Harvey C. Smith Drugs Ltd. v. The Queen, [1995] 1 C.T.C. 143 (FCA)

Desjardins J.A.:-This appeal of a judgment of the Trial Division [1] relates to the interpretation of the word "processing" in the definition of "Canadian manufacturing and processing profits" for the purpose of calculating the manufacturing and processing deduction provided under section 125.1 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act") for the 1979 taxation year. [2]

The appellant submits that the trial judge erred in narrowing the meaning of the word "processing” by the use of the rule noscitur a sociis (or ejusdem generis rule). It claims that the word "or” in the phrase "manufacturing or processing” found in the body of the definition should be given its disjunctive meaning. The interpretation of the word "processing” as found in subsection 125.1(1) of the Act should, therefore, not be influenced by the word "manufacturing" located in the same section. On the contrary, the word "processing” should be given its ordinary meaning. The appellant relies on the Living Webster Encyclopedic Dictionary of the English Language” [3] which provides the following definition of the word "process”:

v.t. To treat or prepare by some particular process; to convert, as an agricultural commodity, into marketable form by some special treatment....

It cites also The Random House Dictionary of the English Language, The Unabridged Edition? [4] which gives the following definition:

I. a systematic series of actions directed to some end; to devise a process for homogenizing milk. 2. a continuous action, operation, or series of changes taking place in a definite manner: the process of decay... 6. the action of going forward or on. 7. the condition of being carried on. 8. course or lapse of time. -v.t. 9. to treat or prepare by some particular process, as in manufacturing. 10. to handle (papers, records, etc.) by systematically organizing them, recording or making notations on them, following up with the appropriate action, or the like... 12. to convert (an agricultural commodity) into marketable form by some special process:....

These meanings, the appellant argues, are within the context of the legislation. Parliament intended to cover all commercial activities including those of the appellant. The breaking of bulk and the packaging of prescription drugs so that they may be sold to individual customers constitute "processing”. The proper test of whether activities constitute "processing”, it says, is not whether that activities result in a physical change in the product being processed. Rather, it is whether the activities undertaken are a "process” and whether that process results in the product being rendered more marketable.

The respondent, referring to the recent decision of the Supreme Court of Canada in Quebec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours (30 September 1994), 23014 (S.C.C.), invites us to adopt the teleological approach, where a legislative provision is to be given a strict or liberal interpretation depending on the purpose underlying it, the purpose being identified in light of the context of the statute, its objective and the legislative intent. In the case at bar, the word "processing", when read in context together with Parliament’s intent, suggests that it was not designed to cover activities such as those of the appellant. It is manifest, says the respondent, that Parliament intended to give tax incentives to Canadian manufacturers and processors faced with foreign competitors in the domestic and foreign markets so as to foster the creation of employment in Canada. [5]

The facts are not in dispute.

The appellant owns and operates a retail drug store in the city of Brantford. Part of its business involves the dispensing of prescription drugs. The dispensing of tablets and capsules, which is the only activity we are concerned with, entails a number of operations which were thus described by the trial judge in Harvey C. Smith Drugs Ltd. v. The Queen, [1992] 1 C.T.C. 325, 92 D.T.C. 6349 at pages 327-28 (D.T.C. 6350) (F.C.T.D.):

The dispensing of drugs in capsule or tablet form requires the pharmacist to read the prescription, verify its authenticity, determine what is required to fill the prescription, select the appropriate tablets or capsules which have been purchased in bulk form (that is, in containers of 100, 500, 1,000, 2,500 or 5,000), dump the tablets into a tray and using a spatula remove any that are discoloured, broken, chipped or cracked, count the tablets and place them in the appropriate container. Two different trays are used, one for penicillin products and one for non-penicillin products. The pharmacist may select as between a brand name drug and a generic unless the doctor directs otherwise. If cold storage prevents deterioration of the drug, the drug will have been kept refrigerated by the pharmacist. The pharmacist is required by legislation to put the capsules into a container with a child-proof safety cap. (Patients who are arthritic can request a snap cap.) The container is a vial which is either clear or amber. Amber vials are used to preserve certain drugs from the effect of light which deteriorates the strength of the medication. The size and colour of the vial is determined by the prescription. The pharmacist does not seal the vial. Lastly, the pharmacist is required by provincial law to label the container with a prescription number, the patient’s name, full directions for use, the doctor’s name, the quantity of the medication and the date dispensed.

The appellant brought to our attention Interpretation Bulletin IT-145R dated June 19, 1981, particularly paragraphs 6 and 41 which, it claims, recognize that packaging goods for sale is "processing" even absent a physical change in the product. Those paragraphs read:

6. The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging.

Drugstores 41. The mixing of various liquids of compounds when preparing a drug prescription is considered to constitute manufacturing and processing. However, the filling of prescriptions by placing labels on products already in their own container or by the placing of pills, capsules or liquids purchased in bulk into small containers and labelling them is not considered to qualify as manufacturing and processing. Where a corporation has considered activities referred to in the previous sentence as qualified activities when computing their manufacturing and processing deduction in previous years, this will be accepted by the Department for taxation years ending prior to January 1, 1979.

[Emphasis added. I

The appellant claims that the first branch of paragraph 6 is applicable to the case at bar. The pharmacist, by filling the prescription and by placing the tablets or capsules in a child-proof cap container, as he is obliged by law to do, applies a systematic procedure to make the product more marketable. Moreover, it says, the exception contained in the second branch of that paragraph, and more particularly the words "filling of orders", is incorrectly applied to the filling of a prescription. We do not find that these paragraphs assist the appellant. The phrase "filling of orders" is broad enough to cover the filling of a prescription. Moreover, paragraph 41 is clearly contrary to its position. Be that as it may, it is now well settled that interpretation bulletins only represent the opinions of the Department. They do not bind either the Minister, the taxpayer or the courts and are only an important factor in interpreting the Act in the event of doubt as to the meaning of the legislation. [6]

The appellant has also brought to our attention Income Tax Regulations 5200, 5201 and 5202 [7] adopted pursuant to paragraph 125.1(3)(a) of the Act. Regulation 5200, which deals with the basic formula for determining "Canadian manufacturing and processing profits", refers to the notions of "cost of manufacturing and processing capital" and "cost of manufacturing and processing labour". These words are defined in Regulation 5202 where the term "qualified activities" is to be found, a word also defined. The appellant invokes in its favour subparagraph (a)(iv) of the definition of "qualified activities" which reads "inspecting and packaging of finished goods". We note, however, that the opening words of that definition indicate that the term applies to those activities "when they are performed in Canada in connection with manufacturing or processing... [emphasis added]. The definition does not cover "packaging" alone. In any event, it is the Act which must be interpreted in light of its content including the case law.

The following definition of the word "processing" was adopted by Cattanach J. in Federal Farms Ltd. v. M.N.R. (No. 2)° [8] on the basis that it was Parliament’s intent that the word be given its ordinary meaning. This is what he said in Federal Farms Ltd. v. M.N.R., ibid. at page 67 (D.T.C. 5071 ):

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

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

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

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

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

This decision was subsequently affirmed by the Supreme Court of Canada (1967), 67 D.T.C. 5311 (S.C.C.). More recently, our Court has adopted this definition in Tenneco Canada Inc. v. The Queen, [1991] 1 C.T.C. 323, 91 D.T.C. 5207 al page 326 (D.T.C. 5209), where the two following tests were drawn from the meaning of the word "process" in Webster’s Third New Dictionary (1964):

The two tests for determining whether a taxpayer processes goods are (i) whether there is a change in the form, appearance or other characteristics of the goods subject to the operation, and (ii) whether the product becomes more marketable. (See Federal Farms Ltd. v. M.N.R., supra. The definition of "process" in Webster’s Third New Dictionary (1964) is:

To subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result; put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process (-ing cattle by slaughtering them) (-ed milk by pasteurizing it) (-ing grain by milling) (-ing cotton by spinning)

Processing occurs when raw or natural materials are transformed into saleable items. Such raw or natural materials are unsaleable, or would sell for a lesser price, in their unprocessed state.

[Emphasis added. I

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 technique of preparation, handling or other treatment designed to effect a particular result". There is no subjection and conversion of the original product from one state to another. The trial judge, in our view, correctly required that the product undergo a physical change in form or appearance for processing to occur. At a minimum, this is certainly so. The use of the word "transformation" in the French version [9] is indicative of the fact that changes or alterations of the product must be present. In the case at bar, the tablet or capsule remains in the same form and dosage throughout. A simple reduction in numbers for marketability does not constitute "processing". [10]

In view of the above, we need not decide whether, in coming to her conclusion, the trial judge was correct in referring to the noscitur a sociis rule (or ejusdem generis rule) so as to determine the meaning of the word "processing".

This appeal will accordingly be dismissed with costs.

Appeal dismissed.