Nova Construction Sand and Gravel Ltd. v. The Queen, 80 DTC 6298, [1980] CTC 378 (FCA)

The Chief Justice (concurred in by Ryan, J and Kerr, DJ):—This is an appeal from reassessments of income tax for the taxation years 1972 and 1973. The issue is the entitlement of the appellant to certain capital cost allowance deductions claimed in computing income for both years and to a deduction from tax claimed for the year 1973.

The appeal turns on the interpretation to be given to the word “producing” in the expression “producing industrial minerals” which is found in the definitions of the expression “manufacturing or processing” in paragraph 125.1(3)(b) of the Income Tax Act and in subsection 1104(9) of the Income Tax Regulations.

For the taxation years 1972 and 1973, the Income Tax Regulations made provision for the deduction in computing income of additional capital cost allowances in respect of property used in the manufacturing or processing of goods for sale or lease.

For the taxation year 1973, section 125.1 of the Act also provided for a deduction from the tax of a corporation of an amount calculated by reference to its profits from the manufacturing or processing in Canada of goods for sale or lease. It is I think to be inferred that the object of these provisions was to encourage investment in manufacturing and processing equipment and the manufacturing and processing of goods in Canada.

The appellant’s claims for such additional capital cost allowances and deductions were disallowed by the Minister and the disallowance was upheld by the Tax Review Board and by the Trial Division.

The facts relating to the appellant’s operations are fully described in the Reasons for Judgment of the learned Trial judge and I need not repeat them. In summary, so far as material, the operation consists of excavating pit run sand and gravel from pits, conveying it to a plant and there washing, screening and sorting it into various sizes and qualities of sand and gravel for industrial use. There is no question that both the pit run sand and gravel and the many specialized products obtained from it are industrial minerals. Nor, in my view, is there any reason to doubt that within the ordinary meaning of words, what the appellant does in its washing, screening and sorting operation is a processing of the excavated pit run material the result of which is to produce the specialized sand and gravel products which the appellant sells. Prima facie, therefore, the appellant’s operation as a whole includes a processing operation.

I turn now to the statutory provisions on which the issues arise and first to section 125.1 of the Act. After providing for the deduction from tax and defining the extent of what is embraced in the expression “Canadian manufacturing and processing profits” the statute goes on to provide that “manufacturing or 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, or

(x) any manufacturing or processing of goods for sale or lease, if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active businesses carried on in Canada was from

(A) the selling or leasing of goods manufactured or processed in Canada by it, and

(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it.

The basis of the disallowance of the appellant’s claim for the deduction from tax provided by section 125.1 is that its whole operation is that of “producing industrial minerals” within the meaning of subparagraph (vii) and that it does not qualify for the deduction.

In The Queen v York Marble, Tile and Terrazzo Limited, [1968] SCR 140 at 144; [1968] CTC 44 at 47; 68 DTC 5001 at 5002, Spence, J, speaking for the Court with respect to the interpretation of the expression “goods produced or manufactured in Canada” in paragraph 30(1)(a) of the Excise Tax Act Said:

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: ([1934] SCR 244)

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.

It is worth noting that in the Vandeweghe case the Chief Justice went on to consider the meaning of the expression in its context by reference to indications to be found in the statute. This led to a broad meaning being given to the words “manufactured” and “produced” in their context in the Excise Tax Act provision under consideration. But as Spence, J points out in the York Marble case, decisions on the wording of other statutory provisions are of limited assistance in construing the exact provisions of a different Statute.

On the facts of the present case I see no reason to doubt that there are common usages of the word “producing” which would embrace the appellant’s processing operations. To my mind it would involve no straining of ordinary language to say that the appellant is producing specialized sand and gravel products by processing pit run sand and gravel. In general the purpose and result of all industrial processing is to produce a product. I find it impossible, therefore, if the words “producing industrial minerals” are to have their broadest meaning and are not to be influenced by their context, to accept the appellant’s position that the producing of industrial minerals by the appellant is the excavation stage only or possibly the excavation and transportation stages. But that leaves unanswered what appears to me to be the critical point as to what scope the expression has in its context.

Turning to that context, it is to be observed that the item in question is the seventh in a list of types of operations to be excluded from “manufacturing or processing”, into which expression, presumably, because they are to be excluded, all of them would otherwise fall. Next, it is noticeable that what is excluded by items (i) farming and fishing, (ii) logging, (iv) operating an oil or gas well and (v) extracting minerals from a mineral resource, if they are to be considered as manufacturing or processing operations at all, are at any rate essentially operations for the production of raw or resource material. Item (viii), producing or processing electrical energy or steam, for sale, is of particular significance. It distinguishes between producing and processing. But, as the end product is still electrical energy or steam, if “producing” is used in its broad sense it includes the processing of electrical energy or steam and the use of the word “processing” is thus redundant. That suggests that in item (viii) “producing” and “processing” are differing concepts, the former referring to the generating of the electricity or steam and the latter to the processing of it after it has been generated. In that sense the result of “producing” is again raw material. Finally it is to be noted that both in item (vi) and in item (ix) the processing, in the one case of ore and in the other of gas, is dealt with specifically and distinctly from the production of unprocessed gas from a well or ore from a mine by an operation that falls within item (iv) or item (v).

These features of the context in which item (vii) is found, using as it does a word which in an accompanying item is used in a restricted sense and in the midst of other items concerned with operations for the production of raw as opposed to processed goods and further in the context of a provision the object of which is to encourage the processing of goods for sale, lead me to the view that it was not intended by the use of the expression “producing industrial materials” to include the processing of industrial minerals to produce specialized industrial mineral products of the kind produced by the appellant’s processing operations.

What I have said with respect to paragraph 125.1(3)(b) applies as well to the similarly worded provisions of subsection 1104(9) of the Income Tax Regulations. I can see no reason for giving the expression “producing industrial minerals” a different interpretation in its context in the regulations.

I would allow the appeal and refer the reassessments back to the Minister for reconsideration and reassessment on the basis that the appellant’s operations at its plant or plants in processing by washing, screening, sorting, etc excavated pit run sand and gravel to produce specialized sand and gravel products do not fall within the meaning of “producing industrial minerals” in paragraph 125.1 (3)(b) of the Income Tax Act or subsection 1104(9) of the Income Tax Regulations. I would award the appellant costs of the appeal and in the Trial Division.