Cullen,
J.:
—This
is
an
appeal
from
reassessments
of
tax
for
the
plaintiff's
1977,
1978
and
1979
taxation
years.
In
these
reassessments
the
Minister
of
National
Revenue
(the
Minister):
1.
reduced
the
manufacturing
and
processing
tax
deduction
claimed
by
the
plaintiff
under
section
125.1
of
the
Income
Tax
Act
(the
Act)
in
respect
of
the
plaintiff's
1977
taxation
year
and
disallowed
the
same
deduction
in
respect
of
the
plaintiff's
1978
and
1979
taxation
years;
2.
disallowed
in
part
the
investment
tax
credits
claimed
by
the
plaintiff
under
section
127
of
the
Act,
in
respect
of
the
plaintiff's
1977,
1978
and
1979
taxation
years;
and
3.
disallowed
accelerated
capital
cost
allowance
on
a
portion
of
the
plaintiff's
machinery
and
equipment
in
respect
of
the
plaintiff's
1977,
1978
and
1979
taxation
years.
The
plaintiff
is
a
corporation
constituted
under
the
laws
of
the
Province
of
Alberta
by
certificate
of
amalgamation
dated
August
1,
1970.
The
plaintiff
is
in
the
business
of
oil
well
servicing
and
in
the
evidence
and
statement
of
claim,
the
plaintiff
described
its
business
activities
as
including
the
preparation
and
sale
of
special
mixtures
of
cement,
fracturing
materials,
acid
and
nitrogen.
The
defendant
disputes
that
the
plaintiff's
business
activities
included
the
preparation
and
sale
of
these
special
mixtures.
In
calculating.
its
income
for
1977,
1978
and
1979
the
plaintiff
claimed
a
manufacturing
and
processing
deduction
under
section
125.1
of
the
Act,
an
investment
tax
credit
under
section
127
of
the
Act,
and
accelerated
capital
cost
allowance
on
machinery
and
equipment
as
assets,
included
in
class
29
of
Schedule
B
to
the
Act
(now
Schedule
11).
Plaintiff's
Position:
The
plaintiff
maintains
that
it
carried
on
a
manufacturing
and
processing
business
the
profits
of
which
qualified
for
the
deduction
provided
for
in
section
125.1
of
the
Act,
and
further,
that
its
business
activities,
namely
the
preparing
and
sale
of
special
mixtures,
constitute
manufacturing
or
processing
in
Canada
of
goods
for
sale
or
lease
within
the
meaning
of
section
125.1
of
the
Act.
In
its
notice
of
objection,
the
plaintiff
argued
that
its
products
were
"goods"
and
that
the
preparation
of
these
products
constitutes
the
manufacturing
and
processing
in
Canada
of
goods
for
sale.
The
plaintiff
also
maintained
that
it
derived
ten
per
cent
or
more
of
its
gross
revenue
from
all
active
business
carried
on
in
Canada
from
the
selling
or
leasing
of
the
products.
The
plaintiff
contends
that
it
made
expenditures
on
qualified
property
within
the
meaning
of
subsection
127(10)
of
the
Act
and
therefore
was
entitled
to
investment
tax
credit
provided
for
in
the
said
section.
Finally,
the
plaintiff
contends
that
it
owned
depreciable
property
(equipment
and
machinery)
which
it
had
acquired
for
use
in
its
business
(i.
e.,
the
manufacturing
or
processing
in
Canada
of
goods
for
sale
or
lease)
such
that
it
falls
within
the
depreciable
property
described
in
class
29
of
Schedule
B
to
the
Regulations
under
the
Act.
Defendant's
Position:
In
reassessing
the
plaintiff,
the
defendant
proceeded
on
the
basis
that
the
plaintiff
carried
on
the
business
of
“a
well
servicing
company".
As
indicated
earlier
the
defendant
disputes
that
the
plaintiff's
business
activities
included
the
preparation
and
sale
of
special
mixtures
of
cement,
fracturing
materials,
acid
and
nitrogen.
The
defendant
contends
that
the
plaintiff
did
not
manufacture
or
process
goods
for
sale
or
lease
and
therefore
does
not
qualify
for
the
manufacturing
and
processing
tax
deduction
provided
for
by
section
125.1
of
the
Act.
In
the
alternative,
the
defendant
submits
that
during
the
taxation
years
in
question
the
plaintiff's
active
business
income
did
not
include
income
attributable
to
manufacturing
or
processing
as
less
than
ten
per
cent
of
its
gross
revenues
from
the
selling
or
leasing
of
goods
manufactured
or
processed
in
Canada
by
it,
and
the
manufacturing
and
processing
in
Canada
of
goods
for
sale
or
lease
other
than
goods
for
sale
or
lease
by
it.
Thus,
the
defendant
maintains,
the
plaintiff
does
not
qualify
for
the
tax
deduction
provided
for
by
section
125.1
of
the
Act.
The
defendant
further
contends
that
the
plaintiff
did
not
own
or
acquire
any
property
to
be
used
primarily
for
the
purpose
of
manufacturing
or
processing
of
goods
for
sale
or
lease
or
any
other
qualified
property
within
the
meaning
of
subsection
127(10)
of
the
Act
and
therefore
the
plaintiff's
claim
for
investment
tax
credit
was
properly
disallowed.
The
defendant
also
maintains
that
the
plaintiff
did
not
own
or
acquire
any
property
to
be
used
directly
or
indirectly
by
it
primarily
in
the
manufacturing
or
processing
of
goods
for
sale
or
lease
or
any
other
property
properly
included
in
class
29
of
Schedule
B
and
therefore
that
portion
of
the
accelerated
capital
cost
allowance
relating
to
class
29
assets
was
properly
disallowed.
The
Main
Issues:
I
cannot
put
it
more
succinctly
than
counsel
for
the
plaintiff
describes
it
in
Volume
1,
page
11
of
the
transcript
of
the
trial:
My
Lord,
the
characterization
of
the
nature
of
the
business
carried
on
by
Nowsco
is
a
fundamental
and
underlying
issue
in
this
case.
In
the
plaintiffs
submission,
that
business
constitutes
the
processing
of
products
for
sale.
And
I
think
it
is
fair
to
say
that
the
difference
of
opinion
with
Her
Majesty
relates
to
the
fact
that,
in
Her
view,
the
business
of
Nowsco
constitutes
the
rendering
of
service
or
services
to
which
the
passage
of
title
to
goods
is
incidental
rather
than
the
actual
subject
matter
of
the
business
relationship.
Common
to
all
the
issues
is
the
question
whether
the
business
carried
on
by
Nowsco
in
Canada
involved
the
manufacturing
or
processing
of
goods
for
sale,
and
is
of
course
a
conclusion
of
law
to
be
based
on
all
the
evidence.
Background:
Both
parties
to
this
action
accept
that,
for
the
purposes
of
these
appeals,
the
oil
industry
in
Canada
may
be
divided
into
three
sectors:
(a)
the
operators
of
wells,
oil
and
gas
wells,
those
being
the
persons
who
own
the
right
to
take
the
oil
and
gas
from
the
well;
(2)
the
service
sector
which
includes
a
wide
range
of
companies
with
its
business
ancillary
to
the
actual
operation
of
oil
wells,
and
are
constituted
the
service
sector;
counsel
for
the
plaintiff
at
page
20,
Volume
1
of
the
transcript:
While
it
would
not
be
entirely
correct
to
say
that
a
service
company
is
one
which,
by
and
large,
carries
on
its
business
at
the
well
site,
I
am
instructed
that
that
is,
generally
speaking,
a
significant
characteristic
of
a
well
service
company.
I
mean
to
say
that
they
have
certain
other
ancillary
activities
that
are
not
necessarily
carried
on
at
the
well
site
but,
by
and
large,
the
activities,
apart
from
the
actual
pumping
of
oil
and
gas,
are
conducted
by
service
companies
on
behalf
of
the
owners
and
operators.
(3)
the
third
sector
is
the
supply
sector,
which
companies
are
in
the
business
of
supplying
"hardware"
to
both
the
operators
and,
to
some
extent,
the
service
companies.
It
was
evident
to
me
that
counsel
for
both
the
plaintiff
and
the
defendant
had
admirably
prepared
for
this
interesting
and
important
case.
We
are
dealing
here
with
the
taxation
years
1977,
1978
and
1979,
but
as
counsel
declared,
However,
the
issues
that
are
raised
in
these
appeals
have
continuing
importance
to
the
taxpayer,
as
I
will
try
to
indicate
in
a
moment.
There
are
claims
for
deductions
that
have
relevance
in
subsequent
periods.
And
accordingly,
there
will
be
some
evidence,
with
agreement
with
my
friend,
that
touches
on
later
years,
it
being
the
hope
of
the
parties
that
the
resolution
of
the
issues
for
these
years
will,
in
fact,
form
the
basis
for
resolving
the
similar
issues
in
subsequent
years.
It
is
therefore
not
surprising
that
the
introductory
comments
by
counsel
for
the
plaintiff
covered
the
issues
in
a
most
comprehensive
manner,
and
although
counsel
for
the
defendant
did
not
of
course
agree
with
the
submissions
vis-a-vis
the
nature
of
the
plaintiff's
business
activities,
there
was
no
real
dispute
with
respect
to
the
terminology
used
by
the
plaintiff's
counsel
in
his
introduction.
Rather
than
paraphrase
these
comments
I
will
simply
incorporate
them
here
as
the
basis
for
the
evidence
and
the
argument
of
both
counsel:
Nowsco
was
formed
to
carry
on
the
business
of
what
is
referred
to
in
the
oil
industry
[as]
a
well
service
company.
Its
original
business
involved
the
specialized
use
of
nitrogen
gas
in
what
is
referred
to
as
“well
stimulation”.
And
just
perhaps,
as
an
aside,
the
name
"Nowsco",
the
initials,
stand
for
Nitrogen
Oil
Well
Service
Company.
.
.
.
Having
been
formed
for
the
purpose
of
promoting
the
use
of
nitrogen
in
subsequent
years,
Nowsco
expanded
into
elated
well
stimulation
and
well
cementing
businesses.
In
the
case
of
stimulation,
if
Your
Lordship
would
imagine
a
hole
or
well
that
has
been
bored
to
some
considerable
depth
in
the
hope
and
expectation
of
tapping
a
deposit
of
oil
or
gas,
you
could
then
imagine
certain
types
of
activities
that
the
owners
or
operators
of
the
wells
might
find
useful
in
promoting
or
stimulating
the
flow
of
the
hydrocarbons
from
that
formation.
Now
there
are
a
number
of
very
sophisticated
techniques
for
achieving
that
stimulation.
They
will
be
described
in
the
evidence.
They
include
a
process
described
or
referred
to
as
“fracturing”
pursuant
to
which
a
specially
mixed
fluid
is
pumped
into
the
well
under
pressure
and
which
fractures
or
splits
the
hydrocarbon-bearing
deposit
or
formation
in
such
a
way
that
that
split
is
propped
open
with
what
is
referred
to
as
a
"proppant"
so
that
following
that
process
there
are
channels
in
the
formation
through
which
the
oil
can
flow.
A
second
activity
designed
to
stimulate
production
is
referred
to
as
“acidizing”.
The
purpose
of
acidizing
is
similar
to
that
of
fracturing;
that
is
to
say,
to
stimulate
production
from
the
well.
But
generally
speaking
in
the
case
of
acidizing,
the
process
or
the
stimulation
is
achieved
by
reason
of
the
action
or
interaction
of
the
acid
with
certain
materials
in
the
formation
so
as
to
dissolve
certain
of
those
materials
thereby
providing
the
channels
through
which
oil
and
gas
might
flow.
That
is
the
second
of
the
activities
that
fall
under
the
heading
of
stimulation.
There
is
a
third.
That
involves
the
use
of
a
gas,
nitrogen,
and
again,
the
history
of
the
use
of
nitrogen
is
one
which
has
shown
an
increasing
sophistication
as
to
the
applications
or
uses
to
which
it
may
be
put.
In
its
simplest
form,
nitrogen
which
is
transported
to
the
well
site
is
a
super
cold
liquid.
That
liquid
nitrogen
is
subjected
to
pressure;
is
heated
and
converted
to
a
gas;
the
gas
is
pumped
down
the
well
and,
in
the
course
of
that,
debris
and
other
matter
in
the
well
that
might
be
restricting
production
is
removed.
More
commonly,
I
believe,
My
Lord,
nitrogen
is
used
in
combination
with
other
fluids
and
chemicals,
particularly
in
those
activities
that
I
described
as
acidizing,
to
give
the
other
fluids
and
chemicals
special
properties
which
enhances
the
stimulation
process.
Thus
there
are
three
major
activities
that
fall
under
the
heading
of
stimulation
or
well
stimulation.
The
other
major
area
of
activity
is
well
cementing.
There
are
various
types
of
cementing:
.
.
.
cementing
is
a
process
which
is
designed
to
fill
the
cavity
that
exists
between
the
hole
that
is
drilled
in
the
ground,
into
the
formation,
and
the
steel
casing
that
is
inserted
into
that
hole
in
order
to
solidify
and
protect
the
casing;
in
order
to
prevent
the
interaction
of
various
fluids
that
might
be
in
the
formation
or
find
their
way
into
the
formation
with
other
parts
of
the
well;
and,
on
occasion,
to
close
off
non-producing
sections
of
a
well
from
producing
sections.
And
as
was
the
case
with
the
evolution
of
the
technology
of
fracturing
and
acidizing,
so
has
been
the
case
with
techniques
for
cementing.
Again,
these
are
processes
which
take
place
at
the
well
site.
Typically
cement,
dry
powder
cement,
is
transported
to
the
well
site.
Possibly
that
dry
cement
has
had
added
to
it,
at
an
earlier
stage,
dry
additives
of
one
or
more
types.
That
mixture
of
dry
cement
and
additives
is
then
subjected
to
further
mixing
and
processing
at
the
well
site.
Water
is
added.
Other
chemicals
may
be
added
to
produce
what
is
referred
to
in
the
industry
as
a
"slurry",
s-l-u-r-r-y.
That
slurry
is
then
pumped
into
the
well
under
pressure
and
depending
on
the
particular
job
at
hand,
to
use
one
or
other
of
the
results
that
I
described
a
moment
ago.
Business
Activities
of
the
Plaintiff:
Certainly
the
plaintiff
is
a
well
service
company
and
a
most
successful
member
of
this
most
competitive
sector.
In
the
course
of
presenting
its
evidence,
the
plaintiff,
with
the
assistance
of
a
video
presentation,
made
it
clear
that
expensive,
custom-fabricated
machinery
was
essential
to
the
success
of
a
well
service
company.
This
equipment
requires
highly
skilled
people
if
it
is
to
be
both
safe
and
effective
in
its
operation.
As
stated
earlier,
when
material
is
pumped
into
the
well,
be
it
for
stimulation
or
cementing,
it
must
be
done
under
pressure
which
is
carefully
calibrated
so
that
damage
will
not
be
done
to
the
casing
or
the
well.
Similarly
the
quantity
of
the
product
must
be
carefully
tabulated
so
there
is
no
shortfall
of
requirement.
Mixing
and
blending
is
a
sophisticated
operation
requiring
constant
attention
by
all
personnel
on
the
job.
Safety
meetings
before
commencing
are
obligatory
and
where
problems
arise
personnel
must
be
properly
trained
to
take
appropriate
action,
be
it
reducing
the
pressure
or
shutting
down
the
whole
operation.
The
proper
organizing
of
personnel
and
equipment
is
essential
if
the
service
is
to
be
performed
effectively.
It
was
clear
from
the
evidence
that
the
party
in
charge
is
the
operator
or
the
representative
of
the
operator
because,
in
the
final
analysis,
the
operator's
investment
and
risk
is
significantly
higher
than
that
of
the
service
company.
But,
if
the
service
company
is
to
be
retained,
it
must
establish
a
high
degree
of
competency
in
all
activities.
Skilled
engineers
and
highly
trained,
experienced
technicians
were
the
norm
for
this
plaintiff.
The
types
of
equipment
used
are
impressive
certainly
but
without
the
deft
hand
of
skilled,
educated,
trained,
and
experienced
people,
the
equipment
would
not
be
sufficient
to
convince
the
operator
that
a
well
service
company
should
be
retained.
Mr.
S.P.
Shouldice
(Shouldice),
chief
executive
officer
of
the
plaintiff,
describes
the
service
sector
as
being
"those
companies
that
provide,
to
the
operator,
what
he
requires
at
the
well
site
during
the
drilling
and
production
of
his
well".
(Transcript
p.
102).
Later,
in
reply
to
his
counsel's
question,
"We
are
in
the
service
sector.
We
don't
own
any
reserve.
We
doesn't
[sic]
sell
rope,
soap
and
dope
(jargon
in
the
industry
for
supplies).
So
we
are
a
service
company”.
Shouldice
also
referred
to
the
significant
number
of
competitors,
who
operate
in
the
same
range
of
activities,
naming
Halliburton
and
Dowell
as
large
companies
also
in
the
service
sector.
Nowsco's
customers
are
the
owner-operators
of
oil
and
gas
wells.
Videos
showing
the
men
and
equipment
at
work
at
well
sites
left
no
room
for
doubt
that
the
service
sector
is
capital
intensive.
To
be
more
specific,
a
foamed
acidizing
activity
had
a
considerable
string
of
frac
pumpers
hooked
up
to
blenders
as
well
as
several
nitrogen
trucks.
Exhibit
P-1,
Tab
16
shows
the
amount
of
equipment
required
at
a
"foamed
acidizing
jobsite"
[see
page
29].
Business
Activities
Prior
to
Securing
a
Contract:
The
greater
part
of
the
plaintiff's
business
occurs
at
well
sites
in
the
province
of
Alberta.
In
order
to
operate
as
they
do
with
the
heavy
sophisticated
equipment,
it
is
necessary
for
the
plaintiff
to
establish
field
stations.
Shouldice,
at
page
113
of
the
transcript:
The
field
station
is
the
home
for
the
equipment
and
the
operators
of
that
equipment
that
is
dispatched
to
the
well
site
when
the
customer
has
the
need.
Q.
Are
those
field
stations,
as
far
as
Canada
is
concerned,
they
are
distributed
geographically
in
proximity
to
some
oil
territory?
A.
That's
right.
They
are
generally
located
in
areas
of
oil
activity.
It
is
a
very
competitive
business
we
are
in,
and
the
client
is
accustomed
to
calling,
sometimes,
on
very
short
notice.
So
it
is
desirous
for
us
to
have
our
people
and
equipment
located
as
close
as
possible
to
the
customer's
needs.
The
plaintiff
maintains
many
field
stations
and
lists
them
in
Exhibit
P-1,
Tab
1,
Shedule
"A".
Shouldice
also
gave
evidence
that
the
plaintiff
has
operating
segments
with
the
head
office
which
include
the
sales
department,
engineering
department,
information
systems
and
a
research
library.
At
page
112
of
the
transcript,
Shouldice
in
reply
to
his
counsel:
Q.
You
referred,
Mr.
Shouldice,
to
sales
function
and
an
engineering
function.
What
would
those
departments
or
divisions
be
principally
engaged
in?
A.
The
sales
function,
of
course,
is
to
make
contact
with
the
customer
to
make
sure
that
Nowsco
gets
its
fair
share
or
more
of
the
business
that
is
available
to
be
had.
The
engineering
function
is
to
provide
the
end
user
with
the
up-to-date
technology
that
is
expected
of
us
to
help
him
develop
the
optimum
method
of
expanding
or
completing
his
well.
Q.
And
is
there
some
degree
of
communication
then
between
engineering
at
head
office
and
the
field
station?
A.
Yes,
Sir.
They
prepare
what
we
refer
to
as
a
program
which
is
sent
to
the
field
station
to
set
the
pattern
as
to
how
to
perform
the
job
at
the
well
site.
[Emphasis
added.]
Later,
in
cross-examination,
Mr.
R.G.
Macdonald
(Macdonald),
Manager
of
Engineering
Systems
for
the
plaintiff,
stated
at
page
358
of
the
transcript
that
the
terms
"treatment
proposals",
"treatment
recommendations"
and
"treatment
programs"
are
interchangeable
and
that
the
plaintiff
and
its
competition
prepare
treatment
proposals,
recommendations
and/or
programs
for
operators.
Macdonald
confirmed
that
the
plaintiff
had
a
separate
group
for
sales
and
a
separate
group
for
engineering,
and
at
page
359
of
the
transcript
stated:
There
are
two
separate
groups.
There
is
also
crossover
in
that
there
is
[sic]
some
engineers
that
are
in
the
sales
group
and
some
engineers
that
do
selling,
although
they
are
still
in
the
engineering
group.
We
heard
that
the
preparation
of
the
proposal
is
often
done
in
consultation
with
the
operator.
The
sales
people
would
call
on
potential
customers
in
the
context
of
developing
treatment
proposals
for
that
particular
customer.
Assistance
was
usually
sought
from
the
engineering
group
and
the
research
and
development
group
of
the
plaintiff.
The
proposal
is
the
final
step
on
the
part
of
the
plaintiff
in
presenting
a
well
workover
or
a
cementing
job
prior
to
the
acceptance
of
that
proposal
by
the
customer.
It
is
probably
trite
to
add
that,
prior
to
securing
a
contract,
the
plaintiff
must
have
available
the
specially
fabricated
equipment
which
will
do
the
job
of
transporting
materials
from
the
field
station
and
perform
their
specialized
functions
at
the
well
site.
The
Business
Activities
at
the
Well
Site:
Many
functions
are
performed
by
the
plaintiff
at
the
well
site
including
cementing,
fracturing,
acidizing,
nitrogen,
carbon
dioxide,
and
endless
tubing.
There
is
what
is
called
primary
and
secondary
cements
or
remedial
cementing.
Also,
within
the
categories
named,
the
plaintiff
could
be
called
upon
from
time
to
time
to
do
a
job
that
might
fit
within
more
than
one
category,
e.g.
a
foamed
acid
frac
which
involves
acid,
fracturing
and
nitrogen.
It
is
probably
appropriate
here
to
elaborate
on
some
of
the
terminology.
"Fracturing":
the
use
of
fluid
under
pressure,
splitting
open
rocks
to
stimulate
productivity
from
a
well.
"Proppant":
once
a
rock
is
split,
to
prop
open
that
frac
in
the
formation,
a
special
fluid
of
certain
viscosity
is
necessary
to
transport
the
proppant
to
the
formation.
As
its
name
implies,
the
proppant
is
used
to
prop
open
the
frac.
"Acidizing":
the
use
of
acid
to
dissolve
parts
of
the
formation
or
any
other
debris
that
may
be
soluble
in
acid
to
enable
the
formation
to
produce
better
to
the
surface.
Matrix
acidizing:
an
acidizing
treatment
that
does
not
crack
open
the
rock
(as
fracturing
treatment
does).
It
is
meant
to
be
fed
into
the
formation
and
then
flow
through
the
formations
matrix
through
the
porosity
of
the
matrix
of
the
formation
to
dissolve
parts
of
that
porosity
and
part
of
the
rock.
Foamed
acidizing:
the
use
of
three
activities
of
the
plaintiff:
one
is
the
addition
of
nitrogen
and
carbon
dioxide;
the
second
is
the
use
of
acid;
and
the
third
is
the
use
of
fracturing
to
acquire
the
pressures
in
order
to
perform
the
job.
Endless
tubing:
A
hollow
steel
tube
that
is
made
of
a
particular
kind
of
steel
that
is
able
to
bend
and
is
reeled
on
to
a
large
reel.
It
can
be
up
to
4,000
metres
in
length.
On
a
job
described
in
evidence
by
Macdonald,
the
operator
wanted
to
clean
out
some
debris
in
the
bottom
of
the
well
and
an
easy
and
economical
way
of
cleaning
out
was
to
run
endless
tubing
into
the
well,
pump
nitrogen
gas
through
it
to
create
turbulence
and
some
lifting
velocity
to
carry
the
debris
from
the
bottom
of
the
well
out
of
the
well
to
the
surface.
Nitrogen:
an
inert,
odourless,
colourless
gas
suitable
for
a
lot
of
applications
in
the
oil
field.
It
is
versatile
in
that
it
can
be
brought
to
the
well
site
in
liquid
form
and
then
converted
to
a
warm
gas
that
can
be
used
for
a
variety
of
operations.
Cementing:
this
is
the
placing
of
a
cement
slurry
to
secure
the
casing
into
the
ground.
There
are
at
least
two
cement
jobs
in
every
well
and
it
can
also
be
done
on
the
production
life
of
a
well
in
the
form
of
remedial
cementing.
Surface
cementing
relates
to
placing
surface
casing
or
cementing
surface
casing
in
the
well.
The
product
that
goes
down
the
inside
of
the
casing
and
up
the
annular
space
is
a
"cement
slurry"
which
is
a
mixture
of
water
and
dry
powder
additives.
As
indicated
earlier,
we
saw
four
videos
showing
various
tasks
done
for
the
operator
by
the
plaintiff:
(1)
fracturing;
(2)
matrix
acidizing;
(3)
foamed
acidizing;
(4)
cementing.
In
order
not
to
belabour
the
matter,
I
will
use
but
one
instance
of
work
done
at
the
site,
which
to
my
mind
is
indicative
of
all
the
activities
performed
at
the
well
site
by
the
plaintiff.
I
have
already
shown
in
these
reasons
the
diagram
of
a
foamed
acidizing
jobsite.
For
the
purpose
of
describing
activity
at
the
job
site
I
have
reproduced
Tab
7
of
Exhibit
P-1
entitled
“Fracturing
Jobsite”
[opposite].
This
diagram
clearly
illustrates
the
job
site
with
the
location
and
type
of
equipment
used.
When
the
plaintiff
arrives
at
the
lease,
the
well
head
and
two
tanks
(oil
and
water)
which
the
operator
arranges
for
in
advance,
are
already
there.
The
first
piece
of
equipment
on
the
site
is
the
blender.
It
must
be
there
to
start
mixing
chemical
almost
immediately
and
needs
to
be
close
to
access
the
fluid
readily.
Macdonald
at
page
257
of
the
transcript
(the
colours
to
which
he
alludes
cannot
course
be
shown
here
but
can
be
seen
on
the
original
Exhibit
P-1,
Tab
7):
So
part
of
the
initial
operation
is
the
blender
gets
set
up
in
a
position
next
to
the
tanks
and
then
it
immediately
starts
drawing
water
via
a
suction
pump
on
the
blender
and
circulating
it
through
this
mix
tub,
which
is
in
green,
back
into
the
blue
water
tank.
It’s
—
the
chemicals
are
added
to
this
mix
tub
and
circulated
from
the
water
tank
through
the
mix
tub
and
back
into
the
water
tank
to
make
sure
that
we
have
a
good,
consistent
blend
of
gelled
water,
in
this
case.
While
that
mixing
is
going
on,
the
next
pieces
of
equipment
to
move
into
place
are
the
frac
pumpers,
which
are
here
and
here.
There
are
two
of
them,
in
this
case.
They
are
called
—
they
are
model
numbers
VT-12005.
And
also,
the
crew
cab,
which
will
be
—
which
hold
some
of
the
fittings
and
also
some
of
the
monitoring
equipment
for
the
job.
While
the
blender
is
still
mixing
the
gelled
water,
the
rest
of
the
treating
iron
is
put
in
place,
and
these
green
lines
coming
from
the
blender
are
typically
hoses
that
go
into
the
frac
pumpers
and
then
these
pink
lines
coming
out
and
going
down
to
the
wellhead
are
steel,
high
pressure
lines
that
we
put
together.
Q.
That's
the
treating
iron?
A.
That
is
what
I
have
referred
to
as
the
treating
iron.
And
you
can
see
the
iron
truck,
it’s
parked
over
here
during
the
job.
But
it
is
the
one
that
has
supplied
all
the
joints
of
pipe
that
are
strung
together
to
the
wellhead.
And
incidentally,
the
chemical
truck
sitting
down
here
is
the
one
that
has
unloaded
its
chemicals
to
this
mix
tub
for
the
gelling
of
this
job.
The
third
party
equipment
that
I
referred
to,
here
is
the
fire
truck.
Its
position
is
quite
close
to
where
the
flammable
oil
can
be
pumped
and
also
close
to
the
blender,
as
that
is
where
the
fluid
itself
is
exposed
to
the
atmosphere.
And
also,
as
the
job
gets
set
up
and
our
conveyor
belts
are
swung
into
position,
we
have
the
sand
trucks
getting
into
position
to
gravity-feed
the
sand
on
the
back
of
a
sand
hopper
which
is
conveyored
up
to
the
mix
tub
and
added
into
the
mix
tub
through
what
is
called
the
blender.
Q.
I
understand,
Mr.
Macdonald,
in
the
years
in
question
in
this
litigation,
that
the
conveyor
system
that
we
see
in
the
video
was
different?
A.
Yes.
That's
correct.
This
orange
conveyor
system
that
you
see
here,
in
fact,
didn't
exist
on
our
blenders
in
the
years
in
question.
And
the
sand
was
then
dumped
from
these
trucks
just
strictly
by
gravity
into
the
mix
tube.
If
I
could
follow
the
fluid
process
—
Q.
Yes,
please.
A.
Once
the
—
at
the
end
of
the
setup,
we
then
do
a
pressure
test,
which
tests
all
the
steel
lines,
and
at
this
point,
we
are
ready
to
have
a
safety
meeting
which
discusses
some
of
the
limitations
of
the
job,
pressure
limitations,
any
constraints
in
terms
of
rates
and
pressures
that
the
customers
may
place.
And
also
the
job
procedures
are
discussed
at
that
time.
And
when
we
start
pumping,
we
are
drawing
from
this
oil
tank
and
from
this
water
tank
to
create
this
polyemulsion
fluid.
The
polyemulsion
fluid
is
a
patented
process
that
was
developed
by
Exxon.
And
it
is
quite
unique,
in
that
we
use
two-thirds
oil
and
one-third
gelled
water,
which
now
has
this
surfactant
and
emulsion
recipe
in
it.
so,
two-third/one-third
blend
are
mixed
on
the
fly,
or
during
pumping,
in
this
mix
tub
and
then
distributed
to
the
frac
pumpers.
So,
what
we
have
attempted
to
show
here
is
that
the
oil
comes
out
as
oil,
the
gelled
water
is
fed
to
the
pumper,
and
it
becomes
this
green
polyemulsion
fluid
—
that's
why
we
have
shown
this
mix
tub
in
green
—
and
then
that
polyemulsion
fluid
is
fed
to
the
frac
pumpers
where
it
is
pressured
up.
To
backtrack
a
little
bit,
the
typical
pressure
that
it
would
be
fed
from
the
blender
to
the
frac
pumper
is
about
80
pounds
per
square
inch.
So,
a
relatively
low
pressure
fluid,
and
then
that
is
increased
in
pressure
as
it
is
pumped
through
the
frac
pumper
and
down
the
well.
The
frac
pumpers
are
responsible
for
controlling
the
rate
that
the
fluid
is
delivered
as
well
as
creating
the
corrct
pressure
to
fracture
the
rock
and
deliver
the
product.
It
is
then
pumped
through,
in
this
case,
there
are
three
different
wellhead
valves
we
are
pumping
through,
so
that
is
why
it
is
split
into
a
stream
of
three,
and
it
is
delivered
to
the
wellhead
and
down
the
well.
In
viewing
the
video
entitled
"fracturing",
Macdonald
made
mention
of
the
chemical
truck,
stating,
"and
it's
the
one
that
contains
all
the
various
sacked
chemicals
that
will
be
used
on
the
job.
He
mentioned,
at
page
266
of
the
transcript,
the
initial
operation,
namely:
These
are
the
hoses
that
are
hooked
from
the
tanks
to
the
suction
manifold
of
the
blender.
First,
so
we
can
get
set
up
and
be
able
to
draw
oil
and
water
from
the
tank
and
also
get
mixing
the
chemicals
into
the
gelled
water.
He
pointed
out
in
the
video,
that
the
blending
tub
after
that
procedure
takes
place,
is
sitting
on
the
ground,
and
the
chemical
truck
moves
into
position.
Macdonald
at
page
266
of
the
transcript:
So
water
is
circulated
through
the
blender
mix
tub
and
back
into
the
tank
at
a
very
high
rate
to
enable
all
these
chemicals
to
be
mixed
very
quickly
and
very
consistently.
The
first
chemical
added
is
this
potassium
chloride
salt
or
KCL.
Several
bags
of
this
are
added
directly
into
the
mix
tub.
You
will
start
to
notice
there
is
the
water
and
the
impeller
inside
the
mix
tub
that
helps
mix
up
the
chemical
with
the
water.
And
you
will
notice
the
consistency
of
the
water
starts
to
change
as
we
add
the
chemicals.
This
is
this
LSR
Guar
gel
that
is
being
added,
and
you
can
see
the
water
has
already
taken
on
a
more
viscous
quality.
This
is
the
DL-15
emulsifier
that
is
added
to
the
water.
And
the
benefit
of
a
polyemulsion
job
is
that
you
can
add
all
the
chemicals
to
the
water
phase
without
having
the
oil.
While
we
are
mixing
that
and
circulating
that
through
the
water
tank,
we
position
the
pumpers.
The
rubber
hose
comes
from
the
discharge
manifold
of
the
blender
to
feed
the
inlet
of
the
frac
pumpers.
You
can
see
the
steel
lines
coming
out
of
the
pumpers
and
they
have
all
been
joined
together
and
connected
toward
the
wellhead.
The
customer's
blue
wellhead
is
being
connected
by
our
red
treating
iron,
and
you
can
see
the
hammer
unions
being
hammered
to
put
everything
together.
And
this
is
the
rather
elaborate
three-way
system
of
hooking
the
iron
to
the
wellhead.
Once
we
are
still
mixing
the
water,
the
Cardium
sand
trucks
pull
into
position
to
be
able
to
feed
the
back
end
of
the
hoppers
of
the
conveyor
belts.
You
can
see
the
conveyor
belts
are
positioned
together
in
this
case
for
ease
of
sand
feed.
And
there
is
the
body-mounted
unit
being
pulled
into
place
as
well.
We
run
our
frac
pumpers
remotely
from
these
boxes
which
rest
on
the
back
of
the
tailgate
of
the
crew
cab
truck.
And
they
are
fixed
to
the
pump
—
to
the
controls
by
this
piece
of
equipment
there.
And
once
we
have
all
the
treating
iron
together,
we
do
the
pressure
test.
You
can
see
the
rising
spikes
of
pressure
on
this
circular
pressure
Chart.
Once
pressure-tested,
we
get
set
for
the
safety
meeting,
and
you
can
see
in
the
background,
you
can
see
the
sand
trucks
have
been
elevated
to
provide
that
gravity
feed
into
the
back
end
of
the
conveyor
belts.
We
have
a
safety
meeting,
at
this
point,
which
involves
discussing
the
pressure
limits,
other
job
procedures
and
safety
related
to
the
job.
There
is
our
field
engineer
discussing
some
of
the
details
of
the
job,
and
our
customer
representative
is
the
one
in
the
blue
jeans
with
the
hard
hat.
He
is
just
giving
us
some
instructions
as
to
rate
and
pressure
from
the
job
itself.
This
is
the
polyemulsion
fluid.
Now,
it
looks
like
kind
of
a
chocolate
milkshake.
This
is
the
two-thirds
oil
and
the
one-third
gelled
water.
And
there
is
what
we
call
the
blender
tender.
He
is
the
one
who
is
controlling
the
mix
of
that
polyemulsion
fluid
through
the
blender.
Here
is
the
sand
being
added
to
the
hopper
of
the
sand
belts,
and
this
is
the
sand
being
dumped
directly
into
that
mix
tub
and
being
mixed
with
the
polyemulsion
fluid.
Things
are
loud
enough
on
the
job
that
we
need
headsets
and
communication
that
way,
simply
because
it
is
too
loud.
One
of
the
monitoring
pieces
of
equipment
we
have
is
measuring
the
kilograms
of
sand
added
per
litre
of
fluid.
This
shows
the
pumper
operators
monitoring
the
job
and
controlling
their
pumpers,
and
that
—
this
is
—
the
gauge
they
are
looking
at
that
shows
the
pressure
the
job
is
being
pumped
at.
Those
are
the
pumper
strokes
being
shown,
and
this
is
the
feed
line
from
the
blender
to
the
steel
line
which
is
going
down
the
wellhead.
To
displace
this
sand-laden
fluid
out
of
the
pipe,
out
of
the
casing
and
into
the
formation,
we
used,
in
this
case,
oil
from
the
tank,
and
we
displaced
all
of
that
sand-laden
fluid
into
the
formation.
This
gives
you
an
idea
of
the
overall
setup
of
the
job
on
location
with
respect
to
the
wellhead.
We
then
break
out
our
treating
iron,
pack
up
the
hoses
on
the
blender.
We
have
some
documents
we
call
a
service
order
and
treatment
report
which
the
customer
representative
signs.
He
gets
a
copy
of
the
service
order,
and
he
also
gets
a
copy
of
the
treatment
report.
And
then
we
leave
in
the
same
convoy
fashion
as
we
arrived
at
the
lease.
I
regret
the
necessity
of
this
comprehensive
coverage
of
"the
business
activities
at
the
well
site”
but
as
the
business
activity
of
the
plaintiff
is
the
most
important
feature
of
these
appeals,
evidence
must
be
incorporated
into
the
reasons
to
show
the
work
done
by
the
plaintiff.
Matrix
Acidizing:
Following
the
initial
video
presentation
on
fracturing,
we
viewed
the
other
three.
It
is
mercifully
unnecessary
to
deal
with
these
in
the
same
detail,
but
some
comment
is
necessary.
Exhibit
P-1,
Tab
11
shows
the
Equipment
on
Site
and
Products
required
to
matrix
acidizing.
The
products
are
—
Description
|
Quantity
|
15%
Hydrochloric
Acid
|
4.0
cubic
metres
|
AI-250
Acid
Inhibitor
|
16
litres
|
WS-50
Surfactant
|
4
litres
|
DL-22
Demulsifier
|
16
litres
|
IS-600
Iron
Sequesterant
|
40
kilograms
|
Ball
Sealers
|
39
|
Here,
in
addition
to
15
per
cent
hydrochloric
acid
which
is
a
diluted
form
of
the
plaintiff's
normal
37
per
cent
bulk
acid,
the
plaintiff
used
an
acid
inhibitor
to
prevent
the
acid
from
reacting
with
the
steel
of
the
casing
as
it
is
pumped
down
the
well.
The
plaintiff
also
used
a
surfactant
which
is
added
to
the
acid
to
enable
it
to
clean
up
after
the
job.
In
the
job
described
on
the
video
they
used
a
demulsifier
which
is
added
to
the
acid
to
prevent
an
emulsion
that
might
be
created
between
the
acid
or
the
spent
acid
and
the
formations
oil.
Also,
on
this
job
the
plaintiff
used
an
iron
sequesterant
which
helps
any
iron
that
the
acid
comes
into
contact
with.
As
Macdonald
says
at
page
275
of
the
transcript,
In
a
typical
acid
reaction,
I'm
told
that
iron
will
tend
to
precipitate
out,
which
could
create
more
debris
in
your
acid
job.
And
this
sequesterant
keeps
it
in
solution
so
that
it
can
be
cleaned
out
of
the
wellbore,
cleaned
out
of
the
formation.
Exhibit
P-1,
Tab
13
is
an
illustration
of
the
Matrix
Acidizing
Jobsite.
The
acid
hauler
offloads
the
acid
(with
additives)
into
the
two
tanks
of
the
T.P.
(truck
powered)
Pumper.
Only
three
of
the
additives
were
added
to
the
acid.
The
fourth
one,
the
1S-600
is
in
a
40-kilogram
sack
and
has
to
be
added
on
site.
“It
is
kind
of
in
a
flake
or
a
crystal
form
and
is
only
dispersed
through
the
acid
when
it
is
augered
with
the
T.P.
pumper's
augers
in
the
tanks.
Once
that
is
done
and
we
now
have
the
acid
with
the
IS-600
and
all
the
other
additives
in
the
two
tanks
we
feed
the
acid
through
the
pump.
It
is
now
a
high
pressure
fluid,
.
.
.
and
the
balls
(ball
sealers)
are
added
to
the
acid
during
the
pumping
so
the
ball
injector
is
capable
of
feeding
these
balls
into
the
acid
blend
under
pressure.
And
then
it
is
fed
to
the
well
head".
Foamed
Acidizing:
Here
again
at
Exhibit
P-1,
Tab
15
we
have
a
listing
of
the
equipment
and
products
on
site,
together
with
the
quantity
of
product
used.
Having
earlier
defined
what
foamed
acidizing
is,
no
more
real
detail
is
required.
The
products
at
the
site
and
the
quantities
(large
in
this
case)
were
enumerated
by
Macdonald
at
pages
287
and
288
of
the
transcript.
This
process
incidentally
was
well
stimulation.
Some
indication
of
the
complexity
of
the
job
can
be
garnered
through
observing
Exhibit
P-1,
Tab
16.
Here
again
one
question
and
answer
gives
some
idea
about
products.
At
page
309
Macdonald
is
asked:
Q.
And
just
a
couple
of
things:
Chemically,
if
you
can,
what
does
the
SF-2
do
when
it
is
added?
A.
The
SF-2
changes
or
—
changes
characteristics
of
the
acid
to
make
it
susceptible
to
an
addition
of
this
high-pressure
nitrogen
to
create
this
foamed
structure
that
we
want
in
this
foamed
acid.
Nitrogen:
As
mentioned
earlier,
nitrogen
can
be
brought
to
a
lease
site
in
liquid
form
and
then
converted
to
gas.
Macdonald
mentions
its
suitability
in
the
“oil
patch”
and
how
they
had
used
it
in
a
"foamed
frac”.
Today
there
is
a
foamed
cement
available.
At
page
315
of
the
transcript
Macdonald,
referring
to
a
blowup
of
Exhibit
P-1,
Tab
19,
says
of
the
product:
Product
flow
starts
at
this
green
nitrogen
tank.
It
starts
as
a
super-cold
liquid,
as
I
have
said,
at
about
minus
320
degrees
Fahrenheit.
And
somewhere
between
0
and
15
p.s.i.,
it
is
first
fed
to
the
pump
that
is
outlined
in
orange
here,
and
that
is
what
we
call
a
cryogenic
pump,
or
a
pump
that
is
able
to
handle
super-cold
liquids.
It
is
pumped
through
this
cryogenic
pump
and
fed
down
a
a
line
to
this
heater
where
a
thermodynamic
process
takes
place.
The
liquid
nitrogen
via
this
heater
is
turned
into
a
gas
as
a
—
typically
in
this
heater,
it
is
a
fired
glycol
unit
or,
in
other
words,
we
use
a
big
burner,
and
it
heats
up
some
tubes
full
of
gycol
alcohol
which,
in
turn,
pass
their
heat
on
to
the
liquid
nitrogen
and
heat
it
up
to
a
warm,
about
80
degrees
Fahrenheit,
gas.
From
the
heater,
it
is
pumped
down
a
line
that
is
parallel
to
the
liquid
one,
and
it
comes
to
the
end
of
the
unit
and
is
pumped
down
the
main
treating
line
toward
the
reel.
Q.
And
then
through
the
reel
A.
Through
the
reel
and
down
inside
the
tubing
and
into
the
wellbore.
Conclusion:
In
these
reasons
I
have
endeavoured
to
point
out,
probably
in
too
much
detail,
the
business
activities
of
the
plaintiff.
It
is
clear
that
in
order
to
be
a
part
of
the
“service
sector",
a
corporation
must
have
field
stations,
raw
products
at
the
field
stations,
and
equipment
able
to
deliver
the
service,
which
involves
a
processing
capability.
Nothing
could
be
clearer
than
the
fact
that
the
plaintiff
is
involved,
and
must
be
involved,
in
processing
if
it
is
to
be
an
effective,
successful
well
service
operator.
Mr.
Farries
(the
plaintiff's
expert
witness)
at
page
695
and
following
of
the
transcript,
says:
A.
No.
I
think
when
we
design,
when
you
are
referring
to
an
acid
job,
for
example,
we
are
not
just
buying
ordinary
regular
acid.
We
are
buying
acid
mixed
with
various
compounds
and
we
are
interested
in
all
these
products
that
go
into
the
final
mixture.
Q.
And
just
focussing
on
inhibitors
for
a
moment,
do
you,
in
evaluating,
in
a
tender
situation
the
different
proposals,
do
you
look
to
see
whether
each
proposal
contains
an
inhibitor,
and
in
your
experience,
are
there
sort
of
a
family
of
inhibitors
that
one
typically
finds?
A.
Yes,
there
are
different
types
of
inhibitors,
and
we
would
examine
competing
proposals,
not
only
that
they
had
a
suitable
inhibitor,
but
the
concentration
or
amount
of
that
inhibitor.
Q.
Was
to
your
liking?
A.
To
our
specifications
or
desires,
yes.
Q.
And
does
the
answer
apply
to
a
surfactant,
if
the
proposal
in
contemplation
requires
a
surfactant?
A.
Yes.
Q.
A
foaming
agent?
A.
Yes.
Q.
A
breaker,
a
gelling
agent,
whatever
it
happens
to
be?
A.
That's
correct.
Each
function
performed
at
the
well
site
involves
some
form
of
processing.
Proppant,
a
“special
fluid”
of
"a
certain
viscosity”
is
necessary
(supra).
Foamed
acidizing
is
“use
of
three
activities".
We
examined
earlier
Exhibit
P-1,
Tab
7
Fracturing
Job
Site,
and
from
the
description
by
Macdonald,
no
room
is
left
for
doubt
that
a
process
operation
is
taking
place,
that
goods
are
being
processed
in
Canada
for
sale
within
the
meaning
of
subsection
125.1
of
the
Act.
Having
listened
to
the
evidence
and
having
had
the
benefit
of
reading
the
transcript
which
was
delivered
daily,
I
am
satisfied
that
the
evidence
leaves
no
other
alternative
than
the
one
pronounced
above
—
the
plaintiff
processes
goods
for
sale
or
lease.
There
is
no
need
to
dwell
at
length
with
the
myriad
of
examples.
One
can
look,
however,
to
a
few
factors.
Fracturing
requires
"a
specially
mixed"
fluid.
Proppant
is
a
“special
fluid
of
certain
viscosity".
Foam
acidizing
has
three
activities,
two
of
which
are
addition
of
nitrogen
and
carbon
dioxide,
the
use
of
acid
(and
not
raw
acid).
Nitrogen
in
liquid
form
is
processed
through
special
pumps
until
it
becomes
a
gas
and
often
used
in
combination
with
other
fluids
and
chemicals.
Certainly,
as
conceded
by
the
plaintiff,
a
well
service
company
by
and
large
carries
on
its
business
at
the
well
site.
There
are
other
ancillary
activities,
e.g.
field
station
operation,
laboratory
work,
computer
data
inventories,
and
of
course
sales
staff,
some
with
and
some
without
engineering
degrees.
To
me,
the
activities
at
the
well
head
are
conducted
by
a
“mobile
factory",
and
this
mobility
should
not
disentitle
the
plaintiff
to
the
tax
benefits
enjoyed
by
a
processing
plant
which
is
always
situate
at
one
location.
Reed,
J.
in
Halliburton
Services
Limited
v.
The
Queen,
[1985]
2
C.T.C.
52;
85
D.T.C.
336,
was
also
of
the
view
that
Halliburton,
a
large
well
service
operator,
was
entitled
to
treat
the
profits
it
received
from
processing
of
specialized
products
as
manufacturing
or
processing
profits.
However,
having
had
the
benefit
of
some
eight
days
of
evidence
and
argument,
I
have
reached
a
different
conclusion
about
the
said
operation.
In
my
view,
a
factory
exists
for
the
processing
of
goods
for
sale
or
lease
and
that
factory
is
a
combination
of
the
field
station
and
the
unit
or
units
that
operate
at
the
well
head.
We
heard
that
when
a
"treatment
proposal"
is
sent
to
the
field
station,
the
job
begins
and
the
pattern
is
established
as
to
how
to
perform
the
job
at
the
well
site.
Earlier
in
these
reasons
we
indicated
what
takes
place,
for
example,
at
the
fracturing
jobsite.
Maintenance
of
pressure,
and
the
correct
pressure,
is
crucial
to
any
operation
at
the
well
head
so
that
no
harm
comes
to
the
operator's
well.
This
work,
i.e.
maintaining
pressure,
is
carried
on
until
the
task
is
finished
and
hopefully
the
oil
flows
more
freely
due
to
the
stimulation.
Pressure
for
cementing
requires
that
it
be
maintained
to
move
the
slurry
to
the
area
or
areas
intended
and
that
does
not
stop
until
the
assignment
is
finished.
Earlier,
I
had
indicated
the
considerable
amount
of
activity
at
a
"foamed
acidizing
jobsite"
(Exhibit
P-1,
Tab
16)
and
a
“fracturing
jobsite”
(Exhibit
P-1,
Tab
7)
as
illustrative
of
but
two
well
service
operations.
It
is
here
therefore
that
I
must
disagree
with
my
colleague
Reed,
J.
I
do
not
regard
mixing
and
blending
aspects
of
the
activity
as
being
separate
and
distinct
from
the
pressurizing
and
pumping
aspects
so
as
to
constitute
them
respectively
as
separate
and
distinct
activities.
In
foamed
acidizing
activity
the
operation
is
one
continuous
process
designed
to
deliver
the
foamed
acid
to
the
well
head
at
a
pre-determined
and
agreed-upon
rate
of
flow.
This
is
definitely
a
more
business-like,
common
sense
approach
to
the
issue
rather
than
a
theoretical
one.
The
latter
approach,
in
my
view,
leads
to
many
inappropriate
implications
both
in
fact
and
in
law.
By
adopting,
for
example,
the
theoretical
approach,
when
the
blending
has
been
completed,
there
is
a
finished
good,
and
that
pumping
constitutes
the
delivery
of
the
finished
good,
and
the
delivery
of
a
finished
good
is
not
an
activity
that
qualifies.
Also,
the
practical
problem
that
would
beset
the
well
service
operator
and
the
Minister
e.g.,
page
947
of
transcript:
It
becomes
necessary,
for
example,
to
determine
what
portion
of
the
labour
cost
that
is
involved
in
the
job
includes
pumping,
running
the
pumps,
since
the
cost
of
that
labour
is
excluded
from
the
M
&
P
calculation
or,
more
accurately,
My
Lord,
the
cost
of
that
labour
is
excluded
in
taking
into
account
the
formula
in
Regulation
5200.
Therefore,
the
time
that
the
employee
responsible
for
running
the
pumping
part
of
the
job,
the
time
employed
becomes
very
important
as
opposed
to
the
amount
of
time
that
is
spent
on
the
blending
side
of
the
activity,
the
setting-up
of
the
job,
getting
there
and
so
on.
How
does
one
really
focus
on
which
employees
on
the
site
had
responsibility
for
which
activities
and
the
extent
to
which
one
might
be
able
to
determine
from
the
material
that
appeared
with
the
invoices,
e.g.
pressure
charts,
what
portion
of
the
total
job
time
was
reflected
in
pumping
as
opposed
to
blending.
To
wrap
up,
counsel
for
the
plaintiff
states
and
I
agree:
.
.
.
this
problem
disappears,
if
one
accepts
what
I
call
the
practical,
business
like
approach,
because
in
my
submission,
the
activities
in
question
constitute
a
continuous
process
and
all
aspects
—
the
blending,
mixing,
pressurizing,
and
pumping
—
are
really,
when
one
looks
at
it
from
the
point
of
view
of
participants,
part
of
the
same
continuous
process.
.
.
.
The
practical
approach
is
one
which
accords
with
the
business
reality.
It's
one
that
can
be
readily
understood
and
applied,
both
by
the
taxpayer
and
the
tax
department.
Thus
the
plaintiff
is
engaged
in
processing
of
goods
for
sale
or
lease
and
is
entitled
to
the
taxation
benefits
of
section
125.1
of
the
Act.
Second,
mixing
and
blending
are
not
separate
and
distinct
from
pressurizing
and
pumping.
Counsel
for
the
defendant
advanced
five
submissions
in
his
argument,
with
the
first
and
principal
submission
being,
"that
Nowsco
supplies
a
service
to
the
oil
and
gas
industry
and
is
not
engaged
in
the
manufacturing
and
processing
in
Canada
of
goods
for
sale
or
lease
within
the
meaning
of
paragraph
125.1
(3)(a)
of
the
Income
Tax
Act.
I
have
dealt
with
that
submission.
The
defendant
also
submitted
that:
Section
125.1
does
not
extend
to
afford
taxpayers,
such
as
Nowsco,
a
manufacturing
and
processing
profits
deduction
where
they
are
operating
an
oil
and
gas
well
within
the
meaning
of
Section
125.1(3)(b)
of
the
Income
Tax
Act
or
are
engaged
in
supplying
supporting
activities
or
services
on
behalf
of
oil
and
gas
well
operation.
The
overwhelming
weight
of
evidence
clearly
shows
that
the
oil
and
gas
industry
is
divided
into
three
sectors
and
the
plaintiff
is
NOT
an
operator
but
is
a
well
service
corporation.
Tax
benefits
accrue
to
oil
and
gas
well
operators
which
I'm
satisfied
do
not
and
would
not
accrue
to
the
plaintiff
if
it
applied
for
these
benefits.
Another
submission
by
the
defendant
offered
as
an
alternative
argument
IS:
.
.
.
that
if
Nowsco
is
engaged
in
manufacturing
and
processing
goods
for
sale
or
lease,
then
the
deduction
is
confined
to
those
activities
of
the
taxpayer
which
involve
mixing
and
blending
as
opposed
to
pumping
and
placement.
This
I
have
already
decided
is
not
the
case
for
the
reasons
given.
The
budget
of
May
1972
proposed
a
special
rate
deduction
for
companies
engaged
in
the
manufacturing
and
processing
of
goods
for
sale
or
lease.
Also,
that
budget
proposed
an
accelerated
rate
of
capital
cost
allowance
within
a
certain
framework.
In
the
budget
of
June
1975,
provisions
were
added
granting
an
investment
tax
credit,
for
business
activities
that
qualified.
In
the
beginning
it
was
difficult
to
determine
the
extent
of
the
plaintiff's
entitlement
to
the
incentives.
The
Department
of
National
Revenue
itself,
after
a
careful
scrutiny
of
a
submission
made
by
the
plaintiff,
expressed
its
view
to
one
effect
and
then
later
changed
that
view
to
one
one
diametrically
different,
despite
no
changes
in
the
plaintiff's
activities.
We
also
heard
that
there
were
no
changes
in
case
law
or
legislation.
In
any
event,
both
budgets
were
clearly
meant
to
stimulate
investment
and
a
capital-intensive
corporation
engaged
in
manufacturing
and
processing
was
meant
to
benefit.
Having
determined
that
the
plaintiff
is
engaged
in
processing
of
products
in
Canada
for
sale
or
lease,
does
the
property
in
question
fall
into
Class
8
or
Class
10?
Class
29,
which
was
engrafted
on
to
pre-existing
series
of
classes
and
those
pre-existing
series
of
classes
include
Class
10
paragraph
(a)
and
paragraph
(h),
limits,
in
my
view,
the
wide
scope
that
the
defendant
suggests
for
"automotive
equipment".
Although
a
person
might
be
moved
to
believe
and
suggest
that
this
equipment
was
"automotive
equipment”,
the
evidence
clearly
indicates
how
and
for
what
reason
the
equipment
was
manufactured
and/or
fabricated.
There
is
no
question,
given
its
mobility,
that
the
equipment
used
the
roads
and
highways
and
is
powered
by
an
engine
but
only
as
a
means
of
getting
to
the
work
site.
Licenses
had
to
be
secured
if
the
equipment
moved
on
the
highway
and
sometimes
“special
permits"
or
both
depending
on
the
size
of
the
equipment
or
the
particular
raw
product
carried
(e.g.
acid)
but
these
were
not
vehicles
designed
for
use
on
the
highway,
but
really
designed
for
use
off
the
highway.
This
equipment
was
designed
and
fabricated
for
a
particular
purpose,
that
is,
functioning
equipment
at
the
job
or
well
site.
None
of
its
equipment
ought
to
be
included
in
Class
10(a).
Also,
to
divide
the
equipment
into
what
has
been
called
front
end
and
back
end
engines
fails
to
give
effect
to
the
basic
purpose
for
which
the
equipment
was
designed.
Often,
at
the
job
site,
the
machinery
is
powered
by
the
same
engine
that
moves
the
equipment
on
the
highway.
Even
when
trailers
are
used,
the
evidence
was
clear
that
the
same
trailer
is
used
with
the
same
equipment
whenever
possible.
I
note
in
passing
that
Reed,
J.
in
Halliburton,supra,
so
regarded
the
equipment
as
falling
into
Class
10
but
there
was
no
guidance
in
her
reasons
for
judgment
as
to
how
she
arrived
at
that
conclusion.
In
this
case,
I
looked
very
carefully
at
several
cases
advanced
by
the
plaintiff,
plus
interpretive
bulletins
directed
to
the
issue,
and
with
respect
cannot
agree
with
my
colleague
Reed,
J.
As
stated
earlier,
I
accept
the
contention
of
the
plaintiff,
that
"for
the
purposes
of
Class
29,
one
includes
all
equipment
that
is
both
necessary
and
ancillary
to
the
processing
operation”.
It
is
not
described
in
paragraph
10(a)
nor
10(h).
The
defendant
concedes
that
the
plaintiff
is
not
in
the
business
of
construction
and
upon
a
careful
examination
of
the
Interpretation
Bulletin
produced
there
is
a
clear
inference
that
what
is
intended
to
be
included
in
Class
10(h)
is
equipment
that
is
used
in
what
is
normally
regarded
as
construction.
The
plaintiff's
equipment,
not
falling
within
Class
10(a)
or
10(h),
falls
into
the
residual
Class
8(d)
—
“a
tangible
capital
asset
that
is
not
included
in
another
class”.
The
seemingly
meandering
trip
through
portions
only
of
the
Income
Tax
Act
reveals
how
necessary
it
is
that
some
simplification
of
drafting
is
necessary.
Even
this
new
legislation,
meant
to
be
an
incentive,
leaves
one
exhausted
trying
to
interpret
its
language
and
intent.
As
counsel
put
it,
"therefore
it
is
equipment
that
is
to
be
regarded
as
falling
into
the
residual
Class
8,
paragraph
(d)
unless
it
falls
into
Class
22".
Counsel
is
given
to
ruminate,
"now
Class
22
.
.
.
happily
it’s
short,
and
unlike
many
of
the
provisions
of
the
Act
and
Regulations,
is
almost
understandable".
(Emphasis
added.)
In
any
event,
we
are
dealing
with
property
that
is
power-operated,
moveable
equipment
designed
for
a
particular
purpose,
“excavating,
moving,
placing
or
compacting
earth,
rock,
concrete
or
asphalt,
and
not
including
a
property
in
Class
7".
Argument
revealed
that
Mr.
St.-Onge
in
Dominic
Supports
and
Forms
Ltd.
v.
M.N.R.,
[1971]
Tax
A.B.C.
144;
71
D.T.C.
117,
referred
to
"the
history
of
this
class
[i.e.
Class
22]
introduced
into
law
in
1964
to
show
what
the
Minister
had
in
mind
when
he
drafted
that
class
was
to
grant
to
the
road
construction
business
an
accelerated
depreciation
because
these
contractors
were
complaining
about
the
enormous
wear
and
tear
on
their
equipment
.
.
.".
This
gives
a
clear
indication
of
the
scope
of
Class
22,
and
the
plaintiff's
equipment
does
not
fall
within
Class
22.
Investment
Tax
Credit:
It
must
be
clear
at
this
stage
that
I
cannot
find
any
basis
on
the
evidence
and
argument
I
heard
for
deciding
that
the
plaintiff
has
front
end
and
back
end
equipment.
The
equipment
is
specially
designed
for
a
particular
job
of
work
and
requires
all
the
equipment
including
iron
trucks
that
bring
out
the
treating
iron,
bulkers
that
bring
out
cement,
liquid
gases
or
the
acids.
They
are
part
of
the
process
and
qualify
for
the
investment
tax
credit.
The
appeals
are
allowed
and
the
subject
matter
is
to
be
referred
back
to
the
Minister
for
reassessment
based
on
the
following
points:
1.
the
income
earned
by
the
plaintiff
is
attributable
to
its
activities,
namely:
fracturing,
acidizing,
nitrogen,
endless
tubing
and
cementing
and
those
activities
constitute
Canadian
manufacturing
and
processing
for
the
purpose
of
section
125.1
of
the
Act
and
Regulation
5200;
2.
the
equipment
of
the
plaintiff
listed
at
Exhibit
P-1,
Tab
47
is
used
directly
or
indirectly
in
the
processing
of
goods
for
sale
and
as
such
is
to
be
included
in
Class
29
of
Schedule
B
to
the
Regulations.
For
the
purposes
of
Class
29
no
distinction
is
to
be
made
between
the
so-called
front
and
back
end;
3.
the
plaintiff
is
entitled
to
investment
tax
credits
in
respect
of
the
same
equipment
that
is
used
primarily
in
the
processing
of
goods
for
sale
in
Canada
and
is
property
included
in
Class
29,
and
again
no
distinction
between
the
so-called
front
end
and
back
end.
The
plaintiff
is
entitled
to
its
costs
of
this
action.
Appeals
allowed.