Foundation-Comstock Joint Venture v. Deputy Minister of National Revenue for Customs and Excise, [1970] CTC 628, 71 DTC 5015

JACKETT, P.:—This is an appeal from a decision of the Tariff Board under the Excise Tax Act on the following questions of law :

1. Did the Tariff Board err as a matter of law in finding that the machinery and apparatus in issue were not sold to or imported by the manufacturer or producer for use by it directly in the manufacture or production of goods within the meaning of paragraph (a) of Section 1 of Part XIII of Schedule III of the Excise Tax Act?

2. Did the Tariff Board err as a matter of law in finding that the devices and equipment in issue were not safety devices and equipment sold to or imported by the manufacturer or producer for use by it in the prevention of accidents in the manufacture or production of goods within the meaning of paragraph (c) of Section 1 of Part XIII of Schedule III of the Excise Tax Act?

What the Tariff Board had to decide was whether an “environmental control system was exempt from sales tax by virtue of Section 32(1) of the Excise Tax Act” and the answer to that question depended upon whether that “system” fell within paragraph (a) or (ec) of Section 1 of Part XIII of Schedule III to the Excise Tax Act. Those paragraphs read as follows :

(a) machinery and apparatus sold to or imported by manufacturers or producers for use by them directly in the manufacture or production of goods;

(c) safety devices and equipment sold to or imported by manufacturers or producers for use by them in the prevention of accidents in the manufacture or production of goods;

The relevant facts were found by the Board as follows:

The environmental control system was installed at the British Columbia Hydro and Power Authority Peace River Project in the Province of British Columbia. The power-house, in which the generators are installed, is located within Portage Mountain some 475 feet below ground level. At ground level there are five breaker buildings and a control building. Shafts run from these buildings to the power-house; shafts to the breaker buildings contain the isolated phase bus ducts and the shaft to the control building contains a passenger elevator.

Moisture is a problem in all the excavated areas; in addition, the mountain in which the power-house is located contains many coal seams and because of the presence of methane gas, a tunnel surrounds the power-house in which the methane gas collects before it reaches the walls of the power-house.

The evidence of the witness for the appellants, the project manager at the site during construction, was to the effect that neither the generating equipment nor personnel could function in the natural atmosphere within the excavated areas. The environmental control system in issue consisting, among other things, of heating equipment, cooling equipment, dehumidifying equipment, air filters, fans and drives, was designed to supply, throughout the excavated area, a conditioned atmosphere in which both the equipment and personnel could function. The atmosphere is kept at a higher pressure than the surrounding area and this prevents the methane gas from seeping in and also keeps dust out.

This Court’s duty on an appeal of this kind is to interfere with the decision appealed from from

(a) if it appears that the Tariff Board acted without any evidence, or

(b) if it appears that no person, properly instructed as to the law and acting judicially, could have reached the particular determination.

See Canadian Lift Truck Co. Ltd. v. Deputy Minister of National Revenue for Customs and Excise (1956), 1 D.L.R. (2d) 497, per Kellock, J. (delivering the judgment of the Supreme Court of Canada) at page 498.

The Board dealt with the applicability of paragraph (c) as follows:

With respect to paragraph (c) of section 1 of Part XIII of Schedule III, the issue is whether the system was for use in the “prevention of accidents”.

Dealing with paragraph (c) first, there is no doubt that th? installation of the environmental control system was essential; the evidence was to the effect that without the system, men and equipment could not function properly in the excavated areas.

In the ordinary meaning of the word an accident is an unexpected event, an unforeseen event, a happening by chance; clearly it was not to prevent an unforeseen event or an unexpected happening that the system was installed. The Board finds that the environmental control system was not installed for use in the “prevention of accidents” within the ordinary meaning of these words.* [1] A breakdown in the environmental control system would seem to be an accident and equipment designed to prevent such an accident might well qualify under the exempting provisions.

Paragraph (c) also provides for “safety devices”. While there was no particular reference to the relevancy of these words in the course of this appeal, it seems to the Board the common and ordinary meaning of these words would not be applicable, on the basis of the evidence, to the goods in issue. Safety devices are commonly considered to be those devices which incorporate a safety feature of some sort, for example, the construction worker’s “hard hat”, steel-toed boots, safety goggles; there was no evidence led to the effect that the equipment in issue was other than ordinary air- conditioning equipment, such as filters, heaters, coolers, dehumidifiers and the necessary fans, drives and controls. In the circumstances the Board does not consider the equipment in issue to be “safety devices”.

The contention that the Board erred in law in finding that the environmental control system was not within paragraph (c), supra, was based on a submission that, on the facts, which were really not disputed, the environmental control system was “safety devices and equipment’’ acquired by the appellant ‘‘for use by it in the prevention of accidents’’ in the production of electricity.

I cannot conclude, on the facts of this case, that a person properly instructed as to the law and acting judicially could not have concluded, as the Tariff Board did, that the “environmental control system’’ was not acquired for use ‘‘in the prevention of accidents”. The system was installed because neither the generating and other equipment used in the production of electricity, nor the persons who worked there, could have performed their functions in the underground areas in question if there had not been an operating system for the drying, cleaning, heating, cooling, etc., of the air. Such a system was a condition precedent to there being a manufacturing operation just as an adequate heating system is a condition precedent to manufacturing in a Canadian factory in wintertime. Without such a system, there would have been no production of electricity of any commercial character. Within the ordinary usage of words such a system is not, in my view, acquired ‘‘for use . . . in the prevention of accidents’’. (I regard the case as indistinguishable on this point from Deputy Minister of National Revenue for Customs and Excise v. Consolidated Denison Mines Limited, et al., [1966] S.C.R. 8; [1965] C.T.C. 548.*) [2]

happening by chance; clearly it was not to prevent an unforeseen event or an unexpected happening that the system was installed.”, it was my impression that the Board’s reasoning was open to the criticism brought against it by the appellant that, in the Board’s view, unless an “event” were “unexpected” or “unforeseen”, it would not be an “accident” with the result that there would never be safety devices or equipment used “in the prevention of accidents” because no business man would spend money on devices or equipment to avoid events that were neither expected nor foreseen. However, when one reads that sentence with the following sentence, viz., “The Board finds that the environmental control system was not installed for use in the ‘prevention of accidents’ within the ordinary meaning of these words.”, it is clear that what the Board is saying is that an “accident” is an event that is not planned (a happening by chance) and in that sense the specific event is “unexpected” or “unforeseen”. The Board is not saying that there is no possibility or probability of events of that class happening. Obviously, the prevention of accidents is not the prevention of events that have been planned but is the prevention of events of a kind that, according to experience, are likely to happen although any particular event is unexpected and unforeseen.

Furthermore, if the environmental control system was not acquired “for use . . . in the prevention of accidents’’, in my view, it was not acquired for use by the appellant in the prevention of accidents.! [3]

The Tariff Board dealt with the applicability of paragraph (a) (supra) as follows:

With respect to paragraph (a) of section 1 of Part XIII of Schedule III, the issue is whether the environmental control system was for use “directly” in the manufacture or production of goods. For the purposes of the Excise Tax Act, electricity is considered to be “goods”.

Dealing with paragraph (a), the issue depends on what is meant by the word “directly”.

Both counsel for the appellants and for the respondent attributed the same meaning to the word “directly” and that is, the meaning “immediately”, in the sense of without the intervention of a medium or agent as given in The Oxford English Dictionary, 1933, Volume III. However, counsel for the appellants argued that the environmental control system did so function, in the manufacture or production of electricity, whereas counsel for the respondent argued that the system did not so function.

As mentioned earlier there is no question that the environmental control system is essential to the successful operation of the project; one could say it is essential to the production of electricity for this project but there are many things which may be essential to the manufacture or production of goods but which are not used “directly” in the manufacture or production of the goods. The Board agrees with the argument put forward by counsel for the respondent that the use of the word “directly” in the legislation implies that there may also be things used indirectly in such manufacture or production.

The manufacture or production of the electricity would seem to take place in the turbines, generators and transformers. Undoubtedly, without the circulation of the conditioned air these pieces of equipment could not be expected to function properly in this installation, but the Board does not consider that the circulation of this conditioned air is “directly” involved in the manufacture or production of electricity in the turbines, generators, or transformers. However, the evidence of the witness for the appel

not “for the prevention of accidents in the manufacturing or production of goods” but were “simply devices to permit the manufacture or production of goods”, so, in my view, the “environmental control system” here, which was necessary to maintain a state of the atmosphere that was essential to the production process was not “for the prevention of accidents” but was “to permit the manufacture or production of goods”.

lants on this aspect dealt more particularly with the return of the conditioned air through the shafts containing the isolated phase bus ducts. Electricity passing through the ducts generates heat and it is, therefore, necessary to cool these ducts. Some of the conditioned air from the power-house area is returned through the shafts containing the isolated phase bus ducts and acts as a coolant; if these ducts were not so cooled they would fail due to the extreme heat generated.

The question then is, is the cooling action of the conditioned air, manufacturing or producing electricity directly? A narrow interpretation of the words, manufacturing or producing, could lead to the conclusion that the cooling action does neither. The cooling action simply makes it possible for the ducts to convey low voltage electricity from the generator to the primary transformers. However, even if the cooling action were part of the manufacturing or production of the electricity it would seem to be indirectly used rather than directly.

In an examination of the legal publications on interpretation of words, it is interesting to note that in The Earl of Jowitt’s Dictionary of English Law (1959)—the word “direct” is defined as being “opposite to collateral”. In this sense, it would seem that the equipment in issue must be adjudged to be “collateral” to the main apparatus for the production of electricity. Therefore, under this definition, it is not “directly” involved in the production of goods, to wit: electricity.

In any event, the use of some of the returning air as a coolant is incidental to the main function of the environmental control system which is simply to create an atmosphere in the excavated areas in which equipment and personnel could operate.

The contention that the Tariff Board erred in not applying paragraph (a) was based, as I understand it, on the submission that, as the environmental control system was essential to the process of producing electricity and as it was integrated into the production process, the only proper view of the undisputed facts was that that system had been acquired by the appellant for use by it ‘‘directly in the . . . production’’ of electricity.

Here again, I cannot conclude, on the facts of this case, that a person properly instructed as to the law and acting judicially, could not have concluded, as the Tariff Board did, that the environmental system was not acquired for use “directly in the . . . production’’ of electricity. It was acquired, as I understand the facts, to be used to maintain the atmosphere throughout the production area in a state that made it possible for the production process to be carried on. Maintaining the atmosphere in such a state was a condition precedent to the production process being carried on in that location. I can conceive of a reasonable person taking the view that the process necessary to maintain the atmos- phere in the particular location in the necessary state became a part of the production process in that location. I cannot conclude that no reasonable person could take the view that it w’as not a part of the production process itself but that its function was merely to create the conditions necessary for the carrying on of the production process or, as the Board chose to put it: “. . even if the cooling action were part of the manufacturing or production of the electricity it would seem to be indirectly used rather than directly’’.

For the above reasons, the appeal is dismissed: with costs.