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 cost of new buildings and equipment used in the production of fuel for sale would be eligible for the Atlantic Investment Tax Credit.
Position: Depends on the particular facts and circumstances.
Reasons: See below.
XXXXXXXXXX 2024-100451
Marie-Audrey Kirouac
April 23, 2024
Dear XXXXXXXXXX:
Re: Atlantic Investment Tax Credit
We are writing in reply to your emails dated XXXXXXXXXX, wherein you requested our views on whether the cost of new buildings and equipment used in the production of fuel for sale, such as XXXXXXXXXX, could qualify for the Atlantic Investment Tax Credit (“AITC”) in subsection 127(9) of Income Tax Act (Canada) (“Act”). In particular, you asked whether the production or processing of fuel could be considered to be the manufacturing or processing of a good for sale in the context of the AITC.
Our comments
This technical interpretation provides general comments about the provisions of the 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 70-6R12 “Advance Income Tax Rulings and Technical Interpretations”. However, we can provide the following general comments.
Overview of AITC
Pursuant to subsection 127(9) of the Act, the AITC (footnote 1) is a credit equal to 10% of the capital cost of “qualified property” that is acquired primarily for use in the Province Province of Nova Scotia, New Brunswick, Prince Edward Island or Newfoundland or the Gaspé Peninsula and certain prescribed offshore regions. (footnote 2)
A “qualified property” means a property (other than a “qualified resource property” (footnote 3) ) that is a “prescribed building”, “prescribed machinery or equipment” or a “prescribed energy generation and conservation property” that has not been previously used for any purpose and that is to be used by the taxpayer in Canada primarily (footnote 4) for the purpose of, inter alia, manufacturing or processing of goods for sale or lease.
A “prescribed building” or a “prescribed machinery or equipment”, as the case may be, must respectively satisfy the requirements of subsection 4600(1) of the Income Tax Regulations (“ITR”) and subsection 4600(2) of the ITR, which generally require that the property in question fall within certain specific capital cost allowance (“CCA”) classes in Schedule II of the ITR.
Pursuant to subsection 4600(3) of the ITR, a “prescribed energy generation and conservation property” generally includes depreciable property that is not a “prescribed building” or “prescribed machinery and equipment” and that is included in specific CCA classes, such as Class 43.1 and 43.2.
Manufacturing or Processing
As for the expression “manufacturing or processing”, subsection 127(11) of the Act defines it as excluding certain activities for the purposes of the definition of qualified property. For instance, excluded activities include producing or processing electrical energy or steam for sale and “Canadian field processing” as defined in subsection 248(1) of the Act, if that definition were read without reference to the expression “in Canada”. (footnote 5)
The Act does not otherwise specify what is considered to be manufacturing or processing goods for sale or lease in the context of the AITC.
Income Tax Folio S4-F15-C1 “Manufacturing and Processing” (“Folio S4-F15-C1”) states that the manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, 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. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.
In Tenneco Canada Inc. v The Queen [91 DTC 5207], the Federal Court of Appeal indicated that the two tests for determining whether a taxpayer is engaged in processing are:
- whether there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and
- whether the product becomes more marketable.
Fuel Production or Processing
Whether or not the production or processing of a particular fuel would be considered to be the “manufacturing or processing of a good for sale or lease” would depend on all the facts and circumstances of a particular situation. The CRA has confirmed in paragraph 1.14 of Folio S4-F15-C1 that the processing of natural gas in a plant in Canada that is devoted primarily to the recovery of ethane, as well as the processing of natural gas at a straddle plant, are both qualified processing activities for purposes of the manufacturing and processing profits deduction (M&P credit) in section 125.1 of the Act.
Also, the Federal Court of Appeal recently confirmed in Canada v. Repsol Energy Canada [2017 FCA 193] that certain properties used in the process of regasification of natural gas that was in a liquid state were used in the processing of good for sale, since a change of form and chemical composition of the product happened during the facility's blending operations and since it transformed the product into a marketable one. As a result, those properties were eligible for inclusion in Class 43 of Schedule II of the ITR which is a class that applies to property used primarily in the manufacturing or processing of goods for sale or lease.
Based on the foregoing, in our view the production or processing of a fuel could be considered to be the manufacturing or processing of a good for sale for purposes of the AITC, depending on the particular circumstances. However, whether the cost of a particular property used in the production or processing of XXXXXXXXXX would be eligible for the AITC would need to be determined taking into account all the relevant requirements, as well as all the facts and circumstances of the particular situation.
We trust that these comments will be of assistance.
Yours truly,
Kimberley Wharram
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
Appendix A – “Canadian field processing”
Subsection 248(1) of the Act defines “Canadian field processing”?as follows:
“Canadian field processing” means, except as otherwise prescribed,
(a) the processing in Canada of raw natural gas at a field separation and dehydration facility,
(b) the processing in Canada of raw natural gas at a natural gas processing plant to any stage that is not beyond the stage of natural gas that is acceptable to a common carrier of natural gas,
(c) the processing in Canada of hydrogen sulphide derived from raw natural gas to any stage that is not beyond the marketable sulphur stage,
(d) the processing in Canada of natural gas liquids, at a natural gas processing plant where the input is raw natural gas derived from a natural accumulation of natural gas, to any stage that is not beyond the marketable liquefied petroleum stage or its equivalent,
(e) the processing in Canada of crude oil (other than heavy crude oil recovered from an oil or gas well or a tar sands deposit) recovered from a natural accumulation of petroleum to any stage that is not beyond the crude oil stage or its equivalent, and
(f) prescribed activities
and for the purposes of paragraphs (b) to (d),
(g) gas is not considered to cease to be raw natural gas solely because of its processing at a field separation and dehydration facility until it is received by a common carrier of natural gas, and
(h) where all or part of a natural gas processing plant is devoted primarily to the recovery of ethane, the plant, or the part of the plant, as the case may be, is considered not to be a natural gas processing plant.
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 For general information about the AITC, see “Atlantic investment tax credit” on Canada Revenue Agency webpage: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-41200-investment-tax-credit/atlantic-i....
2 See section 4609 of the Income Tax Regulations for the definition of “prescribed offshore region”.
3 A “qualified resource property” means a property that is to be used primarily in certain activities such as “Canadian field processing”, which is defined in subsection 248(1) of the Act. See Appendix A for the full definition of “Canadian field processing”.
4 Generally, the word “primarily” means more than 50%.
5 Please refer to Appendix A for the full definition of “Canadian field processing”.
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