Inventory

The taxpayer ("Kruger") engaged in extensive trading of FX options, mostly writing European style puts and calls, although it also purchased FX options. Noël CJ found that Kruger was entitled to use mark-to-market accounting for tax purposes in recognizing a loss on its FX option position for its 1998 year.

He went on to find (at para. 84) that “the Tax Court judge properly held that because the written options only embody a liability, they are not ‘property’ and therefore cannot form part of ‘inventory’;” and (at para. 91) that the purchased options also were not inventory, on the basis that Friesen had established that

although the requirement that qualifying property be “held for sale” is not spelled out in express terms, it nevertheless forms part of the defined meaning of “inventory” [in s. 248(1)]

He added (at para. 95):

It necessarily follows that the purchased options are a type of property that is neither capital property nor inventory.

Before finding that gold and silver bullion of the taxpayer qualified as inventory, Sharlow J.A. indicated (at p. 6210):

"Property is 'described in a' taxpayer's inventory if it is inventory as a matter of fact and law. Inventory in its ordinary sense is simply stock in trade, or property held for sale in the ordinary course of a business."

The taxpayer, as the result of a series of transactions, acquired companies whose shares had a nominal fair market value but a substantial adjusted cost base, with a view to selling the shares and realizing capital losses. In rejecting a submission of the Crown that the shares were neither capital property nor stock-in-trade, Létourneau J.A. noted (at p. 5507) that in Friesen, the Supreme Court found that the Act recognized only two broad categories of property and that the Crown's proposal "would create an undefined and elusive third category of property not contemplated by the Act and unrelated to the type of income or sources of revenues envisaged by the Act".

The taxpayer, which was a farm equipment dealer, was found to have received equipment from the distributor (Deere Canada) on consignment, rather than having acquired the equipment, notwithstanding that it had no express right of return over the equipment (this factor not being determinative in determining whether or not a consignment arrangement existed). There was no ambiguity in the terms of the agreements that the equipment was held on consignment.Accordingly, it did not qualify as the taxpayer's inventory.

The taxpayer, which operated licensed grain elevators, would sell grain that was still owned by the producers who had delivered the grain to the elevators ("storage grain") in addition to selling grain that it had purchased from them. For accounting purposes, the taxpayer assumed that sales of grain at individual elevators were stocked first out of the available stocks of purchased grain at the elevator and only thereafter out of storage grain.

In confirming that the taxpayer, in computing the cost amount of its inventory for inventory purposes, was required to subtract its "negative inventory" elevators for sales that exceeded the quantity of purchased grain on hand, from its positive inventories of purchased grain at other elevators, Stone J.A. stated (at p. 6132):

"The appellant could only lawfully sell purchased grain that it owned. It follows therefore that the only grain 'held for sale' by the appellant... was the purchased grain."

Major J. found that a real estate property held by the taxpayer and others in connection with an adventure or concern in the nature of trade qualified as "inventory" even though it did not represent stock-in-trade of a trading business. In particular, under the plain meaning of the definition, "an item of property need only be relevant to business income in a single year to qualify as inventory" (p. 5555), i.e., a subsequent year in which the property may be sold.

The taxpayer, which was a trader in commodity futures, purchased 15,000 ounces of gold and 500,000 ounces of silver shortly before its year-end and, at the same time, sold futures contracts for corresponding quantities of gold and silver at the same prices, for delivery after its year-end. In finding that the gold and silver bullion was not "inventory" for purposes of s. 20(1)(gg) of the Act, Reed J. quoted the "very broad definition" in s. 248(1) and (at p. 6275) stated:

"What constitutes inventory must be interpreted in the commercial and accounting context within which that term is normally used ... . In this case, the gold and silver bullion was not acquired for any trading purpose. The intention was not to try to make a profit therefrom. Indeed, the structure of the transactions was such that no profit could possibly be made ..."

In his concurring reasons for judgment, Marceau J.A. found that a single property held in connection with an adventure or concern in the nature of trade did not constitute "inventory".

The taxpayer (a real estate developer) held mortgages which it received on the sale of condominiums to maturity. Because there is no evidence that the mortgages were held in the ordinary course of business for sale, they did not qualify as inventory.

A stock of spare parts which were held indefinitely until such time, as if any, as they were required as a result of break-downs at two production facilities of the taxpayer constituted capital property rather than inventory. McNair, J. noted (at p. 6289) that "the definition of 'inventory' is too broadly worded to be of use here".

After making particular reference to the meaning of "incorporated into" and "processed into," Teitelbaum J. accepted the submission of the Crown that inventory described in s. 20(1)(gg) does not include tangible property that is currently consumed in the production of goods. Reagents used to produce ore concentrate, which themselves ended up in the tailings or froth which was removed in the concentration process rather than in the ore concentrate, were not eligible for the allowance.

Goods held by the taxpayer were not inventory because they were not owned by the taxpayer.

The absence of a finding that the taxpayer was a trader or had otherwise acquired shares intending to turn them to profit by resale precluded a finding that the shares were acquired as inventory.

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.

At 6124:

"[T]he stock in trade of a business is that which the business offers for sale in the ordinary course of its trade. An item not so offered for sale is not properly to be included in the inventory of stock in trade." (Mahoney, J.)

Lumber which the taxpayer had contracted to purchase but which would not become property of the taxpayer until the time of delivery in a subsequent taxation year, was not inventory of the taxpayer.

Before finding that the taxpayer has sustained a fully deductible loss on advances which he had made to a business venture, Pigeon J. stated (pp. 5281-5282):

"It must also be noted that the Income Tax Act defines business so as to include 'an adventure or concern in the nature of trade' (section 139(1)(e)). By virtue of this definition, a single operation is to be considered as a business although it is an isolated venture entirely unconnected with the taxpayer's profession or occupation ... Due to the definition of business as including an adventure in the nature of trade, it is unnecessary for an acquisition of shares to be a trading operation rather than an investment that there should be a pattern of regular trading operations".

The taxpayer, who advanced money at a substantial discount on second mortgage loans, was found to be engaged in a money-lending business. Accordingly, the second mortgages were "inventory" of that business.

Proceeds received by the taxpayer, which carried on the business of purchasing conditional sales contracts (mostly from a related used car dealer) and lending on the security of chattel mortgages, from the sale of its contracts and mortgages, were capital receipts. In finding that what was sold was not "inventory," Gibson J stated (at p. 5126) that the "definition of inventory...should not be given the broadest meaning that could be attached to it."

Materials used by a contractor in performing services under contracts were not inventory.