SUBJECT: 24(1)
This is in reply to your memorandum of April 18, 1991 requesting our views with respect to
24(1)
Our Comments
The classification of property as an operating expense (inventory) or a capital property is dependent upon the circumstances of each case. The Department's determination of whether an expenditure is capital in nature is discussed in paragraph 4 of Interpretation Bulletin IT-128R and includes a discussion of enduring benefit, maintenance or betterment, integral part or separate asset, and relative value of the expenditure. In addition, the "primary use" of the asset is considered relevant in distinguishing between an inventory item and capital property. Generally, capital property is used for the purpose of earning income from the use of the property, rather than the sale or consumption of the asset which occurs with an inventory item. We consider that when a business retains ownership of the assets throughout their useful life, the nature of the income derived would appear to be from the use of the property.
Since it is a question of fact, we cannot determine this matter with certainty. However, we believe that property which has a short life expectancy of between 6 months and 3 years and cost between $20 to $90 has little enduring benefit and would not normally be capital property within the meaning of paragraph 54(b) of the Act. The Department has recognized that items, which are consumed in the income earning process or are technically obsolete due to changing customer requirements, would be considered inventory subject to valuation within the meaning of subsection 10(1) of the Act despite arguments that such items in some cases could be considered capital. This is based on the opinion that the case law now supports the position that expenses which might otherwise be on account of capital are on account of income if an asset of enduring benefit does not result. Accordingly, we agree with the opinion you have already received from the Technical Review Section.
We trust our comments will be of assistance
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch