A-1257-82
Lor-Wes Contracting Ltd. (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Pratte, Marceau and MacGuigan
JJ.—Vancouver, June 20; Ottawa, July 2, 1985.
Income tax — Income calculation — Deductions — Logging
— Corporate taxpayer entitled to investment tax credits on
equipment used to build logging roads although not owner of
timber or cutting rights — Interpretation of s. 127(10(c)(vii)
based on "words-in-total-context" approach — Subpara-
graph aimed at use by purchaser of equipment — Sufficient
ultimate purpose logging — Appeal allowed — Income Tax
Act, S.C. 1970-71-72, c. 63, s. 127(5),(9),(10) (as am. by S.C.
1976-77, c. 4, s. 52(3); 1977-78, c. 1, s. 61(7),(8); 1979, c. 5, s.
40(4); 1980-81-82-83, c. 48, s. 73(3),(4), c. 140, s. 89(2)).
Evidence — Trend towards admissibility of legislative his
tory to show intention of Legislature — Budget statement of
Minister of Finance referred to — Investment tax credit
provisions introduced "to guard against any slowdown in
investment" — Incentive to logging industry — Taxpayer
entitled to investment tax credits on equipment used to build
logging roads although not owner of timber or cutting rights.
The question under appeal from the judgment of Dubé J.
reported at [1983] 2 F.C. 11 is whether a taxpayer who does
not own timber or cutting rights is nevertheless entitled to an
investment tax credit on equipment used to build logging roads
and to perform related site services for the owner of the timber
or cutting rights. The investment tax credits claimed by the
appellant for the years 1977 to 1979 were disallowed. The Trial
Division upheld the reassessment and dismissed the appeal on
the ground that the construction of logging roads by itself was
not logging "where those operations are carried out by
independent contractors who have no general interest in logging
... but are specialists in their limited fields". Subparagraph
127(10)(c)(vii) of the Act defines "qualified property" as
property "to be used by him [the taxpayer] in Canada primari
ly for the purpose of logging".
Held, the appeal should be allowed.
The object and spirit of subparagraph 127(10)(c)(vii) of the
Act are to be determined according to a "words-in-total-con
text" approach. Applying that test, the Court found that the
location of the words "by him" in paragraph (c) made it clear
that the provision is aimed at the use of the equipment by the
taxpayer claiming the benefit. The purpose of logging does not
have to be uniquely the taxpayer's; it suffices if the ultimate
purpose is that of logging. Had the words "primarily for the
purpose of logging" been followed by the phrase "by him", then
it could have been said that the benefit conferred would have
been limited to cases where the taxpayer himself is the owner of
timber or cutting rights. The Court agreed with the appellant's
contention that the words "by him" served to differentiate
actual use by a purchaser of equipment (covered by paragraph
(c)) from use by a lessee (covered by paragraph (d)).
While the rule still remains that legislative history is not
admissible to show the intention of the Legislature directly, the
Supreme Court of Canada has nevertheless increasingly looked
to legislative history for related purposes, not only in constitu
tional cases but also in cases relating to the interpretation of
statutes generally. Reference was thus made to the budget
statement of the then Minister of Finance, whereby investment
tax credit provisions were introduced to "guard against any
slowdown in investment". Parliament sought to best achieve
this aim by encouraging the logging industry in its integral
totality. Since subcontracting is general in the industry, any
other interpretation of the provision would lessen that incentive.
CASES JUDICIALLY CONSIDERED
FOLLOWED:
Bunge of Canada Ltd. v. The Queen (1984), 84 DTC
6276 (F.C.A.); Hollinger North Shore Explorations Co.
Ltd. v. Minister of National Revenue, [1960] Ex.C.R.
325; [1960] C.T.C. 136, affirmed sub nom. Minister of
National Revenue v. Hollinger North Shore Explora
tions Company, Limited, [1963] S.C.R. 131; [1963]
C.T.C. 51.
CONSIDERED:
Morguard Properties Ltd. et al. v. City of Winnipeg,
[1983] 2 S.C.R. 493; (1984), 50 N.R. 264; Stubart
Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; 53
N.R. 241.
REFERRED TO:
Re Anti-Inflation Act, [1976] 2 S.C.R. 373; Re Objec
tion by Quebec to a Resolution to amend the Constitu
tion, [1982] 2 S.C.R. 793; R. v. Vasil, [1981] 1 S.C.R.
469.
COUNSEL:
Ian H. Pitfield for appellant.
Gaston Jorré for respondent.
SOLICITORS:
Thorsteinsson, Mitchell, Little, O'Keefe &
Davidson, Vancouver, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
MACGULGAN J.: The question for determination
on this appeal is whether a taxpayer who does not
own timber or cutting rights is nevertheless en
titled to an investment tax credit on equipment
used to build logging roads and to perform related
site services for the owner of the timber or cutting
rights.
The sole business of the appellant is to provide
services under contract to owners of timber or
cutting rights in British Columbia. The services
provided by the appellant in the 1977, 1978 and
1979 years were the following: the building of
access roads to the logging site in the course of
which the appellant would fell, skid, buck, limb
and deck timber and in respect of which it would
be paid specifically for the quantity of timber
recovered; the building of landings along the log
ging road, skid trails to provide access to the
logging site and fire guards around the cutting
block, in the course of which it would fell trees but
for which it would be paid on a contract basis
without reference to quantities of timber produced
or felled; the scarification of the logging site upon
the completion of logging, by which is meant the
accumulation of logging debris for burning and the
preparation of the site for reforestation.
To carry out these functions, it acquired a D8K
Caterpillar Tractor, a Caterpillar 235 Excavator
and a P & M 1250 Excavator, all of which were so
used exclusively, and it claimed investment tax
credits of $3,825, $2,042 and $15,830 in the 1977,
1978 and 1979 taxation years respectively. By
notices of reassessment for all of these years the
credits were disallowed on the ground that the
appellant was "in the business of road building
which is not a designated activity under subpara-
graph 127(10)(c)(vii)" of the Income Tax Act
[R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-72,
c. 63, s. 1)] ("the Act").
The Trial Division upheld the reassessment and
dismissed the appeal [[1983] 2 F.C. 11]. The heart
of the decision is as follows [at pages 16-17]:
It is trite law that the exempting provisions of a taxing
statute must be construed strictly and the taxpayer must fit his
claim squarely within the four corners of any exemption if he is
to benefit from it. He must show clearly that "every constituent
element necessary to the exemption is present in his case and
that every condition required by the exempting section has been
complied with". (See Thorson J. in Lumbers v. Minister of
National Revenue (1943), 2 DTC 631 (Ex. Ct.).)
If Parliament had intended to extend the tax benefit to all
subcontractors in the industry, it would have said so. By any
definition, "logging" is the sum total of all the operations
leading to the felling of timber and the transporting of logs out
of the forest. In my view, the constructing of logging roads, by
itself, is not "logging", any more than the building of fishing
wharves is "fishing", or the erecting of barns constitutes "farm-
ing", where those operations are carried out by independent
contractors who have no general interest in logging, fishing or
farming, but are specialists in their limited fields.
The investment tax credit is provided for by
subsection 127(5) and the credit is further speci
fied by subsection 127(9) of the Act. However,
what is in issue in this case is subsection 127(10)
of the Act, which is as follows:
127... .
(10) For the purposes of subsection (9), a "qualified proper
ty" of a taxpayer means a property (other than a certified
property) that is
(a) a prescribed building to the extent that it is acquired by
the taxpayer after June 23, 1975, or
(b) prescribed machinery and equipment acquired by the
taxpayer after June 23, 1975,
that has not been used, or acquired for use or lease, for any
purpose whatever before it was acquired by the taxpayer and
that is
(c) to be used by him in Canada primarily for the purpose of
(i) manufacturing or processing of goods for sale of lease,
(ii) operating an oil or gas well or processing heavy crude
oil recovered from a natural reservoir in Canada to a stage
that is not beyond the crude oil stage or its equivalent,
(iii) extracting minerals from a mineral resource,
(iv) processing, to the prime metal stage or its equivalent,
ore (other than iron ore) from a mineral resource,
(iv.1) processing, to the pellet stage or its equivalent, iron
ore from a mineral resource,
(v) exploring or drilling for petroleum or natural gas,
(vi) prospecting or exploring for or developing a mineral
resource.
(vii) logging,
(viii) farming or fishing,
(ix) the storing of grain, or
(x) producing industrial minerals, or
(d) to be leased by the taxpayer, to a lessee (other than a
person exempt from tax under section 149) who can reason
ably be expected to use the property in Canada primarily for
any of the purposes referred to in subparagraphs (c)(i) to
(x), but this paragraph does not apply in respect of property
that is a prescribed property for the purposes of paragraph
(b), unless
(i) the property is leased by the taxpayer in the ordinary
course of carrying on a business in Canada and the
taxpayer is a corporation whose principal business is
(A) leasing property,
(B) manufacturing property that it sells or leases,
(C) the lending of money,
(D) the purchasing of conditional sales contracts,
accounts receivable, bills of sale, chattel mortgages, bills
of exchange or other obligations representing part or all
of the sale price of merchandise or services, or
(E) selling or servicing a type of property that it also
leases,
or any combination thereof, and
(ii) use of the property by the first lessee commenced after
June 23, 1975.
The respondent admits that the building of
roads is essential to the logging industry, that
because it requires expertise and efficiency it is in
many instances contracted out by major operators,
that each of the functions performed by the appel
lant is an integral part of logging in British
Columbia, and that the logging industry views
equipment used to perform such functions as being
used for the purpose of logging whether used by
the operator of the site or some other person under
contract, but maintains that the appellant is never
theless properly described as a road builder in the
logging industry, that in fact it did so describe
itself in its income tax returns in the relevant
years, and that the equipment in issue was not
acquired by the appellant for use by him for the
purpose of logging.
The essence of the respondent's contention is
that the investment tax credit provisions are
exemption provisions, that the appellant cannot
benefit from them unless it can bring itself clearly
within these provisions, and that here at best it
does not clearly fall within them.
The Supreme Court of Canada in recent tax
decisions has cleared out a great deal of the under
brush that previously surrounded tax law. For
example, in Morguard Properties Ltd. et al. v.
City of Winnipeg, [1983] 2 S.C.R. 493, at page
509; (1984), 50 N.R. 264, at pages 282-283 deal
ing with tax provisions that derogate from taxpay
ers' rights, Estey J. said for the Court:
In more modern terminology the courts require that, in order
to adversely affect a citizen's right, whether as a taxpayer or
otherwise, the Legislature must do so expressly. Truncation of
such rights may be legislatively unintended or even accidental,
but the courts must look for express language in the statute
before concluding that these rights have been reduced. This
principle of construction becomes even more important and
more generally operative in modern times because the Legisla
ture is guided and assisted by a well-staffed and ordinarily very
articulate Executive. The resources at hand in the preparation
and enactment of legislation are such that a court must be slow
to presume oversight or inarticulate intentions when the rights
of the citizen are involved. The Legislature has complete con
trol of the process of legislation, and when it has not for any
reason clearly expressed itself, it has all the resources available
to correct that inadequacy of expression. This is more true
today than ever before in our history of parliamentary rule.
Similarly, in Stubart Investments Ltd. v. The
Queen, [1984] 1 S.C.R. 536, at pages 575-578; 53
N.R. 241, at pages 263-265, the Supreme Court,
again speaking through Estey J., expressed its
point of view with respect to allowance or benefit
provisions in tax statutes:
Income tax legislation, such as the federal Act in our country,
is no longer a simple device to raise revenue to meet the cost of
governing the community. Income taxation is also employed by
goverment to attain selected economic policy objectives. Thus,
the statute is a mix of fiscal and economic policy. The economic
policy element of the Act sometimes takes the form of an
inducement to the taxpayer to undertake or redirect a specific
activity ....
Indeed, where Parliament is successful and a taxpayer is
induced to act in a certain manner by virtue of incentives
prescribed in the legislation, it is at least arguable that the
taxpayer was attracted to these incentives for the valid business
purpose of reducing his cash outlay for taxes to conserve his
resources for other business activities. It seems more appropri
ate to turn to an interpretation test which would provide a
means of applying the Act so as to affect only the conduct of a
taxpayer which has the designed effect of defeating the
expressed intention of Parliament. In short, the tax statute, by
this interpretative technique, is extended to reach conduct of
the taxpayer which clearly falls within "the object and spirit"
of the taxing provisions. Such an approach would promote
rather than interfere with the administration of the Income
Tax Act, supra, in both its aspects without interference with
the granting and withdrawal, according to the economic cli
mate, of tax incentives ....
Where the taxpayer sought to rely on a specific exemption or
deduction provided in the statute, the strict rule required that
the taxpayer's claim fall clearly within the exempting provision,
and any doubt would there be resolved in favour of the Crown.
See Lumbers v. Minister of National Revenue (1943), 2 DTC
631 (Ex.Ct.), affirmed [1944] S.C.R. 167 [2 DTC 652]; and
W.A. Sheaffer Pen Co. v. Minister of National Revenue,
[1953] Ex. C.R. 251 [53 DTC 1223]. Indeed, the introduction
of exemptions and allowances was the beginning of the end of
the reign of the strict rule.
Professor Willis ... accurately forecast the demise of the
strict interpretation rule for the construction of taxing statutes.
Gradually, the role of the tax statute in the community
changed, as we have seen, and the application of strict con
struction to it receded. Courts today apply to this statute the
plain meaning rule, but in a substantive sense so that if a
taxpayer is within the spirit of the charge, he may be held
liable ....
While not directing his observations exclusively to taxing
statutes, the learned author of Construction of Statutes (2nd
ed. 1983), at p. 87, E.A. Dreidger, put the modern rule
succinctly:
Today there is only one principle or approach, namely, the
words of an Act are to be read in their entire context and in
their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act, and the intention of
Parliament.
It seems clear from these cases that older
authorities are no longer to be absolutely relied
upon. The only principle of interpretation now
recognized is a words-in-total-context approach
with a view to determining the object and spirit of
the taxing provisions.
Applying this test to subparagraph 127
(10)(c)(vii) of the Act, what do we find? The
respondent maintains that the phrase "by him"
implies that the taxpayer claiming the benefit has
to use the equipment for the purpose of logging,
but in fact the location of the phrase makes it clear
that it is the use of the equipment that has to be by
the taxpayer claiming the benefit, not that the
purpose of logging has to be uniquely his. It suf
fices if the ultimate purpose, as defined by the
overall contractor, is that of logging.
Indeed, the reason for the phrase "by him"
seems to be, as contended by the appellant, to
differentiate actual use by a purchaser of equip
ment (covered by paragraph (c)) from use by a
lessee (covered by paragraph (d)). The criterion of
qualification under paragraph (d) is a particular-
kind-of business test, whereas that under para
graph (e) is one of overall purpose.
No additional indicia of legislative intent appear
from the French-language version.
Taking a broader look at the provision, we have
what appears from the text to be an inducement to
taxpayers to undertake or augment specific activi
ties, viz., those listed in paragraph (c). From that
point of view, it would be a matter of indifference
whether the increased activity was that of a log
ging company itself or of a subcontractor: in both
cases the increase in investment and economic
activity would be the same.
I believe that this interpretation is required by
the decision of this Court in Bunge of Canada Ltd.
v. The Queen (1984), 84 DTC 6276 and that of
the Exchequer Court in Hollinger North Shore
Explorations Co. Ltd. v. Minister of National
Revenue, [1960] Ex.C.R. 325; [1960] C.T.C. 136,
upheld by the Supreme Court of Canada, Minister
of National Revenue v. Hollinger North Shore
Explorations Company, Limited, [1963] S.C.R.
131; [1963] C.T.C. 51.
In the Bunge case this Court held that new
equipment which discharged grain from grain
elevators into ships docked at a wharf situated
about 200 feet from the elevators was equipment
used primarily for the purpose of the storing of
grain and so entitled to an investment tax credit
under subparagraph 127(10)(c)(ix) of the Act.
Pratte J. said for the Court (at page 6277) that
"the discharge of grain from a silo appears to me
to be a necessary and integral part of the storing of
the grain".
The Hollinger case is, if anything, even more in
point, even though the question was whether royal
ty income received by a company from another
company to which it had sublet all mining rights
on a tract of land was income derived from the
operation of a mine. Thurlow J. [as he then was]
said (at pages 328-329 Ex.C.R.; 140 C.T.C.):
... the exemption provided is given by reference to the deriva
tion of the income rather than by reference to the kind of
corporation or the nature of the business or activity, if any,
which it carries on. The word "corporation" is not qualified by
any adjective such as "operating" or "mining" which might
have lent colour to the Minister's suggestion, nor is the word
"operation" or the word "mine" followed by the words "by the
corporation" or any wording to the like effect indicating the
benefit of the section is to be limited to cases wherein the
corporation taxpayer is the operator or an operator of the mine.
The ordinary meaning of the words "income derived from the
operation of a mine" is, in my opinion, broader than that
contended for and, had Parliament intended that their meaning
should be limited in the manner suggested, the appropriate
words to so limit it would, I think, have been included in the
section. In their absence, I see nothing in the language used or
in the subject matter being dealt with to warrant reading the
subsection as if such words were present.
Here, the words "primarily for the purpose of
logging" are not followed by the words "by him"
or otherwise qualified so as to limit the benefit of
the section to cases wherein the corporation tax
payer itself has the timber or cutting rights. Not
only was the appellant's equipment used to carry
out an integral part of logging, but owners of such
rights are required by law in British Columbia to
obtain approval from the Forest Service of a five-
year development plan and a two-year logging
plan, including in both cases proposed road
designs. Moreover, since road building is one of
the most expensive parts of the total logging opera
tion, owners subcontract to road building compa
nies for the sake of their own cost efficiency. It is
impossible to regard the work of such road build
ers, whose total operation is dedicated to building
roads for logging, as isolated from the totality of
the logging industry. Their work is dedicated, and
their equipment is used by them, primarily for the
purpose of logging.
I am strengthened in this conclusion by the clear
indication of the evil sought to be remedied found
in the parliamentary debates, of which as public
documents this Court can take judicial notice.
While the rule still remains that legislative history
is not admissible to show the intention of the
Legislature directly, the Supreme Court of
Canada has nevertheless increasingly looked to
legislative history for related purposes, not only in
constitutional cases (Re Anti-Inflation Act,
[1976] 2 S.C.R. 373, Re Objection by Quebec to a
Resolution to amend the Constitution, [1982] 2
S.C.R. 793), but also in relation to the interpreta
tion of statutes generally. So in R. v. Vasil, [1981]
1 S.C.R. 469, the Court referred to Hansard in
order to determine that Canada adopted not only
the text of the British Royal Commission's draft
criminal code of 1879 but also its reasons. The
present rule would thus appear to be that Hansard
may be used, like the report of a commission of
enquiry, in order to expose and examine the mis
chief, evil or condition to which the Legislature
was directing its attention: Morguard Properties
Ltd., supra, at pages 498-499 S.C.R.; 269-270
N.R.
Here, the budget statement of the then Minister
of Finance on June 23, 1975, describes the per
ceived need to which this amendment to the Act
was the response (Debates of the House of Com
mons, June 23, 1975, page 7028):
Measures to Sustain Business Investment
If our economy is to remain productive and competitive and
capable of providing jobs, we must ensure that we have modern
capital facilities with which to work. We must guard against
any slowdown in investment. I have been pleased that capital
investment has continued to expand in present circumstances
and I want to do what government can do to ensure that this
expansion continues.
It is well known that our policies have sought to encourage a
strong manufacturing sector. We have provided long-term tax
incentives to assist our manufacturers and processors to com
pete in domestic and foreign markets. The evidence presented
in the final report on these tax measures demonstrates their
effectiveness. But new and broader initiatives are needed under
current economic circumstances.
I am therefore proposing to introduce an investment tax
credit as a temporary extra incentive for investment in a wide
range of new productive facilities. The credit will be 5 per cent
of a taxpayer's investment in new buildings, machinery and
equipment which are for use in Canada primarily in a manufac
turing or processing business, production of petroleum or min
erals, logging, farming or fishing. The cost of new, unused
machinery and equipment acquired after tonight and before
July, 1977, will be eligible [emphasis added].
The evil aimed at is clearly stated to be "any
slowdown in investment". Such an evil would be
removed by appropriate activity regardless of its
source, and would be best achieved by encouraging
the logging industry in its integral totality. Indeed,
in the light of the fact that subcontracting is
general in the logging industry, any other interpre
tation of the text would considerably lessen the
potential investment incentive in that industry and
so less effectively remove the identified danger of
economic slowdown.
I would therefore allow the appeal with costs
both in this Court and below, and return the
matter to the Minister of National Revenue for
reassessment in accordance with this decision.
PRATTE J.: I agree.
MARCEAU J.: I agree.
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.