Principal Issues: Does the phrase "carried at fair market value" in the definition "mark-to-market property" in subsection 142.2(1) mean carried at the amount determined in accordance with the CICA's Handbook section 3855?
Position: See document.
Reasons: See document.
CLHIA ROUNDTABLE - MAY 2007
Question 7
Meaning of "Carried at Fair Market Value"
Does the phrase "carried at fair market value" in the definition "mark-to-market property" in subsection 142.2(1) mean carried at the amount determined in accordance with the CICA's Handbook section 3855?
Agency's Response
While the definition of "mark-to-market property" in subsection 142.2(1) refers to the phrase "fair market value" as opposed to "fair value" as used in the CICA Handbook section 3855, there are sufficient similarities between the two approaches in terms of the derivation of the values that CRA is prepared to accept that "fair value" is equivalent to "fair market value" for purposes of the definition of "mark-to-market" property in subsection 142.2(1).
More specifically, CRA agrees that "fair value" of securities based on published price quotations in an active market would represent "fair market value" barring exceptional circumstances. However, where a financial instrument is "fair valued" by using a valuation technique as described in section 3855.A47, CRA would not be precluded from reviewing that value for purposes of determining the gain or loss under subsection 142.5(2).
Finance's Response
It is anticipated that the phrase "carried at fair market value" in the definition "mark-to market property" in subsection 142.2(1) will be replaced by the phrase "valued at its fair value ". A financial security will be considered to be a mark-to-market property if it is, in accordance with GAAP, carried in the financial statements of a financial institution at its fair value.
In applying the mark-to-market property rules in section 142.5 of the Act, the fair market value of a mark-to-market property at a particular time will be determined using the normal valuation criteria. The CRA will, as an administrative position, be encouraged to accept, as the fair market value of a mark-to-market property, the amount determined, in accordance with GAAP, to be the fair value of that property where that fair value of the property so determined is a reasonable approximation of fair market value of the property.
In the case of publicly traded securities, we understand that the fair value will be determined as the current bid price on a stock exchange. In the case of securities that are not publicly traded, we understand that the fair value would be determined as the price that a willing seller and a willing purchaser would agree to in respect of a sale of the securities and a purchase of the securities if they were under no compulsion to sell or buy the securities and they had knowledge of relevant facts. If administrative or compliance difficulties arise and persist in this area, such difficulties will be reviewed and resolved with modifications to the rules if necessary. Priority will be placed on the appropriate measurement of income.