The terms “Inventory” and “Capital Property” are both related to a company’s assets:
- Inventory is referred to as the goods and materials that a business holds for the ultimate goal of resale or production. For instance:
- A manufacturing company’s inventory might include components used in production
- A retailer’s inventory might include goods ready for sale
- Capital Property, on the other hand, is often translated to “Capital Assets” or “Fixed Assets”. These are assets that a company acquires for long-term use, such as land, buildings, and equipment. The value of Capital Property may depreciate over time, but it can also appreciate in value.
The classification of an asset as either inventory or capital property is crucial for a business because:
- If it’s inventory,
- 100% of the appreciation is taxable
- 100% of the loss can be included as an expense for income tax reduction
- If it’s a capital asset
- Only 50% of the appreciation is going to income for tax calculation
- Only 50% of the loss can be used to offset capital gains tax
In the realm of Tax Planning, there are significant differences between inventory and capital property. The ubiquitous s.85 roll-over explicitly states that inventory cannot be transferred to a new company at its original “book value”.
So, can land be classified as “inventory” for a company? Yes, it can, as evidenced by the precedent set in Friesen v Minister of National Revenue [1995]:
- A company stockpiled a piece of land with the intention of selling it for a profit
- However, the value of the land fell.
- When the company sold the land at a loss, it wanted to categorize the land as inventory, meaning that 100% of the loss could be counted as an expense to offset income tax.
- The MNR (CRA in Quebec) disagreed.
- After several appeals by the company, the case went all the way to the Supreme Court of Canada, which ruled in favour of the company: Land can indeed be classified as inventory.
