T Bar B Cattle Co LTD v. Minister of National Revenue, [1983] CTC 2168, 83 DTC 165

The Assistant Chairman:—The appellant is in the business of farming in the Province of Alberta. When it filed its income tax return, it did so on what is known as the “cash basis”. As explained by the appellant’s accountant, in preparing its statement of profit and loss for the year, only cash receipts and cash disbursements were considered. However, in preparing the said statement, the appellant claimed as a deduction from income the allowance pursuant to paragraph 20(1 )(gg) of the Income Tax Act.

On assessment the respondent disallowed the said claim on the basis that, since the appellant had no inventory on a cash basis, it was not entitled to the inventory allowance in paragraph 20(1 )(gg).

Paragraph 20(1 )(gg) reads as follows:

20. (1) Notwithstanding paragraphs 18(1 )(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(gg) an amount in respect of any business carried on by the taxpayer in the year, equal to that portion of 3% of the cost amount to the taxpayer, at the commencement of the year, of the tangible property (other than real property or an interest therein) that was

(i) described in the taxpayer’s inventory in respect of the business, and

(ii) held by him for sale or for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business

that the number of days in the year is of 365.

While the appellant called its accountant as a witness, there really was no dispute as to the facts as the respondent admitted all the allegations of fact in the notice of appeal.

The facts alleged in the notice of appeal are as follows:

1. T Bar B Cattle Co Ltd (hereinafter referred to as the “taxpayer”) is a corporation incorporated under the laws of the Province of Alberta having its head office in the said Province of Alberta. The taxpayer carried on the business of farming in each of the relevant taxation years.

2. It its taxation year ending May 31, 1977, the taxpayer reported its farming income for the purposes of the Income Tax Act of Canada (the “Act”) on the accrual basis.

3. In calculating its cost of sales for the purposes of calculating its income for its taxation year ending May 31, 1977, the inventories of the taxpayer were recorded in the amount of $759,475.94.

4. In reporting its income for the purposes of the Act for its taxation years ending May 31, 1978 and May 31, 1979, the taxpayer elected in accordance with the provisions of section 28 of the Act and reported its farming income for these taxation years on the “cash method”.

5. In its return of income for the taxation year ended May 31, 1978, the taxpayer deducted the amount of $22,784.27 in accordance with the provisions of paragraph 20(1 )(gg) of the Act, being 3% of the value of the inventory used in reporting its income for its taxation year ending May 31, 1977.

6. In reporting its income for the taxation year ending May 31, 1978, the taxpayer also elected to include in income the amount of $793,761.84 in accordance with the provisions of paragraph 28(1 )(b) of the Act.

7. In its return of income for the taxation year ended May 31,1979, the taxpayer deducted the amount of $23,812.85 pursuant to the provisions of paragraph 20(1 )(gg) of the Act being 3% of the amount included in income by the taxpayer pursuant to the provisions of paragraph 28(1 )(b) of the Act in its return of income for the taxation year ended May 31, 1978.

8. In its return of income for the taxation year ended May 31,1979, the taxpayer included in income the amount of $798,228.95 pursuant to the provisions of paragraph 28(1 )(b) of the Act.

9. By Notices of Reassessment dated the 12th day of December, 1980, the Deputy Minister of National Revenue for Taxation reassessed the taxpayer for its taxation years ended May 31, 1978 and May 31, 1979 by disallowing the inventory allowance deduction claimed by the taxpayer pursuant to the provisions of paragraph 20(1 )(gg) of the Act and including in the income of the taxpayer for the purposes of the Act the amounts of $22,784.27 and $23,812.85 for the 1978 and 1979 taxation years respectively of the taxpayer.

10. Notices of Objection to the aforesaid Reassessments were filed by the taxpayer on February 2, 1981.

11. By Notification of Confirmation dated the 7th day of May, 1981, W H Dun- woodie, Chief of Appeals, Appeals Division, Edmonton District Office, Department of National Revenue, Taxation confirmed on behalf of the Minister of National Revenue the reassessments of the taxpayer.

The respondent’s reply to notice of appeal, in so far as the facts are concerned, contains two paragraphs which read as follows:

1. He admits paragraphs 1 through to 11 inclusive of the Appellant’s Notice of Appeal.

2. In reassessing the Appellant for its 1978 and 1979 taxation years, the Respondent assumed, inter alia:

(a) that the referred to amounts of $793,761.84 for the 1978 taxation year and $798,228.95 for the 1979 taxation year and which amounts were included by the Appellant in income pursuant to the provisions of paragraph 28(1 )(b) of the Act were not amounts in respect of property that was “described in the taxpayer’s inventory” as required by subparagraph 20(1 )(gg) of the Act;

(b) that since the Appellant had elected in accordance with the provisions of section 28 of the Act to report its farming income for the 1978 and 1979 taxation years on the “cash method”, the value of any alleged “inventory” is irrelevant in computing its income from the business for the taxation years in question.

Counsel for the appellant made reference to section 10(2) and paragraph 20(1 )(gg), which he paraphrased as follows:

10. (2) For the purpose of computing income in any one taxation year property described in inventory at the beginning of that year must be the same amount as that value used for closing inventory in the preceding year.

20 (1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property there may be deducted such of the following amounts as are wholly applicable etc.

(gg) an amount in respect of any business carried on by the taxpayer in the year, equal to 3% of the cost amount (and I will refer to that) to the taxpayer at the commencement of the year, of the tangible property (skipping a few words) that was

(i) described in the taxpayer’s inventory (and that of course is a key word) in respect of the business, and

(ii) held by him for sale etc.

He continued by referring to subsections 28(1) and 248(1) as follows:

28. (1) For the purpose of computing the income of a taxpayer for a taxation year from a farming or fishing business, the income from the business for that year may, if the taxpayer so elects, be computed in accordance with a method, in this section referred to as the “cash” method, whereby the income therefrom for that year shall be deemed to be an amount equal to the aggregate of

(a) and to paraphrase that, that is trading receipts as you know, and

(b) such amount, if any, as may be specified by the taxpayer in respect of the business in his return of income under this part for the year, not exceeding the fair market value at the end of the year of livestock (leaving out a few words) owned by him at that time in connection with the business.

248. (1) “Cost amount” to a taxpayer of any property at any time means, except as expressly otherwise provided in this Act

(c) where the property was property described in an inventory of the taxpayer,

its value at that time as determined for the purpose of computing his income.

“Inventory” means a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year.

As I see the whole matter, the provision with the 3% allowance is strictly a bonus or allowance to a taxpayer, but has no de facto effect on his inventory. It allows him 3% of a figure, which figure is of his choosing — it can be based on full inventory or on an amount just above zero. It has no direct relationship to de facto inventory. Therefore, I conclude the assessments have been properly made and the appeals should be dismissed.

Appeals dismissed.