25 May 1992 Income Tax Severed Letter 9212395 - Manufacturing and processing profits tax credits — Nowsco and Halliburton court cases

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.

SUBJECT: M&P CREDITS/NOWSCO & HALLIBURTON CASES SECTION: 125.1, 127, CLASS 29]

ISSUE SHEET

Question 30 - Manufacturing and Processing Profits Tax Credits (1991 Canadian Tax Foundation Roundtable)

Issue

The question asked for Revenue Canada's assessing guidelines for M&P credits in light of the Federal Court of Appeal decisions in Nowsco, [[1990] 1 C.T.C. 416] 90 DTC 6312 and Halliburton, [[1990] 1 C.T.C. 427] 90 DTC 6320. At issue in these cases was whether well site services of fracturing, acidizing and cementing fell within the meaning of "processing in Canada of goods for sale".

Answer

The answer stated that the court in these cases stressed the unique fact situations which distinguished them from other service cases. The Department's position was therefore that these two cases are applicable only for taxpayers in the oil and gas well service industry with identical operations.

Discussion The facts in the two cases are identical. Both taxpayers engaged in providing materials, labour and equipment to oil well operators (their customers) in the completion and stimulation (cementing, fracturing and acidizing) of oil and gas wells. The court dismissed the Crown's appeals and upheld the Trial Division's decisions in both cases.

The F.C.A. stated at page 6318 that on a common-sense, realistic and business-like appreciation of all of the facts, the taxpayers did not enter into pure service contracts, but rather processed goods to their customers' specification which the taxpayers then utilized to perform the specialized services required of them by their customers. Thus, they were engaged in processing goods for sale and were entitled to the M&P credit, ITC and Class 29 treatment.

Throughout the decisions, however, the court emphasized the unique fact situations of these taxpayers and distinguished the taxpayers from other cases involving contracts for services such as Canadian Wirevision Limited [[1979] C.T.C. 122] (79 DTC 5101, F.C.A.), Crown Tire Service Ltd. [[1983] C.T.C. 412] (83 DTC 5426, F.C.T.D.), Nova Construction Company Limited [[1979] C.T.C. 2048] (79 DTC 77, T.R.B.), and Tenneco Canada Inc. [[1987] 2 C.T.C. 231] (87 DTC 5434, F.C.T.D.). - see pages 6316 and 6322. The Tenneco Canada Inc, case was decided in the Crown's favour by the Federal Court of Appeal on March 21, 1991.

The 1991 CTF Roundtable question and answer was also given at the Canadian Tax Foundation - B.C. Tax Conference in September, 1991 and is consistent with the Appeals Decisions # 86-14R and # 90-30, both dated August 17, 1990, pertaining to the Halliburton and Nowsco cases, respectively. ... cont...

All cases under appeal which were identical to Halliburton and Nowsco and which were held in abeyance by Head Office and District Office Appeals have now been dropped and processed.

Prepared by: John Chan
May 25, 1992
5-921239