Hopkins Construction (Lacombe) LTD v. Minister of National Revenue, [1984] CTC 2172, 84 DTC 1150

Sarchuk, TCJ:—This is the appeal of Hopkins Construction (Lacombe) Ltd from reassessments to income tax with respect to taxation years 1975, 1976, 1978 and 1979, heard in Calgary on December 14 and December 16, 1983.

The issue is whether the respondent was correct in determining that a particular piece of property, described as a caterpillar front end loader, used for the delivery of excavated pit run material to a hopper, is not property used directly in the manufacturing and processing activities of the appellant in Canada of goods for sale or lease, with the consequence that:

(a) it is excluded in calculating the appellant’s allowable Canadian manufacturing and processing profits deduction within the meaning and for the purposes of section 125.1(1) and 125. l(3)(a) of the Act and Regulation 5202 “cost of manufacturing and processing capital” of the Regulations, 1971; and

(b) it is excluded in calculating to the appellant’s allowable investment Tax Credit within the meaning and for the purposes of section 127(5), 127(9) and 127( 10)(c)(i) of the Act.

The appellant is in the gravel processing business in Alberta. It claimed that it qualified for the manufacturing and processing profits deductions under section 125.1 of the Act and the related sections of Regulation 5200, and in particular submitted that this piece of equipment was used directly in qualified activities performed in Canada in connection with the manufacturing and processing of goods for sale or lease.

At the outset of the appeal the respondent conceded that those parts of the appellant’s operation involving the actual crushing, screening and sorting of industrial minerals were an activity within the meaning of the phrase “manufacturing and processing”. The respondent, however, maintained that certain other activities of the appellant, including the extraction of the mineral from the pit area and its delivery to the hopper were not part of the processing activity, but were in fact the production of industrial minerals, an excluded activity.

The appellant called its President, Mr Tony Hopkins, to describe its business and its methods of operation. In essence the appellant contracts almost exclusively with the Province of Alberta through its Transportation Construction Branch (Alberta Transportation) to crush gravel from pit run deposits. Pursuant to these contracts it strips the overburden off the deposits with a caterpillar type tractor equipped with a blade (or this work may be done by others). The appellant then moves what Mr Hopkins described as a gravel crushing unit onto the. site. The equipment generally includes a loader (the caterpillar loader in question), the crushing unit consisting of a hopper, crusher, screen deck and conveyors as well as trucks and all camp facilities and related auxiliary equipment.

The loader excavates material from the exposed source and transports it to a hopper. After the material is dumped into the hopper, it feeds the pit run material into the crusher at a uniform speed and limits the size of the rock being introduced. The resulting crushed gravel is loaded onto either a stockpile truck or hauled directly to the users project. It should be noted that the trucks, camp facilities and related auxiliary equipment were not claimed by the appellant to be directly involved in the manufacturing or processing of the goods.

Two short films were introduced as exhibits by the appellant to demonstrate the various pieces of equipment and machinery in actual use.

Mr Hopkins’ testimony, together with the films, established that the function of the loader was to extract the material from the face of the pit, to carry it back to the gravel crushing unit, and to dump it into the hopper. It is from the hopper that the material is fed into the crusher and sorter.

To meet contract specifications, a “blend sand” is on occasion added at the hopper. This sand is obtained from a storage pile (usually brought in from an outside source) and is also carted from the storage area and dumped into the hopper by means of the loader in question.

The films unfortunately did not demonstrate the excavation stage with adequate clarity. As I understand Mr Hopkins, the source of the material to be crushed is nothing more than a natural bank or gravel pit, and the loader simply drives into it and extracts the material load by load.

During the course of the cross-examination, Mr Hopkins stated, somewhat to the surprise of counsel, that the gravel source did not belong to the appellant. He testified that the appellant had a contract with Alberta Transportation and was being paid just to process the material; in his own words “all those jobs are like that”. This issue was vigorously pursued on cross-examination and Mr Hopkins continued to maintain that the appellant was being paid solely for processing. Upon re-examination, when afforded the opportunity to reconsider, he still maintained this very same position.

Upon further cross-examination it became evident that:

(a) the gravel source is owned either by the Province of Alberta or is on leased

land, that is leased by the Province from persons other that the appellant;

(b) it is the appellant’s sole function pursuant to its contract with the Alberta Transportation to excavate the raw mineral and to perform the crushing and sorting necessary to bring the material to the required specifications;

(c) most, if not all, of the contracts were with Alberta Transportation, evidence of processing for private disposition suggests that such activity was negligible or nonexistent during the relevant taxation years; and

(d) on the evidence adduced, it is clear that no sale of any goods, in the accepted meaning of that term, took place.

On the basis of this evidence, it appeared that one essential element necessary to entitle the appellant to any form of manufacturing and processing profits deductions under paragraph 125. l(3)(a) was missing.

That section reads:

125. l(3)(a): Canadian manufacturing and processing profits. 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.

[Emphasis added]

Regulation 5202 defines qualified activities as:

Reg. 5202(a): Any of the following activities, when they are performed in Canada in connection with manufacturing or processing (not including the activities listed in subparagraph 125. l(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease.

[Emphasis added]

The appellant tendered Exhibit A-3, a sample contract and specifications for the crushing and stockpiling of gravel to support its argument both as to the use of the loader in a qualified activity and to establish that the appellant qualified for the reduced rate of corporate tax under section 125.1. Certain portions of the contract are significant. The specifications describe the activities contracted for in the following terms:

3.2.04.2: The crushed gravel will be paid for at the price bid per cubic yard or ton, as specified in the tender form for “Crushed Gravel”, which payment shall be compensation in full for all labour, tools, equipment and incidentals necessary to complete the work in accordance with these specifications and shall include either', (emphasis added)

(i) Loading to crusher from uncrushed stockpile, screening crushing, adding or eliminating fines, mixing, and loading to trucks, stockpiling; or

(ii) Excavating, screening, adding or eliminating fines, crushing, mixing, and loading to trucks, stockpiling.

Where the tender does not include a bid item for “Overburden Removal”, the cost of clearing, overburden removal and disposal shall be included in the price bid for item 3.2.04.2(ii).

The contract itself (Exhibit A-3 at page 10) requires the appellant:

. . . to do, furnish and perform the works, materials, matters and things required to be done, furnished and performed, in the manner hereinafter described, in connection with the following work or works, namely: CRUSHING AND STOCKPILING GRAVEL FOR OIL TREATMENT in strict accordance with the plans and specifications of said work hereto attached, and to deliver the same over, complete and fully finished in every particular to the Minister on or before the thirtieth day of April, 1977.

These are but two of many similar clauses contained in the documents exhibited by the appellant. All of this evidence tended to establish a service contract between the parties, but not a contract for sale (or leasing) of goods.

A reduced rate of corporate tax is applicable only to a corporation which carries on manufacturing or processing activities in Canada of goods for sale or lease. The appellant argued that it was not necessary for the manufacturer or processor to be the vendor of the goods. This may be so. However, there was no evidence before me in any form establishing that the material was being processed by the appellant for Alberta Transportation or for any other person for subsequent re-sale or lease. In fact, it was accepted by both parties that most, if not all, of the processed material was used by Alberta Transportation for its own purposes in the construction of roads.

No further evidence was adduced by the appellant relative to this issue and, following argument, judgment was reserved. On Friday, December 16, 1983, the appellant applied for an order allowing it to re-open its case to introduce fresh evidence. Counsel for the respondent did not oppose the motion and, in view of the circumstances, I was of the opinion that it would be just and equitable to permit the appellant to introduce such further evidence.

This new evidence consisted of two documents, a sample contract (in blank form) represented to be a standard form of agreement utilized by Alberta Transportation in its arrangements with an owner of the raw minerals (Exhibit A-4) and a series of three letters between Carmacks Construction Ltd (Carmacks), Alberta Transportation and the appellant relating to the sale of some stockpiled material. (Exhibit A-5)

Unfortunately neither document goes very far to support the appellant’s contention. Exhibit A-5 purports to be an arrangement for the purchase by Alberta Transportation of left-over or residual processed product not required by Carmacks. There was no further explanation of the transaction. There was not a tittle of evidence to indicate that the equipment in question was used in this particular transaction, nor was there any evidence to establish that the sale (if there indeed was one) related to material processed by Hopkins Construction (Lacombe) Ltd.

Exhibit A-4, a document entitled “Sand and/or Gravel Agreement”, creates more problems for the appellant than it resolves. The appellant directed the Court’s attention to a subparagraph which reads:

The Minister covenants, promises and agrees:

(a) to pay unto and the said vendor the sum of $( ) cents per cubic yard of accepted sand and/or gravel removed from the said pit, such payment to be compensation in full for said sand and/or gravel.

and argued that in fact Alberta Transportation acquired the sand and/or gravel from a landowner/vendor only upon completion of the crushing and sorting process and that title did not pass to Alberta Transportation until that point of time. It was argued that as a consequence the appellant, whose operation in the normal course preceded this final payment, was in fact “processing for sale” within the meaning of that term in section 125.1 of the Income Tax Act.

This argument, albeit ingenious, ignores several other clauses. The agreement is entered into by Alberta Transportation and a landowner prior to the commencement of any excavation or removal of sand or gravel from the vendor’s property. At that point of time, consideration does pass between the vendor and purchaser, and the vendor transfers all his rights, property and interest in the sand or gravel to Alberta Transportation and concurrently grants Alberta Transportation the right to enter on and to explore, prospect, dig, work, excavate and take from his land all sand or gravel necessary. It would appear that title to the gravel passes to Alberta Transportation upon the execution of this agreement by the parties and the clause relied on by the appellant is simply the formula by which the vendor is paid for the quantity of mineral ultimately removed from his property.

The evidence on this issue, both oral and documentary, leaves a great deal to be desired. While I have some sympathy for the appellant, the dilemma was of its own making. The onus is on the appellant to bring itself within the provisions of the relevant sections. As Mr Justice Dubé stated in Bunge of Canada Ltd v The Queen, [1982] CTC 313; 82 DTC 6273:

. . . 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.

On the evidence adduced I can only conclude that Hopkins Construction (Lacombe) Ltd is contracting to provide a processing service and that its business is not that of manufacturing or processing of goods for sale. In my view the term “manufacturing or processing of goods for sale or lease" must be interpreted in accordance with its ordinary meaning. The goods were not sold or leased by the appellant nor by Alberta Transportation, of that there is no question, counsel for the appellant conceding that the production in each contract was for a specific road building use.

There was no ownership of the property, ie the raw material, or of the finished product, in Hopkins Construction. At all times, on the sparse evidence before me, it remained the absolute property of the Alberta Transportation. I find that the transaction between the appellant and Alberta Transportation did not involve the sale or lease of goods and was nothing more than a contract for services.

Although it may not be absolutely necessary, I propose to deal as well with the question of whether or not the caterpillar front end loader was used by the appellant directly in qualifying activities performed in Canada in connection with the manufacturing or processing of goods.

On the evidence submitted, it seems apparent that the caterpillar loader was used exclusively for the purpose of extracting the raw material from the natural source and for the purpose of delivering it to the point at which the processing operation commences. These functions are, in my view, different and separate from and precede the processing stage. The appellant, in its system, must have the facility to extract the ore from the ground. Clearly this is not processing or manufacturing. It must also have the facility to bring the raw material to the place where the manufacturing or processing activity takes place. The conclusion is inescapable that these functions are not the same.

For the foregoing reasons, I find that the equipment, the caterpillar loader, was not used directly in a qualified activity performed in Canada in connection with the processing of goods for sale or lease, and accordingly the appeal must be dismissed.

Appeal dismissed.