The correspondent described IFRS 9 as introducing an “expected credit loss” (ECL) framework for the recognition by financial institutions of credit losses, which are determined as the sum of the amounts determined under the following three stages:
- Stage 1: An allowance to recognize ECLs resulting from default events that are possible within 12 months from when a loan is originated or purchased as well as existing loans with no significant increase in credit risk since initial recognition.
- Stage 2: An allowance to recognize ECLs for loans for which there have been significant increases in credit risk since initial recognition and the credit risk is not considered low.
- Stage 3: An allowance for credit-impaired loans where events have occurred to cause impairment.
Could this sum be taken as the taxpayer’s allowance for impairment in accordance with generally accepted accounting principles (“GAAP”) for purposes of computing the s. 20(1)(l)(ii) deduction?
After reviewing the GAAP element in the determination of the s. 20(1)(l)(ii) deduction (and indicating that the GAAP allowance must be “calculated on a loan-by-loan basis,” CRA stated:
It is a question of fact as to whether a particular financial institution's reserve for impaired loans determined in accordance with generally accepted accounting principles will give rise to a deductible amount under subparagraph 20(1)(l)(ii) of the Act. In order [to] determine the amount of an impaired loan reserve that may be deductible by a financial institution the Act requires that each loan must be specifically identified as being impaired and that impairment must be measurable on a loan by loan basis. A reserve set up to provide for possible loan losses with no evidence of impairment would be a reserve for a contingency, and subject to the prohibition in paragraph 18(1)(e) … .