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.
September 25, 1986
LONDON DISTRICT OFFICE
Mr. R.W. Dalgleish Chief of Appeals
HEAD OFFICE - APPEALS BRANCE Appeals & Referrals Division J.P. Henley
Classification of Storage and Shipping Facilities for C.C.A. Purposes
This is in reply to your memorandum of May 22, 1986.
The facts can be summarized as follows:
XXXX
Audit Position
The Department disallowed the afore-mentioned Class 29 assets on the following basis,
a) The definition of "Qualified Activities" in Regulation 5204(d) excludes the storing and shipping of finished goods.
b) IT-147R , paragraph 9, excludes distribution assets from Class 29.
Taxpayer's Position
The taxpayer is contending that assets related to the storing and shipping of finished goods do qualify for inclusion in Class 29 on the following grounds:
a) The Income Tax provisions for MPPD (Reg. 5202) and ITC (par. 127(11)(b)) specifically exclude under the definition of "qualified activities", the storing aad shipping of finished goods. While those provisions do not apply to Class 29, the same sort of exclusions are not found either in Regulation 1104(9) or in Schedule II, Class 29.
b) The assets used to store and to ship finished products are indirectly used in the manufacturing and processing, and as such qualify for Class 29.
Your Position
It is your understanding that if the asset is used directly or indirectly for a qualified manufacturing or processing activity, as defined in Regulation 5202, it qualifies for inclusion in Class 29, qualifies for ITC and qualifies for computation of PPD.
Our position
While we agree that Regulation 5202 defines the "qualified activities" for the purposes of MPPD, the said provision is not relevant im the determination of Class 29 assets. The question of whether the assets used to store and ship finished goods qualify for Class 29, is a matter to be determined on the basis of regulation 1104(9), Schedule II - Class 29, and the interpretation of the expression "used directly or indirectly" found in Class 29.
Although the wording of Class 29 does not specifically exclude the storing and shipping of finished goods from the qualified activities, the Department's long-standing policy is that such assets are not "used directly or indirectly" in the manufacturing and processing of goods. When interpreting the words "directly or indirectly", the Department normally accepts to include assets relating to factory overhead.
From our point of view, even though the storage and shipping facilities are a necessary part of the taxpayer's business (so is the administration, promotion etc.), they are not an integral and essential part of its manufacturing or processing activities.
Since the term "manufacture" and "process" only refers to the creation of goods, we cannot accept the proposition that the storing and the shipping of the finished goods are an integral and essential part (directly or indirectly) of this creation process. Consequently, inasmuch as the assets in dispute were used to store and ship finished goods, the reassessment should be confirmed.
In other respects, the question of determining whether a particular asset has been strictly used in the storing and the shipping of finished goods is a matter of judgment. We would like to offer the following comments to assist you in your determination.
a) A product would be considered to be a finished goods when it has reached the state that it is in when sold. Please review Exbibit VI, Items EB9110, FA9116, FB9134B1 where the taxpayer claims that the tanks are not used for finished goods.
b) Where a process, to effect a change in a product, involves the storage of a product, the activity would qualify for Class 29. Please review Exhibit VI, item FB9119, where the taxpayer claims that a mixing operation must take place in the tanks to bring the product into a saleable state.
c) Pipeline may qualify for Class 29, when it is an integral part of M & P activity within a manufacturing plant.
d) Sewers and drains (as being part of a building) used in connection with the M & P operations qualify for class 29.
Your file is enclosed.
Original Signed by
J.C. Boucher
Signature sur l'original
Section Chief Appeals & Referrals Division JPR/pg Enclosure
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