2013-0513321E5 Ontario CMT- mark-to-market accounting adjustments

Principal Issues: Whether an unrealized loss on the write-down of an intercompany loan is considered a mark-to-market change for purposes of computing adjusted net income for CMT purposes.

Position: Yes, if the write down is a mark-to-market change in respect of a specified mark to market property. Specified mark-to-market property means property subject to mark-to-market valuation under GAAP.

Reasons: Accounting loss differences are included in calculating a corporation's adjusted net income. The formula to calculate an accounting loss difference includes a mark-to-market change in respect of a specified mark-to-market property.

Author: Hooey, Kathy
Section: Subsection 57(1) of the Taxation Act (2007); Ontario Regulation 37/09

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                                                                                                                                           2013-051332

November 10, 2014

Dear XXXXXXXXXX:

Re: Ontario CMT- mark-to-market accounting adjustments

This is in response to your request for a technical interpretation concerning your questions all of which essentially enquire whether an accounting write-down of a public company’s debt owing from its subsidiary constitutes mark-to-market changes and is excluded from adjusted net income for Ontario Corporate Minimum Tax (CMT) purposes.

This technical interpretation provides general comments about the provisions of the Taxation Act 2007 (the TA 2007) and related legislation (where referenced).  It does not confirm the tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

The net income or net loss of a corporation for a taxation year for CMT purposes is defined in subsection 54(2) of the TA 2007 to generally be the corporation’s financial statement net income or loss, before any income taxes, for the fiscal period coinciding with the taxation year, as determined in accordance with generally accepted accounting principles (GAAP).

CMT is determined based on a corporation's adjusted net income (or net loss) ("ANI").  A corporation's ANI is basically its financial statement net income (or net loss) with certain adjustments designed to improve the fairness of the base. For taxation years ending after 2008, the specific adjustments are provided in subsection 57(1) of the TA 2007 and Ontario Regulation 37/09 of the TA 2007 (Regulation 37/09). In particular, subsection 9(1) of Regulation 37/09 prescribes that ANI includes a corporation’s accounting loss difference for the year. Subsection 9(3) of Regulation 37/09 provides a formula to determine a corporation’s accounting loss difference for the year, if any. A corporation’s accounting loss difference is essentially the amount of mark-to-market changes, resulting from a decrease in fair value, included in net income or net loss for the year.

Mark-to-market changes are defined in subsection 8(1) of Regulation 37/09 with respect to a specified mark-to-market property held by a corporation to mean changes in the fair value of the property, in accordance with GAAP,  that occur after the corporation acquires the property and before the corporation disposes of the property.  Specified mark-to-market property held by the corporation generally means, pursuant to subsection 8(1) of Regulation 37/09, property in respect of which, under GAAP, any mark-to-market changes from the beginning to the end of a taxation year of the corporation would be reflected in the calculation of the corporation’s net income for the taxation year for CMT purposes if the property were held by the corporation throughout the year.

Accordingly, the relevant provisions provide that ANI for CMT purposes is to be computed to remove  mark-to-market changes in the fair value of property held by the corporation that are reflected in a corporation’s net income/net loss for the taxation year determined in accordance with GAAP. Therefore, where an unrealized loss on a debt is reflected in net income/net loss under GAAP as a mark-to-market change, it is included in ANI for CMT purposes as an accounting loss difference.  In effect, the unrealized loss is added back to the financial statement net income/net loss in determination of the ANI.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz CPA, CA
for Director,
Deferred Income Plans, Section II
Financial Industries and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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