28 May 1990 Administrative Letter 58756 F - General Anti-avoidance Rule and Cash Basis Tax Filers

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.

May 28, 1990

Dear Sirs:

Re:   Section 245 of the Income Tax Act (the "Act") and "Cash Basis" Tax Filers

This is in reply to your letter of September 28, 1989, requesting our views on the application of section 245 of the Income Tax Act (the "Act") to taxpayers filing on the "cash basis" in the situations you described.

The situations you describe are as follows:

1.     A beef farmer, anticipating a profitable year purchases a sufficient quantity of livestock to eliminate the profit.  In case A he does not take delivery. In case B he does take delivery. In both cases he assumes the risk of ownership. In both cases the animals are sent to market shortly after the start of the new year.

Our Comments

In our opinion, it does not matter whether he takes delivery or not. As long as the farmer pays for the livestock and assumes the risk of ownership, the general anti-avoidance rules will generally not affect this type of transaction. Where the farmer is a bona fide farmer as envisioned in the Income Tax Act, and where the transaction does not create a loss to which the mandatory inventory, rules as described in paragraph 28(1)(c) of the Act would apply, he is entitled to arrange his affairs so that he pays the minimum amount of tax. Section 245 of the Act will generally not apply where the farmer properly expenses the purchase of cattle in each year believing a profit might be made in that year or a subsequent year. The farmer is however required to comply with all the provisions of section 28 of the Act. 

2.     A farmer purchases his seed, fertilizer and sprays well in advance of the planting season. In case A the product remains in storage at the supplier's premises. In case B the farmer takes delivery of the product prior to the end of the year. However, the quantity purchased is in excess of the farmer's needs but was done to take advantage of "quantity discounts". In all likelihood the excess will be sold to other farmers, but in a different tax  period.

3.     A farmer purchases large quantities of commodities such as corn, beans, wheat, etc. Some of the purchases may be used by the farmer but most will be sold in the next tax period. In most cases the quantities are in excess of the physical capacity of the farmer's own facilities and are held in storage by an elevator or grain dealer.

Our Comments

Again, in our opinion, provided no loss is created to which the mandatory inventory provisions of section 28 of the Act would apply and provided the bona fide farmer assumes the risk of ownership, section 245 of the Act will generally not be exercised. We do not feel that taking advantage of "quantity discounts" is an abuse or a misuse of the Act.  However, where it is clear that the inventory purchased is much greater than the requirements of the farmer, as would be the case where he consistently sells the excess purchases to other farmers in subsequent fiscal years, the department would take the view that there are two businesses being carried on, one as a trader in supplies and commodities subject to the accrual rules, the other as a farmer eligible for the cash method of reporting income.

4.     A farmer transacts a "commodity" hedge which results in a deduction in the current tax period and income in the next tax period.

Our Comments

In our opinion, when taxpayers take futures positions in, or have transactions in, commodities connected with their business as part of their business operations, the trading in such futures or commodities creates fully taxable profits or fully deductible expenses and is reported either under the "cash method" or the "accrual method" in the same manner as the other business operations of the business in that fiscal period. The comments found in paragraphs 9 and 10 of Interpretation Bulletin IT-34R6 are relevant in determining whether a transaction would fall within a particular business operation.  Accordingly, in our view, section 245 would generally not apply to such a transaction in and by itself.

We trust our comments will be of assistance.

Your truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch