Introduction to the North American Industry Classification System (NAICS) Canada 2022 Version 1.0
- Status
- Purpose of NAICS
- Preface
- Foreword
- Development and historical background of NAICS
- Conceptual framework of NAICS
- Structure of NAICS and NAICS Canada 2022 Version 1.0
- Summary of changes from NAICS 2017 Version 3.0 to NAICS 2022 Version 1.0
- Definition of the establishment
- Determining the Industry Classification of an establishment
- The Relationship of NAICS Canada and ISIC Revision 4
- Use of the North American Product Classification System (NAPCS)
- More information on NAICS 2022 Version 1.0
Status
This standard was approved as a departmental standard on July 30, 2021.
Purpose of NAICS
The North American Industry Classification System (NAICS) is an industry classification system developed by the statistical agencies of Canada, Mexico and the United States. Created against the background of the North American Free Trade Agreement, it is designed to provide common definitions of the industrial structure of the three countries and a common statistical framework to facilitate the analysis of the three economies. NAICS is based on supply-side or production-oriented principles, to ensure that industrial data, classified to NAICS, are suitable for the analysis of production-related issues such as industrial performance.
Economic statistics describe the behaviour and activities of economic transactors and of the transactions that take place among them. The economic transactors for which NAICS is designed are businesses and other organizations engaged in the production of goods and services. They include farms, incorporated and unincorporated businesses and government business enterprises. They also include government institutions and agencies engaged in the production of marketed and non-marketed services, as well as organizations such as professional associations and unions and charitable or non-profit organizations and the employees of households.
NAICS is a comprehensive system encompassing all economic activities. It has a hierarchical structure. At the highest level, it divides the economy into twenty sectors. At lower levels, it further distinguishes the different economic activities in which businesses are engaged.
NAICS is designed for the compilation of production statistics and, therefore, for the classification of data relating to establishments. It takes into account the specialization of activities generally found at the level of the producing units of businesses. The criteria used to group establishments into industries in NAICS are similarity of input structures, labour skills and production processes.
NAICS can also be used for classifying companies and enterprises. However, when NAICS is used in this way, the following caveat applies: NAICS has not been specially designed to take account of the wide range of vertically- or horizontally-integrated activities of large and complex, multi-establishment companies and enterprises. Hence, there will be a few large and complex companies and enterprises whose activities may be spread over the different sectors of NAICS, in such a way that classifying them to one sector will misrepresent the range of their activities. However, in general, a larger proportion of the activities of each complex company and enterprise is more likely to fall within the sector, subsector and industry group levels of the classification than within the industry levels. Hence, the higher levels of the classification are more suitable for the classification of companies and enterprises than are the lower levels. It should also be kept in mind that when businesses are composed of establishments belonging to different NAICS industries, their company- and enterprise-level data will show a different industrial distribution, when classified to NAICS, than will their establishment-level data, and the data will not be directly comparable.
While NAICS is designed for the classification of units engaged in market and non-market production, as defined by the System of National Accounts, it can also be used to classify own-account production, such as the unpaid work of households.
NAICS has been designed for statistical purposes. Government departments and agencies and other users that use it for administrative, legislative and other non-statistical purposes take responsibility for applying the classification in this manner.
Preface
The North American Industry Classification System (NAICS) represents a continuing co-operative effort among Statistics Canada, Mexico's Instituto Nacional de Estadística y Geografía (INEGI), and the Economic Classification Policy Committee (ECPC) of the United States, acting on behalf of the Office of Management and Budget, to create and maintain a common industry classification system. With its inception in 1997, NAICS replaced the existing classification of each country, the Standard Industrial Classification (1980) of Canada, the Mexican Classification of Activities and Products (1994), and the Standard Industrial Classification (1987) of the United States. Since 1997, the countries have collaborated in producing five-year revisions to NAICS in order to keep the classification system current with changes in economic activities.
The North American Industry Classification System is unique among industry classifications in that it is constructed within a single conceptual framework. Economic units that have similar production processes are classified in the same industry, and the lines drawn between industries demarcate, to the extent practicable, differences in production processes. This supply-based, or production-oriented, economic concept was adopted for NAICS because an industry classification system is a framework for collecting and publishing information on both inputs and outputs, for statistical uses that require that inputs and outputs be used together and be classified consistently. Examples of such uses include measuring productivity, unit labour costs, and capital intensity of production, estimating employment-output relationships, constructing input-output tables, and other uses that imply the analysis of production relationships in the economy. The classification concept for NAICS leads to production of data that facilitate such analyses.
In the design of NAICS, attention was given to developing a production-oriented classification for (a) new and emerging industries, (b) service industries in general, and (c) industries engaged in the production of advanced technologies. These special emphases are embodied in the particular features of NAICS, discussed below. These same areas of special emphasis account for many of the differences between the structure of NAICS and the structures of industry classification systems in use elsewhere. NAICS provides enhanced industry comparability among the three North American Free Trade Agreement (NAFTA) trading partners, while also increasing compatibility with the two-digit level of the International Standard Industrial Classification (ISIC Rev.4) of the United Nations.
NAICS divides the economy into twenty sectors. Industries within these sectors are grouped according to the production criterion. Though the goods/services distinction is not explicitly reflected in the structure of NAICS, four sectors are largely goods-producing and sixteen are entirely services-producing industries.
A key feature of NAICS is the information and cultural sector that groups industries that primarily create and disseminate a product subject to copyright. This sector brings together those activities that transform information into a commodity that is produced and distributed, and activities that provide the means for distributing those products, other than through traditional wholesale-retail distribution channels. Industries included in this sector are publishing; motion picture and sound recording; broadcasting and content providers; telecommunications; computing infrastructure and hosting; web search portals, libraries, archives and other information services.
Another feature of NAICS is a sector for professional, scientific and technical services. It comprises establishments engaged in activities where human capital is the major input. The industries within this sector are each defined by the expertise and training of the service provider. The sector includes such industries as offices of lawyers, engineering services, architectural services, advertising agencies, and interior design services.
A sector for arts, entertainment and recreation groups facilities or services that meet the cultural, entertainment and recreational interests of patrons.
The health care and social assistance sector recognizes the merging of the boundaries of these two types of services. The industries in this sector are arranged in an order that reflects the range and extent of health care and social assistance provided. Some important industries are family planning centres, outpatient mental health and substance abuse centres, and community care facilities for the elderly.
In the manufacturing sector, the computer and electronic product manufacturing subsector brings together industries producing electronic products and their components. The manufacturers of computers, communications equipment, and semiconductors, for example, are grouped into the same subsector because of the inherent technological similarities of their production processes, and the likelihood that these technologies will continue to converge in the future. The reproduction of packaged software is placed in this sector, rather than in the services sector, because the reproduction of packaged software is a manufacturing process, and the product moves through the wholesale and retail distribution systems like any other manufactured product.
The NAICS structure reflects the levels at which data comparability was agreed upon by the three statistical agencies. The boundaries of all the sectors of NAICS have been delineated. In most sectors, NAICS provides for comparability at the industry (five-digit) level. However, for real estate, and finance and insurance, three-country comparability will occur either at the industry group (four-digit) or subsector (three-digit) levels. For these sectors, differences in the economies of the three countries prevent full comparability at the NAICS industry level. For utilities, retail trade, wholesale trade, and public administration, the three countries' statistical agencies have agreed, at this time, only on the boundaries of the sector (two-digit level). Below the agreed upon level of comparability, each country may add additional detailed industries, as necessary, to meet national needs, provided that this additional detail aggregates to the NAICS level.
Foreword
Statistics Canada, the Instituto Nacional de Estadistica y Geografía (INEGI) of Mexico and the United States Office of Management and Budget, through its Economic Classification Policy Committee, have jointly updated the system of classification of economic activities that makes the industrial statistics produced in the three countries comparable. The North American Industry Classification System (NAICS) revisions for 2022 are scheduled to go into effect for reference year 2022 in the United States and in Canada and 2023 in Mexico. NAICS was originally developed to provide a consistent framework for the collection, analysis, and dissemination of industrial statistics used by government policy analysts, by academics and researchers, by the business community, and by the public.
NAICS is the first industry classification system that was developed in accordance with a single principle of aggregation, the principle that producing units that use similar production processes should be grouped together. NAICS also reflects, in a much more explicit way, the significant changes in technology and in the growth and diversification of services in recent decades. Though NAICS differs from other international industry classification systems, the three countries continue to strive to create industries that do not cross two-digit boundaries of the United Nations' International Standard Industrial Classification of All Economic Activities (ISIC).
The actual classification reveals only the tip of the work carried out by staff from INEGI, Statistics Canada, and the U.S. statistical agencies. It is through their regular efforts, analysis, and co-operation that NAICS has emerged as a harmonized international classification of economic activities in North America.
Development and historical background of NAICS
NAICS was developed by Statistics Canada, Mexico's Instituto Nacional de Estadística y Geografía (INEGI) and the Economic Classification Policy Committee (ECPC) of the United States Office of Management and Budget.
The three countries agreed upon the conceptual framework of the new system and the principles upon which NAICS was to be developed.
- NAICS would be based on a production-oriented or supply-based conceptual framework. This means that producing units using similar production processes would be grouped together in NAICS.
- Special attention would be given to developing production-oriented classifications for (a) new and emerging industries (b) service industries in general and (c) industries engaged in the production of advanced technologies.
- Time-series continuity would be maintained to the extent possible. However, changes in the economy and proposals from data users would be considered. In addition, in order to create a common system for all three countries, adjustments would be made where the United States, Canada and Mexico had incompatible definitions.
- In the interest of a wider range of international comparisons, the three countries would strive for greater compatibility with the International Standard Industrial Classification of All Economic Activities (ISIC Revision 3) by minimizing the extent to which the lowest levels of NAICS crossed the boundaries of the 2-digit level of ISIC Revision 3.
To help with the development of NAICS, a user committee meeting was called in November 1994 and extensive consultation was undertaken in Canada with federal and provincial government departments and agencies, business and trade associations, economic analysts and the advisory committees of Statistics Canada.
A co-ordinating committee and subcommittees, which covered agriculture, mining and manufacturing, construction, distribution networks (retail and wholesale trade, transportation, communications and utilities), finance, insurance and real estate, business and personal services and health, social assistance and public administration, were responsible for developing the proposed structure of NAICS, in co-operation with representatives from INEGI and the U.S. statistical agencies. Proposals from all three countries concerning individual industries were considered for acceptance, if the proposed industry was based on the production-oriented concept of the system. The structure of NAICS was developed in a series of three-country meetings and formally accepted by the senior representatives of the ECPC, INEGI and Statistics Canada.
The final structure of NAICS was accepted by the heads of Statistics Canada, INEGI and the Office of Management and Budget of the United States on December 10, 1996.
Over the years, Statistics Canada has developed and used a number of industrial classification systems. In 1948, the first Canadian Standard Industrial Classification (SIC) was developed. This was done to meet the government's need to establish a more comprehensive and fully-integrated system of economic reporting, in support of the key objectives of its post-war reconstruction programme outlined in the 1945 White Paper (on employment and income). The 1948 SIC brought together different industry descriptions in use at the time, each of which was applied to data about different aspects of the economy based on different definitions. It facilitated data comparability, by providing a framework of common concepts, terminology and groupings of industries. The introduction to the 1948 SIC manual stated that it was designed for the classification of the establishment but a precise definition was not provided.
In the major revision of the SIC in 1960, the importance of the need for a standard unit of observation was emphasized by the provision of a standard definition of the establishment. The variables needed to assemble the "basic industrial statistics" required for the analysis of the different sectors of the economy were specified and the establishment became the smallest unit capable of reporting that set of variables. The 1970 revision updated the industry groupings to reflect changes in the industrial structure of the economy.
The 1980 revision of the SIC was again a major one. This revision more directly linked the SIC to the System of National Accounts (SNA). It specified the universe of production to be as defined for the production accounts of the SNA. It drew a picture of all the variables that needed to be collected from or allocated to the establishment, in order to calculate value added by establishment for the Input Output accounts and Real Domestic Product by industry. It gave more emphasis to the role of "ancillary" activities in the collection of an integrated system of economic statistics and emphasized the difference between technical and ancillary activities and the role of ancillary units in accounting for total production. By using available statistics, it more explicitly used measures of specialization and coverage to delineate manufacturing industries. It recommended the use of the 1980 SIC for the classification of establishments and the compilation of production statistics.
In 1980, a separate classification, the Canadian Standard Industrial Classification for Companies and Enterprises, was produced for the compilation of financial statistics related to companies and enterprises. This classification took account of vertically-integrated companies and enterprises and created special classes for them at the lowest level of the classification. The higher levels of the classification cut across the traditional groupings of industrial classifications based on separating primary, secondary and tertiary activities in the economy and created sector groupings that drew together single and vertically-integrated companies and enterprises engaged in the production of similar product groups.
It was customary to revise the SIC at ten-year intervals; however, by 1990 not all the economic statistics programs of Statistics Canada had implemented the 1980 SIC. It was decided to postpone the revision and to take into account the statistical needs of the North American Free Trade Agreement signed in January 1994. The needs were met by developing NAICS, an industrial classification common to Canada, Mexico and the United States. The first version, NAICS 1997, was released in March 1998.
NAICS was revised for 2002 to achieve increased comparability among the three countries in selected areas and to identify additional industries for new and emerging activities. To that end, the construction sector was revised and comparability achieved, for the most part, at the industry (five-digit) level. Industries were created for Internet services providers and web search portals, and Internet publishing and broadcasting.
Changes to Canadian and world economies continue to impact on classification systems. NAICS was revised for 2007 to reflect these changes. In particular, the information sector was once again updated. The updates took into account the rapid changes within this area, including the merging of activities. As a result, Internet publishing and broadcasting and web search portals were combined, as were Internet service providers and data processing, hosting, and related services. Telecommunications resellers and other telecommunications were also merged.
The 2012 NAICS revision was undertaken to achieve one main goal: to modify or create industries to reflect new, emerging, or changing activities and technologies. New industries were created for video game publishers and designers, and small clothing manufacturing industries were rolled up to a higher classification level. In addition, new guidelines for the coding of units that outsource production of goods were written into the sector definitions for 31-33 Manufacturing and 41 Wholesale trade.
Various kinds of changes were brought into NAICS 2017 Version 1.0. Many changes involved clarification of the definition and boundary of classes through changes to the descriptive text of the definition; the illustrative examples; the exclusions; and titles of industries. Some changes involved the reduction of industry detail, while other industries were detailed further. Units that outsource the transformation process for manufactured goods were classified to manufacturing if the units owned the material inputs to production. Otherwise the units we classified to wholesale trade. The telecommunications industries were revised in recognition of the structure of telecommunications companies. The oil and gas extraction industries were expanded, and the classification of arts, sports and recreation industries were revised with new 6-digit industries being created. In recognition of the small or diminishing size of some rental industries, existing industries were merged. Record production and distribution industries were also merged.
NAICS Canada 2017 Version 2.0 was created to meet urgent classification needs prior to the scheduled NAICS revision in 2022. The principle change consisted of moving Internet-only publishing activities out of 519130 Internet publishing and broadcasting and web search and into the corresponding publishing industries. A change was made to the list of examples to clarify the treatment of cannabis cultivation for medical use. The growing of cannabis under cover for medical use was classified to 111419 Other food crops grown under cover.
NAICS Canada 2017 Version 3.0 was created to meet classification needs prior to the legalization of cannabis in Canada in 2018. The principle change consisted of creating new cannabis-related industries in agriculture, manufacturing, wholesale trade and retail trade.
Conceptual framework of NAICS
NAICS is based on a production-oriented, or supply-based conceptual framework in that establishments are grouped into industries according to similarity in the production processes used to produce goods and services. The production process refers to the combination of inputs (capital, labour, energy, materials and services – KLEMS) used in producing a certain quantity of outputs. A production-oriented industry classification system ensures that statistical agencies in the three countries can produce information on inputs and outputs, industrial performance, productivity, unit labour costs, employment, and other statistics that reflect structural changes occurring in the three economies.
Producing units are grouped into industries according to similarities in their production processes as defined earlier. The boundaries between industries demarcate, in principle, differences in input structures and production technologies. This means that, in the language of economics, producing units within an industry have similar production functions that differ from those of producing units in other industries.
The unit of observation of the industrial classification is the producing unit or establishment, and the industrial classification groups producing units, not products. Groupings of producing units permit the collection of data on inputs and outputs on a comparable basis. Because establishments each produce a number of products in different combinations and using different technologies, it is hardly possible to group all the establishments producing a particular product. It is more useful to use a production-oriented approach to bring together, into industries, establishments with common input structures, and to compile data on their outputs. This permits the compilation of comprehensive data on the total output of each product by industry and across all industries.
In contrast, the various versions of the Canadian SIC and of the International Standard Industrial Classification of All Economic Activities (ISIC) of the United Nations have used mixed criteria to create the industries of the classification.
Structure of NAICS and NAICS Canada 2022 Version 1.0
The structure of NAICS is hierarchical. The numbering system that has been adopted is a six-digit code, of which the first five digits are used to describe the NAICS levels that will be used by the three countries to produce comparable data. The first two digits designate the sector, the third digit designates the subsector, the fourth digit designates the industry group and the fifth digit designates the industry. The sixth digit is used to designate national industries. A zero as the sixth digit indicates that there is no further national detail.
NAICS agreements define the boundaries of the twenty sectors into which the classification divides the economies of the three countries. Although, typically, agreement has been reached that comparable data will be made available for Canada, Mexico and the United States up to the five-digit industry level of NAICS, differences in the organization of production in the economies of the three countries necessitated certain exceptions. For some sectors, subsectors and industry groups, three-country agreement was reached only on their boundaries rather than on detailed industry structures.
In general, the use of the same code across the three countries indicates that the class is comparable, even if the title is not identical because of differences in the use of language.
NAICS with Canadian detail is designated NAICS Canada while NAICS with the United States' and Mexico's own six-digit detail are designated NAICS United States and Sistema de Clasificación Industrial de América del Norte (SCIAN) México, respectively.
Comparability among the three countries is indicated by superscripts at the end of class titles. The abbreviation "CAN" indicates a Canadian-only class, "MEX" indicates that the Canadian and Mexican classes are comparable, and "US" indicates that the Canadian and United States classes are comparable. When no superscript appears, the Canadian, Mexican and United States classes are comparable.
The Classification Structure displays the codes and titles of the sectors, subsectors, industry groups, industry, and national industries of NAICS Canada. In general, comparable sectors, subsectors, industry groups, industries carry the same code in NAICS Canada, NAICS Mexico and NAICS United States.
The superscript symbols at the end of NAICS class titles used to signify comparability are:
- CAN
- Canadian industry only
- MEX
- Canadian and Mexican industries are comparable
- US
- Canadian and United States industries are comparable
- [Blank]
- [No superscript symbol] Canadian, Mexican and United States industries are comparable.
NAICS Canada 2022 Version 1.0 consists of 20 sectors, 99 subsectors, 323 industry groups, 694 industries and 923 Canadian industries, and replaces NAICS Canada 2017 Version 3.0. The following summary table shows the counts of subsectors, industry groups, industries, and Canadian industries for each of the NAICS sectors.
| Code | Sectors | Sub-sectors | Industry groups | Industries | Canadian industries | Total |
|---|---|---|---|---|---|---|
| 11 | Agriculture, forestry, fishing and hunting | 5 | 19 | 41 | 52 | 117 |
| 21 | Mining, quarrying, and oil and gas extraction | 3 | 5 | 11 | 30 | 49 |
| 22 | Utilities | 1 | 3 | 6 | 10 | 20 |
| 23 | Construction | 3 | 10 | 28 | 29 | 70 |
| 31-33 | Manufacturing | 21 | 87 | 178 | 248 | 534 |
| 41 | Wholesale trade | 9 | 29 | 73 | 73 | 184 |
| 44-45 | Retail trade | 9 | 24 | 48 | 73 | 154 |
| 48-49 | Transportation and warehousing | 11 | 29 | 42 | 58 | 140 |
| 51 | Information and cultural industries | 6 | 11 | 23 | 28 | 68 |
| 52 | Finance and insurance | 5 | 11 | 28 | 52 | 96 |
| 53 | Real estate and rental and leasing | 3 | 8 | 17 | 20 | 48 |
| 54 | Professional, scientific and technical services | 1 | 9 | 35 | 41 | 86 |
| 55 | Management of companies and enterprises | 1 | 1 | 1 | 2 | 5 |
| 56 | Administrative and support, waste management and remediation services | 2 | 11 | 29 | 34 | 76 |
| 61 | Educational services | 1 | 7 | 12 | 12 | 32 |
| 62 | Health care and social assistance | 4 | 18 | 30 | 37 | 89 |
| 71 | Arts, entertainment and recreation | 3 | 9 | 23 | 38 | 73 |
| 72 | Accommodation and food services | 2 | 6 | 10 | 18 | 36 |
| 81 | Other services (except public administration) | 4 | 14 | 30 | 37 | 85 |
| 91 | Public administration | 5 | 12 | 29 | 31 | 77 |
| Total | 99 | 323 | 694 | 923 | 2039 | |
Summary of changes from NAICS 2017 Version 3.0 to NAICS 2022 Version 1.0
NAICS 2022 Version 1.0 was the biggest revision to NAICS since 2002. It includes a large number of revisions related to the digital economy, in addition to other changes in a variety of areas. Some classification items were taken-over, while others were split-off, broken down, merged or transferred.
Structural changes: generalities
The overarching theme to the updates of the NAICS 2022 Version 1.0 is the digital economy. The guiding principle for these changes is to classify platform-based activities and those delivered over the Internet the same as their non-digital counterparts. For instance, ride sharing services are classified in the same industry as taxi and taxi dispatch services. This revision is especially important for the retail, publishing and broadcasting industries.
The Generic Statistical Information Model (GSIM) is used to identify the types of changes made to the classification: real changes and virtual changes. Real changes are those affecting the scope of the existing classification items or categories, whether or not accompanied by changes in the title, definition and/or the coding. Virtual changes are those made in coding, titles and/or definitions, while the meaning or scope of the classification item remains the same. Real changes are the most important ones for analysis.
Combination of classification items
Combinations consist of mergers and take-overs among classes. Close to two hundred and seventy five new groupings were combined into an emerging class (merger) or an existing class (take-over) with the intent to realign the existing classification items under these classes.
The most important combination change, in terms of the number of classes affected, is in the retail trade industry, where 454110 Electronic shopping and mail-order houses is being expired as an industry and these activities are being taken-over by existing retail classes (i.e. brick and mortar retail).
Some other examples of combinations include:
- 335110 Electric lamp bulb and parts manufacturing and 335120 Lighting fixture manufacturing expired and merged to form emerging item 335130 Electric lighting equipment manufacturing.
- 811112 Automotive exhaust system repair and 811119 Other automotive mechanical and electrical repair and maintenance expired and merged to form emerging item 811113 Specialized automotive repair.
Decomposition of classification items
Two hundred and fifty nine classes are affected as a result of either a breakdown or a split-off. Some of the most significant decomposition changes are related to NAICS Canada industry 519130 Internet broadcasting and web search portals. This industry was split-off into three new classes, 516212 Media streaming distribution services, 516219 Other media content providers, and 519290 Web search portals and all other information services.
NAICS 91411 Aboriginal public administration is being renamed to Indigenous public administration and split-off into three new national industries 914111 First Nations public administration, 914112 Métis public administration, and 914113 Inuit public administration.
Transfer of parts of classes
There were ninety instances where part of a class continued while part of it was transferred to one or more existing classes.
An example of transfers include:
Coal and coke merchant wholesalers transferred from 418990 to 412110 Petroleum, petroleum products and other hydrocarbons merchant wholesalers; and many miscellaneous examples of wholesale trade activities were transferred from 418990 All other merchant wholesalers, to where there is a better fit.
Virtual Changes
More than two hundred and twenty classification items were modified as a result of a virtual change where changes were made to codes, titles and definitions without affecting the scope or meaning of the existing classification items. These types of changes are important for clarification and making necessary updates or corrections. For example, 522130 Local credit unions was renamed to Credit unions to clarify the scope of the industry since the word local creates confusion as there are now national credit unions in Canada. Also, some titles and definitions were modified so that the classification aligns with current terminology related to mental health and gender.
Finally, all changes made (real or virtual) can potentially have an impact on the content of the NAICS index file, which contains inclusions, illustrative examples and exclusions. More than 8,000 examples and more than 800 exclusions have been either added, deleted or edited in this version of NAICS Canada 2022. The NAICS index (or reference) file supports coding of activities and fosters fluidity when reading or using the classification.
Definition of the establishment
NAICS is a classification system for establishments. The establishment is defined as the smallest operating entity for which records provide information on the cost of inputs - capital, labour, energy, materials and services - employed to produce the units of output. The output may be sold to other establishments and receipts or sales recorded, or the output may be provided without explicit charge, that is, the good or service may be "sold" within the company itself.
The establishment in NAICS Canada is generally a single physical location, where business is conducted or where services or industrial operations are performed (for example, a factory, mill, store, hotel, movie theatre, mine, farm, airline terminal, sales office, warehouse, or central administrative office).
There are cases where records identify distinct and separate economic activities performed at a single physical location (e.g., shops in a hotel). These retailing activities, operated out of the same physical location as the hotel, are identified as separate establishments and classified in retail trade while the hotel is classified in accommodation. In such cases, each activity is treated as a separate establishment provided that: no one industry description in the classification includes such combined activities; separate reports can be prepared on the number of employees, their wages and salaries, sales or receipts, and expenses; and employment and output are significant for both activities.
Exceptions to the single location exist for physically dispersed operations, such as construction, transportation, and telecommunications. For these activities the individual sites, projects, fields, networks, lines, or systems of such dispersed activities are not normally considered to be establishments. The establishment is represented by those relatively permanent main or branch offices, terminals, stations, and so forth, that are either (1) directly responsible for supervising such activities, or (2) the base from which personnel operate to carry out these activities.
Although an establishment may be identical with the enterprise (company), the two terms should not be confused. An enterprise (company) may consist of more than one establishment. Such multi-unit enterprises may have establishments in more than one industry in NAICS. If such enterprises have a separate establishment primarily engaged in providing headquarters services, these establishments are classified in NAICS Sector 55, Management of companies and enterprises.
Although all establishments have output, they may or may not have receipts. In large enterprises, it is not unusual for establishments to exist to solely serve other establishments of the same enterprise (auxiliary establishments). In such cases, these units often do not collect receipts from the establishments they serve. This type of support activity is found throughout the economy and involves goods producing activities as well as services. Units that carry out support activities for the enterprise to which they belong are classified, to the extent feasible, according to the NAICS code related to their own activity. This means that warehouses providing storage facilities for their own enterprise will be classified as warehouses.
Determining the Industry Classification of an establishment
An establishment is classified to an industry when its principal activity meets the definition for that industry. This is a straightforward determination for establishments engaged in a single activity, but where establishments are engaged in more than one activity, it is necessary to establish procedures for identifying its principal activity.
In cases where there is more than one activity, the industry code is assigned based on the relative share of value-added. The activity with the largest value-added is identified as the establishment's principal activity, and the establishment is classified to the industry corresponding to that activity. For example, if the value added within an establishment consists of 40% from manufacturing dishwashers, 30% from manufacturing airspeed instruments and 30% from assembling clocks, it will be classified to NAICS 335223, Major kitchen appliance manufacturing. The assignment of the industry code is performed at the 6-digit level of the classification.
In most cases, when an establishment is engaged in more than one activity, the activities are treated independently. However, in some cases, the activities are treated in combination. There are two types of combined activities that are given special attention in NAICS. They are vertical integration and joint production (horizontal integration).
These combined activities have an economic basis and occur in both goods-producing and services-producing sectors. In some cases, there are efficiencies to be gained from combining certain activities in the same establishment. Some of these combinations occur so commonly or frequently that their combination can be treated as a third activity in its own right and explicitly classified in a specific industry.
One approach to classifying these activities would be to use the primary activity rule, that is, whichever activity is largest. However, the fundamental principle of NAICS is that establishments that employ the same production process should be classified in the same industry. If the premise that the combined activities correspond to a distinct third activity is accepted, then using the primary activity rule would place establishments performing the same combination of activities in different industries, thereby violating the production principle of NAICS. A second reason for NAICS recognizing combined activities is to improve the stability of establishment classification, both over time and among the various parties that implement the classification. An establishment should remain classified in the same industry unless its production process changes; and different parties should code the same establishment or type of establishment in the same way. A consistent treatment of establishments with combined activities is more likely if they are classified to a single industry.
Vertical integration involves consecutive stages of fabrication or production processes in which the output of one step is the input of the next. In general, establishments will be classified based on the final process in a vertically-integrated production environment, unless specifically identified as classified in another industry. For example, paper may be produced either by establishments that first produce pulp and then consume that pulp to produce paper or by those establishments producing paper from purchased pulp. NAICS specifies that both of these types of paper-producing processes should be classified in NAICS 32212, Paper mills rather than in NAICS 32211, Pulp mills. In other cases, NAICS specifies that vertically-integrated establishments be classified in the industry representing the first stage of the manufacturing process. For example, steel mills that make steel and also perform other activities such as producing steel castings are classified in NAICS 33111, Iron and steel mills and ferro-alloy manufacturing, the first stage of the manufacturing process.
The joint production of goods or services represents the second type of combined activities. In some cases, these combined activities have been assigned to a specific NAICS industry. For example, establishments that both engage in the sale of new cars and also provide repair services are coded to NAICS 44111, new car dealers. In other cases, specific industries have been identified for these combined activities, such as NAICS 45711, Gasoline stations with convenience stores.
In some complex businesses, there are units that exclusively produce services in support of other units within the same company or enterprise. Examples of such units are transportation units, central administrative units and head offices. Such units are known as ancillary units and are classified according to the NAICS code related to their own activity. This means that a warehouse providing storage facilities for its own company or enterprise will be classified as a warehouse. Similarly, a head office providing headquarters services for its own company or enterprise will be classified to the head office industry.
The Relationship of NAICS Canada and ISIC Revision 4
Recognizing that economic statistics are substantially more useful if they are also internationally comparable, the Economic and Social Council of the United Nations (UN) first adopted an International Standard Industrial Classification of All Economic Activities (ISIC) in 1948. Since then, ISIC has been revised in 1958, 1968, 1989, and, most recently, in 2008. This 2008 version of the classification is referred to as ISIC Revision 4. With these various revisions, the Council has recommended that member states adopt, as soon as possible, the latest version of the classification, with such modifications as necessary to meet national requirements, without disturbing the framework of the classification.
Similar to NAICS, ISIC was designed primarily to provide a classification for grouping activities (rather than enterprises or firms), and the primary focus for the ISIC classification system is the kind of activity in which establishments or other statistical entities are engaged. Whereas the main criteria employed in delineating the divisions, groups and classes of ISIC are: (a) the character of the goods and services produced; (b) the uses to which the goods and services are put; and (c) the inputs, the process and technology of production, it is the third criterion of ISIC that corresponds to the conceptual basis of NAICS.
ISIC Rev. 4 groups economic activity into 21 broad sections, 88 divisions, 238 groups, and 419 classes. In the coding system, sections are distinguished by the letters A through U and the divisions, groups, and classes are identified as the two-digit, three-digit, and four-digit groupings, respectively. As was the case with NAICS, the most recent revision of ISIC also focused on improvements to the detail in services sections.
In the development and subsequent revision of NAICS industries, the statistical agencies of the three countries strove to create industries that did not cross ISIC two-digit boundaries. The 2007 revision of NAICS and revision 4 of ISIC increased comparability beyond previous levels. The 2012, 2017 and 2022 NAICS revisions maintains the same level of comparability with ISIC Rev. 4.
The third and fourth versions of ISIC put increased emphasis on harmonization with other activity classifications. ISIC Rev. 4 in particular was intended to have improved comparability with NAICS. The ISIC Rev. 4 revision process spanned several years and involved contributions from classification experts and users around the world, including NAICS experts. The revised ISIC structure is more detailed than the previous version, especially in the area of services. As well, to improve comparability explanatory notes have been extended to provide additional detail. This improved comparability reflects ISIC's central role in international comparison and analysis of industry statistics.
In addition to working to maintain coherence between NAICS and ISIC, international efforts have also focused on moving towards greater coherence between NAICS, ISIC and the Statistical Classification of Economic Activities in the European Community (NACE, Nomenclature statistique des activités économiques dans la Communauté européenne). NACE is very similar to ISIC, so improved convergence of NAICS with ISIC benefits convergence with NACE as well.
Use of the North American Product Classification System (NAPCS)
The needs of analysts to study market shares and the demand for products can more effectively be met by compiling data relating to the products produced by industries and using a product classification based on demand-oriented criteria to group products by markets served. Users of NAICS may want to consider and evaluate whether the classification they require is industry-based or product-based and whether a product classification would best suit their needs.
The North American Product Classification System (NAPCS) is a classification that organizes goods and services throughout the economy in a systematic fashion. It is a departmental standard classification for goods and services. A description of NAPCS is available at the following link: North American Product Classification System (NAPCS) - Canada (12-003-X)
More information on NAICS 2022 Version 1.0
For questions related to the North American Industry Classification System, please send an email to: statcan.csds-standards-industry-cnsd-normes-industrie.statcan@statcan.gc.ca.
