Pratt J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s appeal from its income tax assessment for the 1974 taxation year and holding in effect that the appellant was not, during that year, involved in the manufacturing or processing of goods so as to be entitled to the tax reduction provided for in section 125.1 of the Income Tax Act.
Under that section, which was enacted in 1973,* [1] corporations are entitled to a reduction in tax in respect of their “Canadian manufacturing and processing profits’’, an expression which subsection 125.1(3) defines as meaning
. . . such portion of the . . . income of the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose .. . to be applicable to the manufacturing or processing in Canada of goods for sale . . .
(emphasis added)
The phrase “the manufacturing or processing in Canada of goods for sale” is not defined in the Act which indicates, however, in paragraph 125.1 (3)(b) that the expression “manufacturing or processing” does not include certain specified activities among which
(viii) producing or processing electrical energy . . ., for sale
It is common ground that the appellant would be entitled to the tax reduction it claims under section 125.1 if, as it contends, it processed goods for sale during the taxation year in question.
The appellant is a cablevision company carrying on business in Vancouver, Burnaby and Richmond, B.C. By means of powerful antennas, it receives television and radio signals which it transmits by coaxial cable to the receiver sets of its subscribers. Those television and radio signals are the “goods” which the appellant contends to process and sell to its customers in the normal operation of its business. The trial judge rejected that contention. He held that the signals were not goods within the meaning of section 125.1 of the Income Tax Act and that the contracts entered into between the appellant and its subscribers did not involve the sale of goods.
The appellant’s contention that it processes and sells goods is based on the description of the technology of cablevision which was given by the experts who testified at the trial. Both parties accepted as accurate the summary of that evidence made by the trial judge in the following passage of his judgment:
The signals originate from a broadcast transmitter. The visual and audio information which make up a television broadcast are converted into electrical signals. In the technical language the result is described as an input signal. Most input signals cannot be sent directly over the communication channel. That channel, in the case before me, is the ordinary atmosphere and, eventually, cable. To effect satisfactory transmission from the broadcast antenna the message signal is impressed upon electromagnetic carrier waves. This transformation or modification into a high frequency range is technically described as modulation.
The information signal is now in the air. Its ultimate destination is the television receiver set of the viewer. In the case before me the receiver may be the television set owner’s antenna, or the much more elaborate receiving equipment of operators such as the plaintiff.
Each receiver captures a portion of the electrical energy from the transmitted information signal. The human recipient is not interested in the infinitesimal amount of electrical energy captured. What he is interested in is the contents of the signal—the mutual, to use the technical jargon, information. As Dr J u 11, for the defendant, put it:
“Although energy must necessarily be conveyed, the amount is small; the information conveyed in the signal is the important quantity.”
The energy captured by each receiver is then not available to others. If there were a sufficient number of correctly placed receivers it would be theoretically possible for the whole of the electrical energy to be captured, leaving none for some receivers. It is not, however, a practical consideration.
The receiver converts the signal received into a reconstructed version of the Original signal transmitted by the broadcaster. The television set then converts the reconstructed message signal into a reconstruction of the information message. Ideally, one then views and hears a so-called television broadcast as it was initially recorded by the broadcaster.
At this point I state that I accept the conceptual distinction put forward on behalf of the plaintiff. What is transmitted and received is not a television program in the layman’s sense. What the cablevision company and the viewer are really concerned with is the television signals of “mutual information” which I have attempted to describe.
When the particular information signal in its assigned communication channel, be it air or cable or both, (and even before and after that stage), it is subject to contamination or disturbance. There are three main offendors.
Interference occurs when the signal in one channel spills over into another or others. It occurs, as well, where the signal travels over two or more paths. The fractionally different time arrivals cause what, to the layman, is known as “ghosting”.
Distortion of the signal can be caused by imperfections in the transmitting and receiving equipment. If part of the communication system is cable, as with the plaintiff, that equipment, and ancillary equipment, by their very nature, create distortion of the signal.
The third main enemy is noise. Noise arises from natural causes within and without the communication system. The higher the signal to noise ratio (SNR) the better the result to the ultimate viewer, whether he has his own receiver or is hooked in to the plaintiff’s system.
Speaking generally, cablevision companies combat the contamination and disturbance in a number of ways: Sophisticated receiving antennae are erected at well- situated locations. Some of the antennae are designed to pick up one channel only, and to reject others. This reduces or eliminates spill-over from one channel to another. Multipath interference is reduced by selecting a suitable site or sites on which to locate the antennae. Diversity reception is used, as well, to reduce the effects of multipath interference. That involves using two or more receiving antenna locations. The theory is that, at any given moment, one of the sites will not experience multipath which affects the signal. The signals captured can be combined, or the best signal alone used. The cable companies receive the various broadcast signals at various sites and then transmit the reconstructed message Signals via cable to the individual subscribers.
The companies at their head-end (where their receivers are) filter and amplify the received signals. Every effort is made not to affect the information content of the Original signal. To put it another way, the object is to deliver to the ultimate viewer as close a replica as possible of the original image and sound as recorded by the television camera and the audio equipment. The received signal, after the operations described, is then delivered by cable to the viewers. There are intrinsic limitations in the distribution system. They cause attenuation and noise. The signal to noise ratio tends to decrease. The cablevision companies endeavor to prevent contamination of the signal in the area between their head-end and the viewer—the actual cable system.
Amplification and filtering to a fairly elaborate degree, are, among other things, done.
What I have heretofore described is the general operation of a typical cablevision company. That description is applicable to the plaintiff’s business.
According to the appellant, a television or radio signal, once captured by its antennas, is in its possession and becomes its property; it is then “processed” when it is “cleaned”, “filtered” and “amplified” by going through the appellant’s sophisticated equipment and, ultimately, it is sold when, for a consideration, it is delivered to the appellant’s subscribers. The appellant adds that when it processes and sells signals it, in effect, processes and sells goods since the signals are “a commodity with economic utility derived from their message potential”.
Before considering the merit of that argument, it is necessary to stress that the question for determination is not whether the electrical impulses which travel through the appellant’s cable system at nearly the speed of light could, in theory, be considered as a commodity susceptible of being sold. It is not, either, whether the appellant, in view of the technology of its operations, could not, possibly, have entered into contracts of sale with its customers. The questions raised by this appeal are rather whether the signals are goods within the meaning of section 125.1 and whether the appellant did, in fact, enter into contracts of sale with its customers.
In my view, both these questions must be answered in the negative.
I agree with the trial judge that the word “goods” in section 125.1 “is used in the common parlance of merchandise or wares, or, to put it in legal jargon, tangible moveable property”. In that sense, the signals captured by the appellant, in my view, are not goods. True, electricity is often referred to as a commodity and even, sometimes, as “goods”.* [2] However, the electric- ity that is commonly purchased and sold and referred to as an article of trade is the electricity that is produced, sold and used for its energetic properties. By contrast, radio and television signals, while electrical currents, are never referred to as goods. The television or radio broadcaster is never thought of as the producer of commodities or goods. And the owner of a television set which receives a signal, be it with or without the help of a C.A.T.V. system, is never said to acquire or consume any goods.
Even if that first conclusion were wrong, I am of opinion that the appellant could not succeed because the record does not show that it ever sold signals to its subscribers. Whatever be the technology of cablevision, the only realistic view of the appellant’s activities is that of a mere carrier providing its subscribers with the technical means of obtaining a better reception of radio and television signals. The appellant is in the communication business; it is not in the business of selling goods. The text of the form of contract used by the appellant in its relations with its subscribers supports that conclusion and makes clear that this is the view that the appellant takes of its role. This form does not refer to the sale of any commodity, but to the supply of services.
For those reasons, which are substantially those of the trial judge, I would dismiss the appeal with costs.
SC 1973-74, c 29, section 1.
See: Quebec Hydro-Electric Comm v MNR, [1970] SCR 30; [1969] CTC 574; 69 DTC 5372. The appellant has argued with much force that the exception found in sub paragraph 125.1 (3)(b)(viii) showed that the word “goods” in section 125.1 was used in a sense that included electrical energy.