Le Soleil Limitée v. MNR, 73 DTC 5093, [1973] CTC 91 (FCA)

The Chief Justice (per curiam):—For only two or three taxation years, the Income Tax Act, by section 40A thereof,* [1] provided a special deduction as a “Production Incentive” for manufacturing and processing corporations.

In this appeal in respect of the appellant’s assessment under Part I of the Income Tax Act for the 1963 taxation year, the question at issue is whether the appellant qualified for that deduction. If it did, there is agreement between the parties as to the amount of the deduction.

To be more precise the question is whether the appellant was, for the 1963 taxation year, “a manufacturing and processing corporation” within the very arbitrary and complicated definition of that term to be derived from subsection (2) of section 40A, which provision reads, in so far as relevant, as follows:

40A. (2) In this section,

(a) “manufacturing and processing corporation” means a corporation that had net sales for the taxation year in respect of which the expression is being applied from the sale of goods processed or manufactured in Canada by the corporation the amount of which was at least 50% of its gross revenue for the year, but does not include a corporation whose principal business for the year was

(i) operating a gas or oil well,

(ii) logging,

(iii) mining,

(iv) shipbuilding,

(v) construction, or

(vi) a combination of two or more of the classes set out in subparagraphs (i) to (v) inclusive;

(b) “net sales” of a corporation for a taxation year means an amount equal to

(i) the gross revenue of the corporation for the year from sales,

minus

(ii) the aggregate of each amount paid or credited in the year to a customer of the corporation as a bonus, rebate or discount or for returned or damaged goods;

The facts are relatively simple.

The appellant, during the year in question, carried on the business of producing and distributing a daily newspaper. In so far as that business was concerned, the appellant had two types of revenue. It had revenue from advertisers for advertisements placed in the paper and it had revenues from the purchasers of the paper. Both types of revenue arose from the sale of the paper. Not only would there have been no revenue from purchasers unless papers were sold, but revenues from advertisers were not earned unless the papers in which the advertisements were placed were actually distributed to the public.

During the taxation year in question, the revenues from advertisers exceeded the revenues from purchasers.

The assessment appealed against was based on the view that, on these facts, the appellant’s net sales” for the 1963 taxation year “from the sale of goods processed or manufactured in Canada” was less than 50% of its gross revenue for the year, so that it did not fall within the definition of “manufacturing and processing corporation” in paragraph 40A(2)(a).

In the Trial Division, the matter was argued on the assumption that the only amounts to be included in “net sales” from the sale of goods was the revenue from purchasers of the goods sold. Continuing to make that assumption, the appellant based its appeal, in the first instance, on a contention that the revenue from advertisers was “net sales” from sales to the advertisers of the portions of the newspapers on which the advertisements were printed and that such revenue should, for that reason, be included in “net sales . . . from the sale of goods processed or manufactured in Canada” in applying the definition of “manufacturing and processing corporation” in paragraph 40A(2)(a). This is, in effect, the argument that was rejected by the learned Associate Chief Justice.

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. As it seems to us, the appellant’s argument was based on a view of the contract with its advertisers for which there is no support. The appellant dealt with its advertisers as a person whose business consisted in producing newspapers and selling them to the public. As such a person, for a consideration, it agreed to put an advertisement on behalf of the advertiser in its (the appellant’s) newspaper so that, when a member of the public got the newspaper, the advertiser’s message would, it might be hoped, be communicated to him. In this contract, there is no sale of anything to the advertiser. (If, in fact, there had been a contract under which the appellant sold things to an advertiser under terms that required the appellant to distribute those things among members of the public, we would have no doubt that there was a sale of those things to the advertiser even though there was no delivery to the advertiser; but, as we have indicated, we can find no such contract in the ordinary business relationship between a newspaper operator and an advertiser.)

If the matter had rested simply on the basis on which it was argued in the Trial Division, we should have been for dismissing the appeal. However, in this Court, another view of the matter was put forward, which, counsel for the Minister agrees, is open for consideration in this Court on the basis on which the trial was conducted in the Trial Division. We turn to considering the problem so raised.

To consider the problem that was raised for the first time in this Court, one must re-examine the very awkward provisions found in paragraphs (a) and (b) of subsection 40A(2). To come within the definition of “manufacturing and processing corporation” in paragraph (a), the appellant must have had, for the year in question, “net sales . . . from the sale of goods . . . the amount of which was at least 50 per cent of its gross revenue for the year”. On the face of it, this does not make sense. The words “net sales . .. from the sale of goods” do not mean anything if one applies only the ordinary meaning of the word “sale”. However, paragraph (b) relieves us from trying to torture some meaning out of the expression ‘‘net sales” because it gives to that expression, for purposes of section 40A, an entirely arbitrary meaning. Paragraph 40A(2)(b) provides that, for a taxation year, “net sales” means “an amount” equal to “the gross revenue of the corporation for the year from sales” minus certain amounts with which we need not concern ourselves for the purpose of this appeal.

The sole question is, therefore, what was the appellant’s “gross revenue” from the sales of its newspapers for the 1963 taxation year; or, to be more specific, were the appellant’s “gross revenues” from its sales only the amounts received from the purchasers of the newspapers or did they include also the amounts received from its advertisers for advertisements placed in the newspapers that were sold.

In our view, section 40A is a very special provision for a very special purpose and uses terminology that does not follow the traditional commercial terminology. Such terminology should therefore be interpreted without reference to the meaning of other, more technical, expressions.

The term used in paragraph 40A(2)(b) was not “the proceeds of . . . sales”.* [2] The expression that was used instead was “the gross revenue . . . from sales”. This expression conveys to us the idea of the total revenues the earning of which was dependent upon the sales;* [3] and, in our view, it is quite wide enough to include, in the case of a daily newspaper, not only the amounts received from purchasers of the newspapers but also the amounts received from advertisers, which amounts are not earned by the appellant until it has sold the newspapers in which the advertisers’ advertisements have been placed.

We are fortified in this conclusion by the fact that the result, in the case of a daily newspaper, would seem to be more in accord with the Parliamentary purpose of section 40A than the result reflected by the assessment. We did not understand counsel for the respondent to disagree with this view.

We are therefore of opinion that the appeal should be allowed, with costs, and that there should be a judgment referring the assessment in question back to the respondent for reassessment on the basis that the appellant is entitled to the deduction allowed by section 40A for the 1963 taxation year.