Date: 19980826
Docket: T-1324-92
Between:
HER MAJESTY THE QUEEN
plaintiff
and
LOMEX, INC.
defendant
REASONS FOR JUDGMENT
JOYAL J.
[1] This is an appeal of a decision of the Tax Court of Canada dated February 5, 1992. In that decision, the Court allowed the appeals of Lomex Inc. (Lomex) against reassessments made on the defendant for the 1982, 1983, 1984 and 1985 taxation years. The Department of National Revenue (DNR) is now appealing that decision.
Facts
[2] The defendant Lomex claimed a tax deduction for manufacturing and processing profits when it filed its tax returns for the 1982, 1983, 1984 and 1985 taxation years. This deduction is set out in section 125.1 of the Income Tax Act (the Act) and its purpose is to encourage activity and productivity in manufacturing and processing in Canada.
[3] On January 22, 1988, the DNR determined the tax payable by Lomex for the years at issue. At that time, it disallowed the deductions claimed by Lomex on the ground that collecting and transporting raw materials and all related activities did not constitute manufacturing or processing within the meaning of the Act. The DNR considered that the assets used to transport raw materials and maintain the fleet of trucks were not used in qualified activities and that the salaries paid to employees involved in these activities included periods when they were not engaged in qualified activities.
[4] On January 22, 1988, Lomex objected to the reassessments issued by the DNR. On August 25, 1988, the DNR confirmed the reassessments. On September 15, 1988, Lomex appealed that decision to the Tax Court of Canada, which allowed the appeal on February 5, 1992. In turn, the DNR is appealing that decision.
The defendant"s business
[5] Lomex has its head office and its treatment plant in Montreal, with terminals in the Ottawa and Quebec City areas. It has operated a company which collects and processes animal waste and by-products by dehydration for several years.
[6] The primary raw production material consists of animal waste such as fat, bones, fat trimmings, meat scraps, feathers, blood, offal and animal carcasses. The defendant"s supply comes from approximately 1500 recovery points such as butcher shops, restaurants, supermarkets, farms and slaughterhouses within a 250 km radius of Montréal.
[7] The end products of this dehydration process consist of meat, bone, feather and blood protein meal, as well as fat which is used for animal feed. Soap factories and the oleochemical industry also use these products. The defendant sells its products on both national and international markets. This processing by dehydration is the defendant"s only line of business.
[8] In order to ensure adequate control over its process and the quality of its products as well as compliance with government public health regulations, the defendant has its own fleet of 102 vehicles to collect the raw materials. This fleet mainly consists of dump trucks, trailers, tanker trucks, two maintenance vans, two tow trucks, two waste trucks, a vacuum truck, a sweeper truck and truck cabs to haul the trailers.
[9] The defendant states that the recovery fleet is operated by 56 people, including the director of operations, 44 operators, 4 mechanics, 5 garage attendants as well as a foreman and a supervisor responsible for maintaining and cleaning the equipment.
[10] The defendant submits that the duties of its operators include weighing the raw material, grading the material according to fat and bone content, visually inspecting the material to ensure that it meets the required quality standards, finalizing waybills and handling and emptying its suppliers" containers or receptacles.
Decision of the Tax Court of Canada
[11] Mr. Justice Garon noted in his decision that both parties admitted that the defendant"s business involved manufacturing or processing as set out in section 125.1 of the Act. The issue was whether or not some of the activities of the business were "qualified activities" within the meaning of the definition in section 5202 of the Income Tax Regulations (the Regulations).
[12] The learned judge examined section 5202 of the Regulations in detail. He concluded that while collecting the raw materials and transporting them to the plant did not fall under paragraph 5202(a), they were nevertheless included in the expression "all other activities" in paragraph 5202(b ). The judge held that the collection of raw materials is an essential part of the defendant"s manufacturing or processing activity in Canada, and furthermore that this activity is completely unrelated to the exceptions concerning finished goods and general aspects of the administration of a business set out in paragraphs (d ), (f), (h) and (i).
[13] This examination of section 5202 of the Regulations and its various paragraphs concerning the definition of "qualified activities" led the learned judge to conclude that the activities of the defendant related to collecting raw materials and transporting them to the plant were qualified activities within the meaning of section 5202 of the Regulations.
Issue
[14] Do the activities of the defendant, namely collecting raw materials and transporting them to the plant, constitute "qualified activities" as defined in section 5202 of the Regulations?
Relevant Provisions
[15] Section 125.1 of the Act sets out the formula for calculating manufacturing and processing profits:
| 125.5 (1) There may be deducted from the tax otherwise payable under this Part by a corporation for a taxation year an amount equal to the aggregate of
(a) 9% of the lesser of
| (i) the amount, if any, by which the corporation's Canadian manufacturing and processing profits for the year exceed the least of the amounts determined under paragraphs 125(1) (a) to (c) in respect of the corporation for the year, and |
| (ii) the amount, if any, by which the corporation's taxable income for the year exceeds the aggregate of |
| (B) the least of the amounts determined under paragraphs 125(1) (a) to (c) in respect of the corporation for the year, |
| (C) 2 times the aggregate of amounts deducted under subsection 126(2) from the tax for the year otherwise payable under this Part by the corporation, and |
| (D) the amount, if any, by which the aggregate of the corporation's Canadian investment income for the year and its foreign investment income for the year (within the meanings assigned by subsection 129(4) ) exceeds the amount, if any, deducted under paragraph 111(1)(b) from the corporation's income for the year; and |
(b) 5% of the lesser of
| (i) the corporation's Canadian manufacturing and processing profits for the year, and |
| (ii) the least of the amounts determined under paragraphs 125(1) (a) to (c) in respect of the corporation for the year; |
except that in applying this section for a taxation year after the 1973 taxation year, the reference in paragraph (a) to "9%" shall be read as a reference to "8%" for the 1974 taxation year, "7%" for the 1975 taxation year, and "6%" for the 1976 and subsequent taxation years.
|
|
| 125.1 (1) Une corporation peut déduire de l'impôt payable par ailleurs pour une année d'imposition, en vertu de la présente Partie, un montant égal au total obtenu en additionnant
(a) 9% du moins élevé des montants qui représentent
| (i) la fraction, si fraction il y a, des bénéfices de fabrication et de transformation au Canada réalisés par la corporation pour l'année qui est en sus du moins élevé des montants déterminés en vertu des alinéas 125(1) (a) à (c), à l'égard de la corporation, pour l'année, ou |
| (ii) la fraction, si fraction il y a, du revenu imposable de la corporation pour l'année, qui est en sus du total obtenu en additionnant |
. . .
| (B) le moins élevé des montants déterminés en vertu des alinéas 125(1) (a) à (c), à l'égard de la corporation, pour l'année, |
| (C) le double du total des sommes déduites, en vertu du paragraphe 126(2), de l'impôt pour l'année, par ailleurs payable par la corporation en vertu de la présente Partie, et |
| (D) la fraction, si fraction il y a, du total du revenu de placements au Canada de la corporation pour l'année et de son revenu de placements à l'étranger pour l'année (au sens du paragraphe 129(4) ) qui est en sus de la somme, si somme il y a, déduite en vertu de l'alinéa 111(1)(b), du revenu de la corporation pour l'année; et |
(b) 5% du moins élevé des montants suivants:
| (i) les bénéfices de fabrication et de transformation au Canada réalisés par la corporation pour l'année, ou |
| (ii) le moins élevé des montants déterminés en vertu des alinéas 125(1) (a) à (c), à l'égard de la corporation, pour l'année, |
sauf que, aux fins de l'application du présent article à une année d'imposition postérieure à l'année d'imposition 1973, le pourcentage de "9% qui figure à l'alinéa (a) doit être remplacé par le pourcentage de "8%" pour l'année d'imposition 1974, de "7%" pour
l'année d'imposition 1975 et de "6%" pour les années d'imposition 1976 et suivantes.
|
|
[16] Paragraph 125.5(1)(b) lists some exceptions:
| 125.1 (3)
(b) "manufacturing or processing" does not include
(i) farming or fishing,
(ii) logging,
(iii) construction,
| (iv) operating an oil or gas well, extracting petroleum or natural gas from a natural accumulation thereof or processing heavy crude oil recovered from a natural reservoir in Canada to a stage that is not beyond the crude oil stage or its equivalent, |
| (v) extracting minerals from a mineral resource, |
| (vi) processing ore (other than iron or tar sands) from a mineral resource to any stage that is not beyond the prime metal stage or its equivalent, |
| (vi.1) processing iron ore from a mineral resource to any stage that is not beyond the pellet stage or its equivalent, |
| (vi.2) processing tar sands to any stage that is not beyond the crude oil stage or its equivalent, |
| (vii) producing industrial minerals other than sulphur produced by processing natural gas, |
| (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. |
|
|
| 125.1 (3)
(b) "fabrication ou transformation" ne comprend pas
(i) l'exploitation agricole ou la pêche,
(ii) l'exploitation forestière,
(iii) la construction,
| (iv) l'exploitation d'un puits de pétrole ou de gaz, l'extraction de pétrole ou de gaz naturel d'un gisement naturel de pétrole ou de gaz naturel ou la transformation du pétrole lourd extrait d'un réservoir naturel situé au Canada, jusqu'à un stade qui ne dépasse pas celui du pétrole brut ou de son équivalent; |
| (v) l'extraction de minéraux d'une ressource minérale; |
| (vi) la transformation de minerais tirés de ressources minérales (à l'exclusion du minerai de fer et des sables asphaltiques), jusqu'à un stade qui ne dépasse pas celui du métal pur ou de son équivalent; |
| (vi.1) la transformation du minerai de fer tiré de ressources minérales, jusqu'à un stade qui ne dépasse pas celui de la boulette ou de son équivalent, |
| (vi.2) la transformation de sables asphaltiques, jusqu'à un stade qui ne dépasse pas celui du pétrole brut ou de son équivalent, |
| (vii) la production de minéraux industriels autre que le soufre obtenu par traitement du gaz naturel, |
| (viii) la production ou la transformation d'énergie électrique ou de vapeur en vue de la vente, |
| (ix) le traitement du gaz, si celui-ci est traité dans le cadre de l'exploitation, par un service public, d'une entreprise de vente ou de distribution du gaz, ou |
| (x) toute fabrication ou transformation de marchandises en vue de la vente ou de la location, si, pour une année d'imposition d'une corporation à l'égard de laquelle l'expression s'applique, moins de 10% de ses recettes brutes de toutes les entreprises exploitées activement au Canada provenait |
| (A) de la vente ou de la location d'articles qu'elle a fabriqués ou transformés au Canada, et |
| (B) de la fabrication ou de la transformation au Canada d'articles destinés à la vente ou à la location, autres que des articles qu'elle devrait vendre ou louer elle-même. |
|
|
[17] This appeal specifically turns on the application of sections 5200 and 5202 of the Regulations. These sections read as follows:
| 5200. Subject to section 5201, for the purposes of paragraph 125.1(3)(a) of the Act, "Canadian manufacturing and processing profits" of a corporation for a taxation year are hereby prescribed to be that proportion of the corporation's adjusted business income for the year that
(a) the aggregate of its cost of manufacturing and processing capital for the year and its cost of manufacturing and processing labour for the year,
is of
(b) the aggregate of its cost of capital for the year and its cost of labour for the year.
|
5200. Sous réserve de l'article 5201, aux fins de l'alinéa 125.1(3)(a) de la Loi, les "bénéfices de fabrication et de transformation au Canada" qu'une corporation réalise pour une année d'imposition sont la fraction du revenu rajusté tiré d'une entreprise par la corporation pour l'année, que représente
(a) le total, pour l'année, de son coût en immobilisations de fabrication et de transformation,
par rapport
(b) au total, pour l'année, de son coût en immobilisations et de son coût en main-d'oeuvre.
|
| 5202. In this Part, except as otherwise provided in section 5203 and 5204,
"adjusted business income" of a corporation for a taxation year means the amount, if any, by which
(a) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada
exceeds
(b) the aggregate of all amounts each of which is the loss of the corporation for the year from an active business carried on in Canada;
"cost of capital" of a corporation for a taxation year means an amount equal to the aggregate of
(a) 10 per cent of the aggregate of all amounts each of which is the gross cost to the corporation of a property referred to in paragraph 1100(1)(e), (f), (g) or (h), paragraph 1102(1)(d) or (g) or Schedule II that
| (i) was owned by the corporation at the end of the year, and |
| (ii) was used by the corporation at any time during the year, and |
(b) the aggregate of all amounts each of which is the rental incurred by the corporation during the year for the use of any property a portion of the gross cost of which would be included by virtue of paragraph (a) if the property were owned by the corporation at the end of the year,
but for purposes of this definition, the gross cost of a property or rental cost for the use of any property does not include that portion of those costs that reflects the extent to which the property was used by the corporation during the year
(c) in an active business carried on outside Canada, or
(d) to earn Canadian investment income or foreign investment income as defined in subsection 129(4) of the Act;
"cost of labour" of a corporation for a taxation year means an amount equal to the aggregate of
(a) the salaries and wages paid or payable during the year to all employees of the corporation for services performed during the year, and
(b) all other amounts each of which is an amount paid or payable during the year for the performance during the year, by any person other than an employee of the corporation, of functions relating to
| (i) the management or administration of the corporation, |
| (ii) scientific research as defined in section 2900, or |
| (iii) a service or function that would normally be performed by an employee of the corporation, |
but for the purposes of this definition, the salaries and wages referred to in paragraph (a) or other amounts referred to in paragraph (b) do not include that portion of those amounts that
(c) was included in the gross cost to the corporation of a property (other than a property that was manufactured by the corporation and leased during the year by the corporation to another person) that was included in computing the cost of capital of the corporation for the year, or
(d) was related to an active business carried on outside Canada by the corporation;
"cost of manufacturing and processing capital" of a corporation for a taxation year means 100/85 of that portion of the cost of capital of the corporation for that year that reflects the extent to which each property included in the calculation thereof was used directly in qualified activities of the corporation during the year, but the amount so calculated shall not exceed the cost of capital of the corporation for the year;
|
|
| "cost of manufacturing and processing labour" of a corporation for a taxation year means 100/75 of that portion of the cost of labour of the corporation of the for that year that reflects the extent to which
(a) the salaries and wages included in the calculation thereof were paid or payable to persons for the portion of their time that they were directly engaged in qualified activities of the corporation during the year, and
(b) the other amounts included in the calculation thereof were paid or payable to persons for the performance of functions that would be directly related to qualified activities of the corporation during the year if those persons were employees of the corporation,
but the amount so calculated shall not exceed the cost of labour of the corporation for the year;
"gross cost" of a property means the capital cost of the property computed without reference to subsection 13(7.1) or (10) or section 21 or 80 of the Act;
"qualified activities" means
(a) any of the following activities, when they are performed in Canada in connection with manufacturing or processing (not including the activities listed in subparagraphs 125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease:
| (i) engineering design of products and production facilities, |
| (ii) receiving and storing of raw materials, |
| (iii) producing, assembling and handling of goods in process, |
| (iv) inspecting and packaging of finished goods, |
| (vi) production support activities including security, cleaning, heating and factory maintenance, |
| (vii) quality and production control, |
| (viii) repair of production facilities, and |
(b) all other activities that are performed in Canada directly in connection with manufacturing or processing (not including the activities listed in subparagraphs 125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease, and
(c) scientific research as defined in section 2900,
but does not include any of
(d) storing, shipping, selling and leasing of finished goods,
(e) purchasing of raw materials,
(f) administration, including clerical and personnel activities,
(g) purchase and resale operations,
(h) data processing, and
(i) providing facilities for employees, including cafeterias, clinics and recreational facilities;
"rental cost" of a property means the rents incurred for the use of that property;
"salaries and wages" means salaries, wages and commissions, but does not include any other type of remuneration, any superannuation or pension benefits, any retiring allowances or any amount referred to in section 6 or 7 of the Act.
|
|
| 5202. Dans la présente partie, sauf indication contraire à l'article 5203 ou 5204,
"activités admissibles" signifie
(a) n'importe quelle des activités suivantes, lorsqu'elles sont exercées au Canada dans le cadre des opérations de fabrication ou de transformation au Canada (à l'exception des activités énumérées aux sous-alinéas 125.3(b)(i) à (ix) de la Loi) de marchandises en vue de leur vente ou de leur location à bail:
| (i) la conception technique des produits et des installations de production, |
| (ii) la réception et l'emmagasinage des matières premières, |
| (iii) la production, l'assemblage et la manutention des marchandises en voie de transformation, |
| (iv) l'inspection et l'emballage des produits finis, |
| (v) la surveillance axiale, |
| (vi) les activités de soutien de la production y compris la sécurité, le nettoyage, le chauffage et l'entretien de l'usine, |
| (vii) le contrôle de la qualité et de la production, |
| (viii) la réparation des installations de production, et |
| (ix) la lutte anti-pollution, |
(b) toutes les autres activités qui sont exercées au Canada directement dans le cadre des opérations de fabrication ou de transformation au Canada (à l'exception des activités énumérées aux sous-alinéas 125.1(3)(b)(i) à (ix) de la Loi) de marchandises en vue de leur vente ou de leur location à bail, et
(c) la recherche scientifique, suivant la définition qu'en donne l'article 2900, mais ne comprend aucune des activités suivantes:
(d) l'emmagasinage, l'expédition, la vente et la location à bail des produits finis,
(e) l'achat de matières premières,
(f) l'administration, y compris les activités relatives aux écritures et au personnel,
(g) les opérations d'achat et de revente,
(h) le traitement des données, et
(i) la fourniture d'installations aux employés, y compris les cafétérias, les cliniques et les installations de récréation;
"coût brut" d'un bien signifie le coût en capital du bien calculé sans tenir compte du paragraphe 13(7.1) ou (10) ou de l'article 21 ou 80 de la Loi;
"coût de location" d'un bien signifie le loyer à payer pour l'utilisation de ce bien;
"coût en immobilisations" d'une corporation pour une année d'imposition signifie un montant égal au total formé
(a) de 10 pour-cent du total de toutes les sommes dont chacune constitue le coût brut, pour la corporation, d'un bien visé à l'alinéa 1100(1)(e), (f), (g) ou (h), à l'alinéa 1102(1)(d) ou (g) ou à l'annexe II qui
| (i) appartenait à la corporation à la fin de l'année, et |
| (ii) a été utilisé par la corporation à une époque quelconque de l'année, et |
(b) du total de toutes les sommes dont chacune constitue le coût de location supporté pendant l'année par la corporation pour l'utilisation de tout bien dont une fraction du coût brut serait incluse en vertu de l'alinéa (a) si le bien appartenait à la corporation à la fin de l'année,
mais aux fins de la présente définition, le coût brut d'un bien ou le coût de location pour l'utilisation de tout bien ne comprend par la fraction de ces coûts qui correspond à la mesure dans laquelle le bien a été utilisé par la corporation pendant l'année
|
|
| (c) dans une entreprise exploitée activement hors du Canada, ou
(d) pour tirer un revenu de placements au Canada ou un revenu de placements à l'étranger suivant la définition qu'en donne le paragraphe 129(4) de la Loi;
"coût en immobilisations de fabrication et de transformation" d'une corporation pour une année d'imposition signifie 100/85 de la fraction du coût en immobilisations de la corporation pour cette année qui correspond à la mesure dans laquelle chaque bien inclus dans le calcul de ce coût a été utilisé directement dans des activités admissibles de la corporation pendant l'année, mais le montant ainsi calculé ne doit pas dépasser le coût en immobilisations de la corporation pour l'année;
"coût en main-d'oeuvre" d'une corporation pour une année d'imposition signifie un montant égal au total
(a) des traitements et salaires payés ou payables pendant l'année à tous les employés de la corporation pour des services rendus pendant l'année, et
(b) de toutes les autres sommes dont chacune constitue une somme payée ou payable pendant l'année pour l'exécution pendant l'année, par toute personne autre qu'un employé de la corporation, de fonctions relatives
| (i) à la gestion ou à l'administration de la corporation, |
| (ii) à la recherche scientifique suivant la définition qu'en donne l'article 2900, ou |
| (iii) à un service ou à une fonction que rendrait ou accomplirait normalement un employé de la corporation, |
mais aux fins de la présente définition, les traitements et salaires visés à l'alinéa (a) et les autres sommes visées à l'alinéa (b) ne comprennent pas la fraction de ces sommes qui
(c) était comprise dans le coût brut, pour la corporation, d'un bien (autre qu'un bien fabriqué par la corporation et loué à bail par elle, pendant l'année, à une autre personne) qui est entré dans le calcul du coût en immobilisations de la corporation pour l'année, ou
(d) était reliée à une entreprise que la corporation exploitait activement hors du Canada;
"coût en main-d'oeuvre de fabrication et de transformation" d'une corporation pour une année d'imposition signifie 100/75 de la fraction du coût en main-d'oeuvre de la corporation pour cette année qui correspond à la mesure dans laquelle
(a) les salaires et traitements inclus dans le calcul de ce coût ont été payés ou étaient payables à des personnes pour la partie de leur temps où elles se livraient directement à des activités admissibles de la corporation pendant l'année, et
(b) les autres sommes comprises dans le calcul de ce coût en main-d'oeuvre de la corporation pour l'année;
"revenu rajusté tiré d'une entreprise" par une corporation pour une année d'imposition désigne la fraction, si fraction il y a,
(a) du total de toutes les sommes dont chacune constitue le revenue tiré par la corporation, pour l'année, d'une entreprise exploitée activement au Canada
qui est en sus
(b) du total de toutes les sommes dont chacune constitue une perte subie par la corporation, pour l'année, au titre d'une entreprise exploitée activement au Canada;
"traitements et salaires" signifie les traitements, salaires et commissions, mais ne comprend aucune autre forme de rémunération, aucune prestation de pension de retraite ou autre pension, aucune allocation de retraite, ni aucun montant visé à l'article 6 ou 7 de la Loi.
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Submissions of the Crown
[18] The Crown"s main argument is that the truck drivers and the fleet of trucks as well as the garage attendants and the garage are not used in the type of activity contemplated in section 5200 of the Regulations and for which the qualified activities are set out in section 5202. Specifically, the Crown submits that:
| (1) it already allowed 40% of all of the salaries disallowed in the assessments as representing the proportion of the truck drivers" time spent "receiving raw materials", pursuant to subparagraph 5202(a )(ii) of the Regulations. The Crown considers that this percentage is already very generous; |
| (2) the other activities are not performed in connection with manufacturing and processing; they do not constitute receiving or storing; |
| (3) it must be remembered that the Regulations provide for the allocation of a certain percentage of the assets and employees to qualified activities, which often requires the taxation authorities to categorize these activities in order to determine their true nature; the fact that the Crown agreed to allow 40% of the truck drivers" salaries fulfills this obligation; |
| (4) section 5202 of the Regulations specifies that "activities . . . in connection with manufacturing or processing" are qualified activities, and that "in connection with" means "is part of"; a reading of the Regulations in their entirety confirms that the Regulations refer to specific activities, exclusive to manufacturers, when they are performed in connection with manufacturing and processing; the activities of the truck drivers are no different from other transporting activities, and a privilege granted to a taxpayer under these Regulations would be discriminatory; |
| (5) it goes without saying that the same argument applies to activities related to receiving raw materials; this activity is related to transporting; |
| (6) the concept of a continuous process between the collection and processing of the material leads to the conclusion that all activities related to collection are qualified activities, which would result in an injustice; in any event, the Regulations themselves require that the activities be differentiated; |
| (7) a portion of the truck drivers" activities involve purchasing duties which are excluded pursuant to paragraph 5202(g ) of the Regulations; |
| (8) in general, the nature of the exceptions in section 5202 of the Regulations indicates that peripheral or ancillary activities are not to be considered qualified activities. |
Submissions of the defendant
[19] First, the defendant submits that the purpose of section 125.1 of the Act and the related Regulations is quite simply to assist the manufacturing sector, and manufacturing is in fact the defendant"s only activity. The defendant submits more specifically however, and I quote:
| 1. The activities at issue fall under paragraph 5202(a) of the Regulations because they are performed in connection with manufacturing or processing as part of receiving and storing of raw materials. |
| (1) The collection of raw materials by the defendant forms an integral and essential part of its manufacturing and processing business.1 |
| (2) In any case, the expression "in connection with manufacturing or processing" extends the list of qualified activities beyond those which change the product in its form, appearance or characteristic.1 |
| (3) When calculating the manufacturing and processing credit, the theory of the "integrated business" must be taken into account. According to this theory, a particular step will be considered directly used in connection with manufacturing or processing when it forms an essential and integral part of the manufacturing and processing process, even if no change in form, quality or property of the product occurs during this step.1 |
| (4) As the defendant"s only activity is manufacturing goods for resale, there is a presumption that all of its activities are accordingly performed in connection with this activity.1 |
| (5) Lastly, paragraph 5202(a) of the Regulations does not require that there be a direct link between the activity at issue and the manufacturing or processing. |
| 2. In the alternative, the activities at issue fall under paragraph 5202(b) of the Regulations as other activities that are performed directly in connection with the defendant"s manufacturing or processing activities. The defendant suggests that it could not be otherwise because this is its only activity. |
| 3. Furthermore, the activities at issue are not included in the exceptions set out in paragraphs 5202(c) to (i) of the Regulations; these exceptions confirm the rule that the preceding provisions must have a very broad meaning because otherwise Parliament would have spoken gratuitously. |
| 4. Even if transport is not a qualified activity, the fact that the equipment and labour at issue are partially used for this purpose does not disqualify them as equipment and labour used in qualified activities.1 |
| 5. Regulatory context: the Règlement sur les aliments, R.R.Q., 1981, c. P-29, r. 1 (Ch. 7), imposes very specific conditions on the industry in the areas of transporting, handling and keeping products, in addition to imposing standards for construction and plant layout. |
[20] The defendant submits that its fleet consists of vehicles used exclusively for collecting raw materials on a regular basis and that these vehicles are outfitted with standard equipment which allows for the preparation and sorting of collected materials.
[21] The defendant alleges that in addition to their regular responsibilities, its operators must weigh the raw materials to ensure that they meet the required quality standards, finalize waybills and look after handling and emptying the containers.
[22] The defendant claims that it excluded the salaries of three of its employees who are responsible for purchasing raw materials and related activities from the calculation of the cost of manufacturing and processing labour.
[23] The defendant submits that due to the very nature of the raw materials collected and because of the strict regulatory control imposed by Quebec provincial authorities pursuant to The Agricultural Products, Marine Products and Food Act, the raw materials are stored in the trucks until they are directly unloaded into the different processing systems.
[24] The defendant claims that its operations are continuous and integrated such that the raw
materials collected by the trucks in the morning are transported to the plant, emptied into the dehydration and refining equipment and processed the same day into a finished product which is ready to be sold.
[25] The defendant submits that it is in this way that the collection of raw materials constitutes receiving and storing of raw materials within the meaning of subparagraph 5202(a)(ii) of the Regulations. The defendant claims that in the context of an integrated process, the sorting and inspection of the raw materials and the activities performed during transport constitute producing, assembling and handling within the meaning of subparagraph 5202(a)(iii) of the Regulations. Last, according to the defendant, it is clear that the previously mentioned activities are activities performed in Canada directly in connection with manufacturing or processing within the meaning of paragraph 5202(b) of the Regulations.
Relevant Case Law
[26] I have taken the liberty of summarizing the case law submitted by the parties as much as possible.
| 1. Harvey C. Smith Drugs Limited v. The Queen, 95 D.T.C. 5026 (F.C.A.): |
| The Court of Appeal held that the mixing of various liquids or compounds when preparing a drug prescription is considered 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 manufacturing and processing. |
| 2. Midland Transport Limited v. The Queen, 94 D.T.C. 1759: |
| The issue in this case was whether a double chip bin was used in manufacturing and processing. The Crown claimed that the bin was used for storing or shipping finished goods, activities which are specifically excluded. Relying on Bunge of Canada v. The Queen, 84 D.T.C. 6276 (F.C.A.), and Warren Bituminous Paving Co. v. Corp. of Twp. of Otonnabee (1963), O.R. 29, inter alia, Mr. Justice Bonner held, however, that the contention that the bin was used for storage was unrealistic, having regard to the fact that when rate of production and capacity of the bin are taken into account, no individual chip could remain in the bin for more than two hours. |
| 3. Highway Sawmills Limited v. M.N.R., 66 D.T.C. 5116: |
| In this case, the Court said (at page 5120): "The answer to the question what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation." |
| 4. Hopkins Construction (Lacombe) Ltd. v. M.N.R., 84 D.T.C. 1150: |
| The issue in this case was whether a caterpillar front end loader was used directly in the manufacturing and processing of goods for sale. The Court held that the piece of equipment was simply used to provide a processing service, but was clearly not involved in the manufacturing or processing of goods for sale. |
| 5. Range Grain Company Ltd. v. The Queen, 97 D.T.C. 5221: |
| My colleague, Mr. Justice Wetston, held that maintaining the quality of a good is incidental to any transportation of goods and is not the type of activity referred to in section 125.1 of the Act, i.e. manufacturing and processing. |
| 6. IGTC Ltd. v. M.N.R., [1982] C.T.C. 2570: |
| In this case, it was determined that the expression "dans le cadre de" or "in connection with" did not require that the goods at issue always be the property of the taxpayer or under its control. My reading of the reasons for judgment of the Court suggests that these expressions require the interpretation most consistent with the other facts and circumstances of the case. |
| 7. D./M.N.R. v. Amoco Canada Petroleum Company Limited, [1986] 1 C.T.C. 124: |
| Mr. Justice Urie, for the Federal Court of Appeal, ruled on the application of the sales tax on machinery used directly in the manufacture or production of goods. The Court saw no reason to interpret this provision in a restrictive way. The pipeline at issue could in fact serve as a mode of transport in addition to being directly used in the production of the various hydrocarbons it contained. |
Analysis
[27] It appears that the parties to this case benefited from the decision of Judge Garon of the Tax Court of Canada at first instance, who issued a decision favourable to the taxpayer on February 5, 1992. I note that the parties are substantially in agreement on the facts, while the pleadings suggest different conclusions based on these facts and different approaches to the interpretation of the Regulations at issue. At this point, I must state that the memoranda of fact and law submitted by counsel for the parties appear to me to have been very well prepared and have been very useful in formulating a judgment in this matter.
[28] The public documents and books of authorities filed by the parties contain information and a host of cases in which governments imposed different formulas to segregate activities or plant equipment when they wanted to grant a preferential tax rate or exemption to certain businesses. There are numerous such examples under the Act and under the excise, customs and sales tax systems.
[29] A review of this case law clearly demonstrates how much the particular circumstances of each case are examined in detail and how much the evidence filed by the parties before me appears substantially the same as that which was before Garon J. of the Tax Court of Canada at first instance. This is not surprising: the activities of the defendant are not widely understood and there are few magazine articles on the subject of rendering plants and what goes on behind their walls. Rarer still are the cases in which the Court must define, so to speak, the elements of the manufacturing and processing of crude products delivered to these plants.
Conclusions
[30] Despite all of these specific factors, the Court must draw the following conclusions:
| 1. I agree with Garon J."s conclusion that the elements of manufacturing or processing exist as soon as the raw materials are acquired. In a sense, it matters little whether these elements are always apparent and active throughout the whole process from loading to unloading. I do not believe that the Court should be required to subject each of the acts of handling, transporting and processing the raw materials from loading to unloading minute by minute, to an examination under a microscope, in order to interpret paragraph 5202(a )(ii). |
| 2. I acknowledge and appreciate for its true value the plaintiff"s gesture in allowing the defendant 40% of the salaries of the employees responsible for transporting raw materials. This percentage is limited, however, by the narrow application of subparagraph 5202(a )(ii) which speaks of "receiving and storing of raw materials". In my humble opinion, we must allow subparagraph 5202(a )(iii) to fulfill its role. |
[31] I believe that the Court must also recognize that the various provisions of section 5202 of the Regulations are not mutually exclusive. The text of the section as a whole must accordingly be examined to determine how much one provision of the section can help us to better interpret the scope of another provision. Take, for example, subparagraph 5202(a)(ii) which deals with the "receiving and storing of raw materials" and subparagraph 5202(a )(iii) which speaks of "producing, assembling and handling of goods in process". According to the evidence, by collecting, examining and loading the raw materials into specialized vehicles and transporting them to the plant where they are unloaded within a few hours, the defendant"s business involves a host of individual steps which could be classified under one item or another.
[32] This observation could well serve as a springboard for adopting the defendant"s position that this is an "integrated" manufacturing and processing business which begins when the raw materials are acquired and is not complete until the end of the process, namely at the stage when finished products are sold to third parties.
[33] I am the first to admit that there is no easy answer in this case. The defendant"s activities as a whole, however, are highly unusual, or were at least not contemplated by Parliament when the Regulations at issue were drafted. Furthermore, the parties themselves will agree that the provisions are not models of drafting, especially when not only the exceptions to the general rule but even the exceptions to the exceptions have to be listed. In such cases, the Court can only exercise its better judgment.
[34] I must accordingly dismiss the plaintiff"s appeal, with costs to the defendant. I leave to the parties, however, the responsibility for drafting the formal judgment, the terms of which must be consistent with these reasons, except for prior commitments by either party. I naturally remain seized of the file, and I would ask counsel to advise me of any disagreement.
L-Marcel Joyal
J U D G E
OTTAWA, Ontario
August 26, 1998.
Certified true translation
M. Iveson
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
COURT NO.: T-1324-92
STYLE OF CAUSE: HER MAJESTY THE QUEEN v.
LOMEX, INC.
PLACE OF HEARING: MONTRÉAL, QUEBEC
DATE OF HEARING: JUNE 9 TO 11, 1998
REASONS FOR JUDGMENT OF JOYAL J.
DATED AUGUST 26, 1998
APPEARANCES:
Nathalie Goyette & FOR THE PLAINTIFF
Janie Payette
Claude Desaulniers FOR THE DEFENDANT
SOLICITORS OF RECORD:
MORRIS ROSENBERG FOR THE PLAINTIFF
DEPUTY ATTORNEY GENERAL OF CANADA
MONTRÉAL, QUEBEC
McCARTHY TÉTRAULT FOR THE DEFENDANT
MONTRÉAL, QUEBEC
__________________
1 Le Soleil Limitée v. M.N.R., [1972] C.T.C. 244 (F.C.T.D.); The St. Catherines Standard Limited v. The Queen, [1978] C.T.C. 258 (F.C.T.D.); [1980] 1 S.C.R. 787">Irving Oil Limited et al. v. The Provincial Secretary of The Province of New Brunswick, [1980] 1 S.C.R. 787; Indiana Department of State Revenue v. Cave Stone Inc., [1983] 457 NE (2d) 520 (Indiana Supreme Court); and State of Indiana v. Farmers Tankage, Inc., [1969] NE (2d) 409 (Indiana Court of Appeals).
2 Harvey C. Smith Drugs Ltd. v. M.N.R., [1986] 1 C.T.C. 2339 (Tax Court of Canada); IGTC Ltd. v. M.N.R., [1982] C.T.C. 2570 (Tax Review Board); and Midland Transport Limited v. The Queen, 94 D.T.C. 1759.
3 Compagnie Minière I.O.C. Inc. v. Le Sous-ministre du Revenu du Québec, [1987] RDFQ 232 (Cour provinciale); Roy Legumex Inc. v. M.N.R., [1990] 2 C.T.C. 2389 (Tax Court of Canada); Stora Kopparbergs Bergslags Aktiebolag v. Minister of Finance (Re), [1981] 119 D.L.R. 76 (Supreme Court of Nova Scotia); Joe E. Richardson v. State Tax Commission, [1979] Idaho, 604 P.2d 719 (Idaho Supreme Court); Floyd Charcoal Company Inc. v. Director of Revenue, [1980] 599, S.W. 2d 173 (Supreme Court of Missouri); Coca-Cola Ltd. v. M.N.R. et al., [1985] 6 C.E.R. 90 (F.C.A.); M.N.R. v. Amoco Canada Petroleum Company Ltd., [1986] 1 C.T.C. 124 (F.C.A.); and Shell Canada Resources Ltd. v. M.N.R., [1985] 6 C.E.R. 249 (F.C.A.).
4 The Queen v. Veritas Seismic (1987) Ltd., 94 D.T.C. 6123 (F.C.A.).
1 Petro-Canada Inc. v. M.N.R., [1986] 9 C.E.R 121 (F.C.A.).
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