Nova Construction Company Limited v. Minister of National Revenue, [1979] CTC 2048, 79 DTC 77

Guy Tremblay:—This case was heard at Halifax, Nova Scotia, on June 13, 1978.

1. Point at Issue

The point at issue is whether the respondent is justified, for the 1974 and 1975 taxation years (a) in disallowing the capital cost allowance of 50% according to Class 29 and allowing the capital cost allowance of 30% provided in Class 10, in respect of the mobile asphalt and processing profits deduction tax credit provided for in subparagraph 125.1 (3)(b)(iii) of the new Act. According to the respondent, by producing asphalt, the appellant is making construction, to which Class 29 and subparagraph 125.1 (3)(b)(iii) do not apply.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

The facts are not really in dispute and the proven facts are substantially those described in the appeal.

3.01 The appellant company is a corporate body carrying on, among other things, a construction and paving business through its head office in Antigonish, Nova Scotia.

3.02 As part of its business, the appellant operates a mobile plant for producing asphalt at some distance from the job site, which asphalt is conveyed to the job site as required.

3.03 In its taxation year ending March 31, 1974, the appellant purchased a Parker “Super-Blackmobile” mobile asphalt plant. This plant includes a “turbo-jet” burner, a dryer, hot oil heaters, asphalt tanks, and a bag house. Part of the plant has wheels attached so as to render it mobile by hauling, while other parts of the plant are transported by truck and trailers. The only difference between this mobile plant and a permanent type of asphalt plant is that the latter plant when moved would be completely transported by truck and trailer.

3.04 The advantage of the mobile plant is that it can be located within reach of the nearest suitable source of raw material (that is, sand and gravel) and yet within an economical distance of the site of the paving contract. The location of the plant must meet the environmental standards imposed by government authorities. In practice, this means that the asphalt plant will be located anywhere between 3 and 20 miles from the job site.

3.05 A small percentage of asphalt produced by the plant is sold to other persons. In most cases, the asphalt produced is subsequently used by the appellant to pave roads in the course of its various paving contracts. When produced, the asphalt is either placed directly on hired trucks or stored ina Silo and later hauled to the job site. The distance of the mobile plant from the job site has tended to increase in recent years, as it has become more difficult to find suitable sand and gravel deposits and because of environmental controls.

3.06 It was proven that 50% of the appellant’s work consists in repairing and resurfacing roads with asphalt and 50% in paving new roads.

3.07 The manufacture of the asphalt involves the passing of sand and stone in metered quantities through a dryer and then to a mixer, where liquid asphalt is injected. The sand and stone are derived from gravel that has been crushed and screened.

3.08 On occasion the plant is situated in such a place as to supply material for more than one paving contract. The plant indeed was moved 4 times in two years, being available for 13 jobs. As well, asphalt is sometimes sold to other contractors.

3.09 In its income tax returns for its 1974 and 1975 taxation years, the appellant took the position that its mobile asphalt plant was a “manufacturing or processing” operation and that accordingly the appellant was entitled to claim a deduction under subsection 125.1(1) of the new Act, in computing its tax, as well as capital cost allowance on the basis that the plant fell within Class 29 of Schedule B of the Income Tax Regulations.

3.10 By notices of reassessment dated February 10, 1977, the Minister of National Revenue

(a) disallowed capital cost allowance on the amount of $51,752 in 1974 and $229,305 in 1975 in respect of certain equipment on the basis that the appellant’s mobile asphalt plant was contractor’s movable equipment within Class 10 and not Class 29 as claimed by the appellant;

(b) disallowed the manufacturing or processing profits deduction tax credit (provided in paragraph 125.1(3)(b)) in the amount of $319 in 1974 and $7,960 in 1975. Consequently, no deduction is admitted under section 125.1 of the new Act.

3.11 On April 22, 1977, the appellant filed notices of objection in respect of those reassessments, and on October 4, 1977, the Minister of National Revenue notified the appellant that the reassessments were confirmed.

3.12 On December 21, 1977, an appeal was lodged before the Tax Review Board.

4. Law

The main sections of the Law and Regulations involved in the present case are the following:

Regulations— 1100(i), 1104(9)(c), 5200, 5201, Class 10(h), Class 22, Class 8(e), Class 29(a), Class 29(b);

Law—20(1)(a), 125.1(1), 125.1(3)(b)(iii).

These sections will be quoted later on if necessary.

5. Comments

5.1 Crux of the matter

The crux of the matter is whether by producing asphalt with its mobile asphalt plant, the appellant is making construction. According to regulation 1104(9)(c) and paragraph 125.1(3)(b) the legislator excludes construction from the advantages of Class 29 and of section 125.1.

5.2 Class 29

In Class 29, the parties have invoked paragraphs (a)(i) and (b)(i).

5.2.1 Class 29(a)(1)

Class 29(a)(i) reads as follows:

Property, that would otherwise be included in another class,

(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,

(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease.

There is no doubt for the Board that the appellant’s mobile asphalt plant is used “primarily in the manufacturing or processing of goods”. The facts summarized in paragraph 3.07 of the Facts are clear. If the regulation would stop after the word “goods”, the appeal would be allowed immediately. But are goods produced “for sale or lease”? It is clear that asphalt is not produced for lease. Asphalt must be produced only for sale. But when somebody produces asphalt and uses it for paving, or repairing or resurfacing roads, for which work he is paid, is asphalt produced for sale? Directly not but indirectly, yes.

How to construe that regulation?

The word “sale” is not a word of art with precise meaning but a word with general meaning. The Board thinks that the word in its ordinary meaning covers both direct and indirect sale.

But another problem arises. In the present case, for the appellant, is indirect sale not something as “construction”? (sic)

Before answering that question, the Board must say that in its opinion repairing and resurfacing is “construction” on the same level as paving a new road (see paragraph 3.06 of the Facts). “Construction” indeed is not a term of art and its ordinary meaning covers partial work as repairs, etc.

Now in finding the solution to the above question, it is the Board’s opinion that one thing is producing asphalt and another thing is building and paving roads, ie making construction.

But when, as in the present case, the Board is bound by the words of the description of Class 29, the Board must decide that making construction is something (sic) as “indirect sale”.

Even if a doubt exists, that doubt would be interpreted against the appellant. Paragraph 20(1)(a) indeed and regulation concerning Class 29 are exemption sections. Because the Income Tax Act is a public policy statute, it should be strictly interpreted that is according to the letter of the law. When the doubt concerns a taxation section, it must be interpreted in favour of the taxpayer. When the taxation section clearly applies, however, and that the doubt concerns an exemption section, the following principles apply:

1) taxation is the rule, and the exemption, exception;

2) the doubt must be interpreted against the taxpayer.

5.2.2 Class 29(b)(1)

Class 29(b)(i) reads as follows:

Property, that would otherwise be included in another class,

(b) that is

(i) property that, but for this class, would be included in class 8, but not including railway rolling stock or a property described in paragraph (e) of class 8.

Class 8(e) reads as follows:

Property not included in class 2, 7, 9 or 30 that is

(e) property not included in any other class that is radiocommunication equipment acquired after May 25, 1976.

It is clear that Class 29(b)(i) nor Class 8 apply in the present case. Both parties admitted that point in law.

5.3 Class 10(h)

Class 10(h) reads as follows:

Property not included in any other class that is

(h) contractor’s movable equipment (including portable camp buildings), other than a property included in class 22.

It is the only class with 30% of allowance cost which is applicable.

5.4 Subparagraph 125.1(3)(a)(b)(iii) and regulation 5201

125.1(3) Definitions. In this section,

(a) ‘‘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

(iii) construction.

5201. For the purpose 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 equal to the corporation’s adjusted business income for the year where

(a) the activities of the corporation during the year were primarily manufacturing or processing in Canada of goods for sale or lease.

As the wording is quite the same as the definition of Class 29(a)(i), the problem and solution is the same as described in paragraph 5.2.1.

5.5 Interpretation Bulletin 411

The appellant cited Interpretation Bulletin 411. The Board is never bound by an interpretation bulletin. The law firstly must be applied. The interpretation bulletin must not replace the law when the law applies as in the present case.

6. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.