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.
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Dear Sir:
This is in response to your letter dated July 21, 1993 in which you request our opinion in regards to the following hypothetical situation:
1) In year 1, a corporation (the "taxpayer") valued its inventory using the lower of cost or fair market value.
2) In year 2, the taxpayer joins an association which, for undisclosed reasons, requires that its members value their inventory for financial statement purposes at fair market value.
3) At the end of year 2, as a consequence of changing its inventory method, the taxpayer had an unrealized profit of $100.00 for tax purposes. By this we assume you mean that in implementing the change in accounting methods from lower of cost or market to market, certain items of inventory had fair market values greater than their cost.
Your ask whether, notwithstanding its decision to value inventory at fair market value for accounting purposes, the taxpayer can, for tax purposes, continue to use the lower of cost or market method. You suggest support for your proposition is found in the permissive language of Regulation 1801 of the Income Tax Act ("the Act") which provides "Except as provided for by section 1802, for the purpose of computing the income of a taxpayer from a business, all the property described in all the inventories of the taxpayer may be valued at its fair market value." You are of the view that the use of the word "may" in that section allows the taxpayer to use the market value for accounting purposes but the lower of cost or fair market value method for tax purposes since, while they "may" use the fair market value method, the paragraph does not require that it do so.
Our opinion
Section 9 of the Act provides that a taxpayer's income for a taxation year is his profit therefrom for the year. Section 10 of the Act provides that in calculating that profit the taxpayer shall use the lower of cost or fair market value of his inventory in such calculation, unless he has elected to use the fair market value method as provided for in Regulation 1801.
Having historically valued its inventory using the lower of cost or fair market value method, there is nothing in the legislation which would require that the taxpayer change methods because of the change in the method used for accounting purposes. Indeed, subsection 10(2.1) of the Act provides that a taxpayer must continue to use the method used in the prior year unless the taxpayer, with the concurrence of the Minister and on such terms and conditions as are specified by the Minister, adopts another method provided for in the section of the Act.
We trust these comments will be of assistance.
Yours sincerely,
Murray Brake Business and General SectionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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