Coopers & Lybrand Ltd., Trustee of Hawboldt Hydraulics (Canada) Inc. v. The Queen, 92 DTC 6452, [1992] 2 CTC 363 (FCTD)

MacKay, J.:—This action, an appeal of a decision of the Tax Court of Canada rendered July 11, 1989, came on for hearing on June 27, 1991, in Halifax. At the commencement of the hearing, I allowed an application to amend the statement of claim, including the style of cause, to record that the action is carried on by the trustee in bankruptcy of the successor of the original corporate plaintiff. In advance of the hearing, on consent, an order of this Court permitted the introduction at trial of the transcript of proceedings and exhibits tendered before the Tax Court of Canada, and those were admitted as exhibits at the hearing.

The issue before the Tax Court, and the issue before me, in general terms, is whether certain assets acquired in the original plaintiffs 1982 and 1983 taxation years and used in its business were used primarily in the manufacturing or processing of goods for sale or lease. On the basis that they were so used, in its tax returns for the years in question the taxpayer claimed capital cost allowance in relation to the equipment on the basis that those assets came within Class 29 of Schedule Il of the Regulations. It also claimed an investment tax credit in relation to some of the expenditures for the equipment, under subsection 127(5) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). In reassessing the taxpayer's liability for tax, the Minister of National Revenue disallowed those claims, reclassifying the equipment within Class 8 of Schedule II, thus substantially reducing the allowable capital cost allowances, and he disallowed the claimed investment tax credits. The reassessments were based on the determination that the equipment in question was not used primarily for manufacturing or processing of goods for sale or lease.

On appeal to the Tax Court of Canada, Christie, A.C.T.C.C.J. dismissed the taxpayer's appeal and upheld the ruling of the Minister finding that the equipment in question was not used primarily in the manufacturing or processing of goods for sale or lease. He concluded no sale or lease was contemplated in relation to work described as repair and re-manufacturing. He considered himself bound by the decision of Strayer, J. of this Court in Crown Tire Service Ltd, v. The Queen, [1983] C.T.C. 412, 83 D.T.C. 5426 (F.C.T.D.).

In this appeal counsel were agreed that the sole issue was whether, particularly in light of subsequent decisions of this Court and the Court of Appeal, the Crown Tire decision was applicable in this case. If it is, the appeal is to be dismissed. If it is not applicable, the appeal is to be allowed, with the calculation of the investment tax credit to be made in relation to the equipment agreed by counsel to have been new, not used, when acquired by the taxpayer and excluding one category of equipment identified as miscellaneous”, acquired in 1982.

The effect of decisions subsequent to Crown Tire, relied on by the plaintiff, has been further clarified by decisions of my colleagues in this Court since this case was argued before me. Before reviewing the jurisprudence, however, it is essential to set out briefly the facts giving rise to the issue in this case. Those facts are not in dispute, though their significance for the application of the Income Tax Act and Regulations is not agreed upon.

The Facts

The taxpayer, Maritime Hydraulic Repair Centre Ltd., was in the business of sales, manufacturing and "repair and remanufacturing” of hydraulic compo- nents, and to a lesser extent pneumatic components, for equipment used in a variety of industries. That business had several aspects, including:

a. "off-the-shelf" sales of hydraulic parts and accessories manufactured by others;

b. the replacement of defective parts in hydraulic systems with parts manufactured by others (e.g., hydraulic seals);

c. manufacture of hydraulic components or systems manufactured and sold as a unit to customers, usually custom-made to specification or sample;

and

d. "repair and remanufacture” of hydraulic systems which involved the replacement of a part or parts with a part or parts manufactured by the taxpayer.

The first two aspects did not involve manufacturing or use of the equipment in question. The latter two aspects involved manufacturing by Maritime Hydraulic using the equipment in question in the machining and fabrication of components and parts from raw materials.

The assets in question were items of shop equipment purchased for $340,942 in the 1982 taxation year, and shop equipment purchased for $97,249 in the 1983 taxation year. These items included metal lathes, presses, a lapping machine, a milling machine, an electric hoist, welder, hones, chroming units— in all some 30 items and categories of equipment. They were used for those activities set out above in c and d, the manufacturing or the “repair and remanufacturing” aspects of the business. As already noted, some of these items were used when acquired by the taxpayer and thus were not eligible for the investment tax credit and the parties agreed that one other category, miscellaneous" equipment acquired in 1982, should be disregarded in considering that credit.

It is accepted that the portion of the taxpayer's business concerned with manufacture of hydraulic components or systems (category c) meets the requirements of both subsection 127(10) and Class 29. However, there is dispute over whether the use of the assets in relation to" repair or remanufacture" (category d) satisfies these requirements. There was no argument that the equipment was used for manufacturing or processing and that the taxpayer used it in relation to work in category d, to make or manufacture, to rebuild or refinish cylinders and parts for hydraulic equipment, but the defendant did not agree that this resulted in "goods for sale or lease”. Counsel for the plaintiff admitted that if the "repair or remanufacture” activity did not qualify, then it could not be said that the primary use of the assets was in the manufacturing or processing of goods for sale or lease. As a percentage of revenue, the "repair and remanufacture" category was a greater part of the business than the manufacture of new components category, some 52 per cent in 1982 and 72 per cent in 1983 of the total of invoices for work in categories c and d. The appeal thus succeeds or fails on the determination of whether the taxpayer's activities described in category d constituted manufacturing or processing of goods for sale or lease.

A summary of information from invoices relating to “manufacturing or processing”, utilizing the equipment acquired by the taxpayer, was adduced in evidence before the Tax Court, and was there accepted, as it was by the parties in the hearing in this Court. It shows the following totals (to the nearest dollar). No argument was directed to the significance, if any, of the breakdown of invoices for" repair and remanufacturing” between parts and labour, or to the work in chrome application in 1983. The taxpayer's assertion that the chrome application was essential for certain of the manufactured products was accepted. That work was subcontracted to others in 1982 and was undertaken by the taxpayer in 1983, using new equipment acquired in 1982 which is among the equipment on which the taxpayer's claimed deductions were based.

In the category of its work that the taxpayer described as “repair and remanufacture" the evidence is that a customer would bring to the taxpayer and leave for repair equipment with hydraulic components, or the components themselves. The hydraulic component would be taken apart or "disassembled" and some part of it, either the cylinder, or a piston or a rod, or some other part, would be replaced with a corresponding part manufactured to fit the component from raw materials held in inventory or acquired by the taxpayer. In the manufacture of the required parts the equipment in question was used, as it was in the manufacture of hydraulic components to meet customers' specifications (category c, above), which is not here in issue. When the new part was manufactured, the component or the customer's equipment was reassembled and tested.

The charges for parts in the repair and remanufacturing category were said to be primarily the costs of raw materials used in the manufacture of new parts, while the charges for labour were costs for labour involved in disassembly of the component, in manufacturing of new parts, and in assembly and testing of the component. When invoices for this work were prepared they described the work done as “repair”, not as “repair and remanufacture”, of the component. The description of the work as repair and re-manufacture” was devised by the taxpayer to separate this work from that involving repairs using parts manufactured by others, a separation based on details provided in invoices or appended work orders that were part of the evidence in the Tax Court and before me.

The Act and Regulations

Under paragraph 20(1)(a) of the Income Tax Act provision is made for deductions in relation to capital cost allowances. Section 1100 of the Regulations sets out the particular allowance in relation to each of several classes of property set out in Schedule II, including a 20 per cent allowance for Class 8 and up to 50 per cent for Class 29. The latter class is described in Schedule II, so far as it is relevant for this case, as property manufactured or acquired by the taxpayer "to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease

Section 127 of the Act provides for investment tax credits in relation to qualified property which, under paragraph 127(10)(b) and subparagraph 127(10)(c)(i) includes prescribed machinery and equipment acquired by the taxpayer "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 or lease

While it has no application in this case it is useful to add reference here to section 125.1 of the Act, a provision dealt with in some of the cases here relied upon in argument, which contains wording analogous to that in Class 29 of Schedule II of the Regulations and paragraph 127(10)(c) of the Act. Section 125.1 as dealt with in a number of the cases to be reviewed below provided for a deduction from tax otherwise payable of a portion of a corporation's income, which, under paragraph 125.1(3)(a), was “applicable to the manufacturing or processing in Canada of goods for sale or lease

Since all three provisions, i.e., section 125.1 and paragraphs 127(10)(b) and (c) of the Act, and Schedule II Class 29 of the Regulations, incorporate the same phrase “manufacturing or processing of goods for sale or lease” in relation to different incentives provided in the legislative regime, decisions applying these provisions have treated the phrase without regard to the particulars, in wording and purposes, of the respective incentives.

The Jurisprudence

Crown Tire Service Ltd. v. The Queen, supra, (F.C.T.D.) was relied upon by Christie, A.C.T.C.C.]. in his decision in the Tax Court. He referred to decisions at trial in this Court in Tenneco Canada Inc. v. The Queen, [1987] 2 C.T.C. 231, 87 D.T.C. 5434, and Halliburton Services Ltd. v. Canada, [1985] 2 C.T.C. 52, 85 D.T.C. 5336 (F.C.T.D.), and concluded they were not inconsistent with Crown Tire.

Appeals of Tenneco and Halliburton Services were decided following the decision given by Christie, A.C.T.C.C.J. Counsel for the plaintiff in this case urged that the test set out by Strayer, J. in Crown Tire is not applicable to determine the question at issue in the instant case, in light of subsequent decisions of the Court of Appeal, particularly in Halliburton Services Ltd. v. Canada, [1990] 1 C.T.C. 427, 90 D.T.C. 6320 (F.C.A.), and in Nowsco Well Service Ltd. v. Canada, [1990] 1 C.T.C. 416, 90 D.T.C. 6312 (F.C.A.). Counsel for the defendant, on the other hand, submitted that the decisions referred to by the plaintiff are distinguishable and should be limited to factual situations in the oil industry, and that the Crown Tire case is applicable to the issue in this case.

Since this case was heard, my colleagues in the Trial Division have dealt in two other cases with the argument that the Court of Appeal in Halliburton and Nowsco had effectively rejected the approach in Crown Tire. On both occasions the argument was rejected. In commenting on the jurisprudence, Martin, J. in Rolls-Royce (Canada) Ltd. v. Canada, [1991] 2 C.T.C. 252, 91 D.T.C. 5579 (F.C.T.D.) at page 255 (D.T.C. 5581) said:

In taxation cases of this sort there are two lines of authority. One line, Halliburton Services Ltd. v. The Queen, [1985] 2 C.T.C. 52, 85 D.T.C. 5336 (F.C.T.D.); [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 which appear to favour the plaintiff's case, and the other line of cases represented by Crown Tire Service Ltd. v. The Queen, [1983] C.T.C. 412, 83 D.T.C. 5426 (F.C.T.D.), Tenneco Canada Inc. v. The Queen, [1988] 2 F.C. 3, [1987] 2 C.T.C. 231, 87 D.T.C. 5434 (F.C.T.D.) [affirmed on appeal, Mar. 21, 1991 F.C.A.], and Reg Rad Tech Ltd. v. The Queen, [1990] 2 C.T.C. 77, 90 D.T.C. 6350 (F.C.T.D.); [1991] 2 C.T.C. 201, 91 D.T.C. 5518 (F.C.A.), which appear to favour the defendant's case.

This was quoted with approval by Dubé, J. in Stowe-Woodward Inc. v. Canada, [1992] 1 C.T.C. 209, 92 D.T.C. 6149 (F.C.T.D.). In each of these later cases my colleagues extracted the guiding principles from each line of authority and applied them to the cases before them, a course I propose to follow.

In the latest of the cases, Dubé, J. reviewed the previous cases in the following terms, in part at pages 212-15 (D.T.C. 6152-53):

In Crown Tire, the taxpayer was engaged in the tire retreading business. The old tread of the tire would be stripped off, leaving a casing; a new tread would be applied and secured and the tire would then be returned to the customer. Strayer, J. found that the taxpayer was not engaged in the manufacturing or processing of goods for sale. The contracts were for work and materials and since the taxpayer did not establish that the retreading of casings of its own tires amounted to more than 10 per cent of its business, the Minister's assessment was upheld.The learned judge referred to Benjamin's sale of goods to distinguish between a contract of sale of goods and a contract for work and material: where work is done on the chattel of another involving the use of affixing materials, the contract will ordinarily be one for work and materials, the property passing from one to the other “by accession and not under any contract of sale".

The Tenneco decision was a decision of mine released in 1987. Tenneco was in the business of installing mufflers on automobiles. I held that it did not manufacture goods for sale; it merely installed on cars goods already manufactured elsewhere. I referred to Crown Tire and to Halliburton as well but felt that Crown Tire better applied to the facts of the case then before me.

On March 21, 1991, the Federal Court of Appeal confirmed my decision in Tenneco. Linden, J.A. referred to the Federal Court of Appeal's decision in Halliburton but did not state that Crown Tire was bad law. On the contrary, it confirmed mine which relied largely on it. In Reg Rad Tech my colleague Collier, J. held that the substance of the taxpayer’s business was providing services to patients in processing x-ray films for medical partnerships. The sale of developed films was only a minor step in this process. My colleague relied heavily on a previous decision of McNair, J. of this Court in Dixie X-Ray Associates Ltd. v. The Queen, [1988] 1 C.T.C. 69, 88 D.T.C. 6076, and reported this key paragraph of his decision at page 74 (D.T.C. 6079):

The test for determining whether a contract is one for the sale of goods or for the supply of services is to ask the question: What is the substance of the contract? If the substance of the contract is the production of something to be sold and the transference of property therein to a buyer then the contract is a sale of goods. But if the real substance of the contract is the skill and labour of the supplier in the performance of work for another then that is a contract for work and labour, notwithstanding that property in some materials may pass under the contract as accessory thereto . . . [Citations in original are here omitted].

Judge Collier's decision was confirmed by the Federal Court of Appeal on September 4, 1991. Marceau, J., speaking for the Court, said that the case was “quite unlike the situations in Halliburton and Nowsco Well Services where the production and eventual sale of the product was found to be the dominant feature of company activity”.

As to the other line of cases, also known as the "oil well cases", the Federal Court of Appeal decisions in Nowsco and Halliburton were both released on April 10, 1990 and were written by Urie, J.A. The two decisions favoured the taxpayer. The facts are similar in both cases and the substantial judgment was rendered in Nowsco. The learned judge reviewed the cases I have already mentioned as well as others and found each to be quite distinguishable on its facts.

Urie, J. preferred the reasoning of Reed, J. of the Trial Division in Halliburton and quoted her extensively. The taxpayer in Halliburton was engaged in the business of oil well servicing and its activities included the preparation and pumping into well sites of special mixtures of cement. These materials were used to facilitate the extraction of oil. Reed, J. found it inappropriate to adopt a fragmented view that, when the blending has been completed there is a finished good, and that pumping constitutes the delivery of a finished good which would not be manufacturing or processing. Cullen, J. found in Nowsco that the taxpayer's activities constituted a continuous process, and all aspects of it, including the blending, mixing, pressurizing and pumping, were one and the same process

Urie, J.A. wholly subscribed to the arguments of Reed, J. and added his own analysis as follows at pages 423-24 (D.T.C. 6317-18):

First, as earlier noted, the respondent, in consultation with the operator, its customer, prepares a treatment proposal. According to the evidence, it is the operator who is familiar with the formation through which the drill hole is bored as well as that from which he hopes to extract the oil or gas. Consequently, he must decide on the type of cement slurry required and the stimulation most likely to assist in the extraction, relying on the advice of the respondent in each case as to the proper products to be used to achieve the best results, the equipment to be used and the pressures and rates utilized for the best results. In all cases it is the customer who must ultimately make the decisions on each branch of the proposal.

Secondly, as I understand the evidence, after the proposal as amended is accepted, the respondent proceeds to the well site with its equipment to carry out its proposal which involves, on a carefully orchestrated and integrated basis, the mixing, blending, pressuring and pumping of the various materials, additives, acids, proppants and gases required in cementing and well stimulation.

Thirdly, the form of invoice rendered clearly indicates that the customer is billed for both the materials which it provides in accordance with the customer's specifications and the services it performs in utilizing those materials to achieve the stimulation or cementing results required by the customer. Even a rather cursory inspection of the various invoices in the record, apparently selected and entered in evidence on a random basis, indicates that in dollar amounts the division between materials and services is roughly fifty-fifty.

Fourthly, while the evidence is somewhat sparse there is on the record evidence of an element of profit to the respondent in the sale of its material which on a gross profit basis, (which is the only basis disclosed) is roughly equivalent to the gross profit derived from it by the supply and rental of its equipment.

In the Rolls-Royce case, supra, the issues included the application of section 125.1 of the Act and Class 29 of Schedule II of the Regulations. In that case, at issue was whether the taxpayer's operations were primarily in overhauling airplane engines to certification standards. Those operations, described by the taxpayer as re-manufacturing, involved overhauling engines delivered by customers to whom the same engines were returned when the work was completed. Martin, J. in concluding that the situation was comparable to that in Crown Tire, not the oil well cases, found that of the criteria set out by Urie, J.A. in Nowsco only one, the billing by the taxpayer to its customers for both materials and services, appeared in the Rolls-Royce situation but even then the materials itemized on invoices were those the taxpayer decided were necessary for overhaul of an engine, not materials provided in accord with specifications of the customer which was the case in Nowsco. He also said, in part at page 258 (D.T.C. 5583-84):

I agree with the observations made by Urie, J.A. that the Crown Tire case and the oil well cases are not comparable and I find that the present case bears far more similarity to the Crown Tire case than to the oil well cases. In this case the customer relies completely upon the taxpayer's judgment for the work and materials to be supplied. No new goods are created which are sold to the customer prior to their being incorporated into the customer's engine. It is the taxpayer and not the customer who remains in control of the entire operation. It is the taxpayer who guarantees the work. Finally, title to the materials used passes from the taxpayer to the customer not by sale as found by Urie, J.A. in the oil well cases but by accession at the time they are attached to and become a part of the engine being overhauled similarly to the position in the Crown Tire case.

Furthermore it is a fact and, according to Reed, J., a significant factor differentiating the cases that in the Crown Tire case the customer owned the chattel throughout. Urie, J.A. did not suggest that this was not a significant factor in the Crown Tire case or that it was a factor to be ignored in other cases. He simply pointed out that in his view counsel’s overemphasis on this factor in the oil well cases had the effect of misconstruing the nature of the relationship between the parties. I am unable to accept those observations as being tantamount to overruling the Crown Tire case or the reasoning upon which it was based.

In Stowe-Wood ward, supra, the issues included all three of the tax incentives applicable in relation to the manufacturing of goods for sale, under sections 125.1 and 127 of the Act and within Schedule Il Class 29 applicable under paragraph 20(1)(a) of the Act. There the operations of the taxpayer consisted mainly of the application of rubber covers to roll cores, mostly from mills in the pulp and paper industry. Covers were made from raw materials according to specifications applicable to the customer's roll core requirements in accord with the particular trade-mark requirements of the original manufacturer. (The taxpayer was a licensed user of the various trade-marks.) The operation included stripping old covers off used cores, preparing the surface of the cores to ensure bonding, applying the rubber product specially prepared by the taxpayer for each roll core, and subsequently vulcanizing the product onto them. In concluding that the case fell within the principles of Halliburton and Nowsco, not within those of Crown Tire and the cases following it, Dubé, J. found that the taxpayer did not repair, rather it replaced covers, and while there was an element of service in its operations, the bulk of its activities and the substance of its manufacturing and processing took place before the cover was applied to the roll core. A product, the rubber material prepared to specifications before its application to the roll core, was created using sophisticated machinery and the product was delivered to the customer by applying it to the customer’s roll. Customers might separately buy the product for purposes of making their own repairs. The primary object of the contracts between the taxpayer and its customers was for the transfer of property in the product. Customers received roll covers prepared to their particular specifications for which they paid a flat list price without separate billing for services.

In this case, counsel for the plaintiff submitted that the principle enunciated by Chief Justice Dickson in McClurg v. M.N.R., [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001, should be followed. There his Lordship set out guidelines for the interpretation of the Income Tax Act, as developed in recent decisions of the Supreme Court, concluding (at C.T.C. 183, D.T.C. 5011)". . .it is necessary to determine both the purpose of the legislative provision and the economic and commercial reality of the taxpayer's actions”. Counsel for the plaintiff urged that determination of this case based on the distinction between contracts for the sale of goods and contracts for work and materials or services would be a triumph of juristic classification of form" over “commercial and economic realities’, adopting phrases employed by Dickson, C.J.C. in Bronfman Trusts. The Queen, [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, at page 53 (C.T.C. 5067, D.T.C. 128).

In Halliburton Services, supra, Urie, J.A. for the Court of Appeal quoted and supported comments of Madame Justice Reed at trial in relation to argument that the main activity of the taxpayer was the provision of services and not goods for sale at pages 55-56 (D.T.C. 5338):

This argument is based on the well known distinction between contracts for the sale of goods and contracts for work, labour and materials, developed with respect to sale of goods legislation.

I have considerable difficulty with this line of argument. In the first place, it is based on distinctions developed for purposes of the sale of goods legislation, not with respect to subsection 125.1(3)(b) of the Income Tax Act. I do not read subsection 125.1(3)(b) as requiring that a taxpayer's profit has to arise out of a contract for a sale of goods as defined by the various Sales of Goods Acts. Subsection 125.1(3)(b) does not talk of a sale of goods. It talks of profit arising out of the processing of goods for sale.

Secondly, I do not find any requirement that the contract which gives rise to the taxpayer’s profit must be of a particular nature, e.g., one for the sale of goods and not one of a more extensive nature involving work and labour as well as the goods or materials supplied.

In the third place, to adopt the distinction for which the defendant argues would be to create an illogical result. As counsel for the plaintiff pointed out, under such a regime, a manufacturer or processor of a product (e.g., a chemical fertilizer) who also provided a service in connection therewith (e.g., spreading the fertilizer for his customers) would be denied the processing tax deduction. If he merely sold the product to his customers he would be allowed the deduction.

[Emphasis in original.]

Decision

The purposes of the legislative provisions here in issue, subsection 127(10) of the Act and Class 29 of Schedule II, are to provide incentives related to expenditures on equipment acquired for use in manufacturing or processing goods for sale or lease. Implicitly the incentives recognize and encourage expenditures incurred by those engaged in that activity.

That activity may depend substantially upon the relationship between the taxpayer and its customers or clients, but in my view it depends as well upon the inherent nature of the functions carried on by the taxpayer in using the equipment. Here it is acknowledged that those functions constitute manufacturing. It could hardly be otherwise for the equipment was used to make parts for hydraulic equipment from raw materials, including steel, cast iron, plastic, nylon and other materials, held in inventory or acquired by the taxpayer. From those raw materials, using the equipment here put forth as the basis of the plaintiff's claims to incentives, products were produced in the form of parts or components for hydraulic equipment. Those parts were made to meet specifications of the customer in category c of the plaintiff's classification of its work, or to replace parts of defective hydraulic equipment owned by the customer, a requirement that is no less a specification of the customer than if the latter had described the part or parts required in detail.

Here the customer of repair and re-manufacturing services relied upon the skill and workmanship of the taxpayer, but that reliance related not only to the taxpayer's service in dismantling the defective equipment and reassembling it after servicing its parts but also to the taxpayer's skill and workmanship in manufacturing parts to replace any that were defective. These were incorporated in the customer's equipment when it was reassembled to make a satisfactorily functioning hydraulic component. In sum, the relationship between the taxpayer and its customers was one based on a contract for services and for transfer of property in the replacement parts for a price, that is a sale.

The price for the work done by the taxpayer was not, as in Nowsco and in Stowe-Woodward, fixed solely in relationship to the product provided, rather it was fixed in terms of materials, the raw materials used, and labour, including labour costs in dismantling the equipment of the customer and its re-assembly as well as labour costs in the manufacturing of replacement parts. In my view, that ought not to obscure the true nature of the use of the equipment by the taxpayer. If the taxpayer's work has been priced with reference to the replacement parts alone, including all of the costs for the service provided, the taxpayer might be more readily seen as a user of equipment in the production of goods for sale, but this would not have any bearing on the inherent nature of the functions it carried out using the equipment in question. Nor should the share of total costs for labour unassociated with the manufacturing process have any significance for it is the acquisition and use of the equipment that is the purpose of the incentives, and it is not here argued as a separate item even by the defendant.

It seems to me a formalistic splitting of the taxpayer's business activity, using the equipment in question, to recognize for incentive purposes the use of the equipment where the taxpayer manufactured parts as specified by a customer, including an entire hydraulic component by manufacture and assembly of its parts, but not to do so where the customer leaves defective hydraulic compo- nents for repair and the taxpayer's equipment is used in exactly the same manner to produce a part or parts for replacement of defective parts. In both cases the equipment is used in the same manner to make products, to manufacture goods.

In all cases when the product is made from raw materials owned by the taxpayer it is the property of the taxpayer. It remains so until the product is paid for in those cases where the product is made to the customer's specifications, when property would pass under sale of goods legislation. Counsel for the plaintiff here argued that the same situation applies in the case of products made and installed to effect repair of the customer's component, but it is unnecessary to determine the time of transfer of property in replacement parts to dispose of this case; it is sufficient to note that property in those parts is transferred from the taxpayer to the customer at some point in time.

Since it is the acquisition of equipment for use in manufacture of goods for sale that is assisted by the incentives under the Act, when the relationship between the parties is for both work and materials, or service, as well as for property to pass, the use of the equipment in production of discrete products before their adhesion or affixing to a customer's property would seem to be of significance for the application of the incentives. In Halliburton, Nowsco and Stowe-Woodward the equipment in question was found to be used to produce a product which was then sold to a customer. However that sale is made in terms of the forms or invoicing practices of the parties, or however the taxpayer's product is priced for sale, has no significance for the ultimate transfer of property in the product produced. Nor should these have significance for the assessment of the inherent nature of the taxpayer's functions in use of the equipment.

I distinguish Crown Tire on the basis that there was no product produced by the taxpayer before the work and materials provided resulted in adding to the customer's property by adhesion of the materials. No new tire treads existed until the customer's tire casing was retreaded. In Rolls-Royce there was no evidence of any product made, rather the evidence was that the equipment in question was used in servicing engines and parts and it was argued that the substantial work involved resulted in a new engine, a conclusion that Martin, J. rejected. Both cases would clearly be analogous to use of the taxpayer's chroming equipment to add chrome to parts of the customer's hydraulic components. But that was, at most, a minor aspect of the taxpayer’s business here. Rather, the equipment in this case was used to manufacture goods, parts for hydraulic components, to some of which chrome was added, made to specifications of customers or as replacement parts for defective components of customers. It was urged by the defendant that the hydraulic components continued throughout to be owned by customers, as tire casings were in Crown Tire, but here that could not be said for the replacement parts made by the taxpayer, distinct products, that were not the property of the customer, until at the earliest when affixed to the customer's component on reassembly, or at some later time.

Conclusion

I conclude that the taxpayer's appeal is allowed, for the equipment that here forms the basis for its claims to incentives was acquired for “use in the manufacture of goods for sale” within the meaning of those words in Class 29 of Schedule II of the Regulations and in subsection 127(10) of the Act.

Thus, the action is allowed with respect to the 1982 and 1983 taxation years; the listed assets (except item #25) as agreed between counsel qualify for capital cost allowance under Class 29 of Schedule II of the Income Tax Regulations; and the listed assets which were purchased new in each of the two taxation years (i.e. numbers 19 to 24, 26, and 28 to 30), as agreed between counsel, qualify for the investment tax credit under subsection 127(5) of the Income Tax Act.

This matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of the judgment issued herein in accord with these reasons.

Appeal allowed.