T-3669-77
Canadian Clyde Tube Forgings Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Toronto, December
7; Ottawa, December 18, 1979.
Income tax — Income calculation — Manufacturing or
processing tax credit — Appeal from the disallowance of
amounts paid to independent contractor resulting in reduced
tax credit — Semi-finished product delivered to contractor for
machining — Contractor supplied own machinery and work
force — Contractor's operation carried on entirely in plain
tiffs plant with no artificial barriers between areas of plant
occupied by plaintiff and contractor — Whether or not the
payments to the contractor are amounts 'paid or payable ...
for ... a service ... that would normally be performed by an
employee of the (plaintiff]" — Income Tax Act, S.C. 1970-
71-72, c. 63, s. 125.1 — Income Tax Regulations, SOR/73-
495, s. 5202.
INCOME tax appeal.
COUNSEL:
P. F. Vineberg, Q.C. for plaintiff.
I. S. MacGregor for defendant.
SOLICITORS:
Phillips & Vineberg, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: The issue is whether payments
made by the plaintiff to an independent contractor
fall within the definition of "cost of labour" under
section 5202 of the Income Tax Regulations,
SOR/73-495. The plaintiff included the payments
in computing the amount of its claim of a manu
facturing or processing tax credit under section
125.1 of the Income Tax Act, S.C. 1970-71-72, c.
63, for its 1973 taxation year. The Minister of
National Revenue disallowed the inclusion of those
payments and thereby reduced the credit from
$34,940 to $5,497. The arithmetic is not in issue
and it is not disputed that if the amount paid the
contractor is properly to be included in "cost of
labour", the credit claimed by the plaintiff should
be allowed.
The plaintiff is engaged in the manufacture and
processing of special pipes and fittings for the
refining industry. The entire operation is carried
out in the plaintiffs plant into which it receives
semi-finished fittings and flanges. The semi-fin
ished items are delivered by the plaintiff to the
contractor for machining. They are then returned
to the plaintiff for finishing, such as painting, and
are stocked there and shipped from there to cus
tomers. The contractor supplies the necessary
machines and tools, employs the machinists and is
paid at agreed piece rates. The machinery is all
located in the plaintiffs plant and the contractor's
employees do all their work there. To any observer,
the entire operation, from receiving to shipping,
would appear to be a single, integrated process.
There are no artificial physical barriers between
the areas of the plant occupied by the plaintiff and
the contractor nor superfluous segregation of the
employees of one from those of the other. This
modus operandi was adopted when the plant was
established in 1960 and continues today.
Section 5202 defines "cost of labour" as:
... an amount equal to the aggregate of
(a) the salaries and wages paid or payable during the year to
all employees of the corporation for services performed
during the year, and
(b) all other amounts each of which is an amount paid or
payable during the year for the performance during the year,
by any person other than an employee of the corporation, of
functions relating to
(i) the management or administration of the corporation,
(ii) scientific research as defined in section 2900, or
(iii) a service or function that would normally be per
formed by an employee of the corporation,
Certain immaterial exclusions follow.
The question is whether the payments to the
contractor are amounts "paid or payable ... for
... a service ... that would normally be performed
by an employee of the [plaintiff]". The argument
turned on the construction to be given subpara-
graph (b)(iii) of the definition and, particularly,
the meaning of the word "normally".
The service or function performed by the con
tractor is clearly a necessary service or function in
the course of the plaintiff's manufacturing and
processing operation. The contracting of the
performance of that service or function to an
independent contractor by the plaintiff is, on the
evidence, unique. It is normal for a corporation
carrying on such an operation to carry it on in its
entirety and the service or function performed by
the contractor for the plaintiff is a service or
function normally performed by employees of such
corporation. It is not, however, a service or func
tion normally performed by the plaintiff's
employees. The plaintiff normally engages the con
tractor, rather than its own employees, to perform
that service or function. Indeed, its own employees
have never, before, during or since its 1973 taxa
tion year, performed that service or function.
Nothing in the related provisions of the Act or
Regulations leads me to conclude that the perti
nent words of the definition of the "cost of labour"
are to be interpreted otherwise than in their plain
English sense. The adverb "normally" appears
clearly to relate to the modus operandi of the
manufacturer and processor claiming inclusion of
the particular outlay in its costs of labour. Put
briefly, it is subjective not objective normalcy that
is determinative of whether the amount paid or
payable is properly a "cost of labour".
The action is 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.