A
W
Prociuk:—The
appellant
Canadian
corporation
appeals
from
the
reassessment
of
its
income
by
the
respondent
for
the
taxation
years
1974
and
1975
wherein
its
claim
for
a
deduction
from
corporate
tax,
pursuant
to
the
provisions
of
section
125.1
of
the
Income
Tax
Act,
SC
1970-71-72,
c
63,
as
amended,
was
disallowed
on
the
ground
that
it
was
not
in
the
manufacturing
and
processing
business.
The
appellant’s
ground
of
appeal
is
that
in
the
years
in
question
it
wholly
owned
three
Canadian
subsidiaries,
namely,
The
Big
“O”
Plastics
(Quebec)
Limited,
The
Big
“O”
Plastics
(Hendall)
Limited
and
Comber
Tile
Limited,
which
were
in
the
manufacturing
and
processing
business,
and
since
all
their
profits
were
transferred
to
the
appellant
in
each
year,
and
since
none
of
the
subsidiaries
claimed
the
said
deduction,
the
appellant
was
entitled
to
the
said
deduction.
Section
125.1
of
the
Act
reads
as
follows:
125.1.
(1)
There
may
be
deducted
from
the
tax
otherwise,
payable
under
this
Part
by
a
corporation
for
a
taxation
year
an
amount
equal
to
the
aggregate
of
(a)
9%
of
the
lesser
of
(i)
the
amount,
if
any,
by
which
the
corporation’s
Canadian
manufacturing
and
processing
profits
for
the
year
exceed
the:
least
of
the
amounts
determined
under
paragraphs
125(1)(a)
to
(d)
in
respect
of
the
corporation
for
the
year,
and
(ii)
the
amount,
if
any,
by
which
the
corporation
s
taxable
income
for
the
year
exceeds
the
aggregate
of
(A)
the
aggregate
of
(1)
the
lesser
of
the
amounts
determined
under
paragraphs
124(2)(a)
and
(b)
in
respect
of
the
corporation
for
the
year,
and
(II)
the
lesser
of
the
amounts
determined
under
paragraphs
124(2.1)(d)
and
(e)
in
respect
of
the
corporation
for
the
year,
(B)
the
least
of
the
amounts
determined
under
paragraphs
125(1)(a)
to
(d)
in
respect
of
the
corporation
for
the
year,
(C)
2
times
the
aggregate
of
amounts
deducted
under
subsection
126(2)
from
the
tax
for
the
year
otherwise
payable
under
this
Part
by
the
corporation,
and
(D)
the
amount,
if
any,
by
which
the
aggregate
of
the
corporation’s
Canadian
investment
income
for
the
year
and
its
foreign
investment
income
for
the
year
(within
the
meanings
assigned
by
subsection
129(4))
exceeds
the
amount,
if
any,
deductible
under
paragraph
111(1
)(b)
from
the
corporation’s
income
for
the
year;
and
(b)
5%
of
the
lesser
of
(i)
the
corporation’s
Canadian
manufacturing
and
processing
profits
for
the
year,
and
(ii)
the
least
of
the
amounts
determined
under
paragraphs
125(1)(a)
to
(d)
in
respect
of
the
corporation
for
the
year;
except
that
in
applying
this
section
for
a
taxation
year
after
the
1973
taxation
year,
the
reference
in
paragraph
(a)
to
“9%”
shall
be
read
as
a
reference
to
“8%”
for
the
1974
taxation
year,
“7%”
for
the
1975
taxation
year,
and
“6%”
for
the
1976
and
subsequent
taxation
years.
(3)
In
this
section,
(a)
“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;
The
appellant
paid
taxes
on
all
profits
earned
by
its
subsidiaries.
In
1^73
the
appellant
invested
significantly
in
manufacturing
and
processing
equipment
and
leased
same
to
its
subsidiaries.
All
physical
assets
initially,
except
in
the
case
of
one
subsidiary,
were
owned
by
the
appellant.
Mr
F
Grant
Kime,
president
of
the
appellant
corporation,
testified
on
its
behalf.
He
admitted
that
in
the
years
under
appeal
the
appellant,
itself,
manufactured
nothing.
It
bought
and
sold
raw
materials
and
fittings
to
its
subsidiaries
at
a
small
profit.
The
subsidiaries
manufactured
plastic
pipes
and
related
fittings.
None
of
the
appellant’s
employees
were
on
the
payroll
of
the
subsidiaries.
It
established
the
policy
and
guidelines
which
were
followed
by
subsidiary
management.
Each
subsidiary
had
its
own
accounting
system,
its
own
line
of
bank
credit
and
filed
its
own
income
tax
returns.
There
is
no
doubt
that
the
subsidiaries
could
have
qualified
for
the
deduction
from
corporate
tax.
The
appellant’s
argument
is
premised
on
the
fact
that
it
owned
and
controlled
its
subsidiaries.
It
therefore
complied
with
the
substance
and
spirit
of
the
said
section
and
should
not
be
trapped
by
a.
technicality.
Unfortunately
for
the
appellant,
the
Act
clearly
states
that
it
must
be
the
corporation’s
manufacturing
and
processing
profits—the
appellant
merely
received
the
profits
generated
by
another
entity
which
was
in
the
actual
manufacturing
and
processing
business.
The
Board
has
no
alternative
but
to
dismiss
the
appeal.
Appeal
dismissed.
Email this Content