Question
When a corporation ceases to be a CCPC, subsection 89(8) calculates an addition to the corporation’s low-rate income pool (LRIP). As part of that calculation, the corporation is required to include the total of all amounts each of which is the cost amount to the corporation of a property immediately before the end of its preceding taxation year. “Cost amount” of inventory is defined in subsection 248(1) to be “the value at that time as determined for the purpose of computing the taxpayer’s income” (paragraph (c) of the definition).
The application of this provision to taxpayers carrying on a farming business using the cash method in section 28 is unclear. Under the cash method, income is considered to be earned when cash has been received, and expenses are considered to be incurred when they have been paid. Therefore, if a corporation pays for inventory during the year, it will be entitled to deduct that amount in calculating the corporation’s income for the year. Consequently, the value of the corporation’s inventory at any point during the year does not appear to be relevant for the purposes of calculating the corporation’s income, except for the limited purposes of paragraph 28(1)(b) (which provides for additions to income in order to voluntarily income-average) or paragraph 28(1)(c) (which ensures that the purchase of inventory does not result in losses to the corporation). Subsection 28(1.2) applies only for the purposes of paragraph 28(1)(c) to deem the value of inventory to be the lesser of the cash cost and the FMV of the inventory.
In Interpretation Bulletin IT‑427[Footnote 46] (cancelled and replaced by IT‑427R in 1993),[Footnote 47] the CRA commented that the cost amount of farming inventory for a cash-basis taxpayer was considered to be nil on the rollover of farming inventory under section 85. Section 85 has since been amended to deem the elected amount to be a percentage of the amount included pursuant to paragraph 28(1)(c) (plus any additional amount designated by the parties), and IT‑427R was published to reflect this change. However, it is not clear whether the analysis that led the CRA to conclude that the cost amount of farming inventory was nil would apply for other purposes of the Act, including subsection 89(8).
An analogy might be drawn to Canadian resource property. Canadian resource property acquired by a taxpayer is added to the taxpayer’s resource pools. The CRA has consistently said that the cost amount of Canadian resource property is nil for the purposes of the Act and is not affected by the existence of undeducted resource pools.[Footnote 48]
Can the CRA confirm that it would treat the cost amount of farming inventory of a cash-basis taxpayer as nil for the purposes of subsection 89(8)? Can the CRA also confirm that a cash-basis taxpayer’s accounts receivable, prepaid expenses, accounts payable, and accrued liabilities should generally have a cost amount of nil for this purpose?
Response
For the purposes of applying subsection 89(8), and in accordance with paragraph (c) of the definition of “cost amount” in subsection 248(1), the cost amount of farming inventory to a cash-basis taxpayer immediately before the end of its taxation year preceding its change in status from a CCPC to a non-CCPC generally would be nil, provided that the value of such inventory at that time is not otherwise determined for the purpose of computing the taxpayer’s income.
Furthermore, for the purposes of applying subsection 89(8), the cost amount of rights arising from the prepayment of expenses by a cash-basis taxpayer, immediately before the end of its taxation year preceding its change in status from a CCPC to a non‑CCPC, would be determined pursuant to paragraph (f) of the definition of “cost amount” in subsection 248(1). Accordingly, the cost amount would generally be nil where the amount paid in respect of such prepaid expenses has been deducted in computing the taxpayer’s income for any taxation year preceding the change in status.
The cost amount of accounts receivable to a cash‑basis taxpayer immediately before the end of its taxation year preceding its change in status from a CCPC to a non‑CCPC, for the purpose of applying subsection 89(8), would generally correspond with the face amount that the taxpayer has a right to receive, pursuant to paragraph (e) of the definition of “cost amount” in subsection 248(1).
On the other hand, an amount for the accounts payable of a cash-basis taxpayer should technically be included in variable D of subsection 89(8). Variable D is the total of all amounts each of which is the amount of any debt owing by the corporation, or of any other obligation of the corporation to pay any amount, that was outstanding immediately before the end of its taxation year preceding its change in status from a CCPC to a non‑CCPC.