St-Onge
J.T.C.C.:-The
appeals
of
Universal
Terminal
Ltd.
and
Universal
Fuel
Ltd.
came
before
me
on
October
26
and
27,
1994
in
the
City
of
Montreal,
P.Q.,
and
both
counsel
agreed
that
they
should
be
held
in
common
evidence.
In
its
notice
of
appeal,
the
appellant
UTL
alleged
the
following,
paragraph
1
to
paragraph
16
of
the
summary
of
facts,
and
paragraph
17
to
paragraph
20
of
the
summary
of
grounds
are
an
integral
part
of
my
judgment.
Summary
of
facts
1.
Appellant
is
a
corporation
duly
incorporated
under
the
laws
of
Canada
and
has
its
head
office
in
the
City
of
Cornwall,
Province
of
Ontario.
2.
At
all
pertinent
times,
appellant
has
been
carrying
on
a
business
of
distributing
oil
and
making
profit
therefrom.
3.
In
the
course
of
carrying
on
its
business
of
distributor
of
oil,
appellant
blended
different
types
of
oil
according
to
its
customer’s
requirements
and
specifications.
4.
According
to
commercial
practices
and
expertise
in
the
oil
industry,
blending
of
oils
constitutes
a
complex
operation
requiring
analysis,
testing,
monitoring,
skills
and
experience.
5.
The
products
resulting
from
the
blending
of
oils
constitute
distinct
and
different
substances
from
the
original
ingredients
having
distinctive
character
and
uses.
In
this
respect,
blending
of
oils
modifies
the
nature,
density,
viscosity,
chemical
and
physical
structures
of
the
original
ingredients.
6.
In
the
course
of
carrying
on
its
business,
appellant
acquired
two
tanks
identified
as
M-22
and
M-23
tanks.
7.
Both
the
M-22
and
M-23
tanks
were
acquired
by
appellant
to
be
used
in
the
course
of
blending
oils.
8.
According
to
commercial
practices
and
expertise
in
the
oil
industry,
it
is
necessary
to
store
oils
of
different
types
in
separate
tanks
to
ensure
that
each
type
of
oil
preserves
its
own
character.
9.
According
to
commercial
practices
and
expertise
in
the
oil
industry,
blending
of
oils
can
be
done
inside
or
outside
of
storage
tanks.
10.
During
its
1980
taxation
year,
appellant
blended
oils
inside
its
M-22
tank
whereas
oil
in
its
M-23
tank
was
blended
outside
the
said
tank.
11.
Of
all
the
products
that
came
out
of
tank
M-22
and
that
were
sold
by
the
appellant
during
its
1980
taxation
year,
more
than
80
per
cent
consisted
in
oil
blended
inside
the
said
tank.
12.
Of
all
the
oil
that
came
out
of
the
tank
M-23
during
appellant’s
1980
taxation
year,
approximately
80
per
cent
was
blended
with
other
types
of
oils
outside
the
said
tank
to
become
distinct
products
which
were
in
turn
sold
by
the
appellant.
13.
On
February
20,
1986,
the
Minister
of
National
Revenue
(herein
the
respondent)
reassessed
the
appellant
for
income
tax
concerning
its
1980
taxation
year.
14.
By
the
said
reassessment,
the
respondent
disallowed
the
deduction
amounting
to
$436,475
which
was
claimed
by
the
appellant
for
capital
cost
allowance
with
respect
to
properties
(being
tanks
M-22
and
M-23)
of
Class
29
or
Schedule
II
to
the
Regulations
adopted
by
virtue
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
with
the
view
that
the
appellant’s
business
of
blending
oils
does
not
constitute
a
qualified
activity
of
manufacturing
or
processing
of
goods
for
sale.
15.
On
May
5,
1986,
the
appellant
duly
objected
to
the
reassessment
dated
February
20,
1986.
16.
On
March
19,
1987,
the
respondent
confirmed
the
said
reassessment.
Summary
of
grounds
17.
Appellant
relies,
inter
alia,
on
paragraph
20(1
)(a)
of
the
Act
and
on
description
of
Class
29
in
Schedule
II
to
the
Regulations
adopted
by
virtue
of
the
Act.
18.
Appellant
submits
that
the
blending
of
oils
constitutes
manufacturing
or
processing
of
goods
for
sale
for
purposes
of
Class
29.
19.
Consequently,
appellant
submits
that
tanks
M-22
and
M-23
are
properties
of
Class
29
and
that
as
a
result
it
properly
deducted
capital
cost
allowance
in
respect
thereof.
20.
Therefore,
appellant
submits
that
the
reassessment
dated
February
20,
1986
is
ill-founded
in
fact
and
in
law.
In
its
reply,
the
respondent
alleged
the
following.
The
summary
of
facts
and
the
summary
of
grounds
are
an
integral
part
of
my
judgment:
A.
The
facts
1.
He
admits
paragraphs
1,
2,
6
(only
in
relation
to
paragraph
2
and
not
paragraph
3,
13,
14
(but
he
also
adds
that
said
tanks
were
used
for
storage
not
blending
oils),
15
and
16
of
the
notice
of
appeal;
2.
He
denies
paragraphs
3,
4,
5,
7,
8,
9,
10,
11,
12,
18,
19
and
20
of
the
notice
of
appeal;
3.
In
respect
to
paragraph
17
of
the
notice
of
appeal,
respondent
will
also
rely
on
the
various
sections
and
Regulations
alleged;
4.
In
1980,
appellant
transferred
two
oil
storage
tanks,
M-22
and
M-23
from
class
6
($410,268)
and
the
related
equipment
from
Class
8
($26,207)
to
Class
29
and
claimed
the
total
undepreciated
capital
cost
of
$436,475
as
capital
cost
allowance
in
1980;
5.
In
reassessing
appellant’s
1980
taxation
year,
the
Minister
of
National
Revenue
relied,
inter
alia,
on
the
following
assumption
of
facts:
(a)
Universals
Terminals
Ltd.
(hereinafter
referred
to
as
"UTL")
is
legally
incorporated;
(b)
UTL
is
owned
50
per
cent
by
Ultramar
Inc
of
Toronto
and
50
per
cent
by
Tew
Management
Corporation
of
Cornwall;
(c)
UTL’s
officers
are
as
follows:
chairman,
George
T.
Kaneb,
president
Thomas
A.
Kaneb,
vice-president
Laurie
D.
Woodruff,
secretary-treasurer
Lionel
P.
Tessier,
second
vice-president
Max
Bayer,
third
vice-president
Peter
Maitland;
(d)
On
August
22,
1935,
Mr.
Thomas
A.
Kaneb,
president
of
UTL
signed
form
T2029
(waiver
of
the
four
year
limit)
in
respect
to
the
classification
of
oil
storage
tanks
for
capital
cost
allowance
pur-
poses;
(e)
UTL
is
in
the
business
of
buying
and
selling
bunker
fuel
oil,
gasoline
and
furnace
oil
at
both
the
wholesale
and
retail
levels;
it
owns
oil
and
storage
tanks
in
Cornwall
and
Morrisburg,
Ontario;
(f)
UTL’s
M-22
and
M-23
tanks
are
situated
at
the
Morrisburg
Terminal;
(g)
UTL’s
M-22
was
built
in
1973
at
a
cost
of
$397,623.25;
the
M-22
tank
has
a
capacity
of
140,000
barrels
or
5,250,000
gallons;
(h)
UTL’s
M-23
was
built
in
1974
at
a
cost
of
$457,705.18;
the
M-23
tank
has
the
same
capacity
than
tank
M-22;
(i)
during
1980,
both
oil
tanks
(M-22
and
M-23)
were
not
used
for
a
qualified
manufacturing
and
processing
activity
and
thus
were
not
Class
29
property;
in
fact
both
tanks
do
not
physically
intervene
in
any
manufacturing
or
processing
activity;
the
tanks
were
not
used
at
all
for
blending
oil
and
were
simply
used
for
storage
of
low
or
high
sulphur
Bunker
C
fuel
(also
known
as
#6
oil)
tank
M-22
(j)
during
1980,
this
tank
was
primarily
used
to
supply
number
6
oil
to
DuPont
a
major
customer
of
UTL;
in
1980,
DuPont
purchased
oil
from
UTL
only
for
Les
Usines
Coteau
and
Maitland
Works;
(k)
the
percentage
of
sulphur
content
required
by
DuPont
was
specified
as
follows:
MAXIMUM
ACCEPTABLE
SULPHUR
CONTENTS:
Maitland
Works
1.8%
(Max.)
Les
Usines
Coteau
3%
(Max.)
(l)
the
maximum
acceptable
sulphur
contents
means
that
oil
with
a
sulphur
content
of
up
to
1.8
per
cent
(it
therefore
could
be
less)
could
be
supplied;
low
sulphur
oil
has
usually
a
sulphur
content
of
less
than
1.5
per
cent;
high
sulphur
oil
has
usually
a
sulphur
contents
of
2.5
per
cent
to
3
per
cent
and
UTL
could
supply
DuPont,
oil
in
those
ranges;
(m)
in
1980,
UTL
purchased
and
stored
73,352
barrels
in
tank
M-22;
58,870
barrels
or
79
per
cent
of
the
oil
added
to
tank
M-22
was
low
sulphur
content
oil
available
on
the
Canadian
market
without
any
blending;
(n)
after
the
receipt
of
a
particular
grade
of
low
sulphur
oil,
no
other
oil
was
mixed
into
the
tank
to
adjust
the
sulphur
content
before
the
next
delivery;
(o)
tank
M-22
was
used
for
storing,
shipping
and
selling
of
finished
goods
or
in
other
words
was
used
for
purchase
and
resale
purposes
which
are
not
qualified
activities
in
respect
to
manufacturing
or
processing;
(p)
the
only
way
tank
M-22
was
used
in
any
manner
during
storage
was
as
follows:
number
6
oil
is
a
heavy
oil
and
needs
to
be
constantly
heated
so
that
it
flows
for
delivery;
to
heat
the
oil
properly
and
evenly
the
oil
in
the
tank
is
circulated
through
an
external
pipe
which
carries
the
oil
from
the
bottom
to
the
top
of
the
tank;
(DuPont
paid
UTL
for
this
heating
cost
on
a
monthly
basis)
(q)
the
heating
of
oil
for
delivery
is
not
blending
or
any
other
manufacturing
or
processing
activity;
(r)
during
1980,
UTL’s
tank
M-22
and
its
related
equipment
continued
to
be
Class
8
and
Class
6
property;
TANK,
M-23:
(s)
during
1980,
this
tank
was
primarily
used
to
store
high
sulphur
#6
oil;
(t)
this
tank
also
functions
in
the
same
manner
than
tank
M-22
as
described
in
subparagraph
Sp);
(u)
UTL
sells
marine
fuel
oil;
(v)
the
main
component
of
marine
fuel
oil
is
Bunker
C
fuel
(#6
oil)
or
#6
oil
diluted
with
furnace
oil
(#3
oil)
in
order
to
adjust
the
viscosity
of
the
#6
oil
to
the
requirement
of
a
vessel;
(w)
all
major
oil
companies
provide
their
customers
with
tables
indicating
the
quantity
of
#2
oil
needed
to
dilute
various
grades
of
#6
oil
to
arrive
at
the
required
viscosity;
(x)
when
UTL
fulfills
a
purchase
order
for
marine
fuel
oil,
#6
and
#2
oil
flow
from
their
respective
storage
tanks
into
eventually
a
single
pipe
which
leads
to
a
loading
rack;
this
loading
procedure
is
provided
by
all
the
oil
companies
free
of
charge;
(y)
the
dilution
of
#6
oil
with
#2
oil
does
not
constitute
a
qualified
manufacturing
or
processing
activity;
(z)
during
1980,
UTL’s
tank
M-23
and
its
related
equipment
continued
to
be
Class
8
and
Class
6
equipment;
B.
Statutory
dispositions
and
arguments
6.
Respondent
relies,
inter
alia,
on
subsections
13(5),
13(6)
and
paragraph
20(1
)(a)
of
the
Income
Tax
Act
and
on
description
of
Class
6,
Class
8
and
Class
29
in
Schedule
IT
of
the
Income
Tax
Regulations;
7.
UTL’s
M-22
and
M-23
tanks
are
not
property
used
directly
or
indirectly
by
UTL
primarily
in
the
manufacturing
or
processing
of
goods
for
sale;
8.
Both
tanks
remained
in
1980
what
they
are
namely
storage
tanks
included
in
Class
8;
9.
In
respect
to
Tank
M-22,
UTL
did
not
do
anything
else
than
store
a
finished
product
which
was
sold
as
it
was;
10.
In
respect
to
Tank
M-23,
the
mere
dilution
of
oil
removed
from
said
tank
does
not
constitute
directly
or
indirectly
manufacturing
or
processing
with
Tank
M-23;
11.
The
mere
bringing
together
of
two
oils
at
loading
racks
or
subsequently
during
transportation
is
a
natural
function
which
is
attributable
not
to
manufacturing
or
processing
but
to
the
delivery
and
sale
of
the
oil;
12.
Both
tanks
are
properly
transferred
back
to
Class
6
and
Class
8.
In
the
case
of
UFL,
the
appellant
alleged
the
following,
the
summary
of
facts
up
to
paragraph
18
inclusive
and
the
summary
of
grounds
of
this
notice
of
appeal
are
an
integral
part
of
my
judgment.
Summary
of
facts
1.
Appellant
is
a
corporation
duly
incorporated
under
the
laws
of
the
Province
of
Ontario
and
has
its
head
office
in
the
City
of
Cornwall,
Province
of
Ontario.
2.
At
all
pertinent
times,
appellant
has
been
carrying
on
a
business
of
blending
oils
and
of
selling
marine
fuel
oil
at
retail
making
profit
therefrom.
3.
During
the
relevant
period,
appellant’s
clientele
consisted
of
vessels
powered
by
slow-speed
diesel
engines.
4.
Marine
fuel
oil
is
obtained
by
blending
what
is
known
in
the
oil
industry
as
being
number
6
and
number
2
oils.
5.
In
all
cases,
marine
fuel
oil
has
to
meet
the
specifications
required
by
each
customer.
6.
The
specifications
for
marine
fuel
oil
are
prescribed
by
manufacturers
of
engines
and
must
be
strictly
complied
with.
7.
The
major
categories
of
specifications
for
marine
fuel
oil
are:
(a)
viscosity
in
centistokes
(CST)
at
50
C
(b)
density
(c)
pour
point
in
degree
Celsius
(d)
sulphur—per
cent
by
weight
(e)
bottoms,
sludge
and
water
(B.S.
&
W.)-per
cent
by
weight
(f)
silicone—ppm
(g)
nickel—ppm
(h)
vanadium-ppm
(i)
aluminum—ppm
or
(j)
conradson
carbon-per
cent
by
weight.
8.
According
to
commercial
practices
and
expertise
in
the
oil
industry,
blending
of
oils
constitutes
a
complex
operation
requiring
analysis,
testing,
monitoring,
skills
and
experience.
9.
Marine
fuel
oil
constitutes
a
distinct
and
different
substance
from
number
6
and
number
2
oils
having
distinctive
character
and
uses.
In
this
respect,
the
blending
of
oils
modifies
the
nature,
density,
viscosity,
chemical
and
physical
structures
of
said
ingredients.
10.
The
appellant’s
business,
at
all
pertinent
times,
consisted
of:
(a)
purchasing
number
6
and
number
2
oils
from
oil
distributors;
(b)
blending
such
oils
into
marine
fuel
oil
so
as
to
meet
the
specifications
required
by
its
respective
customers;
and
(c)
selling
the
marine
fuel
oil
to
its
customers
in
accordance
with
their
specifications.
11.
In
the
course
of
carrying
on
its
business,
appellant
used
various
equipments
consisting
of
storage
tanks,
pipelines,
valves,
meters,
loading
racks
and
boilers.
12.
The
said
equipments
were,
at
all
pertinent
times,
owned
by
Universal
Terminals
Ltd.
13.
During
the
relevant
period,
appellant
paid
Universal
Terminals
Ltd.
amounts
for
the
use
by
appellant
of
the
said
equipment.
14.
At
all
pertinent
times,
appellant
exercised
care,
control
and
supervision
over
its
oil
blending
business
which
included
supervising
its
employees.
The
appellant’s
employees,
at
all
pertinent
times,
were
persons
who
had
been
employed
by
Universal
Terminals
Limited
and
who
were,
for
the
times
they
were
performing
services
for
the
appellant,
employees
for
the
appellant.
16.
Appellant
reimbursed
Universal
Terminals
Ltd.
the
amounts
it
paid
to
the
appellant’s
employees
with
respect
to
the
services
they
performed
for
the
appellant.
17.
By
its
income
tax
returns
for
the
1980,
1981,
1982
and
1983
taxation
years,
the
appellant
deducted,
under
section
125.1
of
the
Income
Tax
Act
from
the
tax
otherwise
payable
under
Part
I
thereof,
certain
amounts
in
respect
of
manufacturing
and
processing
profits,
viz:
18.
On
March
13,
1986,
the
Minister
of
National
Revenue
(herein
the
respondent)
reassessed
the
appellant
for
the
1980,
1981,
1982
and
1983
taxation
years
and
disallowed
the
deduction
set
out
in
paragraph
17,
supra,
on
the
view
that
the
appellant
did
not
have
any
cost
of
manufacturing
and
processing
capital
or
any
cost
of
manufacturing
and
processing
labour
for
those
years
and,
therefore,
did
not
have
any
Canadian
manufacturing
and
processing
profits
within
Regulation
5200
for
those
years.
|
TAXATION
YEAR
|
DEDUCTED
AMOUNTS
|
|
1980
|
$49,196
|
|
1981
|
$244,386
|
|
1982
|
$117,611
|
|
1983
|
$32,547
|
Summary
of
grounds
21.
Appellant
relies,
inter
alia,
on
section
125.1
of
the
Act
and
on
Part
LII
of
the
Regulations
adopted
by
virtue
of
it.
22.
Appellant
submits
that
the
amounts
referred
to
in
paragraph
13
above
should
be
included
in
cost
of
manufacturing
and
processing
capital
for
purposes
of
determining
its
Canadian
manufacturing
and
processing
profits
pursuant
to
the
Regulation
5200.
23.
More
specifically,
appellant
submits
that
each
of
the
amounts
referred
to
in
paragraph
13
above
was
the
rental
cost
incurred
by
it
for
the
use
of
the
properties
described
in
paragraph
11,
the
whole
pursuant
to
Regulation
5202.
24.
Appellant
also
submits
that
the
amounts
referred
to
in
paragraph
16
above
should
be
included
in
its
cost
of
manufacturing
and
processing
labour
for
purposes
of
determining
its
Canadian
manufacturing
and
processing
profits
pursuant
to
Regulation
5200.
25.
Consequently,
appellant
submits
that
it
properly
deducted
from
the
tax
otherwise
payable
under
Part
I
of
the
Act
the
amounts
described
in
paragraph
17,
supra,
as
its
deduction
for
manufacturing
and
processing
profits
for
each
taxation
year
in
question.
26.
As
a
result,
appellant
submits
that
the
reassessments
dated
March
13,
1986
are
ill-founded
in
fact
and
in
law.
The
facts
under
A
and
the
statutory
dispositions
and
arguments
under
B
of
the
reply
are
also
an
integral
part
of
my
judgment
:
A.
The
facts
1.
He
admits
paragraphs
1,
12,
17,
18,
19
and
20
of
the
notice
of
appeal;
2.
He
denies
paragraphs
2,
3,
4,
5,
6,
7,
8,
9,
10(a)
,
10(b),
10(c),
11,
13,
14,
15,
16,
22,
23,
24,
25,
and
26
of
the
notice
of
appeal;
3.
In
respect
to
paragraph
21
of
the
notice
of
appeal,
respondent
also
relies
on
the
same
section
and
Regulations
alleged
in
said
paragraph;
4.
In
reassessing
appellant’s
1980,
1981,
1982
and
1983
taxation
years,
the
Minister
of
National
Revenue
relies,
inter
alia,
on
the
following
assumption
of
facts:
(a)
Universal
Fuels
Ltd.
(hereinafter
referred
to
as
"UFL")
is
legally
incorporated
since
November
21,
1980
and
commenced
operations
on
or
about
December
1,
1980;
(b)
"UFL"
is
a
wholly
owned
subsidiary
of
Universal
Terminals
Ltd.
(hereinafter
referred
to
as
"UTL");
(c)
"UTL"
is
owned
50
per
cent
by
Ultramar
Inc.
of
Toronto
and
50
per
cent
by
Tew
Management
Corporation
of
Cornwall;
(d)
the
officers
of
both
"UFL"
and
"UTL"
are
as
follows:
UTL:
chairman,
George
T.
Kaneb,
president,
Thomas
A.
Kaneb,
vice-
president
Laurie
D.
Woodruff,
secretary
treasurer
Lionel
P.
Tessier,
second
vice-president
Max
Bayer,
third
vice-president
Peter
Maitland.
UFL
president,
Thomas
A.
Kaned,
vice-president,
George
Kaneb,
secretary
treasurer,
Lionel
Tessier.
(e)
"UTL"
has
for
many
years
been
in
the
business
of
buying
and
selling
finished
fuel
products
namely
bunker
fuel
oil,
gasoline
and
furnace
oil
at
both
the
wholesale
and
retail
levels;
it
owns
oil
and
storage
tanks
in
Cornwall
and
Morrisburg,
Ontario;
(f)
prior
to
November
21,
1980,
"UTL"
had
been
selling
marine
fuel
oil
which
represented
only
a
small
percentage
of
its
business
less
than
lot
of
its
gross
revenue;
(g)
"UFL"’s
only
business
is
the
sale
of
marine
fuel
oil
purchased
as
a
finished
product
and
taken
delivery
of
in
part
from
its
supplier
and
contractor
namely
"UTL"
at
the
Morrisburg
installation
or
elsewhere
from
other
suppliers;
(h)
the
main
component
of
marine
fuel
oil
is
Bunker
C
fuel
(also
known
as
#6
oil)
or
#6
oil
diluted
with
furnace
oil
(also
known
as
#2
oil),
(i)
UTL
purchases
on
its
own
account
as
inventory
and
stores
separately
#6
and
#2
oil;
(j)
UFL
has
no
#6
and
#2
oil
inventory;
(k)
when
UTL
fulfills
a
purchase
order
for
marine
fuel
oil
from
UFL,
#6
and
#2
oil
flow
from
their
respective
storage
tanks
into
eventually
a
single
pipe
which
loading
rack
leads
to
a
loading
rack;
UTL
remains
at
all
times
in
complete
control
of
these
operations;
(l)
when
UFL
purchases
marine
fuel
oil
from
a
non-arm
length
suppliers
(other
than
UTL),
#2
oil
is
first
loaded
to
the
delivery
truck
and
then
#6
oil
is
added
on
top
which
service
during
delivery
is
provided
free
of
charge;
(m)
during
transportation
by
the
trucks
to
their
final
destination,
#6
and
#2
continue
to
be
shaken
together
without
consequence
to
the
purchased
product
namely
marine
fuel
oil;
(n)
when
UFL
buys
marine
fuel
oil
from
arm’s
lengths
suppliers,
it
pays
a
flat
one
price
charge
per
litre
of
oil;
there
is
no
broken
of
the
price
into
the
suppliers
individual
cost
components;
the
flat
one
price
charge
is
standard
practice
in
the
industry;
(o)
when
UTL
sells
oil
to
its
customers
(except
its
subsidiary
UFL)
it
charges
a
flat
one
price
charge
per
litre
of
oil;
(p)
now
and
then
when
UTL
stores
oil
for
its
customers
it
charges
a
flat
one
price
charge
per
litre
of
oil
(namely
for
the
oil,
storage,
machinery,
labour,
administration,
etc.);
the
charges
relating
to
insurance
heating
and
financing
the
oil
purchase
are
invoiced
separately;
(q)
UTL’s
only
client
who
receives
an
itemized
invoice
which
shows
a
breakdown
of
all
charges
is
UFL;
(r)
UTL
sends
monthly
invoices
to
UFL
showing
the
following
charges:
(1)
price
for
#6
and
#2
oil
(2)
storage
charges
at
$0.0022
per
litre
(3)
transportation
(when
required)
at
0.009
cents
a
litre
(4)
administration,
accounting
office
at
$10
per
truck
load
(5)
rental
of
mixing
and
pumping
equipment,
dispatching,
supervision
at
loading
&
unloading,
48
hours
per
ship
at
$8
per
hour
plus
25
per
cent
employee
benefits;
(s)
in
computing
its
manufacturing
and
processing
deduction,
UFL
proceeds
to
reallocate
the
charge
described
in
subparagraph
(r)(4)
namely:
Administration,
accounting
office
at
$10
per
truck
load
in
the
following
manner:
$3.50
is
considered
to
be
administration
accounting
office;
$6.50
is
considered
to
be
for
rental
of
machinery
and
equipment;
(t)
in
computing
its
manufacturing
and
processing
deduction,
UFL
proceeds
to
reallocate
the
charge
described
in
subparagraph
(r)(5)
namely:
Rental
of
mixing
&
pumping
equipment,
dispatching,
supervision
at
loading
unloading;
48
hours
per
ship
at
$8
per
hour
plus
25
per
cent
employees
benefits
as
only
labour
costs;
(u)
consequently
for
purposes
of
computing
its
manufacturing
and
processing
deduction,
UFL
included
the
following
items
in
the
various
elements
comprising
the
basic
formula:
Cost
of
Capital-is
comprised
of
storage
charges
(i.e.,
the
rental
of
storage
tanks)
at
$0.0022
per
litre,
and
rental
of
the
blending
and
pumping
equipment
at
the
rate
of
$6.50
per
load.
Cost
of
Manufacturing
and
Processing
Capital-same
as
Cost
of
Capital.
Cost
of
Labour-is
comprised
of
charges
for
administrative,
accounting
and
office
services
plus
dispatching,
supervising
and
loading
labour.
Cost
of
Manufacturing
and
Processing
Labour
includes
only
charges
for
dispatching,
supervising
and
loading
labour.
(v)
the
breakdown
of
the
charges
on
the
invoices
sent
by
UTL
to
UFL
(contrary
to
UFL
normal
practice
with
it
other
customers)
attempts
to
convey
the
appearance
of
an
agency
contract
which
does
not
exist;
UTL
remains
at
all
times
a
contractor
and
not
an
agent
for
UTL;
(w)
UFL
has
no
employees,
nor
any
processing
facilities
of
its
own,
nor
any
fixed
assets;
(x)
UFL
does
not
pay
salaries
and
wages
to
employees
of
UTL,
nor
is
there
any
employer-employee
relationship;
UFL
is
simply
paying
invoices
billed
by
UTL
for
the
so-called
"Rental
of
mixing
and
pumping,
equipment,
dispatching
supervision
at
loading
and
unloading
at
48
hours
per
ship"
which
is
a
fixed
rate;
(y)
in
addition,
even
if
said
charges
where
reallocated
as
labour
as
does
UFL,
these
amounts
cannot
constituted
manufacturing
and
processing
labour
costs
since
the
said
invoices
are
for
charges
or
services
which
are
not
normally
performed
by
any
employees
of
UFL;
(z)
UFL
does
not
pay
rent
from
UTL
facilities,
machinery
or
equipment
but
a
charge
for
a
contractor’s
services,
the
so-called
storage
charge
and
rental
charge
and
the
hired
trucks
do
not
constitute
costs
for
the
purposes
of
computing
UFL’s
"cost
of
capital"
and
cost
of
"manufacturing
and
processing
capital";
(aa)
alternatively
even
if
UFL
were
entitled
to
a
manufacturing
and
processing
deduction,
the
various
costs
should
be
allocated
to
"cost
of
capital"
and
"cost
of
labour"
on
the
basis
of
the
charges
on
the
invoice
namely
that
administrative
charges
were
$10
per
load
and
not
$3.50;
(bb)
UFL
does
not
manufacture
or
process
anything
and
does
not
have
any
"cost
of
labour"
or
"cost
of
capital"
for
the
purposes
of
computing
manufacturing
and
processing
profits;
B.
Statutory
dispositions
and
arguments
5.
Respondent
relies,
inter
alia,
on
section
125.1
of
the
Income
Tax
Act
and
on
Part
LII
of
the
Regulations
adopted
by
virtue
of
it;
6.
Appellant
does
not
manufacture
or
process
anything
for
the
purposes
of
the
manufacturing
and
processing
profits
tax
deduction;
7.
Pursuant
to
Regulation
5202,
the
cost
of
labour
of
a
corporation
means
an
amount
equal
to
the
aggregate
of:
(a)
salaries
and
wages
paid
or
payable
to
all
employees
of
the
corporation:
and,
(b)
all
other
amounts
paid
or
payable
to
any
person
other
than
an
employee
of
the
corporation
for
the
performance
of
functions
relating
to
a
service
or
function
that
would
normally
be
performed
by
an
employee
of
the
corporation.
8.
The
cost
of
manufacturing
and
processing
labour
is
the
proportion
of
the
cost
of
labour
that
reflects
the
extent
to
which
salaries
and
wages
paid
or
payable
to
persons
directly
engaged
in
qualified
activities
and
to
other
persons
for
the
performance
of
functions
that
would
be
directly
related
to
qualified
activities
if
they
were
employees
of
the
corporations.
9,
Since
"UFL"
has
no
employees
performing
functions
directly
relatedto
qualifying
activities,
the
company
cannot
argue
that
they
contracted
out
the
services
of
others
for
what
would
have
been
normally
performed
by
their
non-existent
employees;
by
contracting
out
to
UTL,
appellant
cannot
impose
or
create
a
‘normal
work
load
of
the
employees"
by
substituting
or
relying
on
the
work
of
UTL’s
staff.
10.
In
respect
to
the
cost
of
capital,
by
breaking
down
the
monthly
invoices
into
its
component
parts
such
as
oil
cost,
storage
charges,
trucking
charges,
administration
fees,
rental
of
equipment,
finance
and
insurance
charges,
the
taxpayers
are
attempting
to
convey
the
impression
that
either
"UTL"
is
storing
in
its
tanks
oil
which
is
the
property
of
"UFL",
or
that
"UFL"
has
possession
or
use
of
"UTL"
has
storage
tanks
for
purposes
of
storing
"UFL"’s
inventory;
at
no
time
does
"UTL"
store
"UTL"’s
oil
and
in
fact
"UFL
never
has
in
its
possession
oil
which
requires
storing.
"UFL"
has
not
claimed
an
inventory
allowance
in
any
of
the
years
in
question;
11.
UFL
does
not
rent
any
machinery
or
equipment
from
UTL
for
any
manufacturing
or
processing
of
its
goods;
in
addition
when
UTL
uses
its
machinery
and
equipment
it
does
so
as
a
contractor
who
exercises
full
control
of
all
operations;
12.
The
storage
tanks
at
Morrisburg
are
assets
owned
by
"UTL";
"UTL"
uses
the
storage
tanks,
the
pipes
and
pumping
station
to
store,
to
transport
to
the
pumping
station
and
to
load
into
the
trucks,
their
products
which
are
in
themselves
finished
products;
the
assets
are
not
properties
used
primarily
and
directly
in
qualified
activities
because
the
storing
of
finished
products
are
excluded
from
qualified
activities
from
"UTL"’s
point
of
view.
13.
Appellant
is
not
entitled
to
the
manufacturing
and
processing
profits
deduction.
At
the
hearing,
counsel
for
appellant
admits
subparagraphs
4(a)
to
4(d),
(h)
up
to
which
service
during
delivery
is
provided
free
of
charge,
which
was
denied.
He
also
admits
paragraphs
(i),
(r),
(s),
(t),
(u),
the
balance
of
the
allegations
were
denied,
all
this
in
the
reply
in
the
case
of
UFL.
Besides
the
admissions
by
the
appellants,
the
Court
has
examined
very
carefully
the
transcript
of
the
evidence
as
well
as
the
arguments
to
come
to
the
following
conclusion.
It
is
well
established
that
UFL
had
no
employees
and
no
tangible
assets
of
its
own
to
manufacture
or
process
something.
Counsel
for
the
appellant
argued
that
UFL
has
had
a
substantial
profit
from
an
active
business
carried
on
in
Canada,
and
the
only
points
of
interests
is
Regulation
5200.
There
is
no
issue
concerning
the
computation
of
the
adjusted
business
income,
and
the
only
elements
at
issue
are
the
cost
of
capital
and
the
cost
of
labour
as
they
apply
to
manufacturing
and
processing.
His
first
submission
is
essential
that
the
blending
of
#2
oil
with
#6
oil
in
order
to
produce
marine
fuel
oil
by
using
land
blending
and
trucks
constitute
manufacturing
and/or
processing.
His
other
submission
is
cost
of
capital
is
rental
cost
and
cost
of
labour
to
know
the
salaries
and
wages
paid
to
UFL’s
employees
through
UTL
are
related
to
gratified
activity
under
Regulation
5200.
As
to
capital
cost,
counsel
for
appellant
argued
that
rental
cost
is
defined
in
Regulation
5202
to
mean
rents
incurred
for
the
use
of
property.
Then,
he
said
that
UFL
did
realize
a
substantial
profit
by
blending
and
selling
marine
fuel
oil,
and
for
that
purpose
it
did
use
the
equipment
of
UTL
consisting
in
a
storage
tank,
lines,
pumps,
meters,
leading
racks,
it
also
used
trucks
either
owned
by
UTL
or
Provost.
The
charges
for
these
equipment
and
cost
of
employees
are
not
precise,
very
confusing,
and
even
mention
25
per
cent
of
employees
benefit
when
Regulation
5202
on
the
salaries
and
wages
means
(salaries,
wages
and
commissions)
but
does
not
include
any
other
type
of
remuneration,
any
super
"annuition"
of
pension
benefits,
any
retiring
allowance
or
any
amount
referred
to
in
section
6
or
7
of
the
Act.
Counsel
for
appellants
also
argued
that
the
absence
of
an
agreement
in
writing
in
that
respect
is
not
fatal.
As
to
the
cost
of
labour,
he
submitted
that
UTL
be
considered
as
the
paying
agent
of
UFL
with
respect
to
the
amounts
paid
to
the
employees
and
referred
to
Modern
Miss
Sportswear
Ltd.
v.
The
Queen,
[1980]
C.T.C.
521,
80
D.T.C.
6390
(F.C.T.D.)
and
Boynell
v.
Central
Vermont
Railway.
In
that
last
case
he
argued
that:
A
temporary
employer
will
be
found
to
be
the
employer
for
civil
liability
purposes
so
in
order
to
determine
who
is
the
employer
is
not
who
paid
the
employee
but
instead
who
controlled
the
employee.
In
the
case
at
bar,
two
or
three
persons
were
working
under
the
direction
of
George
Peters
who
was
reporting
to
Mr.
Kaneb
who
was
working
for
UFL.
So,
the
control
was
exercised
by
UFL
and
the
cost
of
capital
and
the
cost
of
labour
under
Regulation
5202
with
respect
to
receiving
or
storing
of
raw
materials
is
an
illegible
activity
under
the
qualified
activities
so
the
storage
charges
should
qualify.
Then
he
concluded
by
referring
to
"Tsuda"
to
say
that
he
was
an
independent
contractor
whereas
in
UFL
it
was
simply
a
rental
agreement
with
respect
to
property
and
personnel.
Concerning
UTL,
counsel
for
appellant
suggested,
with
respect
to
tank
number
22,
that
the
variation
of
sulphur
constitutes
an
important
charge
and
increase...change,
an
important
change
and
increase
the
value
of
the
components
in
order
to
be
qualified
as
processing
and
was
directly
involved
in
the
processing
activity
so
the
appeal
should
be
allowed.
With
respect
to
tank
23,
to
the
extent
that
Court
dismisses
UFL’s
appeal,
UTL
should
be
allowed.
Counsel
for
the
respondent
referred
the
Court
to
many
cases
to
show
that
when
you
do
not
have
any
employees,
neither
any
tangible
assets,
it
is
extremely
difficult
to
consider
yourself
as
a
manufacturer.
You
are
a
shell
company
of
another
larger
company
which,
in
the
present
case,
i.e.,
UTL.
On
the
other
hand,
counsel
for
the
appellant
referred
the
Court
to
just
one
case,
Central
Vermont
Company,
in
a
situation
of
a
train
accident,
a
case
of
temporary
service
in
liability
law,
for
accident
or
even
for
workman’s
compensation.
Counsel
for
respondent
argued
that
temporary
service
is
no
equal
to
the
term
of
employee
that
one
has
to
look
at
the
ugly
facts,
those
that
really
reflect
the
reality
of
the
circumstances.
Then
he
referred
to
the
cross-
examination
of
Mr.
Kaneb,
president
of
UTL,
who
testified
that
UFL
(1)
did
not
have
any
employer’s
number;
(2)
did
not
hire
or
fire
anybody;
(3)
did
not
determine
the
work
hour
or
the
salary;
and
(4)
did
not
pay
any
workman’s
compensation.
On
this
question
of
cost
of
employees,
he
also
argued
that
(1)
there
was
no
employer-employee
relationship;
(2)
no
T-4
slip
was
issued
by
UFL;
(3)
in
case
of
firing,
they
could
not
sue
UFL;
(4)
it’s
a
service
charge
and
not
the
payment
of
a
salary
of
an
employee;
(5)
the
service
charge
was
an
estimated
amount;
(6)
an
employee
received
so
much
an
hour;
and
(7)
the
service
charge
goes
to
the
coffers
of
UTL
and
not
directly
in
the
pocket
of
the
employee.
He
concluded
by
saying
that
the
Court
does
not
have
the
quality
of
proof
and
the
facts
to
conclude
by
balance
of
probability
that
UFL
had
employees.
He
referred
the
Court,
amongst
others,
to
the
following
cases:
(1)
Tsuda
Canada
Ltd.
v.
M.N.R.,
[1975]
C.T.C.
2384,
76
D.T.C.
1010
(T.R.B.),
there
was
no
employee
and
no
equipment,
the
appeal
was
dismissed.
(2)
Louben
Sportswear
Inc.
v.
M.N.R.,
[1979]
C.T.C.
2526,
79
D.T.C.
531
(T.R.B.),
appeal
dismissed
because
the
payments
were
not
made
to
individuals
but
to
corporation.
(3)
Canadian
Clyde
Tube
Forgings
Ltd.
v.
The
Queen,
[1980]
C.T.C.
41,
80
D.T.C.
6008
(F.C.T.D.),
appellant
had
no
employees
and
the
payments
were
made
to
an
outside
contractor.
(4)
Levi
Strauss
of
Canada
Inc.
v.
The
Queen,
[1982]
C.T.C.
65,
82
D.T.C.
6070
(F.C.A.),
they
were
making
pants
but
the
shirts
were
made
elsewhere,
appeal
dismissed
because
employees
who
made
the
shirts
were
not
doing
functions
similar
to
those
normally
performed
by
the
appellant’s
employees.
(5)
Beta
Publications
Ltd.
and
Globe
International
Inc.
v.
M.N.R.,
file
nos.
88-129,
88-369
(T.C.C.),
the
appellants
used,
the
services
of
a
parent
company
and
not
its
employees,
the
appeal
was
dismissed.
As
to
UTL,
he
argued
that
previous
to
1980
the
tanks
were
capitalized
as
assets
in
class
6
and
8,
then
in
1980
they
were
isolated
from
the
rest
of
the
operations
and
apparently
were
used
in
order
to
be
qualified
under
section
125.1
and
Regulations
5200
and
5202
dealing
with
tank
22.
He
argued
that
there
was
no
established
proof
of
exactly
what
went
in
and
what
went
out
of
that
tank
during
1980.
Whereas
Mr.
Kaneb
testified
that
#6
fuel
used
for
UFL
came
from
tank
M-23
in
December
1980
which
is
the
first
month
where
they
started
their
operation.
Then
he
referred
the
Court
to
the
decision
in
Produits
L.B.
(1987)
Ltd.
v.
Canada,
[1993]
2
C.T.C.
2625,
93
D.T.C.
1541
(T.C.C.),
at
2632-633,
(D.T.C.
1546-547)
of
the
said
case
the
emphasis
in
yellow
is
an
integral
part
of
my
judgment:
What
was
disputed
by
the
Minister
was
not
so
much
the
acquisition
of
the
packing
machine
for
manufacturing
or
processing
purposes,
but
rather
its
use.
Relying
on
the
definition
of
"qualified
property"
and
that
of
Class
29
property
and
on
a
judgment
by
our
Court
in
Canvil
Ltd.
v.
M.N.R.,
[1985]
2
C.T.C.
2451,
85
D.T.C.
699
(T.C.C.),
counsel
for
the
respondent
argued
that
the
words
of
these
definitions
require
actual
use
of
the
property
for
manufacturing
purposes.
However,
according
to
two
recent
decisions
of
our
Court,
it
is
the
purchaser’s
intention
at
the
time
of
acquisition
of
the
property
that
counts,
not
the
use
of
that
property.
The
decisions
were
in
Setrakov
Construction
Ltd.
v.
M.N.R.,
[1989]
2
C.T.C.
2147,
89
D.T.C.
396
(T.C.C.),
and
Dragon
Construction
Ltee.
v.
M.N.R.,
[1989]
2
C.T.C.
2265,
89
D.T.C.
464
(T.C.C.).
I
agree
with
these
decisions
of
our
Court
that
the
actual
usage
is
not
a
condition
set
by
the
Act.
What
is
a
condition
is
that
the
equipment
be
acquired
for
the
purposes
of
use
in
the
context
of
manufacturing
and
processing
activities.
If
the
Minister
is
of
the
view
that
the
functional
use
of
the
equipment
for
a
given
period
is
also
an
essential
test,
the
legislative
provision
must
be
amended.
He
argued
that
the
Court
should
look
at
the
original
and
intended
use
that
both
tanks
were
originally
built
to
be
used
as
storage
tanks
that
there
is
no
proof
that
after
being
built
they
have
been
on
a
continual
basis
used
to
blend
oil,
because
there
is
no
delivery
charge
or
inventory
sheets
for
these
tanks.
The
Court,
because
of
the
evidence
adduced
and
the
case
used
by
counsel
for
the
respondent,
has
no
hesitation
to
decide
that
because
UFL
did
not
have
any
employees
neither
any
tangible
assets
of
its
own,
cannot
claim
the
deduction
for
manufacturing
and
processing
profits.
It
is
quite
clear
that
the
employees
and
equipments
used
to
realize
UFL
profit
were
those
of
the
parent
company
UTL.
Consequently,
the
appeal
of
UFL
is
dismissed.
With
respect
to
the
two
tanks
originally
built
around
1973
to
be
used
as
storage
tanks,
there
is
no
evidence
to
show
that
10
per
cent
of
the
sales
was
from
goods
that
were
manufactured
and
processed
in
accordance
with
subsection
125.1(3)
in
1980.
Furthermore,
the
decision
in
Produits
L.B.
already
cited
finds
its
application
in
the
appeal
of
UTL.
In
a
few
words,
it
is
the
purchaser’s
intention
at
the
time
of
acquisition
of
the
property
that
counts.
Consequently,
both
appeals
are
dismissed.
Appeals
dismissed.
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94~3076(IT)I).
|
94-3076(IT)I).
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