17 October 1988 Income Tax Severed Letter 5-6092 - []

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

C.R. Bowen (613) 957-2094

XXXX

October 17 1988

Dear Sirs:

We are writing in reply to your letter of May 16, 1988, wherein you requested further information with respect to the matters referred to in Cabana, Seguin Inc. (Appellant) v. The Minister of National Revenue (Respondent) 82 DTC 1360.

The court case in question dealt with a taxpayer who claimed to be in the business of manufacturing and processing goods for sale and, hence, entitled to the manufacturing and processing profits deduction (the "MPP"). The Tax Review Board found that the taxpayer's operation did not involve processing a product from raw materials, but rather the provision of a service and, therefore, the taxpayer was not entitled to the MPP. Revenue Canada, Taxation agrees with the judgement given in this case.

For your information, we also refer you to other jurisprudence which supports our view that a distinction must be made between the manufacturing and processing of goods for sale and the providing of services in determining the eligibility of a taxpayer's activities for the purpose of claiming the MPP. The case Crown Tire Service Ltd. v. the Queen 83 DTC 5426 at page 5429 indicates that in interpreting the words "goods for sale or lease" contained in section 125.1 of the Income Tax Act, reference should be made to the general law of sale or lease in order to give greater precision to the phrase. The judge in the case Dixie X-Ray Associates Limited v. the Queen 88 DTC 6076 states that the courts would look to the substance of the contract in order to determine whether the contract is for the sale of goods or for the supply of services to which the transfer of title to goods was merely incidental. More specifically on page 6079, McNair, J. says "... if the substance of the contract is the production of something to be sold and the transference of property therein to a buyer then the contract is a sale of goods. But if the real substance of the contract is the skill and labour of the supplier in the performance of work for another then that is a contract for work and labour, notwithstanding that property in some materials may pass under the contract as accessory thereto."

We trust these comments will be of assistance to you.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch