2015-0601661E5 PEI and Federal ITC - farming and processing equipment

Principal Issues: Whether certain equipment used to detect foreign metal objects in potatoes will qualify for the federal ITC and the corresponding provincial ITC in subsection 39(1) of the PEI Corporate Tax Act.

Position: Possibly.

Reasons: The law and facts.

Author: D'Angelo, Sandro
Section: 127(5), 127(9), 127(11), ITR 4600(2), ITR 1104(9), PEI Corporate Tax Act ss. 39(1) and 39(2)

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                                                                                   2015-060166
                                                                                   Sandro D’Angelo

Attention: XXXXXXXXXX

September 16, 2015

Dear XXXXXXXXXX:

Re:    Foreign Material Detection Equipment (“FMDE”) – Investment Tax Credit

This is in reply to your letter of July 30, 2015 wherein you have requested our views on whether the cost of certain FMDE acquired by Prince Edward Island (P.E.I.) potato farmers and processors would qualify for the federal investment tax credit (“ITC”) under subsection 127(5) of the Income Tax Act (the “Act”) and the P.E.I corporate investment tax credit (“PCITC”) under subsection 39(1) of the Income Tax Act (Prince Edward Island) (“PEITA”).

Our understanding of the relevant facts is as follows:

In response to recent food tampering incidents in P.E.I., where there have been several cases of metal objects being found in potatoes in Atlantic Canada, some P.E.I potato farmers and producers have responded by acquiring and installing FMDE which is used to detect foreign objects (needles, nails and other metal objects) in potatoes.

Your main question is whether the cost of the FMDE would be eligible for an ITC and the corresponding PCITC on the basis that this FMDE is “qualified property” as that term is defined in subsections 127(9) of the Act and 39(2) of the PEITA.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation.  It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination.  The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, “Advance Income Tax Rulings”.

Where a taxpayer carries on a farming operation together with some other non-farming operation, it is a mixed question of fact and law as to whether or not the farming and non-farming operation will be considered one business or separate businesses.  Generally such a determination will depend upon the degree of interconnection, interlacing or interdependence of the farming and non-farming activities and the extent of the unity embracing the operations.  More information can be found in paragraph 7 of Interpretation Bulletin IT-433R, Farming or Fishing – Use of Cash Method and Interpretation Bulletin IT-206R, Separate Businesses.

Subsection 127(5) of the Act authorizes a taxpayer to deduct from the tax otherwise payable under Part I an amount in respect of the taxpayer’s ITC at the end of a taxation year.  The ITC of a taxpayer at the end of a taxation year, defined in subsection 127(9), is computed with reference to, inter alia, the total of all amounts each of which is the “specified percentage” of the capital cost to the taxpayer of “qualified property” acquired by the taxpayer in the year.  “Qualified property” of a taxpayer as defined in subsection 127(9) includes 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 to be used by the taxpayer in Canada primarily for the purpose of, inter alia, “farming or fishing” or “manufacturing or processing goods for sale or lease”.

For purposes of applying the definition of “qualified property” in section 127(9), subsection 4600(2) of the Income Tax Regulations (the “Regulations”) provides that property is “prescribed machinery and equipment” if it is depreciable property of the taxpayer (other than a “prescribed building”) that is a property included in one of the prescribed CCA classes listed therein.  Whether a particular property meets each of the above-noted requirements remains a question of fact.  It should be noted that pursuant to subsection 1104(9) of the Regulations, for the purposes of paragraph 1100(1)(a.1), subsection 1100(26) and Class 29 in Schedule II of the Regulations, manufacturing and processing does not include farming. (footnote 1)

The PEITA provides for a PCITC which may be deducted from the tax otherwise payable under the PEITA by a corporation for a taxation year an amount equal to the amount of the PCITC at the end of the taxation year.  For a corporation to be eligible for the PCITC, certain criteria must be met as provided under the PEITA.  The criteria to be met for the purpose of claiming the PCITC are largely contained in the respective definitions of “investment tax credit”, “qualified property”, and “manufacturing or processing” provided in the PEITA.  These terms are, generally speaking, determined by referring to the similar respective definitions set out in the Act.

For the purposes of the PCITC, “qualified property” would include property that was acquired by a corporation after 1992 that is prescribed machinery and equipment for the purposes of paragraph (b) of the definition “qualified property” in subsection 127(9) of the Act, that has not been used or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer to be used in P.E.I. primarily for “manufacturing or processing” (“M&P”) goods for sale or lease.  Further, since for purposes of the PCITC M&P has the meaning assigned by subsection 125.1(3) of the Act, farming is specifically excluded from being M&P.

With regard to the situation described in your letter, we agree that where a farmer’s processing activities are incidental to the main activity of farming the FMDE would be considered to be used in the farming business.  In such circumstances, and provided that the other conditions described in the definition of “qualified property” in subsection 127(9) of the Act are met, the cost of the FMDE would qualify for the ITC but would not qualify for the PCITC.

However, in situations where the farmer’s processing operation is not incidental to its farming business (i.e., they are separate businesses) then we agree that the FMDE would more likely be considered to be used in the taxpayer’s processing business.  In such circumstances, and provided that all the other conditions described in the definition of “qualified property” in subsections 127(9) of the Act are met, the cost of the FMDE would be eligible for the ITC.  For the purposes of the PCITC, if the taxpayer carrying on such activities in P.E.I. is a corporation it would appear that the conditions outlined in subsection 39(2) of the PEITA would also be met such that the corporate taxpayer would be able to claim the PCITC.

We trust our general comments above are of assistance.

Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Class 29 property includes, among other things, property that is machinery or equipment manufactured or acquired by the taxpayer after March 18, 2007 and before 2016, which, but for Class 29, would be included, with certain exceptions, in Class 8.  For eligible assets acquired after 2015 and before 2026, new CCA Class 53 (with a 50% declining balance CCA rate) is intended to replace Class 29.

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