Rouleau, J:—These two actions were heard together on essentially common evidence and were the object of identical argument by counsel. Both actions were brought against the Crown pursuant to sections 172 and 175 of the Income Tax Act, SC 1970-71-72, c 63, as amended (all subsequent references are to that Act unless otherwise noted) as a result of reassessment for the 1976 taxation years disallowing deductions claimed under subsection 127(5).
I—Facts
The parties submitted an agreed statement of facts.
Plaintiff Mother’s Pizza Parlour Limited (“Mother’s”) was a corporation incorporated under the laws of Ontario on May 24, 1972. Plaintiff Mother’s Pizza Parlour (London) Limited (“Mother’s London”) is a corporation incorporated under the laws of Ontario on March 18, 1974.
Mother’s and Mother’s London are members of a group of companies which operate establishments under the name and style of “Mother’s Pizza Parlour and Spaghetti House”. These establishments offer a variety of foods of which pizza is the specialty. Generally, they provide dining room, take-out and delivery service to their customers.
Mother’s, as at December 31, 1976 was a joint venture partner in three joint ventures to the following extent:
Wellington Road Associates | 6/22 |
Brantford Associates | 50 per cent |
Kitchener Associates | 37.5 per cent |
Mother’s London, as at December 31, 1976, had a 3/22 interest in Wellington Road South Associates Joint Venture.
Wellington Road Associates, Brantford Associates and Kitchener Associates each acquired after June 23, 1975 and before July 1, 1977 (dates relevant under subsection 127(10), (infra) to the availability of the investment tax credit in question) buildings located in London, Brantford and Kitchener, Ontario at the following costs:
London | $309,525 |
Brantford | 258,453 |
Kitchener | 296,938 |
The Wellington Road Associates joint venture leased the building in London to Mother’s Pizza Parlour (Wellington Road) Limited (“Wellington Road”) an Ontario corporation incorporated on September 8, 1975.
The Brantford Associates joint venture leased the building in Brantford to Mother’s Pizza Parlour (Brantford) Limited (“Brantford”), a corporation incorporated under the laws of Ontario on August 22, 1975.
The Kitchener Associates joint venture leased the building in Kitchener to Mother’s Pizza Parlour (Kitchener) Limited (“Kitchener”), an Ontario corporation incorporated in December 25, 1975. All of these buildings were operated as eating establishments under the name “Mother’s Pizza Parlour and Spaghetti House” (for simplicity I shall refer collectively to the buildings in question and the operations therein as “Mother’s Pizza Parlours”).
In calculating federal income taxes payable for 1976 Mother’s sought to deduct an amount of $18,181 from the tax otherwise payable as an investment tax credit under subsection 127(5) including an amount of $16,250 calculated as arising from its interest in the three buildings.
Similarly Mother’s London sought to deduct the amount of $2,436 including an amount of $2,110 calculated in respect of its interest in the London building.
By notice of reassessment of May 23, 1980, the Minister of National Revenue disallowed Mother’s claim of $16,250 as an investment tax credit in 1976 arising from its interest in the three buildings. Similarly by notice of reassessment of June 13, 1980 Mother’s London attempt to deduct $2,110 was disallowed. Both of these reassessments were based on the Minister’s view that the building was not used nor could reasonably be expected to be used by the lessee in 1976 “primarily for the purpose of manufacturing or processing of goods for sale” as required by subsection 127(10). In short they were found not to be subsection 127(10) “qualified property”.
In each case a notice of objection was filed by the plaintiff and in both cases the Minister of National Revenue confirmed his reassessment.
II— Issues
The defendant disputes the investment tax credit claimed by the plaintiffs as “qualified property” under paragraph 127(10)(c) of the Act. I must determine whether or not buildings leased in 1976 were used for the “processing of goods for sale”; if I find in the affirmative, were the buildings used “primarily” for that purpose.
III— Statutory Provisions
Reference must of course be made to the provisions of the Income Tax Act as they existed in the 1976 taxation year.
Subsection 127(5) establishes a deduction from tax otherwise payable in the following terms:
(5) There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount not exceeding the lesser of
(a) his investment tax credit at the end of the year, and
(b) the aggregate of
(i) $15,000, and
(ii) /z the amount, if any, by which the tax otherwise payable by him under this Part for the year exceeds $15,000.
Subsection 127(9) elaborates the calculation of the “investment tax credit” as being essentially five per cent of the capital cost of qualified property.
Subsection 127(10) provides the definition of “qualified property”. Particular attention should be paid to subparagraph 127(10)(c)(i). The entire subsection reads as follows:
(10) For the purposes of subsection (9), a “qualified property” of a taxpayer means (a) a prescribed building to the extent that it is
(i) acquired by the taxpayer after June 23, 1975, and before June 1, 1977, or (ii) acquired by the taxpayer after June 30, 1977, if installation of the footings or other base support for the building was commenced by the taxpayer after June 23, 1975 and before July 1, 1977 and the building was completed in substantial accordance with plans and specifications agreed to in writing by the taxpayer before July 1, 1977, or
(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975 and before July 1, 1977 that has not been used 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,
(iii) extracting minerals from a mineral resource,
(iv) processing, to the prime metal stage or its equivalent, 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, or
(ix) the storing of grain, 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 (ix), 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, or
(D) the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing part 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 and before July 1, 1977.
Subsection 127(11) refines the definition of “qualified property” in the following terms:
(11) For the purposes of subsection (10),
(a) “manufacturing or processing” does not include any of the activities referred to in subparagraphs 125. l(3)(b)(i) to (ix), and
(b) for greater certainty, the purposes referred to in subparagraphs (10)(c)(i) to (ix) do not include
(1) storing (other than the storing of grain), shipping, selling and leasing of finished goods,
(ii) purchasing of raw materials,
(iii) administration, including clerical and personnel activities,
(iv) purchase and resale operations,
(v) data processing, and
(vi) providing facilities for employees, including cafeterias, clinics and recreational facilities.
Subparagraphs 125.1 (3)(b)(i) to (ix) referred to in paragraph 127(1 l)(a) read as follows:
“manufacturing and processing” does not include
(i) farming or fishing,
(ii) logging,
(iii) construction,
(iv) operating an oil or gas well,
(v) extracting minerals from a mineral resource,
(vi) processing, to the prime metal stage or its equivalent, ore from a mineral resource,
(vii) producing industrial minerals,
(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.
IV—Plaintiffs’ Argument
Counsel for the plaintiffs dealt first with the meaning of the term “processing of goods for sale” and submits, in his view, that the activity carried on was processing, and that the buildings were used “primarily” for that purpose in 1976.
The plaintiffs argued that “processing” is not a term of art and, in the absence of clear statutory authority to the contrary, should be given its ordinary dictionary meaning (I shall refer to the suggested definitions further on). In this connection reference was made to the decision in Federal Farms v MNR, [1966] Ex Ct R 410; [1966] CTC 62; appeal dismissed without reasons, [1967] SCR vi. The Court is specifically urged to avoid relying on any commercially accepted usage of the term and thus reject the expert evidence of Mr Kitson (Exhibit D-8) appearing on behalf of the defendants and who testified that the operations conducted by Mother’s Pizza Parlours do not constitute food processing as that term is generally understood in the food industry. The plaintiffs criticize Controlled Foods v The Queen, [1981] 2 FC 238; [1980] CTC 491 affirming [1979] 2 FC 825; [1979] CTC 270 (FCTD) as wrongly accepting such commercial usage as a guide.
Counsel for the plaintiffs suggests that “processing” is a much wider term and may include any process involving the combination of various foodstuffs into edible food such as the work carried on at Mother’s Pizza Parlours.
Relying on an interpretive argument involving the reference in paragraph 127(1 l)(a) to subparagraphs 125.l(3)(b)(i) to (ix) (which I will discuss further on) and, inter alia, on Canadian Wirevision v The Queen, [1978] 2 FC 577 at 586; [1978] CTC 69 at 76 (TD) and Le Soleil Ltée v MNR, [1973] FC 97; [1973] CTC 91 (CA) affirming [1972] FC 423; [1972] CTC 244 (FCTD), the plaintiffs urge this Court to opt for a broad interpretation of the term “processing”.
Further, with respect to the definition of processing the plaintiffs cite authority which permits the use of departmental interpretation bulletins as an aid to interpreting the Income Tax Act [Hare v Deputy Minister of Revenue (Quebec), [1978] 1 S.C.R. 851 at 859; [1977] CTC 441 at 447; Nowegijick v The Queen, [1983] 1 S.C.R. 29 at 37; [1983] CTC 20 at 24; and The Queen v Royal Trust, [1983] CTC 159 at 165-66; 83 DTC 5172 at 5177]. They refer the Court to paragraph 26 or IT-331 where the view is expressed that “the activities of preparing meals for consumption constitute processing”.
The plaintiffs then submit that the buildings were “primarily” used for processing. On the basis of various dictionary definitions they argue that “primarily” is not a quantitative notion like “mainly” or “substantially” but rather means “essentially”, “fundamentally”, ‘‘of first importance”. In support of this view they referred to several authorities, notably Madat v Riddell 383 US 569 (1966), Scroll v Commissioner of Internal Revenue 447 F 2d 612 (1971) (USCA Fifth Cir) and Canada Trust v MNR, [1979] CTC 2199; 79 DTC 177.
Counsel in argument points to a number of facts with respect to Mother’s Pizza Parlours operations to emphasize that they are “primarily” engaged in what is alleged to be processing, including the relative importance of the kitchen, take-out and delivery aspects of the operation and to diminish the importance of the dining room at Mother’s Pizza Parlours.
V—Defendant's Argument
According to counsel for the defendant, subsection 127(5) creates a tax credit of five per cent of the cost of qualified property; but, one must keep in mind the tax policy approach taken by Mr Justice Estey in Stubart Investments v MNR, [1984] CTC 294; 53 NR 241. The section is designed to stimulate certain industrial sectors in Canada by providing a tax incentive for investment in buildings and equipment. It is the view of the defendant that the words “primarily for the purpose of manufacturing and processing” in subsection 127(10) are conditioned, inter alia, by paragraph 127(1 l)(b) so as to exclude buildings used for the selling of finished goods or by service industries. In reviewing these subsections, one should look to the Stubart Investments case which expresses the view that the courts must not take a strict view of the words of the taxing statute without examining the theme, intent and policy object of the enactment in question.
The defendant further submits that Mother’s Pizza Parlours are not engaged in manufacturing or processing for the purposes of subsection 127(10), but rather involved in the preparation of food for immediate consumption. In support of this proposition the defendant cites Controlled Foods v The Queen (supra), and McDonald's v Oklahoma Tax Commission Okl, 563 P 2d 655. In addition to its relevance to the argument that restaurants do not engage in processing, the Controlled Foods case also sustains the principle that “generally accepted commercial view” may be used by the court in defining processing.
Counsel contends that Mother’s Pizza Parlours prepare food for immediate consumption; that according to generally accepted commercial usage, this does not constitute food processing. Food processing involves the adding of value to foodstuffs through various techniques which increases shelf-life and allows distribution over a wide area. He distinguishes the decision in Federal Farms v MNR (supra).
Interpretation Bulletins may be consulted by the court in the case of ambiguity, but the defendant asserts that they are guidelines only to be considered along with the rest of the evidence.
Finally, counsel for the defendant submits that even if I should find Mother’s Pizza Parlours buildings are used for processing they were not “primarily” so used; despite take-out and delivery services, Mother’s Pizza Parlour buildings are basically restaurants. They are primarily service and sales locations with the processing being of lesser importance. The largest portion of Mother’s floor space and staff are involved in dining room service.
VI—Disposition
I would make one brief preliminary remark. I have no difficulty with the proposition that income tax Interpretation Bulletins may be consulted [see Hard v Deputy Minister of Revenue (Quebec), [1978] 1 S.C.R. 851 at 859; [1977] CTC 441 at 447; Nowegijick v The Queen, [1983] 1 S.C.R. 29 at 37; [1983] CTC 20 at 24; and The Queen v Royal Trust, [1983] CTC 159 at 165-66; 83 DTC 5172 at 5177 (FCA)] but these materials are not binding on Her Majesty and should be considered only as persuasive authority.
Were Mother’s Pizza Parlour buildings used for “processing” and if so, were they “primarily” so used?
Subsection 127(10) is a statutory provision whose meaning is less than clear, and requires interpretation. There appears to be no authority directly on point. A careful reading of the statutory provision in order to discover its meaning in the total scheme of the Income Tax Act is required, keeping in mind the economic policy objectives of Parliament in allowing the investment tax credit. It is my view that the word “processing” must not be given an all-encompassing definition. There are a number of reasons for this conclusion. Even in the light of the Stubart Investments (supra), decision, it is still permissible to require that a taxpayer’s circumstances bring him squarely within the four corners of a section, so long as the economic policy objective of the deduction is kept in perspective.
I cannot agree to giving an all-encompassing meaning for “processing” because of exclusions from 127(10)(c) found in 127(1 l)(b). Counsel for the plaintiffs argued that the 127(ll)(a) exclusion by reference to the exclusions of 125. l(3)(b)(i) to (ix) from the definition of “manufacturing or processing” indicates that those terms as used in 127(10)(c) have an otherwise broad meaning. However, in my view, the exclusions in 127(1 l)(b) are of much greater relevance to the cases before this Court. Subparagraph 127(1 l)(b)(iv) excludes what I understand to be ordinary retail and middle-man operations where no product is prepared in the building in question [see the reasons of my brother Cullen, J in O’Neill v The Queen, [1984] CTC 682; 85 DTC 5026. In these circumstances subparagraph 127(1 l)(b)(i) must be given some meaning. I think its meaning and interpretation are obvious. Subparagraph 127(1 l)(b)(i) deletes from the meaning of “manufacturing and processing” any operation using its building for the “selling ... of finished goods”. I find, as a matter of fact, that whatever the intermediate steps may be, Mother’s Pizza Parlours’ buildings were used for the selling of finished goods, namely meals, whether they were consumed on the premises or were picked up or delivered for consumption in the homes of customers.
There is further reinforcement for my view as to the effect of subparagraph 127(1 l)(b)(i). Parliament could not have intended such a broad meaning for the word “processing” as the plaintiffs would have me adopt. Paragraph 127(10)(c), when read as a whole, indicates that the investment tax credit was intended to provide an incentive for investment in Canada’s traditional primary and secondary industries; to provide a reward for enterprises in those industries who have already made investments in new buildings or equipment. The effect intended was to protect or create Canadian jobs in certain sectors. No doubt Mother’s Pizza Parlours is a large-scale operation with a large number of employees and expansive equipment and buildings. But I see no logical distinction, other than the scale of the operation, between Mother’s Pizza Parlour amd any other restaurant; or for that matter, a corner pastry shop, a haberdashery which makes suits to measure or even a hot dog stand. I cannot accept that Parliament intended to benefit all such operations with the investment tax credit. I am convinced that it was intended to avoid such an absurd result that subparagraph 127(1 l)(b)(i) excludes operations using machinery and buildings to sell finished goods.
Even if I am wrong in stating that the word “processing” cannot, in this instance, be given a wide definition because of the overall scheme and intent of the investment tax credit, I do not think Mother’s Pizza Parlours’ operations can be viewed as processing even if that term is given a very broad meaning. The buildings were used for the preparation of meals for immediate consumption, not for the processing of food. For example, pizzas were prepared (or assembled) using purchased ingredients and the dough was not even made on the premises. It was purchased from an independent supplier.
The plaintiffs place great reliance on what they consider to be the ordinary meaning of processing as reflected in dictionary definitions. These definitions are helpful, but they certainly do not settle the matter. The plaintiffs submitted, as part of Exhibit P-5, the definitions of “process” found in Webster’s Third International Dictionary (1959) and Webster’s Third International Dictionary (1964). They read respectively as follows:
To subject (especially raw materai) 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 pasturizing, fruits and vegetables by sorting and repacking.
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 pasturizing it) (-ing grain by milling) (-ing cotton by spinning).
These definitions seem to confirm my view that processing does not include the preparation of meals for immediate sale as a finished product to the public. These definitions all suggest, with examples, that a factory freezing pizzas or pizza ingredients might be “processing”, but not a restaurant preparing pizza for immediate consumption. I found the expert testimony of Mr John A Kitson more helpful that the dictionary definitions. Mr Kitson testified that Mother’s Pizza Parlours are not food processing operations. He would appear to base his opinion on two factors. First, that ordinary commercial usage in the industry does not include the preparation of food for immediate consumption in a restaurant or for delivery or pick-up in the notion “food processing”. The admissibility and probative nature of such evidence is confirmed by the decision of the Federal Court of Appeal in Controlled Foods v The Queen (supra). Second, that food processing includes some element of transformation or preservation to allow wide distribution at a later date. This does not describe the operations carried out at Mother’s Pizza Parlours. Preservation is not a condition sine qua non of food processing.
This brings me to the case law. There is no authority that has come to my attention which is directly on point. However, there are some decisions which bear careful scrutiny.
The Controlled Foods case (supra) involved the applicability of the federal excise tax exemption for “manufacturers or producers” on machinery purchased for use in the “manufacture or production of goods” and did not deal directly with the meaning of “processing”. However, the exemption was claimed in respect of restaurant equipment alleged to be used for the manufacture or produc- tion of meals and drinks in a restaurant. The Federal Court of Appeal did not interfere with the refusal of the Trial Division [1979] 2 FC 825; [1979] CTC 270, to accord the exemption to such a restaurant operation. This case is instructive and enlightening in view of the similarity to the facts to the present cases.
In Canadian Wirevision v The Queen (supra), it was held that cable television signals are not goods and therefore the taxpayer’s profits did not qualify as “Canadian manufacturing and processing profits’’ under subsection 125.1(3) of the Income Tax Act. It was also stated obiter that capture and delivery of television signals constituted processing in the “ordinary reasonable sense’’ of that term (ibid at 586). I do not regard this obiter dictum as applicable to the present cases because of its vastly different facts.
Similarly, the decision of the Federal Court of Appeal in Le Soleil v MNR (supra), involved facts very far removed from the present case. That a newspaper was considered to be a “manufacturing and processing corporation’’ does not settle the case of Mother’s Pizza Parlours. It should also be noted that the narrow question before the Court in that case was not whether a newspaper 1s involved in processing, but rather whether advertising sales can be regarded as manufacturing or processing sales.
This leaves the decision of Cattanach J in Federal Farms v MNR (supra), which was urged upon me by the plaintiffs. Like the Le Soleil Ltée case, Federal Farms involved the determination of whether the appellant qualified as a “manufacturing and processing corporation’’ for the purposes of then section 40A of the Income Tax Act. Federal Farms may be distinguished from the present cases on two key points. First, the integrated market gardening corporation in question was involved in both the primary and secondary stages of food production. In contrast, Mother’s Pizza Parlours are retail sales and service operations which prepare meals for immediate sale to the public as finished goods. Second, the operations performed in Federal Farms included washing and grading to facilitate later use, spraying to retard bacterial growth and increase shelf life and packaging for the wholesale market. It is primarily the spraying and packaging for wholesale distribution of the vegetables which distinguishes Federal Farms operation from the activities carried out in the buildings in the present cases.
For all these reasons I find that the plaintiffs did not, in the 1976 taxation year, lease the buildings in question to lessees who used them for the processing of goods for sale.
In the circumstances it is not strictly necessary to decide whether the activities that the plaintiffs allege to be processing, were the activities for which the buildings were “primarily’’ used.
In summary, I find that the buildings in question were not used in 1976 for “processing’’ as that term may be understood for the purposes of subsection 127(10) of the Income Tax Act. Thus, the Minister of National Revenue was correct in his notices of reassessment for the 1976 taxation year. Mother’s is not entitled to the deduction of $16,250 and Mother’s London is not entitled to the deduction of $2,110 both claimed under subsection 127(5) with respect to the three buildings as they were not “qualified property’’ within the meaning assigned to that term by subsection 127(10). Accordingly, both actions are dismissed with costs.
Appeals dismissed.