Finance confirms shareholders’ resolutions not relevant for functional currency election

In 2012-0453071I7, Finance confirmed that a corporation could maintain its shareholders’ resolutions in a currency other than its elected functional currency without affecting the validity of the functional currency election.

• As a general rule, Canadian corporations must use Canadian currency for Canadian tax purposes, unless a valid election is filed under s. 261 to use a functional currency other than the Canadian dollar.  One condition for a functional currency election is that the corporation have a “functional currency” for its first taxation year in respect of which the election applies.  “Functional currency” for a year is defined as being a currency, other than the Canadian dollar, that is throughout the year a qualifying currency and the primary currency in which the corporation “maintains its records and books of account for financial reporting purposes”.  With respect to the latter requirement, Finance cited its Explanatory Notes to s. 261(3) and said that shareholders’ resolutions of a corporation can be maintained in a currency other than the corporation’s elected functional currency, without affecting the validity of the corporation’s functional currency election.

• A functional currency election can be useful for a Canadian corporation that conducts its business primarily in US dollars and maintains its primary accounting records in US dollars.  Although a careful review should be conducted, generally less exposure to foreign exchange gains and losses will arise for Canadian tax purposes if a valid functional currency election has been filed.