Regulation 5202 - Interpretation

In finding that refund interest received by the taxpayer following a successful appeal of a substantial assessment represented business income and, therefore, was eligible for the manufacturing and processing deduction, Rip TCJ. stated (at pp. 2170-1):

"If the money used for the overpayment was business income that was intended for use in the business, then, once the courts have decided there was an overpayment of tax, the overpayment is no longer a tax but reverts to the time of overpayment to property owned by the taxpayer for use in its business and interest on that property is business income."

The taxpayer, which used employees throughout the year to manufacture and erect modular buildings, was able to treat amounts paid to subcontractors for the same work during the months of May to August of each year, when it tripled its production in order to manufacture portable school rooms, as the cost of labour.

The word "directly" in s. 1(a) of Part XIII of Schedule III to the Excise Tax Act was found to have a broad meaning of "without any intervening medium" rather than "immediately or without delay". Pipelines that distributed liquid hydrocarbons mix to a fractionation plant accordingly were "machinery and apparatus" that were used by it "directly in the manufacture or production of goods".

An operation of transporting animal residues (e.g., bones, meatscraps, feathers, blood and offal) by specially-adapted trucks to the taxpayer's premises for processing constituted a qualifying activity of "receiving and storing of raw materials" under subparagraph a(ii). Garon J. stated (p. 2259):

"I am of the opinion that receiving raw materials occurs when the business in question, which is involved in manufacturing or processing in Canada, takes possession of the raw materials and thereafter has control of them ... The materials are, from that moment on, the property of the appellant and are at the risk of the appellant."

Furthermore, taking up the raw materials also came under paragraph (b) of the definition. Garon J. noted (p. 2258) that "we must interpret paragraph (b) in a large and liberal manner, so that it may include activities other than those already covered by paragraph (a) ...". He also noted that the words "directly" and "in connection with" mean "activities which, first, are connected with manufacturing and processing operations in Canada but are not an integral part of the actual manufacturing and processing process" (p. 2258).