XXXX C. Higgins (613)957-2097
October 8, 1987
Dear XXXX
We are writing in reply to your letter of July 10, 1987 in which you had specific questions on section 125.1 of the Income Tax Act ("the Act").
The facts as we understand them are as follows:
XXXX
Your questions relating to the above facts are as follows:
(1) Can the labour cost relating to the assembly of windows at the construction site qualify as "cost of manufacturing and processing" labour within the meaning of section 5202 of the Income Tax Regulations for purposes of section 125.1 of the Act since it is an activity which is normally performed in the place of business?
(2) Can the designers' work described in fact (c) above qualify as cost of manufacturing and processing labour for purposes of section 125.1 of the Act?
(3) Can the supervisors' time with respect to reviewing window specifications on-site qualify as cost of manufacturing and processing labour for purposes of section 125.1 of the Act?
In responding to your first question we have reviewed the above facts in determining whether the activities performed by your client on the construction site would be considered "manufacturing or processing" for purposes of the Act.
The term "manufacturing or processing" is not defined in the Act except for the stipulation that it does not include certain activities as provided in subparagraphs 125.1(3)(b)(i) to 125.1(3)(b)(x) of the Act.
Construction is not considered "manufacturing or processing" by virtue of subparagraph 125.1(3)(b)(iii). Interpretation Bulletin IT-411 discusses Revenue Canada's interpretation of the term "construction". Paragraph 2 of this Bulletin states that "construction refers to those activities normally associated with the on-site fabrication and erection of building, roads, bridges, etc, which are intended to be permanently affixed to the land on which they are built. The term does not apply to the manufacture of building products and structures which are transported from the place of manufacture to the place where they are intended to be permanently affixed.... The term also does not apply to the off-site manufacture of prefabricated components for buildings, such as roof trusses, room modules, wall components, windows and doors, stairs and cabinets which are subsequently transported to the construction site for installation." Paragraph 3 of IT-411 provides that "as a general rule, the onsite 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..."
The fact that an activity which if performed at the taxpayers' place of business would be considered "manufacturing or processing" should be of no significance in assessing whether the taxpayers' activities at the construction site are considered manufacturing and processing for purposes of the Act. In Les Ateliers Benoit Allard Inc. V. M.N.R. (84 DTC 1131), the court, in weighing the evidence presented by the taxpayer took into consideration the fact that the taxpayer did not manufacture equipment in its workshop because the equipment could not be transported on account of its size or weight. However, the courts were merely using this evidence to support their overall decision and there were other factors which were significantly more important in determining that the taxpayers' activities were manufacturing or processing for purposes of the Act.
Revenue Canada states in IT-411 , paragraph 3(b) that "the fabrication, installation and erection of the machinery and equipment inside the structure... that is primarily for the purpose of a manufacturing or processing activity which will be carried on inside the structure is not regarded as construction."
As indicated in your letter, your client's activities include the installation of windows and curtain walls, two products which would be component parts of the building. Based on previous court cases and as indicated in IT-411 , these activities would be considered "construction" and therefore excluded from manufacturing or processing by virtue of subparagraph 125.1(3)(b)(iii) of the Act. As a result, labour costs relating to the on-site assembly of these windows would be excluded from the calculation of "cost of manufacturing and processing labour" as defined in Regulation 5202 of the Act.
Regulation 5202 states that the cost of manufacturing and processing labour includes salaries and wages paid or payable to persons for the portion of their time that they were directly engaged in qualified activities of the corporation. Labour costs for activities considered as construction would obviously not be included in "manufacturing and processing labour".
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch