19 September 1989 Income Tax Severed Letter 5-8517 - Whether the mandatory inventory adjustment applies in a particular situation

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.

Dear XXX

We are writing in reply to your letter of August 9, 1989, wherein you requested our views as to whether or not the mandatory inventory adjustment, under subparagraph 28(1)(c)(ii) of the Income Tax Act (the “Act”) would apply to the following situations:

• 1. A farmer acquired seed for $15,000 which was planted, grown, harvested and the crop was on hand at the end of the year.
• 2. A taxpayer operating a nursery business, acquires seedlings and/or one- or two-year old trees which are then grown for, say seven years and then sold to a landscaper or a contractor.

Our Comments

Subsection 28(1.1) defines, for purposes of subsection 28(1), inventory owned in connection with a farming business, as “property that would have been included as inventory of the business if the income from the business had not been computed in accordance with the cash method, and includes livestock but does not include animals included in a taxpayer's basic herd (within the meaning assigned by section 29).”

The term “inventory” is defined in subsection 248(1) as a “description of property, the cost or value of which is relevant in computing a taxpayer's income from a business for taxation year.”

In view of the above, it is our opinion that item 2 could be considered “inventory” for purposes of paragraph 28(1)(c) and item 1 would not be so considered.

With respect to your concluding query regarding a bona fide nursery business being considered a farming business, we draw your attention to the comment in IT-433 paragraph 7 under the heading “Meaning of Farming Business”.

• “The definition is not exclusive and it has been decided by our courts that farming also includes tree farming .... In certain factual circumstances it is considered that farming includes the operation of nurseries and greenhouses ...”

We would caution that the above comments are based on the limited information submitted in your letter, and as such, are not binding upon the Department.