8 November 1989 Income Tax Severed Letter AC73828 - Integrated Sawmill & Pulpmill - M & P 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.

November 8, 1989

         Carole Couin-Toussaint            Rulings Directorate
         Director                          Frank Cillman
         Bilingual Services & Resource
            Industries Division
                                             7-3828A

Subject: Integrated Sawmill & Pulpmill
         - M & P Deduction
The Special Audits Division has requested that we withdraw one of
our previous opinions which states that "the transportation
activity of woodchips between the sawmill and the pulpmill which
occurs within an integrated operation, be included as a qualified
activity within the meaning of section 5202 of the Regulations so
that the capital and labour costs of transporting the chips be
included in the calculation of the M & p deduction."  

Facts

The facts which relate to that particular opinion are as follows:
                               24(1)

The Law

Subsection 125.1(1) of the Act which is the subsection authorizing the M & P deduction requires the calculation of a corporation's Canadian manufacturing and processing profits ("M & p profit") in order to determine its M & P deduction.

Paragraph l25.l(3)(a) of the Act defines M & P profit by reference to rules prescribed by regulation i.e. section 5200 and following of the Income Tax Regulations ("Regulations"). Furthermore, each of the components of the definition are further defined at section 5202 of the Regulation.

Some of these components such as the "cost of manufacturing and processing labour" and the "cost of manufacturing and processing capital" make reference to "salaries and wages...paid or payable to persons ...directly engaged in qualified activities..." and "property...used directly in qualified respectively.

Only "qualified activities" may be considered in the calculation of a corporation's M & P profit and section 5202 of the Regulations provides an exhaustive definition thereof which may be paraphrased as follows:

"qualified activities" means

    (a)  any of the following activities...in connection with 
         manufacturing or processing...

          (ii)  receiving and storing of raw materials,

         (iii)  handling of goods in process,...

    (b)  all other activities...directly in connection with 
         manufacturing or processing...

but does not include any of

(d) shipping...of finished goods,

(e) purchasing of raw materials...

Previous Decision

Under this definition at paragraph 5202(e) of the Regulations, the purchasing of raw materials is a specifically excluded activity and the Department has always held that this included the transportation of raw material to a taxpayer's operation. This position has been expressed by the Department at paragraph 28 of IT-145R and in many letters of opinion on the topic.

                           24(1)
                           21(1)(b)

Current Analysis

                              24(1)

These terms must be defined using their usual everyday meaning unless they have already been defined in the Act. In the Webster's New Collegiate Dictionary, "handling" is defined as follows:

         "a process by which something is handled in a commercial
         transaction, especially the packaging and shipping of an
         object or material (as to a consumer)..."
                       24(1)
                       21(1)(b)

The phrase "directly in connection with" as used in paragraph (b) of the definition "qualified activities" must be fulfilled in order for the transportation to be a "qualified activity". The Department has not issued any publications explaining the meaning of this phrase in the context of section 5202 of the Regulations, however the phrase certainly excLudes any of the activities expressly excluded under the definition of "qualified activities".

In addition in IT-145R and IT-147R2 at paragraphs 36 and 6 respectively, the Department has given its understanding to the meaning of "directly" and although these definitions are not with regards to the use of the word "directly" in the definition of "qualified activities", it is used in a similar context. In each of these meanings, the term "integral and essential" have been used. Therefore, for the transportation of woodchips to be a qualified activity it must be "integrally and essentially" connected to the manufacturing and processing of pulp and paper.

                   21(1)(b)    24(1)24(1)     21(1)(b)
                               23

                               23
Recommendation

                                       21(1)(a)

Chief Resource Industries Section Bilingual Services and Resource Industries Division