Principal Issues: [TaxInterpretations translation] Corporation B using logs belonging to a third party, for which different purposes are reserved, wishes to know whether the profits resulting from its activities are manufacturing and processing profits.
Position: No.
Reasons: According to the facts brought to our attention, Corporation B does not produce goods for sale or lease for at least 10% of its income. This is subcontracted work performed for Corporation A.
XXXXXXXXXX 2008-029932 Nancy Turgeon, CGA December 19, 2008
Dear Sir,
Subject: Section 125.1(3)
This is further to your email of November 5, 2008 in which you asked our opinion as to which activities are excluded within the meaning of the definition of "manufacturing or processing" in subsection 125.1(3) of the Income Tax Act (the "Act").
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
In particular, you wish to know whether the activities carried on by Corporation B are activities that qualify for the manufacturing and processing profits deduction pursuant to subsection 125.1(1). Corporation B is responsible for the management of a lumberyard owned by Corporation A. Its employees grade logs by species and saw them into different lengths according to grade and species. The employees then decide whether the sawn log will go to the paper mill, owned by Corporation A, in which case it will be placed on a loader and brought to the mill, or whether it will be used for the production of wood chips or resold by Corporation A.
The situation you have indicated in your letter appears to relate to an actual situation concerning a specific taxpayer. As explained in Information Circular 70-6R5, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
We are of the view, based on the information submitted, that Corporation B's activities are limited to the provision of services on behalf of others as a subcontractor and that the profits earned by Corporation B are not manufacturing and processing profits in Canada. In addition, based on the facts you have submitted to us, less than 10% of Corporation B's gross revenue is derived from the manufacturing or processing in Canada of goods for sale or lease, other than goods that it must sell or lease itself.
However, if all other conditions of the Act are otherwise satisfied, 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 section 5202 of the Income Tax Regulations.
These opinions do not constitute advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on us.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.