The purpose of the Explanation of Changes is to give the reasons for
the revisions to an interpretation bulletin. It outlines revisions that we have
made as a result of changes to the law, as well as changes reflecting new or
revised departmental interpretations.
This bulletin is being revised to reflect amendments to the Income Tax
Act enacted by S.C.?998, c.?9 (formerly Bill-28). Generally, the
amendments clarify that property described in the inventory of a business that
is an adventure or concern in the nature of trade is to be valued at the end of
the year at cost and not, for example, at the lower of cost and fair market
value as allowed in subsection?0(1). This is in line with the Department's
historical policy that any income or loss from such property is recognized only
on disposition. These amendments respond to the decision of the Supreme Court of
Canada in Jake Friesen v. Her Majesty the Queen, [1995] 2 CTC 369, 95
DTC 5551, in which it was held that the rules applying to the valuation of
business inventory for the purpose of computing income from business also apply
to property held as an adventure or concern in the nature of trade, thus
allowing losses on such property to be recognized prior to the year of
disposition. The comments in this bulletin are not affected by any other draft
legislation released before December 3,?998.
3 contains
information from former ? and 15. It reflects two clarifying amendments made
to subsection?0(1). The first amendment changes the phrase "cost to the
taxpayer" to "cost at which the taxpayer acquired the property." The purpose of
this amendment is to clarify that when property described in an inventory is
valued at the lower of cost and fair market value, the reference to cost is to
the original cost of the property and not its last lowest value. This ensures
that inventory that has been written down is adjusted upwards if the inventory
subsequently increases in value. The second amendment changes the term "fair
market value" to "fair market value at the end of the year."
New 4 reflects new
subsections?0(1.01) and 10(9). Subsection?0(1.01) requires that the inventory
of a business that is an adventure or concern in the nature of trade be valued
at the cost at which the taxpayer acquired the property. Subsection?0(9)
provides that, where property described in an inventory of a business that is an
adventure or concern in the nature of trade has been written-down under former
subsection?0(1) for a taxation year for which that valuation method was
available, the cost of the property to the taxpayer after that time is deemed to
be the value last assigned by the taxpayer under former subsection?0(1).
These subsections apply to all taxation years (fiscal periods in the case
of a partnership) other than those ending before December?1,?995 for which the
inventory of the business was valued, under former subsection?0(1), at an
amount that is less than the cost at which the property was acquired and such
valuation is reflected in an income tax return, a notice of objection or a
notice of appeal filed before December?1,?995. In addition, the amendments do
not apply to a taxation year or a fiscal period that ends before December?1,?995, if the filing due date in respect of that year is after
December?0,?995.
New 5 reflects new
subsection?0(10). This subsection requires that accrued losses in the inventory
of a business that is an adventure or concern in the nature of trade be
recognized in the taxation year that is deemed to end by virtue of
subsection?49(4) immediately before an acquisition of control. This is
consistent with how accrued losses on other inventory are treated on an
acquisition of control. Subsection?0(10) also deems the cost of the property to
the taxpayer after the acquisition of control to be the lower of the cost and
the fair market value of the property immediately before the acquisition. New
subsection?0(10) has the same application date as new subsection?0(1.01) (see
the above comments for new 4).
6 contains
information from former 4. It has been expanded to provide the definition for
a "business that is an individual's artistic endeavour."
7 contains
information from former 4. It clarifies that subsection?0(2.1) does not apply
to property described in the inventory of a business that is an adventure or
concern in the nature of trade. It also clarifies that subsection?0(2.1) does
not apply in the determination of the method to be used in determining the cost
or fair market value of property. In other words, subsection?0(2.1) does not go
beyond the determination of the method of inventory valuation to be selected
from among the statutory alternatives.
10 (former 6) has
been revised to reflect the phrase "cost at which the taxpayer acquired the
property" contained in the amendments to section?0. This phrase clarifies that
when property described in an inventory is valued at the lower of cost and fair
market value, the reference to cost is to the original cost of the property and
not its last lowest value. This ensures that inventory that has been written
down is adjusted upwards if the inventory subsequently increases in value.
12 (former 8), 16 (former
16), and 18(from former ?A href="/E/pub/tp/it473r/it473r-e.html#P124_14930">12 and 16) have been
revised to clarify that if a taxpayer can select from among a number of
accounting methods, each one being in accordance with generally accepted
accounting principles, the method used for income tax purposes should be the one
that presents the truer picture of the taxpayer's income. This position is
supported by the decision in West Kootenay Power and Light Company Limited
v. The Queen, 92 DTC?023, [1992] 1 CTC 15.
22 (former 18)
has been expanded to include other bulletins that may be of interest to the
reader.
The illustration in the Appendix has been amended and information that is not
relevant for the purposes of current taxation years has been deleted.
We have made a number of other changes to improve the overall clarity and
readability of the bulletin.
