5 July 2000 Internal T.I. 2000-0005677 - SALE OF CATTLE AT AUCTION

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: Sale of livestock at auction. Time when farmer includes sale in income.

Position: The farmer must include the sale in income when the purchaser pays the dealer, and if the purchaser pays the dealer by postdated cheque, it is included in income on the date of that cheque, unless the dealer pays the seller at an earlier date.

Reasons: This has been our position since 1993. The dealer is an agent of the seller and is authorized to receive the funds on behalf of the seller. In some provinces, the dealer may also be deemed to hold the funds in trust for the seller.

		July 5, 2000

	London Tax Services	HEADQUARTERS
	451 Talbot Street	David Shugar
	London, Ontario	957-2134

	Attention: William MacGregor
		2000-000567

Deferred Cattle Sales

This is in reply to your request of January 11, 2000 for our views with respect to the reporting of income of a farmer from the sale of cattle through an auction mart. You have received enquiries on this issue from persons in the cattle industry who are concerned that a farmer who sells cattle through an auction mart cannot defer reporting the sale of the cattle by receiving a cheque from the auctioneer, postdated to the farmer's next fiscal period, while a farmer who sells cattle privately may defer reporting the sale until the date of the cheque. You also asked how the sale would be reported if the auction mart received a postdated cheque from the purchaser. We apologize for the delay in responding.

Our Comments

Legislation governing the sale of cattle at auction is a provincial responsibility. Consequently, the relevant acts and regulations differ from province to province. We have not attempted to review the official versions of all possible acts and regulations related to the sale of cattle at auction in each province. In addition to any provincial acts and regulations that deal with livestock sales specifically, there may be additional provincial legislation, such as acts dealing with sales of goods in general, and auctioneers acts, that may also have provisions relevant to the sale of cattle at auction. We have reviewed the unofficial versions of many acts and regulations that were available on provincial governments' websites, and can provide you with the following general comments. References to provincial acts and regulations are to the unofficial versions posted on the websites.

In this letter, 'dealer' refers to the auction mart or auctioneer, 'seller' refers to the farmer whose cattle are being sold at an auction, and 'purchaser' refers to the person who purchases the cattle at an auction. This letter deals with situations where the auction mart does not take possession of the livestock but only acts as an agent for the seller.

In computing the income of a taxpayer from a farming business, income may be computed in accordance with the "cash method" if the taxpayer so elects. When computing income using the cash method, paragraph 28(1)(a) of the Income Tax Act (the "Act") requires that amounts be included in income when received or when deemed by the Act to be received. The Canada Customs and Revenue Agency's (the CCRA) 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:

"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. ...; and

(e) a commodity is accepted in lieu of cash."

The CCRA's views concerning the receipt of a cheque by a cash method taxpayer are described in paragraph 5 of IT-433R, which 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."

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. 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.

There is also considerable jurisprudence concerning the receipt of a cheque by a cash basis farmer. Brul, T.C.J. stated in Rachel Kowalczyk v. M.N.R., 86 DTC 1552 at 1553:

"Courts have had to deal with this problem on a number of occasions. The conclusion generally accepted is that a payment by cheque is equivalent to a payment in cash as long as no special circumstances lead to another conclusion, and of course, that the cheque is not dishonoured on presentation for payment. Mr. Justice Thurlow, then at the Exchequer Court, said in Moody v. M.N.R., 57 DTC 1050 at 1054:

". . .In the absence of some special circumstance indicating a contrary conclusion such as, for example, post-dating or an arrangement that the cheque, is not to be used for a specified time, a payment made by cheque although conditional in some respects, is nevertheless presumably made when the cheque is delivered and, in the absence of such special circumstance, there is, in my opinion no ground for treating such a payment other than as a payment of cash made at the time the cheque was received by the payee."

Similar conclusions can be found in Nourse v. M.N.R., 61 DTC 571, Frankish v. M.N.R., 56 DTC 178, Furk v. M.N.R., 59 DTC 205 and Johnston v. M.N.R., 51 DTC 226. The solution in the case at bar then depends on whether there were any "special circumstances" to lead to the conclusion that the cheques were not payments equivalent to cash. If no such circumstances exist then the Appellant fails in her appeal."

In a private treaty sale where payment is made by postdated cheque, that is not in absolute payment of debt, the income would be reported at the earlier of the date of the cheque and the date the cheque is negotiated. Where livestock is sold at auction, the auction mart, acting as an agent of the seller, receives payment from the purchaser in a transaction described in paragraph 3(a) of IT-433R. In addition, some provincial acts state that funds received by a dealer are deemed to be held in trust for the seller.

Although an agency relationship is usually supported by a written agreement to that effect, such a contract may be implied. An implied agency relationship may be found to exist where the conduct of the parties shows an intention to create an agency. The Act does not provide rules establishing whether an agency relationship exists in a particular situation.

The question of whether or not an agency relationship exists must be determined under the common law (or the Civil Code for the province of Quebec) and can be a complex matter.

Based on our understanding of the process of the sale of livestock through an auction mart, in our view, an agency relationship exists between the seller and the dealer.

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."

Section 6(1) of the Livestock and Livestock Products Act of Alberta , states:

"Sale proceeds held in Trust. All money received by a licensed livestock dealer on account of sale of livestock or livestock products constitutes a trust fund in the hands of the livestock dealer for the benefit of the patron who supplied the livestock or livestock products to him and he shall not appropriate or convert any part of it to his own use or to any use not authorized by the patron until the patron who supplied the livestock or livestock products has been paid for them."

We agree with Mr. Kanis' view that the seller has been paid on the date of the purchaser's cheque.

Some provincial acts and regulations do not explicitly state that a trust is deemed to exist, but contain provisions that result in the funds held by the dealer to be the property of the seller, and, nevertheless, give the result described in Mr. Kanis' comments above. In Saskatchewan, for example, subsection 10(4) of the Livestock Dealer Regulations, 1995, 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, 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, that is sufficient to require the seller to include the funds in income when the dealer receives the funds from the purchaser.

Where a trust, as described in section 6(1) of the Livestock and Livestock Products Act of Alberta, does not exist, the existence of an agency relationship between the seller and the dealer is, by itself, sufficient to conclude that the seller is required to report the income from the sale on the date the dealer receives the purchaser's cheque.

In a situation where the purchaser gives the dealer a post-dated cheque, the date of the cheque is the date the seller is required to report the income, unless the dealer pays the seller prior to that date.

In conclusion, in our view, due to the agency relationship between the seller and the dealer, and/or the requirement that the dealer is deemed to hold the funds in trust for the seller, a cash basis farmer that sells livestock through an auction mart is required to include the sale in income on the date of the purchaser's cheque. This has been the position of the CCRA since 1993.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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