24 November 1995 Internal T.I. 9520457 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Does the activity of transfering an image from a diskette or tape to raw film and then to a pre-press film negative qualify for the M&P tax credit, when the material sold is only incidental to the transaction?

Position TAKEN:

The M&P credit is obtained for "the sale or lease of goods". Where the activity provided is a service and the material sold is incidental to the real object of the contract, the activity does not qualify for the M&P tax credit. The income earned by the taxpayer is based on the service and the sophisticated computers that render the service and not the pre-processed film negative which is only the medium used to convey the results. Information is not goods within the meaning of 125.1 of the Act.

Reasons FOR POSITION TAKEN:

The Coopers & Lybrand case changed the way the courts applied the M&P tax credit by determining the real source of income i.e. the sale of goods or the service provided.

							November 24, 1995

Edmonton Tax Services Office		Merchandising, Manufacturing
1225 Section 441-3-1			  and Partnerships Section
TPR/Audit						Franklyn S. Gillman
							957-9768
Attention: Stan Sewlal
							7-952045

XXXXXXXXXX

This is in reply to your memorandum of July 27, 1995, wherein you requested our opinion whether the activities performed by XXXXXXXXXX qualify for the manufacturing and processing profits deduction (the "M&P Deduction") pursuant to section 125.1 of the Income Tax Act (the "Act").

Facts

Our understanding of the relevant facts are as follows:

XXXXXXXXXX is a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Act.

XXXXXXXXXX

General Discussion

This Directorate, in 1992, considered a similar type of business activity with regards to the M&P Deduction in response to a request from the Toronto District Office. At that time it was decided that the activity carried on by the taxpayer closely resembled that of a "Photo Developer". At paragraph 43 of Interpretation Bulletin IT-145R it was established that the activities connected with the processing of film into prints and slides, negatives into prints and the enlarging of prints are considered to be activities which qualify for the M&P Deduction. It therefore follows that similar activities should also be considered "manufacturing or processing in Canada of goods for sale" as that term is used at subsection 125.1(3) of the Act.

Rulings Opinion

The determination as to whether XXXXXXXXXX activities can be described as "manufacturing or processing goods for sale" for the purposes of section 125.1 of the Act is a question of fact taking into account the comments in IT-145R. Provided that our understanding of the facts are correct and that the activities carried on by XXXXXXXXXX closely resemble that of a photo developer, it is our opinion that the activities carried on by XXXXXXXXXX can be described as "manufacturing or processing goods for sale" for the purposes of section 125.1 of the Act.

We trust the above comments are of assistance. Should you require further assistance, please contact the writer.

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch