5 February 1988 Income Tax Severed Letter 7-2244 - []

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.

DATE: February 5 1988

TO SAINT JOHN, N.B. DISTRICT OFFICE Audit Division

ATTENTION R.S. Chase

FROM- Christopher Higgins Small Business and General Division (613) 957-2097

We are writing in response to your memorandum dated October 22, 1987 in which you requested our advice on the proper treatment of certain assets for investment tax credit purposes.

XXXX

TAXPAYER'S POSITION

The taxpayer's representative maintains that:

(1) paragraph 44 of IT-145R has little to do with whether equipment in fact qualifies for the ITC's, on the basis that the definition of qualified property in subsection 127(9) only requires the equipment to be new and acquired to be used primarily for a specific purpose, the manufacture of a newspaper;

(2) based on paragraph 44 of IT-145R and three tax cases, the manufacture of a newspaper is a qualifying activity; and

(3) subparagraph 125.1(3)(b)(x) is not applicable in determining eligibility of equipment for investment tax credits.

RULINGS POSITION

The relevant portion of Class 29 of Schedule 11 - Capital Cost Allowances, reads as follows:

Property that would otherwise be included in another class in this Schedule (a) that is … property acquired by the taxpayer after May 8, 1972,

(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease, or (...) and

(b) that is

(i) property that, but for this class, would be included in Class 8,...

Therefore, the property to be considered as a Class 29 asset must among other things be used directly or indirectly by the taxpayer in Canada primarily in the manufacturing or processing of goods for sale or lease.

INVESTMENT TAX CREDIT ELIGIBILITY

XXXX will be entitled to investment tax credits if the acquired assets fall within the parameters of the definition of qualified property as provided in subsection 127(9).

The definition of qualified property in subsection 127(9) reads as follows:

"qualified property" of a taxpayer means property (other than an approved project property or a certified property) that is ...

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of (i) manufacturing or processing goods for sale or lease,...

The "qualified property" definition is similar to the requirements for an asset to be included in Class 29. The property must still be used by the taxpayer in Canada primarily for the purpose of processing goods for sale or lease.

Paragraph 44 of IT-145R discusses the Department's views on which activities of a printing and publishing company qualify as manufacturing or processing and also the Department's views on advertising revenue as it relates to "qualified activities" for the purposes of section 125.1. They state that, "some advertising activities may be qualified activities because these activities are connected with the manufacturing and processing of a newspaper, but the gross revenue from advertising is considered to be from a service and is not from the sale or lease of goods". Based on this position and also the fact that the newspaper is distributed by CLP free of charge, it is our view that the assets used by CLP in the production of a weekly newspaper would not be considered "qualified property" for purposes of subsection 127(9) of the Act. Also, these assets would not satisfy the requirements to be included in Class 29.

We hope this information will be of assistance to your audit.

Chief Merchandising, Manufacturing and Construction Section Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch