2 April 1998 External T.I. 9721205 - GAIN/LOSS ON CONTRIB OF INVENTORY TO A JOINT VENTURE

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:

tax consequences arising from a contribution of property to a joint venture by a venturer who reports income on the cash basis

Position:

no gain or loss is recognized at the time of contribution unless the joint venture is in fact a partnership

Reasons:

a joint venture is not recognized as a separate person for tax purposes CICA handbook recommends proportionate consolidation method, with adjustments to account for differences between cost to venturer and the value used for determining the increased interest. In the example given, the contribution was inventory of livestock. For the cash based farmer, the venturer who contributed the inventory has already deducted the cost of the inventory when purchased and the other venturers will have no cost for that contribution - any gain or loss relative to the other venturers is recognized thru the difference between the allocation of the sale of the livestock. CICA handbook 3055.26-.29 & Appendix A show the proportionate consoldation method (which differs from the method used for tax purposes in that no gain or loss is recognized at the time of contribution

972120
XXXXXXXXXX A. Humenuk

Attention: XXXXXXXXXX

April 2, 1998

Dear Sirs:

Re: Contributions to a Joint Venture

We are replying to your letter of August 6, 1997 in which you ask for our opinion concerning the tax treatment of contributions to a joint venture by a participant in the joint venture who reports income on the cash basis.

In the situation you describe, a joint venture is formed to engage in a farming activity and each participant or venturer has an equal interest in the joint venture. Subsequently, three out of four of the venturers contribute livestock to the joint venture in exchange for an increased share in the profits of the joint venture. It is your view that any of the venturers who report income on the cash basis will recognize their contribution to the joint venture as a sale of inventory for an amount equal to the fair market value of the livestock and will recognize their increased share of the joint venture as an expense for the purchase of inventory.

The Canadian Institute of Chartered Accountants handbook defines a joint venture as an economic activity resulting from a contractual arrangement whereby two or more venturers jointly control the economic activity. If the terms of an agreement to engage in a joint venture contain all the essential ingredients of a partnership at law (e.g. joint ownership, joint and several liability, sharing of business profits and losses, continuity of operation), the joint venture will be regarded as a partnership by the Department. The partnership law of the relevant province is persuasive in this regard. An examination of the contractual agreement would be necessary in order to determine if the joint venture is truly a partnership.

If the joint venture is a partnership according to the applicable provincial law, any property which is contributed to the partnership by the partners is deemed to have been disposed of at its fair market value under subsection 97(1) of the Act, unless the partners have made an election as described in Interpretation Bulletin IT-413R, Election by members of a partnership under subsection 97(2).

If the joint venture is not a partnership, the participants in the joint venture are each considered to be conducting business separately so that each participant receives a share of all income received on behalf of the joint venture and incurs a share of each cost incurred by the joint venture to the extent of the venturer's participation in the joint venture. Since the joint venture is not a legal entity, it cannot own the property used by the joint venture.

The assets used in the joint venture may or may not be owned jointly by the participants; the question of ownership of the assets depends on the facts of a particular situation. Thus, if a participant disposes of part of an interest in the livestock to the other participants and acquires an interest in livestock contributed by other participants, a gain or loss on the disposition of the inventory is realized and the participant incurs an expense for the purchase of additional inventory. Paragraph 7 of Interpretation Bulletin IT- 490, Barter transactions, explains how to calculate the amount to be used for the purpose of recognizing such transactions.

We trust our comments will be of assistance to you but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transaction.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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