Section 10

Subsection 10(1) - Valuation of inventory

Cases

CDSL Canada Limited v. Canada, 2010 DTC 5055 [at 6746], 2008 FCA 400

The taxpayers, which carried on consulting businesses, computed their income for financial statement purposes by valuing the work in progress at the end of each year at fair market value (i.e., including a portion of the profit on uncompleted consulting contracts based on a percentage-of-completion method). The trial judge (2008 TCC 106) found that they were required to follow the same method for purposes of computing their income under the Act, given that a different conclusion would have made section 34 of the Act, which permitted certain professions to exclude income in respect of work in progress in computing their income, meaningless.

The Court of Appeal disagreed. Noël J.A. stated at para. 33 that s. 10(1), which requires that inventory be valued at the lesser of cost or fair market value, overrides any GAAP considerations. Noël J.A. also stated at para. 35:

With respect, it is incorrect to say that section 10 applies whenever section 34 applies. These two provisions operate differently. Taxpayers subject to section 10 must account for the value of their inventoried work in progress based on cost or FMV, depending on the circumstances; however, section 34 gives taxpayers the choice of excluding their inventoried work in progress in computing their income, in which case, section 10 does not apply.

Friesen v. Canada, 95 DTC 5551, [1995] 3 S.C.R. 103

loss recognized on decline in value of land held as an adventure

The taxpayer, who along with others held an interest in an undeveloped real estate property as an adventure or concern in the nature of trade, was able to deduct an unrealized decline in the value of his share of the property in computing his income. Among other arguments, Major J. rejected a contention that s. 10(1) applies only to those who "carry on a business", and that s. 10(1) was merely a codification of the common law practice with respect to the valuation of inventories at the lower of their cost or fair market value, a practice which was restricted in its scope to "stock-in-traders". Although it was not necessary to resort to the object and purpose of the provision, the above interpretation was consistent with an objective of restricting trading in pregnant losses (as reflected in a subsequent amendment to Regulation 1801).

Coppley Noyes & Randall Ltd. v. The Queen, 91 DTC 5291 (FCTD), varied on appeal 93 DTC 5196, 5508 (FCA).

In commenting on the Anaconda case, Reed J. stated (p. 5298):

"... I think it is well known that the reasoning of the Privy Council in overruling both the Exchequer Court and the Supreme Court of Canada has been widely criticized ... As I understand it, most commentators have been of the view that the choice of LIFO (last in first out) as a method of inventory costing is not in conflict with the purpose of the Income Tax Act providing that method is used consistently over the years by the taxpayer."

Van Dongen v. The Queen, 90 DTC 6633 (FCTD)

The taxpayer acquired a residence and condominium from his son in order to secure a loan which he previously had made to his son, rather than in connection with an adventure in the nature of trade. Accordingly, although a property which is held in connection with an adventure in the nature of trade may be written down in accordance with the lower of cost and market rule in this case because the properties were not inventory, the taxpayer was precluded from taking such a deduction.

The Queen v. Cyprus Anvil Mining Corp., 90 DTC 6063 (FCA)

The taxpayer, which had a calendar year-end, generally computed its income for accounting and income tax purposes using the lower of cost and market method. For purposes of computing its income from a new mine for the three year period ending 31 January 1973 it initially valued its closing inventory at cost, but later, after reassessment, filed on the basis that its closing inventory should be valued at market, thereby increasing the amount of the exemption which the taxpayer claimed pursuant to former s. 83(5), which provided that "there shall not be included in computing the income of a corporation income derived from the operation of a mine during the period of 36 months commencing with the day in which the mine came into production."

Hugessen J.A. (with whom Pratte J.A. concurred) allowed the Crown's appeal simply on the ground that the words in s. 83(5) "can only mean that the income derived from the operation of the mine must be computed on the same basis as the income from which it is to be deducted." Urie J.A., in addition to allowing the appeal on essentially this basis found, in light of an admission that departing from the taxpayer's previous practice of valuing inventory in accordance with the lower of cost and market method was contrary to GAAP, that in order for the taxpayer's income for the 36-month exempt period not to be computed on a "distorted" basis, the consistency principle should be followed, i.e., the lower of cost and market method which was used for the taxpayer's calendar years should be utilized.

The Queen v. Thyssen Canada Ltd., 87 DTC 5038, [1987] 1 CTC 112 (FCA)

Late-payment charges which were in respect of inventory purchases and whose deduction was denied by s. 18(4) were not permitted to be added to the cost of the inventory. "Generally accepted accounting principles cannot ... be invoked as authorizing the capitalization of interest payments the deduction of which is expressly prohibited by the statute."

The Queen v. Metropolitan Properties Co. Ltd., 85 DTC 5128, [1985] 1 CTC 169 (FCTD)

Amounts expended by a developer in installing sewers, water mains, street lights, paved roads and sidewalks, telephone and electrical services and other municipal improvements respecting a residential subdivision prior to deeding such improvements to the municipality, were treated as part of the cost of the developer's inventory of remaining land in its financial statements in accordance with GAAP. Since there was no specific provision in the Act requiring a departure from GAAP in this case, the expenditures also formed part of the cost of the developer's land inventory for purposes of the Act.

Saskatchewan Co-Operative Credit Society Ltd. v. The Queen, 84 DTC 6225, [1984] CTC 628 (FCTD), aff'd 85 DTC 5599 [1986] 1 CTC 53 (FCA)

Although "it may be that shares held by a company which is in the business of buying and selling shares can be regarded as inventory" the shares in question here had been acquired instead as an investment - the intent of the taxpayer in acquiring the shares was to make available to the issuing corporation a substantial amount of long-term equity capital.

Qualico Developments Ltd. v. The Queen, 84 DTC 6119, [1984] CTC 122 (FCA)

It was held that "the cost of landscaping around dwelling houses constructed for sale in the course of business is clearly a part of the cost of what is to be sold and is thus properly included in the cost of inventory on hand at the end of a fiscal period".

Rudolph Furniture Ltd. v. The Queen, 82 DTC 6196, [1982] CTC 211 (FCTD)

S.10(1) appears to have been interpreted as requiring that all the inventory be valued at cost or all the inventory be valued at fair market value. The plaintiff's calculation of opening inventory, which valued new stock at cost and obsolete inventory at a discount from cost (representing fair market value), accordingly was rejected.

Closing inventory was valued by applying an historical gross margin percentage to its retail (price tag) value. Since closing inventory thus was valued at cost, and since "'the preferred treatment under generally accepted accounting principles is that the opening and the closing inventories for a particular year be valued on a consistent basis'", it was held that the opening inventory also should be valued at cost.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(3) 24

Minister of National Revenue v. Shofar Investment Corporation, 79 DTC 5347, [1979] CTC 433, [1980] 1 S.C.R. 350

The practice required by the Act "in the computation of the profit of a trading business is to deduct from the aggregate proceeds of all sales the cost of sales computed by adding the value placed on inventory at the beginning of the year to the cost of acquisitions to inventory during the year, less the value of inventory at the end of the year."

Handy & Harman of Canada Ltd. v. MNR, 73 DTC 5401, [1973] CTC 507 (FCTD)

For financial statement purposes, the taxpayer, whose business was the processing of silver, used a perpetual inventory costing system under which inventory was carried at the same cost as at the previous year-end or, in the case of net additions to inventory, at the lowest cost at which purchases were made in the year. Cost of sales was determined using replacement cost, except when the base stock of inventory was depleted.

The adoption of this method by the taxpayer for income tax purposes was held to be inappropriate. Heald, J. accepted the position of the Crown's expert that under perpetual costing systems, either average cost or specific costs should be used. In addition, Heald, J. characterized the taxpayer's method as disregarding the known physical facts.

Lawson v. Minister of National Revenue, 69 DTC 5155, [1969] CTC 201, [1969] S.C.R. 587

A mining stock promoter acquired treasury shares of a junior mining company and while he was selling as many shares as he could on The Toronto Stock Exchange also bought substantial quantities of the shares in order "to maintain the market". At the end of his fiscal year (May 31, 1955) his shares had an average cost of 34.1¢ and a market quotation of 67¢.

With respect to determining the fair market value of the shares, Pigeon J. found that "the trial judge was fully justified in holding that there was no evidence that a reasonable program of disposition of the inventory would have brought the market price below cost" (p. 5157). With respect to the cost of the shares, a proposal to specifically identify the shares remaining in the promoter's inventory by an examination of the serial numbers on the certificates ignored the fungibility of shares at law, and there was no convincing evidence that the Fifo method was used to any extent by persons in a situation similar to the promoter's or that this basis of determining cost was "closer to reality" than the average cost basis underlying the reassessment of the Minister. The cost-recovery method also was rejected.

Irwin v. The Queen, 64 DTC 5227, [1964] CTC 362, [1968] S.C.R. 462

Abbott J. indicated, in obiter dicta that he doubted whether the combined effect of s. 14 of the pre-1972 Act and Regulation 1800 made any change to the principle that for income tax purposes gross profit, in the case of a business which consists of acquiring property and reselling it, is the excess of the sale price over costs, subject only to modification by the lower of cost and market rule, and that he was doubtful that such provisions were applicable in the circumstances of a case (such as that a bar) where the actual cost and sale price of each particular piece of property were well-established.

MNR v. Anaconda American Brass Ltd., 55 DTC 1220, [1955] CTC 311 (PC)

The taxpayer, which for corporate purposes had been using the F.I.F.O. method for determining the cost of its sales of manufactured metals and its closing inventories, in 1946 and 1947 switched to the L.I.F.O. method for income tax purposes. The Minister reassessed on the basis that its taxable income for its 1947 year should be determined on the basis of applying the F.I.F.O. method.

Viscount Simonds effectively affirmed the Minister's reassessment in the absence of evidence that the L.I.F.O. method more closely approximated the actual pattern of physical usage of purchased metals by the taxpayer than the F.I.F.O. method (p. 1225):

"There is no room for theories as to flow of costs: nor is it legitimate to regard the closing inventory as an unabsorbed residue of cost rather than as a concrete stock of metals awaiting the day of process. It is in their Lordships' opinion the failure to observe, or, perhaps it should be said, the deliberate disregard of, facts which can be ascertained and must have their proper weight ascribed to them, which vitiates the application of the L.I.F.O. method to the present case. It is the same consideration which makes it clear that the evidence of expert witnesses, that the L.I.F.O. method is a generally acceptable, and in this case the most appropriate, method of accountancy, is not conclusive of the question that the Court has to decide."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 46

See Also

Kruger Incorporated v. The Queen, 2015 DTC 1127 [at 788], 2015 TCC 119, rev'd 2016 FCA 186

options contracts purchased, but not those written, were inventory

The taxpayer traded foreign currency options, with its principal option activity being the writing of European-style puts and calls with banks as the counterparties. The taxpayer reported gains and losses on these options essentially on a mark-to-market basis.

Rip J agreed with the Minister that, in general, the realization method should have been used instead of mark to market, as "the realization principle is basic to Canadian law" (para. 114). However, he accepted the taxpayer's alternative argument that the options contracts, if purchased by it, were held as inventory, and thereby could be valued under s. 10 (noting, at paras. 121-22 that, contrary to GAAP, inventory for ITA purposes can include intangible property and, at para. 124 that "there is no requirement that property must be held for sale to qualify as inventory.") However, the contracts which the taxpayer instead had written were liabilities rather than property, and thus not inventory (stating, at para. 130 that "until maturity or settlement, the writer is liable to the purchaser.") Accordingly, the taxpayer's appeal was allowed only to give effect to the losses claimed on the contracts it had purchased.

See summary under s. 9 –timing.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Inventory options contracts purchased, but not those written, were inventory 114
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) paper manufacturer's large-scale options-trading operation was a separate business 156
Tax Topics - Income Tax Act - Section 9 - Timing realization principle applied to FX options written by taxpayer 293

Grant v. The Queen, 2000 DTC 1985 (TCC) (Informal Procedure)

The promoters of limited partnerships were traders in real estate and sold properties to the partnerships with the intention that the partnerships would sell them at a profit as soon as possible. Accordingly, losses arising from write-downs of the properties that were allocated to the taxpayers were deductible by them.

General Motors Acceptance Corp. of Canada Ltd. v. The Queen, 2000 DTC 1844 (TCC)

Rip TCJ. found that there was no evidence before him that conditional sales contracts purchased by the taxpayer from General Motors dealers were inventory to it at any time. Accordingly, the taxpayer had no basis for writing down those contracts.

Ruland Realty Ltd. v. The Queen, 98 DTC 2172 (TCC), briefly aff'd 2000 DTC 6142 (FCA)

Companies affiliated with the taxpayer, which was a developer of residential subdivisions, entered into land purchase agreements, used bank financing to fund the required deposits, and assigned the agreements (together, apparently, with the obligations under the financing) to the taxpayer. In its 1990 financial statements, the taxpayer wrote off the amount of the deposits (including capitalized interest) to reflect a decline in the value of the land covered by the agreements that was greater than the amounts deposited. In finding that this write-down also could be recognized for purposes of the Act, Bowie TCJ. found that the deposits came within the broad definition of inventory.

Stein v. The Queen, 96 DTC 1526 (TCC)

Because the taxpayer acquired a Florida condominium for speculative purposes, various carrying costs were required to be capitalized.

Consoltex Inc. v. The Queen, 96 DTC 1812 (TCC)

In its 1979 and prior years, and in its 1983 and subsequent years, the taxpayer valued its inventories at the lower of cost and market for financial statement and income tax purposes. In its 1980, 1981 and 1982 years, it valued its inventories at market value for income tax purposes, in order to fully absorb non-capital losses of a subsidiary that had been wound up into it.

Lamarre TCJ. found that this change in inventory valuation to market had the effect of distorting the taxpayer's profits for its 1982, 1983 taxation years and, therefore, was not in accordance with section 9 of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Accounting Principles 123

Northwood Pulp and Paper Ltd. v. The Queen, 96 DTC 1105 (TCC), aff'd 98 DTC 6640 (FCA)

The estimated costs of reforestation work which the taxpayer became obliged to perform in future years when it harvested timber, did not form part of the cost of its log inventory. The reforestation expenditures instead were deductible as period costs only as they were actually made or incurred.

Orlando Corp. v. The Queen, 94 DTC 1046 (TCC)

Payments made by a real estate developer to the City of Mississauga in lieu of conveying park lands to the City were required to be added to the cost of land inventory to which they related.

Weatherhead v. MNR, 90 DTC 1398 (TCC)

On the authority of the Bailey decision, the taxpayer was entitled to value each of three properties which were held by him as an adventure in the nature of trade at the lower of their fair market value and cost.

Bailey v. MNR, 90 DTC 1321 (TCC)

The taxpayers, who acquired farm land in connection with an adventure in the nature of trade and not for use in a trade, were entitled to write down the carrying value of that land in accordance with the lower of cost and fair market value rule contained in s. 10(1). Rip J. stated (at p. 1330):

"Subsection 10(1) directs a property to be valued 'for the purpose of computing income from a business.' The phrase does not contemplate computing income only from carrying on a business, as suggested by counsel for the respondent."

Eckel v. Board of Inland Revenue, [1989] BTC 94 (PC)

On September 26, 1972 an individual entered into a contract to sell land to a company of which the sole directors were her and her husband, and in 1973 and 1974 the wife at the request of the company conveyed part of the land to third parties. Since a continuing contractual relationship subsisted between her and the company throughout the period, it followed that she was still trading in 1973 and 1974 when she conveyed the land.

Saskatchewan Wheat Pool v. The Queen, 85 DTC 5034, [1985] 1 CTC 30 (FCA)

Grains that were owned by another person nonetheless formed part of the taxpayer's inventory because variations in the grains' quality or quantity were for the account of the taxpayer. [C.R.: 248(1) - "Inventory"]

Thomson Hill Ltd. v. C.I.T. (Singapore), [1984] BTC 124 (PC)

Property taxes paid by a land developer that followed the completed-contract method were directly attributable to housing development sites being developed by it, and thus formed part of the cost of its land inventory. It was irrelevant that payment of the property taxes did not enhance the value of the sites.

Lowe & Ors. v. C.I.R. (New Zealand), [1984] BTC 3 (PC)

The taxpayers argued unsuccessfully that since "historic cost accounting was unfair", their profit from the sale of land inventory should be reduced to reflect inflation.

Kelly, Douglas & Co. Ltd. v. MNR, 76 DTC 1090 (T.R.B.)

The taxpayer was entitled to deduct in the year of acquisition the costs of supplies of stationery and special forms that it had on hand at the end of the year notwithstanding that it included those costs in the inventory shown on its balance sheet. The supplies were not inventory in the normal sense of that word (they had no market value and were of no use to anyone other than the taxpayer) and there was no evidence that the method used by the taxpayer (in writing off the supplies) distorted its financial picture.

B.S.C. Footwear Ltd. v. Ridgway, [1972] A.C. 544 (HL)

A shoe retailer, for the purpose of applying the lower of cost and market rule in valuing its inventories of shoes, took the anticipated selling price of its year-end inventories of shoes and deducted therefrom its customary profit margin. The Court followed the Commissioners in finding that the Crown's method should be followed, which was to determine the market price on the basis of the anticipated selling price for the shoes minus anticipated direct selling cost, such as salesmen's commissions. Although the taxpayer had followed its method (which it attempted to justify as a replacement-cost method) consistently in prior years, a departure from that method was justified here because the taxpayer's method made "a considerable inroad upon the broadly accepted principle that neither expected future profits nor expected future losses are to be anticipated" (per Lord Morris). Lord Pearson stated:

"that goods should not be written down below cost price unless there really is a loss actual or prospective. So long as the fall in prevailing prices is only such as to reduce the prospective profit the initial valuation at cost should be retained."

Ostime v. Duple Motor Bodies Ltd., [1961] 2 All E.R. 167 (HL)

A custom manufacturer of automobile bodies for many years had been costing its work in progress using the direct cost method, whereas the Crown reassessed on the basis that the company should have been using absorption costing (or the "on-cost" method, as it was termed). Use of the on-cost method was rejected because of the uncertainties of determining what overheads should be allocated to the work-in-progress (per Viscount Simonds, the "taxpayer should not be put to any risk of being charged with a higher amount of profit than can be determined with reasonable certainty"), and because the per-unit allocation of overheads would rise in an "idle and unprofitable year" under that method. Lord Reid stated that "if a method has been applied consistently in the past, then it seems to follow that it should not be changed unless there is a good reason for the change sufficient to outweigh any difficulties in the transitional year."

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Resolving Ambiguity 32

Hughes v. British Burmah Petroleum Co., Ltd. (1932), 17 TC 286 (KBD)

The taxpayer purchased the oil wells, plant and equipment of its subsidiary in consideration for issuing shares having a value of £120,000. The agreement allocated £70,000 of the consideration to the oil in the wells which were purchased. Finlay J. found that the £70,000 was paid in respect of the acquisition of the oil wells, and accordingly was a non-deductible capital expenditure.

Administrative Policy

1 May 2018 External T.I. 2017-0709101E5 F - Travaux en cours

professionals' WIP excludes partner time but includes variable overhead

Accountants, dentists, lawyers, physicians, veterinarians and chiropractors will maximize their deferrals if they choose to follow the direct cost method rather than the absorption cost method in determining the cost of their work in progress (so that they will not be required to include the costs of fixed overheads such as rent). The cost of their WIP will include payroll costs including benefits but will not include any value of partner time.

For most professionals, the lower of cost and FMV will be cost determined on this basis. However, in the case of personal injury lawyers and others earning income on a contingency fee basis, their WIP will generally be valued under s. 10(4)(a) at “the amount that can reasonably be expected to become receivable in respect thereof after the end of the year,” i.e., nil.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(5) - Paragraph 10(5)(a) cost of professional practice WIP includes variable overheads and all related payroll costs, but not partner or shareholder-manager time 166
Tax Topics - Income Tax Act - Section 10 - Subsection 10(4) - Paragraph 10(4)(a) WIP under a contingency fee basis generally has a nil value 123

1 May 2000 Internal T.I. 1999-0010677 - Inventory Valuation

"An amalgamated corporation has the right to choose any inventory valuation methodology permitted by subsection 10(1). However, the amalgamated corporation must use a method for determining the cost or fair market value of its inventory (i.e., FIFO, average costs, etc.) which yields a true picture of its profit. In circumstances where an amalgamation is undertaken principally to effect a change in an inventory valuation method used by a predecessor corporation, we would consider the application of the general anti-avoidance rule."

1996 A.P.F.F. Round Table No. 7M12910 (Item 4.1.1)

Discussion of the distinction between a business and an adventure in the nature of trade.

8 August 1995 Memorandum 951766 (C.T.O. "Cost of Identical Property - Inventory")

RC's policy that escrowed shares are considered to be identical to freely tradeable shares of the same class, also applies to shares that are held as inventory. Although s. 47(1) does not apply to shares held on income account, a "truer picture" of profit is produced (given that shares are fungible) when the cost of shares sold is determined using the average cost method. "[T]he Department considers the decision by the Tax Court in the Taylor case [88 DTC 1571], that escrowed shares are not identical to free shares, is wrong in law."

1994 A.P.F.F. Round Table, Q. 12

Where the taxpayer follows a method of averaging initial production costs over the forecast number of units to be produced, "if the initial production costs are considered an inventory cost or deferred costs for purposes of preparing the financial statements, the Department would not usually allow a deduction in the year in which the costs were incurred unless the method used to prepare the financial statement does not comply with generally accepted accounting principles or does not enable a fair presentation of profits or clear matching of goods and costs."

4 March 1994 T.I. 932098 (C.T.O. "Inventory")

Where a corporation that has valued its inventories using the lower of cost and fair market value method for tax and financial statement purposes, joins an association which requires its members to value their inventory for financial statement purposes at fair market value, the corporation will continue to be allowed to value its inventory for tax purposes in accordance with the lower of cost and fair market value method. Indeed, s. 10(2.1) provides that it must continue to use the method used in the prior years unless the concurrence of the Minister to a change is obtained.

93 CPTJ - Q.5

RC will not permit the fair market value of inventory to be based on a percentage of cost, or some ratio based on length of time inventory is held.

22 June 1993 T.I. (Tax Window, No. 32, p. 20, ¶2622)

Revenue Canada's concurrence will be required for a change in the method of determining cost, eg., a switch from the average cost method to the FIFO method.

1 February 1993 T.I. (Tax Window, No. 28, p. 11, ¶2386)

Where the cost of developing a golf course situate in the middle of a residential development exceeds its estimated fair market value, the developer will not be able to add such excess to the cost of the surrounding residential lots even though the purpose of developing the golf course was to increase the value of those lots.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 57

10 November 1992 Memorandum (Tax Window, No. 27, p. 19, ¶2344)

Where land is owned by a joint venture and one of the joint venturers is a land developer, the other joint venturers will not be permitted to deduct any amount under s. 10(1) because they are engaged in an adventure in the nature of trade rather than a business.

October 1992 Central Rulings Directorate Tax Seminar, Q. D (May 1993 Access Letter, p. 229)

Joint venturers who are engaged in an adventure in the nature of trade are not entitled to write down the value of their land inventory.

14 November 1991 Memorandum (Tax Window, No. 11, p. 2, ¶1534)

The accrued discount on treasury bills held in the inventory of a financial institution did not increase their cost for purposes of application of the lower of cost and market rule.

89 C.M.TC - Q.19

"cost" refers to original cost. Therefore, a write-down potentially can be reversed.

89 C.M.TC - Q.20

s. 10(1) does not apply to land held as an adventure or concern in the nature of trade.

88 C.R. - Q.50

Since one does not compute business income or loss from property which is the subject of an adventure in the nature of trade until the year in which the property is sold, s. 10(1) does not apply.

IT-473 "Inventory Valuation"

IT-165R "Returnable Containers"

Returnable containers can represent a substantial asset value and their cost cannot be written off as an expense in the year of acquisition. The fair market value of a container is normally its replacement cost. An inventory of returnable containers at any time will consist only of those containers physically in the possession of the taxpayer who owns and uses them to ship the products.

IT-153R3 "Land Developers - Subdivision and Development Costs and Carrying Charges on Land"

Costs in respect of installations within a subdivision, which are considered to constitute a component of the cost of the land inventory, include costs of roads, sewers, water mains, street lighting, sidewalks, landscaping and recreational facilities.

Subsection 10(1.01) - Adventures in the nature of trade

See Also

Stremler v. The Queen, 2000 DTC 1757 (TCC)

The Minister took the position that all costs incurred by the taxpayers subsequent to their acquisition of rental condominium units as adventures in the nature of trade were required to be capitalized. McArthur TCJ. found that the wording of s. 10(1.01) and the accurate-picture doctrine in the Canderel case required that these carrying expenses be deducted when incurred.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Estoppel 65

Administrative Policy

24 May 2013 External T.I. 2013-0487581E5 F - Nature d'un bien acquis pour la revente

cost includes costs incurred to bring the inventory item to its current condition and location/meaning of adventure

In the context of a general discussion of s. 10(1.01) respecting a car acquired and repaired with a view to its sale at a profit, CRA stated:

The term "cost" as used in the phrase "cost at which the taxpayer acquired the property" in section 10 means the original cost of the particular item of inventory plus all costs which may reasonably be considered as having been incurred to bring that particular item of inventory to its condition and location at the end of the taxation year.

Words and Phrases
cost

Subsection 10(1.1) - Certain expenses included in cost

Administrative Policy

17 October 1997 T.I. 970738

Interest that is not deductible because of s. 18(2) will not be subject to s. 78(1) and will be included in the cost of land inventory. Where an amount is deductible but, on an administrative basis is added to inventory, it will cease to be deductible for purposes of s. 78(1).

1996 A.P.F.F. Round Table, Q. 4.1 (9630450)

Discussion of the distinction between an adventure in the nature of trade, and a regular business.

89 C.R. - Q.45

Finance intends to amend s. 10(1.1) to allow an addition to the cost of land held as inventory where an amount was also added to the cost of other property by reason of s. 53(1)(d.3) or 53(1)(e)(xi).

Subsection 10(2) - Continuation of valuation

Cases

The Queen v. Boehringer Ingelheim (Canada) Ltd., 85 DTC 5443, [1985] 2 CTC 211 (FCTD), aff'd 87 DTC 5442, [1987] 2 CTC 245 (FCA)

S.10(2) "deals with the valuation of inventory, not whether inventory exists or not." S.10(2) accordingly does not indicate "that a taxpayer cannot have opening inventory for the purposes of subsection 20(1)(gg) if it does not have closing inventory for the previous year."

Cyprus Anvil Mining Corp. v. The Queen, 85 DTC 5306, [1985] 2 CTC 74 (FCTD), rev'd 90 DTC 6063 (FCA) [by the reasons for judgment of Urie J.A., but not by those of Hugessen J.A.]

The taxpayer corporation, whose taxation years ended on December 31, benefited from an exemption for new mines which applied, in its case, to the three-year period ending on January 31, 1973. The taxpayer corporation in 1977 retroactively changed the basis of valuation of the inventory which it held on January 31, 1973 from cost to market. Collier, J. held : "The change to a market value basis of valuing closing inventory at January 31, 1973, while it involves a departure from the accounting principle of consistency, is a departure permitted by the statute."

Quebec North Shore Paper Co. v. The Queen, 78 DTC 6426, [1978] CTC 628 (FCTD)

In 1968, the taxpayer company ceased to add back to its income for tax purposes the full amount of depreciation and depletion recorded in its books, but instead excluded from the amount of the "add-back" the amount of depreciation and depletion (namely, $1.3 million) included in the cost of its closing inventory for financial statement purposes - on the ground that the deduction of the $1.3 million was not prohibited by s. 18(1)(b) until 1969, when the inventory goods were sold. The court accepted the taxpayer's expert evidence that the net effect of adding the amount of depreciation included in opening inventory for 1968 to 1968 income would have the effect of subjecting the same amount to double taxation, and accordingly excluded that opening amount from 1968 income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28) 42

Administrative Policy

29 May 2017 External T.I. 2014-0537111E5 F - Consequential assessment

reassessing to increase closing inventory permits reassessment to increase next year's COS

CRA confirmed that a reassessment to increase closing inventory for Year 1 permits a consequential reassessment under s. 152(4.3) to increase cost of sales for Year 2 (which otherwise would be statute-barred).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4.3) reassessing to increase closing inventory permits a s. 152(4.3) reassessment to change the taxes payable "balance" for the following year 129

Articles

David A. Ward, "Attribution of Income to Permanent Establishments", Canadian Tax Journal, Vol. 48, No. 3, 2000, p. 559.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 7 0

Subsection 10(3) - Incorrect valuation

Cases

Rudolph Furniture Ltd. v. The Queen, 82 DTC 6196, [1982] CTC 211 (FCTD)

A s. 10(3) direction must be made prior to the assessment giving effect to it. A direction made 3 days before trial accordingly was a nullity.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) 119

Subsection 10(4)

Paragraph 10(4)(a)

Administrative Policy

1 May 2018 External T.I. 2017-0709101E5 F - Travaux en cours

WIP under a contingency fee basis generally has a nil value

Where a lawyer operates on a contingency fee basis, how is the fair market value of the work-in-progress determined? CRA responded:

Where a designated professional enters into an agreement to render services for contingency fees, some or all of the fees may not become ascertainable until after the taxation year in which the designated professional provided the services under the terms of the agreement. In these circumstances, the FMV of such work in progress of the designated professional at the end of the taxation year would be nil … [except where] it is possible, at the end of the year, to establish an amount that can reasonably be expected to be received after the end of the taxation year in respect of that work.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(5) - Paragraph 10(5)(a) cost of professional practice WIP includes variable overheads and all related payroll costs, but not partner or shareholder-manager time 166
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) professionals' WIP excludes partner time but includes variable overhead 137

Subsection 10(5) - Inventory

Cases

Stearns Catalytic Ltd. v. The Queen, 90 DTC 6286 (FCTD)

The taxpayer kept a stock of spare parts at a facility for the production of gaseous oxygen and nitrogen, and a cryogenic facility for the production of liquid hydrogen. The parts were kept on hand because of the extensive lead times for obtaining replacement parts, and many of the parts would not be used before the expiration of the useful lives of the associated facilities.

McNair, J. held that the spare parts were capital property rather than inventory in light of accounting evidence that the parts should be regarded as part of the corporation's fixed assets rather than inventory, and in light of the fact that the stock of spares was not held for prospective immediate use but instead represented an asset to be used in the future in carrying on the income-earning enterprise of the taxpayer.

Administrative Policy

IT-51R2 "Supplies On Hand at the End of a Fiscal Period"

IT-457R "Election by Professionals to Exclude Work in Progress from Income" under "Meaning of 'Work in Progress'"

Paragraph 10(5)(a)

Administrative Policy

1 May 2018 External T.I. 2017-0709101E5 F - Travaux en cours

cost of professional practice WIP includes variable overheads and all related payroll costs, but not partner or shareholder-manager time

In determining the cost of the work-in-progress of a professional practice, how should overhead expenses and the cost of labour be computed? CRA responded:

[Both] the direct costing method [and] the absorption costing method, take into account variable overheads in determining the cost of work in progress.

With respect specifically to the cost of labour of professionals, the CRA is of the view that these costs, including of employee benefits, should also be included in the calculation of the cost of work in progress.

However, where a taxpayer chooses the direct cost method, the taxpayer is not required to include fixed overhead costs in the cost of work in progress. Consequently, in such a case, the costs associated with renting office space or premises would not be required to be included … .

Furthermore, where a partner or owner of a business that is a profession contributes to the work in progress, the amount representing this contribution is not to be included in the cost of such work. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(4) - Paragraph 10(4)(a) WIP under a contingency fee basis generally has a nil value 123
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) professionals' WIP excludes partner time but includes variable overhead 137

Billed-basis Accounting (CRA Webpage) 28 April 2017

Impact of March 2017 Budget elimination of billed-basis accounting for designated professionals on contingency fee arrangements

Under the terms of a contingency fee arrangement, all or a portion of a designated professional’s fees may only become known and billable at some time after the taxation year in which the professional provided services under the arrangement (e.g., where, under the terms of a written contingency fee agreement between a personal injury lawyer and a client, legal fees are only billable by the lawyer on a periodic basis as amounts are received by the client under a negotiated settlement or a court judgment). Until such time, there is often no liability on the professional’s client to pay any fee; consequently, no amount is receivable by the professional until the right to collect the amount is established. Under these circumstances, for purposes of determining the value of the professional’s work in progress at the end of the year, no amount would normally be recognized. As a result, the proposed change to eliminate the ability of designated professionals to elect to use billed-basis accounting is not expected to have any impact on these types of contingency fee arrangements where the terms and conditions of such arrangements are bona fide.

Articles

Joint Committee, "Proposed Amendments to Taxation of Work in Progress ("WIP") for Professionals", Letter of 31 May 2017

professional firms may only be required to recognize the payroll costs (not the dockets) of salaried professional staff and not partners’ time in their WIP

Most professionals subject to the new 2017 Budget rule would choose to value their work-in-progress at the lower of cost and fair market value. However, there is only limited guidance on determining cost of professional WIP. In IT-463R and 5-807, CRA indicated that the cost of WIP means the total of laid-down cost of materials, the cost of direct labour (including benefits) and the applicable share of overhead; and that either direct or absorption costing is acceptable. In the December 18, 1981 Notes of the Department of Finance on the similar proposal in the 1981 Budget, it stated that the cost of WIP would not include: fixed or indirect overhead costs, such as rental, secretarial, and general office expenses; and the cost of the time of partners or proprietors. This should be clarified.

Given that s. 10(4)(a) would appear to contemplate that the valuation of WIP should be determined based on what the professional can reasonably expect will be collected under a fee arrangement in a subsequent year, rather than on what is collectible at year end, the legal basis for the CRA position, of not requiring the recognition of WIP associated with contingent fee arrangements, is unclear.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34 deferral enjoyed by previous partners reversed in hands of current partners 60

Subsection 10(6) - Artistic endeavour

Administrative Policy

19 May 1994 External T.I. 3-940875

Because the business of writing books does not come within the definition of an "artistic endeavour", s. 10(6) will not apply to such writers.

Subsection 10(14.1)

Administrative Policy

26 March 2018 External T.I. 2017-0734381E5 F - Election paragraph 34(a)

transitional rule applies to assignee partner

Since the s. 34 election is made at the partnership level, where the election was made for the 2017 year of a professional partnership by an authorized partner in accordance with s. 96(3), a partner who is subsequently admitted to the partnership (in the posited example, a personal corporation to which an individual’s partnership interest was assigned) will benefit from the election as to its share of the partnership income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34 a subsequently admitted partner benefits from a s. 34 WIP election made for a professional partnership’s 2017 year 160