10 September 1990 Ruling 901681 F - Inventory Election by Bankrupt Farmer

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: Subsection 28(1) Election

This is in reply to your memorandum of July 24, 1990 concerning a subsection 28(1) election by a bankrupt individual.

You described a hypothetical situation where an individual taxpayer who operates a mixed farming business becomes bankrupt on July 1, 1989. The taxpayer in computing his 1988 income from the farming business included pursuant to subsection 28(1) of the Act $30,000 respecting his farm inventory. We are assuming the fiscal period of the farming business ended on December 31. In the taxpayers taxation year deemed by paragraph 128(2)(d) to have ended June 30, 1989 the amount of $30,000 was deducted pursuant to paragraph 28(1)(f). The taxpayer has $20,000 of farm inventory at June 30, 1989 and pursuant to subsection 28(1) includes that amount in computing his income for the taxation year deemed to end June 30, 1989. You requested our views as to whether this $20,000 amount can be deducted in computing the income from the farming business for the taxation year that is deemed to commence on July 1, 1989 and that ends on December 31, 1989.

Our Comments

Although paragraph 128(2)(d) of the Act deems that when an individual becomes bankrupt, the taxation year shall end on the day immediately before the day he became bankrupt, it does not change the fiscal period of the business. Therefore, from a strict technical view the taxpayers fiscal year-end for the farming business would remain December 31 and no farming income would be reported for the taxation year deemed to end on June 30, 1989 and therefore no subsection 28(1) farm inventory inclusion or deduction would be made. However, as stated in paragraph 4(c) of Interpretation Bulletin IT-179 the fiscal period of the farming business could be changed (without acquiring the Departments approval) to June 30. Assuming the fiscal period has been changed to June 30 the taxpayer could in computing his income for the taxation year deemed to end on June 30, 1989 include $20,000 and deduct $30,000 respecting his farm inventory. After June 30 income from the farming business would be reported by the trustee in bankruptcy on behalf of the bankrupt individual pursuant to paragraph 128(2)(e).

If the fiscal period of the farm business is changed to June 30, as discussed above, no farming income would be reported by the trustee in the taxation year ending December 31, 1989 and therefore the $20,000 in respect of the farm inventory could not be deducted at this time, unless the fiscal period is again changed to December 31. This second change in the fiscal period would require the approval of the Department.

We agree with the "accountants' interpretation" that, unlike losses carried forward, subsection 128(2) does not prohibit deductions respecting farm inventory adjustments. However , paragraph 28(1)(f) restricts the deduction to amounts included in income for the immediately preceding taxation year. Therefore the amount that may be deducted in the taxation year ending December 31, 1989 would be the $20,000 amount included in income in the immediately preceding taxation year (ending June 30, 1989). A deduction respecting the $20,000 amount will not be available for taxation years commencing after December 31, 1989. It may therefore be advantageous for the trustee to request approval for a change in the fiscal period to December 31.

Paragraph 128(2)(a) deems the trustee in bankruptcy to be an agent of the bankrupt for all purposes of the Act and paragraph 128(2)(a) deems the estate of the bankrupt not to be an estate or trust for purposes of the Act. In addition paragraph 128(2)(a) provides that any income or loss arising from the trustee's actions in dealing with the property or carrying on the business of the bankrupt will be computed in the same way as if the bankrupt person were performing those actions and such income or loss belonged to the bankrupt person. Therefore, inventory valuation will be on the same basis and continuity will be maintained in so far as closing and opening amounts and subsection 28(1) adjustments are concerned.

We trust this will assist you in responding to the inquiry you received.

B.W. DathDirector Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch