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: When does a seller include in income the proceeds from the sale of livestock, when the sale is done through an auction mart.
Position: When the auctioneer holds the proceeds in trust for the vendor, the proceeds should be included in income at the time the auction mart receives the payment from the purchaser. Where the proceeds are not held in trust, it depends on whether the vendor has received the auctioneers cheque in absolute payment of the debt.
Reasons: The auction mart is acting as an agent for the vendor. If provincial legislation deems the auction mart to hold the proceeds in trust for the vendor, the funds will belong to the vendor when the purchaser pays the auctioneer. The auctioneer's trust account is property of the vendor and the cheque by the auctioneer to the vendor only releases funds already owned by the vendor. The vendor is deemed to have received payment on the date of the purchaser's cheque. If there is no trust arrangement, and the vendor accepts a postdated cheque from the auctioneer, it is income at the time the cheque is received if the cheque was accepted as absolute payment of debt, otherwise it is income at the earlier of the date when the cheque is negotiated and the date the cheque is payable.
XXXXXXXXXX 2000-000471
D. Shugar
April 10, 2000
Dear XXXXXXXXXX:
Re: Deferred Livestock Sale Through an Auction Mart
We are writing in reply to your correspondence of January 27, 2000, concerning the reporting of income from the sale of livestock in circumstances where a post-dated cheque is received from an auction mart.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Canada Customs and Revenue Agency (the CCRA).
The CCRA's views concerning the receipt of a cheque by a cash method taxpayer are described in Interpretation Bulletin IT-433R, Farming or Fishing-Use of Cash Method, a copy of which is enclosed. Paragraph 5 of IT-433R states that:
"The value of a cheque that is received by a taxpayer who uses the cash method to compute income is considered to be income at the time the cheque is received from a person who was indebted to the taxpayer provided the following conditions are applicable:
(a) the debt is payable at the time the taxpayer receives the cheque,
(b) the debt is of such a nature that it would be income of the taxpayer if it were paid in cash,
(c) the cheque does not have any conditions attached to it such as, for example, postdating or an arrangement that the cheque is not to be used for a specific time, and
(d) the cheque is honoured on presentation for payment.
Where a debt is not payable at the time a taxpayer receives a cheque, the value of the cheque is considered to be income at the earlier of:
(e) the time the cheque is cashed or otherwise negotiated, and
(f) the time the debt becomes payable."
Paragraph 6 of IT-433R states that:
"Normally, a post-dated cheque will be accepted as security for a debt without extinguishing the original debt. Where such a debt is an income debt then payable, the value of the post-dated cheque will be brought into income at the earlier of the date that the cheque is payable and the date the cheque is negotiated. In the event that the debt is not payable at the time the post-dated cheque is payable, the value of the cheque will be brought into income at the earlier of the date that the debt becomes payable and the date that the cheque is negotiated.
On the other hand, where a postdated cheque is accepted in absolute payment of debt, the value of the postdated cheque is normally considered to be income at the time it is received subject to a subsequent adjustment if it is not honoured on subsequent presentation for payment. In this situation, the taxpayer accepts the post-dated cheque as full payment of the debt and as such accepts it at the risk of it being dishonoured with the only recourse being an action against the maker of the cheque for failure to honour the cheque."
Therefore the simple receipt of a post-dated cheque does not, in itself, make the amount of the cheque includable in income at the time the cheque was received. In order for the amount to be included, it would have to be established that the farmer received the cheque and that he accepted the cheque in absolute payment of the debt arising on the sale. To determine whether this is the case, a review of the underlying agreement would be necessary.
When a cash basis seller uses the services of an auction mart, the time at which the seller is considered to have received payment must be determined. The CCRA's views concerning the meaning of the term 'received' are described in Interpretation Bulletin IT-433R, Farming or Fishing-Use of Cash Method. Paragraph 3 of IT-433R states that:
"When computing income using the cash method, paragraph 28(1)(a) [of the Income Tax Act] requires that amounts be included in income when received or when deemed by the Act to be received. The meaning of the term received is not necessarily limited to those situations where the income was actually received in cash. Received has a broader meaning, and an amount may be said to have been received by the taxpayer at the time when, for example,
(a) it was received by a person authorized to receive it on behalf of the taxpayer
(b) it was offset against an amount owing by the taxpayer
(c) it was paid or transferred to a third party pursuant to the direction of or with the concurrence of the taxpayer (this may be implicit)
(d) a security or other right or a certificate of indebtedness or other evidence of indebtedness was received in payment or part payment of a pre-existing debt of an income nature. ...
(e) a commodity is accepted in lieu of cash."
In our view, where livestock is sold at auction, depending on the particular province, the auction mart may be acting as an agent for the seller and payments received by the auction mart on the sale of the seller's livestock is a transaction described in (a) above. The sale of livestock at auction mart was addressed in a December 22, 1993 reply from our Edmonton office (J. Kanis) to a local accounting firm. Two of the paragraphs from that reply are reproduced below.
"When livestock is sold by a livestock auction mart, such a sale of livestock is done by the auction mart as an agent for the vendor. I have further been advised that pursuant to [Alberta] Provincial legislation and/or regulations applicable to auction marts, any funds paid to an auction mart by a purchaser are required to be held in trust for the vendor. While certain auctioneers may as a practical consideration defer payment to the vendor until such time as the purchaser's cheque has cleared, this does not change the position that the funds belong to the vendor as of the time the auctioneer has declared the livestock to be sold.
Based on this information, it is my opinion that where the vendor is a farmer who uses the cash basis of accounting, he is in fact paid at the date of the purchaser's cheque. While a vendor may request the auctioneer to issue a cheque to him post-dated to some future time, this would not alter the fact that such a cheque merely releases funds already owned by the vendor from the auctioneer's trust account. As the auctioneer's trust account is in fact the property of the vendor, such a vendor is deemed to have received payment at the date of the purchaser's cheque. If the vendor is a farmer who reports his income on the cash basis, it is the date of the purchaser's, and not the date of the auction mart's cheque, that is the determining factor."
We have not examined the Alberta provincial legislation and/or regulations but on the basis of Mr. Kanis' understanding of what they provide, as reflected above, we concur with his comments.
In our view, when the relevant provincial statutes do not explicitly state that a trust is deemed to exist, but it can be concluded based on the wording of those statutes that the funds held by the dealer are the property of the seller, the seller would include the funds in income when the dealer receives the funds from the purchaser.
We have not examined all the Saskatchewan legislation and/or regulations that may apply in your specific situation, nor have we reviewed the details of the arrangement between you and the auction mart. However, in the unofficial version the Livestock Dealer Regulations, 1995, posted on the Government of Saskatchewan website, subsection 10(4) states that:
"All moneys received by a livestock dealer on account of a sale of livestock that are in the hands of a livestock dealer are to be held for the benefit of the contributor who supplied the livestock, and the moneys shall not be appropriated or converted to the use of any livestock dealer or to any use not authorized by the contributor until the contributor who supplied the livestock has been paid for the livestock."
In our view, the above provision indicates that, in Saskatchewan, the funds held by the dealer are the property of the seller and unless the facts of a particular case indicate otherwise, the funds would be included in the income of the seller when it is received by the dealer. This would be the result regardless of whether the seller received a post-dated cheque from the dealer.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
Attachment
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