1 October 1996 Income Tax Severed Letter 9631835 - Farming — mandatory inventory adjustment

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:

Valuation of inventory under subsection 28(1.2) for purposes of mandatory inventory adjustment. With respect to cattle that are being fed while growing or fattening, would the cost of the food consumed be added to the original cost of the animal when valuing inventory under subsection 28(1.2)?

POSITION:

No. Only the original cost of the animal.

REASONS:

Paragraph 5 of IT-526 states that generally, inventory for purposes of the mandatory inventory adjustment will be valued in accordance with subsection 28(1.2) at the lesser of a), the amount paid by the farmer to acquire the inventory (herein referred to as the "cash cost"), and b), its fair market value.

The 1988 Technical Notes, in part, read,

"Generally, inventory will be valued at the lower of its original purchase price and its fair market value. A "specified animal", however will be valued at its original purchase price less 30% per year on a diminishing basis..."

963183 XXXXXXXXXX A.M. Brake

Attention: XXXXXXXXXX

October 1, 1996 Dear Sirs:

Re: Valuation of Inventory - Farming

This is in reply to your letter of September 17, 1996, requesting our comments on the mandatory inventory adjustment. In particular, you ask for clarification as to what constitutes the cash cost of say, cattle (not considered to be "specified"). You question whether it is only the initial outlay of the animal, itself, or is feed consumed by the animal to be factored in?

OUR COMMENTS

Paragraph 5 of Interpretation Bulletin IT-526 states that generally, inventory for purposes of the mandatory inventory adjustment will be valued in accordance with subsection 28(1.2) of the Income Tax Act at the lesser of a), the amount paid by the farmer to acquire the inventory (herein referred to as the "cash cost"), and b), its fair market value.

The 1988 Technical Notes, in part, reads,

"Generally, inventory will be valued at the lower of its original purchase price and its fair market value. A "specified animal", however, will be valued at its original purchase price less 30% per year on a diminishing basis..."

The exception to the general rule relates to a "specified animal" with regard only to the annual 30% write-off rather than with that which constitutes cost, as in both instances, reference is made to the original purchase price. In our view, the term original purchase price, would not include added value as a result of the feeding. It would not include the cost of food consumed during the year by an animal held for sale even though the fair market value of the animal reflects the growth over time from the feeding.

We provide the following example (assume fair market value of inventory is greater than original cost):

100 calves acquired at $400 each (on hand)$40,000 1000 bags of feed consumed at $5 each 5,000 400 bags of feed on hand at $5 each 2,000

In this example, the taxpayer's inventory would consist of 400 bags of feed and 100 calves. The original purchase price of the feed is $5 per bag and the original purchase price of the calves is $400 each. Hence, the value of the inventory would be the "cash cost" or original cost of $42,000 ($40,000 + $2,000).

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