Table of Contents


Kruger Incorporated v. Canada, 2016 FCA 186

derivatives not held for resale are not 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.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing non-statutory mark-to-market accounting was permissible under s. 9 468
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) Minister implicitly directed to reduce taxpayer's income below that originally filed 100

Canadian Imperial Bank of Canada v. Canada, 2000 DTC 6207 (FCA)

inventory is stock in trade

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."

Words and Phrases

The Queen v. Hollinger Inc., 99 DTC 5500, [1999] 4 CTC 61 (FCA)

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".

Canada v. Pardee Equipment Limited, 99 DTC 5012, [1999] 1 CTC 101 (FCA)

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.

Cargill Ltd. v. R., 98 DTC 6126, [1998] 2 C.T.C. 192 (FCA)

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."

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

property held in an adventure was inventory

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) loss recognized on decline in value of land held as an adventure 142
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate undeveloped land held in speculative venture 142
Tax Topics - Statutory Interpretation - Certainty 97
Tax Topics - Statutory Interpretation - Drafting Style 95
Tax Topics - Statutory Interpretation - Inserting Words interpretation should not effectively add words 104
Tax Topics - Statutory Interpretation - Ordinary Meaning common usage of a technical term given weight 80
Tax Topics - Statutory Interpretation - Resolving Ambiguity 97
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business s. 10(1) applied to an adventure in the nature of trade even if that deemed business was not “carried on” 75
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(a) property not generating income does not convert to capital property unless s. 13(7) or 45(1) applies 209

The Queen v. Bastion Management Ltd., 94 DTC 6272, [1994] 2 CTC 70 (FCTD), aff'd 95 DTC 5238 (FCA)

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 ..."

Friesen v. The Queen, 93 DTC 5313, [1993] 2 CTC 113 (FCA), rev'd supra.

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".

West Hill Redevelopment Co. Ltd. v. The Queen, 91 DTC 5430, [1991] 2 CTC 83 (FCTD)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(b) mortgages included in proceeds at their principal amount rather than lower FMV 55
Tax Topics - Income Tax Act - Section 16 - Subsection 16(1) not applicable where mortgages receivable were all on income account 151

Stearns Catalytic Ltd. v. The Queen, 90 DTC 6286, [1990] 1 CTC 398 (FCTD)

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".

The Queen v. Mattabi Mines Ltd., 89 DTC 5357, [1989] 2 CTC 94 (FCTD), aff'd 92 DTC 6252 (FCA)

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.

The Queen v. Dresden Farm Equipment Ltd., 89 DTC 5019 (FCA)

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

Saskatchewan Co-Operative Credit Society Ltd. v. The Queen, 85 DTC 5599, [1986] 1 CTC 53 (FCA)

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.

Saskatchewan Wheat Pool v. The Queen, 85 DTC 5034, [1985] 1 CTC 31 (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.

Qualico Developments Ltd. v. The Queen, 84 DTC 6119, [1984] CTC 122, 84 DTC 6126 (FCA)

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.)

The Queen v. Jawl Industries Ltd., 74 DTC 6133, [1974] CTC 147 (FCTD)

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.

Minister of National Revenue v. Freud, 68 DTC 5279, [1968] CTC 438, [1969] S.C.R. 75

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".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss loan loss sustained on speculative start-up venture 156

Minister of National Revenue v. Curlett, 67 DTC 5058, [1967] CTC 62, [1967] S.C.R. 280

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Loans/receivables sale of mortgage portfolio to own company not characterized as sale of going concern 91

Ted Davy Finance Co. Ltd. v. MNR, 64 DTC 5124, [1964] CTC 194 (Ex Ct)

conditional sales contracts not invenory

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."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Account Receivable sale of conditional sales contracts and chattel mortgages occurred on sale of business 102

Wilson and Wilson Ltd. v. MNR, 60 DTC 1018, [1960] CTC 1 (Ex Ct)

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

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. Rip J found that the options contracts, if purchased by the taxpayer, were held as inventory, and thereby could be valued under s. 10 (noting, at paras. 121-2) 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."

See summary under s. 10(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) options contracts purchased, but not those written, were inventory 200
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 166
Tax Topics - Income Tax Act - Section 9 - Timing realization principle applied to FX options written by taxpayer 307

Malo v. The Queen, 2012 DTC 1214 [at 3588], 2012 TCC 75 (Informal Procedure)

After finding that the taxpayer's losses from his stake in a tree-planting operation could not be deducted by virtue of failing to comply with the tax shelter rules in s. 237.1, Hogan J. stated in obiter dicta that the taxpayer's outlays (three payments of $25,000) represented the cost of inventory (namely, 750 tree sapplings that would not be sold until they matured), rather than current expenses or capital expenditures. Although the taxpayer received three identical itemized invoices for these amounts (allocating $5000 for soil preparation, for example), there was no evidence that the amounts had actually been spent in such a way.

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

Supplies of stationery and special forms on hand at the end of the year were not inventory because they had no market value at all and were of no use to anyone other than the taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) purchases of stationery could be deducted when acquired 96

Administrative Policy

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

members of co-op were likely the beneficial owners of cattle purchased with co-op financing notwithstanding that the documents accorded legal and beneficial ownership to the co-op

In order to assist its members in the production of feeder cattle, a feeder cattle finance cooperative established under the Co-operative Corporations Act (a “Co-op”) makes funds available to member to purchase cattle “on the Co-op’s behalf” (so that the Co-op retains legal ownership of the cattle) but with the members deciding what type of cattle to purchase and having the ability to negotiate the cattle purchase price (not exceeding what is approved by the Co-op through a Purchase Order Agreement). All expenses associated with the purchase and sale of the cattle are incurred in the name of the Co-op and the purchase documents name the Co-op as owner of the cattle. The members assume the risk of ownership (that is, they are responsible for all the costs of raising the cattle and maintaining their health). The member facilitates the sale of the cattle in the name of the Co-op and ensures that the proceeds are paid to the Co-op. On its receipt of sale proceeds, the Co-op pays off the member’s related debt (which was incurred to the financial institution lender) and forwards any remaining proceeds to the member. Members are responsible for any outstanding debt amounts. Upon full payment of the member’s debt, legal title of the cattle is transferred to the member.

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 it was believed “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.”

After indicating 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,” and that “the primary attributes of beneficial ownership are possession, use, risk and control,” CRA went on to state:

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.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership members of a corporate co-op likely were the beneficial owners of the co-op cattle inventory notwithstanding the documentation’s contrary label 206

29 January 2015 Internal T.I. 2014-0544651I7 - Section 85 transfer of Swap Contracts

swap contract treated as inventory

CRA found that cross-currency swaps with accrued gains, which for redacted reasons were considered to be held on income rather than capital account, qualified as "inventory" under the broad s. 248(1) definition, so that they could be transferred on a rollover basis into subsidiaries under s. 85(1). See summary under s. 85(1.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) swap contract treated as inventory 180
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) swap contract recorded on securities rather than inventory line of T2057 251
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Foreign Exchange swap contract treated as inventory 55

21 December 2004 External T.I. 2004-0085481E5 F - Titres détenus par une compagnie d'assurance

per Friesen, securities held on income account are inventory

After noting that units of a mutual fund trust held by an insurance company are not "mark-to-market property," CRA indicated that, based on Friesen (subsequently “echoed” in Hollinger, Ruland Realty Limited 2000 DTC 6142, and Canadian Imperial Bank of Commerce) having established that there were two categories of property (capital and inventory), so that if the units were held on income account, they were inventory.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 142.2 - Subsection 142.2(1) - Mark-to-Market Property MFT units not mark-to-market property 61

7 November 1996 External T.I. 9628025 - MANDATORY INVENTORY ADJUSTMENT

"Where an amount of the purchase price is allocated for unharvested trees in the field, these trees would be considered purchased inventory ..."

88 CPTJ - Q.17

Where the acquirer of seismic data is acquiring the data solely for resale, the cost is viewed as not being CEE but the cost of an inventory item. Where the data is acquired for use in its own exploration business with the capability to so use it, the cost of acquisition is CEE even though there may be a secondary intention to sell the data.

IT-473 "Inventory Valuation"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1) 0

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

Included in inventories are expenditures for assets which good financial reporting dictates should be deferred and not written off until the year of use or consumption.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(5) 0

IT-345R "Special reserve - Loans secured by mortgages", para. 2

loans made by a taxpayer in a money-lending business do not qualify as inventory.

IT-466 "Trust Companies"

mortgage loans are not inventory.


Henry, "Contingent Loan Loss Reserves of Financial Institutions", 1985 Conference Report, pp. 45:13-17

Loans are inventory of money-lending institutions