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 11, 1996
XXXXXXXXXX TAX SERVICES OFFICE HEADQUARTERS
Resource Industries Section
Attention: XXXXXXXXXX Denise Dalphy
Technical Advisor (613) 957-9231
Audit Services
962065
Manufacturing or Processing of Goods for Sale or Lease
This is in reply to your memorandum of June 6, 1996 wherein you requested our opinion as to whether the business carried on by XXXXXXXXXX would qualify as "manufacturing or processing of goods for sale or lease".
Facts
XXXXXXXXXX
(per paragraphs 4 and 44 of Interpretation Bulletin IT-145R, as amended by the Special Release dated February 28, 1986, which is based on the McGraw-Hill Ryerson Ltd. case (82 DTC 6142, aff'g. 80 DTC 6211).
XXXXXXXXXX
Issue
Does this activity of printing a newspaper which is to be sold by the customer (and not the printer) qualify as "manufacturing or processing goods for sale or lease (emphasis added)" such that XXXXXXXXXX would be eligible for the M&P deduction, ITCs and accelerated CCA?
Position
The better view is that XXXXXXXXXX is carrying on M&P of goods for sale or lease, notwithstanding that the contract between XXXXXXXXXX evidences a contract of service rather than a contract for the sale of goods.
RATIONALE
The Legislation
The definition of "Canadian manufacturing and processing profits" in subsection 125.1(3) the Income Tax Act (the "Act") refers to "manufacturing or processing in Canada of goods for sale or lease". It does not state that the goods must be for sale or lease by any particular taxpayer.
The wording of paragraph (l) of the definition "manufacturing or processing" in subsection 125.1(3) of the Act differentiates (in subparagraphs (i) and (ii)) between a corporation that sells or leases the goods that it manufactures or processes and a corporation that manufactures or processes goods for sale in Canada where that corporation does not sell or lease those goods.
The Act clearly contemplates manufacturing or processing by a taxpayer of goods that will be sold or leased by someone other than the taxpayer.
Interpretation Bulletins
The Department's longstanding position, as described in our Interpretation Bulletins, is that the manufacturer or processor of the goods need not be the ultimate vendor of the goods.
IT 145R (Canadian M&P Profits - Reduced Rate of Corporate Tax), paragraph 4, states "the manufacturer or processor of the goods need not necessarily be the vendor of the goods. However, the reduced rate is not applicable to income arising from service or repair activities carried out on goods which are not for sale or lease ". IT 145 also contained the same statement. IT 331R (Investment Tax Credit), paragraph 29, and IT 147R3 (CCA - Accelerated Write-off of M&P Equipment and Machinery), paragraph 12, contain the same statement.
Departmental Opinions
In 1989, in another case dealing with an intermediate processor, XXXXXXXXXX, Rulings opined that the taxpayer, which had been subcontracted XXXXXXXXXX, would qualify for M&P.
In 1974 the Department gave the following opinion to XXXXXXXXXX:
"The manufacturing and processing referred to in section 125.1 of the Income Tax Act must be of goods for sale or lease but they do not have to be leased or sold by the manufacturer or processor. Accordingly the custom printer (emphasis added) would not be barred because he was not himself selling the material he prints as long as someone else for whom he is doing the work will sell it. On the other hand material printed for free distribution will not qualify."
Another opinion that was favourable to taxpayers was provided to the St. John's District Office with respect to the developing and processing of photographic films where the processor did not sell the goods. In addition, the September 30, 1974 Green Sheets advised:
"7.Q.Would the activities of a company which custom processes goods for another company qualify as a manufacturing or processing activity?
A.Yes. The goods that are manufactured or processed by a company need not necessarily be goods that are sold by that company (as long as they are ultimately sold by the company for which the custom processing is being done)."
XXXXXXXXXX
Caselaw
A decision that the activities of XXXXXXXXXX are not M&P for sale would not be contrary to the established line of case law.
The line of cases that includes the Crown Tire, Coopers and Lybrand, and Lehmann Bookbinding focused on the nature of the contract between the "processor" and its customer and requires a determination as to whether the contract is a contract for the sale of goods or a contract for labour and materials. These cases rejected the line of cases such as Halliburton and Nowsco, where the focus was not upon the contract between the parties, but whether the taxpayer's profits arise from its manufacturing or processing activities.
However, it appears that these cases are distinguishable from XXXXXXXXXX in that, unlike the situation in XXXXXXXXXX, in the Crown Tire, Coopers and Lybrand, and Lehmann Bookbinding cases there does not seem to have been an ultimate vendor of the goods.
In our view, while there must be a sale of the goods, either by the processor or the customer, it is not necessary that there be a contract for the sale of goods between the customer and the subcontractor for a taxpayer to fall within the ambit of the M&P tax incentives in the Act.
XXXXXXXXXX
The definition "cost of labour" in section 5202 of the Regulations refers to, in subparagraph (b)(iii) therein, "a service or function that would normally be performed by an employee of the corporation". Schedule 4 L - Calculation of Cost of Labour on the T2S(27) describes this portion of the legislation, almost word for word, and it is discussed in paragraph 19 of Interpretation Bulletin IT-145. This Bulletin states: "the term "normally" means "commonly", "usually", or "under normal or ordinary conditions". It would apply in cases where a corporation usually performs certain services or functions itself but for some reason, such as lack of capacity, short-run economic conditions, labour problems, or machinery breakdowns, has sublet all or part of the work to third parties..." Based on the facts that you have provided, it would seem that the XXXXXXXXXX is normally subcontracted and not normally performed by XXXXXXXXXX employees.
Please contact the writer if we may be of further assistance.
A/Chief
Resource Industries Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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