Linden, J.A. (Heald and Stone, JJ.A. concurring):—This appeal raises the issue of whether Speedy Muffler King is entitled to take advantage of the tax incentive provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") designed to foster manufacturing and processing of goods in Canada. Tenneco Canada Inc., the successor company to Speedy Muffler King Corporation, appeals a decision of the Honourable Mr. Justice Dubé dated October 26, 1987 ([1987] 2 C.T.C. 231; 87 D.T.C. 5434) in which he held that their business was not permitted to rely on these provisions for the taxation years 1975,1976,1977 and 1978 because it was not engaged in "manufacturing or processing in Canada of goods for sale . . .", as required by paragraph 125.1 (3) (c).
The appellant assembles and installs exhaust systems in automobiles. These systems usually comprise a muffler, a tail pipe and an exhaust pipe, but sometimes the systems are more complicated and include a resonator, a connector and a catalytic converter. A customer of the appellant may have only one part replaced, or two parts, or the entire system, depending on what is required to rectify the problem. In addition to these major parts, in repairing an exhaust system, other minor items are used such as gaskets, clamps, brackets, hangers, nuts and bolts. Each of these parts is made for specific models of automobiles by Walker Exhaust Limited of Cambridge, Ontario. They are shown in a catalogue and are kept in stock at the various outlets of the appellant, which buys them from Walker. None of the parts are actually made by the appellant.
When a customer arrives at the appellant's establishment, an inspection is made of his vehicle, which is hoisted on a jack. He is then advised about the work required, about the part or parts that need to be replaced and the estimated cost. If he approves, the old parts are removed and the new ones installed while he waits. A video presentation of such an operation was prepared for the trial and was shown to this Court during the hearing. The work normally involved in repairing the exhaust system was also explained in detail. The pipes frequently need to be“ "dressed"—that is, flared, deburred, welded, heated, cut and bent to get the parts to fit together properly. In addition, clamping and crimping is usually done. In about one-third of the cases, an entirely new exhaust system has to be installed, which involves its assembly during the operation. In the rest, only one or two parts are needed. Usually the work takes about 15 to 20 minutes; five minutes to remove the worn-out parts and 10 to 15 minutes to install the new parts.
In an imaginative and powerful argument, Ms. Swystun, on behalf of Speedy, contended that the assembly of these complete exhaust systems is manufacturing, within the meaning of the section. In addition, she argued that the dressing and other operations done to many of these parts was processing. Hence, she argued, the appellant should receive the benefit of the tax incentives for that portion of its work that fell within the definition. Senior counsel for the Attorney General, Mr. Olsson disagreed, contending that none of this was manufacturing or processing at all. As the trial judge held, he argued that it was merely selling parts, which had been manufactured by Walker, and installing them into the vehicles after having made the minor adjustments required to get them to fit. Junior counsel for the Attorney General, Mr. Spiro, in a forceful argument, contended that these goods were not sold to the customers but that title passed to them by accession, so that even if there were manufacturing or processing, they could not qualify for the tax incentives.
I am of the view that, despite the superb argument of the appellant's counsel, the trial judge was correct in holding that the business of the appellant did not involve manufacturing or processing, as these words are used in the Income Tax Act. In view of our decision on these issues, it is not necessary to canvass the sale issue, which was, in any event, so thoroughly canvassed by Mr. Justice Urie in this Court in Halliburton Services Ltd. v. The Queen, [1990] 1 C.T.C. 427; 90 D.T.C. 6320 (F.C.A.) and Nowsco Well Service Ltd. v. The Queen, [1990] 1 C.T.C. 416; 90 D.T.C. 6312 (F.C.A.).
The first issue is whether the appellant is" manufacturing". The definition of "manufacturing" derived from The Queen v. York Marble, Tile and Terrazzo Ltd., [1968] S.C.R. 140; [1968] C.T.C. 44; 68 D.T.C. 5001, is as follows: “. . . the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery." Although it is clear that the assembly of a product can amount to manufacture, this is not necessarily so. (See Martland, J. in D/M.N.R. Customs and Excise v. Research-Cottrell (Canada) Ltd., [1968] S.C.R. 684.)
The definition of "assembly" from Webster's Third International Dictionary (1964) reads:
The act or process of building up a complete unit (as a motor vehicle) using parts already in themselves finished manufactured products; a collection of parts so assembled as to form a complete machine, structure or unit of a machine.
The trial judge concluded at page 234 (D.T.C. 5436):
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 manufacturing 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 automobile, which is then distributed wholesale, whereas Speedy Muffler merely assembles a few component parts, already custom built by another manufacturer (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.
[Emphasis added.]
I Agree with this conclusion.
In my view, the appellant is not producing for sale an identifiable article of commerce by assembling parts produced by others, as in the case of a new automobile or a "fully-assembled bicycle." (See Harry D. Shields Ltd. v. D/M.N.R. (1980), 2 C.E.R. 1; See also D/M.N.R. v. Kipp Kelly Ltd., [1982] 1 F.C. 571; 3 C.E.R. 196.) This is not like the major changes made to the marble in The Queen v. York Marble, Tile and Terrazzo, supra, Rather, it is repairing and replacing damaged parts of an automobile. The components of the exhaust system cannot be assembled before being installed. They must be affixed to the vehicle one piece at a time. The appellant is not creating or assembling any new articles for sale to others in the market. There is no new form, quality, property or combination in the automobile involved. (See Gruen Watch Co. v. A.-G. Canada, [1950] C.T.C. 440; 4 D.T.C. 784; [1950] O.R. 429 (Ont. C.A.).)
Any ordinary customer of Speedy Muffler King would be surprised if told that Speedy "manufactures" exhaust systems; such a customer would think that they repair or replace exhaust systems, not manufacture them. Walker is the manufacturer—not the appellant, which is a retailer, repairer and installer of exhaust systems. No one would think that the retailer of tires, who installs them on the wheels of the customers’ vehicles, is manufacturing. There may be some adjustments required in the wheels, air may have to be pumped into the tires, some wheel parts may have to be replaced, but this would be a sale and an installation, not the manufacture of a tire system. The aim of Parliament was not to give tax incentives to this type of operation. (Commons Debates, July 3,1973 at page 5255 and page 5263.)
The second issue is whether the appellant was "processing". Despite the vigorous argument of Ms. Swystun, I am not persuaded that there was any "processing" being done here. Certainly there were adjustments, alterations and changes made to the parts, when needed, in order to fit them together properly and to hold them in place, but this did not amount to processing. The two tests for determining whether a taxpayer processes goods are (i) whether there is a change in the form, appearance or other characteristics of the goods subject to the operation, and (ii) whether the product becomes more marketable. (See Federal Farms Ltd. v. M.N.R., [1966] Ex. C.R. 410; [1966] C.T.C. 62; 66 D.T.C. 5068 at 67 (D.T.C. 5071-72; Ex. C.R. 416); affd 67 D.T.C. 5311 (S.C.C.).) The definition of "process" in Webster's Third New Dictionary (1964) is:
To subject to a particular method, system or technique of preparation, handling or other treatment designed to effect a particular result; put through a special process as (1) to prepare for market, manufacture or other commercial use by subjecting to some process(-ing cattle by slaughtering them) (-ed milk by pasteurizing it) (-ing grain by milling) (-ing cotton by spinning)
Processing occurs when raw or natural materials are transformed into saleable items. Such raw or natural materials are unsaleable, or would sell for a lesser price, in their unprocessed state. Thus, gravel treated by washing, drying and crushing becomes more valuable (Nova Scotia Sand and Gravel Ltd. v. The Queen, [1980] C.T.C. 378; 80 D.T.C. 6298 (F.C.A.)), as do vegetables prepared by washing, brushing, spraying and packing (Federal Farms v. M.N.R., supra). Both of these operations are processing. Furthermore, processing implies uniformity; the same process, or a highly similar one, is usually applied to each item treated (Vibroplant v. Holland, [1982] 1 All E.R. 792 (C.A.)).
The operations of the appellant did not come within these definitions. There was no real change in the form, appearance or characteristics of the pipes and other parts being used in the exhaust systems. There were minor alterations of them, when needed, in order to enable them to fit together and to function as a system. If the alterations and adjustments were not made, the customer would not receive a repaired, operating exhaust system. Nor did the appellant's activities make the goods more marketable. The agreement to buy the parts and have them installed as a functioning system is made prior to the installation operation. If they are not the right parts, if they do not fit together, or if they do not work properly, the agreement would not be performed by the appellant and the payment would not have to be made by the customer.
This case is not like Admiral Steel Products Ltd. v. M.N.R. (1966), 40 Tax A.B.C. 322; 66 D.T.C. 174, where steel products were substantially changed in form so as to be more usable and marketable. Nor is it like the Federal Farms and Nova Scotia Sand and Gravel cases, supra, where the products were processed in order to make them saleable. What was done here resembles more what was done in Harvey C. Smith Drugs Ltd. v. M.N.R., [1986] 1 C.T.C. 2339; 86 D.T.C. 1243, (counting pills) and Latter Investments Ltd. v. M.N.R., [1982] C.T.C. 2076; 82 D.T.C. 1086, (cutting cloth). Suppose someone purchased a ready-made suit of clothes, which required some alterations, at a retail clothing store. To do those alterations on a ready-made suit would not, I think, be considered manufacturing or processing. To order a suit made to measure, however, would be manufacturing by the maker of the suit.
This interpretation is consistent with Parliament's intention, as it has been judicially interpreted, in creating the special incentive through paragraph 125.1 (3)(c) (Mother's Pizza Parlour (London) Ltd. v. The Queen, [1985] 1 C.T.C. 361; 85 D.T.C. 5271 (F.C.T.D.)). The nature of the modern commercial world is that goods often pass through many hands before they reach consumers. At each stage, minor alterations may be made to the goods, or they may be assembled in conjunction with other ready-made goods, before they progress through the commercial chain. The benefit of the incentives cannot be claimed by each of the handlers merely because they altered the goods in some small way. Only those operations which significantly change the character of the goods can truly be described as "manufacturing" or "processing" so as to qualify for the special tax incentives.
In conclusion, in my view, there is is neither manufacturing nor processing taking place in the appellant's establishments. I would dismiss the appeal with costs.
Appeal dismissed.