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: CCA class of a freezer plant.
Position: It depends.
Reasons: See response.
XXXXXXXXXX 2008-029329
André M. Gallant
(613) 957-8961
March 4, 2009
Dear XXXXXXXXXX :
Re: Classification of a Freezer Plant
This is in response to your letter of September 12, 2008, and is further to our telephone conversation on December 8, 2008 (Gallant/XXXXXXXXXX), regarding the proper class in Schedule II of the Income Tax Regulations ("Regulations") in which a freezer plant should be included.
As we understand it, you envisage the following hypothetical situation:
1. The Taxpayer is in the business of wholesaling food products, primarily in a frozen state.
2. The Taxpayer currently outsources the freezing and storage of its food products.
3. The Taxpayer is considering the construction or acquisition of a freezer plant ("Freezer Plant") to facilitate the cold storage of its food products.
4. The Taxpayer has defined the Freezer Plant to encompass the refrigeration equipment, as well as the self-contained structure (including the floor, walls, ceiling, etc.) that houses the refrigeration and other equipment.
5. It is expected that while the Taxpayer would do some blast freezing of some food products in the Freezer Plant, most of the food products will be blast-frozen by a third-party before delivery to the Freezer Plant.
The Freezer Plant would primarily be used to keep the blast-frozen food products in a frozen state. Up to10% of the Freezer Plant would be used as office space. You asked about the class in Schedule II of the Regulations in which the Freezer Plant as a whole or its components referred to in fact 4 above should be included.
Your Position
You are uncertain if the Freezer Plant as a whole can qualify for inclusion in class 43 (or new class 29) of Schedule II of the Regulations on the basis that it is property "to be used directly or indirectly by [the Taxpayer] in Canada primarily in the manufacturing or processing ["M&P"] of goods for sale..."
You referred to the case of B.C. Ice and Cold, in which it was decided that the process of freezing food products qualifies as M&P and that cold storage of frozen foods is continuation of the freezing process, so the assets used in the cold storage would, therefore, qualify as M&P assets: B.C. Ice and Cold Storage Ltd. v. M.N.R., 81 DTC 508 (TRB).
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
Subject to proposed legislative amendments mentioned below, class 29 would not generally include M&P property acquired after 1990. Generally, M&P property that is acquired after February 25, 1992 and would be included in class 29 but for the acquisition date is included in class 43. As a result of legislative proposals, flowing from the 2007, 2008 and 2009 Federal budgets, M&P property that would have been included in class 43 but is acquired after March 18, 2007 and before 2012 will fall into class 29. Since based on the information in your letter, the Freezer Plant would be acquired or constructed during this period, we will restrict our comments to the application of class 29.
Useful information regarding class 29 property can be found in Interpretation Bulletin IT-147R3, Capital Cost Allowance - Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment.
For a property to be included in the current class 29, one of the conditions to be met is that the property must be a property that would, but for class 29, be included in class 8 (with certain exceptions not applicable in this case) or a property that is referred to in subparagraphs (b)(ii) to (v) of class 29, as explained in paragraph 4 of IT-147R3.
A property cannot be included in class 8 if it is property included in class 1. Class 1(q) includes a building or other structure, or part of it, including any component parts such as electric wiring, plumbing, sprinkler systems, air-conditioning equipment, heating equipment, lighting fixtures, elevators and escalators. As explained in paragraph 1 of the Interpretation Bulletin IT-79R3, Capital Cost Allowance - Buildings or Other Structures, a "building" is a "term of wide range covering any structure with walls and a roof affording protection and shelter."
However, certain property is excluded from class 1(q) and such excluded property encompasses property described in paragraphs (a) to (e) of class 8, such as a structure that is M&P machinery or equipment, or tangible property attached to a building and acquired solely for the purpose of M&P or servicing, supporting or providing access to or egress from machinery or equipment.
For a property to be included in the class 29 another condition to be met is that the property must have been acquired or manufactured by the taxpayer "to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease". The meaning of the terms in this expression, namely, "to be used (to use) directly or indirectly", "primarily", and "manufacturing or processing" are discussed in paragraphs 9 to 14 of IT-147R3.
As regards to the meaning of "processing", in CRA documents 9525137 and 9523777 (F), relying on B.C. Ice and Cold, we stated that the maintaining of frozen foods by a taxpayer who does not perform the blast-freezing is not food processing. That is, while blast-freezing would constitute processing, the cold storage would be considered processing if it is part of the blast-freezing activity.
For the purpose of applying the foregoing conditions for inclusion in class 29, the Freezer Plant can be regarded as being made up of the building and the property inside the building such as refrigeration and cold storage equipment.
In our view, the building portion of the Freezer Plant would be included in class 1 and therefore would not fall into class 29.
Whether the property inside the building would be included in class 29 would depend on nature of the property and its use. As we have not been provided with a precise description of such property, we can only make some general statements. Property used primarily (more than 50%) to store frozen food products that have been blast-frozen by a third-party would not be eligible for inclusion in class 29 because it would not be used in processing goods for sale.
On the other hand, taxpayer's property that is referred to in paragraph (b) of class 29, such as a structure that is machinery or equipment, that is used primarily (more than 50%) for blast-freezing (i.e., processing) would be eligible for inclusion in class 29. Also eligible for class 29 inclusion would be taxpayer's equipment primarily used for cold storage of food products blast-frozen by the taxpayer to the extent cold storage is a continuation of the blast-freezing process (B.C. Ice and Cold).
Whether a particular property is used primarily for blast-freezing is determined with reference to the use of the particular property itself. A comparison of the quantity of food products blast-frozen by the particular property with the quantity of food products blast-frozen by a third-party is not of particular significance for purposes of class 29.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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