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: For purposes of determining whether a particular property is used principally in the manufacture or processing of goods for sale (for the purposes of Manitoba's manufacturing investment tax credit) is it reasonable to use the gross revenue method outlined in paragraph 13 of IT-147R3?
Position: Although a question of fact, in the particular situation the answer appears to be yes.
Reasons: Consistent with the law and paragraph 13 of IT-147R3.
XXXXXXXXXX
2014-051737
Tim Fitzgerald, CGA
Attention: XXXXXXXXXX
May 29, 2014
Dear XXXXXXXXXX:
Re: Manitoba Investment Tax Credit ("MITC")
This is in reply to your correspondence of January 3, 2014, and May 6, 2014, and our numerous telephone conversations [Fitzgerald/XXXXXXXXXX] concerning the MITC. The bulk of your questions were dealt with over the telephone but you have asked for our written comments on whether we would consider certain XXXXXXXXXX to be used primarily in the manufacturing or processing of goods for sale by your employer.
Based on your correspondence and our telephone conversations, our understanding of the relevant facts are summarized as follows:
Your employer ("Aco") is a corporation that is in the XXXXXXXXXX business and is currently constructing a new XXXXXXXXXX facility in the province of Manitoba ("Facility"). There are two main revenue streams to be derived from the Facility once it is up and running, which will be as follows:
a. XXXXXXXXXX.
b. XXXXXXXXXX.
XXXXXXXXXX.
It is your view that the XXXXXXXXXX at the Facility will be used primarily for the purpose of manufacturing or processing goods for sale. However, your concern is that the XXXXXXXXXX might arguably be considered to be used primarily for the processing/treatment of XXXXXXXXXX because the time to be spent by a XXXXXXXXXX in processing goods for sale (XXXXXXXXXX) will be the same as the time to be spent by it XXXXXXXXXX. However, you have suggested that if more than 50% of Aco's gross revenues are derived from the sale of XXXXXXXXXX from the Facility's operations then this would tend to be indicative of the XXXXXXXXXX having been acquired by Aco to be used primarily in the processing of goods for sale.
Our Comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (Canada) ("Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular, IC 70-6R5, "Advance Income Tax Rulings".
The Income Tax Act (Manitoba) ("MITA") provides for a manufacturing investment tax credit ("MITC") which is partially refundable, and partially available, within certain limits, as a reduction of corporation's Manitoba income tax otherwise payable. For a corporation to be eligible for the MITC, certain criteria must be met as provided under the MITA. The criteria to be met for the purpose of claiming the MITC are largely contained in the respective definitions of "investment tax credit", "qualified property", and "manufacturing or processing" provided in the MITA. These terms are, generally speaking, determined by referring to the similar respective definitions set out in the Act.
For the purposes of the MITC, "qualified property" would include property that was acquired by a corporation after March 11, 1992 and before 2015, that is "qualified property" within the meaning of subsection 127(9) of the Act (having regard to the excluded activities enumerated in subsection 127(11) of the Act), that is, inter alia, "to be used by the corporation in Manitoba primarily for manufacturing or processing goods for sale or lease". However, unlike the federal requirements, to be a "qualified property" for MITC purposes it is not necessary that the particular property also be new and unused when acquired by the taxpayer provided that the property was acquired by the taxpayer after March 8, 2005.
With regard to your situation, if the XXXXXXXXXX are considered to be used by Aco in Manitoba primarily for XXXXXXXXXX that will be sold to wholesalers you indicate that such property would qualify for the MITC provided all the other requirements in the MITA are met. On the other hand, if the XXXXXXXXXX are considered to be used primarily for XXXXXXXXXX, such activity, albeit processing, would not be considered to be the manufacturing or processing of goods for "sale", in which case such property would not qualify for the MITC.
A property will be accepted as having been acquired to be used in "manufacturing or processing" if it is actually used for that purpose after its acquisition (and assuming the activity is not excluded) and provided there has not been an unreasonable delay before the property is put into use. In establishing whether or not a particular machine or piece of equipment is to be used "primarily" (more than 50%) in the manufacturing or processing of goods for sale or lease, generally speaking, the determining factor would be the proportion of time that it is used in these activities.
However, as mentioned in paragraph 13 of IT-147R3, "Capital Cost Allowance Accelerated Write-Off of Manufacturing and Processing Machinery and Equipment", it may be difficult in some cases to determine the amount of "time" that a particular machine or piece of equipment is used in the manufacturing or processing of those goods that are for sale or lease, and those that are not for sale or lease. In such circumstances, any reasonable method of determining the primary use of the equipment will be accepted. For example, when equipment is used in two operations, an analysis of gross revenue from each operation may be helpful in determining the primary use of that equipment.
Having regard to the above, whether Aco has acquired the XXXXXXXXXX to be used in Manitoba "primarily" for "manufacturing or processing of goods for sale" remains, for the purposes of the MITC, a question of fact. The determination of such matters would normally be dealt with by the applicable Tax Services Office 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. However, your suggestion (see above) of comparing the gross revenue streams appears to be a reasonable method that is consistent with the position described in paragraph 13 of IT-147R3.
We trust our general comments above are of assistance.
Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
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