4 November 2002 External T.I. 2002-0143485 - POST-MIX DISPENSING EQUIPMENT

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: Whether a particular asset acquired to mix certain ingredients to
produce a carbonated beverage ready for consumption meets the definition of "qualified property" in subsection 127(9) of

the Act.

Position: Likely yes.

Reasons: On the basis of the limited facts provided, the particular asset appears to

be qualified property as defined in subsection 127(9).

2002-014348
XXXXXXXXXX Bob Naufal, CMA
(613) 957-2744
November 4, 2002

Dear Sir:

Subsection 127(9) - Qualified Property

This is in reply to your letter of May 27, 2002 wherein you requested our views on whether beverage mixing and dispensing equipment, commonly referred to in the soft drink industry as "post-mix" dispensing equipment (the "Equipment"), would be considered "qualified property" as defined in subsection 127(9) of the Income Tax Act (the "Act"). The Equipment is used to mix water, carbon dioxide and syrup to prepare a carbonated beverage which is sold for consumption.

Our Comments

Written confirmation of the tax implications 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 70-6R5, dated May 17, 2002. This letter does not constitute an advance tax ruling and, accordingly, the comments provided herein are not binding on the CCRA.

Subsection 127(9) of the Act defines "qualified property" to include prescribed machinery and equipment acquired after June 23, 1975 and used by a taxpayer in Canada primarily for the purpose of manufacturing or processing of goods for sale or lease. The determination as to whether an asset is used primarily for the purpose of manufacturing or processing goods for sale or lease is a question of fact that can only be resolved by reference to the facts and circumstances of the particular case.

To qualify pursuant to subsection 127(9), the property must not have been used or acquired for use or lease for any purpose prior to its acquisition. Subsection 127(9) of the Act is subject to subsection 127(11) which provides that, for the purposes of the definition of "qualified property", manufacturing or processing does not include certain activities. In this regard, we acknowledge that the Equipment is not used to undertake any of the activities described in subsection 127(11).

In paragraph 3 of Interpretation Bulletin IT-145R (Consolidated), Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax, we state that the terms "manufacture" and "process" are to be given their ordinary meaning. We further state that the manufacture of goods normally involves the creation of something (e.g., making or assembling machines, clothing, soup) or the shaping, stamping or forming 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 effect a physical change or chemical change in an article or substance. At paragraph 43 of IT-145R (Consolidated) we state that the mixing of a number of ingredients of a drink is considered to be processing but the mere pouring of liquor or beer into a glass and the dispensing of the draft beer are not considered processing.

Subsection 4600(2) of the Income Tax Regulations (the "Regulations") lists the type of property that is considered "prescribed machinery and equipment" for the purposes of the definition "qualified property".

Accordingly, the Equipment would be qualified property as defined in subsection 127(9) if

? it is acquired by a taxpayer after June 23, 1975,
? it is prescribed equipment that is described in subsection 4600(2) of the Regulations,
? it has not been used for any purpose whatever before it was acquired by the taxpayer, and
? is used by the taxpayer in Canada primarily to mix raw materials to produce a carbonated beverage for sale and not merely to dispense a finished product.

Property that is qualified property may be entitled to an investment tax credit, at rates specified in subsection 127(9) of the Act, to the extent that the property is primarily used in specific areas. The specific areas are Newfoundland and Labrador, Nova Scotia, Prince Edward Island, New Brunswick, the Gaspé Peninsula or a prescribed offshore region.

We trust our comments will be of some assistance.

Yours truly,

D. Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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