| November 14, 1990 | |
| HEAD OFFICE - APPEALS BRANCH | Rulings Directorate |
| Appeals & Referrals Division | C. Tremblay |
| (613) 952-1361 | |
| Attention: R. Pitre | |
| 902397 |
SUBJECT: Inventory Allowance 24(1)
This is in reply to your memorandum of September 10, 1990, requesting our comments with respect to the inventory allowance deducted by the above named taxpayer.
24(1)
In your view, the taxpayer is entitled to the inventory allowance because of the definition of inventory found in subsection 10(1) of the Act "a description of property the cost or value which is relevant in computing a Taxpayer's income from a business for a taxation year" In your opinion the 24(1)
Before a taxpayer is eligible to claim an inventory allowance pursuant to paragraph 20(1)(gg) of the Act, one of the four pre-conditions that must be met is that the allowance be claimed on the cost amount of the property in question at the beginning of the taxation year.
Whether the amount of inventory at the beginning of the year is the same as the amount of inventory at the end of the prior year is relevant to the issue. A cash basis taxpayer generally has no inventory for income tax purposes, thus is not allowed an inventory allowance. Farmers however have been given the option of using either generally accepted accounting principles (the accrual method) or section 28 of the Act (the cash method) to calculate income and no ministerial permission is required to change from the "accrual method" to the "cash method" 24(1) Paragraph 12 of IT-435-R considers this the relevant factor for computing the inventory allowance.
Moreover, the cost amount of an inventory is defined in subsection 248(1) of the Act as being its value at that time as determined for the purpose of computing the income of the taxpayer. According to subsection 10(2) of the Act, for the purpose of computing the income for a taxation year from a business, the value of the inventory at the commencement of the year shall be the amount at which it was valued at the end of the immediately preceding year. Since the deduction permitted under paragraph 20(1)(gg) of the Act is a deduction in computing the income from a business the rules in subsection 10(2) of the Act apply, and the original valuation at December 31, 1979, not the adjusted value of inventory, is relevant to the calculation of an inventory allowance.
An Appeals Branch Decision of May 10, 1988, (Number 88-8) concludes that the provisions of subsection 10(2) of the Act were intended to require a consistent method of valuing inventory and not as a limitation on the inventory allowance provision. It further states that situations involving duplication of claims will be resolved based on an interpretation of the particular facts involved. In the case at hand 24(1)
We trust our comments are of assistance.
R.J.L. ReadDirector GeneralRulings DirectorateLegislative and Intergovernmental Affairs Branch