A-21-78
Canadian Wirevision Limited (Appellant) (Plain-
tiff)
v.
The Queen (Respondent) (Defendant)
Court of Appeal, Pratte and Ryan JJ. and Kerr
D.J.—Vancouver, February 14, 15 and 22, 1979.
Income tax — Income calculation — Deductions — Section
125.1 deduction relating to manufacturing and processing of
goods — Whether or not cablevision company, in business of
receiving radio and television signals and transmitting them to
subscribers by coaxial cable, eligible for s. 125.1 deduction —
Income Tax Act, S.C. 1970-71-72, c. 63, s. 125.1.
This is an appeal from a judgment of the Trial Division
dismissing appellant's appeal from its income tax assessment
for the 1974 taxation year and holding in effect that the
appellant was not, during that year, involved in the manufac
turing or processing of goods so as to be entitled to the tax
reduction provided for in section 125.1 of the Income Tax Act.
The appellant is a cablevision company. The Trial Judge
rejected its contention that radio and television signals, received
by appellant and transmitted to subscribers' receiver sets by
coaxial cable, were "goods" sold to its customers in the normal
operation of its business.
Held, the appeal is dismissed. The word "goods" in section
125.1 "is used in the common parlance of merchandise or
wares, or to put it in legal jargon, tangible moveable property".
In that sense, the signals captured by the appellant are not
goods. Further, the appellant could not succeed even if that
conclusion were wrong because the record does not show that it
ever sold signals to its subscribers. Whatever be the technology
of cablevision, the only realistic view of the appellant's activi
ties is that of a mere carrier providing its subscribers with the
technical means of obtaining a better reception of radio and
television signals. The appellant is in the communication busi
ness; it is not in the business of selling goods.
INCOME tax appeal.
COUNSEL:
John G. Smith and Merrill W. Shepard for
appellant (plaintiff).
W. J. A. Hobson, Q.C. and Jacques Côté for
respondent (defendant).
SOLICITORS:
Russell & DuMoulin, Vancouver, for appel
lant (plaintiff).
Deputy Attorney General of Canada for
respondent (defendant).
The following are the reasons for judgment
delivered orally in English by
PRATTE J.: This is an appeal from a judgment
of the Trial Division [ [ 1978] 2 F.C. 577] dismiss
ing the appellant's appeal from its income tax
assessment for the 1974 taxation year and holding
in effect that the appellant was not, during that
year, involved in the manufacturing or processing
of goods so as to be entitled to the tax reduction
provided for in section 125.1 of the Income Tax
Act.
Under that section, which was enacted in 1973,'
corporations are entitled to a reduction in tax in
respect of their "Canadian manufacturing and
processing profits", an expression which subsection
125.1(3) defines as meaning
125.1 (3) ...
(a) . .. such portion of 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 ... to be
applicable to the manufacturing or processing in Canada of
goods for sale. ... [Emphasis added.]
The phrase "the manufacturing or processing in
Canada of goods for sale" is not defined in the Act
which indicates, however, in paragraph
125.1(3)(b) that the expression "manufacturing or
processing" does not include certain specified
activities among which
125.1 (3)(b) ...
(viii) producing or processing electrical energy ... for sale
It is common ground that the appellant would
be entitled to the tax reduction it claims under
section 125.1 if, as it contends, it processed goods
for sale during the taxation year in question.
The appellant is a cablevision company carrying
on business in Vancouver, Burnaby and Richmond,
B.C. By means of powerful antennas, it receives
television and radio signals which it transmits by
coaxial cable to the receiver sets of its subscribers.
Those television and radio signals are the "goods"
which the appellant contends to process and sell to
' S.C. 1973-74, c. 29, s. 1.
its customers in the normal operation of its busi
ness. The Trial Judge rejected that contention. He
held that the signals were not goods within the
meaning of section 125.1 of the Income Tax Act
and that the contracts entered into between the
appellant and its subscribers did not involve the
sale of goods.
The appellant's contention that it processes and
sells goods is based on the description of the
technology of cablevision which was given by the
experts who testified at the trial. Both parties
accepted as accurate the summary of that evidence
made by the Trial Judge in the following passage
of his judgment [at pages 580-583]:
The signals originate from a broadcast transmitter. The
visual and audio information which make up a television broad
cast are converted into electrical 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
electromagnetic carrier waves. This transformation or modifi
cation, into a high frequency range is technically described as
modulation.
The information signal is now in the air. Its ultimate destina
tion is the television receiver set of the viewer. In the case
before me the receiver may be the television set owner's anten
na, or the much more elaborate receiving equipment of opera
tors 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 cap
tured. 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 receiv
ers. It is not, however, a practical consideration.
The receiver converts the signal received into a reconstructed
version of the original signal transmitted 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 television program in the layman's sense.
What the cablevision company and the viewer are really con
cerned 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 channel 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 imperfections in the
transmitting and receiving equipment. If part of the communi
cation 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 communication 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 con
tamination 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 select
ing 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 receiv
ing 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 signals. Every effort is made not
to affect the information 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
delivered 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 endeavor to prevent contamination of the signal in
the area between their head-end and the viewer—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.
According to the appellant, a television or radio
signal, once captured by its antennas, is in its
possession and becomes its property; it is then
"processed" when it is "cleaned", "filtered" and
"amplified" by going through the appellant's
sophisticated equipment and, ultimately, it is sold
when, for a consideration, it is delivered to the
appellant's subscribers. The appellant adds that
when it processes and sells signals it, in effect,
processes and sells goods since the signals are "a
commodity with economic utility derived from
their message potential".
Before considering the merit of that argument,
it is necessary to stress that the question for deter
mination is not whether the electrical impulses
which travel through the appellant's cable system
at nearly the speed of light could, in theory, be
considered as a commodity susceptible of being
sold. It is not, either, whether the appellant, in
view of the technology of its operations, could not,
possibly, have entered into contracts of sale with
its customers. The questions raised by this appeal
are rather whether the signals are goods within the
meaning of section 125.1 and whether the appel
lant did, in fact, enter into contracts of sale with
its customers.
In my view, both these questions must be
answered in the negative.
I agree with the Trial Judge that the word
"goods" in section 125.1 "is used in the common
parlance of merchandise or wares, or to put it in
legal jargon, tangible moveable property". In that
sense, the signals captured by the appellant, in my
view, are not goods. True, electricity is often
referred to as a commodity and even, sometimes,
as "goods". 2 However, the electricity that is com
monly purchased and sold and referred to as an
article of trade is the electricity that is produced,
sold and used for its energetic properties. By con
trast, radio and television signals, while electrical
currents, are never referred to as goods. The televi
sion or radio broadcaster is never thought of as the
producer of commodities or goods. And the owner
of a television set which receives a signal, be it
with or without help of a C.A.T.V. system, is never
said to acquire or consume any goods.
Even if that first conclusion were wrong, I am of
opinion that the appellant could not succeed
because the record does not show that it ever sold
signals to its subscribers. Whatever be the tech
nology of cablevision, the only realistic view of the
appellant's activities is that of a mere carrier
providing its subscribers with the technical means
of obtaining a better reception of radio and televi
sion signals. The appellant is in the communication
business; it is not in the business of selling goods.
The text of the form of contract used by the
appellant in its relations with its subscribers sup
ports that conclusion and makes clear that this is
the view that the appellant takes of its role. This
form does not refer to the sale of any commodity,
but to the supply of services.
For those reasons, which are substantially those
of the Trial Judge, I would dismiss the appeal with
costs.
*
RYAN J. concurred.
* * *
KERR D.J. concurred.
2 See: Quebec Hydro-Electric Comm. v. D.M.N.R. [1970]
S.C.R. 30. The appellant has argued with much force that the
exception found in subparagraph 125.1(3)(b)(viii) showed that
the word "goods" in section 125.1 was used in a sense that
included electrical energy.
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.