The “expenditure limit” of Canadian-controlled private corporations for a calendar year (which is gradually reduced as the total of their taxable capital employed in Canada (“TCEC”) increases above $10 million) must be allocated between them. When the associated CCPCs of a particular CCPC (the “Taxpayer”) report their Canadian tax results in Canadian dollars, and the Taxpayer reports its Canadian tax results in its elected functional currency, how will the TCEC of the associated corporations be converted into the functional currency in accordance with s. 261(5)(c)?
Although the Directorate indicated that one possible interpretation would require the associated CCPCs to convert each component of their TCEC computation (which the Directorate noted “would be administratively burdensome, especially when the associated corporations could not rely on subsection 261(7)”), the Directorate concluded:
The day the TCEC of the associated corporation is considered to “arise” for the purposes of determining the conversion rate according to paragraph 261(5)(c) is the last day of the taxation year of the associated corporation for which it is computed because that is the day when the amount of the TCEC is determined pursuant to section 181.2 (hence when an amount relevant to computing the Taxpayer’s Canadian tax results is created).
The Directorate further stated:
If prior to the date of this letter the Taxpayer was consistently using a different method for converting the TCEC of its associated corporation in its elected functional currency and claimed additional ITC which would not have been available if the Taxpayer used the conversion method put forward in this letter, the CRA will not challenge the computation for those periods.