Démolition A.M. de l'est du Québec Inc. v. MNR, 93 DTC 889, [1993] 2 CTC 2447 (TCC)

Garon, T.C.C.J.:—These are appeals from income tax assessments for the appellant's 1984, 1985 and 1986 taxation years. In these assessments, the Minister of National Revenue reduced the deductions claimed by the appellant for manufacturing and processing profits, as set out in the following table:

The main issue is therefore whether the appellant is entitled to the tax credit for manufacturing or processing profits set out in section 125.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Only one other issue is in dispute, and it relates to the classification of containers for the purposes of the capital cost allowance for the years in issue. The appellant thus abandoned any other issue raised in its original notice of appeal and its amended notices of appeal.

Facts

The appellant was incorporated under Part I of the Quebec Companies Act on August 17, 1973. Albert Maltais was and still is its principal shareholder and its first manager. The appellant operates a demolition business. The appellant's fiscal period coincided with the calendar year for each of the years in issue. The appellant’s head office and its principal place of business are located in Charlemagne, near Montréal. There, the appellant has an office and a parcel of land with an area of about 139,000 square feet. The land in question is used as a storage depot; the appellant stores the machinery and equipment used in the business there, along with some materials which are to be sold and which are obtained from the demolition activities. This land is divided into sections to facilitate sorting the salvaged material. Since the appellant began its activities, and particularly during the years in issue, Albert Maltais has been the key man of the business. As he said during his testimony, he “is into everything" [translation].

In the course of its operations, the appellant is involved in a variety of activities. For example, while demolishing buildings, the appellant does a preliminary sorting of the materials. Some of these materials are then sent to buyers, others are loaded and transported to a dump, and finally, others are delivered to its principal place of business, where the sorting is completed. In performing a demolition contract, the appellant also cleans the work site or, in other words, the place where the demolition operations were carried out. In order to do this work, the appellant employed 13 to 25 people during the years in issue, some of whom were Albert Maltais’s sons. In order to carry out this demolition work, the appellant had rolling stock, boom trucks, a tractor cab, a six-wheel truck, containers, for which no precise number was given, for sorting and transporting materials, and special equipment such as acetylene torches. The appellant also used rented equipment when needed.

Most of the appellant's activities were carried out on the sites where the buildings or works to be demolished were located. In 80 per cent of the cases, these buildings or works had to be completely razed. In almost all cases, the materials from the demolition work belonged to the appellant. Materials which could be salvaged might thus be resold by the appellant. Thus bathtubs, urinals, sinks, copper pipes and other hardware were unbolted, unscrewed and transported in containers to the land in Charlemagne, where they were graded and stored. Materials were also cut to size and sorted. The saleable parts, such as pipes and counters, had to be extracted in some way. A large part of these metals was sold to foundries in the vicinity of the site where the demolition was being carried out. For roofs, the appellant had to use a special machine, at least in a case given as an example, to cut what is called the membrane" which is then taken off and delivered to the dump. Then comes a sort of steel sheet called a "steel deck”, 60 per cent of which is salvaged. Finally, the steel which makes up the roof itself is sectioned and placed in a container like the highest quality "PNS" steel. Different containers were used for different qualities of steel. In addition to metals, the appellant salvaged bricks, concrete blocks, pieces of wood, and so on. In the case of brick walls on buildings no higher than two or three stories, only ten per cent of the bricks break or are otherwise unusable. For pieces of wood, the nails are removed by using a special machine, and the wood resold. The concrete blocks are simply given away to save on dumping charges. For the taxation years in issue, it was established that 22 to 30 per cent of the materials collected on the sites were trash which was delivered to the dump.

The greatest part of the recycling was done on the demolition site. The surplus, apart from the trash which was sent directly to the dump, was transported to customers or to the appellant's land in Charlemagne. For example, it is pointless to sand, polish and protect the steel from the elements. These materials would not have a greater value. In some cases, the appellant made alterations to the salvaged materials at the request of customers. The welding work was not done by the appellant’s employees, but by an outside crew who had special training. It should be noted with respect to the containers that there were generally three to five per site. They were used for sorting materials. These containers were then used to transport trash to the dump and materials to the appellant's land in Charlemagne or directly to customers. Each container held different categories of materials.

The appellant’s income was derived mainly from two different sources: demolition contracts and the sale of salvageable materials. The appellant earned income from renting containers, but the income from this source was minimal. In fact, according to the evidence given by Annick Sauvageau, the appellant's secretary, the receipts from the appellant’s two main activities for the years in issue were as follows:

As may be seen, in 1984, the income which came directly from demolition contracts, that is, the sums paid to the appellant for its demolition work and for laying out the sites, exceeded the income from the sale of salvageable materials by a wide margin. For 1985, the receipts from these two activities were for all practical purposes the same, while for the 1986 taxation year the income from salvageable materials was approximately double the income derived directly from demolition contracts. Specific mention was made of cases in which the demolition work, taken, in isolation, was done at a loss, in that the sum paid to the appellant by the customer for the demolition of a building or work was lower than the costs borne by the appellant in carrying out the demolition work. As an illustration of this latter situation, reference was made to the contract with Alcan Ltd. at Arvida. As can easily be seen, the appellant's profit came from the demolition and recycling operations as a whole.

Appellant's arguments

It was argued on behalf of the appellant that the recycling activities, that is, sorting materials, cutting to size, taking out the hardware, separating the various items, removing nails and screws, were processing activities. Processing is done, according to the appellant, even though the materials are not prepared in accordance with customers' prior requirements.

The appellant argued that the expression "processing" must be interpreted in its overall context, according to its ordinary meaning, which is consistent with the spirit and purpose of the Act and the intention of Parliament. It also advanced that if the interpretation of a provision is not clear, preference must be given to a reasonable interpretation which allows deductions rather than an interpretation which would give no relief to the taxpayer. The appellant relied on a number of decisions of the courts, inter alia, the decision of the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305.

The appellant also relied on the Department of National Revenue's Interpretation Bulletin IT-145R dated June 19, 1981 (as amended by Special Release, dated February 28, 1986) in order to establish that its activities constituted processing activities.

The appellant also referred to the case law on the concept of processing in the context of section 125.1 and mentioned the decision in Federal Farms Ltd. v. M.N.R. (No. 2), [1966] C.T.C. 62, 66 D.T.C. 5068 (Exch. Ct.); W.G. Thompson & Sons Ltd. v. M.N.R. (1966), 41 Tax A.B.C. 1, 66 D.T.C. 291; Admiral Steel Products Ltd. v. M.N.R. (1966), 40 Tax A.B.C. 322,66 D.T.C. 174; and The Queen v. York Marble, Tile and Terrazzo Ltd., [1968] S.C.R. 140, [1968] C.T.C. 44, 68 D.T.C. 5001.

The appellant advanced that there are two tests for determining whether an activity is a processing activity. First, there must be changes in the appearance or nature of the item. Second, the processing of the item must make it saleable or usable. The appellant also argued that if a business both provides services and processes an item, it is entitled to claim the tax credit in respect of the profits it makes from these dual operations. Reference was then made to the following decisions:

Les Ateliers Benoît Allard Inc. v. M.N.R., [1984] C.T.C. 2189, 84 D.T.C. 1140 (T.C.C.);

Installation Mécanique G & B Ltée v. M.N.R., [1987] 1 C.T.C. 2326, 87 D.T.C. 226 (T.C.C.);

Canada v. Nowsco Well Service Ltd., [1990] 1 C.T.C. 416, 90 D.T.C. 6312 (F.C.A.);

Canada v. Halliburton Services Ltd., [1990] 1 C.T.C. 427, 90 D.T.C. 6320 (F.C.A.).

Moreover, the appellant argued that for the purposes of the system of depreciation for tax purposes, the containers should be classified in Class 29 of Schedule II of the Income Tax Regulations, and not in Class 8, on the ground that these containers constitute an essential part of the processing operations. Without the containers, a supplementary appeal memorandum stated, “the processing comes to a halt, since it starts on the construction site” [translation].

Respondent's arguments

The respondent argued that the appellant's activities were not sufficient to constitute processing. Counsel for the respondent indicated that, in his view, the extent of the processing in the cases cited, York Marble, Tile and Terrazzo and Admiral Steel, all supra, was more substantial than in this case. He added that in this case, metal is cut to size simply to facilitate demolition. In his view, the decision in Admiral Steel is a case on the outside margin of the liberal interpretation of the word "processing". He also noted that the appellant's activities could have been considered to be processing if the changes made to the materials had been made to comply with customers' wishes. Counsel for the respondent also argued that the ordinary meaning of the word "construction" also includes the demolition of works. He referred to, inter alia, certain provisions of the Civil Code which deal with the builder's privilege.

With respect to the classification of the containers, the respondent argued that even if processing took place, the containers are not used, even indirectly, in the course of processing goods for sale.

Analysis

I believe that it would be useful first to consider the decisions of the courts which have dealt with what is meant by processing in the context of section 125.1 of the Income Tax Act. The relevant portions of section 125.1 read as follows:

125.1 (1) There may be deducted from the tax otherwise payable under this Part by a corporation for a taxation year an amount equal to the aggregate of

(a) nine per cent of the lesser of

(i) the amount, if any, by which the corporation's Canadian manufacturing and processing profits for the year exceed the least of the amounts determined under paragraphs 125(1)(a) to (c) in respect of the corporation for the year, and [1]

(ii) the amount, if any, by which the corporation’s taxable income for the year exceeds the aggregate of

(A) [Repealed by 1976-77, c. 4, subsection 50(1).]

(B) the least of the amounts determined under paragraphs 125(1)(a) to (c) in respect of the corporation for the year, [2]

(C) two times the aggregate of amounts deducted under subsection 126(2) from the tax for the year otherwise payable under this Part by the corporation, and

(D) the amount, if any, by which the aggregate of the corporation's Canadian investment income for the year and its foreign investment income for the year (within the meanings assigned by subsection 129(4)) exceeds the amount, if any, deducted under paragraph I'll(1)(b) from the corporation’s income for the year; and

(b) five per cent of the lesser of

(i) the corporation's Canadian manufacturing and processing profits for the year, and

(ii) the least of the amounts determined under paragraphs 125(1)(a) to (c) in respect of the corporation for the year, [3]

except that. . . .

(3) In this section,

(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; and

(b) manufacturing or processing" does not include

(i) farming or fishing,

(ii) logging,

(iii) construction,

(iv) operating an oil or gas well, extracting petroleum or natural gas from a natural accumulation thereof 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, [4]

(v) extracting minerals from a mineral resource,

(vi) processing ore (other than iron ore or tar sands) from a mineral resource to any stage that is not beyond the prime metal stage or its equivalent, [5]

(vi.1) processing iron ore from a mineral resource to any stage that is not beyond the pellet stage or its equivalent, [6]

(vi.2) processing tar sands to any stage that is not beyond the crude oil stage or its equivalent, [7]

(vii) producing industrial minerals other than sulphur produced by processing natural gas,

(viii) producing or processing electrical energy or steam, for sale,

(ix) processing gas, if such gas is processed as part of the business of selling

or distributing gas in the course of operating a public utility, or

(x) any manufacturing or processing of goods for sale or lease, if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active business carried on in Canada was from

(A) the selling or leasing of goods manufactured or processed in Canada by it, and

(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it.

The concept of processing was examined in Federal Farms Ltd. v. M.N.R.,

supra, in the context of section 40A, which, with some changes, became section 125.1. At that time, section 40A allowed a tax credit for manufacturing and processing corporations. Cattanach, J. of the Exchequer Court of Canada, as he then was, discussed the meaning of the word "process", for which the equivalent in French is the verb "transformer", at page 67 (D.T.C. 5071-72):

While I am aware that dictionaries are not to be taken, in all instances, as authoritative exponents of the meaning of words as used in Acts of Parliament, nevertheless when words are used in their ordinary sense (as I have concluded they are in the section under which the present appeal is made) it is then appropriate that resort be had to recognized dictionaries for it is in these books that the ordinary meaning of a word is ordinarily to be found.

The word "process" is defined in The Shorter Oxford English Dictionary, Third Edition, as "To treat by a special process; e.g. to reproduce (a drawing, etc.) by a mechanical or photographic process."

In Webster's Third New International Dictionary published in 1964 the word "process" is defined as follows, "to subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result: put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process (-ing cattle by slaughtering them) (-ed milk by pasteurizing it) (-ing grain by milling) (-ing cotton by spinning):"

In Webster's Second New International Dictionary published in 1959 the following definition of the word process" appears, "To subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form as live stock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking."

Other standard works consulted define "process" as “to treat, prepare, or handle by some special method."

I find it useful to consider the comments of Judge St-Onge, then a member of the Tax Appeal Board, in Admiral Steel Products Ltd. v. M.N.R., supra, at pages 326-27 (D.T.C. 177):

In the instant matter, there is merely a change in the form. Is this change important enough or involving enough manpower, machinery and capital to say that the product is processed? . . .

It should be remembered that even if the steel is produced by a foundry in such a coil, it is not very usable as such if not processed as described above. It would be rather difficult to imagine somebody with a pair of scissors trying to cut a piece of steel. . . .

The operations discussed, in the case at bar, were sizeable and required heavy equipment. Although substance is not altered, major changes take place in the form. From the economic point of view, there are instances where changes in the form are more important than changes in substance, as the case may be in the present appeal.

Judge Bonner of this Court, at that time a member of the Tax Review Board, decided in Latter Investments Ltd. v. M.N.R., [1982] C.T.C. 2076, 82 D.T.C. 1086, not to allow the deduction provided in section 125.1. It is interesting to note the following observations (C.T.C. 2078-79, D.T.C. 1088-89) :

The word "process" is one of very broad import as can be seen from the passage just referred to. It is not, however, in my opinion, an apt word to use in collectively describing the various operations which were carried on in the appellant's stores. This is particularly apparent when it is remembered that it is, in the Act, used in conjunction with the word manufacturing”.

Many of the dictionary definitions of the word "process" speak of a "special" process or "particular" method and systems designed to effect a desired result. There does not appear to be anything"special" or"particular" about the series of operations carried on in the appellants’ stores . . . [passage omitted]. The words manufacturing or processing in Canada of goods for sale or lease” do not suggest a Parliamentary intention to extend the tax relief afforded by section 125.1 to profits derived from ordinary retailing operations such as are carried out here.

He then referred to the Petit Robert and the Larousse:

This conclusion is, in my view, supported by the French version of the Act. It uses the words "Bénéfices de fabrication et de transformation au Canada.” The word "transformer" is defined in Le Petit Robert Dictionnaire Alphabétique & Analogique de la Langue Française,, published in 1973, as follows:

TRANSFORMER : 1, Faire passer d'une forme a une autre, donner un autre aspect, d'autres caractères formels a. V Changer, modifier, renouveler. Transformer une maison. Transformer une matière première. V Elaborer, traiter. Transformer en améliorant, en altérant.

The same word is defined in the Larousse Trois Volumes en Couleurs, tome trois, published in 1968, in part as follows:

Transformer . . . Faire changer de forme : Circé transforma les compagnons d'Ulysse en pourceaux.

In Harvey C. Smith Drugs Ltd. v. M.N.R., [1986] 1 C.T.C. 2339, 86 D.T.C. 1243, Judge Brulé of this Court set out certain guidelines which may assist in determining the important elements in terms of what may constitute processing operations, after distinguishing the dictionary definitions of the English equivalent of the word "transformer", "process". Judge Brulé stated, at page 2347 (D.T.C. 1248 and 1249):

The problem with limiting ourselves to this approach is that the ordinary sense of the word "processing" is so general that, in the words of J.O. Weldon, Q.C.:

It readily lends itself to any commercial operation which is made up of a series of steps. W.G. Thompson & Sons Limited v. M.N.R., supra.

If one were to retain the ordinary meaning of the word "processing" as the only guide to its interpretation there would, of course, be very little in our society that could not be categorized as some form of processing. What the Court must do is to draw a line between what is and what is not "processing" in the context of the Act, based on the facts of the case.

He continued, at pages 2347-48 (D.T.C. 1249):

Guidelines for interpretation

The word process" as J.O. Weldon, Q.C. said in the Thompson case, supra, at page 297:

. . is a word . . . which not only has a broad meaning to begin with, but has an ever-increasing range of meaning, and so is almost impossible to define.

It is possible, however, to highlight certain guidelines for its interpretation.

The first is found in the question: Does the process change the product in its form, appearance or other characteristic? (Kimel Limited et al. v. M.N.R., supra). It

is essential, in the context of section 125.1, that the process, or at least part of the process, change the product in "its form, appearance or other characteristic". I say “part of the process" in that if a corporate taxpayer were involved in the preparation of fresh vegetables, for example, as was the case in Federal Farms Ltd. v. M.N.R., supra, and one of the steps in their preparation consisted of packaging the vegetables, then the packaging activity would be considered "processing" even though it did not change.

The second guideline to consider is: Does the process make the produce more marketable? (Amdiral Steel Products Limited v. M.N.R., supra). The marketability of the product is an economic concept, not a legal one. For instance, the legal requirement that a product be packaged in a transparent container does not increase the intrinsic economic worth or marketability of a product, although it may be the only legal way of getting the product to market.

It is important to establish the economic purpose of a particular activity in order to determine whether or not it consists of processing.

Mrs. Justice Reed of the Federal Court-Trial Division, also in Harvey C. Smith Drugs Ltd. v. M.N.R., [1992] 1 C.T.C. 325, 92 D.T.C. 6349, upholding the decision of Judge Brulé, dealt with the concept of processing in these terms at pages 332-33 (D.T.C. 6354-56):

As I read the cases that have been cited to me, I conclude that in order to characterize an activity as processing within the meaning of section 125.1 there must at the least be a change in form of appearance of the product being processed. In all of the cases, there has been a physical change in the product being processed. The physical change may be chemical or electrical and thus not immediately visible to the eye but there has been a physical change to the product. In Federal Farms, the carrots and potatoes were washed and sprayed with a growth retardant to prevent deterioration. In Admiral Steel Products, the steel was flattened, sheared, split; it was changed into a difference [sic] shape and size so as to become useable by the ultimate consumer. In the Thompson case, the beans were washed and treated with chemicals to prevent bacterial infection. In Woods Harbour Lobster Co. v. M.N.R., [1989] 2 C.T.C. 2032, 89 D.T.C. 303 (T.C.C.) at page 2034 (D.T.C. 306), the lobsters were cleaned, their claws were pegged.

Counsel for the plaintiff argues that the interpretation principle captured by the Latin phrase noscitur a sociis should not be employed in this case. (That is, that the meaning of "processing" should not be influenced by its association with "manufacturing".) It is argued that Mr. Justice MacGuigan’s comments in British Columbia Telephone Company Ltd. v. Her Majesty the Queen, [1992] 1 C.T.C. 26, 92 D.T.C. 6129 (F.C.A.) at page 32 (D.T.C. 6133), should be adopted. Mr. Justice MacGuigan quoted Maxwell on the Interpretation of Statutes, 12 ed. by P. St. J. Langan at page 289 and Attorney-General for British Columbia v. The King, [1922] 63 S.C.R. 622 at page 638, for the proposition that the noscitura sociis rule should not be applied lightly. Counsel for the plaintiff argues that in this case when the words "manufacturing or processing” are used, they are being used disjunctively and one should be careful to give each its separate meaning.

While I accept that admonition, in the present case the whole context of the Act makes it clear that the concepts" manufacturing” and” processing” are related. The concept "processing" as was noted in the Kimel case, is very broad. The ordinary dictionary definition of that word encompasses a very wide variety of activity. For the purposes of section 125.1, it is necessary to narrow that broad scope in order for the term to be meaningful. One factor which is useful in such interpretation is the import and meaning of the associated word manufacturing”. This to me imports a requirement that the product being processed undergo a physical change in form or appearance and not merely be packaged.

Later, Mrs. Justice Reed elaborated on the connection that exists between the two tests analyzed by Judge Brulé in that case. According to Mrs. Justice Reed, these tests are not independent (C.T.C. 333-34, D.T.C. 6355):

. . . I have some difficulty with the idea that a processing activity loses its character as such, if it occurs after an order is made rather than before. This argument seems to flow from the assumption that processing for section 125.1 purposes is synonymous with any activity which "makes the product more marketable”. I do not read the jurisprudence as establishing this criterion as an independent test. Such a test would be very broad indeed. An activity which makes the product more marketable in my view, can encompass much that would not fall under the concept processing. I have no doubt that the activity engaged in by the pharmacist renders the prescription drugs more marketable. Indeed, they cannot be sold to the ultimate consumer without the dispensing activity.

In light of the principles set out in the decisions to which I have referred, I have come to the conclusion in the case that concerns us that the work carried out by the appellant for the purpose of selling part of the materials found in the buildings or works to be demolished constitute processing within the meaning of section 125.1 of the Income Tax Act.

For example, in the case of steel-based materials, the appellant must do considerable work to get products from these materials which might be saleable. The work which must first be done in the case of pieces of wood is substantial. The nails are removed by using a special machine before it can be sold. In the case of the brick, a brick wall must be demolished in a very specific way so as to do the least possible damage to be bricks.

Throughout this recycling work, materials must be sorted and then graded to some extent. Specialized equipment or tools must be used to perform the work which is needed to put the materials into saleable condition. It is also important to note that, in many cases, the demolition work would not be profitable if it were not followed by the work of processing the portion of the materials which may be saleable or usable. The evidence established that in the case of a number of contracts, the sale of the recycled materials brings in much higher gross revenue than the sum received by the appellant for demolishing the works and cleaning the site.

This approach seems to me to be entirely consistent with the comments set out in paragraph 46 of the Interpretation Bulletin cited supra, IT-145R, with respect to scrap metal dealers. This paragraph reads:

Scrap Metal Dealers

46. Activities carried on by a scrap metal dealer, such as sorting, removing contaminants, grading, cutting to size and baling, in order to make raw scrap saleable are considered qualified activities.

In fact, the situation of demolition businesses seems to me to be similar to that of scrap metal dealers, at least from the point of view of the application of section 125.1 of the Act.

In considering the question of whether the demolition and recycling work done by the appellant in the course of its business could constitute processing within the meaning of section 125.1 of the Act, I find it advisable to mention that, in his assessments for the taxation years in issue, the Minister of National Revenue recognized that some of these activities qualified for the tax credit for manufacturing or processing profits, since he allowed this credit for the sums of $3,768, $6,630 and $2,788 for the 1984, 1985 and 1986 taxation years, respectively. The evidence does not disclose the origin and nature of this portion of the appellant's profits, in respect of which the tax deductions set out in section 125.1 were allowed in the years in question. Is this, for example, the portion of the profits which derived from the sale of steel-based materials taken from the buildings or works demolished by the appellant? The evidence is silent on this point.

Counsel for the respondent also argued, in the alternative, that if it were held that the activities relating to the work done on the materials constitute manufacturing or processing, those activities are not included in qualified activities by virtue of subparagraph 125.1 (3)(b)(iii), on the ground that they were construction activities. The scope of this exception was analyzed in The Queen v. Nova Construction Co., [1986] 1 C.T.C. 68, 85 D.T.C. 5594 (F.C.A.) by Mr. Justice Stone on behalf of the Federal Court of Appeal. Mr. Justice Stone wrote, at page 72 (D.T.C. 5597):

The respondent by its cross-appeal alleges an error on the part of the trial judge in refusing to interfere with this aspect of the Minister’s reassessment. He concluded at page 2 of his reasons for judgment:

In its use of the term "construction", Parliament seems to have had in mind construction as an industrial undertaking rather than construction in the narrower sense of an activity.

"Construction" is not a term of art. The paving of roads, parking lots, and so on, is construction. That is so whether the paving is the initial application of pavement to a newly constructed grade, the maintenance or repair of an old pavement or a combination as in the case of a road widening and reconstruction. . . .

I share the opinion of the learned trial judge that the word''construction" in its context in subparagraph 125.1(3)(b)(iii) refers to a construction undertaking or enterprise rather than to construction in any narrower sense.

It is clear to me that, on the ordinary meaning of the words, the demolition activities are not construction. The construction contemplated by subparagraph 125.1(3)(b)(iii) of the Act can surely apply to the action of erecting a building, making roads, building a bridge, and, generally speaking, major works.

To argue that demolition is construction within the meaning of subparagraph 125.1(3)(b)(iii), counsel for the respondent relied on article 2013 of the Civil Code relating to the privilege that attaches, inter alia, to the builder’s claim, in asserting that, in his view, the Civil Code considers demolition work to be construction work. First, it should be noted that there is no statement in those provisions, either express or implied, that the work done by someone who demolishes must be treated like construction work. Moreover, under article 2013, the builder’s privilege applies only if there is additional value given to the immoveable by the work done on it. I would tend to believe that, at least as a general rule, demolition work does not add additional value to an immoveable. On this point, it is laid down in the case law that, for example, renovation and repair work will give rise to privilege only when such work has given additional value to a particular immoveable. There is therefore no privilege if such work merely preserves the original value of the immoveable. In any event, these provisions of the Civil Code, assuming that they operate to treat demolition work on the same basis as construction activity, can be of no assistance when it comes to interpreting a federal tax statute dealing with the scope of the manufacturing and processing profits tax credit. It is of no relevance that the demolition industry in Quebec is governed by the Office de la construction du Québec, which was established under a provincial statute. It follows that this exception, which appears in subparagraph 125.1 (3)(b)(iii) of the Income Tax Act, must be interpreted solely in the context of that Act. The interpretation cannot be determined by provincial statutes which may vary from one province to another in respect of the same subject and thus treat demolition businesses and related activities differently.

It remains for me to consider the question of the classification of the containers in terms of depreciation for tax purposes.

On this point, the appellant is of the opinion, as was noted earlier, that these containers fall within Class 29 of Schedule II to the Income Tax Regulations. On the other hand, in making the assessments which are the subject of this appeal, the respondent had placed these items in Class 8. The relevant portion of Class 29 of Schedule I! to the Regulations reads as follows:

Property that would otherwise be included in another class in this Schedule

(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,

(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease, or

(b) that is

(i) property that, but for this class, would be included in Class 8, except railway rolling stock or a property described in paragraph (j) of Class 8,

(ii) an oil or water storage tank,

(iii) a powered industrial lift truck,

(iv) electrical generating equipment described in Class 9, or

(v) property described in paragraph (b) or (f) of Class 10; . . .

On the evidence as a whole, it is indisputable that these containers, which were installed on the sites, were used for sorting materials. The evidence established that using containers was a practical and economic manner of sorting the materials and other items which were ultimately to be sold or otherwise disposed of by the appellant. In terms of time, this stage, sorting the materials and other items, came, at least in the vast majority of cases, immediately after the processing work. From all appearances, the sorting work is closely connected to the work of processing the materials taken from the demolished buildings and works, which was carried out on the sites. These containers were therefore used at least indirectly by the appellant in Canada primarily for the processing of goods for sale. These containers were indeed also used to transport goods to the customers in some cases, to the appellant's land in other cases, and finally, to the dump, in the case of the trash. However, the fact remains that these containers were used at a point that was prior and essential to sorting the materials. I am therefore of the opinion that the two conditions set out in subparagraphs (a)(i) and (b)(ii) of Class 29 are fulfilled in this case. According to the evidence, it seems that all of the containers were used in the years in issue, both during sorting of the materials and subsequently in transporting the materials to one of the three destinations referred to above. None of the containers was used, for example, solely to transport the materials. In terms of depreciation for tax purposes, these containers must fall into Class 29 of Schedule II to the Income Tax Regulations.

Decision

For these reasons, the appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessments on the basis that the appellant is entitled to the tax credit for manufacturing and processing profits with respect to the activities relating to the recycling of products for sale. In making these reassessments, the Minister of National Revenue shall also take into account the fact that, for the purposes of the capital cost allowance, the containers come within Class 29 of Schedule Il to the Income Tax Regulations.

Appeal allowed.