| 24(1) | 5-902897 |
| N. Goldstein | |
| (613) 952-9853 |
19(1)
November 26, 1990
Dear Sirs:
We are writing in response to your letter of October 18, 1990, in which you requested the reasons for the removal of part of former paragraph 5 of IT-287 in IT-287R.
Part of former paragraph 5 of IT-287 read as follows:
"However, where a taxpayer is in the money-lending business, debts receivable by him on account of loans he has made may be regarded as inventory and a sale of them may be dealt with pursuant to subsection 23(1) if the sale was made as set out in that subsection. Where a taxpayer is in the business of buying mortgages at a discount or of buying conditional sales contracts or other forms of debts receivable for collection, these also may be regarded as inventory and a sale of them may be dealt with pursuant to subsection 23(1) if the sale was made as set out in that subsection. Accordingly, subsection 28(5) would not be applied in either of the foregoing circumstances".
The above sentences were placed in IT-287 as a result of certain court cases, particularly M.N.R. v. Harry Graves Curlett, [1967] CTC 62 (S.C.C.) which dealt with the disposition of second mortgages and the application of subsection 85(1)(e) of the Income Tax Act (the "Act"), the forerunner to subsection 23(1) of the Act to that disposition.
Paragraph 5 of IT-287 was only intended to deal with situations were subsection 23(1) of the Act applied and not be interpreted, as appears to have been the case, as the Department's general views for purposes of the Act. It was for this reason that the above noted quote was eliminated.
It is the Department of National Revenue's position that while debts receivable and other such properties may be the stock and trade of a taxpayer, they are not necessarily inventory, although the gain of the disposition of such assets is generally considered to be included in the computation of income. In this regard, we would note certain amendments to the Act, effective for the taxation years and for fiscal periods commencing after June 17, 1987, for your consideration. In particular, paragraph 18(1)(s) of the Act expressly denies any deduction for any loss, depreciation or reduction in the value or amortized cost of a loan or lending asset by a taxpayer whose ordinary business includes the lending of money except as expressly provided for in Part I of the Act. Those express provisions include all deductions or reserves described in paragraphs 20(1)(1), 20(1)(1.1) and 20(1)(p) of the Act. Paragraphs 12(1)(d) and 12(1)(d.1) may be relevant to a taxpayer if reserves were deducted in the previous year pursuant to paragraphs 20(1)(1) and 20(1)(1.1). Paragraph 12(1)(i) of the Act requires an inclusion in income of amounts received by a taxpayer which had previously been deducted as a bad debt or an uncollectible loan or lending assets. Subsection 248(1) of the Act defines "amortized cost" and "lending assets".
In this regard the Explanatory Notes to Legislation Relating to Income Tax, issued by the Department of Finance in June 1988, indicate that as a result of paragraph 18(1)(s) of the Act, a taxpayer whose ordinary business includes the lending of money or who acquired a loan or lending asset in the ordinary course of business will not be entitled to claim an inventory write-down on assets that are eligible for a reserve under subparagraph 20(1)(1)(ii) of the Act.
We trust the foregoing is of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate