18 January 2000 External T.I. 9912575 - MANUFACTURING AND PROCESSING DEDUCTION

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: is the re-conditioning of pallets for sale or rental considered to be manufacturing and processing?

Position: Maybe if activities are analogous to comments made in IT145R par. 46 & 49. Also consider comments made by court in Tenneco.

Reasons: IT-145R par 46 & 49. Also comments in Tenneco

XXXXXXXXXX 								991257
S. Tevlin
Attention:  XXXXXXXXXX 

January 18, 2000

Dear Sirs:

Re: Manufacturing and Processing Deduction ("M&P Deduction")

We are writing in response to your letter dated May 6, 1999 wherein you requested our comments as to whether certain activities performed by your client would qualify for the M&P Deduction pursuant to subsection 125.1 of the Income Tax Act (the "Act").

The situation described in your letter involves an actual fact situation of a specific taxpayer. Written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3 ("IC-70-6R3"), dated December 30, 1996. For a completed transaction, you should submit all relevant facts and documentation to your local tax services office for their views.

However, we are prepared to offer the following general comments.

You have described a situation wherein the taxpayer reconditions pallets for rental or sale. You have noted that the decision in Minister of National Revenue v. Federal Farms Limited 66 DTC 5068 provided certain guidelines in the determination of what constitutes manufacturing and processing of goods.

Since that case, other cases have dealt with the meaning of "manufacturing" or "processing", including Tenneco Canada Inc., 91 DTC 5207, [1991] 1 C.T.C. 323 wherein the Court indicated or reaffirmed:

(a) with regard to the meaning of manufacturing, whether raw or prepared material was used to produce articles "by giving these material new forms, qualities or properties,"

(b) with regard to the meaning of processing, that:

(A) "processing occurs when raw materials are transformed into saleable items. Such raw or natural materials are unsaleable, or would sell for a lesser price, in their unprocessed state," and

(B) "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 Court in Tenneco Canada Inc. indicated, at DTC 5209-5210, C.T.C. 327, what type of operations come within the meaning of "manufacturing" and "processing":

"The nature of the modern commercial world is that goods often pass through many hands before they reach consumers. At each stage, minor alterations may be made to the goods, before they progress through the commercial chain. The benefit of the incentive cannot be claimed by each of the handlers merely because they altered the goods in some small way. Only those operations which significantly change the characteristics of the goods can truly be described as "manufacturing" or "processing" so as to qualify for the special tax incentives."

We note that in paragraph 46 of Interpretation Bulletin IT-145R the following comment is made, "Activities carried on by a scrap metal dealer, such as sorting, removing contaminants, grading, cutting to size and baling, in order to make scrap saleable are considered qualified activities." In addition, paragraph 49 of IT-145R states that "The activities of reconditioning used automobiles or trucks for resale, such as cleaning, painting, safety inspection, tune-ups, replacement of parts and repairing are considered qualified activities."

It is therefore our general opinion that if the activities involved in reconditioning pallets are analogous to the activities described in paragraphs 46 and 49 of IT-145R, then the activities of reconditioning pallets may qualify for the deduction. However, such a determination would be based on a question of fact.

The forgoing comments are given in accordance with the practice referred to in paragraph 21 of IC-70-6R3, and are not binding on the Canada Customs and Revenue Agency.

We trust our comments will be of assistance to you.

Yours truly,

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