14 November 1991 External T.I. 91M11170 F - Subsection 10(1) and Bonds

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

SUBJECT: Subsection 10(1) of the Income Tax Act (the "Act") and Bonds:

Since providing a draft of the attached memorandum, we have been asked to comment on a T2S adjustment pursuant to subsection 10(1) of the Act by the same taxpayer in the following circumstances:

24(1)

You have asked for our opinion on the propriety of the T2S adjustment, in light of our comments in the previous memorandum.

We are of the opinion that, if the bond is an inventory item, the adjustment pursuant to subsection 10(1) of the Act may be proper for the following reasons:

1.      The fair market value is below cost.

2.      The method used for accounting purposes is not an authorized method under the Act. There may be some merit to the taxpayer's position that the adjustment is necessary to meet the requirements of the Act.

3.      The bond appears to be a saleable commodity which is a factor in determining whether it constitutes inventory to the taxpayer and, as noted above, the taxpayer does sell bonds prior to their maturity.

4.      It appears that the taxpayer is using, basically, the lower of cost or market method in valuing its marketable securities, with the qualification that an asset is valued at fair market value only if there has been a permanent impairment in its value. As the Act requires that a taxpayer use only one method in valuing its inventory for income tax purposes, it would appear that, if the bonds are inventory, the taxpayer should be using the same method of valuation as is used in valuing other parts of its inventory.

We trust the foregoing comments are of assistance.

yours truly

for DirectorFinancial Industries DivisionRulings Directorate