Date: 19980622
Docket: 93-692-IT-G
BETWEEN:
DONOHUE ST-FÉLICIEN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
ARCHAMBAULT, J.T.C.C.
[1]Donohue St-Félicien Inc. ("Donohue")
is challenging income tax assessment notices issued by the
Minister of National Revenue ("the Minister") for the
1985 and 1986 taxation years. At the start of the hearing the
parties filed a consent to judgment settling the appeal with
respect to 1985. As to 1986, the only issue was whether Donohue
is entitled to an investment tax credit ("ITC") with
respect to three forest roads built or improved in 1986. For
there to be entitlement to the ITC, the three roads had to
be "qualified property" according to the definition
contained in s. 127(9) of the Income Tax Act
("the Act"):
"qualified property" - "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 . . .
This provision applies to only three types of property,
namely prescribed buildings, prescribed machinery and prescribed
equipment. As a forest road is neither a building nor machinery,
that leaves the third type of property, "prescribed
equipment". Donohue maintained that the forest roads it
built or improved were prescribed equipment described in
s. 4600(2)(h) of the Income Tax Regulations
("the Regulations") and that they were not roadways,
which are excluded from that definition.
Section 4600(2)(h) provides as follows:
4600. (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 . . .
(h) a property included in paragraph (n) of
Class 10, or Class 15, in Schedule II (other than
a roadway) . . .
The property included in paragraph (n) of
Class 10 or in Class 15 is the following:
Class 10
(n) property that was acquired for the purpose of
cutting and removing merchantable timber from a timber limit and
that will be of no further use to the taxpayer after all
merchantable timber has been removed from the limit, unless the
taxpayer has elected to include another property of this kind in
another class in this Schedule . . .
Class 15
Property that would otherwise be included in another class in
this Schedule and that
(a) was acquired for the purpose of cutting and
removing merchantable timber from a timber limit, and
(b) will be of no further use to the taxpayer after all
merchantable timber that the taxpayer is entitled to cut and
remove from the limit has been cut and removed,
except
(c) property that the taxpayer has, in the taxation
year or a preceding taxation year, elected not to include in this
class, or
(d) a timber resource property.
In short, the question comes down to whether forest roads are
equipment, and if so, whether they are roadways.
Facts
[2]Donohue is a company operating a forestry business which
includes the cutting and removal of merchantable timber located
in a Crown forest. In 1986 Donohue, in the course of its forestry
business, built roads to enable the merchantable timber to be cut
and removed.
[3] The capital cost of the forest roads at issue with regard
to the 1986 taxation year was as follows:
Samaqua road: $176,806
Desautels road: $258,000
Libéral-Mistassini road: $ 58,155
[4]Donohue asked Rosaire Després, a forestry
engineer with a degree from the Université Laval, to
testify as an expert witness and describe a roadway. Counsel for
the Minister objected to Mr. Després testifying for
this purpose because, in his submission, it was the Court's
responsibility, not that of an expert witness, to define the
meaning of the word chaussée ("roadway").
I took counsel’s objection under advisement and allowed
each of the parties to call its expert witness.
[5] In R. v. Mohan, [1994] 2 S.C.R. 9,
at page 20, Sopinka J. of the Supreme Court of Canada set
out the tests to be used by a judge to decide whether expert
evidence is admissible. They are the following:
(a) relevance;
(b) necessity in assisting the trier of fact;
(c) the absence of any exclusionary rule;
(d) a properly qualified expert.
[6] Here the question is whether the word "roadway"
should be broadly interpreted, in the sense of a highway or road,
or be given a narrower interpretation, like that adopted by
Donohue, under which it would mean the surface course on which
vehicles travel and which is located between the two shoulders.
As this word is found in a regulatory provision applying to
property used in the logging industry, I think it is useful to
determine whether the word "roadway" (or
"chaussée") can have a special meaning for
people in that industry. That is a factor which could have a
bearing on the scope of these words.
[7] Through the testimony of the two expert witnesses I
learned not only what they considered was meant by the word
"roadway", but also how forest roads are built.
Finally, this testimony drew the Court's attention to certain
texts dealing with such matters. I therefore conclude that their
testimony is admissible. It is quite clear that it is admitted
solely in order to assist the Court and enable it to decide the
matter at issue.
[8]Mr. Després, Donohue's expert witness,
filed passages taken from the Manuel de foresterie
published in 1996 by Les Presses de l'Université Laval
in collaboration with the Ordre des ingénieurs forestiers
du Québec.[1] In that manual, the structure of a forest road is
described as follows, and I quote the relevant passage in
full:
[TRANSLATION]
|
1.1.2 Structure of a forest road
Forest road terminology distinguishes between several
structural components. These components are features of the
road and delineate its physiognomy. As regards forest
roads, the nomenclature of these components differs
somewhat from that used by the Ministère des
transports (MTQ).
Figure 2 illustrates, with the aid of a
well-defined road, the components of a forest road and the
terminology generally used with regard to forest roads.
However, it should be noted that for some types of road
the foundation can serve as a sub-foundation and rest
directly on the roadbed. In the same way, the surface
course is almost non-existent in a forest road: the road
surface rests directly on the foundation, the
sub-foundation or sometimes even on the roadbed (e.g.
winter roads).
1.1.2.1 Roadbed
The roadbed is defined as the earthworks supporting the
sub-foundation, the foundation and its shoulders. The upper
limit is the roadbed line. "Subgrade" is a term
commonly used in forestry and, though sometimes
rudimentary, the subgrade corresponds to the roadbed. The
word "subgrading" is generally used with
reference to the construction of the roadbed.
Although in superior quality roads the roadbed consists
of mineral materials, a mixture of stumps and organic and
mineral matter is frequently used for lesser quality
roads.
|
1.1.2.2 Sub-foundation
The sub-foundation consists of a layer of coarse
granular material (natural gravel) resting on the roadbed.
For secondary and tertiary roads, the sub-foundation
commonly serves as the foundation.
1.1.2.3 Foundation
In the case of forest roads, the foundation is generally
the layer of material which serves as the road surface.
In that case the words "roadway" or
"surface course" are often used to refer to the
foundation. It sometimes consists of crushed gravel or
natural gravel which has been sorted or sifted.
1.1.2.4 Side ditches
Side ditches are adjacent to the raised area forming the
road and their primary function is to channel runoff water
from the road and the right-of-way. These ditches prevent
the formation of stagnant ponds and erosion of the road.
They form part of the excavation work.
1.1.2.5 Drainage ditches
Drainage ditches are primarily excavation works for the
drainage of wet areas. The term also refers to the
diverting of water and the improvement of water runoff.
This work is done beyond the side ditches and drainage
ditches often extend beyond the right-of-way.
1.1.2.6 Right-of-way
The right-of-way is the strip of land necessary for road
construction work; it usually corresponds to the cleared
corridor.
|
[9]Mr. Després stated that in forestry
chaussée ("roadway") has always referred
to the surface course which forms the road surface on which
vehicles travel:
[TRANSLATION]
Seen crosswise, the roadway is the central part of the road.
It is bordered on each side by a shoulder.
Seen in cross-section, the roadway consists of a layer of
materials of appropriate grading which is put there to
ensure comfortable travel.
[My emphasis.]
[10]Dominique Parent, the Minister's expert witness,
is a forestry engineer who works for the Quebec Department of
Natural Resources (Ministère des ressources naturelles),
in the forest bridges and roads division of the technical
assistance branch. He expressed the following opinion on the
meaning of the word chaussée
("roadway"):
[TRANSLATION]
In Quebec, in the language in use in the road construction
sector (forest or other roads), the word chaussée
("roadway") refers to everything done the primary
effect of which is to alter the natural profile of the land so as
to obtain a road surface, that is, a finished product which is
often characterized by the width reserved for vehicular
traffic.
Based on my knowledge and practical experience in the forest
bridges and roads division of the Department of Natural
Resources, all work involved in earthmoving, in preparation of
the roadbed and in putting down a gravel layer about 30 cm
deep to serve as a road surface represents costs relating to the
construction of a chaussée ("roadway") or
forest road.
[11] In support of this interpretation, Mr. Parent relied
in particular on the Highway Construction Manual by
G.-Robert Tessier, Highway Department, Quebec, 1967, in
which, in Chapter 9, titled "Terminology",
chaussée ("pavement" in the English
version) is defined as all parts of a highway, including the
"paving" and shoulders. He also relied on the Cahier
des charges et devis généraux, 1993 edition,
published by Les Publications du Québec. Prepared by the
operations support branch of the Department of Transport
(Ministère des transports), this Cahier des charges
defines the rights and duties of the Department of Transport and
those of the contractor. In this document chaussée
("roadway") is defined as follows:
[TRANSLATION]
Roadway
The roadway is the surface on which vehicles travel. It also
refers to all the layers of material placed above the roadbed and
intended to support vehicles: those layers are the
sub-foundation, the lower and upper foundations and the road
surface.
Analysis
[12] For Donohue to be entitled to its ITC, it is essential
that the forest roads with respect to which it incurred costs be
qualified property within the meaning of s. 127(9) of the
Act.
[13] Before considering whether Donohue is right in saying
that "prescribed equipment" includes a forest road
except for the surface course, it must first be decided whether
the word "equipment" includes a forest road. Answering
this question is essential because only a building, machinery and
equipment can be "qualified property". If a forest road
does not constitute equipment, then the Governor in Council could
not make it "prescribed" equipment under s. 127(9)
of the Act. In exercising the power conferred on him by
s. 221(1)(a) of the Act, the Governor in Council can
only make the regulations contemplated by the Act.
[14]Counsel for Donohue argued that the word
matériel ("equipment") has a broad enough
meaning to encompass a forest road. As the word
matériel ("equipment") is not defined in
the Act, reference must be made to its everyday meaning.
According to Le Robert - Dictionnaire alphabétique et
analogique de la langue française (tome 4, Paris,
Société du Nouveau Littré), the word
matériel ("equipment") means:
[TRANSLATION]
|| 2 ° Set of objects, tools,
machines . . . used in some service or operation
(as opp. to staff). See Equipment, and also
Capital. Farming, cultivation . . .
printing, laboratory, office equipment. Modern
equipment . . . Makeshift
equipment . . . "Equipment" account in
business accounting (See Equipment, furniture, tools).
Depreciation of equipment. Chief in charge of
equipment . . . Collect tons of equipment for a
polar expedition . . .
[15] A forest road is not a "tool" nor a
"machine". However, counsel for Donohue argued that a
forest road is an "object", a word defined as follows
in Le Robert:
[TRANSLATION]
|| 2 ° Used of whatever has a physical existence and
serves a certain purpose. See
thing . . .
[16] In the English version of the Act the equivalent of the
word matériel is "equipment", defined as
follows in Webster's Third New International Dictionary of
the English Language:
1 a: the equipping of a person or thing (the
development and ~ of a library extension program) b: the
state of being equipped (the institution did not spring in full
maturity and ~ - J.H. Burton) 2 a: the physical
resources serving to equip a person or thing (funds for building
and ~) (the vocal ~ of a singer) (a new jail became part of the
municipal ~ - Amer. Guide Series: Va.)as
(1): the implements (as machinery or tools) used in an
operation or activity: APPARATUS (where a tractor is
standard ~) (sports ~) (2): all the fixed assets
other than land and buildings of a business enterprise (the
plant, ~, and supplies of the factory) . . .
syn EQUIPMENT, APPARATUS, MACHINERY, PARAPHERNALIA,
OUTFIT, TACKLE, GEAR, MATÉRIEL, can signify, in common,
all the things used in a given work or useful in effecting a
given end. EQUIPMENT usu. covers everything, except personnel,
needed for efficient operation or service, often applying also to
human qualities and skills useful in this way (the marines took
with them full combat equipment, including tanks,
artillery, jeeps, trucks, and flamethrowers - Time) (other
equipment in the park includes tables, benches, and
playground apparatus . . .)
[My emphasis.]
[17] I do not think we should adopt such a broad meaning as
that suggested by counsel for Donohue. First, in determining the
scope of a term it is important to fully understand the context
in which the term is used. In the definition of the phrase
"qualified property" in s. 127(9) of the Act, it
can be seen that the Act creates a distinction between a
building, machinery and equipment. If the broad meaning suggested
by counsel for Donohue were adopted, there would have been no
need to state that qualified property could include a building or
machinery. In any case, it would not have been necessary to use
two separate paragraphs to describe qualified property, one
dealing with prescribed buildings and the other with prescribed
machinery or prescribed equipment.[2]
[18]Further, I do not think that the word
matériel ("equipment") includes a dirt or
gravel road to the man in the street. It is interesting to note
that according to Webster’s Dictionary the word
"equipment" may have either a broader or narrower
meaning. Thus, it means an "implement" (which may be
translated in French by outil or instrument, such
as machinery or tools. It can also mean any fixed asset, other
than land or buildings, of a business enterprise.[3] In my view, the word
"equipment" used in the definition of the phrase
"qualified property" does not include the buildings a
company uses in operating its business and also does not include
land, or the roads built thereon. In conclusion, I do not think
the Governor in Council could have included forest roads in
"prescribed equipment". Consequently, Donohue’s
forest roads are not qualified property for the purposes of the
ITC.
[19]Even if my conclusion regarding the scope of the word
"equipment" were incorrect and forest roads had to be
treated as equipment, I would conclude that forest roads are not
"prescribed equipment" because they are roadways and as
such excluded from the definition of "prescribed
equipment" in s. 4600(2)(h) of the Regulations.
The word "roadway", as confirmed by two experts, can
have a broader meaning and narrower meanings. In its broader
sense the word is synonymous with "road". In its
narrowest sense the word "roadway" refers to the thin
surface course located between the shoulders of the road. In the
latter case, the term does not include either the roadbed on
which this surface course rests or the shoulders.
[20] I do not think the narrow sense suggested by Donohue is
in keeping with the spirit of the Act and Regulations. If the
Governor in Council intended a forest road to be prescribed
equipment, why did he take the trouble to exclude the surface
course? As we have seen in the statement of facts, in most cases
this surface course is almost non-existent in forest roads. What
would be the use of excluding a part of a road which is not
usually present? This appears to me to be an absurd result. I see
no good reason of fiscal policy for including a forest road but
excluding its surface course.
[21]This conclusion would be still more obvious if one were to
take the word "roadway" as meaning
"foundation" (see 1.1.2.3 of the passage from the
Manuel de foresterie cited in paragraph 8 above). In
that case the foundation of the road would be excluded from
"prescribed equipment". As the sub-foundation commonly
serves as the foundation, the only parts of the forest road which
could constitute "prescribed equipment" would be the
shoulders and side ditches: so why exclude the foundation but not
the shoulders and side ditches? It makes no sense.
[22] If Donohue’s interpretation were adopted, it could
also lead to needless problems with regard to application. In
some cases it might be difficult to separate the costs related to
the roadbed and those related to construction of the surface
course. On the basis of what "appropriate grading"
should a surface course be considered to exist? Here, counsel for
Donohue argued that the forest roads were not covered with a
surface course and that all the costs incurred related to a
forest road, excluding a surface course.
[23] I have no hesitation in adopting the broad meaning of the
word "roadway" and concluding that this word is
synonymous with "road" for the purposes of
s. 4600(2)(h) of the Regulations.
[24] For these reasons, Donohue’s appeal for the 1986
taxation year is dismissed with costs to the Minister. The appeal
in respect of 1985 is allowed and the assessment referred back to
the Minister for reconsideration and reassessment in accordance
with the terms of the consent to judgment filed by the
parties.
Signed at Ottawa, Canada, this 22nd day of June 1998.
"Pierre Archambault"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 16th day of July
1998.
Erich Klein, Revisor
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