Date: 19990629
Docket: A-764-95
OTTAWA, ONTARIO, TUESDAY, JUNE 29, 1999
PRESENT: DESJARDINS
DÉCARY
LÉTOURNEAU, JJ.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
MONT-SUTTON INC.,
Respondent.
JUDGMENT
The main appeal is dismissed with costs against the appellant and the cross-appeal is dismissed with costs against the respondent.
| "Alice Desjardins" |
| J.A. |
Certified true translation
Bernard Olivier
Date: 19990629
Docket: A-764-95
PRESENT: DESJARDINS
DÉCARY
LÉTOURNEAU, JJ.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
MONT-SUTTON INC.,
Respondent.
Hearing held in Montréal, Quebec, Wednesday, June 16, 1999
Judgment pronounced in Ottawa, Ontario, Tuesday, June 29, 1999
REASONS FOR JUDGMENT BY: LÉTOURNEAU, J.A.
CONCURRING: DESJARDINS, J.A.
DÉCARY, J.A.
Date: 19990629
Docket: A-764-95
PRESENT: DESJARDINS
DÉCARY
LÉTOURNEAU, JJ.A.
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
MONT-SUTTON INC.,
Respondent.
REASONS FOR JUDGMENT
LÉTOURNEAU, J.A.
[1] Is Mont-Sutton Inc. (the "corporation") entitled, for the 1986 to 1989 taxation years:
(a) to the capital cost allowance provided in Class 17 of Schedule II of the Income Tax Regulations (the "Regulations"), on the ground that its ski trails are depreciable properties due to their construction and development?
(b) to the credit on Canadian manufacturing and processing profits from goods for lease, as provided in section 125.1 of the Income Tax Act (the "Act"), the investment tax credit on manufacturing and processing of goods for lease provided in subsection 127(5) of the Act, and the capital cost allowance provided in Class 29 of the Regulations for property it has acquired for the manufacturing or processing of goods for lease on the grounds that it manufactures artificial snow, which it uses in copious amounts to cover the ski trails, and leases these snow-covered trails to downhill skiing enthusiasts?
[2] Those are the two questions put to us by way of the appeal by Her Majesty the Queen and the cross-appeal by Mont-Sutton Inc.
[3] The answer to the first question depends on the interpretation of paragraph (c), which identifies some of the depreciable property in Class 17, the relevant part of which reads as follows:
| Les biens qui autrement seraient compris dans une autre catégorie de la présente annexe et qui sont constitués par a) b) c) un chemin, un trottoir, une piste d"envol, un parc de stationnement, une aire d"emmagasinage ou une semblable construction en surface. |
Property that would otherwise be included in another class in this Schedule that is (a) (b) (c) a road, sidewalk, airplane runway, parking area, storage area or similar surface construction. |
[4] In regard to the second question, which is the subject of the cross-appeal, the answer originates in the interpretation given to the definition of "Canadian manufacturing and processing profits" under subsection 125.1(3) of the Act, the definition of "qualified property" in subsection 127(9) of the Act and the definition of property included in Class 29 of Schedule II of the Regulations. The relevant parts of these disputed provisions read as follows:
| Art. 125.1(3) Les définitions qui suivent s"appliquent au présent article, |
| "bénéfices de fabrication et de transformation au Canads" S"agissant des bénéfices de fabrication et de transformation au Canada d"une société pour une année d"imposition, la partie du total des montants dont chacun est le revenu que la société a tiré pour l"année d"une entreprise exploitée activement au Canada, déterminé en vertu des règles établies à cette fin par règlement pris sur recommandation du ministre des Finances, qui doit s"appliquer à la fabrication ou à la transformation au Canada d"articles destinés à la vente ou à la location. |
Art. 125.1(3) In this section,
"Canadian manufacturing and processing profits" of a corporation for a taxation year means such portion of the total of all amounts each of which is 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 by regulation made on the recommendation of the Minister of Finance to be applicable to the manufacturing or processing in Canada of goods for sale or lease;
| "fabrication ou transformation" Ne sont pas visés par ces termes: |
| l) toute fabrication ou transformation de marchandises en vue de la vente ou de la location, si, pour une année d"imposition d"une société à l"égard de laquelle l"expression s"applique, moins de 10% de son revenu brut tiré de toutes les entreprises exploitées activement au Canada provenait: |
| (i) de la vente ou de la location d"articles qu"elle a fabriqués ou transformés au Canada, |
"manufacturing or processing" does not include
(l) any manufacturing or processing of goods for sale or lease, if, for any taxation year of a corporation in respect of which the expression is being applied, less than 10% of its gross revenue from all active businesses carried on in Canada was from
| (i) the selling or leasing of goods manufactured or processed in Canada by it, and |
| Art. 127(9) |
| "bien admissible" Relativement à un contribuable, bien (à l"exclusion d"un bien d"un ouvrage approuvé et d"un bien certifié) qui est: |
Art. 127(9)
"qualified property" of a taxpayer means property (other than an approved project property or a certified property) that is
| a) soit un bâtiment visé par règlement, dans la mesure où le contribuable l"a acquis après le 23 juin 1975; |
(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or
| b) soit une machine ou du matériel visés par ràglement et que le contribuable a acquis après le 23 juin 1975, |
| qui, avant l"acquisition, n"a été utilisé à aucune fin ni acquis pour être utilisé ou loué à quelque fin que ce soit, et: |
| c) soit qu"il compte utiliser au Canada principalement à l"une des fins suivantes: |
| (i) la fabrication ou la transformation de marchandises à vendre ou à louer, |
(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 by the taxpayer in Canada primarily for the purpose of
| (i) manufacturing or processing goods for sale or lease, |
| Catégorie 29 |
| Les biens qui autrement seraient compris dans une autre catégorie de la présente annexe |
| a) c"est-à-dire les biens fabriqués par le contribuable et dont la fabrication a été achevée après le 8 mai 1972, ou autres biens acquis par le contribuable après le 8 mai 1972, |
| (i) et devant être utilisés directement ou indirectement par lui au Canada surtout pour la fabrication ou la transformation de marchandises en vue de la vente ou de la location, ou |
Class 29
Property that would otherwise be included in another class in this Schedule
(a) that is property manufactured by the taxpayer, the manufacture of which was completed by him after May 8, 1972, or other property acquired by the taxpayer after May 8, 1972,
| (i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease, or |
Facts and proceedings
[5] The corporation has operated a ski resort in the Eastern Townships of the province of Quebec since 1960. Between 1986 and 1989, it added new downhill ski trails to an existing network.
[6] The addition of new trails requires some significant development work, which begins with studies and analyses on the ground as to the selection of the ideal location for building the trail, the demarcation of the slope, the location of the necessary chairlifts to service and link these trails and the elimination of natural obstacles that might interfere with the development of the trails.
[7] The operations involve sequenced phases of levelling the ground, cutting and planting trees as needed to eliminate obstacles and prevent erosion, dynamiting, filling in cavities, pruning branches and marking out the trails. It may also be necessary to develop surface or underground pipes or culverts where the projected trail crosses streams or bodies of water. A trail that runs through underbrush also requires some special work: the elimination of roots and debris from downed trees, the removal of tree stumps using a power shovel, the burying of large rocks and the scraping of the newly developed surface. As an additional measure to prevent erosion, hay is spread over the surface of the newly developed trails. This spreading operation is done manually and involves transporting equipment and personnel to the top of the slopes by helicopter.
[8] The cost of developing a new trail varies between $10,000 and $15,000 an acre and the cost of the materials added to the trail accounts for 10% to 16% of the total cost of the trail.
[9] For the taxation years in question, the corporation concluded that its new ski trails were deductible property under Class 17 of Schedule II of the Regulations, and it claimed a capital cost allowance of $1,706, $6,916 and $7,156.
[10] The credits claimed pertain to the acquisition of property for manufacturing artificial snow at a total cost of $70,746 for the period in question. Evidence was submitted that such equipment was needed to maintain and increase the clientele, given the atmospheric conditions existing in the region. Sixty percent of the skiable trails are covered with artificial snow.
[11] The corporation"s income from the sale of ski tickets varied between 3 and 4.5 million dollars for each of the taxation years. The income from associated services (locker rentals, restaurant services, childcare, etc.) was between $163,000 and $326,000.
[12] Considering that more than 10% of its gross revenue was derived from the skiers" lease of artificial snow manufactured by its equipment, the corporation deducted a credit for manufacturing and processing profits, which was rejected by the Minister of National Revenue (the "Minister"). The Minister was also of the opinion that the snow-making equipment did not fall within Class 29 of Schedule II of the Regulations and thus was not a qualified property under subsection 127(9). Hence the refusal of both the capital cost allowance and the investment tax credit claimed for this property.
[13] The corporation appealed the Minister"s decision to the Tax Court of Canada. The taxpayer"s appeal was allowed in part. The Tax Court judge refused the credit on manufacturing and processing profits, the investment tax credit and the capital cost allowance in relation to the Class 29 property under Schedule II of the Regulations. But he allowed the allowance claimed for the ski trails, which he considered to be Class 17 property under the Schedule. Hence the two appeals now before us.
The cross-appeal on the manufacturing and processing profits credit, the investment tax credit and the Class 29 capital cost allowance
[14] The corporation is entitled to these credits and to the capital cost allowance if the artificial snow it manufactures with the equipment it acquired constitutes a good that it leases to the skier. The Tax Court of Canada judge answered this question in the negative and, I think, correctly.
[15] Indeed, the corporation clearly does not lease artificial snow as such, just as the owner of a paved parking lot clearly does not lease the asphalt to someone who wants to park his automobile there. Moreover, counsel for the corporation conceded that it was not the manufactured snow that was leased but rather some snow-covered surfaces, although in his factum he argues that the main purpose of the contract with a skier is the "[Translation ] enjoyment of quality snow in sufficient quantity".1 Yet a reading of subsections 125.1(3) and 127(9) of the Act and the applicable text in the Regulations (Class 29) indicates that it is the manufactured property, the "good", that must be leased. Once this manufactured property is incorporated with another property and becomes an accessory, albeit important or necessary, thereto, it loses its own identity and is therefore no longer an object of lease.
[16] In Canada v. Hawboldt Hydraulics (Canada) Inc.,2 Isaac C.J., writing on behalf of the Court, noted that the expression "for sale or lease" is not defined and held that in that case they were dealing with a commercial statute and that in commerce the words have a meaning that is well understood. In the common law, he added, "for sale" does not mean "for use in a repair process".
[17] In my humble opinion, it is the same situation in this case. The words "for lease" in relation to the manufactured good, i.e. the artificial snow, do not mean "to be used in some other leased property or for the lease of some other property". To repeat the words of the Chief Justice, as adapted to the facts of this case, "I doubt that any informed commercial person would seriously say that the manufacture of artificial snow to be used to enhance a ski slope was a manufacture for lease."3
[18] In the instant case, it seems clear that the main purpose of the contract entered into with the downhill skier is the lease of land that has been specifically developed for the practice of this sport and that the snow, the gradient of the slope and the ski-lifts are important accessories that make the land appropriate for the use for which it is intended and thereby promote its leasing. To break an entity down into its component parts and focus, as the corporation"s counsel does, on only one part, important as it is, amounts to truncating the commercial and legal reality of the transaction and favouring the accessory over the main thing.
[19] For these reasons, I am of the opinion that the cross-appeal must be dismissed with costs to Her Majesty the Queen.
The main appeal on the capital cost allowance on the ski trails as Class 17 property
[20] Paragraph 20(1)(a) of the Act allows a deduction of such part of the capital cost of certain property as is allowed by regulation. Subsection 1100(1) of the Income Tax Regulations allows the deduction of part of the capital cost of the property contemplated by Schedule II. However, subsection 1102(2) of the Regulations excludes the land on which the property was constructed, in the following words:
| (2) Land. " The classes of property described in Schedule II shall be deemed not to include the land upon which a property described therein was constructed or is situated. |
[21] Land or a plot of land on which a structure is erected cannot be depreciated, therefore.4 Similarly, clearing, levelling or draining operations on a piece of land are not depreciable, unless it is agricultural land for which Parliament has provided the following exception in section 30 of the Act:
| 30. Notwithstanding paragraphs 18(1)(a) and (b), there may be deducted in computing a taxpayer"s income for a taxation year from a farming business any amount paid by him before the end of the year for clearing land, levelling land or installing a land drainage system for the purposes of the business, to the extent that such amount has not been deducted in a preceding taxation year. |
[22] To qualify for a capital cost allowance, the corporation must establish that the development of its ski trails, which requires, inter alia, some clearing and drainage, is not a mere development of the land but in fact constitutes a surface construction and that this construction is similar to those listed in Class 17(c) of Schedule II of the Regulations, that is, a road, sidewalk, airplane runway, parking area or storage area.
[23] The word "similar" in Class 17(c ) clearly qualifies the surface construction and encompasses a surface construction distinct from those listed but resembling and comparable to them in that, while being distinct from them, it has some common features with them.
[24] In fact, the word "similar" is defined in the Oxford English Dictionary (2nd ed.)5 as, inter alia, "having a marked resemblance or likeness; of a like nature or kind", and is synonymous with "comparable". "Compare" is defined in part as "to bring or place together (actually or mentally) for the purpose of noting the similarities".6 It is therefore necessary, first, to identity the like features of the distinct surface constructions that are listed in the Regulations and, second, to ask ourselves whether the construction of the ski trails constitutes a surface construction and, if so, whether it displays the characteristics peculiar to those structures that are listed.
[25] The Tax Court of Canada judge accepted as a feature common to all of the enumerated surface constructions the fact that they are all flattened properties that have been converted through the necessary intervention of man, the final product of which makes them distinguishable from any other land in its natural state.
[26] Counsel for Her Majesty, in her submissions, criticized the judge below for having interpreted the expression "similar surface construction" by erroneously resorting to the ejusdem generis rule of construction in order to reach this conclusion. Relying on Slaight Communications Inc. v. Davidson,7 she submitted that the ejusdem generis rule was inapplicable in this case since one of the preconditions to its application was lacking, namely, that the terms in the enumeration had no significant characteristic in common that would allow them to be considered specific examples of a class of things.
[27] With respect, I think this criticism is unmerited and that, in any event, even if it was merited, it would alter nothing in the result.
[28] In Class 17(c), Parliament identifies a class of things " surface constructions " of which the road, sidewalk, airplane runway, parking area and storage area are specific examples, and to which another similar example may be added. Furthermore, as we saw previously, the use of the word "similar" leads us inevitably to look for one or more features common to the surface constructions that are enumerated in order to determine whether the surface construction at issue compares with these constructions. I think the Tax Court of Canada judge adopted the correct approach in interpreting the expression "similar surface construction". But the question we should ask ourselves is: Did he adopt the right significant characteristic common to each of the specific examples or, if you prefer, the common feature peculiar to all of these surface constructions?
[29] I confess quite candidly that it is easier to ask the question than to answer it. Schedule II of the Regulations contains an eclectic and puzzling list of properties organized by classifications. Over and above the fact that the properties in this Schedule represent almost all of the capital properties needed for the operation of a business, with the exception of land, it is virtually impossible to see the defining relationship, if there is one, between the various classes and even among the properties within the same class. To complicate the situation, the word "road" is sometimes translated in French as "route" and sometimes as "chemin", although the latter word has a broader connotation.8 For example, a route is defined in the Petit Robert as a "[Translation ] developed land transportation corridor, larger than a chemin, located outside of an agglomeration or linking one agglomeration to another".9 Chemin refers to a "[Translation ] lane allowing passage from one place to another".10
[30] Similarly, the term "parking area" has been rendered in French as either parc de stationnement or terrain de stationnement.11 "Storage area" refers to an aire d"emmagasinage,12 a zone d"entrepôt13 or an aire d"entreposage.14 Finally, the expression "similar surface construction" found in classes 1(g ), 10(l)(ii), 17(c) and 37(a)(i) becomes a semblable construction en surface, a construction de surface semblable and d"autres constructions en surfaces semblables!
[31] I would add, as the final touch to this dismal picture, that no one has enlightened us on the interpretative approach that should be taken to Schedule II. Should the classes be construed in relation to each other? Should the many lists within the same class be construed in relation to each other? Or should the terms within the same list be construed in relation to each other?
[32] Whatever the interpretative approach that is selected, one fact remains: Class 17(c) artificially groups together, and considers as surface constructions, some disparate items for which the construction aspect is, in some instances, as minimal as can be.
[33] Counsel for Her Majesty argued on this appeal that the common characteristic in the Class 17(c) enumeration lies in the fact that the items referred to there all have a certain foundation. While this may, generally speaking although not mandatorily, be the case for a road, sidewalk and airplane runway, it is otherwise for a parking area or storage area. A parking area need not be paved according to the words in Class 17 and the word "area" or aire used to qualify storage is defined in the Petit Robert as "[Translation ] any flat surface" or the "[Translation ] place of certain activities". Nor does the storage area need to be paved or, as in the case of a parking lot, have any special foundation, and it is characterized by little sophistication. To all intents and purposes, we are, insofar as these properties are concerned, confronted with a construction much more by the intention or the purpose assigned to it than by the contribution of materials as such and the scope of the work devoted to it, which may barely go beyond a simple levelling operation, if that.
[34] Finally, before discussing the characteristics of these surface constructions, it should be noted that one can construct by adding to existing matter, transforming it or its purpose, or remodelling it.
[35] Having stated these considerations, and keeping them in mind, it appears to me that the following characteristics are common to the five types of surface construction in Class 17(c).
[36] First, the land or property which, as a result of the transformations or work performed, becomes a surface construction should display a clearly discernable change in configuration. This change in configuration should go beyond a mere clearing and levelling and, to use the expression of the Tax Court of Canada judge, should be readily distinguishable from another property in its natural state.
[37] Second, the surface constructions in Class 17(c) occupy a circumscribed space identifiable as such, are visible and to varying degrees require the addition of some materials in order to fulfill the function for which they are intended. For example, a storage area may be built on a rudimentary surface, but this surface will be bounded and surrounded by security parameters ensuring the preservation of the stored materials.
[38] Third, because they are subject to wear and tear, they have a recurring need for and cost of maintenance to retain their identity and purpose. For example, a parking lot loses its value if it becomes unusable as a result of deterioration caused by usage and lack of maintenance. Similarly, the unpaved parking lot that is allowed to become overgrown returns to its natural state, loses its distinctive configuration and its purpose and identity and ceases to be a surface construction.
[39] In my opinion, the ski slopes built by Mont-Sutton Inc. that are the subject of this litigation meet these three criteria and are a surface construction similar to those enumerated in Class 17(c) of Schedule II of the Regulations.
[40] The record discloses beyond a doubt that the construction of the new ski slopes necessitated some work and a contribution of materials that exceeds the clearing and levelling stage. The final product is, in form, clearly discernable from land in its natural state. Anyone who, from the south shore of the St. Lawrence River, at a distance of dozens of kilometres, saw the ski slopes of Mont- Ste-Anne, particularly in the evening when they are illuminated, can only agree that this is no longer a mountain in its natural state and cannot help recognizing the surface construction. This person may see, clearly traced, demarcated and maintained, the road that the skiers must take to arrive safely at their destination. Similar considerations apply to Mont-Sutton. Furthermore, like a parking lot, the space is demarcated, identifiable as such, and the surface construction clearly identifies the purpose for which the site is intended. Finally, the evidence shows that ski slopes are subject to deterioration through erosion and use and necessitate some maintenance measures analogous to those required by the other surface constructions in Class 17(c). These surface constructions have a useful life that is different from and independent of the properties on which they are erected.
[41] I have attempted to give some meaning to the enumeration that is found in paragraph (c) of this class. If I have failed to do so, and there is some remaining ambiguity, this ambiguity should benefit the taxpayer.15
[42] For these reasons, it is my opinion, as in the cross-appeal, that the main appeal should be dismissed with costs against the appellant, Her Majesty the Queen.
"Gilles Létourneau"
J.A.
"I concur
Alice Desjardins, J.A."
"I concur
Robert Décary, J.A."
Certified true translation
Bernard Olivier
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
FILE NO: A-764-95
STYLE: The Queen v. Mont-Sutton Inc.
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: June 16, 1999
REASONS FOR JUDGMENT BY: Létourneau, J.A.
CONCURRING: Desjardins, J.A.
Décary, J.A.
DATED: June 29, 1999
APPEARANCES:
Anne-Marie Lévesque for the appellant
Luc R. Borduas for the respondent
SOLICITORS OF RECORD:
Morris Rosenberg for the appellant
Deputy Attorney General of Canada
Ottawa, Ontario
Demers, Bureau, Borduas for the respondent
Advocates
Sherbrooke, Quebec
__________________1 Factum of the cross-appellant Mont-Sutton Inc., p. 49, par. 78 to 80.
2 [1995] 1 F.C. 830, at p. 847 (F.C.A.).
3 Idem.
4 Her Majesty the Queen v. Hampton Golf Club, T-6075-79, F.C.; Oriole Park Fairways Ltd. v. M.N.R., 56 DTC 537 (T.A.B.); Laurentide Motels Ltd. v. M.N.R., 60 DTC 500, at pages 501 and 504 (T.A.B.).
5 OED2 on CD-ROM, Version 1.14 (Oxford: Oxford University Press, 1994).
6 Idem.
7 [1989] 1 S.C.R. 1038, at p. 1071.
8 Classes 1(g), 17(c) and 37(a)(i) refer to chemin, while classes 10(l)(ii) and (p) refer to a route.
9 Dictionnaires Le Robert (Paris: 1996 ed.), p. 2006.
10 Idem, at p. 357.
11 Classes 1(g), 17(c) and 37(a)(i) deal with parc de stationnement, while class 10(l)(ii) uses the words terrain de stationnement.
12 Classes 1(g) and 17(c).
13 Class 10(l)(ii).
14 Class 37(a)(i).
15 CUQ v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, at p. 20.