24 September 1996 External T.I. 9612615 - M&PCREDIT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a particular activity involving the packaging of finished goods constitutes processing for the M&P credit

Position:

No

Reasons:

Consistent with court decisions

XXXXXXXXXX							961261

July 10, 1996

Dear Sirs:

Re: Eligibility for the Manufacturing and Processing profits deductions

This is in reply to your letter of April 8, 1996, wherein you requested our opinion as to whether the activities performed by your business will qualify for the Manufacturing and Processing profits deduction under section 125.1 of the Income Tax Act.

We do not give opinions in respect of factual transactions and suggest that you consult with your local tax services office in this regard. However, we will provide the following general comments.

The determination as to what constitutes "processing" for purposes of the Manufacturing and Processing profits deduction has been before the courts and, in Federal Farms Ltd. v. MNR (1966), the following two tests were considered in determining whether a taxpayer processes goods:

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

-whether the product becomes more marketable.

In the 1991 court decision of Tenneco Canada, (1991 DTC) the judge stated that processing occurs when raw or natural materials are transformed into saleable items and where such raw or natural materials are unsaleable, or would sell for a lesser price, in their unprocessed state.

As you have noted, the Department has taken the position, in paragraph 6 of Interpretation Bulletin 145R, that the activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, this paragraph then goes on to state that the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging. Moreover, paragraph 5 of this Bulletin provides that "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. Finally we note that paragraph 31 of the Bulletin, which discusses the definition of "qualified activities", states that if a good can be sold in bulk, but is packaged for the convenience of making a sale or because the taxpayer can receive a higher price if the product is placed in packages, it will generally be considered to be a finished good before packaging takes place.

Consistent with the foregoing positions, in our view, the activities described in your letter which consists of combining different finished goods to create baskets of goods would not constitute processing for purposes of the Manufacturing and Processing profits deduction. However, the determination as to whether the activities of a particular corporation can be described as manufacturing or processing is a factual one and we reiterate our suggestion that you consult with your local tax services office in this regard.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch