Administrative Policy
S4-F15-C1 - Manufacturing and Processing
Flexible application of formula
1.22 ... Where a corporation can readily obtain information that is reasonably similar to that required by section 5202, it will be acceptable for purposes of the formula if no significant distortion of the formula results.
Adjusted Business Income
See Also
Irving Oil Ltd. v. The Queen, 2000 DTC 2164 (TCC)
In finding that refund interest received by the taxpayer following a successful appeal of a substantial assessment represented business income and, therefore, was eligible for the manufacturing and processing deduction, Rip TCJ. stated (at pp. 2170-1):
"If the money used for the overpayment was business income that was intended for use in the business, then, once the courts have decided there was an overpayment of tax, the overpayment is no longer a tax but reverts to the time of overpayment to property owned by the taxpayer for use in its business and interest on that property is business income."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Canadian Manufacturing and Processing Profits | 105 |
Administrative Policy
10 July 2003 Internal T.I. 2003-0018897 F - INTERET-REVENU RAJUSTE TIRE ENTREPRISE
A corporation engaged in manufacturing and processing received interest on federal and Ontario tax refunds and also interest on advances or loans to associated corporations, also engaged in active businesses. In finding that the refund interest was from an active business and, thus, included in “adjusted business income,” CCRA stated:
The tax paid by the Corporation that gave rise to the refund related to the active business operations of the Corporation. …
This situation is similar to that considered ….in ... Irving Oil … .
Regarding the interest on the advances, CCRA indicated that the interest was not recharacterized under s. 129(6)(b) as that provision applied only for purposes of ss. 125 and 129(6). Furthermore, the Ensite doctrine did not appear to be applicable, as to which CCRA stated:
In the past, we have examined whether advances or loans to corporations are assets employed and at risk in a corporation's business. Our conclusion was that, except in unusual circumstances, loans or advances to corporations are not assets employed and at risk in a corporation's business when the business is not a money lending business.
S4-F15-C1 - Manufacturing and Processing
Partnership look-through
1.23 ... The definition includes the corporation's share of active business income from a partnership but does not include income from an active business carried on outside Canada.
11 April 1995 Internal T.I. 9429497 - ADJUBI - INTEREST INCOME
Interest earned on overpayments of taxes are not income from an active business.
Cost of capital
Administrative Policy
S4-F15-C1 - Manufacturing and Processing
Exclusion of double counting
1.32 A double counting problem occurs in a group of associated corporations where one corporation in the group charges another for the use of a building that it owns or rents. A rental charge appears in the cost of capital of both corporations and, in effect, is counted twice to the detriment of the group as a whole. To alleviate this inequity, the CRA will allow rents paid for a property to be netted with rents received or receivable from related corporations for the use of that property. Similarly, if the corporation receiving such rents owns the building, it may exclude the portion of the capital cost of the building that related to the area rented to related corporations from its cost of capital calculation.
Cost of Labour
See Also
NRB Inc. v. The Queen, 93 DTC 295, [1993] 1 CTC 2435 (TCC)
The taxpayer, which used employees throughout the year to manufacture and erect modular buildings, was able to treat amounts paid to subcontractors for the same work during the months of May to August of each year, when it tripled its production in order to manufacture portable school rooms, as the cost of labour.
Administrative Policy
S4-F15-C1 - Manufacturing and Processing
1.25 ... The simplest method generally will be an analysis of the T4 slips. ... This will also be acceptable for many corporations whose tax years do not end on December 31, provided that the total of salaries and wages as shown by the T4 slips approximates the total salaries and wages for the fiscal year. ... Where amounts are allowed as a deduction at year end as bonuses that are payable to specific employees, these amounts would form part of the cost of labour.
Application of "normally"
1.27 ... The term normally means commonly, usually, or under normal or ordinary conditions. It would apply in cases where a corporation usually performs certain services or functions itself but for some reason, such as lack of capacity, short-run economic conditions, labour problems, or machinery breakdowns, has sublet all or part of the work to third parties. It is the CRA's view that what is normally performed is determined in the context of a service or function of a particular corporation and not in the context of the industry... . Those corporations operating in more than one province will already have experience in calculating these amounts for purposes of allocating income to various provinces under subsection 402(7) of the Regulations.
Determination on net basis
Double counting problem – cost of labour
1.28 A problem will occur in a group of associated corporations where one corporation acts as a paymaster for the others. To mitigate the double counting effect that will occur when two associated corporations include the same salaries and wages in their cost of labour, the CRA will allow the corporation paying the salaries and wages to treat these amounts as net of amounts received or receivable from associated corporations in respect of these expenses, provided that this is done for both qualified activities and non-qualified activities carried on by the employees.
Paragraph (a)
Administrative Policy
30 January 2004 Internal T.I. 2003-0037191I7 F - Fabrication /sous-traitants/frais de gestion
Individuals (the "Persons") performed services only for Cco but (for administrative ease) were paid by a sister of Cco (Bco), so that Bco was responsible for hiring and firing the individuals, and handled the payroll. A percentage of their salary (representing the proportion of manufacturing in Canada) was billed to Cco by Bco and was included by Bco in calculating its "cost of labour" and "cost of manufacturing and processing labour".
Cco paid the contributions to the Commission de la santé et de la sécurité du travail du Québec ("CSST") and the Commission des normes du Travail ("CNT") on the salaries paid to the Persons, and also claimed provincial tax credits respecting their salaries.
The Directorate, in noting that “[i]t is possible that the person paying salary or wages is not the employer,” repeated the statement in Mollenhauer “that subsection 153(1) … does not speak of whether persons doing the paying are employers or not,” and went on to find that the Persons likely were employees of Cco, so that the charges from Bco for their salaries likely could be included in the “cost of labour” of Cco under Reg. 5202.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | s. 153(1) applicable to salaries paid as agent | 143 |
| Tax Topics - Income Tax Regulations - Regulation 5202 - Cost of Labour - Paragraph (b) - Subparagraph (b)(iii) | tasks performed by subcontractors were not normally performed by employees | 106 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | partial disallowance of salaries of taxpayer where it was not fully reimbursed by the recipient of their services | 111 |
Paragraph (b)
Subparagraph (b)(iii)
Administrative Policy
30 January 2004 Internal T.I. 2003-0037191I7 F - Fabrication /sous-traitants/frais de gestion
Subcontractors doing business with Cco (a manufacturer) were paid on a piecework basis for inputs produced by them under production schedules set by them.
The Directorate indicated its agreement with the TSO’s view “that the amounts paid to subcontractors are not for the performance of duties relating to a service or function that would normally be performed by an employee of Cco,: and further stated:
[T]he tasks performed by the subcontractors are not normally performed by Cco. Consequently, the functions or services performed by the subcontractors do not fall within the definition of "cost of labour" … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 5202 - Cost of Labour - Paragraph (a) | cost of labour included amounts paid to a sister company that paid the employees on behalf of the manufacturer | 205 |
| Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | s. 153(1) applicable to salaries paid as agent | 143 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | partial disallowance of salaries of taxpayer where it was not fully reimbursed by the recipient of their services | 111 |
Cost of Manufacturing and Processing Capital
See Also
D.MNR for Customs and Excise v. Amoco Canada Petroleum Co. Ltd., 86 DTC 6008, [1986] 1 CTC 124 (FCA)
The word "directly" in s. 1(a) of Part XIII of Schedule III to the Excise Tax Act was found to have a broad meaning of "without any intervening medium" rather than "immediately or without delay". Pipelines that distributed liquid hydrocarbons mix to a fractionation plant accordingly were "machinery and apparatus" that were used by it "directly in the manufacture or production of goods".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Ordinary Meaning | 27 |
Cost of Manufacturing and Processing Labour
Administrative Policy
19 December 2008 External T.I. 2008-0299321E5 F - Exploitation forestière et DBFT
Corporation B, in managing a lumberyard owned by Corporation A, grades and cuts logs and arranges for the sale or chipping of the log residues. CRA stated:
Corporation B's activities are limited to the provision of services on behalf of others as a subcontractor and … the profits earned by Corporation B are not manufacturing and processing profits in Canada. ….
However … it is possible that the subcontracting costs paid by Corporation A to Corporation B could be included in the "cost of manufacturing and processing labour" as defined in [Reg.] 5202 … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Canadian Manufacturing and Processing Profits | managing processing operation of another corp. did not qualify | 97 |
1 May 2003 Internal T.I. 2002-0178347 F - BENEFICES FABRICATION
Canco, a Canadian manufacturing corporation, performs scientific research and experimental development for its US parent ("USco") and is fully reimbursed for its SR&ED costs by USco, which owns the resulting patents. Canco includes such reimbursements in "Other income" in its financial statements.
For purposes of computing the s. 125.1(1) credit, should "adjusted business income" include such expense reimbursements, and should such reimbursements reduce Canco’s "labour cost" and "cost of manufacturing and processing labour "? CCRA responded:
To the extent that Canco is not acting as an agent of USco in performing SR&ED and the reimbursements were received as a result of transactions in the ordinary course of Canco's business, we are of the view that the reimbursements received by Canco for its SR&ED costs constitute income from a business pursuant to subsection 9(1) of the Act and therefore must be included in computing its "adjusted business income" for purposes of section 5202 of the Regulations. In this context, the SR&ED costs do not have to be reduced by the portion of the reimbursement relating to them for the purposes of computing "cost of labour" and "cost of manufacturing and processing labour".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 5202 - Qualified Activities | no requirement that the SR&ED be connected to M&P | 148 |
| Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement | reimbursements of SR&ED labour and other expenses did not reduce cost of labour | 58 |
9 October 1990 Memorandum (Tax Window, Prelim. No. 1, p. 23, ¶1030)
Where the cost of foreign-based engineering designs of products and production facilities is included in amounts charged to a Canadian corporation as SR&ED and such costs meet the requirements of Regulation 2900, the labour component of such charges will be included as part of the cost of labour under Regulation 5202 and also as part of the cost of manufacturing and processing labour.
Qualified Activities
Cases
St. Catharines Standard Ltd. v. The Queen, 78 DTC 6168, [1978] CTC 258 (FCTD)
The receiving and storing of news by reporters at a newspaper, the researching and writing of articles or the preparation of advertisements, and the editing of articles constituted the receiving and storing of news, the producing and handling of goods in process, and quality control, respectively. More generally, these activities were performed directly in connection with manufacturing or processing of newspapers for sale.
See Also
Lomex Inc. v. MNR, 92 DTC 2253, [1992] 2 CTC 2678, [1992] 1 CTC 2731, [1992] DTC 2246 (TCC)
An operation of transporting animal residues (e.g., bones, meatscraps, feathers, blood and offal) by specially-adapted trucks to the taxpayer's premises for processing constituted a qualifying activity of "receiving and storing of raw materials" under subparagraph a(ii). Garon J. stated (p. 2259):
"I am of the opinion that receiving raw materials occurs when the business in question, which is involved in manufacturing or processing in Canada, takes possession of the raw materials and thereafter has control of them ... The materials are, from that moment on, the property of the appellant and are at the risk of the appellant."
Furthermore, taking up the raw materials also came under paragraph (b) of the definition. Garon J. noted (p. 2258) that "we must interpret paragraph (b) in a large and liberal manner, so that it may include activities other than those already covered by paragraph (a) ...". He also noted that the words "directly" and "in connection with" mean "activities which, first, are connected with manufacturing and processing operations in Canada but are not an integral part of the actual manufacturing and processing process" (p. 2258).
Administrative Policy
S4-F15-C1 - Manufacturing and Processing
Line supervision: up to plant manager
1.35 The terms line supervision (a qualified activity) and administration (a non-qualified activity) may be confusing. The CRA views administration as being the function of determining corporate policy and co-ordinating various activities (production, selling, etc.) of the corporation at the management level. Line supervision, on the other hand, refers to the line of authority for supervision of the manufacturing or processing activities... . [T]he persons who form part of the vertical line of supervision of the manufacturing or processing activities of a corporation, except those involved with the determination of corporate policy or the co-ordination of the production facilities, may be said to be involved in qualified activities. In most cases, the dividing line will occur at, or somewhere near, the plant manager.
1.36 Storing, shipping, selling, and leasing of finished goods are non-qualified activities. ... [A] homogenous product that must usually be broken from bulk and packaged before it can be sold is generally not considered to be a finished good until after it is packaged.
Computer control of manufacturing included
1.37 ... [D]ata processing... exclude[s] accounting activities that are merely ancillary to a manufacturing operation. However, where a computer is used as an integral part of a qualified activity, that portion of the cost of the computer that reflects the extent to which the computer is used directly in qualified activities is included in the cost of manufacturing and processing capital. ...
1 May 2003 Internal T.I. 2002-0178347 F - BENEFICES FABRICATION
Canco, a Canadian manufacturing corporation, performs SR&ED for its US parent ("USco"), which fully reimburses it for its related costs. Before finding that such reimbursements did not reduce Canco’s "cost of manufacturing and processing labour cost," CCRA stated:
Paragraph (c) of the definition of "qualified activities" in paragraph 5202 of the Regulations includes "scientific research and experimental development ...carried on in Canada". Unlike paragraphs (a) and (b) of that definition, there is no requirement that the SR&ED be performed in Canada in connection with manufacturing or processing in Canada of goods for sale or lease. In addition, the definition of "qualified activities" is relevant only in determining what amount of the cost of labour and the cost of capital is considered to be the "cost of manufacturing and processing labour" and the "cost of manufacturing and processing capital".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 5202 - Cost of Manufacturing and Processing Labour | reimbursements of SR&ED expenses do not reduce cost of manufacturing and processing labour | 204 |
| Tax Topics - Income Tax Act - Section 9 - Expense Reimbursement | reimbursements of SR&ED labour and other expenses did not reduce cost of labour | 58 |
15 May 2001 External T.I. 2001-0071085 F - FABRICATION AU CANADA
A corporation actively carries on a business of marketing, developing, designing, manufacturing and selling clothing and also develops its own clothing trademarks. All these operations are carried out entirely in Canada by its employees, except for the manufacture of the garments, which is carried out entirely by unrelated companies located abroad, who own such garments until delivered to the corporation at the ship.
CCRA indicated that if the corporation exercises extensive control from beginning to end over the content, design and physical qualities of the goods and is substantially involved in those aspects, the product development, design and conception activities are activities carried out in connection with manufacturing operations, but they would not be carried out in connection with manufacturing operations in Canada since a very significant portion of the manufacturing and processing activities is carried on outside Canada.
6 February 2001 External T.I. 2000-0059485 F - DBFT - Sous-traitants - textile
Regarding a taxpayer who carries on a business of designing and distributing clothing in Canada but who has its products manufactured by a third party carrying on business outside Canada, CCRA stated:
Paragraph (b) of the definition of “cost of manufacturing and processing labour” in section 5202 of the Income Tax Regulations (the “Regulations”) refers to amounts paid by a corporation to persons for the performance of functions that would be directly related to qualified activities of the corporation during the year if those persons were employees of the corporation. The term “qualified activities” is also provided for in section 5202 of the Regulation. For activities to constitute qualified activities, they must be performed in Canada. In addition, the preamble to the definition of “cost of manufacturing and processing labour” specifies that this definition refers to a portion of the corporation's “cost of labour”. According to the definition of “cost of labour”, amounts paid to a person other than an employee of the corporation are covered by paragraph (b) provided, among other things, that the duties of that person would normally be performed by an employee of the corporation claiming the deduction provided for in section 125.1 of the Act.
In the hypothetical situation that you have submitted to us, we understand that the duties performed by the third parties are not duties that would normally have been performed by an employee of the corporation. Consequently, the amounts paid to those third parties would not fall within the definition of “cost of manufacturing and processing labour”. In addition, the concept of qualified activities constitutes an additional difficulty since the activities of the third party are carried on outside Canada.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.1 - Subsection 125.1(3) - Canadian Manufacturing and Processing Profits | goods can be physically manufactured abroad if Canco exercises extensive involvement and control over the content, design, and physical qualities of the goods from inception to completion | 114 |
November 1991 Memorandum (Tax Window, No. 13, p. 13, ¶1578)
Minerals extracted from a mineral resource which have not been subsequently manufactured or processed do not constitute finished goods.
91 CPTJ - Q.30
Oil and gas which has been extracted and which is not yet been subsequently manufactured or processed does not constitute finished goods.
Rental Cost
Administrative Policy
S4-F15-C1 - Manufacturing and Processing
Royalties included
1.30 Royalty payments are considered to qualify as rental costs under paragraph (b) of the definition of cost of capital in section 5202 of the Regulations. This will be the case provided they are payments made in respect of property that, if owned by the corporation at the end of a year, would have been included in paragraph (a) of the definition of cost of capital.
1.31 Since an accurate allocation of rental charges for the use of telecommunication equipment is impossible, the CRA will not require their inclusion in calculating cost of capital.
Salaries and Wages
Administrative Policy
15 May 2003 Internal T.I. 2003-0010237 F - COUT EN MAIN-D'OEUVRE
Where tips received by restaurant servers from various sources (directly from the customers, added by the customers to their credit card payments or billed by the restaurant owner, Xco, directly on the customers' bills) to be included in the "labour cost" for the purpose of calculating Xco's "Canadian manufacturing and processing profits". CCRA responded:
[T]ips received by employees directly from customers or through the employer are not part of the term "wages" or "salaries" for the purposes of the definition of "salaries and wages" in section 5202 of the Regulations, but rather are part of the term "other remuneration". It is therefore our view that tips should be excluded from "labour costs" … .