29 November 1993 Income Tax Severed Letter 9324755 - Mandatory Inventory Adjustment—Farmers

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           932475
XXXXXXXXXX                      Glen Thornley
                                           (613) 957-2101

Attention: XXXXXXXXXX

November 29, 1993

Dear Sirs:

Re: Mandatory Inventory Adjustment—Farmers

This is in reply to your letter of August 25, 1993 asking whether a farm loss in one location can be offset by income in another location in a situation whereby a corporation with cattle operations in different locations, e.g., XXXXXXXXXX

Your main concern is that the mandatory inventory losses in paragraph 28(1)(c) of the Income Tax Act may eliminate the XXXXXXXXXX loss unless both operations are considered to be one business.

You ask that we assume that there are no employees and that the operations are run under the same name but under XXXXXXXXXX feedlots respectively. As discussed (Albert\XXXXXXXXXX), we also assume that this corporation has been incorporated in Canada and that it is considered resident in Canada.

Although you have asked for a technical interpretation, it would appear that a proposed transaction by a particular taxpayer is involved. Thus this matter would appear to be more appropriately the subject of an Advance Income Tax Ruling. We are, however, prepared to provide some general comments.

OUR COMMENTS

The Department's position with respect to what constitutes separate businesses is set out in Interpretation Bulletin IT-206R . In paragraph 2 of the Bulletin it states, "Whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations." Paragraph 5 of IT-206R states, with respect to "farming" operations being a business, the following:

"5. When determining whether business operations are of the same kind, the principal factor to be considered is the type of business that a taxpayer is in. It is not essential that the same inventory or machinery and equipment be used in the two operations. Factors, such as a change in name or a change in location of a business are not, in themselves, material when determining whether business operations are the same kind.

Comprehensive rules on when business operations are of the same kind are not possible, but the following are examples:

(c) those activities that come within the definition of "farming" in subsection 248(1) even though they are dissimilar or are conducted in different places;"

A further reference on a more or less related subject is found in Interpretation Bulletin IT-433 , entitled "Farming—Use of Cash Method", where the following comments (in paragraph 6 thereof) are made regarding whether or not a taxpayer is carrying on the business of farming or some other business. Although the comments refer mainly to when one aspect of a business ends and another aspect or process begins the references to interlaced, interdependent and interconnected could also refer to the same type of operation carried on in two different locations. Paragraph 6 states:

"When a taxpayer is carrying on a farming operation together with some other business operation (e.g., the processing of farm products), it is a question of fact dependent upon the circumstances of the case as to whether or not the farming operation can be considered a separate business for which the farmer can elect to report the income using the "cash" method. Normally, a taxpayer will be considered to operate two separate business if the businesses are not so interlaced, interdependent and interconnected that it is virtually impossible to separate one operation from the other. If it is established that two separate businesses are being carried on, the taxpayer may elect to report his income from the farming business using the "cash" method provided he maintains a separate set of books and records for the farming business."

If only one business is involved the loss from one operation of the business may be offset against income arising in another part of the operation. However, if separate businesses exist, the business reporting income cannot combine it with a loss from a separate business and in the case of a farm loss, the mandatory inventory adjustment may very well eliminate any loss as you suggest.

It is possible that personnel at the Edmonton District Office could, if presented with all the facts, make a determination regarding separate businesses or as noted above you may wish to apply for an advance income tax ruling in accordance with the guidelines in Information Circular 70-6R2. We caution, however, that where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling, a request for an advance ruling may be refused. See paragraph 14(j) of Information Circular 70-6R2.

We trust that our comments may prove helpful.

Yours truly,

Roberta Albert for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch