Wainwright Double "R" Feedlot Ltd. v. Minister of National Revenue, [1990] 1 CTC 2421, 90 DTC 1301

Rip, T.C.J.:—The issue in these appeals from income tax assessments for the 1982, 1983 and 1984 taxation years is whether feed inventory of the appellant, Wainwright Double "R" Feedlot Ltd. ("Wainwright"), was held for sale or was passed on to cattle not by sale but by accession. If the feed was held for sale, the appellant was entitled to deductions in computing its business income for the years in appeal pursuant to paragraph 20(1)(gg) of the Income Tax Act ("Act").

Paragraph 20(1 )(gg) read as follows:

. . . 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.

The appellant operates a custom feedlot and is claiming an inventory deduction with respect to the cost amount of inventory of feed. Feed includes grain, silage, concentrate (minerals and vitamins) and drugs on hand at the commencement of each year in issue which one made into a ration composed for cattle. Also included in cost is a portion of custom work required to be performed. In a feedlot operation, independent farmers and ranchers bring their cattle to the feedlot to be fed over a period of time, usually for subsequent sale.

Mrs. Marcine Pearl Roach, one of the principal shareholders of the appellant who has maintained the books of account of the appellant for the past 15 years described the feedlot operation. She said when cattle are purchased by a farmer or rancher, the cattle are brought to a feedlot to be weighed, identified and checked for health and are then placed in a pen for feeding. A pen contains cattle owned only by one rancher or farmer. The appellant contacts the farmer or rancher for his management decision, that is, to tell the feedlot operator where his cattle are headed: to fatten, to eventual pasture, etc. The decision of the owner determines the type of feed ration to be given to the cattle. In other words, the cattle owner determines when he wants the cattle finished, their size and weight and the appellant determines the ration. Depending on how the rancher or farmer wished to finish his cattle, his cattle may be fenced in more than one pen.

A ration consists of three or four components including roughage (silage, hay or straw), barley and minerals. The ration in Alberta is determined by its barley content; the higher the barley content, the stronger the ration. A 25 per cent barley ration is weak, a 70 per cent ration is strong and is fed to finishing cattle. Normally a ration will vary as to the size, weight and age of the animal and what the owner has decided to do with it.

The employees on the feedlot run the mill, prepare the mixtures, drive the feed truck and perform other services as and when required. The employees are regular ranch-hands who have been trained for their jobs and have no special expertise except that gained from experience.

A feedlot operator does not purchase rations. He purchases the feed components and mixes the rations as required. The ration is placed on a truck which is driven between aisles separating the pens and deposits the ration in bins in front of the pens.

In the 1982 and 1983 taxation years the appellant operated a feedlot only. In 1984 it purchased and sold cattle; the treatment of the cattle is not subject to this appeal.

In Mrs. Roach's view, the main service provided by the appellant is the feeding of cattle. The appellant also provides a market analysis to its clients giving them weekly cattle prices to assist the farmer to decide at what point he has to go to market. The appellant sorts the cattle according to size and weight for possible sale. The farmer or rancher is contacted by telephone, advised as to the size and weight of his cattle and the expected price for that week. The farmer then decides to sell or not. The appellant carries on weekly sales by telephone bids. The farmer or rancher is not charged for this service.

On a daily basis employees check the pens and pull out ill cattle for treatment; such cattle are placed in a pen separated from the other cattle. Hired hands inoculate the cattle. Pens are cleaned annually. This service is not reflected in the invoice.

Mrs. Roach testified the appellant grows the silage on its farm and also has a small cut of hay and straw. Barley and the majority of hay and straw are purchased from farmers, most of whom have their cattle at the feedlot.

Mrs. Roach contended that it is more economical for a farmer or rancher to have his cattle in a feedlot than having them on his own land and feeding them. The availability and means of distribution of feed stock is a more efficient means of feeding cattle.

The appellant charges its clients separately for feed and drugs. In the winter a bedding charge is made. Bedding, consisting of straw (a by-product of harvesting grain), would be included in the feed cost. No charge is made for yardage, that is, to keep the cattle on the feedlot, if the feed is paid for by the fifteenth of the month, and in fact the appellant has not charged for yardage during the 15 years it has been in business.

Mr. Brian Claude Travers, C.A., a partner in the Edmonton office of Peat, Marwick, Thorne is responsible for that farm's agricultural clients, including feedlot operations. He has been partner in charge of the appellant since 1984. According to the financial statements of the appellant for 1984, prepared by Mr. Travers, the gross profit of the feedlot operation is its revenue after subtracting direct costs; direct costs include the cost of the material, that is, the cattle feed and custom work. In the 1982 and 1983 statements, which were not prepared by Peat, Marwick, Thorne, or any of its predecessor firms, the amount of custom work is separated from the cost of feed. In 1982 and 1983 the custom work cost $14,869 and $7,235, respectively. The cost of feed in 1982 and 1983 was $1,164,605 and $1,297,527, respectively. In 1983 the cost of custom work was $42,120 and the cost of feed was $1,136,296. The gross income from custom feeding was $1,761,307, $2,094,531 and $1,819,878 in 1982, 1983 and 1984 respectively. In the balance sheets for each relevant fiscal period the feed is described in the appellant's inventory in respect of the business of a feedlot.

The appellant's invoice is prepared for the feed. The total of invoices equals the item "custom feeding" on the statement of operations and retained earnings as summarized in the books of account. This is the appellant's gross sales. Each invoice refers to feeding of specific animals and includes information as to the animals’ locations, their sex, brand and ration. Each invoice applies the price per amount of ration to the number of units of ration fed to the cattle. Only feed charges are invoiced. If a yardage fee had been charged, it would be included in the item “custom feeding”, Mr. Travers explained.

Mr. Justice Joyal of the Federal Court of Canada described in Burrard Yarrows Corporation v. The Queen, [1986] 2 C.T.C. 313; 86 D.T.C. 6459 (F.C.T.D.), at page 316 (D.T.C. 6461), the four preconditions that must be met before the taxpayer was eligible to claim an inventory allowance in accordance with paragraph 20(1)(gg) :

First, the allowance must be claimed on the cost amount of the property in question at the beginning of each taxation year in question. Next, the property against which it is claimed must be tangible property other than real estate or an interest therein. Thirdly, it must be established that the property was described in the taxpayer's inventory in respect of his business, and finally, that it was held for sale or to be processed, manufactured, incorporated into, attached to, or otherwise converted into property for sale in the ordinary course of that business. Failure to establish the existence of any one of these elements results in a disen- titlement to a reserve under that paragraph.

The parties agree that the feed was described in the appellant's inventory in respect of the business of a feedlot. The only dispute between the parties is whether the tangible property, the feed, "was . . . held by (the appellant) for sale . . .". While counsel for the appellant says the feed was held by his client for sale, the respondent's counsel argues the ownership of the feed is passed onto the appellant by accession and not under any contract of sale.

The respondent's view is that the contract between the appellant and the customers was for performance of work and labour and not for the sale of feed, notwithstanding the customer is billed only for feed (and inoculations). It is open to the Court, counsel submitted, to determine the real and final agreement between the parties from all the surrounding circumstances of the transactions: Fairbanks Soap Co. v. Sheppard, [1952] 1 D.L.R. 417 at page 423 (O.C.A.). On the facts of the appeal at bar, counsel claimed the appellant was providing a service to its customers, to wit, to provide the rancher or farmer with a fatter cow. The appellant is not selling feed to its customers. The appellant maintains and cares for the animal until it reaches a predetermined growth or weight: it is this service it is selling and the rations fed (and the inoculations given) to the cattle are to that end. The service may also include the appellant's monthly reports to its customers as to the cattle’s state and advice on market conditions. It is absurd, concluded respondent's counsel, to believe a farmer or rancher puts cattle on a feedlot simply to feed the cattle; he aims at the end result.

Counsel for the respondent relied upon two cases which held that the business of retreading of tires owned by customers and the business of installing mufflers and other parts of the exhaust system of automobiles was in the nature of providing services, including material, and were not in respect of goods "for sale” within the meaning of subsection 125.1(3). In both cases the materials used became the property of the owner of the tire and the owner of the automobile by accession as soon as they were attached to the tire and installed on the vehicle: Crown Tire Service Ltd. v. The Queen, [1983] C.T.C. 412; 83 D.T.C. 5426 (F.C.T.D.) per Strayer, J. and Tenneco Canada Inc. v. The Queen, [1987] 2 C.T.C. 231; 87 D.T.C. 5434 (F.C.T.D.) per Dubé, J.

In his reasons for judgment in Crown Tire Service, supra, Mr. Justice Strayer referred, at page 414 (D.T.C. 5428), to Benjamin's Sale of Goods'* [1] for the general principle applicable in considering the distinction between a contract of sale of goods and a contract for work and material:

Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use of affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale.

Strayer, J. cautions however that the application of this general principle is "always a matter for interpretation in each case".

In his reasons for judgment in Tenneco Canada, supra, Mr. Justice Dubé cited the Crown Tire Service case, supra, and Mr. Justice Strayer's reference to Benjamin. He noted, on pages 235-36 (D.T.C. 5437), that in a subsequent edition of Benjamin: [2]

. . . at paragraph 41, entitled “Sale distinguished from contract for work and materials” that it is sometimes extremely difficult to decide whether a particular agreement is more properly described as a contract of sale of goods, or a contract for the performance of work or service and he points out that the distinction "now appears to be of little significance”, but, as he continues to say, "except in relation to other statutory provisions which apply only to a sale” or a "contract of sale”. (Paragraph 125.1(3) of the Income Tax Act applies only to goods for sale or lease.) The author goes on at paragraph 43 to deal with chattel to be affixed to land or another chattel:

Chattel to be affixed to land or another chattel.

Where work is to be done on the land of the employer or on a chattel belonging to him, which involves the use of [sic] affixing of materials belonging to the person employed, the contract will ordinarily be one for work and materials, the property in the latter passing to the employer by accession and not under any contract of sale. Sometimes, however, there may instead be a sale of an article with an additional and subsidiary agreement to affix it. The property then passes before the article is affixed, by virtue of the contract of sale itself or an appropriation made under it. Obviously, the question whether the intention of the parties is substantially one of improving the land or principal chattel (to which the furnishing of materials is incidental) on the one hand or one of making a sale (to which the agreement to affix is incidental) on the other hand is a matter of degree, which may be difficult to determine in practice; but there is no theoretical difficulty. In decided cases, the following have been held contracts for work and materials: to supply and install machinery in a building, to renew and alter the engines and other machinery in a ship, to erect a building, to construct a built-in cocktail cabinet in a house, to fix [sic] new brake-linings to a car. In contrast, a contract to supply black-out curtains and rails and to fit them in premises has been held a sale of goods and so has a contract to manufacture a bulk food hopper and (for an additional charge) to deliver and erect it.

A final quote bears reproduction. In Sterling Engine Works v. Red Deer Lumber Co., the Manitoba Court of Appeal held that a contract made to furnish a machine or movable thing of any kind and (before the property in it passes) affix it to land or to another chattel is not a contract for the sale of goods. Dennistoun JJ.A. said as follows at page 513:

With great respect I am of opinion that the ownership of each plate, rivet or other particle of material built into the defendant's engine by the plaintiff passed to the defendant at the time it was affixed to that engine and not otherwise.

Counsel for the appellant relied upon the Federal Court-Trial Division reasons for judgment in Halliburton Services Ltd. v. The Queen, [1985] 2 C.T.C. 52; 85 D.T.C. 5336, Nowsco Well Service Ltd. v. The Queen, [1988] 2 C.T.C. 24; 88 D.T.C. 6300 and Mother's Pizza Parlour (London) Limited et al. v. The Queen, [1985] 1 C.T.C. 361; 85 D.T.C. 5271 as well as the Court's reasons in Edwards Fine Foods Ltd. v. M.N.R., [1986] 2 C.T.C. 2447; 86 D.T.C. 1815. I do not believe it will serve any useful purpose, however, to review counsel's representation in view of my finding of fact and what the appellant and its customers understood to be their agreement.

I agree with respondent's counsel's view that it would be absurd to consider the arrangement between the appellant and its customers as only the sale or supply of food to the latter's cattle. The appellant's feedlot operation is more than just a place where cattle get fed. The cattle are cared for by the appellant. The appellant's employees check regularly for sick animals and act accordingly; if the illness is not serious employees administer drugs to the sick cattle, if the illness is serious and significant costs are predicted, the owner is informed. Sick cattle are placed in separate pens. Mr. Travers acknowledged the feedlot is responsible for a healthy environment.

The appellant also keeps the cattle owners apprised of market conditions for cattle. A farmer or rancher could telephone the appellant at any time to verify prices. The feedlot facilitates the sale of the cattle.

The appellant does not charge its customers for yardage, cleaning of pens, market conditions and selling of cattle. While a charge is made for drugs and veterinarian services, there is no cost to the customer for the time spent by the appellant's employees in feeding the cattle, administering drugs to the cattle, cleaning pens, or providing advice.

On the evidence it is clear that the appellant is providing its customers with more than feed for their animals and it is not unreasonable to infer a rancher or farmer contracts with the appellant for all the services, not only the supply of feed to the cattle. The appellant's contract with its customers is not solely for feed, but is for the performance of services as well.

In the cases relied on by the respondent the material became the property of customers by accession as soon as it was attached to the chattel owned by a customer. The facts in the appeal at bar are similar to the example described in paragraph 43 of Benjamin, supra. The appellant's submission that the ownership of the feed is passed onto its customers by accession and not by sale would be valid if the customer secures ownership of the feed at the moment the feed enters into the animal. But the evidence indicates that the appellant distributes the ration, containing the feed, vitamins and minerals, into a bin at the front of the pen and then the animals feed upon the ration. Each pen contains only one owner's cattle. Each ration is prepared for particular cattle of a particular owner. I am of the view that once the ration is deposited into a bin by the appellant or its servants and is available to the customer's animals, the appellant has divested himself of ownership of the feed. At the same time the owner of the cattle has become owner of the feed. The feed has not yet entered the cattle and its owner could not be said to have obtained ownership by accession. The true agreement between the appellant and its customers is for a sale of feed by the appellant to its customers but, also, at the same time the appellant and its customer have agreed that in consideration of the appellant selling feed to the customer, the appellant will provide other services to the customer.

Paragraph 20(1)(gg) addresses itself to “tangible property . . . held . . . for sale" by the taxpayer, that is, the vendor of the tangible property. The Court should interpret the provision bearing in mind whether the vendor is holding the feed for sale or for something else. The intention of the appellant and its customers to the agreement may not necessarily be the same. The respondent is probably correct in stating the customer enters into an agreement with the appellant to improve the principal chattel, his cattle. On the other hand the appellant says it is in business to make a profit from selling feed. The primary responsibility of the appellant is to feed his customers' cattle. The bulk of its assets is invested in feed. There is no reason to cast any doubt on the appellant's declared intention. The other services it provides at no cost could truly be described as “loss leaders”, a practice used to get farmers and ranchers to purchase feed from it. I do not find that the work or skill of the appellant in preparing the ration was over and above what goes into the making of the ration. The work performed by the appellant in preparing the ration is really no different from that of a chemist, who makes up a prescription and sells it, since his work and skill goes entirely into the ration —it is simply a component reflected in the price of goods: vide Benjamin, second edition, page 32, paragraph 45. [3] The intentions of the appellant and its customers are not identical, but they are compatible. The property passes before the feed enters, or is attached to, the animal by virtue of the contract of sale itself or an appropriation made under it. In my view, the weight of evidence indicates the intention and actions of the vendor-appellant were to make sales of the feed.

Accordingly the appeals are allowed with costs.

Appeals allowed.