3 December 1993 External T.I. 9200995 F - Transfer of Farm Inventory to a Corporation

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.

Attention:  XXXXXXXXXX

December 3, 1993

Dear Sirs:

Re:  Transfer of Farm Inventory to a Corporation

We are writing in response to your letter of January 3, 1992 in which you have requested clarification of certain tax consequences arising from the transfer of farm inventory to a corporation under the provisions of subsection 85(1) of the Income Tax Act (the "Act").  We apologize for the delay in responding.

You have asked us to consider a situation where the market price of wheat is $2.00 per bushel; however, under the gross revenue insurance program ("GRIP") a farmer is guaranteed a price of $4.00 per bushel.  You have asked for our comments as to whether the fair market value of the wheat for purposes of the subsection 85(1) election is $2.00 or $4.00 per bushel.

As discussed during your telephone conversation with Mr. Kerr of this Department, you are uncertain whether the individual farmer or the corporation must report the GRIP amount.  You are concerned that since the GRIP contract is in the name of the individual farmer, the individual would have to report the GRIP amount and that subsection 56(2) of the Act would apply if the right to make such a claim was transferred to the corporation.

It is our understanding that under the GRIP, a contract for a crop year is in the name of a specific producer and any payments for that crop year will be made to that producer.  Under the GRIP, the term "producer" is a defined term and includes an individual farmer or a farm corporation.  It is also our understanding that under the program as administered by the Manitoba authorities, in order for an individual to have his contract for a crop year transferred to his corporation, the individual would have to advise the relevant authorities before April 30 of that year.  The producer, whether an individual or a corporation, is not entitled to any amount under the program for a crop year until the end of that year, which occurs on July 31.  At the end of the crop year the producer reports the production harvested on which the payments for the crop and the GRIP are based to the relevant authorities.

Our Comments

For purposes of our response, we have assumed that

(i)     the wheat has not been sold by the individual farmer pursuant to a deferred cash purchase ticket as described in Interpretation Bulletin IT-184R,

(ii)     the individual farmer has reported his crop production for the relevant crop year to the responsible authorities and he is thus entitled to receive a GRIP payment of $2.00 per bushel, and

(iii)     no part of the crop inventory sold consists of "purchased inventory" as referred to in paragraph 85(1)(c.2) of the Act.  All expenses related to the crop inventory have been deducted by theividual farmer in computing his income on the cash basis, and consequently, his cost of the crop inventory for tax purposes is nil.

As stated in paragraph 3 of Information Circular 89-3, "fair market value is the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact."  The value of property relates to the attributes of the property itself and is unaffected by the tax position of the owner.

Applying these principles to your hypothetical situation, it is our view that for the purposes of the transfer of the wheat inventory referred to above by the individual farmer to his corporation, the fair market value would be $2.00 per bushel notwithstanding that the farmer could receive a total of $4.00 per bushel when the GRIP payment is included.  In our view, the GRIP payment is a separate property, and constitutes an account receivable to the individual farmer.

Pursuant to paragraph 85(1)(c.1) of the Act, the individual farmer may transfer the wheat inventory to his corporation at an agreed amount between its cost of nil and its fair market value of $2.00 a bushel.  Since no part of the crop inventory consists of "purchased inventory", paragraph 85(1)(c.2) of the Act would have no application.

In our opinion, since the GRIP amount constitutes an account receivable to the individual farmer that relates to the farming business carried on by him, it is on income account and is not a capital property to him.  Consequently, because the GRIP amount is on income account, it does not constitute an "eligible property" within the meaning of subsection 85(1.1) of the Act, and therefore it cannot be transferred by the farmer to his corporation at an amount less than its fair market value.  If the farmer were to assign this right to the corporation, and assuming that the farmer would otherwise have received the GRIP amount in the taxation year in which he assigned the right, subsection 56(4) would apply to include this amount in the individual farmer's income in the year of transfer.  This approach is consistent with the comments in paragraph 15 of Interpretation Bulletin IT-433R, which state that a section 85 rollover is not available to a taxpayer using the cash method in respect of accounts receivable, since they are an income amount to the taxpayer when received.  Although we think that subsection 56(4) of the Act is the more appropriate provision, the provisions of subsection 56(2) could also technically apply to a transfer of the GRIP amount for the purposes of paragraph 28(1)(a) of the Act (see paragraph 3(c) of IT-433R in this regard).

It is also our view that any consideration in the form of shares or debt of a corporation received by the individual farmer as a result of the transfer of the GRIP amount to his corporation may constitute a security in satisfaction of an income debt, within the meaning of subsection 76(1) of the Act.  Consequently, the value of this consideration would be includable in computing the income of the individual farmer in the taxation year in which he would transfer the right to receive the GRIP amount.  Generally in such a case, the provisions of subsection 4(4) of the Act should apply to prevent double taxation taking place in the hands of the individual farmer.  IT-77R discusses the circumstances under which a security in satisfaction of an income debt would be included in computing the income of the recipient.

We hope that the above comments will be of assistance to you, and once again, we apologize for the delay in responding to your letter.

Yours truly,

for DirectorReorganizations and Foreign Division Rulings DirectorateLegislative and IntergovernmentalAffairs Branch