22 November 2011 Internal T.I. 2011-0415571I7 - M&P; Capital Tax Credit for Manufacturers

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.

Principal Issues: 1.Does a corporation whose sole activity is the performance of SR&ED qualify for the Ontario M&P tax credit and the Ontario capital tax credit for manufacturers? 2. If 2% of its income is from sales of prototypes, is the answer the same?

Position: 1. No. 2,

Reasons: A corporation that solely performs SR&ED cannot be manufacturing or processing goods for sale or lease since SR&ED by definition does not include commercial production. The definition of SR&ED in subsection 248(1) excludes commercial production. The CRA does not generally consider the sale of prototypes to be commercial production.

MEMORANDUM        NOTE DE SERVICE
							DATE	November 22, 2011	

TO	Kitchener Tax Services Office		FROM	Income Tax Rulings Directorate
À							DE	Ontario Corporate Tax Division
								Bonnie Ruttan-Morillo
	Attention: Helen Zelobowski
							FILE	2011-041557
							DOSSIER

SUBJECT: Ontario Manufacturing & Processing ("M&P") Tax Credit and Ontario
OBJET: Capital Tax Credit for Manufacturers

This is in reply to your email dated July 28, 2011, regarding a corporation's eligibility for the Ontario M&P income tax credit and the Ontario capital tax credit for manufacturers where the corporation's activities consist solely of scientific research and experimental development ("SR&ED"). You have also asked if the answer would be different if the corporation derived 2% of its revenue from the sale of prototypes.

Section 33 of the Taxation Act, 2007 (Ontario) ("Taxation Act") provides a tax credit to corporations with profits from manufacturing and processing activities. One of the factors in the computation of the tax credit base in subsection 33(2) of the Taxation Act is "eligible Canadian profits". According to subsection 33(4) of the Taxation Act, this is determined with reference to "Canadian manufacturing and processing profits" for the year as defined in subsection 125.1(3) of the Income Tax Act ("Act"). That definition states as follows:

"Canadian manufacturing and processing profits" of a corporation for a taxation year means such portion of the total of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease;

Based on this definition, a corporation must manufacture or process goods for sale or lease to be eligible to claim the Ontario M&P income tax credit. The Act does not contain an exhaustive definition of "manufacturing or processing", subsection 125.1(3) of the Act instead states what is not included. SR&ED does not include commercial production as per paragraph (i) of the definition of SR&ED in subsection 248(1). Therefore, in our opinion, the corporation cannot be considered to be manufacturing or processing goods for sale or lease if its sole activity is SR&ED. This is consistent with our previous position (Document 2003-002053) in which we stated that a corporation would not qualify for the federal M&P tax credit if its only activity was the performance of SR&ED.

It is the view of the Canada Revenue Agency, as expressed in SR&ED Application Policy No. 2004-03, that the production of prototypes as defined in Information Circular 86-4R3, Scientific Research and Experimental Development, would not generally be considered to be the commercial production of a new or improved material, device or product or the commercial use of a new or improved process. A prototype is defined in that information circular as "an original model on which something new is patterned, and of which all things of the same type are representations or copies. It is a basic experimental model possessing the essential characteristics of the intended product. The design, construction, and testing of prototypes generally fall with the scope of experimental development." Therefore, the corporation would still be considered to be conducting only SR&ED where it produced prototypes, and no part of its activity would be considered to include the manufacturing and processing of goods for sale or lease (i.e. no commercial production).

We also do not believe that the taxpayer is eligible for the Ontario capital tax credit for manufacturers. Based on the commentary in the Ontario 2008 Budget, the Ontario government introduced the capital tax credit to provide relief to corporations primarily engaged in manufacturing and resource activities. As a result, a corporation that is not engaged in M&P activities is not intended to receive the credit. Under subsections 83.1(2) and (3) of the Taxation Act, a corporation is allowed a deduction from tax equal to its capital tax credit for manufacturers. The term "manufacturer" is not defined in the Taxation Act, but we believe that it should be interpreted consistently with section 33 of the Taxation Act which provides an income tax credit for corporations engaged in M&P activities. Therefore, a corporation would be considered a manufacturer for Ontario capital tax purposes if it manufactured or processed in Ontario goods for sale or lease. As stated above, a corporation that is solely performing SR&ED would not be considered to be manufacturing and processing goods for sale or lease and would not be a considered a manufacturer entitled to the capital tax credit for manufacturers under the Taxation Act.

In conclusion, it is our opinion that the corporation is not eligible for either the Ontario M&P income tax credit or the Ontario capital tax credit for manufacturers where the only activity of the corporation is the performance of SR&ED.

Yours truly,

Nerill Thomas-Wilkinson
A/Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch