Words and Phrases - "processing"


22 January 2009 External T.I. 2008-0290971E5 F - Bénéfices de fabrication et de transformation

operation of breaking bulk packages into smaller lots for repackaging and sale was not “processing”

An operation of the taxpayer consists of taking products, received in bulk in boxes, and dividing them up by category according to specific customer instructions, such as size, colour and quantity, then packaging the products for sale and distribution to consumers. After noting its position in IT-145R that “the execution of orders from bulk stock is not considered a processing activity where the activities involved consist solely of counting or measuring and repackaging” and the position in Tenneco that “the goods must undergo a change in form, appearance or nature” in order for there to be processing, CRA stated:

[A]lthough the taxpayer's processing activities have the effect of making … [the] products more marketable, we do not believe that there has been any change in the form, appearance or other characteristics of the products. Therefore, the activities carried on by the taxpayer would not be eligible for the manufacturing and processing profits deduction …

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 29 equipment used in dividing and repackaging bulk goods was not “processing” equipment 164

Coop de travailleurs en serres Belle-de-Jour v. Agence du revenu du Québec, 2019 QCCQ 6609

greenhouse heating equipment was used in non-farming manufacturing of floral arrangements

The taxpayer used approximately 20% of the area within greenhouses to grow cucumbers or other vegetables, or flowers, from seed for sale as grocery items or as little plants that could be transplanted. The taxpayer also annually produced about 85,000 floral arrangements in pots, which it sold to retailers such as Costco. To this end, it purchased already-grown flowers from other growers, and maintained them in its greenhouses pending its use of them for incorporation into the floral arrangements. Between 2012 and 2014, it constructed a biomass system for heating the greenhouses.

S. 1029. of the Taxation Act potentially provided an investment tax credit for a Class 29 property, but Regulation 130R12(a) provided that for purposes of Class 29, “manufacturing or processing” did not include “farming.”

In finding that the taxpayer’s floral-arranging activity did not constitute “farming,” Gibbens JCQ noted the element of artistry in this activity, observed that although the flowers would still grow while being kept in the greenhouses, this was not the predominant element in a process that entailed the creation of something new, and stated (at para. 55, TaxInterpretations translation) that the activity:

also entailed an aspect of processing, as the purchased plants … were subject to a series of standard procedures: they were arranged with each other and with other materials and placed in pots in a particular manner according to a precise model. The plants and other material underwent a change in form and appearance to become the final product – the arrangements sold to the customers.

In further finding that the two activities were distinct, so that the flower-arranging activity was not assimilated to the taxpayer’s farming business, Gibbens JCQ stated (at para. 68):

Nothing otherwise suggests that the two activities were dependent one on the other. In particular, the floral arrangements were manufactured exclusively from already-grown plants that had been purchased by the Coop from third-party suppliers and not from flowers that the Coop had grown for sale as small plants to be transplanted.

Respecting the use of the biomass system, although 20% of the greenhouses were used in farming, the greenhouse-heating was not necessary to this business, with the exception of the warming of cucumber seeds in the spring so as to encourage germination, whereas heating was essential to the floral arrangement business, whose focus was on the cold season. Accordingly, the biomass system was used “primarily” in the manufacturing or processing of the floral arrangements.

Words and Phrases
processing manufacturing
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) use of greenhouses to further grow flowers before use in making floral arrangements was separate from the taxpayer’s greenhouse plant-growing farming business 221
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Farming use of greenhouses to further grow flowers before use in making floral arrangements did not constitute farming 163

Canada v. Repsol Energy Canada Ltd., 2017 FCA 193

“integration principle” applied to find that a jetty was a “processing” asset

The taxpayers were the partners of a limited partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified,", and then delivered to a pipeline for shipment to the U.S. resellers.

The eligibility of the related costs for investment tax credits and classification as a Class 43 asset turned principally on whether it came within the exclusion from Class 1(n) (respecting manufacturing and distributing equipment and plant acquired primarily for the production or distribution of gas) contained in (ii) thereof for “property acquired for the purpose of processing natural gas, before the delivery of such gas to a distributions system.” The Crown’s primary position was that the terminal was not so excluded because it was part of a distribution system, and secondarily took the position that the terminal’s operation was not “processing.”

In rejecting the Crown’s position, Woods JA stated (at para 40) that she agreed with C. Miller J below that the Class 1(n)(ii) exclusion “only makes sense if distribution starts at a pipeline,” and further noted (at para 48):

Northern & Central … stands for the proposition that the term “distribution” can encompass not only short-distance pipelines, in accordance with industry usage, but also long-distance transmission lines. It did not state a broader principle. …

Woods J also rejected a Crown submission that the distribution process started with the tanker, in part because, unlike Northern & Central, the purpose of the processing here was “to make the gas more marketable” rather to merely “provide storage in the course of transmission.”

In also rejecting the Crown’s position on “processing,” she stated (at paras 54 and 56):

… It is clear that the product has been changed when it is transformed from a liquid to a gaseous state. …

Furthermore ...change ... takes place during the facility’s blending operations, and ... in chemical composition… [and] the operations …transform the product from being non-marketable in the North American market, to being marketable… .

Finally, in rejecting a Crown submission that, as a jetty was specifically mentioned in Class 3(h), the Jetty should be so classified, she stated (at paras. 64-65):

…Class 3 only applies to property “not included in any other class.” … If the Jetty falls within Class 43, that is the end of the matter. …

The judge-made integration principle provides that processing includes all activities that are necessary and integral to the processing operation.

Repsol Canada Ltd. v. The Queen, 2015 TCC 21, aff'd 2017 FCA 193

LNG regasification jetty and terminal were one asset for processing before distribution

The taxpayers were related companies, and the general partner and a 75% limited partner of a partnership which constructed a terminal and jetty in St. John to which liquid natural gas would be delivered by tanker (at the jetty), "regasified," tested and processed to meet quality standards such as flammability and low O2 content, and then delivered to a pipeline for shipment to the U.S. resellers.

The eligibility of the related costs for investment tax credits turned on whether the assets qualified as a Class 43 property rather than (as maintained by the Minister) as Class 1(n) (i.e. for the distribution of natural gas) and 3(h) (i.e. a jetty not captured by any other class).

As a preliminary matter, C Miller J found that terminal and jetty were one asset on the basis that the Jetty could "be considered ancillary and necessary, and part of the integral totality of the operation occurring at the Terminal" (para. 88), including that the jetty operators monitored the safety of the overall operation. Furthermore, the terminal was not engaged in distribution, but rather processing before distribution. There was "processing" because there was a change to the goods (including a change in chemical composition) and there was an increase in the goods' marketability (i.e., the natural gas entering into the pipeline was worth more than the LNG arriving at the jetty). He also stated that, even in the "broadest sense," "distribution" of natural gas does not commence before the gas enters a transmission pipeline (para. 120).

(Class 47, which explicitly includes liquid natural gas plants and thus excludes those plants from Class 43, was introduced in 2007; consequently this appeal concerned the approximately one third of capital costs arising before that introduction.)

Words and Phrases
distribution processing

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