T-1996-82
Crown Tire Service Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Strayer, J.—Edmonton, October
26; Ottawa, November 2, 1983.
Income tax — Income calculation — Deductions — Appeal
from reassessments for 1975 to 1977 disallowing deductions
under s. 125.1(1) of Act — Plaintiff retreading tires belonging
to customers, as well as own tires subsequently sold or leased
as retreaded tires — No evidence of what portion of business
retreading customers' tires as opposed to own tires — S.
125.1(1)(a) allowing deduction of portion of profits from
"Canadian manufacturing and processing" — S. 125.1(3)(a)
requiring such profits to be income applicable to "manufac-
turing or processing in Canada of goods for sale or lease" —
S. 125.1(3)(6)(x) not qualifying such "manufacturing or proc
essing" for deduction if less than 10% of gross revenue derived
from profits of this nature — Defendant contending retreading
customers' tires not manufacturing or processing "of goods for
sale or lease" but "manufacturing or processing" of services —
Plaintiff alleging retreading of customers' tires within s.
125.1(3)(a) because involving sale of tire treads even where
applied treads to tires owned by customers — Appeal dis
missed — Retreading of customers' tires not constituting
manufacturing or processing of "goods for sale or lease" —
Contracts with respect to such tires were for work and ma
terials and not contracts for sale of goods — Customers
retaining ownership of tires throughout process — Retreading
involving contract for repairs — Rubber affixed to casing
becoming property of tire owner by accession — No evidence of
sale of treads without being affixed to tire casing — Court in
His Majesty The King v. Boultbee Limited, 119381 Ex.C.R.
187 treating retreading of customers' tires for purpose of sales
and excise taxes as contract for repair — Plaintiff not dis
charging burden of proving reassessments wrong by showing
what portion of business attributable to retreading own tires
for sale or lease, and that such portion exceeding 10% of gross
revenue — Income Tax Act, S.C. 1970-71-72, c. 63, s.
125.1(1)(a),(3)(a),(b)(x) (as enacted by S.C. 1973-74, c. 29,
s. 1).
CASES JUDICIALLY CONSIDERED
APPLIED:
Sterling Engine Works v. Red Deer Lumber Co. (1920),
51 D.L.R. 509 (Man. C.A.); Scott Maritimes Pulp Ltd.
v. B. F. Goodrich Canada Ltd. et al. (1977), 72 D.L.R.
(3d) 680 (N.S.S.C.); His Majesty The King v. Boultbee
Limited, [1938] Ex.C.R. 187.
REFERRED TO:
Johnston v. Minister of National Revenue, [1948] S.C.R.
486.
COUNSEL:
H. George McKenzie for plaintiff.
William Mah for defendant.
SOLICITORS:
Bell, Felesky, Iverach, Flynn, Struck &
McKenzie, Edmonton, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
STRAYER J.: This is an appeal from reassess
ments for tax for taxation years ending February
28, 1975, and December 31, 1975, 1976 and 1977.
In these reassessments the Deputy Minister of
National Revenue disallowed deductions claimed
by the company under subsection 125.1(1) of the
Income Tax Act [R.S.C. 1952, c. 148 (as am. by
S.C. 1970-71-72, c. 63, s. 1; S.C. 1973-74, c. 29,
s. 1)].
Paragraph 125.1(1) (a) allows a corporation in
certain circumstances to deduct from tax otherwise
payable a portion of its profits from "Canadian
manufacturing and processing". By paragraph
125.1(3)(a), one of the requirements of "Canadian
manufacturing and processing profits" is that they
be income applicable "to the manufacturing or
processing in Canada of goods for sale or lease"
(underlining added). By virtue of subparagraph
125.1(3)(b)(x), however, such "manufacturing or
processing" does not qualify a corporation for
deduction if less than 10% of its gross revenue
comes from profits of this nature. This is referred
to, for convenience, as the de minimis rule.
The plaintiff in the present case had given notice
of objection to the reassessments but they were
subsequently confirmed. It then appealed to the
Tax Review Board and the Tax Review Board, in a
judgment of November 23, 1981 dismissed the
appeal. The plaintiff then appealed the reassess
ments to this Court.
The plaintiff company is the successor company
to Crown Tire Retreaders Ltd. which was the
relevant taxpayer during the taxation years in
question. I shall simply refer to the relevant tax
payer compendiously as "Crown Tire". During
these taxation years Crown Tire operated a tire
retreading business. It retreaded tires using three
different processes, some of which involved more
fabrication and processing on their premises than
did others. Much of their business involved receiv
ing worn tires from customers accompanied by an
order for the retreading of same. They would then
strip off the old tread, leaving the "casing", put a
new tread on it by applying a strip or strips of
rubber which they provided either by their own
processing of raw rubber or by using strips pur
chased from a supplier, and after applying heat
and pressure the tread would be secured to the
casing and the retreaded tire emerged. In some
cases Crown Tires itself owned the casing which it
would retread by these processes and then sell or
lease the end product as a retreaded tire to random
purchasers or lessees. Neither before the Tax
Review Board nor before me could Crown Tire
produce evidence establishing what portion of their
business consisted of retreading tires provided by
customers for return to those customers, and what
portion consisted of the retreading of casings
owned by Crown Tire for sale or lease as retreaded
tires.
The defendant did not dispute before me that
the plaintiff was engaged in "Canadian manufac
turing and processing" in the operation of this
business. Nor, with respect to the retreading and
sale or lease of casings owned by Crown Tire did it
deny that this was "manufacturing or processing
in Canada of goods for sale or lease" as required
by paragraph 125.1(3)(a). It does deny however
that the remainder of the business, involving
retreading for a fee of casings provided by custom
ers and returned to them after retreading, con
stituted manufacturing or processing "of goods for
sale or lease". It contends that the manufacturing
or processing did not produce goods for sale but
rather was a "manufacturing or processing" of
services. It further contends that since the plaintiff
cannot discharge the burden of proof on it to prove
its entitlement to the deduction by proving what
portion of its production involved retreading of its
own tires for sale or lease as retreaded tires, in
order to make a claim for the deduction with
respect to that portion of its profits and to show
that they would exceed the 10% requirement of the
de minimis rule, the reassessment should stand.
The plaintiff argues that all of its retreading busi
ness constituted "manufacturing or processing ...
of goods for sale or lease" and that it is therefore
entitled to the deduction with respect to all of its
income from the retreading business. In particular,
it argues that that portion of the business involving
the retreading of customers' tires comes within the
language of paragraph 125.1(3)(a) because it was
engaged in the sale of tire treads to its customers
even where it applied those treads to tires already
owned by the customer.
The essential question then is as to the nature of
that portion of the plaintiff's business involving the
retreading of customers' tires. The plaintiff con
tends that in this aspect of its business it was
manufacturing or processing tire treads for sale as
such. The defendant argues that at best the plain
tiff was engaged in the manufacturing or process
ing of a service. In particular, it says that the
materials—namely, the rubber strip—used for
retreading did not pass into the ownership of the
customer pursuant to a contract of sale. Instead, it
argues that the contract was one for work and
materials to be provided by Crown Tire, with
property in the materials passing to the customer
by accession at the time when they were attached
to the customer's casing.
I have come to the conclusion that the manufac
turing or processing in which the plaintiff was
engaged during the period in question, in so far as
it involved retreading of tires owned by customers,
was not with respect to "goods for sale or lease".
In my view the contracts with respect to such tires
were contracts for work and materials and not
contracts for the sale of goods. Although I was
invited to draw certain inferences from the con
tract documents, including order forms, invoices,
and warranties, I did not find these to be particu
larly helpful in determining the nature of the
contract except as noted below.
In Benjamin's Sale of Goods (London, 1974), in
considering the distinction between a contract of
sale of goods and a contract for work and ma
terials, it is stated:
Where work is to be done on the land of the employer or on a
chattel belonging to him, which involves the use 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.'
This I believe states the general principle appli
cable to the situation, although its application is of
course always a matter for interpretation in each
case.
I believe that the situation here fits within the
general principle as stated in Benjamin. With
respect to the retreading of tires owned by custom
ers, it appears to me that the customers retain
ownership throughout the process. In an order
form admitted as Exhibit P-1, the customer asked
Crown Tire Service to retread a particular tire "if
economical". Testimony from the company's offi
cers given before me indicated that this meant that
if, upon closer inspection, Crown Tire concluded
that the tire was not worth retreading, it would so
advise the customer and request further directions
as to whether the customer wanted the tire
returned to him or discarded. Where a tire was
retreaded, it would be returned to the same cus
tomer who supplied it. This suggests to me that the
casing was seen throughout as being the property
of the customer and the work and materials pro
vided by Crown Tire were applied to that casing.
This involved essentially a contract for repairs.
Once the rubber material was affixed to the casing
it would become the property of the owner of the
casing by accession. That material could therefore
not be the subject of a contract of sale since it
' At p. 29.
merged with the customer's property at the time of
adhesion to it.
It appears to me that the most relevant prece
dents support this interpretation. In Sterling
Engine Works v. Red Deer Lumber Co. (1920), 51
D.L.R. 509 (Man. C.A.) the Manitoba Court of
Appeal held that where two steel plates were
attached by the plaintiff to the defendant's
locomotive to repair the fire box the title in the
plates passed to the defendant not by sale but by
accession. In reaching this conclusion Dennistoun
J.A., noted that there was no evidence to suggest
that the plaintiff was a vendor of, or dealer in,
steel plates and that they merely used steel plates
in the course of repairing the locomotive. Similarly
in the present case the evidence indicated that the
plaintiff company did not sell "tire treads" to
anyone without them being affixed to a tire casing.
This reinforces the view that the provision of tire
treads in the retreading process was not seen as a
contract of sale.
The Sterling Engine Works case was followed
by the Nova Scotia Supreme Court, Appeal Divi
sion in Scott Maritimes Pulp Ltd. v. B. F. Good-
rich Canada Ltd. et al. (1977), 72 D.L.R. (3d)
680 where it was held that a contract for replacing
a rubber cover on a press roll is a contract for
labour and materials and not for the sale of the
rubber cover. More pertinent, perhaps, is the deci
sion of the Exchequer Court of Canada in His
Majesty The King v. Boultbee Limited, [1938]
Ex.C.R. 187. That case also involved a tire
retreading business and the issue was whether the
retreading of tires resulted in "goods produced or
manufactured" by the defendant so as to make
those tires subject to sales tax and excise tax. In
that case the Court also had to consider the nature
of such transactions where the defendant retreaded
the customer's tire. The Court treated that trans
action as a contract for repair and not as a sale.
Thus it was a contract for work and material and
the sales and excise taxes were not applicable.
The most important factor in establishing that
Crown Tires's contracts for retreading customers'
tires were contracts for work and material is, in
my view, the fact that the work was done to a tire
casing which the customer owned throughout. I
think this distinguishes the present situation from
those involved in many of the decided cases where
the customer had never previously owned any part
of the end product.
While the distinctions employed here may seem
somewhat technical and remote from revenue law,
one must assume that Parliament in speaking of
"goods for sale or lease" had reference to the
general law of sale or lease to give greater preci
sion to this phrase in particular cases.
The plaintiff has not discharged the burden of
proof that lay upon him to show that the reassess
ments for the taxation years in question were
wrong. As stated in the pleadings of the defendant,
the Minister of National Revenue in making those
reassessments assumed that the transactions
involving the retreading of tires owned by custom
ers does not constitute the sale or lease of goods
manufactured or processed in Canada by the
plaintiff. He further assumed (presumably in
recognition of the fact that some of the plaintiffs
business consisted of the sale or lease of retreaded
tires owned by it) that less than 10% of the
plaintiffs gross revenues was in respect to the sale
or lease of goods manufactured and processed in
Canada by it. I have concluded that the retreading
of customers' tires did not constitute manufactur
ing or processing for sale or lease. This means that
at least a substantial part of the business income of
the plaintiff during the period in question would
not qualify for the tax deduction provided by
section 125.1. But the plaintiff has not been able to
demonstrate what portion of its business income
could be attributed to the retreading of its own
tires for sale or lease and thus be eligible for the
tax deduction. Nor has it been able to demonstrate
whether such portion would exceed the 10% of
gross revenue as required by subparagraph
125.1(3)(b)(x) in order to qualify for the tax
deduction, the Minister having assumed that it
does not. In such cases the burden is on the
plaintiff to prove that the Minister's assumptions
and assessements are wrong. See Johnston v. Min
ister of National Revenue, [1948] S.C.R. 486. The
plaintiff has not so demonstrated.
ORDER
It is hereby ordered that this appeal be dis
missed with costs.
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