22 October 2013 External T.I. 2013-0503311E5 - Class. of steel tanks & oak barrel for CCA purpose

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 steel tanks and oak barrels used for fermenting/clarifying/blending and/or aging wine, and acquired after March 18, 2007 and before 2016, would be included in class 29 of Schedule II of the Income Tax Regulations.

Position: In this particular case, likely yes.

Reasons: See comments

XXXXXXXXXX
2013-050331
Tim Fitzgerald, CGA

October 22, 2013

Dear XXXXXXXXXX:

Re: Steel Tanks and Oak Barrels of a Winery Business

We are replying to your correspondence of August 31, 2013 and further to our telephone conversation [XXXXXXXXXX/Fitzgerald] of October 4, 2013 concerning the classification of steel tanks and oak barrels used in a winery business for capital cost allowance ("CCA") purposes under the Income Tax Act (the "Act").

Our general understanding of the key facts is summarized as follows:

• The taxpayer is a Canadian-controlled private corporation that carries on the business of producing wine made principally from grapes.
• The taxpayer's business is carried on in Canada.
• The taxpayer's activities include growing and purchasing grapes; crushing/pressing grapes to produce juice for wine-making; fermenting/clarifying/blending and aging of wine; and bottling, corking or capping its wine for distribution and sale as finished goods.
• The taxpayer owns certain steel tanks and oak barrels, which it acquired after March 18, 2007, and which are used primarily for fermenting/clarifying/blending and/or aging wines. These activities are undertaken before the wine is bottled and corked or capped by Aco as finished goods for sale.

You indicated that the steel tanks and oak barrels are not property that would be considered as a building or other structure (or part thereof) described in class 1 of Schedule II of Income Tax Regulations (the "Regulations") and on that basis you would like to know if the taxpayer's capital cost of such property would be included in class 29 of Schedule II of the Regulations for CCA purposes.

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 of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. Situations involving completed transactions and questions of fact are normally dealt with by the local tax services office during the course of an audit which, if undertaken, would be conducted after the taxpayer has filed its income tax return for the year. However, we offer the following general comments.

Class 29 property in Schedule II of the Regulations includes, among other things, property that is machinery or equipment, manufactured or acquired by the taxpayer after March 18, 2007 and before 2016, which, but for class 29, would be included, with certain exceptions, in class 8. Such property must also be used directly or indirectly by the taxpayer in Canada primarily (more than 50%) in the manufacturing or processing of goods for sale or lease or leased by certain corporations to a lessee who can reasonably be expected to use, directly or indirectly, the property in Canada primarily in the manufacturing or processing of goods for sale or lease.

A property cannot be included in class 8 of Schedule II of the Regulations if it is property included in class 1. In that regard, since you indicated that the steel tanks and the oak barrels are not property described in class 1, it appears that in the absence of class 29, the steel tanks and oak barrels would be included in class 8.

For purposes of, among other things, class 29, "manufacturing or processing" ("M&P") is defined in subsection 1104(9) of the Regulations to specifically exclude farming, fishing, logging, construction, and, as well, certain resource activities that are not relevant to your query. The terms "manufacturing" and "processing" have their ordinary meaning. It may be said 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 and/or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods and homogenizing and pasteurizing dairy products. The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging.

As mentioned above, class 29 includes, among other things, property that is machinery or equipment that is to be used directly or indirectly by the taxpayer in Canada primarily in the manufacturing or processing of goods for sale or lease. The expression "to be used directly or indirectly" refers to property acquired by the taxpayer for the purpose of being an integral and essential part of the taxpayer's manufacturing or processing activities, as well as any ancillary equipment such as furniture and fixtures, repair and maintenance equipment and fire extinguishing equipment, which is acquired for use in those activities. For further discussion in this regard, see IT-147R3, "Capital Cost Allowance – Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment", which is available on the CRA's website.

While a question of fact, based on the limited facts provided, it appears that the steel tanks and oak barrels would be used primarily in the manufacturing or processing of goods for sale and would be assets included in class 29.

We trust our comments above are of assistance.

Yours truly,

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