8 September 1999 External T.I. 9901145 - M&P

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can the electronic creation of a "template" for an advertising business be considered M&P?

Position: Yes.

Reasons: However, T\P must have complete control over content, design, and physical qualities of the medium produced.

XXXXXXXXXX 990114
S. Tevlin
Attention: XXXXXXXXXX

September 8, 1999

Dear Sirs:

Re: Subsection 125.(1) of the Income Tax Act (the “Act")

We are writing in response to your letter of January 12, 1999 wherein you requested our opinion with respect to whether the creation of a certain product would qualify for the manufacturing and processing ("M&P") credit pursuant to subsection 125.1(1) of the Act.

In particular you describe a situation involving certain activities that are characteristic of advertising agencies which provide media advertising services (i.e. billboards, print ads). These agencies not only produce the ideas for the billboard or ads, but are also involved in the production of the final product.

The agencies involvement in producing the final product may occur at one of two stages:

1. The agency produces a "template" through the use of an electronic medium, which prior to technological advances were known as "final art boards" or "paste-ups". These templates are sold to the customer, and then used by printers to produce the final product, being billboards or print ads.

2. Certain agencies have some printing capacity and may itself produce some billboards and print ads, depending on the size of the particular task.

As technology has advanced, the "final art boards" or "paste-ups" are now generally in electronic form and delivered to clients or their print services on a diskette, or alternatively files are sent electronically through the Internet.

You also refer to the decision in Design One Creative Production Ltd. V. MNR ("Design One") 92 DTC 1006, wherein it was held that the production of acetate art boards or paste-ups did qualify for the manufacturing and processing credit.

You are of the opinion that although the process now uses an electronic medium, the end product, a template which may be used by the printers is the same; however, the form of the template has changed from the acetate art boards or paste-ups to an electronic medium for direct transfer to the printing house.

The situation described in your letter appears to involve an actual fact situation. Written confirmation of the tax implications inherent in proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3 ("IC-70-6R3"), dated December 30, 1996. Consequently, we can only offer the following general comments.

Subsequent to the decision in the Design One case the Department accepts that a graphic design business is manufacturing goods for sale when an art board is produced for a customer.

Interpretation Bulletin IT-145R ("IT-145R"), entitled 44Canadian Manufacturing and Processing Profits", at paragraph 40 discusses computer services that qualify for M&P. Subparagraph 40(d) of IT-145R describes types of computer service businesses, one being software firms that prepare computer programs on computer cards, tapes, discs, etc.

Paragraph 40 further states, "(w)here software is transmitted by way of tangible property, such as computer cards, tapes or discs, those activities that relate to the manufacture or process of this property, such as producing a clean compilation and testing the program, would be considered qualified activities,"

It is therefore our opinion that where a taxpayer in the graphic design or advertising business creates a template in electronic form on a medium such as a diskette or tape, it will generally be considered to be carrying on the activities of manufacturing and processing goods for sale and will have income therefrom for those contracts which clearly meet the conditions in revised paragraph 4 of IT-145R, i.e. extensive involvement and control over any work contracted out and the taxpayer's involvement in the product from inception to completion. Before allowing this treatment for a particular contract, the onus is on the taxpayer to prove that he does in fact exercise complete control over the content, design and physical qualities of the tangible medium produced.

Finally, we would expect that where an advertising agency is also responsible for creating ideas for billboard ads, as well as being involved in the production of the final product, most of the agency's efforts would constitute the provision of service rather than the manufacturing or processing of goods for sale.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch