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 the Taxpayer's activities qualify as "manufacturing or processing of goods for sale" for the purposes of the M&P tax credit provided in subsection 125.1(1) of the Act.
Position: No.
Reasons: The Taxpayer might be "manufacturing" goods, but could also be involved in "construction" activities (which is excluded as an M&P activity). In addition, based on Will-Kare Paving, the Taxpayer is probably not manufacturing or processing goods "for sale", but as part of contracts for work and materials (i.e., services).
2008-030461
XXXXXXXXXX André Gallant
(613) 957-8961
March 16, 2009
Dear XXXXXXXXXX :
Re: Manufacturing and processing tax credit
This is in response to your letter of December 16, 2008, and is further to our telephone conversation on February 4, 2009 (Gallant/XXXXXXXXXX), regarding the manufacturing and processing ("M&P") tax credit in section 125.1 of the Income Tax Act (Canada) (the "Act").
Our understanding of the facts is as follows:
1. The client company (the "Taxpayer") is in the business of supplying and installing granite on countertops, fireplaces or vanities in its customers' homes.
2. The Taxpayer receives granite sheets from its supplier. These granite sheets are in a finished state and require no further processing in order to be usable.
3. The Taxpayer cuts the granite sheets material to specifications required to fill the customers' work orders and assembles the pieces in its shop, gluing them together and sanding down any rough edges.
4. Following the step in 3 above, the pieces are installed/assembled on a countertop, fireplace or vanity in the homes of the Taxpayer's customers as specified. At this point, some final cutting, backfilling cavities with drywall, and sanding may be required to properly fit the granite structure in place.
You asked whether, for the purposes of the M&P tax credit in subsection 125.1(1) of the Act, the Taxpayer's income derived from supplying and installing granite at its customers' home can be considered to be income from the manufacturing or processing of goods for sale as required for purposes of the definition of "Canadian manufacturing or processing profits" in subsection 125.1(3) of the Act.
Your Position
While you are inclined to believe that the Taxpayer's activities would not constitute manufacturing or processing for the purposes of subsection 125.1(1), you are uncertain whether this is the case or not. You referred in your letter to the definitions of the words "manufacturing" and "processing" in paragraph 3 of the Interpretation Bulletin IT-145R (Consolidated), Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax, but in your view, this paragraph does not specifically address the Taxpayer's particular situation.
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.
Corporations involved in M&P activities may be entitled to the M&P tax credit under subsection 125.1(1). Generally speaking, the M&P tax credit is a percentage of the M&P profits.
Under the Act, corporations (except an investment corporation, a mortgage investment corporation, or a mutual fund corporation) may also be entitled to claim, pursuant to subsection 123.4(2) of the Act, a general rate reduction in computing their tax payable. The general rate reduction is a percentage of certain qualifying income. The qualifying income is generally income that does not benefit from preferential corporate tax treatment, such as income eligible for the small business deduction and the M&P tax credit, and investment income subject to the refundable tax provisions.
Since the same percentage is used to calculate the M&P tax credit under subsection 125.1(1) and the general rate reduction under subsection 123.4(2), generally the portion of taxable income in respect of which the M&P tax credit is claimed is not qualifying income that is eligible for the general rate reduction. While the issue of whether a corporation's activities constitute M&P of good for sale (or lease) for purposes of the M&P tax credit may not be of particular import if the related income is otherwise qualifying income for the purposes of the general rate reduction, the issue is still relevant for other tax purposes such as the classification of depreciable capital property in order to claim capital cost allowance (e.g., class 29 or 43 of Schedule II of the Income Tax Regulations). As explained below, there are two reasons why the Taxpayer may not be entitled to claim the M&P tax credit under subsection 125.1(1). The first reason is that the Taxpayer's activities may be considered construction.
Whether a taxpayer is manufacturing or processing goods for sale is a question of fact depending on a review of all the circumstances and relevant documentation. While the terms "manufacturing" and "processing" are not defined in the Act, subsection 125.1(3) provides that the expression "manufacturing or processing" does exclude a series of activities, one of which is "construction".
The word "construction" is also not defined in the Act, but as explained in Interpretation Bulletin IT-411R, Meaning of "Construction", paragraph 1, this term refers to a construction undertaking or enterprise rather than construction in the narrow sense of an activity. Factors taken into consideration to determine if a corporation is engaged in construction includes whether the construction industry would view the corporation's overall activities as construction activities and the use of construction equipment (e.g., trucks, tractor trailers, rollers).
While construction activities are normally associated with on-site fabrication and erection of building, roads, bridges etc., which are intended to be permanently affixed to the land, an activity may still be considered to be a construction activity where the building products and structures (e.g., pre-fabricated components of buildings) are manufactured off-site and then brought on-site where they are intended to be permanently affixed.
It would appear that the Taxpayer's activities may constitute construction activities because the Taxpayer assembles granite structures off-site (in the shop) and brings them on-site where they are intended to be permanently affixed (at the customers' homes where they are installed).
In the event that the Taxpayer's activities would not be considered to be construction activities, the Taxpayer would be entitled to the M&P tax credit if its activities constitute "manufacturing" or "processing" and result in goods for sale.
The terms "manufacturing" is defined in paragraph 3 of IT-145R (Consolidated) as follows:
"... the manufacture of goods normally involves the creation of something (e.g., making or assembling machines, clothing, soup) or the shaping, stamping or forming of an object out of something (e.g. making steel rails, wire nails, rubber balls, wood moulding)."
This passage does not deal specifically with the granite work done on a countertop, fireplace or vanity. However, the Supreme Court of Canada has concluded that the marble work done on walls and floors constitutes "manufacturing" for the purposes of paragraph 30(1)(a) of the Excise Tax Act (1952): The Queen v. York Marble, Tile and Terrazzo Ltd, 68 DTC 5001 (SCC). The question of whether the taxpayer was involved in "construction" activities was not an issue in this Excise Tax Act (1952) case. In the York Marble case, before the subcontractor could complete the installation of the marble in a given building, it had to select suitable marble slabs from its stock and subject them to various processes including matching, grouting, rodding, gluing, grinding, rough and fine polishing, cutting and edge finishing. The SCC concluded that the processed marble constituted "goods produced or manufactured in Canada" under paragraph 30(1)(a) of the Excise Tax Act (1952).
Based on the York Marble case, in our view, the Taxpayer's shop activities related to the assembling of the granite pieces into a structure to be installed in customers' homes would constitute manufacturing.
Notwithstanding that the Taxpayer's activities constitute manufacturing and were assumed not to be construction activities, nevertheless, in our view, the Taxpayer would likely not be entitled to the M&P tax credit because the contracts with its customers would not be for the sale of goods but would be for work and materials.
The courts have been asked many times for a determination as to whether a contract was one for the sale of goods or for work and materials. For example, the SCC concluded that the asphalt produced by a paving business was not considered to be a good manufactured or processed for "sale or lease", but instead supplied through contracts for work and materials: Will-Kare Paving & Contracting Ltd v. The Queen, 2000 DTC 6467 (SCC). The indicia considered by the courts to distinguish between contracts for sale of goods and contracts for work and materials include the following:
1. the intention of the parties;
2. the substance (or principal component) of the contract;
3. the actual and primary role of taxpayer;
4. the subject matter of the transaction (primary versus incidental); and
5. the ownership of the goods.
The intention of the parties must be ascertained through a review of the contract documents, including any ancillary documents leading to the final contract, and the industry practice.
In the present case, it would appear that the Taxpayer is providing the granite to its customers through contracts for work and materials in the same way in which in Will-Kare the taxpayer provided asphalt to its customers through such contracts.
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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