1 September 1989 Administrative Letter 74026 F - Manufacturing and Processing Deduction Claims

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.

SUBJECT:  24(1) Manufacturing and Processing Deduction Claims

This is in reply to your memorandum of June 15, 1989, concerning the taxpayer's claims related to the manufacturing and processing (M & P) deduction, investment tax credits (ITC's) and capital cost allowance (CCA).

24(1)

Your Comments

It is your opinion that in the taxpayer's situation the courts old rule it to have a contract for the supply of services and would not allow the claim.  However, you point out that the court cases which you received all dealt with end producers as opposed to intermediate processors.  In addition, in your opinion the courts would rule that the taxpayer is not processing "goods for sale or lease".  Your reasons for these conclusions are as follows:

1)     Interpretation Bulletin ("IT") 145R, paragraphs 47 to 49, states that work performed on goods owned by another parry is a contract for service and therefore is not M & P.

2)     IT 145R, paragraph 4, and IT 147R2, paragraph 9, both contain the statement that "the manufacturer or processor of the goods need not necessarily be the vendor of the goods".  However, in your opinion as the statements are not explained it implies that we may accept some situations and not others.

3)     A review of court decisions shows that the courts have interpreted the words "goods for sale or lease" in terms of their common legal usage.  This has lead them to always make a distinction between a contract for the sale of goods and a contract for the supply of services.  You make reference to the cases involving Dixie X-Ray Associates Limited, 88 DTC and Crown Tire Service Ltd., 1983 DTC.

4)     The Income Tax Act (the "Act") does not make a clear statement as to who is the vendor of the goods except in subparagraph l25.l(3)(b)(x) of the Act where you state that it states the goods must be for sale or lease by the taxpayer.

Taxpayer's Representations

In the taxpayer's opinion the (1) which were processed were, in fact, processed for sale or lease. `The taxpayer's reasons for this conclusion are as follows:

1)     The definition of Canadian M & P profits in the Act requires that the goods be for sale or lease, it does not state that the goods must be for sale or lease by the taxpayer.

2)     The wording of subparagraph 125.1(3)(b)(x) of the Act differentiates between the selling or leasing of goods by a taxpayer and the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by the taxpayer.  This provision contemplates the processing by the taxpayer of goods for sale or lease by someone other than the taxpayer.

3)     IT 145R, paragraph 4, states "the manufacturer or processor of the goods need not necessarily be the vendor of the goods".

4)     The Crown Tire Service Ltd. case can be distinguished from the taxpayer's situation in that the tires processed by Crown were not ultimately for sale or lease as they were owned by customers.

Our Comments

In our opinion 24(1) is entitled to the M & P deduction, the ITC's and to include the assets in classes 29 and 39.  This opinion is based on the above four representations made by the taxpayer and on the following additional information:

-       IT 331R, paragraph 29, states "Goods manufactured or processed must be for sale or lease but the manufacturer or processor need not be the vendor or lessor of the goods".

-      The comments in paragraphs 47 to 49 of IT 145R, relate to were performed on goods owned by another party where the goods are not for resale or lease by the other party and as such are not applicable to the taxpayer's situation.

-       Comments in paragraph 5 of IT 145R state that the dyeing of cloth can be considered the processing of goods.  As acid and stone washing would be in the same category as dyeing cloth it is unlikely that the activities could be considered a service rather than processing.

-       Paragraph 9 of IT 147R2 states that the manufacturer or processor of the goods need not necessarily be the vendor of the goods.

-       The facts in the Dixie X-Ray Associates Limited case can be distinguished from that of the taxpayer in that the case involved taxpayers who were providing a service and no physical goods were sold or leased.  In 24(1) case, clearly necessarily is the major activity and the finished products are sold by 24(1)

-       A legal opinion received by Specialty Rulings Directorate June 21, 1984 supports the above opinions in that it states that 23

We trust that our comments will be of assistance.

Roberta AlbertA/ChiefMerchandising, Manufacturing andConstruction SectionSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch