Roland
St-Onge:—The
appeal
of
Produce
Processors
Limited
came
before
me
on
May
5
and
7,
1980,
in
the
City
of
Peterborough,
Ontario,
and
also
whether
some
assets
are
in
Class
29
or
Class
8
and
also
whether
the
appellant
company
was
a
corporation
whose
principal
business
was
leasing
property
or
a
corporation
whose
principal
business
was
manufacturing
property
that
it
sold
or
leased
in
its
1973,
1974,
1975
and
1976
taxation
years.
The
contentions
of
the
party
are
well
set
forth
in
the
notice
of
appeal
at
pages
1
to
7
inclusive
and
at
paragraph
2
of
the
reply
to
the
notice
of
appeal
which
read
as
follows:
Notice
of
Appeal
Notice
of
Appeal
is
hereby
given
from
Notices
of
Re-assessment
dated
October
26,
1977,
for
the
taxation
years
1973,
1974,
1975,
and
1976,
which
re-assessments
on
objection
were
confirmed
by
notification
from
the
Minister
on
January
25,1979.
STATEMENTS
OF
FACTS
In
each
of
the
years
1973
and
1974,
the
Minister
has
excluded
from
the
company
capital
cost
allowance
claim
amounts
deducted
under
the
provisions
of
Class
29
treating
them
instead
as
Class
8
allowances
with
a
corresponding
reduction
in
their
amount.
In
each
of
the
years
1975
and
1976,
further
amendments
in
the
company’s
capital
cost
allowance
were
made
as
a
result
of
the
non-recognition
of
the
Class
29
additions
in
1973
and
1974.
In
1976,
at
issue
is
the
fact
that
the
process
by
which
foodstuffs
are
instantly
frozen
represents
a
recognized
process
carried
on
for
profit
as
defined
in
Section
125.1(3)(a)
and
as
such
is
eligible
for
the
special
corporate
tax
deduction
permitted
under
Section
125.1.
Also
at
issue
in
1976
is
the
fact
that
a
“freezer
warehouse”
constructed
by
the
company
and
used
by
it
to
manufacture
frozen
air,
which
in
turn
is
stored
for
future
sale
to
customers
requiring
frozen
storage
for
their
goods,
represents
a
recognized
manufacturing
operation
in
as
much
as
the
frozen
air
is
sold
and
guaranteed
to
its
customers.
These
sales
of
climatically
controlled
atmosphere
are
carried
on
for
profit
as
defined
in
Section
125.1
(3)(a)
and
as
such
is
eligible
for
the
special
corporate
tax
deduction
permitted
under
Section
125.1,
and
in
addition
the
cost
of
said
“freezer
warehouse”
is
properly
included
as
a
Class
29
asset
for
purposes
of
capital
cost
allowance.
REASONS
SUBMITTED
IN
SUPPORT
OF
APPEAL
Produce
Processors
Limited
is
a
corporation
whose
shareholders
are
comprised
of
only
local
agricultural
growers.
Our
company
was
formed
expressly
to
enable
the
local
growers
to
improve
the
marketability
of
their
products,
and
in
1973
it
extended
its
activities
by
introducing
an
on-premises
process
of
freezing
to
preserve
their
products
thereby
making
it
possible
for
them
to
sell
competitively
in
foreign
markets.
In
1972
serious
complaints
had
been
received
by
the
company
because
of
high
bacteria
count
in
our
product.
Investigations
revealed
that
the
cause
of
this
product
defect
was
the
fact
that
after
its
initial
processing,
the
product
was
transported
to
the
premises
of
Trenton
Cold
Storage
Limited
for
freezing.
During
transportation
the
product
was,
particularly
on
hot
days,
vulnerable
to
bacterial
activity.
To
correct
this
problem
the
Ontario
Ministry
of
Agriculture
through
its
ARDA
Division
offered
to
assist
us
to
build
our
own
freezer
tunnel;
however,
because
of
poor
operating
results
in
the
1972
year,
it
was
necessary
for
us
to
obtain
substantial
financial
assistance
from
other
sources.
The
solution
that
emerged
was
that
Trenton
Cold
Storage
Limited,
utilizing
one
of
its
own
existing
freezer
tunnels,
would
build
a
larger
freezer
tunnel
for
us
on
our
premises
and
provide
the
necessary
financing.
The
solution
was
agreeable
to
the
ARDA
Branch,
who
responded
with
a
substantial
grant
towards
the
project.
The
freezing
tunnel
was
acquired
in
1973
in
an
arm’s
length
transaction
and
according
to
Interpretation
Bulletin
IT
147,
February
8,1974,
should
have
qualified
as
a
Class
29
asset;
however,
initially,
probably
because
of
the
substantial
loss
carryforward,
we
erred
by
including
this
addition
in
Class
8,
which
was
subsequently
corrected
in
1976.
In
1974
a
further
$94,831
was
spent
on
the
freezing
tunnel
and
this
was
allocated
to
Class
29.
Also
in
1974
$164,873
was
spent
on
a
refrigeration
and
water
system
for
the
new
warehouse,
which
was
built
to
complement
the
freezing
tunnel.
We
maintain
this
expenditure
should
also
be
treated
as
a
Class
29
asset
since
the
refrigeration
and
water
system
equipment
are
an
integral
part
of
the
entire
processing
activity.
The
zero
storage
facility
was
required
to
maintain
the
frozen
state
of
the
product
until
it
could
be
marketed
or
transferred
to
another
zero
storage
warehouse.
Our
company
has
continually
claimed
all
tax
incentives
available
to
processors
or
manufacturers
in
the
firm
belief
that
the
processing,
freezing
and
warehousing
of
goods
in
a
frozen
state
represents
a
continuing
process,
the
absence
of
which
would
result
in
a
significant
chemical
change.
The
word
“processed”
has
not
been
specifically
defined
in
the
Act
or
Regulations
and
should
be
construed
in
its
ordinary
sense.
This
position
is
backed
up
in
Federal
Farms
Ltd
DTC
66/5069
when
the
learned
judge,
Mr
J
Cattanach,
is
discussing
“processing”
said,
“This
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
...”.
This
concept
is
reiterated
in
Interpretation
Bulletin
#145,
February
5,
1974
which
states,
“Consequently,
the
ordinary
and
every
day
meaning
of
the
term
must
be
looked
to
for
a
definition.”
Accordingly,
we
look
to
the
dictionary
definitions
of
the
word
“processing”
in
order
to
prove
that
in
the
ordinary
meaning
of
the
word
it
includes
freezing
and
zero
storage
warehousing.
The
concise
Oxford
Dictionary
includes
in
its
definition
of
the
word
“process”—preserve
(food).
When
we
go
further
and
look
up
the
word
PRESERVE,
we
find—MAINTAIN
(State
of
things).
RETAIN
(Quality,
condition).
Interpretation
Bulletin
145
also
says
that
..
processing
of
goods
refers
usually
to
a
technique
of
preparation,
handling,
or
other
activity
designed
to
effect
a
physical
or
chemical
change
in
an
article
or
substance.”
We
submit
accordingly
that
freezing
and
zero
storage
are
both
forms
of
processing
when
interpreted
in
the
ordinary
dictionary
definition
and
fall
within
the
processing
concepts
outlined
in
IT
145.
Accordingly,
the
company
is
a
“processor”
for
all
those
parts
of
the
Act
affecting
manufacturers
and
processors.
Further
credence
to
this
position
is
given
in
Interpretation
Bulletin
#145
which
when
talking
about
FISHING
states
.
.
any
activities
carried
out
to
prepare
fish
for
market
such
as
.
.
.
freezing
.
.
.
are
considered
to
be
processing
activities.”
In
further
support
of
our
contention
that
freezing
is
a
process,
we
reproduce
below
the
text
of
a
statement
made
by
the
Refrigeration
Research
Foundation
in
september
1975
which
we
feel
speaks
for
itself:
The
act
of
freezing
is
undoubtedly
a
processing
procedure
which
fundamentally
alters
and
modifies
the
properties
of
the
material
frozen.
In
fact,
simply
the
change
of
state
that
occurs
in
the
process
of
freezing
from
liquid
to
solid
is
a
most
fundamental
change.
When
such
a
process
is
performed
on
food
materials
which
usually
contain
60
to
90%
moisture,
the
water
activity
is
reduced
to
practically
zero
so
that
no
further
microbiological
changes
can
take
place.
Physically,
there
is
a
change
in
the
cell
walls
with
a
substantial
amount
of
rupturing
and
desiccation
of
the
intracellular
space.
As
a
result
of
this,
the
material
is
altered
very
substantially,
not
only
biochemically,
but
also
physically.
Indeed,
the
process
of
freezing
is
recognized
as
one
of
the
three
major
methods
of
food
preservation,
the
others
being
dehydration,
where
the
food
is
preserved
by
a
reduction
of
the
water
content
and
water
activity
is
reduced
simply
by
the
withdrawal
of
water.
The
other
process
is
that
of
canning,
where
foods
are
preserved
by
application
of
high
temperatures
which
have
little
effect
on
water
activity,
but
inactivate
microorganisms.
In
the
book
entitled,
“Food
and
the
Consumer”
in
Chapter
6
(entitled
“Food
Preservation”),
the
methods
of
food
perservation
are
listed
as:
canning,
pasteurization,
ionizing
radiation,
freezing,
dehydration
and
chemical
methods.
Another
example
where
freezing
is
listed
as
a
major
form
of
processing
can
be
found
in
the
book
on
“Potato
Processing”
where
the
three
sections
dealing
with
processed
potato
products
deal
with
dehydration,
freezing
and
canning,
(A
copy
of
this
release
is
attached)
A
learned
authority
who
has
authored
and/or
edited
several
books
and
over
300
publications
in
scientific
and
trade
journals
in
the
USA
concurs
that
the
major
methods
of
food
processing
are
drying
and
freezing,
where
the
basic
process
is
that
of
reducing
water
activity;
and,
canning
and
pasteurizing,
where
the
basic
process
involves
the
use
of
the
heat
to
reduce
or
inactivate
enzymatic
and
microbiological
activity.
He
also
states
that
frozen
storage
for
frozen
foods
is
an
integral
part
of
the
freezing
process.
Specifically,
with
regard
to
the
refrigeration
equipment
and
water
system
equipment
related
to
the
zero
storage
warehouse,
one
must
recognize
that
frozen
storage
warehouse
activity
is
not
simply
storage,
but
is
an
integral
part
of
the
freezing
process
in
that
this
process
is
required
to
maintain
the
frozen
state
of
the
product.
In
the
book
“Home
Refrigeration
and
Air
Conditioning”
the
author,
Edwin
P
Anderson,
states
that
“Food
preservation
is
the
largest
application
of
mechanical
refrigeration
today.’’
He
goes
on
to
say
that
“in
many
industries
the
cooling
and
conditioning
of
air
is
an
important
phase
of
the
manufacturing
process.
In
his
book
“Commercial
Refrigeration”
author
Anderson
further
states
that
“Refrigeration,
regardless
of
the
means
by
which
it
is
obtained,
may
be
defined
as
a
process
of
removing
heat
from
a
substance
or
from
space.
The
refrigeration
cycle
consists
of
a
series
of
operations
in
which
heat
is
first
absorbed
by
the
refrigerant,
changing
it
from
a
liquid
to
a
gas,
then
the
gas
is
compressed
and
forced
into
the
condenser
where
the
heat
is
absorbed
by
the
circulating
air,
thus
bringing
the
refrigerant
back
to
is
(sic)
original
or
liquid
state.
The
essential
parts
of
a
refrigerant
plant
are:
1.
Compressor
2.
Condenser
3.
Receiver
4.
Expansion
valve
5.
Evaporator
coils
6.
Suitable
pipe
lines,
shut
off
valves
gauges,
thermostats,
etc
The
compressor
is
merely
a
pump
which
takes
the
ammonia
vapor
from
the
low-
pressure
side,
compresses
it,
and
delivers
it
to
the
high-pressure
side.
The
high-
pressure
side
of
the
plant
comprises
the
compressor
discharge
piping,
condenser,
liquid
receiver,
and
liquid
piping
between
the
liquid
receiver
and
expansion
valve.
The
low-pressure
side
comprises
the
piping
leading
from
the
expansion
valve
to
the
evaporator
coil,
evaporator
coil,
and
piping
leading
from
the
evaporator
coil
to
the
compressor
suction
side.
The
pressure
at
the
low
side
of
the
system
remains
practically
constant
and
is
indicated
by
the
back-pressure
gauge
at
the
suction
side
of
the
compressor.
In
a
refrigeration
plant
of
this
type,
ammonia
vapor
superheated
by
the
work
of
compression
passes
through
a
condenser
where
cooling
water
lowers
its
temperature
until
it
condenses
into
liquid
ammonia.
The
liquid
leaving
is
subcooled
(82°),
which
temperature
is
slightly
below
that
of
condensation,
which
is
86°
F.
The
expansion
valve
comprises
the
diving
point
between
the
high-pressure
and
the
low-pressure
side
of
the
system.
The
function
of
the
expansion
valve
is
to
regulate
the
flow
of
ammonia
from
the
high-pressure
to
the
low-pressure
side.
The
heat
absorbed
from
the
refrigerator
by
the
liquid
ammonia
in
the
evaporating
coils
causes
the
liquid
to
boil
until
vaporization
is
complete
and
vapor
is
slightly
superheated.
After
the
liquid
refrigerant
has
produced
its
refrigerating
effect
in
the
evaporating
coils,
the
gas
is
compressed
to
a
suitable
pressure.
Ammonia
gas,
for
example,
when
compressed
to
154.5
lbs
gauge,
will
condense
at
a
temperature
of
86°F.
Cooling
water
of
a
lower
temperature
than
86°F
is
usually
available
for
abstracting
the
latent
heat
from
the
vapor,
thus
converting
it
to
a
liquid
(ie,
condensing
it).
To
obtain
this
pressure
of
154.5
lbs,
this
system
requires
the
use
of
a
compressor
with
some
form
of
motive
power,
and
also
a
condenser
in
which
the
gas
may
be
liquefied.
The
regulating
or
expansion
valve
releases
the
liquid
from
the
condenser
or
its
accompanying
liquid
container
or
receiver
and
controls
the
pressure
at
which
the
evaporation
and
consequent
refrigeration
takes
place.
The
expansion
valve
may
be
hand
or
automatically
controlled,
and
its
opening
or
closing
allows
more
or
less
refrigerant
to
pass
to
the
low-pressure
side
of
the
system.
The
liquid
refrigerant
in
the
low
side
is
evaporated
by
the
heat
of
the
substance
being
cooled,
and
the
reducing
gas
pumped
away
by
the
compressor.
To
replace
this,
enough
refrigerant
is
allowed
to
pass
from
the
high
side
through
the
expansion
valve
to
maintain
a
constant
pressure
and
temperature
in
the
low
side.
The
compressor
brings
the
low-pressure
ammonia
gas
from
the
cold
side,
compresses
it,
and
discharges
it
to
the
high-pressure
side.
This
increase
in
pressure
raised
the
boiling
or,
in
this
case,
condensing
temperature
of
the
gas
so
that
comparatively
warm
cooling
water
readily
condenses
the
compressed
gas
again
to
a
liquid.
This
liquid
ammonia
is
usually
collected
in
a
receiver,
and
from
there
it
is
passed
through
the
expansion
valve.
The
reduction
in
pressure
lowers
the
boiling
point
in
the
ammonia,
causing
it
to
evaporate.
The
action
of
other
refrigerants
used
in
compression
systems
closely
resemble
that
just
described
for
ammonia.
These
systems
operate
fundamentally
in
the
Same
manner,
and
are:
1.
Evaporation
of
liquid
at
low
pressure.
2.
Compression
of
gas
to
raise
its
condensing
temperatures.
3.
Condensation
of
gas
at
high
pressure.
4.
Reduction
of
pressure
on
the
liquid
to
lower
its
boiling
temperature.
Head
pressures,
back
pressures,
and
working
temperatures
vary
in
accordance
with
the
properties
of
each
refrigerant
and
with
conditions
encountered
in
individual
plants.
The
result
of
the
process
is
that
during
the
change
in
state
accomplished
in
the
refrigerant,
cooler
temperatures
are
achieved
and
these
temperatures
are
circulated
into
the
refrigerated
space
by
means
of
fans.
Therefore,
in
addition
to
the
change
in
state
of
the
refrigerant
the
process
produces
cold
air
which
controls
the
atmospheric
temperature
in
the
storage
maintained.
Put
simply,
the
refrigeration
process
is
a
process,
the
result
of
which
is
that
further
chemical
change
is
prevented
from
taking
place
in
the
frozen
product
namely,
decomposition.
In
summary,
our
contention
is
that
refrigeration
is
in
itself
a
process
and
all
equipment
used
by
this
process
qualifies
for
inclusion
in
Class
29
and
the
profits
earned
therefrom
are
subject
to
the
Section
125.1
deduction.
Before
concluding
our
arguments,
we
draw
to
your
attention
the
following
examples
of
businesses
who
qualify
as
processors
and
ask
you
to
consider
our
activities
in
light
of
the
decisions
reached
in
these
cases
and
these
industries.
1.
Federal
Farms
Ltd
(DTC
66/5069)
was
considered
to
be
processing
when
it
put
potatoes
and
carrots
into
bags.
2.
Fleming
Farms
Ltd
(DTC
77/351)
who
incubates
chicken
eggs
to
produce
chicks
was
held
to
be
a
manufacturer
or
processor
because
it
hatches
the
chicks
and
packs
them
into
cartons.
3.
W
G
Thompson
and
Sons
Ltd
was
deemed
to
be
engaged
in
processing
because
it
cleaned
and
packaged
white
beans
for
sale.
4.
Preparing
meals
in
a
restaurant
has
been
held
to
be
manufacturing
and
processing
per
Interpretation
Bulletin
IT
145,
February
5,
1974.
5.
Filling
prescriptions
in
a
drug
store
constitutes
processing.
6.
Reconditioning
of
used
cars
by
an
automobile
dealer
constitutes
manufacturing
or
processing.
Based
on
the
foregoing,
we
submit
that
the
assets
in
question
for
the
years
1973
to
1976
should
properly
be
included
in
Class
29
and
that
the
company
is
entitled
to
the
deduction
allowed
under
Section
125.1,
and
therefore
the
assessments
for
all
years
should
be
vacated.
Reply
to
the
notice
of
appeal
2.
In
reassessing
the
Appellant
for
his
1973
to
1976
taxation
years,
he
made,
inter
alia,
the
following
assumptions
of
fact:
(a)
in
the
years
1973
and
1974
the
Appellant
incurred
various
expenses
to
acquire
a
“freezing
tunnel”
and
to
construct
a
frozen
storage
warehouse.
(b)
during
the
years
1973
and
1976
the
Appellant
did
not
use
the
freezing
tunnel
and
the
frozen
storage
warehouse
itself;
instead,
it
leased
the
facilities
to
Trenton
Cold
Storage
Limited.
(c)
in
preparing
its
income
tax
returns
for
the
years
1972
and
1976,
the
Appellant
treated
the
cost
expended
on
acquiring
the
freezing
tunnel
and
the
frozen
storage
warehouse
as
capital
expenditures
for
property
coming
within
Class
29
of
Schedule
B
of
the
Income
Tax
Regulations.
(d)
in
preparing
its
tax
return
for
the
1976
taxation
year,
the
Appellant
treated
its
profits
from
leasing
the
freezing
tunnel
and
the
frozen
storage
warehouse
as
“Canadian
manufacturing
and
processing
profits”
for
the
purposes
of
section
125.1
of
the
Income
Tax
Act.
(e)
the
frozen
storage
warehouse
is
not
property
used
directly
or
indirectly
primarily
in
the
manufacturing
or
processing
of
goods
for
sale.
(f)
the
operation
of
the
frozen
storage
warehouse
does
not
constitute
manufacturing
or
processing.
(g)
the
expenditures
for
the
freezing
tunnel
and
the
frozen
storage
warehouse
were
not
expenditures
for
Class
29
property.
(h)
the
Appellant
was
in
the
business
of
processing
vegetables.
At
the
hearing,
counsel
agreed
that
the
process
in
the
freezing
tunnel,
the
tempering
and
the
intermediate
storage
were
processing
and
it
is
only
the
final
stage
that
was
in
issue:
to
know
the
operation
of
the
frozen
storage
warehouse.
After
hearing
the
evidence
on
this
question,
the
Board
decided
that
the
final
operation,
being
the
storage
of
the
goods
in
the
frozen
storage
warehouse,
was
in
integral
part
of
the
food
processing,
and
therefore
it
was
processing
even
if
Regulation
5202
under
“qualified
activities’’
states
at
paragraph
(d):
.
..
does
not
include
any
of
(d)
storing,
shipping,
selling
and
leasing
of
finished
goods.
Indeed,
the
evidence
has
revealed
that
the
goods
become
finished
goods
only
after
they
are
removed
from
the
storage.
The
only
issues
that
remain
to
be
ascertained
are
whether
the
appellant
company
is
entitled
to
the
deduction
under
section
125.1
of
the
Income
Tax
Act
and
also
whether
it
can
obtain
capital
cost
allowance
by
using
Class
29
of
the
Regulations.
The
respondent
contended
that
the
appellant
is
not
entitled
to
such
deductions:
(1)
because
the
freezing
tunnel
and
the
frozen
storage
warehouse
were
not
used
directly
or
indirectly
by
the
appellant
in
the
manufacturing
of
goods
for
sale
or
lease;
(2)
because
the
appellant
is
not
a
corporation
whose
principal
business
is
the
leasing
of
property
or
the
manufacturing
of
property
that
it
sells
or
leases;
(3)
because
the
profits
from
the
leasing
are
not
Canadian
manufacturing
and
processing
profits
as
defined
by
paragraph
125.1(3)(a)
for
the
simple
reason
that
they
do
not
relate
to
income
from
the
manufacturing
or
processing
in
Canada
of
goods
for
sale
or
lease.
The
Facts
Prior
to
1972,
there
was
a
company
that
processed
the
farm
products
for
the
farmers.
Around
1971
this
company
decided
to
leave
and
for
one
year
the
farmers
sent
their
products
to
Trenton
Cold
Storage
Limited
(hereinafter
referred
to
as
“Trenton”)
to
be
frozen
and
held
for
distribution.
Following
problems
with
the
appearance
of
bacteria
in
the
products,
the
appellant
decided
to
proceed
otherwise.
Trenton
agreed
to
build
a
freezer
tunnel
on
the
appellant’s
premises;
then,
in
1973
the
appellant
acquired
it
and
built
the
following:
first,
a
freezer
room
was
built
in
1973
but
the
appellant
took
possession
thereof
only
in
1976.
Then,
a
second
and
a
third
freezer
room
were
built
and
owned
by
the
appellant
in
1974.
However,
upon
cross-examination,
Mr
W
J
Wilkinson,
a
chartered
accountant
and
an
auditor
for
the
appellant
company,
explained
that
the
freezer
tunnel
and
the
warehouse
were
operated
by
the
appellant’s
employees
and
all
the
costs
were
charged
to
and
paid
for
by
Trenton;
that
only
the
freezing
tunnel
was
the
object
of
a
written
lease.
Another
witness,
Mr
Robert
Borthwick,
explained
that
there
was
a
verbal
agreement
to
the
effect
that
Trenton
would
use
the
appellant’s
building
by
paying
a
monthly
rent;
that
the
appellant
would
provide
the
ammonia
and
that
the
vegetables,
property
of
the
farmers,
were
stored
as
follows:
(1)
in
bulk
packages
of
1500
pounds;
(2)
in
50-pound
bags
sold
for
exportation
and
(3)
for
institution-type
packaging.
Counsel
for
the
appellant
argued
as
follows:
the
sections
involved
in
this
particular
case
must
be
liberally
construed
because
they
were
enacted
to
encourage
the
industry
and
also
because
the
Interpretation
Bulletin
IT
145
gives
this
impression.
He
then
summarized
the
facts
by
saying
that
the
equipment
was
acquired,
owned,
operated
or
used
by
the
appellant,
the
goods
were
handled
manually
by
the
appellant’e
employees
and
the
farmers
were
the
only
owners
of
the
goods
at
all
times.
He
did
not
deny
that
this
agreement
was
a
lease
and
referred
to
the
decision
in
Harry
John
Foster
v
MNR,
4
Tax
ABC
235;
51
DTC
232.
He
also
argued
that
this
agreement
was
part
of
a
financing
arrangement.
He
then
stated
that
the
only
business
of
the
appellant
company
was
the
manufacturing
or
processing
of
goods;
that
Class
29
was
the
proper
class
because
the
appellant
company
acquired
property
to
be
used
directly
or
indirectly
by
it,
primarily
in
the
manufacturing
or
processing
of
goods;
and
that
the
appellant
company
is
entitled
to
have
the
reduced
rate
of
section
125.1
because,
in
the
years
under
appeal,
it
was
always
involved
in
the
manufacturing
and
processing
business.
Among
other
cases,
counsel
for
the
appellant
referred
the
Board
to
various
decisions
on
the
interpretation
of
federal
statutes
and
quoted:
(1)
Canadian
Clyde
Tube
Forgings
Limited
v
MNR,
[1977]
CTC
2451;
77
DTC
304;
and
(2)
Dorothy
Dean
(Canada)
Limited
v
MNR,
[1978]
CTC
3057;
78
DTC
1764.
He
stated
that
there
were
many
factors
in
these
cases
which
were
not
present
in
the
appellant
company’s
appeal.
He
also
referred
to
many
definitions
in
the
dictionary
such
as
the
word
“use”—“the
act
or
employing
anything
or
the
state
of
being
employed,
to
employ
or
make
use
of,
the
acquit
or
by
means
of,
to
do
work
with”,
a
definition
taken
from
the
New
Webster’s
Dictionary
at
p
924.
Counsel
for
the
respondent
argued
the
following:
the
appellant
cannot
benefit
by
Class
29
because
it
is
another
taxpayer
who
did
the
processing,
and
also
because
Regulation
5200,
which
deals
with
the
basic
formula
to
calculate
the
manufacturing
and
processing
profits
as
mentioned
at
Regulation
5202
under
“cost
of
manufacturing
and
processing
capital”
and
under
“cost
of
manufacturing
and
processing
labour”:
“(a)
the
salaries
and
wages
.
.
.
that
were
directly...
engaged
in
qualified
activities
of
the
corporation
during
the
year”.
He
admitted
that
the
equipment
was
owned
by
the
appellant
company
and
the
appellant
company’s
employees
were
doing
the
work.
However,
there
was
a
special
relationship
between
the
appellant
company
and
Trenton,
although
there
was
no
written
agreement
to
this
effect.
The
only
document
was
a
lease
for
the
freezing
tunnel
(Exhibit
A-9)
which
contains
the
following
clauses:
Together
with
all
rights
of
access,
of
ingress
and
egress
required
by
the
Lessee
for
the
efficient
operation,
maintenance
repairs
and
general
conduct
of
the
freezing
operations
to
be
carried
out
and
without
limiting
the
generality
thereof,
space,
facilities
and
access
for
docking,
loading,
unloading
and
related
activities
required
to
operate
The
Lessee
covenants
that
he
will
not
do
or
permit
to
be
done
on
the
said
premises
anything
which
may
be
annoying
to
the
Lessor,
or
which
the
Lessor
may
deem
to
be
a
nuisance,
and
that
the
Lessee
will
use
and
occupy
the
said
premises
as
a
shop
or
store
and
private
dwelling
house
only,
and
will
not
carry
on
or
permit
to
be
carried
on
therein
any
trade
or
business
other
than
that
of
the
processing
and
freezing
of
food
products
and
related
activities.
The
Lessee
shall
maintain
the
premises
and
the
equipment
and
fixtures
therein
in
good
repair
and
will
pay
the
proportionate
share
of
utilities
costs
attributable
to
its
operation
and
business
taxes.
The
Lessor
will
pay
all
municipal
taxes
assessed
on
the
premises
and
all
insurance
thereon
including
liability
insurance,
with
the
interest
of
the
Lessee
duly
endorsed
thereon.
Then,
referring
to
the
lease,
counsel
for
the
respondent
argued
that
the
implication
was
that
Trenton
was
carrying
on
the
business
of
processing,
which
evidence
was
very
strong
and
very
difficult
to
be
refused.
As
to
the
other
equipment,
there
was
an
arrangement
by
which
Trenton
was
to
pay
a
certain
amount
each
month.
At
the
end
of
each
year,
the
appellant
company
was
reimbursed
for
the
out-of-pocket
expenses,
with
the
exception
of
the
ammonia
which
was
a
long-lasting
asset,
the
use
of
which
could
have
been
included
in
the
rent.
Counsel
for
the
respondent
also
argued:
(1)
that
the
appellant
company
provided
services
that
were
not
in
the
processing
business;
(2)
that
Trenton
did
the
processing
because
it
acted
as
a
processor
by
billing
the
farmer
for
the
processing
of
their
products
and
by
assuming
all
the
risks
of
processing;
(3)
the
only
thing
that
was
effectuated
by
the
appellant
company
was
the
receiving
of
the
rent
and
the
paying
of
the
property
taxes
and
insurance
premiums;
(4)
that
Class
29
is
an
exempting
section
and
must
be
construed
restrictively;
(5)
that
there
was
no
use
of
qualified
activities
by
the
appellant
company
and
that
its
reimbursement
at
the
end
of
the
year
does
not
change
the
appellant
company’s
activities
to
qualify
it
as
being
in
the
processing
business.
He
then
gave
two
examples
of
the
application
of
the
words
“to
be
used’’
and
“directly”
in
the
manufacturing
and
processing
of
goods:
(1)
the
buying
of
testing
equipment
for
a
company
which
is
in
the
business
of
operating
automatic
machines
and
(2)
qualified
activities,
according
to
Regulation
5202
at
paragraph
(viii)
means:
“repair
of
production
facilities”.
Counsel
for
the
respondent
terminated
his
argument
by
saying
that
the
Act
should
be
looked
at
as
one
scheme;
that
the
lease
of
a
property
is
not
an
indirect
use
of
the
same;
that
Class
29,
at
subparagraph
(ii)
covers
a
taxpayer
who
uses
properties
in
the
leasing
business,
but
does
not
include
the
type
of
leasing
effectuated
by
the
appellant
company.
With
respect
to
the
cases
cited,
Canadian
Clyde
Tube
Forgings
Limited
and
Dorothy
Dean
(Canada)
Limited
(supra),
the
issue
was
to
find
out
who
was
really
the
processor.
In
both
cases,
it
was
decided
that
the
appellant
was
not
the
processor,
having
transferred
this
activity
to
another
taxpayer.
According
to
counsel
for
the
resondent,
the
appellant
company
was
not
in
the
business
of
freezing
or
storing
goods
and
consequently
does
not
fall
under
section
125.1
of
the
Income
Tax
Act
nor
under
Regulation
5202.
There
is
ample
evidence
to
show
that
the
appellant
company
herein
acted
much
more
as
a
landlord
than
as
a
processor
of
goods.
It
paid
the
property
taxes
and
insurance
premiums
as
an
ordinary
landlord
would
do,
the
only
difference
being
that
its
employees
looked
after
the
operation,
but
were
effectively
paid
with
money
coming
from
Trenton.
There
is
a
beginning
of
proof
in
writing
by
the
existence
of
the
lease
for
the
freezing
tunnel,
to
show
that
the
whole
operation
was
to
be
leased
to
Trenton.
To
corroborate
this,
there
is
also
verbal
evidence
to
the
effect
that
Trenton
was
to
pay
a
certain
amount
every
month
for
other
items
and
that
the
appellant
company’s
employees
(four)
were
to
be
reimbursed
at
the
end
of
each
year.
All
of
this,
in
the
absence
of
a
written
agreement
as
to
the
whole
operation,
could
be
indicated
that
the
appellant
company
did
not
only
lease
the
buildings
and
equipment,
but
also
the
necessary
personnel
to
operate
the
whole
processing
system.
It
is
a
well-accepted
principle
in
a
business
that
the
one
who
pays
the
operating
costs
of
an
operation
is
deemed
to
be
the
one
who
operates
it.
The
fact
that
Trenton
was
the
lessee
of
all
the
buldings,
the
equipment
and
personnel
shows
that
it
was
the
one
who
was
using
the
said
assets
and
who
was
processing
the
farmers’
products.
In
fact,
it
is
Trenton
that
billed
the
farmers
for
the
processing
of
its
products
and,
according
to
the
evidence,
the
Board
is
convinced
that,
in
case
of
any
complaint,
they
would
be
addressed
to
Trenton
and
not
to
the
appellant
company.
In
light
of
all
of
these
facts
and
taken
as
a
whole,
it
appears
that
the
appellant
company
was
acting
more
as
a
landlord
than
as
a
processor.
In
the
case
of
the
lease,
the
lessee
has
the
possession
of
the
property
and
is
the
only
one
that
could
use
it.
As
a
matter
of
fact,
the
appellant
company
could
not
prevent
Trenton
from
using
the
freezing
tunnel
and
the
warehouse
because
they
were
leased
to
it.
Consequently,
it
cannot
be
said
that
the
appellant
company
indirectly
used
the
assets.
For
these
reasons,
the
appeal
is
dismissed.
Appeal
dismissed.
Email this Content