16 September 1996 Internal T.I. 9626937 - DEFERRED INCOME OF 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:

Timing of reporting income from cattle sales made near year end by farmer reporting on a cash basis.

Position:

Income at the time of sale provided the auctioneer has been paid for the sale.

Reasons:

Relevant Alberta law provides that the auctioneer is the agent of the vendor and that the funds are held in trust for the farmer. The funds in question, held in trust by the agent, are in fact property of the farmer.

									962693
XXXXXXXXXX							A.M. Brake

Attention: XXXXXXXXXX

September 16, 1996

Dear Sirs:

Re: Deferred Income of Farmers

This is in reply to your letter of July 24, 1996, to the Edmonton TSO, which has been referred for our reply, relating to three matters which are as follows:

1. DEFERRED CASH GRAIN TICKETS ("DCGT"):

As explained in Interpretation Bulletin IT-184R, a deferral can take place when a farmer receives a DCGT. Paragraph 8 thereof states that income is not reported until the date on the DCGT, while at the same time the DCGT can be used to obtain deductions in the current year under certain circumstances. For example, the supply dealer accepts the ticket as a payment on a farmer's account resulting in a current expense for the year, as the farmer will be considered to have made a payment in that year.

OUR COMMENTS

There is no doubt that by negotiating the DCGT, the farmer has a constructive receipt in the current year equal to the consideration received on passing the DCGT on to the supplier. The farmer, therefore, is considered to have made a payment for a like amount at that time. There is no restriction contained in subsection 76(4) of the Income Tax Act (the "Act") that requires the farmer to retain the DCGT to be entitled to the deferral and since subsection 76(4) specifically provides for the deferral, the deferral stands, notwithstanding the subsequent constructive receipt. Provided the farmer otherwise qualified for the deferral contained in subsection 76(4) of the Act, the mere negotiation of the DCGT for other consideration would not be valid cause to deny the deferral.

2. PAY DOWN OF CASH ADVANCES: Based on your question, we are providing the following scenario:

A cash basis farmer, reporting on a calender year, receives an advance of $50,000 in October 1995 for stored grain. In November 1995, the farmer delivers $20,000 worth of grain to an elevator, of which $18,000 is applied against the $50,000 advance and a DCGT dated January 1996 was accepted for the $2,000 net balance.

The question being whether the full $20,000 or the $18,000 off-set is taxable in 1995 with the remaining $2,000 being deferred to 1996.

Our Comments

There is no requirement to include the advance of $50,000 in computing the 1995 income. The repayment of the $18,000 is considered to be a constructive receipt in that the liability for the advance was, in fact, decreased and, therefore, the $18,000 would be treated as if it were received in cash and repaid against the advance.

In accordance with the comments contained in paragraph 3 of Interpretation Bulletin IT-184R, subsection 76(1) of the Act would require a cash basis farmer to include the $2,000 DCGT (security) in computing 1995 income. However, provided the conditions as reflected in paragraph 4 of IT-184R are met, subsection 76(4) of the Act will defer the $2,000 to 1996.

3. DEFERRED LIVESTOCK SALES THROUGH A PUBLIC AUCTION MART:

It is common practice within Alberta for farmers to sell livestock in the fall and ask for the proceeds to be paid to them in the subsequent taxation year. You understand that if a post-dated cheque is received at the time the livestock is sold, post marked into the subsequent taxation year, that Revenue Canada will take the position that the post-dated cheque is really only a "promise" to pay in the future and only represents evidence of the indebtedness and not an extinguishment of that indebtedness. Other farmers actually deliver the livestock and do not receive a post-dated cheque but other documentation from the auction mart indicating they have the right to ask for payment at any future time.

OUR COMMENTS

This matter was dealt with in a December 22, 1993 reply from our Edmonton office (J.Kanis, CGA) to a local accounting firm and two paragraphs from that reply are reproduced below. The information contained therein places the transaction in a different perspective from that set out in your example above.

"It is my understanding that when livestock is sold by a livestock auction mart, such a sale of livestock is done by the auction mart as an agent for the vendor. I have further been advised that pursuant to Provincial legislation and/or regulations applicable to auction marts, any funds paid to an auction mart by a purchaser are required to be held in trust for the vendor. While certain auctioneers may as a practical consideration defer payment to the vendor until such time as the purchaser's cheque has cleared, this does not change the position that the funds belong to the vendor as of the time the auctioneer has declared the livestock to be sold.

Based on this information, it is my opinion that where the vendor is a farmer who uses the cash basis of accounting, he is in fact paid at the date of the purchasers cheque. While a vendor may request the auctioneer to issue a cheque to him post-dated to some future time, this would not alter the fact that such a cheque merely releases funds already owned by the vendor from the auctioneer's trust account. As the auctioneer's trust account is in fact the property of the vendor, such a vendor is deemed to have received payment at the date of the purchaser's cheque. If the vendor is a farmer who reports his income on the cash basis, it is the date of the purchaser's, and not the date of the auction mart's cheque, that is the determining factor."

We have not examined the relevant Provincial legislation and/or regulations but on the basis of Mr. Kanis's understanding of what they provide, as reflected above, we concur with his comments. The practise of deferring income with respect to transactions where the funds, in fact, have already become the property of the vendor is not acceptable.

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 our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. John Kanis, Edmonton TSO