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 Please be aware that any statute or policy referred to in this letter may have been superseded.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-0013, February 25, 2003
We refer to your facsimile dated December 2, 2002 and our telephone conversation of February 18,
2003 regarding the application of Ontario Retail Sales Tax (RST) to the supply and installation of a system
to clean oily water.
This interpretation is based on the information provided and which is conveyed in the "Understanding of
Facts" portion of this ruling. Please review the information for its completeness and accuracy. If it is
determined that the information is incomplete or inaccurate, this interpretation will not be binding. In the
event that our understanding of the facts is inaccurate or incomplete, please notify the undersigned, in
writing, so that we may reconsider our opinion.
Understanding of Facts
It is our understanding that Company A will fabricate a system that is an environmental application to clean
oily water. The system will then be sold and installed at manufacturing companies as part of their
processing system. The system will become a permanent fixture once installed. You stated in our
telephone conversation that Company A is already considered a manufacturing contractor as it fabricates
and installs other items that are installed as fixtures to real property and Company A's manufacturing cost
of the installed items exceeds $50,000 in a fiscal year.
You are enquiring as to the following:
- Whether Company A is entitled to purchase materials used in the fabrication of the system exempt
from RST.
- Whether Company A is required to charge RST on the sale of the system to its manufacturing
customers, as well as, is Company A required to charge RST if the client provides a RST
exemption form.
Legislation and/or Administrative Policy
Regulation 1013 Section 1 of the Ontario Retail Sales Tax Act (Act) defines a "manufacturer" or
"producer" to mean, in part,
"a person who manufactures, 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 for 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 equipment and is stated, in part, 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, ...
This exemption only applies to machinery, equipment and processing materials. The exemption does not
apply to buildings or structures. Parts and materials to build or repair a building or structure within which
goods are manufactured may not be purchased exempt from RST.
Where a real property contractor supplies and installs items as fixtures to real property, the contractor
is considered to be the end user or purchaser of the items and is liable for RST on their cost of the items
that become real property or fixtures when installed. If the contractor also manufactures the items supplied
and installed as fixtures to real property, the contractor is required to account for RST on their
manufactured cost if the total manufactured cost of all items supplied and installed exceeds $50,000 in the
fiscal year. The RST paid on items for these contracts forms part of the cost used by the contractor to
determine the contract price. No RST should be charged or shown on the invoice to the customer. The
installation labour is not taxable.
In order to account for RST, the manufacturing contractor must have an RST vendor permit number and is
required to remit the RST owing on the manufactured cost of goods supplied and installed. The RST to be
paid, is reported and remitted on Line 3 of the RST Return covering the period during which the goods
were manufactured, not when the goods are installed.
Paragraph 2 of Regulation 1012 s.14(1) of the Act provides a list of the prescribed machinery, equipment
and processing materials for the purposes of the exemptions provided under paragraph 7(1)40 of the Act
and states as follows: "machinery and apparatus used directly in the detection, prevention, measurement,
treatment, reduction or removal of pollutants to water, soil or air if the pollutants are attributable to the
manufacture or production of tangible personal property".
Paragraph 7(1)41 of the Act provides an exemption for goods purchased for the purpose of being
processed, fabricated or manufactured into, attached to, or incorporated into, items for the purpose of
sale.
Contractors may supply and install equipment for certain customers who are entitled to an exemption from
RST on the equipment (i.e., production equipment installed for a manufacturer). The contractor may claim
exemption on the purchase of the equipment provided it is bought for the use of the exempt customer. It is
the contractors'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.
Analysis & Conclusion
Based on our understanding that Company A is considered a manufacturing contractor for the purpose of
the RST Act, we will now respond to your questions:
Is Company A entitled to purchase materials used in the fabrication of the system exempt from
RST?
When Company A manufactures items (i.e., system, etc.) for own use in its real property contracts
and when the manufacturing costs of the fabricated items exceeds $50,000 in a fiscal year, then,
Company A qualifies as a manufacturer and it is eligible to claim the various conditional exemptions
available to manufacturers. Included in the exemptions are, raw materials used in the fabrication of
the system (i.e., steel, valves, electrical parts, etc.), machinery, equipment and processing
materials (consumables) used primarily and directly in the manufacture of the system. In order to
purchase these items exempt from RST, Company A must provide a properly completed purchase
exemption certificate (PEC) to its suppliers.
Is Company A required to charge RST to the sale of the system to its manufacturing client, as well
as, is Company A required to charge RST if the client provides a RST exemption form?
When Company A supplies and installs a system as a fixture to real property, Company A is the
end user or purchaser of the items installed and is liable for RST on the cost of the items that
become real property or fixtures when installed. The RST paid on items for these contracts forms
part of the cost used by Company A to determine the contract price to its customer. No RST
should be charged or shown on the invoice to the customer. The installation labour is not
taxable.
Where Company A is awarded a supply and install contract by a qualifying manufacturer,
Company A would not be required to pay or self-assess RST on any machinery and equipment
(the system) which when installed become the property of the manufacturer for use directly in the
treatment of pollutants and where the pollutants to be treated will be or were attributable to the
manufacture or production of goods. In this case, the manufacturer is not required to provide a
PEC to Company A as it is Company A's responsibility to determine if the customer is entitled to an
exemption since it is Company A's tax liability that will be affected. The exemption is, limited to the
machinery and equipment and does not apply to building materials that once installed will become
part of the manufacturer's realty or that will become part of the structure.
A system used in a supply and installation contract entered into by Company A which is not for a
qualifying manufacturer and/or which is not for a system to treat water pollutants where the
pollutants to be treated will be or were attributable to the manufacture of production of goods would
be subject to RST. In this case, Company A would be required to self-assess the applicable tax on
its manufacturing cost of the system and on any associated materials purchased for use in such
contracts. The RST paid on the system forms part of the cost used by Company A to determine
the contract price. No RST would be charged or shown on the invoice to the customer and the
installation labour would not be subject to RST.
Please note the list of excluded manufacturers in the enclosed Sales Tax Guide # 400 "Manufacturers". If
Company A does work for Ontario municipalities, for example, the system will be taxable, to Company A as
the contractor, if Company A supplies and installs equipment that becomes a fixture attached to real
property.
Since Company A manufactures over $50,000 of items including systems in a fiscal year, which it supplies
and installs as fixtures to real property, Company A is considered a manufacturing contractor. Company A
must obtain a vendor permit number to remit RST on its manufactured costs of the items if the items are
supplied and installed to customers that do not qualify for an exemption from RST.
If a vendor permit number is required, please contact your local Ministry of Finance tax office.
We are also enclosing Ontario Sales Tax Guides 204 - Purchase Exemption Certificates,
206 - Real Property and Fixtures and 401 - Manufacturing Contractors for your information.
If you have any further questions, please contact our office.
