8 October 2010 Roundtable, 2010-0373651C6 F - Monnaie fonctionnelle - PCGR et NIIF
Principal Issues: [TaxInterpretations translation] Can the accounting standards (GAAP or IFRS) adopted by a corporation be used as authorities to interpret the expression "for financial reporting purposes" in the definition of "functional currency" in section 261?
Position: No.
Reasons: Wording of the Act.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 53
Functional currency
The Income Tax Act now allows corporations to report their income in a functional currency other than the Canadian dollar.
The definition of "functional currency" in section 261 indicates inter alia that the functional currency of a taxpayer for a taxation year is the currency of a country other than Canada if that currency is, throughout the taxation year, the primary currency in which the taxpayer maintains its records and books of account for financial reporting purposes.
Generally accepted accounting principles ("GAAP") provide rules for determining the functional currency to be used for financial statement purposes.
Question to the CRA
Is a corporation required to rely on the GAAP rules used by a corporation in interpreting the words "for financial reporting purposes" in the functional currency definition in section 261?
CRA Response
We are of the view that the 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. Although the accounting standards provide rules for the determination of the functional and financial reporting currency in various circumstances, it is generally recognized that accounting standards do not have the force of law for the purpose of the application of the ITA.
It is highly probable that the functional currency or reporting currency of a taxpayer as determined by the applicable accounting standards will correspond to the functional currency determined in accordance with the definition of that term in subsection 261(1). However, a corporation cannot rely on the rules in the applicable accounting standards to interpret the functional currency definition in the Act. That definition specifically provides three requirements that circumscribe the determination of a functional currency for the purposes of the Act and which may involve a determination that differs from that made in accordance with the accounting standards applicable to a taxpayer for a particular year. Along with general comments, these three requirements are:
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.
The particular circumstances of a given taxpayer must be analyzed to determine whether all of these conditions are satisfied. As stated in the Explanatory Notes issued by the Department of Finance and attached to the Proposed Legislation of 2009:
“In making determinations as to whether a corporation has a “functional currency”, the reasons for the introduction of this optional tax reporting regime, as discussed in the overview section of these notes, should be borne in mind.”
In this regard, reference is made to the following in the "Overview" section of that document:
“There are two main reasons for allowing taxpayers to report in a currency other than the Canadian dollar. First, certain taxpayers maintain their books and records for financial reporting purposes in a foreign currency and translate those results to Canadian dollars solely in order to compute their Canadian tax liability. Second, the determination of certain taxpayers’ Canadian tax liabilities in Canadian dollars when their financial results are determined in a foreign currency can result in distorted financial results in years of currency volatility. As such, the option to elect into functional currency tax reporting is meant both to ease compliance and to promote more representative financial reporting.”
In that context, the determination of the principal currency in which the taxpayer maintains its books and records for the purpose of financial reporting is an issue that can only be resolved after an analysis of all the facts of a particular situation. To date, the CRA has not issued any guidance with respect to this new rule of law.
Taxpayers who have questions about the results of a functional currency assessment or general questions about the filing of a functional currency election or return may contact the Business Inquiries at 1- 800-959-7775 (French) or 1-800-959-5525 (English). You need to specify that your question is about functional currency. In that way, your call will be forwarded to the CRA's Functional Currency Team in order that we can respond accurately.
Yannick Roulier
(613) 957-2134
October 8, 2010
2010-037365.