7-903673
Subject: Horses Used in a Riding Business
This is in reply to your memorandum of December 18, 1990 concerning the tax treatment of horses used in a riding business.
It is your view that a riding business should be allowed to include the value of a riding horse in its inventory on the basis that a dairy farmer is allowed to inventory his milk cows. Allowing a riding business to include riding horses in inventory would in your view provide for a proper matching, of income and expenses.
Our Views
There is no provision in the Act that provides for any type of deduction in respect of horses used in a riding business. The Income Tax Regulations specifically exclude animals from the types of capital property in respect of which CCA may be claimed and the cost thereof does not qualify for eligible capital expenditure treatment as horses are tangible property. Furthermore, horses used in a riding business would not be considered inventory of that business. Hence, the horses would be non-depreciable capital property of the riding business. However, the Department regards the replacement cost of a comparable horse as a deductible expense in the year in which the horse is replaced. This means that although the original cost of acquiring the horses, as well as the cost of any expansion in the number of such animals, is considered a capital-expenditure, the cost of replacing these horses is considered a deductible expense in the year of replacement.
The treatment of the livestock of a taxpayer, in the business of farming, as inventory is a long-standing practice of the Department (see paragraph 1 of IT-427, published in 1979). New subsection 28(1.1) of the Act requires that for purposes of subsection 28(1) livestock is to be included in inventory. There is no similar provision in the Act respecting the livestock of a taxpayer in a non farming business.
We trust our comments will be of assistance to you.
for DirectorBusiness and General DivisionRulings Directorate