Yukie Asa, John Asa, Kenji Asa, Roy Asa, Jitsumi Asa and Norma Asa v. Minister of National Revenue, [1990] 2 CTC 2598

Sobier, T.CJ.:—The appellants are six partners in Asa Leasing, a partnership (“Asa” or the "partnership"). The appeals were heard on common evidence.

In 1983 the partnership showed additions to Class 29 assets of $2,820,106 and claimed capital cost allowance in respect thereof at the rate of 25 per cent, i.e. $705,026. The appellants claimed their respective share in their 1983 income tax returns.

The respondent reassessed the appellants and issued a notice of reassessment dated October 6, 1986 as confirmed by notice of confirmation dated January 23, 1989, whereby the respondent classified $2,187,374 of the said assets as assets falling under Class 8 of Schedule II of the Income Tax Regulations rather than under Class 29 and treated the balance of the additions, i.e. $632,732 as additions to the partnership's inventory. These assets were in the nature of automatic photo finishing equipment.

At the outset, counsel for the appellants and respondent agreed that the assessment as to the amount included in inventory was not in dispute.

The following is a summary of the history of the Japan Camera Centre business and some of the relevant facts as given in evidence by Keith Donald Murray, chief financial officer of the Group.

The Japan Camera Group of Companies consists of Japan Camera Centre Ltd. ("JCCL") and Japan Camera Centre 1 Hour Photo Ltd. ("1 Hour") the partnership and Ricoh of Canada Ltd. The shareholders of the corporations JCCL and 1 Hour are John Asa, Kenji Asa and Roy Asa. The partners of Asa are the above gentlemen and their wives Norma Asa, Jitsumi Asa, and Yukie Asa. There have been no changes in the shareholders or partners since 1983. The senior officers of each of the corporations are the same people and the head office is located at 150 Duncan Mill Road, Don Mills, Ontario. The directors of each of the three corporations are the three Asa brothers.

When asked who makes decisions for the partnership, Mr. Murray replied: “that it was the three brothers and the executive committee of the corporations who are the same people who decide and make decisions for the two corporations".

Mr. Murray indicated that the business is treated as one entity and gave as an example negotiating lines of credit with banks.

In the early 1950s, the business started as a camera retailer and grew into a chain of stores. In 1959, there was one store and this grew in the 1970s until there were 10 stores in 1979. The breakthrough seems to have come in 1979 when the brothers discovered the one-hour photo finishing machine. They managed to deal with Noritsu Koki Co. Ltd. ("Noritsu") the owners of the machine in Japan and in 1979 they became exclusive distributors for the machines in Canada. The equipment is loosely referred to as "QSS" meaning "Quick Service System" and will sometimes be referred to as QSS.

In 1979, one machine was purchased and at the same time JCCL entered into an agreement dated April 28,1979 with Noritsu for the exclusive distributorship in Canada.

The equipment was unique at the time since it was the only equipment which permitted on-site film processing outside of a darkroom. Previously, darkrooms and huge labs were used. With the advent of malls where people would linger for more than a few moments, customers could drop off their film and pick it up in an hour's time or later the same day. There were no other suppliers of this type of equipment in 1979. It was fully developed in Japan but not yet brought to Canada.

Purchases of equipment by JCCL increased over the years and the evidence was that between 20 and 30 machines were purchased each year and that the cost in 1979 of an individual machine was between $80,000 and $90,000 and that the machine sold for between $130,000 and $150,000.

Originally, JCCL owned its own stores using the equipment and sold the equipment to others. In 1980 one machine was used in a company-owned store in the Eaton Centre in Toronto and one machine was sold to a third party. In 1981, eight corporate stores were opened and a number of franchised stores were also opened but at this time the franchisees generally purchased the equipment from JCCL. Franchising was started because it was difficult for JCCL to open stores from its own resources and Noritsu insisted on increased sales and these sales could be effected by granting franchises and selling equipment to the franchisees. At the same time the franchise system offered to franchisees QSS as well as benefit of the purchasing power of approximately 40 stores. JCCL had technicians and other employees to help the franchisees in the stores.

Subsequently, the leasing method was used to finance equipment. Because of a recession and the inability of franchisees to raise funds to purchase the equipment, the established credit of JCCL was used to purchase the equipment and lease it to a franchisee.

In 1983, there were 15 corporate stores and 40 franchised stores in which the equipment was purchased by the franchisees and 14 franchised stores in which the equipment was leased by the franchisees. In fiscal year 1983, 20 machines were sold to third parties. Evidence was led that there was excitement and that the brothers wanted to move quickly and by 1983, Mr. Murray stated they were making "lots of money".

The partnership was set up in September 1982 and its first fiscal year was completed on March 31,1983 which is the taxation year in question.

The 1979 exclusive distributorship agreement with Noritsu was transferred from JCCL to the partnership. There was no evidence adduced as to any assignment document but reference was made to a letter to Noritsu telling of the assignment or requesting permission to assign. It is taken that there was an assignment.

Mr. Murray was asked why the vehicle of a partnership was chosen. He stated that there was great success in the group and that they wanted to involve the wives in the business and perhaps even set up a separate company. The Asa name was used in order to have a name appear which was different from "Japan Camera Centre" so that prospective purchasers would not know that they could be purchasing from a competitor. In answer to the question "Why the partnership was used and not a corporation?”, Mr. Murray stated that the principals were advised by their advisors that it was the most advantageous vehicle, that it would defer taxes for one year, that there was flexibility in a partnership and it would involve the wives of the principals.

The partnership engaged in other activities of a minor nature including importing of small accessories for cameras and accessories for the QSS machines. Some of these were sold to the franchisees by the partnership, some were sold to JCCL and some to third parties.

Mr. Murray stated that the only activity of the partnership was to sell and lease equipment and accessories to JCCL and franchisees. In 1983, only the partnership was engaged in equipment leasing.

Dealing with the issue of Class 29 assets, Mr. Murray stated that it was management's opinion that they were entitled to this classification and it was a great factor in deciding this course of action. He also stated that the Class 29 treatment would provide accelerated depreciation over three years. He further stated that management believed that leasing was successful because it required less cash and therefore allowed the business to expand. In 1983, the 14 franchise stores employed approximately 14 to 20 persons to work on the machines. Another six or seven employees were hired in each store, thereby creating a total of approximately 84 new jobs. The evidence indicated that the 14 stores might not have been opened had it not been for leasing and that the capital invested was approximately $3,500,000 to $4,000,000 in those 14 locations.

Documents dealing with the Brandon, Manitoba franchise were entered as exhibits and it was agreed that these documents were representative of the types used in all of the franchises and that they were all similar with perhaps a few minor changes.

There was a franchise agreement ("franchise agreement") dated September 1, 1982 between [sic] 1 Hour as franchisor (the "franchisor"), Jibouti Watch Co. of Canada Ltd. as franchisee ("franchisee") and two corporations as guarantors.

There was a sublease of the premises (the "sublease") dated November 2, 1982 from which the franchisee would operate between [sic] JCCL as Tenant, the franchisee as sub-Tenant and the two guarantors.

There was an equipment lease ("equipment lease”) dated May 10, 1983 between [sic] Asa Corporation Ltd. as lessor, the franchisee as lessee and the two guarantors.

The subject matter of the equipment lease was the photo finishing equipment (the "equipment").

It was pointed out that 1 Hour was the franchisor only as a bare trustee for JCCL and that the Asa Corporation Ltd. was a bare trustee for the partnership.

There is no dispute that the equipment was purchased by the partnership and was leased to some of the franchisees of JCCL under the terms of equipment leases.

It is the appellants’ contention that the equipment was used directly or indirectly by the partnership in Canada primarily for the manufacturing or processing of goods for sale or lease. The issue therefore is whether or not the equipment was used by the partnership either directly or indirectly for those purposes.

The difficulty which the appellants must overcome in order to be entitled to claim the equipment as Class 29 assets may be found in the Regulations concerning Class 29 assets as follows:

Property that would otherwise be included in another class in this Schedule

(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,

(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease, or

(ii) to be leased, in the ordinary course of carrying on a business in Canada of the taxpayer, to a lessee who can reasonably be expected to use, directly or indirectly, the property in Canada primarily in the manufacturing or processing by him of goods for sale or lease, if the taxpayer is a corporation whose principal business is

(A) leasing property,

(B) manufacturing property that it sells or leases,

(C) the lending of money,

(D) the purchasing of conditional sales contracts, accounts receivable, bills of sale, chattel mortgages, bills of exchange or other obligations representing part or all of the sale price of merchandise or services, or

(E) selling or servicing a type of property that it also leases,

or any combination thereof unless use of the property by the lessee commenced before May 9, 1972; and . . .

Briefly, paragraph (a) of Class 29 requires that this class of property, if acquired by the taxpayer after May 8, 1972, be used by the taxpayer directly or indirectly in the manufacturing or processing of goods for sale or lease or if the property is to be leased by the taxpayer, to a lessee who can reasonably be expected to use directly or indirectly, the property in Canada primarily in the manufacturing or processing by him of goods for sale or lease, if the taxpayer is a corporation whose principal business is leasing property.

The appellants have chosen a partnership as the vehicle to carry on this business and since the partnership is not a corporation, the partners are not entitled to the benefits of subsection (a)(ii) of Class 29 and therefore, in order to succeed the partnership must put itself within the provisions of subsection (a)(i) of Class 29 and the equipment must be property acquired by the taxpayer after May 8, 1972, to be used directly or indirectly by it in Canada primarily in the manufacturing or processing of goods for sale or lease.

Can it be said that the leasing of the equipment to a lessee/franchisee is use by the appellants of the equipment directly or indirectly by primarily in the manufacturing or processing of goods for sale or lease?

The appellants argue that because of the restrictions placed upon the franchisee by the sublease and the franchise agreement as well as the equipment lease, the partnership is not only controlling but is using the equipment indirectly.

It was the appellants’ contention that the business was carried on by the “Japan Camera Group" acting through the Japan Camera System and that the entities should be regarded as one entity since there was a common mind or force behind the system.

The handing over of possession of the equipment (albeit with the right of the lessor to retake possession) indicates to this Court that the business of the appellants was leasing the equipment to the franchisee to permit the franchisee to use the equipment for the purpose of processing film.

The partnership agreement was entered as Exhibit R-1. This agreement was dated September 1,1982 and was executed by all six partners.

Paragraph 2 reads as follows: 2. The objects of the partnership shall be to carry on the business of rental of equipment."

The franchisee operates its business from its premises which are leased under the sublease. It hires and pays the operators of the equipment and the franchisee is the one who processes customers' film. There is no doubt that the franchisee deals with the public, receives films for processing, processes this film and returns it to the customer in exchange for payment. No employees of the partnership or the franchisor operate the equipment or meet with customers. The franchisor receives fees and royalties.

The appellants’ counsel argues that the equipment lease and relationship between the partnership and the franchisee go far beyond that of a simple lease. He claims that the partnership would not enter into the equipment lease with the franchisee unless the franchisee also executed the franchise agreement which he claims specifically reserves the legal right to control every aspect of the use of the equipment and the processing operation using the equipment.

In reviewing the franchise agreement, the sublease and the equipment lease, there is no doubt that JCCL could exert a great deal of control over the franchisee. This was achieved mainly through the franchise agreement.

However, the equipment lease is an important document for the purpose of this appeal since it is the only document directly linking the partnership and the franchisee and since it is the only document which was executed by those parties.

Paragraph 6A of the equipment lease reads as follows: “All right, title and interest in and to the equipment is and shall remain vested in ASA subject to the Lessee(s) right to possession and use on the terms of this lease.”

In addition, paragraph 10 dealing with Use and Maintenance and Repair of the equipment reads as follows:

Lessee(s) shall continuously use the equipment for its business purposes. The equipment shall be used, maintained and repaired by Lessee(s) as would a careful and prudent owner, at Lessee(s) sole expense, using competent trained staff and repair personnel. Lessee(s) will not reduce the business value of the equipment or impair its useability but shall maintain same always in first class operating condition having regard to its age and upon termination of this lease shall return the equipment to ASA in such condition, unless the option to purchase has been exercised and payment made in accordance therewith.

Generally speaking in leases, the leased property is transferred to the lessee by the lessor for the purpose of allowing the lessee to use the property until such time as the lease has expired or until the lessor is entitled to terminate the lease for a breach of one or more of its covenants or conditions.

The fact that a lease and documents ancillary to a lease contain provisions which may be termed onerous on the part of the lessee does not alter the relationship of lessee and lessor.

The Oxford English Dictionary defines "use" as the act of using or fact of being used; the act of employing a thing for any purpose. It is clear here that the only one employing the equipment is the franchisee.

The Random House Dictionary of the English Language states that "use" means to employ for some purpose, to put into service, make use of, act of employing, using or putting into service such as the use of tools. Again this definition does not appear to assist the appellants.

The appellants have not established that they used the equipment directly. Can it be said therefore that the appellants used the equipment indirectly? The Oxford English Dictionary defines "indirectly" as by indirect action, means, connection, agency or instrumentality through some intervening person or thing.

The appellants seek to characterize the use by the partnership as indirect use because of the manner in which JCCL and 1 Hour exercise control over the franchisee.

The appellants submitted as Exhibit A-9, a document headed "Japan Camera Centre 1 Hour Photo Operations Manual”. The appellants argued that this manual was further evidence of the method by which the partnership indirectly used the equipment.

It is clear that this is a "How To" manual. This manual is provided to all store locations whether they are company owned or franchised and whether the equipment was leased or purchased by franchisee. The manual provides information to assist the operator operating the equipment in solving his own problems, keeping the equipment in good repair, etc. The appellants cannot claim to be using the equipment which was sold to a franchisee because of any restrictions which may be imposed by the manual. Therefore, how can they argue that they use leased equipment because of those same restrictions?

The "Japan Camera Centre 1 Hour Photo Store Operations Manual” was also introduced as Exhibit A-8. Under Tab 2, Company is spelled out as being JCCL; 1 Hour; Ricoh Photographic, a division of Asa Corp. Ltd.; J.F.K.R., a division of Asa Corp. Ltd.; Maxell, a division of Asa Corp. Ltd.; Ricoh Office Automation, a division of Asa Corp. Ltd.; Noritsu, a division of Asa Corp. Ltd.; Comet Lighting, a division of Asa Corp. Ltd. Asa partnership, is not mentioned nor is Asa Corporation Ltd. mentioned as having an equipment leasing division even though as bare trustee.

The store operations manual is also a "How To" manual but in this case, it is a manual instructing the franchisee how to operate his store from opening in the morning to closing in the evening.

By requiring the franchisee to follow this manual also indicates control over the business of franchisee. However, this control is not exerted by the partnership but by the franchisor.

No direct evidence was led as to how the partnership physically indirectly used the equipment. The Court was invited to come to the conclusion that there was indirect use merely through the control over the franchisee's operations by the franchisor or others. For what purpose did the partnership use the equipment indirectly? Surely, it was not for the purpose of providing photo finishing services to its customers. It had no customers.

The appellants invite the Court to look at the whole Japan Camera System in order to see the substance of the transaction rather than its form. In support of this, counsel for the appellants refer to Front & Simcoe Ltd. v. M.N.R., [1960] C.T.C. 123; 60 D.T.C. 1081 (Exchequer Court of Canada).

At page 132 (D.T.C. 1085), Cameron, J. stated:

The true principle, then, is that the taxing Acts are to be applied in accordance with the legal rights of the parties to a transaction. It is those rights which determine what is the “substance” of the transaction in the correct usage of that term. Reading “substance” in that way, it is still true to say that the substance of a transaction prevails over mere nomenclature.

The question for determination, therefore, is "What is the real character of the receipt?" and in answering that question I am entitled to regard the surrounding circumstances. In that connection, reference may be made to the speech of Lord Tomlin in C.I.R. v. Westminster (Duke), [1936] A.C. 1 at page 20, where he referred to "the indisputable rule that the surrounding circumstances must be regarded in construing a document”.

In my view, the evidence which I have set out above clearly establishes that when the new lease (Exhibit 4) was signed, the parties thereto, notwithstanding the form and language of the agreement, intended that the sum of $75,000, the right to which in form only was waived by the lessee, should be accepted by the appellant in return for the lower rental which the new lease reserved.

In Front & Simcoe, the appellant was trying to characterize as something else, payment of an amount which was previously made to it and which under certain circumstances could be liquidated damages.

In that case, there was an attempt to create a sham which the Court chose to ignore and characterized the payment as income.

Other cases were cited in support of the “substance not form" proposition.

In the present case, the appellants ask the Court to set aside the legal effects of the equipment lease in order to qualify the equipment for Class 29 treatment. The appellants argue that "direct" means free from intervening agency and that since "indirect" is the opposite of direct, it stands to reason that "indirect" means through an intervening agency. However valiantly appellants' counsel struggled to characterize the actions of the partnership as its own direct acts or the actions of JCCL and/or 1 Hour as acts of an agent on behalf of the partnership, he failed.

The franchisee is not the agent or instrumentality using the equipment on behalf of the partnership. The appellants on the advice of advisors intentionally chose to carry out the scheme by means of equipment leases with the partnership as lessor and this may have brought about a result which was not foreseen. This is not reason enough to attempt now to portray the partnership as the "user" of the equipment when it was never intended to be a "user" even indirectly.

Subsection 16.01(d) of the franchise agreement gives the franchisor the right to terminate the franchise agreement if the franchisee fails to pay rent or observe or perform any other terms or conditions under the sublease. There is no event of default under the franchise agreement if the franchisee is in default under the equipment lease.

The sublease states in paragraph 5:

5. Upon termination for any reason of the Sub-Tenant's right and licence to operate a retail sales outlet from the Leased Premises as provided in the Franchise Agreement, the Sub-Tenant shall be deemed to be in default under the terms, covenants and conditions of this Sub-Lease and this Sub-Lease shall be deemed to be terminated. Without in any way limiting any of the rights or remedies to which 1 Hour is entitled under the Franchise Agreement or this Sub-Lease, or any of the rights or remedies to which the Tenant is entitled under the Sub-Lease, in the event of any such termination. The Tenant shall have the immediate right to reenter the Leased Premises and expel all persons and remove all property from the Leased Premises without the Tenant being considered guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby, as if the SubTenant had not been in possession of the Leased Premises.

Counsel for the appellants stated that there was no reason to have all of the terms and conditions of the various agreements repeated in the equipment lease since they were well taken care of in the franchise agreement. However, in the sublease and franchise agreement the parties thought those provisions were necessary in order to tie matters up. They provided for cross defaults.

The appellants argued that if the franchisee was in default under the franchise agreement, the franchisor could control the equipment under the equipment lease through the partnership. Assuming there was a default under the franchise agreement, there was no right in that agreement or the equipment lease to take over the equipment if the franchisee was not in default under the equipment lease. The equipment would still be rightfully in the possession of the franchisee.

Other than operating the company-owned stores, the business of JCCL is that of franchising. The Minister's counsel went through the franchise agreement pointing out the duties of both the franchisor and franchisee. The franchisor no doubt has great control over the franchisee and agrees to be helpful in assisting the franchisee in operating his business. It is clear from the franchise agreement that the franchisee employs its own employees. The actions of the franchisee's employees in dealing with JCCL do not make those employees, the agents of JCCL, or more remotely the agents of the partnership.

The Minister referred to Jirna v. Mister Donut of Canada Ltd., [1975] 1 S.C.R. 2. The essence of this case is that if an agency relationship is excluded in a franchise agreement there is no agency.

The relevant language in Mister Donut is as follows: "The relationship between the parties is only that of independent contractors. No partnership, joint venture or relationship of principal and agent is intended.”

At page 3, Martland, J. stated: "The Court of Appeal allowed the respondent's appeal, holding that it must give full effect to the express intention of the terms of the agreement made between the parties on equal footing and at arm's length.”

He agreed with the reasons and conclusions of the Court of Appeal.

Language even stronger than the language in Mister Donut may be found in the equipment lease which clearly states that they are not each others agent for any purpose whatsoever. Therefore, use by franchisee cannot be said to be use by an agent of the partnership.

Counsel for the appellants referred to Interpretation Bulletin IT-147R2 dated June 19, 1985, in particular to section 9 where it is stated: "the manufacturer or processor of the goods need not necessarily be the vendor of the goods." However, section 6 headed “Meaning of Terms" begins as follows:

6. The term "to be used (to use) directly or indirectly” in 2 above refers to assets which are acquired by the taxpayer for the purpose of being an integral and essential part of the taxpayer's or lessee's manufacturing or processing activities as well as any ancillary equipment, such as furniture and fixtures, repair and maintenance equipment and fire extinguishing equipment, which is acquired for use in those activities. Although such equipment is generally located in the manufacturing or processing plant, it may also quality if located elsewhere.

There has been no evidence of any manufacturing or processing activities carried on by the partnership. While Interpretation Bulletins may be of help, they are certainly not binding on the Court and it is still the Court's duty to interpret the Income Tax Act as it is written.

Dealing with the words "directly" or "indirectly", reference should be made to Green v. Hoyle, [1976] 2 All E.R. 633 (Queen's Bench Division). This was an appeal from a conviction under the Solicitor's Act. The essence of the section under review was that unqualified persons were prohibited directly or indirectly from drawing or preparing an instrument of transfer. Lord Widgery, C.J. at page 638 dealt with the meaning of "directly or indirectly”. He said:

No doubt the draftsmen in drawing or preparing a conveyance will normally sit with paper in front of him and will put on paper the words which he selects as the preparation of the document goes ahead. No doubt if the document is prepared in that way, it is a perfectly sensible thing to say that it was directly drawn or prepared by its author, and for my part I do not think the word “directly” would add very much to that situation, but it is no doubt quite sensible and proper to describe this as the drawing or preparation of an instrument directly, as opposed to indirectly. The conception of preparing an instrument indirectly is one which I have found extremely difficult throughout the argument in this case. Of course, the person responsible for composing the document may not use his own hand to write it out. He could dictate it to a typist. It may be, and I do not propose to decide it this morning, that to draft through the medium of a typist is “indirectly” for the purposes of the section. Nowadays people drawing conveyances may, for all I know, use recording machines, and it may be, although I would not decide it, that again is an instance which amounts to indirect preparation of a document.

But what I feel quite convinced about, having listened to the argument and thought about it a great deal overnight, is that however wide the expression “directly or indirectly” is held to be, it cannot be so wide as to take the operation outside the words "draw or prepare" altogether. That which is being struck at is the drawing or preparation of the document and, by saying that the prohibition extends to that act, whether done directly or indirectly, it cannot mean that the offence can be committed when that which is being done is not the drawing and preparation of a document at all.

I find no difficulty in equating the words "draw" or "prepare" with the word "used".

The Minister’s counsel referred to the case of Produce Processors Ltd. v. M.N.R., [1980] C.T.C. 2551; 80 D.T.C. 1483. In addition to other issues, an issue in that case was whether some of the assets were in Class 29 or Class 8. There, the appellant owned certain freezing facilities used in connection with processing frozen foods. It operated the facilities for some time on its own but found that this could better be served by having an outside operator, Trenton Cold Storage Ltd., operate the facilities under a lease from the appellant to Trenton. The appellant treated the cost expended on acquiring a freezing tunnel in the freezing storage warehouse as a capital expenditure for property coming within Class 29 of Schedule “B” of the Income Tax Regulations. In evidence, the auditor for the appellant explained that the freezer tunnels in the warehouse were operated by the appellant's employees and all costs were charged to and paid for by Trenton and only the freezing tunnel was the object of a written lease. There was ample evidence to show that the appellant company acted more as a landlord rather than a processor of goods even though its own employees operated the facilities.

In the present case, the only document connecting the appellants and the franchisee is the equipment lease. The partnership acted as "landlord" of the equipment although other matters were undertaken by JCCL as franchisor and 1 Hour as "sublandlord".

Counsel for the appellants referred to Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79; 85 D.T.C. 5310 (F.C.A) and Versatile Machine & Tool Manufacturing Co. v. M.N.R., [1986] 2 C.T.C. 2387; 86 D.T.C. 1785 (T.C.C.). In these cases, the Minister chose to construe the language in question very narrowly. In Lor-Wes, the Court held that even though the appellant was using the equipment to build logging roads and to perform related sites services for the owner of the timber or cutting rights, by cutting timber and using the equipment, the appellant was using the equipment for the purpose of logging.

At page 83 (D.T.C. 5313), MacGuigan, J. states:

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

On page 84 (D.T.C. 5313), His Lordship goes on to say:

Here, the words “primarily for the purpose of logging” are not followed by the words “by him” or otherwise qualified so as to limit the benefit of the section to cases wherein the corporation taxpayer itself has the timber or cutting rights. Not only was the appellant’s equipment used to carry out an integral part of logging, but owners of such rights are required by law in British Columbia to obtain approval from the Forest Service of a five-year development plan and a two-year logging plan, including in both cases proposed road designs. Moreover, since road building is one of the most expensive parts of the total logging operation, owners subcontract to road building companies for the sake of their own cost efficiency. It is impossible to regard the work of such road builders, whose total operation is dedicated to building roads for logging, as isolated from the totality of the logging industry. Their work is dedicated, and their equipment is used by them, primarily for the purpose of logging.

At first blush, Lor-Wes and the present appeal seem to be similar. However, on closer scrutiny it is clear that what the Court was attempting to answer was the question: Was the equipment being used for the purpose of "logging"? There was never any question in Lor-Wes that the appellant was using the equipment. The interpretation of the Minister was that the equipment was not being used for the purpose of logging but in road building. The Court disagreed using the "words in context" approach stated above and said the equipment was used in logging.

In the present case, it is not a question whether or not the equipment was used for photo processing but whether the equipment was used by the appellants.

In Versatile, Taylor, J. agreed with the conclusions reached in Lor-Wes and cites them with approval.

His Honour also sets out on page 2391 (D.T.C. 1788) another portion of the Lor-Wes judgment where he states:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words-in-total-context approach with a view to determining the object and spirit of the taxing provisions.

Can the appellants benefit from the "words-in-a-total-context" approach in determining the spirit of the taxing provisions? The apparent spirit in creating Class 29 was to stimulate manufacturing and processing in Canada and investment in related equipment. Having set this out as the principle, we must still read the language in Class 29 since this is the method by which the intention of Parliament is put into play. There was a clear intention to differentiate between a taxpayer who uses the equipment and one who leases the equipment to another who uses it in turn. Those two taxpayers both own the equipment but in the case of the taxpayer who leases the equipment, the lessor must be a corporation. That is clear.

It was also Parliament's intention in creating Class 29 assets that the equipment in question would be "used" in connection with manufacturing or processing.

Class 29 treatment may be obtained if the equipment was used by the taxpayer directly or indirectly in manufacturing or processing or leased by the taxpayer to another who would in turn use it directly or indirectly in manufacturing or processing. If it was to be leased by the taxpayer, the taxpayer must be a corporation. If the taxpayer wishes to qualify under their "use scheme", he must use the equipment directly or indirectly in connection with manufacturing and processing.

The equipment was not used directly or indirectly by the partnership in Canada primarily in the manufacturing or processing of goods for sale or lease.

The appellants' counsel conceded that the partnership not being a corporation, the partners were not entitled to treatment under clause (a)(ii)(A) of Class 29.

For all of the above reasons, the appeals are dismissed.

Appeals dismissed.