Principal Issues: Is the meat produced by slaughtering and processing raised animals included in the inventory owned for the purpose of paragraph 28(1)(b)?
Position: Question of fact.
Reasons: If the combined activities of raising animals and slaughtering and processing animals constitute a farming business of the taxpayer, the meat could be included in the inventory owned by the taxpayer in connection with the farming business. The question of whether the activity of slaughtering and processing is part of the farming business of a taxpayer depends on whether the activity constitutes a separate business or is an integral part of the farming business. To be an integral part of the farming business, the slaughtering and processing activity needs to be incidental to the taxpayer's farming activity.
XXXXXXXXXX 2015-059472
Lucie Allaire, LL.B, CPA, CGA, D. Fisc.
September 22, 2016
Dear Sir,
Subject: Optional Inventory Adjustment
This letter is in response to the June 1, 2015 e-mail sent to us by the Taxpayer Services Branch so as to respond to your inquiry.
You wish to know whether a taxpayer may consider, as inventory owned in connection with an agricultural business for the purposes of paragraph 28(1)(b) of the Income Tax Act ("Act"), ground or cut meat ("processed meat") obtained by slaughtering and processing animals raised by the taxpayer.
Unless otherwise indicated, all legislative references are references to the provisions of the Act.
Our comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 28(1)(b) permits farmers who have elected to compute their income in accordance with the cash method to add to their income for a taxation year an optional inventory adjustment. The adjustment cannot exceed the fair market value of the inventory owned in connection with the farming business at the end of the year less any mandatory inventory adjustment determined under paragraph 28(1)(c) .
Subsection 248(1) defines "inventory" as a description of property the cost or value of which is relevant in computing a taxpayer's income from a business for a taxation year or would have been so relevant if the income from the business had not been computed in accordance with the cash method. The definition of the term also specifies that it includes livestock held in the course of carrying on the farming business. On the other hand, according to Guide T4003 Farming and Fishing Income, a farmer's inventory consists of the tangible goods that the farming business is in the course of producing, which it holds for sale, or uses to produce products for sale. Thus, in this case, the processed meat that has not been sold could be an inventory item.
In the situation described, the question is whether the processed meat inventory is part of a farming business that includes the processing activity, or is part of a separate processing business. Based on the limited facts available to us, we can provide the following general comments.
A farming business refers to a "farming activity". This latter term is not defined in the Act. However, the term "farming", as defined in subsection 248(1), includes in particular livestock raising or exhibition, and the raising of poultry or fur farming. Since this definition is not exhaustive, it is necessary to use the generally accepted ordinary meaning of this term. In addition, in De Cloet Ltd. v. M.N.R. (Footnote 1), the Tax Court of Canada stated that: "Agricultural farming involves the whole aspect of commercial production of any crop or plant which has economic value, and (…) encompasses all of the activities of a farmer.”
In this case, the taxpayer, who raises animals and makes them undergo a transformation to sell them in a different form, carries out two activities, one that can qualify as farming and the other of which is processing.
It is a question of fact whether a taxpayer carries on one or more businesses and, if only carrying on one, whether it is a farming business or not.
In this respect, it must be determined whether the processing activity forms an integral part of the taxpayer's farm business or is a separate business. Where a taxpayer is engaged in both farming and processing activities at the same time, it is the circumstances of the case that determine whether those activities can be considered together as a single farming business.
This determination depends on the degree of interconnection, interlacing or interdependence between the two activities. In making this determination between the taxpayer's two activities, paragraph 3 of Interpretation Bulletin IT-206R, Separate Businesses, describes certain factors to be considered.
In general, the Canada Revenue Agency does not consider income from certain activities such as processing, which in and of themselves are not farming activities, as being derived from a farming business unless they are not incidental to the farming activity and the income from these activities is not materially significant in relation to the income from farming. The term "incidental" means that these activities should not be significant in relation to the farming activity.
Whether the taxpayer's processing activity is incidental to his farming activity is also a question of fact. Factors such as the capital invested and labor required for each activity as well as the income generated by the processing activity in relation to the farming activity are to be considered. In Tinhorn Creek Vineyards v. The Queen (footnote 2), in determining whether or not a producer-farmer's sole business was a farming business, the Tax Court of Canada examined these various factors and concluded that winemaking was linked to viticulture and was an integral part of the taxpayer's farming business.
In light of the foregoing, if the taxpayer has only one business and that business is a farming business, the processed meat held by the taxpayer (of which it was the owner) at the end of a year could then be property included in inventory for the purposes of paragraph 28(1)(b).
If, on the other hand, the taxpayer carries on two separate businesses or only carries on a processing business (if farming was incidental to the processing), the income from the processing activity cannot be computed in accordance with the cash method of accounting provided for in section 28, and the processed meat cannot be considered as goods included in inventory in connection with a farming business.
We trust that our comments will be of assistance.
Louise J. Roy, CPA, CGA
Manager
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, the footnotes contained in the original document are reproduced below:
1 89 DTC 207.
2 2005 DTC 1589.