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.
Principal Issues: Whether the application of new accounting standards in sections 1530 and 3955 of the CICA Handbook, will result in some assets of a corporation which may have previously been treated as Specified Debt Obligations (SDOs) for tax purposes, now being treated as Mark-to-Market Property(MTMP) for purposes of the Act.
Position: This would appear to be the case.
Reasons: Words in paragraph (b) of the definition of "mark-to-market property" in subsection 142.2(1) of the Act.
2005 TEI Conference
Question 15. Mark-to-Market Property
The Accounting Standards Board of the Institute of Chartered Accountants of Canada has issued two new standards: CICA 1530, Comprehensive Income, and CICA 3855, Financial Instruments - Recognition and Measurement. For fiscal years beginning on or after October 1, 2006, adoption of these standards by financial statement issuers will change the financial accounting treatment and reporting of certain financial instruments, including specified debt obligations (SDOs) defined in subsection 142.2(1) of the Act. Specifically, SDOs that satisfy the CICA 3855 definition of "available for sale" will be reported on the balance sheet at their market value, but the income will continue to be recorded in the income statement on an accrual basis. The difference between the market value of the instrument and the accrual value of affected instruments will be reported in "Other Comprehensive Income" (OCI) - a new category of Shareholders Equity.
Currently, SDOs are excluded from mark-to-market property treatment for income tax purposes because they are not marked to market for financial statement purposes and thus do not satisfy the definition of "mark-to-market property" in paragraph 142.2(1). Hence, the new financial accounting standards may create ambiguity about the proper income tax treatment of some SDOs. Since the purpose of the mark-to-market tax rules is to report the proper amount of income subject to tax, we believe a reasonable interpretation of paragraph b of the definition of "mark-to-market property" in subsection 142.2(1) is that it requires only instruments that are marked to market for income statement purposes to be marked to market for income tax purposes. Under this interpretation, the new accounting standard would not change the taxation of affected SDOs because the income statement treatment of the instruments has not been changed by the new standards. This interpretation would also be consistent with the current requirement that the reconciliation of accounting and taxable income begin with the income per financial statements without considering OCI. Does CRA concur with TEI's interpretation?
CRA Response
- Where, as described in the question, a corporation will now be required to carry some SDOs on the balance sheet at fair market value the result would appear to be that such SDOs would be considered to be "carried at fair market value in the taxpayer's financial statements" for the purposes of paragraph (b) of the definition of "mark-to-market property". In this regard, it is our view that the phrase "carried on the financial statements at fair market value" refers to those assets carried on the balance sheet at fair market value rather than the income statement which records flows of income, gains, expenses and losses. Whether this result is consistent with tax policy is a question you may wish to raise with the Department of Finance, as the setting of tax policy is within their purview.
2005-015879
December 6, 2005
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