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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
J. Daman C.R. Bowen
A Acting Director Merchandising,
Audit Applications Division Manufacturing and
Audit Programs Directorate Construciton Section
R.B. Boicey
SUBJECT: Classification of Gravel Crushing
Equipment for C.C.A. Purposes 7-3972
We are writing in reply to your round trip memorandum of June 1, 1989, wherein you requested that we review the position taken in our memorandum of April 21, 1989 (file number 7-3685) that the gravel crusher described therein is either a class 10(h) or 10(k) property.
Background
XXX
The primary pieces of equipment used in the pit are a feeder hopper, primary jaw crusher (or secondary crusher) and a front end loader. The hopper and crushers are each mounted on a frame on the back of a trailer and are transported from site to site by means of a highway transport truck. Other than levelling an area of the pit on which the equipment is placed, there is no site preparation or foundation required for this equipment. The only assembly required is to connect the electrical power lines from a separate power van to the equipment in order to supply its power.
The equipment is moved about 12 times during the road building season. Once the equipment is set out in the pit, the front end loader dumps the raw pit run material from the pit onto the feeder hopper which then funnels the material onto a conveyor belt. The conveyor belt moves the material to the primary jaw crusher which screens and shakes the sand away from the gravel and crushes the gravel into 3 to 12 inch pieces. This material is then carried by means of another conveyor belt into the secondary crusher which screens and shakes out the smaller material and grinds the pit material into the desired size. From the secondary crusher the gravel is transported to either a pile at the side of the pit or onto a surge used to load the material onto a truck.
Your Comments
It is your opinion that the primary and secondary crusher used in the pit by XXX to process the pit run material into a marketable state meet the requirement of subparagraph (a)(i) of class 29 as this equipment is used directly by the taxpayer in the processing of goods for sale. In addition, it is your opinion that the gravel crushers should properly be included in either class 8(a) of 8(i), and therefore would satisfy subparagraph (b)(i) of class 29. Since the conditions of both paragraphs (a) and (b) of class 29 are met, the gravel crushers would therefore qualify for inclusion in class 29.
Our Comments
In order for a property to be included in class 29, the property must meet the requirements of both paragraph (a) thereof as being used in a manufacturing or processing activity and paragraph (b) thereof as being property of a specified class. Our comments on each of these two requirements are indicated below.
Processing Activity
We have reconsidered the comments provided in our memorandum of April 21, 1989. It is now our opinion that, as supported by the court case Nova Scotia Sand and Gravel, [[1980] C.T.C. 378] 1980 DTC 6298, the secondary (or cone) crusher used by XXX in the pit to process excavated pit run material into a marketable state (i.e. specialized gravel and sand) is property used primarily in the processing of goods for sale. Therefore, the secondary crusher would qualify as property described in subparagraph (a)(i) of class 29. As the secondary crusher is used in a processing activity, it would not be included in class 10(k) as mining equipment. However, the equipment used prior to this processing activity such as the primary jaw crusher, conveyor belt, hopper feeder and front end loader would be included in class 10(k) as it would be considered to be used in the activity of producing industrial minerals as indicated in paragraph 11 of Interpretation Bulletin IT-145R and supported by the court case Nova Scotia Sand and Gravel. The conveyor belt used to transport the raw material from the primary crusher will not be considered to be used in a processing activity as the transportation of raw material to the location where the processing takes place is not considered an eligible activity (per paragraph 28 of IT-145R). The conveyor belt used to transport the final product or crushed gravel away from the secondary crusher will not be considered to be used in the processing activity in accordance with subparagraph 127(11)(b)(i) of the Income Tax Act and paragraph (d) of the definition of qualified activities in section 5202 of the Income Tax Regulations.
CCA Class
In order for a gravel crusher to be a class 8(a) property, it must be a structure that is processing machinery or equipment. The concept of what constitutes a structure has been reviewed in several court cases including British Columbia Forest Products Ltd. v. M.N.R., [[1971] C.T.C. 270] 1971 DTC 5178, (S.C.C.), and The Queen v. Hampton Golf Club Limited, [[1986] 2 C.T.C. 403] 1986 DTC 6513, (F.C.T.D.). The decision reached in the former case, that assets which were permanently affixed to concrete pads and supports were considered structures referred to in class 3, appears to be the reason that the current wording in class 8(a) was created. Paragraphs 1 and 6 of Interpretation Bulletin IT-79R2 outline the Department's position on the concept of a structure in general, as well as for the purposes of class 8 and are indicated below.
- The word "structure" has been defined by the courts to include anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation ... Tanks, vats and hoppers when located outside a plant building but erected on a steel framework or other permanent foundation, although structures, are included in class 8 if acquired for use in manufacturing or processing. Similarly, the housing and framework for outdoor conveyor systems acquired for use in manufacturing or processing operations are included in class 8.
In the court case Mersey Seafoods Limited v. M.N.R., [[1985] 2 C.T.C. 2485] 1985 DTC 731, on page 740, the Minister's position was that a factory freezer trawler is a vessel and a vessel is not a structure for the purpose of class 8(a). A structure is something that is in one place, that is affixed somehow and which is built up of parts and is intended to remain on a foundation. The only court case that supports the concept of a structure being movable is Nova Construction Company v. The Queen, [[1983] C.T.C. 58] 1983 DTC 5105, (F.C.T.D.) where the judge held that a portable asphalt processing plant can be a class 8(a) property. This case was subsequently heard at the Federal Court of Appeal, [[1986] 1 C.T.C. 68] 2985 DTC 5594, where the judge held the plant was used in the activity of construction, but did not confirm whether the plant would be included in class 8(a) or 10(h).
As it is the Department's position, as supported by several court cases, that structure must, among other things, be affixed and intended to remain permanently on a permanent foundation, it is our opinion that a portable secondary crusher which is intended to be used in a number of different locations and is not permanently affixed to any one location will not be considered a structure that is processing machinery or equipment for the purposes of class 8(a).
In order for the secondary crusher to qualify under paragraph (i) of class 8, it cannot be included in another class, such as class 10(h). In two court cases, Dominic Supports and Forms Ltd. v. M.N.R., [[1971] Tax A.B.C. 144] 1971 DTC 117, and O.K. Construction and Supply Company Limited v. M.N.R., [19 Tax A.B.C. 232] 1958 DTC 316, the courts considered the concept of movable equipment. Movable equipment does not require a permanent foundation, is designed to be moved from place to place, is easily transported by a highway tractor, is located in one location on a short term temporary basis only, and does not need to be disassembled prior to being transported. Based on these criteria, the secondary crusher clearly qualifies as movable equipment.
Until recently, the Department has maintained the position outlined in paragraph 3 of Interpretation Bulletin IT-306R that the equipment to be included in class 10(h) is restricted to equipment used in construction industry. However, as a result of the court case Halliburton Services Ltd. v. The Queen, [[1985] 2 C.T.C. 52] 1985 DTC 5336, the Department accepted the position that the equipment mounted on the vans and trucks used by a contractor for exploring or drilling for petroleum or natural gas qualifies as class 10(h) property. In another court case Nowso Well Service Ltd. v. The Queen, [[1988] 2 C.T.C. 24] 1988 DTC 6300, the judge held on page 6313 that "... upon careful examination of the Interpretation Bulletin produced there is clear inference that what is intended to be included in class 10(h) is equipment that is normally regarded as construction". Therefore, the judge decided that the equipment used in the business of oil well servicing should be in class 8(i). In addition, as the taxpayer used the equipment in the processing of goods for sale, the equipment was therefore eligible for class 29 and for investment tax credit as qualified property. The Department is appealing this latter decision as its our position that the equipment is not used for manufacturing or processing and should therefore be in class 10(h). Based on the decision reached in Nowso, Halliburton Services is appealing the judge's treatment of their equipment in class 10(h), and instead wants it to be class 8(i) used in a processing activity (and hence eligible for class 29). In the court case Laidlaw Waste Systems v. The Queen heard at the Tax Court of Canada [[1989] 1 C.T.C. 2375] on April 6, 1989, the judge held that the word contractor in class 10(h) could not be so narrowly interpreted as to include only building construction contractors, but included a waste disposal contractor who dropped off and picked up portable garbage bins at the customer's business location. The decision as to whether to appeal this case has not been decided upon at this time. XXX XXX It is possible that resolution of the above court cases in the future may produce judgements that are in opposition to the Department's long standing position in paragraph 3 of IT-306R. As a result, our position may require revision at that time to include in class 10(h) property not used in the course of construction work.
In the fact situation of XXX the taxpayer is not engaged directly in the activity of construction, but has been contracted by a company engaged in the business of road building to provide the gravel. In the court case The Queen v. Nova Construction Company Ltd., [[1986] 1 C.T.C. 68] 1985 DTC 5594, (F.C.C.), the movable equipment which produced asphaltic concrete used primarily in the taxpayer's business of highway construction was held to be used in a construction activity and not in a processing activity. Therefore, based on the principle established in the case, had XXX primarily used the gravel it produced in its own road construction business, the processing of the gravel in the secondary crusher may well have been considered part of its construction activity.
Despite the current uncertainty surrounding the application of class 10(h), it is our opinion that the secondary gravel crusher is contractor's movable equipment used primarily by XXX supply gravel to taxpayers engaged in the building of roads and therefore should be included in class 10(h). Our position is supported by the first two sentences of paragraph 3 of IT-306R which state that "The term `contractor's movable equipment' has a wide meaning and ... is intended to include the kind of equipment that normally is moved from place to place in the course of construction work. that kind of equipment is class 10 property even though the owner is not a construction contractor ...". In XXX case, the secondary gravel crusher is moved from place to place directly as a result of and as a consequence of construction activities being carried on, even though the taxpayer himself is not a construction contractor. As the secondary gravel crusher qualifies as class 10(h) property, it is not eligible for class 8(i) and therefore, does not qualify under subparagraph (b)(i) of class 29.
Conclusion
Although the secondary crusher meets the requirements in paragraph (a) of class 29, it does not meet the requirements in paragraph (b) thereof. Therefore, it can not be included in class 29, but instead should properly be included in class 10(h).
We trust our comments will be of assistance.
B.W. Dath
Director
Small Business and General Division
Specialty Rulings and Directorate
Legislative and Intergovernmental
Affairs Branch
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