Versatile Machine & Tool Manufacturing Co. Ltd. v. Minister of National Revenue, [1986] 2 CTC 2387, 86 DTC 1785

Taylor, T.C.J.:—This is an appeal heard in London, Ontario, on September 10, 1986, against income tax assessments for the years 1978, 1979, 1980, 1981 and 1982, in which the Minister of National Revenue assessed on the basis that certain property of the appellant was not “qualified property' for purposes of the investment tax credit within the provisions of subsection 127(10) of the Income Tax Act, as that Act read during the relevant years. An agreed statement of facts (below) was filed with the Court, and this constituted the only factual information available, and the decision of the Court is based thereon, as augmented by the jurisprudence and argument submitted by counsel.

Agreed Statement of Facts

1. Versatile Machine & Tool Manufacturing Co. Ltd. (hereinafter called "Versatile ) was incorporated under the laws of the Province of Ontario on May 24, 1973.

2. Versatile is related to 398644 Ontario Ltd., a company incorporated under the laws of Ontario on October 20, 1978, which carries on business as Concord Manufacturing (hereinafter called "Concord ).

3. Versatile had a lease agreement with Concord according to which Versatile purchased certain prescribed machinery and equipment after June 23, 1975, and which Versatile leased to Concord, and which is prescribed machinery and equipment pursuant to sub-section 127(10) of the Income Tax Act.

4. In the ordinary course of carrying on a manufacturing business, Versatile had as its principal business, the manufacturing of tools, dies, jigs and fixtures for sale to the automotive industry in Windsor, Ontario.

5. During Versatile's 1978 to 1982 taxation years inclusive, Versatile leased equipment, in the ordinary course of its manufacturing business*, [1] worth Four Hundred and Eighty-nine Thousand, Five Hundred and Three Dollars ($489,503.00) to Concord, which was used by Concord, as the Lessee, primarily in the manufacturing of goods for sale or lease.

6. Versatile’s profits during the 1979 through 1982 taxation years, inclusive, from the sale of manufactured goods were as follows:

	Revenues	Expenses	Gross Profits
1979	$1,256,312	$ 977,343	$278,969
1980	1,732,760	1,302,193	430,567
1981	1,856,476	1,528,461	328,015
1982	1,633,441	1,334,404	299,037

7. Versatile's gross profits during the 1979 through 1982 taxation years, inclusive, from the leasing of machinery to Concord were as follows:

	Gross Revenues	Expenses	Gross Profits
1979	$ 45,124	$ 25,860	$19,264
1980	170,131	87,694	82,437
1981	150,800	88,991	61,809
1982	156,000	135,073	20,927

8. The machinery had not been used or acquired for use or lease for any purpose whatsoever before it was acquired by Versatile for lease to Concord.

9. Versatile did not manufacture the machinery which was leased by it to Concord, but acquired all of the new machinery from another source. The Appellant does not as its principal business in Canada either lease property or manufacture property that it leases. The Appellant does manufacture goods, being tools, dies, jigs, and fixtures that it sells in Canada.

10. All of the prescribed machinery and equipment was acquired by Versatile after June 23, 1975 and before July 1, 1980 and the use of the property by Concord commenced after June 23, 1975 and before July 1, 1980.

The argument of the parties consisted of interpretation and definition of various parts and terms contained in the following extract from subsection 127(10) of the Act;

127.(10) "Qualified property”. — For the purpose of subsection (9), a "qualified property” of a taxpayer means. . . .

(b) prescribed machinery and equipment acquired by the taxpayer, and that is

(d) to be leased by the taxpayer, to a lessee (other than a person exempt from tax under section 149) who can reasonably be expected to use the property in Canada primarily for any of the purposes referred to in subparagraphs (c)(i) to (x), but this paragraph does not apply in respect of the property that is a prescribed

property for the purposes of paragraph (b), unless . . .

(i) the property is leased by the taxpayer in the ordinary course of carrying on a business in Canada and the taxpayer is a corporation whose principal business is

(B) manufacturing property that it sells or leases,

It was common ground between the parties in this appeal that Concord used the leased machinery for "manufacturing or processing of goods for sale or lease”, meeting a separate condition under subparagraph 127(10) (c)(i) of the Act.

The crux of the argument of counsel for the appellant was that Versatile qualified because it was a corporation "manufacturing property that it sells . . .” as its "principal business”; and that "in the ordinary course of carrying on a business” it simply acquired and leased to Concord the equipment at issue.

The basic position asserted by the respondent was that leasing of property was not part of the “ordinary course of the appellant’s business”, and accordingly on either or both of these grounds the assessment should be upheld.

During the course of argument the parties made reference to certain portions from the following jurisprudence:

Bunge of Canada Ltd. v. The Queen, [1984] C.T.C. 284; 84 D.T.C. 6276 — April 10, 1984 — (F.C.A.) — Taxpayer Successful;

Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305

— June 7, 1984 — (S.C.C.) — Taxpayer Successful;

Mother’s Pizza Parlour (London) Limited and Mother's Pizza Parlour Limited v. The Queen, [1985] 1 C.T.C. 361; 85 D.T.C. 5271 — April 30, 1985 — (F.C.T.D.) — Taxpayer Unsuccessful;

Lor-Wes Contracting Ltd. v. The Queen, [1985] 2 C.T.C. 79; 85 D.T.C. 5310 — June 2, 1985 — (F.C.A.) — Taxpayer Successful;

BXL Bulk Explosives Limited v. M.N.R., [1985] 2 C.T.C. 2256; 85 D.T.C. 579 — August 29, 1985 — (T.C.C.) — Taxpayer Successful.

In the above list of jurisprudence I have included the dates upon which the judgment was delivered, and the Court involved. I do so because it seems to me that the “break with tradition”, as that term was used in this appeal came when the Federal Court of Appeal in Bunge (supra) reversed a judgment of the Federal Court—Trial Division ([1982] C.T.C. 313; 82 D.T.C. 6273) which had dismissed the appeal of that taxpayer. I would quote from the 1982 judgment at 314 (D.T.C. 6274):

Obviously, the plaintiff in order to operate its business must have the capability to offload grain from incoming vessels as well as the capability to load grain into outgoing vessels. It must also have the facilities to store the grain. Those are three separate operations. It cannot be said that the equipment used for taking the grain out for shipping is itself “primarily for the purpose of the storing of grain”. The obvious conclusion is that the shipping galleries are primarily used for the shipping of grain on board outbound vessels. Section 127 is an exemption section which must be strictly construed and the taxpayer must fit his claim squarely within the four corners of the exemption in order to benefit from it. The old principle still applies: taxation is the rule and exemption is the exception.

In the Federal Court of Appeal judgment, at 285 (D.T.C. 6277) the following is to be found:

The only question on this appeal, therefore, is whether those new discharging facilities were used by the appellant “primarily for the purpose of. . . the storing of grain”. That question must, in my view, be answered in the affirmative. The storage of grain requires not only that there be silos where the grain can be stored but also that the silos be provided with the equipment necessary to receive the grain for storage and deliver it to its owner after it has been stored. In my opinion, the equipment required to discharge grain from the appellant’s silos was equipment used for “the storing of grain” because the discharge of grain from a silo appears to me to be a necessary and integral part of the storing of the grain. I cannot, for this reason, agree with the conclusion of the trial judge.

The direction for the Minister and for the courts had thereby been chartered, and the signal judgment of Stubart (supra) provided the basis for the subsequent Lor-Wes (supra) judgment, in the following quotation at 5312 of Lor-Wes:

Similarly, in Stubart Investments Ltd. v. The Queen, [1984] C.T.C. 294 at 314; 53 N.R. 241 at 263-5, the Supreme Court, again speaking through Estey, J., expressed its point of view with respect to allowance or benefit provisions in tax statutes:

Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by government to attain selected economic policy objectives. Thus, the statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect a specific activity . ..

Indeed, where Parliament is successful and a taxpayer is induced to act in a certain manner by virtue of incentives prescribed in the legislation, it is at least arguable that the taxpayer was attracted to these incentives for the valid business purpose of reducing his cash outlay for taxes to conserve his resources for other business activities. It seems more appropriate to turn to an interpretation test which would provide a means of applying the act so as to affect only the conduct of a taxpayer which has the designed effect of defeating the expressed intention of Parliament. In short, the tax statute, by this interpretative technique, is extended to reach conduct of the taxpayer which clearly falls within “the object and spirit” of the taxing provisions. Such an approach would promote rather than interfere with administration of the Income Tax Act, supra, in both its aspects without interference with the granting and withdrawal, according to the economic climate, of tax incentives . . .

Where the taxpayer sought to rely on a specific exemption or deduction provided in the statute, the strict rule required that the taxpayer's claim fall clearly within the exempting provision, and any doubt would there be resolved in favour of the Crown. See Lumbers v. M.N.R., [1943] C.T.C. 281; 2 D.T.C. 652 (Ex. Ct.), affirmed [1944] S.C.R. 167 and W. A. Sheaffer Pen Co. Ltd. v. M.N.R., [1953] Ex. C.R. 251; [1953] C.T.C. 345; 53 D.T.C. 1223. Indeed, the introduction of exemptions and allowances was the beginning of the end of the reign of the strict rule.

Professor Willis,* [2] accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable . ..

While not directing his observations exclusively to taxing statutes, the learned aurhor of Construction of Statutes, 2nd ed. (1983), at 87 E.A. Dreidger, put the modern rule succinctly:

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.

As I read it, the judgment in BXL (supra) is consistent with that view of the evolving jurisprudence, and the adverse judgment in Mother's Pizza (supra) should be regarded as directly related to the specifics of that case.

The income tax assessments at issue in this appeal were dated January 26, 1984, and the Minister's confirmation of those assessments was dated September 25, 1984. Even the Minister's reply to notice of appeal was dated June 11, 1985. Taken in the context of the time frame necessary for appropriate absorption of even critical judgments within income tax procedure, I do not find it unreasonable that the respondent's position in this matter reflected more of the traditional assessing practice than can easily be seen in a review of more current jurisprudence.

In my view, the “principal business” of Versatile was “manufacturing property that it sells . . .”, (in this case “tools, dies, jigs and fixtures") and that “in the ordinary course of carrying on a (that) business", the corporation saw an opportunity to increase its revenue by acquiring and leasing, certain machinery, and, at the same time taking advantage of the investment tax credit inducement by accomplishing this in the manner described in this appeal.

I am prepared to take from the jurisprudence cited above, that this Court should interpret the provisions of the Act at issue in this appeal with an eye toward whether the purpose for the investment tax credit had been accomplished. That objective would appear to be to provide an incentive for investment in certain fields of endeavour. The list of possible circumstances, under which a business could qualify under subsection 127(10) of the Act would indicate to me that a fairly wide cross-section of the economy was intended to be covered by this provision. No reasons have been advanced which would exclude this appellant from that qualified group.

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party and party costs.

Appeal allowed.