R.A. D'Avignon Director General Appeals Branch
DATE October 1 1987
FROM - Specialty Rulings Directorate M.D. Praulins (613) 957-2103
ATTENTION B.A. Chisholm Appeals & Referrals Division
XXXX
RE: Eligibility of a Combine (Thresher) for the Manitoba Investment Tax Credit
This is in reply to your memorandum dated July 21, 1987, in which you request our further comments regarding the eligibility of an asset for the Manitoba investment tax credit.
Our Comments
We remain of the view that the combine is property that was acquired by the taxpayer primarily for the purpose of farming. To our knowledge, a combine is used exclusively in farming and thus it more closely fits the description of property referred to in subparagraph (c)(x) under the definition "qualified property" in subsection 127(9) of the Income Tax Act (the "Act"). However, even if we were to agree with your suggestion to classify the combine as machinery to be used primarily for the purpose of processing goods for sale for purposes of subsection 127(9) of the Act, it would fail to meet the description of manufacturing or processing in subparagraph 125.1(3)(b) (referred to in paragraphs 9(2)(b) and (c) of the Income Tax Act (Manitoba)), which specifically excludes farming. This is the case because, in our view, the combine can only be used in farming.
From our review of the available information in the file that you forwarded to us, it appears to us that the taxpayer acquired the combine primarily for the purpose of farming, and is only claiming to be processing goods for sale because he wants the Manitoba investment tax credit. Had Manitoba wanted to extend the credit to include farm machinery, it could have done so. However, it seems apparent to us that the province is trying to encourage manufacturing and processing businesses and not farming.
Where a taxpayer carries on farming activities on a custom basis, the activities remain "farming" even though the taxpayer may not consider himself a farmer. In order to obtain the benefit of the investment tax credit (in the present instance), the equipment must be used in farming, but the purpose of farming need not be uniquely his (Lor-Wes Contracting Ltd. v. the Queen, 85 DTC 5310). Regarding the definition of farming, one must look to the common, ordinary and generally accepted meaning of the word, as well as to the specific activities detailed in the statute. Indeed, the activities performed by the taxpayer on behalf of his customers appear to be farming, both in the context of the general inclusive definition of "farming" in subsection 248(1) of the Act, as well as existing case law which supports a broad view of the activities which are included as farming, e.g., Pollon v. the Queen, 84 DTC 6139, and The Queen v. Fred Juster, 73 DTC 5325, affirmed by the Court of Appeal in 74 DTC 6540.
The taxpayer has taken the position that he should be permitted to consider a portion of his activities as processing. He cites as justification for this opinion paragraph 9 of Interpretation Bulletin IT-145R Canadian Manufacturing and Processing Profits - Reduced Rate of Corporate Tax, and the relevant Special Release thereto. In our view, the intent of the Department's policy in paragraph 9 is to permit a farmer or farming corporation to operate two distinct businesses and to calculate income and expenses based on two separate sources. However, as indicated above, given the known facts in this case, we cannot agree that the taxpayer acquired the combine to be used by him primarily for the purpose of processing goods for sale or lease, and it appears to us that he did not, in fact, operate a processing business distinctly separate from his farming business.
In conclusion, because the asset does not, in our view, meet the definition of "qualified property" in subparagraph 9.1(2)(b)(i) of the Income Tax Act (Manitoba) and was not used by the taxpayer primarily for the purpose of manufacturing or processing of goods for sale or lease within the meaning of paragraph 125.1(3)(b) of the Act, the asset does not appear to qualify for the Manitoba investment tax credit.
Your documentation is returned herewith.
Director General Specialty Rulings Directorate Legislative & Intergovernmental Affairs Branch
Enclosure