Latter Investments Limited v. Minister of National Revenue, [1982] CTC 2076, 82 DTC 1086

M J Bonner:—The appellant Latter appeals from assessments of income tax for the 1977 and 1978 taxation years. The appellant Kimel appeals from an assessment for its 1978 taxation year only. At all relevant times the two appellants carried on business in partnership under the firm name of Fabricland Distributors. It was the appellants’ contention on appeal that they were entitled to the deduction from tax permitted by section 125.1 of the Income Tax Act. It was common ground that the appellants did not earn manufacturing profits. They contended, however, that they did earn processing profits. The respondent assessed on the basis that they did not.

Fabricland sold to the public fabrics and notions used in sewing clothing, draperies and upholstery. It did so in retail stores of the barebones warehouse type. The partnership bought all goods sold in its stores.

The operations carried on in the stores operated by the partnership were described in evidence by Mannie Kimel, the person who managed both companies and was principal, if not sole, shareholder of the appellant Kimel. The fabrics arrived at the stores in cardboard boxes, usually containing several bolts or rolls of cloth which ranged in length from 30 to 80 yards. The cloth was wound on a long spindle. Following receipt, the appellants’ employees unrolled and measured the cloth. 60 to 70 per cent of the time they folded the cloth along its long axis to form a double thickness. When necessary, the cloth was straightened before folding and markings on the ends were cut off. The cloth was sometimes cut into shorter lengths for ease of handling. The cloth was then rewound on cardboard spindles and placed on display.

Fabrics were sold by the partnership in the lengths requested by the customers for the particular projects which they had in mind. Most frequently sales were of pieces of cloth two to three yards in length. In order to avoid wastage in the cutting of patterned fabrics the cuts must be made in a line perpendicular to the long axis of the bolt. Because the fabrics were often cut when folded in two, the folding had to be precise so the line of cut in relation to the pattern was exact and fabric was not wasted. The operations required a small degree of skill. No machinery was used. All that was necessary Was a pair of scissors and a long table.

Each store normally had a staff of eight to ten persons. Most of the employees’ time was spent on the operations already described. They had little time available for selling. The customers selected the desired fabric from bolts on display and thus the selling activities of the staff were, for the most part, confined to cutting and packaging the lengths specified by the customers.

The sole issue in these appeals was whether the appellants, in carrying on such activities, generated “Canadian . . . processing profits” within the meaning of subsection 125.1(1) of the Act.

The appellants’ counsel submitted that preparation for market is processing so long as the product is prepared in a special manner. He relied on the decision of the Exchequer Court of Canada in Federal Farms Limited v MNR, [1966] CTC 62; 66 DTC 5068. He submitted that the result of the appellant’s operations was to change the cloth, which usually arrived in long heavy bolts, into a more marketable form.

Counsel for the respondent submitted that a change in form or substance is required for there to be a processing of goods. She attempted to support this submission by reference to Part LII of the Income Tax Regulations. This line of argument was based, in part, on the premise that because the Legislature, by paragraph 125.1 (3)(a) of the Act, granted to the Governor in Council the power to make regulations as to the quantum of “Canadian manufacturing and processing profits’, the Regulations “cast light” on the meaning of the term. I disagree. Paragraph 125.1 (3)(a), together with section 221 of the Act, confer on the Governor in Council the power to make rules for the determination of the portion of active business income applicable to the manufacturing or processing in Canada of goods for sale or lease. Nothing in paragraph 125.1 (3)(a), either expressly or by necessary implication, grants a power to extend or to limit the meaning to be attached to the words “manufacturing or processing” as used in the statute. Thus, the Regulations cannot be used as a guide to the intention of the Legislature.

Counsel for the respondent made further submissions based on decisions interpreting section 27 of the Excise Tax Act. I cannot see how decisions dealing with the question whether goods are “manufactured or produced” in Canada can be of much assistance in interpreting the words “manufacturing or processing”, where the question is whether certain operations constitute processing. The words “process” and “produce” are not synonymous.

In Federal Farms Limited the Court had to decide whether the appellant company, which washed, sorted, trimmed, graded and packaged carrots and potatoes, was a “manufacturing and processing corporation” within the meaning of section 40A of the former Act. The act defined “manufacturing and processing ocprporation” as .. a corporation that had net sales for the taxation year . . . from the sale of goods processed or manufactured in Canada by the corporation . .

Cattanach, J, in words which apply with equal force to the interperetation of the provision now in question, said at 66 [5071]:

Section 40A of the Income Tax Act is dealing with matters affecting manufacturing and processing corporations generally. The section is not one passed with reference to a particular trade or business from which it follows that the words in question are to be construed in their common or ordinary meaning and not as having a particular meaning as understood by persons conversant with a particular trade or business. For this reason I do not accept the definition put forward by Mr Long that processing connotes a material change being made in the texture and structure of the product.

While I am aware that dictionaries are not to be taken, in all instances, as authoritative exponents of the meaning of words as used in Acts of Parliament, nevertheless when words are used in their ordinary sense (as I have concluded they are in the section under which the present appeal is made) it is then appropriate that resort be had to recognized dictionaries for it is in these books that the ordinary meaning of a word is ordinarily to be found.

His Lordship then referred to dictionary definitions of the word “process” as follows:

The word “process” is defined in the Shorter Oxford English Dictionary, Third Edition,as “To treat by a special process; eg to reproduce (a drawing, etc) by a mechanical or photographic process.

In Webster’s Third New International Dictionary published in 1964 the word “process” is defined as follows, “to subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result: put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process (-ing cattle by slaughtering them) (-ed milk by pasteurizing it) (-ing grain by milling) (-ing cotton by spinning)”;

In Webster’s Second New International Dictionary published in 1959 the following definition of the word “process” appears, “To subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form as live stock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.”

Other standard works consulted define “process” as “treat, prepare, or handle by some special method”.

The word “process” is one of very broad import as can be seen from the passage just referred to. It is not, however, in my opinion, an apt word to use in collectively describing the various operations which were carried on in the appellants’ stores. This is particularly apparent when it is remembered that it is, in the Act, used in conjunction with the word “manufacturing”.

Many of the dictionary definitions of the word “process” speak of a “special” process or “particular” method and systems designed to effect a desired result. There does not appear to be anything “special” or “particular” about the series of operations carried on in the appellants’ stores. Those operations are, I have no doubt, essentially similar to the operations carried on in most retail yardgoods stores with a view to selling stock in trade. Further, they are, in essence, similar to the operations of most retail sales businesses which involve the receipt of goods, the display thereof to customers and the allocation to customers of such part of the stock in trade as they require. The words “manufacturing or processing in Canada of goods for sale or lease” do not suggest a Parliamentary intention to extend the tax relief afforded by section 125.1 to profits derived from ordinary retailing operations such as are carried on here.

This conclusion is, in my view, supported by the French version of the Act.* [1] It uses the words . . bénéfices de fabrication et de transformation au Canada . . The word “transformer” is defined in Le Petit Robert Dictionnaire Alphatétique & Analogique de la Langue Française, published in 1973, as follows:

TRANSFORMER . . .

1. Faire passer d’une forme à une autre, donner un autre aspect, d’autres caractères formels à. V Changer, modifier, renouveler. Transformer une maison. Transformer une matière première. V Elaborer, traiter. Transformer en améliorant, en altérant.

The same word is defined in the Larousse Trois Volumes en Couleurs, tome trois, published in 1968, in part as follows:

Transformer . . . Faire changer de forme: Circé transforma les compagnons d’Ulysse en pourceaux.

In Federal Farms Limited, Cattanach, J, found at 67 [5072] that:

Although the product sold remains a vegetable, nevertheless, it is not a vegetable as it came from the ground but rather one that has been cleaned, with improved keeping qualities and thereby rendered more attractive and convenient to the consumer.

The present case is distinguishable.

While I do not suggest that a change as dramatic as that wrought by Circe is necessary to a finding that operations constitute processing, I do find that because the appellants’ operations did not bring about any change in the form, appearance or other characteristics of the cloth, those operations did not amount to processing.

For the foregoing reasons the appeals will be dismissed.

Appeals dismissed.