Interpretation Letter AG-0009, July 2001

Thank you for your letter dated April 30, 2001 regarding the application of Ontario retail sales tax (RST) to the business activities of your client.

Your letter pertains to an unnamed client's situation. As the facts of each case may differ and what may appear to be an unimportant difference could be a critical factor in determining the application of RST, it is Branch policy not to provide interpretations regarding unidentified clients. However, we are providing you with a general response based on the information provided. Our ruling does not pertain to any specific taxpayer.

Understanding of Facts

It is our understanding that your client is a large farm operation where they raise cattle and chickens for the production of eggs. They have a number of barns for the livestock and 9 barns for the chickens. The eggs are brought by tracks to a large building where they are graded and/or further processed by being cracked and separated for sale to bakeries. Your client also purchase eggs from outside farms for grading and further processing but the bulk of the grading and processing is for their own eggs.

Your client also built a freezer that is 30 ft long by 30 ft wide by 20 ft high within the farm structure. This freezer is used exclusively for the freezing of egg whites and yolks as part of the processing. Your enquire as to whether the grading/processing building and the freezer qualify as farm equipment or real property.

As part of another division, being a separate legal entity, this operation also has a large egg grading station in Someplace. It purchases eggs from a number of farms for washing, drying, quality checking, grading, packaging and resale to major food chains across Canada. You also wish to clarify if this operation qualifies as a manufacturing operation and if the equipment can be purchased exempt from RST as food processing equipment.

Legislation and/or Administrative Policy

Under paragraph 7(1)13 of the Ontario Retail Sales Tax Act (Act), persons engaged in the business of farming are entitled to an exemption from RST on the purchase of farm implements, farm machinery, farm equipment, agricultural products and repair parts. Regulation 1013 s.1 defines a person engaged in the business of farming to be a person who takes up farming with a reasonable expectation of profit.

Paragraph 14 of subsection 7(1) of the Act provides a conditional exemption for building materials purchased to build or modernize a structure or building used exclusively for farm purposes and states:

Tangible personal property incorporated into buildings or structures that are used exclusively in the business of farming by a person engaged in the business of farming. However, the exemption conferred by this paragraph does not apply to tangible personal property incorporated into residential premises, an office, a residential garage, a road, a sidewalk, a bridge or a building or structure prescribed by the Minister as not entitled to the exemption conferred by this paragraph;

Paragraph 7(1)40 of the Act provides an exemption for machinery, equipment or processing materials used primarily and directly by a manufacturer in the manufacture of tangible personal property or directly in and exclusively for research or development purposes. The equipment must be prescribed in Regulation 1012 Subsection 14(1) and must not be excluded by Regulation 1012 Subsection 14(1.1).

A "manufacturer" is defined in section 1 of Regulation 1013 as "a person who manufactures, fabricates, produces or assembles as applicable, 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...".

The exemption is for machinery only and not building materials. Building materials are not equipment and therefore are taxable under the Act. Therefore, RST applies to materials used by manufacturers or contractors to build buildings and structures for the use of a manufacturer.

Analysis

Effective October 1, 2000, persons engaged in the business of farming may claim the RST exemption at the time of sale by providing their supplier with a completed purchase exemption certificate (PEC) or a farmer's declaration statement when purchasing building supplies used to build or modernize structures used exclusively for farm purposes. Similarly, a contractor or other person purchasing building materials for farm structures would provide a PEC to their supplier.

The RST exemption applies to building materials (i.e., wood, nails, paint, etc.) that are purchased to build or modernize a structure or building used exclusively for farm purposes. The exemption can be claimed by farmers or contractors purchasing materials for incorporation into qualifying structures. Hobby farmers do not qualify for the exemption.

Conclusion

We consider your client to have both a farming operation and a manufacturing operation.

Barns used for the chickens are considered farm buildings. Consequently, building materials purchased to build or modernize barns may be purchased exempt from RST under Paragraph 7(1)14 of the Act. In order to be exempt from RST, a farmer must issue a properly completed PEC to its suppliers. Implements, machinery and equipment designed for farm use can also be purchased by persons in the business of farming without having to complete a PEC. Repairs to these items also qualify for exemption.

Egg grading stations (where the eggs are washed, dried, checked, graded and packaged) do not qualify as manufacturing operations for the purpose of 7(1)40 of the Act. Consequently, the Someplace egg grading station is not entitled to an exemption from RST on machinery and equipment used in the grading of eggs.

However, the grading and further processing of eggs (where the eggs are graded, cracked and processed) are considered manufacturing operations. If your client sells eggs in excess of $5,000.00 in a fiscal year from the processing building, it would meet the definition of a manufacturer. Consequently, your client would be entitled to an exemption from RST on machinery and equipment and processing materials used primarily and directly in the manufacturing process. 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 under paragraph 7(1)40 of the Act.

The freezing of eggs is part of the manufacturing operation. The supply and installation of the freezer is a structure assembled from building materials, not pieces of equipment. For RST purposes, the contractor is considered the consumer of the materials used to complete the contract. PEC's cannot be provided to the supplier in supply and install contracts where the contractor is considered to be the consumer of the materials used. However, the condensing units, defrost coils, compressor, blower and blower motor are considered to be refrigeration equipment. This refrigeration equipment qualifies as exempt temperature and humidity equipment under the provisions of paragraph 7(1)40 of the Act.

If RST was paid in error on materials or equipment that could have been purchased exempt from RST, a refund may be claimed directly with the RST Branch. Refund claims must be received within four years from the date tax was paid. To claim the refund, a "General Application of Refund of Ontario Retail Sales Tax" must be completed.

Enclosed for you information is Ontario Sales Tax Guides #204 - "Purchase Exemption Certificates", #400 - "Manufacturers" # 807 - "Farmers" and Information Notice - "2000 Ontario Budget Announcement - Rebate Program for Farm Building Materials to Point-of-Sale Exemption" and a "General Application of Refund of Ontario Retail Sales Tax".

If you have any further questions, please contact our office.

ISBN 0-7794-2507-3

© Queen's Printer for Ontario, 2002