28 May 1990 Ruling 59461 F - Investment Tax Credit upon Acquisition of Certified Property

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.

May 28, 1990

Dear Sirs:

Re:   Investment Tax Credit ("ITC") Upon Acquisition of "Certified Property"

We are writing in reply to your letter of January 15, 1990 regarding the definitions of "certified property" and "qualified property" contained in subsection 127(9) of the Income Tax Act (the "Act").  In your letter you requested our assistance in answering the following questions:

1)     Would a company that qualifies for ITC as a manufacturer or processor of goods for sale or lease under the definition of "qualified property" be eligible for ITC available to "certified property" if the asset was used in a prescribed area?

2)     Are there any differences between the definition of manufacturing and processing ("M & P") of goods for sale or lease for "qualified property" vs. "certified property"?

3)     Would equipment used to mix chemicals which are pumped into pipes at a pulp mill to facilitate manufacturing at the pulp mill qualify as a "facility" for "certified property"?

4)     Would a pulp mill qualify as a "facility" for purposes of the Regional Development Incentives Act (the "RDIA") and for "certified property"?

5)     Would equipment used in an oil well service company, such as Halliburton Services Ltd., 85 DTC 5336, qualify as "certified property"?

6)     Would an oil and gas in situ plant qualify as "certified property"?

Our Comments

We offer the following comments related to the above questions:

1)     The RDIA states that a "facility" means "the structures, machinery and equipment that constitute the necessary components of a M & P operation, other than an initial processing operation in a resource-based industry".  For the purposes of this definition, a M & P operation has the meaning given in the Regulations Respecting Regional Development Incentives (the "RDIA Regulations").  These regulations state that a "manufacturing or processing operation" means:

     "an operation whereby any goods, products, commodities or wares are created, fabricated, refined or made more marketable, but does not include

     (a)  the merchandising of any goods, products, commodities or wares except where they are products of, and their merchandising is integral with, an operation whereby they are created, fabricated, refined or made more marketable,

     (b)  the growing, catching or harvesting of any natural or cultivated product of nature,

     (c)  the extracting of minerals by any method,

     (d)  the production of energy except as an integral part of and solely for use in an operation whereby any goods, products, commodities or wares are created, fabricated, refined, or made more marketable,

     (e)  the mixing of concrete or asphalt if, in the opinion of the Minister, such operation is carried out to a significant degree for direct application in plastic form to roadway paving or for direct use in construction in metropolitan and surrounding areas,

     (f)  salt or potash extraction,

     (g)  any mobile manufacturing or processing operation, except where the applicant agrees to use the assets of the operation for a period of at least five years in such area of the designated region as is specified by the Minister,

     (h)  construction work,

     (i)  repairing as distinct from rebuilding,

     (j)  the rendering of consumer services, and

     (k)  publishing other than printing;"

     As the RDIA Regulations contain their own distinct definition of a M & P operation, a property that qualifies for ITC because it is used primarily for the purpose of "manufacturing or processing goods for sale or lease" under the definition of "qualified property", will not necessarily be eligible for ITC available to "certified property" even if the property is used in an area prescribed by section 4602 of the Income Tax Regulations.

2)     Yes, as stated in 1) above, the RDIA Regulations contain a definition of "manufacturing and processing operation", which differs from that found in subsection 127(11) of the Act used for the purposes of "qualified property".

3)     In our opinion, whether equipment used to mix chemicals which facilitate manufacturing at a pulp mill qualify as a "facility" depends upon whether the pulp mill itself qualifies as a "facility" and whether the equipment is "necessary" to the M & P operation.  Where a pulp mill qualifies as a "facility", depreciable property which is used to mix chemicals which can be viewed as ancillary and necessary from a technical or economic perspective to the manufacturing activities at the pulp mill will generally qualify as part of a "facility".

4)     Whether a pulp mill will itself qualify as a "facility" depends upon the operations which occur at the pulp mill. Generally, all pulp mills are considered to be initial processing operations in a resource-based industry and thus do not qualify.  However, the definition of "initial processing operation" contained in the RDIA Regulations makes certain exceptions to this general rule.  The exceptions are:

a)     a pulp mill used for the processing of wood by the sulphite process into bleached sulphite pulp in a pulp mill that prior to January 1, 1972 produced dissolving and high alpha cellulose pulp on a regular basis, and

b)     a pulp mill operation that produces wood pulp which it then converts into paperboard or paper other than newspaper. Where a pulp mill produces some pulp for market and the rest is used by the taxpayer for conversion into paperboard or paper other than newspaper, it is necessary to segregate the capital costs of the property relating to the integrated paper operation, which are considered to be part of a "facility", from those costs relating to the market pulp operation which are considered to be part of a  "facility".

5)     In order for equipment of an oil well service company such as Halliburton Services Ltd. to qualify as "certified property", it would have to be part of a "facility".  However, if our understanding of the operations of, such companies is correct, it appears that the equipment is mobile and that it would fail to meet the definition of "manufacturing and processing operation" found in the RDIA Regulations because of paragraph (g) thereof.  This paragraph excludes any mobile manufacturing or processing operation, unless the applicant agrees to use the assets of the operation for a period of at least five years in such area of the designated region as is specified by the Minister.  Even in factual cases where this exclusion does not apply, there are a number of other conditions that would have to be satisfied before the equipment could be seen to be a part of a "facility".  Some of the questions of fact that would seem relevant include the following:

a)     are goods created?

b)     do the activities constitute an initial processing operation in a resource-based industry?

c)     do the activities constitute construction?

d)     do the activities constitute the provision of a consumer service?

     For taxpayers engaged in activities similar to that of Halliburton Industries Ltd., the Department has maintained that those types of activities were not manufacturing or processing of goods for sale but rather the provision of  services to customers.  Since the appeal process with respect to this case is not yet final, we do not wish to provide any further comments on this subject at this time.

6)     Oil and gas in situ plants do not generally qualify as a "certified property" as they are considered to be initial processing operations in a resource-based industry.  The definition of "initial processing operation" in the RDIA Regulations includes an operation the product of which is a fuel and the refining of petroleum.  None of the exceptions listed in the definition are considered to apply to oil and  gas in situ plants.

We trust that our comments will be of assistance.

Your truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch