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.
Principales Questions: (1) Can profits from a limestone quarry fall under resource profits as this expression is defined in section 1204 of the Income Tax Regulations.
(2) In the situation at hand, at what point does the production of the ore end and its manufacturing and processing begin?
Position Adoptée: (1) No.
(2) The production of limestone includes the initial crushing of the raw material by the primary crusher.
Raisons: (1) The "resource profits" concept is not applicable if the Minister of Natural Resource does not certify that the limestone ore constitutes a mineral resource. In the situation at hand, the limestone ore may qualify as an industrial mineral.
(2) In the current situation, the processing of the limestone ore would begin after the ore has been reduced in size in the primary crusher by compression or impact.
July 16, 2007
XXXXXXXXXX Tax Services Office Headquarters
Individual, Business and
Partnerships Section
Attention: XXXXXXXXXX François Bordeleau, Lawyer
2007-024239
Manufacturing and Processing Tax Credit - XXXXXXXXXX
This is in response to your letter received June 28, 2007 concerning certain activities carried on by XXXXXXXXXX (the "taxpayer") as they relate to the computation of the taxpayer's manufacturing and processing profits deduction ("MPPD").
The taxpayer produces cement and cementitious products, XXXXXXXXXX Based on information you provided us, the quarries require blasting in order to extract limestone. Blasted limestone segments are then shipped by hauling trucks to a crusher located on site.
In light of the above, you ask if profits stemming from the limestone quarries constitute resource profits which should be deducted in the calculation of the taxpayer's Canadian manufacturing and processing profits. Likewise, you wish to determine at which point the production of limestone ceases and at which point the taxpayer's manufacturing and processing process using limestone begins.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").
Our opinion
Subsection 125.1(3) defines "Canadian manufacturing and processing profits" of a corporation for the purposes of the MPPD to mean the portion of a corporation's income for the taxation year from an active business carried on in Canada as is determined under regulation to be applicable to the manufacturing or processing in Canada of goods for sale or lease.
Pursuant to section 5200 of the Income Tax Regulations (the "Regulations") and subject to section 5201, the Canadian manufacturing and processing profits of a corporation for a particular taxation year are prescribed to be a calculated proportion of the corporation's adjusted business income ("ABI") for that year. Under section 5202 of the Regulations, ABI is defined, for the purposes of Part LII of the Regulations and subject to the provisions of sections 5203 and 5204 thereof, to mean, essentially, the excess of the "income of the corporation for the year from an active business carried on in Canada" over its losses from such "active business".
In the event a corporation has "resource activities" for a taxation year, subsection 5203(1) of the Regulations provides a reduction in the corporation's ABI, usually in the amount of the corporation's "net resource income" that exceed the net resource adjustment. Pursuant to subsection 5203(3) of the Regulations, a corporation's net resource income is comprised, among other things, of the corporation's resource profits for the year.
Pursuant to section 5200 of the Regulations, "resource profits" has the meaning assigned by section 1204 of the Regulations. Subsection 1204(1.1) of the Regulations provides that resource profits of a taxpayer for a taxation year means the amount, if any, by which the taxpayer's "gross resource profits" exceed specified deductions. Generally, a corporation's gross resource profits, as defined in subsection 1204(1), will include, among others, the aggregate of his incomes for the year from the processing in Canada of iron ore, tar sands ore and ore from a mineral resource located in Canada up to a certain stage of production.
A mineral resource is defined at subsection 248(1) to represent, amongst other things, a mineral deposit in respect of which the Minister of Natural Resources has certified that the principal mineral extracted is an industrial mineral contained in a non-bedded deposit. As described in paragraph 3 of IT-492, Capital Cost Allowance - Industrial Mineral Mines, limestone usually occurs in bedded deposits and consequently is not generally considered a mineral resource.
The definition of "manufacturing or processing" at subsection 125.1(3) specifically excludes the producing of industrial minerals. More specifically, paragraph 9 of bulletin IT-145R (Consolidated) Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax, states the following:
Producing industrial minerals is considered to include all activities connected with the mining, excavating and extracting the mineral material from the mine or pit area, including any primary crushing operation required to make it transportable from the mine or pit area as well as the transporting of the material from the mine or pit. Subsequent activities such as crushing, washing, screening and sorting of the mineral material in order to make the product of mine or pit marketable are considered to be processing activities. The CCRA recognizes that in some cases some or all of these subsequent activities may be conducted within the confines of the mine or pit, in which case processing will commence after the delivery of the excavated pit run material to the first of these processing operations. In light of the information provided, we believe that the processing of the limestone ore begins after the ore has been reduced in size in the primary crusher by compression or impact. This conclusion is supported by the consent judgment of the Federal Court of Appeal in the matter of Continental Lime Ltd. v. Her Majesty the Queen1 .
In order to determine a corporation's manufacturing and processing profits pursuant to section 5200 of the Regulations, it is necessary to determine the cost of manufacturing and processing labour and capital as per the definition of those expressions at section 5202 of the Regulations. Generally, the cost of manufacturing and processing labour includes 100/75 of that portion of the salaries and wages paid to employees that reflects the time that they were directly engaged in qualified manufacturing or processing activities.
Likewise, the cost of manufacturing and processing capital of a corporation for a taxation year means 100/85 of that portion of the cost of capital of the corporation for that year that reflects the extent to which each property included in the calculation thereof was used directly in qualified activities of the corporation during the year, but the amount so calculated shall not exceed the cost of capital of the corporation for the year. Pursuant to paragraph 34 of bulletin IT-145R, the expression "used directly" refers to those assets that are an integral part of the particular qualified activity being carried on.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Request for this latter version should be made by you to Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We trust the above to be satisfactory.
Louise J. Roy, CGA
Acting Manager
Individual, Business and Partnerships Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 Unreported. The Tax Court decision can be found at [1999] 3 CTC 2525.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content