2021-0913421C6 CEWS - Foreign exchange as qualifying revenue

Principal Issues: Questions submitted by the TEI: (1) would unrealized foreign exchange gain and losses be qualifying revenue? (2) would realized foreign exchange gain and losses be qualifying revenue?

Position: (1) No. (2) Possibly.

Reasons: (1) Unrealized foreign exchange gains and losses do not result in an inflow of cash, receivables, or other consideration. (2) While realized foreign exchange gains and losses likely result in an inflow, whether they arise in the course of the ordinary activities of the entity is a question of fact.

Author: Ross, Matthew
Section: 125.7

Tax Executives Institute, Inc.
Liaison Meeting Questions

Question - Definition of qualifying revenue: Foreign exchange

Where an eligible entity’s normal accounting practice is to convert the inflow of cash, receivables, and other consideration into Canadian currency from a foreign currency, it re-evaluates the balance of certain accounts to reflect their value in Canadian currency as of the date of the balance sheet. Can CRA comment on whether those re-evaluations of balance sheet accounts should be included in the computation of qualifying revenue? Or should only realized foreign exchange gain or loss arising in the course of the ordinary activities of the eligible entity—generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity—be included in the computation of qualifying revenue?

CRA Response

The term “qualifying revenue” is defined in subsection 125.7(1) of the Income Tax Act (“the Act”), in part, as follows:

“qualifying revenue, of an eligible entity for a prior reference period or a current reference period, means the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of the eligible entity — generally from the sale of goods, the rendering of services and the use by others of resources of the eligible entity — in Canada in the particular period, …”

Subsection 125.7(4) of the Act provides that, for the purposes of the definition “qualifying revenue” in subsection 125.7(1) of the Act, the qualifying revenue of an eligible entity is to be determined in accordance with its normal accounting practices, subject to certain choices and elections available to the eligible entity.

As noted in the definition in subsection 125.7(1) of the Act, qualifying revenue requires, among other things, an inflow of cash, receivables or other consideration. Where an entity re-evaluates or translates certain balance sheet accounts to reflect their value in Canadian currency at a certain time, no inflow of cash, receivables or other consideration has occurred. Accordingly, any unrealized foreign exchange gain or loss resulting from a re-evaluation or translation of a balance sheet account would not be considered qualifying revenue.

Whether a realized gain or loss results in an inflow of cash, receivables and other consideration is a question of fact. However, in order to be considered qualifying revenue, an inflow of cash, receivables or other consideration must also arise in the course of an entity’s ordinary activities in Canada, generally from the sale of goods, the rendering of services and the use by others of resources of the entity. Whether a particular activity arises in the course of an entity’s ordinary activities in Canada depends on the facts and circumstances of a particular situation. While the question does not provide enough information to make a determination, depending on the facts of the situation, a realized foreign exchange gain or loss arising from an entity’s ordinary activities in Canada, that is determined in accordance with the entity’s normal accounting practice, may be considered qualifying revenue for the entity. For example, if an entity realizes a foreign exchange gain on the collection of an account receivable that arose on the sale of goods, the realized gain may be included in the entity’s qualifying revenue.

Matthew Ross, CPA, CA
2021-091342
January 23, 2022

UNCLASSIFIED

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