12 January 1995 External T.I. 9408735 - CASH BASIS 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.

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.

		940873
XXXXXXXXXX	A.M. Brake

Attention: XXXXXXXXXX

January 12, 1995

Dear Sirs:

Re: Cash Basis Farmer, Section 76

This is in reply to your letter of March 29, 1994, wherein you requested a technical interpretation of section 76 of the Income tax Act (the "Act") as it applies to a farmer reporting on a cash basis under section 28 of the Act. We apologize for the delay of our reply.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. We are, however, prepared to provide some general comments.

Our Comments

For farmers reporting on a cash basis, no amount is added to income until received unless a provision like subsection 76(1) of the Act applies. In order for subsection 76(1) to apply three conditions are necessary; something must be received, that something must constitute a security or other right or an evidence of indebtedness, and that something must be in lieu of payment or in satisfaction of a debt then payable to the recipient.

With respect to subsection 76(1) of the Act, it is our view that generally this subsection would not apply to a cash basis farmer who receives a debt as a result of the sale of an inventory item but would apply where the debt, already in place, is being replaced by some additional security or right at a later point in time. We draw your attention, however, to paragraph 9 of Interpretation Bulletin IT-77R which states: "Subsection 76(1) can apply where a security is received concurrently with the creation of a debt provided the security in not merely evidence of the existence of the debt, but is received in absolute payment of the debt." It would be our position that a lien or chattel mortgage taken on another property of the purchaser of the inventory would not be considered to be a security taken in absolute payment of the debt.

In the event of a non arm's length transaction, section 69 of the Act would have application should the inventory be gifted or sold for less than fair market value.

The foregoing comments are given in accordance with the practice of providing opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that you will find our comments of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch