Citation: 2009TCC376
Date: 20090722
Docket: 2007-4015(IT)G
BETWEEN:
H.B. BARTON TRUCKING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
At the hearing of this
appeal, the Appellant withdrew its appeal to all issues raised in the Notice of
Appeal except one. The sole issue to be decided is whether the Appellant is
entitled to claim an investment tax credit (“ITC”) for equipment which it
purchased in the 2004 and 2005 taxation years to transport wood chips from the
harvest site in the woods to the pulp and paper mill. The equipment at issue is
listed in Schedules A and B of these reasons and was attached to the Partial
Agreed Statement of Facts submitted by the parties.
[2]
The Partial Agreed
Statement of Facts reads as follows:
1.
The Appellant is a company incorporated under
the laws of the Province of New Brunswick.
2.
The Appellant purchased various trucks and
equipment during the 2004 and 2005 taxation years.
3.
The Appellant claimed Investment Tax Credits
(“ITCs”) with respect to the purchase of various trucks and equipment during
the 2004 and 2005 taxation years.
4.
By Notices of Reassessment dated August 10,
2006, the Minister of National Revenue (the “Minister”) reassessed the
Appellant for the 2004 and 2005 taxation years on the basis that the assets in
question (see Schedules “A” and “B” attached to these Reasons) did not meet the
definition of qualified property for investment tax credit (“ITC”) purposes to
subsection 127(9) and paragraph 127(11)(b) of the Income Tax Act R.S.C.
1985, c.1 (5th Supp.), as amended (the “Act”).
5.
A valid Notice of Objection was filed on
September 26, 2006.
6.
By Notice of Confirmation dated July 16, 2007
the Respondent confirmed the Notice of Reassessment for the 2004 taxation year.
7.
By Notice of Reassessment dated July 16, 2007
the Respondent varied the Notice of Reassessment for the 2005 taxation year to
allow additional ITCs totalling $13,279 based on allowable qualifying
investment property used in qualifying activities totaling $132,787. As a
result the following ITC amounts were allowed reducing the total amount of
ITC’s disallowed to $79,755 [$93,034 - $13,279]:
|
Qualifying investment amount
|
$132,787
|
|
Prescribed percentage
|
10%
|
|
Current year Credit
|
$13,279
|
|
|
|
|
Current year reduction to taxes (maximum amount)
|
$2,443
|
|
ITC refund (($13,279 - $2,443) x 40%)
|
$4,334
|
|
ITC carryover
|
$6,501
|
|
Total
|
$13,279
|
8.
Harold Barton was a shareholder of the
Appellant.
9.
The Appellant operated a transportation of wood
chips business.
10.
The Appellant was an independent sub-contractor
engaged by J.D. Irving to chip logs and haul the wood chips directly to the
mill.
11.
The process of making wood chips involves a
piece of equipment called a “feller buncher” that cuts the full tree hardwood
with limbs and foliage.
12.
A “grapple skidder” takes the full tree hardwood
from the stump to the woods road where a “mobile chipper” is set up.
13.
The “mobile chipper” grabs the full tree
hardwood and debarks, delimbs and chips the full tree into wood chips that are
then blown directly into a “chip trailer”.
14.
The “chip trailer” is hooked to the Volvo
Tractor while this occurs.
15.
Once loaded, the Volvo Tractor and “chip
trailer” then proceed from the woods directly to the mill.
16.
The Appellant did not own the limit or cutting
rights to the woods.
2004 Taxation Year
17.
The fiscal year end of the Appellant was March
30.
18.
The property referenced in Schedule “A” was used
to transport wood chips to the mill.
2005 Taxation Year
19.
The fiscal year end of the Appellant was March
31.
20.
The property listed in schedule “B” was used to
transport wood chips from the lot to the mill.
21.
The properties noted in Schedule “B”, with the
one bolded exception, were disallowed by the Minister for ITC purposes.
22.
The one exception, the Volvo VNL64 tractor for $132,787
was purchased from Lounsbury Leasing on March 31, 2005 and financed via a
conditional sales contract with Wells Fargo.
23.
The ITC amounts allowed for 2005 are outlined in
Schedule “C”.
[3]
At the hearing of this
appeal, Daniel Murphy and Harold Barton gave evidence on behalf of the
Appellant. William Eldridge, a team leader in the Audit Division at the Canada
Revenue Agency (“CRA”) in Saint
John, New Brunswick,
testified on behalf of the Respondent.
[4]
Daniel Murphy is
employed by the Department of Natural Resources (the “Department”) for the Province of New
Brunswick as the Director of
the Forest Management Branch. In this capacity, one element of his
responsibilities is to oversee the logging operations on Crown Land in the province.
[5]
In his evidence, Mr.
Murphy explained the procedure for logging operations on Crown Land. He stated that the Crown Timber Licensees
were responsible for planning the overall functions. They and the sub-licensees
harvested the trees to produce various products, depending on the quality of
the timber and the designated user. The products produced at the harvest site
included veneer, saw logs, pulp wood and wood chips. All of these products are
viewed in the industry as primary forest products or raw materials. He referred
to the definition of “processed wood” in the Crowns Lands and Forests Act,
S.N.B. 1980, c.C-38.1, s.1 as follows:
“processed wood” means secondary wood products manufactured
from timber in a wood processing facility;
“wood processing facility” means a mill in which timber is
manufactured into secondary wood products.
[6]
It was his evidence that
the Department considered the chipping of felled trees at the harvest site to
be part of the logging operation as it was the collection of a primary forest
product.
[7]
Consistent with Mr.
Murphy’s testimony, the Forest Products Act, R.S.N.B. 1973, c. F-21
defines “primary forest products” to include wood chips:
1. In this Act
“primary
forest products” means
(a)any
unmanufactured product of forest trees of hardwood or softwood species, and
(b)wood
chips and biomass produced at or on the harvest site, but does not include
(c)coniferous
trees cut for sale as Christmas trees, and
(d)products
from the sap of maple trees;
[8]
He stated that prior to
the use of the mobile chippers, the felled trees had to be debranched, cut into
logs, hauled to the woods road, loaded on a truck, driven to the pulp and paper
mill, taken off the trucks, debarked, and then put through a chipper. The new
practice is simplified, very efficient, and cost-effective. It was his evidence
that the practice of using mobile chippers at the harvest site became prevalent
in the logging industry in the last 8 years.
[9]
Mr. Harold Barton,
president and sole shareholder of the Appellant, testified as to current
logging practices. He explained that when he first became involved in the
logging industry, he transported “round wood” because it was the only thing
available at the time. As time progressed, J.D. Irving Limited began to phase
out the wood rooms at the pulp mills, preferring instead that wood chips be
delivered directly from the harvest sites.
[10]
The current logging
practice involves the use of several pieces of machinery. One piece of
equipment called a “feller buncher” cuts the full tree complete with limbs and
foliage. Another piece of equipment known as a “grapple skidder” puts the
felled trees into bunches, and brings them from the stump to the woods road
where a mobile chipper is set up. The mobile chipper uses “flails” to debark
the tree, chips the tree, and blows the chips directly into a trailer operated
by the Appellant. The trailer, which is attached to one of the Volvo tractors,
is then hauled to the pulp and paper mill.
[11]
Mr. Barton explained
that by chipping entire trees at the harvest site, a higher volume of product
is obtained. In addition, in 2004 and 2005, bark had little value aside from
being used as forest mulch, so further savings were achieved by avoiding the
expense of hauling the added weight of the bark to the mill.
[12]
It was Mr. Eldridge’s
evidence that the equipment used to transport logs from the harvest site to the
mills qualified for the ITC. The logs can be tree length or cut into smaller
lengths and the equipment used to transport them would still qualify for the
ITC.
[13]
Mr. Eldridge stated
that logging ended when the logs were delivered to the mill site. Formerly,
wood chips were produced in the “wood room” at the mill and this was the
beginning of processing and not logging. It was his opinion that the use of the
wood chippers at the harvest site allowed the logging industry to move the
“wood room” from the saw mill to the harvest site.
[14]
Subsection 127(5) of
the Act provides that a taxpayer may deduct an ITC from the tax otherwise
payable pursuant to Part I. Subsection 127(9) of the Act defines ITC and
“qualified property” and provides, in part, as follows:
"investment tax
credit" of a taxpayer at
the end of a taxation year means the amount, if any, by which the total of
(a) the total of all amounts each
of which is the specified percentage of the capital cost to the taxpayer of
certified property or qualified property acquired by the taxpayer in the year,
…
"qualified property" of a taxpayer means property (other than an
approved project property or a certified property) that is
(a) a prescribed building to the
extent that it is acquired by the taxpayer after June 23, 1975, or
(b) prescribed machinery and
equipment acquired by the taxpayer after June 23, 1975,
that has not been used, or
acquired for use or lease, for any purpose whatever before it was acquired by
the taxpayer and that is
(c) to be used by the taxpayer in Canada
primarily for the purpose of
(i)
manufacturing or processing goods for sale or lease,
(ii) farming
or fishing,
(iii) logging,
[15]
Subsection 4600(2) of the
Regulations provides:
4600 Qualified Property,…
(2) Property is prescribed
machinery and equipment for the purposes of the definition "qualified
property" in subsection 127(9) of the Act if it is depreciable property of
the taxpayer (other than property referred to in subsection (1)) that is…
(f) notwithstanding paragraph (e),
a logging truck acquired after March 31, 1977 to be used in the activity of
logging and having a weight, including the weight of property the capital cost
of which is included in the capital cost of the truck at the time of its
acquisition (but for greater certainty not including the weight of fuel), in
excess of 16,000 pounds;
However, for the
purposes of the definition of “qualified property” in subsection 127(9) of the
Act, subparagraph 127(11)(b)(i) specifies:
127 (11) Interpretation
-- For the purposes of the definition "qualified property" in
subsection (9),
(b) for greater certainty, the
purposes referred to in paragraph (c) of the definition "qualified
property" in subsection (9) do not include
(i) storing (other than the
storing of grain), shipping, selling or leasing finished goods,
[16]
In accordance with the evidence
given by Mr. Eldridge, it is the Respondent’s position that when the trees were
fed into the chipper the logging operation ceased and the manufacturing and
processing of the trees began.
[17]
Counsel for the Respondent argued
that the wood chips are finished goods and subparagraph 127(11)(b)(i)
specifically stipulates that the purposes referred to in paragraph 127(9)(c)
do not include the shipping of finished goods.
[18]
I do not agree with the
Respondent’s position. It is my opinion that one must bear in mind the facts
and circumstances that were considered when the ITC was first introduced into
the Act.
[19]
In Lor-Wes
Contracting Ltd. v. The Queen[1],
Justice MacGuigan referred to Hansard to ascertain the conditions considered by
Parliament in bringing the Investment Tax Credit into effect. At paragraphs 20
and 21 he stated:
20 Here, the budget statement of the then Minister
of Finance on June 23, 1975, describes the perceived need to which this
amendment to the Act was the response (Debates of the House of Commons,
June 23, 1975, 7028):
Measures
to Sustain Business Investment
If our economy is to remain
productive and competitive and capable of providing jobs, we must ensure that
we have modern capital facilities with which to work. We must guard against
any slowdown in investment. I have been pleased that capital investment has
continued to expand in present circumstances and I want to do what government
can do to ensure that this expansion continues.
It is well known that our policies
have sought to encourage a strong manufacturing sector. We have provided
long-term tax incentives to assist our manufacturers and processors to compete
in domestic and foreign markets. The evidence presented in the final report on
these tax measures demonstrates their effectiveness. But new and broader
initiatives are needed under current economic circumstances.
I am therefore proposing to
introduce an investment tax credit as a temporary extra incentive for
investment in a wide range of new productive facilities. The credit will be 5
per cent of a taxpayer's investment in new buildings, machinery and equipment
which are for use in Canada primarily in a manufacturing or processing
business, production of petroleum or minerals, logging, farming or fishing. The
cost of new, unused machinery and equipment acquired after tonight and before
July, 1977, will be eligible [Emphasis added].
21 The evil aimed at is clearly
stated to be "any slowdown in investment". Such an evil would be
removed by appropriate activity regardless of its source, and would be best
achieved by encouraging the logging industry in its integral totality. Indeed,
in the light of the fact that subcontracting is general in the logging
industry, any other interpretation of the text would considerably lessen the
potential investment incentive in that industry and so less effectively remove
the identified danger of economic slowdown.
[20]
The ITC was announced in the 1975
budget as a temporary investment incentive. It has been extended and increased
over the years. By means of the ITC, Parliament has created an economic
stimulus to promote investment and development in various sectors[2]. Surely, the incentive is
not to be diminished because the logging industry has evolved to become more
efficient
[21]
The definition of
logging used by Justice Dubé in Lor-Wes Contracting Ltd. v.
The Queen[3]
was:
…By any definition, "logging" is the
sum total of all the operations leading to the felling of timber and the
transporting of logs out of the forest.
[22]
This definition has
also been adopted by the CRA. While the business of logging may generally have
been understood to comprise the harvesting of trees, sawing them into pieces
and transporting them to a saw mill, paper mill or other similar facility, it
must also be appreciated that the different phases of this process will vary
with local conditions and technology.
[23]
Mr. Barton described
the current logging practices of using a mobile chipper at the harvest site as
the “evolution” of the logging industry. The mobile chipper allows for
efficiency and cost-effectiveness in the industry. It is my opinion that the
definition of “logging” must evolve with the industry and include the
transporting of woods chips from the harvest site.
[24]
In Canada v. Markevich[4], the Supreme Court of Canada affirmed that
the modern approach to statutory interpretation requires that the words of an
Act are “to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament”[5].
[25]
A purposive, contextual
interpretation of the legislation in issue requires that the definition of
“logging” include the transportation of wood chips from the harvest site to the
pulp and paper mill. This definition is in alignment with the purpose of the
legislation.
[26]
Counsel for the
Respondent has argued that the production of the wood chips is processing and
once processing has begun, any subsequent activity is outside the scope of
“logging”.
[27]
In Nova Scotia Sand and Gravel Limited v. The Queen[6],
the Federal Court of
Appeal had to interpret the expression “producing industrial materials”, which
activity, along with logging, is excluded from “manufacturing or processing” in
section 125.1 of the Act. In determining the scope of that expression, Chief
Justice Thurlow turned to its context, and at paragraph 12 he stated:
Turning to that context, it is to be observed that the item
in question is the seventh in a list of types of operations to be excluded from
'manufacturing or processing', into which expression, presumably, because they
are to be excluded, all of them would otherwise fall. Next, it is noticeable
that what is excluded by items (i) farming and fishing, (ii) logging, (iv)
operating an oil or gas well and (v) extracting minerals from a mineral
resource, if they are to be considered as manufacturing or processing
operations at all, are at any rate essentially operations for the production of
raw or resource material.
[28]
These observations
recognize that while operations such as logging are essentially for the
production of raw or resource material, a certain degree of processing is
inevitable. Prior to the use of mobile chippers, entire trees could not simply
be harvested and transported to the mill. Limbs and foliage needed to be
removed, and the timber had to be cut into manageable sizes. This processing
activity was a normal part of harvesting the trees.
[29]
In the present appeal,
while the technology used in logging operations may have evolved, the product
can still be characterized as raw or resource material. The evidence given by
both Mr. Murphy and Mr. Barton support this conclusion.
[30]
They described the wood
chips from the mobile chippers as being of a lower quality than the wood chips
produced in a mill. Mr. Barton stated that “the chips that came from a mobile
chipper have different specs than the chips that came from a sawmill because
they (the pulp and paper mill) accept more bark from the mobile chipper; they
accept more fines (very small materials)”.
[31]
Mr. Murphy described
the wood chips produced at the harvest site as the raw material for the pulp
and paper mills.
[32]
I conclude that the
wood chips transported by the Appellant are no more finished goods than the
logs that were transported prior to the advances in the logging industry.
[33]
To view the matter
otherwise would unfairly punish the Appellant for advances that enabled the
logging industry to become more efficient. As noted by Justice MacGuigan in Lor-Wes
Contracting Ltd. at paragraph 21, the intended purpose of the investment
tax credit is best achieved “by encouraging the logging industry in its
integral totality”. The transportation of the wood chips from the harvest site
to the mill is within the “integral totality” of the present day logging
industry.
[34]
For these reasons the
appeal is allowed, with costs.
Signed at Halifax, Nova Scotia, this 22nd day of July 2009.
“V.A. Miller”
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