Rip,
T.C.J.
[Translation]:—The
appellant,
B.B.G.P.
Inc.,
is
appealing
reassessments
for
the
1979
and
1980
taxation
years
in
which
the
Minister
of
National
Revenue,
the
respondent,
disallowed
tax
deductions
for
manufacturing
and
processing
profits
under
section
125.1
of
the
Income
Tax
Act.
B.B.G.P.
Inc.
began
operating
its
business
in
1979.
During
the
years
in
question
B.B.G.P.
Inc.
ran
a
software
business.
It
designed,
developed
and
implemented
various
accounting
systems.
It
created
personalized
systems
for
each
of
its
customers;
each
system
met
the
needs
of
a
particular
customer.
In
its
opinion
the
creation
of
these
systems
was
manufacturing.
The
respondent
said
that
the
appellant
was
providing
services
to
its
customers
and
was
not
manufacturing
any
finished
products
on
its
own
premises
and
then
selling
them
to
its
customers.
The
appellant
did
not
own
the
computer
and
data
processing
equipment
which
used
the
software.
The
terms
of
proposals
between
the
appellant
and
its
customers
provided
that
the
appellant
could
use
the
customer's
equipment
at
no
cost
while
the
system
was
being
developed.
A
few
specimen
proposals
were
filed
in
evidence
by
the
appellant
to
show
the
type
of
work
it
was
doing
during
1979
and
1980.
The
proposals
were
not
identical
but
there
were
similarités
in
each
concerning
the
point
at
issue,
and
I
shall
cite
relevant
parts
of
a
proposal
submitted
to
Wabasso
Inc.:
(a)
B.B.G.P.
Inc.
will
design,
develop
and
implement
the
Accounting
system
at
the
Trois-Rivières
plant
of
Wabasso
Inc.
(c)
Wabasso
Inc.
also
agrees
to
provide
B.B.G.P.
Inc.
with
computer
time
on
the
Four
Phase
equipment
at
the
Ville
Mont-Royal
executive
offices
for
the
development
of
the
accounting
system
at
no
extra
charge
to
B.B.G.P.
Inc.
(d)
B.B.G.P.
agrees
to
supply
adequate
systems
and
programming
resources
to
fulfil
the
design,
programming,
testing,
documentation
and
implementation
activities
herein
described.
(g)
B.B.G.P.
Inc.
will
develop
and
document
the
system
specifications
in
detail
for
approval
by
Wabasso
Inc.
(k)
B.B.G.P.
Inc.
will
test
the
system
thoroughly
using
test
data
prepared
by
B.B.G.P.
Inc.
personnel.
(l)
Wabasso
Inc.
with
support
from
B.B.G.P.
Inc.,
will
conduct
a
customer
acceptance
test
in
order
to
certify
that
the
system
complies
with
previously
agreed
upon
specifications.
The
appellant
apparently
succeeded
in
designing,
developing
and
implementing
systems
for
Wabasso
Inc.
and
for
other
customers
and
received
fees.
In
its
advertising
material
sent
to
potential
customers
in
1980,
B.B.G.P.
Inc.
described
itself
as
“a
business
operating
in
the
computer
consulting
field’’
and
listed
a
few
of
its
services
as
follows:
"'project
management,
feasibility
study,
conversions,
systems
analysis,
systems
development,
programming,
equipment
choice,
documentation,
installation
of
systems,
user
training..
.
.’’.
Denis
Bureau,
the
appellant’s
president,
testified
that
when
B.B.G.P.
Inc.
began
working
on
a
contract,
it
examined
the
customer’s
needs
and
prepared
a
program
for
the
customer.
The
customer
had
all
the
information
necessary
to
develop
an
accounting
system;
this
information
included
sales’
figures,
inventory,
costs
and
prices.
B.B.G.P.
Inc.
supplied
the
program
structure.
The
appellant’s
only
tangible
assets
for
the
years
in
question
were
office
furniture
worth
$4,215
and
equipment
worth
$373.
The
financial
statements
show
that
the
income
for
1979
and
1980
consisted
of
professional
fees;
there
is
no
reference
to
sales.
B.B.G.P.
Inc.
had
only
four
employees;
the
employees
were
the
shareholders
of
the
corporation.
The
appellant
submitted
that
it
manufactured
these
systems
to
order
for
customers
and
that
after
a
particular
system
had
been
manufactured,
it
was
sold
to
the
customer.
It
relied
on
the
last
sentence
in
paragraph
40
of
Interpretation
Bulletin
IT-145R
dated
June
19,
1981:
Where
software
is
transmitted
by
way
of
tangible
property
such
as
computer
cards,
tapes
or
disks,
those
activities
that
relate
to
the
manufacture
or
process
of
this
property,
such
as
producing
a
clean
compilation
and
testing
the
program,
would
be
considered
qualified
activities.
The
appellant
suggested
that
all
its
work
in
the
creation
of
a
system
for
a
customer
is
manufacturing
a
product.
I
am
of
a
different
view.
When
the
appellant
begins
work
on
a
system
for
a
customer,
the
system
does
not
exist;
it
must
be
developed
or
invented.
The
process
of
developing
a
system
is
not,
in
my
view,
a
manufacturing
stage.
A
product
can
be
manufactured
once
one
has
the
knowledge
of
how
to
manufacture
it.
In
a
development
stage
this
knowledge
is
being
sought.
There
can
be
many
failures
before
the
goal
is
reached.
For
the
appellant
the
goal
is
to
develop
a
system
for
the
customer.
Once
the
system
is
developed,
its
manufacture
can
begin
and
it
can
be
received
by
way
of
tangible
property:
computer
cards,
tapes
or
discs.
Once
the
system
is
developed,
the
work
consists
of
manufacturing.
Once
the
system
has
been
created,
it
can
be
transformed
into
tangible
property
and
its
manufacture
begun.
What
sort
of
work
did
the
appellant
do
during
the
years
in
question?
Was
it
carrying
on
a
manufacturing
or
a
service
business?
The
appellant
adduced
in
evidence
a
few
specimen
proposals
and
its
financial
statements
for
1979
and
1980.
I
have
not
had
an
opportunity
to
examine
any
written
contracts,
if
there
are
any,
between
the
appellant
and
a
customer.
Neither
of
the
parties
adduced
evidence
concerning
when
or
how
the
appellant
could
or
was
entitled
to
claim
its
fees
from
a
customer.
With
such
evidence
it
would
be
possible
to
analyse
more
accurately
whether
the
appellant
was
selling
a
tangible
item
or
its
time
and
expertise.
The
presumptions
of
fact
supported
by
the
respondent
include
the
fact
that
“the
appellant
was
carrying
on
a
service
business
and
derived
all
its
revenue
from
fees
as
a
computer
consultant."
The
appellant
did
not
adduce
any
facts
to
counter
this
hypothesis.
The
appellant’s
evidence
and
arguments
consisted
in
trying
to
show
that
it
was
operating
a
manufacturing
business.
As
I
said
earlier,
design
and
development
of
a
product
do
not
constitute
its
manufacture.
The
financial
statements
for
1979
and
1980
show
that
all
its
revenue
was
derived
from
professional
fees.
There
are
no
figures
for
sales,
sales
costs
or
other
accounting
details
used
by
a
manufacturer.
The
appellant
has
not
established
that
this
presumption
of
the
respondent
was
false.
The
appellant
has
not
established
that
it
was
a
manufacturer
of
accounting
systems,
even
after
they
were
developed,
during
the
years
in
question.
The
reassessments
must
be
upheld
and
the
appeal
is
dismissed.
Appeal
dismissed.
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