Judgments

Decision Information

Decision Content

T-4983-76
Canadian Wirevision Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Vancouver, September 14, 15, 16 and 22, 1977 and January 3, 1978.
Income tax — Income calculation — Deductions — Plain tiff, a cablevision company, appeals Minister's disallowance of its s. 125.1 deduction, a manufacturing or processing deduc tion — Whether or not the signals delivered by plaintiff are "goods" — Whether or not there is a sale of the alleged goods — Whether or not there has been a processing of goods for sale — Income Tax Act, S.C. 1970-71-72, c. 63, s. 125.1 as amended by S.C. 1973-74, c. 29 — Income Tax Regulations SOR/73-495, s. 5202.
Plaintiff, a cablevision company, claimed for its 1974 taxa tion year, a manufacturing and processing deduction from its tax otherwise payable pursuant to section 125.1(1) of the Income Tax Act. The Minister in his assessment disallowed this deduction and plaintiff appeals to have that part of the assess ment vacated. The issues between the parties are: (1) are the signals delivered by plaintiff to subscribers "goods", (2) is there a sale of the alleged goods and (3) has there been processing of goods for sale.
Held, the appeal is dismissed. The signals delivered by plaintiff to its subscribers are not goods. "Goods for sale" in section 125.1 is used in the common parlance of merchandise or wares—tangible moveable property. The transaction between plaintiff and its subscribers does not involve the sale of goods but rather is more akin to a contract of services. The decision concerning the third issue, that plaintiff's activities in capturing and delivering the signals fall within the ordinary reasonable sense of "processing", is not necessary to the determination of the case.
Quebec Hydro-Electric Commission v. Deputy Minister of National Revenue for Customs and Excise [1970] S.C.R. 30, referred to. The Noordam (No. 2) [1920] A.C. 904, considered.
INCOME tax appeal. COUNSEL:
John G. Smith and M. W. Shepard for plaintiff.
T. E. Jackson, Q.C., and J. Williamson for defendant.
SOLICITORS:
Douglas McK. Brown, Q.C., c/o Russell & DuMoulin, Vancouver, for plaintiff.
Deputy Attorney General of Canada for defendant.
The following are the reasons for judgment rendered in English by
COLLIER J.: The plaintiff is a cablevision com pany carrying on business in Vancouver, Burnaby and Richmond, B.C. For its 1974 taxation year it claimed, pursuant to subsection 125.1(1) of the Income Tax Act', a manufacturing or processing deduction from its tax otherwise payable. The Minister of National Revenue, in his assessment, disallowed the deduction. The plaintiff appeals to this Court to have that part of the assessment vacated.
Subsection 125.1(1) refers to a corporation's "... Canadian manufacturing and processing prof its ..." . That phrase is defined in subsection (3):
125.1.. .
(3) In this section,
(a) "Canadian manufacturing and processing profits" of a corporation for a taxation year means such portion of the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease; and
(6) "manufacturing or processing" does not include
(i) farming or fishing,
(ii) logging,
(iii) construction,
(iv) operating an oil or gas well,
(v) extracting minerals from a mineral resource,
(vi) processing, to the prime metal stage or its equivalent, ore from a mineral resource,
(vii) producing industrial minerals,
(viii) producing or processing electrical energy or steam, for sale,
(ix) processing gas, if such gas is processed as part of the business of selling or distributing gas in the course of operating a public utility, or
' R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63 and subsequently, (the "New" Act). Section 125.1 was added by S.C. 1973-74, c. 29, s. 1.
(x) any manufacturing or processing of goods for sale or lease, if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active businesses carried on in Canada was from
(A) the selling or leasing of goods manufactured or processed in Canada by it, and
(B) the manufacturing or processing in Canada of goods for sale or lease, other than goods for sale or lease by it. [My italics.]
Part LII of the Income Tax Regulations deals with Canadian manufacturing and processing profits. The definition of "qualified activities" in regulation 5202 has some relevance:
5202. ...
"qualified activities" means
(a) any of the following activities, when they are performed in Canada in connection with manufacturing or processing (not including the activities listed in subparagraphs 125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease:
(i) engineering design of products and production facilities,
(ii) receiving and storing of raw materials,
(iii) producing, assembling and handling of goods in process,
(iv) inspecting and packaging of finished goods,
(v) line supervision,
(vi) production support activities including security, clean ing, heating and factory maintenance,
(vii) quality and production control,
(viii) repair of production facilities, and
(ix) pollution control,
(b) all other activities that are performed in Canada directly in connection with manufacturing or processing (not includ ing the activities listed in subparagraphs 125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for sale or lease, and
(c) scientific research as defined in section 2900,
but does not include any of
(d) storing, shipping, selling and leasing of finished goods,
(e) purchasing of raw materials,
(/) administration, including clerical and personnel activi
ties,
(g) purchase and resale operations,
(h) data processing, and
(i) providing facilities for employees, including cafeterias, clinics and recreational facilities;
The plaintiff, by means of sophisticated equip ment, captures from the air message signals trans mitted by a number of television broadcasters and delivers reconstructed message signals to the individual television sets of its cablevision subscribers. 2 The issues between the parties are, as I see it:
(1) Are the signals, delivered by the plaintiff to its subscribers, goods?
(2) Is there a sale of the alleged goods?
(3) Has there been processing of goods for sale?
I go first to the question as to whether the signals are "goods" as specified in the legislation. I have found that to be a difficult problem. A description of the operation carried on by cablevi- sion companies such as the plaintiff is necessary.
The signals originate from a broadcast transmit ter. The visual and audio information which make up a television broadcast are converted into electri cal signals. In the technical language the result is described as an input signal. Most input signals cannot be sent directly over the communication channel. That channel, in the case before me, is the ordinary atmosphere and, eventually, cable. To effect satisfactory transmission from the broadcast antenna the message signal is impressed upon elec tromagnetic carrier waves. This transformation or modification into a high frequency range is techni cally described as modulation.
The information signal is now in the air. Its ultimate destination is the television receiver set of the viewer. In the case before me the receiver may be the television set owner's antenna, or the much more elaborate receiving equipment of operators such as the plaintiff.
Each receiver captures a portion of the electrical energy from the transmitted information signal. The human recipient is not interested in the infinitesimal amount of electrical energy captured.
2 That statement is probably an over-simplification of the basic facts, but is a convenient way in which to frame the dispute.
What he is interested in is the contents of the signal—the mutual, to use the technical jargon, information. As Dr. Jull, for the defendant, put it:
Although energy must necessarily be conveyed, the amount is small; the information conveyed in the signal is the important quantity.
The energy captured by each receiver is then not available to others. If there were a sufficient number of correctly placed receivers it would be theoretically possible for the whole of the electrical energy to be captured, leaving none for some receivers. It is not, however, a practical consider ation.
The receiver converts the signal received into a reconstructed version of the original signal trans mitted by the broadcaster. The television set then converts the reconstructed message signal into a reconstruction of the information message. Ideally, one then views and hears a so-called television broadcast as it was initially recorded by the broadcaster.
At this point I state that I accept the conceptual distinction put forward on behalf of the plaintiff. What is transmitted and received is not a televi sion program in the layman's sense. What the cablevision company and the viewer are really concerned with is the television signals of "mutual information" which I have attempted to describe.
When the particular information signal is in its assigned communication channel, be it air or cable or both, (and even before and after that stage), it is subject to contamination or disturbance. There are three main offenders.
Interference occurs when the signal in one chan nel spills over into another or others. It occurs, as well, where the signal travels over two or more paths. The fractionally different time arrivals cause what, to the layman, is known as "ghosting".
Distortion of the signal can be caused by imper fections in the transmitting and receiving equip ment. If part of the communication system is cable, as with the plaintiff, that equipment, and
ancillary equipment, by their very nature, create distortion of the signal.
The third main enemy is noise. Noise arises from natural causes within and without the com munication system. The higher the signal to noise ratio (SNR) the better the result to the ultimate viewer, whether he has his own receiver or is hooked in to the plaintiff's system.
Speaking generally, cablevision companies combat the contamination and disturbance in a number of ways: Sophisticated receiving antennae are erected at well-situated locations. Some of the antennae are designed to pick up one channel only, and to reject others. This reduces or eliminates spill-over from one channel to another. Multipath interference is reduced by selecting a suitable site or sites on which to locate the antennae. Diversity reception is used, as well, to reduce the effects of multipath interference. That involves using two or more receiving antenna locations. The theory is that, at any given moment, one of the sites will not experience multipath which affects the signal. The signals captured can be combined, or the best signal alone used. The cable companies receive the various broadcast signals at various sites and then transmit the reconstructed message signals via cable to the individual subscribers.
The companies at their head-end (where their receivers are) filter and amplify the received sig nals. Every effort is made not to affect the infor mation content of the original signal. To put it another way, the object is to deliver to the ultimate viewer as close a replica as possible of the original image and sound as recorded by the television camera and the audio equipment. The received signal, after the operations described, is then deliv ered by cable to the viewers. There are intrinsic limitations in the distribution system. They cause attenuation and noise. The signal to noise ratio tends to decrease. The cablevision companies endeavour to prevent contamination of the signal in the area between their head-end and the view- er—the actual cable system. Amplification and
filtering to a fairly elaborate degree, are, among other things, done.'
What I have heretofore described is the general operation of a typical cablevision company. That description is applicable to the plaintiff's business.
A considerable body of evidence was led by the plaintiff as to what it did after capturing the broadcaster's signal. This testimony was largely directed as to whether or not there was "process- ing", as required by the legislation in order to qualify for the tax deduction. The technical aspects were fully described by Mr. Saperstein and Mr. Bethel. They were illustrated in Exhibits 6 to 14.
I do not propose to recapitulate that evidence. It was not seriously contradicted by the defendant. The main dispute was whether or not the various steps done, and techniques used, were "process- ing", as that word is used in the legislation. Dr. dull preferred the expression "conditioning". The plaintiff's witnesses, understandably, adopted the term "processing". My task is, unfortunately, not to decide which of the opposing professional views is, in the industry, and in the professions, the better one. It is to determine what the legislators meant by the word. I shall deal further with this point later.
I return to the first issue: Are the signals, deliv ered by the plaintiff to its subscribers, "goods"?
My answer is they are not.
Reference was made by both parties to other statutes dealing with "goods" and to judicial deci sions based on those statutes. 4 In my view not too much assistance is obtained from those sources. Lord Sumner put it this way in The Noordam (No.
3 Amplification and filtering are also done at the head-end itself.
4 See, for example: Quebec Hydro-Electric Commission v. Deputy Minister of National Revenue for Customs and Excise [1970] S.C.R. 30. It was there common ground that "electrici- ty" was included in "goods" as used in the relevant provisions of the Excise Tax Act.
2). 5 The question was whether some bearer bonds and coupons seized as prize during wartime were "goods" within the meaning of a certain Order in Council:
At first sight the word "goods" might seem to be an equally inappropriate description. It must, however, be observed that the word is of very general and quite indefinite import, and primarily derives its meaning from the context in which it is used. Their Lordships were referred to sundry statutes, in which the word is either defined or stated to include specified things. Of the latter kind the Naval Prize Act, 1864, was particularly relied on, for it brings within the term "goods" "all things subject to adjudication as prize." This does not advance matters. When, as in that Act, a word is extended by statute to include a named thing, the conclusion naturally is that in its ordinary sense the bare word would have been insufficient to include it. There is further no reason why the definition clause of the Naval Prize Act, 1864, should be treated as explanatory of the language of an Order in Council which makes no reference to it.
Their Lorships are of opinion that the cardinal consideration in interpreting the Order in Council is the character and scope of the Order itself. The content of the word "goods" differs greatly according to the context in which it is found and the instrument in which it occurs. In a will or in a policy of marine insurance, in the marriage service or in a schedule of railway rates, in the title of a probate action or in an enactment relating to the rights of an execution creditor, the word may sometimes be of the narrowest and sometimes of the widest scope. The question is what is its content here.
To my mind, "goods for sale" in section 125.1 is used in the common parlance of merchandise or wares, or to put it in legal jargon, tangible 6 move able property.
In the court below in the Quebec Hydro-Elec tric Commission litigation, Jackett P. (now C.J. of this Court) made these comments in respect of the difficulties of classifying electrical energy as goods: 7
5 [1920] A.C. 904 at 908-909.
6 "The law of sale of goods only comprehends such things as are tangible": Fridman, Sale of Goods in Canada (1973) Carswell, p. 10.
7 Dep. M.N.R. v. Quebec Hydra-Electric Commission 68 DTC 5221 at 5223-5224. The Supreme Court of Canada allowed the appeal. Nevertheless, it is my view Jackett P.'s remarks are apt in this case.
Before coming to the facts, it should be noted that, while section 30 imposes the tax in question on the sale price of "goods" in which context the word "goods" would appear to be used in the common sense of merchandise or wares (Which probably includes all moveable tangible property), it is common ground that the word "goods", both in section 30 and, what is more important from the respondent's point of view in this case, in paragraph (a) of Schedule V, must be construed as including "electricity" which, according to the Shorter Oxford English Dictionary (Third Edition), according to the view now current, is "a peculiar condition of the molecules of a body or of the ether surrounding them (According to the Petit Larousse, the word "électricité" is a "Nom donné à l'une des formes de l'énergie"), even though this "peculiar condition" could hardly be regarded as falling within any sense in which the word "goods" is ordinarily used in the English language. The reason why the parties are agreed on the view that the word "goods" in these provisions must be read as including "electricity" is that, by virtue of section 32(1), the tax imposed by section 30 does not apply to the sale or importation of the "articles" mentioned in Schedule III, and one of the "articles" mentioned in that schedule is "electricity" (see paragraph 3 of Part VI of Schedule III). The parties are in agreement that the reasoning in Dominion Press, Limited v. Minister of Customs and Excise, (1928) A.C. 340 [1 DTC 127], is applicable to con strain one to the conclusion that the word "goods" in the charging section (section 30) must be read as including all the things enumerated as "articles" in the schedule referred to in the exempting provision (section 32(1)) and that, therefore, the same word "goods", when used in another provision that is part of the same taxation scheme—i.e. Schedule V—must also be read as including "electricity". As the parties to this appeal are agreed upon this view, I adopt it for the purposes of this appeal, without expressing any opinion as to its soundness. It should be noted, however, that it is the fact that electricity has none of the ordinary characteristics of the tangible moveable property that is normally referred to by the words "article" and "goods" that gives rise to the special difficulties encountered in applying paragraph (a) of Schedule V to the problem raised by this appeal.
In my opinion, those observations apply with equal force to the information signals furnished to the plaintiff's subscribers here.
In Benjamin's Sale of Goods, 8 the following comments are made in respect of electrical and other forms of energy:
8 The Common Law Library, Number 11 (1974 ed.) Sweet and Maxwell, para. 77 (p. 54). Reference was made by the plaintiff to Maritime Electric Co. Ltd. v. M.N.R. 65 DTC 282, a decision of J. O. Weldon, Q.C. of the Tax Appeal Board. In that case it was held that "electrical energy" was embraced within the term "goods" as used in then section 40A(2)(a) of the Income Tax Act. Section 40A(2)(a) was enacted in 1962 and repealed in 1964. In my view, the decision is distinguish able on its facts, and in principle. On a similar basis, I find Great Lakes Power Company Ltd. v. North Canadian Enter prises Ltd. [1972] 3 O.R. 770 (Vannini D.C.J.), distinguishable as well.
77 Electricity and other forms of energy. There is no doubt that energy, whether in mechanical, electrical or other form, is capable of being bought and sold. It has been judicially referred to as a "thing" and an "article" and also as a "commodity," but there has been no decision whether it comes within the term "goods." In Bentley Bros. v. Metcalfe & Co. mechanical power from a shaft was supplied by a landlord to his tenant, who also rented the machine which it drove. It was held that since the power was consumed in the process, it was bought and not hired; and it was further held that there was an implied contractual obligation to supply power fit for the user's purpose.
There are clearly difficulties in attributing to energy all the legal qualities of a physical object. For instance, it cannot be possessed per se --it is capable of being kept or stored only by changing the physical or chemical state of other property which is itself the subject of possession.
I do not find it necessary to categorize, in any precise way, the transaction entered into between the plaintiff and its subscribers, other than to say it does not, as I see it, involve the sale of goods. It is more akin to a contract of services. It is, I think, sufficient to say it is a transaction other than a contract for the sale of goods. 9
The foregoing disposes of the first two issues earlier set out.
I turn to the remaining issue: Has there been processing of goods? In view of my conclusions on the other matters, it is technically not necessary to express an opinion on this point. It is, I think, desirable (should this case proceed further), having in mind the extensive evidence led on this point, to set out my views. In doing so, I shall assume the information signals, delivered to sub scribers, are goods.
I have much less difficulty in coming to a deci sion on this aspect. I am convinced the plaintiff's activities in capturing and delivering the signals fall within the ordinary reasonable sense of the expression "processing".
Dr. Jull, for the defendant, accepted amplifica tion and filtering as, in the broad sense, signal processing acts. The evidence shows the plaintiff, in its operations, performs a good deal of those
9 See Benjamin's Sale of Goods (earlier cited), paras. 24, 25, 34, 39, 40, 70, 71, 72.
acts. Dr. Jull preferred to describe the other activi ties carried out as "conditioning". But he added this:
Any operation that you do to an electrical signal can be described as processing in the broad sense of the term, but in the normal sense of the term, signal processing—normally applies to much more sophisticated operations on the signal.
The legislators, to my mind, did not, when they used the word "processing" have in mind the more sophisticated operations envisaged by Dr. Jull. As I see it, the expression was used in the ordinary parlance of treating or preparing, putting into marketable form. The following decisions, as I see it, support that view:
Federal Farms Lid. v. M.N.R. 10 , W. G. Thompson & Sons Ltd. v. M.N.R. 11 and Admiral Steel Products Ltd. v. M.N.R. 12
I go now to two other matters. When this appeal against the assessment was filed, the plaintiff dis puted the Minister's treatment of the costs of "drop cables." At trial, the term "drop costs" was used. The plaintiff disputed, as well, the Minister's method of computing interest.
Those two matters have, by agreement, been resolved.
The defendant concedes the plaintiff's manner of calculating the interest is the correct one.
In respect of the drop costs, the following was agreed:
We request that the 1974 appeal, to the extent it relates to the treatment of drop line connection costs, be allowed and the matter be referred back to the Minister of National Revenue for reassessment in terms whereby exterior costs, namely, those relating to drop lines connecting cablevision cables with single family dwellings or with the central meter or core areas of multiple occupancy buildings, such as apartments, which amount to 25% of total connection costs, be treated as outlays upon capital account and interior costs, being those relating to drop lines from the outside of single family dwellings or from the meter or core areas of multiple occupancy buildings to individual television sets in suites or otherwise, which amount to 75% of total connection costs, be allowed as expenses.
10 [1966] Ex.C.R. 410 per Cattanach J. at 415-417.
66 DTC 291 (Tax Appeal Board). 12 66 DTC 174 (Tax Appeal Board).
The assessment will be referred back to the Minister for reassessment, as agreed, in respect of drop costs and interest.
The appeal, on the main issue, is dismissed. The defendant is entitled to costs.
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