February 8, 1980
HEAD OFFICE Corporate Rulings Directorate K.J. Donnelly
Inventory Resources - Automobile Dealers
This is in reply to your memorandum of January 15, 1990 requesting our opinion as to whether a particular automobile dealer is permitted, for tax purposes, to reduce his inventory values to wholesale or replacement values. You indicated that you are familiar with the Department's position of reducing the used car asking price by 20% to arrive at market and that the taxpayer does not wish to adopt this approach.
The Department's policy of determining market prices in valuing used car inventory, by reducing the asking price by 20%, has been in existence since the early 1950's. This policy was agreed upon after consultation with the Federation of Automobile Dealers Association of Canada and was confirmed in 1977.
The taxpayer's method of using the wholesale of "Black Book" values in arriving at market value for used cars is one which has been considered by Head Office in the past and was found to be unacceptable. The position is that these wholesale prices (averages) bear no relation to any particular unit in any particular dealer's inventory and are too arbitrary and hypothetical to be acceptable for income tax purposes.
With respect to demonstrators and the previous year's models, the general policy in determining market is to reduce the asking price by the average profit margin which should not exceed the difference between the new car cost and the retail price for a particular unit.
In summary, our policy does not permit the use of wholesale values in determining market and a dealer's used car, demonstrator, and last year new car inventories should be valued at its cost to the dealer or its fair market value, whichever is lower. Market value is as described separately above for used cars, and for demonstrators and new prior year models.
We trust these comments will be of assistance to you.
Chief Services, Public Utilities, & Exempt Corporation Section Corporate Rulings Division Corporate Rulings Directorate Legislation Branch