25 November 1991 Income Tax Severed Letter

24(1)19(1)

                                                  912613
                                                  C.R. Brown
                                                  (613) 957-8954

November 25, 1991

Dear Sirs:

Re: Class 29 and 39 of the Income Tax Regulations

This is in reply to your letter of September 5, 1991 concerning Classes 29 and 39 of the Income Tax Regulations.

It appears that this request involves a specific taxpayer and fact situation. We are not prepared to provide specific comments on an actual case since the review of such cases are normally the responsibility of the local District Taxation Office. We will however, provide some general comments which may be of assistance.

24(1)

If it can be established that the subsidiary's primary use of the leased assets and its own depreciable assets is in the manufacturing and processing of goods for sale by the subsidiary, it is your view that the subsidiary could include its depreciable assets that otherwise meet the requirements of Class 29 and its successor Class 39 in such classes. In addition, the parent corporation could likewise include such machinery and equipment in these classes

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We are in agreement with these views.

The key issue as you mention in your letter is whether 24(1) of the business of the subsidiary which is performed under contract, as described above, constitutes a contract for services or for the sale of goods.

This matter can only be determined on the basis of the contractual arrangement between the parties and an analysis of the facts and circumstances involved in each contract. For this reason it is difficult to provide any meaningful comments without a detailed examination of the contracts involved.

You have referred to the comments in Benjamin's Sale of Goods on differentiating a sale of goods from other contractual arrangements. You,have also referred to the Dixie X-ray Associates Limited and the Crown Tire Services Limited as two of the Court cases commenting on these issues. We agree these comments and cases provide guidance on how the substance of a contract ic to be determined. The comments in the Tenneco decision, 91 DTC 5207, which was only recently reported may also provide assistance in distinguishing a contract for goods from one for services. We also draw your attention to the decision of the Federal Court of Appeal given on September 4, 1991 in the Reg Rad Tech Ltd. appeal which confirmed that provision of goods that are incidental to a contract can be ignored. In addition, Interpretation Bulletins IT-145R and IT-331R discuss the qualification of certain activities and property for the purposes of the manufacturing and processing tax credit and the investment tax credit.

If it can be clearly established on the basis of the facts and consistent with the precedents established by our Courts, that a contract is for a sale of a good and not for the provision of a service, the Department would, of course, accept the contract as such.

We would be pleased to consider these issues should you wish to submit an advance income tax ruling on behalf of a specific taxpayer who proposes to enter into a contract. Alternatively, an actual case involving a completed transaction may be discussed with officials of the local District Taxation Office.

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

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