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.
September 29, 1993
APPEALS BRANCH RULINGS DIRECTORATE
Appeals and Referrals Division
Resource Industries Section
L. Tremblay
Director Peter Lee
957-8977
Attention: Ken Berini 8-931576
XXXXXXXXXX
Manufacturing and Processing Activities
This is in reply to your memorandum of May 26, 1993 wherein you requested our opinion on whether a primary crusher and a conveyor belt used by XXXXXXXXXX in a dolomitic limestone quarry operation would be considered as Class 8, 10, 22 or 29 assets for the purposes of calculating capital cost allowance, and whether their costs would be included in the calculations of investment tax credit and manufacturing and processing profits deduction. We apologize for the delay in replying to you.
Facts
XXXXXXXXXX
XXXXXXXXXX
Views of Taxpayer's Representative
6. In the view of the representative of XXXXXXXXXX the primary crushing operation in the Quarry is accomplished by the blasting process, the processing operation commences at the Crusher and the conveyance of shot rock from the Crusher to the Plant constitutes "handling of goods in process" within the meaning of the phrase "qualified activity" under section 5202 of the Regulations. Accordingly, this position is consistent with the first and third sentences of paragraph 11 of IT-145R .
Auditor's Views
7. XXXXXXXXXX
Appeals' Views (XXXXXXXXXX D.O.)
8. XXXXXXXXXX
Opinions Requested
9. You have requested our opinions as follows:
(a) whether the Crusher and Conveyor have been used
in manufacturing and processing activities; (b) whether the Crusher is an asset related to a
processing activity to be included in Class 29
assets or whether it should be included in Class
8, Class 10 or Class 22; (c) whether the Coveyor has been used in "qualified
activities" within the meaning of the expression
under section 5202 of the Regulations.
Our Views
10. Pursuant to Class 10(k) under Schedule II of the Income Tax Regulations (the "Regulations"), qualified property is:
(k) property (other than a property included in
Class 28 or property described in paragraph (l)
or (m)) that was acquired for the purpose of
gaining or producing income from a mine and that
is (i) a structure that would otherwise be
included in Class 8, or (ii) machinery or
equipment, ....
11. Whether the Crusher and Conveyor could be classified as Class 10(k) assets depends on whether they were acquired for the purpose of gaining or producing income from a mine.
The Quarry produces industrial mineral—limestone, primarily for use as aggregates or for other construction purposes. There was no certification by the Department of Energy, Mines and Resource on such deposit as "mineral resource" within the meaning of the term under subsection 248(1) of the Act. Subsections 1104(7) and (8) of the Regulations, as they then applied to the relevant years, specifically exclude sand pits, gravel pits and stone quarries from the term "mine", but only for the purposes of Classes 12 and 28 in Schedule II of the Regulations. There is no such restriction in the description of the terms "income from a mine" and "mine" in subsection 1104(5) and (6) of the Regulations which apply for the purposes of Class 10. Accordingly, these regulations do not specifically preclude the Crusher and Conveyor from being classified as Class 10(k) assets.
In the case of Nomad Sand and Gravel Limited,
91 DTC 5032 (FCA), Urie, J.A. cited with approval the case of Canadian Gypsum Co., Ltd.,
65 DTC 5125 (Exch. Ct.) in which the Exchequer Court considered whether an open-pit gypsum operation was a mine in the context of "income derived from the operation of a mine" for the purpose of the three year tax exemption available at that time. Urie, J.A. in the case of Nomad Sand and Gravel Limited adopted certain principles from the case of Canadian Gypsum Co., Ltd. as follow at page 5037:
Three things are noteworthy from that quotation
(from the case of Canadian Gypsum Co.,
Ltd.). First, the meaning of the word
"mine", inter alia, "is by no means fixed
and is readily controlled by the context and
subject matter." Two, the size of the operation
and the skills of those involved was relevant.
Three, the learned Judge would have had
difficulty in finding the operation in question
to be a mine had it not been for the admission by
the Minister that it was not a stone quarry.
In concluding that the Respondent's front-end loaders were not machinery and equipment "acquired for the purpose of gaining or producing income from a mine" and they were not Class 10 assets but were properly characterized as Class 22 assets, Urie, J.A. commented at page 5037:
... the operation here was a gravel pit which is
akin to a stone quarry... These factors (the
above-noted three principles), when coupled with
Pigeon J.'s comment that the word "mine is not in
common use to describe a sand or gravel pit..."
(in the case of Avril Holdings Ltd.,
70 DTC 6366 (SCC) at page 6368), and the fact that
when Parliament wished to include or exclude such
operations from the ambit of "mines" it said so,
leads me irresistibly to the conclusion that the
operation in question is not a mine.
The Quarry operation is similar to the sand and gravel operation in the case of Nomad Sand and Gravel Limited in that they are both considered as stone quarries. Based upon this case, it is our view that the Quarry operation is not a mine, and that the Crusher and Conveyor should not be classified as Class 10(k) assets.
12. Pursuant to Class 22 of Schedule II of the Regulations, qualified property is:
... power-operated movable equipment designed for
the purpose of excavating, moving, placing or
compacting earth, rock, concrete or asphalt,
except a property included in Class 7.
In the case at hand, both the Crusher and Conveyor are not movable equipment. Furthermore, the Crusher was not designed for the purpose of excavating, moving, placing or compacting rock. Accordingly, it is our view that the Crusher and Conveyor should not be classified as Class 22 assets.
13. Pursuant to Class 29 of Schedule II of the Regulations, qualified property is:
... property acquired by the taxpayer... to be
used directly or indirectly by him in Canada
primarily in the manufacturing or processing of
goods for sale...
Pursuant to subsection 1104(9) of the Regulations, for the purposes of Classes 29 in Schedule II, "manufacturing or processing" does not include:
... (g) producing industrial minerals...
For the purposes of calculating manufacturing and processing profits deduction and investment tax credit under subsections 125.1(1) and 127(5) of the Act, respectively, there are similar exclusions of "producing industrial minerals" from the definition of "manufacturing or processing" under subparagraphs 125.1(3)(b)(vii) and 127(11)(a)(i) of the Act, respectively.
14. In the case at hand, pursuant to the Regulations, the Crusher and Conveyor could be classified as Class 29 assets only if they were primarily used in processing, and not producing, limestone. Otherwise, they would be classified as Class 8 assets. Similarly, the costs of the Crusher and Conveyor could be included in the calculations of manufacturing and processing profits deduction and investment tax credit under subsections 125.1(1) and 127(5) of the Act, respectively, only if they were primarily used directly or indirectly in processing, and not producing, limestone.
15. Whether the Crusher and Conveyor have been primarily used directly or indirectly in processing, and not producing, limestone, is a question of fact to be determined. Paragraph 11 of Interpretation Bulletin
IT-145R dated June 19, 1981, states the following:
Producing industrial minerals is considered to
include all activities connected with the mining,
excavating and extracting the mineral material
from the mine or pit area, including any
primary crushing operation required to make it
transportable from the mine or pit area as well
as the transporting of the material from the mine
or pit. Subsequent activities such as
crushing, washing, screening and sorting of the
mineral material in order to make the product of
the mine or pit marketable are considered to be
processing activities. The Department recognizes
that in some cases some or all of these
subsequent activities may be conducted within the
confines of the mine or pit, in which case
processing will commence after the delivery of
the excavated pit run material to the first of
these processing operations. The Department
considers an industrial mineral to include any
mineral that does not qualify as a mineral from a
deposit that is a mineral resource as defined in
subsection 248(1). Examples of industrial
minerals (essentially non-metallic minerals) are:
gravel, limestone, clay, sand, stone and
feldspar.
(Underlines added)
Both the auditor and appeal officer of XXXXXXXXXX District Office have relied on the first sentence of the above-noted Department's position in coming to the conclusion that the Crusher and Conveyor have been used in producing, and not processing, industrial minerals.
16. In the case of Tenneco Canada Inc., 91 DTC 5207 (FCA), Linden J.A. commented at page 5209:
The two tests for determining whether a taxpayer
processes goods are (i) whether there is a change
in the form, appearance or other characteristics
of the goods subject to the operation, and (ii)
whether the product becomes more marketable.
(See Federal Farms Ltd. v. M.N.R. (1966)
Ex. C.R. 410, at 416, aff'd S.C.C.
67 DTC 5311.)... Processing occurs when raw or natural
materials are transformed into saleable items.
Such raw or natural materials are unsaleable, or
would sell for a lesser price, in their
unprocessed state. Thus, gravel treated by
washing, drying and crushing becomes more
valuable (Nova Scotia Sand and Gravel Limited.
v. The Queen,
80 DTC 6298 (FCA)), as do
vegetables prepared by washing, brushing,
spraying and packing (Federal Farms v.
M.N.R.) Both these operations are
processing.
In the case of Nova Scotia Sand and Gravel Limited, the Court concluded that the taxpayer was not engaged in producing industrial minerals, rather, it was engaged in a processing operation, and that it qualified for the manufacturing and processing tax credit and the capital cost allowance. Thurlow C.J. commented in this case at page 6301:
... it was not intended by the use of the
expression "producing industrial minerals" to
include the processing of industrial minerals to
produce specialized industrial mineral
products... I would allow the appeal... on the
basis that the appellant's operations at its
plant or plants in processing by washing,
screening, sorting, etc., excavated pit run
sand and gravel to produce specialized sand and
gravel products do not fall within the meaning of
"producing industrial minerals" in paragraph
125.1(3)(b) of the Act or subsection 1104(9) of
the Regulations. (Underlines added)
In the case at hand, it was agreed by the Department and XXXXXXXXXX that, based upon the case of Nova Scotia Sand Gravel Limited, prior to 1988 all equipment in the Plant, including the primary crusher referred to in 3 above, were classified as Class 29 assets.
XXXXXXXXXX
Based upon the above-noted two tests, it is our view that there is a respectable argument that the Crusher has been used for "processing", and not "producing", because the Crusher helps to reduce the size of stone by more than 50% to make it more marketable (N.B., this is unlike the primary and secondary crushing in metal-mineral mining, the purpose of which is to reduce the size of the crude ore from the mine to transport and to free up the particles of ore that are to be concentrated; the remaining stone after the concentrating stage is generally not marketable).
17. In the case of Bethlehem Copper Corp. Ltd., 74 DTC 6520 (SCC), the Court, in concluding that the respondent company's income from the operation of the second ore body was exempt from tax, decided that the phrase "operation of a mine" in section 83(5) refers only to the extraction of ore from an ore body and does not include processing of the ore after it has been produced (N.B., the phrase "operation of a mine" has a broader meaning than the term "production", by analogy, see the case of Cominco Ltd., 84 DTC 6535, at page 6538, affirmed by the Court of Appeal without written reasoning). Based upon this case and the case of Nova Scotia Sand Gravel Limited, it is our view that in XXXXXXXXXX circumstances, there is a respectable argument that the production of stone from the Quarry is completed when XXXXXXXXXX bedrock quarry has been drilled and blasted to explode the stone into manageable sizes and the stone has been transported from the quarry surface.
18. After XXXXXXXXXX bedrock quarry has been drilled and blasted to explode the stone into manageable sizes, the stone becomes transportable by the truck from the quarry surface to the Crusher. Accordingly, for the purpose of paragraph 11 of
IT-145R , it is our view that the Crusher operation is not a "primary crushing operation required to make it transportable from the mine", and that the "processing commences after the delivery of the excavated pit run material" to the Crusher.
19. Based upon the facts in the case at hand and the above-noted jurisprudence, our views on the matters referred to in 9 above are as follows:
(a) for the purpose of calculating the investment tax
credit under subsection 127(5) of the Act, the
Crusher and Conveyor are considered to have been
used primarily for the purpose of manufacturing
and processing goods for sale; (b) for the purpose of calculating the capital cost
allowance under paragraph 20(1)(a) of the Act,
the Crusher and Conveyor are considered as assets
primarily used directly or indirectly in
manufacturing and processing goods for sale,
accordingly, they should be classified as Class
29 assets, and not Class 8, Class 10 or Class 22
assets; (c) for the purpose of calculating the manufacturing
and processing profits deduction under subsection
125.1(1) of the Act, the Crusher and Coveyor are
considered to have been used in "qualified
activities" within the meaning of the expression
under section 5202 of the Regulations by virtue
of paragraph (b) or subparagraph (a)(iii) of such
definition.
If you have any questions or wish to discuss any of the above, please contact the writer.
for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate
Statement of Principal Issues
Re: XXXXXXXXXX Peter Lee
Production v. Processing of Industrial Mineral 8-931576
Investment Tax Credit September 28, 1993
Manufacturing and Processing Profits Deduction
Capital Cost Allowance
Background
XXXXXXXXXX
Issues
1. Whether the quarry is a "mine" for the purpose of Class 10(k).
2. Whether the new primary crusher and conveyor are earth moving equipment for the purpose of Class 22.
3. Whether the new primary crusher and conveyor are considered to have been primarily used directly or indirectly in processing, and not producing, industrial mineral, for the purposes of calculating capital cost allowance, manufacturing and processing profits deduction and investment tax credit under paragraph 20(1)(a), subsections 125.1(1) and 127(5) of the Act, respectively.
Analysis and Positions Taken
1. Based upon the case of Nomad Sand and Gravel Limited, 91 DTC 5032 (FCA), Canadian Gypsum Co., Ltd., 65 DTC 5125 (Exch. Ct.), and Avril Holdings Ltd., 70 DTC 6366 (SCC), it is our view that XXXXXXXXXX quarry is a stone quarry - an industrial mineral mine, but, it is not a "mine", within the common meaning of the term, for the purpose of Class 10(k).
2. Both the Crusher and Conveyor are not movable equipment. Furthermore, the Crusher was not designed for the purpose of excavating, moving, placing or compacting rock. Accordingly, it is our view that the Crusher and Conveyor should not be classified as Class 22 assets.
3. Based upon the facts of this situation and the cases of Tenneco Canada Inc., 91 DTC 5207 (FCA), Nova Scotia Sand and Gravel Limited. v. The Queen, 80 DTC 6298 (FCA), Federal Farms Ltd. v. M.N.R. (1966) Ex. C.R. 410, at 416, aff'd S.C.C.
67 DTC 5311, and Bethlehem Copper Corp. Ltd.,
74 DTC 6520 (SCC), (in particular, the two tests in determining whether an activity is "processing" in the case of Federal Farms—(i) whether there is a change in the form, appearance or other characteristics of the goods subject to the operation and (ii) whether the product becomes more marketable, and the conclusion in the case of Nova Scotia Sand and Gravel that producing industrial mineral does not include processing industrial mineral), it is our view that the new primary crusher and conveyor are considered to have been primarily used directly or indirectly in processing, and not producing, industrial mineral, for the purposes of calculating capital cost allowance, manufacturing and processing profits deduction and investment tax credit under paragraph 20(1)(a), subsections 125.1(1) and 127(5) of the Act, respectively.
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