Issues for MNEs with the New "Relevant Spot Rate"
On May 1, 2017, the Bank of Canada will cease providing data on noon
exchange rates between the Canadian dollar and foreign currencies, and
instead will provide only a single daily average exchange rate by 4:30
p.m. ET. As a result, amendments to section 261 provide that this daily
average rate is now the rate to be used for computing the tax
consequences of foreign currency transactions made on that day. This
change can cause a problem for taxpayers who are planning foreign
currency transactions that require knowledge of that day's exchange rate
before the transaction can be processed; following the posting of the
daily rate, there is little business time left in the day to implement
those transactions. To avoid complicating ordinary business dealings, a
change to the law could be considered in order to allow more time
between the release of the rate and the close of the business day.
Subject to certain exceptions, a taxpayer's Canadian tax results are
required to be determined in Canadian currency pursuant to paragraph
261(2)(a). Under paragraph 261(2)(b), if a particular amount that is
relevant in computing those Canadian tax results is expressed in a
currency other than Canadian currency, the conversion into Canadian
currency is to be performed using the relevant spot rate (defined in
subsection 261(1)) for the day on which the particular amount arose.
Following an amendment effective March 1, 2017, this generally means the
Bank of Canada's rate released by 4:30 p.m., or another rate of
exchange that is acceptable to the minister.
Consider a routine intercompany transaction, such as the payment of
service fees in respect of a US-dollar-denominated contract by Subco C
(located in Canada) to Subco U (located in the United States). Suppose
that the funds available to pay the fee are in Canadian dollars, which
Subco C will use to pay the amount without purchasing US dollars. In
order to have the transaction cause no book and tax difference (with
associated higher compliance costs), Subco C and Subco U may agree to
use the Bank of Canada's exchange rate for that day to determine the
Canadian-dollar amount required to satisfy the obligation. Thus, the
exchange rate should ideally be known before the transaction is
Such agreements have not worked as well since the March 1 effective date
for the amendment, with the exchange rate for the day being available
only by 4:30 p.m. instead of soon after 12:00 noon. Many large financial
institutions have a cutoff around 5:00 p.m. or earlier on cash
movements. In addition, multiple functions (treasury, accounting, legal,
and finance) within an MNE may be involved with the approval and
execution of the payment, all of which take time. Further, an MNE may
have multiple layers of companies. For example, cash-rich operating
entities could be located in one part of the chain and foreign currency
amounts owing elsewhere in the structure, requiring multiple movements
and involving different financial institutions. A high level of effort,
speed, and coordination would thus be required to accomplish multiple
movements in 30 minutes (4:30 p.m. to 5:00 p.m.). The time zone
difference works in favour of entities in western Canada, so they may
have fewer problems with the new 4:30 p.m. ET rate.
Although the definition of "relevant spot rate" also permits the
taxpayer to use "another rate of exchange that is acceptable to the
Minister," uncertainty surrounds what constitutes such a rate and what
evidence is required to support its use for a particular transaction.
Perhaps the CRA could release guidance permitting the use of the
previous day's rate in the situation described above, or the law could
be changed to allow a company to elect in advance, for a given taxation
year, to use the day X rate for all transactions executed on day X + 1.
Other variations also exist.
Max Thung and Clara Pham
The TDL Group Corp., Oakville, ON