Donald R O’neil v. Minister of National Revenue, [1983] CTC 2613

Cardin, TCJ:—The appeal of Donald R O’Neil is from an assessment of tax with respect to the 1979 taxation year. The respondent disallowed an amount of $11,234 claimed by the appellant as an investment tax credit on the acquisition of two ABCO Air Unloaders under subsection 127(9) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The issue is whether the machines are qualified property within the meaning of subsection 127(10) of the Income Tax Act. The ancillary question is whether one of the unloaders was acquired in the 1979 taxation year.

Summary of Facts

The appellant’s principal occupation is that of a fish broker. Since 1970, the appellant purchased large quantities of fish directly from fishermen at the docks. Until 1979, the appellant had to unload the fishing boats by means of scoop nets, buckets and a winch, loaded his trucks and transported the fish to some 32 fish processors in the New Brunswick area.

Mr Yvon Leblanc and Mr Norman Ouellette, owners of their respective processing plant and clients of the appellant, testified that the fish purchased from the appellant prior to his acquisition of the unloaders were dirty and bruised and had to be washed and scaled before they could be placed in salt tanks in preparation for smoking or other fish processing.

The washing and scaling of herring and gaspereau was, according to Mr Y Leblanc and Mr N Ouellette, a relatively simple matter. The fish were placed in a water tank and propelled towards an outlet. As they emerged the fish were both washed and scaled. Neither of the witnesses could explain how the fish were scaled by their simple passage through a water tank that had no other equipment than that required to move the fish along.

The appellant purchased the first ABCO Air Unloader in January of 1979 from Atlantic Bridge Company Limited (Atlantic Bridge) whose business it was to design and construct a variety of equipment used in the fishing industry. Mr Roger Davison, a certified engineering technician and project design manager with Atlantic Bridge Company Limited, was indeed very familiar with both air unloaders purchased by the appellant. According to Mr Roger Davison, the basic principle of the air unloaders was that of a suction pump. By means of a gantry and steel ducts the fish were sucked up from the hold of the vessel and moved along in controlled air and water streams and automatically loaded into trucks ready for shipment (Exhibits R-1, A-3, A-4 and A-5).

Mr Roger Davison as well as Mr Yvon Leblanc and Mr Normand Ouellette stated that the passage of the herring and gaspereau through the air unloader had the effect of washing and scaling the fish to the point that the fish processors were no longer required to wash or scale the fish at the processing plant and could proceed immediately to place the fish in salt water tanks prior to processing. As a result, the appellant was able to obtain a better price for washed and scaled fish. The appellant’s sales prior to 1979 were anywhere between $70,000 and $800,000. After the acquisition of the air unloader the appellant’s sales rose to $1.4 million in 1979 and 1980.

From the evidence, it is clear that the appellant was not a fisherman but a fish broker whose basic operation was to buy boat loads of fish, unload the vessels and transport the fish to fish buyers. It is also clear from the evidence that the use of the air unloaders did was and scale the type of fish usually purchased by the appellant.

The question to be answered is whether the washing and scaling of herring and gaspereau in the process of unloading fish by means of the ABCO Air Unloader renders the machine “qualified property” within the meaning of subsection 127(10) of the Income Tax Act. The pertinent paragraphs of subsection 127(10) of the Act are paragraphs (b) and (c)(viii) which read as follows:

(10) “Qualified property” For the purposes of subsection (9), a “qualified property” of a taxpayer means

(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975 and before July 1, 1977 . . .

(c) to be used by him in Canada primarily for the purpose of

(viii) farming or fishing,

It is the appellant’s position that the ABCO Air Unloaders were designed for the purpose of unloading, washing, and scaling fish and that the washing and scaling of fish are important steps in the processing of fish for market. He concludes that the air unloaders meet all the applicable requirements of subsection 127(10) of the Income Tax Act and are qualified property.

There can be no doubt that the machines were designed to unload fish. I have, however, serious reservations as to whether the machines were designed to wash and scale fish as well. According to Mr Roger Davison, the use of water in the operation of the machines was not for the purpose of washing the fish but it was used to maintain a vacuum in the suction ducts. In his opinion as an expert witness, the washing and scaling of the fish were a secondary result of fish passing through the air stream and the water stream flow which were designed specifically and incorporated into the ABCO Air Unloaders for the purpose of unloading and loading fish. The company’s advertisement of the ABCO Air Unloader mentions the washing of the fish as well as unloading them but there is no mention of scaling of fish. Mr Roger Davison testified that the scaling of certain fish required specially-designed equipment and fish such as red fish would not be scaled by passage through the air unloaders.

From the evidence of Mr Yvon Leblanc, Mr Normand Ouellette and Mr Roger Davison, one can readily conclude that the washing and scaling of herring and gaspereau are easily accomplished by the simple brushing of one fish against another in the unloading process.

In support of his contention the appellant referred to Interpretation Bulletin IT-331 which reads:

The term ‘manufacturing or processing’ is not defined for purposes of the investment tax credit. Consequently the ordinary and every day meaning of the term must be looked to for a definition. ... processing of goods usually refers to a technique of preparation, handling or other activity designed to effect a physical or chemical change . . . other than natural growth.

Counsel also referred to Interpretation Bulletin IT-145R which reads:

Once the fish are caught and transported to a fish processing plant or cannery, any activities carried out to prepare the fish for market, such as filleting, shelling, icing, canning, freezing, smoking, salting, cooking, and pickling are considered to be processing activities.

I do not find that either of the Bulletins referred to are in any way helpful to the appellant. Even in the ordinary and every day meaning and use of the word “processing” there is a dividing line that separates what is and what is not processing. Particularly, Bulletin IT-145R enumerates the type of activities which can constitute processing but only after the fish have been caught and transported to a processing plant.

In my opinion, the accidental washing and scaling of herring and gaspereau in the operation of unloading fish from a vessel and loading them into trucks by means of an air unloader is not processing of fish within the meaning of subsection 127(10) of the Income Tax Act and is not within the ordinary meaning of the word processing.

Counsel cited the following cases:

(1) Admiral Steel Products Ltd v MNR, 40 Tax ABC 322; 66 DTC 174;

(2) Federal Farms Ltd v MNR, [1966] CTC 62; 66 DTC 5068;

(3) W G Thompson and Sons Limited v MNR, 41 Tax ABC 1 ; 66 DTC 291 ;

(4) Canadian Wirevision Limited v The Queen, [1978] CTC 69; 78 DTC 6113;

(5) Produce Processors Limited v MNR, [1980] CTC 2551; 80 DTC 1483;

(6) Nova Scotia Sand and Gravel Ltd v The Queen, [1980] CTC 378; 80 DTC 6298.

The facts of each of cases cited are easily distinguishable from those of the instant appeal in that in all the cited cases the taxpayer was already engaged in the business of processing at least in part certain materials, whether it was steel carts, vegetables or sand and gravel. The issue was whether in the context of the taxpayer’s business certain activities could be considered as processing or manufacturing of goods.

In this appeal the taxpayer’s business is not the processing of fish, it is the purchase of fish as found in the “hold” of a vessel, the unloading of the fish and their transportation to fish processing plants where they are sold and the fish processing carried out. The fact that the fish happened to be washed and scaled in the unloading process, thereby permitting the appellant to obtain a higher price for the fish, does not make of the appellant a fish processor, nor does it change the nature of his business as fish broker.

The appellant has not succeeded in establishing that the respondent’s assumptions, as expressed in paragraph 4(e) and paragraph 4(f) of his reply, were ill founded. I find that the air unloaders were acquired primarily and used by the appellant in the exercise of his business of transferring fish from vessels to trucks for transportation to his clients. The machines were not acquired primarily for the purpose of processing fish. They were not designed for that purpose and indeed are considered and sold by the manufacturer as unloaders and not processors.

Conclusion

I must conclude, therefore, that the two ABCO Air Unloaders acquired by the appellant are not “qualified property” within the meaning of subsection 127(10) of the Income Tax Act. Having so held, it is not necessary to determine whether the second air unloader was acquired in 1979 or 1980.

My decision will go therefore dismissing the appeal.

Appeal dismissed.