T-4983-76
Canadian Wirevision Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Vancouver, September
14, 15, 16 and 22, 1977 and January 3, 1978.
Income tax — Income calculation — Deductions — Plain
tiff, a cablevision company, appeals Minister's disallowance of
its s. 125.1 deduction, a manufacturing or processing deduc
tion — Whether or not the signals delivered by plaintiff are
"goods" — Whether or not there is a sale of the alleged goods
— Whether or not there has been a processing of goods for
sale — Income Tax Act, S.C. 1970-71-72, c. 63, s. 125.1 as
amended by S.C. 1973-74, c. 29 — Income Tax Regulations
SOR/73-495, s. 5202.
Plaintiff, a cablevision company, claimed for its 1974 taxa
tion year, a manufacturing and processing deduction from its
tax otherwise payable pursuant to section 125.1(1) of the
Income Tax Act. The Minister in his assessment disallowed this
deduction and plaintiff appeals to have that part of the assess
ment vacated. The issues between the parties are: (1) are the
signals delivered by plaintiff to subscribers "goods", (2) is there
a sale of the alleged goods and (3) has there been processing of
goods for sale.
Held, the appeal is dismissed. The signals delivered by
plaintiff to its subscribers are not goods. "Goods for sale" in
section 125.1 is used in the common parlance of merchandise or
wares—tangible moveable property. The transaction between
plaintiff and its subscribers does not involve the sale of goods
but rather is more akin to a contract of services. The decision
concerning the third issue, that plaintiff's activities in capturing
and delivering the signals fall within the ordinary reasonable
sense of "processing", is not necessary to the determination of
the case.
Quebec Hydro-Electric Commission v. Deputy Minister
of National Revenue for Customs and Excise [1970]
S.C.R. 30, referred to. The Noordam (No. 2) [1920] A.C.
904, considered.
INCOME tax appeal.
COUNSEL:
John G. Smith and M. W. Shepard for
plaintiff.
T. E. Jackson, Q.C., and J. Williamson for
defendant.
SOLICITORS:
Douglas McK. Brown, Q.C., c/o Russell &
DuMoulin, Vancouver, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: The plaintiff is a cablevision com
pany carrying on business in Vancouver, Burnaby
and Richmond, B.C. For its 1974 taxation year it
claimed, pursuant to subsection 125.1(1) of the
Income Tax Act', a manufacturing or processing
deduction from its tax otherwise payable. The
Minister of National Revenue, in his assessment,
disallowed the deduction. The plaintiff appeals to
this Court to have that part of the assessment
vacated.
Subsection 125.1(1) refers to a corporation's
"... Canadian manufacturing and processing prof
its ..." . That phrase is defined in subsection (3):
125.1.. .
(3) In this section,
(a) "Canadian manufacturing and processing profits" of a
corporation for a taxation year means such portion of the
aggregate 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; and
(6) "manufacturing or processing" does not include
(i) farming or fishing,
(ii) logging,
(iii) construction,
(iv) operating an oil or gas well,
(v) extracting minerals from a mineral resource,
(vi) processing, to the prime metal stage or its equivalent,
ore from a mineral resource,
(vii) producing industrial minerals,
(viii) producing or processing electrical energy or steam,
for sale,
(ix) processing gas, if such gas is processed as part of the
business of selling or distributing gas in the course of
operating a public utility, or
' R.S.C. 1952, c. 148, as amended by S.C. 1970-71-72, c. 63
and subsequently, (the "New" Act). Section 125.1 was added
by S.C. 1973-74, c. 29, s. 1.
(x) 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
(A) the selling or leasing of goods manufactured or
processed in Canada by it, and
(B) the manufacturing or processing in Canada of goods
for sale or lease, other than goods for sale or lease by it.
[My italics.]
Part LII of the Income Tax Regulations deals
with Canadian manufacturing and processing
profits. The definition of "qualified activities" in
regulation 5202 has some relevance:
5202. ...
"qualified activities" means
(a) any of the following activities, when they are performed
in Canada in connection with manufacturing or processing
(not including the activities listed in subparagraphs
125.1(3)(b)(i) to (ix) of the Act) in Canada of goods for sale
or lease:
(i) engineering design of products and production
facilities,
(ii) receiving and storing of raw materials,
(iii) producing, assembling and handling of goods in
process,
(iv) inspecting and packaging of finished goods,
(v) line supervision,
(vi) production support activities including security, clean
ing, heating and factory maintenance,
(vii) quality and production control,
(viii) repair of production facilities, and
(ix) pollution control,
(b) all other activities that are performed in Canada directly
in connection with manufacturing or processing (not includ
ing the activities listed in subparagraphs 125.1(3)(b)(i) to
(ix) of the Act) in Canada of goods for sale or lease, and
(c) scientific research as defined in section 2900,
but does not include any of
(d) storing, shipping, selling and leasing of finished goods,
(e) purchasing of raw materials,
(/) administration, including clerical and personnel activi
ties,
(g) purchase and resale operations,
(h) data processing, and
(i) providing facilities for employees, including cafeterias,
clinics and recreational facilities;
The plaintiff, by means of sophisticated equip
ment, captures from the air message signals trans
mitted by a number of television broadcasters and
delivers reconstructed message signals to the
individual television sets of its cablevision
subscribers. 2 The issues between the parties are, as
I see it:
(1) Are the signals, delivered by the plaintiff to
its subscribers, goods?
(2) Is there a sale of the alleged goods?
(3) Has there been processing of goods for sale?
I go first to the question as to whether the
signals are "goods" as specified in the legislation. I
have found that to be a difficult problem. A
description of the operation carried on by cablevi-
sion companies such as the plaintiff is necessary.
The signals originate from a broadcast transmit
ter. The visual and audio information which make
up a television broadcast are converted into electri
cal 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 elec
tromagnetic carrier waves. This transformation or
modification into a high frequency range is techni
cally 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.
2 That statement is probably an over-simplification of the
basic facts, but is a convenient way in which to frame the
dispute.
What he is interested in is the contents of the
signal—the mutual, to use the technical jargon,
information. As Dr. Jull, 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 consider
ation.
The receiver converts the signal received into a
reconstructed version of the original signal trans
mitted 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 televi
sion 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 is 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 offenders.
Interference occurs when the signal in one chan
nel 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 imper
fections in the transmitting and receiving equip
ment. 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 com
munication 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 sig
nals. Every effort is made not to affect the infor
mation 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 deliv
ered 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
endeavour to prevent contamination of the signal
in the area between their head-end and the view-
er—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.
A considerable body of evidence was led by the
plaintiff as to what it did after capturing the
broadcaster's signal. This testimony was largely
directed as to whether or not there was "process-
ing", as required by the legislation in order to
qualify for the tax deduction. The technical
aspects were fully described by Mr. Saperstein and
Mr. Bethel. They were illustrated in Exhibits 6
to 14.
I do not propose to recapitulate that evidence. It
was not seriously contradicted by the defendant.
The main dispute was whether or not the various
steps done, and techniques used, were "process-
ing", as that word is used in the legislation. Dr.
dull preferred the expression "conditioning". The
plaintiff's witnesses, understandably, adopted the
term "processing". My task is, unfortunately, not
to decide which of the opposing professional views
is, in the industry, and in the professions, the
better one. It is to determine what the legislators
meant by the word. I shall deal further with this
point later.
I return to the first issue: Are the signals, deliv
ered by the plaintiff to its subscribers, "goods"?
My answer is they are not.
Reference was made by both parties to other
statutes dealing with "goods" and to judicial deci
sions based on those statutes. 4 In my view not too
much assistance is obtained from those sources.
Lord Sumner put it this way in The Noordam (No.
3 Amplification and filtering are also done at the head-end
itself.
4 See, for example: Quebec Hydro-Electric Commission v.
Deputy Minister of National Revenue for Customs and Excise
[1970] S.C.R. 30. It was there common ground that "electrici-
ty" was included in "goods" as used in the relevant provisions
of the Excise Tax Act.
2). 5 The question was whether some bearer bonds
and coupons seized as prize during wartime were
"goods" within the meaning of a certain Order in
Council:
At first sight the word "goods" might seem to be an equally
inappropriate description. It must, however, be observed that
the word is of very general and quite indefinite import, and
primarily derives its meaning from the context in which it is
used. Their Lordships were referred to sundry statutes, in
which the word is either defined or stated to include specified
things. Of the latter kind the Naval Prize Act, 1864, was
particularly relied on, for it brings within the term "goods" "all
things subject to adjudication as prize." This does not advance
matters. When, as in that Act, a word is extended by statute to
include a named thing, the conclusion naturally is that in its
ordinary sense the bare word would have been insufficient to
include it. There is further no reason why the definition clause
of the Naval Prize Act, 1864, should be treated as explanatory
of the language of an Order in Council which makes no
reference to it.
Their Lorships are of opinion that the cardinal consideration
in interpreting the Order in Council is the character and scope
of the Order itself. The content of the word "goods" differs
greatly according to the context in which it is found and the
instrument in which it occurs. In a will or in a policy of marine
insurance, in the marriage service or in a schedule of railway
rates, in the title of a probate action or in an enactment relating
to the rights of an execution creditor, the word may sometimes
be of the narrowest and sometimes of the widest scope. The
question is what is its content here.
To my mind, "goods for sale" in section 125.1 is
used in the common parlance of merchandise or
wares, or to put it in legal jargon, tangible 6 move
able property.
In the court below in the Quebec Hydro-Elec
tric Commission litigation, Jackett P. (now C.J. of
this Court) made these comments in respect of the
difficulties of classifying electrical energy as
goods: 7
5 [1920] A.C. 904 at 908-909.
6 "The law of sale of goods only comprehends such things as
are tangible": Fridman, Sale of Goods in Canada (1973)
Carswell, p. 10.
7 Dep. M.N.R. v. Quebec Hydra-Electric Commission 68
DTC 5221 at 5223-5224. The Supreme Court of Canada
allowed the appeal. Nevertheless, it is my view Jackett P.'s
remarks are apt in this case.
Before coming to the facts, it should be noted that, while
section 30 imposes the tax in question on the sale price of
"goods" in which context the word "goods" would appear to be
used in the common sense of merchandise or wares (Which
probably includes all moveable tangible property), it is common
ground that the word "goods", both in section 30 and, what is
more important from the respondent's point of view in this case,
in paragraph (a) of Schedule V, must be construed as including
"electricity" which, according to the Shorter Oxford English
Dictionary (Third Edition), according to the view now current,
is "a peculiar condition of the molecules of a body or of the
ether surrounding them (According to the Petit Larousse, the
word "électricité" is a "Nom donné à l'une des formes de
l'énergie"), even though this "peculiar condition" could hardly
be regarded as falling within any sense in which the word
"goods" is ordinarily used in the English language. The reason
why the parties are agreed on the view that the word "goods" in
these provisions must be read as including "electricity" is that,
by virtue of section 32(1), the tax imposed by section 30 does
not apply to the sale or importation of the "articles" mentioned
in Schedule III, and one of the "articles" mentioned in that
schedule is "electricity" (see paragraph 3 of Part VI of
Schedule III). The parties are in agreement that the reasoning
in Dominion Press, Limited v. Minister of Customs and
Excise, (1928) A.C. 340 [1 DTC 127], is applicable to con
strain one to the conclusion that the word "goods" in the
charging section (section 30) must be read as including all the
things enumerated as "articles" in the schedule referred to in
the exempting provision (section 32(1)) and that, therefore, the
same word "goods", when used in another provision that is part
of the same taxation scheme—i.e. Schedule V—must also be
read as including "electricity". As the parties to this appeal are
agreed upon this view, I adopt it for the purposes of this appeal,
without expressing any opinion as to its soundness. It should be
noted, however, that it is the fact that electricity has none of
the ordinary characteristics of the tangible moveable property
that is normally referred to by the words "article" and "goods"
that gives rise to the special difficulties encountered in applying
paragraph (a) of Schedule V to the problem raised by this
appeal.
In my opinion, those observations apply with
equal force to the information signals furnished to
the plaintiff's subscribers here.
In Benjamin's Sale of Goods, 8 the following
comments are made in respect of electrical and
other forms of energy:
8 The Common Law Library, Number 11 (1974 ed.) Sweet
and Maxwell, para. 77 (p. 54). Reference was made by the
plaintiff to Maritime Electric Co. Ltd. v. M.N.R. 65 DTC 282,
a decision of J. O. Weldon, Q.C. of the Tax Appeal Board. In
that case it was held that "electrical energy" was embraced
within the term "goods" as used in then section 40A(2)(a) of
the Income Tax Act. Section 40A(2)(a) was enacted in 1962
and repealed in 1964. In my view, the decision is distinguish
able on its facts, and in principle. On a similar basis, I find
Great Lakes Power Company Ltd. v. North Canadian Enter
prises Ltd. [1972] 3 O.R. 770 (Vannini D.C.J.), distinguishable
as well.
77 Electricity and other forms of energy. There is no doubt
that energy, whether in mechanical, electrical or other form, is
capable of being bought and sold. It has been judicially referred
to as a "thing" and an "article" and also as a "commodity,"
but there has been no decision whether it comes within the term
"goods." In Bentley Bros. v. Metcalfe & Co. mechanical power
from a shaft was supplied by a landlord to his tenant, who also
rented the machine which it drove. It was held that since the
power was consumed in the process, it was bought and not
hired; and it was further held that there was an implied
contractual obligation to supply power fit for the user's
purpose.
There are clearly difficulties in attributing to energy all the
legal qualities of a physical object. For instance, it cannot be
possessed per se --it is capable of being kept or stored only by
changing the physical or chemical state of other property which
is itself the subject of possession.
I do not find it necessary to categorize, in any
precise way, the transaction entered into between
the plaintiff and its subscribers, other than to say
it does not, as I see it, involve the sale of goods. It
is more akin to a contract of services. It is, I think,
sufficient to say it is a transaction other than a
contract for the sale of goods. 9
The foregoing disposes of the first two issues
earlier set out.
I turn to the remaining issue: Has there been
processing of goods? In view of my conclusions on
the other matters, it is technically not necessary to
express an opinion on this point. It is, I think,
desirable (should this case proceed further),
having in mind the extensive evidence led on this
point, to set out my views. In doing so, I shall
assume the information signals, delivered to sub
scribers, are goods.
I have much less difficulty in coming to a deci
sion on this aspect. I am convinced the plaintiff's
activities in capturing and delivering the signals
fall within the ordinary reasonable sense of the
expression "processing".
Dr. Jull, for the defendant, accepted amplifica
tion and filtering as, in the broad sense, signal
processing acts. The evidence shows the plaintiff,
in its operations, performs a good deal of those
9 See Benjamin's Sale of Goods (earlier cited), paras. 24, 25,
34, 39, 40, 70, 71, 72.
acts. Dr. Jull preferred to describe the other activi
ties carried out as "conditioning". But he added
this:
Any operation that you do to an electrical signal can be
described as processing in the broad sense of the term, but in
the normal sense of the term, signal processing—normally
applies to much more sophisticated operations on the signal.
The legislators, to my mind, did not, when they
used the word "processing" have in mind the more
sophisticated operations envisaged by Dr. Jull. As
I see it, the expression was used in the ordinary
parlance of treating or preparing, putting into
marketable form. The following decisions, as I see
it, support that view:
Federal Farms Lid. v. M.N.R. 10 , W. G. Thompson & Sons Ltd.
v. M.N.R. 11 and Admiral Steel Products Ltd. v. M.N.R. 12
I go now to two other matters. When this appeal
against the assessment was filed, the plaintiff dis
puted the Minister's treatment of the costs of
"drop cables." At trial, the term "drop costs" was
used. The plaintiff disputed, as well, the Minister's
method of computing interest.
Those two matters have, by agreement, been
resolved.
The defendant concedes the plaintiff's manner
of calculating the interest is the correct one.
In respect of the drop costs, the following was
agreed:
We request that the 1974 appeal, to the extent it relates to the
treatment of drop line connection costs, be allowed and the
matter be referred back to the Minister of National Revenue
for reassessment in terms whereby exterior costs, namely, those
relating to drop lines connecting cablevision cables with single
family dwellings or with the central meter or core areas of
multiple occupancy buildings, such as apartments, which
amount to 25% of total connection costs, be treated as outlays
upon capital account and interior costs, being those relating to
drop lines from the outside of single family dwellings or from
the meter or core areas of multiple occupancy buildings to
individual television sets in suites or otherwise, which amount
to 75% of total connection costs, be allowed as expenses.
10 [1966] Ex.C.R. 410 per Cattanach J. at 415-417.
66 DTC 291 (Tax Appeal Board).
12 66 DTC 174 (Tax Appeal Board).
The assessment will be referred back to the
Minister for reassessment, as agreed, in respect of
drop costs and interest.
The appeal, on the main issue, is dismissed.
The defendant is entitled to costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.