The Canadian-resident corporate Taxpayer has applied the International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements. However, in preparing its unconsolidated financial statements (also using IFRS) for the purpose only of filing its tax returns it later retroactively adopted IFRS 9 (re fair value accounting), and refiled previous returns accordingly. The reported effect was to increase its opening retained earnings at the commencement of the affected years so as to reflect increases in the fair market value of its direct and indirect interests in certain partnerships and corporations (as approximated by including the previously reported net income of such entities in each relevant period.)
Is this use of an accounting standard only in the unconsolidated statements permitted and, if not, can the Taxpayer in the alternative include in its retained earnings its proportionate share of partnership income determined under s. 96(1) when determining the “equity amount” for thin capitalization purposes? The Directorate responded:
[C]onsistency between the consolidated financial statements and unconsolidated financial statements… is expected… to avoid the use of financial statements as a tax planning tool…with the exception that the unconsolidated financial statements would eliminate the consolidation aspects of the consolidated financial statements. …
[T]he Taxpayer should not be able to adopt IFRS 9 in the unconsolidated financial statements prepared for the purpose of filing the tax returns until the time the Taxpayer adopts the same standard in its consolidated financial statements. …
[T]he Taxpayer is not permitted to add its proportionate share of partnership income allocated… under subsection 96(1)… to the retained earnings balance when determining the “equity amount” for thin capitalization purposes. Partnership income is only included in the “equity amount”, as defined in subsection 18(5), if such income is included in the retained earnings of the corporation under the applicable accounting standards.