16 December 1996 External T.I. 9640405 - INCOME DETERMINATION

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: income determination

Position:closing inventory

Reasons:

964040
XXXXXXXXXX S. Tevlin

Attention: XXXXXXXXXX

December 16, 1996

Dear Sirs:

Re: Stock and Equipment Chargeback

We are writing in response to your letter dated November 14, 1996 wherein you asked for our opinion with respect to whether the implementation of the stock and equipment chargeback system between the Province of Ontario (the "Province") and licencing agents (an "agent") will have any income tax implications on that agent.

You have advised us that previously all stock held by the agents were the property of the Province. Under the new stock and equipment chargeback system any stock shipped to the agents will be the property of the agents and the agents will be considered to have paid for that stock and will receive a "statement of business charges" from the Province to support that amount. Correspondingly, the agent's commission income will be augmented by an equivalent amount.

Since the information you have requested relates to a fact situation and proposed transactions it should be in the form of a request for an advance income tax ruling in accordance with the procedures set forth in Information Circular 70-6R2 dated September 28, 1990 ("IC-70-6R2").

We will however provide the following general comments.

If under the stock and equipment chargeback system the
amount added to the agents's T4A information slip is equal
to the amount shown on the agent's statement of business
charges received from the Province then there should be no
net income effect to that agent except to the extent that
that agent has inventory at year-end, as more fully
described in the following paragraphs.

In the determination of net income for income tax purposes
generally accepted accounting practices require that an
agent would, in calculating a "cost of goods sold" for an
accounting period, be required to determine a fiscal year
end inventory.

It is a question of fact as to whether any stock or
equipment that is acquired by an agent is to be considered

as on income or capital account. Such determination can

only be made after a thorough examination of the related

documents.

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.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch