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.
Principal Issues: Whether "manufactures or processes" in subparagraph 212(13.2)(b)(i) has same meaning as "manufacturing or processing" in subsection 125.1(3)?
Position: No
Reasons: Words in subsection 125.1(3), scheme of the Act
2003-000384
XXXXXXXXXX Suzanie Chua
613 957-2115
February 27, 2004
Dear XXXXXXXXXX:
Meaning of the words "manufactures or processes" in subparagraph 212(13.2)(b)(i)
This is in reply to your letter regarding the above matter.
As you know, the term "manufacturing or processing" in subsection 125.1(3) of the Income Tax Act (the "Act") is defined as excluding certain activities. The rationale for providing an exclusive rather than an inclusive definition was given in July 1972 by the then Honourable John Turner, Minister of Finance, in Release no. 72-91 that any attempt to catalogue all of the varied activities would be arbitrary and incomplete. However, it is not clear from the Department of Finance's Technical Notes why the particular activities listed were excluded. It appears certain resource activities may be excluded because the profits therefrom already qualify for preferential treatment under another provision of the Act. For example, in reference to former subparagraph 125.1(3)(b)(vi) (current subparagraph 125.1(3)(f)(ii)) regarding iron ore processing beyond the pellet stage, the December 1982 Technical Notes state the amendment to include such activity as "manufacturing or processing" was because "previously, the processing of iron ore to the pig iron stage or its equivalent was considered for tax purposes to be a resource activity rather than a manufacturing and processing activity". As that was no longer the case, the amendment to subsection 125.1(3) was made and further "a consequential amendment will be made in Part XII of the Income Tax Regulations to exclude the processing of iron ore beyond the pellet stage from the definition of "resource profits"".
Whatever the policy reasons behind the specific exclusions listed in the definition in subsection 125.1(3) might be, there would appear to be no reason to exclude those same activities from the meaning of the words "manufactures or processes" in subparagraph 212(13.2)(b)(i). In our view, subsection 125.1(3) should only apply for the limited purpose of section 125.1. This reasoning is confirmed by the opening words "in this section" in subsection 125.1(3).
The Canada Revenue Agency's ("CRA's") Interpretation Bulletin IT-145 in reference to section 125.1 states that the ordinary and everyday meaning of the terms "manufacture" and "process" should apply and further, those terms do not lend themselves to any simple, all-inclusive definition or explanation. The CRA in paragraph 3 of Interpretation Bulletin IT-145 lists some activities that would qualify as "manufacturing or processing" activities. In our view, when considering the words "manufactures or processes" in subparagraph 212(13.2)(b)(i), we would use the ordinary and everyday meaning of the terms "manufacture" and "process" for the same reasons as expressed in Interpretation Bulletin IT-145 as that phrase in subparagraph 212(13.2)(b)(i) does not bear a special definition apart from the ordinary and everyday meaning of the words therein. However, for the reasons set out above, we would not consider the exclusions in subsection 125.1(3) to apply to those words in subparagraph 212(13.2)(b)(i).
Legislative proposals introduced by the Department of Finance on December 20, 2002 ("Legislative Proposals") effective for obligations entered into after December 20, 2002, propose to substantially revise subsection 212(13.2). Amended subsection 212(13.2) will not contain the phrase "manufactures or processes" and Part XIII tax will be exigible in respect of any portion of a payment made by one non-resident person to another non-resident that is deductible in computing the first non-resident's taxable income earned in Canada from any source. The only exceptions are payments that are deductible in respect of "treaty-protected business" or "treaty-protected property" as those terms are defined in subsection 248(1).
We trust that the foregoing will be of assistance to you.
Yours truly,
Olli Laurikainen
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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