22 August 1988 Income Tax Severed Letter 5-6100 - []

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.

C.R. Bowen (613) 957-2094

XXXX

August 22 1988

Dear Sirs:

We are writing in reply to your letter of May 24, 1988, wherein you seek our confirmation that a particular facility would qualify as a "certified property" as opposed to a "qualified property" for investment tax credit purposes.

Facts

XXXX

Our Comments

While we are unable to provide our opinion of the income tax effects of a specific situation, we can provide the following general comments concerning the

XXXX

A) Certified Property

In order for a property to be considered a "certified property" as defined in subsection 127(9) of the Income Tax Act (the "Act"), it must satisfy all of the following requirements:

1) The property must be described in paragraph (a) or (b) of the definition of "qualified property" in subsection 127(9). As a result, the building, machinery or equipment must be described in one of the capital cost allowance classes outlined in section 4600 of the Income Tax Regulations (the "Regulations").

2) The property must be part of a "facility" as defined for the purposes of the RDIA. The word "facility" is defined in section 2 thereof as meaning " the structures, machinery and equipment that constitute the necessary components of a manufacturing or processing operation...". In paragraph 2(2)(e) of the Regional Development Incentives Regulations, a manufacturing or processing operation is defined as "an operation whereby any goods, products, commodities or wares are created, fabricated, refined or made more marketable, but does not include the growing, catching or harvesting of any natural or cultivated product of nature".

3) The property must be for use by the taxpayer primarily in an area prescribed under subsection 4602(1) of the Regulations. The word "'primarily" applies only with respect to the location in which the asset is used and not with respect to the type of activity for which the asset is used, XXXXXXXX is prescribed area.

4) The property must not have been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer.

Where the property is acquired by the taxpayer after 1986, it will be eligible for an investment tax credit ("ITC") rate of 40% of the net capital cost of the property as reduced by government or non-government assistance. As per subclause 107(3) of Bill C-139, which received first reading in the House of Commons on June 30, 1988, the ITC rate for "certified property" acquired after 1988 will be reduced to 30%. In order for a property to be eligible for an ITC rate of 50%, it must be acquired either 1) before 1987, or 2) before 1988 where the property is i) a building under construction before 1987, or ii) machinery and equipment ordered in writing by the taxpayer before 1987. Interpretation Bulletin IT-50R outlines our position concerning the date on which a depreciable property is considered to be acquired.

B) Qualified Property

"Qualified property" is defined in subsection 127(9) of the Act to mean a building, machinery or equipment as prescribed under section 4600 of the Regulations (other than an "approved project property" or "certified property"). The new property acquired by the taxpayer must be used in Canada primarily for one of a number of different purposes including 1) manufacturing or processing of goods for sale or lease, and 2) farming. The ITC rate available for property used in XXXX. As per subclause 107(3) of Bill C-139, the rate will drop to 15% for "qualified property" acquired after 1988 for use in XXXX.

C) Farming vs Manufacturing or Processing

The definition of "farming" in subsection 248(1) of the Act does not contain an all-inclusive list of the agricultural activities that constitute farming for income tax purposes. On this point, The Honourable Mr. Justice Addy in Pollon et al v. The Queen 84 DTC 6139 stated at page 6142:

"It seems clear on reading the definition of farming in section 248(1) quoted at the beginning of these reasons that, since farming is defined as including the raising of poultry, together with other various agricultural activities, the enumeration of these matters is not intended to constitute an exhaustive definition and one must look to the common, ordinary and generally accepted meaning of the word as well as to the specific activities detailed in the statute. It follows that, should I not be satisfied that the activities of the taxpayers fell within the meaning of raising poultry, I must still consider whether they fell within the generally accepted meaning of farming".

On pages 6143-44 he expands on the general acceptability of classifying modern growing techniques as farming activities:

"Since mechanically operated (poultry) hatcheries are a very recent development, it is not at all surprising that the activity is not specifically included in the dictionary definitions of farming. More and more today because of numerous and rapidly developing scientific and technological methods and procedures in the field of food production, men and manually controlled implements are being replaced by machinery and scientifically developed technical processes. Where the development of the basic food product still involves the growing process and natural biological changes as opposed to artificially manufactured foods or mere processing, I do not feel that, generally speaking, the activity would be considered by the general public anything other than agricultural in nature and would, therefore, generally be considered as a farming operation".

The judgement in the above court case supports our position outlined in paragraph 5 of Interpretation Bulletin IT-145R - Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax which states that the processing of goods does not include natural growth.

Therefore, it is our view that although the fish may be raised or matured in an internally controlled computerized environment using scientific methods, the end product is still the result of natural growth. Therefore, this activity would normally be considered farming. Consequently, the raising of fish would not constitute manufacturing or processing of goods for sale for the purposes of 1) the definition of "qualified property" in subsection 127(9) of the Act, or 2) the manufacturing and processing profits deduction found in section 125.1 of the Act. Similarly, property used in such an activity would not constitute part of a "facility" under the RDIA for the purposes of the "certified property" definition, since the activity would constitute "the growing, catching or harvesting of any natural or cultivated product of nature".

However, the activities carried out after the fish have matured and are taken to the processing area of the facility, such as XXXX prior to shipping will normally qualify as processing. As a result, the portion of the building which can reasonably be allocated to these processing activities, as well as the machinery and equipment used in these activities, will normally qualify as part of a facility under the RDIA. In addition, these properties will normally be considered as used in a processing activity for the purposes of the manufacturing and processing profits deduction.

Despite the position outlined in paragraph 9 of Interpretation Bulletin IT-145R , the Department now accepts that a farm corporation will be entitled to the manufacturing and processing profits deduction under section 125.1 of the Act in cases where the processing activities are not segregated into a separate business provided that: 1) it is established that a portion of its activities qualify as processing, 2) there is a clear delineation between the activities of farming and processing as evidenced in the records of the company, and 3) the income from processing is reported on an accrual basis.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and accordingly, is not binding on Revenue Canada, Taxation.

We trust these comments have been of assistance.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch