Principal Issues: a) What criteria are used by the CRA in order to determine whether it is reasonable to maintain surplus accounts of a foreign affiliate in Canadian currency, a currency other than the currency of the country of residence of the affiliate, or to change the currency in which the accounts are maintained? b) For surplus accounts of foreign affiliates which were maintained in foreign currency prior to December 18, 2009, does the CRA accept that they can be converted to Canadian currency at the exchange rate applicable on that date and maintained in Canadian currency thereafter?
Position: a) Each situation depends on its facts. b) If the use of Canadian currency is reasonable in the circumstances and there is no evidence of retroactive tax planning, we would accept that the surplus balances of a foreign affiliate could be translated to Canadian currency based on the "relevant spot rate" for the first day of its first taxation year beginning after December 18, 2009.
Reasons: See below.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 24
Calculation of surplus
ITR subsection 5907(6) has been amended for taxation years beginning after December 18, 2009 to eliminate the prohibition against maintaining a foreign affiliate's surplus accounts in Canadian dollars. The paragraph now states that surplus accounts must be maintained on a consistent basis from year to year in the currency of the country in which the foreign affiliate of the corporation resident in Canada is resident or in any currency that the corporation resident in Canada demonstrates to be reasonable in the circumstances.
Questions to the CRA
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 that were calculated in the foreign currency of a particular country before the legislative amendment, does CRA accept that the balance as at December 18, 2009 is converted to Canadian dollars at the exchange rate on that date and that the surplus accounts are then maintained in Canadian dollars?
CRA response to question 24(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 relevant notwithstanding the amendments made to this subsection by the Technical Tax Amendments Act, 2012 (S.C. 2013, c. 34) (the "2012 Act"). This subsection, as it read, also provided for the possibility of using a currency other than the currency of the foreign affiliate's country of residence for the purpose of calculating its surplus, excepting Canadian currency, to the extent that it was reasonable to do so. Essentially, the amendments made by the 2012 Act to subsection 5907(6) ITR had the effect of adding the possibility of using Canadian currency, to the extent it is reasonable to do so.
To begin with, we would like to state that each situation must be examined on a case-by-case basis, according to its own facts. Among the criteria that can be used to determine whether it is reasonable to use the Canadian dollar for purposes of calculating a foreign affiliate’s surplus accounts, we will consider, in particular, and without any of these criteria being decisive in themselves, 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 relevant, 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.
With respect to currency changes, each situation should be considered on a case-by-case basis.
CRA response to question 24 (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, being the effective date of the amendments to ITR subsection 5907(6) under the 2012 Act. 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 under the ITA
Hugo Gravel
(613) 957-2058
2014-053818