Gibson,
J:—This
action
and
four
others
were
heard
on
common
evidence.*
Actions
T-4586-77
and
T-4587-77
relate
to
the
1973
and
1974
taxation
years
of
the
plaintiff
and
actions
T-4588-77,
T-4970-77
and
T-4971-77
relate
to
the
1973,
1974
and
1975
taxation
years
of
the
plaintiff.
The
plaintiff
claims
to
be
entitled
to
a
so-called
manufacturing
or
processing
deduction
which
is
an
amount
equivalent
to
a
certain
percentage
of
the
amount
of
profit
from
manufacturing
or
processing
in
Canada
of
goods
for
sale
within
the
meaning
of
paragraph
125.1(3)(a)
of
the
Income
Tax
Act,
RSC
1952,
c
148
as
amended
by
section
1
of
SC
1970-71-72,
c
63
and
as
amended
thereafter
for
the
1974
taxation
year,
computed
by
a
formula
prescribed
in
Regulations
5200
and
5202
of
the
Act.
There
is
no
issue
between
the
parties
as
to
the
quantum
of
the
deductions
claimed.
In
each
of
the
cases,
depending
on
this
adjudication,
the
plaintiff
is
entitled
to
the
amounts
claimed
or
to
nothing.
What
is
in
issue
is
whether
or
not
what
the
plaintiff
did
during
these
taxation
years
constituted
“manufacturing
or
processing
in
Canada
of
goods
for
sale’’
so
as
to
have
earned
“Canadian
manufacturing
or
processing
profits’’
within
the
meaning
of
paragraph
125.1(3)(a)
of
the
Income
Tax
Act.
What
the
plaintiff
MDS
Health
Group
Limited
did
during
these
taxation
years
upon
which
such
claim
is
based
was
to
operate
medical
laboratories.
Dr
J
C
Nixon,
MS,
MSc,
PhD
of
the
plaintiff
in
evidence
described
what
MDS
Health
Group
Limited
did
and
does.
He
said
that
a
laboratory
in
scientific
circles
has
a
broad
meaning,
but
in
medicine
it
means
a
place
where
technical
work
or
tests
are
done
to
arrive
at
a
diagnosis.
Tests
and
examinations
involve
various
tissues
and
secretions.
MDS
is
a
laboratory
which
(like
all
other
laboratories)
performs
laboratory
tests
requested
by
a
physician.
Dr
Nixon
explained
that
a
specimen
may
be
taken
by
a
referring
physician
and
forwarded
to
MDS
Laboratory
by
courier
or
the
patient
may
simply
attend
a
laboratory
with
a
requisition
from
the
physician,
in
which
case
the
specimen
is
provided
by
the
patient
at
the
laboratory.
Like
all
laboratories
which
normally
provide
a
numerical
number
for
their
tests
and
also
provide
what
is
to
them
a
normal
or
abnormal
range
for
that
particular
test,
be
it
a
red
blood
cell
count,
an
estimation
of
sodium
in
the
serum
of
the
blood,
etc,
MDS
Laboratories
did
so
as
well.
He
noted
that
various
testing
processes
are
performed
by
different
technicians,
using
analytical
means.
He
described
in
great
detail
the
technique
for
obtaining
a
Pap
smear,
what
the
Pap
smear
kit
consists
of,
and
the
intricate
method
of
staining
and
the
final
preparation
before
an
examination
under
a
microscope.
Similarly,
under
the
heading
of
“Histopathology’’
Dr
Nixon
explained
what
happens
to
biopsy
tissue
removed
by
a
physician.
A
slide
is
prepared
again
for
microscopic
examination.
With
regard
to
“Biochemistry”,
which
may
be
performed
on
blood
promptly,
but
also
urine
and
other
body
fluids,
Dr
Nixon
gave
a
short
simple
course
in
Clinical
Pathology.
He
pointed
out
that
MDS
operates
a
sophisticated
autoanalyzer
SMA
12/60
which
identifies
and
measures
12
constituents
in
the
blood,
such
as
glucose,
urea,
cholesterol,
alkaline
phosphatase,
etc.
This
test
is
the
so-called
SMA-12
which
is
a
mechanical
run-through
of
constituents
in
the
serum
specimen.
With
regard
to
“Microbiology”
which
involves
a
culture
of
organisms,
either
found
in
the
feces,
urine,
blood,
sputum,
etc,
which
are
examined
under
the
microscope
after
incubation
to
encourage
growth
in
special
media
and
which
permits
visual
examination
of
the
organism
colony,
Dr
Nixon
described
how
MDS
did
such
in
their
laboratories.
He
noted
that
similarly,
haematological
techniques
produce
red
and
white
cell
counts,
haemoglobin,
measurement
and
quantity
of
other
constituents
in
the
blood.
Dr
Nixon
then
spoke
of
quality
control
to
ensure
accurate
data
collection.
Finally,
Dr
Nixon
spoke
of
the
environmental
conditions
necessary
for
a
laboratory
which
deals
with
a
wide
range
of
storage
conditions,
which
includes
freezing
and
refrigeration.
In
sum,
MDS
Laboratory,
employing
their
skilled
staff
analyse
what
specimens
are
brought
to
them,
and
by
its
staff
produce
or
make
a
report.
There
is
no
other
“end
product’’
produced
from
the
specimens.
MDS
puts
it
this
way
saying
that
its
activities
include:
(a)
the
procuring
of
specimen
which
may
be
human
blood,
serum,
feces,
urine,
sputum,
tissue
or
other
body
fluids;
(b)
the
processing
of
the
specimen;
and
(c)
the
manufacture
of
a
report.
As
pleaded,
MDS
says
that
these
activities
“constituted,
in
the
relevant
year,
the
manufacturing
and
processing
of
goods
for
sale
and
that
its
activities
were
performed
in
connection
with
the
manufacturing
or
processing
of
goods
for
sale
within
the
meaning
of
subsection
125.1(3)
of
the
Income
Tax
Act,
having
regard
to
statutory,
common
law
and
other
definitions
and
interpretations
of
the
words
‘manufacturing
and
processing
.
.
.
of
goods
for
sale
..
”’
As
put
by
counsel
for
the
plaintiff:
Section
125.1
of
the
Income
Tax
Act
permits
a
corporation
to
deduct
from
tax
a
certain
percentage
in
respect
of
its
‘‘canadian
manufacturing
and
processing
profits’’.
This
latter
term
is
defined
in
section
125.3
as
follows:
“(a)
Canadian
manufacturing
and
processing
profits
of
a
corporation
for
a
taxation
year
means
such
portion
of
the
aggregate
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.”
As
set
out
in
this
subsection,
the
credit
is
applicable
to
profits
derived
from
manufacturing
OR
processing.
The
profit
from
manufacturing
and
processing
is
arrived
at
through
application
of
a
formula
set
out
in
Regulation
5200
which
reads
as
follows:
“5200.
Subject
to
section
5201,
for
the
purpose
of
paragraph
125.1(3)(a)
of
the
Act,
‘Canadian
manufacturing
and
processing
profits’
of
a
corporation
for
a
taxation
year
are
hereby
prescribed
to
be
that
proportion
of
the
corporation’s
adjusted
business
income
for
the
year
that
(a)
the
aggregate
of
its
cost
of
manufacturing
and
processing
capital
for
the
year
and
its
cost
of
manufacturing
and
processing
labour
for
the
year
is
of
(b)
the
aggregate
of
its
cost
of
capital
for
the
year
and
its
cost
of
labour
for
the
year.”
This
formula
may
be
depicted
as
follows:
cost
of
manufacturing
and
processing
of
capital
and
labour
total
cost
of
capital
and
labour
Regulation
5202
defines
‘‘cost
of
manufacturing
and
processing
labour”
as:
‘cost
of
manufacturing
and
processing
labour’
of
a
corporation
for
a
taxation
year
means
100/75
of
that
portion
of
the
cost
of
labour
of
the
corporation
for
that
year
that
reflects
the
extent
to
which
(a)
the
salaries
and
wages
included
in
the
calculation
thereof
were
paid
or
payable
to
persons
for
the
portion
of
their
time
that
they
were
directly
engaged
in
qualified
activities
of
the
corporation
during
the
year.
but
the
amount
so
calculated
shall
not
exceed
the
cost
of
labour
of
the
corporation
for
the
year.”
This
definition
requires
a
determination
to
be
made
of
wages
or
salaries
paid
to
persons
for
the
portion
of
their
time
that
they
were
directly
engaged
in
“qualified
activities”.
Regulation
5202
defines
“qualified
activities”
as
follows:
‘qualified
activities’
means
(a)
any
of
the
following
activities,
when
they
are
performed
in
Canada
in
connection
with
manufacturing
or
processing
(not
including
the
activities
listed
in
subparagraphs
125.1
(3)(b)(i)
to
(ix)
of
the
Act)
in
Canada
of
goods
for
sale
or
lease:
(i)
engineering
design
of
products
and
production
facilities,
(ii)
receiving
and
storing
of
raw
materials,
(iii)
producing,
assembling
and
handling
of
goods
in
process,
(iv)
inspecting
and
packaging
of
finished
goods;
(v)
line
supervision,
(vi)
production
support
activities
including
security,
cleaning,
heating
and
factory
maintenance,
(vii)
quality
and
production
control,
(viii)
repair
of
production
facilities,
and
(ix)
pollution
control.
(b)
all
other
activities
that
are
performed
in
Canada
directly
in
connection
with
manufacturing
or
processing
(not
including
the
activities
listed
in
subparagraphs
125.1
(3)(b)(i)
to
(ix)
of
the
Act)
in
Canada
of
goods
for
sale
or
lease.”
The
words
“manufacture”
or
“process”
are
not
defined
in
the
Income
Tax
Act.
The
submission
is
that
the
activities
of
MDS
in
each
of
its
laboratory
subdivisions
involved
the
processing
of
specimens
within
the
meaning
of
the
case
law
and
dictionary
definitions
of
the
word
“process”.
Particular
reliance
is
placed
on
the
case
of
The
St
Catherines
Standard
Limited
v
Her
Majesty
The
Queen,
[1978]
CTC
258;
78
DTC
6168.
In
that
case,
however,
the
Crown
conceded
that
the
publication
of
a
newspaper
was
the
manufacturing
and
processing
of
goods
for
sale
within
the
meaning
of
section
125.1
of
the
Act
and
the
only
question
at
issue
was
whether
news
gathering,
editorial
work
and
the
preparation
of
advertisement
were
“qualified
activities”
within
the
meaning
of
Regulation
5202
so
that
salaries
paid
to
employees
who
performed
these
functions
would
constitute
“cost
of
manufacturing
and
processing
labour”.
In
this
case,
the
quality
of
the
contents
of
the
report
produced
by
the
plaintiff’s
various
laboratories
is
the
only
thing
of
value.
It
is
not
an
end
product
of
the
specimens
after
analysis
in
the
sense
required
by
the
Act
and
Regulation,
namely,
goods
as
contemplated
and
within
the
meaning
of
section
125.1
of
the
Income
Tax
Act
and
Regulation
5200.
The
analysis
of
the
specimens
ends
in
nothing
that
can
become
the
subject
of
a
sale.
Although
after
the
analysis
reports
are
prepared
and
such
reports
contain
valuable
information,
such
reports
are
not
“goods”
contemplated
and
meant
in
the
context
of
the
words
“manufacturing
or
processing
in
Canada
of
goods
for
sale”
in
section
125.1
of
the
Act.
Accordingly,
the
finding
is
that
the
plaintiff
does
not
manufacture
or
process
in
Canada
goods
for
sale
or
lease
within
the
said
statutory
sense
and
as
a
consequence
does
not
qualify
for
any
deduction
from
tax
under
the
provisions
of
section
125.1
of
the
Income
Tax
Act.
The
appeal
is
dismissed
with
costs.
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