2015-0624191E5 Investment tax credit - processing facility

Principal Issues: 1) Which activities constitute processing for ITC purposes? 2) How much of a building needs to involve processing to qualify for the ITC?

Position: 2) More than 50% of a building needs to be used for processing to qualify for the ITC.

Reasons: See below.

Author: Kom, Joel
Section: 125.1(3), 127(5), 127(9), 127(11), Reg 4600(1)

XXXXXXXXXX                                2015-062419
                                                        J. Kom

January 28, 2016

Dear XXXXXXXXXX:

Re: Investment Tax Credit for a building

We are writing in reply to your email of December 21, 2015, wherein you requested our views on whether XXXXXXXXXX-processing facility would qualify for the federal investment tax credit (“ITC”) under subsection 127(5) of the Income Tax Act (the “Act”).

You stated that the new facility will receive XXXXXXXXXX and process them for sale.  You sought our views on: what kinds of activities constitute processing for ITC purposes; and how much of a building must be used for processing activities in order to qualify for the ITC.  Unless otherwise stated, all statutory references herein are to the Act.

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 70-6R6, “Advance Income Tax Rulings”.

A property may qualify for an ITC under subsection 127(5) if it meets all the conditions set out in the definition of “qualified property” in subsection 127(9).  Generally speaking, subsection 127(9) defines “qualified property” as property of a taxpayer (other than a qualified resource property) that is either a “prescribed building” or “prescribed machinery and equipment” (acquired by the taxpayer after June 23, 1975) that has not been used, acquired for use or lease, for any purpose whatever, before it was acquired by the taxpayer and is to be used in Canada primarily for certain qualifying purposes specifically set out in paragraph (c) of that definition.  Paragraph (c) of the definition of “qualified property” includes, inter alia, manufacturing or processing of goods for sale or lease in Canada and farming or fishing in Canada as being qualifying purposes; however, subsection 127(11) specifically excludes certain activities from being considered as “manufacturing or processing” for the purpose of this ITC.

In order to be a “prescribed building”, or “prescribed machinery or equipment” such property, as the case may be, must also satisfy the requirements of subsection 4600(1) (in the case of a building) or subsection 4600(2) (in the case of machinery and equipment) of the Income Tax Regulations.

The Canada Revenue Agency (“CRA”) considers that the reference to the word “primarily” in paragraph (c) of the definition of “qualified property” in subsection 127(9) requires the use of the particular property in Canada for a qualifying purpose to represent more than 50 percent of its total use.  Since usage of a property, such as a building, is generally measured in square feet, if more than 50 percent of a building’s square footage is used for a qualifying purpose in Canada the building would qualify for the ITC assuming all the other legislative requirements were met.

Moreover, based on the above, the CRA and the courts generally consider “processing” to refer to a method, system or technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth.  Such processing is typically done to make the product more marketable.  An activity that might not be considered as processing on its own because, for example, it does not bring about a physical or chemical change, could be considered processing if it forms an integral part of an overall method, system or technique that constitutes processing.  An example of one such activity is grading products for size, weight or class before or after their physical or chemical form changes.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, CPA, CA
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2016

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2016