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Docket: 2003-2715(IT)G |
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BETWEEN: |
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TDS GROUP LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
Appeals heard on December 14, 2004 at London, Ontario
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Before: The Honourable Justice T. O'Connor |
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Appearances: |
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Counsel for the Appellant: |
Roger Taylor and Michelle Anderson |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Ifeanyi Nwachukwu |
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the taxation years ending August 22, 1996, September 30, 1996 and September 30, 1997 are allowed, with costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 11th day of May, 2005.
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"T. O'Connor" |
O'Connor, J.
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Citation: 2005TCC40 |
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Date: 20050511 |
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Docket: 2003-2715(IT)G |
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BETWEEN: |
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TDS GROUP LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
O'Connor, J.
[1] These appeals were heard at London, Ontario on December 14, 2004.
[2] Testimony on behalf of the Appellant was given by Andrew Dodd, a former executive of the Appellant, TDS Group Limited (sometimes referred to as "TDS" or "Appellant") and by Mehmet Ali Gencer, a chemical engineer and the President of Northern Technologies International. Mr. Dodd was familiar with the relevant activities of TDS and Mr. Gencer was also familiar with these activities and with the properties of a chemical process used in those activities more fully described below in paragraphs 15 and 16.
[3] The Respondent called no witnesses.
Issue
[4] The sole issue is whether TDS's activities in the taxation years ending August 22, 1996, September 30, 1996 and September 30, 1997 (the "relevant taxation years") constituted "processing" in Canada of goods for sale within the meaning of subsection 125.1(1) of the Income Tax Act ("Act") such that TDS was entitled to a 7% deduction from its federal income tax otherwise payable in respect of its "Canadian Manufacturing and Processing Profits" ("M & PP deduction"). Those activities consisted generally in the reception, assembly and special packing of automobile and truck parts received by TDS at its plants in London and Tillsonburg, Ontario, applying a special corrosion-inhibiting substance to the parts and arranging for their transportation to corporations operating vehicle assembly plants in Venezuela, Brazil, Argentina and Columbia.
[5] Counsel for TDS contends that the said activities constitute "processing" whereas counsel for the Respondent contends that they do not.
Facts
[6] The relevant facts are contained in the Notice of Appeal and in the "Appellant's Memorandum of Fact" and are proven either by admissions or the evidence. Those facts are as follows:
1. By Notices of Reassessment dated June 19, 2000 the Minister of National Revenue ("Minister") reassessed TDS additional federal income tax payable on the grounds that it was not entitled to the M & PP deduction in respect of the relevant taxation years.
2. On September 15, 2000 TDS filed Notices of Objection.
3. By letter dated April 30, 2003 TDS was advised that the reassessments had been varied to allow the M & PP deduction in respect of the activities at TDS's Hagersville facility and another deduction. Neither of these deductions are of concern in these appeals. The remainder of the reassessments was confirmed and revised Notices of Reassessment, dated April 30, 2003 were issued.
4. In the revised Notices of Reassessment, the Minister, denied the M & PP deduction in respect of TDS's operations at its London and Tillsonburg facilities in the amounts of:
(a) $588,475 for the taxation year ending August 22, 1996;
(b) $63,240 for the taxation year ending September 30, 1996; and
(c) $1,040,412 for the taxation year ending September 30, 1997.
5. The Minister, in denying the M & PP deduction, did so on the basis that TDS was not engaged in manufacturing or processing goods for sale or lease within the meaning of the definition of "Canadian manufacturing and processing profits" in subsection 125.1(3) of the Act.
6. During the relevant taxation years TDS's head office was located at 301 Tillson Avenue, Tillsonburg, Ontario and it operated facilities in London, Tillsonburg and Hagersville, Ontario.
7. During the relevant taxation years TDS was in the business of assembling and treating vehicle parts into "completely knocked down" ("CKD") Kits specifically for offshore assembly plants ("OSAPs) of Ford, General Motors and Chrysler (the "carmakers") at its London and Tillsonburg facilities and manufacturing wooden cases to house the CKD Kits at its Hagersville facility.
[Note: All of the foregoing facts in paragraphs 1 to 7 are admitted by the Respondent in the Reply to the Notice of Appeal ("Reply")].
8. The evidence establishes that in the relevant taxation years TDS was the only Canadian Corporation engaged in such business, that all of TDS's competitors operated from the U.S.A. and that substantially all of TDS's gross revenue from its active businesses in Canada was derived from its business activities described in paragraph 7 above.
9. In North American automobile plants, the same model vehicle is assembled continuously, and substantially all the parts are manufactured in (or "sourced from") North America. The North American automobile parts manufacturers deliver parts, on a continuous basis, directly to the carmakers' North American assembly plants for immediate integration into the production run of the specific vehicle made at that plant. This is referred to as "just in time" delivery of parts inventory. Accordingly, no special precautions need be taken for the physical or chemical protection of such parts.
10. OSAPs differ from North American assembly plants, inter alia, in that:
(a) "just in time" delivery of parts is not possible, given that parts for such plants are sourced, for the most part, in North America and shipped to the OSAPs; and
(b) OSAPs have production runs of different types of vehicles, rather than a single vehicle type.
11. Consequently, the delivery of automobile parts to OSAPs must be in a manner which takes into account the needs of the OSAPs for parts that are:
(a) assembled in the sense that all parts needed for a production run of a certain number of vehicles of a certain make, model and colour are aggregated together in the correct number and type for a complete production run;
(b) fit for assembly into the specific production run of the certain vehicle as described, i.e. no defective parts and, in particular, no corroded parts, given that the OSAPs do not keep an inventory of parts nor do they have ready access to the majority of their parts; and
(c) stored until use without corrosion in an often corrosive environment (e.g. Venezuela, China).
12. During the relevant taxation years, the North American parts manufacturers delivered parts directly to TDS's Tillsonburg and London facilities in exactly the same way as they shipped parts to the carmakers' North American assembly plants. TDS inspected the parts for defects, then created CKD Kits from these parts. Each CKD Kit contained between 100 and 250 cases that contained all of the North American sourced parts needed by the OSAPs to assemble a particular number of a specific kind of vehicle.
13. Each CKD Kit was in accordance with TDS's engineering department's instructions for a specific production run order, in a manner appropriate to the unloading facilities, inventory storage system, and line-side feeding process specified for the production run of a certain number of a particular vehicle by the specific offshore assembly plant.
14. It was a critical requirement of the OSAPs that the parts in every CKD Kit arrived at the OSAPs chemically and physically unchanged despite the highly corrosive environment of ocean travel and, to a lesser extent, despite the inventory storage facilities of the OSAPs. Traditional anti-corrosion methods (i.e., oil-dip) are costly in that parts need to be cleaned before assembly, are not consistently effective, and can be hazardous to employees and the environment.
15. TDS at one time protected the parts in the CKD Kits from the corrosion of ocean travel by dipping the parts in oil. However, TDS over time converted to a more technologically sophisticated and effective method: enveloping the parts in a vapour corrosion inhibitor ("VCI").
16. The VCI is a wrapping which emits a chemical vapour that coats the parts with a chemical mono-molecular layer. This chemical layer prevents corrosion of the metals used in automobile parts. The VCI vapour is more effective than oil-dipping in that it permeates all areas of the parts, including those which are normally difficult of access (crevices and cavities of parts). The VCI, although expensive, is less costly than oil-dipping because the chemical layer does not have to be removed from the part before assembly. The protection afforded by VCI wrapping protects against corrosion for as long as 24 months even if the part is repeatedly unwrapped and wrapped.
[Note: All of the foregoing facts in paragraphs 9 to 16 are admitted by the Respondent in the Reply.]
17. [OSAPs]
(a) The OSAPs were not organized to efficiently order or receive parts from hundreds of North American parts manufacturers;
(b) TDS's activities ensured that the correct type of part arrived in the correct quantities for assembly runs, were quality controlled with respect to colour and physical condition, and were corrosion-free;
(c) The CKD Kits were organized in a manner that was compatible with the unpacking systems of the OSAPs;
(d) The CKD Kits were organized to facilitate assembly-line-side feeding; and
(e) The parts, as assembled in the CKD Kits, could be stored in an easily traceable, space-efficient and non-corroding manner in inventory when not taken directly to production runs.
[Note: Paragraph 17 is admitted by the Respondent. See "Admitted Facts from Notice of Appeal" submitted at the hearing.]
[Certain further facts, including clarifications or amplifications, are mentioned in the Appellant's Memorandum of Fact, also submitted at the hearing. I have condensed these further facts, based upon what I find has been established by the evidence. For convenience I have numbered these further facts as paragraph 18 and following.]
18. The OSAPs were incapable of receiving and assembling automobile parts directly from the various North American suppliers to TDS; instead, they required the delivery of undamaged and corrosion-free parts in CKD Kits containing the precise number of parts required for a particular run of a particular automobile or family of automobiles.
19. The Tillsonburg plant occupied almost 500,000 square feet and employed an average of 200 to 300 people. The London plant occupied 220,000 square feet and employed an average of 75 to 125 people.
20. Essentially, a CKD Kit ensures that an OSAP will have all of the parts necessary to assemble a particular number of automobiles (usually, a multiple of 12). For example, if Chrysler contracts with an OSAP to assemble 24 Impalas, TDS will deliver a CKD Kit to the OSAP containing all of the North American-manufactured parts (representing approximately 90% of the total number of parts) necessary to assemble 24 Impalas - no more, no less. In this example, a CKD Kit might consist of 30 to 60 customized containers.
21. Before a CKD Kit is put together by TDS, several preliminary steps must have occurred. First, an OSAP must have sent an order to one of the carmakers, requesting the delivery of CKD Kits containing the parts necessary for the OSAP to assemble the requisite number of automobiles. Second, TDS must have successfully bid on the creation of the CKD Kits for the OSAP. Third, TDS must have identified those parts comprising the relevant CKD Kits for which it had not already designed specific packaging, and TDS must have already contacted the North American suppliers of the parts and ordered them. Fourth, TDS must have designed specific packaging for those "new" parts.
22. Subsequent to these preliminary stages, TDS would have engaged in each of the following activities in order to create CKD Kits for a particular OSAP:
(i) Received automobile parts from North American suppliers;
(ii) Physically inspected, counted and identified such parts;
(iii) Matched the parts against certified samples to ensure an exact match;
(iv) Assembled the requisite number of parts to enable the particular OSAP to assemble a specified number of automobiles (in multiples of 12);
(v) Pre-packaged the parts in such a manner as to withstand the rigours of overseas shipment and to reduce and optimize the space required by such parts in the export containers;
(vi) Segregated and identified the parts to be directed to a specific station on the OSAP assembly line;
(vii) Applied a corrosion inhibitor, principally VCI;
(viii) Constructed special wooden containers to protect the parts from damage during shipping;
(ix) Packed the parts in the containers in such a manner that the OSAPs can easily unpack them;
(x) Facilitated shipping across international borders in a manner commensurate with the customs laws of the country in which the OSAP was located.
23. OSAPs are incapable of assembling automobiles using local parts because local suppliers largely do not exist, or using parts sourced directly from North American suppliers (the principal source of automobile parts) because the OSAPs lack the technological capabilities, facilities and economies of scale of the North American assembly plants.
24. An OSAP lacks the infrastructure to receive and process the vast array of parts required to assemble automobiles in the absence of the CKD Kits. The CKD Kits not only contain all of the relevant parts, but they also allow the OSAPs to simply take the parts out of their protective containers and packages and assemble those parts into automobiles.
25. For all of these reasons, the OSAPs differ from their North American assembly plant counterparts in that they require the delivery of CKD Kits in order to assemble automobiles.
26. TDS was originally a division of Livingston Industries Limited ("Livingston"), Livingston and later TDS from 1973 until the relevant taxation years was considered by Revenue Canada as being entitled to the M & PP deduction. Tab 2 of the Joint Book of Documents is a request dated January 15, 1973 by Livingston to the Department of National Revenue for a ruling allowing Livingston the deduction in question and Tab 3 of the Joint Book of Documents reads as follows:
Mr. G.T. Francolini,
President,
Livingston Industries Limited
Tillsonburg, Ontario.
January 31, 1973
Dear Mr. Francolini:
This is in reply to your letter of January 15, 1973. Until legislation similar to that proposed in Bill C-222 has been passed by Parliament, no definite opinion can be given concerning the questions raised in your letter. However, the Department's present views concerning these questions are outlined below.
Based on the information contained in your letter, it is our view that Livingston Industries Limited is primarily engaged in a manufacturing or processing activity for purposes of clause 18 of Bill C-222. In our opinion the breaking of bulk, coating or wrapping to prevent rust, removal of certain engine parts, alteration to parts, and the assembly of these parts into kits for final assembly in a manner compatible with customers' foreign assembly facilities are activities which are considered to be manufacturing or processing for purposes of the lower rate of corporate tax as well as the fast write-off. We are enclosing a copy of the Department of Finance Press Release dated December 28, 1972 which contains the main features of the Regulation which corporations will use to compute their "Canadian manufacturing and processing profits". Equipment that is acquired for the purpose of earning your corporation "Canadian manufacturing and processing profits" is eligible for the fast write-off provided that it meets the requirements set out in paragraphs (d) to (i) on pages 2 and 3 of the Department of Finance Press Release dated July 26, 1972 (a copy of which is enclosed for your convenience).
Regarding your comment that the lack of ownership of the product being manufactured or processed is not a crucial factor in determining whether a company is engaged in a manufacturing or processing activity, we agree with you provided that the product which is being custom processed is destined for sale or lease by another person.
We trust that the above information will be of assistance to you.
Yours very truly,
for Director,
RDW/bg Technical Interpretations Division.
Submissions of the Appellant
[7] Counsel for the Appellant submits as follows:
• That what the Appellant was working on and what was being sold was not individual parts, as contended by the Respondent, but rather CKD Kits or the mechano sets.
• That the documentation between the car manufacturers and the Appellant, indicates that in the breakdown of the costs a certain amount is allocated to the materials (i.e. the parts) and another amount is allocated to what is referred to by the car manufacturers as "processing" and generally speaking the amount allocated to "processing" is approximately five times higher than the cost of the parts. Tab 6 of the Joint Book of Documents is referred to as an example of the documentation used in the relevant taxation years.
• The Appellant's operations are complex. There are 25 separate steps for properly assembling the CKD Kits. Tab 13 of the Joint Book of Documents demonstrates this. Further, the assembly must be done precisely because it is the Appellant and not the car manufacturer who is financially responsible for any shortcomings in the CKD Kits as they arrive at the facility of the offshore manufacturer.
• The Appellant was not merely packaging. The application of the VCI process described in paragraphs 15 and 16 of the Facts demonstrates this. The application of the VCI process is in fact an addition to the part and that application is essential to prevent corrosion.
[8] Counsel then goes on to refer to what might be considered the leading case, namely Federal Farms Limited v. Minister of National Revenue 66 DTC 5068 (Ex. Ct.), affirmed 67 DTC 5311. In that case the Supreme Court of Canada agreed with the conclusion reached by Justice Cattanach of the Exchequer Court of Canada (later the Federal Court of Canada). That case dealt with the "processing" of potatoes and carrots. The processor, namely Federal Farms Limited, selected the potatoes and carrots for size and uniformity, washed and brushed them to remove soil, sprayed them with a chlorine solution to improve shelf life, dried them and sorted them into 5, 10 and 20 pound bags and shipped them to retail stores. The Court held that this was "processing". Justice Cattanach stated as follows:
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Here it is plain that section 40A of the Income Tax Act is dealing with manufacturing and processing corporations generally and that the words "manufacturing" and "processing" as used in subsection (2)(a) of section 40A are used in their ordinary unrestricted senses. If this were not the case and the words were not to be intended to be used in their unrestricted senses then it was obviously unnecessary to make a specific enumeration of those types of businesses in which certain corporations are engaged as being excluded from the meaning of the words "manufacturing and processing corporation".
Section 40A of the Income Tax Act is dealing with matters affecting manufacturing and processing corporations generally. The section is not one passed with reference to a particular trade or business from which it follows that the words in question are to be construed in their common or ordinary meaning and not as having a particular meaning as understood by persons conversant with a particular trade or business. For this reason I do not accept the definition put forward by Mr. Long that processing connotes a material change being made in the texture and structure of the product.
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In Webster's Third New International Dictionary published in 1964 the word 'process' is defined as follows, to subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result: put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process..."
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The evidence of the appellant as to its operations convinces me that those operations were a process or series of processes to prepare the product for the retail market. There is no doubt that quite apart from the grading of the vegetables, a clean and attractive appearance is an important factor in marketing vegetables and especially so in the present day methods of retail marketing. Although the product sold remains a vegetable, nevertheless, it is not a vegetable as it came from the ground but rather one that has been cleaned, with improved keeping qualities and thereby rendered more attractive and convenient to the consumer.
The potatoes and carrots were, therefore, "processed" by the appellant within the ordinary and common meaning of the word "process" which I have concluded must be applicable in the present instance and within the meaning of the dictionary definitions of that word which are quoted above and which I have accepted as being the ordinary and common meaning of the word.
I do not consider that the operations of the appellant constitute packaging only and so precluded the appellant from qualifying as a manufacturing and processing corporation by reason of subsection (3)(a) of section 40A. To my mind the term 'packaging' applies to the appellant's ultimate operation in placing the vegetables in bag containers, but not to the antecedent steps of washing, brushing, spraying, drying, sizing, culling and grading.
[9] Counsel submitted further that Federal Farms Limited set the standard for all cases which followed and provided the description of what "processing" was.
[10] Counsel submits further that what Federal Farms Limited described as "processing" is exactly what the Appellant does. The special market is the offshore assembly plant. The product is the CKD Kit and it is in putting that together, the processes involved in putting that together that constitutes what TDS does as "processing". Counsel referred to several other cases but confirmed that the basic principles as to what constitutes "processing" were established in the Federal Farms Limited case.
[11] Counsel also referred to my decision in Cintas Canada Ltd. v. Canada, [1999] T.C.J. No. 255, and quoted the following:
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The test to be applied in determining whether processing has taken place, that is, whether there has been a change in the form, appearance or other characteristics of the goods and whether the goods become more marketable, is therefore well established. The application of those principles in a particular case depends on the particular facts of that case.
The Federal Court of Appeal has found that processing implies the application of a uniform process to each item (Tenneco) or the subjection of the product to a method, system or technique of preparation, handling or other treatment (Harvey C. Smith). The videotape evidence and the evidence of Mr. Gedmintas illustrate that the uniforms rented by the Appellant were subject to a uniform, highly-organized system of handling and treatment, from the alteration, adaptation and labelling of garments in the make-up phase, the sorting, cleaning and repairing of used and soiled garments and the sorting for dispatch of garments at the end of the process. The degree of system or uniformity or organization in this process cannot, in my submission, be distinguished in any material way from the processes which were applied to vegetables in Federal Farms ....
[12] Counsel also referred to the case of Harvey C. Smith Drugs Limited v. Her Majesty the Queen, 95 DTC 5026. In that case the Federal Court of Appeal held that the operations of Harvey C. Smith did not constitute processing. Amongst other things the Court stated as follows:
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 other treatment designed to effect a particular result'. There is no subjection and conversion of the original product from one state to another.
[13] Counsel attempted to distinguish the Harvey C. Smith case and stated as follows:
... What we have in the TDS operations is the start with parts coming from all over North America from 1,000 different suppliers or at least 1,000 different parts. There may be 500 suppliers. And turned that into, at the end of the approximate six day process Mr. Dodd told us to get this ready from beginning to end, to turn this into a CKD kit for export to foreign assembly plants.
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... the difference between the operations of TDS and those of Harvey C. Smith Drugs are very significant indeed.
Submissions of Counsel for the Respondent
[14] These submissions are contained at pages 255 and following of the transcript. The most relevant portions of the submissions are as follows:
The characterization of what TDS Group does is central to how this appeal will be decided. It is our position that notwithstanding Mr. Taylor's very able argument, the things that TDS Group does under its contract with General Motors is no more than packaging for shipment. It is no more than packaging. And that is borne out by the documents that result in the contract.
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What we know about the facts of this case is that General Motors manufactures its cars in Venezuela different than they manufacture them in Canada. They manufacture them in lots of 12, 24, 48 and they send the parts to Venezuela in kits that are complete insofar as all of the North American parts that are required to build the car. Those parts are all manufactured in North America by subcontractors to General Motors or manufacturers within General Motors to produce those parts. What has been contracted for is the service of collecting the parts, putting them into appropriate boxes, crates, and cases for shipment in a sea container to Venezuela. There is not one piece of assembly. There is not one piece of taking these parts and making them any closer to a car which is the ultimate product that General Motors hopes to sell.
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Our position simply is that the individual act of taking something from bulk, packaging a number into a package, whether it's a pill bottle or whether it's a plastic bag or a cardboard box or a plywood box, whether you encase it in VCI wrap or add desiccants to it, it doesn't matter. What is not happening in that series of steps of counting and of putting in the bag or putting into a container is processing. So our position, simply put, is that the law clearly establishes that packaging is not processing.
And I'm not here to say that Federal Farms is wrong because Federal Farms is the case that has been applied by all of the courts, this Court and the Federal Court of Appeal in deciding issues relating to manufacturing and processing since it was decided in the sixties. That is the case that the courts are comfortable in applying. The test is the one that is applied.
What I'm saying, though, is that the test in Federal Farms is not met here. The test has two parts to it and we've all agreed on what the two parts are. Part number one, is there a change in the form, appearance or other characteristic of the goods? Now, Mr. Taylor tries to say we can't look at the individual part in finding a process here, we have to look at the combination of all of the parts when they're put together in boxes and the boxes are put into three containers. That CKD kit, that 24 is the process. That's not what the legislation is aimed at.
The legislation is aimed at taking raw material and manufacturing something with it, taking apart or taking something and changing its form, its substance, its character, its appearance in a way that makes it more marketable. And nothing is done in this particular case that makes the individual part more marketable or all of the parts more marketable.
The parts are assembled because they've already been pre-sold. General Motors says I will sell you 24 Impalas in pieces and it says to TDS Group, here are the pieces, put them into boxes according to the needs of my customer. So the customer says I want these pieces to be destined to number ten point on my assembly line, number 15, number 20. We've got the document that shows how important that is. So the customer's requirements are being accommodated by TDS, but nothing is being processed.
All that's happening is that parts are being counted, parts are being packaged, parts are being wrapped up to protect them from the conditions they may be subjected to while they're transported from Canada to Venezuela or somewhere else. And we know from the Range Grain case that transportation in and of itself is not manufacturing or processing. And the protection of an item as part of the transportation process is not processing.
And so, when you look at what is really happening in this particular case, in light of the decisions that have been decided and Mr. Taylor has referred to, you will see that there is a fundamental distinction between what happened in those cases where there was a packaging component or a transportation component that was viewed to be part of the processing of a good in Canada and of this particular case. Because this case is not part of an integrated process where packaging is at the tail end or transportation is at the tail end. This case involves a service provider that does no more than packaging and facilitate transportation; nothing more.
[15] Counsel then goes on to analyze the Harvey C. Smith case which held that packaging alone is not to be considered as "processing".
[16] Counsel refers to other authorities which held that transportation in itself is not "processing".
[17] Counsel summarizes its position as follows:
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Our position here is quite simple; that these cases also stand for the proposition that if you're a transportation company or a packaging company and you do nothing to alter the form, appearance or characteristic of the good or make it more marketable, then you do not qualify. And it's as simple as that.
He states further:
What does TDS Group do? It collects, counts and packages automotive parts to be put on ocean going vessels for export. It does not refine the parts. It does not process the parts. It does nothing to the parts other than put them into the appropriate box or case.
[18] Counsel submits further that the application of the VCI does not mean that processing was involved. All that VCI did was to protect the parts while they were being transported. Counsel concluded as follows:
...
And ultimately, the use of that equipment was found not to be subject to the deduction. Ultimately, I suppose what we're saying is that this particular case is not a complicated case. The facts are not in dispute. It's a matter of looking at the facts as they are, having regard to what is the contract between General Motors and TDS Group or the other car companies to the extent that they're similar. And the contract is to package.
The contract is to receive, package and to get ready for shipping. It's nothing more complicated than that. And if the contract is a service contract to provide packaging services, then that is not processing and the cases are clear on that.
And I don't have to reinvent what processing is because it's clear that all of the cases are, to the extent that they have to comment on it, say that packaging or transportation is only not to be excluded if it's part of an integrated activity. And here there is no integrated activity.
Analysis and Conclusion
[19] I have reached the following conclusions:
a) The sophisticated operations of the Appellant were clearly not simply packaging. Nor was the Appellant involved in transportation as part of its service. The Appellant arranged transportation but the actual transportation was done by third party carriers.
b) The goods being processed were, as submitted by Counsel for the Appellant, not the parts nor the finished product, i.e. an automobile, but rather the CKD Kits, which were sold to the offshore manufacturer.
c) At the very least the Appellant's operations comprised part of the overall process that in the end resulted in the production of automobiles. Without the Appellant's input in assembling the CKD Kits (i.e. the mechano set) the offshore manufacturers could not have produced a vehicle. The Appellant's operations were an integral part in the overall process.
d) The operations of the Appellant were significantly different to the separating and counting, etc., of pills in Harvey C. Smith.
e) It is clear that value was added by the Appellant and the OSAPs paid good money for the input of the Appellant. Reference is made to the fact that the relevant documentation establishes that in most cases the price allocation for "processing" was approximately 5 times that for the parts.
f) The question of ownership of the parts was raised in the Reply but counsel for the Respondent submitted this was no longer an issue. This is also clear from Interpretation Bulletin IT-145R found at Tab 16 of the Joint Book of Documents. In other words the fact that the Appellant did not own the parts (the car manufacturers did) does not mean that the Appellant was not a processor. Moreover the condition of a sale taking place has been met since the CKD Kits and their contents were sold to the OSAPs.
g) In ambiguous cases, references to the policy behind legislation can be helpful. That policy was to encourage the employment and labour situations in Canada and to enable Canadian manufacturers and processors to compete with foreign competitors. This policy was particularly applicable to the Appellant as it was the only Canadian corporation carrying out the operations in question. Also in such cases it can be helpful to look at the Ruling given in 1973 and not changed until the 1996 year. The Ruling is not binding on the Minister of National Revenue but certainly indicates what the view of the Minister was for a considerable period of time.
[20] In conclusion for all of the above reasons the operations of the Appellant in the relevant taxation years consisted of processing of goods for sale within the meaning of subsection 125.1(1) of the Act. Consequently, the appeal is allowed with costs and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on this basis.
Signed at Ottawa, Canada, this 11th day of May, 2005.
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"T. O'Connor" |
O'Connor, J.
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CITATION: |
2005TCC40 |
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COURT FILE NO.: |
2003-2715(IT)G |
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STYLE OF CAUSE: |
TDS Group Limited and H.M.Q. |
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PLACE OF HEARING: |
London, Ontario |
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DATE OF HEARING: |
December 14, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T. O'Connor |
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DATE OF JUDGMENT: |
May 11, 2005. |
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APPEARANCES: |
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Counsel for the Appellant: |
Roger Taylor and Michelle Anderson |
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Counsel for the Respondent: |
Peter M. Kremer, Q.C. and Ifeanyi Nwachukwu |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Roger Taylor and Michelle Anderson |
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Firm: |
Couzin Taylor, LLP Ottawa, Ontario |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |