Regulation 5202 - Interpretation

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Flexible application of formula

1.22 ... Where a corporation can readily obtain information that is reasonably similar to that required by section 5202, it will be acceptable for purposes of the formula if no significant distortion of the formula results.

Adjusted Business Income

See Also

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."

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Partnership look-through

1.23 ... The definition includes the corporation's share of active business income from a partnership but does not include income from an active business carried on outside Canada.

11 April 1995 Internal T.I. 9429497 - ADJUBI - INTEREST INCOME

Interest earned on overpayments of taxes are not income from an active business.

Cost of capital

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Exclusion of double counting

1.32 A double counting problem occurs in a group of associated corporations where one corporation in the group charges another for the use of a building that it owns or rents. A rental charge appears in the cost of capital of both corporations and, in effect, is counted twice to the detriment of the group as a whole. To alleviate this inequity, the CRA will allow rents paid for a property to be netted with rents received or receivable from related corporations for the use of that property. Similarly, if the corporation receiving such rents owns the building, it may exclude the portion of the capital cost of the building that related to the area rented to related corporations from its cost of capital calculation.


Rental Cost

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Royalties included

1.30 Royalty payments are considered to qualify as rental costs under paragraph (b) of the definition of cost of capital in section 5202 of the Regulations. This will be the case provided they are payments made in respect of property that, if owned by the corporation at the end of a year, would have been included in paragraph (a) of the definition of cost of capital.

1.31 Since an accurate allocation of rental charges for the use of telecommunication equipment is impossible, the CRA will not require their inclusion in calculating cost of capital.

Cost of Labour

See Also

NRB Inc. v. The Queen, 93 DTC 295, [1993] 1 CTC 2435 (TCC)

The taxpayer, which used employees throughout the year to manufacture and erect modular buildings, was able to treat amounts paid to subcontractors for the same work during the months of May to August of each year, when it tripled its production in order to manufacture portable school rooms, as the cost of labour.

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

1.25 ... The simplest method generally will be an analysis of the T4 slips. ... This will also be acceptable for many corporations whose tax years do not end on December 31, provided that the total of salaries and wages as shown by the T4 slips approximates the total salaries and wages for the fiscal year. ... Where amounts are allowed as a deduction at year end as bonuses that are payable to specific employees, these amounts would form part of the cost of labour.

Application of "normally"

1.27 ... The term normally means commonly, usually, or under normal or ordinary conditions. It would apply in cases where a corporation usually performs certain services or functions itself but for some reason, such as lack of capacity, short-run economic conditions, labour problems, or machinery breakdowns, has sublet all or part of the work to third parties. It is the CRA's view that what is normally performed is determined in the context of a service or function of a particular corporation and not in the context of the industry... . Those corporations operating in more than one province will already have experience in calculating these amounts for purposes of allocating income to various provinces under subsection 402(7) of the Regulations.

Determination on net basis

Double counting problem – cost of labour

1.28 A problem will occur in a group of associated corporations where one corporation acts as a paymaster for the others. To mitigate the double counting effect that will occur when two associated corporations include the same salaries and wages in their cost of labour, the CRA will allow the corporation paying the salaries and wages to treat these amounts as net of amounts received or receivable from associated corporations in respect of these expenses, provided that this is done for both qualified activities and non-qualified activities carried on by the employees.

Words and Phrases

Cost of Manufacturing and Processing Capital

See Also

D.MNR for Customs and Excise v. Amoco Canada Petroleum Co. Ltd., 86 DTC 6008, [1986] 1 CTC 124 (FCA)

The word "directly" in s. 1(a) of Part XIII of Schedule III to the Excise Tax Act was found to have a broad meaning of "without any intervening medium" rather than "immediately or without delay". Pipelines that distributed liquid hydrocarbons mix to a fractionation plant accordingly were "machinery and apparatus" that were used by it "directly in the manufacture or production of goods".

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Ordinary Meaning 27

Cost of Manufacturing and Processing Labour

Administrative Policy

19 December 2008 External T.I. 2008-0299321E5 F - Exploitation forestière et DBFT

fees of another corp. for managing the taxpayer’s log processing operation could qualify as "cost of manufacturing and processing labour"

Corporation B, in managing a lumberyard owned by Corporation A, grades and cuts logs and arranges for the sale or chipping of the log residues. CRA stated:

Corporation B's activities are limited to the provision of services on behalf of others as a subcontractor and … the profits earned by Corporation B are not manufacturing and processing profits in Canada. ….

However … it is possible that the subcontracting costs paid by Corporation A to Corporation B could be included in the "cost of manufacturing and processing labour" as defined in [Reg.] 5202 … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Canadian Manufacturing and Processing Profits managing processing operation of another corp. did not qualify 97

9 October 1990 Memorandum (Tax Window, Prelim. No. 1, p. 23, ¶1030)

Where the cost of foreign-based engineering designs of products and production facilities is included in amounts charged to a Canadian corporation as SR&ED and such costs meet the requirements of Regulation 2900, the labour component of such charges will be included as part of the cost of labour under Regulation 5202 and also as part of the cost of manufacturing and processing labour.

Qualified Activities


St. Catharines Standard Ltd. v. The Queen, 78 DTC 6168, [1978] CTC 258 (FCTD)

The receiving and storing of news by reporters at a newspaper, the researching and writing of articles or the preparation of advertisements, and the editing of articles constituted the receiving and storing of news, the producing and handling of goods in process, and quality control, respectively. More generally, these activities were performed directly in connection with manufacturing or processing of newspapers for sale.

See Also

Lomex Inc. v. MNR, 92 DTC 2253, [1992] 2 CTC 2678, [1992] 1 CTC 2731 (TCC)

An operation of transporting animal residues (e.g., bones, meatscraps, feathers, blood and offal) by specially-adapted trucks to the taxpayer's premises for processing constituted a qualifying activity of "receiving and storing of raw materials" under subparagraph a(ii). Garon J. stated (p. 2259):

"I am of the opinion that receiving raw materials occurs when the business in question, which is involved in manufacturing or processing in Canada, takes possession of the raw materials and thereafter has control of them ... The materials are, from that moment on, the property of the appellant and are at the risk of the appellant."

Furthermore, taking up the raw materials also came under paragraph (b) of the definition. Garon J. noted (p. 2258) that "we must interpret paragraph (b) in a large and liberal manner, so that it may include activities other than those already covered by paragraph (a) ...". He also noted that the words "directly" and "in connection with" mean "activities which, first, are connected with manufacturing and processing operations in Canada but are not an integral part of the actual manufacturing and processing process" (p. 2258).

Words and Phrases

Administrative Policy

S4-F15-C1 - Manufacturing and Processing

Line supervision: up to plant manager

1.35 The terms line supervision (a qualified activity) and administration (a non-qualified activity) may be confusing. The CRA views administration as being the function of determining corporate policy and co-ordinating various activities (production, selling, etc.) of the corporation at the management level. Line supervision, on the other hand, refers to the line of authority for supervision of the manufacturing or processing activities... . [T]he persons who form part of the vertical line of supervision of the manufacturing or processing activities of a corporation, except those involved with the determination of corporate policy or the co-ordination of the production facilities, may be said to be involved in qualified activities. In most cases, the dividing line will occur at, or somewhere near, the plant manager.

1.36 Storing, shipping, selling, and leasing of finished goods are non-qualified activities. ... [A] homogenous product that must usually be broken from bulk and packaged before it can be sold is generally not considered to be a finished good until after it is packaged.

Computer control of manufacturing included

1.37 ... [D]ata processing... exclude[s] accounting activities that are merely ancillary to a manufacturing operation. However, where a computer is used as an integral part of a qualified activity, that portion of the cost of the computer that reflects the extent to which the computer is used directly in qualified activities is included in the cost of manufacturing and processing capital. ...

November 1991 Memorandum (Tax Window, No. 13, p. 13, ¶1578)

Minerals extracted from a mineral resource which have not been subsequently manufactured or processed do not constitute finished goods.

91 CPTJ - Q.30

Oil and gas which has been extracted and which is not yet been subsequently manufactured or processed does not constitute finished goods.