1 April 1985 Income Tax Severed Letter

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.

April 1, 1985

HEAD OFFICE CORPORATE RULINGS DIRECTORATE V.A. Sider 993-6937

RE: Chartered Banks' Trading-Account Securities

On November 30, 1983 we gave you an opinion concerning securities held in the "Trading Account" of a chartered bank XXXX. The XXXX had valued such securities at market value in 1978 for both financial statement and tax purposes. In 1979 and 1980 it maintained the same treatment of such securities for financial statement purposes but used the lower of cost or market value for tax purposes.

In our previous opinion we indicated that section 26 of the Income Tax Act, and not section 10, governs the valuation of such securities for tax purposes. Furthermore, we indicated that if section 10 did apply, the change in valuation method proposed by the taxpayer for 1979 and 1980 would not be accepted since it would not fulfill the conditions set out in Interpretation Bulletin IT-473 .

In your memorandum of February 19, 1985 you indicated that the change in valuation method proposed by the XXXX for 1979 and 1980 was disallowed and that you propose to disallow the use of the lower-of-cost-or- market method for 1981 as well. The taxpayer's objections to this are as follows:

(1) The "Trading Account" shares are inventories and have been valued at the lower of cost or market value in accordance with section 10 of the Act. (2) Section 26 of the Act, which deals only with "the write-down of the value of assets", has no application. The "write-down" claimed by the XXXX is not a "write-down" in the true sense, but a reversal of the "write-up" from cost to market value reflected in the accounting income. For tax purposes, the assets have neither been "written down" nor "written up".

You have also drawn our attention to a memorandum dated October 29, 1984 from J.R. Robertson, Director General, Audit Directorate, to the Chief of Audit of the Toronto District Office regarding the change in inventory valuation, for tax purposes only, by another taxpayer. That memorandum provides the conditions under which the Department would accept a change in valuation methods for tax purposes, despite the comments (to the contrary) in IT-473 . In view of the XXXX objections and Mr. Robertson's memorandum, you have requested our further opinion on this matter.

We are currently reviewing the issue of whether subsection 10(1) or 26(2) should govern the valuation for tax purposes of property that is inventory of a bank. In connection with this review, we are requesting the views of our Tax Policy division. Until such time as this review is completed, we are not prepared to comment on the applicability of subsection 10(1) to banks. However, even if subsection 10(1) applies to a bank, in our opinion, we should not accept a change in the valuation method adopted by the XXXX in its 1978 tax return because such a change would not comply with the conditions set out in IT-473 . We have advised Mr. Robertson, in relation to his memorandum of October 29, 1984 to which you referred, that generally we should continue to apply the criteria set out in IT-473 in determining whether a change in the method of inventory valuation should be accepted. It is our understanding that in the circumstances addressed in Mr. Robertson's memorandum the taxpayer was changing from a valuation method that was not permitted by the Income Tax Act, and that the requirements in paragraph 4 of IT-473 are not applicable in such a situation. While the issue of appropriate criteria for accepting a change in inventory valuation methods is still under discussion, we recommend that we continue to apply the criteria set out in IT-473 . Therefore the XXXX should not be allowed to change its inventory valuation method.

With respect to whether the lower-of-cost-or-market method for the valuation of "Trading Account" securities would be appropriate to the business of a chartered bank if subsection 10(1) was applicable, we consider that the accounting method that is in accordance with generally accepted accounting principles for that business would be relevant to this determination; however guidelines concerning this determination have not been established.

In view of the fact that our review of this matter is not completed, we do not think that it would be appropriate to provide the XXXX with copies of our correspondence on this subject at this time; however, we are prepared to accept direct representations from the XXXX if they so desire.

Chief Financial Institutions Section Bilingual Services & Finance Division Corporate Rulings Directorate