Cullen, J.:— The plaintiff, Cumberland Ready Mix Ltd., appeals to this Court from notices of reassessment by the Minister of National Revenue (the Minister), dated July 3, 1987, in respect of the plaintiff’s 1983, 1984, 1985 and 1986 taxation years. The Minister denied the plaintiff's claim for investment tax credits and refunds in those years. The claim was denied on the basis that the property with respect to which the plaintiff sought to claim a credit was neither "qualified property” nor “qualified construction equipment” within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").
Counsel for the plaintiff advised the Court during his opening address that the plaintiff was no longer pursuing the remedy sought in paragraph B. 12 of the amended statement of claim which read as follows:
12. The plaintiff further submits in the alternative that the vehicles are “qualified construction equipment” as defined in paragraph 127(10.1)(f) of the Income Tax Act as amended for the 1983 and 1984 taxation years and subsection 127(9) of the Income Tax Act as amended for the 1985 and 1986 taxation years, since they are prescribed equipment for the purposes of Regulation 4603, which were used by the plaintiff principally for the purpose of construction in Canada in the course of carrying on a business.
Agreed statement of facts
The plaintiff and the defendant agree that the following facts are not in dispute:
1. The plaintiff, Cumberland Ready Mix Ltd., carries on an integrated operation for the provision of pre-mixed cement products.
2. The plaintiff owns a fleet of vehicles, commonly referred to as concrete readymixers.
3. Each ready-mixer is comprised of a truck cab and chassis on which a concrete mixer has been mounted.
4. The plaintiff uses the ready-mixers to manufacture and process concrete, and to deliver the concrete to construction sites.
5. The concrete ready-mixers are property described in Class 22 of Schedule II of the Income Tax Regulations (capital cost allowance) as power-operated, movable equipment designed for the purpose of placing concrete.
1984 Taxation Year
6. In filing its T2 Corporation Income Tax Return for the 1984 taxation year, the plaintiff claimed investment tax credits for some of its vehicles, as follows:
(1) #11—1980 Ford LTS 9000
Cost: $68,340
ITC claimed: $4,784
Date of purchase contract: August 26, 1980
(2) #12—1979 Ford LTS 9000
Cost: $62,979
ITC claimed: $4,408
Date of purchase contract: August 8, 1980
(3) #51—1984 Ford LT 9000
Cost: $53,000
ITC claimed: $3,710
Date of purchase contract: January 30, 1984
(4) #14—1980 Intl. Paystar F5070
Cost: $66,353
ITC claimed: $4,645
Date of purchase contract: April 6, 1981
(5) #15—1980 Intl. Paystar F5070
Cost: $64,962
ITC claimed: $4,547
Date of purchase contract: March 18, 1981
(6) #16—Mack DM 685 S
Cost: $102,630
ITC claimed: $7,184
Date of lease agreement: August 25, 1980
7. All of the vehicles listed above are concrete ready-mixers except vehicle no. 51 which is a stone slinger. A stone slinger spreads stone on construction sites.
8. The investment tax credits which the plaintiff claimed in the 1984 taxation year were as shown in the attached chart (Schedule "A").
9. The total of the investment tax credits which the plaintiff claimed in its 1984 taxation year was $36,528.31. The vehicles listed above accounted for $29,278 of that amount.
10. Of the investment tax credits claimed for the concrete ready-mixers in the 1984 taxation year, the plaintiff carried back $7,921.33 to its 1983 taxation year, and carried forward $8,276.98 to its 1985 taxation year, leaving $13,079.87 to be applied to its 1984 taxation year.
1986 Taxation Year
11. In filing its T2 corporation income tax return for the 1986 taxation year, the plaintiff claimed investment tax credits for some of its concrete ready-mixers, as follows:
Truck Cabs and Chassis
(1) #28—1985 Mack DM 685 S
Cost: $67,600
ITC claimed: $4,732
Date of purchase contract: May 8, 1985
(2) #29—1985 Mack DM 685 S
Cost: $67,600
ITC claimed: $4,732
Date of purchase contract: May 9, 1985
(3) #30—1985 Mack DM 685 S
Cost: $67,600
ITC claimed: $4,732
Date of purchase contract: May 14, 1985
(4) #31—1985 Mack DM 685 S
Cost: $67,600
ITC claimed: $4,732
Date of purchase contract: May 14, 1985
(5) #32—1985 Mack DM 685 S
Cost: $67,950
ITC claimed: $4,756.50
Date of purchase contract: September 24, 1986
(6) #33—1985 Mack DM 685 S
Cost: $67,950
ITC claimed: $4,756.50
Date of purchase contract: September 24, 1986
(7) #34—1986 Mack DM 686 S
Cost: $72,195
ITC claimed: $5,053.65
Date of purchase contract: February 14,1986
(8) #35—1986 Mack DM 686 S
Cost: $72,195
ITC claimed: $5,053.65
Date of purchase contract: February 14,1986
Mixer Units
(a) Four Jaeger model RE-100TD mixers (all on one purchase contract) Cost: $75,600
ITC claimed: $5,292
Date of purchase contract: April 10, 1985
(b) Two Jaeger model RE-100TD mixers (both on one purchase contract) Cost: $40,700
ITC claimed: $2,849
Date of purchase contract: September 24, 1985
(c) Two London Action 85 mixers (both on one purchase contract) Cost: $41,000
ITC claimed: $2,870
Date of purchase contract: February 19,1986
12. The investment tax credits which the plaintiff claimed in the 1986 taxation year were as shown in the attached chart (Schedule "A"),
13. The total of the investment tax credits which the plaintiff claimed in its 1986 taxation year was $51,246. The truck cabs and chassis and mixers listed above accounted for $49,559 of that amount.
14. Of the investment tax credits claimed for the truck cabs and chassis and mixers in the 1986 taxation year, the plaintiff sought to carry back $16,429 to its 1983 taxation year and $7,230 to its 1985 taxation year. In addition, the plaintiff applied $16,240 to its 1986 taxation year and claimed a refundable investment tax credit of $3,864 for that year. The plaintiff left the amount of $5,796 for carryforward to future taxation years.
Investment Tax Credits
15. The plaintiff claimed investment tax credits for all of the truck cabs and chassis and mixers listed in paragraphs 6 and 11 above on the basis that they are "prescribed machinery and equipment" and thus “ qualified property" as defined by the Income Tax Act and Income Tax Regulations.
16. All of the truck cabs and chassis and mixers listed in paragraphs 6 and 11 above were new when the plaintiff acquired them.
17. In addition, all of the truck cabs and chassis and mixers listed in paragraphs 6 and 11 above were acquired by the plaintiff principally for the manufacturing, processing and delivery of concrete in connection with its major business activity of manufacturing and processing concrete for sale.
18. The plaintiff also claimed the manufacturing and processing profits deduction in each of its 1983, 1984, 1985 and 1986 taxation years.
Notices of reassessment
19. The Minister of National Revenue, by notices of reassessment dated July 3, 1987, reassessed the plaintiff for its 1983, 1984, 1985 and 1986 taxation years after determining that the plaintiff was not entitled to investment tax credits in the amounts of $30,014.18 for the 1984 taxation year and $49,559 for the 1986 taxation year. The reassessments disallowed the following investment tax credits claimed for the truck cabs and chassis and mixers mentioned in paragraphs 6 and 11 above:
| 1983— | $7,921.33 |
| 1984— | $13,079.87 |
| 1985— | $ 8,276.98 |
| 1986— | $16,240 |
20. As regards paragraph 14 above, the reassessment for the 1986 taxation year reduced the plaintiff's refundable investment tax credit from $3,864 to nil. Further, to date the Minister has denied the plaintiff's request to carry the 1986 investment tax credits back and forward as indicated.
21. The Minister disallowed the investment tax credits claimed by the plaintiff on the basis that the plaintiff's concrete ready-mixers are trucks "designed for use on highways and streets". Therefore, according to the Minister, the trucks are not “prescribed machinery and equipment” and thus are not "qualified property" as defined by the Income Tax Act and Income Tax Regulations.
Notices of objection
22. The plaintiff contested the Minister’s reassessments for the 1983, 1984, 1985 and 1986 taxation years by notices of objection dated August 31,1987.
Minister's confirmation
23. The Minister, by notice of confirmation issued on December 17, 1987, confirmed the reassessments against the plaintiff.
During the course of the trial, counsel for the defendant noted that in paragraph 6 of the amended statement of claim the figure $30,014.98 in line 12 should now read $29,278.
It is also agreed that over the time of this action income tax provisions relating to investment tax credits have been amended several times between 1983 and 1986. Many paragraphs have been added or deleted, and further, sections and paragraphs dealing with the definition of qualified property and qualified construction equipment have been moved around. The wording in the provisions relating what is qualified property (and qualified construction property) has remained constant throughout the tax years in dispute.
Plaintiff's position
Cumberland Ready Mix Ltd. carries on business for the provision of premixed cement products. As part of this business the plaintiff owns several "cement mixer” trucks and one stone slinger. The plaintiff acquired these after June 23, 1975. The plaintiff uses the mixers to manufacture, process and deliver cement products and claims to incorporate them into concrete structures in Canada as part of the construction process. Further, these mixers are "property" as defined in Class 22 of Schedule II of the Income Tax Regulations. The plaintiff claims that the mixers are "power operated movable equipment for the placing of concrete". The plaintiff claims that the mixers are designed for use on "construction site terrain" so they can deliver cement products at the construction site.
The Minister, by notice of reassessment dated July 3, 1987, reassessed the plaintiff to deny "investment tax credits". The Minister also denied the plaintiffs claim for an "investment tax refund”. Finally, the Minister denied the investment tax credits earned by the plaintiff with respect to mixers acquired in the 1984 and 1986 tax years.
The Minister, by notice of confirmation issued December 17, 1987, confirmed the reassessment of the plaintiff. The plaintiff appealed to this Court.
The defendant's position
In reassessing the plaintiff's 1983, 1984, 1985, and 1986 taxation years the Minister proceeded on the basis that:
(i) the plaintiff's mixers were trucks designed for use on highways and streets (therefore not qualified” property); and
(ii) the mixers were acquired principally for the purpose of manufacturing, processing and delivery of concrete in connection with its major business activity of manufacturing and processing concrete for sale and were not, therefore, acquired for the purpose of construction in Canada, in the course of carrying on business (therefore not qualified construction equipment). As indicated this claim has been removed by the plaintiff.
Issue
Can the plaintiff's mixer be defined as “ qualified property" for the purpose of the investment tax credit provisions of the Act?
The legislative scheme
Subsection 127(9) of the Act provides a method by which the investment tax credit may be calculated. It does this by defining the investment tax credit. It states in part:
investment tax credit—!* investment tax credit" of a taxpayer at the end of a taxation year means the amount, if any, by which the aggregate of
(a) the aggregate of all amounts each of which is the specified percentage of the capital cost to him of qualified property, qualified transportation equipment, qualified construction equipment, approved project property or certified property acquired by him in the year. . . .' [1]
[Emphasis added.]
It is clear from the wording of subsection 127(9) that the taxpayer has acquired qualified property or qualified construction property in order to be able to calculate an investment tax credit and therefore make a deduction or get a refund.
Subsection 127(9) also provides a definition of qualified property. [2] It states in part:
qualified property.—" qualified property" of a taxpayer means property (other than an approved project property or certified property) that is. . . .
(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 primarily in Canada for the purpose of
(i) manufacturing or processing goods for sale or lease
Whether something is prescribed machinery or equipment will depend upon Regulation 4600. This regulation reads in part:
4600.(1) Qualified Property
(2) Property is prescribed machinery and equipment. . .if it is depreciable property of the taxpayer. . .that is. . .
(e) a property included in paragraph (a) of Class 10, or Class 22, in Schedule II
(other than a car or a truck designed for use on highways or streets). . . .
This is where the issue arises. Although it is agreed that the mixers are part of Class 22, the Minister, nonetheless, takes the position that they are not prescribed machinery or equipment given the exclusionary effect of Regulation 4600(2)(e), namely that they are designed for use on highways or streets. As a result of the plaintiff withdrawing its alternate claim that the mixers are construction equipment, the sole issue for me to determine is whether these mixers are excluded under Regulation 4600(2)(e).
The equipment in question
Cumberland Ready Mix purchases cement mixers from at least three different companies; Mack, International Paystar and Ford. The stone slinger in question was purchased from Ford. The plaintiff called as witnesses a representative from each of the above three companies. Each witness explained how their particular vehicle was designed, what modifications are made to a basic truck design to allow it to be used as a mixer, and how they market and sell the equipment. For the purposes of these reasons, it will be sufficient for me to review the evidence of the first witness, Mr. David McKenna of Mack, and simply to state that his evidence is essentially in line with the evidence of the other two witnesses.
Mr. McKenna is experienced in sales and marketing of these types of mixers, as well as in the technology behind the equipment. He also takes credit for designing the Mack Track system which I will explain shortly.
Mr. McKenna testified that there are two types of trucks from Mack's point of view, a highway truck and a construction truck. The differences are such that, in the words of the Mack brochure (exhibit 7): "Mack does not send a highway truck to do a construction truck's job". In Mr. McKenna's opinion, mixers are clearly construction trucks.
Mr. McKenna then went on to detail some of the modifications on the DM (dumper/mixer) trucks to prepare them for use as mixers, as opposed to highway trucks. As these modifications are crucial in deciding the issue at hand, I shall review them in some detail.
Firstly, he stated that the frame on the mixer would be a deep section frame with a reinforced channel, and I-beam cross members. These modifications add rigidity to the frame so that it won't bend or flex under the load of the cement barrel. Next, he discussed the powertrain, for which Mack uses the Maxidyne EM6, a high torque rise engine designed to deliver high power at extremely low motor speed, or revolutions per minute (r.p.m.).This high torque rise allows the mixer to move around the severe terrain of a job site and drive the auxiliary features such as the front pump for the mixer.
The next area discussed was the transmission. Mr. McKenna testified (page 87 of the transcript):
A. The transmission that we would use in a construction truck, specifically a mixer, would be a six-speed transmission that we would use, our own six speed, it has what we call a low hole in it, which is a very, very, very low first gear. And the reason for this is this gear is used specifically ana only for a mixer chassis that would be involved with a so-called motion pour, where the mixer has to move ahead at a very, very low rate of speed, but at an even speed to maintain the quality of the pour. And you would not use this transmission — as a matter of fact, you cannot use lights, it's that low.
Modifications to the front and rear axles were also detailed. The front are 20,000 pound axles with a wide pivot, as compared to 12,000 pounds for highway trucks. The extra weight is to support the heavy load required of a mixer, and the wide pivot is to facilitate the use of flotation tires, which will be discussed below. The front axle also has unequal front springs, higher-rated on the left-hand side than the right in order to handle the weight shifts in the barrel while it mixes the concrete. With this arrangement, there is less likelihood that the chassis would lean to one side and pose a safety threat. The front axle and flotation tires also require a special steering gear, to allow extra manoeuvrability on the job site.
The rear axle is a 44,000 pound unit. It contains a Hendrickson suspension, which, in this case, is a heavy duty, rubber block suspension, namely three rubber blocks per side that isolate the road from the chassis. This arrangement offers increased stability for uneven surfaces, as well as increased rigidity to compensate for the high centre of gravity on the mixer. Both this and the front axle add to the weight of the vehicle, making it uneconomical for regular highway usage.
The trucks in question also have a 26 inch frame extension at the front of the chassis. This extension allows the oil pump or drive unit which drives the mixer to be fixed to the frame and connected to the engine through a small drive shaft and a crankshaft adaptor. The frame is also fitted with heavy duty bumpers to allow for minor collisions on the job site.
Flotation tires are large, wide-based tires that are used to support the extra load and have the ability to "float" over mud, snow and imperfections in the surface on which the truck is being driven. The ones in question are 18 to 20- ply rating, meaning they are heavier and more durable for use on construction sites. Mr. McKenna stated that the increased ply rating (as compared to the normal 14-ply for highway trucks) allows the vehicle to run over stones, bricks and demolition debris on-site, without carving up the side of the tires.
In addition to the modifications discussed above, when selling a mixer, or similar construction vehicle, Mack uses a computerized ordering system known as Mack Track. It is a system whereby an order is put into the computer but if the order does not contain certain mandatory options for the given application, the computer won't accept it. For example, Mr. McKenna stated that if you were to submit a mixer chassis order leaving out certain options on the chassis, the system would not accept it, based on strict engineering guidelines.
The other two representatives, Mr. Speller from International Paystar and Mr. Pelkey from Ford, testified as to substantially similar modifications on each of their products. In addition, although their companies do not have a Mack Track system, they each have similar safeguards in place to ensure the vehicles ordered meet or exceed engineering requirements for this type of application.
The meaning of “designed for use on highways or streets”
It is the Minister's position that the trucks in question are designed for three purposes: firstly, to manufacture and process concrete, secondly, for use on highways and streets, in order to transport the concrete to customers, and thirdly, to deliver the concrete at the construction site. Based on the second of these purposes, the defendant Minister argues that the mixers and stone slinger are excluded from prescribed machinery and equipment within the meaning of Regulation 4600(2)(e). The Minister further argues that the" primary purpose" test urged by the plaintiff does not apply to the regulation at issue, and therefore it is immaterial that the mixers and stone slinger are not primarily designed for use on roadways. Counsel suggests that this is the common sense approach to this problem.
Counsel for the plaintiff urges a different common sense approach. He suggests focusing on the words designed for”, and then applying the primary purpose test as set out by the Federal Court of Appeal in Nowsco Well Services Ltd. v. The Queen, [1990] 1 C.T.C. 416, 90 D.T.C. 6312 [aff'g [1988] 2 C.T.C. 24, 88 D.T.C. 6300 (F.C.T.D.)]. He does concede that if the regulation was worded as "a truck used on highways”, Cumberland's mixers and stone slinger could probably be excluded. However, he submits that this Court must focus on the words "designed for” and as such he provided a dictionary definition of "design" to mean:
. I. .to have a purpose, have an intention or purpose, or to devise something for a specific function or end. (transcript, page 171)
The plaintiff relied on the evidence to show that the trucks in issue were designed for the specific function: operating off-highway, Counsel for the plaintiff readily conceded, both in his opening remarks and his closing arguments that the vehicles use the highways and streets, but he argued that these roadways were simply a means of getting to the work site and that the true purpose was to get from the entrance of the work site to the place the customer wanted the concrete to be placed. The use of the roads and highways must not take away from what the vehicles were truly designed for, namely to process concrete, and then place it at a wide variety of job sites.
I agree with counsel for the defendant that if the primary purpose test from Nowsco, supra, does not apply to the regulation in question, then the vehicles' other design purpose, using the highways and streets, may be sufficient to exclude the mixers and stone slinger from the investment tax credits claimed. I thus turn to decide what is the proper test to be applied in this case.
The test to be applied
Although the Court of Appeal in Nowsco, supra, was not dealing with property governed under Regulation 4600(2)(e), (i.e., property within Class 10(a), 22 or 38) Urie, J.A. did interpret the language found in that regulation. In upholding the trial decision, he stated at page 6319 of his reasons:
While perhaps initially the vehicles used by the respondent were "designed for use on highways or streets" their design was so modified for purposes of their utilization, that the limited design purpose was of minimal importance. Their primary purpose was to become parts of an integrated process for the cementing and/or stimulation of oil or gas wells.
[Emphasis added.]
Counsel for the defendant is correct in asserting that the exclusionary language of Regulation 4600(2)(e) does not include the word “ primarily”, or any similar qualification. However, based on the words of Urie, J.A., the Court of Appeal has added the extra requirement.
This test was applied to the regulation in question in a decision of the Tax Court of Canada by Mogan, J.T.C.C. in Terraco Industries Ltd. v. M.N.R., [1993] 1 C.T.C. 2614, 93 D.T.C. 1. In that case, the appellant carried on the business of providing hot oil services to wells of major oil companies. The vehicles at issue were trucks modified to transport and power these hot oil service units. In reaching his decision that the vehicles were not excluded from the investment tax credits, Judge Mogan applied the primary purpose test and stated at page 2618 (D.T.C. 4):
Any heavy equipment (e.g. a hot oil unit) can be made mobile by mounting it on wheels. If it is towed around on a trailer, there is no risk that it will be mistaken for a truck. But if, for efficiency, safety and convenience, it is mounted on the chassis of a truck and the truck's engine is used to power it, is the resulting equipment primarily a truck used to transport only a hot oil unit or is it primarily a self- propelled hot oil unit which has assimilated what was originally designed as a truck. If the hot oil unit and the truck are brought together for the sole purpose of making the unit mobile, it does not seem reasonable to regard the truck component of the resulting equipment as if its chassis and engine had not been absorbed into the overall system of the hot oil unit to provide it with power and a platform It is the specifications imposed by the appellant which change the basic concept of the truck into a power plant which can operate equipment at a fixed location and then move it to another location.
[Emphasis added.]
Judge Mogan then concluded at page 2619 (D.T.C. 5) that the vehicles were not trucks designed for use on highways or streets and thus not excluded from the definition of prescribed machinery and equipment by virtue of Regulation 4600(2)(e).
Although counsel for the plaintiff proposed the “assimilation” argument from Terraco, supra, as an alternative to the primary purpose test, I believe the two approaches can be treated as one. Further, I believe that this is the proper standard to be applied to the plaintiff's mixers and stone slinger.
The evidence which I detailed earlier demonstrates to me that the mixers and stone slinger are not designed to be an ordinary truck. The requirements of their respective applications dictate that they be much more. True, they have a chassis and an engine and they are operated on the highways and streets, but in my opinion, that use is ancillary to the main purpose, namely to process and deliver concrete for Cumberland's customers. The chassis and engine of the truck have been substantially modified so as to become assimilated with the hopper (or stone slinger mechanism), thus becoming one new piece of equipment. This equipment has as its primary purpose to operate off-highway on construction sites or at the plant.
It is this primary purpose for which the vehicles are designed. This fact is supported by the evidence of the representatives from the truck manufacturers, as well as the buyer of the equipment, the plaintiff, Cumberland, represented by Mr. Prud'Homme. The chassis of the trucks is modified to provide extra rigidity and weight in order to support the hopper and the cement. The front axle is specially designed to support the extra weight, to allow for increased manoeuvrability at the job site and to allow the use of the large, 18-ply flotation tires required by the severe terrain commonly encountered. The rear axle is similarly heavy duty to support the additional weight and it is equipped with a special suspension system to increase its rigidity. Both the engine and the transmission have also been substantially modified to suit the application. In fact, the evidence indicated the top speed of the mixers to be between 55 and 60 miles per hour, well below that of a normal highway truck. In addition, the mixers have a low hole first gear which is essentially useless except for the motion pours the mixer must perform. Therefore, even though the modifications do not prevent it from being operated on the highways and streets, they certainly demonstrate that such a use was not its primary purpose, nor is it a practical one, other than the minimum travel required from the plant to the job sites.
Conclusion
I see no reason to depart from the common sense, business approach approved by Urie, J.A. in Nowsco, supra, and subsequently applied by Mogan, J.T.C.C. in Terraco, supra. The mixers have as their primary purpose to be a piece of prescribed machinery or equipment in the business of Cumberland Ready Mix and therefore should qualify for the investment tax credits rejected by the Minister.
The appeal from the Minister's reassessment for the plaintiff's 1983, 1984, 1985 and 1986 taxation years is allowed. The plaintiff shall receive the investment tax credits claimed for the mixers and stone slinger at issue as set out in the agreed statement of facts, on the basis of these vehicles being properly described as qualified property within the meaning of the Act.
Appeal allowed.
The previous subsection 127(9) that would apply to the 1983 and 1984 tax years was different in that it specified certain percentages of the qualified property or construc tion property that could be used as an investment tax credit. Nonetheless, it still required the taxpayer to have acquired qualified property or qualified construction property.
This definition was previously contained in subsection 127(10). Subsection 127(10) is applicable to the 1983 and 1984 taxation years.