The Royal Bank of Canada v. The Deputy Minister of National Revenue for Customs and Excise, [1979] CTC 342, 79 DTC 5263

Urie, J:—The issue in this appeal is whether the Tariff Board was right in declaring that the generators in issue were not exempt from consumption or sales tax under the exempting provisions of paragraph 1(a) of Part XIII of the Excise Tax Act.

The facts briefly stated follow. The appellant is a chartered bank. It is the owner of a large building complex in the City of Toronto known as the Royal Bank Plaza (the “plaza”). It is occupied not only by the appellant but also by lessees of retail and office space. The evidence before the Board is that the regular supply of electricity for the plaza is obtained from Toronto Hydro and converted to a lower utilization voltage by 17 step-down transformers installed in the plaza. Where lower voltages are required it is further stepped down by secondary transformers.

The equipment in issue in this appeal consists of four generators and ancillary equipment which were installed permanently to provide emergency power to operate elevators, pumps, emergency lighting, alarms and evacuation controls for the benefit of the occupiers of the plaza in the event of loss of regular power supply for any reason. The generators may be activated manually or automatically. They are capable of producing approximately 10% of the electrical capacity installed in the plaza and could, if necessary, be used to supplement the regular power supply. However, it is common ground that the equipment is basically for back-up purposes. The generators operate 100 hours on the average during a year—50 hours of testing and another 50 hours for power outage.

The appellant applied to the Tariff Board pursuant to section 59 of the Excise Tax Act for a declaration that the four generators and ancillary equipment were exempt from the tax imposed by paragraph 27(1)(a) of the Act in that they were exempted therefrom by subsection 29(1) and Part XIII, paragraph 1(a) of Schedule III of the Act. The relevant sections and those requisite portions of the Schedules read as follows:—

27.(1) There shall be imposed, levied and collected a consumption or sales tax of 12 per cent on the sale price of all goods

(a) produced or manufactured in Canada

(i) payable, in any case other than a case mentioned in subparagraph (ii) or (Hi), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier,

(ii) payable, in a case where the contract for the sale of the goods (including a hire-purchase contract and any other contract under which property in the goods passes upon Satisfaction of a condition) provides that the sale price or other consideration shall be paid to the manufacturer or producer by installments (whether the contract provides that the goods are to be delivered or property in the goods is to pass before or after payment of any or all instalments), by the producer or manufacturer pro tanto at the time each of the instalments becomes payable in accordance with the terms of the contract,

and

(iii) payable, in the case of dressed or dressed and dyed furs, by the person to whom the furs are delivered by the dresser or dyer, at the time of such delivery, whether or not that person is a licensed wholesaler or licensed manufacturer, and the sale price of the goods shall be deemed to be either the aggregate of the current market value of the furs in their raw state and the dressing or dressing and dyeing charge, or the dyeing charge only where the furs delivered were dressed furs on which tax has been paid under this subparagraph or on importation, and the dresser or dyer shall, at the time the furs are so delivered, collect the tax in the form of a certified cheque made payable to the Receiver General and shall forthwith remit the same to the Receiver General;

29.(1) The tax imposed by section 27 does not apply to the sale or importation of the articles mentioned in Schedule III.

PART XIII—SCHEDULE III

1. All the following;

(a) machinery and apparatus sold to or imported by manufacturers or producers for use by them directly in the manufacture or production of goods;

The Tariff Board dismissed the appellant’s application and declared that the generators were subject to and not exempt from the tax imposed by subsection 27(1) of the Act. It is from that dismissal that this appeal is taken.

It is clear from an examination of subsection 29(1) and Part XIII of Schedule III that, in order to benefit from the exemption from sales tax on the generators in issue, the following conditions must be met:

(a) machinery or apparatus must be sold to or imported by a manufacturer or producer; and

(b) the manufacturer or producer must use the machinery or apparatus directly in the manufacture or production of goods.

It is common ground that the stand-by generators are pieces of machinery sold to the appellant and that electricity is an article or good for the purpose of the exempting provisions of the Excise Tax Act. The question still remains, however, as to whether or not the appellant is a manufacturer or producer of electricity in the sense in which those terms are used In the Act.

In my opinion it is not although, with great deference to the Tariff Board, not for the reasons given by it. I will deal with its decision later in these reasons.

The contentions of counsel for the appellant, in his able presentation, were that:

(a) the appellant is a manufacturer or producer of electricity within the meaning of the Act, and the generators sold to it are used directly in the production of goods, namely, electricity;

(b) in purchasing the generators at issue the appellant already being a producer of electricity in that its transformers stepped down the voltage of the electricity delivered to it by Toronto Hydro to usable levels, merely acquired further machinery for use directly in the production of electricity. (He relied on the decision of the Supreme Court of Canada in Quebec Hydro-Electric Commission v Deputy Minister of National Revenue, [1970] SCR 30; [1969] CTC 574; 69 DTC 5372 as the foundation for this submission).

(c) in any event, the Board erred in finding that the electricity produced by the appellant was not produced for sale.

Appellant’s counsel relied heavily on the Quebec Hydro case, supra, and the two cases to which I will now refer, in respect to his first submission. In The Queen v York Marble, Tile and Terrazzo Limited, [1968] SCR 140; [1968] CTC 44; 68 DTC 5001, at 145 (48, 5003), Spence, J adopted the following definition of “manufacture” as providing the proper test in determining whether work done constitutes manufacture within the meaning of the Excise Tax Act—“manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery’’. Applying that test, in counsel’s submission, clearly shows that the appellant in generating electricity by use of the diesel stand-by generators, was manufacturing electricity, a good under the Act. Furthermore, he said, if it were not found to be manufacturing electricity it was certainly engaged in producing it. It is difficult to quarrel with these submissions. However, in my view, it does not enable the appellant to bring itself within the exemption created by section 29 and Schedule III. Part XIII (1)(a) of that Schedule exempts “machinery and apparatus sold to or imported by manufacturers or producers for use by them directly ...”. Subsection 27(1) makes no reference to “manufacturer or producer.’’ Neither does section 28. Both of those sections speak of goods “manufactured or produced”. Subsection 27(2) does refer to a licensed manufacturer” and, in the context, it seems clearly to refer to a person or firm which is engaged in the business of manufacturing. It seems to me that, by the use of the nouns manufacturers and producers in Part Xlll(1)(a), Parliament intended that to bring itself within the exemption provided by that section, an appellant must show that it is a manufacturer or producer per se; it is not sufficient that incidentally a firm may engage in some activity which might be described as manufacturing.

Resort to standard dictionary definitions of manufacturer and producer tends to confirm this view of the meaning of the legislation. The New Webster Dictionary of the English Language defines manufacturer as:

(1) one who manufactures; one who employs workmen for manufacturing; the owner of a manufactory.

The Shorter Oxford English Dictionary, 3rd edn, definition is:

(2) an operative in a manufactory, the owner of a manufactory.

The word “producer” in the latter work is defined as:

(1) one who produces (grows, makes) an article of consumption.

While undoubtedly, applying these definitions very broadly, the appellant’s use of generators for emergency electricity could be described as manufacturing, using the definitions in the context of the Act and Schedule leads me to conclude that the purpose for which they are used is much too limited in scope and duration to qualify for the exemption available to true manufacturers or producers.

However, it becomes necessary to examine another authority relied on by the appellant—Bank of Nova Scotia v His Majesty the King, [1930] SCR 174—to test the validity of this view. In that case the appellant, a chartered bank, maintained in Toronto a printing plant wherein it printed and made up the printed material required in carrying on the bank’s business at its various offices throughout Canada and elsewhere. The purpose in maintaining this operation was convenience, expedition in supply and secrecy. The receiving office of the printed material was charged with the cost or estimated cost of such materials as part of its overhead.

In the legislation as it then stood, was a section corresponding to paragraph 28(1 )(d)* [1] of the present Act. The question before the Court thus was whether the bank was a manufacturer or producer of stationery supplies for use by its various office, because if it was it was liable for consumption or sales tax thereon.

Anglin, CJC, had the following to say:

We agree with the learned President of the Exchequer Court that as a printer, lithographer or engraver, which produced, for its own use and not for sale, the goods in question, viz, stationery supplies for its head office and branches, the bank was a producer within the meaning of that term, as used in clause (a) of section 86 of the Special War Revenue Act, RSC 1927, c 179, and that the goods in question were produced in Canada by it within the meaning of that clause.

We cannot find anything in the statute to support the view put forward by counsel for the appellant that its application is confined to a manufacturer or producer whose business is manufacturing or producing for sale. That construction of the Act would involve the exclusion from our consideration of clause (d) of section 87, which, in our opinion, was introduced to remove any doubt that the statute was intended to apply to a case such as that at bar.

In my opinion this case illustrates that the determination of whether or not a given company is a manufacturer or producer is a question of fact which is dependent largely on the scope of the activities in which it is engaged. The Bank of Nova Scotia printing plant apparently was a full time operation producing all of the Bank’s printing requirements. In the case at bar, by way of contrast, the generators in issue are used for part-time emergency use, in the supply of a minimal amount of electricity to one only of the Royal Bank’s many properties. Clearly, in my view, the incidental production of electricity on such a small scale, an activity totally divorced from its regular banking business, ought not to provide it with the exemption from tax available to those manufacturers or producers engaged in manufacturing and production on a substantial scale either for their own use or for use by their customers.

As further support for the view that the appellant is not, for purposes of the Excise Tax Act, a manufacturer or producer, I agree with counsel for the respondent that it is not improper to consider as an aid the generally accepted commercial view of the operation under review. Audette, J did so in The King v Peter Karson and William Karson (1922), 21 Ex CR 257, and Angus, J and Gibson, J also did so in The King v Shelly, [1935] Ex CR 179; [1935-37] CTC 48; 1 DTC 298, and Controlled Foods Corporation Limited v Her Majesty the Queen, [1979] CTC 270; 79 DTC 5189. I find it inconceivable that normal commercial usage would indicate, in the limited circumstances of this case, that the Royal Bank was a manufacturer or producer of electricity.

The Bank of Nova Scotia case also demonstrates that the Tariff Board in this case erred in making the following findings:

To bring the generators within the exempting provision of subsection 29(1) and subparagraph 1 (a)(i) of Part XIII of Schedule III, it is therefore necessary to show that the goods produced by the generators (electricity) are goods within the meaning of subsection 27(1), ie, they must be goods which enter into commerce and which, unless specifically exempted by Schedule III, would be taxed when they are delivered to the purchaser or at the time when the property in the goods passes.

The emergency power produced by the generators does not serve leased premises in the building but only halls, stairs and other areas that must be lit, or elevators, fire pumps, fire alarms and other devices which must be operated for emergency purposes. Thus, it is not a service which is provided for the regular use of tenants such as lighting, heating and air-conditioning, water and toilets. There was no evidence to show that the electricity produced by the generators is delivered to a purchaser or that the property in the electricity passes. All the evidence was that it remains in the possession of the applicant to be used by it for emergency purposes.

The finding that goods must “enter into commerce” to obtain the exemption is contrary to Chief Justice Anglin’s finding noted above. Equally, the finding that the emergency electricity is solely for the Bank’s own use is, in my view, fallacious because the occupiers of the building other than the Bank receive the benefit therefrom as part of the consideration paid for the occupation of the leased premises. Notwithstanding these errors and accepting the fact that there is a sale of electricity the appellant’s third contention must fail because of its inability to surmount the first hurdle in demonstrating that it is a manufacturer or producer.

I have now only to deal with the appellant’s second submission that the acquisition of the generators was merely to supplement the appellant’s existing production of electricity by virtue of its use of the 17 transformers. As previously indicated, counsel relied on the Hydro-Quebec case, supra, as the foundation for this submission because the Supreme Court of Canada in that case held transformers to be exempt from tax because the transformation of electricity to a usable form, constitutes part of the manufacture and production of electricity. It seems to me that the fallacy in that submission is that the production of electricity by the generators is in no way connected with the stepping down of the electricity received from the primary source, Toronto Hydro. The only connection between the two is that if the emergency system is called into play, the distribution of the power will be over the same system, in part, used in the regular distribution of power.

As pointed out by Pigeon, J in Consumer’s Gas v Deputy Minister of National Revenue, [1976] 2 SCR 640; [1976] CTC 99; 75 DTC 5423, manufacture and production do not include distribution. Since the only link between the two systems is distribution, it cannot be said that the stand-by generators form part of the production of power by the appellant, if there is in fact such production. They are two separate and distinct systems—primary and Substitute. The latter is not, as found, a manufacturing or production system so the fact that power generated by it might be used to supplement from time to time the primary source of power does not, in my view, cause it to be part of the main or primary system.

Accordingly, for all of the above reasons, I would dismiss the appeal.