May 29, 1980 HEAD OFFICE Corporate Rulings Division Kevin J. Donnelly
This is in reply to your memorandum of April 2, 1980 and the following are our views on the matter raised by you.
1. Catalysts
While we have very little information in our research files on the subject of catalysts we have determined that in 1978 when class 26 was proposed as an amendment to the Regulations, the particular catalyst for which the 1% rate was prescribed was being used in the processing of gasoline. While the rate is now 5%, it is obvious that the catalysts which were to be capitalised in class 26 were those with a useful life of many years.
As the Act does not define "catalyst" we looked to the dictionary definition and found the following in Webster's:
Catalyst - "A substance or agent including catalysis"
Catalysis
"Modification and especially increase in the rate of a chemical reaction induced by material unchanged chemically at the end of the reaction"
This definition ties-in well with our observation that ordinarily catalysts would have a long useful life.
It would seem to us that the items that the taxpayer refers to as catalysts do not meet either the dictionary defnition which suggests long life or the facts which indicate the life of the gauze and pellets is less than one year. In our view these items would not seem to qualify for inclusion in class 26.
Whether or not the inventory in question qualifies for the allowance under paragraph 20(1)(gg) depends on whether the items are held for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into property for sale in the ordinary course of business. We understand from our telephone discussion with Mr. Kamka that the catalysts wear out from use rather than their being used up or becoming an ingredient in products for sale. Consequently, it is our opinion, that the inventory of catalysts would not qualify for the 20(1)(gg) inventory allowance.
2. Cattle Feed Inventory
We understand that the taxpayer is feeding his own cattle for sale. We have taken the very definite position that feed grain for beef cattle and dairy cattle will qualify for the inventory allowance.
3. Prepaid Expenses
While we do not disagree in principle with your position we are sympathetic to the taxpayer's changing his method of accounting for prepaid taxes and insurance from yearly deferrals to writing them off as an expense in the year paid. Our reasons for suggesting that you consider accepting the taxpayers position are as follows:
1. On April 25, 1977 Audit Operations Branch advised the Tax Advisory Committee that "a change in the taxpayer's usual practice of accounting for prepaid expenses for tax purposes will be accepted provided it falls within the Department's policy relating to that type of expenditure and the change does not create an undue tax advantage. The new method selected must be applied consistently from year to year".
2. Interpretation Bulletin IT-417 has been causing some uncertainty as to what our position is on changing methods and the Bulletin would have been changed before now had it not been for the proposed changes in the law requiring taxpayers to deduct insurance and taxes in the year to which they reasonably relate.
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We trust the foregoing will be of assistance to you.
Chief Manufacturing, Merchandising and Construction Section Corporate Rulings Division