26 September 1989 Ruling 74243 F - Valuation of Inventory of Returnable Containers

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.

Subject: 24(1) Valuation of Inventory of Returnable Containers

We are writing in reply to your memoranda of August 18, 1989, wherein you requested our opinion on whether returnable 24(1)

The facts as we understand them are as follows:

1.

2.      24(1)

3.

Your Opinion

24(1)

2.     The support for your position is found in paragraph 1 of IT-165R indicates that refundable deposits are generally charged and such deposits would be included in income under paragraph 12(1)(a) or 12(1)(b) of the Act.  In addition, paragraph 2 of IT-l65R, states that the cost of returnable containers cannot be written off as an expense in the year of acquisition" and the opening statement of paragraph 5 reads as follows:  "where returnable containers are to be accounted for as inventory, it will be the Department's position that all containers in transit to, or in the hands of customers have been sold for proceeds equal to the amount charged to the customer as a refundable deposit."

24(1)  Representations

24(1) Therefore, exclusion of pallets in the hands of customers from inventory is acceptable and supported by the last sentence in paragraph 5 of IT-I65R which reads as follows: "an inventory of returnable containers, at any time, will thus consist only of those containers physically in the possession of the taxpayer who owns and uses them to ship the product."

Our Comments

As indicated in paragraph 3 of IT-l65R, the Department normally relies upon the corporation's auditors to determine whether its returnable containers should be accounted for as inventory or as depreciable property.  In making this determination, one of the considerations is the status of ownership of the containers while in possession of the taxpayer's customers.  Where there is strong evidence that the taxpayer continues to have the right of repossession of the containers after shipment to the customers (i.e. the containers remain the property of the supplier at all times), all such containers whether on hand or with customers would normally be considered depreciable property.  On the other hand, where the customers have the ability to use the containers for whatever purpose, destroy or return them at will without consulting the supplier (e.g. returnable beer bottles), the supplier is considered to have sold the containers when they are shipped to the customer and to hold those containers on hand as inventory because they are held for sale.  The method chosen for the financial statements of the corporation is normally acceptable for income tax purposes, unless the method chosen is not in accordance with generally accepted accounting principles and is not certified by the corporation's auditors.  For taxation years commencing prior to February 16, 1984, the comments in IT-l65 applied and paragraph 2 thereof provided the taxpayer with the option of treating returnable containers either as depreciable property or as inventory, regardless of the accounting method used in the financial statements, as long as the method vas used consistently.

Where the returnable containers are accounted for as inventory, all containers in transit or in the hands of customers are treated as having been sold as the vendor is no longer considered to have title to the containers.  This position applies regardless of whether a refundable deposit has been received from the customer.  An amount charged to the customer, whether received or receivable, is included in income by virtue of paragraph 12(1)(a) or (b) in respect of property sold in the course of business.

The second sentence of paragraph 2 of lT-l65R which states that the cost of returnable containers cannot be written off as an expense in the year of acquisition vas intended to indicate that the treatment of the cost of all returnable containers purchased in the year as a period cost expensed in that year is unacceptable.  This sentence vas not intended to refer to the cost of containers in the hands of customers at the year-end which are deducted as an expense in the year because they have been excluded from the cost of inventory at the year-end.

In summary, as long as the taxpayer is entitled to use the inventory method of accounting for the pallets, the taxpayer's' inventory of pallets at any time will consist only of those containers physically in the possession of the taxpayer.

We trust these comments will be of assistance.

R. Albert A/Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch