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 subsection 112(4.1) results in an accrued inventory gain being included in income
Position:
yes
Reasons:
taxpayer has chosen lower to value inventory at fair market value
Tax Executives Institute
December 6, 1995
QUESTION 18 - DIVIDEND ON SHARES HELD AS INVENTORY
For the purposes of applying subsection 10(1), subsection 112(4.1) requires, in certain circumstances, an addition to the fair market value of shares held in inventory equal to the amount of any dividends received on the shares. The appendix to IT-328R3 provides an example in which the fair market value of the shares plus the dividend received is greater than the cost of the share, such that the application of the "lesser of cost or market" rule results in no gain or loss. If a taxpayer has chosen, in accordance with section 1801 of the Regulations, to value all of its inventory at fair market value, should a gain be recognized in these circumstances?
Department's Position
Subsection 112(4.1) provides that for the purposes of valuing a share held as inventory by a corporate taxpayer, the fair market value of the share will, unless the taxpayer has owned the share for at least 365 days and the taxpayer, either alone or together with any non-arm's length person, did not own more than 5% of the issued shares of any class of the payer corporation at the time the dividend was paid, be deemed to be its fair market value otherwise determined at the time the inventory is valued plus any taxable dividend received on the share before that time that was deductible in computing the corporation's taxable income or taxable income earned in Canada and any other dividend received on the share before that time, other than a capital gains dividend received from a mutual fund corporation. However, subsection 112(4.1) does not apply to mark-to-market properties held by a financial institution.
Where a taxpayer has chosen, for the purposes of subsection 10(1), to value all of its inventory at fair market value under section 1801 of the Regulations, a gain should be recognized in those circumstances where the deemed fair market value as determined under subsection 112(4.1) is greater than the cost of the share on which the dividends were paid.
Author: T. Harris
File: 953112
Date: November 28, 1995
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