L. & R. Asphalt Ltd. v. Minister of National Revenue, [1989] 1 CTC 2370

Sarchuk, T.CJ.:— The appellant L & R Asphalt Ltd. appeals from a reassessment of income tax for its 1985 taxation year. In issue is the proper classification for capital cost purposes of certain equipment purchased by the appellant in the taxation year and described as a "WRT Portable Three- Bin Cold Feeder" (the Feeder).

In computing its income for the 1985 taxation year the appellant deducted capital cost allowance in respect of this asset on the basis that it was property belonging to Class 22 of Schedule Il of the Income Tax Regulations (Regulations) and claimed an investment tax credit in respect of its acquisition pursuant to subsection 127(5) of the Income Tax Act (the Act). In so doing the appellant asserts that the Feeder is a power operated movable piece of equipment designed to move and place earth, rock, concrete or asphalt, which is primarily used for the moving and conveying of aggregate.

The respondent reassessed on the basis that the asset described by the appellant belonged to Class 10 as opposed to Class 22 of Schedule Il of the Regulations because it is contractor's movable equipment used in a construction activity and is not qualified property. In so reassessing the respondent assumed as a fact that the Feeder forms part of an asphalt batching plant in that it serves the function of regulating and premeasuring the flow of input material going into a drum mixer, which is also a part of the plant and the use of the Feeder in conjunction with the use of the drum mixer was an integral part of the asphalt production process.

Briefly stated the facts are that the appellant, since its incorporation in 1976, has been involved in the road construction business. Mr. L. Wellings, the President and principal shareholder of the appellant, described the nature and quantum of its activities as: production of asphalt (20 per cent); sand sealing (road surfacing) (20 per cent); and base and sub-base preparation (60 per cent). Its contracts were exclusively with the Department of Highways in the Province of Saskatchewan.

In 1985 the appellant purchased the asset in issue and has used it exclusively in the production of asphalt. The plant consists of the Feeder which moves the required amount of material (aggregate) by means of a 15-foot conveyor belt into a drum mixer which is seven feet in diameter and approximately 26 feet long. Oil is fed into the mixer along with the gravel where they are heated by means of a propane fired burner. A 72-foot conveyor discharge is hooked onto the other end of the plant to convey the hot asphalt and put it into a storage pile. Since 1984 the appellant has not been involved in paving roads but has been contracted, as Wellings put it, "to mix government maintenance piles, little black piles you see all around the province, that's what it has been used for". In the course of this activity in 1985 the asphalt plant, including the Feeder, was disassembled and moved to different locations some 57 times.

In a letter dated January 8, 1987 the distributor who sold the Feeder to the appellant described its operation in the following words:

This machine is an “aggregate feeder". It has three independent bins each with a belt feeder. The feeders are electrically driven and, by varying their speed and/or a gate opening on the bin itself, the feed rate of the aggregate can be controlled. The aggregate falls onto a collector belt and is conveyed over a belt scale and off the end of the belt. The effect of these functions is that up to three different aggregates can be proportioned onto the collector belt, weighed, and fed to whatever purpose of [sic] owner chooses. It is not necessary to load the bins with different material nor is it necessary to weigh the material on the scale. If suitable, only one bin could be used for projects requiring a lower feed rate. The collector belt is designed in such a manner that it will feed aggregate into almost any type of equipment.

It is evident that the Feeder is designed to operate as one part of a larger operation, and in this case was used and formed an integral part of the appellant's asphalt batching process.

The question for determination is whether the appellant's property is properly included in Class 10 of Schedule II of the Regulations and thus eligible for a 30 per cent capital cost allowance as assessed by the respondent or in Class 22 of Schedule II with a 50 per cent capital cost allowance rate as asserted by the appellant. The relevant provisions of the Regulations read as follows:

Class 22:

Property acquired after March 16, 1964, that is power-operated movable equipment designed for the purpose of excavating, moving, placing or compacting earth, rock, concrete or asphalt, except a property included in

(a) Class 7; or

(b) Class 10 by virtue of paragraph (t) of that Class.

Class 10:

Property not included in any other class that is

(h) contractor's movable equipment, including portable camp buildings, except a property included in . . .

(iii) Class 22;

[Emphasis added.]

It is conceded by both counsel that the exceptions in Class 22 are not relevant. Furthermore, this is not a situation where the equipment can be classified in two categories and a taxpayer would have a choice such as was described in Lindwest Holdings Ltd. v. The Queen, [1988] 2 C.T.C. 287; 88 D.T.C. 6482. In this case if the Feeder comes within Class 22 it is excluded from Class 10 and that is the end of the matter.

Counsel for the appellant submitted that the property in question is designed for the purpose of excavating, moving, placing or compacting earth, rock, concrete or asphalt. He argued that the description of property in Class 22 contains no requirement that the movement or placement of the material is required to be for the final or ultimate destination of the particular material being conveyed and that the only requirement is that the equipment be used for one of those purposes. Counsel submitted that it had been so used by the appellant in its operations. According to counsel the respondent's position is erroneous since it appears to be premised on an argument that property described in Class 22 must be intended to be used exclusively for the purposes mentioned in that particular Class. He relied on Armand Guay Inc. v. The Queen, [1974] C.T.C. 168; 74 D.T.C. 6328; Paju v. M.N.R., [1974] C.T.C. 2121; 74 D.T.C. 1087; and The Queen v. Nomad Sand & Gravel Ltd., [1987] 2 C.T.C. 112; 87 D.T.C. 5343.

Counsel for the respondent argued that the Feeder does not in any reasonable fashion fit the definition of "property" set out in Class 22 of the Regulations. It was not designed for the purposes set out in that Class and although it may have had a secondary and limited use of moving aggregate in the process of producing asphalt, that was neither its primary nor designed purpose. The design purpose of the Feeder, according to the respondent, is to collect or receive aggregate into one or more of its bins and to afford the operator a “premix facility”. I assume that counsel in so submitting was referring to the fact that the equipment can proportion up to three different aggregates onto the collector belt and feed them to whatever purpose the owner chooses.

The respondent's position is that the three-bin portable aggregate feeder is merely an integral part of the operation of an asphalt plant and that it is not the type or kind of equipment that is contemplated by Class 22. Counsel submitted that the position expressed in the respondent's Interpretation Bulletin IT-469 as follows was correct:

12. Equipment that handles one or more of the items mentioned in the wording of class 22 but does so for some purpose not referred to therein would not qualify for inclusion in that class. Examples of such equipment are

(a) an asphalt batching plant,

(b) crushing, washing and screening equipment, and

(c) a cement mixer not designed for the direct placing of concrete. On the other hand, a truck-mounted cement mixer is included in class 22 because it is designed to allow its contents to be put directly into place.

Reference was made by counsel to the decision in The Queen v. Nova Construction Company Ltd., [1986] 1 C.T.C. 68; 85 D.T.C. 5594 as collaterally supporting the above proposition. In my view, that case is of no assistance to the respondent since it is distinguishable on the facts and because it dealt with the issue of whether equipment, which produced asphaltic concrete by passing sand and stone through a drier and then to a mixer where hot liquid asphalt was injected, was property used primarily in the manufacturing or processing of goods for sale. That equipment, which could be disassembled and moved from place to place, was normally located in gravel pits some distance away from the construction sites. In that factual context there was some discussion of whether the production of “asphaltic concrete” was an integral part of the taxpayer's road construction business. The Court held that it was, and since the Act expressly provided that "manufacturing and processing” did not include “construction”, the taxpayer was not entitled to a deduction in respect of manufacturing and processing profits. That is an entirely different issue than the one before me.

I am not satisfied that the definition of Class 22 property can be construed as narrowly as the respondent suggests by Interpretation Bulletin IT-469 and as contended by counsel. In Construction of Statutes, 2d. ed. (1983) at page 87 E.A. Driedger said:

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.

[Emphasis added.]

To qualify as Class 22 property it must be "power-operated movable equipment". The property in issue is power-operated, each bin having an electrically driven belt feeder. The collector belt which moves and deposits the aggregate is similarly driven. The Feeder is also movable. When in operation it is not physically attached to the mixer and when the asphalt plant is being re-located the Feeder is not itself disassembled. I do not read the phrase "power-operated movable" as suggesting that the equipment must be self-propelled, a view which seems to be shared by the Department of National Revenue, Taxation (see paragraph 3, IT-469).

The next step is to consider whether the equipment was “designed for the purpose of excavating, moving, placing or compacting earth, rock, concrete or asphalt”. Counsel for the respondent argued that it was not designed for any of those purposes and suggested that it was primarily a "premix facility”. I am not satisfied that was the case, and most certainly on the evidence before me that was not the use the equipment was put to. In any event the wording of Schedule II does not require that property in Class 22 be designed exclusively for the purposes mentioned. (Armand Guay Inc. v. The Queen, supra.)

The evidence of Mr. Wellings and the vendor's description of the Feeder (which was not challenged by the respondent) establishes that it is equipment designed to premeasure and to move "rock product" along the collector belt. As was noted in the distributor's letter the collector belt is designed in such a manner that it will feed aggregate into almost any type of equipment. If so desired the Feeder also has the capability of feeding three separate materials, for example fine gravel, coarse gravel and clay, onto the feeder belt to be conveyed and placed into the mixer. The Feeder does not premix the material. As Mr. Wellings said:

It just conveys the three different products, it won't mix it, it will layer it.

There is a suggestion in counsel's submissions that to come within Class 22, equipment must not only be designed to move a product but must also be capable of moving it by means other than a conveyor belt. An example discussed was a "front-end loader". I do not agree. The use to which the appellant put the “front-end loader" was similar to that of the Feeder and it was in fact allowed Class 22 treatment. It moved aggregate from a storage pile and placed it in the Feeder's bins. The Feeder then moved the aggregate from its bins and placed it in the mixer. The Feeder was, in my view, both designed and used for some of the purposes set out in Class 22, being the moving and/or placing of earth or rock and the restrictive interpretation placed on the definition of Class 22 property by the respondent in the Interpretation Bulletin and counsel's arguments cannot be sustained.

One final challenge must be met by the appellant. There is no doubt that the equipment was used by it in its asphalt-making process. Indeed in cross- examination Mr. Wellings described the limitations of the Feeder as follows:

Q. . . . in each case this machine, this three-bin portable cold aggregate feeder acts exactly as that, a feeder of rock product?

A. Feeder or a conveyor.

Q. That's all it does in other words?

A. Basically.

Q. All right. You don't use it to, say, move gravel from a pit to a location down the road, you don't hook it on to the back of the truck and —

A. Carry material with me, no.

Q. It is not designed for that?

A. No.

Q. It would fall apart?

A. It is probably heavy enough on its own empty without.

Q. So in order for you to use that equipment, you have to connect it up with some other part of your operation, asphalt plant for example?

A. That's correct.

I find that the appellant has incorporated the Feeder into its asphaltprocessing activity. The question is whether it is excluded from Class 22 as being equipment which, although it handles one or more of the items mentioned in the wording of Class 22, it does so for some "purpose not referred to therein” which appears to be the general thrust, both of counsel's argument and of paragraph 12 of Interpretation Bulletin IT-469, supra.

I do not believe that is the case. In the process of producing asphalt the appellant utilizes various assets which qualify for various capital cost allowance deductions as properties falling into different classes of Schedule II of the Regulations. The Feeder in issue is a part of the asphalt-producing process, as is the mixer, as is the discharge conveyor and indeed as is the front-end loader. As long as it is designed for one of the purposes enumerated in Class 22 and is so used, as I have found it to be, it satisfies the definition of Class 22 property as that definition is presently worded.

The appeal is allowed, with costs, and the matter referred back to the respondent for reconsideration and reassessment.

Appeal allowed.