Roland
St-Onge
(orally:
September
16,
1976):—This
appeal
was
heard
on
September
16,
1976
at
the
City
of
London,
Ontario.
The
question
at
issue
is
whether
the
appellant’s
business
of
hatching
chicks
in
his
1973
taxation
year
falls
under
paragraph
125.1
(3)(a)
of
the
Income
Tax
Act
and
consequently
the
appellant’s
income,
in
that
respect,
would
constitute
Canadian
manufacturing
and
processing
profit
within
the
meaning
of
section
125.1.
In
his
notice
of
appeal
the
appellant
alleged
in
two
paragraphs
that
the
appellant
is
a
corporation
incorporated
under
the
laws
of
the
Province
of
Ontario
and
carries
on
business
in
and
about
Beamsville,
Ontario.
In
the
1973
taxation
year
the
appellant’s
business
consisted
of
two
divisions:
the
operation
of
a
farm
for
the
purpose
of
production
of
eggs
and
the
operation
of
a
chicken
hatchery
for
the
processing
of
eggs
for
the
purpose
of
hatching
and
sale
of
baby
chickens.
At
the
hearing
Mr
Fleming,
president
of
the
company,
testified
that
he
bought
this
business
from
his
mother.
From
1960
to
1965
he
acquired
six
farms
with
a
total
acreage
of
750.
He
has
ten
chicken
houses
on
his
farms
and
some
70,000
egg
lays.
The
hatchery
is
18,000
square
feet
and
zoned
commercial.
Numerous
photos
were
filed
to
show
that
this
business
looks
like
a
factory
and
is
operated
as
such
with
complicated
machinery.
There
are
70
incubators
worth
$5,000
each
and
16
hatchers
worth
$4,000
each.
The
chicks
are
put
in
boxes
and
moved
to
other
rooms
to
be
counted,
selected
and
a
Merek’s
Disease
vaccination
is
automatically
effectuated.
The
chicks
are
divided
into
sexes.
The
company
does
not
feed
the
chicks
and
the
next
morning
they
are
sent
in
boxes
of
102
to
be
sold.
The
company
produces
9
to
10
million
chicks
a
year
to
be
sold.
The
hatchery
operation
has
18
employees
and
its
bookkeeping
is
done
separately
from
the
farming
operation.
Seventy-five
per
cent
of
the
company
profit
comes
from
the
hatchery
operation.
The
hatchery’s
assets
are
some
$350,000
and
it
is
located
in
the
city.
The
appellant
filed
Exhibit
A-2
which
is
a
statement
of
income
and
shows
the
total
sales
for
each
operation.
The
farming
operation
amounts
to
some
$760,000,
compared
to
the
hatchery
operation,
$1,500,000.
The
salary
paid
with
respect
to
the
farming
operation
is
$73,000
compared
to
$124,000
for
the
hatchery
operation
and
the
profit
before
investment
income
and
provision
for
income
tax
with
respect
to
the
farming
operation
is
$46,000,
compared
to
the
hatchery
operation
which
is
$193,000.
I
am
using
the
rough
figures.
Counsel
for
the
appellant
argued
that
they
are
really
two
separate
businesses,
whereas
counsel
for
the
Minister
argued
that
it
should
be
a
vertical
integration
of
two
businesses.
It
seems,
according
to
the
evidence
adduced,
that
the
appellant
company
is
really
operating
two
different
businesses
and
that
it
has
two
different
sources
of
income.
What
is
the
nature
of
those
sources
of
income?
According
to
the
definition
of
“farming”
at
subsection
248(1)
of
the
Income
Tax
Act,
the
hatching
of
chicks
cannot
be
regarded
as
farming.
Indeed,
farming
includes,
among
other
things,
either
livestock
raising
or
raising
of
poultry.
In
the
first
case,
the
hatching
of
chicks
does
not
seem
to
be
livestock
raising,
because
the
company
does
not
raise
the
chicks,
but
just
produces
them
for
sale.
Furthermore,
Webster’s
Dictionary
defines
livestock
as
“Domestic
animals,
cattle
and
hogs
bred
or
kept
on
a
farm
for
use
and
commercial
profit”.
Consequently
the
hatching
of
chicks
does
not
fall
under
that
definition
and
cannot
be
considered
livestock
raising.
In
the
second
case,
“raising
of
poultry”,
this
expression
implies
that
the
farmer
would
keep
the
baby
chicks
for
a
while
in
order
to
have
a
farm
product
which
comes
under
the
definition
of
poultry;
that
can
be
considered
as
raising
poultry
because
the
farmer
has
to
operate
or
act
as
such
to
increase
the
weight
and
size
of
the
chicks
to
render
them
a
marketable
product.
In
the
case
at
bar
the
company
has
already
a
marketable
product
just
by
the
hatching
of
chicks
and
does
not
have
to
raise
them
in
order
to
render
them
marketable.
The
company
does
manufacture
the
chicks,
because
out
of
the
eggs
it
creates
the
chicks
by
processing
them
by
artificial
methods
which
suggest
manufacturing
as
opposed
to
natural
methods.
Indeed,
manufacturing
implies
“A
change
of
raw
material,
either
in
its
form
or
substance”.
In
the
case
at
bar
both
changes
occur,
the
eggs
lose
both
form
and
substance
to
become
the
chicks.
From
the
eggs
the
company
produced
a
completely
new
marketable
product
for
the
sole
purpose
of
selling
it.
For
these
reasons
I
allow
the
appeal
in
part
and
refer
the
matter
back
to
the
respondent
so
that
the
profit
from
the
source
of
income
related
to
the
hatching
of
chicks
will
be
assessed
in
accordance
with
section
125.1
of
the
Income
Tax
Act.
Appeal
allowed.
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