18 January 1991 Internal T.I. 902447 F - Manufacturing and Processing 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.

Dear Sirs:

Re:  Manufacturing and Processing Deduction ("M&P Deduction") Section 125.1 of the Income Tax Act (the "Act")

This is in reply to your letter dated September 7, 1990 concerning the operations of grocery stores owned by your clients.  You ask whether the M&P deduction was allowed in respect of income generated from the meat, bakery and produce departments of those stores for the years 1973 to 1980.

Matters referring to completed transactions or accessing practices of previous years should be addressed to the officials of your local district taxation office since they would relate to auditing and assessing actions normally undertaken by such offices.  While we are unable to provide confirmation of the income tax effects of the particular situations, we can offer the following general comments:

1.     Interpretation Bulletins IT-145 and IT-145R dated February 5, 1974 and June 19, 1981, respectively provide certain comments concerning the application of section 125.1 of the Act.  The bulletins state that "manufacture of goods normally involves the creation of something while processing of goods usually refers to a technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth".

2.     While a particular grocery store would not necessarily undertake these activities, paragraph 10 of IT-145 indicates that, among other things, the aging of cheese, cleaning and polishing of beans and cleaning, sorting and grading of eggs carried on by a taxpayer would be considered to be processing activities.  In addition, any of the activities described under the definition of "qualified activities" in section 5202 of the Income Tax Regulations (the "Regulations") such as receiving and storing of raw materials, when performed in connection with manufacturing and processing would themselves be considered as manufacturing and processing.  In accordance with paragraph 31 of IT-145R any homogeneous product that must be broken from bulk and packaged before it is sold is generally considered to be raw material before the time it is packaged.  This could apply, for example, to meat purchased in bulk that needs to be cut, deboned or ground and wrapped in smaller packages prior to being sold.  Such activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make the product more marketable are generally considered to be processing for the purposes of section 125.1.

3.     Generally, the activities of distributing, retailing or maintaining frozen food that was acquired frozen or the thawing of such food by a taxpayer would not be considered to be food processing.  However, the Department considers that original blast freezing and maintaining of food at O deg F by a taxpayer would be considered as a processing activity.  Also, it is our view that the making of bread and pastries for sale would be a qualified activity for the purposes of section 125.1 of the Act.

4.     Based on the interpretation set out in paragraph 1, you will appreciate that it is a question of fact whether the activities of a particular corporation can be described as manufacturing or processing and that in each particular circumstance the actual activities of the taxpayer must be determined.  In any case, an activity by a corporation would not be considered as "manufacturing or processing" for the purposes of the Act and the Regulations if the corporation did not meet the 10%-of-gross- revenue test described under subparagraph 125.1(3)(b)(x) of the Act.

Subject to our comments above, it is our view that certain activities in the meat, bakery and produce operations carried on by a corporation could be considered as manufacturing and processing.  Accordingly, property that was acquired for use "primarily in manufacturing and processing" activities would be included in Class 29 of Schedule II of the Regulations provided that all other requirements of Class 29 were met.  Additionally, property that was acquired after June 23, 1975 for use "primarily in manufacturing and processing" activities would qualify for the investment tax credit provided that all other requirements of subsection 127(10) of the Act, as it refers to the 1975 to 1980 taxation years, were met. Please refer to Interpretation Bulletins, IT-147R2 and IT-331R which discuss Class 29 property and the investment tax credit, respectively.

In view of the limited information submitted, we hope that our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch