19 July 2010 External T.I. 2010-0360641E5 - Manufacturing and processing

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: Whether the following activities are construction or manufacturing and processing: 1) a road contactor processes material and places the material on a road 2) a contractor is engaged by a road manufacturer or other entity to simply process material in a pit and is not involved in any aspect of the usage or placement of the material.

Position: 1) Construction. 2) Part of the process would be manufacturing and processing.

Reasons: As explained in Interpretation Bulletin IT-411R, paragraph 1, construction 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.
The term "manufacturing or processing", pursuant to subsection 125.1(3) and regulation 1104(9), excludes producing industrial minerals. As explained in Interpretation Bulletin IT-145R (consolidated), paragraph 9, producing industrial minerals is considered to include all activities connected with the mining, excavating and extracting the mineral material from the mine or pit area, including any primary crushing operation required to make it transportable from the mine or pit area as well as the transporting of the material from the mine or pit. Subsequent activities such as crushing, washing, screening and sorting of the mineral material in order to make the product of the mine or pit marketable are considered to be processing activities.

XXXXXXXXXX
									2010-036064
									Charles Rafuse
									613-247-9237
July 19, 2010

Dear XXXXXXXXXX :

Re: Manufacturing and Processing Activities

This is in response to your letter of March 12, 2010, regarding whether certain activities are considered to be manufacturing and processing (M&P) or construction.

You have indicated that it is your opinion that if a road contractor processes material and places the material on a road the activity would be considered to be construction. However, if a contractor is engaged by a road construction company or other entity to simply process material in a pit and is not involved in any aspect of the usage or placement of the material you consider this activity to be M&P. You have asked whether we agree with your conclusions.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.

Corporations involved in M&P activities may be entitled to the M&P tax credit under subsection 125.1(1) of the Income Tax Act (the "Act"). Generally speaking, the M&P tax credit is a percentage of the M&P profits.

Under the Act, corporations (except an investment corporation, a mortgage investment corporation, or a mutual fund corporation) may also be entitled to claim, pursuant to subsection 123.4(2) of the Act, a general rate reduction in computing their tax payable. The general rate reduction is a percentage of certain qualifying income. The qualifying income is generally income that does not benefit from preferential corporate tax treatment, such as income eligible for the small business deduction and the M&P tax credit, and investment income subject to the refundable tax provisions.

Since the same percentage is used to calculate the M&P tax credit under subsection 125.1(1) and the general rate reduction under subsection 123.4(2), generally the portion of taxable income in respect of which the M&P tax credit is claimed is not qualifying income that is eligible for the general rate reduction. While the issue of whether a corporation's activities constitute M&P of good for sale (or lease) for purposes of the M&P tax credit may not be of particular import if the related income is otherwise qualifying income for the purposes of the general rate reduction, the issue is still relevant for other tax purposes such as the classification of depreciable capital property in order to claim capital cost allowance (e.g., class 29 or 43 of Schedule II of the Income Tax Regulations ("Regulations").

Whether a taxpayer is manufacturing or processing goods for sale is a question of fact depending on a review of all the circumstances and relevant documentation. The terms "manufacturing" and "processing" are not defined in the Act. For the purpose of the M&P tax credit under section 125.1, subsection 125.1(3) of the Act provides that the expression "manufacturing or processing" does exclude a series of activities, one of which is "construction". Similarly, for the purpose of the additional CCA rate under paragraph 1100(1)(a.1) of the Regulations in respect of an eligible non-residential building, for the purpose of subsection 1100(26) in respect of the CCA rules applicable to specified energy property, and for the purpose of class 29 in Schedule II of the Regulations, subsection 1104(9) of the Regulations provides that the expression "manufacturing or processing" excludes a number of activities, one of which is construction.

The word "construction" is also not defined in the Act, but as explained in Interpretation Bulletin IT-411R, Meaning of "Construction", paragraph 1, this term refers to a construction undertaking or enterprise rather than construction in the narrow sense of an activity. Factors taken into consideration to determine if a corporation is engaged in construction includes whether the construction industry would view the corporation's overall activities as construction activities and the use of construction equipment (e.g., trucks, tractor trailers, rollers).

Construction activities are considered to be those normally associated with on-site fabrication and erection of building, roads, bridges etc., which are intended to be permanently affixed to the land on which they are built. Accordingly, we agree with your conclusion that if a road contactor processes material and places the material on a road the activity would be considered to be construction.

Pursuant to subsection 125.1(3) of the Act and subsection 1104(9) of the Regulations, the term "manufacturing or processing" also excludes producing industrial minerals. Interpretation Bulletin IT-145R (consolidated), Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax, paragraph 9, provides the following explanation for this:

"Industrial Minerals

9. Producing industrial minerals is considered to include all activities connected with the mining, excavating and extracting the mineral material from the mine or pit area, including any primary crushing operation required to make it transportable from the mine or pit area as well as the transporting of the material from the mine or pit. Subsequent activities such as crushing, washing, screening and sorting of the mineral material in order to make the product of the mine or pit marketable are considered to be processing activities. The CCRA recognizes that in some cases some or all of these subsequent activities may be conducted within the confines of the mine or pit, in which case processing will commence after the delivery of the excavated pit run material to the first of these processing operations.

The CCRA considers an industrial mineral to include any mineral other than a mineral from a deposit that is a mineral resource as defined in subsection 248(1). Examples of industrial minerals (essentially non-metallic minerals) are:

Gravel
Limestone
Clay
Sand
Stone
Feldspar"

Based on the above, it is our opinion that if a contractor is engaged by a road construction company or other entity to simply process material in a pit and is not involved in any aspect of the usage or placement of the material, this activity, other than the part associated with producing industrial minerals as explained above, is considered to be M&P.

We trust that these comments will be of assistance.

Yours sincerely,

S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch