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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Will the Department follow the CICA Handbook and OSFI Regulations with respect to impaired loans for financial institutions ?
Reasons FOR POSITION TAKEN:
Many of the the guidelines do not correspond to specific provisions of the Act which must take precedence.
XXXXXXXXXX J.P. Dunn
July 26, 1995
Re: Change in Accounting Treatment for Loan Impairment
We are writing in response to your correspondence of June 17, 1995 with respect to the accounting standard for "Impaired Loans" which was recently approved by the Canadian Institute of Chartered Accountants (the "CICA") and the guidelines for federally regulated financial institutions issued by the Office of the Superintendent of Financial Institutions of Canada ("OSFI") with respect thereto.
Although we appreciate that consistency between the accounting and tax treatment for the recognition and recording of impaired loans may be a desirable objective, we would also note that, in situations in which the above noted CICA guidelines and the Income Tax Act (the "Act") conflict, this Department has no alternative but to observe the explicit provisions of the Act. For example, paragraph 3025.26 of the accounting standard which is imported into the OSFI guidelines, provides that the recognition of interest income should cease when a loan becomes impaired. Subsection 12(3) of the Act, however, provides no such latitude and, accordingly, interest must be recognized for income tax purposes pursuant to that provision even in those circumstances in which the loan is considered to be impaired. Similarly, the provisions of section 79 of the Act are required to be observed in respect of mortgage foreclosures.
The above comments would equally apply to reserves for doubtful debts pursuant to paragraph 20(1)(l) of the Act which would be analogous to the "allowance for loan impairment" account as described in the guidelines. For example, the guidelines state that a loan may be considered an impaired loan despite the existence of reasonable assurance of ultimate collection of the full amount of principal and, accordingly, provides that the loan should be revalued to reflect this circumstance. Subparagraph 20(1)(l)(ii) of the Act, however, provides no allowance or reserve in respect of a loan unless there is doubt as to the recovery of the principal amount of the loan regardless of any associated factors such as the contractual interest rate or the value of any security provided in support of the loan. Also, as noted previously, the Act and the associated Income Tax Regulations provide specific rules for the computation of certain of the components of this reserve and it is not possible for the Department to ignore these specific provisions in circumstances in which they may conflict with the guidelines.
Accordingly, while we are not able to concur with your views regarding the above noted items, XXXXXXXXXX to explore issues such as the criteria used in the identification of impaired loans and the determination of the quantum of an appropriate reserve in respect thereof. In this regard, you may wish to contact Mr. Doug Mitchell of the Toronto North Tax Services Office at (416) 512-4236 in order to further explore any such avenues of mutual cooperation which you feel may assist in achieving these objectives.
We trust that this is the information which you require.
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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