Information and Disclaimer
This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued. Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter. Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided. In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.
Interpretation Letter MF-0006, November 2000
Thank you for your letter of August 11, 2000 concerning the application of Ontario retail sales tax with
respect to production equipment. We acknowledge receipt of your client's authorization to correspond
directly with you.
Understanding of Facts
You indicated that your client, Company C, is preparing plans for the construction of a large automotive
related production plant. Some of the large pieces of equipment will require that special cavities be
constructed below grade with tunnel or stair access to the cavities for normal course maintenance and
repair of the equipment. These cavities and access features will be constructed at the same time as the
rest of the plant but could be separately described and priced in the tender process.
Your client believes that these cavities and the access and support structure are integral parts of the
machinery and equipment and are therefore, exempt from retail sales tax as production equipment and that
the sub-contractor should not have to pay retail sales tax on these items as goods incorporated into real
property.
You requested a ruling confirming whether or not the cavity structure and access thereto is part of
production machinery and equipment and therefore exempt from retail sales tax or whether it must be
regarded as part of real property where retail sales tax must be paid on those goods being incorporated to
such.
Legislation and/or Administrative Policy
There are two types of property for retail sales tax purposes, ie., tangible personal property and real
property. Tangible personal property refers to free standing items and real property refers to land and any
items permanently attached to land. Fixtures are items which upon installation are permanently attached to
real property. Permanently attached means bolted, lagged or in some other fashion, permanently affixed.
Where a real property contractor supplies and installs items as fixtures to real property, the contractor is
considered to be the end user of the items and is liable for payment of the retail sales tax on the cost of the
items. No retail sales tax should be charged to the customer. The retail sales tax paid by the contractor is
an element of the total cost of the goods being supplied and should be considered when the contractor sets
the selling price. The installation labour is not taxable.
Contractors may supply and install equipment for certain customers who are entitled to an exemption from
retail sales tax on the equipment (ie., production equipment installed for a manufacturer). The contractor
may claim an exemption on the purchase of the equipment provided it is bought for the use of the exempt
customer. It is the contractor's responsibility to determine if the customer would be entitled to an
exemption since it is the contractor's tax liability that will be affected.
A manufacturer is defined in section 1 of Regulation 1013 to the Ontario Retail Sales Tax Act (Act) as a
"person who manufacturers, fabricates, produces or assembles tangible personal property for sale where
the fair value of such tangible personal property sold to others exceeds $5,000, or where the fair value of
such tangible personal property manufactured for that person's own use exceeds $50,000 in the fiscal year...".
Paragraph 7(1)40 of the Act provides an exemption for production machinery and is stated as follows:
Such machinery, equipment or processing materials as may be prescribed by the Minister
that are purchased to be used by a manufacturer or producer,
- directly in the manufacture or production of tangible personal property,
- directly in and exclusively for research into or the development of goods to be
manufactured or produced by any person,
- directly in and exclusively for research into or the development of manufacturing
or production processes for use by any person, or
- directly in and exclusively for more than one of the purposes described in
subparagraphs i, ii, and iii,
but not machinery, equipment or processing materials that are used by persons prescribed
by the Minister or that are used in a manner, process, industry or enterprise prescribed by
the Minister.
Subsection 14(1) of Regulation 1012 to the Act prescribes the following machinery, equipment and
processing materials for the purposes of paragraph 40 of subsection 7(1) and is stated, in part, as follows:
Machinery and apparatus used primarily and directly in,
- the manufacture or production of tangible personal property,
- the development of manufacturing or production processes, or
- the development of tangible personal property for manufacture or
production.
Bases and Foundations
Bases and foundations which merely provide a platform on which the production machinery and equipment
rests are taxable.
Above ground supports for structures located on the manufacturing premises, even if they have a
secondary function of supporting realty, may be constructed using materials purchased exempt from
Ontario retail sales tax if they can be identified as parts for the production equipment (ie., support columns
for overhead cranes that extend upward and provide support for the roof).
Concrete bases that have an interrelationship with the machinery to be attached and are committed to
particular machinery that are used directly in the production of goods may also qualify for the exemption
from retail sales tax. The bases must be portable and relocatable at various sites for production activities.
Building Materials
Retail sales tax applies to materials used by manufacturers to build buildings and structures. Production
machinery and equipment must retain its identity as personal property when used in the manufacturing
process since the exemption only applies to the purchase of tangible personal property that is purchased
for use in a manufacturing process. Building materials such as concrete, steel, lumber, insulation, etc.
cannot be considered to be such machinery before they are incorporated into a building or structure.
After the materials are incorporated, they lose their identity as tangible personal property and become real
property. The use to which the building or structure may be put is irrelevant as far as the building materials
are concerned. For example, a manufacturer may purchase, or manufacture, exempt of retail sales tax, a
qualifying storage tank, silo, etc. that is tangible personal property and then attach it to real property.
However, if the building materials are used to build a real property structure that is used as a storage tank,
silo, etc., the person buying the materials must pay tax on the material used.
Catwalks, Platforms, Walkways and Similar Structures
Retail sales tax will apply to these structures where their specific function is to provide worker access to
install, operate, maintain or repair taxable equipment, or to service the manufacturing premises.
Exemptions are provided if the structures are:
- designed and dedicated to a particular piece of tax exempt production machinery or apparatus,
and
- used to provide worker access to goods being manufactured or produced (ie., aircraft, large
motor, etc.), or
- used by service personnel to access tax exempt production equipment for repair or maintenance
purposes.
Analysis & Conclusion
Because the cavities are below grade and part of the foundation, any materials used to construct the
cavities would be taxable. These cavities are not considered to be production equipment but rather real
property. As explained above, building materials such as concrete cannot be considered production
machinery before it is incorporated into a building or structure. As well, after the concrete is installed, it
loses its identity as tangible personal property and becomes real property not production equipment. The
installer, who is the end user of the materials installed, is required to pay retail sales tax on the cost of the
concrete and any other materials used to construct the cavities.
We are enclosing Retail Sales Tax Guides 400 - Manufacturer and 206 - Real Property and Fixtures for
your information.
If you have any further questions, please contact our office.
