The Queen v. Canadian Hydroponics Ltd., [1968] CTC 511, 68 DTC 5316

JACKETT, P.:—This is an action for excise tax and penalties in respect of sales, made in the period from June 14, 1963 to May 31, 1966, of certain ‘‘Hydroponic Green Feed Units” and related equipment and goods.

The parties are agreed that the only question to be decided is whether the goods in question or any part of them are exempt by virtue of Section 32(1) of the Excise Tax Act.

Hydroponic Green Feed Units (hereinafter sometimes referred to as Units”) are for use by farmers in producing a ‘‘6 day oat grass”.

The process, which, as I have indicated, is carried out by the farmer, is a simple one. Oat seeds are soaked in water for two days and are then placed in baskets that are lined with paper pads called basket liners’’. The seeds are left in the basket for six days during which time they are periodically soaked with water in which has been dissolved appropriate plant food or fertilizer. During all that period the temperature, light, and moisture conditions are controlled in accordance with a predetermined formula. At the end of that time the oat seeds have grown into oat grass, the whole of which can be used as a green feed.

A Hydroponic Green Feed Unit, which is supplied to a farmer for this process, is sold in parts and is erected on the farmer’s property either by the farmer himself or by the dealer who sold it to him. There are two main structures, a storage bin for the oat seeds that are ready to feed into the process and a prefabricated building’’, being a structure that is sometimes about twelve feet wide, twenty-two feet long and eight feet high, and sometimes other sizes of the same general magnitude. It is completely enclosed by sheets of aluminum separated by insulating material. This portion of the unit is like a walk-in refrigeration box and is equipped with

(a) an augur with a motor on it by which the oat seeds are brought in from the storage bins (this is optional),

(b) trays at one end where the two-day incubation stage takes place,

(c) several rows of some six pans each (arranged one above the other) in which the baskets of seeds are placed for the six-day part of the process,

(d) a water pan above each row of pans in which the plant food is dissolved in the water and from which the water with the plant food in its is periodically allowed to run through the baskets of seeds in various stages of growth “beneath it,

(e) an air conditioner and special duct work and a special extra circulating fan designed to maintain the appropriate temperature,

(f) fluorescent lights designed to maintain proper light conditions and to contribute such heat as may be needed,

(g) a thermometer and thermostat,

(h) a chopper from which the chopped feed is fed out of a nozzle on the outside of the structure (this is optional).

Obviously, the Unit has to be permanently connected with a source of electric energy and with a pressure water system.

Apart from the augur that brings the oat seeds into the main part of the Unit and the chopper, both of which are operated by electric motors, the physical work in the process is done by hand. The fertilizing baskets are filled by hand. The water is turned off and on by hand, the plant food is placed in the water trays by hand. Each day, one layer of fully grown oat grass is removed from the trays by hand and new baskets of seeds are put in their place by hand. The fully grown grass is removed from the unit by hand or is fed into the chopper, if there is one, by hand.

The defendant relies, for exemption from sales tax, upon Section 32(1) of the Excise Tax Act, which reads as follows :

32. (1) The tax imposed by section 30 does not apply to the sale or importation of the articles mentioned in Schedule III. 1931,

c. 54, s. 15; 1945, c. 30, s. 6.

It must be read with the following portions of Schedule III (as applicable to the period in question),

Feeds for poultry, cattle and other stock, for fur-bearing or laboratory animals and for fish, supplements for addition to such feeds, and materials to be used exclusively in the manufacture of such foods or supplements;

GOODS ENUMERATED IN CUSTOMS TARIFF ITEMS . . . 409f . . .

and with Item 409f, which read at that time as follows:

409f Aluminum sluice-type devices for controlling water in irrigation ditches;

Animal clippers;

Automatic stock watering devices;

Barn hay forks, carriage, pulleys and track; Barn litter carriers and track;

Combination excavating and transporting scraper units; Egg cooling cabinets;

Elevators (other than storage elevators) ; Grain crushers;

Grain or hay dryers;

Grain or hay grinders ;

Grain loaders;

Gravity discharge farm wagon boxes;

Hay stack forms ;

Heaters for orchards;

Hitches and couplings;

Hydraulic hoists for unloading vehicles:

Land levellers;

Machines and tools for use on tractors, including blades, loaders, rippers, rakes and related operating and controlling gear;

Milk coolers;

Sodium metabisulphite;

Sprinkler irrigation systems;

Steel stanchions for confining livestock either in pens or

individually, and complete equipment for milking parlours; All the foregoing for use on the farm for farm purposes only; Brooders;

Ensilage cutters;

Fodder or feed cutters;

Hay loaders;

Hay tedders;

Post hole diggers;

Potato diggers;

Potato planters;

Snaths;

Stumping machines;

All other agricultural implements or agricultural machinery, n.0.p.;

Parts of all the foregoing

To succeed by virtue of the first item in Schedule III on which it relies in respect of the Hydroponic Green Feed Unit as a whole, the defendant had to establish that the Unit”, as such, was “materials to be used . . . in the manufacture” of “Feeds . . .” In my appreciation of the facts, the Unit as such is the plant and apparatus used for the manufacture of feeds, but was not the materials used in their manufacture. The oat seeds, the fertilizer and the water would, in my view, be materials used in the process of manufacture. The claim for exemption of the unit as such under this head therefore fails.

The claim for exemption of the Unit as such by virtue of Tariff Item 409f depends on being able to classify the Unit as a whole as falling within the words ‘‘agricultural implements’’ or “agricultural machinery’’. No matter what definition is adopted of the words in question, I find it impossible so to classify this plant and equipment regarded as a whole. I cannot distinguish it from other structures to be found on a farm such as silos, green houses and barns, any of which have machinery or implements installed in them or used in connection with them. I am of the view that, properly appreciated, the Unit consists of two buildings specially designed and equipped for a. particular production process. I do not think that the building. with its equipment can be regarded as a single unit that is a machine or implement so long, at least, as the major part of the process is carried on by hand labour. The claim for exemption of the Unit as a whole under Item 409f is also rejected.

That does not end the consideration that I must give the matter, however, as it was recognized by counsel for the plaintiff that, if I reached that conclusion, I must consider whether some part of the sale of the components of the Unit (which was, as I have said, sold in parts to be erected on the site) are entitled to the exemption claimed.

It is clear, in my view, that a box of fertilizer worth $30, which constituted a part of each sale of a $7,500 unit, was “materials” to be used exclusively in the manufacture of feeds for cattle and was, therefore, exempt. This was practically conceded by counsel for the plaintiff. I am of opinion that the same reasoning applies to a $27 box of basket liners, although this was not conceded by counsel for the plaintiff. These liners, as I understand the evidence, were to be used on the bottom of the baskets in which the oat grass grows and, while they did not become part of the grass, a liner was completely used up or consumed with the production of one six-day growth of grass. In my view, it is therefore a ‘‘material’’ used in the production of the grass just as the fuel that was used to produce the heat for the plant would be if fuel had been so used.

I have more difficulty with the question whether the augur, chopper, fan, air conditioner, and similar equipment, can properly be classified as ‘‘ agricultural machinery ” so as to be exempt by virtue of Tariff Item 409f. I have no doubt that they are machinery, but they do not fall within the category of machinery commonly regarded as ‘‘agricultural’’ machinery. They are, however, designed for use in what is a new and modern type of farm operation. The air conditioner had, indeed, been specially adapted to such use. With some hesitation, I conclude that any machinery forming part of the Unit was exempt by virtue of Tariff Item 409f.

I have even more difficulty with the question whether the remainder of the Unit — that is, the moveable things such as baskets, pans, ete. — are agricultural implements. When, however, I read Itc m 409f as a whole and find that, after enumerating such things as ‘ ‘ Barn . . . track ’ ’, egg cooling cabinets, hay stack forms, milk coolers, steel stanchions for confining livestock, and brooders, it concludes the enumeration by the words, ‘‘ All other agricultural implements or agricultural machinery’’, I feel constrained to conclude that ‘‘agricultural implements’’ is used in the very broadest of senses and includes almost any apparatus, utensils or instruments used for agricultural purposes. If that is the correct view, almost all, if not all, of the ‘‘Unit’’ (other than things that have been incorporated into the structure) that is not otherwise exempt is exempt as falling within the words ‘ other agricultural implements ’ ’.

As my conclusions based on Item 409f relate to matters that were not the subject of particular attention during the trial, I am prepared to consider submissions with regard thereto before I come to a final conclusion and pronounce judgment.

My understanding with counsel was that, when I delivered reasons indicating my conclusion, they would endeavour to agree on the judgment that I should pronounce as a consequence. If they can do so, it was understood that they would send to the Registrar an agreement as to the form the judgment should take. If they cannot do so, either party may bring on a motion for judgment and I will hear counsel for the respective parties on the question.

Subject to considering any representations that counsel may make as to costs (which representations may be made by letters to the Registrar if the parties can otherwise agree on the pronouncement), as success is divided, I propose to award no costs of the action.