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.
APR 21 1981
HEAD OFFICE Corporate Rulings Directorate Lois C. Pollock
Treatment of Volume Rebates and Cash Discounts by the Grocery Industry
This is in reply to your memorandum of January 12, 1981 in which you request our opinion on the above two matters in order that you may apply a consistent assessing policy to the grocery industry files under your control. In this memorandum "cost of sales method" refers to the case where the rebates and discounts are considered to be a component of cost of goods purchased rather than a source of other income which is the "other income method".
The Department's present practice with respect to inventory valuation, in general terms, is that any method used by a particular taxpayer is acceptable if that method:
(a) is in accordance with generally accepted accounting principles (GAAP),
(b) does not conflict with specific rules in the Income Tax Act or Regulations,
(c) is consistently followed by that particular taxpayer, and
(d) is used both for financial statement and income tax purposes.
Where there is more then one GAAP method it is not necessary that each taxpayer within a particular industry use the same method; on the other hand, similar divisions of a particular taxpayer are required to use the same method.
Neither volume rebates nor cash discounts is specifically covered in section 3030 of the CICA handbook. The accepted practice, according to accounting texts and what, in fact, is done, is to permit both to be given either the cost of sales or other income treatment provided the treatment chosen is followed consistently. Accordingly, we are prepared to accept either treatment on a consistent basis. We understand that IT-473 is silent on the issue to permit this flexibility and to remain "current" in the event that the CICA takes one position and codifies the same.
It is our opinion that the cost of sales treatment is the more appropriate for both but, in particular, for volume rebates and especially where these rebates are a significant factor as we understand they are in the grocery industry. Where a taxpayer uses the other income method in accounting for purchases throughout the year, it seems to us that a reduction to inventory for the amount of volume rebates earned to date and for the cash discounts taken into income to date reasonably attributable to the goods on hand has the overall effect of converting to the cost of sales method. Accordingly, we are prepared to accept a reduction to inventory for such amounts provided the adjustment is also made for financial statement purposes.
Where a taxpayer has used the other income method and proposes to change to the cost of sales method (either by way of an "inventory reduction" or by a change of accounting procedures throughout the year), we would be prepared to accept the change provided the cost of sales method is consistently followed thereafter and is used for financial statement purposes as well as income tax purposes; our reasons being the same as in the preceding paragraph.
Similar to your five examples, our research revealed that there is no generally accepted (or generally recommended) practice by the Canadian grocery industry. However, according to J. K. Lasser's third edition of Handbook of Accounting Methods (1964) the U.S. grocery industry generally reduces inventory for both volume rebates and cash discounts attributable thereto.
Where the taxpayer chooses the cost of sales method, your suggested treatment in points (1) to (5) appears reasonable to us.
Original signed by
Chief Merchandising, Manufacturing & Construction Corporate Rulings Division Corporate Rulings Directorate Legislation Branch
s.10 Research File CR2220 Inventory
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