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: Does a recycling business involving 3 different procedures a qualified activity for the manufacturing and processing deduction?
Position: General comments but it appears that at least 2 of the three procedures qualify
Reasons: Meaning of "Processing"
XXXXXXXXXX 2001-007349
C. Tremblay, CMA
March 26, 2001
Dear XXXXXXXXXX:
Re: Manufacturing and Processing
This is in reply to your letter of March 7, 2001 requesting our opinion on whether a corporation's activities qualify for the Manufacturing and Processing profits deduction as provided in section 125.1 of the Income Tax Act (the "Act"). You state that the corporation is in the recycling business.
Cans, bottles and cartons are received at the plant, sorted and contaminants removed. The sorting process separates products such as beer cans, wine and whiskey bottles, pop cans, small cartons (eg. Juice boxes), large cartons (eg. Juice containers), beer bottles, and plastic bottles on a systematic basis. There are different procedures for the products as follows:
Procedure for Beer Cans
The sorted beer cans are transferred to the compacting area and placed onto a conveyor belt. The conveyor belt takes the cans to a compacting machine, which crushes the cans in blocks of 1,000 cans. The product is a rectangular compacted block of tin cans of specific size, which is sold and eventually reprocessed in a smelter.
Procedure for Wine and Whiskey Bottles
Wine and whiskey bottles are dumped into a grinder by a hydraulic lift. The bottles are processed into glass chips and sent by conveyor to a large bin. Once the bin is full, it is delivered to the purchaser of the glass chips.
Procedure for Other Items
Pop cans, plastic bottles and cartons are sorted, caps removed, and bagged. The bags are delivered to a purchaser who continues the recycle process.
The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving completed and on-going transactions. As explained in Information Circular 70-6R4, with respect to on-going transactions, this Directorate will only provide advance income tax rulings on proposed transactions involving specific taxpayers. With respect to your situation involving completed transactions, you should submit all relevant facts and documentation to the appropriate taxation services office for their views. However, we are prepared to offer the following comments, which may be of some assistance to you.
The term "manufacturing or processing" in subsection 125.1(3) of the Act is not defined except for the stipulation that it does not include farming, fishing, logging, construction, certain resource activities set out in paragraphs 125.1(3)(f) to (k) and activities where 10% de minimis rule in paragraph 125.1(3)(l) is not met. In our view, the manufacture of goods normally involves the creation of something (e.g., making or assembling machines, clothing, soup) or the shaping, stamping or forming of an object out of something (e.g. making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling or other activity designed to affect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods and homogenizing and pasteurizing dairy products.
Paragraph 4 of Interpretation Bulletin IT-145R (Consolidated), states that the activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. You should note that paragraph 44 of that IT, although referring to scrap metal dealers, states that activities carried on by a scrap metal dealer, such as sorting, removing contaminants, grading, cutting to size and baling, in order to make raw scrap saleable are considered qualified activities. Qualified activities are listed in section 5202 "qualified activities" of the Income Tax Regulations and include any of the listed activities therein when they are performed in Canada in connection with the manufacturing and processing.
The first consideration in recognizing whether there is "processing" (see Kimel Limited et al. v. M.N.R. (82 DTC 1086)) is whether the process changes the product in its form, appearance or other characteristic. The second consideration (see Admiral Steel Products Limited v. M.N.R. (66 DTC 174)) is whether the process makes the product more marketable. It is important to establish economic purpose of a particular activity in order to determine whether or not it consists of processing. The term "processing" is further discussed in Démolition A.M. de l'est du Québec Inc. v. M.N.R. (93 DTC 889). In that decision, throughout the transformation process there was a constant sorting and classification of materials involved, all of which required specialized equipment.
Accordingly, in our view, a recycling facility would generally qualify for the manufacturing and processing profits deduction pursuant to subsection 125.1(1) of the Act, provided all other requirements therein are met. However, a procedure, which involves mainly the collection of garbage to be sold for processing as opposed to the actual recycling of materials for sale, will not, in our view, be a qualified activity.
We trust our comments are of assistance.
Steve Tevlin
for Director
Business and Partnerships Division
Income tax Ruling Directorate
Policy and Legislative Branch
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