Continental Lime Ltd. v. R, 99 DTC 1154, [1999] 3 CTC 2525 (TCC)

McArthur T.C.J.:

During the Appellant’s 1991, 1992 and 1993 taxation years, the Appellant paid a total of $342,726 in legal fees defending a lawsuit. The primary issue is whether the expense was incurred for the purpose of gaining or producing income from a business or property. A secondary and unrelated issue is whether certain load and haul and packaging expenses are allowable for the purpose of the calculation of the manufacturing and processing deduction pursuant to subsection 125.1 ( 1 ) of the Income Tax Act and Regulation 5202 of the Act.

With respect to the first issue, for the most part the facts were not in dispute and an agreed statement of facts was filed. This was supplemented by the evidence of Wayne J. Wagner, the chief financial officer of the Appellant, Robert J. Mair, the Appellant’s legal counsel, and William M. Everett, one of the litigation lawyers who acted for the Appellant in defence of the lawsuit.

The Appellant is in the business of mining limestone from which it produces lime. It is the largest producer of lime in Western Canada and it has quarry sites and production plants in Manitoba, Alberta and British Columbia. Very briefly, the facts can be summarized as follows. In 1983, Candou Industries Ltd. went bankrupt owning 17% of the shares of Steel Brothers Canada Ltd. (“SB Canada”) which was the predecessor of the Appellant. Steel Brothers Canadian Holdings Ltd. (“SB Holdings”) owned the remaining shares. Candou had pledged the shares to the Bank of Montreal. The Bank, together with the bankruptcy trustee for Candou, sold the shares to SB Holdings for $6,000,000. In 1989, these shares were sold by SB Holding’s successor for in effect $34,000,000. [1] Med Finance, claiming to be a creditor of Candou, sued the Appellant claiming the Bank’s sale was made at a substantial undervalue and claimed damages. The Appellant successfully defended the action but was out-of-pocket $342,726 in legal fees which it attempted to deduct from its non-capital income. The agreed statement of facts filed by the parties contains the following:

4. At all relevant times, the operations of the Appellant generally consisted of the following:

(a) stripping overburden from the land;

(b) blasting and drilling the underlying limestone;

(c) loading the resulting chunks of limestone onto industrial dumptrucks and then hauling the limestone to the crusher, approximately one-half mile at the Pavillion and Faulkner sites and eight miles at the Exshaw site:

(d) crushing the limestone into small pieces, approximately 2 inches by /4 inch large:

(e) feeding the limestone into a kiln and heating the limestone to very high temperatures (note: when the limestone is heated its composition changes from calcium carbonate (CAO to calcium oxide (CAO) and the limestone becomes lime); and

(f) depending on the customer’s order, the lime may be sold in bulk or may be required to be bagged in five-ton bags.

5. On November 10, 1989 a company by the name of Med Finance Co. S.A. (“Med Finance”) commenced a legal action against the Appellant and several other parties. The Appellant was included in the lawsuit because it was the successor by amalgamation of Steel Brothers Canada Ltd. (“SB Canada”), and Steel Brothers Canadian Holdings Ltd. (“SB Holdings”). The lawsuit arose from the following facts;

(a) Med Finance was, at all material times, a creditor of a company by the name of Candou Industries Ltd. (“Candou”).

(b) Candou owned approximately 17% of the shares of SB Canada. SB Canada operated a lime, limestone aggregate and construction materials business. Candou had pledged the shares owned by it in SB Canada (the “Shares”) to the Bank of Montreal (the “Bank”) as security for monies advanced to Candou by the Bank pursuant to various commercial arrangements. The remaining shares of SB Canada were owned by SB Holdings.

(c) In 1983, following the bankruptcy of Candou, the Bank sold the Shares to SB Holdings, so that SB Canada became substantially a wholly-owned subsidiary of SB Holdings.

6. By Agreement dated May 5, 1989, all of the shares of SB Holdings were sold to a third party, 360283 B.C. Ltd., a wholly-owned subsidiary of Graymont Ltd.

7. The Appellant is the company that emerged from an amalgamation between, among other companies, SB Holdings, SB Canada, and 360283 B.C. Ltd. (the “Amalgamation”) and thus was liable for any obligations incurred by SB Holdings and SB Canada. The Amalgamation Agreement was dated June 15, 1989 and the Certificate of Amalgamation was issued on July 4, 1989.

8. All of the shares of the predecessor companies of the Appellant, including the Shares, disappeared as a result of the Amalgamation.

9. In the court action commenced by Med Finance against the Appellant, Med Finance claimed that the Bank’s sale of the Shares to SB Holdings was made at a substantial undervalue, and claimed damages against the Appellant resulting from “negligent representations, fraudulent representations, and conspiring to understate the value of the Shares and to cause the Sale at an undervalue”.

10. On the 21st day of July, 1994 the Supreme Court of British Columbia dismissed the action against the Appellant and the other Defendants. The Judgment of the Court awarded costs to the Appellant and to the other Defendants. However, only a fraction of the Court awarded costs were recovered by the Appellant because Med Finance was a Panamanian company without exigible assets in the jurisdiction.

1 1. Med Finance filed an appeal to the British Columbia Court of Appeal,

and on the 1st day of November, 1994 Med Finance abandoned its appeal.

12. In the course of defending itself from the lawsuit brought by Med Finance, the Appellant incurred and paid legal fees in 1991, 1992 and 1993 in the amount of $22,826, $100,039, and $219,861 respectively (collectively, the “Legal Fees”).

13. In computing its income for its 1991, 1992 and 1993 taxation years, the

Appellant deducted the Legal fees as follows:
Taxation year	Legal Fees Deducted
199]	$ 22,826
1992	100,039
1993	219,861
Total:	$342,726

14. In computing its income for its 1992, 1993, and 1994 taxation years, the Appellant deducted certain amounts relating to “load and haul” and “bagging” activities under section 125.1(1) of the Income Tax Act (the “Act”) as manufacturing and processing activities.

Med Finance’s action, if successful, would have amounted to a judgment against the Appellant of $23,000,000 plus interest. The trial of the issues lasted 24 days. The Respondent denied the Appellant’s deduction of $342,726 [2] in legal fees paid over three years.

Position of the Appellant

Re: Legal fees

The Appellant maintains that it was obliged to pay legal fees to defend itself and its director, Mr. A.D. Laird, from the lawsuit in order to protect its business reputation and its profit-making structure to enable it to continue to carry on its business and that the fees are deductible pursuant to section 9 of the Act.

In the lawsuit brought by Med Finance, the title to the shares purchased by SB Holdings was not challenged. It therefore follows that the legal fees paid by the Appellant did not give rise to any new asset, nor were they paid to preserve title to an asset. The shares of SB Canada had disappeared after the 1989 amalgamation and, therefore, the fees were not paid to preserve a capital asset.

The legal action was frivolous and vexatious which essentially amounted to a form of blackmail against the Appellant. The Appellant was obliged to defend the legal action, both on its own behalf and on behalf of its director, Mr. Laird, to protect its business reputation. Counsel relied heavily on the reasoning of Iacobucci J. in Symes v. /?. [3]

Re: Manufacturing and Processing Tax Deduction

The Appellant maintains that the production of limestone is limited to activities of blasting, quarrying and removing of limestone from a limestone quarry to be stockpiled for further processing. The processing of limestone begins with the transportation of limestone from the quarry to the first stage manufacturing and processing operation, which includes crushing and screening of the quarried limestone. The Appellant maintains that such transportation (the load and haul activities) constitute qualified activities within the meaning of Regulation 5202 of the Act in that such activities relate to the receiving and storing of raw materials or in the alternative, that they relate to all other activities that are performed in Canada directly in connection with manufacturing or processing.

The Appellant further maintains that the packaging of lime is an integral part of producing its finished product — packaged lime. Although the Appellant also sells lime in bulk, it is necessary to package lime in a form which may be readily marketable to certain customers. The packaging of lime is required in order to facilitate the sale of lime to those customers who do not wish to buy lime in bulk and consequently, packaging is an essential element of the product sold to certain customers. The packaged lime is a product which is sold by the Appellant to its customers. The bagging or packaging operations are properly classified as costs incurred in qualified activities as defined in Regulation 5202 of the Act. Specifically, qualified activities include the inspecting and packaging of finished goods and consequently, packaging is a qualified activity within the meaning of Regulation 5202 to the Act.

Position of the Respondent

The Respondent submits that the disallowed legal fees are not expenses incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act but were expenses of a capital nature.

The Respondent further submits that the load and haul operations of the Appellant are included in the activity of producing industrial minerals undertaken by the Appellant and the associated costs are therefore excluded from the definition of manufacturing or processing pursuant to subsection 125.1(3) of the Act. Further, the Respondent submits that the load and haul operations and the bagging of lime are not qualified activities pursuant to the definition in Regulation 5202 of the Act and the capital assets and labour associated with the cost centres load and haul and bagging of lime are not allowable expenses for the purpose of calculation of the manufacturing and processing deduction.

Legislation — Legal Fees

The Appellant relied primarily on subsection 9(1) which reads as follows:

9(1) Subject to this Part, a taxpayer’s income for a taxation year from a business

or property is the taxpayer’s profit from that business or property for the year.

The Respondent relied on subsection 18(1) which reads as follows:

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Analysis with respect to the legal fees

To succeed the Appellant must establish on a balance of probabilities that the fees were incurred for the purpose of gaining or producing income from a business or property, pursuant to paragraph 18( 1 )(rz) of the Act. The Respondent contends that the fees were incurred for the purpose of preserv- ing a capital asset of the Appellant and as such, an outlay of a capital nature is not deductible against income.

The thrust of the Appellant’s submissions was that the fees were deductible under subsection 9(1) of the Act in keeping with generally accepted accounting principles. Counsel stated that section 9 presupposes that business expenses have been deducted and the fees were an expense incurred in the ordinary course of the Appellant’s business. Mr. Wagner, who is the Appellant’s chief accountant, stated in effect that the fees were expended to protect the company from a substantial claim that, if successful, may well have hindered the company from carrying on business. He added that legal fees are generally regarded, in accounting principles, as income expenses.

No doubt subsection 9(1) permits deductions before computing profits from a business. The Appellant’s counsel referred the Court to Symes, supra, wherein the taxpayer sought to deduct child care expenses. Iacobucci J. stated at pages 6009 and 6010:

Thus, in a deductibility analysis, one’s first recourse is to subsection 9(1), a section which embodies, as the trial judge suggested, a form of “business test” for taxable profit.

This is a test which has been variously phrased. As the trial judge rightly noted, the determination of profit under subsection 9(1) is a question of law: Neonex International Ltd. v. The Queen, [1978] C.T.C. 485 (F.C.A.). Perhaps for this reason, and as Neonex itself impliedly suggests, courts have been reluctant to posit a subsection 9(1) test based upon “generally accepted accounting principles” (G.A.A.P.): see also “Business Income and Taxable Income” (1953 Conference Report: Canadian Tax Foundation) cited in B. J. Arnold and T. W. Edgar, eds., Materials on Canadian Income Tax (9th ed. 1990), at page 336. Any reference to G.A.A.P. connotes a degree of control by professional accountants which is inconsistent with a legal test for “profit” under subsection 9(1). Further, whereas an accountant questioning the propriety of a deduction may be motivated by a desire to present an appropriately conservative picture of current profitability, the Income Tax Act is motivated by a different purpose: the raising of public revenues. For these reasons, it is more appropriate in considering the subsection 9(1) business test to speak of “well accepted principles of business (or accounting) practice” or “well accepted principles of commercial trading”.

Adopting this approach to deductibility, it becomes immediately apparent that the well accepted principles of business practice encompassed by subsection 9(1) would generally operate to prohibit the deduction of expenses which lack an income earning purpose, or which are personal expenses, just as much as subsections 18( 1 )(a) and (h) operate expressly to prohibit such deductions. For this reason, there is an artificiality apparent in the suggestion that one can first examine subsection 9(1) in order to determine whether a deduction is authorized, and can then turn to subsection 18(1) where another analysis can be undertaken:...

In other cases, including the present case, however, the real issue may be whether a deduction is prohibited by well accepted principles of business practice for the reason that it is not incurred for the purpose of earning income, or for the reason that it is a personal or living expense. In such cases, any treatment of the issue will necessarily blur subsection 9(1) with subsections 18(1)(a) and (h).

Emphasis in original.

Mr. Wagner, while not an independent witness, was impressive and credible. His evidence was not contradicted. He stated that the legal expenses are deductible pursuant to accepted business and accounting practices. The issue narrows down to, as lacobucci J. stated, “whether a deduction is prohibited by well accepted accounting principles of business practices for the reason that it is not incurred for the purpose of earning income”. Iacobucci J. further stated that there are no tests, courts must look for objective manifestations of purpose which is a question of fact to be decided with due regard to all of the circumstances.

Counsel for the Appellant submitted several cases in support of his position. In Minister of National Revenue v. Kellogg Co.,^ [4] affirmed by the Supreme Court of Canada, [5] the Kellogg Company incurred legal fees defending its registered trademark. The Court found the legal expenses deductible. Maclean J. stated at page 554:

...Here, Kellogg had encountered a business difficulty, one associated directly with the sales branch of its business, which it had to get rid of, if possible, in order to continue the sales of its products as it had in the past....

In a similar manner, Continental Lime met a business difficulty which it had to dispose of to continue as it had in the past. The Respondent’s argument that the Appellant’s legal expenses are too remote from its business does not reflect commercial reality. As part of carrying on its business, the Appellant had to defend a lawsuit claiming millions of dollars and fraud for acts of its predecessor. There is nothing remote with respect to a lawsuit for significant damages that would have severely affected its earning capacity let alone the accusations of fraud.

Counsel for the Appellant referred the Court to Hudson’s Bay Co. v. Minister of National Revenuef [1] in which some competitive companies at- tempted to carry on business in a similar name. Hudson’s Bay deducted legal fees paid to defend its name. At page 992-3, Angers J. held:

... These costs and expenses were not laid out with the object of acquiring or bringing into existence an asset; they were made in the ordinary course of preserving and maintaining the trade of the appellant and safeguarding it from the diversion thereof by a party misusing the appellant’s name. 1 do not believe that these costs and expenses can be considered as a capital outlay.

The statements of Mclean J. in Kellogg and Angers J. in Hudson’s Bay apply equally to the present situation. The Appellant’s legal fees were made in the ordinary course of maintaining its business and were not a capital outlay.

Counsel for the Appellant further referred the Court to Premium Tron Ores Ltd. v. Minister of National Revenue, [7] wherein the taxpayer sought to deduct legal expenses incurred from seeking legal advice when it learned it may be liable to pay United States taxes. Justice Hall stated at pages 5286 and 5287:

A company such as the appellant exists to make a profit. All its operations are directed to that end. The operations must be viewed as one whole and not segregated into revenue producing as distinct from revenue retaining functions, otherwise a condition of chaos would obtain....

“The income” surely means the net receipts over disbursements in the taxation year in the totality of the taxpayer’s business as an on-going concern other than capital expenditures, gifts and the like. I can see no reason to regard legal expenses as differing from other expenses in that they differ solely by the fact that they are disbursements paid to lawyers as distinct from payments made to auditors or to accountants and others for work done in preparing the yearly income tax returns, or premiums paid for insurance to indemnify the taxpayer from loss by fire or from negligence or liability imposed by law. In my view, no distinction is to be drawn between proper legal expenses and other business expenses. All must be tested by the same standards.

The Respondent relied, for the most part, on the approach taken in Poulin c. /?.. [8] Mr. Poulin, a real estate agent, was sued alleging fraud and misrepresentation while negotiating a real estate transaction. The Court denied Mr. Poulin the deduction of legal expenses incurred and damages he paid to his clients. At page 381, Marceau J. stated:

In order for such a payment, which in itself, of course, is not made for the purpose of earning a profit, to be nonetheless considered to meet the require- ment in paragraph 18(1)(a) of the Act, it must be seen as the unfortunate consequence of a risk that the taxpayer had to take and assume in order to carry on his trade or profession. And in order for the payment to be seen as such, it is an essential condition, 1 believe, that it be directly related to an act that was necessary in order to carry on the trade or profession and that it could potentially have

N	onsiderec to have been erformed improper

Emphasis added.

He stated further at page 382:

However, while it must be admitted that the commission of an involuntary fault in performing an act that is necessary for carrying on a trade or profession is inevitable, and accordingly that the obligation to pay compensation is a risk inherent in that activity, we cannot extend the idea to the commission of a delict in the civil law sense, to the commission of a reprehensible act committed deliberately with the aim of causing damage. The delictual act cannot in that case be considered as being necessary for carrying on the trade or profession. It was committed while carrying on the trade or profession, but it is completely foreign to it. There is therefore no ground for arguing that, in this case, the payment of an award of damages meets the requirement in paragraph 18(1 )(«) of the Act.

Marceau J. indicates that a legal expense is deductible if incurred to defend an involuntary fault and such a defence is important to carrying on business. The present Appellant did not commit a deliberate delict or wrong with the aim of causing damage. The Appellant was joined in a legal proceeding because it was the successor of SB Holdings and SB Canada. The Supreme Court of British Columbia concluded that the Appellant and its predecessors did not fraudulently misrepresent Candou or Med Finance. In dismissing the action, Edwards J. stated in his Reasons for Judgment [9] at page 33:

...I find that Holdings and Laird made no misrepresentation by not disclosing those things the Trustee already knew, or which Mr. Drake acknowledged would not have affected the trustee’s view of the valuation. In any event, the things Med argued ought to have been disclosed would not necessarily, on Mr. Drake’s evidence, have led the Trustee to decline to approve the sale. Nor did Holdings’ provision of the valuation without disclosure of instructions or conditions accepted by Deloitte amount to misrepresentation. All Holdings can be taken to have said, in effect, by providing the valuation to the Trustee, is: “Here is what we believe to be a professional valuation.”

Poulin, supra, can be distinguished in that the taxpayer committed “an intentional unlawful act, a deliberate act committed with the aim of causing damage”. For these reasons, the Federal Court of Appeal found that Mr. Poulin’s payment of legal fees did not meet the requirements of paragraph 18( 1 )(a) of the Act. The present Appellant made no misrepresentation nor did it commit a deliberate unlawful act. It had to defend an involuntary lawsuit to permit it to continue on in business as it had been accustomed.

The defendants to the Med Finance action were Bank of Montreal, Deloitte, Haskins & Sells Limited, Deloitte, Haskins & Sells Limitée, Deloitte, Haskins & Sells, Chartered Accountants, a firm, the Appellant and A.D. Laird. Med Finance was incorporated under the laws of Panama and had no assets in British Columbia where it commenced the lawsuit and claimed general damages against the Appellant and Mr. Laird, a director of the Appellant, which may have totalled $23,000,000, plus interest and costs. Prior to trial, Med Finance attempted to settle with the Appellant for $1,500,000 and reduced that amount to as low as $500,000, with the Appellant refusing to settle. On the first day of trial, Med Finance dropped its claim of fraudulent misrepresentations.

The Respondent called no witnesses. The logical conclusion is that the Med Finance action was an adventurous flyer with little merit, commenced by a foreign corporation with anonymous directors and shareholders. Mr. Wagner for the Appellant was an impressive witness and I accept his evidence to the effect that the action had to be defended to protect its profitability and to protect the reputation of the Appellant Approximately 80% of its business is done with 10 major customers. Surely, the Appellant had to defend the accusations of fraud and misrepresentation and conspiracy. In an examination for discovery read in as evidence, Mrs. S.E. Dow, on behalf of Revenue Canada, agreed that a bad business reputation would harm the Appellant’s income. The action was apparently triggered upon Med Finance learning of the sale of the Appellant in 1989 for $200,000,000. Converting the share value back to 1983, Candou’s 17% would have been $34,000,000 as opposed to $6,000,000. After a 24-day trial, the Supreme Court of British Columbia found no merit in Med Finance’s argument.

In Poulin, supra, Marceau J. found that the taxpayer had deliberately committed an unlawful act and decided the case on that basis. In the present appeals, the legal expenses were incurred to defend an unfounded claim for damages and that claim arose in the course of the Appellant’s normal business activity.

Med Finance was demanding more money from the Appellant for the shares they purchased years earlier from the Bank of Montreal and Deloitte Haskins. In defending the lawsuit, the Appellant was not acquiring or pre- serving an enduring benefit. It was protecting its income. The Appellant was entitled to the shares purchased from the Bank of Montreal. It owned the shares and was not trying to buy them nor was Med Finance trying to acquire them. Med Finance was after money from the Appellant, that the Appellant required to carry on its normal operations. Surely, it is an accepted principle of commercial trading that a business would defend itself from a substantial lawsuit that if successful, would have severely restricted the company from earning income. With respect to the legal expenses, the appeals are allowed.

Re: Manufacturing and Processing

Legislation

Both parties referred the Court to subsection 125.1(3) of the Act and subparagraphs 5202(«)(ii) and (iv) and paragraph 5202(b) of the Regulations, which read as follows:

125.1(3) In this section,

“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

(e) extracting minerals from a mineral resource,

5202 In this Part, ... “qualified activities” means:

(a) any of the following activities, when they are performed in Canada in connection with manufacturing or processing ... in Canada of goods for sale or lease:

(ii) receiving and storing of raw materials,

(iv) inspecting and packaging of finished goods,

(b) all other activities that are performed in Canada directly in connection with manufacturing or processing ... in Canada of goods for sale or lease,...

Analysis

The Appellant claims a manufacturing and processing profits tax credit in respect of the transportation of limestone from its quarries to its plants, as well as the bagging of lime, the finished product, at the plant. It must be determined where “manufacturing and processing” begins and ends. The Respondent submits that it does not begin with the transportation eight miles by truck from the quarry to the crusher and that it does not include the bagging of lime because bulk lime is the finished product of the Appellant [10] and is in marketable form before bagging. Counsel for the Respondent quoted Justice Linden in Tenneco Canada Inc. v. Z?., [11] as follows:

..Only those operations which significantly change the character of the goods can truly be described as “manufacturing” or “processing” so as to qualify for the special tax incentives.

The Appellant owns three limestone quarries, one is in Falconer, Manitoba, a second in Exshaw, Alberta and the third in Pavillion, British Columbia. The load and haul distances for Falconer and Pavillion operations are insignificant in that they are short distances from the quarry where the limestone is blasted to the lime plant. It is of significance at Exshaw where the limestone has to be loaded in large trucks and hauled eight miles. Is this load and haul to be included under “manufacturing and processing”? Where do you draw the line?

The legislative guidelines are complex. The Appellant submits it falls within the ambit of subparagraphs 5202(«)(ii) and (iv) or paragraph 5202(b) of the Regulations. To be a “qualified activity”, the activity must be performed in connection with manufacturing and processing and must not be included in the activities listed in paragraphs 125.1(3)(a) to (k) of the Act. The words manufacturing and processing are not precise and are almost synonymous. I accept that the manufacturing and processing credit legislation is intended to be a tax incentive to assist manufacturers and processors to maintain a competitive position creating and protecting Canadian jobs. [12] I believe the words manufacturing and processing are to be given a broad interpretation.

The Act does not clearly define what consists of “manufacturing and processing” activities. With the enactment of section 125.1 in 1972, the then Finance Minister stated:

Any attempt to catalogue all of the varied activities to be found in Canadian industry would be arbitrary, incomplete and quickly obsolete. Furthermore, such a list would preclude taxpayers from access to the courts to argue that a particular activity should be considered eligible. The government’s view is that the proposed approach will prove to be more flexible and more favourable to taxpayers and will ensure that the purpose of the budget proposals is achieved.

In Harvey C. Smith, supra, Brulé J. referred to the above comment. It would appear that the legislature intended that a generous interpretation be given to section 125.1. In the Harvey C. Smith case, the Courts [13] found that the druggist who took large quantities of pills and put them into small containers was not carrying a manufacturing and processing operation.

Section 125.1 specifically provides that producing industrial minerals is excluded from the meaning of manufacturing and processing. As described by Mr. Wagner on behalf of the Appellant, the Appellant clears off the overburden, drills into the limestone and blasts. The limestone falls onto a prepared ledge or shelf referred to as a bench. That is the production of industrial minerals. The production of limestone is complete when it is blasted and released from the bedrock and ready for pick-up. I find that the processing commences when this limestone is loaded into a truck and taken to the crusher. These activities are an essential part of the processing of lime.

Both counsel referred the Court to Nova Scotia Sand & Gravel Ltd. v. R.,' [14] wherein the issue was whether the whole operation of the taxpayer is that of “producing industrial minerals”. The taxpayer was in the business of excavating, extracting, washing, drying, crushing, sorting and bagging sand and rocks for resale. The Court found that the taxpayer was not engaged in producing industrial minerals but rather it was engaged in a processing operation. The Federal Court of Appeal concluded that the expression “producing industrial mineral” should not encompass all activities related to the production of minerals. It also concluded that this phrase should be con- strued narrowly. It follows that “producing” does not include “processing”. Clearly, the operations of a taxpayer can consist both of a “producing” aspect as well as a “processing” aspect.

Counsel for the Respondent referred to Range Grain Co. v. R. [15] The Court found that the grain elevator used by the taxpayer was not part of processing but was for transportation purposes. It was not for improving or changing the grain. The present case is easily distinguished because the transportation of limestone, an industrial material produced after blasting, is the commencing of the processing activity.

Paragraph 4(e) of the Agreed Statement of Facts described the process used to produce lime or quick lime. [16] Once the limestone has been extracted into pieces that permit a front-end loader to load a truck, it cannot be sold in that industrial form. It then begins the process of being converted to a different state. Therefore, the limestone is the raw material used by the Appellant in processing its final product which is lime, falling squarely within the ambit of “qualified activity” under section 5202 of the Regulations. At all material times, the Appellant was in the business of producing lime, which is not an industrial mineral, but a derivative of the limestone after using a complex process of heating. One could argue that the limestone extracted from the quarries is marketable at that point, but the test in Tenneco, supra, refers to “more marketable”. Therefore, processing the limestone and making lime from it, certainly makes the limestone more marketable, since lime has “major applications in the manufacture of glass, concrete and in agriculture”. Furthermore, after the heating process, the limestone has changed its form and characteristics.

At some point, the Appellant ceased producing limestone and commenced manufacturing and processing lime. I find as a fact that that point is after the blasting of the rock to produce limestone which is then ready to be picked up for processing. If the Appellant was in the exclusive business of producing limestone and delivering the limestone to customers, I would then conclude that the transportation is not a processing activity because the limestone is not processed or changed in any way. This is not the présent situation. The Appellant is in the business of producing lime. To do 50, it has to pick up the raw product and deliver it to its plant which is “receiving and storing of raw materials” as envisaged in subparagraph 5202(ti)(ii). The limestone was extracted and produced within the meaning of subsection 125.1(3) after blasting and it lay on the bench ready to commence the process of converting it into lime.

The determination of when the “producing industrial materials” ends is not an exact science. I believe the line drawn by the Respondent, which is after the transportation of limestone to the crusher, does not reflect the true picture. Each case is to be viewed on its own merits and the entire operations taken as a whole. The processing begins after the limestone is ready for transportation. Had the processing plant been next to the bench upon which the limestone had fallen after blasting, there would be no question that the production of the industrial metal, limestone, ended at that point. Why penalize the Appellant for having to transport the product eight miles. The purpose of the legislation is to assist manufacturers and processors. A narrow interpretation of manufacturing and processing unnecessarily restricts that intention.

In conclusion, the transportation of the limestone to the different plants is part of the processing and is a qualified activity under section 5202 of the Regulations.

Dealing now with the final issue of bagging the lime, I conclude that it also qualifies under section 5202, subparagraph (iv) as a manufacturing or processing activity. The word processing is more applicable to bagging activity than manufacturing. The Canadian Oxford Dictionary 1998 defines process as “a series of stages in manufacture or some other operation”. Again, taking the entire activity into consideration, the bagging is a final stage of processing.

Both Counsel referred to Harvey C. Smith, supra, wherein a drugstore submitted that the activity of, in effect, packaging prescription capsules and tablets was “manufacturing and processing”. The Federal Court of Appeal concluded at page 5030 that there was no conversion of the original product from one state to another. This conclusion is understandable but can be distinguished from the present facts in that the Appellant converted limestone into lime. The fact that most of the lime is sold in bulk does not preclude the Appellant from claiming the bagging process. Approximately 20% of the lime is sold in five-ton bags. The bagging allows the Appellant to sell to customers who will only purchase the bagged product thus making it more marketable.

In Produits L.B. ( 1987) Ltée v. /?., [17] Lamarre Proulx T.C.C.J. considered the question of whether the packaging of animal food was a processing activity. Her Honour states at page 1545:

Packaging is considered as the final phase of manufacturing activities. Packaging is not in itself a manufacturing or processing activity, but it is such an activ bottling pills that are purchased from a pill manufacturer is not a manufacturing Or processing activity, but it may be considered as such for the manufacturer.

ity when 1

2s at

the nd of

the goods production line. Thus, for example,

Emphasis added

Her Honour concluded that the shelves used to store the packaged bags are part of manufacturing and processing activities. Applying the principle enunciated by Lamarre Proulx J., the bagging of the lime is the end of the production line. Whether the lime is delivered in truckloads to the customer or packaged in bags, the lime has to be in some form of container. Therefore, the bagging of the lime is part of the processing activity. The bagging activity is a processing activity and falls within the definition of “qualified activities” as set out in subparagraph 5202(a)(iv) of the Regulations. The appeals are allowed, with costs.

Appeal allowed.