T-4587-77
MDS Health Group Limited (Toronto Medical
Laboratories Limited) (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Toronto, June 12;
Ottawa, July 11, 1979.
Income tax — Manufacturing and processing deduction
Plaintiff operating medical laboratories doing tests to arrive at
diagnosis — Whether or not plaintiffs activities constituted
"manufacturing or processing in Canada of goods for sale" so
as to earn "Canadian manufacturing or processing profits"
within meaning of s. 125.1(3)(a) of Income Tax Act — Income
Tax Act, S.C. 1970-71-72, c. 63, s. 125.1(3)(a) — Income Tax
Regulations, SOR/73-495, ss. 5200, 5202.
Plaintiff claims to be entitled to a manufacturing or process
ing deduction which is an amount equivalent to a certain
percentage of the amount of profit from manufacturing or
processing in Canada of goods for sale within the meaning of
section 125.1(3)(a) of the Income Tax Act, and which is
computed by a formula in Regulations 5200 and 5202. Plaintiff
operated medical laboratories where technical work or tests are
done to arrive at a diagnosis. What is in issue is whether or not
what the plaintiff did during these taxation years constituted
"manufacturing or processing in Canada of goods for sale" so
as to have earned "Canadian manufacturing and processing
profits" within the meaning of section 125.1(3)(a).
Held, the appeal is dismissed. The quality of the contents of
the report produced by plaintiff's various laboratories is the
only thing of value produced. It is not an end product of the
specimen after analysis in the sense contemplated by section
125.1 of the Act and Regulation 5200. The analysis of the
specimens ends in nothing that can become the subject of a
sale. Although after the analysis reports are prepared and such
reports contain valuable information, such reports are not
"goods" as contemplated and meant in the context of the words
"manufacturing or processing in Canada of goods for sale" in
section 125.1 of the Act.
St. Catharines Standard Ltd. v. The Queen 78 DTC 6168,
distinguished.
INCOME tax appeal.
COUNSEL:
A. M. Schwartz for plaintiff.
Deen C. Olsen for defendant.
SOLICITORS:
Fasken & Calvin, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GIBSON J.: This action and four others were
heard on common evidence.' Actions T-4586-77
and T-4587-77 relate to the 1973 and 1974 taxa
tion years of the plaintiff and actions T-4588-77,
T-4970-77 and T-4971-77 relate to the 1973, 1974
and 1975 taxation years of the plaintiff.
The plaintiff claims to be entitled to a so-called
manufacturing or processing deduction which is an
amount equivalent to a certain percentage of the
amount of profit from manufacturing or process
ing in Canada of goods for sale within the meaning
of section 125.1(3)(a) of the Income Tax Act,
R.S.C. 1952, c. 148 as amended by section 1 of
S.C. 1970-71-72, c. 63 and as amended thereafter
for the 1974 taxation year [S.C. 1973-74, c. 29, s.
1], computed by a formula prescribed in Regula
tions 5200 and 5202 [SOR/73-495] of the Act.
There is no issue between the parties as to the
quantum of the deductions claimed. In each of the
cases, depending on this adjudication, the plaintiff
is entitled to the amounts claimed or to nothing.
What is in issue is whether or not what the
plaintiff did during these taxation years constitut
ed "manufacturing or processing in Canada of
goods for sale" so as to have earned "Canadian
manufacturing and processing profits" within the
meaning of section 125.1(3)(a) of the Income Tax
Act.
What the plaintiff MDS Health Group Limited
did during these taxation years upon which such
claim is based was to operate medical laboratories.
Dr. J. C. Nixon, M.S., M.Sc., Ph.D. of the plain
tiff in evidence described what MDS Health
Group Limited did and does.
' The four other actions were: T-4586-77 MDS Health
Group Limited v. The Queen; T-4588-77 MDS Health Group
Limited v. The Queen; T-4970-77 MDS Health Group Limited
v. The Queen; and T-4971-77 MDS Health Group Limited v.
The Queen.
He said that a laboratory in scientific circles has
a broad meaning, but in medicine it means a place
where technical work or tests are done to arrive at
a diagnosis. Tests and examinations involve vari
ous tissues and secretions.
MDS is a laboratory which (like all other
laboratories) performs laboratory tests requested
by a physician. Dr. Nixon explained that a speci
men may be taken by a referring physician and
forwarded to MDS Laboratory by courier or the
patient may simply attend a laboratory with a
requisition from the physician, in which case the
specimen is provided by the patient at the labora
tory. Like all laboratories which normally provide
a numerical number for their tests and also pro
vide what is to them a normal or abnormal range
for that particular test, be it a red blood cell count,
an estimation of sodium in the serum of the blood,
etc., MDS Laboratories did so as well. He noted
that various testing processes are performed by
different technicians, using analytical means. He
described in great detail the technique for obtain
ing a pap smear, what the pap smear kit consists
of, and the intricate method of staining and the
final preparation before an examination under a
microscope.
Similarly, under the heading of "Histopatholo-
gy", Dr. Nixon explained what happens to biopsy
tissue removed by a physician. A slide is prepared
again for microscopic examination.
With regard to "Biochemistry", which may be
performed on blood promptly, but also urine and
other body fluids, Dr. Nixon gave a short simple
course in Clinical Pathology. He pointed out that
MDS operates a sophisticated autoanalyzer SMA
12/60 which identifies and measures 12 constitu
ents in the blood, such as glucose, urea, choles
terol, alkaline phosphatase, etc. This test is the
so-called SMA -12 which is a mechanical run-
through of constituents in the serum specimen.
With regard to "Microbiology" which involves a
culture of organisms, either found in the feces,
urine, blood, sputum etc., which are examined
under the microscope after incubation to encour
age growth in special media and which permits
visual examination of the organism colony, Dr.
Nixon describes how MDS did such in their
laboratories.
He noted that similarly, haematological tech
niques produce red and white cell counts, haemo
globin, measurement and quantity of other con
stituents in the blood.
Dr. Nixon then spoke of quality control to
ensure accurate data collection.
Finally, Dr. Nixon spoke of the environmental
conditions necessary for a laboratory which deals
with a wide range of storage conditions, which
includes freezing and refrigeration.
In sum, MDS Laboratory, employing their
skilled staff analyze what specimens are brought to
them, and by its staff produce or make a report.
There is no other "end product" produced from
the specimens.
MDS puts it this way saying that its activities
include:
(a) the procuring of specimen which may be human blood,
serum, feces, urine, sputum, tissue or other body fluids;
(b) the processing of the specimen; and
(c) the manufacture of a report.
As pleaded, MDS says that these activities
"constituted, in the relevant year, the manufactur
ing and processing of goods for sale and that its
activities were performed in connection with the
manufacturing or processing of goods for sale
within the meaning of paragraph 125.1(3) of the
Income Tax Act, having regard to statutory,
common law and other definitions and interpreta
tions of the words `manufacturing and processing
... of goods for sale ... ' ".
As put by counsel for the plaintiff:
Section 125.1 of the Income Tax Act permits a corporation
to deduct from tax a certain percentage in respect of its
"canadian manufacturing and processing profits". This latter
term is defined in section 125.3 [sic] as follows:
"Canadian manufacturing and processing profits"
(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.
As set out in this subsection, the credit is applicable to profits
derived from manufacturing OR processing.
The profit from manufacturing and processing is arrived at
through application of a formula set out in Regulation 5200
which reads as follows:
5200. Subject to section 5201, for the purpose of para
graph 125.1(3)(a) of the Act, "Canadian manufacturing and
processing profits" of a corporation for a taxation year are
hereby prescribed to be that proportion of the corporation's
adjusted business income for the year that
(a) the aggregate of its cost of manufacturing and pro
cessing capital for the year and its cost of manufacturing
and processing labour for the year is of
(b) the aggregate of its cost of capital for the year and its
cost of labour for the year.
This formula may be depicted as follows:
cost of manufacturing and processing of capital and labour
total cost of capital and labour
Regulation 5202 defines "cost of manufacturing and process
ing labour" as:
"cost of manufacturing and processing labour" of a corpo
ration for a taxation year means 100/75 of that portion of
the cost of labour of the corporation for that year that
reflects the extent to which
(a) the salaries and wages included in the calculation
thereof were paid or payable to persons for the portion of
their time that they were directly engaged in qualified
activities of the corporation during the year.
but the amount so calculated shall not exceed the cost of
labour of the corporation for the year.
This definition requires a determination to be made of wages or
salaries paid to persons for the portion of their time that they
were directly engaged in "qualified activities".
Regulation 5202 defines "qualified activities" as follows:
"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.
The words "manufacture" or "process" are not
defined in the Income Tax Act.
The submission is that the activities of MDS in
each of its laboratory subdivisions involved the
processing of specimens within the meaning of the
case law and dictionary definitions of the word
"process". Particular reliance is placed on the case
of The St. Catharines Standard Limited v. The
Queen 2 . In that case however, the Crown conceded
that the publication of a newspaper was the manu
facturing and processing of goods for sale within
the meaning of section 125.1 of the Act and the
only question at issue was whether news gathering,
editorial work and the preparation of advertise
ment were "qualified activities" within the mean
ing of Regulation 5202 so that salaries paid to
employees who performed these functions would
constitute "cost of manufacturing and processing
labour".
In this case, the quality of the contents of the
report produced by the plaintiff's various laborato
ries is the only thing of value. It is not an end
product of the specimens after analysis in the sense
required by the Act and Regulations, namely,
goods as contemplated and within the meaning of
section 125.1 of the Income Tax Act and Regula
tion 5200. The analysis of the specimens ends in
nothing that can become the subject of a sale.
Although after the analysis reports are prepared
and such reports contain valuable information,
such reports are not "goods" contemplated and
meant in the context of the words "manufacturing
2 78 DTC 6168.
or processing in Canada of goods for sale" in
section 125.1 of the Act.
Accordingly, the finding is that the plaintiff
does not manufacture or process in Canada goods
for sale or lease within the said statutory sense and
as a consequence does not qualify for any deduc
tion from tax under the provisions of section 125.1
of the Income Tax Act.
The appeal is dismissed with 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.