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:
Is an optional inventory amount reduced in the year of forgiveness subject to the rules in the application of section 80?
Position TAKEN:
NO
Reasons FOR POSITION TAKEN:
NO PROVISION IN THE ACT FOR SUCH REDUCTION
October 17, 1994
REGINA DISTRICT OFFICE HEAD OFFICE
Business Enquiries Rulings Directorate
C. Tremblay
Attention: R. Hauff (613) 957-8953
942548
Optional Inventory Adjustment and
Section 80 Forgiveness of Debt
We are writing in response to your memorandum of October 3, 1994, wherein you describe a situation where in 1992,
XXXXXXXXXX
The optional inventory adjustment, as described in paragraph 28(1)(b) of the Act, allows a taxpayer using the cash method in computing income from a farming business to include in his income an amount up to the fair market value of his inventory to reduce his loss. Thus, in the case at hand, two conditions must be satisfied, he must be eligible to compute income using the cash method and he must have an inventory having a fair market value of at least $XXXXXXXXXX. We assume both conditions have been met. Further, paragraph 28(1)(f) of the Act requires that the amount included in income under paragraph 28(1)(b) of the Act must be deducted from income in the immediately subsequent fiscal period. Accordingly, the optional inventory adjustment constitutes part of the income and expenses of the farming business of XXXXXXXXXX during the relevant fiscal period and is not included in his loss carry forwards.
Subsection 80(1) of the Act provides the rules to be applied in a forgiveness of debt and subsection 5400(1) of the Regulations provides the ordering to reduce the capital cost of depreciable property and the reduction of the adjusted cost base of capital property after the losses have been used up. Once the forgiveness has been applied according to those rules, any balance left unapplied, in our view, does not get allocated anywhere. There are no provisions in the Act which deal with any part of the unapplied balance remaining after the procedure described above is followed. However, if a taxpayer were to avail himself of the optional inventory adjustment for a first time in anticipation of a debt forgiveness in order to avoid the effects of section 80 of the Act, in our view, the provisions of subsection 245(2) would be applicable.
XXXXXXXXXX
Consequently, there are no further adjustments as a result of the forgiveness, required to XXXXXXXXXX' 1992 income tax return.
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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