When you elect to file the return using a functional currency, the program converts the amounts in the table of rates and values used in the federal and provincial returns into the selected functional currency based on the relevant spot rate that you indicated in the Form Corporate Identification and Other Information (Jump Code: ID) and uses the converted amounts for calculation purposes.
You must ensure to comply with all the rules under section 261 ITA and to file Form T1296, Election or Revocation of an Election, to Report in a Functional Currency within the prescribed time periods. Enter all data (including GIFI data) in the functional currency chosen for the particular taxation year, according the relevant spot rate. The exchange rate entered should be the Canadian dollar against the functional currency rate selected. For example, if C$1 is worth 0.7062 €, the rate used should be 0.7062. In the program, you must modify, by manually entering or using an override, the carried forward amounts (balance of deduction, credit and losses, provision, undepreciated capital cost, etc.) with the functional currency amounts.
The provinces of Manitoba and Prince Edward Island informed us that corporations are still required to file the MCT1, Corporation Capital Tax Return, MB-Credit Unions, Credit Unions and Caisses Populaires Tax Return and the PE-Capital Tax, Financial Corporation Capital Tax Return in Canadian dollars. Also note that the AGRI/HAGRI, HAGRI ADD and COZ-1179 forms as well as lines 425z, 440, 440b, 440p to 440y (code 07) and 441b of the CO-17 return must always be completed in Canadian dollars. Diagnostics were added to help you with these requirements. We invite you to verify the position of each provincial and territorial administration concerning this measure as well as the procedures specific to these administrations.
The functional currency of a taxpayer for a taxation year is the qualifying currency of a country which, throughout the year, is the main currency in which the taxpayer maintains its records and books of account for financial reporting purposes. The qualifying currencies are the following:
- the American dollar;
- the euro;
- the sterling pound;
- the Australian dollar; and
- the Japanese yen.
The election to report in a functional currency applies to a taxpayer if the following requirements are met:
- the taxpayer is, throughout the particular taxation year, a corporation (other than an investment corporation, a mortgage investment corporation or a mutual fund corporation) resident in Canada;
- the taxpayer has filed that election with the Minister using the appropriate form(T1296, Election, or Revocation of an Election, to Report in a Functional Currency) and in the prescribed manner on or before the day that is sixty days after the first day of the particular year;
- there is a functional currency of the taxpayer for the first taxation year affected by the election;
- the taxpayer has not filed another election; and
- a revocation by the taxpayer does not apply to the particular taxation year.
A taxpayer may revoke its election by filing, on a day that is in a functional currency year of the taxpayer (other than its first functional currency year), a notice of revocation using the appropriate form (T1296, Election, or revocation of an election, to report in a functional currency) and in the prescribed manner. The revocation applies to each taxation year of the taxpayer that begins on or after the day that is six months after that day.
When the election to report in a functional currency is made, the following rules apply:
- the taxpayer’s Canadian tax results for the particular taxation year are to be determined using the taxpayer’s elected functional currency;
- unless the context otherwise requires, each reference, in the statutes or applicable regulations, to an amount (other than in respect of a penalty or a fine) that is described as a particular number of Canadian dollars is to be read, in respect of the taxpayer and the particular taxation year, as a reference to that amount expressed in the taxpayer’s elected functional currency using the relevant spot rate for the first day of the particular taxation year, and
- unless the context otherwise requires, if a particular amount that is relevant in computing the taxpayer’s Canadian tax results for the particular taxation year is expressed in a currency other than the taxpayer’s elected functional currency, the particular amount is to be converted to an amount expressed in the taxpayer’s elected functional currency using the relevant spot rate for the day on which the particular amount arose.
The relevant spot rate for a particular day is to be used in converting an amount from a particular currency to another currency. The meaning of “relevant spot rate” depends on whether either of the currencies is the Canadian dollar. The Bank of Canada publishes a single rate per currency pair each day at 16:30 eastern time. If there is no such exchange rate quoted by the Bank of Canada for the particular day, the relevant spot rate is the exchange rate quoted on the closest preceding day for which such a rate is quoted, but only if the Bank of Canada ordinarily quotes such a rate.
The instalments that are payable by the taxpayer for the particular taxation year are to be determined by converting those amounts, as determined in the taxpayer’s elected functional currency, to Canadian dollars using the relevant spot rate for the day on which those amounts are due.
The balance of the payable tax by the taxpayer for the particular taxation year is to be paid in Canadian dollars using the relevant spot rate for the day on which those amounts are due. The Alberta balance of tax payable must be paid in Canadian currency by using the average exchange rate for the taxation year.
For more details with regards to the election to file the return in a functional currency, consult section 261 of the Income Tax Act.
Alberta
Alberta accepts tax returns filed in a functional currency and requests that a copy of federal Form T1296 be forwarded to them. When you elect to file the Alberta Corporate Income Tax Return using a functional currency, the program converts into the selected functional currency the amounts in the “Alberta” section of the Provincial Table of Rates and Values Used in the Return and certain values in the return based on the average exchange rate that you indicated in Form AT1, Alberta Corporate Income Tax Return (Jump Code: AJ) and uses the converted amounts in the calculations. The exchange rate entered should be the functional currency rate selected against the Canadian dollar. For example, if 1 euro is worth CAN$1.3986, the rate used should be 1.3986.
The filing of such returns is subject to the dispositions of article 261 of the ITA, under some exceptions. For example, instead of using the relevant spot rate, like the federal government, Alberta takes the average exchange rate into account. For more information on these exceptions, please consult sections 4.01 and 4.02 of the Alberta Corporate Tax Act and the Information Circular CT-23.