18 February 1997 Internal T.I. 9632377 - MANUFACTURING AND PROCESSING

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 purchase and combining of finished goods XXXXXXXXXX constitutes processing for purposes of section 125.1.

Position:

No.

Reasons:

No change in the form, appearance or other characteristic of the goods subject to the operation.

		February 18, 1997

	Toronto Centre TSO             Headquarters
	Business Enquiries	                               B.G. Dodd
	4th Floor                      (613) 957-8954	

Att: Gigi Ng
     443-6-6
			                               		963237

XXXXXXXXXX
Manufacturing and Processing ("M&P") Deduction

This is in reply to your memorandum dated September 25, 1996. We apologize for the delay.

The issue involves XXXXXXXXXX initial request, dated April 8, 1996, for our views on whether it would qualify for an M&P deduction under section 125.1 of the Income Tax Act (the "Act"), our reply dated July 10, 1996, and their follow-up letter to you dated September 23, 1996 on which you have asked for our comments.

We would note initially, as discussed in our July 10 letter, that whether or not a particular activity qualifies for the M&P deduction is a question of fact. The determination is one which can best be made by the local tax services office because it is equipped, normally in the course of an audit, to conduct a detailed examination of the taxpayer's operations, books and records, ascertain all of the facts which are relevant to the issue, make the necessary enquiries, and form an appropriate conclusion. As set out in paragraph 22 of Information Circular 70-6R3 concerning advance income tax rulings, the Department's tax services offices consider requests for written opinions on completed transactions. This was the basis for our suggestion that XXXXXXXXXX pursue the matter with your office.

With respect to XXXXXXXXXX position as set out in its follow-up letter of September 23, 1996, it provides little new in the way of facts to be considered. Their comments do not alter the general views as set out in our July 10 letter. We also have the following observations.

-We have some difficulty with respect to XXXXXXXXXX use of the decision in Tenneco Canada Inc., 91 DTC 5207, for support inasmuch as in Tenneco the court referred to processing in terms of the transformation occurring with respect to raw or natural materials whereas in XXXXXXXXXX case, it is our understanding that they are working with finished goods.

-XXXXXXXXXX seeks to distinguish its operations from those discussed in IT-145R relative to "bulk", notably in paragraphs 6 and 31 thereof. Paragraph 6 of the bulletin states in part:

"the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging."

XXXXXXXXXX states, at page 2,

XXXXXXXXXX

If there is a difference here, it does not appear to us to be fundamental.

With respect to paragraph 31 of the bulletin, XXXXXXXXXX again does not seem to take into account that they are essentially dealing with finished goods from the outset.

-XXXXXXXXXX comment that use of the word "usually" in paragraph 5 of IT-145R means that the definition is not exhaustive and therefore does not exclude XXXXXXXXXX from eligibility is not particularly helpful. While it is true that the meaning of "processing" as discussed in paragraph 5 of IT-145R is not necessarily exhaustive, it does, in our view, provide the overall flavour or essence of the word as it has been judicially interpreted, as illustrated by the following.

1.In Tenneco, the taxpayer was found not to be engaged in "processing" because there was no change in the form, appearance or other characteristic of the good subject to the operation.

2.In Harvey C. Smith Drugs Limited v. The Queen, 92 DTC 6349, the taxpayer's activity was found not to be "processing" because the tablets or capsules underwent no change in their original form or appearance from the time the taxpayer received them from the manufacturer, which was the test laid down in the case law, typified by the decision in Tenneco.

3.In Tuyauteries Saglac Inc. v. The Minister of National Revenue, 93 DTC 40, the taxpayer was found to be "manufacturing or processing" because its activities did not consist of the mere joining of lengths of pipe end to end.

Rather, a series of other operations was involved, including cutting and welding to give the pipes a very special shape in order to incorporate them into the network. As a result, the final product no longer had the characteristics of shape or appearance of the pipe purchased from its supplier.

In conclusion, it remains our view that the purchasing of finished goods XXXXXXXXXX for resale does not constitute processing for purposes of the M&P deduction. We hope this will be of assistance to you in your reply to XXXXXXXXXX.

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch