Is a corporation required to rely on GAAP in interpreting the words "for financial reporting purposes" in the “functional currency”? CRA responded:
[T]he accounting standards (GAAP or International Financial Reporting Standards) adopted by a corporation cannot be used as authorities in determining "the primary currency in which the taxpayer maintains its records and books of account for financial reporting purposes” for the purposes of section 261.
CRA went on to indicate three requirements for determining a functional currency:
1) The currency must be a currency of a foreign country that is used throughout the year. Even if a taxpayer keeps its books and records for financial reporting purposes in accordance with accounting standards in a foreign currency, that foreign currency may not qualify as a functional currency for the purposes of section 261 if it is only used for part of the year.
2) The currency must be a qualifying currency, as that term is defined in subsection 261(1). Rules made for accounting purposes may provide for a currency other than a qualifying currency.
3) The currency must be the primary currency in which the taxpayer maintains its records and books of account for financial reporting purposes. That requirement implies that the primary currency be identified, whereas the applicable accounting standards may permit the maintenance of a taxpayer's books and records in various currencies for the purpose of financial reporting.