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.
February 4, 1994
XXXXXXXXXX
District Office Head Office XXXXXXXXXXResource Industries Section Chief of Audit
Attention: XXXXXXXXXX Technical Advisor
Investment Tax Credit ("ITC")
This is in reply to your memorandum of November 18, 1993 wherein you have requested our comments on certain issues, relating to the potential qualification for ITC of trucks and trailers used to haul logs or wood chips, which have arisen subsequent to our memorandum to you of XXXXXXXXXX We also acknowledge our various telephone conversations concerning this matter.
These issues stem from two major questions contained in a letter which you received from XXXXXXXXXX The first such question involves the use of the word "exclusively" vs. "primarily" in correspondence describing the use of certain assets for the purpose of hauling logs in Canada.
The second question described by XXXXXXXXXX
The issue is whether the Assets used to haul wood chips can be considered to be "used for the purpose of logging or manufacturing" so as to constitute "qualified property" for ITC purposes in the following situations:
A. The wood chips are transported from a location in the woods where the landowner or logging contractor has stationed a wood chipper.
B. The wood chips are transported from a sawmill operation where they are a by-product processed from waste material.
Our Comments:
With regard to the first question, the preamble to paragraph (c) of the definition of "qualified property" (the "Definition") in subsection 127(9) of the Income Tax Act (the "Act") contains a requirement that the property be acquired to be used by the relevant taxpayer in Canada primarily for a purpose specified in that paragraph. Therefore, we agree that where contractors own trucks and trailers which otherwise meet the requirements of the Definition, such equipment would be eligible for ITC where it is being used by the contractors in Canada primarily for the purpose of logging, e.g., transporting logs from the cut area to the mill as described in our previous memorandum. The "requirements" of the Definition would include being "prescribed machinery and equipment" pursuant to subsection 4600(2) of the Income Tax Regulations (the "Regulations"). The meaning of the word "primarily" is discussed in paragraph 16 of Interpretation Bulletin IT- 331R; where equipment is used more than 50% of the time for logging it would be considered to be used primarily for logging.
In order to satisfy the "prescribed machinery and equipment" requirement contained in paragraph (b) of the Definition, a property included in paragraph (a) of Class 10 to Schedule II of the Regulations which is a truck designed for use on highways or streets, would, pursuant to paragraph 4600(2)(f) of the Regulations, have to be "a logging truck acquired after March 31, 1977 to be used in the activity of logging and having a weight...in excess of 16,000 pounds". In addition, as noted above, paragraph (c) of the Definition also requires that all of the property in question be acquired to be used by the owner in Canada primarily for the purpose of the activities listed in subparagraphs (c)(i) through (c)(xiii) thereof. The activities in question with regard to this particular situation are those contained in subparagraph (c)(i), being "manufacturing or processing goods for sale or lease", and in subparagraph (c)(ix), being "logging". It should also be noted that the provisions of subsection 127(11) of the Act are relevant to the Definition with paragraph 127(11)(b) thereof expressly excluding, from the purposes referred to in paragraph (c) of the Definition, "shipping...of finished goods".
The determination as to whether or not the various requirements referred to in the preceding paragraph are satisfied in a particular situation involve questions of fact which can only be resolved with reference to the facts and circumstances of that situation. There are, however, various decisions from the Courts which may assist in making such a determination.
In considering the purpose test contained in the Definition with respect to "logging", the Federal Court of Appeal (the "FCA") in its decision in the Lor-Wes Contracting Ltd. case, 85 DTC 5310 at 5313, indicated that:
...it is the use of the equipment that has to be by the taxpayer claiming the benefit, not that the purpose of logging has to be uniquely his. It suffices if the ultimate purpose, as defined by the overall contractor, is that of logging.
The FCA also indicated at the same page that the equipment in question in that case was "used to carry out an integral part of logging". In addition, prior to concluding that such equipment was used by the taxpayer "primarily for the purpose of logging" the FCA indicated at page 5314 that:
It is impossible to regard the work of such road builders, whose total operation is dedicated to building roads for logging, as isolated from the totality of the logging industry.
The FCA went on to indicate at the same page that support for its conclusion could be found with reference to the "evil sought to be remedied" by the legislators, i.e., "any slowdown in investment", which in the view of the FCA "would be best achieved by encouraging the logging industry in its integral totality."
In our view, the above decision from the FCA indicates that equipment owned by a contractor may potentially satisfy the "used...primarily for the purpose of logging" test where it is used by the contractor as an integral part of "logging". In its decision in The James MacLaren Company Limited case, 52 DTC 1030 at 1031, the Exchequer Court of Canada (the "Ex. Ct.") indicated, with reference to its decision in the Spruce Falls Power and Paper Company Limited case, 52 DTC 1023, that income from logging operations arose "up to the point where the logs were taken into the mill for processing". It was also decided in The James MacLaren Company Limited case, at pages 1032 and 1033, that the cost of "barking" the logs was to be excluded from the cost of logging operations, with the Court indicating "barking" was to be "considered as part of manufacturing or processing".
In our opinion, the Court decisions referred to in the previous paragraph support the view that "logging" ends upon delivery of the logs to the sight where "processing" of the logs first occurs. This view is also consistent with the comments contained in the first sentence of paragraph 12 of Interpretation Bulletin IT-145R as well as those contained in paragraph 2 of Interpretation Bulletin IT-501 as reflected in the Special Release thereto dated December 30, 1987. In the decision rendered in the Tenneco Canada Inc. case, 91 DTC 5207 at page 5209, while considering the word "processing", as utilized in the provisions of section 125.1 of the Act, the FCA indicated (with reference to the decision of the Ex. Ct. in the Federal Farms Limited case 66 DTC 5068, affirmed by the Supreme Court 67 DTC 5311) that:
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.
The FCA went on to say, at the same page, that "(p)rocessing occurs when raw or natural materials are transformed into saleable items."
The three documents to which you referred in the third paragraph of your memorandum do not resolve this issue in the situation at hand because:
i) In order for their "handling" to be relevant for the purpose of subparagraph (a)(iii) of the definition of "qualified activities" contained in section 5202 of the Regulations, the determination would have already been made that the wood chips involved in the first document constituted "goods in process".
ii) The ability of the word chips to be encompassed by the provisions of subparagraph 700(1)(d)(i) of the Regulations in the second document is due to the words "logs, timber and products produced therefrom" found in that provision.
iii) The third document concerns a situation where the trucks and trailers appear to be used primarily to transport pulpwood or logs rather than wood chips.
In our view, based upon the above factors, the Assets would be used, in both of situations A and B described above, in transportation occurring after the completion of logging operations. Therefore, in our opinion, the Assets could not be "used... primarily for the purpose of...logging" for the purposes of subparagraph (c)(ix) of the Definition.
It should also be noted that, the wood chips described in situations A and B above may, depending upon the facts of a particular situation, represent "finished goods" for the purposes of paragraph 127(11)(b) of the Act. For example, where they are being sold by a landowner, sawmill owner or independent contractor to the pulp and paper company rather than forming "goods in process" in the integrated operations of such a company. In the latter situation the independent contractor would, basically, be transporting this material to the next stage in such operations which may not yield a saleable product or "finished good" until the end of such integrated operations. In the former situation, the shipping of the wood chips would be excluded from the purposes referred to in paragraph (c) of the Definition pursuant to the provisions of paragraph 127(11)(b) of the Act, as indicated above, without having to rely on the above analysis concerning "logging".
The question remaining to be considered is whether the use of the Assets could satisfy the "used... primarily for the purpose of...manufacturing or processing goods for sale or lease" for the purposes of subparagraph (c)((i) of the Definition.
As noted above, in order to satisfy the "prescribed machinery and equipment" requirement contained in paragraph (b) of the Definition, a property included in paragraph (a) of Class 10 to Schedule II of the Regulations which is a truck designed for use on highways or streets, would have to satisfy the requirements contained in paragraph 4600(2)(f) of the Regulations, which include being "a logging truck acquired...to be used in the activity of logging". Since, as discussed above, in our view the transportation involved in both of situations A and B occurs after the cessation of logging operations, this requirement could not be satisfied in either of those situations with respect to such a truck included in the Assets.
As discussed in the previous paragraph, where the wood chips are "finished goods", shipping of same would be excluded, pursuant to the provisions of paragraph 127(11)(b) of the Act, from all of the purposes referred to in paragraph (c) of the Definition. Therefore, in such circumstances all of the property comprising the Assets would be precluded from satisfying such purpose test.
It is also our view that the transportation of goods in process which may arise in situations A and B above does not constitute manufacturing and processing for the purposes of the Definition (you should note that we previously expressed a similar view to the same office of the accounting firm referred to above in an interpretation letter dated January 7, 1988; see document #E55151). This conclusion is consistent with the above discussion of the meaning of the term "processing" and with the comments concerning the phrase "manufacturing or processing" contained in paragraph 5 of Interpretation Bulletin IT-145R. We would also note that our view with regard to the reference to the "handling of goods in process", in subparagraph (a)(iii) of the definition of "qualified activities" contained in section 5202 of the Regulations, relevant in determining a taxpayer's "Canadian manufacturing and processing profits" remains as stated in the above-mentioned document, as follows:
Where a taxpayer's goods in process are transported by the taxpayer or a subcontractor from one plant to another for further processing, it is our general view that this activity would not constitute the "handling of goods in process". We regard this phrase as generally referring to handling that occurs as manufacturing or processing steps are being carried out.
Therefore, any property comprising the Assets not otherwise excluded by the factors previously discussed above, would be precluded from being "used... primarily for the purpose of...manufacturing or processing goods for sale or lease" for the purposes of subparagraph (c)((i) of the Definition.
If you have any further questions concerning this matter, please do not hesitate to contact us.
for A/DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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