25 March 2013 External T.I. 2012-0470501E5 - 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. Does the process of converting water into ice cubes/blocks for sale by the particular taxpayer qualify as manufacturing and processing?
2. If so, would the equipment used for such purpose be eligible for inclusion in class 29/43?

Position: 1. May be. Question of fact and law. 2. Same as above.

Reasons: Mixed question of fact and law

XXXXXXXXXX
2012-047050
Lata Agarwal, CMA, MBA

March 25, 2013

Dear XXXXXXXXXX:

Re: Manufacturing and Processing

This is in response to your correspondence dated November 20, 2012, wherein you have requested our views on whether your client's activities are "manufacturing or processing" ("M&P") activities for the purposes of the M&P credit in subsection 125.1(1) of the Income Tax Act ("Act"). You also seek clarification on whether your client's machinery and equipment can be included in class 29 or class 43 of Schedule II of the Income Tax Regulations ("Regulations") as property used directly or indirectly primarily in the manufacturing or processing of goods for sale or lease.

In brief, you indicate that the taxpayer carries on a business of producing ice cubes and blocks that are packaged in bags and sold to end users and distributors, directly from the taxpayer's premises. The production process includes the accumulation of water XXXXXXXXXX in ice making towers after the water is softened and fed a chemical refrigerant for the purposes of lowering its temperature quickly. The production and packaging process involves various types of machinery and equipment.

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.

For the purpose of the M&P tax credit, subsection 125.1(3) defines the expression, "manufacturing or processing" as to exclude a series of activities that include farming, fishing, logging, construction, certain resource and other activities as set out in paragraphs 125.1(3)(a) to (k) as well as activities where the 10 per cent de minimis rule in paragraph 125.1(3)(l) is not met. In the event that the taxpayer's activities would not be considered to be one of the excluded 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.

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 the specific scenario you described, while it might be reasonable to consider that the production, packaging and sale of ice cubes and blocks could be processing or manufacturing of goods for sale or lease for the purposes of the M&P credit, as noted above, the particular taxpayer's TSO would need to conduct a detailed review of the taxpayer's operations before any definitive conclusion could be reached.

As for the classification of the equipment for capital cost allowance purposes ("CCA"), where the machinery and equipment is acquired by a taxpayer after February 25, 1992 to be used directly or indirectly by the taxpayer in Canada primarily (more than 50%) in manufacturing or processing of goods for sale or lease, such property is included in class 43 (with a CCA rate of 30% on a declining balance basis). However, where such property is acquired after March 18, 2007, and before 2014 (the Federal Budget, on March 21, 2013, proposed to extend it to property acquired in 2014 and 2015 also), it can be included in class 29 (with a CCA rate of 50% on a straight line basis). You can also refer to the comments in IT-147R3, Capital Cost Allowance - Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment for additional information.

We trust that these comments will be of assistance.

Yours truly,

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