17 January 2001 External T.I. 2000-0054005 - GRAPE-GROWING&WINE MAKING(WHETHER 2 BUS.)

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: Whether grape-growing and wine-making separate businesses. If separate businesses, how does wine-maker value inventory of grapes obtained from the grape-growing business.

Position: There is likely only one business.

Reasons: Paragraph 3(c) of IT-206R indicates that where one operation exists primarily to supply the other, the two operations likely should be regarded as one business, even if a small amount of goods are sold elsewhere.

XXXXXXXXXX 	J. Gibbons, CGA
		2000-005400
Attention:  XXXXXXXXXX 

January 17, 2001

Dear XXXXXXXXXX:

We are replying to your letter of October 24, 2000, in which you requested our views concerning the valuation of inventory if a taxpayer carries on a farming business, which uses the cash method, but also carries on a processing business which uses the raw products produced by the farming business.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

Facts

1. The taxpayer is a corporation that operates a vineyard.

2. The taxpayer uses some or all of the grapes from the vineyard in its wine-producing business.

3. The taxpayer elects to use the cash method to calculate its income from the vineyard operation.

4. At the end of the taxpayer's fiscal year, all of the grapes have either been sold or used up in the wine-making business.

5. The taxpayer has many years worth of wine production in various stages of completion.

Based on the foregoing hypothetical facts, you wish to know:

i. How the cost of the taxpayer's wine inventory should be valued?

ii. Is the taxpayer considered to be carrying on two businesses, one of which transfers its inventory to the other at zero cost?

iii. Is the taxpayer considered to be carrying on one business whose cost of wine inventory includes the costs incurred by the taxpayer in growing the grapes?

In your letter, you referred to the Leblanc case (93 DTC 1564), in which the Tax Court observed that the appellant, who grew grapes and made wine, appeared to be operating two businesses, a farming business and a wine-making business.

Our views

As you stated, paragraph 7 of IT-433R indicates that where one taxpayer carries on both a farm business and another business, the cash method may be used by the farm business. It will always be a question of fact, dependent upon the circumstances of each case, whether or not the farming or fishing operation can be considered a separate business for which the taxpayer can elect to report the income using the cash method. This determination would be made by the Verification and Enforcement Division of the local tax services office. Normally, a taxpayer will not be considered to operate two separate businesses if the businesses are so interlaced, interdependent and interconnected that it is virtually impossible to separate one operation from the other.

When determining the degree of interconnection, interlacing or interdependence between simultaneous business operations, we consider the various factors listed in paragraph 3 of IT-206R, "Separate businesses." In this regard, we refer you to, in particular, the comments in paragraph 3(c), wherein it discusses the situation where one operation exists primarily to supply the other. It gives the example of a market-garden operation which operates chiefly for the purpose of supplying a hotel with fresh produce. It explains that, in these circumstances, the two operations likely should be regarded as one business, even if a small amount of the market-garden produce is sold elsewhere. Accordingly, since you stated that the taxpayer uses some or all of its grapes from the vineyard in its wine-producing business, it is likely that the operation of the vineyard and the wine-processing business by the taxpayer should be regarded as one business.

In the Leblanc case, which you cite for support of your view that the taxpayer is involved in two businesses, the issue of whether the appellant was involved in two businesses was not analyzed by the Tax Court, but rather the issue analyzed was whether the appellant was involved in farming at all. As noted, the facts must be examined in each case to determine if there are two businesses.

If the facts of a particular situation support the conclusion that a taxpayer is carrying on two separate businesses, a farming business and a processing business, paragraph 7 of IT-433R indicates that the taxpayer may elect to report the income from the farming business using the cash method if it maintains a separate set of books and records for each business. Accordingly, in these circumstances, the taxpayer must determine the value of the closing inventory for the processing business. In this regard, it is our view that the phrase "the cost at which the taxpayer acquired the property" in subsection 10(1) of the Income Tax Act means that, when valuing the closing inventory of the processing business, the taxpayer must include the cost of the grapes obtained from the farming business.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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