6 November 1997 External T.I. 9720815 - TIMING OF DEDUCT FOR INVENTORY PAID BY CASH BASED FARMER

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 deduction for feed purchased by cash basis farmer in one taxation year when the feed will not be delivered until the next taxation year

Position:

no deduction until title to feed is transferred to purchaser

Reasons:

section 28 modifies GAAP to allow the deduction of an amount that would otherwise be accrued when it is paid, but if title to the goods has not transferred, the amount could not be considered to be for the purchase of the goods

A. Humenuk
XXXXXXXXXX 972081

Attention: XXXXXXXXXX

November 6, 1997

Dear XXXXXXXXXX:

Re: Cash Basis of Accounting

We are replying to your letters of July 30 and September 9, 1997, concerning the timing of the deduction for inventory purchased by a farming corporation which reports its income on the cash basis.

You ask whether a farming corporation which reports its income on the cash basis is entitled to a deduction for an amount paid for feed in the taxation year in which the payment is made, if the feed so purchased is to be manufactured and delivered in instalments over the following taxation year and is subject to a price adjustment clause. In the example given in your letter, a farming corporation contracts with a supplier in one taxation year to buy feed which is to be manufactured and delivered in the following taxation year. Although the farming corporation pays the contract price for the feed prior to the end of its taxation year, the final price to be paid for the feed will be adjusted at the time of each delivery to reflect any price adjustment required as a result of changes to the price of feed on the actual date of delivery.

Paragraph 28(1)(e) of the Income Tax Act (the "Act") entitles a taxpayer in the business of farming or fishing to deduct expenditures that meet the general tests of deductibility and would otherwise be deductible under the accrual basis of accounting, which are paid in the year or are deemed by the Act to have been paid in the year. It is our view that a taxpayer will be entitled to a deduction for the purchase of feed in the year in which payment for the feed is made, provided that legal title to the feed passes to the taxpayer in that year. Accordingly, in the situation described above, the timing of the deduction for the cost of the feed would depend on the terms of the agreement between the farming corporation and the supplier, as well as the legislation governing the sale of goods in the particular jurisdiction. Under such circumstances, the supplier would, of course, have to include the amount invoiced for the feed in its income for the year.

Under the sale of goods legislation of most provinces, title to unascertained or future goods cannot be transferred to the purchaser until some act is performed to ascertain the goods. Generally, title to goods purchased under a contract for unascertained or future goods passes to the purchaser when the goods are in a deliverable state and unconditionally appropriated to the contract. The term "unconditionally appropriated" means that the goods have been so dealt with by the vendor that the vendor could not use them for any purpose other than the fulfilment of the contract and the purchaser could not refuse to accept them as fulfilment of the contract. In the situation described above, this would require the feed supplier to manufacture the feed to be supplied under the contract for sale and to segregate it from the supplier's other inventory.

We trust our comments will be of assistance to you.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch