Principal Issues: Are cash purchase tickets described in subsection 76(4) of the Act inventory for the purposes of the optional inventory adjustment in paragraph 28(1)(b) of the Act or the mandatory inventory adjustment in paragraph 28(1)(c) of the Act?
Position: No.
Reasons: The law.
XXXXXXXXXX 2010-038174 Michael Cooke, C.A.
October 22, 2010
Dear XXXXXXXXXX :
Re: Deferred Cash Purchase Tickets Issued for Grain
This is in response to your email dated September 27, 2010, wherein you asked whether cash purchase tickets issued for grain delivered by a farmer would be considered as inventory for the purposes of the "optional inventory adjustment" and "mandatory inventory adjustment" rules described in subsection 28(1) of the Income Tax Act (the "Act").
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
The term "inventory" is defined in subsection 248(1) of the Act to mean "... 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 ...". In Canadian Imperial Bank of Commerce v. the Queen, 2000 DTC 6207 (FCA), the Court stated the following:
"Property is "described in" a taxpayer's inventory if it is inventory as a matter of fact and law. Inventory in its ordinary sense is simply stock in trade, or property held for sale in the ordinary course of a business. For income tax purposes inventory generally is any property the cost or value of which is relevant in determining income: Friesen v. Canada, [1995] 3 S.C.R. 103."
Interpretation Bulletin IT-184, Deferred Cash Purchase Tickets Issued for Grain, discusses the tax implications for farmers who receive "cash purchase tickets" issued in respect of the delivery of grain to a primary or a process elevator. As noted therein, the general rule contained in subsection 76(1) of the Act would require a farmer who computes income on a cash basis (i.e., a "cash basis farmer") to include in income the value of a cash purchase ticket that is received in satisfaction of an income debt in the taxation year in which it is received. However, subsection 76(4) of the Act provides an exception to the general rule where a cash basis farmer receives a cash purchase ticket under the following conditions:
- the cash purchase ticket issued by the primary or process elevator is for the sale of grain (wheat, oats, barley, rye, flaxseed and rapeseed) produced in designated areas; and
- the holder of the cash purchase ticket is entitled to payment by the elevator operator of the amount stated therein, without interest, at a date that is after the end of the taxation year in which the grain is delivered (our emphasis added).
Where the above conditions have been satisfied the cash basis farmer would exclude the amount stated on the cash purchase ticket (i.e., the "deferred grain ticket") from the income of the taxation year in which the grain was delivered. In the immediately following taxation year that amount would be included in the farmer's income pursuant to subsection 76(4) of the Act. Amounts brought into income by a farmer under subsection 76(4) of the Act are considered income from a farming business.
In our view, in the circumstances where a deferred grain ticket is issued to a cash basis farmer as payment for the sale price of grain the farmer delivered to a primary or process elevator, such ticket would not constitute "inventory" (purchased or otherwise) of that farmer. The fact that subsection 76(4) of the Act allows a cash basis farmer to defer reporting the purchase price for the quantity of grain as stated on the deferred grain ticket to the subsequent taxation year does not mean that the deferred grain ticket is considered to be inventory of that farmer. Accordingly, neither the optional inventory adjustment rules nor the mandatory inventory adjustment rules described in subsection 28(1) of the Act would apply to a cash basis farmer holding a deferred cash purchase ticket issued to that farmer at the end of a taxation year.
We trust that these comments will be of assistance.
Yours truly,
Sandy Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch