23 March 1990 Income Tax Severed Letter AC74656 - Capital Cost Allowance - Investment Tax Credit - M & P Tax 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.

March 23, 1990

Audit Division Head Office
Saint John D.O. Specialty Rulings
Dave Turner
Attention: C. Richard (613) 957-2094

24(1) 7-4656

We are writing in reply to your memorandum of January 18, 1990, concerning 24(1)

In your memorandum you state that the taxpayer's business consists of the following activities:

24(1)

The taxpayer's income tax returns indicate the following:

24(1)

• 1. OUR COMMENTS

In our opinion, it is important to differentiate between the taxpayer's various activities. From the limited information provided it would appear that the taxpayer engages in the following activities:

24(1)

Each of these activities and the assets used in the activities must be considered separately in order to determine the correct income tax treatment of the taxpayer's business. Based upon the individual activities undertaken, we offer the following

• a) 24(1)

24(1) do NOT qualify as being
in Class 29/39, and Class 10(a) of Schedule II of the
Regulations. In order to qualify in Class 29/39,
assets must be used in M&P. Paragraph 1104(9)(e) of
the Regulations states that for the purposes of Class
29/39 M&P does include extracting minerals from a
mineral resource and subsection 1104(3) defines
"industrial mineral mine", "mineral" and "mining" to
include a peat bog, peat and harvesting of peat,
respectively, for the purposes of Part 1100 and
Schedule II of the Regulations. In addition, as the
definitions apply to all classes in Schedule II, the
assets belong in Class 10(k) rather than in Class 10(a)
of Schedule II as they are property that was acquired
for the purpose of gaining or producing income from a
mine.

b) In our opinion, assets used in the 24(1)
do NOT qualify as "certified property" as defined in
subsection 127(9) of the Income Tax Act (the "Act") for
purposes of claiming ITC's. The assets appear to meet
the definition of "qualified property" in subsection
127(9) of the Act, however, they are not a part of a
"facility" as defined for the purposes of the Regional
Development Incentives Act (the "RDIA"). The RDIA
defines "facility" as the structures, machinery and
equipment that constitute the necessary components of
an M&P operation, OTHER THAN an initial processing
operation in a resource-based industry. In our
opinion, based on the definitions contained in the
Regional Development Incentives Regulations, 1974,
24(1) would not be considered to be M&P and
fits the definition of an initial processing operation
in a resource based industry.

c) In our opinion, 24(1) does NOT
constitute M&P for purposes of the M&P deduction. In
addition, we feel that the 24(1)
disqualifies the taxpayer from making use of the "Small
Manufacturers' Rule" contained in section 5201 of the
Regulations. Paragraph 5201(c) of the Regulations
provides that a taxpayer cannot use the "Small
Manufacturers' Rule" if it is engaged in an activity
listed in subparagraphs 125.1(3)(b)(i) to (ix) of the
Act at any time during the year. One of the activities
contained in those subparagraphs is the extraction of
minerals from a mineral resource and in our opinion
this would include 24(1)

• 2. TRANSPORTATION TO THE PROCESSING PLANT

a) As stated in paragraph 28 of IT-145R, activities
related to the transportation of raw materials
24(1) to the plant do NOT qualify as M&P
activities. Assets used for this activity would not
qualify as Class 29/39 assets as subparagraph (a)(i) of
Class 29 requires the assets to be used directly or
indirectly in the manufacturing or processing of goods
for sale or lease. The automotive equipment used in
the transportation would appear to qualify as either
Class 10(a) or (k) depending on whether it is used only
for transportation 24(1) is loaded onto
the equipment from a primary storage area) or is used
in the harvesting operation as stated in paragraph 11
of IT-145R (ie., 24(1) is transferred
directly to the equipment at time of harvesting),
respectively.

b) In our opinion, if the equipment is considered to be
part of the harvesting operation, it is NOT "certified
property" for the same reasons given in 1 b) above. As
such, the taxpayer is NOT entitled to ITC's at the rate
available for "certified property" on equipment used in
the transportation 24(1) to
the plant. If the equipment is used only for
transportation to the plant, it will not meet the
definition of "qualified property" or "certified
property" in subsection 127(9) of the Act as it is NOT
used in a qualified M&P activity or in the extraction
of minerals from a mineral resource. Paragraph 4601(c)
of the Regulations should be considered in order to
determine whether the equipment will qualify as
"qualified transportation equipment" as defined in
subsection 127(9) of the Act.

c) As stated in paragraph 2 a) above, transportation of raw materials to the plant does NOT qualify as M&P. As such, the transportation would not be considered to be M&P in determining whether the taxpayer's activities were primarily M&P for purposes of paragraph 5201(a) of the Regulations relating to the "Small Manufacturers' Rule", assuming the taxpayer could show that it was not restricted by paragraph 5201(c) of the Regulations.
• 3. 24(1)

a) In our opinion, 24(1) constitutes
M&P for the purposes of Class 29/39. Any property used
primarily in the processing of the 24(1)
will be included in Class 29/39 provided it meets the
other requirements contained in the description of
Class 29/39 assets. The property would be included in
Class 10(k) as it is would not be considered to have
been acquired for the purpose of gaining or producing
income from a mine.

b) In our opinion, the processing plant is considered to
be a "facility" as defined in the RDIA, and structures,
machinery and equipment used in the processing
24(1) will qualify as "certified property"
provided that they are primarily for use in a
prescribed area.

• c) In our opinion, as stated in 1 c) above

24(1)

• 4. TRANSPORTING THE FINISHED PRODUCT TO A STORAGE AREA

a) As stated in paragraph 31 of IT-145R, the shipping and
storing of finished goods is NOT a qualified M&P
activity. As such, property used in the shipping or
storage of the 24(1) will NOT
be classified as Class 29/39 assets. Automotive
equipment would generally be classified as Class 10(a)
and other equipment as Class 8.

b) In our opinion, the equipment used in the
transportation and storage of the 24(1)
will not meet the definition of "qualified property" or
"certified property" in subsection 127(9) of the Act as
it is NOT used in a qualified M&P activity. Again,
paragraph 4601(c) of the Regulations should be
considered in order to determine whether the equipment
will qualify as "qualified transportation equipment" as
defined in subsection 127(9) of the Act.

• c) As stated in paragraph 4 a) above, the transportation and storage of finished goods does NOT qualify as M&P in determining whether the taxpayer's activities were primarily M&P for the purposes of paragraph 5201(a) of the Regulations relating to the "Small Manufacturers' Rule", again, assuming the taxpayer could show that it was not restricted by paragraph 5201(c) of the Regulations.

We trust our comments will be of assistance.

R.E. Thompson
Chief
Merchandising, Manufacturing and
Construction Section
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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