28 August 1989 Income Tax Severed Letter AC80306 - Ready-mix Concrete Trucks

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.

To:      Mr. J.C. Boucher
         A/Director
         Appeals Branch
         Appeals and Referrals
           Division
         J. Yu

From:    Specialty Rulings
           Directorate
         C.R. Bowen
         (613) 957-2096

Subject: 24(1)

                                               8-0306

We are writing in reply to your memoranda of July 5, 1989, wherein you requested our comments on certain issues related to ready-mix concrete trucks ("concrete mixers") used by the above-noted taxpayer.

Background 24(1)

Your Questions

You requested our comments on the following questions:

1. Does paragraph 2 of interpretation Bulletin IT-411

          represent the Department's current position as to
          what constitutes construction?

     2.   What types of equipment are considered to be qualified  
          construction equipment?

     3.   Is any other class 22 property. apart from concrete     
          mixers, that would be movable equipment used for
          placing concrete?

     4.   Does paragraph 16 of  IT-331R
 represent the Department's 
          current position concerning the word "principally"?

5.        Is a stone slinger eligible for ITC as qualified        
          construction equipment?

6.        If concrete mixers spend more than 50% of their time on 
          construction sites, can they be considered to be
          used principally in the activity of construction?

7.        What is meant by the phrase "placing of concrete" in    
          paragraph 4 of  IT-411
? At what point in the placing
          of concrete does construction commence?

8.        If the concrete mixers and stone slinger are considered
          to be qualified construction equipment by the Judge,
          will that property and the related labour costs of the
          drivers also be considered to be manufacturing and
          processing capital and labour for the purpose of
          section 5202 of the Regulations.

Our Comments

Our responses are in the same order as the questions posed.

1.        We confirm that paragraph 2 of  IT-411
 represents the
          Department's current position as to what constitutes
          construction.

2.        As per section 4603 of the Regulations. the definition
          of qualified construction equipment excludes qualified  
          property and qualified transportation equipment but
          includes class 22 property. a crane, pile driver, or a
          dredge.  In order to be eligible for ITC, the qualified
          construction equipment must be used by the taxpayer
          principally for the purpose of construction in Canada
          in the course of carrying on a business.

          Examples of qualified construction equipment would
          include the following property if it is used
          principally for the purpose of construction: 1) a dump
          trailer which is used to move and place earth and rocks
          as well as a truck tractor used as the source of power
          for the trailer, 2) a movable crane or hoist designed
          or modified to move or place earth, concrete or rocks in
          a bucket at a construction site, and 3) a fork lift
          fitted with concrete block tines which is designed and
          used primarily for moving concrete blocks at a
          construction site.

3.        Class 22 equipment used to place concrete generally
          would include a crane with a bucket, a power-operated
          movable curb machine, and a concrete pump mounted on a
          truck.

4.        We confirm that paragraph 16 of  IT-331R
 represents the  
          Department's position concerning the word "principally".

5.        A stone slinger is used to move and place stones and
          sand and would normally meet the definition of
          power-operated movable equipment in paragraphs 2 and 3
          of  IT-469
.  Therefore, it would normally be included in
          class 22.  In order for a stone slinger to be eligible
          for ITC as qualified construction equipment it must be
          used more than 50% of the time for the purpose of
          construction.  A stone slinger would be considered
          to be used in a construction activity when it is
          placing, by means of its conveyor belt system, the sand
          or crushed stones into or onto a form or structure
          which is permanently affixed to the ground at a
          construction site. 

6.        Prior to unloading the concrete at the construction site,
          it is necessary to continue processing the concrete by
          rotating the mixer and adding more water when necessary.
          The processing activity ends once the concrete is removed
          from the concrete mixer into its chute.  Therefore, it is
          our opinion that a concrete mixer and its driver are
          engaged in a construction activity only at the time they
          are placing concrete.

7.        It is our opinion that the term "placing of concrete" in     
          paragraph 4 of  IT-411
 refers to the activity of
          incorporating the concrete into a structure or a form
          which is permanently affixed to the land.  Where the
          chute at the end of the concrete mixer is used to pour
          and direct the concrete directly into a concrete form,
          such as in a basement foundation, the time spent by the
          driver and the concrete mixer moving the truck into
          place, setting up the chute, and pouring the concrete
          would be considered a construction activity.  However,
          where the concrete is poured down the chute into a
          receptacle such as a wheelbarrow, a bucket on the end of
          a crane or a concrete pump, the actual pouring of the
          concrete into a form is not done by the concrete mixer
          and its chute, nor is it the responsibility of the
          truck's driver. Consequently, the activity of unloading
          the concrete from the concrete mixer would be considered
          the delivery of finished goods.

8.        The deduction from tax otherwise payable by a
          corporation for its Canadian manufacturing and
          processing profits ("M & PP") per section 125.1 of the Act
          is determined in accordance with the formulas in section
          5200 of the Regulations.  The term manufacturing or
          processing ("M & P") does not include construction
          activities (per paragraph 125.1(3)(b) of the Act).
          Therefore, capital or labour used at a specific time in a
          construction activity cannot also be used at that same
          time in an "M & P" activity.  If the Judge finds that the
          concrete mixers and stone slinger and the drivers thereof
          are engaged in a construction activity while performing
          certain duties, then paragraph 5201(c) of the Regulations
          prohibits the taxpayer from using the small manufacturers'
          rule in calculating its M & PP. Instead, the taxpayer will
          have to use the basic formula outlined in section 5200 of
          the Regulations.  As a result, the amount of M & PP eligible
          for the reduced rate of tax would be calculated according
          to the following formula:

          M & PP = (MC + ML)/(C + L) x adjusted business income

          MC =  Cost of M & P capital           C = Cost of capital

          ML =  Cost of M & P labour            L = Cost of labour

All of these terms are defined in section 5202 of the Regulations.

The portion of the cost of capital (i.e., for the concrete mixers and stone slinger) that reflects the extent to which the property was used in a construction activity for each year would be excluded from the calculation of the cost M & P capital. Similarly, the portion of the cost of' drivers' labour that reflects the extent to which the salaries and wages paid or payable for the portion of their time that they were engaged in a construction activity for each year would be excluded from the calculation of the cost of M & P labour.

We trust these comments will be of assistance. for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch