Section 125.1

Subsection 125.1(3) - Definitions

Canadian Manufacturing and Processing Profits

Cases

Canada v. Irving Oil Ltd., 2002 DTC 6716, 2001 FCA 364

The taxpayer, who carried on an active business of refining crude oil and marketing refined petroleum products, paid the amount of a disputed income tax assessment and received interest on a refund of the tax when its objection was successful. Sharlow J.A., in finding such interest was income from an active business, noted that if there were no such thing as refund interest, the taxpayer might well have chosen to provide security for the disputed assessment rather than paying it, with the result that it probably would have made business profits from the use of its money for the many years it took to resolve the dispute, that the taxpayer had only one business and that the decision to pay tax in dispute was a business activity.

Allarcom Pay Television Limited v. The Queen, 98 DTC 6646 (FCA)

The taxpayer, which was a licensed pay television company that purchased rights to movies, and retaped them with introductions and commentary onto blank tape for sale to cable companies, was found not to be thereby manufacturing or processing goods for sale or lease for purposes of the manufacturing and processing deduction and the eligibility of related depreciable assets for inclusion in Class 29.

Publi-Hebdos Inc. v. The Queen, 95 DTC 5547 (FCTD)

The taxpayer, which published and distributed free of charge two newspapers 75% of whose space was devoted to advertising, was characterized as providing "an elaborate service in which the provision of space in the newspaper is a necessary but incidental part of the principal purpose of the contracts" (p. 5551), rather than as leasing advertising space to advertisers. Accordingly, its newspapers did not qualify as goods for lease.

The Queen v. International Petrodata, Inc., 95 DTC 5335 (FCA)

The taxpayer, which gathered, edited and interpreted technical data for wells drilled for oil and gas, and placed that data on computer tapes or microfiches which were provided to its customers for a fee, was found not to be manufacturing or processing goods for sale. The essence of its business was the gathering, processing and providing of information, which was not "goods".

The Queen v. Lehmann Bookbinding Ltd., 95 DTC 5063 (FCTD)

The taxpayer, whose commercial book-binding business entailed the binding of issues or volumes of periodicals, the binding of monographs and the restoration of old books, was found not to be manufacturing or processing "goods for sale" because under the applicable common law governing contracts for labour and materials, its customers acquired property in the materials affixed by the taxpayer by accession, rather than there being contracts for sale of goods.

The Queen v. Veritas Seismic (1987) Ltd., 94 DTC 6123 (FCA)

The taxpayer, which used computer programs to process data from a few tapes in order to create images of sections of the surface of the earth (displayed on sheets of plastic, and also recorded on output tapes) was found to derive its income from the provision of services to its customers (i.e., processing information) rather than from the physical preparation involved in conveying the results of work to its customers. Accordingly, it was not engaged in the manufacturing or processing of goods.

Harvey C. Smith Drugs Ltd. v. The Queen, 95 DTC 5026 (FCA)

In finding that the taxpayer was not eligible for the manufacturing and processing deduction, Desjardins J. stated (p. 5030):

"By its very language, the word 'processing' used in its ordinary meaning cannot be applied to the dispensing of drugs in capsules or tablets where the only activities of the pharmacist consists in removing the discoloured, broken, chipped or cracked ones, counting the appropriate ones in a number prescribed by the physician, and placing them in a labelled container with a child-proof safety cap. What is absent from the activities of the pharmacist is the subjection of the product 'to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result'."

Stowe-Woodward Inc. v. The Queen, 92 DTC 6149 (FCTD)

The taxpayer, which received roll cores from pulp and paper companies, and then prepared a rubber material which it applied in a continuous operation to the customers' roll cores, was found to be manufacturing or processing roll covers for sale, rather than being engaged in a repair service.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 39

Rolls-Royce (Canada) Ltd. v. The Queen, 91 DTC 5579 (FCTD), aff'd 93 (DTC) 5031 (FCA)

The taxpayer's customers' engines were removed from aircraft, overhauled by the taxpayer and then reintroduced into the same customers' aircraft. This operation did not entail manufacturing or processing given that the engine retained its identity throughout the process (it retained the same serial number and logbook, and apparently less than 50% of the engine would be replaced by new parts), and the customer retained ownership of the engine throughout.

Tenneco Canada Inc. v. The Queen, 91 DTC 5207 (FCA)

only operations significantly changing goods' character are "manufacturing" or "processing"

In finding that a corporation which assembled and installed exhaust systems in automobiles was not engaged in manufacturing ("producing for sale an identifiable article of commerce by assembling parts produced by others" (p. 5208)) or processing (which "occurs when raw or natural materials are transformed into saleable items" (p. 5209)), Linden J.A. stated (pp. 5209-5210):

"The nature of the modern commercial world is that goods often pass through many hands before they reach consumers. At each stage, minor alterations may be made to the goods, or they may be assembled in conjunction with other ready-made goods, before they progress through the commercial chain. The benefit of the incentives cannot be claimed by each of the handlers merely because they altered the goods in some small way. Only those operations which significantly change the character of the goods can truly be described as 'manufacturing' or 'processing' so as to qualify for the special tax incentives."

Words and Phrases
manufacturing processing

Reg Rad Tech Ltd. v. The Queen, 90 DTC 6350 (FCTD), aff'd 91 D.T.C 5518 (FCA)

provision of X-ray results on film was a service

The taxpayer purchased raw film, took x-rays or ultrasound films of patients referred to it by a partnership of radiologists (five of the original partners of whom or their holding companies controlled it), developed the films, and sold them to the partnership. Collier, J. held:

"The plaintiff was not engaged, as its primary purpose, in the processing of goods for sale. It was, in my opinion, from a common sense, realistic and business-like appreciation of the evidence, providing services to the patients and the diagnosing radiologists of the partnership."

The Queen v. Nowsco Well Service Ltd., 90 DTC 6312 (FCA)

The taxpayer provided various services to oil and gas operators respecting the completion and stimulation of wells including pumping cement slurries around well casings, fracturing rock formations with proppants, and acidizing rock formations with a specially-blended acid. Urie, J.A., after finding the common law distinction between a contract for the sale of goods and a contract for work, labour and materials to be irrelevant, stated (p. 6318):

"... the Respondent does not enter into pure service contracts, but, rather processes goods to the operator's/customer's specification which it utilizes to perform the specialized services required of it by its customer. It does so by means of what the Trial Judge described as a 'mobile factory' which utilizes the various materials, mixtures and blends produced for delivery to the well bore ..."

and went on to find that the taxpayer's business therefore entailed the processing of goods for sale.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Resolving Ambiguity 30

Dixie X-Ray Associates Ltd. v. The Queen, 88 DTC 6076 (FCTD)

The taxpayer processed and developed x-ray films of patients who had been referred to radiologists who were its shareholders. The patients were referred to the radiologists on the basis of their professional skill in producing a diagnostic report rather than on the basis of the taxpayer's capability in processing x-ray films. Therefore the substance of the contract with the patient was the provision of services in which the passing of any property in the x-ray films was incidental thereto, and the contract accordingly was for the supply of services rather than the sale of goods.

Canadian Marconi v. R., 86 DTC 6526, [1986] 2CTC 465, [1986] 2 S.C.R. 522

Interest, which an electronic equipment manufacturer received from short term loans and certificates of deposit which it had acquired out of the proceeds of sale of a broadcasting station, was held to be "income ... from an active business carried on in Canada." The manufacturer has a specific "investment business" object, and there is a rebuttable presumption that income earned by a corporation in the exercise of its duly authorized objects is income from a business. In addition "the extensive activities of the [taxpayer's] employees in purchasing short-term investments, the large number and high value of those transactions, the high proportion which the interest earned bore to the total income of the company and the high proportion which the total value of the investments bore to the total value of [the taxpayer's] assets" reinforced the character of the interest as business income.

Halliburton Services Ltd. v. The Queen, 85 DTC 5336, [1985] 2 CTC 52 (FCTD), aff'd 90 DTC 6320 (FCA).

separate sale of well fluids

The appellant, which pumped custom-made cement, fracturing fluids and acid blends (the "goods") into the oil and gas wells of its customers, was held to have manufactured or processed the goods "for sale" notwithstanding the services which it provided in conjunction with the goods. Semble, that it was irrelevant that in some cases, the goods were consumed in providing the service.

Crown Tire Sevice Ltd. v. The Queen, 83 DTC 5426, [1983] CTC 412 (FCTD)

service of retreading tires

The taxpayer, in retreading worn tires before returning the tires to its customers, was providing a service to its customers rather than "manufacturing or processing ... goods for sale" to them, because the customers retained ownership of the tires at all times.

Levi Strauss of Canada, Inc. v. The Queen, 82 DTC 6070, [1982] CTC 65 (FCA)

The modus operandi of the taxpayer corporation was to contract out all of the cutting, making and trimming of shirts. This function thus was not a "function that would normally be performed by an employee of the corporation" under the "cost of labour" definition in regulation 5202. The fact that the cutting, making and trimming of pants was carried out by the corporation's employees might have been relevant only if words such as "of a kind" followed the word "function" in the definition.

Canadian Clyde Tube Forgings Ltd. v. The Queen, 82 DTC 6041, [1982] CTC 21 (FCA)

Machining operations in the taxpayer's plant were always carried out by a subcontractor rather than the taxpayer's employees. Payments to the subcontractor accordingly were excluded from the "cost of labour" by virtue of subparagraph b(iii) of the definition in regulation 5202.

McGraw-Hill Ryerson Ltd. v. The Queen, 80 DTC 6211, [1980] CTC 280, aff'd 82 DTC 6142, [1982] CTC 167 (FCA)

A textbook publisher was held to be engaged in the manufacturing or processing of books. Although the typesetting, printing and binding of the books was done by a printer rather than by the taxpayer, the remaining functions carried out by it, such as copy editing, book design and proofing, were integral elements of the "manufacturing" and "processing" of books within the ordinary meaning of those words. Although the books took their value from their informational content, the books nonetheless were what the taxpayer sold, and those books were "goods".

Modern Miss Sportswear Ltd. v. The Queen, 80 DTC 6390, [1980] CTC 521 (FCTD)

The payment by a garment manufacturer of the invoices of contractors to which it had farmed out the sewing of its garments could not be treated as part of its cost of labour. The degree of control exercised by the manufacturer upon the contractors' sewing machine operators and the fact that the manufacturer was ultimately legally responsible for their unpaid wages and benefits were insufficient to establish a master and servant relationship.

MDS Health Group Ltd. v. The Queen, 79 DTC 5279, [1979] CTC 337 (FCTD)

Medical laboratories were not engaged in the processing of goods for sale. The analysis of specimens by the laboratories did not result in an end product that could be sold. Instead, all that was sold were analysis reports, which were not the product of previous processing activities.

Canadian Wirevision Ltd. v. The Queen, 79 DTC 5101, [1979] CTC 122 (FCA)

TV signals not goods

A cable television company argued unsuccessfully that it was processing goods for resale when it processed T.V. signals for transmission to its subscribers. Although electricity can be bought and sold as a commodity or "good", in this situation the television signals would not be referred to in common parlance as goods. In addition, the contracts with its subscribers indicated that it was supplying services rather than goods to them.

See Also

C.R.I. Environnement Inc. c. La Reine, 2008 DTC 3787, 2007 TCC 206, aff'd 2008 DTC 2471, 2008 FCA 103

The taxpayer, who in consideration for a charge made by it to its customers, sorted, consolidated and reshipped industrial waste produced by them, in consideration for fees paid by them, was found to have under the Quebec Civil Code contracts for services with them rather than contracts of sale, so that it was not eligible for the allowance.

The Federal Court of Appeal noted that the same result likely would have been reached under the common law.

TDS Group Limited v. The Queen, 2005 DTC 786, 2005 TCC 40

The taxpayer, which sprayed automobile and truck parts with a corrosion inhibitor and specially packed them in kits before shipping the kits to plants in third-world countries for assembly there as automobiles, was found to be engaged in the processing of goods for sale. Without the taxpayer's input in assembling the kits, the offshore manufacturers could not have produced a vehicle, and it was not relevant that the taxpayer did not own the parts (the car manufacturers did).

Irving Oil Ltd. v. The Queen, 2000 DTC 2164 (TCC)

In finding that refund interest received by the taxpayer following a successful appeal of a substantial assessment represented business income and, therefore, was eligible for the manufacturing and processing deduction, Rip TCJ. stated (at pp. 2170-1):

"If the money used for the overpayment was business income that was intended for use in the business, then, once the courts have decided there was an overpayment of tax, the overpayment is no longer a tax but reverts to the time of overpayment to property owned by the taxpayer for use in its business and interest on that property is business income."

Cintas Canada Ltd. v. The Queen, 99 DTC 926 (TCC)

The taxpayer carried on a uniform rental business under which it agreed to lease uniforms to customers for a period generally of five years and, in that connection, would make alterations to affix identification tags and company crests and to wash and dry garments that it acquired for the lease. In finding that the taxpayer was processing goods for lease in Canada, O'Connor TCJ. found that these activities represented an operation of altering the form of the garments, making them more marketable.

Will-Care Paving & Contracting Ltd. v. The Queen, 97 DTC 506 (TCC)

The production of asphalt for use in the paving of driveways, parking lots and small public roadways was found not to qualify as use for contracts for sale, rather than contracts for work and materials.

Mont-Sutton Inc. v. The Queen, 96 DTC 1472 (TCC)

The making of artificial snow by a ski resort operator ("Sutton") did not qualify as manufacturing or processing of goods for sale or lease. "As the principal object of the contract binding a skier and Sutton concerns the use of immoveable property and the supply of services, one may not conclude that Sutton manufactured 'goods for lease' ...". (p. 1478

Démolition A.M. de l'est du Québec Inc. v. MNR, 93 DTC 889 (TCC)

The taxpayer, which derived its revenues from contracts for the demolition of buildings or other works, and from the sale of materials resulting from its alleged processing activities on the demolition sites, successfully maintained its position that its recycling activities, i.e., sorting materials, cutting to size, taking out the hardware, separating various items, removing nails and screws, etc., were processing activities.

Hope Brook Gold Inc. v. Minister of Finance of Newfoundland (1992), 96 DLR (4th) 114 (Nfld. C.A.)

In finding that electric trucks used by a gold mine to transport crushed ore to the surface, and carbon regeneration kilns used to restore carbon for reuse in the process of separating the gold from the rock, were used in "manufacturing" for purposes of regulations pursuant to the Retail Sales Tax Regulations (Newfoundland), Gushue J.A. stated (p. 122):

"Once having commenced, everything subsequent which was an integral part of the operation, and this would certainly include the transportation of that reduced material to the cone crusher above ground, was surely part of the manufacturing process ... As for the carbon regeneration kiln, this was a money-saving aspect of the operation which obviated the necessity and expense of having to continually purchase new carbon for cleaning purposes. It is obviously a logical and essential part of the operation ..."

International Petrodata Inc. v. The Queen, 93 DTC 110 (TCC)

The sale and leasing of tapes and microfiches containing technical data on Canadian oil wells which the taxpayer had gathered, edited and organized was eligible for the deduction.

Tuyauteries Saglac Inc. v. MNR, 93 DTC 40 (TCC)

In finding that an operation of installing industrial pipes and fittings in paper mills to the detailed and intricate specifications of the owners constituted a manufacturing or processing operation, Couture C.J. stated (p. 44):

"The work performed by the appellant to install a system of pipes and to link a paper machine to energy sources to permit its use did not consist in the mere joining of lengths of pipe end to end, but in a series of operations, cuts and welding to give those pipes a very special shape in order to incorporate them in that network."

Versa Services Ltd. v. MNR, 92 DTC 1769 (TCC)

Microwave ovens and coffee brewers used by customers of the taxpayer's coin-operated vending machines in order to heat such products as hotdogs, hamburgers and pizzas, or to brew coffee, were not used for the "processing" of goods.

Industrial Forest Reserves Ltd. v. MNR, 92 DTC 1060 (TCC)

The taxpayer's subsidiary carried out an aerial triangulation process in order to produce and provide a map framework to the taxpayer. The taxpayer used the map frameworks to produce maps for forestry companies. In finding that both corporations were engaged in the processing of goods for sale, Brulé J. stated (p. 1066) that "the evidence shows ... that the Appellants are being asked to supply maps and frameworks for maps, not to work for the customers".

Design One Creative Graphic Productions Ltd. v. MNR, 92 DTC 1006 (TCC)

The taxpayer was found to be engaged in manufacturing when it prepared final art boards out of clear sheets of acetate and sold the boards to its customers for the printing of advertising flyers.

Calgary Television Ltd. v. MNR, 90 DTC 1577 (TCC)

Fees charged by a television station to advertisers as for air time during the live telecast of hockey games and other presentations was not income from manufacturing and processing goods for sale.

Fiat Auto Canada Ltd. v. The Queen, 83 DTC 5451, [1983] CTC 432 (FCTD)

It was stated in the context of the Excise Tax Act that the addition of radios by a Canadian distributor to imported motor vehicles "would not, in normal commercial usage, be considered either as an act of manufacture or production". The reason was that "there was no change in the form, qualities or the combinations of the motor vehicle", i.e., the motor vehicles could be operated just as well without the radios. (The Court went on to find that the taxpayer also did not "assemble" goods.)

Royal Bank of Canada v. Deputy Minister of National Revenue for Customs and Excise, 81 DTC 5301, [1982] CTC 183, [1981] 2 S.C.R. 139

emergency-generator production of electricity was manufacturing

The taxpayer was a bank which also was the landlord of the Royal Bank Centre in Toronto. In that capacity, it operated emergency electricity generators at the buildings for approximately 100 hours per year (consisting of 50 hours of testing and 50 hours of power interruption). In accepting the taxpayer's submission that the taxpayer's purchases of generators were exempt from sales tax under the Excise Tax Act as "machinery and apparatus sold to...manufacturers or producers for use by them directly in...the manufacture or production of goods," McIntyre J state (at pp. 143-4):

There is no definition of manufacturing or manufacture in the Act, but I accept a definition given by Spence J. in R. v. York Marble, Tile and Terrazzo Ltd...where he said, at p. 145:

For the present purposes, I wish to note and to adopt one of the definitions cited by the learned judge, [Archambault J. in Minister of National Revenue v. Dominion Shuttle Company Limited (1933), 72 Que. S.C. 15] i.e., that “manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery”.

...I conclude that the appellant is performing the act of manufacturing electricity by the use of the generators... .

Words and Phrases
manufacture

Controlled Foods Corp. Ltd. v. The Queen, 80 DTC 6369, [1980] CTC 491 (FCA)

The preparation of meals and beverages by a restaurant did not constitute "manufacturing or producing" in the generally accepted commercial view of that phrase.

The Queen v. York Marble, Tile and Terrazzo Ltd., [1968] S.C.R. 140, [1968] CTC 44, 68 DTC 5001

finishing marble slabs was producing and likely also manufacturing

The respondent imported “greyish, non-descript” slabs of raw marble (sometimes as long as 16 feet) and, after finishing them, installed them in buildings as subcontractor. The finishing work included matching slabs so that the veining would match, grouting voids, rodding weakened slabs, gluing broken slabs, grinding, rough and fine polishing, cutting and finishing the edges. In finding that the finished slabs were “goods produced or manufactured in Canada” within the meaning of s. 30(1)(a) of the Excise Tax Act, R.S.C. 1952, Spence J stated (at p. 145, and quoting in the first sentence from M.N.R. v. Dominion Shuttle Co. Ltd. (1933), 72 C.S. 15 (Que. S.C.)):

“manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery”. (The italics are my own.) ...[T]he finished marble slabs which left the respondent’s plant had by work, both by hand and machinery, received new form, new quality and new properties.

After noting (at p. 146) the finding in Gruen Watch Company of Canada Ltd. v. A.G. (Canada), 1950 CanLII 77 (ON SC), [1950] C.T.C. 440 that “the simple operation of putting a watch movement into a watch case is [not] ‘manufacturing’ a watch in the ‘ordinary, popular and natural sense’ of the word, but… the plaintiffs ‘produced’ watches,” Spence J stated (at p. 147):

if I had any doubt that the various procedures taken by the respondent in reference to the marble slabs resulted in the manufacture of a piece of marble, I would have no doubt that those procedures did result in the production of a piece of marble.

Words and Phrases
manufacture
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Similar Statutes Customs Tariff legislation was in pari materia to the Excise Tax Act 374

Biltrite Tire Co. v. The King, [1937] S.C.R. 364, 1 D.T.C. 360

repairing and retreading of tires constituted manufacturing

The taxpayer purchased in bulk lots, by the pound, old and worn-out motor vehicle tires and put them through a process of repair, treatment (including being pressed and partially cooked in a boiler) and retreading, and sold the retreaded tires. Throughout the process the sidewall of the tire was not dismantled or destroyed, the numerical identification of the original tire was not destroyed, the name of the manufacturer of the original tire was still clearly marked upon its sidewalls. In finding that the restored sales when sold fell to be treated as “goods produced or manufactured” by the taxpayer under s. 86 (1) (a) of the Special War Revenue Act (R.S.C. 1927, c. 179) and were “tires manufactured or produced” by it under s. 80, Kerwin J stated (at pp. 366-7, SCR):

[I]f the appellant had purchased an old or worn-out tire which had already been treated by the vendor in the manner described above, down to and including the cutting off of the old tread…[and] then… had purchased from a third party the rubber preparation and had applied the latter and continued with the subsequent steps, could it be suggested that the article in its final condition had not been produced or manufactured by the appellant? The definitions of the words “manufacture” and “produce” as nouns or verbs, in the standard dictionaries, clearly indicate that such proceedings would constitute the appellant a manufacturer or producer. And the mere fact that the appellant has itself performed the defined operations on the old tire cannot exclude it from the operation of the section.

…It is suggested that the old or worn-out tire did not lose its identity qua tire and that, therefore, the appellant could not be said to have manufactured or produced a tire. However, when one bears in mind the various steps taken by appellant and particularly the state of the article when the tread was removed, it would appear that appellant cannot be any less the manufacturer of a tire because it started with something that had once been a usable tire than if, as suggested in the preceding paragraph, it had commenced with two substances purchased from different sources.

Words and Phrases
produce manufacture

Administrative Policy

7 March 2019 Internal T.I. 2018-0781511I7 F - Fabrication ou transformation

commercial printing or photocopying operations may not be M&P

9406917 F, after referencing the position in IT-145R, para. 42 that various activities of a printing firm constituted manufacturing or processing, indicated that:

photocopying activities from a photocopier equipped with a computer and the activities of assembling photocopies with a flange constitute the manufacturing or processing of goods for sale.

After referring to Will-Kare and to the position in IT-145R on printing and publishing activities not being carried forward to Folio S4-F15-C1, CRA stated:

Consequently, considering the new case law, the cancellation of IT-145R and the technological progress of the last 25 years in the field of photocopying, we cannot confirm or deny that the position taken in the Interpretation continues to reflect the position of the CRA. If we had a specific file under study, we would have to do a complete re-analysis before making a decision.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 printing or photocopying operations may no longer be manufacturing or processing 145

S4-F15-C1 - Manufacturing and Processing

Meaning of "manufacturing" and "processing".

1.2 ... [T]he manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling, or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.

1.3 In Tenneco Canada Inc. v The Queen, [1991] 1 CTC 323, 91 DTC 5207, the Federal Court of Appeal indicated that the two tests for determining whether a taxpayer is engaged in processing are:

  • whether there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and
  • whether the product becomes more marketable.

1.4 The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging. ...

1.8 A corporation that merely sells goods manufactured or processed by another party or supervises the manufacturing or processing of goods where the actual manufacturing or processing is carried on by another party will also not qualify for the M&P credit. However, based on the Federal Court of Appeal decision in McGraw-Hill Ryerson Ltd. v The Queen, [1982] CTC 167, 82 DTC 6142, where the goods are being manufactured or processed in Canada by another party on behalf of the corporation and the corporation exercises extensive involvement and control over the content, design, and physical qualities of the goods from inception to completion in Canada, the corporation may qualify for the M&P credit.

25 March 2013 External T.I. 2012-0470501E5 - Manufacturing and processing

CRA indicated that "it might be reasonable to consider that the production, packaging and sale of ice cubes and blocks could be processing or manufacturing of goods for sale or lease for the purposes of the M&P credit." It also stated:

[T]he manufacture of goods normally involves the creation of something (e.g., making or assembling machines, clothing, soup) or the shaping, stamping or forming of an object out of something (e.g. making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth.

26 March 2001 External T.I. 2001-007349 -

After noting that the "processing of goods usually refers to a technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth", and that examples included galvanizing iron, dyeing fence posts, dehydrating foods and modernizing and pasteurising dairy products, the Agency indicated that "a recycling facility would generally qualify for the manufacturing and processing profits deduction ... . However, a procedure, which involves mainly the collection of garbage to be sold for processing as opposed to the actual recycling of materials for sale, will not, in our view, be a qualified activity".

21 March 1996 Memorandum 960592 (C.T.O. "Interest on Overpayment and Adjusted Business Income")

Interest arising under s. 164(3) due to a refund of an overpayment resulting from a court-ordered reassessment, should be viewed as interest arising from the operation or the provisions of the Act, rather than from business activities of the taxpayer or from property "immersed in the trading activity of the corporation" (as enunciated in the Ensite case (86 DTC 6521)). Accordingly, such interest does not qualify as income from an "active business" for purposes of the definition of "Canadian manufacturing and processing profits" in s. 125.1(3), and for purposes of Regulation 5202.

8 March 1993 T.I. (Tax Window, No. 29, p. 4, ¶2446)

In determining whether the manufacturing and processing deduction is available to the producer of a television show, the important consideration is whether the contract between the producer and the broadcasters is a contract for sale or for services.

2 March 1993 T.I. (Tax Window, no. 29, p.18, ¶2450)

Embalming and cosmetic surgery performed on cadavers is not eligible for the manufacturing and processing deduction.

91 C.R. - Q.33

The judgments in the Nowsco Well and Haliburton Services cases are applicable only for taxpayers in the oil or gas well service industry with identical operations.

25 July 1991 T.I. (Tax Window, No. 7, p. 18, ¶1373)

A funeral home which normally contracts out the manufacture of caskets to third parties is not the manufacturer of the caskets for purposes of s. 125.1.

18 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 26, ¶1097)

Discussion of the M&P activities of the meat, bakery and produce departments of a grocery store.

88 CPTJ - Q.10

The treatment of sour gas by a gas plant is considered to be processing because there would normally be by-products that would be derived from such processing.

79 C.R. - Q.21

The mixing of the ingredients for a drink by a barman, and the combination of ingredients by a vending machine to make coffee, drinks and soup, constitute processing.

IT-145R "Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax".

manufacturing or processing

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Meaning of "manufacturing" and "processing".

1.2 ... [T]he manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling, or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.

1.3 In Tenneco Canada Inc. v The Queen, [1991] 1 CTC 323, 91 DTC 5207, the Federal Court of Appeal indicated that the two tests for determining whether a taxpayer is engaged in processing are:

  • whether there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and
  • whether the product becomes more marketable.

1.4 The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging. ...

1.8 A corporation that merely sells goods manufactured or processed by another party or supervises the manufacturing or processing of goods where the actual manufacturing or processing is carried on by another party will also not qualify for the M&P credit. However, based on the Federal Court of Appeal decision in McGraw-Hill Ryerson Ltd. v The Queen, [1982] CTC 167, 82 DTC 6142, where the goods are being manufactured or processed in Canada by another party on behalf of the corporation and the corporation exercises extensive involvement and control over the content, design, and physical qualities of the goods from inception to completion in Canada, the corporation may qualify for the M&P credit.

15 January 2015 External T.I. 2014-0548101E5 F - Sens de "fabrication ou transformation"

steel rod plating could qualify

A steel plating company manufactured an alloy of various metals using specialized machinery, which was then applied to steel rods to make them more resistant. Does this activity qualify as "manufacturing or processing" under s. 125.1(3), and would the rods qualify for the M&P Credit if they are not the corporation’s property?

After discussing the meaning accorded to “manufacturing” and “processing” in Tenneco, CRA stated:

[I]f steel rod plating is carried out for the sale or lease of goods and the criterion as to the percentage of gross revenue is met, it is possible that this process constitutes manufacturing or processing activities for the purposes of the M&P Credit. …

As specified in IT-147R3, it is not necessary for the manufacturer or processor of the goods to be the seller.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 “primarily” based on the fraction of time used in the qualifying activities 104

(a)

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Separate processing operations of fishing corporation

1.11 ... [W]here substantial processing activities are carried out on board a vessel in Canada by a fishing corporation or where a farming corporation carries on substantial processing activities of farm products, the CRA will consider the processing activities to be a distinct business from that of fishing or farming where such activities are separated.

(b)

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

End of logging

1.12 ... [L]ogging does not include activities that take place after the delivery of the logs to a sawmill, pulp mill, plywood mill, or other similar place for processing logs.

(c)

Cases

Nova Construction Co. Ltd. v. The Queen, 85 DTC 5594, [1986] 1 CTC 68 (FCA)

A company engaged in highway construction used a "blackmobile" to produce asphaltic concrete at the site of a sand and gravel pit by passing sand and stone through a dryer and then to a mixer where hot liquid asphalt was injected. The asphaltic concrete was then transported from 2 to 34 miles to the road surface being repaired or paved by the company.

Although the production of asphaltic concrete was a processing operation, it was excluded from manufacturing or processing by s. 125.1(3)(b)(iii). "The blackmobile was used ... primarily to produce a product needed by the respondent to carry out various obligations under construction contracts. It is immaterial that the product happened to be produced some distance from actual construction sites."

See Also

Démolition A.M. de l'est du Québec Inc. v. MNR, 93 DTC 889 (TCC)

Garon J. rejected the Crown's submission that the activities of the taxpayer in demolishing buildings and other works constituted "construction".

Chateau Manufacturing Ltd. v. Dep. MNR, 84 DTC 6126, [1984] CTC 43 (FCA)

Construction materials are not limited to goods which are intended to be assembled on a construction site, but also can include goods which are sold at retail in kit form for later assembly on a construction site. (Excise Tax Act)

Administrative Policy

14 February 2014 External T.I. 2013-0504601E5 F - Bénéfices de fabrication et de transformation

construction exclusion avoided if road asphalt is produced by related corp

Company A, whose business was to construct roads, produced asphalt and sold over 90% of its production in constructing roads. A related corporation, Company B, is incorporated to produce the asphalt and sell it to Company A. CRA found that Company B would be eligible for the credit without limitation by para. (c), stating:

[T]he fact that Company A itself laid the asphalt it produced prevents it from claiming the M&P credit. However, if a separate corporation were formed for the purpose of producing asphalt, we would be of the view that this corporation would be eligible for the M&P credit to the extent that it would otherwise qualify for the credit. The mere fact that Company B would sell more than 90% of the asphalt it produces to Company A would not preclude it from being eligible for the credit..

Locations of other summaries Wordcount
Tax Topics - General Concepts - Separate Existence avoidance through M&P carried on through related corp 31

(d)

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Straddle plant excluded

1.14 The processing of natural gas at a straddle plant in Canada and the processing of natural gas in a plant in Canada that is devoted primarily to the recovery of ethane are both qualified processing activities.

(h)

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Electricity for own use not excluded

1.17 The production or processing of electrical energy or steam used directly or indirectly by taxpayers in their own manufacturing or processing activities is generally considered to be eligible for the M&P credit. However, producing or processing electrical energy or steam for sale is specifically excluded from being manufacturing or processing by virtue of paragraph (h) of the definition in subsection 125.1(3). Such activities do not qualify for the M&P credit under subsection 125.1(1).

(e)

See Also

Continental Lime Ltd. v. The Queen, 99 DTC 1154 (TCC)

The processing activities of the taxpayer in producing lime were held to include the transport of limestone from one of its quarries to its processing plant (the production of limestone was completed with the blasting of the rock) and the bagging of that portion of the lime that was not being sold in bulk.

(i)

See Also

Nova Construction Sand and Gravel Ltd. v. The Queen, 80 DTC 6298, [1980] CTC 378 (FCA)

The fact that the word "producing" in s. 125.1(3)(b) appears to be used in contradistinction to the word "processing", the references in other subparagraphs to operations for the production of raw as opposed to processed goods and "the context of a provision the object of which is to encourage the processing of goods for sale", led the Court to the view that in s. 125.1(3)(b)(vii) "it was not intended by the use of the expression 'producing industrial minerals' to include the processing of industrial minerals to produce specialized mineral products", i.e., various sizes and qualities of sand and gravel for industrial use.

Manufacturing or Processing (l)

Cases

Range Grain Co. Ltd. v. The Queen, 97 DTC 5221 (FCTD)

The processes of cleaning, fumigating and ventilating grain in a transfer elevator of the taxpayer did not qualify as processing because those operations were carried out for the purpose of maintaining rather than improving or changing the grain. This conclusion was reinforced by the taxpayer's non-ownership of the grain, which suggested that it was carrying out only a contract for service, namely, transportation.

Qit-Fer et Titane Inc. v. The Queen, 92 DTC 6071 (FCTD), aff'd on different grounds 96 DTC 6213 (FCA)

Rouleau J. applied s. 15(1) of the Interpretation Act in finding that because ss.125.1(3)(b)(v), (vi) and (vi.1) excluded the production of ferric oxide and titanium dioxide from "manufacturing or processing" the sale of such production also was excluded from "the selling ... of goods manufactured or processed in Canada" referred to in s. 125.1(3)(b)(x) of the Income Tax Act. Accordingly, because the taxpayer's sales of ferric oxide and titanium dioxide could not be included in its sales of goods manufactured or processed in Canada for purposes of s. 125.1(3)(b)(x), its secondary activity of manufacturing iron powder did not qualify.

Crown Tire Sevice Ltd. v. The Queen, 83 DTC 5426, [1983] CTC 412 (FCTD)

The onus is upon the taxpayer to establish that the 10% test has been satisfied.

See Also

Le Soleil Limitée v. MNR, 73 DTC 5093, [1973] CTC 91 (FCA)

The "gross revenues ... from sales" of a newspaper included its advertising revenues.