Reg. 5907(6) was amended for taxation years commencing after 18 December 2009 to eliminate a prohibition against maintaining surplus accounts of a foreign affiliate in Canadian dollars. (a) What are the criteria which CRA applies to determine if it is reasonable to maintain the surplus accounts in Canadian dollars or a foreign currency other than the currency of the affiliate's residence, or to change the currency? (b) For surplus accounts of foreign affiliates calculated in the foreign currency of a particular country before the amendments, does CRA accept that the balance as at December 18, 2009 is converted to Canadian currency at the exchange rate on that date and that the surplus accounts are then maintained in Canadian currency? CRA responded (TaxInterpretations translation):
…(a) As indicated in response to question 7 at the Corporate Management Tax Conference Roundtable of the Canadian Tax Foundation in 1992, there is no hard and fast rule for determining what, in a particular situation, is considered reasonable respecting the choice of a currency in which the surplus accounts of a foreign affiliate are to be maintained for purposes of ITR subsection 5907(6). Those comments remain relelvant notwithstanding the amendments…[which] essentially…had the effect of adding the possibility of using Canadian currency, to the extent it is reasonable to do so.
…A number of criteria may apply in determining if it is reasonable to use the Canadian dollar…such as…the principal currency in which the corporation maintains its books and registers for purposes of presenting its financial results, the currency generally used in conducting its commercial transactions in the country in which it carries on business, and the currency which it uses for taxation purposes in the country of its residence. If an examination of these criteria, as well as others considered to be appropriate, permits a determination that use of the Canadian dollar presents a fair picture ["image juste"] of the surplus account balances of the foreign affiliate, we will consider that such use is reasonable in the circumstances.
…(b) Provided that the use of the Canadian dollar is reasonable in the circumstances and that there is no retroactive tax planning involved, we will accept that the surplus account balances of a foreign affiliate for its taxation years terminating before the entry into force of the amendments effected by the 2012 Act [on 26 June 2013] are to be converted into Canadian dollars using the "relevant spot rate," as that expression is defined in subsection 261(1), at the first day of the first taxation year of the foreign affiliate commencing after 18 December 2009… . Generally, we would not consider that retroactive tax planning is involved if the taxpayer advised us in writing well in advance of the time of the preparation of the accounts for the purposes of a determination… .