Lor-Wes Contracting Ltd. v. The Queen, 85 DTC 5310, [1985] 2 CTC 79 (FCA)

MacGuigan, J:—The question for determination on this appeal is whether a taxpayer who does not own timber or cutting rights is nevertheless entitled to an investment tax credit on equipment used to build logging roads and to perform related site services for the owner of the timber or cutting rights.

The sole business of the appellant is to provide services under contract to owners of timber or cutting rights in British Columbia. The services provided by the appellant in the 1977, 1978 and 1979 years were the following: the building of access roads to the logging site in the course of which the appellant would fell, skid, buck, limb and deck timber and in respect of which it would be paid specifically for the quantity of timber recovered; the building of landings along the logging road, skid trails to provide access to the logging site and fire guards around the cutting block, in the course of which it would fell trees but for which it would be paid on a contract basis without reference to quantities of timber produced or felled; the scarification of the logging site upon the completion of logging, by which is meant the accumulation of logging debris for burning and the preparation of the site for reforestation.

To carry out these functions, it acquired a D8K Caterpillar Tractor, a Caterpillar 235 Excavator and a P & M 1250 Excavator, all of which were so used exclusively, and it claimed investment tax credits of $3,825, $2,042 and $15,830 in the 1977, 1978 and 1979 taxation years respectively. By notices of reassessment for all of these years the credits were disallowed on the ground that the appellant was “in the business of road building which is not a designated activity under subparagraph 127(10)(c)(vii)” of the Income Tax Act (“the Act”).

The Trial Division upheld the reassessment and dismissed the appeal. The heart of the decision is as follows:

It is trite law that the exempting provisions of a taxing statute must be construed strictly and the taxpayer must fit his claim squarely within the four corners of any exemption if he is to benefit from it. He must show clearly that "every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with. (See Thorson J in Lumbers v MNR (1943) 2 DTC 631 (Ex Ct))

If Parliament had intended to extend the tax benefit to all subcontractors in the industry, it would have said so. By any definition, “logging” is the sum total of all the operations leading to the felling of timber and the transporting of logs out of the forest. In my view, the construction of logging roads, by itself, is not "logging”, anymore than the building of fishing wharves is “fishing”, or the erecting of barns constitutes ""farming”, where those operations are carried out by independent contractors who have no general interest in logging, fishing, or farming, but are specialists in their limited fields.

The investment tax credit is provided for by subsection 127(5) and the credit is further specified by subsection 127(9) of the Act. However, what is in issue in this case is subsection 127(10) of the Act, which is as follows:

(10) “Qualified property”. For the purposes of subsection (9), a ""qualified property” of a taxpayer means a property (other than a certified property) that is

(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975,

that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is

(c) to be used by him in Canada primarily for the purpose of

(i) manufacturing or processing of goods for sale or lease,

(ii) operating an oil or gas well or processing heavy crude oil recovered from a natural reservoir in Canada to a stage that is not beyond the crude oil stage or its equivalent,

(iii) extracting minerals from a mineral resource,

(iv) processing, to the prime metal stage or its equivalent, ore (other than iron ore) from a mineral resource,

(iv.1) processing, to the pellet stage or its equivalent, iron ore from a mineral resource,

(v) exploring or drilling for petroleum or natural gas,

(vi) prospecting or exploring for or developing a mineral resource,

(vii) logging,

(viii) farming or fishing,

(ix) the storing of grain, or

(x) producing industrial minerals, or

(d) to be leased by the taxpayer, to a lessee (other than a person exempt from tax under section 149) who can reasonably be expected to use the property in Canada primarily for any of the purposes referred to in subparagraphs (c)(i) to (x), but this paragraph does not apply in respect of property that is a prescribed property for the purposes of paragraph (b), unless

(i) the Property is leased by the taxpayer in the ordinary course of carrying on a business in Canada and the taxpayer is a corporation whose principal business is

(A) leasing property,

(B) manufacturing property that it sells or leases,

(C) the lending of money,

(D) the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing parts or all of the sale price of merchandise or services, or

(E) selling or servicing a type of property that it also leases, or any combination thereof, and

(ii) use of the property by the first lessee commenced after June 23, 1975.

The respondent admits that the building of roads is essential to the logging industry, that because it requires expertise and efficiency it is in many instances contracted out by major operators, that each of the functions performed by the appellant is an integral part of logging in British Columbia, and that the logging industry views equipment used to perform such functions as being used for the purpose of logging whether used by the operator of the site or some other person under contract, but maintains that the appellant is nevertheless properly described as a road builder in the logging industry, that in fact it did so describe itself in its income tax returns in the relevant years, and that the equipment in issue was not acquired by the appellant for use by him for the purpose of logging.

The essence of the respondent’s contention is that the investment tax credit provisions are exemption provisions, that the appellant cannot benefit from them unless it can bring itself clearly within these provisions, and that here at best it does not clearly fall within them.

The Supreme Court of Canada in recent tax decisions has cleared out a great deal of the underbrush that previously surrounded tax law. For example, in City of Winnipeg v Morguard Properties Ltd et al (1983), 50 NR 264, 282-83, dealing with tax provisions that derogate from taxpayers’ rights, Estey, J said for the Court:

In more modern terminology the courts require that, in order to adversely affect a citizen’s rights, whether as a taxpayer or otherwise, the Legislature must do so expressly. Truncation of such rights may be legislatively unintended or even accidental, but the courts must look for express language in the statute before concluding that these rights have been reduced. This principle of contruction becomes even more important and more generally operative in modern times, because the Legislature is guided and assisted by a well-staffed and ordinarily very articulate Executive. The resources at hand in the preparation and enactment of legislation are such that a court must be slow to presume oversight or inarticulate intentions when the rights of the citizen are involved. The Legislature has complete control of the process of legislation, and when it has not for any reason clearly expressed itself, it has all the resources available to correct that inadequacy of expression. This is more true today than ever before in our history of parliamentary rule.

Similarly, in Stubart Investments Ltd v The Queen, [1984] CTC 294 at 314; 53 NR 241 at 263-5, the Supreme Court, again speaking through Estey, J, expressed its point of view with respect to allowance or benefit provisions in tax statutes:

Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by government to attain selected economic policy objectives. Thus, the statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect a specific activity. . . .

Indeed, where Parliament is successful and a taxpayer is induced to act in a certain manner by virtue of incentives prescribed in the legislation, it is at least arguable that the taxpayer was attracted to these incentives for the valid business purpose of reducing his cash outlay for taxes to conserve his resources for other business activities. It seems more appropriate to turn to an interpretation test which would provide a means of applying the Act so as to affect only the conduct of a taxpayer which has the designed effect of defeating the expressed intention of Parliament. In short, the tax statute, by this interpretative technique, is extended to reach conduct of the taxpayer which clearly falls within “the object and spirit” of the taxing provisions. Such an approach would promote rather than interfere with the administration of the Income Tax Act, supra, in both its aspects without interference with the granting and withdrawal, according to the economic climate, of tax incentives. . . .

Where the taxpayer sought to rely on a specific exemption or deduction provided in the statute, the strict rule required that the taxpayer’s claim fall clearly within the exempting provision, and any doubt would there be resolved in favour of the Crown. See Lumbers v MNR, [1943] CTC 281; 2 DTC 631 (Ex Ct), affirmed [1944] SCR 167; and W A Sheaffer Pen Co Ltd v MNR, [1953] Ex CR 251; [1953] CTC 345; 53 DTC 1223. Indeed, the introduction of exemptions and allowances was the beginning of the end of the reign of the strict rule.

Professor Willis, accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable . . .

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed, (1983), at 87, E A Dreidger, put the modern rule succinctly:

“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.

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

Applying this test to subparagraph 127(10)(c)(vii) of the Act, what do we find? The respondent maintains that the phrase “by him” implies that the taxpayer claiming the benefit has to use the equipment for the purpose of logging, but in fact the location of the phrase makes it clear that it is the use of the equipment that has to be by the taxpayer claiming the benefit, not that the purpose of logging has to be uniquely his. It suffices if the ultimate purpose, as defined by the overall contractor, is that of logging.

Indeed, the reason for the phrase “by him” seems to be, as contended by the appellant, to differentiate actual use by a purchaser of equipment (covered by paragraph (c)) from use by a lessee (covered by paragraph (d)). The criterion of qualification under paragraph (d) is a particular-kind-of business test, whereas that under paragraph (c) is one of overall purpose.

No additional indicia of legislative intent appear from the Frenchlanguage version.

Taking a broader look at the provision, we have what appears from the text to be an inducement to taxpayers to undertake or augment specific activities, viz, those listed in paragraph (c). From that point of view, it would be a matter of indifference whether the increased activity was that of a logging company itself or of a subcontractor: in both cases the increase in investment and economic activity would be the same.

I believe that this interpretation is required by the decision of this Court in Bunge of Canada Ltd v The Queen, [1984] CTC 284; 84 DTC 6276 and that of the Exchequer Court in Hollinger North Shore Exploration Co Ltd v MNR, [1960] CTC 136; 60 DTC 1077; upheld by the Supreme Court of Canada, MNR v Hollinger North Shore Exploration Co Ltd, [1963] SCR 131; [1963] CTC 51.

In the Bunge case this Court held that new equipment which discharged grain from grain elevators into ships docked at a wharf situated about 200 feet from the elevators was equipment used primarily for the purpose of the storing of grain and so entitled to an investment tax credit under subparagraph 127(10)(c)(ix) of the Act. Pratte, J said for the Court (at 285 (DTC 6277)) that “the discharge of grain from a silo appears to me to be a necessary and integral part of the storing of the grain".

The Hollinger case is, if anything, even more in point, even though the question was whether royalty income received by a company from another company to which it had sublet all mining rights on a tract of land was income derived from the operation of a mine. Thurlow, J said (at p 140 [DTC 1078-79]):

[T]he exemption provided is given by reference to the derivation of the income rather than by reference to the kind of corporation or the nature of the business or activity, if any, which it carries on. The word "corporation” is not qualified by any adjective such as "operating” or "mining” which might have lent colour to the Minister’s suggestion, nor is the word "operation” or the word "mine” followed by the words "by the corporation” or any wording to the like effect indicating the benefit of the section is to be limited to cases wherein the corporation taxpayer is the operator or an operator of the mine. The ordinary meaning of the words "income derived from the operation of a mine” is, in my opinion, broader than that contended for and, had Parliament intended that their meaning should be limited in the manner suggested, the appropriate words to so limit it would, I think, have been included in the section. In their absence, I see nothing in the language used or in the subject matter being dealt with to warrant reading the subsection as if such words were present.

Here, the words "primarily for the purpose of logging" are not followed by the words “by him" or otherwise qualified so as to limit the benefit of the section to cases wherein the corporation taxpayer itself has the timber or cutting rights. Not only was the appellant’s equipment used to carry out an integral part of logging, but owners of such rights are required by law in British Columbia to obtain approval from the Forest Service of a five-year development plan and a two-year logging plan, including in both cases proposed road designs. Moreover, since road building is one of the most expensive parts of the total logging operation, owners subcontract to road building companies for the sake of their own cost efficiency. It is impossible to regard the work of such road builders, whose total operation is dedicated to building roads for logging, as isolated from the totality of the logging industry. Their work is dedicated, and their equipment is used by them, primarily for the purpose of logging.

I am strengthened in this conclusion by the clear indication of the evil sought to be remedied found in the parliamentary debates, of which as public documents this Court can take judicial notice. While the rule still remains that legislative history is not admissible to show the intention of the legislature directly, the Supreme Court of Canada has nevertheless increasingly looked to legislative history for related purposes, not only in constitutional cases (Re Anti-Inflation Act, [1976] 2 SCR 373, Re Objection by Quebec to a Resolution to Amend the Constitution, [1982] 2 SCR 793), but also in relation to the interpretation of statutes generally. So in R v Vasil, [1981] 1 SCR 469, the Court referred to Hansard in order to determine that Canada adopted not only the text of the British Royal Commission’s draft criminal code of 1879 but also its reasons. The present rule would thus appear to be that Hansard may be used, like the report of a commission of enquiry, in order to expose and examine the mischief, evil or condition to which the Legislature was directing its attention: City of Winnipeg v Morguard Properties Ltd, supra, at 269-70.

Here, the budget statement of the then Minister of Finance on June 23, 1975, describes the perceived need to which this amendment to the Act was the response (Debates of the House of Commons, June 23, 1975, 7028):

Measures to Sustain Business Investment

If our economy is to remain productive and competitive and capable of providing jobs, we must ensure that we have modern capital facilities with which to work. We must guard against any slowdown in investment. I have been pleased that capital investment has continued to expand in present circumstances and I want to do what government can do to ensure that this expansion continues.

It is well known that our policies have sought to encourage a strong manufacturing sector. We have provided long-term tax incentives to assist our manufacturers and processors to compete in domestic and foreign markets. The evidence presented in the final report on these tax measures demonstrates their effectiveness. But new and broader initiatives are needed under current economic circumstances.

I am therefore proposing to introduce an investment tax credit as a temporary extra incentive for investment in a wide range of new productive facilities. The credit will be 5 per cent of a taxpayer’s investment in new buildings, machinery and equipment which are for use in Canada primarily in a manufacturing or processing business, production of petroleum or minerals, logging, farming or fishing. The cost of new, unused machinery and equipment acquired after tonight and before July, 1977, will be eligible [Emphasis added].

The evil aimed at is clearly stated to be “any slowdown in investment”. Such an evil would be removed by appropriate activity regardless of its source, and would be best achieved by encouraging the logging industry in its integral totality. Indeed, in the light of the fact that subcontracting is general in the logging industry, any other interpretation of the text would considerably lessen the potential investment incentive in that industry and so less effectively remove the identified danger of economic slowdown.

I would therefore allow the appeal with costs both in this Court and below, and return the matter to the Minister of National Revenue for reassessment in accordance with this decision.

Appeal allowed.