23 March 1990 Administrative Letter 74656 F - Capital Cost Allowance Investment Tax Credit M&P Deduction

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)

We are writing in reply to your memorandum of January 18, 1990, concerning 24(1) .

In your memorandum you state that the taxpayer's business consists of the following activities;

24(1)

The taxpayer's income tax returns indicate the following:

24(1)

OUR COMMENTS

In our opinion, it is important to differentiate between the taxpayer's various activities.  From the limited information provided it would appear that the taxpayer engages in the following activities:

24(1)

Each of these activities and the assets used in the activities must be considered separately in order to determine the correct income tax treatment of the taxpayer's business.  Based upon the individual activities undertaken, we offer the following

24(1)

     24(1) do NOT qualify as being in Class 29/39, and Class 10(a) of Schedule II of the Regulations.  In order to qualify in Class 29/39, assets must be used in M & P.  Paragraph 1104(9)(e) of the Regulations states that for the purposes of Class 29/39 M & P does include extracting minerals from a mineral resource and subsection 1104(3) defines "industrial mineral mine", "mineral" and "mining" to include a peat bog, peat and harvesting of peat, respectively, for the purposes of Part 1100 and Schedule II of the Regulations.  In addition, as the definitions apply to all classes in Schedule II, the assets belong in Class 10(k) rather than in Class 10(a) of Schedule II as they are property that was acquired for the purpose of gaining or producing income from a mine.

b)     In our opinion, assets used in the 24(1) do NOT qualify as "certified property" as defined in subsection 127(9) of the Income Tax Act (the "Act") for purposes of claiming ITC's. The assets appear to meet the definition of "qualified property" in subsection 127(9) of the Act, however, they are not a part of a "facility" as defined for the purposes of the Regional Development Incentives Act (the "RDIA").  The RDIA defines "facility" as the structures, machinery and equipment that constitute the necessary components of an M & P operation, other than an initial processing operation in a resource-based industry.  In our opinion, based on the definitions contained in the Regional Development Incentives Regulations, 1974, 24(1) would not be considered to be M & P and fits the definition of an initial processing operation in a resource based industry.

c)     In our opinion, 24(1) does not constitute M & P for purposes of the M & P deduction.  In addition, we feel that the 24(1) disqualifies the taxpayer from making use of the "Small Manufacturers' Rule" contained in section 5201 of the Regulations.  Paragraph 5201(c) of the Regulations provides that a taxpayer cannot use the "Small Manufacturers' Rule" if it is engaged in an activity listed in subparagraphs 125.1(3)(b)(i) to (ix) of the Act at any time during the year.  One of the activities contained in those subparagraphs is the extraction of minerals from a mineral resource and in our opinion this would include 24(1) .

2)     Transportation to the Processing Plant

a)     As stated in paragraph 28 of IT-145R, activities related to the transportation of raw materials 24(1) to the plant do not qualify as M & P activities. Assets used for this activity would not qualify as Class 29/39 assets as subparagraph (a)(i) of Class 29 requires the assets to be used directly or indirectly in the manufacturing or processing of goods for sale or lease.  The automotive equipment used in the transportation would appear to qualify as either Class 10(a) or (k) depending on whether it is used only for transportation 24(1) is loaded onto the equipment from a primary storage area) or is used in the harvesting operation as stated in paragraph 11 of IT-145R (ie., 24(1)   is transferred directly to the equipment at time of harvesting), respectively.

b)     In our opinion, if the equipment is considered to be part of the harvesting operation, it is not "certified property" for the same reasons given in 1 b) above. As such, the taxpayer is NOT entitled to ITC's at the rate available for "certified property" on equipment used in the transportation 24(1) to the plant. If the equipment is used only for transportation to the plant, it will not meet the definition of "qualified property" or "certified property" in subsection 127(9) of the Act as it is NOT used in a qualified M & P activity or in the extraction of minerals from a mineral resource.  Paragraph 4601(c) of the Regulations should be considered in order to determine whether the equipment will qualify as "qualified transportation equipment" as defined in subsection 127(9) of the Act.

c)     As stated in paragraph 2 a) above, transportation of raw materials to the plant does NOT qualify as M & P.  As such, the transportation would not be considered to be M & P in determining whether the taxpayer's activities were primarily M & P for purposes of paragraph 5201(a) of the Regulations relating to the "Small Manufacturers' Rule", assuming the taxpayer could show that it was not restricted by paragraph 5201(c) of the Regulations.

3)     24(1)

a)     In our opinion, 24(1) constitutes M & P for the purposes of Class 29/39.  Any property used primarily in the processing of the 24(1) will be included in Class 29/39 provided it meets the other requirements contained in the description of Class 29/39 assets.  The property would be included in Class 10(k) as it is would not be considered to have been acquired for the purpose of gaining or producing income from a mine.

b)     In our opinion, the processing plant is considered to be a "facility" as defined in the RDIA, and structures, machinery and equipment used in the processing 24(1) will qualify as "certified property" provided that they are primarily for use in a prescribed area.

c)     In our opinion, as stated in 1 c) above

     24(1)

4)     Transporting the Finished Product to a Storage Area

a)     As stated in paragraph 31 of IT-145R, the shipping and storing of finished goods is NOT a qualified M & P activity.  As such, property used in the shipping or storage of the 24(1) will not be classified as Class 29/39 assets.  Automotive equipment would generally be classified as Class 10(a) and other equipment as Class 8.

b)     In our opinion, the equipment used in the transportation and storage of the 24(1) will not meet the definition of "qualified property" or "certified property" in subsection 127(9) of the Act as it is NOT used in a qualified M & P activity.  Again, paragraph 4601(c) of the Regulations should be considered in order to determine whether the equipment will qualify as "qualified transportation equipment" as defined in subsection 127(9) of the Act.

c)     As stated in paragraph 4 a) above, the transportation and storage of finished goods does NOT qualify as M & P in determining whether the taxpayer's activities were primarily M & P for the purposes of paragraph 5201(a) of the Regulations relating to the "Small Manufacturers' Rule", again, assuming the taxpayer could show that it was not restricted by paragraph 5201(c) of the Regulations.

We trust our comments will be of assistance.

R.E. ThompsonChiefMerchandising, Manufacturing and Construction SectionBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch