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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Is prefabrication of log homes (but not erection of log homes) considered construction and thus excluded from the M&P credit?
Position: probably not considered construction
Reasons: The Company is apparently not involved in the construction of the log homes only the supply of building materials - since the company is not involved in the construction of log homes the activity (preparing of log home components) would not be considered construction.
XXXXXXXXXX 2001-010857
Shaun Harkin, CMA
February 21, 2002
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Characterization of Company's Business Activities
This is in reply to your facsimile of November 1, 2001 wherein you asked whether the activities of processing lumber for direct sale and the prefabrication of log homes would be considered "manufacturing or processing" ("M&P") or construction when the following conditions exist:
(1) A Canadian controlled private corporation ("the Company") carries on an active business in Canada.
(2) The Company's business activities consist of the following:
a) Design of log homes. The Company has employees that prepare original drawings of the log homes.
b) The Company acquires raw logs and cuts them into dimensions required by the plans.
c) The logs are then packaged according to the plan requirements.
d) The packaged log homes are shipped to customers. The Company is not involved in the construction of the log homes. The buyers must engage a builder to construct the log home from the packaged components based on the plans.
e) The Company also processes raw logs for direct resale. That is, sale of lumber components as opposed to packaged log homes.
(3) The Company belongs to a manufacturing and processing/remanufacturing association.
(4) The Company is not registered with any builder or construction industry associations.
You also ask, if the activities of the Company are considered M&P, would office furniture and equipment be included in class 43 by virtue of the words "directly or indirectly" in subparagraph (a)(i) of the class 29 definition in schedule II of the Income Tax Regulations (the "Regulations").
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
Paragraph two of Interpretation Bulletin IT-411R states in part,
"A manufacturing or processing activity carried on by a corporation that is engaged in a construction undertaking would normally be considered to fall within the meaning of construction, if the activity forms an integral part of the construction undertaking. The manufacturing or processing activity is considered to form an integral part of the construction undertaking if all or substantially all of the production from that activity is used or is needed to carry on the corporation's construction undertaking.
.... Accordingly, when a corporation enters into a supply and erect contract, the off-site manufacture of building products and pre-fabricated components would, generally, be considered to be construction if the above criteria are met."
In the situation you describe it appears that the Company enters into supply but not erect contracts and, since the Company is not involved in the construction of the log homes it is our view that the processing of lumber for direct sale and the preparing of log home components would not normally be considered to fall within the meaning of construction. Based on the limited information you provided, it would appear that the Company's activities of processing lumber for direct sale and the preparing of log home components could be considered M&P activities.
Whether or not any particular property that otherwise qualifies for inclusion in Class 8 of Schedule II of the Regulations is property acquired to be used by the purchaser directly or indirectly in Canada primarily in the M&P of goods for sale or lease such that it would qualify for inclusion in Class 43 of Schedule II of the Regulations is a question of fact which would be determined by an examination of all of the circumstances of a particular taxpayer and the particular situation. Interpretation Bulletin IT-147R3 provides a general discussion of property that may qualify as M&P machinery and equipment.
The term "to be used directly or indirectly" refers to property acquired by the taxpayer for the purpose of being an integral and essential part of the taxpayer's M&P activities, as well as any ancillary equipment such as furniture and fixtures, repair and maintenance equipment and fire extinguishing equipment, which is acquired for use in those activities. Although such equipment is generally located in the M&P plant, it may also qualify if located elsewhere. Furniture and equipment acquired by the taxpayer for use by a taxpayer primarily in activities such as selling, distribution, and administration, which are not M&P, are not eligible for inclusion in Class 43 of Schedule II of the Regulations.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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