A Canadian corporation (“Canco”) with an elected functional currency is subject to transfer pricing income adjustments respecting a functional currency year. What is the relevant spot rate to be used in converting the C$5,000,000 threshold in s. 247(3)(b)(ii) into the elected functional currency? S. 261(5)(b) generally requires that the relevant spot rate for the first day of the particular taxation year in issue be used in a converting a dollar amount, except where that amount is “in respect of a penalty or fine.”
CRA found that, in light of the quoted exclusion, the threshold amount was to be converted using the relevant spot rate for the first day of Canco’s particular taxation year in respect of which the transfer pricing income adjustments are made. In this regard, CRA noted that the C$5M threshold amount in s. 247(3)(b)(ii) was only one of the two components for establishing the threshold above which a penalty might be assessed, and that the penalty itself is equal to 10% of the amount determined under s. 247(3)(a), and does not take into account s. 247(3)(b). Thus, the C$5M threshold was in respect of determining whether a penalty might apply, but was not in respect of the penalty itself.