STC Steel – Tax Court finds that Cdn.$ NCLs of a sub were converted at the spot rate for the most recent completed tax year end when wound up into a USD functional currency parent

A subsidiary of the taxpayer incurred non-capital losses in its 2009 to 2011 taxation years. The subsidiary was wound up into the taxpayer, and dissolved, on December 2, 2020. Unlike the subsidiary, the taxpayer had elected, for all relevant taxation years, to have the US dollar as its functional currency.

The taxpayer took the position that the quantum of the non-capital losses, expressed in its functional currency, should be converted at the exchange rate applicable at the end of each taxation year in which the losses were incurred; whereas the Minister considered that they should be converted at the spot rate applicable at the end of the subsidiary’s last Canadian currency year, i.e., December 31, 2019.

The taxpayer argued that the subsidiary did not have a taxation year ending after the commencement of the winding-up on December 2, 2020 as its final taxation year ended on that day, so that s. 261(16) did not apply as it had no taxation year ending after the commencement of the winding-up. In rejecting this submission, Clark J noted that the use in s. 261(16) of “commencement time” rather than “commencement day” contemplated a sequencing of events on the winding-up day, that the year end did not occur until dissolution, and that the commencement time (of the winding-up) “must occur before the year end, even if both occur on the same day.”.

She further stated:

Subsection 88(1.1) deems the subsidiary’s property to have been disposed of for proceeds of disposition equal to the cost amount to the subsidiary of that property. This deemed disposition takes place in the moment before wind‑up and is consistent with understanding subsection 261(16) to require conversion into the elected functional currency in the moment before wind‑up.

As a result, s. 261(16)(a)(i) provided that s. 261(5) was deemed to apply to the taxation year that included the commencement time, which was the taxation year that ended on December 2, 2020.

Neal Armstrong. Summary of STC Steel Technologies Canada, Ltd. v. The King, 2026 TCC 149 under s. 261(16) and Interpretation Act, s. 11.