Controlled Foods Corp. Ltd. v. The Queen, [1980] CTC 491, 80 DTC 6373 (FCA)

Urie, J:—This is an appeal from a judgment of the Trial Division dismissing the action of appellant in which it sought declarations that the appellant is, for the purposes of paragraphs 1(a), (c) and (d) of Part XIII of Schedule III to the Excise Tax Act, RSC 1970, c E-13, as amended, a manufacturer or producer with the result that certain items of machinery, apparatus and equipment purchased by it are exempt from the imposition of sales tax otherwise payable thereon by virtue of subsection 29(1) of the Act.

The appellant is the operator of restaurants in five provinces. During the year 1976 it caused to be erected a building in Richmond, British Columbia for the purpose of operating a restaurant known as “The Corkscrew’’. For use in that operation it purchased and had installed certain machinery, apparatus and equipment which it has used continuously therein since that time in the preparation of food and beverages for consumption by its customers on the premises. Items of that machinery, apparatus and equipment are identified in three groups in the agreed statement of facts filed by the parties. The items in Schedule A to the statement, it is agreed by the parties, are exempt from the payment of sales tax if the appellant is successful in this appeal. Those listed in Schedule B, it has been agreed, are not exempt. The respondent does not concede that those items identified in Schedule C are exempt even though the appellant is successful in its appeal.

The evidence discloses that the total area of the restaurant premises is approximately 12,000 square feet of which about two-thirds is available for public use while the balance of one-third is used for staff areas and kitchen areas. The restaurant seats 210 in the dining area and 50 in the lounge area where drinks are prepared and served. Of the appellant’s 65 employees, two-thirds are employed servicing the public area while the remainder are employed on what was described as the “processing” side of the operation.

The sections of the Excise Tax Act relevant to this appeal are:

27.(1) There shall be imposed, levied and collected a consumption or sales tax of twelve per cent on the sale price of all goods

(a) produced or manufactured in Canada

(i) payable, in any case other than a case mentioned in subparagraph (ii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier.

29.(1) The tax imposed by section 27 does not apply to the sale or importation of the articles mentioned in Schedule III.

Paragraphs 1(a), (b), (c) and (d) of Part XIII of Schedule III are relevant to the appeal and read as follows:

1. All the following:

(a) machinery and apparatus sold to or imported by manufacturers or producers for use by them directly in

(i) the manufacture or production of goods,

(ii) the development of manufacturing or production processes for use by them, or

(iii) the development of goods for manufacture or production by them;

(b) machinery and apparatus sold to or imported by manufacturers or producers for use by them directly in the detection, measurement, prevention, treatment, reduction or removal of pollutants to water, soil or air attributable to the manufacture or production of goods;

(c) equipment sold to or imported by manufacturers or producers for use by them in carrying refuse or waste from machinery and apparatus used by them directly in the manufacture or production of goods or for use by them for exhausting dust and noxious fumes produced by their manufacturing or producing Operations;

(d) safety devises and equipment sold to or imported by manufacturers or producers for use by them in the prevention of accidents in the manufacture or production of goods;

As has been said frequently before,* [1] in order to obtain exemption from the sales tax otherwise imposed by subsection 27(1), two conditions must be met, as subsection 29(1) and Part XIII of Schedule III clearly discloses. They are:

(a) machinery or apparatus must be sold to or imported by a manufacturer or producer; and

(b) the manufacturer or producer must use the machinery or apparatus directly in the manufacture or production of goods.

The issues in this appeal, thus, are whether or not the learned trial judge erred in finding, first, that the activities of the appellant do not constitute “manufacturing or producing” and, second, in finding that the appellant was not a “manufacturer or producer”.

It is common ground that the appellant was the purchaser of the machinery, apparatus and equipment in issue and that the food and drinks prepared and dispensed are goods for the purpose of the exempting provisions of the Act. This agreement between the parties, however, does not extend to either of the issues above defined. The appellant claims that it is a “manufacturer or producer” of meals and beverages and is entitled to the exemptions provided in those paragraphs of Part XIII, Schedule III above quoted on the basis that:—

1. the machinery and apparatus purchased by it, to the extent that such is used directly in the production of meals and beverages, falls within the terms of subparagraph 1(a)(i);

2. the equipment for use by it in carrying refuse or waste from machinery and apparatus used by it in the manufacture of meals and beverages falls within the terms of paragraph 1(c);

3. the equipment for use by it in exhausting dust and noxious fumes produced during the manufacturing or production of meals and beverages also falls within the terms of paragraph 1(c);

4. safety devices and equipment for use by it in the prevention of accidents in the manufacture or production of meals and beverages falls within the terms of paragraph 1(d).

Counsel for the appellant relied in large part in his submissions before this Court on the judgment in the Supreme Court of Canada in The Queen v York Marble Tile & Terrazzo Ltd, [1968] SCR 140; [1968] CTC 44; 68 DTC 5001. Because it is important to place the portion of the judgment of Spence, J, speaking for the Court, upon which the appellant understandably relies, in its proper context I quote hereunder the rather substantial excerpt therefrom commencing on p 144 [47, 5002]:

The learned Exchequer Court Judge in his reasons for judgment found that the activities aforesaid were not the application of an art or process so as to change the character of the imported natural product dealt with so as to come within the meaning of “produced or manufactured” in the Excise Tax Act, and it is this finding which is contested by Her Majesty the Queen in this appeal.

Many authorities were cited but in my view few are enlightening. It must always be remembered that decisions in reference to other statutory provisions, and particularly decisions in other jurisdictions, are of only limited assistance in construing the exact provisions of a statute of Canada. In reference to the words “all goods (a) produced or manufactured in Canada”, Duff, CJ noted in His Majesty the King v Vandeweghe Limited:

The words “produced” and “manufactured” are not words of any very precise meaning and, consequently, we must look to the context for the purpose of ascertaining their meaning and application in the provisions we have to construe.

Further reference shall be made to that judgment hereunder. It was delivered on March 6, 1934, and on December 2,1933, Archambault, J, in MNR v Dominion Shuttle Company Limited, gave a very interesting judgment in the Superior Court of the Province of Quebec.

Both of these judgments considered the said ss 85ff of the Special War Revenue Act in which the same words, “produced or manufactured in Canada” were used. Archambault, J, outlined the facts as follows:

The evidence shows that these lengths of lumber were sold and delivered by the saw mill in British Columbia to defendants at Lachute, in lengths of 20', 16' and 25' and at so much per thousand feet.

The work done on these lengths by defendant was: first, to cut them in lengths of 10', or 8'; second, to creosote them, or dip them in creosoting oils to preserve them against the elements of the weather (for which defendants have a special plant); third, to round them or mill or dress the lumber to the rounded shape; fourth, to bore holes in them in order to insert the pin on which the insulator is placed, and after this work was done, they were sold to the Canadian Pacific Railway at the price, not based on so much a thousand feet, but based on so much per hundred “cross arms”.

and he then continued:

The questions to be decided are: first, are the defendants the producers or manufacturers of these “cross arms”? second, should the cost of transportation from British Columbia to Lachute be included in the sale price?

First, what is a manufacturer? There is no definition of the word “manufacturer” in the Act and it is practically impossible to find a definition which will be absolutely accurate, but from all the definitions contained in leading dictionaries, Corpus Juris, Encyclopedias, etc, the Court gathers that to manufacture is to fabricate; it is the act or process of making articles for use; it is the operation of making goods or wares of any kind; it is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery.

This is exactly what the defendant company did. They received the raw material or prepared raw material, or lengths of lumber, and put them through the processes already mentioned to make “cross arms” and sold them to the consumer.

For the present purposes, I wish to note and to adopt one of the definitions cited by the learned judge, ie that “manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery”. (The italics are my own.) If one were to apply the latter test to the question at issue in this appeal, in my view, the finished marble slabs which left the respondent’s plant had by work, both by hand and machinery, received new form, new quality and new properties. (Italics mine)

It was of course, appellant’s contention that the evidence disclosed that all of the treatments and processes used by the appellant in the preparation of meals and beverages caused raw material used in the treatments and processes to acquire new forms, qualities and properties and to receive substantial changes in their essencesfrom the time they were first dealt with by the appellant to the time of the finished product. Thus what the appellant was doing was manufacturing or producing meals and beverages.

As the learned trial judge observed, in adducing evidence to support its submission, the appellant’s expert adopted the exact words of Spence, J in Stating that, in the preparation of the meals and beverages, what was done imparted to the components thereof new forms, qualities and properties. However, it was also the learned judge’s view that although such changes did occur such fact did not conclusively determine that the appellant, even if it could be said that it was manufacturing and producing, was a manufacturer or producer. I agree with him for two reasons.

Firstly, it must be noted that Mr Justice Spence adopted “for the present purposes’’ one only of the definitions of “manufacturer’’ cited by Archambault, J in the Dominion Shuttle case. Clearly he chose the definition in the light of the particular circumstances of that case and did not exclude the application of other definitions or the consideration of other principles in other circumstances. Resort to standard dictionary definitions which I need not quote, support the view that the one chosen by Spence, J does not, in all factual circumstances, necessarily apply.

Secondly, a line of authorities in Canadian jurisprudence, extending back as far as 60 years, has held that “it is not improper to consider as an aid the generally accepted commercial view of the operation under review.* [2] The learned trial judge reviewed and referred to the authorities upon which this principle is based, including a number of decisions from courts in the United States, and concluded that, quite properly, he could take into account in reaching his decision the generally accepted view of knowledgeable persons in the trade as to the nature of the operations conducted in a restaurant. He held as follows:

In view of and having considered these and other authorities and after considering the whole of the evidence and using commercial usage as a guide and confined to the facts of this appeal, in my opinion what has been done and is done by Controlled Foods to the raw materials it uses in the treatments and processes employing the subject machinery, apparatus and equipment would not in fact and generally would not be recognized as constituting the “manufacture or production of goods”, and further Controlled Foods would not be considered and would not be generally recognized as a “manufacturer” or “producer” within the meaning of the Excise Tax Act especially Schedule III thereto. (Italics mine)

I am of the opinion that, as a matter of law, he correctly found that, to determine the questions here in issue, he was entitled to examine the generally accepted commercial view of the nature of a restaurant operation as well as the dictionary definitions of those terms. In ascertaining the commercial view, there was evidence before him from which he could infer, as he did, that the treatments and processes employed by the appellant in the preparation of the meals and beverages served to its customers would not generally be recognized as constituting “maunfacturing or producing” in the accepted sense of those terms or that it was, in so conducting its operations, a “manufacturer or producer”.

The appellant adduced evidence from two witnesses only to demonstrate that “all of the treatments and processes used by the plaintiff as described in this report cause the raw material used in the treatments and processes to acquire new forms, qualities and properties and to receive substantial changes in their essences from the time they were first dealt with by the plaintiff to the time of the finished product.”! [3] As far as I have been able to ascertain appellant tendered no evidence as to commercial usage.

On the other hand, the respondent adduced evidence through an expert witness, J A Kitson, the head of the Food Processing Section of the federal Department of Agriculture. He agreed that the changes to the various foods and drinks prepared by the appellant for consumption by its customers on its premises, during preparation, as described by Dr Richards were correct. But, he also distinguished between the operations of food processors such as canners, meat, fish and poultry packers and frozen food processors, from those of a restaurant. The formers’ task is, essentially, to preserve and prolong the shelf life of foods to be consumed some time after their preparation. A restaurant, on the other hand, he stated, prepared its food for consumption shortly after the cooking process has been completed. He testified in part as follows:

Q. Now, in your experience in dealing with the food processing industry, is a restaurant considered to be a food processor?

A. Not in my experience at all. As an example, we have in British Columbia here a Western Food Processors Association with a number of members, all of whom are canners or freezers, or an association such as the Mushroom Growers Association, who are involved in the processing industry.

Q. Are you able to state, Mr Kitson, that the preparation of food by a restaurant is not generally recognized by those involved in the food processing operation?

A. That is correct, it is generally regarded as a different industry.

Q. And then the essential difference between the restaurant operation and the food processor is what?

A. The restaurant is preparing potatoes in this case or any product for a relatively short storage life of a day, possibly two days and in some cases, in most cases just a few minutes or an hour, whereas the processor is preparing a product to have a lengthy storage life to put it through the distribution chain and enable the final consumers to hold it for whatever period they desire before consumption.

MR SCARTH: Is my learned friend prepared to take Mr Kitson’s statement as read?

MR STORROW: Oh, yes.

THE COURT: How does that tie in or have anything to do with whether the food is processed?

A. What I am referring to, my lord, is the generally accepted term in the trade called food processing.

THE COURT: Has that got anything to do with the meaning of manufacture or production of food, are they synonymous?

A. Manufacture and production are synonymous with—

THE COURT: Processing?

A. Manufactured food, one is thinking, I believe, of fabrication of a food from a group of ingredients. In processing as it is generally accepted in the field in which I work, we are always referring to something that is providing a longer storage life, some degree of sterilization.

THE COURT: They are food processors?

A. Yes.

THE COURT: Are they manufacturers or producers in your view?

A. They are producers.

THE COURT: Producers?

A. Let me think. I don’t feel qualified to answer.

THE COURT: You are just sticking with a food processor in the trade is usually not characterized as—a restaurateur is not categorized in the industry as a food processor and that is all you are saying?

A. Yes.

From all of the above it is, in my opinion, that there clearly was evidence permitting the learned trial judge to reach the conclusions, which I earlier quoted, with reference to the general understanding of the nature of what the appellant does to the raw materials it uses.* [4] Moreover, his conclusions also accord with my opinion that the preparation of food and particularly beverages for immediate retail sale on the restaurant premises is not manufacturing or producing within the meaning of the Act.

Since I have also expressed the view that he was entitled to ascertain the generally accepted commercial view of what a restaurant operation does, it follows that he did not err in finding that the appellant was not entitled to the exemptions it claimed from the payment of the sales tax imposed by subsection 27(1) of the Excise Tax Act. In view of this conclusion it is unnecessary to consider which of the particular items of machinery, apparatus and equipment listed in the Schedule to the agreed statement of facts, are dutiable or exempt from duty.

For the foregoing reasons, the appeal should be dismissed with costs.