Crown Tire Sevice Ltd. v. The Queen, 83 DTC 5426, [1983] CTC 412 (FCTD)

Strayer, J:—This is an appeal from reassessments for tax for taxation years ending February 28, 1975, and December 31, 1975, 1976 and 1977. In these reassessments the Deputy Minister of National Revenue disallowed deductions claimed by the company under subsection 125.1(1) of the Income Tax Act.

Paragraph 125.1(1)(a) allows a corporation in certain circumstances to deduct from tax otherwise payable a portion of its profits from “Canadian manufacturing and processing”. By paragraph 125.1 (3)(a), one of the requirements of “Canadian manufacturing and processing profits” is that they be income applicable “to the manufacturing or processing in Canada of goods for sale or lease” (italics added). By virtue of subparagraph 125.1 (3)(b)(x), however, such “manufacturing or processing” does not qualify a corporation for deduction if less than 10 per cent of its gross revenue comes from profits of this nature. This is referred to, for convenience, as the de minimis rule.

The plaintiff in the present case had given notice of objection to the reassessments but they were subsequently confirmed. It then appealed to the Tax Review Board and the Tax Review Board, in a judgment of November 23, 1981 dismissed the appeal. The plaintiff then appealed the reassessments to this Court.

The plaintiff company is the successor company to Crown Tire Retreaders Ltd which was the relevant taxpayer during the taxation years in question. I shall simply refer to the relevant taxpayer compendiously as “Crown Tire’. During these taxation years Crown Tire operated a tire retreading business. It retreaded tires using three different processes, some of which involved more fabrication and processing on their premises than did others. Much of their business involved receiving worn tires from customers accompanied by an order for the retreading of same. They would then strip off the old tread, leaving the “casing”, put a new tread on it by applying a strip or strips of rubber which they provided either by their own processing of raw rubber or by using strips purchased from a supplier, and after applying heat and pressure the tread would be secured to the casing and the retreaded tire emerged. In some cases Crown Tire itself owned the casings which it would retread by these processes and then sell or lease the end product as a retreaded tire to random purchasers or lessees. Neither before the Tax Review Board nor before me could Crown Tire produce evidence establishing what portion of their business consisted of retreading tires provided by customers for return to those customers, and what portion consisted of the retreading of casings owned by Crown Tire for sale or lease as retreaded tires.

The defendant did not dispute before me that the plaintiff was engaged in “Canadian manufacturing and processing” in the operation of this business. Nor, with respect to the retreading and sale or lease of casings owned by Crown Tire did it deny that this was “manufacturing or processing in Canada of goods for sale or lease” as required by paragraph 125.1(3)(a). It does deny however that the remainder of the business, involving retreading for a fee of casings provided by customers and returned to them after retreading, constituted manufacturing or processing “of goods for sale or lease”. It contends that the manufacturing or processing did not produce goods for sale but rather was a “manufacturing or processing” of services. It further contends that since the plaintiff cannot discharge the burden of proof on it to prove its entitlement to the deduction by proving what portion of its production involved retreading of its own tires for sale or lease as retreaded tires, in order to make a claim for the deduction with respect to that portion of its profits and to show that they would exceed the 10 per cent requirement of the de minimis rule, the reassessment should stand. The plaintiff argues that all of its retreading business constituted “manufacturing or processing . . . of goods for sale or lease” and that it is therefore entitled to the deduction with respect to all of its income from the retreading business. In particular, it argues that that portion of the business involving the retreading of customers’ tires comes within the language of paragraph 125.1 (3)(a) because it was engaged in the sale of tire treads to its customers even where it applied those treads to tires already owned by the customer.

The essential question then is as to the nature of that portion of the plaintiff’s business involving the retreading of customers’ tires. The plaintiff contends that in this aspect of its business it was manufacturing or processing tire treads for sale as such. The defendant argues that at best the plaintiff was engaged in the manufacturing or processing of a service. In particular, it says that the materials — namely, the rubber strip — used for retreading did not pass into the ownership of the customer pursuant to a contract of sale. Instead, it argues that the contract was one for work and materials to be provided by Crown Tire, with property in the materials passing to the customer by accession at the time when they were attached to the customer’s Casing.

I have come to the conclusion that the manufacturing or processing in which the plaintiff was engaged during the period in question, in so far as it involved retreading of tires owned by customers, was not with respect to “goods for sale or lease”. In my view the contracts with respect to such tires were contracts for work and materials and not contracts for the sale of goods. Although I was invited to draw certain inferences from the contract documents, including order forms, invoices, and warranties, I did not find these to be particularly helpful in determining the nature of the contract except as noted below.

In Benjamin’s Sale of Goods (London, 1974), in considering the distinction between a contract of sale of goods and a contract for work and materials, it is stated:

Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use or affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale.*

This I believe states the general principle applicable to the situation, although its application is of course always a matter for interpretation in each case.

I believe that the situation here fits within the general principle as stated in Benjamin. With respect to the retreading of tires owned by customers, it appears to me that the customers retain ownership throughout the process. In an order form admitted as Exhibit P-1, the customer asked Crown Tire Service to retread a particular tire “if economical”. Testimony from the company’s officers given before me indicated that this meant that if, upon closer inspection, Crown Tire concluded that the tire was not worth retreading, it would so advise the customer and request further directions as to whether the customer wanted the tire returned to him or discarded. Where a tire was retreaded, it would be returned to the same customer who supplied it. This suggests to me that the casing was seen throughout as being the property of the customer and the work and materials provided by Crown Tire were applied to that casing. This involved essentially a contract for repairs. Once the rubber material was affixed to the casing it would become the property of the owner of the casing by accession. That material could therefore not be the subject of a contract of sale since it merged with the customer’s property at the time of adhesion to it.

It appears to me that the most relevant precedents support this interpretation. In Sterling Engine Works v Red Deer Lumber Co (1920), 51 DLR 509, the Manitoba Court of Appeal held that where two steel plates were attached by the plaintiff to the defendant’s locomotive to repair the fire box the title in the plates passed to the defendant not by sale but by accession. In reaching this conclusion Dennistoun, JA, noted that there was no evidence to suggest that the plaintiff was a vendor of, or dealer in, steel plates and that they merely used steel plates in the course of repairing the locomotive. Similarly in the present case the evidence indicated that the plaintiff company did not sell “tire treads” to anyone without them being affixed to a tire casing. This

“At page 29.

reinforces the view that the provision of tire treads in the retreading process was not seen as a contract of sale.

The Sterling Engine Works case was followed by the Nova Scotia Supreme Court, Appeal Division in Scott Maritimes Pulp Ltd v B F Goodrich Canada Ltd (1977), 72 DLR (3d) 680, where it was held that a contract for replacing a rubber cover on a press role is a contract for labour and materials and not for the sale of the rubber cover. More pertinent, perhaps, is the decision of the Exchequer Court of Canada in The King v Boultbee Limited, [1938] Ex CR 187; [1938-39] CTC 78; 1 DTC 443. That case also involved a tire retreading business and the issue was whether the retreading of tires resulted in “goods produced or manufactured” by the defendant so as to make those tires subject to sales tax and excise tax. In that case the Court also had to consider the nature of such transactions where the defendant retreaded the customer’s tire. The Court treated that transaction as a contract for repair and not as a sale. Thus it was a contract for work and material and the sales and excise taxes were not applicable.

The most important factor in establishing that Crown Tire’s contracts for retreading customers’ tires were contracts for work and material is, in my view, the fact that the work was done to a tire casing which the customer owned throughout. I think this distinguishes the present situation from those involved in many of the decided cases where the customer had never previously owned any part of the end product.

While the distinctions employed here may seem somewhat technical and remote from revenue law, one must assume that Parliament in speaking of “goods for sale or lease” had reference to the general law of sale or lease to give greater precision to this phrase in particular cases.

The plaintiff has not discharged the burden of proof that lay upon him to show that the reassessments for the taxation years in question were wrong. As stated in the pleadings of the defendant, the Minister of National Revenue in making those reassessments assumed that the transactions involving the retreading of tires owned by customers does not constitute the sale or lease of goods manufactured or processed in Canada by the plaintiff. He further assumed (presumably in recognition of the fact that some of the plaintiff’s business consisted of the sale or lease of retreaded tires owned by it) that less than 10 per cent of the plaintiff’s gross revenues was in respect to the sale or lease of goods manufactured and processed in Canada by it. I have concluded that the retreading of customers’ tires did not constitute manufacturing or processing for sale or lease. This means that at least a substantial part of the business income of the plaintiff during that period in question would not qualify for the tax deduction provided by section 125.1. But the plaintiff has not been able to demonstrate what portion of its business income could be attributed to the retreading of its own tires for sale or lease and thus be eligible for the tax deduction. Nor has it been able to demonstrate whether such portion would exceed the 10 per cent of gross revenue as required by subparagraph 125.1(3)(b)(x) in order to qualify for the tax deduction, the Minister having assumed that it does not. In such cases the burden is on the plaintiff to prove that the Minister’s assumptions and assessments are wrong. See RWS Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182. The plaintiff has not so demonstrated.

ORDER

It is hereby ordered that this appeal be dismissed with costs.