for the rules of calculation to be satisfied. We are of the view that the financial statements of a foreign affiliate prepared under IFRS could only be used for the purposes of ITR subsection 5907(2.1) ITR if they were financial statements prepared in accordance with the laws of the country in which the corporation resides.
Yannick Roulier
(613) 957-2134
October 8, 2010
2010-037366.