Citation: 2007TCC206
Date: 20070501
Docket: 2004-4248(IT)G
BETWEEN:
C.R.I. ENVIRONNEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1] These are appeals pursuant
to the General Procedure from reassessments made in respect of the Appellant
for its taxation years ending on March 31, 1998, January 31, 1999, and March 31, 2000
(the "years concerned"). In making the reassessments, the Minister of
National Revenue (the "Minister") disallowed the Appellant's claim to
a Canadian manufacturing and processing profits deduction (the
"deduction") under section 125.1 of the Income Tax Act (the
"Act") for each of the years concerned.
[2] The only issue in
this appeal is the following: Were the goods manufactured or processed by the
Appellant for sale as prescribed under subsection 125.1(3) of the Act?
Facts
[3] The Appellant is in
the business of managing residual hazardous materials ("industrial
waste"). Its processing centre (the "Centre") has a highly
qualified staff and modern equipment, allowing it to store and consolidate
industrial waste. The Appellant holds all the government permits and authorizations
required to collect any type of industrial waste, except for materials contaminated
with explosive, radioactive or pathogenic substances.
[4] The Centre accepts liquid,
semi-liquid and solid industrial waste, as well as contaminated water and hazardous
domestic waste.
[5] The Appellant's
main activity consists in storing this industrial waste, sorting and
consolidating it in a highly selectively manner and finally reshipping the processed
waste to authorized destinations in Canada and the United States.
[6] Whenever a producer
of industrial waste sends in a shipment, the Appellant takes possession of the
industrial waste and undertakes the following activities:
(i) a representative of the
Appellant collects a sample of the industrial waste or obtains a data sheet
from the producer for submission to the Appellant's laboratory;
(ii) samples of the
industrial waste are characterized and analyzed at the Appellant's laboratory;
(iii) the Appellant
issues a waste code and then makes a quotation to the waste producer;
(iv) the industrial waste is transported to
the Appellant's centre to be checked;
(v) on arrival, the Appellant takes samples
of the industrial waste and analyzes them to ensure they conform to the sample
supplied;
(vi) the industrial waste is accepted, given
a different code or refused, as the case may be;
(vii) the industrial waste is then weighed
and unloaded by the Appellant;
(viii) the Appellant fills out a receiving report
for the industrial waste;
(ix) the industrial waste is
then removed from its containers, sorted and processed to treat and/or
stabilize it to meet the acceptance criteria of the various destinations to
which it will be shipped for disposal by incineration or burial;
(x) industrial waste which may be optimized
is sent to a destination where it will be reclaimed, in certain cases as a
supplemental fuel or otherwise;
(xi) once the containers are emptied, they
are consolidated and sorted according to their physical and chemical
characteristics and the acceptance criteria of the recycling centres where they
are reclaimed, if they are made of metal, for use in the manufacture of steel
or aluminum.
[7] The Appellant
collects a cash payment from the producers of industrial waste in order to process
and eliminate the waste.
[8] Once it has
processed the industrial waste, the Appellant pays to have it shipped to
authorized destinations in Canada and the United States.
[9] The Appellant hires
transportation companies to carry the waste to its final destination.
[10] Sales of cardboard
and metal obtained from the empty containers processed by the Appellant do not
exceed 5% of its total sales.
[11] The relevant
provisions of the Act for the years concerned read as follows:
125.1. Manufacturing
and processing profits deductions
(1) There may be deducted from the
tax otherwise payable under this Part by a corporation for a taxation year an
amount equal to 7% of the lesser of
(a) the amount, if any, by which the
corporation's Canadian manufacturing and processing profits for the year
exceed, where the corporation was a Canadian-controlled private corporation
throughout the year, the least of the amounts determined under paragraphs
125(1)(a) to 125(1)(c) in respect of the corporation for the year,
and
(b) the amount, if any, by which the
corporation's taxable income for the year exceeds the total of
(i) where the corporation was a
Canadian-controlled private corporation throughout the year, the least of the
amounts determined under paragraphs 125(1)(a) to 125(1)(c) in
respect of the corporation for the year,
(ii) 10/4 of the total of the
amounts that would be deductible under subsection 126(2) from the tax for the
year otherwise payable under this Part by the corporation if those amounts were
determined without reference to section 123.4, and
(iii) where the corporation was a
Canadian-controlled private corporation throughout the year, its aggregate
investment income for the year (within the meaning assigned by subsection
129(4).
[12] Reference should
also be made to the following definitions to determine which activities are
included in the notion of "manufacturing and processing" for the
years concerned. These definitions are found in subsection 125.1(3) of the Act:
"Canadian
manufacturing and processing profits"
of a corporation for a
taxation year means such portion of the total of all amounts each of which is
the income of the corporation for the year from an active business carried on
in Canada as is determined under rules prescribed for that purpose by
regulation made on the recommendation of the Minister of Finance to be
applicable to the manufacturing or processing in Canada of goods for sale or
lease;
"manufacturing
or processing" does not include:
(l) any manufacturing
or processing of goods for sale or lease, if, for any taxation year of a
corporation in respect of which the expression is being applied, less than 10%
of its gross revenue from all active businesses carried on in Canada was from
(i) the selling or leasing of
goods manufactured or processed in Canada by it, and
(ii) the manufacturing or
processing in Canada of goods for sale or lease,
other than goods for sale or lease by it.
[13] This provision
refers to the Income Tax Regulations (the "Regulations"). Section
5202 of the Regulations is the only regulation relevant to this case. This
regulation concerns which activities qualify or do not qualify for the
deduction. It reads as follows:
(a) any of the
following activities, when they are performed in Canada in connection with
manufacturing or processing (not including the activities listed in
subparagraphs 125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for
sale or lease:
(i)
engineering
design of products and production facilities,
(ii)
receiving
and storing of raw materials,
(iii)
producing,
assembling and handling of goods in process,
(iv)
inspecting
and packaging of finished goods,
(v)
line
supervision,
(vi)
production
support activities including security, cleaning, heating and factory
maintenance,
(vii) quality and production
control,
(viii) repair of production
facilities, and
(ix)
pollution
control,
(b) all other
activities that are performed in Canada directly in connection with manufacturing or processing
(not including the activities listed in subparagraphs 125.1(3)(b)(i) to (ix) of
the Act) in Canada of goods for sale or lease,
and
(c) scientific
research and experimental development, as defined in section 2900, carried on
in Canada,
but does not include any of
(d) storing, shipping,
selling and leasing of finished goods,
(e) purchasing of raw
materials,
(f) administration,
including clerical and personnel activities,
(g) purchase and
resale operations,
(h) data processing,
and
(i) providing facilities
for employees, including cafeterias, clinics and recreational facilities;
[14] These statutory provisions
provide that the Appellant must abide by the following conditions to have the
benefit of the deduction:
(i) it must actively
operate an enterprise in Canada;
(ii) it must
manufacture or process goods;
(iii) the
goods must be manufactured or processed for sale or lease; and
(iv) at
least 10% of its gross yearly income must come from the manufacture or
processing of goods for sale or lease.
[15] The analysis will
essentially address the last two conditions, especially the third one, because
the Minister admitted that the first two have been met.
[16] The relevant
provisions of the Civil Code of Québec (the "C.C.Q.") for the
purposes of this case are articles 1708 and 2098. Article 1708 defines the
contract of sale as follows:
1708. Sale is a contract by which a person, the seller, transfers ownership of
property to another person, the buyer, for a price in money which the latter
obligates himself to pay.
A dismemberment of the right of
ownership, or any other right held by the person, may also be transferred by
sale.
[17] Article 2098 of the
C.C.Q. defines the "contract for services" as follows:
A contract of enterprise or for services is a
contract by which a person, the contractor or the provider of services, as the
case may be, undertakes to carry out physical or intellectual work for another
person, the client or to provide a service, for a price which the client binds
himself to pay.
Appellant's submissions
[18] The Appellant submits
as follows:
(i) Its
activities consisted in acquiring hazardous waste materials, which were
products having a negative value, to process them to reduce the negative value
and then sell the materials at a lesser negative price so as to make a profit.
(ii) The
contracts concluded with its suppliers and third-person purchasers were not
contracts for services. Indeed, the Appellant submits that it did not process a
supplier's hazardous materials only to then return them so that the supplier
could dispose of them afterward. According to the Appellant, the supplier of hazardous
materials was totally unaware of the type of processing it did to this hazardous
waste and did not in any way request that the Appellant process this waste. The
Appellant submits that the only requirement of the supplier was that it assume
ownership of the supplier's industrial waste so it would be free of any
environmental liability related to the ownership of this industrial waste.
Likewise, the Appellant submits that it did not require any services from the third-party
purchaser, except that it become owner of the industrial waste so that the
Appellant in turn would be free of any environmental liability related to the ownership
of this waste.
(iii) The
contract by which the supplier transferred ownership of the hazardous waste to the
Appellant could only be a contract of sale, since it could not be described as
a contract for services. Likewise, it submits that the contract by which it
transferred ownership of the processed industrial waste to third parties could
only be a contract of sale, since it could not be qualified as a contract of
service.
(iv) The
only objective in processing the hazardous waste was to reduce its negative
value so it could be re-sold to third parties for profit. The Appellant notes that
all it had to do to make a profit was sell the waste at a negative price that
was less than the processing costs and (negative) acquisition costs.
(v) For
these reasons, the transfer of ownership of the processed hazardous waste to
third parties was merely a sale, although the price was negative.
Analysis
and conclusion
[19] Since it is admitted
that the Appellant was engaged in the Canadian manufacturing or processing of
goods, the only issue in this case is whether the Appellant processed or manufactured
industrial waste for the purposes of sale. In other words, was the industrial
waste processed by the Appellant transferred to third persons by contracts of
sale?
[20] In Will-Kare
Paving & Contracting Ltd. v. Canada, 2000 SCC 36, the Supreme Court of
Canada had an opportunity to consider the meaning and scope of "sale"
in the phrase "to be used directly or indirectly by him in Canada
primarily for the purpose of manufacturing or processing goods for sale or
lease" in the context of applying the deduction for an accelerated capital
cost allowance for Class 39 goods. Although this is not exactly the case here,
I am of the opinion that the pronouncements of the Supreme Court of Canada in
this judgment are helpful for resolving the present case. Writing for the
majority, Major J. acknowledged the various trends in the case law at that
time and made the following observations with regard to this expression:
Manufacturing or Processing Goods for Sale
19
Canadian jurisprudence to this point has adopted two divergent interpretations
of the activities that constitute manufacturing and processing goods for
sale. Without canvassing these authorities exhaustively, it may be
helpful to outline briefly those cases which delineate these two distinct approaches.
20
One point of view is expressed in Crown Tire Service Ltd. v. The Queen,
[1984] 2 F.C. 219 (T.D.), where the court imports common law and provincial
sale of goods law distinctions in defining the scope of the manufacturing and
processing incentives’ application. Only capital property used to
manufacture or process goods to be furnished through contracts purely for the
sale of such goods qualifies. Property used to manufacture or process
goods to be supplied in connection with the provision of a service, namely
through a contract for work and materials, is not viewed as being used directly
or indirectly in Canada primarily in the manufacturing or processing of goods
for sale, and as such, does not qualify for either the accelerated capital cost
allowance or the investment tax credit.
. . .
22 A second line of authority departs
from the point of view in Crown Tire and declines to apply statutory and
common law sale of goods rules in delineating that capital property to which
the manufacturing and processing incentives apply. Rather, these cases
advocate a literal construction of “sale” such that the provision of a service
incidental to the supply of a manufactured or processed good does not preclude
receiving the benefit of the incentives. Any transfer of property for
consideration would suffice. See Halliburton Services Ltd. v. The
Queen, 85 D.T.C. 5336 (F.C.T.D.), aff’d 90 D.T.C. 6320 (F.C.A.), and The
Queen v. Nowsco Well Service Ltd., 90 D.T.C. 6312 (F.C.A.).
23 Halliburton and Nowsco
considered the form of contract entered into between the taxpayer and customer
to be irrelevant. In both cases the Federal Court of Appeal quoted with
approval language from Reed J.’s decision in Halliburton at the Trial
Division that appears to suggest an alternative test based upon the source of
the taxpayer’s profit. As stated by Reed J., at p. 5338:
. . . I do not find any
requirement that the contract which gives rise to the taxpayer’s profit must be
of a particular nature, eg: one for the sale of goods and not one of a more
extensive nature involving work and labour as well as the goods or material
supplied. In my view it is the source of the profit, (arising out of
processing) that is important . . . not the nature of the taxpayer’s contract
with its customers.
24 Rolls-Royce (Canada) Ltd. v. The Queen, 93 D.T.C. 5031 (F.C.A.),
attempted to reconcile these diverging lines of authority by restricting Crown
Tire’s reasoning to circumstances that do not evidence the manufacture of a
discrete and identifiable good prior or contemporaneous to the provision of a
service. As stated by MacGuigan J.A. at p. 5034:
The crucial distinction
between Crown Tire and Halliburton seems to me to be . . . that
the processing in Crown Tire “did not involve the creation of a good
antecedent to its use in the provision of a service”. . . . The rubber strip in
Crown Tire was not on the evidence manufactured or processed by the
taxpayer, whereas the cement in Halliburton was made by the taxpayer,
indeed was custom-made according to very exact specifications.
25 In Hawboldt Hydraulics,
supra, the respondent taxpayer relied upon the Rolls-Royce
interpretation of Crown Tire to claim a Class 29 accelerated capital
cost allowance and s. 127(5) investment tax credit with respect to property
used to manufacture parts for use in repair services. Rejecting the
taxpayer’s claim, the court reverted to the original Crown Tire
approach. Isaac C.J. wrote at p. 847:
We are invited by the modern
rule of statutory interpretation to give those words their ordinary
meaning. But we are dealing with a commercial statute and in commerce the
words have a meaning that is well understood . . . . Strayer J. was right, in
my respectful view, to say in Crown Tire, at page 225 that:
. . . one must assume that
Parliament in speaking of “goods for sale or lease” had reference to the
general law of sale or lease to give greater precision to this phrase in
particular cases.
. . .
29
Notwithstanding this absence of direction, the concepts of a sale or a lease
have settled legal definitions. As noted in Crown Tire and
Hawboldt Hydraulics, Parliament was cognizant of these meanings and
the implication of using such language. It follows that the availability
of the manufacturing and processing incentives at issue must be restricted to
property utilized in the supply of goods for sale and not extended to property
primarily utilized in the supply of goods through contracts for work and
materials.
. . .
31 To apply a “plain meaning”
interpretation of the concept of a sale in the case at bar would assume that
the Act operates in a vacuum, oblivious to the legal characterization of the
broader commercial relationships it affects. It is not a commercial code
in addition to a taxation statute. Previous jurisprudence of this Court
has assumed that reference must be given to the broader commercial law to give
meaning to words that, outside of the Act, are well-defined. See Continental
Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298. See also P. W. Hogg, J. E.
Magee and T. Cook, Principles of Canadian Income Tax Law (3rd ed. 1999),
at p. 2, where the authors note:
The Income Tax Act relies
implicitly on the general law, especially the law of contract and property . .
. . Whether a person is an employee, independent contractor, partner, agent,
beneficiary of a trust or shareholder of a corporation will usually have an
effect on tax liability and will turn on concepts contained in the general law,
usually provincial law.
32 Referring to the
broader context of private commercial law in ascertaining the meaning to be
ascribed to language used in the Act is also consistent with the modern
purposive principle of statutory interpretation. As cited in E. A.
Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:
Today there is only one
principle or approach, namely, the words of an Act are to be read in their
entire context and in their grammatical and ordinary sense harmoniously with
the scheme of the Act, the object of the Act, and the intention of Parliament.
See Rizzo & Rizzo
Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at para. 21. The modern approach
to statutory interpretation has been applied by this Court to the
interpretation of tax legislation. See 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at
para. 5, per Bastarache J., and at para. 50, per Iacobucci J.;
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 578.
[21] This judgment stands
for the proposition that it must be presumed that, when referring to sale,
Parliament intended that this word be interpreted by referring to the general
law of sale.
[22] In my opinion, in the
case at bar, "sale" must be analyzed in the light of the Quebec civil
law where the applicable provincial law is that of Quebec. On this point, suffice
it to read the decision of the Federal Court of Appeal in St‑Hilaire v.
Canada, [2004] 4 F.C. 289 (F.C.A.) and section 8.1 of the Interpretation
Act (R.S.C., c. I-21) to find that proposition irrefutable.
[23] According to article
1708 of the C.C.Q., there is a sale when:
(i) the
seller transfers ownership of property to another person; and
(ii) in exchange
for the transfer of ownership, the buyer obligates himself to pay a price in
money.
[24] Therefore, article 1708
of the C.C.Q. requires that the Court deal with the following two issues:
(i) First
of all, did the Appellant acquire ownership of the unprocessed industrial waste
from its suppliers? In the years concerned, according to the environmental
statutes then applicable to the ownership of industrial waste, was the
Appellant actually only in temporary possession of this industrial waste and
therefore could not transfer the ownership of processed industrial waste to
third parties?
(ii) Secondly,
were third parties required to pay the purchase price in money in exchange for
the transfer of ownership of the processed industrial waste?
[25] Although the first
question is of considerable interest, I am of the opinion that it is not
necessary to answer it to determine if the contracts concluded between the
Appellant and third persons in this case were actually contracts of sale within
the meaning of article 1708 C.C.Q. Indeed, even if I ruled that the suppliers
had transferred ownership of the industrial waste to the Appellant and that the
Appellant could therefore in turn transfer ownership of the processed
industrial waste to third parties, these contracts nevertheless cannot be qualified
as contracts of sale, because in the first case the Appellant had no obligation
to pay the purchase price in money to its suppliers, and in the second case the
third parties had no obligation to pay a purchase price in money to the
Appellant. Indeed, in the first case, the evidence showed that it was the
suppliers who paid the Appellant so that it could acquire ownership or take
possession of their industrial waste, while in the second case, the evidence
showed that it was rather the Appellant who paid the third parties so that they
could acquire ownership or take possession of the processed industrial waste.
[26] As regards the
Appellant's implicit argument to the effect that the contracts concluded with
suppliers or third persons, as the case may be, had to be contracts of sale
because they could not be qualified as contracts for services, it is in my
opinion incorrect. The provisions of the C.C.Q. do not in any way lead to the
conclusion that a contract must be a contract for services if it cannot be
characterized as a contract of sale.
[27] As regards the
Appellant's implicit argument to the effect that the contracts concluded with
its suppliers or third parties could not be qualified as contracts for services
because, in both cases, they involved a transfer of ownership of industrial
waste between the parties, I am of the opinion that it is just as incorrect. Article
2098 C.C.Q. does not in any way specify that a contract cannot be a contract for
services when there is a transfer of ownership between the parties.
[28] In this case, the
contracts concluded between the Appellant and third parties were, in my
opinion, contracts for services within the meaning of article 2098 C.C.Q.,
in that the third parties undertook to become owners or to take possession of
the industrial waste which the Appellant had processed for the purpose of
avoiding environmental liability related to its ownership for a price the
Appellant was required to pay them.
[29] There is no doubt in
this case that the Appellant processed industrial waste and made a profit from
it. However, the profit that the Appellant made from processing this industrial
waste was definitely not made under a contract of sale, but rather a contract
for services. In other words, I cannot allow the deduction, because the
processed industrial waste was not for sale and therefore does not fall within
subsection 125.1(3) of the Act.
[30] Given the controversies
bearing on our planet's survival, the Appellant's industry possibly deserves to
be encouraged. If Parliament decided it should be, in my opinion, it would have
to use a criterion other than "goods for sale", that is, one based on
the source of the taxpayer's profits.
[31] For these reasons,
the appeals are dismissed with costs.
Signed at Ottawa,
Canada, this 1st day of May, 2007.
"Paul Bédard"
Translation certified true
on this 20th day of February 2008.
François Brunet, Revisor
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