21 July 1994 External T.I. 9409095 - 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.

Principal Issues:

Whether a taxpayer who operates a farming business both individually and through a partnership must calculate the mandatory inventory adjustment of paragraph 28(1)(c) of the Act separately for each business?

Position TAKEN:

It must be calculated separately for each business since paragraph 28(1)(c) of the Act is relevant in the computation of income and must therefore be applied at the partnership level.

Reasons FOR POSITION TAKEN:

5-9001

		5-940909
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

July 21, 1994

Dear Sir:

Re: Mandatory Inventory Adjustment - Farmers

We are writing in reply to your letter of March 18, 1994 wherein you requested our comments on the application of paragraph 28(1)(c) of the Income Tax Act (the "Act") in the following situation:

1.The taxpayers are partners in a farm partnership. The partnership's primary activities include operating a dairy farm, farming land owned by the taxpayers and operating a feedlot.

2.The partnership purchases and sells feeder cattle in order to facilitate the marketing of crops grown on the land farmed by the partnership and to assist with income tax planning.

3.The taxpayers want to have a farming business of their own, with their spouses and children.

4.Each taxpayer has personally acquired approximately $100,000 worth of feeder cattle. This cattle is fed by the partnership and other non-related feedlots.

5.Each taxpayer has established a new farm corporation to conduct farming activities personally.

Our Comments

Your request for a technical interpretation appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following comments.

In response to your first question, since paragraph 28(1)(c) of the Act is relevant in the computation of income, it is applied at the partnership level. Consequently, the mandatory inventory adjustment for the farming business conducted by the partnership must be calculated based on the farming income of the partnership, as in example #2 of your letter. Our response would not be different if the feeder cattle were purchased by a taxpayer at fair market value from the partnership. Nor would our response be different if, in a subsequent taxation year, a taxpayer transferred feeder cattle to a corporation under section 85 of the Act.

Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

The foregoing comments are given in accordance with the practice 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 these comments will be of assistance.

Yours truly,

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch