ARCHIVED - Meaning of "Construction"

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NO: IT-411R

DATE: October 23, 1996

SUBJECT: INCOME TAX ACT
Meaning of "Construction"

REFERENCE: Paragraph (c) of the definition of "manufacturing or processing" in subsection 125.1(3) (also subsection 127(5), paragraph 127(11)(a) of the Income Tax Act; and classes 22, 29, 38, 39 and 43 of Schedule II, subsection 1104(9) and paragraph 4600(2)(e) of the Income Tax Regulations)

Notice -- Bulletins do not have the force of law

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Contents

• Application
• Summary
• Discussion and Interpretation
  • General (¶s 1-6)
  • Ready-Mix Concrete Truck (¶s 7-9)
• Explanation of Changes

Application

This bulletin cancels and replaces IT-411 dated March 23, 1978, and the Special Release to IT-411 dated October 31, 1991.

Summary

This bulletin discusses the meaning to be attributed to the term "construction" for the purposes of the manufacturing and processing profits deduction, the investment tax credit and capital cost allowance on classes 29, 39, and 43.

The manufacturing and processing profits deduction is a deduction from a corporation's Part I tax otherwise payable, which is based on Canadian manufacturing and processing profits. The deduction reduces the effective rate of corporate tax on Canadian manufacturing and processing profits.

The purpose of this deduction is to attract and increase investment in the Canadian manufacturing and processing sector and to provide a tax incentive for businesses that could readily relocate to another country to remain in Canada.

This incentive is not available to service industries such as construction. Accordingly, certain types of activities such as construction are excluded from the definition of "manufacturing or processing" for purposes of this deduction. In addition, depreciable property used in a construction business is excluded from classes 29, 39, and 43 for capital cost allowance purposes and does not qualify for the investment tax credit because such property is not used in earning Canadian manufacturing and processing profits.

Discussion and Interpretation

General

¶ 1. The meaning of "construction" in paragraph (c) of the definition of "manufacturing or processing" in subsection 125.1(3) has been interpreted by the courts as referring to a construction undertaking or enterprise rather than construction in the narrower sense of an activity. The determination of whether a corporation is engaged in construction generally takes into account factors such as:

Such activities are considered to be those normally associated with the on-site fabrication and erection of buildings, roads, bridges, parking lots, driveways, etc., which are intended to be permanently affixed to the land on which they are built. However, in some cases (see ¶s 2 and 3 below), the term "construction" may apply to activities which involve the manufacture of building products and structures which are transported from the place of manufacture to the place where they are intended to be permanently affixed. Such building products may, for example, include ready-mix concrete, asphalt, structural and reinforced steel, precast concrete sections and blocks, curtain walls, ductwork, and pre-fabricated components for buildings.

¶ 2. A corporation may carry on a construction undertaking and, at the same time, carry on an activity that is viewed as a manufacturing or processing operation. The determination of whether the manufacturing or processing operation is, in reality, a component of the construction undertaking is a question of fact and depends on the circumstances of each particular case.

A manufacturing or processing activity carried on by a corporation that is engaged in a construction undertaking would normally be considered to fall within the meaning of construction, if the activity forms an integral part of the construction undertaking. The manufacturing or processing activity is considered to form an integral part of the construction undertaking if all or substantially all of the production from that activity is used or is needed to carry on the corporation's construction undertaking.

For this purpose, the proximity of the particular location where the product is manufactured, to the location where it is to be permanently affixed or installed, and whether plant or equipment used in the particular activity is fixed or mobile, are not determinative factors. Accordingly, when a corporation enters into a supply and erect contract, the off-site manufacture of building products and pre-fabricated components would, generally, be considered to be construction if the above criteria are met.

¶ 3. As a general rule, the on-site fabrication, installation, and erection of machinery and equipment, regardless of size, is not considered to be construction, unless it constitutes a component part of a building or structure (e.g., heating system, air-conditioning equipment, sprinkler system, plumbing, wiring, etc.). Machinery or equipment which forms an integral part of a manufacturing or processing activity carried on inside a building is not regarded as a component part of the building and therefore, is not construction, even if it may be firmly attached to the building because of vibrations, weight, size, etc. In some cases, when the installation of machinery and equipment coincides with the construction and erection of a building or other structure, there may be practical difficulties in determining what activities are construction. In these cases, the following guidelines apply:

The work described in (a) above is considered to be a component part of the building, whereas (b) refers to work related to the machinery or equipment that is used for manufacturing or processing purposes and is not considered to be a component part of the structure. With respect to (a) above, the fact that the building is used for manufacturing and processing purposes by its occupant is not relevant in determining whether the installer is engaged in a manufacturing or processing activity, as opposed to construction. The fact that activities described in (b) above are not considered to be construction does not mean that the activities necessarily qualify as a manufacturing and processing activity for the purpose of section 125.1 of the Act.

¶ 4. If a manufacturing or processing activity is not considered to be construction because it does not form an integral part of the construction undertaking, the activity is considered to be separate from the construction undertaking and may qualify for the manufacturing and processing profits deduction under section 125.1, provided that the other requirements of that section are met. For this purpose, a separate activity would be considered to be a distinct business carried on by the corporation in addition to the construction business and the production from such a manufacturing activity would represent the manufacturing or processing of goods. To qualify for a deduction under subsection 125.1(1), there has to be a clear delineation of the income from each such business and the income from the manufacturing business has to be properly calculated. Subsection 125.1(3) contains the definition of "Canadian Manufacturing and Processing Profits" for this purpose.

¶ 5. An activity that is considered to be separate from the construction undertaking will remain as such once it is established that the activity is not construction. However, if the circumstances have subsequently changed and the activity can be considered, over a reasonable period, to be an integral part of the construction undertaking, the separate activity may be considered to have ceased at the beginning of that reasonable period, and the activity may be considered to be construction. Whether or not an activity, which is not considered to be construction, is undertaken as a separate activity, is a finding of fact.

¶ 6. Whether plant and equipment used in such a manufacturing or processing activity is fixed or mobile is not a factor for capital cost allowance purposes, determined under classes 29, 39, or 43 of Schedule II of the Regulations.

Ready-Mix Concrete Truck

The comments in ¶s 7 to 9 below deal with whether the activities related to the use of a ready-mix concrete truck are considered to be construction and are subject to the comments in ¶s 1 and 2 above. If such activities form an integral part of the construction undertaking, they are considered to be construction.

¶ 7. Where the ingredients to make concrete are mixed in a concrete truck, the mixing may qualify as manufacturing and processing and generally is not considered construction. The travel time of the truck is considered handling of goods in process which is a qualified activity of manufacturing and processing. The concrete is not considered finished goods until the removal from the mixer, but the actual placing of concrete on-site is, in general, considered to be construction.

¶ 8. For purposes of the deduction under section 125.1, the mixer and truck cab and chassis upon which they are mounted are generally considered part of "cost of manufacturing and processing capital." The wages of the truck driver, in general, form part of "cost of manufacturing and processing labour," as defined in section 5202 of the Regulations.

¶ 9. Since the mobile mixer on the truck is power-operated moveable equipment designed not only for manufacturing and processing concrete but also for placing concrete, it is included in class 22 or 38 of Schedule II depending on when and under what circumstances it was acquired (see the current version of IT-469, Capital Cost Allowance -- Earth-Moving Equipment, for a discussion on the applicable dates for classes 22 and 38 as well as their capital cost allowance rates). The truck cab is normally a component part of the mobile mixer and is also included in class 22 or 38. Because the mobile mixer is included in class 22 or 38, it does not qualify for inclusion in classes 29, 39 or 43.

In general, the capital cost of a concrete truck (including mobile mixer) does not qualify for the investment tax credit under subsection 127(5). Such a truck is designed for use on highways and streets and is consequently excluded from prescribed machinery and equipment by paragraph 4600(2)(e) of the Regulations. However, in Cumberland Ready Mix Ltd. v. Her Majesty the Queen, 94 DTC 6079, [1994] 1 C.T.C. 12, the Federal Court -- Trial Division has qualified this position by indicating that if the trucks are substantially modified to process and deliver concrete to customers such that the trucks' primary purpose was to operate off-highway on construction sites or at the plant, the trucks may qualify for the investment tax credit.

Explanation of Changes

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Overview

This bulletin discusses, in general terms, criteria which the Department will consider in determining the meaning of the term "construction" for purposes of the manufacturing and processing profits deduction under section 125.1, the investment tax credit, and capital cost allowance on classes 29, 39 and 43.

The primary purpose of this revision is to reflect a change in our position regarding the meaning of the term "construction."

The comments in this bulletin are not affected by any draft legislation released before August 8, 1996.

Legislative and other changes

Throughout the bulletin, we have made minor changes for clarification or readability purposes.

¶ 1 (replaces former ¶ 2) is revised to reflect the fact that location is not the sole or basic criterion in determining whether an activity is considered to be construction and is consistent with the Federal Court of Appeal's comments in the decision in Her Majesty the Queen v. Nova Construction Company Ltd., 85 DTC 5594, [1986] 1 C.T.C. 68. ¶ 1 also outlines the factors that should be taken into account in the determination.

New ¶ 2 discusses circumstances when an activity that is viewed as a manufacturing or processing operation can be considered to be construction and are consistent with the findings in Her Majesty the Queen v. Nova Construction Company Ltd. In addition, ¶ 2 introduces an "all or substantially all" test as a basis for determining if an activity undertaken by a corporation forms an integral part of the corporation's construction undertaking.

¶ 3 (replaces former ¶ 3) is expanded to clarify the difference between the two guidelines discussed therein.

New ¶s 4 and 5 provide additional comments on the requirements for an activity to constitute a separate activity from the construction undertaking.

New ¶ 6 indicates that the mobility of plant and equipment used in a manufacturing or processing activity is not a factor for capital cost allowance purposes with respect to classes 29, 39, or 43 of Schedule II of the Regulations.

¶s 7 to 9 (replace former ¶s 4 to 6), which concerns ready-mix concrete trucks, have been revised to indicate that location is not, by itself, a determinative factor in determining whether the activities related to the trucks are considered to be construction. ¶ 9 also discusses the decision of the Federal Court -- Trial Division in Cumberland Ready Mix Ltd. v. Her Majesty the Queen, 94 DTC 6079, [1994] 1 C.T.C. 12.

The comments in former ¶ 7, which related to mobile and fixed asphalt plants, are no longer relevant since location is not, by itself, a determinative factor in determining whether an asphalt plant is considered to be construction. The general principles outlined in the bulletin regarding the meaning of construction apply to asphalt plants.

Notice -- Bulletins do not have the force of law

Interpretation bulletins (ITs) provide Revenue Canada's technical interpretations of income tax law. Due to their technical nature, ITs are used primarily by departmental staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, the Department offers other publications, such as tax guides and pamphlets.

While the ITs do not have the force of law, they can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff. In cases where an IT has not yet been revised to reflect legislative changes, readers should refer to the amended legislation and its effective date. Similarly, court decisions subsequent to the date of the IT should be considered when determining the relevancy of the comments in the IT.

An interpretation described in an IT applies as of the date the IT is published, unless otherwise specified. When there is a change in a previous interpretation and the change is beneficial to taxpayers, it is usually effective for all future assessments and reassessments. If the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date of the IT.

A change in a departmental interpretation may also be announced in the Income Tax Technical News.

If you have any comments regarding matters discussed
in this IT, please send them to:

Date modified:

2002-09-06