Les Ateliers Benoît Allard Inc v. Minister of National Revenue, [1984] CTC 2189, 84 DTC 1131

Tremblay, TCJ [TRANSLATION]:—This case was heard at Quebec City, Quebec on October 15, 1982. It was taken under advisement when the last written pleadings were filed on January 31, 1983.

1. Point at issue

The question is whether the appellant was correct in claiming tax credits of $1,509.14 for 1976, $4,020.50 for 1977, $7,200 for 1978 and $7,137.87 for 1979. These credits are covered by the provisions of paragraph 125. l(3)(a) and (b) of the Income Tax Act, in the calculation of the manufacturing and processing profits (hereinafter referred to as “MPP”) of goods in Canada.

Respondent maintained that 79 per cent of the appellant’s activities are devoted primarily to construction, that is to purposes other than the manufacturing and processing of goods for sale or lease, and should be excluded from calculation of the MPP. He accordingly reduced these credits to $680.32 (1976), $1,717.79 (1977), $2,630.24 (1978) and $2.647.80 (1979).

2. Burden of proof

2.01 The appellant has the burden of showing that the respondent’s assessments are incorrect. This burden of proof results not from a particular section of the Income Tax Act but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts presumed by the respondent are described in subparagraphs (a) to (i) of paragraph 5 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

5. In assessing the appellant for its 1976, 1977, 1978 and 1979 taxation years the respondent relied, inter alia, on the following facts:

(a) the appellant specializes in the installation of machinery in sawmills;

(b) the installations done by the appellant include the construction of supports, walkways and various related work;

(c) most of the work is done at the sawmills;

(d) the appellant owns part of the tools needed for the installation work, including welding machines, an iron folder, a lift to move material in its workshop, and a crane and special truck to move material about at the sawmills where the installation work is done;

(e) the appellant’s custormers are owners of the material used in manufacturing machinery where it is to be installed, and of the material required to construct and install the machinery;

(f) the appellant’s labour force consists essentially of welders;

(g) in addition to installing machinery in sawmills, the appellant does repairs and processes goods which are not intended for sale;

(h) the appellant devotes most of its activities to construction work and to providing its customers with services, and not to processing or using goods intended for sale or lease;

(i) 21% of the appellant’s total activities are eligible for the deduction for manufacturing and processing profits (MPP) in Canada, and the calculations made to determine the MPP for the years at issue are reproduced in Appendices A, B, C and D, to form an integral part of this reply to the notice of appeal;

3. Facts

3.01 At the start of the hearing, counsel for the appellant told the Court that all the facts presumed by the respondent and related above in paragraph 2.02 were denied.

3.02 The only witness in this case was Mr Benoît Allard, the sole shareholder of the appellant. He is its general manager, who is responsible for everything: the technical side, design, manufacture, staffing, on-site and in-workshop work (Trans p 9)

3.03 The witness has nineteen years’ experience “in the field of processing wood which goes into sawmills, and in paper mills, and in transporting wood; and in all conveyors and transverses made in factories to manufacture such products’’ (Trans p 9)

3.04 The appellant was incorporated in 1975. Its principal activity is the manufacture of sawmill equipment, chiefly transverses and conveyors.

These two types of equipment are used to transport logs, which are ordinarily sixteen feet long. The transverse is located outside the sawmill, and the conveyor inside. On the latter, the log moves one end in front of the other (what might be called lengthwise) on a belt. The transverse carries the log so that both ends move forward together (what one might call crosswise) using endless chains, which move or turn lenthwise (Trans p 12).

3.05 The appellant’s factory, located on Boul Tadoussac in Chicoutimi-Nord, consists of 20,000 square feet of buildings. It has an office, store, plate shop and machine shop. Photos were filed (Exhibits A-l, A-2, A-3 and A-4) showing the shops and machinery.

3.06 The plate shop is the one where the steel plates are received. The latter are cut by a guillotine (costing $100,000) and folded in the required form by the folding machine. Steel girders are also worked on.

This is where the conveyors are made (they may be from six to 500 feet long and between twelve and forty-eight inches wide). The conveyors may be installed at ground level or up to 100 feet high (Trans pp 10-15).

3.07 In the machine shop there are lathes, drilling machines, iron saws, milling machines and presses. This is the tooling or machining section.

This is where all the specific equipment “which goes on conveyors and transverses*’ is made. They make shafts, sprockets, rollers, frames and wheels.

3.08 According to the witness, ‘‘.. . in fact we have all the equipment necessary to manufacture conveyors and transverses without subcontracting anything to anyone” (Trans pp 10-15). Additionally, the appellant always provides the steel to make these pieces. The appellant is the only supplier of such equipment in the Saguenay-Lac St-Jean region, and it has a corresponding inventory (Trans pp 51-52).

3.09 In addition to manufacturing conveyors and transverses (which is its chief activity), the appellant also manufactures suction pipes, cyclones (which separate material with air), “. . . there are uppers, there are what we call a “stop and loader’’, machines which separate logs one by one; we have ram scramblers, which separate small from large logs. There are a great many things which go into that!” (Trans p 16). The appellant also manufactures walkways, railings and steps. The latter are made in the shop, but walkways, which may be 200 feet long, are made on the site. If the walkway is small (six to eight feet) and easily transportable, it is made in the shop (Trans pp 50-51):

You cannot make the whole thing in the shop, and take it to the site. You make the main parts which have a structure, and which are cut, and folded, and can then be carried. Sometimes, it is not just the length and breadth, it is the volume, the weight, as well! That is why there are so many parts which are made in pieces; you cannot bring a 200-ton crane! You could bring one, but you cannot “handle” two hundred tons in a plant, when you only have twenty-four feet of clearance. You have to carry it in pieces, and you finish manufacturing it on the spot! (Trans pp 40-41)

3.10 The appellant also manufactures bases on which are installed the machinery which the appellant’s customers buy elsewhere, such as:

(a) the barker;

(b) the machine which takes a round log after barking and squares it off (the canter);

(c) the edger, which makes beams or planks of various sizes with “cants”;

(d) the planer.

The barker, the canter and the edger are the three chief machines in a medium-sized sawmill for which the appellant makes the bases. In such a plant, in addition, there may be fifty conveyors or transverses:

Because moving the log to the barker is not all; here, below, one conveyor takes away the bark, another conveyor carries rejects outside, logs that are too small or too large. When you come to the other machine here, it’s the same thing: conveyors are used to carry shavings to the shavings system, here; a conveyor is used to take away what is called sawdust.

You know, there is a lot of equipment that goes with these machines! (Trans p 18)

3.11 The appellant is not concerned with construction of the building, the foundation, the lighting system or the air-conditioning system: . . We handle strictly the mechanical side of the plant . . . the plant as a whole is what produces wood . .. I could even build a plant without a building, on foundations outside! — however, everything that covers it, which makes it operate, from the electrical standpoint . . . we are not concerned with that. That is in the construction order.”

There is no “employee . . . in Les Ateliers Benoît Allard who is in the construction order” (Trans pp 19-21).

3.12 The appellant has regular customers like Consolidated Bathurst, Price Brothers and other factories for which it did work during the years in question, but the work done in the said years was primarily at:

(a) the Scierie des Outardes Enr of Hauterive;

(b) the Scierie Gagnon et Frères at Chibougamau; and

(c) the Scierie Gagnon et Frères at Roberval.

In the latter two cases, the appellant acted as a subcontractor for Forano Inc, which was the main contractor (Trans p 67).

In the case of the Scierie des Outardes, the appellant was the principal contractor.

3.13 In general, the appellant’s costs were divided 70 per cent for labour and 30 per cent for material. This was the case for the Scierie des Outardes Enr: labour $374,975.62, and materials $103,294.21 (Exhibit A-5).

For the subcontracts with Forano Inc, the cost breakdown was 60 per cent for labour and 40 per cent for materials (Trans pp 107-109).

The work on the equipment made was done at the shop and on the site. Labour was broken down as follows:

The following table summarizes the cost of materials and labour in the shop and on the site:

3.14 Labour accounts for about 5 per cent of the cost of installing the principal machinery supplied by the customer. “We just put them there. We are not responsible for the machines” (Trans p 49). The representatives of the seller of the machinery handle the start-up process.

3.15 At the Scierie des Outardes (consisting of three plants costing $23,000,000), logs arrived not in sixteen-foot lengths, but between forty and seventy feet long, that is, the entire length of the tree after it has been trimmed (photo A-2). The conveyors and transverses to be made had to be sixty feet long. The parts were cut at the shop, but manufactured and assembled on the site. A ram scrambler also had to be made, sixty-five feet long on sixteen-foot-high bases, the entire thing weighing between 75,000 and 100,000 pounds. Its parts were prepared in the shop, but it was manufactured on the site.

This plant had, among other things, a planing machine which was 120 feet wide and 350 feet long. “It is full of conveyors and transverses”, which were made by the appellant. The plant, which took two and a half years to build, produces 120,000,000 feet of lumber per year. The lumber leaves sorted, counted and measured automatically. It is the largest sawmill in North America (Trans pp 26-28).

3.16 In the Roberval and Chibougamau plants, they also had the manufacture of conveyors and transverses, cyclones, shavings reservoirs, trucks, lath chutes in front of package unstackers, stoppers at the end of the planer, and so on (Exhibit A-16).

3.17 The notebook of twenty-three work sheets, used by the respondent’s employee in determining the assessment, was filed as Exhibit A-16. It mentions a series of jobs done on the three different sites, as well as for the Price Company and other customers. The related amounts are entered in a column headed “construction”, or in a column headed “MPP”: thus, for example, at p 7 there is an entry under “MPP” of $21,736.25 for construction of conveyors at the Scierie des Outardes, while the installation of a log pond for $17,715.38 is classified as “construction”. At p 2, the installation of two cyclones is regarded as “construction”; also regarded as “construction” at p 14 are seven invoices (Nos 5084- 5090) for labour at the Scierie des Outardes, totalling about $14,000. The same is true for $12,000 of labour (invoices Nos 5093-5098) at p 15, and $13,000 of labour at p 16.

3.18 The assessment was made on the basis of the appellant’s 1979 fiscal year, from July 1, 1978 to June 30, 1979, where 79 per cent was regarded as not applicable to manufacturing and processing profits. The balance, or 21 per cent, regarded as MPP was applied for the 1976, 1977 and 1978 fiscal years as well. This appears from Exhibit A-16, p 1, where it can be seen that the amount of $76,602.90 is eligible for MPP, while $477,322.95 is excluded. The other twenty- two pages of Exhibit A-16 are only the details of the outline given on page 1.

3.19 Of the appellant’s forty employees, fifteen are welders. It owns fifty welding machines.

3.20 It also owns all the equipment used in manufacturing conveyors and transverses (Trans p 29). The transportation of equipment from the plant to the site is handled by independent carriers.

3.21 Sometimes a distinction is made between shop time and on-site time in billing for labour; but this distinction was not made with the Scierie des Outardes. Each man’s time was computed at $15 an hour. When bills were issued for labour only, this was because the materials had been billed earlier. In cases of site work, materials had already been transported to the site and the men continued working on them there (Trans p 101).

4. Act — case law — analysis

4.01 Act

The principal provisions of the Income Tax Act concerned in the case at bar are paragraph 125.1(3)(a) and (b). This also applies to Regulations 5200 and 5202, making pursuant to s 125.1 of the Act.

All these provisions read as follows:

125. l(3)(a) In this section, “Canadian manufacturing and processing profits’’ of a corporation for a taxation year means such portion of the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease; and

(b) “manufacturing or processing’’ does not include

(i) farming or fishing,

(ii) logging,

(iii) construction,

(iv) operating an oil or gas well or processing heavy crude oil recovered from a natural reservoir in Canada to a stage that is not beyond the crude oil stage of its equivalent,

(v) extracting minerals from a mineral resource,

(vi) processing to the prime metal stage or its equivalent, ore from a mineral resource,

(vii) producing industrial minerals other than sulphur produced by processing natural gas,

(viii) producing or processing electrical energy or steam, for sale,

(ix) processing gas, if such gas is processed as part of the business of selling or distributing gas in the course of operating a public utility, or

(x) any manufacturing or processing of goods for sale or lease, if for any taxation year of a corporation in respect of which the expression is being applied, less than 10 per cent of its gross revenue from all active businesses carried on in Canada was from

(A) the selling or leasing of goods manufacturing or processed in Canada by it,

and

(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it.

5200. Subject to section 5201, for the purposes of paragraph 125.1(3)(a) of the Act, “Canadian manufacturing and processing profits” of a corporation for a taxation year are hereby prescribed to be that proportion of the corporation’s adjusted business income for the year that

(a) the aggregate of its cost of manufacturing and processing capital is for the year and its cost of manufacturing and processing labour for the year,

is of

(b) the aggregate of its cost of capital for the year and its coat of labour for the year.

5202. In this Part, except as otherwise provided in section 5203 or 5204,

“adjusted business income” of a corporation for a taxation year means the amount, if any, by which

(a) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada

exceeds

(b) the aggregate of all amounts each of which is the loss of the corporation for the year from an active business carried on in Canada;

“cost of capital” of a corporation for a taxation year means an amont equal to the aggregate of

(a) 10 per cent of the aggregate of ail amounts each of which is the gross cost to the corporation of a property referred to in paragraph 1100(1 )(e),(f),(g) or (h), paragraph 1102(1)(d) or (g) or Schedule II that

(i) was owned by the corporation at the end of the year, and

(ii) was used by the corporation at any time during the year, and

(b) the aggregate of all amounts each of which is the rental cost incurred by the corporation during the year for the use of any property a portion of the gross cost of which would be included by virtue of paragraph (a) if the property were owned by the corporation at the end of the year,

but for the purposes of this definition, the gross cost of a property or rental cost for the use of any property does not include that portion of those costs that reflects the extent to which the property was used by the corporation during the year

(c) in an active business carried on outside Canada, or

(d) to earn Canadian investment income or foreign investment income as defined in subsection 129(4) of the Act;

“cost of labour” or a corporation for a taxation year means an amount equal to the aggregate of

(a) the salaries and wages paid or payable during the year to all employees of the corporation for services performed during the year, and

(d) all other amounts each of which is an amount paid or payable during the year for the performance during the year, by any person other than an employee of the corporation, of functions relating to

(i) the management or administration of the corporation,

(ii) scientific research as defined in section 2900, or

(iii) a service or function that would normally be performed by an employee of the corporation,

but for the purposes of this definition, the salaries and wages referred to in paragraph (a) or other amounts referred to in paragraph (b) do not include that portion of those amounts that

(c) was included in the gross cost to the corporation of a property (other than a property that was manufactured by the corporation and leased during the year by the corporation to another person) that was included in computing the cost of capital of the corporation for the year, or

(d) was related to an active business carried on outside Canada by the corporation;

“cost of manufacturing and processing capital” of a corporation for a taxation year means 100/85 of that portion of the cost of capital of the corporation for that year that reflects the extent to which each property included in the calculation thereof was used directly in qualified activities of the corporation during the year, but the amount so calculated shall not exceed the cost of capital of the corporation for the year;

“cost of manufacturing and processing labour” of a corporation for a taxation year means 100/75 of that portion of the cost of labour of the corporation for that year that reflects the extent to which

(a) the salaries and wages included in the calculation thereof were paid or payable to persons for the portion of their time that they were directly engaged in qualified activities of the corporation during the year, and

(b) the other amounts included in the calculation thereof were paid or payable to persons for the performance of functions that would be directly related to qualified activities of the corporation durng the year if those persons were employees of the corporation,

but the amount so calculated shall not exceed the cost of labour of the corporation for the year;

“gross cost” of a property means the capital cost of the property computed without reference to subsection 13(7.1) or (10) or section 21 or 80 of the Act;

“qualified activities” means

(a) any of the following activities, when they are performed in Canada in connection with manufacturing or processing (not including the activities listed in subparagraphs 125. l(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease:

(i) engineering design of products and production facilities,

(ii) receiving and storing of raw materials,

(iii) producing, assembling and handling of goods in process,

(iv) inspecting and packaging of finished goods,

(v) line supervision,

(vi) production support activities including security, cleaning, heating and factory maintenance,

(vii) quality and production control,

(viii) repair of production facilities, and

(ix) pollution control,

(b) all other activities that are performed in Canada directly in connection with manufacturing or processing (not including the activities listed in subparagraphs 125. l(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease, and

(c) scientific research as defined in section 2900,

but does not include any of

(d) storing, shipping, selling and leasing of finished goods,

(e) purchasing of raw materials,

(f) administration, including clerical and personnel activities,

(g) purchase and resale operations,

(h) data processing, and

(i) providing facilities for employees, including cafeterias, clinics and recreational facilities;

“rental cost” of a property means the rents incurred for the use of that property;

“salaries and wages” means salaries, wages and commissions, but does not include any other type of remuneration, any superannuation or pension benefits, any retiring allowances or any amount referred to in section 6 or 7 of the Act.

In short, the specific application of these legal provisions can be summarized in the following formula:

4.02 Case law and theory

Counsel for the parties referred the Court to the following theory and decisions:

Sale of goods v work contract

A. Civil theory and precedent

1. Thérèse Rousseau-Houle, Précis du droit de la vente et du louage, Quebec City, PUL, 1978 PUL;

2. Léon Faribault, “Traité du Louaige”, Traité de droit civil du Québec, Montreal, Wilson & Lafleur Ltd, 1951, t 12 at p 416;

3. Kenneth Williams v Albatross Ferro-Cement Ltd et al, [1975] CS 803;

4. Innis v Gabriel Lucas Ltée, [1963] QB 500;

5. Roy v Duchesneau et al, [1979] CA 206;

6. Reliance Insurance Company of Philadelphia v Chayer et al, [1978] CS 301;

7. Gravel v Déziel, [1965] CS 257;

8. Vermont Construction Inc v Beatson, [1977] 1 SCR 758;

9. Naud v Dolbec, [1959] CS 120;

10. Fairbanks Soap Company Ltd v Sheppard, [1951] OR 860, [1953] 1 SCR 314;

11. Clark et al v Bulmer et al, 152 ER 793;

12. Mignault, Traité de droit civil canadien, Tome 7;

13. Morgan v Turnbull (1888), 14 QLR 121;

14. Thibodeau v Dame Chapaut, [1961] QB 392;

15. Innis v Gabriel Lucas Limitée, [1963] QB 500;

B. Tax precedents

16. Crown Tire Retreaders v MNR, [1981] CTC 3013; 81 DTC 931;

17. The Minister of Customs and Excise v Dominion Press Ltd, 1 DTC 107, affirmed by 1 DTC 127;

18. Dominion Bridge Company Limited v The King, [1940-41] CTC 83; 1 DTC 499-12;

19. Coopérative Fédérée de Québec v The Queen, [1980] RDFQ 136;

20. Agnico-Eagle Mines Ltd v The Queen, [1977] RDFQ 136;

21. Les Ateliers d'ingénierie Dominion v The Queen, [1981] RDFQ 144;

22. Nova Scotia Sand & Gravel Limited v The Queen, [1980] CTC 378; 80 DTC 6298;

23. Le Soleil Ltée v MNR, [1973] CTC 91; 73 DTC 5094;

24. The St Catharines Standard Limited v The Queen, [1978] CTC 258; 78 DTC 6168;

25. Shaw Pipe Protection Limited v MNR, [1967] Tax ABC 980; 67 DTC 663;

26. Frankel Steel Construction Limited v MNR, [1968] CTC 76; 68 DTC 144;

27. Cabana, Séguin Inc v MNR, [1982] CTC 2363; 82 DTC 1360;

28. Interpretation Bulletins'. IT-411 et IT-415R;

C. Interpretation and intent of legislator

29. W A Sheaffer Pen Company of Canada Ltd v MNR, [1953] CTC 345; 53 DTC 1223;

30. “Federal Manufacturing and processing Incentives”, Canadian Tax Journal, September-October 1973.

4.03 Analysis

4.03.1 The Court was surprised to find that the respondent’s assessment was based only on the result of an investigation made into the 1979 fiscal year (July 1, 1978 to June 30, 1979, see para 3.18), while the fiscal years at issue run from June 1, 1975 to June 30, 1979.

No evidence was presented by the respondent that the appellant had no accounting system for the years 1976 to 1978. On the contrary, it appeared from the financial statements attached to the appellant’s tax returns that the accounting firm presented these statements on the basis of the appellant’s books.

Furthermore, how could the tax returns contain over ten pages of purchases from suppliers with dates, the names of the suppliers and costs, to show additions made to the building, equipment and machinery, without consulting the books and invoices?

It is difficult to accept such a policy on the part of the Department of National Revenue: it is unbelievably arbitrary. The weight of the evidence, therefore, is that the reassessments for 1976, 1977 and 1978 have no basis. The Court must accordingly allow the appeal for 1976, 1977 and 1978.

4.03.2 With respect to 1979, the respondent’s argument was that 79 per cent of the total activities were not eligible for the MPP deduction.

This argument was based primarily on the facts presumed by the respondent and stated in subparagraphs (a) to (i) of paragraph 5 of the reply to the notice of appeal, cited at length in para 2.02 above.

4.03.3 The main facts presumed by the respondent are that the appellant is primarily engaged in installing machinery in sawmills, machinery which belongs to customers. Additionally, the work done for customers is construction work and the providing of services on materials owned by the appellant’s customers. In the respondent’s opinion, such activities do not involve the manufacturing or processing of goods for sale or lease, as defined in the Act and Regulations cited above.

Specifically, the respondent maintained that the appellant does not sell goods, but performs contracts because, inter alia, most of its costs consist of labour.

Counsel for the respondent relied on Arts 1683 and 1684 of the Civil Code and on learned theory and precedents.

Before considering the appellant’s theory and precedents, the Court feels that it should compare the facts presumed by the respondent with the facts proven.

4.03.4 It was clearly established, and indeed was admitted by counsel in their argument, that the labour used to instal the machinery, such as a barker, edger and so on, the property of the appellant’s customers which was not brought from the appellant, constituted only 5 per cent of the total labour (para 3.14).

4.03.5 The weight of the evidence was that

(a) the appellant manufactured, sold and most of the time installed the equipment used in sawmills: transverses, conveyors, walkways, suction pipes, cyclones and so on (se paras 3.04 and 3.09);

(b) this equipment was manufactured both in the appellant’s workshop and on the various sites where a new sawmill was built, or in an already existing sawmill which needed equipment (see paras 3.06, 3.07, 3.13, 3.15 and 3.16;

(c) the equipment and materials used by the appellant in manufacturing are its own property (see paras 3.08 and 3.19);

(d) when the appellant did not manufacture equipment in its workship, this was because the equipment could not be transported on account of its size or weight.

4.03.6 The two foregoing paragraphs establish that the evidence presented in the Court substantially contradicts the facts presumed by the respondent.

4.03.7 Furthermore, even if the equipment sold by the appellant which was installed and affixed with solder and nails thereafter constituted immovables by destination within the meaning of the Civil Code, so far as the customer was concerned, it nonetheless remained a sale for the appellant and to that extent it was not a construction activity. Both counsel admitted as valid the description of a construction activity given in paragraph 3 of Interpretation Bulletin IT-411. Even though the Court is not bound by these bulletins, it feels that in the case at bar at least the description is accurate:

3. As a general rule, the on-site fabrication, installation and erection of machinery and equipment, regardless of size, is not considered to be construction, unless it constitutes a component part of a building or structure (eg — heating system, air- conditioning equipment, sprinkler system, plumbing, wiring, etc.). Machinery or equipment which will form an integral part of a manufacturing or processing activity carried on inside a building is not regarded as a component part of the building, even though it may be firmly attached to it because of vibrations, weight, size, etc. In some cases, where the installation of machinery and equipment coincides with the construction and erection of a building or other structure, there may be practical difficulties in determining what activities are construction. In these cases, the following criteria apply:

(a) The installation and erection of the foundation, walls, floors, roof and infrastructure for the machinery or equipment (ie — pilings footings, piers, pillars, pits, etc.) is regarded as construction.

(b) The fabrication, installation and erection of the machinery and equipment inside the structure (including related wiring, plumbing, ductwork, etc.) that is primarily for the purpose of a manufacturing or processing activity which will be carried on inside the structure is not regarded as construction.

4.03.8 Without going into all the details of Exhibit A-16, which is the basis for the assessment, the Court notes (see ara. 3.17) that respondent has largely eliminated the appellant’s on-site labour in calculating the MPP. It is clear that this approach results from an incorrect assumption of fact, that the appellant was not the owener of the property used in manufacturer, that it was a hire or work, and that accordingly there was no sale.

4.03.9 There is no necessity to review all the precedendents regarding interpretation of the terms “manufacturing or processing of goods for sale”. However, the Court shares the view of counsel for the appellant that a wide interpretation should be given to section 125.1, following the judgments rendered in Le Soleil Ltée and The St Catharines Standard Limited’.

In Le Soleil Ltée v Minister of National Revenue, 73 DTC 5094, the Court had to apply the old s 40A of the pre-1972 Income Tax Act, which referred to a credit for manufacturing or processing profits, similar to that in effect at the present time. In that section, it satated:

Manufacturing and processing corporation means a corporation that had net sales for the taxation year in respect of which the expression is being applied from the sale of goods processed or manufactured in Canada by the corporation the amount of which was at least 50% of its gross revenue for the year, but does not include a corporation whose principal business for the year was construction

It was accordingly held that the editorial functions, sale of advertising page manufacturing activities of a newspaper were activities from which the gross income was included in the gross income for purposes of determining the 50% percentage. In this case, it seems clear that the gross income was related to the sale of goods.

In The St Catharines Standard Limited, 78 DTC 6174, the Federal Court - Trial Division, referring to the Le Soleil Ltée case, commented as follows:

Reference was made at Page 101 (DTC p 5095) to Section 40A as being a very special provision for a very special purpose that the terminology should therefore not be interpreted by reference to the meaning of technical expressions and it was commented:

We are fortified in this conclusion by the fact that the result, in the case of a daily newspaper, would seem to be more in accord with the Parliamentary purpose of section 40A than the result reflected by the assessment.

Possibly the same could be said with respect to the Parliamentary purpose of Section 125.1 of the Act and the regulations made pursuant thereto in the case of a daily newspaper.

The courts have accordingly been unwilling to give a wide interpretation to the terms of s 125.1 of the Act and the aplicable Regulations, as intended by the legislator.

4.03.10 Indeed, because of the evidence in the case at bar, even a strict interpretation leads to a conclusion in favour of the appellant’s argument. Since the facts presumed by the respondent are substantially contradicted by the evidence, and since the appellant in fact engaged in sale, manufacture and processing, not construction, the Court accordingly allows the appeal in respect of the 1979 [sic] taxation year.

5. Conclusion

The appeal is allowed and the whole is referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.