2020-0839061E5 Atlantic Investment Tax Credit

Principal Issues: Whether the cost of a new waste conversion plant and its equipment would be eligible for the Atlantic investment tax credit?

Position: Depends on the particular facts and circumstances.

Reasons: See below.

Author: Savonarota, Frank
Section: Definition of "qualified property", "prescribed building", "prescribed machinery or equipment", "investment tax credit," "specified percentage" in ss. 127(9), ss. 127(11), ss. 4600(1) and 4600(2) of the Regulations.

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                                                                                                                         2020-083906
                                                                                                                         F. Savonarota

March 22, 2021

Dear XXXXXXXXXX:

Re: Atlantic Investment Tax Credit

We are writing in reply to your email of February 5, 2020, wherein you requested our views on whether the cost of thermal waste electrical generation equipment and plant qualifies for the Atlantic Investment Tax Credit (“AITC”) in subsection 127(9) of Income Tax Act (Canada) (“Act”).  More specifically, in our calls and subsequent emails with you, you indicated that XXXXXXXXXX is planning to build a plant in XXXXXXXXXX that would process multiple forms of waste, wood, agricultural waste, municipal solid waste and more and convert it into a high-quality, drop in ready renewable diesel. The diesel would be sold to major refiners in Canada and the United States.

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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

The AITC in subsection 127(9) is a credit equal to 10% of the capital cost of “qualified property” that is acquired primarily for use in the Province of Nova Scotia, New Brunswick, Prince Edward Island or Newfoundland or the Gaspé Peninsula. Qualified property includes certain prescribed buildings, prescribed machinery or equipment or prescribed energy generation and conservation property that has not been previously used for any purpose and that is to be used by the taxpayer in Canada primarily (footnote 1)  in the following activities: (footnote 2) 

(i)   manufacturing or processing goods for sale or lease;
(ii)  farming or fishing;
(iii) logging;
(iv)  storing grain; or
(v)   harvesting peat.

“Prescribed energy generation and conservation property” generally includes depreciable property that is not a “prescribed building” or “prescribed machinery and equipment” and that is included in certain capital cost allowance (“CCA”) classes, such as Class 43.1 and 43.2. Generally, equipment that is used to produce liquid biofuels or chemicals from waste would not be included in Class 43.1 or 43.2. (footnote 3) 

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, which generally require that the property in question fall within certain specific CCA classes.

In broad terms, the manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling, or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.

Courts have determined that the taxpayer would be engaged in processing if the following two tests are met:

     • there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and

     • the product becomes more marketable. (footnote 4)

We trust that these comments will be of assistance.

Yours truly,

Kimberley Wharram
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

FOOTNOTES

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

1  The CRA generally considers that the reference to the word "primarily" requires the use of the particular property in Canada for a qualifying purpose to represent more than 50 percent of its total use
2  However, subsection 127(11) specifically excludes certain activities from qualifying, such as storing, shipping, selling or leasing finished goods, purchasing raw materials, administration, purchase and resale operations, data processing or providing facilities or employees, including cafeterias, clinics and recreational facilities.
3  See technical interpretations 2018-0768241E5 and 2019-0797491E5. For a detailed description of the type of property that is included in Classes 43.1 and 43.2, see Income Tax Folio S3-F8-C2, Tax Incentives for Clean Energy Equipment on the Canada Revenue Agency webpage: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-8-resource-properties/income-tax-folio-s3-f8-c2-tax-incentives-clean-energy-equipment.html
4  For a more detailed discussion of the concept of manufacturing or processing, see Income Tax Folio S4-F15-C1, Manufacturing and Processing on the Canada Revenue Agency webpage: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-4-businesses/series-4-businesses-folio-15-manufacturing-research-development/income-tax-folio.html

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