T. Marcogliese (613) 957-2054
MAR 9 1988
Re: Rental of Display Booths
This is in reply to your letter of November 1, 1987 wherein you requested our comments on the treatment under the Income Tax Act (the "act") of supplies and component parts acquired by XXXX to construct exhibits for customer use at trade shows.
The facts, as we understand them, are as follows:
XXXX
(c) The financial arrangements between XXXX and its customers consist of a short-term agreement which also serves as an invoice for revenue determination.
At issue is whether the component items acquired for use and reuse in constructing the exhibits should be considered as capital property as defined in paragraph 54(b) of the Act, expensed immediately for purposes of the Act or treated as inventory within the definition of that term in subsection 248(1) of the Act.
In our view, a determination of the correct tax treatment involving a particular situation can only be made after a review of all of the relevant facts and circumstances. Accordingly, we can only provide the following general comments on your query.
The classification of property as inventory or 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.
In certain circumstances, the facts of the situation may indicate that there is a mixture of items consisting of capital property, inventory and supplies. For example, assets originally acquired as capital property in order to be used in a rental business could, as a result of a change of intent, become inventory. In this regard, unless the three conditions described in clauses (a) to (c) in paragraph 4 of Interpretation Bulletin IT-102R2 are met, capital property, which is normally acquired for rental but is often sold to the customer, would constitute the sale of inventory rather than a disposition of capital property.
As indicated in Interpretation Bulletin IT-51R2 , the term inventory which is defined in subsection 248(1) of the Act, includes any property that is relevant in computing a taxpayer's income from a business. For purposes of clarification, subsection 10(5) of the Act states that supplies are inventory and accordingly are required to be valued in accordance with subsection 10(1) of the Act.
Although we cannot determine with certainty because it is a question of fact, we believe that property which has an enduring benefit, such as the chairs and display cases that are not sold to customers, would normally be capital property within the meaning of paragraph 54(b) of the Act. In our view, other items, which are consumed in the income earning process or are technically obsolete due to changing customer requirements, and including display cases which are sold, would be considered inventory subject to valuation within the meaning of subsection 10(1) of the Act.
These comments represent our opinion of the law as its applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch