23 March 1999 External T.I. 9901945 - TOPSOIL INVENTORY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can the topsoil on a parcel of land be considered as a corporation’s inventory for purposes of determining its cost of topsoil sold?

Position: Yes.

Reasons: The parcel of land is purchased expressly to provide the corporation with topsoil for its business of selling topsoil. Section 10 would be used to determine the cost of topsoil sold.

XXXXXXXXXX 		990194
J. E. Grisé
Attention: XXXXXXXXXX 

March 23, 1999

Dear Sirs:

Re: Topsoil Inventory

This is in reply to your letter of January 25, 1999, requesting a technical interpretation related to the purchase of topsoil inventory.

For illustration purposes, you have asked us to consider the situation of a corporation that carries on a business of selling topsoil and various other soil mixtures in Canada. The corporation is finding it difficult to obtain its topsoil inventory from conventional sources such as farmers and developers. To overcome this difficulty, the corporation is contemplating the purchase of a parcel of land in order to remove and sell the land’s topsoil. Upon removal of the topsoil, the corporation will sell the land on the open market for its residual value.

It is your view that the parcel of land is inventory to the corporation. Furthermore, you contend that the land should be divided into two assets. For the purpose of determining the cost of the topsoil sold in a particular year, the cost of the topsoil inventory would be the purchase price of the parcel of land less an estimate, at the date of purchase, of the value of the land stripped of topsoil. As the topsoil is stripped from the land, the corporation would annually have to determine the amount of remaining topsoil in order to determine the appropriate amount to be removed from the topsoil inventory and charged to cost of goods sold. It is also your view, in the scenario presented, that the sale of the land stripped of its topsoil will be on account of income. This will in effect be the sale of the remaining inventory.

We agree that the land would likely be inventory to the corporation in the scenario presented. However, we see no basis for dividing the land into two assets. In our view, the land purchased would be one inventory item to the corporation. Assuming that the fair market value method of valuing inventory prescribed by section 1801 of the Income Tax Regulations is not adopted, the cost of selling the topsoil for a particular year, in respect of the land inventory, will depend on its cost and its fair market value at the end of a particular year. It is our view that a deduction for a particular year will arise when the value of land inventory at the beginning of the year exceeds the lower of cost and the fair market value of the land inventory at the end of the year. Therefore, no deduction can be made in a year when the lower of cost and the fair market value of the land at the end of a particular year equals or exceeds the land inventory at the beginning of the year. In our view, the sale of topsoil would not in itself result in a partial disposition of the land.

We hope our comments are helpful but since they do not constitute an advance income tax ruling, are not binding on the Department with respect to any particular transaction.

Yours truly,
J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

- 2 -