Principal Issues: Whether the following are construction activities pursuant to section 238 of the Regulations. 1. The manufacture of portable oil tanks and pressure vessels. 2. The construction, installation and maintenance of refrigeration units for commercial kitchens. 3. The installation and maintenance of heating and air conditioning.
Position: It is always a question of fact. 1. Likely no. 2. and 3. Likely yes but not the maintenance.
Reasons: 1. The portable oil tanks and pressure vessels are not a component part of a building or structure. 2. and 3. The refrigeration units and the heating and air conditioning constitute a component part of a building.
2007-022697 XXXXXXXXXX Kathryn McCarthy CA (613) 948-6106 March 25, 2008
Dear XXXXXXXXXX ,
Re: Regulation 238 - Construction Activities
This is in response to your letter of March 6, 2007, requesting our views regarding the requirement to file a T5018 Information Return (which includes a T5018 Information Slip, Statement of Contract Payments, and a T5018 Summary, Summary of Contract Payments) pursuant to Income Tax Regulation ("Regulation") 238. In particular, you inquire as to whether the following are considered construction activities for purposes of Regulation 238:
- the manufacture of portable oil tanks and pressure vessels;
- the construction, installation and maintenance of refrigeration units for commercial kitchens; and
- the installation and maintenance of heating and air conditioning for residential purposes and commercial grocery operations.
We apologize for the delay in our response.
The situations outlined in your letter appear to relate to factual ones, involving specific taxpayers. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situations involve specific taxpayers and transactions that have already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situations, we are prepared to provide the following general comments, which may be of assistance.
Subsection 238(2) of the Regulations provides that "every person or partnership that pays or credits, in a reporting period, an amount in respect of goods or services rendered on their behalf in the course of construction activities shall make an information return in the prescribed form in respect of that amount, if the person's or partnership's business income for that reporting period is derived primarily [more than 50%] from those activities." According to subsection 238(1) of the Regulations, "construction activities" include "the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or sub-surface construction, or any similar property."
Subsection 238(2) of the Regulations does not apply to amounts that are paid or credited in the reporting period in respect of goods for sale or lease by the person or partnership, or to which section 212 of the Income Tax Act applies (i.e. tax on income from Canada of non-resident persons). The CRA requires mixed service and goods payments to be reported on a T5018 if there is a service component of $500 or more per reporting period. You may wish to consult cra-arc.gc.ca/newsroom/factsheets/1999/dec/confct-e.html for further information.
Pursuant to Interpretation Bulletin IT-411R, "Meaning of Construction":
¶ 3. As a general rule, the on-site fabrication, installation, and erection of machinery and equipment, regardless of size, is not considered to be construction, unless it constitutes a component part of a building or structure (e.g., heating system, air-conditioning equipment, sprinkler system, plumbing, wiring, etc.).
It is always a question of fact whether a particular activity is a construction activity and whether a person's business income for a reporting period is derived primarily from such activity. In our opinion, it is reasonable to conclude that generally, in and of itself, the manufacture of portable oil tanks and pressure vessels does not represent a construction activity because the tanks and vessels do not form a component part of a building or structure. However, the construction and installation of refrigeration units for commercial kitchens would generally represent a construction activity because the units form a component part of the building. Similarly, the installation of heating and air conditioning in and of itself generally also represents a construction activity because they are also a component part of a building. We note that although a "repair" may be a construction activity for purposes of Regulation 238, regular ongoing maintenance is not.
Consequently in the scenarios you describe, under the assumption that the requirements of Regulation 238 are otherwise met, the necessity to file a T5018 Information Return will apply to the construction and installation of the commercial refrigeration units and installation of the heating and air conditioning.
We trust the above comments are of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch