Section 127

Kitchen equipment that was used in a guest house for preparing meals for guests qualified as equipment used for the purpose of processing goods for sale.

The taxpayer was selected by Spar Aerospace Ltd. to perform subcontract work in relation to a contract Spar had been awarded to design and manufacture a satellite. It was found that the taxpayer did not have any direct contractual relationship with the federal government, with the result that amounts it expended on qualified expenditures made by it did not represent contract payments (notwithstanding a clause in the subcontract that all technical information would become property of the federal government).

D'Arcy J found that Form T2SCH31 ("Schedule 31") was a prescribed form, as it was "authorized by the Minister" as contemplated under s. 244(16). Consequently, the taxpayer's failure to file this form within the paragraph (m) deadline meant that, under paragraph (m), the taxpayer was barred from claiming SR&ED credits for the year in issue. It was therefore irrelevant that the information needed to calculate the taxpayer's SR&ED credits was otherwise available in its return and on Form 661, both of which it had filed on a timely basis.

After the 1995 taxation year the taxpayer became statute-barred, the Minister determined that the taxpayer had claimed an excessive investment tax credit entitlement in respect of its 1995 year. Accordingly, the Minister took the position that the opening ITC balance of the taxpayer for its 1996 taxation year was negative $206,364 on the basis that paragraph (c) should reflect the amounts which the taxpayer should have claimed, and paragraph (f) should reflect the amounts actually deducted by the taxpayer in the preceding years. Lamarre Proulx J. indicated that this approach of the Minister amounted "to asserting that a taxpayer may have to pay back in a subsequent year an ITC that he or she claimed as a deduction from tax payable for a year and that was considered in the assessment for that year" and that, accordingly, this approach was not permitted.

The taxpayer was precluded from making an ITC claim in April 1999 with respect to expenditures incurred by its 1986 taxation year notwithstanding that the deadline for making such claims was not imposed until after 1986.

The taxpayer, which was performing cancer research in Canada for a Swedish firm, incurred costs in respect of a temporary facility in Kentucky. The facility was required because in order to extract pharmaceuticals that the Swedish firm wanted, it was necessary that tobacco plants be harvested and processed within two hours. In finding that these expenditures were qualified expenditures, Bell TCJ. found that the portion of the research that physically took place in Kentucky was an isolated and relatively small part of the systematic investigation which was ongoing in Canada, and that the experiments conducted in Kentucky were not a separate and distinct systematic investigation but were part of the continuous scientific research on tobacco being carried on in Canada.

The Minister was unsuccessful in a submission that the qualified expenditures of the taxpayer should be reduced by the amount of income derived by it from the sale of experimental production. Lamarre Proulx J. noted that none of the authority cited established that amounts from the sale of products must be deducted in the calculation of "expenditures".

After finding that the Act made reference to expenditures (or expenses) made in contradistinction to expenditures (or expenses) incurred, Garon J. found that salaries which were accrued in one year but were not paid until the subsequent taxation year did not constitute "qualified expenditures" in the year of accrual.

Favreau J. denied the taxpayer's investment tax credits in respect of a substantial renovation on a shrimp fishing boat, because the boat had been used before the renovation and was therefore not qualified property. While the renovations were extensive (taking three years and $722,505), they were not so extensive that the restored vessel could be considered a new asset (a similar vessel would have cost $2 million new).

The taxpayer's parent company ("Séma") was in the business of providing consulting and maintenance services to the Canadian National Railway Company. Séma incorporated the taxpayer for the purpose of cutting, and supplying Séma with, railway-grade steel pieces. Jorré J. found that the taxpayer's tools were being used "primarily for the purpose of manufacturing or processing goods for sale or lease." It was irrelevant that the steel pieces were made predominantly for Séma's maintenance business because the taxpayer and Séma were distinct legal entities - the taxpayer had no direct involvement in Séma's maintenance contracts (para. 54). The taxpayer being separate from Séma also distinguished the facts from Albert, where the high value of the taxpayer's labour compared to his material costs in his dentistry practice led to a finding that he was not selling goods (paras. 62-63).

It was also immaterial that the goods were custom-made to meet Séma's specific purposes, and therefore presumably of limited use to other potential customers. Jorré J. stated (at para. 57):

The "high end" in manufacturing is the manufacturer who can quickly fill an order for goods intended to satisfy a client's specific needs. It would be surprising to discover that such a manufacturer that makes unique goods to order to meet a client's needs does not sell those goods to that client.

(He stated in a footnote, however, that this comment was confined to situations where the manufacturer obtains the necessary parts and materials itself, and that the conclusion might be different where the client provides some or all of the parts and materials.)

Instruments that a dentist used to prepare ceramic restorations did not qualify as equipment used by him for processing goods "for sale" given that the value of the labour provided to him to his patients was always higher than that of the materials, so that it must be concluded that he had a contract for services with them rather than a contract for sale.

In finding that a subcontractor, whose business involved chipping logs and hauling the wood chips directly to a pulp and paper mill for processing was engaging in a qualifying "logging" activity and was not under the prohibition in s. 127(11)(b) engaged in the shipping of "finished goods", V. Miller J. stated her opinion "the definition of 'logging' must evolve with the industry and include the transporting of wood chips (at para. 25) that "a purposive, contextual interpretation of the legislation in issue requires the definition of 'logging' include the transportation of wood chips from the harvest site to the pulp and paper mill".

An organization set up by the Saskatchewan government to assist the agricultural industry tested a combine for approximately 115 hours (roughly 0.5% of its expected useful life) while title remained with the manufacturer and prior to its delivery to the purchasing taxpayer (a farmer). Bowman A.C.J. found that the combine had not been used for any purpose whatever at the time of its acquisition by the taxpayer, and stated (at p. 1020):

"Testing new equipment by or at the behest of the manufacturer is an essential part of the manufacturing process."

The taxpayer, which at the time was engaged exclusively in seismic exploration in western Canada, bought telemetry equipment for the first time following its entering into a contract with a guaranteed term of approximately two years requiring the taxpayer to use telemetry equipment and providing seismic exploration services in Jordan. It was found that the taxpayer nonetheless had acquired the telemetry equipment primarily for use in Canada given that it had a bona fide reasonable expectation of using that equipment in Canada for at least eight years after the expiration of the two-year contract in Jordan. It was not relevant that in fact the equipment was used back in Canada for only ten months before it was traded in for more advanced equipment.

After accepting that packaging, although not itself a manufacturing or processing activity, constitutes such an activity when it comes at the end of the goods production line, Lamarre Proulx TCJ. went on to find that an operation of loading bags of food into pallets that were of an appropriate size for shipping constituted an element of the shipping rather than of the manufacturing process.

A packaging machine purchased in the year by the taxpayer was eligible for the investment tax credit notwithstanding that the vendor's engineers were unable to make it functional, and the machine was returned for a refund. The relevant test was whether the equipment was acquired for the purposes of use in manufacturing and processing activities, rather than whether the equipment actually was so used.

At the time the taxpayer contacted the lessor ("Hewitt") of equipment to it that it wished to exercise the purchase option, Hewitt suggested another institution ("Lafleur") as a source of financing the purchase. Accordingly, the taxpayer entered into a lease with Lafleur.

In finding that the taxpayer did not acquire the equipment pursuant to the lease with Lafleur (and therefore, was not eligible for an investment tax credit under s. 127(5)), Tremblay TCJ. noted that one clause of the lease provided that "ownership of all vehicles leased shall remain with the lessor, and said vehicles should be registered in the lessor's name"; that another clause provided that at the expiry of the contract the lessor (Lafleur) was required to attempt to arrange the sale of the vehicle, with any shortfall to be paid by the taxpayer, and any excess to be refunded by Lafleur; and that a transfer of ownership took place between Hewitt and Lafleur.

The taxpayer also was not eligible for the investment tax credit because of the prior lease of the equipment from Hewitt.

Storage bins were held to form an integral part of the appellant's overall process for manufacturing plate glass, and thereby constituted "machinery and equipment used for manufacturing ... purposes" within the meaning of s. 3(17) of the Assessment Act (Ontario).

Machinery or apparatus for use in "the manufacture or production of goods" can include machinery that is used after the moment when a usable and saleable article is in existence. "[M]eans for removal of the product from the production equipment is as essential as any other part of the machinery or apparatus used in the manufacture or production of the product." (Excise Tax Act)

Silos used in a milling operation to store, mix and decontaminate wheat constituted "machinery and equipment used for manufacturing", notwithstanding the absence of moving parts. (Assessment Act (Ontario), s. 3, para. 17)

A mining dragline constituted "machinery" and "equipment" for purposes of the Taxation Ordinance (N.W.T.).

Lumber sorting and stacking equipment was found to form part of the taxpayer's production line for the manufacture of lumber from logs, and thus fell within an exemption in the Retail Sales Tax Act (Ontario) for equipment purchased for manufacturing.

A Quebec tax credit equal to 10% of the wages of Quebec employees of the taxpayer engaged in research reduced the amount of the taxpayer's qualified expenditures (in addition to constituting income under s. 12(1)(x)).