18 July 2022 External T.I. 2021-0887121E5 - Feeder Cattle Loan Guarantee Program

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.

Principal Issues: Under the XXXXXXXXXX Loan Guarantee Program, can members of a feeder cattle finance co-operative treat cattle as inventory for tax purposes?

Position: Depends who has beneficial ownership of the cattle.

Reasons: Beneficial ownership is a question of fact which will depend on who has the primary attributes of beneficial ownership and has entitlement to the possession, use, risk and control of the cattle.

XXXXXXXXXX							2021-088712
							 	Frank Savonarota

July 18, 2022

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Loan Guarantee Program

This is in response to your email of March 31, 2021 where you requested our views on the income tax treatment of cattle that are purchased by members of a XXXXXXXXXX Finance Cooperative (“Co-op”) and that are financed through the XXXXXXXXXX Loan Guarantee Program. You have also asked whether the members of the Co-op could treat the cattle as inventory for income tax purposes if they do not have any legal, beneficial or contingent ownership of the cattle.

Unless otherwise stated all the statutory references herein are to the provisions of the Income Tax Act (the “Act”).

BACKGROUND

Based on the information provided, it is our understanding that the XXXXXXXXXX administers a Feeder Cattle Loan Guarantee Program (the “Program”). The Program supports beef cattle farmers by facilitating access to competitive, short-term, low-interest borrowing through Co-ops.

A Co-op participating in the Program is a feeder cattle finance cooperative established under the Co-operative Corporations Act. The Co-ops are owned by individuals or corporations who raise and produce cattle (“Members”). Members are not employees of the Co-op. The Program operates whereby a Co-op negotiates bulk lending from a financial institution (“Lender”) for feeder cattle purchases. The Co-op enters into a loan agreement with the Lender. The purpose of the Program is to facilitate access for the Co-ops to low-interest loans so that a Co-op can assist its Members in producing feeder cattle.

It is our understanding that each Member determines the funds they require and requests them from the Co-op. A Member enters into a Purchase Order/Feeder Agreement (“Purchase Order Agreement”) with the Co-op. Under the Purchase Order Agreement:

• The Co-op makes funds available to a Member to purchase cattle on the Co-op’s behalf.
• As security for the funds advanced to a Member, the Co-op retains legal ownership of the cattle.
• Members can decide where and the type of cattle to purchase and have the ability to negotiate the cattle purchase price. (not exceeding what is approved by the Co-op through the Purchase Order Agreement).
• All expenses associated with the purchase and sale of the cattle are incurred in the name of the Co-op. When the cattle are purchased, the Member must ensure that the purchase documents for the cattle names the Co-op as owner of the cattle.
• Each Member is responsible for all the care and feeding costs of the cattle prior to the sale of the cattle. Members agree to maintain the health of the cattle and pay all related costs. Members assume the risk of ownership (that is they are responsible for all the costs of raising and ensuring that the cattle are healthy).
• The Co-op has oversight over the raising of the cattle throughout the process and monitors whether Members are producing the cattle in accordance with agreed terms and conditions. The Co-op may repossess cattle from a Member where that Member breaches certain agreed to conditions.
• When the cattle are ready to be sold, the Member facilitates the sale of the cattle in the name of the Co-op and ensures that the proceeds from the sale of the cattle are paid to the Co-op.
• The Co-op receives the proceeds from the sale of the cattle, pays out the Member’s related debt (which is equal to the principal and the interest charged by the financial institution) and forwards any remaining proceeds to the Member. Members are responsible for any outstanding debt amounts.
• If the proceeds from the sale of the cattle are insufficient to cover the Loan to the Lender, the Member is responsible to make up any shortfall.
• Upon full payment of the Member’s debt, legal title of the cattle is transferred to the Member.
• The Co-op carries an insurance policy on the cattle which is charged to the Member.
• The Co-op may take legal action against a Member who is unable to pay their debt.

The Purchase Order Agreement between Members and the Co-op are intended to secure the debt related to the purchase of the cattle. The transfer of ownership of the cattle to the Co-op and payment of funds to the Co-op on the sale of the cattle is for the purpose of securing payment of the debt.

Because XXXXXXXXXX believes that there may be a risk from other creditors claiming rights over cattle funded through the Program should a Member subsequently declare bankruptcy, Program rules stipulate that when Members are producing cattle purchased through the Co-op, the Co-op retains all legal, equitable and beneficial ownership in the cattle.

INVENTORY OWNERSHIP (AND BENEFICIAL OWNERSHIP)

The term “inventory” is defined in subsection 248(1) to mean a description of property the cost or value of which is relevant in computing a taxpayer’s income from a business for a taxation year or would have been so relevant if the income from the business had not been computed in accordance with the cash method and includes, among others, with respect to farming business, all of the livestock held in the course of carrying on the business. The courts have said that inventory in its ordinary sense is simply stock in trade, or property held for sale in the ordinary course of a business. It is our view that the definition of inventory in the Act is consistent with the ordinary meaning of the word and that in order to hold inventory for sale a taxpayer must own the inventory.

In common law jurisdictions, two forms of property ownership are recognized - legal and beneficial. Normally “legal ownership” exists when title is transferred to, recorded in, registered in or otherwise carried in the name of a person. Legal owners are generally entitled to enforce their ownership rights against all other persons. In contrast, the term “beneficial ownership” is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership.

Beneficial ownership refers to the ultimate ownership or control over an asset. Beneficial ownership is generally determined in accordance with the ordinary meaning found in common law. The concept has been considered by the Canadian courts, which support that the primary attributes of beneficial ownership are possession, use, risk and control. For more information on the concepts of legal and beneficial ownership, please refer to paragraphs 2.79 to 2.82 of Income Tax Folio S1-F3-C2: “Principal Residence”, which can be viewed on the Canada Revenue Agency’s web site.

TAX CONSEQUENCES

The Purchase Order Agreement indicates that the Co-op has legal, beneficial and equitable interest in the cattle. However, the determination of who in fact is the beneficial owner (i.e., who has the possession, use, risk and control of the cattle) of the cattle is a question of fact and law, which can only be determined after a complete review of all the terms and conditions of the Purchase Order Agreement.

If legal and beneficial ownership is transferred to the Co-op when the cattle are purchased then the cattle would be considered inventory for the Co-op. If however legal ownership is transferred to the Co-op but beneficial ownership of the cattle remains with the Member then the cattle would be considered inventory for the Member.

While the determination of who beneficially owns the cattle is a mixed question of law and fact that can only be determined after a complete review of all the terms and conditions of the contracts and agreements between the parties, it is our view that based on the information submitted that the beneficial ownership of the cattle is likely with the Members. The Members would treat the cattle as inventory for income tax purposes.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo, CPA, CMA
Acting Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch