4 August 1988 Income Tax Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

DATE AUG 4 1988

To: R.A. D'Avignon Assistant Deputy Minister Appeals Branch

FROM Head Office Specialty Rulings Directorate C.R. Bowen (613) 957-2094

Attention: R.L. Barber

SUBJECT: XXXX 1982 to 1984 Taxation Years Notices of Objection

We are writing in reply to your memorandum dated May 9, 1988, wherein you requested our comments on whether equipment used by a cleaning contractor to clean and maintain floors in various buildings qualifies as contractor's movable equipment under paragraph (h) of class 10 in Schedule II of the Income Tax Regulations (the "Regulations").

Background

Our understanding of the facts is as follows: XXXXXXXXPosition

The corporation acts as a cleaning contractor using movable equipment which is moved to each job site. As the expression "contractor's movable equipment" in paragraph (h) of class 10 does not specifically restrict itself either to construction contractor's movable equipment or to a particular size of equipment, XXXXequipment should be included in this class.

RCT's Assessing Position

As per paragraph 3 of Interpretation Bulletin IT-306R , RCT has taken the position that the term 'contractor's movable equipment' is intended to include the kind of equipment that normally is moved from place to place in the course of construction work. The implied reference of the word contractor to the construction industry reflects the original intent of the legislation.

Specialty Rulings Position

There are several court cases involving the discussion of whether certain assets qualified as class 10(h) or 22 for capital cost allowance purposes. However, in each case the equipment involved was used in construction related activities and the interpretation of the word 'contractor' was not an issue. Therefore, it is not possible to use existing jurisprudence in interpreting the meaning of the word in question.

Initially, it appears that the taxpayer's business operations might satisfy the definition of each word in the phrase 'contractor's movable equipment', as indicated below:

a) the vacuums, floor polishers, automatic scrubbers, etc. are considered to be equipment,

b) the equipment is capable of being moved from job site to job site, and is therefore movable, and

c) the taxpayer has entered into contracts with its customers to provide services for a fee and consequently meets one of the definitions of the word contractor.

However, in interpreting the meaning of the term 'contractor's movable equipment', the basic principles of statutory interpretation must be kept in mind. These principles are indicated in Ward's Tax Law and Planning - Book 1, Chapter 2. The two principles applicable to this situation are quoted and discussed below:

1) Dictionary definition

"In the Bank of Nova Scotia v. The Queen, 80 D.T.C. 6009, (1980) C.T.C. 57, affirmed 81 D.T.C. 5115, 11981 C.T.C. 162 (F.C.A.), Mr. Justice Addy stated:

'Wherever a term is not defined in the Act, then, unless the context otherwise requires, it must be given its common ordinary meaning and, where the term is a common commercial or financial one, its meaning must be determined according to ordinary commercial or financial principles."'

The definition of the word 'contractor' as found in several dictionaries includes the following:

i) Per The Concise Oxford Dictionary - "undertaker of contract, especially for building to specified plans."

ii) Per the Random House Dictionary of the English Language "one who contracts to furnish supplies or perform work at a certain price or rate."

iii) Per the Webster's Third International Dictionary

"a) one that contracts: a party to a bargain: one that formally undertakes to do something for another, b) one that performs work (as a printing job) or provides supplies on a large scale (as to troops) according to a contractual agreement at a price predetermined by his own calculations, c) one who contracts on predetermined terms to provide labor and materials and to be responsible for the performance of a construction job in accordance with established specifications or plans - called also building contractor."

iv) Per the American Heritage Dictionary of the English Language "one who agrees to furnish materials or perform services at a specified price, especially for construction."

2) Predominant ordinary meaning

"Interpreting words of the Act in accordance with their ordinary meaning generally means that if there is a choice between two possible meanings of a word or phrase, one of which is a common or predominant meaning, and the second of which is a much less common meaning then, in the absence of contrary indications, the first of the possible two meanings will be chosen." For example, in The Queen v. Continental Air Photo Ltd., 62 D.T.C. 1306, (1962) C.T.C. 495 (Ex. Ct.), the judge chose the popular sense of the word 'portraits' after taking into account the dictionary definitions and its usage in the trade.

Therefore, in order to determine the popular sense and common usage of the word 'contractor', numerous sources of written material were reviewed. The results of the review are indicated below:

Source of Information                     Findings

Yellow pages of the               All companies listed under        
Ottawa - Hull Bell Canada         the subject heading 'contractors' 
telephone book dated              were involved in either           
January 27, 1988                  the construction or excavating    
                                  business. Companies supplying a   
                                  cleaning service were listed under
                                  the subject heading 'Cleaning     
                                  Equipment and Service Industrial, 
                                  see Janitorial Service.'

Encyclopedia of                   There were numerous associations         

Associations - 1987 (U.S.A.)      which had the word contractor       
                                  as part of their name. The majority 
                                  of the associations were connected  
                                  to the construction industry,       
                                  while a few represented the         
                                  clothing and oil industries.        

Articles from the Canadian        The majority of the articles      
Business Index Database           specifically related to the       
(which covers 150 Canadian        construction industry and not     
magazines written-from            one article discussed office      
1984 to 1987, as well as the      cleaning and maintenance services.
Financial Post, Financial Times 
and The Globe and Mail) 
appearing under the subject 
heading 'contractor'.

In order to determine whether there was a common industry usage of the phrase 'contractor's movable equipment', a key word search was conducted on the XXXX The phrase was not used in any of the articles and appears to have no common industry usage.

Specialized industry asset

In addition, in the as yet unreported decision of the Federal Court of Appeal in the Queen v. Nova, an Alberta Corporation which was issued on July 15, 1988, Urie, J. commented as follows concerning the interpretation of terms used in the capital cost allowance schedules:

"(T) he statutory language employed in particular sections of an enactment must be interpreted in the context of the statute as a whole." "(T)he question becomes what is the grammatical and ordinary meaning of the word 'pipeline' and, as well, to whom and what should a Court turn to ascertain the grammatical and ordinary meaning of words or terms in a statute?"

"It is a word in fairly common usage, employed here in a Schedule to a regulation of a statute which is applicable to all corporations which may be entitled to claim capital cost allowance on various of its assets... I would have thought that in construing it in its 'popular sense' would mean that sense 'which people conversant with the subject matter with which the statute is dealing [in this case those utilizing the service of the pipeline for the transmission of gas, oil, water, steam or solids] would attribute to it' not the popular sense derived from the perception of the man in the street not conversant with either the user industries or pipelines. Even if it were, I find it difficult to conceive that such a man would view a compressor station or metering facilities as part of a pipeline in its most fundamental sense."

"The whole of Schedule B is directed to special actual situations where terms are used in respect of depreciable assets which have particular meanings to those conversant with those assets ... I would have thought that it would be from persons conversant with such structures that evidence might be adduced to assist in resolving disputes as to the meanings of the terms."

In determining the meaning of the word 'pipeline' in the above court case, the judge accepted the evidence of experts familiar with the industry as the meaning of the word 'pipeline' in various dictionaries varied sufficiently such that they would be described as inconclusive for purposes of interpreting the provision.

Following a similar line of reasoning, class 10(h) represents a class specifically set up for assets used in a special factual situation or industry which, in this case, is the construction industry. Therefore, the assets referred to have a particular meaning understood by those people conversant in that industry.

Conclusion

It is our opinion that the word 'contractor' in the expression 'contractor's movable equipment' in class 10(h) should be given an interpretation based on its common usage, predominant meaning and in keeping with the creation of a class for assets used in a specific situation. The above review of written material supports our position that the word 'contractor' is most commonly used in connection with the construction industry. Hence, in our view, the position in IT-306 is supportable. Therefore, the equipment used by the taxpayer to provide cleaning services should not qualify as class 10(h) property.

We trust these comments will be of assistance.

ORIGINAL SIGNED BY

R J. L. READ R.J.L. Read Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch