Ashworth Bros. Canada Inc. v. Minister of National Revenue, [1991] 2 CTC 2458, 91 DTC 1218

Tremblay, T.CJ.:—This appeal was heard on January 12, 1990 Montreal, Quebec.

1. Point at Issue

The point at issue is whether the appellant’s business during the 1983, 1984 and 1985 nation years constituted the manufacturing or processing in Canada of "goods for sale" within the meaning of paragraph 125.1(3)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") so as to entitle the appellant to the deduction claimed from its manufacturing and processing profits.

The appellant contends that it performs manufacturing and processing activities on goods for sale in Canada and therefore has the right to claim the deduction permitted by the Income Tax Act.

The appellant considered as its income for the said years $4,692(1983), $9,317 (1984) and 45,730(1985) respectively.

The respondent contends that the appellant does not manufacture or process "goods for sale" but that this business remains essentially a service repair business which is a service contract including labour and material.

Consequently, the respondent refused the tax credit deduction. Moreover, he also refused. the capital cost allowance on goods of category 29, and deduction for investment tax credit and inventory allowance. After allowing some additional capital cost allowance on goods of category 8 and making some adjustments, the respondent arrived at the following net and taxable income of $40,413 (1983), $33,386 (1984), and $55,344 (1985). It goes without saying that a favourable decision would entitle the appellant to capital cost allowance of category 29 of the Income Tax Regulations and investment tax credit according to subsection 127.5 of the Act since they require as does subsection 125(3(a) "the manufacturing and processing of a good for sale”.

2. Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1984] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his reassessments were also deemed to be correct. In the present case, the assumed facts are described in paragraphs 7(a) to

(k) of the reply to notice of appeal. They read as follows:

7. In reassessing appellant's 1983, 1984, 1985 taxation years, the respondent relied on the following facts (that the appellant at the beginning of the trial admitted or denied):

(a) appellant is a wholly owned subsidiary of an American corporation namely Ashworth Bros. Inc.; [admitted]

(b) Ashworth Bros. Inc. (the American corporation) manufactures in the U.S.A.

card machines and related equipment such as cylinders, etc; [admitted]

(c) a card machine is used in the textile industry to transform cotton or wool bales into fibres; [admitted]

(d) a card machine has several components such as cylinders that ensures the rotation or circulation of cables with slanted and dented threads referred to as “clothing” in the textile industry; the “clothing” are an integral part of the cylinders; [admitted]

(e) appellant’s business consists of the following:

i) direct sales of component parts (which appellant does not manufacture) for card machines;

ii) the repair and reconditioning of cylinders which also includes the installation, adjustment (sic) and fitting of clothing; [denied]

(f) except for direct sales, appellant's gross income is earned through service contracts which include labour and material; [denied]

(g) appellant does not manufacture or process goods for sale and consequently had no manufacturing or processing profits; [denied]

(h) appellant uses various components parts (not manufactured by appellant) to install them during the repair process; the repairs are executed on machinery owned by appellant's clients; [denied]

(i) except for direct sales, the various components parts used for repairs are not gods for sale; the parts become the property of appellant's customers by accession as the service contract progresses and not because of a sale which is only incidental in the labour and material contract; [denied]

(j) except for parts held in inventory for the purpose of direct sales, the other parts held for executing repairs contracts were not property for sale and consequently do not qualify for inventory allowance; [denied]

(k) appellant's machinery is not used to manufacture and process goods for sale but is used in the repair business and consequently falls within category 8 for computation of capital cost allowance; [denied]

2.03 In consequence of the respondent's contention, he made the following adjustments to the appellant's income declared in its returns:

ADJUSTMENTS:

	1983 1984			1985
PREVIOUS INCOME	$ 40,692	$ 9,317	$45,730
ADD:	$ 3,707	$24,755 $10,857
—capital cost allowance refused, category 29
—deduction for inventory refused		$ 6,752	$ 5,030
		$31,507	$15,887
LESS:	$ 3,986	$ 7,438	$ 6,273
—additional C.C.A., category 8
—net adjustment	($ 279) $24,069 $ 9,614
Net and taxable income	$ 40,413	$33,386	$55,344
Changes in income tax
Deduction for manufacturing and processing
profits
|JI
refused	$ 2,442	$ 559 $ 2,744
Investment tax credit refused	$ 2,790		$	41

3. Facts

3.01 The appellant is a wholly owned subsidiary of an American corporation. It holds federal sales tax licences as a wholesale dealer and as a manufacturer.

3.02 The appellant contends that during the relevant period, he performed activities in the field of manufacturing equipment used in the textile industry.

He sold equipment manufactured by its parent corporation, commonly called "clothing" or "card" which are used for shredding wool.

3.03 It is in relation to the sale of the said "clothing" or "card" for which the appellant claimed tax credit for manufacturing and processing inventory allowance, depreciation on its equipment and investment credit.

3.04 According to the appellant, a "clothing" or "card" cannot be manufactured on measure and must come in a standard size. Consequently, he says that in order to fit the “clothing” or "card" to the specific needs of a given client, it is necessary to perform numerous modifications, adjustments and technical fine tuning to obtain the required size and density for the wool used by the client. These modifications, adjustments and fine tuning could take up to five days to complete and constitute the manufacturing and processing activities of the appellant.

3.05 In the course of discussions between counsel for the parties, the respondent admitted that the activities referred to in paragraph 3.04 may be indeed manufacturing and processing activities.

3.06 The appellant contends that generally speaking, the modifications, adjustments and fine tuning were done on the premises of the buyer in the following fashion;

a) the "card" or “clothing” was set up, manually or by mechanical means, on a "roller" at the buyer's premises;

b) thereafter, according to the specifications given by the buyer, the technical experts of the appellant proceeded, with highly specialized equipment mostly acquired from its mother corporation, to modify, adjust and fine tune the “clothing” or “card” until the desired type of wool was obtained; and

c) upon failure of the “clothing” or “card” ,it was necessary to replace it and start over the operations set out in a) and b), supra.

3.07 Pursuant to the appellant, most of the sales of the appellant (close to 90 per cent in each taxation year) required adjustments in order of clothing or card to perform to the client's needs. However some sales of the appellant did not require any adjustment where, for instance, the client already had the technical expertise to perform the adjustments himself.

4. Law- Case at Law and Doctrine-Analysis

4.01 Law

The provisions chiefly involved in this case are subsection 125. 1(1),paragraph 125.1(3)(a), subsections 127(5), (9) and (10) and paragraph 20(1)(gg) of the Income Tax Act and sections 5200 and 5201 as well as schedule II category 8 and 29 of the Income Tax Regulations.

Subsection 125.1(1) and paragraph 125.1(3)(a) of the Income Tax Act and 5200 and 5201 of the Income Tax Regulations reads as follows:

125.1 (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 (d) 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

(A) the aggregate of;

(I) the lesser of the amounts determined under paragraphs 124(2) (a)

and to (d) in respect of the corporation for the year, and

(Il) the lesser of the amounts determined under paragraphs 124

(2.1)(d) and (e), in respect of the corporation for the year.

(B) the least of the amounts determined under paragraphs 125(1)(a) to (d) 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, deductible 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 (d) 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 paragraphs (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 (3)(a) “Canadian manufacturing and processing profits” of a corporation for a taxation year means such portion of 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 as is determined under rules prescribed for that purpose by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease.

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.

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 equal to the corporation's adjusted business income for the year where

(a) the activities of the corporation during the year were primarily manufacturing

or processing in Canada of goods for sale or lease; (b) the aggregate of

(i) the aggregate of all amounts each of which is the income of the corporation for the year from an active business minus the aggregate of all amounts each of which is the loss of the corporation for the year from an active business, and

(ii) if the corporation is associated in the year with a Canadian corporation, the aggregate of all amounts each of which is the income of the latter corporation from an active business for its taxation year coinciding with or ending in the year,

did not exceed $200,000;

(c) the corporation was not engaged in any of the activities listed in subparagraphs

125. 1(3)(b)(i) to (ix) of the Act at any time during the year; and

(d) the corporation did not carry on any active business outside Canada at any time during the year.

Other provisions will be reproduced in the analysis if necessary.

4.02 Cases at Law and doctrine

Counsel for the parties referred the Court to the following cases at law and doctrine:

1. Ateliers Benoit Allard Inc. v. M.N.R., [1984] C.T.C. 2189; 84 D.T.C. 1131.

2. Crown Tire Retreaders Ltd. v. M.N.R., [1981] C.T.C. 3013; 81 D.T.C. 931.

3. Crown Tire Service Ltd. v. The Queen, [1983] C.T.C. 412; 83 D.T.C. 5426.

4. Dixie X-Ray Associates Ltd. v. The Queen, [1988] 1 C.T.C. 69; 88 D.T.C. 6076.

5. Halliburton Services Ltd. v. The Queen, [1985] 2 C.T.C. 52; D.T.C. 5336.

6. The Queen v. Halliburton Services Ltd., [1990] 1 C.T.C. 427; 90 D.T.C. 6320 (F.C.A.).

7. Installation Mécanique G & B. Ltée v. M.N.R., [1987] 1 C.T.C. 2326; 87 D.T.C. 226.

8. J. Marcel Ltd. v. Tapper, [1953] E.L.R. 15.

9. Nowsco Well Service Ltd. v. The Queen, [1988] 2 C.T.C. 24; 88 D.T.C. 6300 (F.C.T.D.).

10. Nowsco Well Service Ltd. v. The Queen, [1990] 1 C.T.C. 416; 90 D.T.C. 6312 (F.C.A.).

11. Preolad Co. v. Regina (City), [1958] C.A. 433.

12. Tenneco Canada Inc. v. The Queen, [1987] 2 C.T.C. 231; 87 D.T.C. 5434.

13. M Daniel Massé, "Contrat de vente ou contrat d'entreprise", 1984, Volume 6, No. 2, Revue de planification fiscale et successorale.

14. M.G. Bridge, "Sale of Goods" Butterworths, Toronto and Vancouver, 1988. 4.03 Analysis

4.03.1 The respondent does not dispute the fact that certain activities performed by the appellant may involve processing. What is disputed however is whether these activities occur on goods for sale. It is contended by the respondent that the appellant's main activity is the provision of a service contract where the sale of goods in connection therewith is only incidental to the service being provided.

The respondent also contends that the component part (card or clothing) used and set up on the customer card machine did not pass into the ownership of the customer pursuant to a contract of sale. Instead, he contends that the contract was one of work and that the part to be provided by the appellant was passed to his customers by accession at the time the desired result was obtained (3.06).

4.03.2 Consequently, the appellant in its notice of appeal objected to the reassessment for the following reasons:

the modifications, adjustments and fine tuning required to adapt the “clothing” or “card” to its client’s needs constituted manufacturing and processing within the meaning of those expressions set out at section 125.1 I.T.A. the profits earned from its manufacturing and processing activities were “Canadian manufacturing and processing profits" within the meaning of that expression set out at paragraph 125.1(3)(a) I.T.A. and Regulation 5200.

the appellant submits that its manufacturing and processing activities were performed on goods for sale in Canada belonging to it.

he submits that the “clothing” or "card" would be useless for its clients without the modifications, adjustments and fine tuning required to conform to the client's needs and that, therefore, a sale could not be completed until the said modifications, adjustments and fine tuning had been performed.

the appellant therefore submits that it remained owner of the “clothing” or "card" for as long as modifications, adjustments and fine tuning were required and consequently, the manufacturing and processing activities were performed on goods for sale belonging to it.

the appellant further submits that the equipment used to modify, adjust and fine tune the "card" or “clothing” constituted properties used directly or indirectly by the appellant in the manufacture or processing of goods for sale and therefore were duly classified by the appellant within class 29 of Schedule 2 of the Income Tax Regulations.

he also submits that it was entitled to claim an inventory allowance pursuant to paragraph 20(1)(gg) I.T.A. on all the "card" or “clothing” held by it for the purposes of sale in its business.

and finally, the appellant submits that it was entitled to claim investment tax credit pursuant to section 127 I.T. A. on the acquisition of the specialized equipments used to modify, adjust and fine tune the “card” or “clothing” sold in its business.

In fact, the substance of the appellant's contention is that the activity performed in the field of manufacturing equipment used in the textile industry is processing and the clothing or card used by him and manufactured by its parent corporation is a good, the transactions with his customers involve a “sale of goods" in the meaning of paragraph 125.1 (3)(a).

4.03.3 In this instance, it may be relevant to specify the substance of subsection 125.1 of the Income Tax Act.

Subsection 125.1 of the allows a corporation a tax reduction on Canadian manufacturing and processing profits for the 1973 and subsequent taxation years.

Paragraph 125.1(3)a) requires that the Canadian manufacturing and processing profits become applicable to the manufacturing or processing in Canada of "good for sale or lease".

The calculation of Canadian manufacturing and processing profits is determined under the formula prescribed by sections 5200 to 5204 (Part LI I of the Regulation).

In the present case, it is exclusively a question of a good for sale.

4.03.4 Counsel for the appellant relies strongly on the recent case of Halliburton Services Ltd. v. The Queen (4.03(5)).

In this case, the taxpayer claimed a deduction under paragraph 125.1(3)(b) in respect of the profits arising from the manufacturing or processing of goods for sale. In addition to providing services related to the drilling of oil and gas wells, the taxpayer also provided a related specialized product for its customer. The Court held that the taxpayer was entitled to treat the profit it received from the processing of the specialized product as manufacturing or processing profits. The Court found that there was no need to draw a distinction between goods sold pursuant to a contract for the sale of goods and those sold pursuant to a contract for services labour and material. This decision was confirmed by the Federal Court of Appeal (4.03(6)).

Therefore, the appellant contends that there is no need to make a distinction between a contract for the sale of goods and one for the sale of service.

He relies on this statement made by Reed, J., at page 55 (D.T.C. 5338) (4.03(5)) in the Halliburton case. It reads as follows:

I have considerable difficulty with this line of argument. In the first place, it is based on distinctions developed for purposes of the sale of goods legislation, not with respect to subsection 125.1(3)(b) of the Income Tax Act. I do not read subsection 125.1(3)(b) as requiring that a taxpayer's profit has to arise out of a contract for a sale of goods as defined by the various Sales of Goods Acts. Subsection 125. 1(3)(b) does not talk of a sale of goods. It talks of profit arising out of the processing of goods for sale. There is no doubt that the products in question are sold to the plaintiff's customers in the sense that the invoices list the cost of the various components which go into each product and the blending and processing charges are specifically detailed in the invoice.

Secondly, I do not find any requirement that the contract which gives rise to the taxpayer's profit must be of a particular nature, eg: one for the sale of goods and not one of a more extensive nature involving work and labour as well as the goods or material supplied. In my view it is the source of the profit, (arising out of processing) that is important for the purposes of section 125.1(3)(b), not the nature of the taxpayer's contract with its customers.

4.03.5 However, further in that same case of Halliburton, Reed, J., referring to the Crown Tire Service case (4.03(2)) also stated at page 58 (D.T.C. 5340): ‘Accordingly, while the distinction between contracts for the sale of goods and contract for work labour and materials may have been significative in the Crown Tire Service case, I do not think it is applicable in the present one.”

It seems clear that the relevance of the distinction existing between both contracts depends on each case. The Court believes that this is what emerges from both statements of the Halliburton case reproduced above.

In other words, the Court is of the opinion that the present case must be confined to its particular facts and it is necessary to consider the distinction between contracts for the sale of goods and contract for the sale of services.

4.03.6 In Halliburton, the appellant was a manufacturer and processor of a specialized product and also provided a service in connection therewith. In that case, there is no doubt that the object of subsection 125.1 would have been denied if one had said that the substance of the appellant's contract had become a service contract simply because he had extended the sale of the specialized product he processed by providing related services.

Moreover, the major difference between the present case and the Halliburton case is that in the latter, the processing involved the creation of a good, prior to its use in the provision of a sale ana extended services.

In the present case, Ashworth buys from its parent corporation (USA) the manufactured component part (card or clothing) and then the processing arises from the contract with its customer and on its customer premises.

In fact, the processing with which the appellant is concerned does not involve the creation of a good, prior to its use, in the provision of a sale and extended service. In fact, the essence of the contract seems to be the performance of certain work on the good where incidentally the ownership of the good passes to the buyer.

4.03.7 In the Dixie X-Ray case (4.03(4)), the Court found that the substance of the contract with the patient was the provision of services in which the passing of any property in the X-Ray film was merely ancillary. The Court found that it was not a contract for the sale of goods.

At page 74 (D.T.C. 6079) of this case, Mr. Justice McNair suggests a test "for determining. . . the substance of contract". It reads as follows:

The test for determining whether a contract is one for the sale of goods or for the supply of services is to ask the question: What is the substance of the contract? If the substance of the contract is the production of something to be sold and the transference of property therein to a buyer then the contract is a sale of goods. But if the real substance of the contract is the skill and labour of the supplier in the performance of work for another then that is a contract for work and labour, notwithstanding that property in some materials may pass under the contract as accessory thereto. See Atiyah, The Sale of Goods, 7th ed., pp. 23-24; Robinson v. Graves, [1935] 1 K.B. 579 (C.A.) per Greer, L.J. at p. 587; and Sterling Engine Works v. Red Deer Ltd. [1920], 51 D.L.R. 513 (Man. C.A.).

This seems to confirm the Court's opinion that the real substance of the contract between Ashworth and his customer is the skill and labour in the performance of work. In fact, throughout the process done by the appellant on the customer machine, any modification, adjustments or work of any sort are done on the customer premises.

In the present case, there might be one question to ask to determine the substance of the contract. What is the customer's fundamental reason for entering into a contract with the appellant? Is it simply to obtain the clothing or card or is it also and principally to obtain the work and service perform by the appellant? If the answer is the latter then it makes sense to say that the appellant does not sell a good but a service.

4.03.8 The Tenneco Canada Inc. case referred to by both counsel (4.03(12)) is quite properly applicable to the present case.

The facts are quoted as follows from the headnote in the Dominion Tax Cases.

The taxpayer corporation was in the business of installing mufflers and/or other parts of the exhaust system on automobiles. The taxpayer took the position that it was engaged in manufacturing or processing goods for sale in Canada and accordingly claimed deductions for manufacturing and processing profits, accelerated capital cost allowance on certain capital assets and investment tax credits. The Minister assessed on the basis that the taxpayer was not engaged in manufacturing or processing and the taxpayer appealed to the Federal Court-Trial Division.

Held: The taxpayer's appeal was dismissed. The Court found that the taxpayer did not create new goods for sale; it merely installed on cars goods already manufactured elsewhere. The work carried out was in the nature of providing services rather than manufacturing or processing. Furthermore, even if the work could be so characterized, the activities would not be in respect of goods "for sale” since the exhaust parts became the property of the customers by accession as soon as they were installed on the vehicle.

The appellant submits that in the Tenneco case, the muffler is affixed to a car, and immediately after, the car is ready to go. However, in the present case, after the "card" or “clothing” is affixed to the customer machine, the work is far from being completed.

As I understand the evidence, the appellant then has to perform numerous modifications, adjustments and technical fine tuning to obtain what the clients require. These activities involve many hours of work.

The Court is of the opinion that if such work described above (3.06) constitutes processing as concluded by both counsel (3.05), such activities do not qualify in respect of goods for sale within the meaning of the Act.

It is not the numerous hours the appellant has to devote to the installation of the good on the customer's machine that make it a good for sale.

On the contrary, those several hours of labour and work tend to indicate that the real substance of the contract existing between the appellant and its customers is in fact a service contract since 90 per cent of them require such work to be done on their card machine. The evidence shows that for the most part, the customer does not purchase the good without the service. This evidence corroborates the Court's belief regarding the substance of the contract.

Moreover, notwithstanding the fact that such activities (3.06) demand many hours of labour and work, it is also in evidence that the customer does not depend on the appellant to have such work accomplished.

In fact, if he has the technical expertise he may install the component part (clothing or card) himself. Contrary to the Halliburton case, where because of the way the industry was structured, it was impracticable for customers to buy strictly the good offered, the appellant's customers have this choice. Consequently, since ten per cent only of the customers do not require adjustments in order for the "clothing or card" to perform, it seems that what brings the customer to the appellant is not the good but the service offered. The customers want to buy that service which necessarily but incidentally includes the passing of the “clothing or card" owned by the appellant to the customer by accession, since it is attached to the customer's machine through the labour and work done on it.

4.03.9 Exhibit A-9 produced by the appellant shows that the "good" (clothing or card) financial value is worth at least 50 per cent of the total contract's financial value.

It is described as follows:

Therefore, counsel for the appellant submits that the good financial value being as much or even greater than the labour financial value, the contract should be considered as a sale of good.

He relies on this paragraph written by M Daniel Massé in "contrat de vente et d'entreprise" (4.02(13)) where he states at page 228: "[Translation] The contract of sale usually includes a greater value for the corporeal property sold and a lower value for the labour provided."

Counsel for the appellant therefore submits that this is the case of the appellant's contract.

The appellant also relies on the second of the three tests of “sale of goods" described by M. G. Bridge (4.02(14)) where at page 50 it is stated:

If a compound transaction must be classified as a contract of work and materials or one of sale of goods, the choice seems to lie among three possible tests. Either a court can look impressionistically at a transaction and decide whether in substance or essential character it is the one or the other; doing much the same thing but more pedantically, the court can quantify the comparative financial value of the labour and the goods; or, it may decide that all transactions involving the conveyance of goods are sale of goods contracts except where the goods aspect is wholly incidental to the transaction. As the cases currently stand, the first of these tests is uncontroversial and objectionable only to those who oppose vague tests; the second has attracted some support and the third, despite strong 19th century authority in favour of it, has received little support in the present century. It cannot be stressed too strongly, however, that it is only under s. 5 that the distinction between sale of goods and work and materials is vitally important in the Sale of Goods Act. The disfavour in which many courts have held the writing requirement has led to a shrinking of the sale of goods category and consequently to a preference for the first and second tests over the third test.

It is the Court's opinion that if the quantification of the “good” and "labour and work" comparative financial value may be relevant in certain cases, it has no relevancy with the facts of the present case. The Court must determine the substance of the appellant's contracts through those facts.

Moreover, there are several cases where the "good" financial value may be more important but the contract remains a service contract.

For example, one can say that almost every contract that occurs between a garage owner and his customers is in fact a service contract (labour and material contract). However, very often, the good to be affixed to the car is much more expensive than the labour financial value.

Therefore, the service aspect is the substance of the contract notwithstanding the fact that the "good" to be affixed is of more value.

4.03.10 The Court has come to the conclusion that the manufacturing and processing which the appellant was involved in during the taxation years in question, insofar as it involves principally affixing and adjusting in order for the "clothing" or "card" to perform according to the client's need, is not a contract for sale of good per se.

4.03.11 Consequently, the decision not being favourable, the appellant is not entitled to capital cost allowance of category 29 but rather of category 8 of the Income Tax Regulations. Nor is he entitled to investment tax credit (par. 127.5) of the Act.

Concerning the deduction of the inventory allowance provision, 20(1 )(gg) of the Act reads as follows:

20(1 )(gg). An amount in respect of any business carried on by the taxpayer in the year, equal to that portion of 3% of the cost amount to the taxpayer, at the commencement of the year, of the tangible property (other than real property or an interest therein) that was

(i) described in the taxpayer's inventory in respect of the business, and

(ii) held by him for sale or for the purposes of being processed, fabricated, manufactured, incorporated into, attached to, or otherwise converted into or used in the packaging of, property for sale in the ordinary course of the business that the number of days in the year is of 365.

Since 90 per cent of the appellant's inventory of materials is held by him for use in fulfilling his labour and material contract, this part of the inventory cannot be considered to be held for any of the purposes described in subparagraph 20(1 )(gg)(ii) and therefore does not qualify for the inventory allowance.

However, the evidence shows that ten per cent of the appellant inventory was held by him for sale. Therefore, the appellant is entitled to inventory allowance for this part of ten per cent of its inventory.

5. Conclusion

The appeal is dismissed for the above reasons.

Appeal dismissed.