SUBJECT: 24(1)
This is in reply to your memorandum of May 7, 1991 concerning the rental of tuxedos by 24(1)
24(1)
You have indicated that each tuxedo rented for a short period of time requires alterations. We assume that the taxpayer considers these alterations to be qualified manufacturing and processing activities. Based on this contention, the taxpayer classified certain assets acquired in 1988 and 1989 as Class 39 property.
You have requested our comments concerning the appropriate tax treatment of these tuxedos and corporate operations.
While a tuxedo usually is not considered a costume, it would certainly fit within the definition of "apparel... used for earning rental income" as described in paragraph (k) of Class 12 of the Regulations. Consequently, the tuxedo should be included in Class 12 and any sales thereof should be credited to the class.
The determination of whether the corporation is manufacturing and processing for the purposes of Class 39 of the Regulation would be based on the D.O.'s determination and analysis of the facts. Although we can not make this determination you may wish to consider the following comments.
The activities of altering and tailoring garments can qualify as manufacturing and processing activities and the garments are available for lease. However, the significant issue is whether these activities are the real source of at least 10% of the corporation's gross revenue. If it does not meet this test we would conclude the corporation is not engaged in manufacturing and processing but instead supplies a service. In such a case none of its assets would qualify for inclusion in Class 39.
Initially, we would have thought that 24(1) as a service operation with tuxedos to fit all and that most of the corporation's resources were devoted to sales, purchasing and booking arrangements. However, you have indicated that most rental garments have to be altered and this would indicate significant activities and costs in this respect.
21(1)(b)
We trust these comments will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch