Edwards Fine Foods Ltd. v. Minister of National Revenue, [1986] 2 CTC 2447, 86 DTC 1815

Christie, A.C.J.T.C.: —B notices of reassessment dated October 15, 1984, the respondent informed the appellant that its income tax liability respecting its 1980 and 1981 taxation years had been reassessed on the basis that it was not entitled to make certain significant deductions by way of investment tax credit from the tax otherwise payable by it. Notices of objection followed. The response to these was notification of confirmation by the respondent of the reassessments. Hence this appeal.

The principal witness at the hearing was Mr. Paul Edwards, president of the appellant. It has been a franchise of Kentucky Fried Chicken Canada Limited since 1958. It has 14 outlets in Nova Scotia, 11 in the Halifax- Dartmouth metropolitan area, 1 in Liverpool, 1 in Yarmouth and 1 in Digby. The appellant owns the real estate comprising each outlet.

Construction at four outlets, namely, Wyse Road, Dartmouth; Cole Harbour Road, Dartmouth; Yarmouth and Digby, is relevant to this appeal. Three reasons were given for doing this work: regular upgrading of outlets is required by the franchisor, making changes to the heating systems because of rising energy costs and to provide self-serve seating areas for customers. The last reflected some shift of customer preference in favour of eating in the outlets rather than in automobiles. Prior to the renovations and new construction, the four outlets had a maximum of five seats each for customers wishing to dine inside.

The renovations and additions were relatively extensive. The increase in square feet, excluding basements, was: Wyse Road 1,000 to 1,810.7 or 45 per cent, Cole Harbour Road 2,628 to 3,435.2 or 23 per cent, Yarmouth 1,750 to 2,653.4 or 34 per cent and Digby 1,152 to 1,928.3 or 40 per cent. Of the total business transacted on these premises after completion of the work, it was estimated by representative samples that 15 per cent, 17 per cent, 22 per cent and 29 per cent respectively was "Customers Eat-In’’, the remainder of the food sold being taken off the premises for consumption.

Persons who dine on the premises pick up and pay for the food at a counter and eat in an area designated for this purpose which is equipped with chairs and tables. The containers for the food and the utensils are disposable. No one waits on tables. The same kind of food is sold at each outlet. It consists of fried chicken, french fried potatoes, salads, bread and nonalcoholic beverages.

The appellant has a warehouse in Halifax which receives, stores and redistributes fresh, raw butchered chickens. These come from suppliers in the Annapolis valley. Other products and ingredients related to what is prepared and sold in the outlets passes through the warehouse. Included in this is "breading flour". It is obtained from the franchisor and is shipped from Ontario. It is a spiced mixture, the composition of which is said to be a trade secret. The chicken is coated with breading flour prior to cooking. Some of the outlets place less reliance on the warehouse for supplies than others. For example, the outlets at Yarmouth and Digby obtain chicken and other foods from local suppliers and have breading flour shipped directly from Ontario.

Edwards said that the four outlets referred to are not what is regarded in the restaurant industry as "full-service restaurants”. Restaurants of that kind provide table service, dishes and cutlery. He characterized them as places "where the dining experience is a major part of the reason why the consumer goes". As for the appellant’s Kentucky Fried Chicken outlets he said: "Our restaurants are not full-service. They are self-service. We have no table service, no cutlery, no reusable cutlery, no reusable dishes. We do not wash dishes, no linen". He added that recognition of the distinction by the industry is unquestionable.

The witness was asked to describe the operations of Mother's Pizza restaurants. The significance of this will become apparent later. He replied: "They are basically a home-service dining room, where they have full table service and reusable dishes and cutlery, very pleasant decorations and tablecloth type operations. They also have some take-out and deliveries, but it is primarily a full-service licensed dining room". His testimony went on that in restaurants of this kind the majority of persons employed are involved in selling food and beverages while in restaurants such as Kentucky Fried Chicken outlets the majority are involved in production. Prices for food are higher in full-service restaurants. So is the capital cost of constructing and equipping them.

The Cole Harbour Road and Digby outlets were originally constructed after the investment tax credits were introduced in 1975. These credits were deducted in relation to that construction by the appellant in computing its tax liability and this was allowed by the taxing authorities. It was said that the same is true regarding two other outlets: one in Lower Sackville and the other on Tacoma Drive, Dartmouth. Both were “identical to what Digby and Yarmouth are today.”

Subsection 127(5) of the Income Tax Act ("the Act") provided:

There may be deducted from the tax otherwise payable by a taxpayer under this Part for a taxation year an amount not exceeding the lesser of

(a) his investment tax credit at the end of the year, and

(b) the aggregate of

(i) $15,000, and

(ii) /2 the amount, if any, by which the tax otherwise payable by him under this Part for the year exceeds $15,000.

Included in the definition of investment tax credit of a taxpayer at the end of a taxation year under subsection 127(9) was a percentage of the capital cost to him of qualified property after making applicable specified deductions. The phrase “qualified property” was defined under subsection 127(10) and included “‘A property that is a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, that has not been used for any purpose whatever before it was acquired by the taxpayer and that is to be used by him in Canada primarily for the purpose of manufacturing or processing of goods for sale.” By operation of subsection 248(1) of the Act, prescribed building means a building prescribed by Regulation. Under subsection 4600(1) of the Income Tax Regulations a prescribed building may include additions and alterations.

I will first deal with the evidence pertaining to assessments of the appellant's tax liability by Revenue Canada in years prior to those under appeal regarding the deductibility of investment tax credits. That there may have been, or even if there has in fact been, inconsistencies in different taxation years in assessing or reasssessing a taxpayer this cannot alter the law as laid down by or under the authority of Parliament. It is that law, unfettered by the manner in which the Act and Regulations may have been construed and applied in other years by those administering them, that governs the determination of appeals to this Court. The impact on legislation of administrative policy and interpretation is limited to the role of interpretative aids in circumstances of legislative ambiguity: Wollenberg v. M.N.R., [1984] C.T.C. 2043 at 2045; 84 D.T.C. 1055 at 1057.

There is no dispute regarding whether the reconstructed and renovated outlets were prescribed buildings which were acquired by the appellant after June 23, 1975. The focus of the appeal is whether they were to be used by it in Canada primarily for the purpose of processing of goods for sale within the meaning of subparagraph 127(10)(c)(i) of the Act. Subparagraph 127(11)(b)(i) provided that the purpose referred to in subparagraph 127(10)(c)(i) does not include selling of finished goods.

In order for this appeal to succeed in this Court it must be properly distinguishable from what was said by Mr. Justice Rouleau of the Federal Court—Trial Division in Mother’s Pizza Parlour (London) Limited and Mother's Pizza Parlour Limited v. The Queen, [1985] 1 C.T.C. 361; 85 D.T.C. 5271. A recital of these attenuated facts is sufficient for present purposes. Both plaintiffs were involved in operating restaurants called “Mother's Pizza Parlour and Spaghetti House”. They sought to deduct investment tax credits under subsection 127(5) of the Act from the tax otherwise payable by them in respect of their 1976 taxation year. On reassessment this was disallowed by the Minister of National Revenue. The issue was whether buildings in which restaurants were housed were qualified properties. This in turn raised the particular question whether those buildings had been acquired to be used by the plaintiffs “in Canada primarily for the purpose of manufacturing or processing of goods for sale” within the meaning of subparagraph 127(10)(c)(i). Then, as in the years now under review, subparagraph 127(11)(b)(i) provided that the purpose referred to in subparagraph 127(10)(c)(i) does not include selling of finished goods. Mother's Pizza Par- lour and Spaghetti Houses offered a variety of foods, pizza being the specialty of the house. They provided dining rooms, take-out and delivery service to their customers. The largest portion of the floor space of the restaurants and of the staff was involved in dining room service. In dismissing the appeal His Lordship said at 367 (D.T.C. 5275) in relation to subparagraph 127(11)(b)(i):

I think its meaning and interpretation are obvious. Subparagraph 127(11)(b)(i) deletes from the meaning of “manufacturing and processing” any operation using its building for the “selling . . . of finished goods”. I find, as a matter of fact, that whatever the intermediate steps may be, Mother’s Pizza Parlours’ buildings were used for the selling of finished goods, namely meals, whether they were consumed on the premises or were picked-up or delivered for consumption in the homes of customers.

He went on at 367-68 (D.T.C. 5276):

Paragraph 127(10)(c), when read as a whole, indicates that the investment tax credit was intended to provide an incentive for investment in Canada’s traditional primary and secondary industries; to provide a reward for enterprises in those industries who have already made investments in new buildings or equipment. The effect intended was to protect or create Canadian jobs in certain sectors. No doubt Mother’s Pizza Parlours is a large-scale operation with a large number of employees and expensive equipment and buildings. But I see no logical distinction, other than the scale of the operation, between Mother’s Pizza Parlour and any other restaurant; or for that matter, a corner pastry shop, a haberdashery which makes suits to measure or even a hot dog stand. I cannot accept that Parliament intended to benefit all such operations with the investment tax credit. I am convinced that it was intended to avoid such an absurd result that subparagraph 127(11)(b)(i) excludes operations using machinery and buildings to sell finished goods.

Even if I am wrong in stating that the word “processing” cannot, in this instance, be given a wide definition because of the overall scheme and intent of the investment tax credit, I do not think Mother’s Pizza Parlours’ operations can be viewed as processing even if that term is given a very broad meaning. The buildings were used for the preparation of meals for immediate consumption, not for the processing of food. For example, pizzas were prepared (or assembled) using purchased ingredients and the dough was not even made on the premises. It was purchased from an independent supplier.

After citing definitions of “process” from the 1959 and 1964 editions of Webster's Third International Dictionary, Mr. Justice Rouleau added at 368 (D.T.C. 5277):

These definitions seem to confirm my view that processing does not include the preparation of meals for immediate sale as a finished product to the public. These definitions all suggest, with examples that a factory freezing pizzas or pizza ingredients might be “processing”, but not a restaurant preparing pizza for immediate consumption. I found the expert testimony of Mr. John A. Kitson more helpful than the dictionary definitions. Mr. Kitson testified that Mother’s Pizza Parlours are not food processing operations. He would appear to base his opinion on two factors. First, that ordinary commercial usage in the industry does not include the preparation of food for immediate consumption in a restaurant or for delivery or pick-up in the notion “food processing”. The admissibility and probative nature of such evidence is confirmed by the decision of the Federal Court of Appeal in Controlled Foods v. The Queen, (supra). Second, that food processing includes some element of transformation or preservation to allow wide distribution at a later date. This does not describe the operations carried out at Mother’s Pizza Parlours.

In seeking to distinguish this case from Mother's Pizza Parlour Mr. Harris underscored the differences between the appellant’s Kentucky Fried Chicken outlets and the Mother's Pizza Parlour and Spaghetti House estab- lishments in relation to such matters as floor space, staff and expenditures committed to dining room facilities. With respect I cannot concur that this is a valid basis upon which to differentiate. I regard disposition of this appeal as being governed by Mother's Pizza Parlour.

I understand that the judgment in Mother's Pizza Parlour has been appealed to the Federal Court of Appeal, but that the appeal has yet to be heard. The mere fact that an appeal has been launched cannot affect the disposition of this appeal. Until the judgment of the Federal Court — Trial Division in Mother's Pizza Parlour is reversed or qualified in some significant way by the Federal Court of Appeal or the Supreme Court of Canada, I believe that the proper course for me to adopt is to accept and apply it whenever the occasion arises. It was brought to my attention at the hearing that apparently Revenue Canada does not regard itself bound in similar manner. Paragraph 45 of Interpretation Bulletin No. IT-14R dated June 19, 1981, reads:

Generally, the primary activities of a restaurant are those of providing service to its patrons. Such services include the waiting upon tables, clearing, washing and drying of cutlery and dishes, cashier services and in some cases the provision of entertainment. However, the activities of preparing meals for consumption constitutes processing and thus some part of a restaurant’s income may be eligible for the reduced rate of corporate tax. The mixing of a number of ingredients of a drink is considered processing but the mere pouring of liquor or beer into a glass and the dispensing of draft beer are not considered processing.

In the case of “take-out” establishments, the primary activities may be the preparation of meals and thus all of the business income of the corporation may qualify for the reduced rate of tax under the small manufacturers’ rule.

On February 28, 1986, Revenue Canada issued a “Special Release on Interpretation Bulletin IT-145R”. It reads:

As stated in paragraph 45, the Department’s view for several years has been that the preparation of food by restaurants and “take-out stores” falls within the meaning of processing for purposes of entitlements to tax credits under the Income Tax Act. For reasons not inconsistent with this view, the Department disallowed certain credits claimed by a group of restaurants during the course of a tax audit. In the ensuing litigation the Department argued and the Federal Court held that food preparation is not “processing”. The taxpayers have appealed the decision to the Federal Court of Appeal.

A review of the reasons for judgment given by the Court indicates that the Department’s position as stated in paragraph 45 may have been ill-founded. However, it has been decided for assessing purposes to continue to follow the view expressed in that paragraph pending further consideration and the decision of the Federal Court of Appeal.

The appeal is dismissed.

Appeal Dismissed.