USAco, a domestic corporation, operates a Canadian subsidiary, CANco. The functi

Question

USAco, a domestic corporation, operates a Canadian subsidiary, CANco. The functional currency of the Canadian subsidiary is the Canadian dollar (C$). At the end of year one, CANco has earnings and profits of C$100,000. On January 1 of year two, CANco distributes C$100,000 to USAco. On January 1 of year one, $1 U.S. was worth C$1.75. During year one, the exchange rate averaged $1 U.S. to C$1.50. On January 1 of year 2, $1 U.S. was worth C$1.25. Ignoring any gross-up income associated with the deemed paid credit, the amount of year two income USAco reports as a dividend in U.S. dollar is:

(a) $57,143

(b) $66,667

(c) $80,000

(d) $100,000

Explanation / Answer

The aaplicable exchange rate would be the rate on date of dividend payment by CANco, i.e. rate on January 1 of year two

So, Income to be reported = C$100,000/1.25 = $80000 (C)

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