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.
Principal Issues:
Whether the B.C. Ice Cold Storage Case should be applied to entitle a taxpayer to ITC on a cold storage system constructed to maintain the taxpayer's XXXXXXXXXX products in a frozen condition even though the products were blast-frozen by the taxpayer.
Position:
The taxpayer is entitled to the ITC on the property which is a qualified property as it is used for the purpose of processing.
Reasons:
In the particular situation, the taxpayer blast-freezes the products which are then maintained in a cold storage in the taxpayer's warehouse on special equipment constructed by the taxpayer. This situation is similar to that described in the B. C. Ice and Cold Storage case which decided that blast freezing of foodstuff and maintaining the food in a frozen state is food processing. The Department agrees with this decision as has been stated in numerous correspondence. Accordingly, equipment used to blast freeze and maintain the particular foodstuff would qualify a "qualified property" for the purpose of the investment tax credit and would either be included as class 29 or class 39 property, on the basis that such property would be "used..primarily in manufacturing or processing goods for sale".
January 8, 1996
XXXXXXXXXX Tax Services Office Merchandising, Manufacturing
Audit Division and Partnerships Section
XXXXXXXXXX, Director F.B. Fontaine
(613) 957-4364
Attn: XXXXXXXXXX
Large File Case
952513
XXXXXXXXXX
Frozen Storage - Investment Tax Credit ("ITC")
This is in reply to your memorandum dated September 15, 1995, regarding the above-captioned subject concerning, among other things, the entitlement to the ITC by the taxpayer on certain property.
Our understanding of the situation is as follows:
XXXXXXXXXX
Your Opinion
It is your view that, notwithstanding the B.C. Ice and Cold Storage case (81 DTC 508), the warehouse primarily is used for storing goods that have been processed and simply maintains the XXXXXXXXXX in a frozen state. The warehouse itself was not used to blast-freeze the products. While the systematic procedure to make a product more marketable by breaking bulk is "processing" in accordance with IT-145R, it is your opinion that the repackaging of XXXXXXXXXX from bulk inventory is merely counting or measuring and packaging and, therefore, does not qualify as processing.
It is established that the taxpayer's XXXXXXXXXX (the "products") are blast-frozen by the taxpayer. The B.C. Ice and Cold Storage case dealt specifically with the issue of blast-freezing and the Department agrees with the decision rendered in that case. In reaching its decision, the Tax Review Board relied on the expert testimony provided by Dr. A. Kramer of the University of Maryland. In addition, the Department consulted a Dr. J. Holmes of Agriculture Canada. Both Drs. Kramer and Holmes agreed that the purpose of food processing is to retard change; to extend the life of the product; to retard its decay and to keep the product safe for human consumption and, therefore, maintaining the frozen food in that state would constitute part of food processing. In other words, the Department agreed that the blast-freezing of foodstuff by a taxpayer is "processing" and maintaining the blast-frozen food in a frozen state is a continuation of the processing activity.
Accordingly, we agree that equipment used to blast-freeze the food products as well as the storage equipment used to maintain the products in a frozen condition would be "qualified property" and, therefore, eligible for the ITC for the purposes of subsections 127(9) and 127(11) of the Income Tax Act (the "Act") and section 5202 of the Income Tax Regulations (the "Regulations"). Our reasons are as follows:
(1)You confirmed that the three areas of the warehouse (if not the entire warehouse) is in fact a large refrigerated area which requires one to use a coat and gloves, closely similar to a meat refrigerated room. This would give some support that the particular storage areas are used to maintain the blast-frozen products in that condition.
(2)For the purposes of the definition of "qualified property", property must be acquired for use primarily in "manufacturing or processing" which latter term does not include the "storing of finished goods". In this case, however, the storage equipment is not used for storing products that have been processed, as you contend. The position, as taken in the B.C. Ice and Cold Storage case, is that "processing" by a taxpayer continues as long as the product is maintained in a frozen state and the taxpayer also carried out the blast-freezing of the product. And this is what happened in this situation. On the other hand, we have stated that the maintaining of frozen foods by a taxpayer who does not perform the blast-freezing is not food processing.
(3)Paragraph 6 of Interpretation Bulletin IT-145R provides that the activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. This position was adopted following the decision of the Federal Farms Limited case (66 DTC 5068). In the present situation, the repackaging of the bulk products into smaller bags carried on in the warehouse would allow certain of the taxpayer's customers, such as grocery stores, to market the products to their customers in such smaller packages and, accordingly, would appear to satisfy this position of making the products more marketable. This can be distinguished from the Harvey C. Smith Drugs case (86 DTC 1243) wherein the court found that pills received from the manufacturer were already in dosage form when received by the pharmacist and the dispensing thereof did not make them any more marketable. Also, the court found that before the alleged "processing" by the pharmacist, the sale of the pills to the customer had already been consummated. In the present situation, the taxpayer follows a systematic procedure of repackaging the products in smaller bags and it would be difficult to argue that the products were pre-sold when so repackaged.
(4)Based on the B.C. Ice and Cold Storage case, we would conclude that:
(i)paragraph (2) above, except the last sentence thereof, applies in the particular situation.
(ii)the storage equipment would be "used...primarily for the purpose of manufacturing or processing goods for sale" and would be "qualified property" pursuant to paragraph (b) and subparagraph (c)(i) of the definition of the term under subsection 127(9) of the Act. Consequently, the equipment should properly be included in class 39 (as it would otherwise meet the requirements of subparagraph (a)(i) of class 29 of Schedule II of the Regulations) and would qualify for the ITC.
(iii)because "processing" continues in the warehouse (and in any other equipment owned by the taxpayer that maintains the products in a frozen condition), the products likely would not be considered "finished" for the purposes of subparagraph 127(11)(b)(i) of the Act until the products are removed from the warehouse or any such other equipment. (See paragraph 4 of IT-411 in the case of ready-mix concrete. The concrete is not considered finished until the concrete is removed from the concrete truck).
(iv)as a result of (iii) above, any "assembling or handling" and "quality and production control" of the products carried on in the warehouse would, therefore, be considered to be "qualified activities" pursuant to the definition of the latter term under section 5202 of the Regulations.
We hope that the above comments will provide some clarification of the law as it applies to the particular situation.
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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