Functional Currency Tax Reporting Rules
Question 1
What is the meaning of “debt obligation” as the term is used in new section 261 of the Act? Does it include trade payables as well as inter-company loans and advances? If so, where a taxpayer has both a payable and receivable to and from the same entity, can these amounts be netted for purposes of computing the pre-transition debts of the taxpayer to which new subsections 261(8) to (10) of the Act apply?
Response 1
A debt obligation of a taxpayer means any indebtedness owing by the taxpayer, including trade payables, inter‑company loans, and advances. In this respect, subsection 248(26) of the Act clarifies that an amount that a debtor becomes liable to pay (other than interest) as consideration for any property acquired by, or services rendered to, the debtor shall, for the purposes of applying the provisions of the Act, be considered to be an obligation issued by the debtor equal to the amount of the liability. There is no provision in new section 261 of the Act for netting amounts payable and receivable.
Question 2
Where a taxpayer has elected into the functional currency tax-reporting regime, will a reassessment of a prior Canadian currency year of the taxpayer be issued in Canadian dollars or the taxpayer’s elected functional currency?
Response 2
The election, by a taxpayer, to become a functional currency tax reporter will not have an impact on the basis for assessment of any prior taxation year that is a Canadian currency year of the taxpayer. Therefore, if the CRA issues a reassessment in respect of a prior Canadian currency year of the taxpayer, the reassessment will show any adjustments in Canadian currency.
Similarly, if the taxpayer incurs a non-capital loss in a functional currency year and the taxpayer wishes to carry back that loss to offset taxable income in a Canadian currency year, the amount of the loss is converted to Canadian currency in the manner provided for in new subsection 261(15) of the Act. This converted amount is applied against the taxable income of the taxpayer in the Canadian currency year.