Northwest Wood Preservers LTD v. Minister of National Revenue, [1983] CTC 2079

D E Taylor [ORALLY]:—These are the appeals of Northwest Wood Preservers Ltd for the taxation years 1975, 1976 and 1977. While there are different amounts of tax at issue in the various years, the issue is the same and will be dealt with as if it were strictly one point.

The Board finds little reason to refer to the specifics of the amounts at issue, both parties having been in accord, but does note that the sections of the Act in dispute refer to section 125 and Regulation 5202 — essentially, the manufacutring and processing credit that is available to Canadian corporations.

With that preamble, I will simply read paragraphs 3, 4 and 5 of the notice of appeal for 1977 into the record:

The gross cost of this industrial machinery and equipment must also be included in the computation of the “Cost of Manufacturing and Processing Capital” because ALL these assets were used by the Appellant during the year in Canada directly in manufacturing and processing activities, ie the creosoting of pieces of wood owned by it with the intention of selling them to users of such products.

The fact that this machinery and equipment may have been used at certain intervals during the year 1977 in treating customers’ pieces of wood does not alter the fact that ALL these assets were required by the Appellant to carry on the creosoting of its own pieces of wood and, consequently, the gross cost of ALL these assets must be included in computing the “Cost of Manufacturing and Processing Capital”.

Under the definition of “Cost of Manufacturing and Processing Capital” in Regulation 5202 under the Income Tax Act, there is no requirement to exclude a portion of the capital cost of manufacturing and processing assets when ALL these assets are required and used directly in manufacturing and processing activities during the year.

Paraphrasing paragraph 10(b) of the respondent’s reply, it would also read:

The Appellant’s cost of manufacturing and processing capital for each of its taxation years is based on that portion of the cost of the capital of the Appellant for the year that reflects the extent to which each asset included in the calculation thereof was used directly in the qualified activities of the Appellant during the year.

The critical portion of the Act is in section 5202 of the Regulations — the definition of “cost of manufacturing and processing capital” — and it reads for the record:

“cost of manufacturing and processing capital” of a corporation for a taxation year means 100/85 of that portion of the cost of capital of the corporation for that year that reflects the extent to which each property included in the calculation thereof was used directly in qualified activities of the corporation during the year, but the amount so calculated shall not exceed the cost of capital of the corporation for the year.

Counsel for the appellant noted several aspects of the matter which he believed supported the appellant’s position, two of these taken directly from the definition which I have just read: first, he noted the phrase “each property” and secondly, the phrase “during the year”. Counsel for the respondent dealt largely with the question of the phrases “that portion of the cost” and “reflects the extent to which . .

In my view, the purpose of section 125 and Regulation 5200 of the Act is to provide a benefit, a reduction of the impact of the income tax related directly to the manufacturing and processing profit of Canadian companies in qualified activities. Where an amount of profit can be shown to arise not from manufacturing and processing, but from a non-qualified activity, it is then difficult to find any basis in the Act for providing that benefit under section 125 to the non-qualified activities. The crux of the matter is that raised by the respondent in fixing on the word “portion”. The question therefore before the Board is simply whether the word “portion” contained in the critical paragraph of Regulation 5202 permits the division of the total cost of any individual machine or any number of machines into amounts which reflect the portion the machine or machines are used in “qualified” as opposed to “non-qualified” activities. While I do not have to decide the point, in my view if an asset were used only and exclusively for qualified activities, then the total cost could come under Regulation 5202 as “cost of manufacturing and processing capital” even if the asset were used directly just once and only once during the year, and if the balance of the time it were strictly idle. Conversely, it appears logical that if that asset were only partly used in a qualified activity and partly used in a non-qualified activity even though, in each case, used to produce profit, then it is certainly arguable that only that portion used directly in the qualified activity would be the part which would be applicable for the benefit under section 125. That is consistent with the Minister’s position in this matter.

I would note the relationship in the definition of the “cost of manufacturing and processing capital” which has been read into the record, and it says: “that portion of the cost of capital of the corporation for that year that reflects the extent to which each property inculded in the calculation thereof”. That term “calculation thereof” refers to the cost of capital. It appears very clear to me that the “calculation” refers to the cost of capital and only the portion of that calculation of the cost of capital which is used directly can be included for the benefit sought. The Act does not say “required for use in qualified activities”, which is the basis of the appellant’s argument — the Act says specifically “used directly in qualified activities”. In my view, the Act not only permits the apportionment determined by the Minister in the assessments at issue, it positively requires just such apportionment. The total cost of capital is divided according to its direct use, not according to some generic or mechanical origin or operational necessity when interpreting Regulation 5202 or section 125 of the Act. That view would be consistent with other calculations which arise out of a similar section of the same regulation dealing with the “cost of manufacturing and processing labour”. I find no basis for any argument with the Minister’s assessments in this matter and the appeals are dismissed.

Appeals dismissed.