Manufacturers

RST Guide 400, March 2001

• The information in this Guide describes the Retail Sales Tax (RST) exemptions for production machinery and equipment bought by, or for the use of, qualified manufacturers. Please note that this Guide replaces the previous version dated March 1998.

Manufacturer

Definition

Under Ontario's Retail Sales Tax Act, a manufacturer is a person who manufactures, fabricates, produces or assembles goods for sale where the fair value of the goods sold to others is more than $5,000 in the fiscal year or, the fair value of goods manufactured for own use is more than $50,000 in the fiscal year.

Those Who are Not Manufacturers

The following are not manufacturers for RST purposes:

• professionals such as lawyers, accountants, architects and engineers to the extent that they produce printed matter on their professional services
• public hospitals, schools, school boards, universities
• restaurateurs, caterers, or other persons in the business of producing prepared food products, snack foods, confections, or beverages in an eating establishment, centralized kitchen or similar facility
• religious, charitable or benevolent organizations that make stage props, sets and costumes for staging their own live theatrical or musical performances
• custom computer program developers. See RST Guide 650 - Computer Programs and Related Services for further information.

Note: A repair person is not a manufacturer. Repairing an item restores it to its original or intended state or running order. Those who provide only repair services are not manufacturers.

Excluded Manufacturers

The following must pay RST on the purchase of production machinery and equipment but do not pay RST for processing materials used in their manufacturing operations:

• Ontario Government ministries and Ontario Crown agencies
• municipalities, including districts and regions
• public libraries, park management, health, police, utility or transportation boards or commissions or any board or commission set up by one or more municipalities
• Ontario Hydro, the Urban Transportation Development Corporation, or any corporation where all directors are appointed by the Lieutenant Governor in Council
• contractors or subcontractors who buy machinery or equipment to complete a contract for any of the above.

Tax-Exempt Items

Examples of Tax-Exempt Items

If you qualify as a manufacturer, the following items may be bought without paying RST:

• machinery and apparatus used primarily and directly in the:

1. manufacture or production of goods
2. *development of manufacturing/production processes
3. *development of goods for manufacture

* Note: This exemption also applies to machinery and equipment used by a manufacturer exclusively in research and/or development of goods and manufacturing/production processes for others. Non-manufacturing organizations involved in research and/or development are not entitled to the exemptions available to manufacturers.

• machinery for control of pollutants attributable to the manufacture or production of goods
• equipment used to carry away waste or refuse from production machinery
• safety devices to prevent accidents in manufacturing or production of goods
• self-propelled trucks mounted on rubber-tired wheels for off-highway use only at mines and quarries
• internal combustion tractors, other than highway truck tractors, used only in logging operations for log removal from stump to dump, skidway or carrier
• logging wagons and sleds
• logging cars, machinery, cranes, block and tackle, wire rope, etc., for use in operations including removal from stump to dump, skidway or carrier
• pipes or tubes commonly known as "oil country goods," including casing or tubing, and fillings, couplings, thread protectors and nipples, drill pipe, for use with natural gas or oil wells
• machinery and apparatus, including wire rope, drilling bits and seismic shot-hole casing, for use in exploration or discovery or development of petroleum, natural gas or minerals
• repair and maintenance equipment for use by manufacturers in servicing any of the above
• parts for goods listed above
• drilling mud and additives
• geophysical surveying precision instruments and equipment for use only in prospecting, or for geophysical studies for engineering projects
• plans and drawings used directly in the manufacture and development of goods, the development of production processes and in the control of pollutants due to the manufacture or production of goods
• typesetting and composition, metal plates, cylinder, matrices, film, art work, designs, photographs, rubber materials, plastic material and paper material when impressed with or displaying or carrying an image for reproduction by printing for use only in the manufacture of printed material. (Only the person who actually manufactures or produces the printed matter can buy these items without paying RST unless the printed matter qualifies as an exempt publication. For more information, see RST Guide 507 - Publications).

Note: The exemption for production machinery and equipment may be claimed by a person other than a manufacturer, provided the item is bought for the use of a manufacturer. For example, a mechanical contractor performing a contract for a manufacturer, to supply and install a production machine that becomes a fixture when attached to realty. In this case, the equipment becomes the property of the manufacturer and has been purchased "for the use of a manufacturer" and as such is exempt. Contractors must pay RST on all equipment used to install or repair manufacturing equipment, since the equipment is not for the "use of the manufacturer" but rather for the use of the contractor. See RST Guide 206 - Real Property and Fixtures for further information.

Processing Materials

In addition to the above, manufacturers may also buy processing materials or consumables without paying RST. These are materials (not including grease, lubricating oils, or fuel for use in internal combustion engines) used directly in:

1. the process of manufacture or production of goods
2. the development of manufacturing/production processes
3. the development of goods for manufacture
4. the control of pollutants produced during the manufacture or production of goods

Generally, materials are considered to be processing materials or consumables when bought in quantities such as litres, kilograms, bags or rolls.

Combination Use of Machinery

Machinery, equipment or processing materials used directly in, and exclusively (90% or more of the time) for, a combination of manufacturing and research and development (R&D) activities qualify for exemption. For example, equipment used 75% for R&D purposes and 25% for manufacturing purposes may be purchased exempt from RST by manufacturers.

Taxable Items

Examples of Taxable Items

The following are examples of items that are taxable to manufacturers:

• any vehicle, and parts for it, that requires or has a permit issued under subsection 7(7) of the Highway Traffic Act
• bases or foundations that provide a platform on which the production equipment rests
• catwalks, platforms, walkways and similar structures where their specific function is to provide access to install, operate, maintain or repair taxable equipment, or to service the manufacturing premises
• containers designed for repeated use that are not for use exclusively and directly in the manufacture or production of goods
• machinery and equipment, including transformers, used in the transmission or distribution of electricity unless the machinery and equipment is used within a plant where goods, other than electricity, are manufactured or produced
• office equipment
• pipes, valves, fittings, pumps, compressors, regulators, and equipment related to machinery or equipment used in transporting or distributing goods that are not used within a manufacturing or production facility or in gathering systems for natural gas, natural gas liquids or oil in natural gas or oil fields
• portable and standby electric generators and alternators, including drive motors; portable generator and alternator set; and, standby generator and alternator set used primarily in a building that utilizes electricity supplied by a public or privite utility, if the building is used for activities other than the manufacture or production of goods.

Goods Manufactured for Own Use

Manufacturing Contractors

You are considered to be a manufacturing contractor if you manufacture and install items such as doors, kitchen cabinets, and windows which, after installation, become part of or fixtures to real property. RST must be paid by you on the manufactured cost of items installed when the produced cost is greater than $50,000 in the fiscal year. RST Guide 401 - Manufacturing Contractors explains how RST must be calculated on your manufactured cost.

Printing

If you print taxable items for your own use, you must pay RST on the produced cost of the taxable printed matter if the total cost of all printed matter is more than $50,000 in the fiscal year. RST Guide 402 - Printing, explains how RST must be calculated on your produced cost.

Warranty, Extended Warranty and Maintenance Contracts

Replacement parts and labour are subject to RST when repairs are made to taxable goods covered by a service, maintenance, warranty or extended warranty contract, or guarantee.

RST paid on parts and labour used to carry out repairs to taxable goods covered under warranty contracts, extended warranty contracts, service or maintenance contracts or guarantees will be completely phased-out by April 1, 2004. During the phase-out period, the RST rates will be:

• 8% for repairs up to and including May 2, 2000
• 6% from May 3, 2000 to March 31, 2001
• 4% from April 1, 2001 to March 31, 2002
• 2% from April 1, 2002 to March 31, 2003
• 1% from April 1, 2003 to March 31, 2004

RST is not payable on repairs made to production machinery and equipment that may be purchased by the manufacturer exempt from RST.

In some instances, manufacturers provide warranties on goods they produce. If parts are sent by the manufacturer free of charge to restock the repair person's or distributor's inventory of parts used in warranty repairs, RST is payable by the manufacturer based on the repair person's or distributor's replacement cost.

If the manufacturer takes parts from its own inventory and these same parts are provided to the repair person and used in the repair, then the manufacturer must account for RST on its cost of these parts. The cost of a replacement part is the manufactured cost where the original part is scrapped either by the manufacturer or by the repair person under the manufacturer's direction. If the original part is returned to the manufacturer and is repaired and returned to inventory, the cost on which RST must be accounted for by the manufacturer is the cost to repair the part.

Manufacturers must also pay RST on any charges made by the repair person or distributor for labour. If the manufacturer does the repair, RST is paid on the manufactured cost of the parts and not on the repair labour.

For More Information

The information contained in this publication is only a guideline. For more information, please contact the Ontario Ministry of Revenue at 1 866 ONT-TAXS (1 866 668-8297) or visit our website at ontario.ca/revenue.

© Queen's Printer for Ontario, 2001

ISBN 0-7794-0889-6