and Revenue Administration
Corporate Tax Act
||August 24, 2010
||Alberta Treasury Board and Finance, Tax and
|For more information:
CT-23 / August 2010
NOTE: This information circular is intended to
explain legislation and provide specific information. Every effort
has been made to ensure the contents are accurate. However, if a
discrepancy should occur in interpretation between this information
circular and governing legislation, the legislation takes precedence.
CORPORATE TAX ACT INFORMATION CIRCULAR:
FUNCTIONAL CURRENCY TAX REPORTING
This information circular explains the Alberta application of the functional currency tax reporting effective for taxation years beginning after December 13, 2007. The topics discussed include:
- Generally, corporations are required to file their tax returns in Canadian dollars. Some corporations carrying on business in Canada may maintain their books and records in a foreign currency, and then translate their financial results into Canadian dollars solely for tax purposes. The value of the foreign currency may fluctuate against the Canadian dollar, distorting the financial results of the corporation.
- For taxation years beginning after December 13, 2007, eligible corporations may elect to determine their Canadian tax results in their functional currency rather than Canadian currency, for federal and Alberta tax purposes. Corporations must meet particular federal requirements to be eligible to make the functional currency election. The change to functional currency tax reporting is expected to make compliance easier and allow more representative financial reporting for eligible corporations calculating their financial results in a foreign currency.
- Alberta has adopted the federal rules for functional currency tax reporting found in section 261 of the federal Income Tax Act (ITA), with some exceptions. Therefore, for a comprehensive review of the functional currency tax reporting requirements, refer to the ITA and the Alberta Corporate Tax Act (ACTA). Alberta has its own rules related to Canadian currency requirements, conversion of amounts payable, and conversion of amounts carried back. The functional currency reporting requirements and calculations specific to Alberta corporate income tax are explained below.
- Normally, corporations are required to determine their Canadian tax results in Canadian currency. A corporation may only report its Canadian tax results in a functional currency if it meets certain requirements and files a valid federal election.
- A corporation that makes a federal election, according to subsection 261(3) of the ITA, to report its financial results in a functional currency, or makes a revocation of the federal election to use functional currency, according to subsection 261(4) of the ITA, is deemed to have made the same election or revocation for Alberta.
- All Alberta corporate tax is payable in Canadian currency. A corporation’s tax payable determined in its functional currency will be converted to Canadian dollars using the average exchange rate for the taxation year.
- The average exchange rate for the taxation year is calculated as the average of the rate of exchange quoted by the Bank of Canada at noon on each business day in the taxation year for the exchange of a unit of the particular currency for a unit of Canadian currency.
- Any instalment payments required must be determined in Canadian dollars. The required instalments are calculated using the corporation’s tax payable in Canadian dollars. For more information about calculating the required corporate tax instalments for Alberta, please refer to Information Circular CT-3, Alberta Corporate Tax Instalments.
- Any amounts deemed to be paid on account under the ACTA, except any Alberta scientific research and experimental development tax credits, are converted at the spot rate for the day the amounts are deemed to be paid.
- Alberta scientific research and experimental development tax credits deemed paid on account are converted at the average exchange rate for the taxation year.
- Corporations that have reported Canadian tax information in functional currency and have revoked the functional currency election will revert to Canadian currency reporting. Subsequent taxation year-ends are considered reversionary years for tax purposes.
- Any deduction for amounts carried back to previous years for Alberta tax purposes will be treated as follows:
- If the later year is reported in a functional currency and the earlier year is reported in Canadian currency,
- amounts carried back from a functional currency year to be applied to an earlier Canadian year are converted at the spot rate on the last day of the corporation’s last Canadian currency year, and
- functional currency amounts carried back to an earlier Canadian year are to be converted back to the functional currency at the same rate to calculate the balances remaining to be applied to other years.
- If the later year is a reversionary (Canadian currency) year and the earlier year is functional currency year,
- amounts carried back from Canadian currency to be applied to an earlier functional currency year are to be converted to functional currency at the average exchange rate for the earlier functional currency taxation year, and
- Canadian currency amounts carried back to an earlier functional currency year are to be converted back to Canadian currency at the same rate to calculate the balances remaining to be applied to other years.
- Amounts carried back from a reversionary year to a Canadian currency year remain in Canadian currency and do not need to be converted.
- A corporation reporting in functional currency will convert the following amounts from Canadian currency to functional currency at the average exchange rate for the year:
- the corporation’s business limit for the year,
- the corporation’s maximum expenditure limit for the year, and
- the dollar amounts used to calculate the political contributions tax credit.
- Alberta has an anti-avoidance provision similar to the federal rule to address the transfer of properties between corporations with different tax reporting currencies for the purpose of changing the currency in which the property is recorded. The Alberta and federal provisions allow the Minister of National Revenue to decide the currency to be used to report the Canadian tax results if certain conditions are met.