Isaac C.J.:— This is an appeal from a judgment of the Trial Division reported at [1992] 2 C.T.C. 363, 92 D.T.C. 6452, which reversed a decision of the Tax Court of Canada that dismissed an appeal by the respondent's predecessor in title ("the taxpayer") from reassessments of its income tax liability for the taxation years 1982 and 1983.
The issue in the appeal is whether the taxpayer's activities in repairing and remanufacturing hydraulic and pneumatic components, for use in industry, amounted to a manufacturing of goods for sale such that the taxpayer is eligible in those taxation years for capital cost allowance under Class 29 of Schedule II of the Income Tax Regulations ("the Regulations”) and for investment tax credit under subsection 127(5) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
Background
1. The Facts
The facts are not in dispute. At the material times, the taxpayer (Maritime Hydraulic Repair Centre Limited) carried on the business of manufacturing, selling, “repairing and remanufacturing” hydraulic and pneumatic components for equipment used in industry. The business included the following categories of activities:
(a) selling hydraulic parts and accessories manufactured by others;
(b) replacing defective parts in hydraulic systems with parts manufactured by others;
(c) manufacturing, with its own raw materials and machinery, hydraulic components or systems and selling them to customers by sample or according to their specifications (custom-made); and
(d) repairing and “remanufacturing” hydraulic systems for customers. The activities in this category included the replacement of a part or parts of a customer's hydraulic system with a part or parts manufactured by the taxpayer. In his reasons, the trial judge described the category (d) activities as follows (Appeal Book Vol. VIII, page 1505):
In the category of its work that the taxpayer described as “repair and remanufacture” the evidence is that a customer would bring to the taxpayer and leave for repair equipment with hydraulic components, or the components themselves. The hydraulic component would be taken apart or “disassembled” and some part of it, either the cylinder, or a piston or a rod, or some other part, would be replaced with a corresponding part manufactured to fit the component from raw materials held in inventory or acquired by the taxpayer. In the manufacture of the required parts the equipment in question was used, as it was in the manufacture of hydraulic components to meet customers' specifications (category (c) above), which is not here in issue. When the new part was manufactured, the component or the customer's equipment was reassembled and tested. No issue is raised in this appeal in respect of the activities mentioned in categories (a) or (b). In respect of the activities mentioned in category (c), it is common ground that the taxpayer’s machinery and equipment were used primarily for the purpose of manufacturing or processing goods for sale within the meaning of the relevant statutory provisions.
In the taxation years 1982 and 1983, the taxpayer purchased the machinery and equipment that were used for the activities mentioned in categories (c) and (d). Some were new, others were used. It was agreed that only the new ones were eligible for the deductions claimed. The cost of those purchased in the 1982 taxation year was $340,942 and of those purchased in the taxation year 1983, $97,249.
The taxpayer's revenues from “manufacturing and processing", using its own machinery and equipment, in the relevant taxation years are indicated below:
Taxation
Activities Year
| Chrome | | Repair and Re-manufacturing |
| Application | Manufacturing | |
| Parts | Labour | Total |
| 1982 sub-contracted | $213,751 | $ 75,093 $159,556 $234,649 |
| 1983 | $17,454 | $121,524 | $148,124 $220,058 $368,182 |
The revenues from repair and remanufacturing represented approximately 52 per cent and 72 per cent, respectively, of the total revenues received by the taxpayer in the 1982 and 1983 taxation years from manufacturing or processing (including "chrome applications”) for work described in categories (c) and (d). Counsel for the appellant admits that, the category (d) activities involved manufacturing; but he contends vigorously that the goods so manufactured were not for sale within the meaning of the relevant statutory provisions.
2. History of the Litigation
(a) The Tax Court of Canada
The Tax Court was concerned with the taxpayer's appeal from the reassessment of its tax liability for the taxation years 1982 and 1983.
Before that Court, as before the Trial Division, the evidence was that in the 1982 taxation year the taxpayer's revenues from category (c) activities, i.e., from manufacturing, were $213,751, while revenues from category (d) activities, i.e., repairing and remanufacturing, were $238,649 or $20,898 in excess of revenues from category (c). Similarly, for the taxation year 1983, revenues from category (c) activities were $121,524 and from category (d) activities $368,183 or $246,659 in excess of revenues from category (c).
On this evidence, the Associate Chief Judge of the Tax Court, considering himself bound by the judgment of Strayer J. in Crown Tire Service Ltd. v. The Queen, [1983] C.T.C. 412, 83 D.T.C. 5426, held that in respect of category (d) activities, the taxpayer did not use its machinery and equipment to manufacture or process goods for sale within the meaning of relevant statutory provisions. He held further that the machinery and equipment were so used in respect of category (c) activities. He noted that the machinery and equipment were used just as freely for category (d) as for category (c) activities and that the revenues from the former were greater than those from the latter. He therefore concluded that the machinery and equi ment were not used primarily in the manufacturing or processing of goods for sale within the meaning of the relevant statutory provisions and ne dismissed the appeal.
(b) The Trial Division
The taxpayer appealed that decision to the Trial Division of this Court by trial de novo. BY the time the appeal came on for hearing, the taxpayer had been adjudged a bankrupt. At the commencement of the hearing of the appeal, the trial judge, by order, authorized amendment of the statement of claim including the style of cause, to permit the present respondent to prosecute the appeal in the place of the taxpayer.
The appeal was argued on the record before the Tax Court which was admitted in evidence by consent order. No new evidence was called or tendered.
The issue before the Trial Division was the same as it was before the Tax Court, namely, whether the machinery and equipment which the taxpayer had acquired in the 1982 and 1983 taxation years were used primarily in the manufacturing or processing of goods for sale.
At page 2 of his reasons (Appeal Book Vol. VIII, page 1502), the trial judge noted that counsel were agreed that “the sole issue [before him] was whether, particularly in light of subsequent decisions of this Court, the Crown Tire decision" governed the appeal. They also agreed that the appeal should be dismissed if he concluded that it was; otherwise, the appeal should be allowed.
After an extensive canvass of the jurisprudence of both Divisions of this Court and a review of the facts, the learned trial judge concluded that Crown Tire was distinguishable and did not govern. He therefore allowed the appeal for reasons with which I will deal later.
Issue
Although, in his memorandum of fact and law, the appellant took several objections to the judgment in appeal, nevertheless, the only issue argued before us was whether the goods manufactured as a result of the category (d) activities, i.e., repair and remanufacture, were “manufactured for sale" within the meaning of the relevant statutory provisions.
In oral argument, counsel for the appellant admitted that the activities of repair and remanufacture involved manufacturing. However, he submitted that such manufacturing was not for sale as required by the relevant statutory provisions, but was part of a repair service. Hence, in his view, the machinery and equipment did not qualify and were not eligible for the deductions claimed. He submitted further that the appeal was governed by Crown Tire and should succeed or fail on Our acceptance or rejection of this submission.
Since the answer to the question posed in the appeal must turn on the proper construction of the relevant statutory provisions, I find it useful to reproduce them, in relevant part, before proceeding to an assessment of the submissions of the parties.
Relevant statutory provisions
Paragraph 20(1 )(a) of the Act provides for the deduction of capital cost allowances by taxpayers in the following terms:
20(1) Notwithstanding paragraphs 18(1 )(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:
CAPITAL COST OF PROPERTY
(a) such part of the capital cost to the taxpayer of property, or such amount in respect of the capital cost to the taxpayer of property, if any, as is allowed by regulation;
Subsection 127(5) of the Act provides for the deduction from tax otherwise payable by a taxpayer for a taxation year, an amount that relates to his investment tax credit at the end of the year. Subsection 127(5) reads:
INVESTMENT TAX CREDIT
127(5) There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount not exceeding the lesser of
(a) his investment tax credit at the end of the year, and
(b) the aggregate of
(i) $15,000 and
(ii) 1/2 the amount, if any, by which the tax otherwise payable by him under this Part for the year exceeds $15,000.
In order to qualify for an investment tax credit, a taxpayer must have incurred a capital cost in qualified property described in subsection 127(9) of the Act. Subsections 127(9) and (10) define investment tax credit and qualified property as follows:
"INVESTMENT TAX CREDIT” DEFINED
(9) For the purposes of subsections (5) to (8) and subject to subsection (11.1), “investment tax credit” of a taxpayer at the end of a taxation year means the amount, if any, by which the aggregate of
(a) an amount equal to five per cent of the aggregate of all amounts, each of which is the capital cost to him of a qualified property, determined without reference to subsection 13(7.1). ...
“QUALIFIED PROPERTY”
(10) For the purposes of subsection (9), a “qualified property" of a taxpayer means a property.... that is
(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or
(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975, that has not been used,or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer and that is
(c) to be used by him in Canada primarily for the purpose of
(I) manufacturing or processing of goods for sale or lease. . . .
[Emphasis added.]
For present purposes, paragraph 4600(2)(k) of the Regulations describes the property eligible for investment tax credit as follows:
QUALIFIED PROPERTY
(2) Property is prescribed machinery and equipment for the purposes of paragraph 127(10)(b) of the Act if it is depreciable property. . . that is
(k) a property included in. . .Classics]. . .29. . .in Schedule II.
Schedule II deals with the rates of capital cost allowance applicable to various classes of property. Class 29 reads:
Class 29
50 per cent
Property that would otherwise be included in another class in this Schedule
(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,
(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease;
[Emphasis added.]
It is plain that both subsection 127(1 )(b) and (c)(i) of the Act and Class 29 of Schedule II to the Regulations provide that machinery and equipment are qualified property if used for the purpose of “manufacturing of goods for sale or lease".
Legislative history of the statutory provisions
It is now well settled that in construing legislation courts may consider, as part of the external context, materials such as Reports of House of Commons Debates or of Committees of the House of Commons as aids to discovering the aims of the legislating body, the evils or mischief with which it was contending at the time of enactment, and the background and purpose of the legislation. See, Lyons v. The Queen, [1984] 2 S.C.R. 633 at page 684, per Estey J., The Queen v. Morgentaler, [1993] 3 S.C.R. 463 at 484-85, per Sopinka J.
Subsections 127(5), (9) and (10) of the Act were first introduced into the House of Commons in 1973 as part of Bill C-65, to amend the Income Tax Act. They formed part of a package of legislative amendments enacted by Parliament to encourage industrial development in Canada by providing tax incentives to the manufacturing and processing sectors of the Canadian economy. Section 125.1 of the Act, which provided for a reduction of tax on corporate profits from manufacturing and processing in Canada, also formed part of the package and was introduced into the House earlier by Bill C-192.
In opening the debate on second reading of Bill C-192, the Minister of Finance spoke to the objectives of the government in introducing the legislation, as follows:
Mr. Speaker, the basic objectives of the measures before the House for its consideration this afternoon are twofold: they are to protect the millions of jobs that today depend directly and indirectly on maintaining the international competitiveness of our vitally important manufacturing and processing industries. . . .
I believe, that whatever may need to be done in the future to meet changing world conditions, parliament should adopt the measures we are now proposing to help our manufacturing and processing industries to meet and match the increasingly intense competition they face from foreign companies both in our own home market and in markets abroad.
. . . . the measures now being considered by the House provide a concrete and positive means of helping to overcome the critical problems confronting Canada’s manufacturing and processing industries over the medium and longer term. The legislation before the House for second reading, Bill C-192, provides for tne reduction effective at the beginning of 1973 of the top rate of corporate tax on manufacturing and processing profits to 40 per cent, and the reduction of the rate on manufacturing and processing profits of smaller, Canadian-owned enterprises to 20 per cent. A companion proposal, the fast two-year write-off of equipment and machinery acquired by manufacturers and processors between May 8, 1972, and December 31, 1974, is subject to implementation through changes in capital cost allowance regulations under authority provided by parliament.
On May 29 I tabled a draft of the proposed regulations, which form an integral part of the plan put forward by the government, so that the House would be in a position to consider and debate the whole program in a meaningful and comprehensive way. As soon as parliament has approved this bill, it is the government's intention to introduce these regulations by order in council. . . .
The proposed reduction in the tax burden borne by Canadian manufacturers and processors is designed to assist them to meet increasingly intense foreign competition in a variety of ways: to increase the efficiency of their operations and lower costs; to undertake more research so as to develop new and better products and technologies; to finance increased capital investment both to modernize their operations and to expand productive capacity and employment; and to increase their price competitiveness with foreign producers both at home and abroad. . . .
.... In all parts of Canada, and especially in the eastern and western regions of the country, an increasingly intense effort is being made by governments at all levels to broaden industrial development, to extend production beyond the raw and semiprocessed stage to the output of fully manufactured or processed goods for sale across Canada and around the world.?
Enacted as An Act to amend the Income Tax Act (No.2), S.C. 1973-74, c. 29, s.1, Bill C-192 received Royal Assent on July 27, 1973.
Similar statements were made by the Minister of Finance and by his Parliamentary Secretary during the debate on the second reading of Bill C-65, which was enacted as An Act to amend the statute law relating to income tax (No.2), S.C. 1974-75-76, c.71 subsection 9(1) and received Royal Assent on December 2, 1975.
Analysis
It is now well accepted that the modern principle of interpretation of statutes is that the words of the statute are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament: Driedger, Construction of Statutes (2nd ed., Butterworths, Toronto, 1983), at page 8. This is the so-called words-in-total context approach. As regards the interpretation of taxing statutes Courts have been instructed to interpret the words of the statutes in light of the object and spirit of the taxing provisions and in the context of the economic and commerciality of the transaction giving rise to the dispute. Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 at page 576 (C.T.C. 315 D.T.C. 6322); Golden v. The Queen, [1986] 1 S.C.R. 209, [1986] 1 C.T.C. 274, 86 D.T.C. 6138 at pages 214-15 (C.T.C. 277 D.T.C. 6140); Bronfman Trust v. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, at pages 52-53 (C.T.C. 128 D.T.C. 5066-67). But these principles are not invitations to Courts to ignore other well-accepted rules of construction, such as that which requires Courts to construe statutes so as "to ascribe some meaning to each word used by the legislature”. Atco et al. v. Calgary Power Ltd., [1982] 1 S.C.R. 557 at page 569.
I must therefore construe the clause "to be used by him in Canada primarily for the purpose of manufacturing goods for sale or lease”, as they appear in subpara- graph 127(10)(c)(i) and in Clause (i) of paragraph (a) of Class 29, in light of these principles. The words are not defined in the legislation. How then should their meaning be ascertained?
I start with context. One external context is, of course, the debates on second reading in the House of Commons to which I have made reference. They speak clearly and eloquently of the purpose of the legislation and the “mischief” with which Parliament was contending at the time of its enactment. The provisions were obviously part of a national industrial development strategy designed to stimulate employment in industry. The means used were legislated tax incentives of various kinds to encourage investment in new machinery and equipment for the manufacture or processing of goods in Canada for sale or lease in Canada and elsewhere in competition with foreign manufacturers and processors.
A second external context is the body of jurisprudence of this Court interpreting the legislation. The clause has received extensive judicial notice in this Court and two lines of authority have emerged as to the meaning of the phrase "manufacturing goods for sale or lease". One has its origins in Crown Tire, upon which the appellant relies: the other in The Queen v. Nowsco Well Service Ltd., [1990] 1 C. T.C. 416, 90 D.T.C. 6312 (F.C.A.), aff'g [1988] 2 C.T.C. 24, 88 D.T.C. 6300 (F.C.T.D.), and The Queen v. Halliburton Services Ltd., [1990] 1 C.T.C. 427, 90 D.T.C. 6320 (F.C.A.), aff’g [1985] 2 C.T.C. 52, 85 D.T.C. 5336 (F.C.T.D.), upon which the respondent relies.
I find no need to embark upon another review of the jurisprudence since that has been done extensively in the reported decisions cited to us, the latest being the decision of this Court in Rolls Royce (Canada) Ltd. v. The Queen, [1993] 1 C.T.C. 272, 93 D.T.C. 5031, where the Court applied Crown Tire and dismissed the taxpayer's appeal. It will be sufficient to state the different approaches. In Crown Tire, Strayer J. was required to construe the phrase as it is used in paragraph 125.1 (3)(a) of the Act. He approached construction on the basis that by using the phrase "goods for sale” without defining it, Parliament must have intended that its meaning should be derived from the general law of contract and sale. In that case he applied the common law distinction between contracts for sale and contracts for work and materials and reached a conclusion based upon it. In Nowsco and Halliburton, both supra, Urie J.A., for the Court, adopted a passage from the reasons of Reed J. in Halliburton in which she rejected the meaning based upon the common law distinction, opting instead for one based upon a literal construction of the word sale, such that any transfer of property manufactured by a taxpayer to a customer for a consideration, regardless of the nature of the contract between them, would amount to a sale within the meaning of the legislation. In adopting that approach Urie J.A. distinguished on its facts an earlier decision of this Court in Canadian Wirevision Ltd. v. The Queen, [1979] C.T.C. 122, 79 D.T.C. 5101 (F.C.A.), in which Pratte J.A., for the Court, clearly applied the common law distinction articulated in Crown Tire, albeit in obiter.
These, in summary, are the two approaches to the interpretation which the trial judge had before him when he decided the appeal. He chose one. Basing himself on an analysis which emphasized the nature of "the functions carried on by the taxpayer in using the equipment” and on his view that the purposes of the relevant statutory provisions are to provide incentives related to expenditures on equipment and machinery acquired for use in manufacturing goods for sale or lease, he chose the Nowsco, Halliburton approach. Critical to his conclusion is the following passage at page 372 (D.T.C. 1515) of his reasons:
Since it is the acquisition of equipment for use in manufacture of goods for sale that is assisted by the incentives under the Act, when the relationship between the parties is for both work and materials, or service, as well as for property to pass, the use of the equipment in production of discrete products before their adhesion or affixing to a customer's property would seem to be of significance for the application of the incen- tives. In Halliburton, Nowsco and Stowe-Woodward the equipment in question was found to be used to produce a product which was then sold to a customer. However that sale is made in terms of the forms or involving practices of the parties, or however the taxpayer's product is priced for sale, has no significance for the ultimate transfer of property in the product produced. Nor should these have significance for the assessment of the inherent nature of the taxpayer's functions in use of the equipment.
The trial judge had earlier observed at pages 371-72 (D.T.C. 1514-15) of his reasons:
It seems to me a formalistic splitting of the taxpayer's business activity, using the equipment in question, to recognize for incentive purposes the use of the equipment where the taxpayer manufactured parts as specified by a customer, including an entire hydraulic component by manufacture and assembly of its parts, but not to do so where the customer leaves defective hydraulic components for repair and the taxpayer's equipment is used in exactly the same manner to produce a part or parts for replacement of defective parts. In both cases the equipment is used in the same manner to make products, to manufacture goods.
Reduced to essentials, it is the position of counsel for the appellant that the taxpayer's category (d) activities did not constitute the manufacture of goods for sale, because the contract between the taxpayer and its customer in each case was one for work and materials. That was, he said, the common sense and businesslike appreciation of the arrangement between them. He contends that the trial judge was wrong in failing to distinguish between a contract for sale and one for a repair service, i.e., for providing work and materials. In his view, the effect of the judgment in appeal is that every repair except one for labour only would be a sale, thus entitling every repairman who manufactures a good to be incorporated in the repair process to the incentives offered by the statutory provisions. He asserted that the analysis in Crown Tire was valid and applicable to the facts of this case. When so applied, he says, the machinery used in the taxpayer's category (d) activities were not engaged Primarily in the manufacture of goods for sale. Consequently, the taxpayer did not qualify for the incentives claimed.
For his part, counsel for the respondent supported the judgment of the Trial Division. Like counsel for the appellant, he admitted that his position could not be sustained if this Court approved the Crown Tire approach. But he maintained that the Crown Tire approach was not valid and, in any event, was overtaken by the reasoning in Rolls Royce where MacGuigan J.A., in obiter, sought to reconcile Crown Tire and Nowsco, Halliburton on the basis that in the former case the processing “did not involve the creation of a good antecedent to its use in the provision of a service". Based on that statement, counsel submitted that, in respect of category (d) activities, the taxpayer did use its equipment to manufacture components which it then placed in the customer's machinery in substitution for defective components, for a consideration. This, he said, constituted manufacture of goods for sale within the relevant statutory provisions.
I am of the opinion that the appeal should succeed and the submissions of the respondent be rejected for the following reasons. First, it is clear from the total context of the legislation, including the passages from the House of Commons Debates to which I have referred, that Parliament's objective in enacting the legislation was encouragement of increased production of manufactured and processed goods to be placed on the domestic and international markets in competition with foreign manufacturers. That that is the activity which Parliament sought to encourage is, to my mind, plain from the debates. It is equally plain that Parliament intended to benefit manufacturers and processors who engaged in those activities. In other words, the relevant statutory provisions were designed to give Canadian manufacturers and processors an advantage over their foreign competitors in the domestic and foreign markets. It is also clear that Parliament had in mind specific target groups and specific target activities. The legislation was not intended to benefit every manufacturing activity or every manufacturer.
The language of the statute is clear that the activities to be benefitted were the manufacture of goods for sale or lease and the beneficiaries, the manufacturers engaged in that activity. This is the short answer to those who say that the Crown Tire approach yields illogical results or results in a formalistic splitting of taxpayers' activities. In my view, that is the background against which the clause should be understood and construed.
As I have said, Parliament did not define the phrase “for sale or lease" in the legislation. How then should its meaning be determined? We are invited by the modern rule of statutory interpretation to give those words their ordinary meaning. But we are dealing with a commercial statute and in commerce the words have a meaning that is well understood. In the common law, “for sale” does not mean “for use in a repair process”. And I doubt that any informed commercial person would seriously say that the manufacture of parts to be used to repair a customer's defective equipment was a manufacture of those parts for sale. Strayer J. was right, in my respectful view, to say in Crown Tire at page 415 (D.T.C. 5428) that
. . . .one must assume that Parliament, in speaking of “goods for sale or lease" had reference to the general law of sale or lease to give greater precision to this phrase in particular cases.
On this approach, the taxpayer’s category (d) activities did not constitute the manufacture of goods for sale. To conclude otherwise would obscure the well known distinction between manufacturing for the purpose of sale and manufacturing for the purpose of repair services, and be contrary to the plain intention of Parliament in enacting the legislation—an intention which the authorities say a proper construction of legislation must give effect to. Furthermore, it would be at odds with the taxpayer's own categorization, for I note that the taxpayer was at pains to separate its records for category (c) activities from those for category (d) activities. There would be no reason for the separation if the taxpayer itself did not appreciate the distinction: it would have been easy to keep one set of records for all the goods manufactured without distinguishing between category (c) and (d) activities. But the taxpayer did not. It kept separate records for each of those activities, even though, as the trial judge found, the same machinery and equipment were used for both activities. This, in my view, is a telling indication that the taxpayer did appreciate the distinction.
Conclusion
In sum, the clause should be interpreted as suggested in Crown Tire. Even though the section of the Act in issue there was different, the language is the same and has the same purpose and intent as the relevant statutory provisions in issue here. The taxpayer's category (d) activities, i.e., repairing and remanufacturing, do not constitute the manufacturing of goods for sale. On the evidence, the taxpayer’s machinery and equipment were used primarily for those activities. The taxpayer is, therefore, not entitled to the deductions claimed.
For these reasons, I would allow the appeal with costs both here and in the Trial Division, set aside the judgment of the Trial Division and restore the reassessment made by the Minister.
Appeal allowed
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