The Canada Revenue Agency has released an updated income tax folio regarding its new capital cost allowance regime featuring updated guidance on how property purchased with foreign currency should be reported for tax purposes.
Published on Feb. 27, “Income Tax Folio S3-F4-CI, General Discussion of Capital Cost Allowance” includes information reflecting amendments made by the federal government in 2017 to the definition of “relevant spot rate,” or the rate at which at an amount is converted from a foreign currency to the Canadian dollar for that day, or vice versa.
The CRA provides guidance on the interpretation of the term relevant spot rate, among other topics related to tax compliance and currency, in “Income Tax Folio S5-F4-1 Income Tax Reporting Currency,” released the same day as the CCA folio.
In May 2017, the Bank of Canada stopped reporting a noon spot price, and instead began providing a daily average rate, published at 4:30 p.m. ET. Later that year, the Government of Canada changed the definition of relevant spot rate, effective retroactively to March 1, 2017.
When a property is acquired with a foreign currency, the relevant spot rate is used to convert the amount to Canadian dollars. In the Income Tax Act, the relevant spot rate is generally defined as the foreign exchange rate quoted by the Bank of Canada for the particular day, or, if the day is before March 1, 2017, the Bank of Canada noon rate. The CRA may accept a spot rate other than the Bank of Canada rate, under certain situations. These situations are discussed in detail in the updated income tax folio on currency reporting.
The updated income tax folio on capital cost allowance provides taxpayers with a general discussion and guidance on the regime. In particular, it addresses proposed changes to the CCA regime released by the Department of Finance in November 2018, as part of that year’s Fall Economic Statement, that would allow businesses to expense the purchase of machinery, equipment and other capital properly more quickly than before. The measures were introduced to address a perceived gap in competitiveness relative to the U.S. after the U.S. government introduced extensive tax reforms in 2017.