Functional Currency Flashcards
General rule regarding reporting currency
Canadian tax results must be in Canadian dollars.
How does currency reporting impact businesses?
The reporting in Canadian dollars may distort company results that conduct business operations and report in a foreign currency
Explain functional currency rules
Functional currency rules allow certain taxpayers to file Canadian tax returns in qualifying functional currency
Why have functional currency?
Removes earning distortions caused by FX gains/losses
Explain the general subsection 261(2) rule
All amounts required to be determined under the provisions of the Act are to be determined in Canadian currency.
What is subsection 261(3) of the Act
Where the conditions described are satisfied and an election is filed, a Canadian corporation is permitted to determine its “Canadian tax results” in its “elected functional currency”
What are the conditions for the functional currency exception?
In a tax year, 1. TP is a Canadian resident corporation, 2. has elected that ss. 261(5) apply to it in the year, 3. utilizes a functional currency election; 4. has not previously filed another ss 261(5) election; 5. has not revoked a functional currency election that year.
What is the application of the functional currency on a year-to-year basis?
Once a functional currency is elected it must be applied consistently from year to year. The corporation must never have used functional currency reporting in any previous year. As such, a functional currency election is a “one time election”
Describe, in general terms, subsection 261(5) of the Act
Provides the rules for converting Canadian currency amounts for purpose of functional currency reporting. Canadian tax results determined using the elected functional currency.
What is the rate used for the election?
Generally the relevant spot rate on the day the amount arose
What does ss 39(1) of the Act provide for Fx gains/losses?
Provides that a taxpayer’s gain/loss from the disposition of a property. No bifurcation between fx and economic component.
What does ss. 39(1) of the Act not apply to?
Does not refer to the disposition of liabilities.
How are gains/losses determined under ss 40(1) of the Act provide for?
Gain/loss is equal to the taxpayer’s proceeds of disposition minus the taxpayer’s ACB.
What does ss 39(2) of the Act provide?
Taxpayer must have made a gain and sustained a loss in a tax year as a result of fluctuation in value of a currency relative to the Canadian currency. Does not apply to ss. 39(1) transactions (taxpayer shares).
What is the treatment of fx gains/losses on a loan receivable?
SS 261(2) - convert using relevant spot rate on date amount arose. SS 39(1) is used to compute the gains/loss on disposition of property.
What is the treatment of fx gains/losses on a loan payable?
SS 261(2) - convert using relevant spot rate on date amount arose (same as receivable). SS 39(1) does not apply, but ss 39(2) is used to compute the gains/loss on disposition.
What factors influence the ability to claim fx capital losses
Fx capital losses limited by suspended and loss denial rules; if the income earning purpose of disposed of debt is not met; and if loss suspended if property continues to be owned by corporate group
What triggers the fx loss denial rules within a group and the impact?
- transfer of property within affiliated group within 60 days; 2. loss deemed nil and realized only in subsequent triggering event; but 3. does not apply to disposition of excluded property
What are the 3 issues to determine for the treatment of fx gains and losses?
- What is the denomination of the loan; 2. is that property excluded property; and 3. what is the computation of the fx gains/loss
What there three types of loans that trigger fx gain/loss rules?
- loans between FAs; 2. loans between canco and FA;and 3. loans between FA and related group
Do Canadian domestic rules apply to the tax result of FAs for gains and losses?
Yes, specific FA rules and Canadian domestic rules need to be considered to determine the calculation of gain/loss from settling fx loans; claiming losses and whether there is FACL/FAPI.
What section is the main computational rule for FAs for gains/losses?
Paragraph 95(2)(f)
What does 95(2)(f) provide, generally?
That FA must be treated as if it were a Canadian resident for capital gain/losses and must use Canadian domestic rules for computation.
What does 95(2)(f.11) provide?
Applies to capital gains/losses of FA that are treated as Canadian resident.
