Principal Issues: Whether the CRA can confirm in which currency amounts reported in form T2057 should be denominated in circumstances where section 85 applies in respect of a property transferred by a transferor that has a tax reporting currency different from that of the transferee.
Position: The CRA requires that two separate forms T2057 be filed. The amounts reported must be denominated in the transferor’s tax reporting currency on the first form T2057 and in the transferee’s tax reporting currency on the second form T2057.
2020 International Fiscal Association Conference
CRA Roundtable
Question 1 - Relevant currency for purposes of filing form T2057 when parties have different tax reporting currencies
Where a taxpayer transfers property to another corporation on a tax-deferred basis pursuant to section 85 of the Income Tax Act (Act), form T2057 must be jointly filed by the transferor and the transferee. The transfer will have implications for both parties’ Canadian tax results (CTR), as that term is defined in subsection 261(1) of the Act, though the impact on the transferee’s CTR will be prospective only. Where the two parties have different tax reporting currencies, within the meaning of subsection 261(1) of the Act, can the CRA confirm that amounts to be reported on form T2057 should be denominated in the transferor’s elected functional currency, as that term is defined in subsection 261(1) of the Act?
CRA Response
Where section 85 of the Act applies in respect of a property transferred by a transferor that has a tax reporting currency (as defined in subsection 261(1) of the Act) different from that of the transferee, the CRA requires that two separate form T2057 be filed.
The amounts reported must be denominated in the transferor’s tax reporting currency on the first form T2057 and in the transferee’s tax reporting currency on the second form T2057.
The potential application of subsection 261(18) of the Act could be considered based on the facts and circumstances of the asset transfers.
Subsection 261(18) of the Act employs a principal purpose test that will be met if “one of the main purposes of the transfer or of any portion of a series of transactions or events that includes the transfer is to change, or to enable the changing of, the currency in which the Canadian tax results in respect of the property, or property substituted for it, for a taxation year would otherwise be determined”. The subsection then further provides that, even if the principal purpose test is met, it will only apply if the Minister so directs.
One of the objectives of subsection 261(18) of the Act is to protect the integrity of the restriction provided in subsection 261(3) of the Act that permits a corporation to make only one functional currency election (e.g. once a corporation elects to report in USD, it cannot then subsequently elect to report in Euro or revert to CAD reporting and then elect USD again). The first scenario of example 3 in paragraph 1.69 of the Folio S5-F4-C1 – Income Tax Reporting Currency (Feb. 27, 2019) provides an example of a situation where subsection 261(18) of the Act might be applicable. Example 3 of the Folio can be found online at https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/series-5-international-residency-folio-4-foreign-currency/income-tax-folio-s5-f4-c1-income-tax-reporting-currency.html.
Jean-Bernard Dion/Marie-Claude Routhier
2020-085341
September 15, 2020
Response prepared in collaboration with:
Jeffrey Johns, International Tax Division
International and Large Business Directorate
Compliance Programs Branch