Section 125.1

The taxpayer, who carried on an active business of refining crude oil and marketing refined petroleum products, paid the amount of a disputed income tax assessment and received interest on a refund of the tax when its objection was successful. Sharlow J.A., in finding such interest was income from an active business, noted that if there were no such thing as refund interest, the taxpayer might well have chosen to provide security for the disputed assessment rather than paying it, with the result that it probably would have made business profits from the use of its money for the many years it took to resolve the dispute, that the taxpayer had only one business and that the decision to pay tax in dispute was a business activity.

The taxpayer, which was a licensed pay television company that purchased rights to movies, and retaped them with introductions and commentary onto blank tape for sale to cable companies, was found not to be thereby manufacturing or processing goods for sale or lease for purposes of the manufacturing and processing deduction and the eligibility of related depreciable assets for inclusion in Class 29.

The taxpayer, which published and distributed free of charge two newspapers 75% of whose space was devoted to advertising, was characterized as providing "an elaborate service in which the provision of space in the newspaper is a necessary but incidental part of the principal purpose of the contracts" (p. 5551), rather than as leasing advertising space to advertisers. Accordingly, its newspapers did not qualify as goods for lease.

The taxpayer, which gathered, edited and interpreted technical data for wells drilled for oil and gas, and placed that data on computer tapes or microfiches which were provided to its customers for a fee, was found not to be manufacturing or processing goods for sale. The essence of its business was the gathering, processing and providing of information, which was not "goods".

The taxpayer, whose commercial book-binding business entailed the binding of issues or volumes of periodicals, the binding of monographs and the restoration of old books, was found not to be manufacturing or processing "goods for sale" because under the applicable common law governing contracts for labour and materials, its customers acquired property in the materials affixed by the taxpayer by accession, rather than there being contracts for sale of goods.

The taxpayer, which used computer programs to process data from a few tapes in order to create images of sections of the surface of the earth (displayed on sheets of plastic, and also recorded on output tapes) was found to derive its income from the provision of services to its customers (i.e., processing information) rather than from the physical preparation involved in conveying the results of work to its customers. Accordingly, it was not engaged in the manufacturing or processing of goods.

In finding that the taxpayer was not eligible for the manufacturing and processing deduction, Desjardins J. stated (p. 5030):

"By its very language, the word 'processing' used in its ordinary meaning cannot be applied to the dispensing of drugs in capsules or tablets where the only activities of the pharmacist consists in removing the discoloured, broken, chipped or cracked ones, counting the appropriate ones in a number prescribed by the physician, and placing them in a labelled container with a child-proof safety cap. What is absent from the activities of the pharmacist is the subjection of the product 'to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result'."

The taxpayer, which received roll cores from pulp and paper companies, and then prepared a rubber material which it applied in a continuous operation to the customers' roll cores, was found to be manufacturing or processing roll covers for sale, rather than being engaged in a repair service.

The taxpayer's customers' engines were removed from aircraft, overhauled by the taxpayer and then reintroduced into the same customers' aircraft. This operation did not entail manufacturing or processing given that the engine retained its identity throughout the process (it retained the same serial number and logbook, and apparently less than 50% of the engine would be replaced by new parts), and the customer retained ownership of the engine throughout.

In finding that a corporation which assembled and installed exhaust systems in automobiles was not engaged in manufacturing ("producing for sale an identifiable article of commerce by assembling parts produced by others" (p. 5208)) or processing (which "occurs when raw or natural materials are transformed into saleable items" (p. 5209)), Linden J.A. stated (pp. 5209-5210):

"The nature of the modern commercial world is that goods often pass through many hands before they reach consumers. At each stage, minor alterations may be made to the goods, or they may be assembled in conjunction with other ready-made goods, before they progress through the commercial chain. The benefit of the incentives cannot be claimed by each of the handlers merely because they altered the goods in some small way. Only those operations which significantly change the character of the goods can truly be described as 'manufacturing' or 'processing' so as to qualify for the special tax incentives."

The taxpayer purchased raw film, took x-rays or ultrasound films of patients referred to it by a partnership of radiologists (five of the original partners of whom or their holding companies controlled it), developed the films, and sold them to the partnership. Collier, J. held:

"The plaintiff was not engaged, as its primary purpose, in the processing of goods for sale. It was, in my opinion, from a common sense, realistic and business-like appreciation of the evidence, providing services to the patients and the diagnosing radiologists of the partnership."

The taxpayer provided various services to oil and gas operators respecting the completion and stimulation of wells including pumping cement slurries around well casings, fracturing rock formations with proppants, and acidizing rock formations with a specially-blended acid. Urie, J.A., after finding the common law distinction between a contract for the sale of goods and a contract for work, labour and materials to be irrelevant, stated (p. 6318):

"... the Respondent does not enter into pure service contracts, but, rather processes goods to the operator's/customer's specification which it utilizes to perform the specialized services required of it by its customer. It does so by means of what the Trial Judge described as a 'mobile factory' which utilizes the various materials, mixtures and blends produced for delivery to the well bore ..."

and went on to find that the taxpayer's business therefore entailed the processing of goods for sale.

The taxpayer processed and developed x-ray films of patients who had been referred to radiologists who were its shareholders. The patients were referred to the radiologists on the basis of their professional skill in producing a diagnostic report rather than on the basis of the taxpayer's capability in processing x-ray films. Therefore the substance of the contract with the patient was the provision of services in which the passing of any property in the x-ray films was incidental thereto, and the contract accordingly was for the supply of services rather than the sale of goods.

Interest, which an electronic equipment manufacturer received from short term loans and certificates of deposit which it had acquired out of the proceeds of sale of a broadcasting station, was held to be "income ... from an active business carried on in Canada." The manufacturer has a specific "investment business" object, and there is a rebuttable presumption that income earned by a corporation in the exercise of its duly authorized objects is income from a business. In addition "the extensive activities of the [taxpayer's] employees in purchasing short-term investments, the large number and high value of those transactions, the high proportion which the interest earned bore to the total income of the company and the high proportion which the total value of the investments bore to the total value of [the taxpayer's] assets" reinforced the character of the interest as business income.

The appellant, which pumped custom-made cement, fracturing fluids and acid blends (the "goods") into the oil and gas wells of its customers, was held to have manufactured or processed the goods "for sale" notwithstanding the services which it provided in conjunction with the goods. Semble, that it was irrelevant that in some cases, the goods were consumed in providing the service.

The taxpayer, in retreading worn tires before returning the tires to its customers, was providing a service to its customers rather than "manufacturing or processing ... goods for sale" to them, because the customers retained ownership of the tires at all times.

The modus operandi of the taxpayer corporation was to contract out all of the cutting, making and trimming of shirts. This function thus was not a "function that would normally be performed by an employee of the corporation" under the "cost of labour" definition in regulation 5202. The fact that the cutting, making and trimming of pants was carried out by the corporation's employees might have been relevant only if words such as "of a kind" followed the word "function" in the definition.

Machining operations in the taxpayer's plant were always carried out by a subcontractor rather than the taxpayer's employees. Payments to the subcontractor accordingly were excluded from the "cost of labour" by virtue of subparagraph b(iii) of the definition in regulation 5202.

A textbook publisher was held to be engaged in the manufacturing or processing of books. Although the typesetting, printing and binding of the books was done by a printer rather than by the taxpayer, the remaining functions carried out by it, such as copy editing, book design and proofing, were integral elements of the "manufacturing" and "processing" of books within the ordinary meaning of those words. Although the books took their value from their informational content, the books nonetheless were what the taxpayer sold, and those books were "goods".

The payment by a garment manufacturer of the invoices of contractors to which it had farmed out the sewing of its garments could not be treated as part of its cost of labour. The degree of control exercised by the manufacturer upon the contractors' sewing machine operators and the fact that the manufacturer was ultimately legally responsible for their unpaid wages and benefits were insufficient to establish a master and servant relationship.

Medical laboratories were not engaged in the processing of goods for sale. The analysis of specimens by the laboratories did not result in an end product that could be sold. Instead, all that was sold were analysis reports, which were not the product of previous processing activities.

A cable television company argued unsuccessfully that it was processing goods for resale when it processed T.V. signals for transmission to its subscribers. Although electricity can be bought and sold as a commodity or "good", in this situation the television signals would not be referred to in common parlance as goods. In addition, the contracts with its subscribers indicated that it was supplying services rather than goods to them.

The processes of cleaning, fumigating and ventilating grain in a transfer elevator of the taxpayer did not qualify as processing because those operations were carried out for the purpose of maintaining rather than improving or changing the grain. This conclusion was reinforced by the taxpayer's non-ownership of the grain, which suggested that it was carrying out only a contract for service, namely, transportation.

Rouleau J. applied s. 15(1) of the Interpretation Act in finding that because ss.125.1(3)(b)(v), (vi) and (vi.1) excluded the production of ferric oxide and titanium dioxide from "manufacturing or processing" the sale of such production also was excluded from "the selling ... of goods manufactured or processed in Canada" referred to in s. 125.1(3)(b)(x) of the Income Tax Act. Accordingly, because the taxpayer's sales of ferric oxide and titanium dioxide could not be included in its sales of goods manufactured or processed in Canada for purposes of s. 125.1(3)(b)(x), its secondary activity of manufacturing iron powder did not qualify.

The onus is upon the taxpayer to establish that the 10% test has been satisfied.