21 January 2013 External T.I. 2012-0465071E5 - Manufacturing and processing

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: 1) Whether the taking, editing and printing of pictures using photographic equipment, computers, printers and a building can qualify as "manufacturing and processing" for purposes of the M&P credit

Position: 1) Question of fact.

Reasons: 1) Based on the meaning of M&P and our comments in IT-145R

XXXXXXXXXX
2012-046507
Katie Robinson

January 21, 2013

Dear XXXXXXXXXX:

Re: Manufacturing and Processing

This is in response to your email of October 5, 2012, regarding whether certain activities are considered to be manufacturing and processing (M&P) for purposes of the M&P credit under subsection 125.1(1) of the Income Tax Act (the "Act").

More specifically, you have indicated that a taxpayer is in the photography business which consists of taking pictures that are later edited and processed in the taxpayer's studio before they are printed and sold on an order-by-order basis to the taxpayer's customers. You have asked if the editing and printing activities are considered to qualify as M&P activities for purposes of the M&P credit.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. Notwithstanding the foregoing, we are prepared to provide the following comments that may be of assistance.

Corporations involved in M&P activities may be entitled to the M&P tax credit under subsection 125.1(1) of the Act. 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 ("Regulations")).

The term "manufacturing or processing" is defined in subsection 125.1(3) as excluding farming, fishing, logging, construction, certain resource activities set out in paragraphs (d) to (k) of the definition, and activities where the 10 per cent de minimis rule set out in paragraph (l) of the definition is not met. As the definition does not specifically indicate activities that would be "manufacturing or processing", the terms "manufacturing" and "processing" have their ordinary meaning. Unfortunately, those terms do not lend themselves to any simple, all-inclusive definition or explanation. It may be said, however, 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 of 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 or chemical change in an article or substance, other than natural growth.

In paragraph 41 of IT-145R (Consolidated) - Canadian Manufacturing and Processing Profits – Reduced Rate of Corporate Tax (Cancelled), the CRA has indicated that, "The activities connected with the processing of film into prints and slides, negatives into prints and the enlarging of prints are considered to be qualified activities." However, the comments in paragraph 38 and 42 of IT-145R, dealing with computer services and printing and publishing may also be relevant.

Accordingly, based on the comments in IT-145R, if the taxpayer's business is considered to be the rendering services as opposed to selling goods, the activities would not qualify as M&P activities. The determination of whether a taxpayer's business is considered to be the rendering services or the manufacturing or processing of goods for sale or lease remains a question of fact that can only be resolved with reference to the particular facts and circumstances of that situation and, as noted above, such a determination would be the responsibility of the taxpayer's TSO.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, C.P.A., C.A.
Manager
Business and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch