In order to assist its members in the production of feeder cattle, a feeder cattle finance cooperative established under the Co-operative Corporations Act (a “Co-op”) makes funds available to member to purchase cattle “on the Co-op’s behalf” (so that the Co-op retains legal ownership of the cattle) but with the members deciding what type of cattle to purchase and having the ability to negotiate the cattle purchase price (not exceeding what is approved by the Co-op through a Purchase Order Agreement). All expenses associated with the purchase and sale of the cattle are incurred in the name of the Co-op and the purchase documents name the Co-op as owner of the cattle. The members assume the risk of ownership (that is, they are responsible for all the costs of raising the cattle and maintaining their health). The member facilitates the sale of the cattle in the name of the Co-op and ensures that the proceeds are paid to the Co-op. On its receipt of sale proceeds, the Co-op pays off the member’s related debt (which was incurred to the financial institution lender) and forwards any remaining proceeds to the member. Members are responsible for any outstanding debt amounts. Upon full payment of the member’s debt, legal title of the cattle is transferred to the member.
The transfer of ownership of the cattle to the Co-op and payment of funds to the Co-op on the sale of the cattle is for the purpose of securing payment of the debt. Because it was believed “that there may be a risk from other creditors claiming rights over cattle funded through the Program should a member subsequently declare bankruptcy, Program rules stipulate that when members are producing cattle purchased through the Co-op, the Co-op retains all legal, equitable and beneficial ownership in the cattle.”
After indicating that “the definition of inventory in the Act is consistent with the ordinary meaning of the word and that in order to hold inventory for sale a taxpayer must own the inventory,” and that “the primary attributes of beneficial ownership are possession, use, risk and control,” CRA went on to state:
While the determination of who beneficially owns the cattle is a mixed question of law and fact that can only be determined after a complete review of all the terms and conditions of the contracts and agreements between the parties, it is our view that based on the information submitted that the beneficial ownership of the cattle is likely with the Members. The Members would treat the cattle as inventory for income tax purposes.