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 the definition of construction activities under Ssec 238(1) of the Regulations include well drilling?
Position: 1) Yes.
Reasons: 1. The definition of construction activities "includes the... excavation, (and) installation... of all or any part of a... structure, surface or "sub-surface" construction, or any similar property". A structure has been defined in the courts as something that is in one place, that is affixed somehow and which is built up of parts and is intended to remain on a foundation. A drilled well is a structure created in the ground by drilling to access ground water in underground aquifers.
XXXXXXXXXX
2010-036058
S. Kim
(613) 952-1506
June 21, 2010
Dear XXXXXXXXXX :
Re: Meaning of "Construction Activities"
This is in response to your letter dated January 25, 2010 to XXXXXXXXXX , the T5018 Compliance Clerk of XXXXXXXXXX Tax Centre, which was forwarded to this Division with respect to the definition of Construction Activities, and further to our telephone conversation (Kim/XXXXXXXXXX ), regarding the reporting requirements for section 238 of the Income Tax Regulations (the "Regulations"). In particular, you have asked whether water well drilling activities fall under the definition of "construction activities" under subsection 238(1) of the Regulations.
Pursuant to our telephone conversation and based on our review of your business website, our understanding is that the construction of a water well involves the following:
- A water well is an excavation or structure created in the ground by drilling to access ground water in underground aquifers.
- Your company drills standard six inch water and geothermal wells to a maximum depth of 155 meters each. A drilled well consists of a hole bored into the aquifer with the upper part lined with a steel pipe casing. The casing is constructed by welding segments of casing together. The casing is installed during the drilling, and it prevents the collapse of the borehole walls.
- Well drilling rules require that the steel casing be driven firmly into bedrock to seal out surface water.
- The steel casing is capped with either an engineered well cap or seal to provide sanitary protection.
- At the bottom of wells, based on formation, a screen device, filter pack, slotted casing, or open bore hole is left to allow the flow of water into the well.
- Once the well has been completed and developed to produce clear water, a pump is installed in the casing in order to move the water from the well to the point of use.
Our Comments
Subsection 238(1) of the Regulations provides the following definition of construction activities:
"In this section, "construction activities" include the "erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or subsurface construction, or any similar property (emphasis added)."
This definition of construction activities covers a broad range of activities. For example, using the definition above, construction activities would include, but are not limited to, the construction and installation of cable network and the installation of septic systems. In other words, the term is not limited to the onsite fabrication and erection of buildings, roads, bridges, parking lots, etc.
Although the expression "construction activities" is defined in the Regulations, the term "construction" is not defined in the Regulations or the Income Tax Act. The Collins English Dictionary (2000 edition) defines the word "construction" as "the process or act of constructing or manner in which a thing is constructed; the thing constructed; as a structure", etc... The Black's Law Dictionary (Eighth edition) defines the word "construction" as "the act of building by combining or arranging parts or elements; the thing so built".
The word "structure" can be regarded as including anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation.
With reference to the activities mentioned in the definition of construction activities in subsection 238(1) of the Regulations, well drilling includes "excavation", "installation" of all or any part of a "structure", "surface or subsurface construction, or any similar property". We would also mention that the activity of excavating a well is commonly described and accepted as "constructing" a water well.
In our view, well drilling activity would fall within the definition of construction activities for the purposes of section 238 of the Regulations. Consequently, where your business income was derived primarily from construction activities, which includes water well drilling activities, and you make payments to subcontractors for construction services (i.e., you do not need to report payments to subcontractors for services such as bookkeeping, janitorial, or legal), you will be required to make an information return (form T5018) pursuant to subsection 238(2) of the Regulations.
We have discussed with the XXXXXXXXXX Tax Centre of your concerns regarding the recent increase in paperwork experienced by your business for tax compliance purposes. CRA Business Window is available at 1-800-959-5525 to discuss further with you any options that may be available to help reduce or streamline some of the paperwork relating to tax programs administered by the CRA.
We trust that our comments will be of assistance.
Phil Jolie
Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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