Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Ruling Directorate
Place de Ville, Tower A, 15th Floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 146556
June 27, 2013
Dear [Client]:
Subject: GST/HST INTERPRETATION
Is the baling of cardboard a manufacturing activity?
Thank you for your letter of August 2, 2012, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the recapture of input tax credits (RITCs) for specified energy used to bale cardboard.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
A ruling sets out the Canada Revenue Agency's (CRA's) position on how the relevant provisions of the legislation apply to a clearly defined fact situation. Given that you have not provided us with specific details regarding the company, we are providing you with the following interpretation.
We understand the following:
• A waste management company ([...] [ACo]) has several locations that bale cardboard.
• [ACo] uses balers that cut and bale cardboard at these locations.
• The bales of cardboard are sold to other companies who process the cardboard for various purposes.
• [ACo] is a "large business" for purposes of section 236.01 of the ETA and the New Harmonized Value-Added Tax System Regulations, No. 2 (the Regulations).
Interpretation Requested
You would like to know if the baling of cardboard is manufacturing and, if so, can [ACo] use the production proxy for the specified energy it uses at all locations or only those locations where the baling of the cardboard is being done.
Interpretation Given
Pursuant to section 236.01 of the ETA and the Regulations, a large business will generally be subject to the RITCs requirement in respect of specified property or services that are acquired in, or brought into, Ontario, Prince Edward Island (PEI) or British Columbia, by a large business for consumption or use by that business in those provinces.
Specified property and services include specified energy. Specified energy will generally include the following:
• electricity, gas, steam; and
• anything (other than fuel for use in a propulsion engine) that can be used to generate energy;
• by way of combustion or oxidization; or
• by undergoing a nuclear reaction in a reactor for the generation of energy.
Generally, consideration for a supply of specified energy will include the consideration attributable to transportation services and fees (e.g., delivery charges or regulatory fees) that are incidental to the supply of the specified energy.
Under section 31 of the Regulations, the RITC requirement will generally not apply to the part of the specified energy used by a large business directly in the production of tangible personal property (TPP) for sale, or in the production of production equipment used by the large business in the production of TPP for sale. The RITC requirement will, however, generally apply to the part of the specified energy that is used by the large business to light, heat, air condition or ventilate the production premises, unless that consumption or use is integral to the production of that TPP or production equipment.
To simplify compliance with the RITC requirement, a large business that produces TPP for sale may be able to elect to use a production proxy to determine the portion of the specified energy that will not be considered to be used directly in the production of the TPP and, therefore, subject to the RITC requirement.
As noted, one of the conditions to use the production proxy is that the large business must produce TPP for sale.
"Production" is defined under section 26 of the Regulations to mean an activity (other than the assembling, processing or manufacturing of TPP in a retail establishment or the storage of finished products) that is:
(a) the assembling, processing or manufacturing of particular TPP to create other TPP that is different in nature or character from the particular TPP;
(b) the generation of any form of energy or its transformation into another form of energy;
(c) the restoring of TPP by its owner;
(d) the recording of images or sound on media;
(e) the cutting, transforming and handling of timber in a forest and the building and maintenance of forest access roads in the course of those activities;
(f) the extraction and processing of a mineral until the first stage of concentration or the equivalent;
(g) the transformation of toxic industrial waste into a non-toxic product; and
(h) if performed in conjunction with an activity referred to in any of paragraphs (a) to (g) by the same person that performed that activity,
(i) the detection, measurement, treatment, reduction or elimination of water, soil or air pollutants that are attributable to producing personal property,
(ii) the transportation of refuse or waste derived from producing personal property,
(iii) the quality control of personal property being produced or of production equipment, and
(iv) the cleaning, screening, sifting, wrapping, packing or putting into containers of property.
In general, the baling of cardboard involves receiving loose cardboard boxes and putting them through a baler that may or may not cut the cardboard to size to create bales which are easier to store and transport. This activity does not change the form, qualities or properties of the cardboard to such a degree that there is a new product created that is different in nature or character from the initial cardboard. As such, this activity would not be considered production as that term is defined under section 26 of the Regulations. Consequently, where a large business does not produce TPP for sale, it cannot use a production proxy to determine the amount of its RITCs in respect of specified energy.
For more information on RITCs, please refer to the GST/HST Technical Information Bulletin B104, Harmonized Sales Tax-Temporary Recapture of Input Tax Credits in Ontario and British Columbia, available on the CRA's Web site.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-952-2826. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Paul Lepine
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate
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