3 March 2005 Excise Interpretation 58167 - Manufacturing Activities for Excise Tax Purposes

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

This is in reply to your facsimile message XXXXX in which you seek clarification of your compliance obligations pursuant to the Excise Tax Act ("ETA").

Our comments are set out below.

Information Provided

1. You operate a retail jewellery business in which you sell single diamonds and diamond jewellery. You currently hold a manufacturer's excise tax license and have been remitting excise tax for approximately two years.

2. Your activities in your jewellery business are more specifically described below:

•   purchase finished (i.e. cut and polished) single diamonds and sell in your retail store;

•   purchase finished diamond stud earrings and diamonds rings and sell in your store;

•   supply finished diamonds (from your own inventory) to manufacturers in XXXXX who produce rings and pendants, which you sell in your retail store.

Question

Are you required to hold a manufacturer's excise tax license, in view of the activities in which you are engaged in your retail jewellery business?

Answer

General Rules

Pursuant to subsection 23(1) of the ETA, there is an excise tax on the manufacture or production in Canada or importation into Canada of goods listed in Schedule I of the ETA. Goods listed in Schedule I include clocks and watches having a value of $50 or more; articles made in whole or in part of semi-precious stones; and jewellery, precious and semi-precious stones and goldsmiths and silversmiths products (excluding gold-plated or silver-plated ware for the preparation or serving of food or drink.)

On February 23, 2005, the Minister of Finance proposed in his Budget that the excise tax on jewellery, etc. would be phased out over a four year period. Effective February 24, 2005, the excise tax rate would drop from 10% to 8%, and continue to drop by 2% every March 1 thereafter, until March 1, 2009, when the excise rate would be 0%.

It must be emphasized that this Budget proposal affects only the rate of excise tax on jewellery. There will be no change with respect to the structure or operation of the excise tax on jewellery during the four year phase-out period. During this period, licensees must comply fully with their legal obligations under the Excise Tax Act. That is, they must self-assess on their taxable sales, file regular returns and remit regular returns.

Pursuant to subsection 23(2) of the ETA, the excise tax is payable by the manufacturer or the wholesaler or the importer on importation into Canada.

"Manufacturing" is not defined in the ETA. However, the courts have provided guidelines that help define those activities that would be affected. The courts have stated that any activity that gives new forms, qualities or properties to raw or prepared materials is considered manufacturing.

Further, in the ETA, "manufacturer or producer" includes what is referred to as a " legal manufacturer". This is a person who "... owns, holds, claims or uses any patent, proprietary, sales or other right to goods being manufactured, whether by them, in their name or for or on their behalf by others, whether that person, firm or corporation, sells, distributes, consigns or otherwise disposes of the goods or not."

As a general rule, persons who manufacture goods that are subject to excise tax are required to operate under a manufacturer's excise tax license when the sales value of the taxable goods is over $50,000 per year.

Licensed manufacturer's may purchase or import "partly manufactured goods" excise tax free. "Partly manufactured goods" are goods that are to be incorporated into and form a component part of articles that are subject to excise tax.

Application of Rules to Your Business

You must purchase single finished diamonds for resale and other finished jewellery on an excise tax paid basis. You would not be considered a manufacturer with respect to these activities and, thus, the manufacturers of these goods must charge excise tax on them when they are sold to you.

However, you will be considered a "legal manufacturer" with respect to the rings, pendants, etc. that are manufactured on your behalf by others. Therefore, if your sales of these goods exceed $50,000 per year, you must hold a manufacturer's excise tax license and collect the 8% excise tax (or excise tax at the applicable rate, as announced in the February 23, 2005, Budget proposals) on these sales.

You may use your excise tax license to purchase these finished rings, pendants, etc. excise tax free from the physical manufacturer. Again, when you sell these goods in your retail store, you must collect the excise tax.

Single finished diamonds purchased by you and supplied as inputs for the goods for which you are a "legal manufacturer" must be bought on an excise tax paid basis. You can then claim a credit on your tax return for the excise tax paid on these diamonds. (Note: these single diamonds are not considered "partly manufactured goods", eligible to be purchased excise tax free, because such tax relief is not available to retail jewellers having no manufacturing premises.)

We are providing you with this interpretation letter that sets out our general views with respect to the subject matter of your inquiry. Future amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. This letter is not a ruling and, in accordance with the guidelines in section 1.4 of Chapter 1 of the GST/HST Memorandum series, does not bind the Canada Revenue Agency with respect to a particular situation.

If you have any further questions or require clarification of the above matter, please do not hesitate to contact a member of my staff, Pauline Greenblatt, at telephone number (613) 957-1140 XXXXX.

Yours truly,

Doug Rollins
Manager
Excise Taxes
Excise Duties and Taxes Division
Excise and GST/HST Rulings Directorate

2005/03/17 — RITS 59196 — Excise Tax Rates on Jewellery, etc.