Principal Issues: In applying subsection 247(3) with respect to “transfer pricing income adjustments” made in respect of a “functional currency year” of a taxpayer, what is the “relevant spot rate” to be used in order to convert the C$5M threshold amount stated in subparagraph 247(3)(b)(ii)?
Position: In accordance with paragraph 261(5)(b), the conversion shall be made at the “relevant spot rate” for the first day of the taxpayer’s particular taxation year.
Reasons: Interpretation of the Act.
2021 International Fiscal Association Conference
CRA Roundtable
Question 3 – Application of subsection 261(5) to the $5M threshold of subsection 247(3)
Assume that a Canadian corporation (“Canco”) with an “elected functional currency”, within the meaning of subsection 261(1), is subject to “transfer pricing income adjustments”, as defined in subsection 247(1), in respect of a “functional currency year”, as per the meaning of that expression under subsection 261(1).
In these circumstances, what would be the “relevant spot rate”, within the meaning of subsection 261(1), to be used in order to convert the C$ 5,000,000 threshold amount stated in subparagraph 247(3)(b)(ii) into the elected functional currency?
In this respect, we note that paragraph 261(5)(b) states the following:
(b) unless the context otherwise requires, each reference in this Act or the Regulations to an amount (other than in respect of a penalty or fine) that is described as a particular number of Canadian dollars is to be read, in respect of the taxpayer and the particular taxation year, as a reference to that amount expressed in the taxpayer's elected functional currency using the relevant spot rate for the first day of the particular taxation year;
[Emphasis added]
CRA Response
The interpretative issue is whether the C$ 5,000,000 threshold in subparagraph 247(3)(b) is “in respect of a penalty”. Those words are very broad and one might argue that since subsection 247(3) provides for the liability to pay a penalty and also determines the amount of such penalty, paragraph 261(5)(b) is not applicable to the conversion of the C$ 5,000,000 threshold in the elected functional currency.
The C$ 5,000,000 threshold amount in subparagraph 247(3)(b)(ii) is one of the two components that delineate the threshold above which a penalty might be assessed. It is only if the amount determined under paragraph 247(3)(a) exceeds the amount determined under paragraph 247(3)(b) that the taxpayer is subject to pay a penalty. The amount of the penalty itself is equal to 10% of the amount determined under paragraph 247(3)(a) and does not take into account paragraph 247(3)(b).
In our view, the C$ 5,000,000 threshold amount in subparagraph 247(3)(b)(ii) is to be converted using the “relevant spot rate” for the first day of Canco’s particular taxation year in respect of which “transfer pricing income adjustments” are made, in accordance with paragraph 261(5)(b).
We reach that conclusion in the context of the situation submitted on a textual, contextual an purposive analysis of both the English and French versions of paragraph 261(5)(b), including in particular its parenthetical exclusion, which provides that it does not apply to an amount “in respect of a penalty or fine”.
That conclusion is in line with the French version of paragraph 261(5)(b): “sauf s’il s’agit d’une pénalité ou d’une amende”. Also, predictability should prevail in applying subsection 247(3). The application of paragraph 261(5)(b) to identify the “relevant spot rate” as the relevant spot rate for the first day of the particular taxation year when converting the C$ 5,000,000 threshold under subparagraph 247(3)(b)(ii) is consistent with that goal.
Yannick Roulier
2021-088828
May 5, 2021