Calgary Television Ltd. v. MNR, 90 DTC 1577, [1990] 2 CTC 2036 (TCC)

Taylor, T.C.J.:—These are appeals heard in Toronto, Ontario, on January 18, 1990, against income tax assessments for the years 1982, 1983, 1984 and 1985 in which the Minister of National Revenue disallowed certain deductions claimed. The only one of these items still outstanding for determination at the hearing concerned the application of section 125.1 of the Income Tax Act ("the Act")—a manufacturing and processing deduction. The point at issue, was described in the respondent's reply to the notice of appeal as follows:

— . . . the Appellant claimed the manufacturing and processing profits deduction under section 125.1 and in computing the deduction, included revenues earned from fees charged to advertisers for air time during the live telecast of hockey games and other presentations;

— in broadcasting live hockey games and other events, the Appellant was not manufacturing or processing goods for sale or lease;

— . . . less than 10% of the Appellant's gross revenue from all active businesses carried on in Canada was from the selling or leasing of goods manufactured by it, and the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it;—it is submitted that the Appellant was not entitled to the deduction from tax under section 125.1, as a result of section 125.1(3)(b)(x).

Evidence

Counsel for the appellant submitted full and informative details regarding the operation of the corporation which evidence included both documentation and testimony from witnesses. With that as the background, counsel proceeded to outline a relationship by which the Court should view the evidence in applying the relevant provisions of the Act, and I shall deal therefore with the argument of counsel for both parties, since reference was made therein as required, to specific areas of that evidence.

Argument

The proposition of the appellant was summarized as:

I think we’re in the position of selling programming, particular programming that we produce ourselves. In the case of programs produced by us, the local productions, the syndications, the hockey and the newscast that, incidental to what we're doing, we're selling product, tangible product, to our customers.

(As I understand the evidence, the "customers" of the appellant as that term is used in this quotation, are the advertisers, not the viewers of the programs.) For the respondent, it was put forward as:

That the revenues from live telecasts were not from either (A)or (B) in subparagraph 125.1(3)(b)(x) and therefore, that the Appellant was not entitled to any deduction under section 125.1.

Counsel for the appellant concentrated a substantial part of his argument on the assertion that the activity of the appellant constituted “manufacturing and processing", and he compared and relied upon the perspective which could be read into the judgments in Le Soleil Limitée v. M.N.R., [1973] C.T.C. 91; 73 D.T.C. 5093 (F.C.A.), St. Catharines Standard Limited v. The Queen, [1978] C.T.C. 258; 78 D.T.C. 6168 (F.C.T.D.), London Cable TV Limited v. M.N.R., [1976] C.T.C. 2443; 76 DTC 1328 (T.R.B.) and Canadian Wirevision Limited v. The Queen, [1979] C.T.C. 122; 79 D.T.C. 5101 (F.C.A.). With regard to London Cable TV Limited, supra, a significant] remark of counsel was:

. . . the operation of a cablevision company did not constitute manufacturing and processing. And, in discussing this case with my clients, they would agree. They think their business is so totally different from what a cablevision company does that this case has no application. . . .

And with regard to Canadian Wirevision Limited, supra, at both the Federal Court-Trial Division, [1978] C.T.C. 69; 78 D.T.C. 6113 (F.C.T.D.) and the Federal Appeal Division, [1979] C.T.C. 122; 79 D.T.C. 5101 (F.C.A.) levels:

. . . In both those situations, the Court had no difficulty in following your earlier decision in London Cable that such an operation was not included in the idea of manufacturing and processing.

Analysis

I do not agree with counsel for the appellant that in either London Cable TV Limited, supra, or Canadian Wirevision, supra, the Courts rejected the propo sition that the term "manufacturing" and "processing" might have application. From page 2444 (D.T.C. 1329) of London Cable, supra: "The respondent accepted only that during the course of their activities the appellants performed functions (gathering and purifying) which could be defined as processing."

And page 2446 (D.T.C. 1331):

Sufficient evidence regarding the nature of processing has been brought forward that it should not be excluded from the description of “qualified activities". To the degree that the issue would turn on this point the Board would rule in favour of the appellants.

And from Canadian Wirevision, Trial Division, supra, at page 76 (D.T.C. 6117-8):

I have much less difficulty in coming to a decision on this aspect. I am convinced the plaintiff's activities in capturing and delivering the signals fall within the ordinary reasonable sense of the expression "processing". . . . The legislators, to my mind, did not, when they used the word "processing" have in mind the more sophisticated operations envisaged by Dr Jull. As I see it, the expression was used in the ordinary parlance of treating or preparing, putting into marketable form.

In Canadian Wirevision, Appeal Division, supra, at page 124 (D.T.C. 5103), the issue was not whether there was “manufacturing and processing” at all, in the eyes of the learned justices: "The questions raised by this appeal are rather whether the signals are goods within the meaning of section 125.1 and whether the appellant did, in fact, enter into contracts of sale with its customers."

In my view, all of the above jurisprudence noted by counsel for the appellant is directly relevant to the instant appeal, but it provides the company no comfort. The critical item in the proposition of the cited appellants, London Cable TV and Canadian Wirevision, supra, which was dealt with and rejected by the Courts, was that of "goods for sale". That aspect of this appeal was dealt with by counsel for the appellant relying on some of the other jurisprudence— Le Soleil, supra, and St. Catharines Standard, supra, as follows:

. . . in particular, the St. Catharines Standard case, conceded openly that the publication of a newspaper was manufacturing and processing. The question was: Was the gathering and reporting of news, preparing editorial copy, a part of the process? And it was found to be so. I think it’s very instructive and I draw great comfort from the St. Catharines case and these essentially are competing media. I suppose most people both buy newspapers and watch television but they are competing. I can’t believe that Parliament intended that people doing much the same thing, though in different form, should be treated radically different under the taxing statute.

It is certainly true that the term "manufacturing and processing" was applied in these cases to the activity and functions of the appellants, and to that degree I would accept counsel's application of the same term to the functions of this appellant to whatever degree there might be a similarity. It served no purpose, however, in my mind, to make any detailed comparisons or, if necessary, differentiations, between the production and distribution of a newspaper, and the production and dissemination of a television program. I am content that the critical issue in this appeal does not rest there—it remains, as noted above, in the phrase "goods for sale". In the St. Catharines Standard case, supra, the issue was whether such items of expense involved in "preparing advertisement, gathering and reporting news, researching and preparing editorials, preparing and editing the copy—" are activities performed in connection with the manufacturing and processing of goods for sale and were therefore qualified activities within the meaning of regulation 5202 (see head- note). It was concluded, albeit with considerable reluctance which I would share, that the "editorials" “feature articles and news stories" were "raw materials" and within that narrow context the appeal was allowed. In the St. Catharines Standard case, supra, the customers were the purchasers of the newspapers. In this appeal we have no such similar situation. The contracts of sale herein (if so they should be described) are between the appellant T.V. program producers and the advertisers who provided the revenues for the production of the program. I would easily find a great deal of comparability between the base element of this case, and that described in the Le Soleil case, supra, at the Trial Division level, [1972] C.T.C. 244; 72 D.T.C. 6207, which appeal was dismissed there on the specific grounds that the advertising revenue did not qualify for the purpose as desired, and I quote from page 248 (D.T.C. 6210):

It is not possible, in fact, without doing violence to the wording of section 40A, and without distorting the meaning of the words “sale of goods", to maintain that an “advertising contract" is a sale of goods. Indeed, a sale of goods necessarily implies that property in chattels is transferred to another for a money consideration, and I find it hard to accept that there is such a transaction or operation when an advertiser pays a sum of money for an advertisement he wants to have inserted in a newspaper. There is in such a case no goods which change hands, and the advertiser obtains no property right in the advertisement paid for by him and inserted in the newspaper. I feel, therefore, that it is more true, to say that where advertisements are concerned, the newspaper only undertakes to perform certain services for the advertiser, namely that when the newspaper is printed and sold it will contain the advertisement ordered by the advertiser.

As I read it, the Appeal Division of the Federal Court upheld the Trial Division judgment on that point—at page 92 (D.T.C. 5094): "We are in complete agreement with the decision of the Associate Chief Justice on the appeal as it was argued before him and we should be content to adopt his reasons." However, in the circumstance of this appeal one could ask—does the balance of the judgment of the Federal Court, Appeal Division in Le Soleil, supra, have application here? That is, notwithstanding the comment of the Court “in this contract there is no sale of anything to the advertiser" page 93 (D.T.C. 5095), can it be said that the rationale used to interpret the words of subsection 40A(1) and (2) of the Act of 1962-1963 (no analogous subsection in the new Act of 1972) should be applied here to the benefit of the appellant? The significant determinations therein by the Court are going to be found at pages 93-94 (D.T.C. 5095):

The term used in paragraph 40A(2)(b) was not "the proceeds of . . . sales”. The expression that was used instead was "the gross revenues . . . from sales”. This expression conveys to us the idea of the total revenues the earning of which was dependent upon the sales; . . .

The learned justices of the Court in Le Soleil, supra, described the section of the Act as "very awkward provisions” and with that I would most certainly concur. The condensed expression "the gross revenues . .. from sales”, as I follow the judgment, came from interpolating the definition of “net sales" to the "manufacturing and processing" corporation definition in the following way. Paragraph 40A(2)(a) reads ”. . . net sales . . . from the sale of goods . . . the amount of which was at least 50% of its gross revenue"; and paragraph 40A(2)(b) reads: "net sales means . . . the gross revenue . . . from sales". Accordingly, as I see it, to substitute the definition of "net sales" from 40A(2)(b) above for that term in 40A(2)(a)—would result in: "the gross revenue . . . from sales . . . from the sale of goods the amount of which was at least 50% of its gross revenue”. The reduction of the above total expression to the simpler "the gross revenue . . . from sales” apparently did permit the learned Justices to reach a determination, and it must be concluded that the deletion of the phrase "from the sale of goods" did not affect that outcome in their view. However, in this instant matter even that option is not available to this Court since we do not have any similar definitional flexibility nor can I contrive any which could work to the advantage of this appellant. I am unable to find that the phrase “from the sale of goods" should be deleted. In this situation, the "processing of goods for sale must exceed 10% of the gross revenue" for the appellant to succeed. Irrespective of certain general assertions proposed by counsel for the appellant, I am quite satisfied that without the inclusion of the hockey broadcast revenue from advertisers at issue, the required level of gross revenue ten per cent could not be attained and characterized as "processing of goods for sale”. For the greatest part of its revenue, the appellant provided a service to its advertisers, by arranging, setting up and broadcasting its program, within which program the advertisers could include for a fee the messages desired. I am not persuaded that such a relationship between this appellant corporation and its advertisers can properly be described as "manufacturing or processing goods for sale”. In my view, the jurisprudence available for this appellant comes to rest in Le Soleil, supra, at the Federal Court, Trial Division level, and the prospect of using the reversal of that judgment by the Federal Court, Appeal Division, leaves no room for application in this matter.

The appeals are dismissed.

Appeals dismissed.