Installation Mécanique G & B Ltée v. Minister of National Revenue, [1987] 1 CTC 2326, 87 DTC 226

Tremblay, T.C.J. [Translation]:—This appeal was heard on December 5, 1985 at Québec, Quebec.

1. The Point at Issue

According to the pleadings, the issue is whether the appellant, a corporation whose principal activity is the provision of installation services for industrial machinery, is correct in claiming the deduction for Canadian manufacturing and processing profits as defined in paragraphs 125.1 (3)(a) and (b) of the Income Tax Act (the “Act") in computing its income for the 1976, 1977 and 1978 taxation years. The appellant argues that it operates a company that manufactures various pieces of equipment used, inter alia, by sawmills and pulp and paper mills in their production.

The respondent disallowed the deduction of such profits, chiefly on the grounds that the machinery installed did not belong to the appellant and, moreover, had not been manufactured by it. He also contends that the appellant’s activities really relate to construction and, therefore, paragraph 125.1(3)(a) does not apply.

2. The Burden of Proof

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

The appellant initially disputed this burden, but later agreed to it.

2.02 The facts relied on by the respondent are set out in subparas (a), (b),

(c) (d) and (e) of paragraph 6 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

6. In reassessing [sic] the appellant for the 1976, 1977, and 1978 taxation years, the respondent relied, inter alia, on the following presumed facts:

(a) During the taxation years in question, the appellant’s principal activity was the provision of installation and erection services for industrial machinery as indicated in its income tax return for the 1978 taxation year;

(b) The machinery installed by the appellant did not belong to it and was not manufactured by it;

(c) The appellant’s activities were in fact related to construction;

(d) For the purposes of the excise tax, the appellant did not qualify as a manufacturer;

(e) During the taxation years in question, the appellant’s manufacturing and

processing activities represented less than 10 per cent of its gross income.

3. Discontinuance and Admissions

During the investigation, counsel for the appellant discontinued the appeal in respect of the 1976 taxation year. With regard to the 1977 and 1978 taxation years, the reassessments were based on 50 contracts according to Exhibit A-1, a handwritten worksheet used by the respondent's auditors, Mr. Guy Portelance and Mr. Jacques Dubé. Exhibit A-2 is a typewritten summary of Exhibit A-1 and lists the 1977 contracts, numbered from 1 to 9 and the 1978 contracts from 10 to 48 (no. 45 includes two contracts, and no. 48, three contracts. There is no contract no. 47).

The 1977 contracts total $306,748.79 and the 1978 contracts, $662,079.73.

According to the reassessments, only five of these contracts (nos. 1, 10, 11, 22, 46) are eligible for the manufacturing and processing deduction of $18,000 in 1977 (contract no. 1) and $43,813 in 1978. These were accordingly allowed by the respondent and treated as such in the reassessments. It should be noted that the $43,813 figure, which includes $17,818 for contract no. 11 (Exhibit A-2) and which was admitted by the respondent during the investigation (Exhibit A-1) as being in relation to the processing of goods for sale, is thus allowed as “Canadian manufacturing and processing profits".

Twenty-nine of the other 46 contracts were not entered in evidence by the appellant, 2 in 1977 (nos. 2 and 8) totalling $128,845.29 and 27 in 1978 (nos. 12 to 18, 20, 24 to 29, 30, 36, 39 to 45 (2) and 48(3)) totalling approximately $301,326. The appellant has therefore admitted that these contracts do not meet the requirements for the "manufacturing and processing profits" deduction.

In addition, 16 contracts were put in evidence by the appellant and the Court must reach a decision as to their status. The following six contracts (nos. 3, 4, 5, 6, 7 and 9) relating to 1977 are worth over $170,000 or 57 per cent of $310,019, which is the turnover for 1977 according to the financial statements. As for 1978, the other ten contracts (nos. 19, 21, 23, 30, 32, 33, 34, 35 37 and 38) total more than $350,000. This is approximately 53 per cent of $720,995, the turnover for 1978 according to the financial statements.

4. The Facts

A. General

4.01 Two witnesses testified: Mr. Gilles Bouchard, president and director general of the appellant, and Mr. Roland Gauthier, C.A., the appellant’s financial adviser and auditor.

4.02 Mr. Bouchard testified that:

(a) the appellant, incorporated in May 1975, specialized in the installation of industrial machinery generally in sawmills and paper mills; a significant amount of machinery was also installed at the Alcan factory;

(b) the appellant leased two buildings, approximately 4,000 square feet in size, both located on rue Vimy in Chicoutime-Nord, Quebec; these buildings were used as factory space. In addition, the appellant also had a 5,000 to 6,000 square foot warehouse; material such as steel beams and so forth was also stored on the property;

(c) at the time of the hearing the appellant’s annual turnover in 1984 and 1985 was $7 million;

(d) installation of machinery in a sawmill takes place after construction of the building has been completed, with the exception of large machines which are installed prior to the completion of construction, since it would be impossible to install such machinery once construction was completed;

(e) some machines (such as debarkers, edgers, planing machines, motors and so on) were bought by the customer (the sawmill owner) and some or all of the base plates for this machinery were manufactured at the appellant’s factory and then transported to the client's factory and affixed to the floor; the said machines were then attached to the bases under the supervision of representatives (engineers or others) of the vendors of the said machinery. In comparison to the project as a whole, such installations represented a very small part;

(f) in addition to the bases, the appellant also manufactured slabs, sheet steel tanks, belt guards linking motors, ladders, walkways, railings;

(g) twenty per cent of the work related to the manufacture of the base plates, slabs, tanks and belt guards was done at the appellant's factory and 80 percent on the customer's premises; the large preportion of on-site manufacture is attributed to the numerous adjustments required to adapt the plates to site characteristics;

(h) in 1977 and 1978, the appellant had between 16 and 100 employees;

(i) contracts were usually obtained by tenders, but occasionally at the customer's invitation. In the Province of Quebec there were only five or six other outfits in the business of mechanical installation;

(j) according to the contracts, material and labour were allocated as follows: 25 to 33 per cent for materials and 6624 per cent for labour.

4.03 Mr. Roland Gauthier, the appellant’s auditor, testified that an agreement had been reached with the provincial tax department and Revenue Canada respecting sales tax in accordance with their respective jurisdictions. When the customer issued a purchase order and marked it "exempt" (see, for example, Alcan, Exhibits A-3, A-4, A-5, A-6), the appellant first paid the sales tax on the cost of material and then claimed the reimbursement. Because of that agreement, the appellant said, it never had to apply for registration as a manufacturer for purposes of the excise tax.

4.04 It is important to note that Exhibit A-1, the auditor's work sheet on which the reassessment was based, contains a breakdown showing the percentage of manufacturing and processing activities engaged in by the appellant compared to gross income for the two years in question:

1977 — $18,000 as against $306,748.79 or six per cent

1978 — $43,813 as against $662,079.73, or seven per cent

The ten per cent minimum required by subparagraph 125.1 (3)(b)(x) of the Act, para. 5.01, infra, has not therefore been met. Evidence concerning the contracts in dispute is therefore of significant importance.

B. The Disputed Contracts

4.05 The first disputed contract (no. 3, Exhibit A-2) for $11,705 ($4,785 for materials and $6,920 for labour) relates to a purchase order dated January 13, 1977 from Alcan. Among other things it required that work commence on January 10, 1977 (Exhibit A-3). The work was therefore already underway when the order was issued. The work to be performed was as follows: repair "the hopper — building 310 in accordance with the sketch attached hereto and Mr. R. Lennox's verbal instructions". Mr. Lennox is probably the Alcan engineer.

The hopper was a tank (with a bevelled base) that collected the material from the electrolytic cell. Steel sheets or plates furnished by the appellant were used to make the repair.

4.06 The second disputed contract (no. 4, also with Alcan) amounted to $5,644.20. It was also dated January 13, 1977 and was entered as part of Exhibit A-3. It was actually an addition to contract no. 2. It provided for installing guiding slabs on the conveyor to prevent the materials from overturning.

4.07 The third disputed contract (no. 5, Exhibit A-2) amounted to $97,535. This purchase order from Alcan was dated December 16,1976 (Exhibit A-4). This contract resulted from the strike in 1976 that left 137 cells full of hardened or congealed material. Alcan made the necessary repairs to the cells to get them back into production. The order gave a rather terse description of the work to be done:

TO COVER YOUR SERVICES AND THE MATERIALS REQUIRED FOR: ON 137 SODERBERG ANODE CELLS IN ONE OR TWO CELL ROOMS SOLDER, FLEXIBLE, ANODE BUS BARS, HANGERS, ANGLE BARS AND SEAL-BOX IN ACCORDANCE WITH OUR CONTRACT NO. 20-36-76, dated December 16, 1976.

In short, the work consisted of installing hangers to facilitate connection of the anode bus bars between adjoining cells. A cell is 20 feet long by 10 feet wide by 16 feet high. The anode bus bars were electrical conductors that had jumped following the strike. The bus bar was an integral part of the cell. Bases had to be made which involved installing the base on the floor, cutting the angle-iron flush with the steel plates and soldering. Even when Alcan provided some of the angle bars that it had in stock, they had to be "worked" on and adapted. In connection with this work, the respondent's auditor wrote in Exhibit A-1: "137 cells, construction, because it involves work on components affixed to the building".

4.08 The fourth disputed contract (no. 6, Exhibit A-2) totalling $19,500 ($3,500 for materials and $16,000 for labour) was an addition to the preceding, contract no. 5. It was also dated December 16, 1977 and was part of Exhibit A-4. It referred to the purchase order for contract no. 5. The work to be performed was described as follows:

TO COVER INSTALLATION AND SOLDERING OF STEEL AND ALUMINUM ANGLES AND ALUMINUM SQUARE RODS ON THE BUS BARS AND CELLS TO SUPPORT THE INSULATORS WHICH WILL SEAL CELL ENDS.

ALL MATERIAL AND LABOUR IS (sic) PROVIDED BY THE CONTRACTOR FOR BEFORE FRIDAY, MARCH 11, 1977 AT 4 O'CLOCK.

The auditor’s note for Exhibit A-1 was “of the same kind as 5”, i.e. construction, since affixed to the building.

4.09 The fifth disputed contract (no. 7, Exhibit A-2) for $13,956 was dated February 4,1977 (Exhibit A-5). The work began on February 1. This contract was also with Alcan. The work to be performed was described as follows:

TO COVER MATERIALS AND LABOUR FOR THE INSTALLATION OF NEW VALVES FOR UNLOADING BAUXITE ON BELTS BC-5 AND BC-12, ACCORDING TO THE SKETCH ATTACHED HERETO AND PLANS A-62210-AC, A-622011-AC and A-62212-AC AND YOUR LETTER OF JANUARY 31, 1988 [sic]. THE WORK COVERED BY THIS CONTRACT ORDER SHOULD COMMENCE ON FEBRUARY 1, 1977 AND BE COMPLETED BY MARCH 17, 1977.

According to the witness, the train unloaded alumina (washed bauxite) onto a filter above the conveyer. The new valves made of sheet steel were supposed to do a better job of guiding the alumina along the belts and to close if necessary. There was a glider system to allow the valve to open and close. The gliders were made by the appellant and affixed to the ceiling and floor. The new mechanism allowed the loading of the conveyer to be stopped by closing the valve.

On this subject, the comment of the respondent's auditor (Exhibit A-1) was: “affixed to the building”’.

4.10 The sixth disputed contract (no. 9, Exhibit A-2), dated March 25, 1977, amounted to $11,563 (Exhibit A-6). The job was to commence on March 28 and to end on April 25. This contract was also with Alcan. The job was described as follows:

FOR THE CONSTRUCTION OF A FUME EVACUATION SYSTEM ACCORDING TO OUR DESIGN A-62959-AC AND INSTRUCTIONS DATED MARCH 10, 1977.

On the letter of March 10, 1977, entered as part of Exhibit A-6, the Court read: “The contractor will have to do the excavation for a fume evacuation system as shown on drawing B-62960-AC". According to the witness, the purpose of the ventilation system was to remove fumes from the cells. The fumes were caused by the smelting of alumina in the cells. The ventilation system was provided by Alcan, but the work consisted of placing the said system on a steel base manufactured by the appellant and in joining the whole thing to the chimney by a system of piping manufactured by the appellant.

On this subject, the auditor’s comment for the respondent (Exhibit A-1) was: “affixed to the building for ventilation".

4.11 The seventh disputed contract (no. 19, Exhibit A-2) amounted to $6,780 and was dated October 24, 1977 (Exhibit A-11). The purchase order from Alcan described the work to be performed as follows:

TO COVER LABOUR, SUPERVISION, EQUIPMENT AND MATERIALS REQUIRED FOR THE INSTALLATION OF A STEEL PLATE ON THE NORTH WALL OF CASTING SECTION 32 AS PER DRAWING A0-93595-R—00. THE WORK COVERED BY THIS ORDER CONTRACT (sic) SHALL COMMENCE ON NOVEMBER 26, 1977 AND SHALL BE COMPLETED BY DECEMBER 1977. SCHEDULE “A” ATTACHED HERETO FORMS PART OF THIS CONTRACT ORDER.

According to the witness, the purpose of installing the said plate was to protect the north wall because it was near where the molten aluminum was poured to manufacture rolls or plates. Moreover, the appellant had placed two poles joined by pipes, manufactured by the appellant, to “prevent the fork lifts from knocking against each other and the material”. (Transcript, p. 50).

4.12 The eighth disputed contract (no. 21, Exhibit A-2) issued by Alcan was an addition to the preceding contract (Exhibit A-11 ). The purchase order for $1,521 was also dated October 24,1977 and was the Schedule A mentioned in the preceding contract (supra para. 4.11). In this case, it involved “a modification to the east wall of casting pit C-32 as per our discussion .. .”

According to the witness, the job involved placing steel plates inside the elevator shaft “. . . it’s not an elevator that's being put in there . . . It’s at the bottom of the hole, there is a kind of “jack” that takes the big pieces of aluminum and gently lifts them up. It comes in and it raises it at the same time that it “fits", it raises it. It’s called an elevator, but it’s ... a jack” (Transcript, p. 51). The steel plates were cut and installed on the walls inside the hole; the said plates were bolted on.

4.13 The ninth disputed contract (no. 23, Exhibit A-2) was with the Price Company (as were all contracts nos. 22 to 36, incidentally). The amount involved was $5,790. It was set out in purchase order no. KKA—114804, dated August 22,1977 with four other pieces relating to contracts nos. 33, 34 and 35. It is part of Exhibit A-10. The description on the purchase order reads as follows:

TO EFFECT THE FINAL CONNECTIONS BETWEEN THE NEW LINES AND EXISTING LINES ON THE BY-PASS CLARIFIER PROJECT AND ON THE SEWER CLEANER PROJECT, AS PER YOUR TENDER 178-77-KK1-161 OF AUGUST 12, 1977 AND THE ANNUAL CONTRACT SIGNED ON JULY 27, 1977.

According to the witness, the work of making the final connection between the by-pass tank and the sewer tank consisted chiefly of labour and hardly involved any materials. This contract (no. 23) which was carried out toward the end of August 1977 would have been performed at the same time as the three others (33, 34, 35), if the factory had not been in operation when the appellant finished the sewer system.

4.14 Given that contracts nos. 33, 34 and 35 belong together with contract no. 23 (para. 4.13), all filed as Exhibit A-10, it is appropriate to consider them here.

4.14.1 Contract no. 33, the tenth disputed contract, was provided for under purchase order no. 112339 dated June 23, 1977 and the tender letter of the appellant to the Price Company dated May 16, 1977. These documents show that basically the work consisted of installing piping and pumps for the sewer cleaner at a cost of $32,240 ($25,700 for labour and $6,540 for materials).

According to the witness “. . . it was pipes . . . that were brought in, that were cut, that were fit, that joints were made in so it would fit, that sort of thing" (Transcript, p. 46). After soldering, the pipes were suspended from the ceiling by the support beams. As in a paper mill, the witness explained, there are many open drains in the floor to collect “all the liquid from everywhere" and channel it into a holding tank (Transcript, p. 47). The pipes installed under contract no. 33 took the waste liquid from the holding tank to a cleaner to be clarified. This clarified liquid was then moved along to another tank and when it came out was “white water”. This tank was linked to another system which used the white water in the paper manufacturing process.

4.14.2 Contract no. 34, the eleventh disputed contract, (order of July 27, 1977, no. KKA-112339) was an addition to contract no. 33. The order reads as follows: “To cover pipe work, an extra on the original contract. This work is due either to certain modifications made in the plans or to errors on these plans or to changes to the equipment already installed?" The price was $7,371, or 409.5 hours at $18 an hour. There was no provision for materials in this contract. Furthermore, on this order, the Court read:

4.14.3 Contract no. 35, the twelfth disputed contract, for $2,450 ($1,800 for labour and $650 for materials) involved manufacturing and installing a walkway "to reach the recently installed valves on the sewer cleaner project"". This was all provided for under purchase order KKA-113827 dated August 1, 1977.

All this work (contracts nos. 23, 33, 34 and 35) was done at the Kénogami factory.

4.15 The thirteenth disputed contract (no. 30, Exhibit A-2) involved $4,151 ($900 for materials and $3,251 for labour). According to purchase order KKA 113915 dated August 3, 1977 (Exhibit A-12) the job involved "the installation of a screw conveyor and replacing the chute in the chip cyclone chute digester service"".

According to the witness, the job basically involved making bases to set the conveyor on. There was $900 for materials and $3,251 for labour.

4.16 The fourteenth disputed contract (no. 32, Exhibit A-2) was also with the Price Company. It involved $75,200, as per purchase order KKA 114929, dated August 25, 1977 (Exhibit A-9). The work to be performed was described as follows: "To perform all mechanical work required to install the foundation for the new Jagenberg cutter . . ."" According to the witness, it meant installing a German-made board-cutting machine on a base constructed by the appellant. To do this, the appellant’s employees had to break open the cement floor, set beams and repour the cement. To make the base required, he said, 50 per cent material and 50 per cent labour. The cost was approximately $50,000. It had cost $25,000 just to install the cutter once the base was completed. It was complicated.

4.17 The fifteenth disputed contract was awarded by Donohue St-Félicien Inc. for the sawmill at Millage 54, Chibougamau Division. In contract no. 37 (Exhibit A-2), the amount involved was $42,924.87. The purchase order of March 30, 1978 (Part of Exhibit A-7) showed, however, $116,000. It appears that only $42,924.87 was included in income for 1978. The reason is that the job had continued during the 1979 taxation year, and the balance of the income from it was included in that year.

The work to be performed was described as follows: "To provide all labour required to perform mechanical installation work and all equipment required for this pursuant to our call for tenders 4160793-3.7.2 and your bid dated March 14, 1978 . . .”.

According to the witness, the job involved installing all the machinery that would be needed in a sawmill: planers, edgers, canters, saws, and so on and all the conveyor belts for moving the wood. These conveyors took up 60 per cent of the factory area (Transcript p. 29). The appellant did not manufacture or purchase all these machines. It only did the installation and the bases and shortened or lenghtened the feet of the machines as re- quired. Seventy-five per cent of the total cost of the job went to supplying and manufacturing the bases and 25 per cent to installing the machinery on the bases (Transcript, p. 31).

4.18 The sixteenth disputed contract, for $175,712.51, was also awarded by Donohue St-Félicien Inc. for the Girardville mill (no. 38, Exhibit A-2). The work was of the same nature as in the case of the sawmill at Millage 54, Chibougamau Division (para. 4.17). The work of mechanical installation included such sawmill equipment as conveyors, planing machines, eight debarkers and so on. According to Mr. Bouchard, the appellant "manufactured what it needed” for the machines purchased by Donohue to make a sawmill, namely bases, ladders, ramps, walkways, and so on. A series of 13 photographs numbered from A-8.1 to A-.8.13 shows the bases of the conveyors, the debarkers, the beams used as foundations for the walkways and so on.

The contract was introduced in evidence as part of Exhibit A-7. The difference between $98,500 and $175,712 is attributed to additional work arising out of the installation, Incidentally, the quantum is not in dispute.

Seventy-five per cent of $175,712 was for manufacturing and installing the bases (Transcript, p. 35).

5. Act — Case Law — Analysis

5.01 Act

The provisions chiefly involved in this case are paragraphs 125.1 (3)(a) and (b) of the Income Tax Act and section 5200 of the Income Tax Regulations. These provisions read as follows:

125.1(3) Definitions. In this section,

(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 and

(b) “manufacturing or processing” does not include

(i) farming or fishing,

(ii) logging,

(iii) Construction,

(iv) operating an oil or gas well,

(v) extracting minerals from a mineral resource,

(vi) processing to the prime metal stage or its equivalent, ore from a mineral resource,

(vii) producing industrial minerals other than sulphur produced by processing natural gas,

(viii) producing or processing electrical energy or steam, for sale,

(ix) processing gas, if such gas is processed as part of the business of selling

or distributing gas in the course of operating a pubic utility, or

(x) any manufacturing or processing of goods for sale or lease if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active businesses carried on in Canada was from

(A) the selling or leasing of goods manufactured or processed in Canada by it, and

(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it.

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.

5.02 Case law and doctrine

The parties referred the Court to the following case law and doctrine:

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

2. Le Soleil Limitée v. M.N.R., [1973] F.C. 97; [1973] C.T.C. 91; 73 D.T.C. 5093 (F.C.A.);

3. Halliburton Services Ltd. v. The Queen, [1985] 2 C.T.C. 52; 85 D.T.C. 5336 (F.C.T.D.);

4. Federal Farms Limited v. M.N.R., [1966] S.C.R. 410; [1966] C.T.C. 62; 66 D.T.C. 5068;

5. The Queen v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140; [1968] C.T.C. 44; 68 D.T.C. 5001;

6. Frankel Steel Construction Limited v. M.N.R., 68 D.T.C. 144;

7. Admiral Steel Products Limited v. M.N.R., 40 Tax A.B.C. 322; 66 D.T.C. 174;

8. Gruen Watch Company of Canada Limited et al. v. Attorney-General of Canada, [1950] C.T.C. 440; 50 D.T.C. 784;

9. Nowegijick v. The Queen, [1983] 1 S.C.R. 29; [1983] C.T.C. 20;

10. Interpretation Bulletins IT-145R of June 19, 1981 and IT-411 of March 23, 1978.

5.03 Analysis

5.03.1 In view of the appellant’s discontinuance of its appeal in respect of the 1976 contracts from April 1, 1975 to March 31, 1976 and in view of the admissions that were made, the task before the Court is to analyze the 16 contracts placed in evidence, six for 1977, from April 1, 1976 to March 31, 1977, and ten for 1978, from April 1, 1977 to March 31, 1978 (para. 3.01).

The first question is whether manufacturing and processing were involved in the first 16 contracts.

5.03.2 With the exception of contract no. 23, Exhibit A-2 (the ninth disputed contract, see para. 4.13), which the appellant’s witness admitted involved only labour and no materials, the evidence showed that manufacturing and processing was involved in the other 15 contracts. Contract no. 23 is also analyzed in para. 4.03.6 infra.

5.03.3 According to the respondent, the fact that a contract did involve manufacturing and processing does not mean that the whole contract relates only to manufacturing and processing. In the case of the installation of a large machine, for example, making a base or angle irons for it may be manufacturing, while, on the other hand, the actual installation of the machine with the help of a crane can hardly be considered manufacturing, according to the respondent, and the appellant would not have met the burden of proof.

At first blush, the Court is of the opinion that everything depends upon the proportion of the work which is neither manufacturing nor processing compared to the work which constitutes manufacturing and processing, in accordance with the Halliburton Services Ltd. case studied below. Before I get into that, I should say that in Les Ateliers Benoît Allard Inc. (para. 5.2.1.), there was uncontradicted evidence that the labour used for the installation of machinery such as debarkers, edgers and so on, belonging to the appellant's customers and purchased from someone other than the client, was only five per cent of the appellant’s total labour cost (D.T.C., p. 1147, para. 4.03.4).

In this appeal, the manufacturing and processing work in respect of which evidence was led was performed in the course of rendering a service, the installation of machinery.

In Halliburton Services Ltd., supra, an argument similar to the respondent's was made.

The Department of National Revenue argued that drilling oil wells was a service and that this work consisted almost entirely of labour. The Department also argued that the processing activity was only incidental to the service rendered. Accordingly, the Department argued that it was not manufacturing and processing of merchandise for sale (see subparagraph 125.1 (3)(b)(x) of the Act, supra, para. 5.01).

The Court rejected that contention and held that subparagraph 125.1(3)- (b)of the Act did not necessarily relate to the sale of goods, but rather to the profit from the manufacture or processing of goods for sale. There is no reason to distinguish between goods sold under a contract for the sale of goods and those sold under a contract of service for labour and materials.

More specifically, the Court says in Halliburton Services Ltd. at 55 (D.T.C. 5338):

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, e.g.: 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 paragraph 125.1(3)(b), not the nature of the taxpayer’s contract with its customers.

In the third place, to adopt the distinction for which the defendant argues would be to create an illogical result. As counsel for the plaintiff pointed out, under such a regime, a manufacturer or processor of a product (e.g.: a chemical fertilizer) who also provided a service in connection therewith (e.g.: spreading the fertilizer for his customers) would be denied the processing tax deduction. If he merely sold the produce to his customers he would be allowed the deduction.

5.03.4 A simple reading of Bouchard’s evidence relating to the disputed 1977 contracts (i.e., all the contracts with Alcan, see para. 4.05, 4.06, 4.07, 4.08, 4.09, 4.10) makes it clear that the manufacture of bases for the gliders and so on was the main subject of the contracts.

The auditor viewed much of this as construction work because it was affixed to the building. It is obvious, as Bouchard testified, that all this material "could not be held up by thin air".

The Court already touched on that aspect in Les Ateliers Benoît Allard Inc. (supra), and it also made reference to Interpretation Bulletin IT-411 in para. 4.03.7, at p. 1147. This reads as follows:

4.03.7 Furthermore, even if the equipment sold by the appellant which was installed and affixed with solder and nails thereafter constituted immovables by destination within the meaning of the Civil Code, so far as the customer was concerned, it nonetheless remained a sale for the appellant and to that extent it was not a construction activity. Both counsel admitted as valid the description of a construction activity given in paragraph 3 of Interpretation Bulletin IT-411. Even though the Court is not bound by these bulletins, it feels that in the case at bar at least the description is accurate:

3. As a general rule, the on-site fabrication, installation and erection of machinery and equipment, regardless of size, is not considered to be construction, unless it constitutes a component part of a building or structure (e.g. — heating system, air-conditioning equipment, sprinkler system, plumbing, wiring, etc). Machinery or equipment which will form an integral part of a manufacturing or processing activity carried on inside a building is not regarded as a component part of the building, even though it may be firmly attached to it because of vibrations, weight, size, etc. In some cases, where the installation of machinery and equipment coincides with the construction and erection of a building or other structure, there may be practical difficulties in determining what activities are construction. In these cases, the following criteria apply:

(a) The installation and erection of the foundation, walls, floors, roof and infrastructure for the machinery or equipment (i.e. — pilings footings, piers, pillars, pits, etc.) is regarded as construction.

(b) The fabrication, installation and erection of the machinery and equipment inside the structure (including related wiring, plumbing, ductwork, etc.) that is primarily for the purpose of a manufacturing or processing activity which will be carried on inside the structure is not regarded as construction.

5.03.5 The disputed 1978 contracts (paras. 4.1 to 4.18) principally relate to work performed in lumber mills, with the exception of contracts nos. 19 and 21 of Exhibit A-2 (paras. 4.11 and 4.12) which consisted of work for Alcan.

The two Alcan contracts required steel plates to be installed on the north wall in the casing section and on the east wall of the casting pit or elevator shaft. The respondent argued that the contracts did not involve manufacturing or processing but rather construction.

According to the evidence, this casting pit, if the Court correctly understood the technical details, is crucial to the processing of molten aluminum in rolls and plates. A jack lifts large pieces of aluminum in this pit. It appears to the Court that the plates installed in the pit, just like the poles that were joined by pipes to prevent the forks of the jack (or of the elevator) from knocking against the walls, form an integral part of the whole system that manufactures aluminum plates and rolls from molten aluminum. Accordingly, the Court is of the opinion that the installation of the plates, poles and pipes is not part of the construction of the building but rather part of manufacturing and processing within the meaning of the Act.

5.03.6 The other disputed contracts for 1978 involve work performed in lumber mills.

Contract no. 23 of Exhibit A-2 (para. 4.13) for $5,790 involves labour only and does not at first appear to be manufacturing. The Court must consider, however, that it represents the final stage completing a group of three other contracts, nos. 33, 34 and 35 of Exhibit A-2.

The three contracts involved the construction of a piping system for moving waste water into a tank to be clarified or purified for re-use in the paper manufacturing process. This, in my opinion, is not construction but involves an entire component required directly in the production of paper, namely manufacturing.

Contract no. 23 was the final phase. It involved connecting already existing lines of pipe to the pipelines that had just been built under contracts nos. 33, 34 and 35. This contract required labour only.

In response to the question as to whether the new system could function independently of the old one, the Court decided that because of the nautre of the work it could not. Connecting the two systems required only labour and was absolutely vital to the operation of the new system. Also, when the sewer system (contracts nos. 33, 34 and 35) was completed, it would have been connected up immediately, (contract no. 23), but for the fact that the paper mill was in operation; this work could not be done unless the paper mill were shut down.

Because the existing system was needed to make the new one operate, contract no. 23 cannot be considered separately from the three others.

I am of the opinion that the decision handed down in Halliburton Services Ltd., supra, applies to this case.

5.03.7 Evidence concerning the installation of a Jagenberg cutter (no. 32, Exhibit A-2) in para. 4.16 shows that the placement alone of the said machinery cost $25,000 out of a $75,000 contract. It would seem, therefore, at first glance that the $25,000 should be excluded from the manufacturing amount. However, on the basis of Hallibuton Services Ltd., supra, I am of the opinion that this amount should be treated as manufacturing, because it is part of the entire $75,000, the profit from which is the basis of the deduction claimed.

5.03.8 The evidence relating to the installation of a screw conveyor (no. 30, Exhibit A-2), supra, para. 4.15, makes it clear that manufacturing was involved.

5.03.9 The same conclusion applies to the contract for the installation of machinery for a sawmill at Millage 54, Chibougamau Division that was awarded by Donohue St-Félicien Inc. (no. 37, Exhibit A-2). The facts here are substantially similar to those in Les Ateliers Benoit Allard Inc., supra.

5.03.10 The evidence relative to similar work awarded by Donohue St- Félicien Inc. for the installation of the Girardville sawmill also leads to the same conclusions.

6. Conclusion

The appeal is dismissed in respect of the 1976 taxation year. It is admitted in part with costs for the 1977 and 1978 taxation years in accordance with the grounds set out above.

Appeal allowed in part.