Regulation 5202

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.

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.

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.

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.

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. ...