Le Soleil Limitée (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Noël A.C.J.—Quebec, P.Q., Feb-
ruary 23; Ottawa, April 7, 1972.
Income tax—Claim for deduction for production incen-
tives—Manufacturing and processing corporation—News-
paper—Advertising revenue more than half of net sales—
Income Tax Act, section 40A—Deduction not within section.
Appellant company, publisher of a daily newspaper, had
gross sales of over 8 million dollars in 1963, of which more
than half was received from advertisers for space in the
newspaper.
Held, appellant company was not entitled to a deduction
under section 40A of the Income Tax Act. Its net sales from
manufacturing and processing in 1963 were not at least
50% of its gross revenue for the year.
INCOME tax appeal.
Maurice Jacques, Q.C. for appellant.
Paul Bowin, Q.C. for respondent.
Noel. A.C.J.—This is an appeal to this Court
from the decision of the Tax Appeal Board on
December 2, 1970, [1971] Tax A.B.C. 94,
allowing an assessment for 1963 in which, on
July 10, 1968, the Minister had added the sum
of $18,514.91 to appellant's income by refusing
to permit it to deduct this amount which it had
claimed, as a manufacturing and processing cor
poration, as a production incentive under s. 40A
of the Income Tax Act.
Appellant prints and publishes in Quebec City
the newspaper Le Soleil, which had a circula
tion on December 31, 1963 of about 167,000
copies. There are four editions of this newspa
per: the metropolitan Quebec City edition; the
regional edition serving all areas outside met
ropolitan Quebec City, such as the counties of
Beauce and Dorchester, as far as Montmagny;
the Saguenay-Lac-St-Jean edition, taking in the
whole of that region; and the lower St. Law-
rence edition, distributed from Montmagny to
the tip of the Gaspé peninsula.
In 1962, appellant, which regards itself as a
manufacturing and processing corporation, and
whose sales of goods processed and manufac
tured in Canada amounted to at least 50 per
cent of its gross annual income, took advantage
of the provisions of s. 40A of the Act which
relate to production incentives, complied with
the formalities required by the Act in this con
nection, and was in fact recognized by the
Department as being entitled to the said deduc
tion. As appellant was in the same situation in
1963 as existed in 1962, and took the same
view as formerly, it again availed itself of the
provisions of s. 40A of the Act in the same way
as in 1962.
On July 10, 1968, the Minister informed
appellant by assessment that he refused to grant
it the right to the deduction provided in s. 40A
of the Act, because, in the Minister's view,
appellant did not derive more than 50 per cent
of its sales from manufacturing. The Minister in
fact seeks to distinguish between sales of the
newspaper and advertising sales, which in the
latter case would not be sales from manufactur
ing. Appellant contends, first, that advertise
ments in its newspaper must be taken into
account, since printers of circulars, advertising
handouts and other things of that kind, dis
tributed by the printer himself or through third
parties, qualify under the provisions of s. 40A,
and since almost every day, and, if not, at least
frequently, appellant does exactly what the
printer of circulars or advertising handouts does
when required. Appellant submits that a news
paper is a single entity, and cannot be divided
into two sections, namely the newspaper itself
and the advertisements. It argues that a person
buying a newspaper wants to be informed not
only of the international, national and local
news, but also of the products of various busi
ness firms, and that in some families, and by
certain members of the family, the advertise
ments are read first, which clearly indicates that
they constitute reading material as important to
readers as the other news. Newspapers are not
concerned by the fact that the news is paid for
by the advertisers, as otherwise the selling price
would be prohibitive; a newspaper without
advertising either does not sell or has a very
short life. In appellant's submission, newspa
pers as such, even including the advertisements,
constitute goods processed or manufactured in
Canada. Where the preparation of a newspaper
is concerned there is, in appellant's view, no
difference between what may be described as
reading material, and advertising, because there
has to be manufacturing and processing in both
cases. It points out, to show that the reader's
interest is the same as that of the advertiser,
that, to cite only one instance, the advertise
ments in the metropolitan Quebec City edition
are generally not the same as those for Lac-St-
Jean. It adds that the same also applies to
certain news which is appropriate to one edition
and not to others. This means that an advertiser
pays "in another's stead a few cents less than
the amount it would cost to buy a newspaper
with the advertisements he wants to see in it".
In appellant's submission, the total sales of
manufactured products, compared with the total
sales of the business, amount to 57.126 per
cent, which is more than sufficient since the
Act requires 50 per cent. According to appel
lant, the advertiser chooses the size of the
advertisement, its position in the newspaper,
and the items and text he wants to insert, with
out the newspaper being able to exercise any
influence, except when morals, public order and
libel may be involved, so that the newspaper
has no latitude and must comply with the
instructions received. In appellant's submission,
therefore, it is a manufacturing corporation
within the meaning of the relevant provisions of
the Act, as was recognized, moreover, by the
Minister in his decision, and since the expres
sion "manufacturing and processing corpora
tion" must be interpreted disjunctively, not con-
junctively, it falls within the conditions
specified as a qualification for the said deduc
tion in 1963.
The Minister admits that income from the
public sale by a printer of the circulars and
advertising handouts he has made may qualify
for the provisions of s. 40A, but he submits that
in ,calculating the printer's income the amount
paid for space reserved in the newspaper by
advertisers cannot be included for the purposes
of this section. Payment for space reserved in a
newspaper by an advertiser is, in respondent's
submission, payment for services rendered, and
a printer's income from this source cannot be
considered as income from the sale of manufac
tured and processed goods within the meaning
of s. 40A of the Act. It follows, therefore, that
the payments received by appellant for these
services would not be regarded as income from
manufactured or processed goods, and the sale
of its manufactured or processed goods by
appellant would thus not constitute 50 per cent
of its gross income for 1963.
The Minister submits that an analysis of
appellant's sales for 1963 showed that of the
total amount of $8,016,344, only $3,392,340
came from the sale of manufactured or proc
essed goods. He said that appellant's income for
1963 from goods processed or manufactured in
Canada did not, therefore, amount to at least 50
per cent of its gross income for the year within
the meaning of the said section. In the Minis
ter's submission, appellant was not a manufac
turing and processing corporation within the
meaning of s. 40A of the Act. It should be
noted, first of all, that in my view the statement
of the learned member of the Tax Appeal Board
to the effect that while appellant may be regard
ed as a manufacturing corporation, it may not
be regarded as a processing corporation, a view
on which he appears to have relied, at least in
part, in arriving at his decision, is not well
founded. First, I feel that manufacturing and
processing are both involved in producing a
newspaper, but that even if processing were not
involved manufacturing would suffice, since s.
40A(2) uses the disjunctive wording "... of
goods processed or manufactured in Canada".
Where advertisements and news are con
cerned, it is true that both are involved in
production of a newspaper, and that production
is continuous from the time the news is first
compiled and put into written form, or, in the
case of advertisements, from the time the
employee not only obtains an advertising con
tract, but brings the advertisement to the office
where it will also be put in print. It is probably
also true to say that income from advertise
ments and from readers of the paper is income
from sources which could not exist without
each other. Both operations are interdependent,
and both form an integral part of the manufac
turing and processing involved in the produc
tion of a newspaper, and it is even possible that
the latter could not be done profitably or satis
factorily without the income from advertise
ments. Furthermore, the manufacturing of a
newspaper is done in the same way for the
news as for advertisements. It includes the col
lection and page-setting of news for the infor
mation, instruction and entertainment of the
readers who buy the paper, but it also covers
collection of information from those desirous of
paying for the advertisements inserted in the
newspaper. This collection of news and infor
mation is part of the process of manufacturing a
newspaper, and is included in the uninterrupted
sequence of operations from the time the news
item or advertisement is collected or obtained
until the newspaper is in the purchaser's hands,
and the income resulting from these two opera
tions undoubtedly comes from manufactured
and processed goods. Furthermore, the newspa
per vendor who buys newspapers for resale will
have for sale, in his stock, goods manufactured
and processed in Canada. Unfortunately for
appellant, however, these are not the only con
ditions specified in order to qualify for the
deduction provided in s. 40A. Indeed, the latter
does not say that a manufacturing and process
ing company may make certain deductions from
its income tax if the income from goods which
it has processed or manufactured in Canada
amounts to at least 50 per cent of its gross
income, but rather that it may make these
deductions if the net sales come from the sale
of goods processed or manufactured in Canada.
The income must therefore come from the sale
of goods if it is to be included in the taxpayer's
income for deduction purposes.
Although it may be difficult to distinguish the
case of advertising circulars sold to an advertis
er for distribution to the addressees from that
of advertisements sold to the same advertiser
for insertion in the newspaper, when both are
produced by the same process and by the same
workers or employees, using the same materi
als, the fact remains that the publication of
advertisements in the newspaper does not con
stitute a true sale of "goods processed or manu
factured", such as that which occurs on sale of
the newspaper itself to the reader, or even on
the sale of circulars to the advertiser. In fact,
one aspect is lacking which is essential in order
to bring the amounts paid for advertisements
inserted in the taxpayer's newspaper within its
net income from the sale of processed or manu
factured goods, in that it is paid for services
rendered, and not for goods sold, since the
advertiser receives no goods except the benefit
of using the newspaper's facilities to get his
information across to actual or potential cus
tomers. I feel I must come to this conclusion,
even though the advertiser, through what might
be called an advertising "subsidy", is thereby
contributing to the cost of the newspaper, and
thus making it possible for the reader to pay a
lower price than what he would otherwise have
to pay if he had to bear his full share of the cost
of producing the newspaper.
It is not possible, in fact, without doing vio
lence to the wording of s. 40A, and without
distorting the meaning of the words "sale of
goods", to maintain that an "advertising con
tract" is a sale of goods. Indeed, a sale of goods
necessarily implies that property in chattels is
transferred to another for a money considera
tion, and I find it hard to accept that there is
such a transaction or operation when an adver
tiser pays a sum of money for an advertisement
he wants to have inserted in a newspaper. There
is in such a case no goods which change hands,
and the advertiser obtains no property right in
the advertisement paid for by him and inserted
in the newspaper. I feel, therefore, that it is
more true to say that where advertisements are
concerned, the newspaper only undertakes to
perform certain services for the advertiser,
namely that when the newspaper is printed and
sold it will contain the advertisement ordered
by the advertiser.
I therefore consider it impossible to extend
the provisions of s. 40A of the Act so as to
make them apply to appellant.
The appeal is therefore dismissed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.