Stark International Inc. v. The Queen

Stark International Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-11-01
Neutral citation
2019 TCC 248
File numbers
2016-2624(IT)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Income Tax Act
Decision Content
Docket: 2016-2624(IT)G
BETWEEN:
STARK INTERNATIONAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on February 26 and 27, 2018 and September 18, 2018, at Halifax, Nova Scotia
Before: The Honourable Justice Don R. Sommerfeldt
Appearances:
Counsel for the Appellant:
Daniel F. Wallace
Counsel for the Respondent:
Devon E. Peavoy
JUDGMENT
The Appeals are allowed, without costs, and the reassessments that are the subject of the Appeals are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
(a) the oil processing equipment in the Appellant’s mobile transformer maintenance trailers (“TMTs”) designated as TMT 3, TMT 4 and TMT 5 and in a shop at the Appellant’s premises was acquired by the Appellant to be used directly or indirectly by the Appellant in Canada primarily in the processing of oil for sale, and
(b) the capital cost of the oil processing equipment in each TMT or the shop, as the case may be, was the following:
TMT 3
$189,923.93
TMT 4
$260,233.76
TMT 5
$122,408.29
Shop
$207,542.10
Signed at Ottawa, Canada, this 1st day of November 2019.
‶Don R. Sommerfeldt″
Sommerfeldt J.
Citation: 2019 TCC 248
Date: 20191101
Docket: 2016-2624(IT)G
BETWEEN:
STARK INTERNATIONAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1] These Reasons pertain to the Appeals instituted by Stark International Inc. (“Stark”) in respect of reassessments (the “Reassessments”) issued by the Canada Revenue Agency (the “CRA”) on behalf of the Minister of National Revenue (the “Minister”) in respect of the 2009, 2010 and 2011 taxation years, each of which ended on December 31 of the particular calendar year.
II. ISSUES
[2] The issues in these Appeals are:
1) Was Stark entitled to claim investment tax credits (“ITCs”) in respect of certain property (the “Property”) purchased from time to time by Stark in 2009, 2010 and 2011?
2) For the purposes of capital cost allowance (“CCA”), was the Property to be classified as Class 29 or 43 (as claimed by Stark), or as Class 8 (as reassessed by the CRA)?
III. FACTS
A. Background
[3] In broad terms, the Property consisted of a building and three mobile transformer maintenance trailers (each, a “TMT”). [1] The Appeals relate to ITCs claimed in respect of the Property in 2009, 2010 and 2011. As will be discussed below, at the hearing there was some uncertainty as to the identification of the three TMTs, with some evidence suggesting that they were TMT 3, TMT 4 and TMT 5, and other evidence suggesting that they were TMT 4, TMT 5 and TMT 6. As well, there was uncertainty as to whether the three TMTs were constructed in 2009, 2010 and 2011, or in 2010, 2011 and 2012. Since the evidence concerning the completion dates of the three TMTs was inconclusive, for the purposes of these Reasons, I will refer to the four possible years in question, i.e., 2009, 2010, 2011 and 2012, as the “Particular Period.”
B. Testimony of Scott MacEachern
[4] In 2004, Scott MacEachern purchased a corporation known as Stark Oil Purification Systems Limited, which, sometime after 2011, changed its name to Stark International Inc. In these Reasons, the term “Stark” will be used to refer to the Appellant both before and after the change of its name.
[5] During the Particular Period, Stark carried on a multifaceted business in respect of electrical transformers. A major facet of Stark’s business was to maintain and repair electrical transformers on the premises of its customers. Much of the work done was mechanical, involving the replacement of bushings and other parts in the transformers, repairing oil leaks and repainting the transformers. As well, the work often required purification of the oil in the transformers. If the oil in a particular transformer was not overly dirty, it could be purified at the customer’s premises by using hoses to attach the transformer to a piece of processing equipment in a trailer, and then flowing the oil through the processor to dehydrate it or to perform other simple purification procedures. The revenue from this type of work was categorized by Stark as “Electrical Systems” revenue or as “Mechanical” revenue. The electrical systems revenue constituted the major source of Stark’s revenue during the three years in question.
[6] The oil purification procedures involved several processes, including dehydrating the oil, degasifying the oil, and removing polychlorinated biphenyls (“PCBs”) and other contaminants from the oil. Some of those processes, such as dehydration, were simpler than others, such as removing PCBs.
[7] During the Particular Period, in processing a customer’s oil for reuse by the customer and in processing Stark’s own oil for sale, Stark used various pieces of equipment, including vacuum chambers (also known as vacuum pumps, to dehydrate or remove moisture from the oil), booster pumps (to remove additional moisture from the oil), filters (to remove certain contaminants from the oil), fuller’s earth towers (to remove acids and sludge from the oil), degasifiers (to remove various gases from the oil), sodium dispersion units (to remove PCBs from the oil), oil-fired boilers, heat exchangers and other heating devices (to heat the oil), dielectric testers and other testing equipment (to test the oil before, during and after the purification process), control panels and miscellaneous parts (such as hoses, pipes, valves, gauges and other similar items).
[8] In 2004, Stark had five pieces of oil processing equipment, which were old but proven. After Mr. MacEachern purchased Stark, it began to experiment with newer technologies and began to construct additional pieces of oil processing equipment. Some of Stark’s oil processing equipment was mounted on skids, such that it could be loaded on a truck or in a trailer and taken to a customer’s premises or to a job site. The trailers, once equipped with oil processing equipment, tools and other related equipment, were referred to as mobile transformer maintenance trailers or TMTs, and were 48-foot to 53-foot drop box trailers, with a width of 9.5 feet and standard commercial trailer height, and were designed to be pulled by a transport cab (in essence, the cab and the TMT were an 18-wheel unit). The TMTs had onboard crew housing and utilities (power, water and waste containment) for working at remote locations.
[9] During the Particular Period, Stark constructed three TMTs, which became the subject of these Appeals. It is my understanding that initially Stark claimed ITCs and accelerated CCA in respect of all or most of the cost of those three TMTs. As will be discussed below, by the conclusion of the hearing of these Appeals, Stark had acknowledged that the cost of certain components of the TMTs did not qualify for ITCs and accelerated CCA.
[10] The Property that is the subject of the Appeals was referred to, in non-specific terms, under the heading “Qualified Property” in Part 4 of Schedule 31 to Stark’s income tax returns for 2009, 2010 and 2011 as follows: [2]
Table 1
2009
CCA Class
Description
Date Available [3]
Amount
29
Oil testing equipment
2009/10/05
$4,771
29
Oil fired boiler
2009/01/06
2,400
29
Oil purification equipment
2009/11/15
140,777
[BLANK]
Total for 2009
[BLANK]
$147,948
2010
CCA Class
Description
Date Available
Amount
43
Production equipment
2010/09/30
$243,690
29
Processing equipment
2010/10/31
45,000
[BLANK]
Total for 2010
[BLANK]
$288,690
2011
CCA Class
Description
Date Available [4]
Amount
43
Oil processing equipment
2011/10/31
$352,303
29
Oil processing equipment
2011/10/31
193,470
1
Oil processing facility
2011/10/31
131,373
[BLANK]
Total for 2011
[BLANK]
$677,146
Total for all three years
$1,113,784
Each of the corresponding tables in Part 4 of Schedule 31 to each tax return indicated that the location (i.e., province or territory) where the particular Property was used was Nova Scotia.
[11] About 2009, Stark began to expand another aspect of its business, which was the reclamation and subsequent sale of used transformer oil. The reclamation process was conducted at Stark’s premises at Bailey’s Brook, Nova Scotia. Some of the processing was done in a shop that had been owned by Stark for many years and, according to Mr. MacEachern, some of the processing was done in a building constructed by Stark in 2011. [5] Other processing equipment was located elsewhere at Stark’s premises, particularly before 2011. As well, some of the processing equipment was contained in the three TMTs constructed during the Particular Period.
[12] Stark sought various sources for the acquisition of contaminated oil. In some cases Stark was paid by the owner of contaminated oil to haul it away, and in other cases Stark paid a modest price for the contaminated oil. Stark had several tanker trucks which it used to pick up the contaminated oil and transport it to its facility at Bailey’s Brook, where the contaminated oil was stored either in a tanker truck or in storage tanks on Stark’s premises, pending receipt of a test report indicating the nature of the contaminants, and pending accumulation of a large enough volume of oil to make a particular reclamation operation worthwhile. After those conditions were satisfied, Stark processed the contaminated oil through its equipment. If it was able to remove essentially all of the contaminants, the reclaimed oil was sold to customers who demanded exacting specifications. If the reclaimed oil met only intermediate standards, it was sold to customers whose standards were not as exacting. In some situations, the reclaimed oil did not meet intermediate standards, so it was sold to customers, such as asphalt producers, for use as fuel. The revenue from the reclamation and sale of oil was characterized by Stark as “Oil Sales” revenue.
[13] Stark claimed ITCs, but not accelerated CCA, in respect of the building that it constructed in 2011 and that it described in Part IV of Schedule 31 to its 2011 income tax return as an oil processing facility. During his direct examination, Mr. MacEachern stated the following about that building:
So my plan was to build better oil processors, not only for Stark but to sell them outside of Atlantic Canada, United States, hopefully all around the world. So we built this facility to manufacture oil processing equipment. [6]
[14] According to Mr. MacEachern, it was the cost of the equipment that was used for the purpose of reclaiming contaminated oil (which had been acquired by Stark and which was subsequently sold by Stark) that was the subject of the claim for both the ITCs and the accelerated CCA.
C. Testimony of Brad Cameron
[15] Mr. Cameron, who is now Stark’s transformer supervisor, was hired by Stark in May 2010 and shortly thereafter was appointed as Stark’s maintenance supervisor in the shop located at Bailey’s Brook. When Mr. Cameron began his employment with Stark, it owned two TMTs (“TMT 1” and “TMT 2” respectively) and the construction of a third TMT (“TMT 3”) was approximately 75% completed.
[16] Mr. Cameron stated that TMT 1 and TMT 2 “were mainly on the road” [7] and were “spread out across the country, … in Ontario or in Alberta.” [8] It is my understanding that TMT 1 and TMT 2 were used primarily to perform jobs at the premises of Stark’s customers.
[17] Mr. Cameron testified that TMT 3 came into use in November 2010, [9] and that Stark continued to build TMTs, with TMT 4 being completed near the end of 2011 and TMT 5 being completed in mid-2012. [10] Mr. Cameron stated that the TMTs were built to meet the demand for oil processing services. [11]
[18] On February 11, 2014, while Stark’s Notice of Objection was being considered by the CRA’s Appeals Division, Stark’s then counsel sent a letter [12] to the appeals officer who was considering the objection. Attached to that letter was a three-page chart that had been prepared by Stark’s chief financial officer (the “CFO”). That chart indicated that TMT 4 became available for use on November 15, 2009, TMT 5 became available for use on September 15, 2010 and TMT 6 became available for use on October 31, 2011. When asked about the discrepancy between the identifying TMT numbers in the CFO’s chart and his own testimony (see paragraph 17 above), Mr. Cameron explained that the CFO did not begin to work for Stark until 2012 or perhaps 2013, [13] such that she would not have been with Stark when TMT 3, TMT 4 and TMT 5 were completed. Mr. Cameron stated that he did not know why the CFO referred to TMTs 4, 5 and 6. [14] I accept the submission by counsel for Stark that the CFO was confused in her description of the three TMTs and that the testimony of Mr. MacEachern and Mr. Cameron, as well as many of the invoices, indicate that the TMTs completed during the Particular Period were TMT 3, TMT 4 and TMT 5. [15]
[19] After each new TMT was constructed, Stark tested it at its own facility, using its own oil. As explained by Mr. Cameron:
Q. Mr. Cameron, once the TMTs were built, what did Stark do with them?
A. Once they were built we tested them on our oil... The oil shop at that time did not have its own stand-alone processing unit inside, so all the oil work at the shop had to be done through our TMTs. Our first two original ones were mainly on the road.
The new ones when they came in -- when they were finished, the extensive testing was done by processing on the oil at the shop with it. And so there would have been probably at least two months of me running at the shop testing it, making sure all the safeties worked, it was doing what it was supposed to. After that there was always one -- at least one at the... TMT-3 would have been at the shop quite a lot of the time. The odd job on the road locally would have been -- it would have went to that, but for the most part with the oil orders, we were still required to hold it near the shop to process that oil until -- until others were built. Even a lot of the times when there was big orders of oil, there would be two machines running at the shop.
Q. ... Earlier in your answer you said all the oil work in the shop had to be done through the TMTs?
A. Yes.
Q. What do you mean by oil work?
A. The processing of the oil. The degassing, removing the moisture, everything that the -- adding inhibitor, removing the acids, that requires the TMT at the shop at that time.
Q. And you said there -- TMT-3 was always at the shop except for the odd job on the road locally.
A. Yeah. Yeah. It was... There was always oil moving at the shop at that time, so … it was mainly used at the shop and in this part of the country….
Q. And did the shop have the capability of having more than one TMT in action at one time?
A. Oh yes. Yes, by times there was -- there would be at least two -- two TMTs running down there.
Q. Okay.
A. On different -- different oils, different -- doing different processes to an oil. Some oils do not require fuller’s earth removing of acids, so one trailer would be doing just basic dehydration and cleaning of the oil, while another -- the other one would be doing earthing. [16]
D. Areva / Bruce Power Contract
[20] In September 2011, Stark obtained a large 10-month contract with Areva Resources Canada Inc. (“Areva”) at the nuclear power facility of Bruce Power in Ontario, [17] which required Stark to send a TMT to Bruce Power’s facility to vacuum fill a new transformer acquired by Bruce Power to replace a transformer that had failed. This was a rush job. Stark sent TMT 4 to Bruce Power’s facility shortly after the testing of TMT 4 had been completed. [18]
[21] During his cross-examination, Mr. MacEachern stated that TMT 5 was at Bruce Power’s facility for 10 months, starting in September 2011. [19] This answer was given in response to a question relating to an excerpt from a letter sent to the CRA by Stark’s then counsel. [20] That letter was based on the three-page chart prepared by Stark’s CFO. As noted above, that chart mistakenly referred to TMTs 4, 5 and 6, whereas the evidence of both Mr. MacEachern and Mr. Cameron is quite clear that it should have referred to TMTs 3, 4 and 5. Accordingly, I view Mr. MacEachern’s response to the question in cross-examination as an indication that the second of the three TMTs built during the Particular Period was the TMT sent to Bruce Power’s facility for the 10-month duration of the Areva contract. That, of course, was TMT 4.
[22] Mr. Cameron’s recollection was that TMT 4 was at Bruce Power’s facility on and off for the 10-month duration of the contract, rather than being there “straight through.” [21]
[23] While TMT 4 was being used at Bruce Power’s facility in Ontario, TMT 5 was in the early-construction phase. Bruce Power requested that Stark make certain modifications to the standard TMT design in order that TMT 5 would be customized for use at Bruce Power’s facility. In particular, Bruce Power requested that special shielding be put around the living quarters in TMT 5 in order to make it safer for occupancy at Bruce Power’s nuclear power facility. [22] This suggests that one of the purposes for the completion of TMT 5 was to enable Stark to fulfill its contract with Areva.
E. Fabrication Shop
[24] When Mr. Cameron began his employment at Stark in May 2010, there were two buildings at the Bailey’s Brook facility. One was the oil processing facility, also known as the oil shop, located on Bailey’s Brook Road, and the other was the mechanics shop, located on Brown’s Mountain Road. In late 2011, a new fabrication shop was completed. Before the completion of the fabrication shop, the construction of the TMTs was split between the oil shop and the mechanics shop, given that there was only limited space in those two buildings. [23]
[25] Mr. Cameron explained the purpose for constructing the fabrication shop in this manner:
It was built to house our fabricating facility for the TMTs…. There was talk of us eventually getting into building these for −− manufacturing these to sell; that has since fallen through. But we wanted our own stand-alone shop because doing – doing the fabrication work around the oil shop was not particularly safe or helpful to the oil. [24]
Mr. Cameron stated that the fabrication shop was used to construct TMTs until 2014, when the last TMT was completed. [25] Mr. Cameron stated that the fabrication shop was used only for the construction of TMTs, and that no oil was processed in the fabrication shop. [26]
[26] Mr. Cameron stated that Stark’s office was located on Archimedes Street in New Glasgow, which is about a 40-kilometre drive from Bailey’s Brook. Mr. MacEachern, the CFO, managers, job planners and office staff worked in New Glasgow. In fact, according to Mr. Cameron, Mr. MacEachern worked mostly in New Glasgow. In other words, on a day-to-day basis, Mr. MacEachern was generally at the office in New Glasgow rather than at the shops at Bailey’s Brook. Given Mr. Cameron’s proximity, and Mr. MacEachern’s lack of proximity, to Stark’s operational and construction premises, it is my view that the testimony of Mr. Cameron concerning the construction of the TMTs and the processing of oil at Bailey’s Brook is more reliable than that of Mr. MacEachern in respect of those matters. Accordingly, to the extent that there is any discrepancy between the testimony of Mr. MacEachern and the testimony of Mr. Cameron concerning Stark’s operations, I generally prefer the testimony of Mr. Cameron.
F. Transformer Construction / Maintenance and Oil Processing
[27] Mr. Cameron explained that, when Stark sent a crew and a TMT to a customer’s job site, the processing of the oil in the customer’s transformers represented approximately 20% to 25% of the job. The major aspect of the job was repairing or maintaining the transformers. [27] When building a new transformer, the proportionate amount of time needed to complete the oil processing was even less, as it took approximately two weeks to build the transformer and only two days, using the oil processor, to fill the transformer with oil. [28]
IV. LEGISLATIVE PROVISIONS
A. Investment Tax Credit
[28] During the relevant taxation years (i.e., 2009 through 2011), pursuant to subparagraph 127(5)(a)(i) of the Income Tax Act (the “ITA”), [29] a taxpayer was entitled to deduct from the tax otherwise payable by the taxpayer under Part I of the ITA for the particular taxation year an amount not exceeding the taxpayer’s investment tax credit at the end of the year (subject to various other limitations that are not relevant here). Subsection 127(9) of the ITA defined a taxpayer’s “investment tax credit” at the end of a taxation year as including “the specified percentage of the capital cost to the taxpayer of … qualified property acquired by the taxpayer in the year.” [30] At that time, the applicable portion of the definition of the term “qualified property,” as set out in subsection 127(9) of the ITA, read as follows:
“qualified property” of a taxpayer means property … that is
(a) a prescribed building to the extent that it is acquired by the taxpayer after June 23, 1975, or
(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….
Subparagraph 127(11)(b)(vi) of the ITA indicated that, for greater certainty, the purposes referred to in paragraph (c) of the definition “qualified property” in subsection 127(9) of the ITA did not include the provision of facilities for employees, including cafeterias, clinics and recreational facilities.
[29] During the relevant taxation years, paragraph 4600(1)(a) of the Income Tax Regulations (the “ITR”) [31] provided that, for the purposes of the definition “qualified property” in subsection 127(9) of the ITA, a property was a prescribed building if it was depreciable property of the taxpayer that was a building erected on land owned or leased by the taxpayer and if it was included in Class 1 (as well as various other enumerated classes). Subsection 4600(2) of the ITR provided that, for the purposes of the definition “qualified property” in subsection 127(9) of the ITA, a particular property was “prescribed machinery and equipment” if it was depreciable property of the taxpayer and it was a property included in Class 8, [32] Class 29 or Class 43, [33] or various other classes that are not relevant here. There was no dispute, nor submissions by counsel, as to whether the Property came within the term “prescribed building” or the term “prescribed machinery and equipment,” as the case may be.
B. Accelerated Capital Cost Allowance
[30] During the relevant taxation years, Class 8 in Schedule II to the ITR, which has a CCA rate of 20%, included (among other things) any of the following:
(a) a structure that is manufacturing or processing machinery or equipment;
(b) tangible property attached to a building and acquired solely for the purpose of
(i) servicing, supporting, or providing access to or egress from, machinery or equipment,
(ii) manufacturing or processing, or
(iii) any combination of the functions described in subparagraphs (i) and (ii);
(i) a tangible capital property that is not included in another class in this Schedule….
(c) a building that is a kiln, tank or vat, acquired for the purpose of manufacturing or processing; …
During the relevant taxation years, Class 29 in Schedule II to the ITR, which has a 50% straight-line rate of CCA, included:
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 …;
(i) property that, but for this class, would be included in Class 8 …;
(b) that is
and
(c) that is property acquired by the taxpayer …
(iii) after March 18, 2007 and before 2014 if the property is machinery, or equipment,
(A) that would be described in paragraph (a) if subparagraph (a)(ii) [which is not applicable here] were read without reference to [a phrase that is not applicable here], and
(B) that is described in any of subparagraphs (b)(i) to (iii) and (vi)…. [34]
The applicable portion of the description of Class 43 in Schedule II to the ITR, which has a CCA rate of 30%, was as follows:
Property acquired after February 25, 1992, that
(a) is not included in Class 29, but that would otherwise be included in that Class if that Class were read without reference to subparagraphs (b)(iii) and (v) and paragraph (c) thereof….
There were no submissions by Stark as to why it is of the view that the Property was included in Class 29 or Class 43, as the case may be, or by the Crown as to why it is of the view that the Property was included in Class 8.
[31] For the purposes of these Appeals, the distinguishing features of Class 29 and Class 43, as distinct from Class 8, were that the particular property was to be machinery or equipment manufactured or acquired by a taxpayer “to be used directly or indirectly by [the taxpayer] in Canada primarily in the manufacturing or processing of goods for sale…” and there was no requirement that the property be a structure or an attachment to a structure.
V. JURISPRUDENCE CONCERNING THE MEANING OF “SALE”
[32] In discussing the meaning of the word “sale” in the context of the above legislative provisions (or their predecessors), the Supreme Court of Canada, in Will-Kare Paving, stated:
19. Canadian jurisprudence to this point has adopted two divergent interpretations of the activities that constitute manufacturing and processing goods for sale. Without canvassing these authorities exhaustively, it may be helpful to outline briefly those cases which delineate these two distinct approaches.
20. One point of view is expressed in Crown Tire Service Ltd. v. The Queen, [1984] 2 F.C. 219 (T.D.), where the court imports common law and provincial sale of goods law distinctions in defining the scope of the manufacturing and processing incentives’ application. Only capital property used to manufacture or process goods to be furnished through contracts purely for the sale of such goods qualifies. Property used to manufacture or process goods to be supplied in connection with the provision of a service, namely through a contract for work and materials, is not viewed as being used directly or indirectly in Canada primarily in the manufacturing or processing of goods for sale, and as such, does not qualify for either the accelerated capital cost allowance or the investment tax credit…. [Emphasis in original.]
22. A second line of authority departs from the point of view in Crown Tire and declines to apply statutory and common law sale of goods rules in delineating that capital property to which the manufacturing and processing incentives apply. Rather, these cases advocate a literal construction of “sale” such that the provision of a service incidental to the supply of a manufactured or processed good does not preclude receiving the benefit of the incentives. Any transfer of property for consideration would suffice. See Halliburton Services Ltd. v. The Queen, 85 D.T.C. 5336 (F.C.T.D.), aff’d 90 D.T.C. 6320 (F.C.A.), and The Queen v. Nowsco Well Service Ltd., 90 D.T.C. 6312 (F.C.A.)….
28. From the legislative material accompanying the manufacturing and processing incentives, it is clear that Parliament’s objective was to encourage the manufacturing and processing sector’s ability to address foreign competition in the domestic and international markets and foster increased employment in that sector of the Canadian economy. Furthermore, it is clear that Parliament did not wish to define exhaustively the scope of manufacturing or processing, words which do not have distinct legal meanings, but left it to the courts to interpret this language according to common commercial use. The language in Hansard is not helpful as to the meaning which Parliament intended to subscribe to the words “for sale or lease”. It neither dictates, nor precludes, the application of common law sale of goods distinctions.
29. Notwithstanding this absence of direction, the concepts of a sale or a lease have settled legal definitions. As noted in Crown Tire and Hawboldt Hydraulics, Parliament was cognizant of these meanings and the implication of using such language. It follows that the availability of the manufacturing and processing incentives at issue must be restricted to property utilized in the supply of goods for sale and not extended to property primarily utilized in the supply of goods through contracts for work and materials. [35]
[33] In the circumstances of these Appeals, when Stark used the oil processing equipment in a TMT at a customer’s premises or job site, the equipment processed the customer’s own oil, such that there was not a sale of oil in that situation. When Stark used the oil processing equipment in a TMT to process oil at its own premises, the oil in question belonged to Stark and, after the processing was completed, was sold by Stark. There was no accompanying or incidental service in respect of Stark’s sale of its own oil, nor was there a contract for work and materials. Therefore, the sale by Stark of processed oil came within the meaning of the word “sale,” as determined by the Supreme Court in Will-Kare Paving.
VI. ANALYSIS
A. Deficient Documentation
[34] One of the difficulties that I have encountered is that Stark did not keep regular records indicating the various locations where the TMTs were used. As those TMTs were housed in semi-trailers, they were intended to be mobile and were used from time to time at the premises of a customer, rather than at Stark’s own premises.
B. Incorrect Information Provided to the CRA
[35] While considering Stark’s claim for the ITCs, the CRA requested certain information from Stark concerning, among other things, the qualifying activity for which the Property was primarily used and the physical address where the Property was primarily used. On May 31, 2012, Stark’s bookkeeper sent a letter to the CRA addressing those questions, as well as others, in the context of the 2011 taxation year. The following statements were included in that letter:
The qualifying activity for which the property is primarily used is Oil Processing….
The physical address where the property is primarily used varies by job location and can be located anywhere in Canada. The property is mostly used in Alberta, Ontario, Nova Scotia & Newfoundland. [36]
In the above-mentioned letter, the bookkeeper mentioned that she was still working on gathering the documents for 2009 and 2010. On July 5, 2012, the bookkeeper sent two letters, one dealing with 2009 and the other dealing with 2010, to the CRA. The statements made by the bookkeeper in those letters about the qualifying activity and the physical address in respect of the Property were identical to the corresponding statements in the letter of May 31, 2012. [37] During his testimony at the hearing, Mr. MacEachern stated that the bookkeeper was mistaken when she suggested in her three letters that the Property was primarily used at the customers’ job locations.
[36] On February 28, 2014, the solicitor whom Stark had retained in respect of its dispute with the CRA wrote a letter to the CRA appeals officer, in which the following was stated:
The TMTs are used directly in the following areas of the taxpayer’s business – repairs, insulating oil services, transformer commissioning, monitoring and conditioning services. In each of these categories there are a number of different processes that the taxpayer can perform on oil with the TMT. In particular:
repairs (vacuum fill and oil processing);
insulating oil services (oil processing, reclamation and re-inhibit);
transformer commission, vacuum fill; and
monitoring and control services (re-inhibit, vacuum fill and oil processing).
The process of cleaning transformer oil is called reclamation. This process involves circulating the oil through towers of fullers earth to remove acid and particulate from the oil. All of the client’s TMTs are equipped with these fullers earth towers and have the ability to perform the oil reclamation process on a customer’s site on the existing oil in their transformer. The other role that the TMT plays in cleaning old oil is at the client’s oil shop facility in Nova Scotia. It can perform the same fullers earth treatment to tanks of oil to clean it for resale as reclaimed oil….
Please note the enclosed revenue break-down. Kindly note further that in monthly revenue for jobs that we provided previously, we had only picked up the revenue that would have been generated by the TMTs and other revenue had been ignored. In the present chart the TMT revenue would be included in the “Electrical Systems” revenues.
In your question you ask about total revenue earned from reclaimed oil sales. We clarify that the oil sales you were asking about is the reclaimed oil that the client sells from its shop – although it goes through the same process as the TMTs do on site with oil, this is revenue for used oil that client picked up and the client has reclaimed to resell. The TMTs will process and reclaim oil on site but that is included in the cost of the job and not billed separately so this [sic] reclaimed oil sales has [sic] nothing to do with TMTs that are being discussed herein. [38]
[37] As indicated above, the Reassessments were issued by the CRA on April 10, 2013. Stark filed Notices of Objection in which it took the position that what was processed by Stark’s use of the Property and then sold was electricity that was generated as an indirect result of transformer oil being processed through the TMTs.
C. Communication of Corrected Information
[38] When the Minister confirmed the Reassessments on February 23, 2015, Stark initially refrained from appealing, but subsequently, after further review, applied for an extension of time within which to appeal. In support of that application, Mr. MacEachern swore an affidavit, which was filed with the Court on May 24, 2016 and which contained the following statements:
5. Stark served notices of objection in response to the said reassessments. At that time it submitted that the “goods for sale or lease” was electricity that was generated as an indirect result of the processing through the TMTs of used oil in electricity transformers.
6. By notices of confirmation dated February 23, 2015, the objections to Stark’s 2009, 2010 and 2011 taxation years were dismissed and the objected-to reassessments were confirmed.
7. On the basis of the factual and legal theory supporting its notices of objection, Stark did not appeal to the Tax Court within the applicable 90 day period following the February 23, 2015 date of confirmations.
8. Recently, within the statutory one year period commencing at the end of the said 90 day period, a further review instigated by Stark of all pertinent facts and legal theory identified that used and new oil was being processed by the TMTs directly for sale to Stark customers. This important fact had not previously been communicated, or sufficiently clearly communicated, to our professional advisors; due it appears to errors in communication between certain administrative staff and our professional advisors.
9. As President and CEO of Stark, I realized in retrospect that I should have been more directly involved in these previous discussions to ensure their accuracy and comprehensiveness as to the various business endeavours of Stark.
10. In recent days and weeks we have clearly communicated to our professional advisors the fact, with supporting data, that the subject TMTs were intended primarily for use, and were primarily used for, the processing [of] oil for sale to Stark customers. [39]
[39] Stark was successful in obtaining an extension of the time within which to appeal. In its Notice of Appeal, Stark stated the following about the ITCs and the TMTs:
3. In particular the appellant appeals the Minister’s denial by means of the said reassessments of investment tax credits (ITCs) claimed by the appellant for each said taxation year in respect of the appellant’s expenditures in constructing “mobile transformer maintenance trailers” (TMTs), intended to be primarily used in the processing of goods for sale….
6. The appellant pleads that the TMTs were intended to, and in fact were primarily used in each of the taxation years 2009, 2010 and 2011, to process oil for the purpose of selling such processed oil to customers of the appellant.
7. In particular the processing involved the degasifying and dehydrating of new and used oil….
10. The appellant states that in primarily using the subject TMTs to process new and used oil by degasifying and dehydrating such oil for the purpose of selling that processed oil, the appellant was accordingly entitled to the ITCs denied by the Minister for each of the appellant’s 2009, 2010 and 2011 taxation years. [40]
[40] On September 15, 2017, Stark filed an Amended Notice of Appeal, for the purpose of adding the second issue in these Appeals [41] and for the purpose of broadening the description of the Property. Of the four paragraphs of the original Notice of Appeal quoted above, only paragraphs 3 and 10 were amended. The amendments are shown below:
3. In particular the Appellant appeals the Minister’s denial by means of the said reassessments of investment tax credits (ITCs) claimed by the Appellant for each said taxation year in respect of the Appellant’s expenditures in constructing “mobile transformer maintenance trailers” and other processing equipment and facilities (TMTs), intended to be primarily used in the processing of goods for sale. The Appellant also appeals the Minister’s decision that the TMTs should be reclassified in the 2011 taxation year as Class 8 property rather than Class 29 and 43 property as reported by the Appellant....
10. The Appellant states that in primarily using the subject TMTs to process new and used oil by degasifying and dehydrating such oil for the purpose of selling that processed oil, the Appellant was accordingly entitled to the ITCs denied by the Minister for each of the Appellant’s 2009, 2010 and 2011 taxation years. The Appellant states that, for the same reason, the subject TMTs were properly classified in 2011 as Class 29 and 45 [sic] property. [42]
[41] It was only at the hearing of these Appeals that it became apparent that what was really of significance here was the fabrication shop at Stark’s premises at Bailey’s Brook and the oil processing equipment located at those premises, including the oil processing equipment in the TMTs while the TMTs were parked at those premises.
D. The CRA’s Initial Position
[42] Based on its initial understanding that the Property was used in various locations throughout Canada, and not primarily in Atlantic Canada, the CRA denied Stark’s claim for ITCs and accelerated CCA. A further reason given by the CRA for denying Stark’s claim for ITCs was that the definition “qualified property” in subsection 127(9) of the ITA required that such property be used in manufacturing or processing the goods in question. As Stark had told the CRA that it was processing electricity, and as the CRA was aware that the TMTs were not used for the purpose of processing electricity, the CRA denied the claim for ITCs. [43]
[43] As neither the CR