| DATE April 6, 1990 | |
| TO Ed Gauthier | FROM M.M. Trotier |
| Director | 957-8957 |
| Special Audits Division | |
| File No. 5-9535 |
Subject Re: Loan Realization Assets and Trading Investment Accounts of Banks
Attached is a copy of a letter dated March 30, 1990 addressed to the 24(1) concerning certain loan realization assets of a bank and whether they could constitute inventory for income tax purposes.
Following the meeting last week of the 24(1) we would like to briefly comment on an issue which was raised at that meeting. It was indicated that Audit Application considers securities held by a bank in its trading account as being inventory for income tax purposes and those recorded in its investment account as either inventory or capital properties.
In draft regulation 6209 Finance has referred to 'prescribed security" of a bank as a security which is reported as part of the bank's trading account and of any other taxpayer as a security which is described in an inventory of the taxpayer. A bank therefore, cannot claim a reserve with respect to such securities pursuant to paragraph 20(1)(l) of the Income Tax Act (the "Act").
We understand Finance's concern was that taxpayers not be entitled to a deduction under section 10 of the Act and a reserve under paragraph 20(1)(l) of the Act in respect of the same security.
In our view the characterization of a property as inventory is a question of fact to be determined in the circumstances and general positions such as that noted above could lead to difficult situations. For example, we would expect that the gains or losses form the disposition of most properties in the investment account would be on income account. To treat these as inventory would entitle a bank to value such properties under section 10 of the Act and claim a reserve pursuant to paragraph 20(1)(l) of the Act. Similarly a bank may be in the same situation with respect to debt acquired on a debt swap (whether LDC or domestic debt).
21(1)(b)
We would appreciate receiving your views on this matter.
ChiefFinancial Institution sectionFinancial Industries DivisionRulings Directorate
| 19(1) | 5-9535 |
| M.M. Trotier | |
| (613) 957-8957 | |
| March 30, 1990 | |
| Re: Loan Realization Assets | |
| Dear Sirs: | |
| Following the 24(1) meeting on February 1, 1990 we undertook to provide you with our comments concerning your enquiry as to whether certain loan realization assets of a bank, which are not lending assets as defined in subsection 248(1) of the Income Tax Act, could constitute inventory for income tax purposes. | |
| Whether loan realization assets constitute inventory or other income assets of a bank is a question of fact which can only be determined upon review of all the relevant facts. We are, however, prepared to provide you with the following general comments.We considered the situation where shares, (other than preferred shares) are acquired by a bank in satisfaction or partial satisfaction of a loan and title to the shares is taken by the bank. The shares will be held for resale by the bank and would qualify for inclusion in the bank's "trading account" as determined for purposes of the Office of the Superintendent of financial Institutions. The bank would be required to sell or dispose of such shares within a period of two years pursuant to subsection 193(12) of the Bank Act.In the circumstances described above it is our view that such shares would constitute inventory to the bank for income tax purposes.We trust that the above will be of assistance.Yours truly,for DirectorFinancial Industries DivisionRulings Directorate |