T-757-83
Tenneco Canada Inc. (formerly Tenneco Canada
Corp., formerly Speedy Muffler King Corporation,
formerly Discoverer Services Limited) (Plaintiff)
v.
The Queen (Defendant)
INDEXED AS: TENNECO CANADA INC. V. CANADA
Trial Division, Dubé J.—Toronto, October 6, 7
and 8; Ottawa, October 26, 1987.
Income tax — Income calculation — Capital cost allowance
— Assembly and installation of motor vehicle exhaust systems
— Contract for services — Not "processing" as parts, supplied
by subsidiary, installed unchanged — Assembly not "manu-
facturing" when limited to installation of replacement parts —
Must create new product — Taxpayer not creating new goods
for sale, but installing goods custom-manufactured elsewhere
— No sale of goods as required by Income Tax Act, s. 125.1(3)
— Property in parts passing by accession.
This is an income tax appeal. The taxpayer's business is the
assembly and installation of exhaust systems on motor vehicles.
The parts are supplied by a subsidiary, and are installed
without substantial alterations. Often, only one or two major
parts are replaced, as opposed to an entire exhaust system.
After removing the used parts, new ones are installed one by
one. The customers' invoices refer only to parts, not to labour.
The prices charged for the parts include the cost of labour. The
issues are whether the taxpayer's business constitutes manufac
turing and processing and if so, whether goods are produced for
sale as required by the definition of "Canadian manufacturing
and processing profits" in paragraph 125.1(3)(a) of the Income
Tax Act.
Held, the action should be dismissed.
The work done by Speedy Muffler does not constitute manu
facturing or processing, but constitutes services. There are two
criteria for "processing": 1) the treatment must make the goods
more marketable and 2) there must be some change in the
appearance or nature of the goods. The work done by the
taxpayer's employees does not meet these criteria as the parts
are installed virtually unchanged. Although wholesale and large
scale aspects of manufacturing have often been stressed in the
cases, assembly has been held to constitute manufacturing in
some circumstances. But not when assembly is limited to the
installation of replacement parts. The assembly must create a
new product. Speedy Muffler does not create new goods for
sale, it merely installs on motor vehicles goods custom-
manufactured elsewhere.
Even if the work constituted manufacturing or processing,
such activities would not be in respect of goods for sale. The
exhaust parts are not sold to the customers, but become theirs
by accession. Benjamin's Sale of Goods states that where work
is done on a chattel belonging to the employer, which involves
affixing materials belonging to the employee, the contract is
ordinarily for work and materials, the property in the latter
passing to the employer by accession and not under a contract
of sale. Sometimes there may be instead a sale of an article
with a subsidiary agreement to affix it. The property then
passes before the article is affixed. It is a question of intention.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 125.1(1)(a)
(as enacted by S.C. 1973-74, c. 29, s. 1), (3)(a) (as
enacted idem), (b) (as enacted idem), 127(5) (as
enacted by S.C. 1974-75-76, c. 71, s. 9.).
Income Tax Regulations, C.R.C., c. 945, Schedule II,
Class 29.
CASES JUDICIALLY CONSIDERED
APPLIED:
Crown Tire Service Ltd. v. The Queen, [1984] 2 F.C.
219; (1983), 83 DTC 5426 (T.D.); Sterling Engine
Works v. Red Deer Lumber Co. (1920), 51 D.L.R. 509
(Man. C.A.).
DISTINGUISHED:
Halliburton Services Ltd. v. The Queen (1985), 85 DTC
5336 (F.C.T.D.).
CONSIDERED:
Federal Farms Ltd. v. Minister of National Revenue,
[1966] Ex.C.R. 410; (1967), 67 DTC 5311; aff'd without
reasons, [1967] S.C.R. vi; Queen, The v. York Marble,
Tile and Terrazzo Limited, [1968] S.C.R. 140; rev'g
[1966] Ex.C.R. 1039; [1966] C.T.C. 355; (1966), 66
DTC 5210; Fiat Auto Canada Limited v. The Queen,
[1984] 1 F.C. 203 (T.D.); Canadian Wirevision Ltd. v.
R., [1978] 2 F.C. 577 (T.D.); aff'd [1979] 2 F.C. 164;
[1979] CTC 122 (C.A.); R. v. Sutherland, [1930] 4
D.L.R. 183 (B.C.C.A.); Deputy Minister of National
Revenue for Customs and Excise v. Research-Cottrell
(Canada) Limited et al., [1968] S.C.R. 684; Re Coleman,
Township of and Northern Ontario Light and Power Co.
Ltd. (1927), 60 O.L.R. 405 (App. Div.); Martin, John,
Paper Co. v. American Type Foundry Co., [1924] 3
D.L.R. 1080 (Alta. S.C.).
AUTHORS CITED
Benjamin's Sale of Goods, 1st ed. A.G. Guest, London:
Sweet & Maxwell, 1974.
Benjamin's Sale of Goods, 3rd ed. A.G. Guest, London:
Sweet & Maxwell, 1987.
COUNSEL:
Wolfe D. Goodman, Q.C. and Joanne E.
Swystun for plaintiff.
Ian S. MacGregor and Alexandra Brown for
defendant.
SOLICITORS:
Goodman & Carr, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
DUBS J.: By this income tax appeal the plaintiff
(at times referred to as "Speedy Muffler") claims
that its activities in assembling and installing
exhaust systems on motor vehicles constituted an
active business of manufacturing and processing
goods for sale in Canada. A favourable decision
would entitle the plaintiff to capital cost allow
ances, deductions and investment tax credits for
the taxation years 1975, 1976, 1977 and 1978
under three provisions of the Income Tax Act
[S.C. 1970-71-72, c. 63] and Income Tax Regula
tions [C.R.C., c. 945], namely Class 29 of
Schedule II, paragraph 125.1(1) (a) [as enacted by
S.C. 1973-74, c. 29, s. 1] and subsection 127(5)
[as enacted by S.C. 1974-75-76, c. 71, s. 9] of the
Act.
The Income Tax Act does not define the terms
"manufacturing" or "processing", but subsection
125.1(3) [as enacted by S.C. 1973-74, c. 29, s. 1]
defines "Canadian manufacturing and processing
profits" as follows:
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
(b) "manufacturing or processing" does not include
(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.
According to its own statement of claim, during
the years 1975 through 1978, the plaintiff was in
the business of assembling and installing exhaust
and suspension systems in motor vehicles (the
installation of suspension systems is not included
in this action).
Exhaust systems are generally made up of three
major components: the exhaust pipe connected to
the engine, the muffler itself which is the central
component, and the tail pipe leading to the rear of
the vehicle. Some of the systems include three
additional major components, namely the resona
tor, the connector and the catalytic converter.
However, in many instances, only one or two
major parts are replaced. For the years in question
the average number of major components replaced
was 2.31 per vehicle.
Smaller standard parts are used to connect, or to
link, or to attach the major components to one
another or to the body of the car. They are gas
kets, clamps, hangers and brackets. Assorted nuts
and bolts complete the basic inventory at Speedy
Muffler's garages.
All the major components are obtained from
Walker Exhausts Limited of Cambridge, Ontario,
("Walker"), a subsidiary of the plaintiff Tenneco
Canada Inc. Walker publishes a master catalogue
for all exhaust systems. All Speedy Muffler gar-
ages keep in stock a sufficient inventory of the
major component parts to satisfy the demand. All
the major component parts are made for specific
models and specific years of vehicles. The smaller
attachment parts are also obtained from Walker.
No components are made or created in Speedy
Muffler's garages.
A video presentation of the installation of an
exhaust system was shown by the plaintiff on a
television screen at the hearing. The vehicle
involved was a 1975 Ford LTD stationwagon. The
vehicle is raised on a jack and a Speedy Muffler
employee (not a licensed mechanic, but a person
trained by Speedy Muffler) first proceeds to take
down the used parts which have to be replaced, in
that case the entire exhaust system. A torch was
used to remove a rusted stud which was replaced
by a new bolt. The major components are not
assembled on the floor and lifted under the car;
they are installed one by one, commencing with
the exhaust pipe which is connected to the mani
fold. Then the muffler itself, which is linked to the
exhaust pipe with the assistance of a muffler
clamp. Finally the tail pipe which is connected to
the muffler and attached to the body of the car by
a hanger.
Various tools of the trade are used by the
attendants: the expected hammers, screwdrivers
and wrenches, and more specialized tools, such as
Spee-D expanders (to remove grooves and dents
from pipes) and Spee-D pipe shapers (to reshape
pipes and bushing ends). Generally, it would take
about five minutes to dismantle an old exhaust
system and fifteen minutes to install a new one. In
the course of the installation of the new component
parts, some of the pipes may have to be flared, so
as to be properly mated to other parts, or com
pressed as a result of being attached by the
clamps. No substantial alterations of parts are
effected in the garages. In most cases, the major
components, including the pipes, fit into one
another without alterations as they are all made by
Walker to fit vehicles of specific models and years.
The invoices handed to the customers at the
completion of the installations do not include any
charges for labour, merely for parts. It is common
ground that the sales prices for the parts include
the cost of labour. The customers also get a writ
ten guarantee for all exhaust system parts and
workmanship for one year. All heavy duty muf
flers for North American cars are guaranteed "for
as long as you own the car upon which it is
installed."
As already mentioned, the Income Tax Act does
not provide a definition for "manufacturing" or
"processing". There is, however, extensive juris
prudence in the matter. It has been held that the
technical meaning attributed to the word "process-
ing" by expert testimony ought to be rejected in
favour of the ordinary, or dictionary meaning of
the word.' The following dictionary definition of
"process" has been quoted with approval: 2 "to
subject to a particular method, system or tech
nique of preparation, handling or other treatment
designed to effect a particular result."
Finishing operations on slabs of raw marble
were found to constitute "manufacturing": the
marble slabs had "by work, both by hand and
machinery, received new form, new quality and
new properties." 4 It has also been held "that the
installation of radios by the plaintiff on the cars
' Federal Farms Ltd. v. Minister of National Revenue,
[1966] Ex.C.R. 410; (1967), 67 DTC 5311; affd by S.C.C.
without written reasons, [1967] S.C.R. vi.
2 Id., at p. 416.
3 Webster's Third New International Dictionary, 1964.
° Queen, The v. York Marble, Tile and Terrazzo Limited,
[1968] S.C.R. 140, at p. 145 (rev'g [1966] Ex.C.R. 1039;
[1966] C.T.C. 355; (1966), 66 DTC 5210).
which it had imported for sale to its dealers did not
constitute it a manufacturer or producer."'
There are two criteria to define "processing".
First, that the treatment must make the goods
more marketable and, second, that there must be
some change in the appearance or the nature of
the goods. 6
Some decisions stress the wholesale aspect of
manufacturing, it being "The making of articles
... (... on a large scale) by physical labour or
mechanical power."' It has been held that "Deve-
loping or producing by mechanical contrivances, in
a wholesale way, a definite, controlled, vendible
product, seems to me to connote `manufacture'." 8
And also that manufacturing connotes "large
quantities to be placed upon the market for gener
al sale." 9
The British Columbia Court of Appeal found in
R. v. Sutherland 10 that "a modern conception of a
manufacturer is one who on a reasonably large
scale turns out a finished or partly finished prod
uct by the application of labour or mechanical
power for general use. He has not a known cus
tomer for every article produced." In Deputy Min
ister of National Revenue for Customs and Excise
v. Research-Cottrell (Canada) Limited et al." the
Court was dealing with a company which assem
bled and erected eight precipitators and imported
domestically fabricated components. Martland J.
said at page 693 that "the assembly of parts may,
in certain circumstances, constitute manufacture,
but I do not agree that this must be so in all
5 Fiat Auto Canada Limited v. The Queen, [1984] 1 F.C.
203 (T.D.), at p. 210.
6 Federal Farms Ltd. v. Minister of National Revenue, supra
note 1, at p. 410 and Canadian Wirevision Ltd. v. R., [1978] 2
F.C. 577 (T.D.); aff d, [1979] 2 F.C. 164; [1979] CTC 122
(C.A.).
' Shorter Oxford English Dictionary, at p. 1275.
8 Re Coleman, Township of, and Northern Ontario Light
and Power Co. Ltd. (1927), 60 O.L.R. 405 (App. Div.), at p.
408.
9 Martin, John, Paper Co. v. American Type Foundry Co.,
[1924] 3 D.L.R. 1080 (Alta. S.C.), at p. 1082.
10 [1930] 4 D.L.R. 183 (B.C.C.A.), at p. 187.
11 [1968] S.C.R. 684.
circumstances." In my view, assembly can be
"manufacture" , but not when it is merely limited
to the installation of replacement parts: the
assembly must create a new product.
The only witness, called by the plaintiff, had on
some occasions visited a major automobile manu
facturing plant. He viewed it as an assembly of
parts, yet constituting a manufacture of cars. The
major distinction, of course, is that those large
assembly plants create a new product, an automo
bile, which is then distributed wholesale, whereas
Speedy Muffler merely assembles a few compo
nent parts, already custom built by another manu
facturer (Walker) and attaches them to a vehicle.
As I see it, Speedy Muffler does not really create
new goods for sale: it merely installs on cars goods
already manufactured elsewhere.
Under paragraph 125.1(3)(a) of the Act the
"manufacturing" or "processing" must be "of
goods for sale". The defendant's position is that
the plaintiff's business was not the production of
goods for sale but was essentially a service opera
tion: Speedy Muffler either repairs or replaces
exhaust components as a service to individual cus
tomers and the components are not sold to the
customers, but are attached to their vehicles and
ownership of the component parts passes to them
by way of accession.
In Crown Tire Service Ltd. v. The Queen, 12
Strayer J. of the Trial Division held, with refer
ence to the retreading of tires owned by customers,
that the manufacturing or processing in which the
taxpayer was engaged was not in respect of goods
for sale: the contracts involved with such tires were
12 [1984] 2 F.C. 219; (1983), 83 DTC 5426 (T.D.).
for work and materials. The Court referred to
Benjamin's Sale of Goods: 13
Where work is to be done on the land of the employer or on a
chattel belonging to him, which involves the use of affixing of
materials belonging to the person employed, the contract will
ordinarily be one for work and materials, the property in the
latter passing to the employer by accession and not under any
contract of sale.
Strayer J. concluded as follows:
I believe that the situation here fits within the general
principle as stated in Benjamin. With respect to the retreading
of tires owned by customers, it appears to me that the custom
ers retain ownership throughout the process. 14
However, in Halliburton Services Ltd. v. The
Queen 15 Reed J., also of this Court, dealt with a
taxpayer corporation which was engaged in activi
ties related to the drilling of oil and gas wells
requiring a specialized product which the taxpayer
would produce in addition to providing the related
services. The Court found that the taxpayer was
engaged in manufacturing and, in that case, there
was no need to draw a distinction between goods
sold pursuant to a contract for the sale of goods
and those sold pursuant to a contract for services.
She distinguished her case from the decision of
Strayer J. as follows:
It should first of all be noted that while Mr. Justice Strayer
relied on the distinction between contracts for the sale of goods
and contracts for work, labour and materials as described in
Benjamin's Sale of Goods, he expressly noted that the applica
tion of that principle was "always a matter for interpretation in
each case". Secondly the processing with which he was con
cerned did not involve the creation of a good antecedent to its
use in the provision of a service. Thirdly, the significant factor
in that case was the fact that "the work was done to a tire
casing which the customer owned throughout." 16 [My
emphasis.]
Suffice it to say that in the case at bar the third
distinction does not apply, as the work was done by
Speedy Muffler to a vehicle which the customer
owned throughout.
13 Id., at p. 223 F.C.; 5428 DTC; Benjamin's Sale of Goods,
First Ed. A. G. Guest London: Sweet & Maxwell, 1974.
14 Crown Tire Service Ltd. v. The Queen, supra, note 12, at
pp. 223 F.C.; 5428 DTC.
15 (1985), 85 DTC 5336 (F.C.T.D.).
16 Id., at p. 5340.
It is noted in Benjamin" at paragraph 41, en
titled "Sale distinguished from contract for work
and materials" that it is sometimes extremely dif
ficult to decide whether a particular agreement is
more properly described as a contract of sale of
goods, or a contract for the performance of work
or service and he points out that the distinction
"now appears to be of little significance", but, as
he continues to say, "except in relation to other
statutory provisions which apply only to a `sale' or
a `contract of sale.' " (Subsection 125.1(3) of the
Income Tax Act applies only to goods for sale or
lease.) The author goes on at paragraph 43 to deal
with chattel to be affixed to land or another
chattel:
Chattel to be affixed to land or another chattel. Where work
is to be done on the land of the employer or on a chattel
belonging to him, which involves the use of or affixing of
materials belonging to the person employed, the contract will
ordinarily be one for work and materials, the property in the
latter passing to the employer by accession and not under any
contract of sale. Sometimes, however, there may instead be a
sale of an article with an additional and subsidiary agreement
to affix it. The property then passes before the article is affixed,
by virtue of the contract of sale itself or an appropriation made
under it. Obviously, the question whether the intention of the
parties is substantially one of improving the land or principal
chattel (to which the furnishing of materials is incidental) on
the one hand or one of making a sale (to which the agreement
to affix is incidental) on the other hand is a matter of degree,
which may be difficult to determine in practice; but there is no
theoretical difficulty. In decided cases, the following have been
held contracts for work and materials: to supply and install
machinery in a building, to renew and alter the engines and
other machinery in a ship, to erect a building, to construct a
built-in cocktail cabinet in a house, to fit new brake-linings to a
car. In contrast, a contract to supply black-out curtains and
rails and to fit them in premises has been held a sale of goods,
and so has a contract to manufacture a bulk food hopper and
(for an additional charge) to deliver and erect it.
" Op. cit., supra note 13, 3rd ed. London: Sweet & Maxwell,
1987.
A final quote bears reproduction. In Sterling
Engine Works v. Red Deer Lumber Co., 18 the
Manitoba Court of Appeal held that a contract
made to furnish a machine or movable thing of
any kind and (before the property in it passes)
affix it to land or to another chattel is not a
contract for the sale of goods. Dennistoun J.A.
said as follows, at page 513:
With great respect I am of opinion that the ownership of
each plate, rivet or other particle of material built into the
defendant's engine by the plaintiff passed to the defendant at
the time it was affixed to that engine and not otherwise.
Summing up, the work carried out by Speedy
Muffler on the vehicles of its customers, whether it
be repair to the exhaust system in place, or the
replacement of some of its components, or the total
replacement of the whole exhaust system, does not
constitute the manufacturing or processing of
goods for sale, but constitutes services.
Furthermore, even if I considered such work to
constitute manufacturing or processing, such
activities would not be in respect of goods for sale
within the meaning of the Act, as in my view the
exhaust parts installed under the vehicles of the
customers are not sold to the customers, but have
become the property of the customers by
accession.
The action of the plaintiff is therefore dismissed
with costs.
18 (1920), 51 D.L.R. 509 (Man. C.A.).
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.