14 January 1985 Income Tax Severed Letter

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.

January 14, 1985

Head Office Corporate Rulings Directorate J.F. Oulton (613)995-1787

RE

Further to our memorandum dated June 15, 1984 and yours of April 2, 1984 we have considered further the question of whether XXXX is entitled to the inventory allowance on the portion of its inventory for which it has received progress payments.

FACTS

XXXX

Comments:

We are in agreement with your position that XXXX should be denied the inventory allowance on its inventory to the extent of the progress payments received or for which it is legally entitled, at the end of the year. Even though such portion of the inventory has not been charged to cost of sales (since XXXX reports its profit on contracts using the completed method), it is our opinion that the requirements in subparagraph 20(1)(g)(ii) of the Act are not met with respect thereto. Legal title is vested in the customer, as evidenced by the financial statements, relevant portions of the contracts etc., so that it can no longer be said that such property is "property for sale" in the ordinary course of business. XXXX continues to hold the property of course after the customer obtains legal title in order to complete its work under the contract, but that alone does not mean that such property is held in the manner required by paragraph 20(1)(g) of the Act.

We have considered the arguments made by XXXX with repsect to "possession, use and risk" and the reference to paragraph 15 of Interpretation Bulletin IT-435R . It is our view that "possession, use and risk" (in the context of the Bulletin) are attributes to be considered where a taxayer claims ownership but someone else holds legal title (such as the case of a vendor holding legal title as security for the purchase price). However, in our opinion since XXXX has given up legal title on accepting the progress payments, the work which it continues to do pursuant to the terms of the contract, is being done on someone else's property.

You may also wish to refer to the Federal Court decision of the Saskatchewan Wheat Pool v. HMQ at 5268 fot eh 1983 DTC. Some of the attributes of ownership as noted above, were exercised by the Pool and the inventory in question had even been recorded in its audited financial statements. However, the grain was legally someone else's until certain subsequent events occurred with the result that the Minister's denial of the inventory allowance was upheld. Therefore, it is our view that the inventory which has legally been sold by XXXX is no longer property for sale (even though it still has possession and risk) in the ordinary course of its business, with the result that the inventory allowance should be denied thereon.

We have also considered the character of the progress payments received for purposes of section 12. It is our opinion that the progress payments received constitute amounts described in paragraph 12(1)(a) since the goods are not delivered before the end of the year. Therefore, XXXX would be entitled to a reserve under paragraph 20(1)(m) on the progress payment received. As indicated in paragraph 5 of Interpretation Bulletin IT-154 , a reasonable amount is normally the full amount received by the taxpayer.

As you are aware, we are proceeding to go to Court on the XXXX case, the facts of which are identical. Thus we are essentially presenting an inflexible position for XXXX at this stage. Therefore, should further clarification concerning our position be required, please do not hesitate to contact us.

Chief Service Public Utilities & Exemption Corporation Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch