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Citation: 2005TCC40
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Date: 20050511
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Docket: 2003-2715(IT)G
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BETWEEN:
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TDS GROUP LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
O'Connor, J.
[1] These appeals were heard at
London, Ontario on December 14, 2004.
[2] Testimony on behalf of the
Appellant was given by Andrew Dodd, a former executive of the
Appellant, TDS Group Limited (sometimes referred to as
"TDS" or "Appellant") and by Mehmet Ali
Gencer, a chemical engineer and the President of Northern
Technologies International. Mr. Dodd was familiar with the
relevant activities of TDS and Mr. Gencer was also familiar
with these activities and with the properties of a chemical
process used in those activities more fully described below in
paragraphs 15 and 16.
[3] The Respondent called no
witnesses.
Issue
[4] The sole issue is whether
TDS's activities in the taxation years ending August 22,
1996, September 30, 1996 and September 30, 1997 (the
"relevant taxation years") constituted
"processing" in Canada of goods for sale within the
meaning of subsection 125.1(1) of the Income Tax Act
("Act") such that TDS was entitled to a 7%
deduction from its federal income tax otherwise payable in
respect of its "Canadian Manufacturing and Processing
Profits" ("M & PP deduction"). Those activities
consisted generally in the reception, assembly and special
packing of automobile and truck parts received by TDS at its
plants in London and Tillsonburg, Ontario, applying a special
corrosion-inhibiting substance to the parts and arranging for
their transportation to corporations operating vehicle assembly
plants in Venezuela, Brazil, Argentina and Columbia.
[5] Counsel for TDS contends that the
said activities constitute "processing" whereas counsel
for the Respondent contends that they do not.
Facts
[6] The relevant facts are contained
in the Notice of Appeal and in the "Appellant's
Memorandum of Fact" and are proven either by admissions or
the evidence. Those facts are as follows:
1. By Notices of
Reassessment dated June 19, 2000 the Minister of National Revenue
("Minister") reassessed TDS additional federal income
tax payable on the grounds that it was not entitled to the
M & PP deduction in respect of the relevant taxation years.
2. On September 15, 2000
TDS filed Notices of Objection.
3. By letter dated April
30, 2003 TDS was advised that the reassessments had been varied
to allow the M & PP deduction in respect of the activities at
TDS's Hagersville facility and another deduction. Neither of
these deductions are of concern in these appeals. The remainder
of the reassessments was confirmed and revised Notices of
Reassessment, dated April 30, 2003 were issued.
4. In the revised Notices
of Reassessment, the Minister, denied the M & PP deduction in
respect of TDS's operations at its London and Tillsonburg
facilities in the amounts of:
(a) $588,475 for the taxation
year ending August 22, 1996;
(b) $63,240 for the taxation year
ending September 30, 1996; and
(c) $1,040,412 for the taxation year
ending September 30, 1997.
5. The Minister, in
denying the M & PP deduction, did so on the basis that TDS was
not engaged in manufacturing or processing goods for sale or
lease within the meaning of the definition of "Canadian
manufacturing and processing profits" in
subsection 125.1(3) of the Act.
6. During the relevant
taxation years TDS's head office was located at 301 Tillson
Avenue, Tillsonburg, Ontario and it operated facilities in
London, Tillsonburg and Hagersville, Ontario.
7. During the relevant
taxation years TDS was in the business of assembling and treating
vehicle parts into "completely knocked down"
("CKD") Kits specifically for offshore assembly plants
("OSAPs) of Ford, General Motors and Chrysler (the
"carmakers") at its London and Tillsonburg facilities
and manufacturing wooden cases to house the CKD Kits at its
Hagersville facility.
[Note: All of the foregoing facts in paragraphs 1 to 7
are admitted by the Respondent in the Reply to the Notice of
Appeal ("Reply")].
8. The evidence
establishes that in the relevant taxation years TDS was the only
Canadian Corporation engaged in such business, that all of
TDS's competitors operated from the U.S.A. and that
substantially all of TDS's gross revenue from its active
businesses in Canada was derived from its business activities
described in paragraph 7 above.
9. In North American
automobile plants, the same model vehicle is assembled
continuously, and substantially all the parts are manufactured in
(or "sourced from") North America. The North American
automobile parts manufacturers deliver parts, on a continuous
basis, directly to the carmakers' North American assembly
plants for immediate integration into the production run of the
specific vehicle made at that plant. This is referred to as
"just in time" delivery of parts inventory.
Accordingly, no special precautions need be taken for the
physical or chemical protection of such parts.
10. OSAPs differ from North American
assembly plants, inter alia, in that:
(a) "just in time"
delivery of parts is not possible, given that parts for such
plants are sourced, for the most part, in North America and
shipped to the OSAPs; and
(b) OSAPs have production runs of
different types of vehicles, rather than a single vehicle
type.
11. Consequently, the delivery of
automobile parts to OSAPs must be in a manner which takes into
account the needs of the OSAPs for parts that are:
(a) assembled in the sense that
all parts needed for a production run of a certain number of
vehicles of a certain make, model and colour are aggregated
together in the correct number and type for a complete production
run;
(b) fit for assembly into the specific
production run of the certain vehicle as described, i.e. no
defective parts and, in particular, no corroded parts, given that
the OSAPs do not keep an inventory of parts nor do they have
ready access to the majority of their parts; and
(c) stored until use without corrosion
in an often corrosive environment (e.g. Venezuela, China).
12. During the relevant taxation
years, the North American parts manufacturers delivered parts
directly to TDS's Tillsonburg and London facilities in
exactly the same way as they shipped parts to the carmakers'
North American assembly plants. TDS inspected the parts for
defects, then created CKD Kits from these parts. Each CKD Kit
contained between 100 and 250 cases that contained all of
the North American sourced parts needed by the OSAPs to
assemble a particular number of a specific kind of vehicle.
13. Each CKD Kit was in accordance
with TDS's engineering department's instructions for a
specific production run order, in a manner appropriate to the
unloading facilities, inventory storage system, and line-side
feeding process specified for the production run of a certain
number of a particular vehicle by the specific offshore assembly
plant.
14. It was a critical requirement of
the OSAPs that the parts in every CKD Kit arrived at the OSAPs
chemically and physically unchanged despite the highly corrosive
environment of ocean travel and, to a lesser extent, despite the
inventory storage facilities of the OSAPs. Traditional
anti-corrosion methods (i.e., oil-dip) are costly in
that parts need to be cleaned before assembly, are not
consistently effective, and can be hazardous to employees and the
environment.
15. TDS at one time protected the
parts in the CKD Kits from the corrosion of ocean travel by
dipping the parts in oil. However, TDS over time converted to a
more technologically sophisticated and effective method:
enveloping the parts in a vapour corrosion inhibitor
("VCI").
16. The VCI is a wrapping which emits
a chemical vapour that coats the parts with a chemical
mono-molecular layer. This chemical layer prevents corrosion of
the metals used in automobile parts. The VCI vapour is more
effective than oil-dipping in that it permeates all areas
of the parts, including those which are normally difficult of
access (crevices and cavities of parts). The VCI, although
expensive, is less costly than oil-dipping because the chemical
layer does not have to be removed from the part before assembly.
The protection afforded by VCI wrapping protects against
corrosion for as long as 24 months even if the part is repeatedly
unwrapped and wrapped.
[Note: All of the foregoing facts in paragraphs 9 to 16 are
admitted by the Respondent in the Reply.]
17. [OSAPs]
(a) The OSAPs were not organized
to efficiently order or receive parts from hundreds of North
American parts manufacturers;
(b) TDS's activities ensured that
the correct type of part arrived in the correct quantities for
assembly runs, were quality controlled with respect to colour and
physical condition, and were corrosion-free;
(c) The CKD Kits were organized in a
manner that was compatible with the unpacking systems of the
OSAPs;
(d) The CKD Kits were organized to
facilitate assembly-line-side feeding; and
(e) The parts, as assembled in
the CKD Kits, could be stored in an easily traceable,
space-efficient and non-corroding manner in inventory when not
taken directly to production runs.
[Note: Paragraph 17 is admitted by the Respondent. See
"Admitted Facts from Notice of Appeal" submitted at the
hearing.]
[Certain further facts, including clarifications or
amplifications, are mentioned in the Appellant's Memorandum
of Fact, also submitted at the hearing. I have condensed these
further facts, based upon what I find has been established by the
evidence. For convenience I have numbered these further facts as
paragraph 18 and following.]
18. The OSAPs were incapable of
receiving and assembling automobile parts directly from the
various North American suppliers to TDS; instead, they required
the delivery of undamaged and corrosion-free parts in CKD Kits
containing the precise number of parts required for a particular
run of a particular automobile or family of automobiles.
19. The Tillsonburg plant occupied
almost 500,000 square feet and employed an average of 200 to 300
people. The London plant occupied 220,000 square feet and
employed an average of 75 to 125 people.
20. Essentially, a CKD Kit ensures
that an OSAP will have all of the parts necessary to assemble a
particular number of automobiles (usually, a multiple of 12). For
example, if Chrysler contracts with an OSAP to assemble 24
Impalas, TDS will deliver a CKD Kit to the OSAP containing all of
the North American-manufactured parts (representing approximately
90% of the total number of parts) necessary to assemble 24
Impalas - no more, no less. In this example, a CKD Kit might
consist of 30 to 60 customized containers.
21. Before a CKD Kit is put together
by TDS, several preliminary steps must have occurred. First, an
OSAP must have sent an order to one of the carmakers, requesting
the delivery of CKD Kits containing the parts necessary for the
OSAP to assemble the requisite number of automobiles. Second, TDS
must have successfully bid on the creation of the CKD Kits for
the OSAP. Third, TDS must have identified those parts comprising
the relevant CKD Kits for which it had not already designed
specific packaging, and TDS must have already contacted the North
American suppliers of the parts and ordered them. Fourth, TDS
must have designed specific packaging for those "new"
parts.
22. Subsequent to these preliminary
stages, TDS would have engaged in each of the following
activities in order to create CKD Kits for a particular OSAP:
(i) Received automobile parts
from North American suppliers;
(ii) Physically inspected,
counted and identified such parts;
(iii) Matched the parts against
certified samples to ensure an exact match;
(iv) Assembled the requisite number of
parts to enable the particular OSAP to assemble a specified
number of automobiles (in multiples of 12);
(v) Pre-packaged the parts in such a
manner as to withstand the rigours of overseas shipment and to
reduce and optimize the space required by such parts in the
export containers;
(vi) Segregated and identified the
parts to be directed to a specific station on the OSAP assembly
line;
(vii) Applied a corrosion inhibitor,
principally VCI;
(viii) Constructed special wooden containers to
protect the parts from damage during shipping;
(ix) Packed the parts in the
containers in such a manner that the OSAPs can easily unpack
them;
(x) Facilitated shipping across
international borders in a manner commensurate with the customs
laws of the country in which the OSAP was located.
23. OSAPs are incapable of assembling
automobiles using local parts because local suppliers largely do
not exist, or using parts sourced directly from North American
suppliers (the principal source of automobile parts) because the
OSAPs lack the technological capabilities, facilities and
economies of scale of the North American assembly plants.
24. An OSAP lacks the infrastructure
to receive and process the vast array of parts required to
assemble automobiles in the absence of the CKD Kits. The CKD Kits
not only contain all of the relevant parts, but they also allow
the OSAPs to simply take the parts out of their protective
containers and packages and assemble those parts into
automobiles.
25. For all of these reasons, the
OSAPs differ from their North American assembly plant
counterparts in that they require the delivery of CKD Kits in
order to assemble automobiles.
26. TDS was originally a division of
Livingston Industries Limited ("Livingston"),
Livingston and later TDS from 1973 until the relevant taxation
years was considered by Revenue Canada as being entitled to the
M & PP deduction. Tab 2 of the Joint Book of Documents is a
request dated January 15, 1973 by Livingston to the Department of
National Revenue for a ruling allowing Livingston the deduction
in question and Tab 3 of the Joint Book of Documents reads as
follows:
Mr. G.T. Francolini,
President,
Livingston Industries Limited
Tillsonburg, Ontario.
January 31, 1973
Dear Mr. Francolini:
This is in reply to your letter of January 15, 1973. Until
legislation similar to that proposed in Bill C-222 has been
passed by Parliament, no definite opinion can be given concerning
the questions raised in your letter. However, the
Department's present views concerning these questions are
outlined below.
Based on the information contained in your letter, it is our view
that Livingston Industries Limited is primarily engaged in a
manufacturing or processing activity for purposes of clause 18 of
Bill C-222. In our opinion the breaking of bulk, coating or
wrapping to prevent rust, removal of certain engine parts,
alteration to parts, and the assembly of these parts into kits
for final assembly in a manner compatible with customers'
foreign assembly facilities are activities which are considered
to be manufacturing or processing for purposes of the lower rate
of corporate tax as well as the fast write-off. We are enclosing
a copy of the Department of Finance Press Release dated December
28, 1972 which contains the main features of the Regulation which
corporations will use to compute their "Canadian
manufacturing and processing profits". Equipment that is
acquired for the purpose of earning your corporation
"Canadian manufacturing and processing profits" is
eligible for the fast write-off provided that it meets the
requirements set out in paragraphs (d) to (i) on pages 2 and 3 of
the Department of Finance Press Release dated July 26, 1972 (a
copy of which is enclosed for your convenience).
Regarding your comment that the lack of ownership of the product
being manufactured or processed is not a crucial factor in
determining whether a company is engaged in a manufacturing or
processing activity, we agree with you provided that the product
which is being custom processed is destined for sale or lease by
another person.
We trust that the above information will be of assistance to
you.
Yours very truly,
for Director,
RDW/bg
Technical Interpretations Division.
Submissions of the Appellant
[7] Counsel for the Appellant submits
as follows:
• That what the
Appellant was working on and what was being sold was not
individual parts, as contended by the Respondent, but rather CKD
Kits or the mechano sets.
• That the
documentation between the car manufacturers and the Appellant,
indicates that in the breakdown of the costs a certain amount is
allocated to the materials (i.e. the parts) and another amount is
allocated to what is referred to by the car manufacturers as
"processing" and generally speaking the amount
allocated to "processing" is approximately five times
higher than the cost of the parts. Tab 6 of the Joint Book of
Documents is referred to as an example of the documentation used
in the relevant taxation years.
• The
Appellant's operations are complex. There are 25 separate
steps for properly assembling the CKD Kits. Tab 13 of the Joint
Book of Documents demonstrates this. Further, the assembly must
be done precisely because it is the Appellant and not the car
manufacturer who is financially responsible for any shortcomings
in the CKD Kits as they arrive at the facility of the offshore
manufacturer.
• The Appellant
was not merely packaging. The application of the VCI process
described in paragraphs 15 and 16 of the Facts demonstrates this.
The application of the VCI process is in fact an addition to the
part and that application is essential to prevent corrosion.
[8] Counsel then goes on to refer to
what might be considered the leading case, namely Federal
Farms Limited v. Minister of National Revenue
66 DTC 5068 (Ex. Ct.), affirmed 67 DTC 5311. In that
case the Supreme Court of Canada agreed with the conclusion
reached by Justice Cattanach of the Exchequer Court of Canada
(later the Federal Court of Canada). That case dealt with the
"processing" of potatoes and carrots. The processor,
namely Federal Farms Limited, selected the potatoes
and carrots for size and uniformity, washed and brushed them to
remove soil, sprayed them with a chlorine solution to improve
shelf life, dried them and sorted them into 5, 10 and 20 pound
bags and shipped them to retail stores. The Court held that this
was "processing". Justice Cattanach stated as
follows:
...
Here it is plain that section 40A of the Income Tax Act
is dealing with manufacturing and processing corporations
generally and that the words "manufacturing" and
"processing" as used in subsection (2)(a) of
section 40A are used in their ordinary unrestricted senses. If
this were not the case and the words were not to be intended to
be used in their unrestricted senses then it was obviously
unnecessary to make a specific enumeration of those types of
businesses in which certain corporations are engaged as being
excluded from the meaning of the words "manufacturing and
processing corporation".
Section 40A of the Income Tax Act is dealing with matters
affecting manufacturing and processing corporations generally.
The section is not one passed with reference to a particular
trade or business from which it follows that the words in
question are to be construed in their common or ordinary meaning
and not as having a particular meaning as understood by persons
conversant with a particular trade or business. For this reason I
do not accept the definition put forward by Mr. Long that
processing connotes a material change being made in the texture
and structure of the product.
...
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..."
...
The evidence of the appellant as to its operations convinces
me that those operations were a process or series of processes to
prepare the product for the retail market. There is no doubt that
quite apart from the grading of the vegetables, a clean and
attractive appearance is an important factor in marketing
vegetables and especially so in the present day methods of retail
marketing. Although the product sold remains a vegetable,
nevertheless, it is not a vegetable as it came from the ground
but rather one that has been cleaned, with improved keeping
qualities and thereby rendered more attractive and convenient to
the consumer.
The potatoes and carrots were, therefore,
"processed" by the appellant within the ordinary and
common meaning of the word "process" which I have
concluded must be applicable in the present instance and within
the meaning of the dictionary definitions of that word which are
quoted above and which I have accepted as being the ordinary and
common meaning of the word.
I do not consider that the operations of the appellant
constitute packaging only and so precluded the appellant from
qualifying as a manufacturing and processing corporation by
reason of subsection (3)(a) of section 40A. To my mind the
term 'packaging' applies to the appellant's ultimate
operation in placing the vegetables in bag containers, but not to
the antecedent steps of washing, brushing, spraying, drying,
sizing, culling and grading.
[9] Counsel submitted further that
Federal Farms Limited set the standard for all
cases which followed and provided the description of what
"processing" was.
[10] Counsel submits further that what
Federal Farms Limited described as
"processing" is exactly what the Appellant does. The
special market is the offshore assembly plant. The product is the
CKD Kit and it is in putting that together, the processes
involved in putting that together that constitutes what TDS does
as "processing". Counsel referred to several other
cases but confirmed that the basic principles as to what
constitutes "processing" were established in the
Federal Farms Limited case.
[11] Counsel also referred to my decision in
Cintas Canada Ltd. v. Canada, [1999] T.C.J. No.
255, and quoted the following:
...
The test to be applied in determining whether processing has
taken place, that is, whether there has been a change in the
form, appearance or other characteristics of the goods and
whether the goods become more marketable, is therefore well
established. The application of those principles in a particular
case depends on the particular facts of that case.
The Federal Court of Appeal has found that processing implies
the application of a uniform process to each item (Tenneco) or
the subjection of the product to a method, system or technique of
preparation, handling or other treatment (Harvey C. Smith).
The videotape evidence and the evidence of Mr. Gedmintas
illustrate that the uniforms rented by the Appellant were subject
to a uniform, highly-organized system of handling and treatment,
from the alteration, adaptation and labelling of garments in the
make-up phase, the sorting, cleaning and repairing of used and
soiled garments and the sorting for dispatch of garments at the
end of the process. The degree of system or uniformity or
organization in this process cannot, in my submission, be
distinguished in any material way from the processes which were
applied to vegetables in Federal Farms ....
[12] Counsel also referred to the case of
Harvey C. Smith Drugs Limited v. Her Majesty the
Queen, 95 DTC 5026. In that case the Federal Court of Appeal
held that the operations of Harvey C. Smith did not
constitute processing. Amongst other things the Court stated as
follows:
By its very language, the word "processing" used in
its ordinary meaning cannot be applied to the dispensing of drugs
in capsules or tablets where the only activities of the
pharmacist consists in removing the discoloured, broken, chipped
or cracked ones, counting the appropriate ones in a number
prescribed by the physician, and placing them in a labelled
container with a child-proof safety cap. What is absent from the
activities of the pharmacist is the subjection of the product
'to a particular method, system or other treatment designed
to effect a particular result'. There is no subjection and
conversion of the original product from one state to another.
[13] Counsel attempted to distinguish the
Harvey C. Smith case and stated as follows:
... What we have in the TDS operations is the start with parts
coming from all over North America from 1,000 different suppliers
or at least 1,000 different parts. There may be 500 suppliers.
And turned that into, at the end of the approximate six day
process Mr. Dodd told us to get this ready from beginning to end,
to turn this into a CKD kit for export to foreign assembly
plants.
...
... the difference between the operations of TDS and those of
Harvey C. Smith Drugs are very significant indeed.
Submissions of Counsel for the Respondent
[14] These submissions are contained at
pages 255 and following of the transcript. The most relevant
portions of the submissions are as follows:
The characterization of what TDS Group does is central to how
this appeal will be decided. It is our position that
notwithstanding Mr. Taylor's very able argument, the things
that TDS Group does under its contract with General Motors is no
more than packaging for shipment. It is no more than packaging.
And that is borne out by the documents that result in the
contract.
...
What we know about the facts of this case is that General
Motors manufactures its cars in Venezuela different than they
manufacture them in Canada. They manufacture them in lots of 12,
24, 48 and they send the parts to Venezuela in kits that are
complete insofar as all of the North American parts that are
required to build the car. Those parts are all manufactured in
North America by subcontractors to General Motors or
manufacturers within General Motors to produce those parts. What
has been contracted for is the service of collecting the parts,
putting them into appropriate boxes, crates, and cases for
shipment in a sea container to Venezuela. There is not one piece
of assembly. There is not one piece of taking these parts and
making them any closer to a car which is the ultimate product
that General Motors hopes to sell.
...
Our position simply is that the individual act of taking
something from bulk, packaging a number into a package, whether
it's a pill bottle or whether it's a plastic bag or a
cardboard box or a plywood box, whether you encase it in VCI wrap
or add desiccants to it, it doesn't matter. What is not
happening in that series of steps of counting and of putting in
the bag or putting into a container is processing. So our
position, simply put, is that the law clearly establishes that
packaging is not processing.
And I'm not here to say that Federal Farms is wrong
because Federal Farms is the case that has been applied by all of
the courts, this Court and the Federal Court of Appeal in
deciding issues relating to manufacturing and processing since it
was decided in the sixties. That is the case that the courts are
comfortable in applying. The test is the one that is applied.
What I'm saying, though, is that the test in Federal Farms
is not met here. The test has two parts to it and we've all
agreed on what the two parts are. Part number one, is there a
change in the form, appearance or other characteristic of the
goods? Now, Mr. Taylor tries to say we can't look at the
individual part in finding a process here, we have to look at the
combination of all of the parts when they're put together in
boxes and the boxes are put into three containers. That CKD kit,
that 24 is the process. That's not what the legislation is
aimed at.
The legislation is aimed at taking raw material and
manufacturing something with it, taking apart or taking something
and changing its form, its substance, its character, its
appearance in a way that makes it more marketable. And nothing is
done in this particular case that makes the individual part more
marketable or all of the parts more marketable.
The parts are assembled because they've already been
pre-sold. General Motors says I will sell you 24 Impalas in
pieces and it says to TDS Group, here are the pieces, put them
into boxes according to the needs of my customer. So the customer
says I want these pieces to be destined to number ten point on my
assembly line, number 15, number 20. We've got the document
that shows how important that is. So the customer's
requirements are being accommodated by TDS, but nothing is being
processed.
All that's happening is that parts are being counted,
parts are being packaged, parts are being wrapped up to protect
them from the conditions they may be subjected to while
they're transported from Canada to Venezuela or somewhere
else. And we know from the Range Grain case that transportation
in and of itself is not manufacturing or processing. And the
protection of an item as part of the transportation process is
not processing.
And so, when you look at what is really happening in this
particular case, in light of the decisions that have been decided
and Mr. Taylor has referred to, you will see that there is a
fundamental distinction between what happened in those cases
where there was a packaging component or a transportation
component that was viewed to be part of the processing of a good
in Canada and of this particular case. Because this case is not
part of an integrated process where packaging is at the tail end
or transportation is at the tail end. This case involves a
service provider that does no more than packaging and facilitate
transportation; nothing more.
[15] Counsel then goes on to analyze the
Harvey C. Smith case which held that packaging alone is
not to be considered as "processing".
[16] Counsel refers to other authorities
which held that transportation in itself is not
"processing".
[17] Counsel summarizes its position as
follows:
...
Our position here is quite simple; that these cases also stand
for the proposition that if you're a transportation company
or a packaging company and you do nothing to alter the form,
appearance or characteristic of the good or make it more
marketable, then you do not qualify. And it's as simple as
that.
He states further:
What does TDS Group do? It collects, counts and packages
automotive parts to be put on ocean going vessels for export. It
does not refine the parts. It does not process the parts. It does
nothing to the parts other than put them into the appropriate box
or case.
[18] Counsel submits further that the
application of the VCI does not mean that processing was
involved. All that VCI did was to protect the parts while they
were being transported. Counsel concluded as follows:
...
And ultimately, the use of that equipment was found not to be
subject to the deduction. Ultimately, I suppose what we're
saying is that this particular case is not a complicated case.
The facts are not in dispute. It's a matter of looking at the
facts as they are, having regard to what is the contract between
General Motors and TDS Group or the other car companies to the
extent that they're similar. And the contract is to
package.
The contract is to receive, package and to get ready for
shipping. It's nothing more complicated than that. And if the
contract is a service contract to provide packaging services,
then that is not processing and the cases are clear on that.
And I don't have to reinvent what processing is because
it's clear that all of the cases are, to the extent that they
have to comment on it, say that packaging or transportation is
only not to be excluded if it's part of an integrated
activity. And here there is no integrated activity.
Analysis and Conclusion
[19] I have reached the following
conclusions:
a) The sophisticated
operations of the Appellant were clearly not simply packaging.
Nor was the Appellant involved in transportation as part of its
service. The Appellant arranged transportation but the actual
transportation was done by third party carriers.
b) The goods being
processed were, as submitted by Counsel for the Appellant, not
the parts nor the finished product, i.e. an automobile, but
rather the CKD Kits, which were sold to the offshore
manufacturer.
c) At the very least the
Appellant's operations comprised part of the overall process
that in the end resulted in the production of automobiles.
Without the Appellant's input in assembling the CKD Kits
(i.e. the mechano set) the offshore manufacturers could not have
produced a vehicle. The Appellant's operations were an
integral part in the overall process.
d) The operations of the
Appellant were significantly different to the separating and
counting, etc., of pills in Harvey C. Smith.
e) It is clear that value
was added by the Appellant and the OSAPs paid good money for the
input of the Appellant. Reference is made to the fact that the
relevant documentation establishes that in most cases the price
allocation for "processing" was approximately 5 times
that for the parts.
f) The question of
ownership of the parts was raised in the Reply but counsel for
the Respondent submitted this was no longer an issue. This is
also clear from Interpretation Bulletin IT-145R found at
Tab 16 of the Joint Book of Documents. In other words the
fact that the Appellant did not own the parts (the car
manufacturers did) does not mean that the Appellant was not a
processor. Moreover the condition of a sale taking place has been
met since the CKD Kits and their contents were sold to the
OSAPs.
g) In ambiguous cases,
references to the policy behind legislation can be helpful. That
policy was to encourage the employment and labour situations in
Canada and to enable Canadian manufacturers and processors to
compete with foreign competitors. This policy was particularly
applicable to the Appellant as it was the only Canadian
corporation carrying out the operations in question. Also in such
cases it can be helpful to look at the Ruling given in 1973 and
not changed until the 1996 year. The Ruling is not binding on the
Minister of National Revenue but certainly indicates what the
view of the Minister was for a considerable period of time.
[20] In conclusion for all of the above
reasons the operations of the Appellant in the relevant taxation
years consisted of processing of goods for sale within the
meaning of subsection 125.1(1) of the Act. Consequently,
the appeal is allowed with costs and the matter is referred back
to the Minister of National Revenue for reconsideration and
reassessment on this basis.
Signed at Ottawa, Canada, this 11th day of May, 2005.
O'Connor, J.
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