CRA refuses to condone mark-to-market accounting for trading liabilities of financial institutions

It is understood that many financial institutions such as securities dealers and banks mark-to-market both the assets used in their core businesses and the related liabilities for income tax (as well as accounting) purposes, notwithstanding that the Act only specifically authorizes mark-to-market accounting for qualifying assets.  This practice has been called into question by a recent technical interpretation.  It indicates that it does not accord with the Act for financial institutions to recognize, on an accrual basis, gains or losses on liabilities due to fluctuations in interest rates, credit ratings or other adjustments.  Although the CRA position could be technically correct, the result of applying this policy is that the income for tax purposes of a financial institution may not reflect that it is maintaining a largely hedged book in the sense that decreases in the value of its assets as a result of increasing interest rates will be largely matched by decreases in the value of its liabilities.

Neal Armstrong.  Summarized under ITA s. 9 "computation of profit".