4 December 1989 Ministerial Letter 73828A F - Integrated Sawmill & Pulpmill Subsection 125.1(1) - M & P Deduction

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.

SUBJECT:  Integrated Sawmill & Pulpmill Subsection 125.1(1) - M & P Deduction

We are writing in response to your memo dated April 13, 1989, wherein you requested that we reconsider a previous opinion rendered by the Rulings Directorate dated December 1, 1986 as to whether the transportation of woodchips from a sawmill (whether owned by a taxpayer or otherwise) to a pulpmill is a "qualified activity" as defined at paragraph 5202 of the Income Tax Regulations.

In addition, you requested that we re-affirm an opinion issued in 1978 by Corporate Rulings that logs are the finished goods of the logging activity.  We shall respond to this request in a future memorandum.  The other opinion requested in your memo concerning a uniform treatment of lags, chips, pulp, paper and lumber as either "raw material", "goods in process", or "finished foods", was withdrawn by Mr. Peters (the former "Forestry Specialist") during a telephone conversation he had with Frank Gillman of this Division.

Background

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24(1) 21(1)(b)

In order to properly understand the meaning of this phrase, it must be defined using the usual everyday meaning of the words unless the words have already been defined in the Act, which is not the case.  In the Webster's New Collegiate Dictionary, "handling" is defined as follows:

     "a process by which something is handled in a commercial transaction, especially the packaging and shipping of an abject or material (as to a consumer)..."

In the light of this definition, the handling of woodchips to be shipped to the pulpmill may be a qualified activity in connection with manufacturing or processing under the definition of "qualified activities" found at section 5202(a)(iii) of the Regulations, but certainly not the shipping itself (i.e. the transportation).  This view was expressed by the Rulings Directorate in the above-mentioned December 1, 1986 opinion.

It is further contended that the transportation of woodchips is not "directly in connection with manufacturing or processing".  The phrase "directly in connection with" as used in paragraph (b) of the definition "qualified activities" must be fulfilled in order for the transportation to be a "qualified activity".  The Department has not issued any publications explaining the meaning of this phrase in the context of section 5202 of the Regulations, however the phrase most certainly excludes any of the activities expressly excluded under the definition of "qualified activities", i.e. the purchasing of raw materials.

In addition in IT-145R and IT-147R2 at paragraph 36 and 6 respectively, the Department has given its understanding to the meaning of "directly" and although these definitions are not with regards to the use of the word "directly" in the definition of "qualified activities", it is used in a similar context.  In each of these meanings, the term "integral and essential" have been used.  Therefore, for the transportation of woodchips to be a qualified activity it must be "integrally and essentially" connected to the manufacturing and processing of pulp and paper. 24(1)   21(1)(b)

We also hold to the view that an activity should not be treated differently under the Act solely because one taxpayer has an integrated facility while the other does not.  This would create an unjust burden on one and give the other an economic advantage, and the Act is not intended to be interpreted in such a fashion.

Conclusion

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DirectorBilingual Services & ResourceIndustries DivisionRulings Directorate