T-1761-86
Harvey C. Smith Drugs Ltd. (Plaintiff
v.
Her Majesty the Queen (Defendant)
INDEXED AS: HARVEY C SMITH DRUGS LTD. v. M.N.R. (T.D.)
Trial Division, Reed J.—Toronto, April 16; Ottawa,
April 27, 1992.
Income tax — Income calculation — Deductions — Dispens
ing of prescription drugs in capsule or tablet form requiring
pharmacist to cull damaged pills, count pills, place pills in
appropriate container, label container — Not "processing"
within Income Tax Act, s. 125.1 — Context of Act indicating
"manufacturing" and "processing" related — "Manufactur-
ing" used to narrow scope of dictionary meaning of "process-
ing" for purposes of s. 125.1 — Imports requirement product
being processed undergo physical change in form or appear
ance — Pharmacist not changing form or appearance of tab
lets and capsules — "Making product more marketable" not
independent test — Packaging alone, apart from production
processes involving change in form or appearance of product,
not processing.
Construction of statutes — Income Tax Act, s. 125.1 —
Whether "processing" in s. 125.1 encompassing dispensing of
prescription drugs in capsule or tablet form — Taxing statutes
interpreted in accordance with object and purpose found in
other sections of Act, context of Act generally and other stat
utes in pari materia — Explanations by departmental officials
given in Senate and House of Commons Committees may shed
light on ambiguous provisions, but should be used with care —
Statements by ministers in House of Commons even less relia
ble — If doubt as to which alternative interpretation intended
after reading relevant provisions in light of purpose and object
o f statute, should be resolved in favour of taxpayer — Noscitur
a sociis rule not to be applied lightly — Context of Act indicat
ing "manufacturing" and "processing" related — "Manufac-
turing" importing requirement product undergo physical
change in form or appearance — Pharmacist not changing
form or appearance of tablets or capsules.
This was an appeal by way of trial de novo from the Tax
Court's decision that the dispensing of prescription drugs in
tablet and capsule form did not constitute "processing" for the
purposes of the manufacturing and processing deduction under
Income Tax Act, section 125.1. As part of its retail drugstore
business, the taxpayer dispensed prescription drugs, with
respect to which it was accorded the section 125.1 processing
deduction, except with respect to the dispensing of tablets or
capsules. The dispensing of drugs in capsule or tablet form
requires the pharmacist to read the prescription, verify its
authenticity, determine what is required to fill the prescription,
select the appropriate tablets or capsules which have been pur
chased in bulk form, dump the tablets into a tray and, using a
spatula, remove any that are damaged, count the tablets, place
them in the appropriate container, and label it as required by
legislation.
According to the Minister's budget speech, section 125.1
was added to the Act in 1973 to encourage processing in
Canada by giving a deduction to Canadian firms which were in
direct competition with foreign businesses. During 1962 and
1963, a related provision, subsection 40A(3), had deemed that
packaging was not manufacturing or processing.
Taxpayer argued that the interpretation principle noscitur a
sociis should not be employed. It was argued that "manufactur-
ing or processing" were used disjunctively and should each be
given its separate meaning.
Held, the action should be dismissed.
The artificially restrictive rules of interpretation respecting
taxing statutes had been swept away by Stubart Investments
Ltd. v. The Queen, [1984] 1 S.C.R. 536. Taxing statutes are to
be interpreted in accordance with their object and purpose,
found in other sections of the Act, the context of the Act gener
ally and other statutes in pari materia. Although explanations
given, particularly by departmental officials, in Senate or
House of Commons Committee proceedings may shed light on
ambiguous statutory provisions, they must be used with care
since such proceedings take on an advocacy flavour. State
ments by ministers in the House of Commons may be even
less reliable, as in this case where section 125.1 was drafted
more broadly than necessary to meet the stated objective. A
reference to the object of the legislation in a budget speech
could not be used to graft onto the legislation terms and condi
tions which are not there. Little weight should be given to
statements of the Minister of Finance in interpreting section
125.1.
Comments by the Supreme Court of Canada that, in cases of
uncertainty, the taxpayer must be given the benefit of the doubt
should not be interpreted as resiling from the principle set out
in Stubart. They merely indicate that if, after reading the statu
tory provisions in the light of the purpose and object of the
statute, there is still doubt as to which alternative interpretation
was intended, then that doubt should be resolved in favour of
the taxpayer.
The case law has established that, to characterize an activity
as "processing" within the meaning of section 125.1, there
must at least be a change in form or appearance of the product
being processed, even if only a chemical or electrical change
not visible to the naked eye. While the noscitur a sociis rule
should not be applied lightly, in this case the whole context of
the Act made it clear that "manufacturing" and "processing"
are related. The pharmacist did not change the form or appear
ance of the tablets and capsules.
Case law does not establish that making the product more
marketable is an independent test. That would be a very broad
test, as an activity which makes a product more marketable can
encompass much that would not be considered "processing".
The absence of legislation deeming packaging only not to be
processing did not lead to the conclusion that packaging must
be considered a process under section 125.1. The "deeming"
clause in the former section 40A was intended only to ensure
that what did not naturally fall within "processing" for section
40A purposes would not in fact do so. Although many produc
tion processes could involve as an end step the packaging of
the product being processed, which could legitimately be con
sidered to be part of a processing of the product, packaging
alone, apart from an integrated activity, involving change in
the form or appearance of the product, cannot be classified as
processing for section 125.1 purposes.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Child Resistant Packages Regulation, R.R.O. 1980, Reg.
445.
Health Disciplines Act, R.S.O. 1980, c. 196.
Income Tax Act, R.S.C. 1952, c. 148 (as am. by S.C.
1970-71-72, c. 63, s. 1), ss. 40A (as enacted by S.C.
1962-63, c. 8, s. 10), 125.1 (as enacted by S.C. 1973-
74, c. 29, s. 1).
CASES JUDICIALLY CONSIDERED
APPLIED:
Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R.
536; [1984] CTC 294; (1984), 84 DTC 6305; 53 N.R.
241; Kimel, M. v. Minister of National Revenue (1982),
82 DTC 1086 (T.A.B.).
DISTINGUISHED:
Federal Farms Ltd. v. Minister of National Revenue,
[1966] Ex.C.R. 410; [1966] C.T.C. 62; (1966), 66 DTC
5068; affd [1967] S.C.R. vi; (1967), 67 DTC 5311; Admi
ral Steel Products Ltd. v. Minister of National Revenue
(1966), 66 DTC 174 (T.A.B.); Thompson, W.G., & Sons
Ltd. v. Minister of National Revenue (1966), 66 DTC 291
(T.A.B.); Woody Harbour Lobster Co. Ltd. v. Minister of
National Revenue (1989), 89 DTC 303 (T.C.C.).
CONSIDERED:
Canada v. Fries, [1990] 2 S.C.R. 1322; [1990] 2 C.T.C.
439; (1990), 90 DTC 6662; 114 N.R. 150; Johns-Manville
Canada Inc. v. The Queen, [1985] 2 S.C.R. 46; (1985), 21
D.L.R. (4th) 210; [1985] 2 CTC 111; 85 DTC 5373; 60
N.R. 244; Tenneco Canada Inc. v. Canada, [1991] 1
C.T.C. 323; (1991), 91 DTC 5207 (F.C.A.); Attorney
General for British Columbia v. The King (1922), 63
S.C.R. 622; 68 D.L.R. 106; [1922] 3 W.W.R. 2669; Brit-
ish Columbia Telephone Company Limited v. The Queen
(1992), 92 DTC 6129 (F.C.A.).
AUTHORS CITED
Canada. House of Commons Debates, Vol. III, 4th Sess.,
28th Parl., 21 Eliz. II, May 8, 1972.
Maxwell on the Interpretation of Statutes, 12th ed. by P.
St. J. Langan, London: Sweet & Maxwell Ltd., 1969.
APPEAL from Tax Court of Canada decision,
[1986] 1 C.T.C. 2339; (1986), 86 DTC 1243, that dis
pensing of prescription drugs in capsule or tablet
form did not constitute "processing" for the purposes
of the deduction under Income Tax Act, section 125.1.
Action dismissed.
COUNSEL:
Richard B. Thomas and D. Lisa Goldstein for
plaintiff.
M. Judith Sheppard for defendant.
SOLICITORS:
McMillan Binch, Toronto, for plaintiff.
Deputy Attorney General of Canada for defen
dant.
The following are the reasons for judgment ren
dered in English by
REED J.: The plaintiff corporation appeals (by way
of trial de novo) a decision of the Tax Court dated
March 12, 1986, and reported at [ 1986] 1 C.T.C.
2339, which held that the dispensing of prescription
drugs in tablet and capsule form does not constitute
"processing" for the purposes of the manufacturing
and processing deduction under section 125.1 [as
enacted by S.C. 1973-74, c. 29, s. 1] of the Income
Tax Act, R.S.C. 1952, c. 148, as amended [by S.C.
1970-71-72, c. 63, s. 1].
125.1 (1) There may be deducted from the tax otherwise
payable under this Part by a corporation for a taxation year an
amount equal to the aggregate of
(a) 9% of the lesser of
(i) the amount, if any, by which the corporation's Cana-
dian manufacturing and processing profits for the year
exceed the least of the amounts determined under
paragraphs 125(1)(a) to (d) in respect of the corporation
for the year, and
(b) 5% of the lesser of
(i) the corporation's Canadian manufacturing and
processing profits for the year, and
(ii) the least of the amounts determined under paragraphs
125(1)(a) to (d) in respect of the corporation for the year;
except that in applying this section for a taxation year after the
1973 taxation year, the reference in paragraph (a) to "9%"
shall be read as a reference to "8%" for the 1974 taxation year,
"7%" for the 1975 taxation year, and "6%" for the 1976 and
subsequent taxation years.
Facts
The plaintiff owns and operates a retail drugstore
in the city of Brantford. Part of that business involves
the dispensing of prescription drugs. Such drugs can
be liquids, ointments or creams, reconstituted drugs
(i.e., made from powders by mixing with distilled
water or other solvent), compound prescriptions, tab
lets or capsules. With respect to the dispensing of all
of these except tablets and capsules, the plaintiff is
accorded the section 125.1 processing deduction
(except when the drug is merely relabelled in the
manufacturer's container). I understand, for example,
that the deduction is allowed if a small quantity of a
liquid drug is taken by the pharmacist from a larger
bulk quantity, inspected, placed in an appropriately
sized, and if required coloured, bottle and labelled. In
the case of ointments and creams, the processing
deduction is allowed when these are scooped from a
bulk quantity, perhaps smoothed by a mortar and pes
tle, and placed in an appropriately sized smaller
container. I understand, too, that the taking of non
prescription tablets and capsules from a bulk quan
tity, placing them in colourful containers, sealing the
containers and placing them on drugstore shelves for
selection by customers is also considered to be
processing. The dispensing of prescriptions drugs in
tablet or capsule form, however, is not treated as
processing by the defendant.
The dispensing of drugs in tablet or capsule form
is the most significant part of the plaintiff's dispens
ing business. Without this being included for section
125.1 purposes, the plaintiff cannot meet the 10% of
gross revenues required by subparagraph
125.1(3)(b)(x) of the Income Tax Act (the "de minimis
rule").
The dispensing of drugs in capsule or tablet form
requires the pharmacist to read the prescription, ver
ify its authenticity, determine what is required to fill
the prescription, select the appropriate tablets or cap
sules which have been purchased in bulk form (that is
in containers of 100, 500, 1,000, 2,500 or 5,000),
dump the tablets into a tray and, using a spatula,
remove any that are discoloured, broken, chipped or
cracked, count the tablets and place them in the
appropriate container. Two different trays are used,
one for penicillin products and one for non-penicillin
products. The pharmacist may select as between a
brand-name drug and a generic unless the doctor
directs otherwise. If cold storage prevents deteriora
tion of the drug, the drug will have been kept refrig
erated by the pharmacist. The pharmacist is required
by legislation' to put the capsules into a container
with a child-proof safety cap. (Patients who are
arthritic can request a snap cap.) The container is a
vial which is either clear or amber. Amber vials are
used to preserve certain drugs from the effect of light
which deteriorates the strength of the medication.
The size and colour of the vial are determined by the
prescription. The pharmacist does not seal the vial.
Lastly, the pharmacist is required by provincial law
to label the container with a prescription number, the
patient's name, full directions for use, the doctor's
name, the quantity of the medication and the date dis
pensed.
1 Child Resistant Packages Regulation, R.R.O. 1980, Reg.
445, enacted under the Health Disciplines Act, R.S.O. 1980, c.
196.
Legislative History
Section 125.1 provides for a deduction from the
tax otherwise payable by a corporation. The amount
is calculated by reference to the corporation's "manu-
facturing and processing profits for the year". Para
graph 125.1(3)(a) defines "Canadian manufacturing
and processing profits":
125.1 (3) .. .
(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; ....
[Underlining added.]
Section 125.1 was added to the Act in 1973. The text
of the budget speech of the Minister of Finance 2
when introducing the relevant amendment states:
As a major step in the development of a new industrial pol
icy for this country, I am bringing forward measures of a fun
damental nature to revitalize the manufacturing and processing
industries. These measures will help this sector improve its
competitive position in the world and will thus protect existing
jobs and provide well-paying new jobs for Canadians in and
near the urban centres where they want to work. Moreover,
these proposals will further reinforce growth throughout the
economy by stimulating an early expansion in capital invest
ment.
First, I propose that the cost of all machinery and equipment
purchased after tonight by a taxpayer to be used for the pur
pose of manufacturing or processing goods for sale or lease in
Canada may be written off in two years. A new capital cost
allowance class will be established and a taxpayer will be enti
tled to claim as depreciation up to 50 per cent of the cost of the
asset in the year in which it is acquired and the unclaimed bal
ance in any subsequent year.
Second, commencing January 1, 1973, the top rate of corpo
rate tax applicable to manufacturing and processing profits
earned in Canada will be reduced to 40 per cent. Similarly, the
effective rate of corporate tax applicable to manufacturing and
processing profits earned in Canada eligible for the small busi
ness deduction will be reduced from 25 per cent to 20 per cent.
In order to give effect to these rate reductions, it will be neces
sary to provide rules to enable a corporation to distinguish its
2 House of Commons Debates, at pp. 2001-2002 (May 8,
1972).
manufacturing and processing income from other kinds of
income, such as investment income, wholesaling and retailing
income and natural resource income. Specific rules for this
purpose will be included in the bill and in the regulations.
The tax treatment of companies engaged in manufacturing
and processing will now compare very favourably with that in
other nations, particularly the United States and the enlarged
Common Market countries. Accordingly, it is to be expected
that these measures will provide a substantial incentive for the
establishment in Canada of new manufacturing enterprises and
the expansion of existing enterprises by increasing the return
that can ultimately be realized on capital investment.
The increase in the flow of funds available to these indus
tries will strengthen their ability to compete with foreign
manufacturers in a variety of ways. They make use of these
expanded resources to finance new research and development,
to finance an expansion of productive capacity, to introduce
new product lines and to finance the development of new cost-
reducing methods.
Prior to the 1973 amendment, a related provision
had existed in the taxation years 1962 and 1963. Dur
ing those years subsection 40A [as enacted by S.C.
1962-63, c. 8, s. 10] of the Income Tax Act provided:
40A. (1) There may be deducted from the tax otherwise pay
able for a taxation year by a manufacturing and processing cor
poration an amount determined by the following rules:
(2) In this section,
(a) "manufacturing and processing corporation" means a cor
poration that had net sales for the taxation year in respect
of which the expression is being applied from the sale of
goods processed or manufactured in Canada by the corpo
ration the amount of which was at least 50% of its gross
revenue for the year, but does not include a corporation
whose principal business for the year was
(i) operating a gas or oil well,
(ii) logging,
(3) For the purpose of paragraph (a) of subsection (2)
(a) goods processed or manufactured shall be deemed not to
include goods that have been packaged only; .... [Under-
lining added.]
Several cases were cited which dealt with the inter
pretation of the admonition in subsection 40A(3) that
packaging was deemed not to be manufacturing or
processing. In Federal Farms Ltd. v. Minister of
National Revenue, [1966] Ex.C.R. 410; affd [1967]
S.C.R. vi, it was held that washing, brushing, spray
ing, drying, sizing, culling, grading and packaging
carrots and potatoes was a process or a series of
processes which prepared the product for the retail
market. This activity was held to fall within the ordi
nary meaning of the word "processing". (The vegeta
bles travelled along conveyor belts, went through
washing machines, etc.) That decision referred to
various dictionary definitions of the word "process"
(at page 416):
In Webster's Third New International Dictionary published
in 1964 the word "process" is defined as follows, "to subject to
a particular method, system or technique of preparation, han
dling or other treatment designed to effect a particular result:
put through a special process as (1) to prepare for market,
manufacture or other commercial use by subjecting to some
process (—ing cattle by slaughtering them) (—ed milk by pas
teurizing it) (—ing grain by milling) (—ing cotton by spin
ning):
In Webster's Second New International Dictionary pub
lished in 1959 the following definition of the word "process"
appears, "to subject (especially raw material) to a process of
manufacturing, development, preparation for market, etc.; to
convert into marketable form as live stock by slaughtering,
grain by milling, cotton by spinning, milk by pasteurizing,
fruits and vegetables by sorting and repacking".
Other standard works consulted define "process" as "to
treat, prepare, or handle by some special method".
Mr. Justice Cattanach summed up his decision in the
Federal Farms Ltd. case by saying (at page 416):
Although the product sold remains a vegetable, nevertheless it
is not a vegetable as it came from the ground but rather one
that has been cleaned, with improved keeping qualities [as a
result of the spraying] and thereby rendered more attractive
and convenient to the consumer.
I do not consider that the operations of the appellant consti
tute packaging only... .
In Admiral Steel Products Ltd. v. Minister of
National Revenue (1966), 66 DTC 174 (T.A.B.), the
slitting, flattening, shearing and edging of coils of
strip steel in order to adapt them to the needs of the
taxpayer's customers was held to be processing. The
taxpayer changed the form of the steel coils to render
them more usable and marketable. The Tax Appeal
Board noted that the form in which the steel coils
were received from the foundry was not usable by the
ultimate customer until their form had been changed.
This change of form required the use of extensive
machinery.
In Thompson, W.G., & Sons Ltd. v. Minister of
National Revenue (1966), 66 DTC 291 (T.A.B.), the
taxpayer purchased white beans directly from grow
ers. The beans were then put through eleven opera
tions which involved the use of elaborate equipment.
They were, for example, to be cleaned, sorted, dried,
treated with chemicals to prevent bacterial infection
and packaged. The Tax Appeal Board held that this
did not constitute "packaging only" (at page 296):
In interpreting section 40A(2)(a), quoted above, there only
seems to be the one statutory guide-post, namely, section
40A(3)(a) which states that "goods processed or manufactured
shall be deemed not to include goods that have been packaged
only". So, it is clear from that guide-post that, while section
40A remained in effect (the section was made applicable to any
taxation year ending after March 31, 1962 and repealed in
1963 cutting off the deduction to the 1964 and subsequent tax
ation years), Parliament had no intention of providing a pro
duction incentive to a processing corporation where the opera
tion carried on by it was nothing more nor less than one of
packaging.
It should be observed that Parliament does not say in section
40A(3)(a) that there is no such thing as a packaging process.
Indeed, that section which is quoted above suggests to me that
Parliament accepts the proposition that packaging can be
regarded as a process. If the word "manufactured" in section
40A(3)(a) happens to apply to the goods in question then it is,
obviously, unnecessary to decide whether the word
"processed" is also applicable to the said goods, but if the word
"manufactured" is not applicable to the said goods, then the
alternative word "processed", assuming it is possible to inter
pret section 40A(3(a) [sic], must be applicable to the goods in
question. On that basis, it would appear to be reasonable to
regard packaging as a process for the purposes of section 40A
of the Act. Accordingly, all that remains to be decided now is
whether the appellant's processing operation of white beans,
involving the steps Nos. 1-1l outlined earlier, constitutes
something more than the routine or perfunctory operation of
packaging. When it is realized that only step No. 10, of the 11
above-mentioned steps, constituted packaging then it begins to
look as if the appellant was entitled to the production incentive
provided in section 40A in its 1962 taxation year. When it is
further realized: that steps Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9 and 11
involved modern, mechanical, chemical, electrical, and elec
tronic equipment; that such equipment had to be operated and
maintained by trained technical personnel; that some of the
technicians had to be licensed to handle ... .
The taxpayer was thus entitled to the processing tax
credit.
After the 1973 amendment which added the pre
sent section 125.1 to the Act, the Interpretation Bulle
tin issued by the Department of National Revenue
(IT-145 dated February 5, 1974) with respect to the
manufacturing and processing deduction, stated in
paragraph 6:
6. The Department views packaging and wrapping activities as
processing provided that they are carried on in conjunction
with other manufacturing or processing activities. As well, the
activities of breaking bulk and repackaging are generally con
sidered to be processing.
In 1981, the relevant Interpretation Bulletin
(IT-145R dated June 19, 1981) was changed some
what. In paragraph 41 it states:
41. The mixing of various liquids or compounds when prepar
ing a drug prescription is considered to constitute manufactur
ing and processing. However, the filling of prescriptions by
placing labels on products already in their own container or by
the placing of pills, capsules or liquids purchased in bulk into
small containers and labelling them is not considered to qualify
as manufacturing and processing. Where a corporation has
considered activities referred to in the previous sentence as
qualified activities when computing their manufacturing and
processing deduction in previous years, this will be accepted
by the Department for taxation years ending prior to January 1,
1979 [but not thereafter].
Statutory Interpretation
Much of counsel's argument centred upon the rele
vant principles of statutory interpretation. It is
accepted that Mr. Justice Estey in Stubart Invest
ments Ltd. v. The Queen, [1984] 1 S.C.R. 536 swept
away the artificially restrictive rules of interpretation
respecting taxing statutes which seem to have pre
vailed prior to that time. It is no longer acceptable to
parse the language of a taxing statute rigidly. It is no
longer appropriate to decide that, if a taxpayer does
not fall squarely within the four corners of a charging
section, that section cannot be applied to the tax
payer. It is no longer acceptable to require a taxpayer
to demonstrate that he or she falls precisely and
exactly, without any doubt, within the literal wording
of a deduction or exemption section in order to bene
fit from it.
Taxing statutes, like other statutes, are to be inter
preted in accordance with their object and purpose.
But the question remains where does one find that
purpose? There is no doubt that other sections of the
Act, the context of the Act generally and other stat
utes in pari materia are sources of purpose and
intent. Although there was a general principle that
legislative debates and other similar material were
not referred to as a source in interpreting legislation,
that principle is no longer rigorously applied. Expla
nations given, particularly by departmental officials,
in Senate or House of Commons Committee proceed
ings may shed light on ambiguous statutory provi
sions. These must be used with care, however, since
it is known that such proceedings take on an advo
cacy flavour; those supporting the proposed legisla
tion wish to put it in the best light.
Although one would not want to discount entirely
statements by ministers in the House of Commons,
these often will be even less reliable. In my view, the
reliance on the Minister of Finance's budget papers
in this case is a good example. As counsel for the
plaintiff argues, the Minister's statement may be
absolutely true, that is he explained the object of the
section 125.1 deduction as being designed to
encourage processing in Canada (to give a deduction
to Canadian firms which were in direct competition
with foreign competitors). The provision as drafted
may very well accomplish that object. But the deduc
tion is more broadly drafted than necessary to meet
only that objective. For example, the treatment of
prescription drugs which are liquids and ointments,
and which treatment the defendant admits constitutes
processing, does not fall within the object of the leg
islation as enunciated by the Minister. A reference to
the object of the legislation as enunciated by the Min
ister in the budget papers cannot be used to graft onto
the statutory provisions of the Act terms and condi
tions which are simply not there. In the present case,
I cannot give much weight to the statements of the
Minister of Finance in interpreting section 125.1.
With respect to the statements in Canada v. Fries,
[1990] 2 S.C.R. 1322; and Johns-Manville Canada
Inc. v. The Queen, [1985] 2 S.C.R. 46 which indicate
that in cases of uncertainty the taxpayer must be
given the benefit of the doubt, I do not interpret those
comments as in any way resiling from the principle
set out in Stubart. In my view, those cases merely
indicate that if after one has read the relevant statu
tory provisions of an Act and read them in the light
of the purpose and object of the statute, there is still
doubt as to which alternative interpretation was
intended, then, that doubt should be resolved in
favour of the taxpayer, regardless of whether the pro
vision in question is a charging section or an exemp
tion or deduction provision.
Recent Jurisprudence
A number of decisions which have been rendered
with respect to section 125.1 of the Income Tax Act
were cited. The most important of these for present
purposes is Tenneco Canada Inc. v. Canada, [1991]
1 C.T.C. 323 (F.C.A.). In that case, the Court dealt
with whether or not the assembling and replacing of
mufflers on cars was a "manufacturing" or "process-
ing" activity. In deciding that it was not, the Federal
Court of Appeal relied on the Federal Farms case,
supra. The Court went on to state (at page 326):
Processing occurs when raw or natural materials are trans
formed into saleable items. Such raw or natural materials are
unsaleable, or would sell for a lesser price, in their
unprocessed state. Thus, gravel treated by washing, drying and
crushing becomes more valuable (Nova Scotia Sand and
Gravel Ltd. v. The Queen, [1980] C.T.C. 378; 80 D.T.C. 6298
(F.C.A.)), as do vegetables prepared by washing, brushing,
spraying and packing (Federal Farms v. M.N.R., supra). Both
of these operations are processing. Furthermore, processing
implies uniformity; the same process, or a highly similar one,
is usually applied to each item treated (Vibroplant v. Holland,
[1982] 1 All E.R. 792 (C.A.)).
The operations of the appellant did not come within these
definitions. There was no real change in the form, appearance
or characteristics of the pipes and other parts being used in the
exhaust systems. There were minor alterations of them, when
needed, in order to enable them to fit together and to function
as a system. If the alterations and adjustments were not made,
the customer would not receive a repaired, operating exhaust
system.
The Court added [at page 327]:
This case is not like Admiral Steel Products Ltd. v. M.N.R.
(1966), 40 Tax A.B.C. 322; 66 D.T.C. 174, where steel prod
ucts were substantially changed in form so as to be more usa
ble and marketable. Nor is it like the Federal Farms and Nova
Scotia Sand and Gravel cases, supra, where the products were
processed in order to make them saleable. What was done here
resembles more what was done in Harvey C. Smith Drugs Ltd.
v. M.N.R., [1986] 1 C.T.C. 2339; 86 D.T.C. 1243, (counting
pills) and Latter Investments Ltd. v. M.N.R., [1982] C.T.C.
2076; 82 D.T.C. 1086, (cutting cloth). Suppose someone pur
chased a ready-made suit of clothes, which required some
alterations, at a retail clothing store. To do those alterations on
a ready-made suit would not, I think, be considered manufac
turing or processing. To order a suit made to measure, how
ever, would be manufacturing by the maker of the suit.
Counsel for the plaintiff recognizes that the refer
ence to the Tax Court decision in the present case 3 is
a difficulty he must address. He argues that the Fed
eral Court of Appeal referred to the Tax Court deci
sion without having viewed the evidence in this case
and particularly without being aware that the pharma
cist does more than merely count the tablets and cap
sules. He notes in addition that the reference to alter
ations by a tailor appears to conflict with paragraph
48 of IT-145R.
Considerations and Conclusion
As I read the cases that have been cited to me, I
conclude that in order to characterize an activity as
processing within the meaning of section 125.1 there
must at the least be a change in form or appearance
of the product being processed. In all of the cases,
there has been a physical change in the product being
processed. The physical change may be chemical or
electrical and thus not immediately visible to the eye
but there has been a physical change to the product.
In Federal Farms, the carrots and potatoes were
washed and sprayed with a growth retardant to pre
vent deterioration. In Admiral Steel Products, the
steel was flattened, sheared, split; it was changed into
a difference shape and size so as to become usable by
3 A similar reference is also found in Woods Harbour Lobs
ter Co. Ltd. v. Minister of National Revenue (1989), 89 DTC
303 (T.C.C.), at p. 306.
the ultimate consumer. In the Thompson case, the
beans were washed and treated with chemicals to pre
vent bacterial infection. In Woods Harbour Lobster
Co. Ltd. v. Minister of National Revenue, supra, the
lobsters were cleaned, their claws were pegged.
Moreover, I agree with the analysis in Kimel, M. v.
Minister of National Revenue (1982), 82 DTC 1086
(T.A.B.), where processing was defined in light of its
association with "manufacturing", it was held that
taking a large bolt of cloth from the manufacturer,
unrolling it, measuring it into smaller lengths,
smoothing it out, cutting it and rerolling onto spin
dles (cardboard tubes) was not processing for section
125.1 purposes (at page 1088):
The word "process" is one of very broad import.... It is
not, however, in my opinion, an apt word to use in collectively
describing the various operations which were carried on in the
Appellants' stores. This is particularly apparent when it is
remembered that it is, in the Act, used in conjunction with the
word "manufacturing".
Counsel for the plaintiff argues that the interpreta
tion principle captured by the Latin phrase noscitur a
sociis should not be employed in this case. (That is,
that the meaning of "processing" should not be influ
enced by its association with "manufacturing") It is
argued that Mr. Justice MacGuigan's comments in
British Columbia Telephone Company Limited v. The
Queen (1992), 92 DTC 6129 (F.C.A.), at page 6133,
should be adopted. Mr. Justice MacGuigan quoted
Maxwell on the Interpretation of Statutes, 12th ed. by
P. St. J. Langan, at page 289, and Attorney General
for British Columbia v. The King (1922), 63 S.C.R.
622, at page 638, for the proposition that the noscitur
a sociis rule should not be applied lightly. Counsel
for the plaintiff argues that in this case when the
words "manufacturing or processing" are used, they
are being used disjunctively and one should be care
ful to give each its separate meaning.
While I accept that admonition, in the present case
the whole context of the Act makes it clear that the
concepts "manufacturing" and "processing" are
related. The concept "processing", as was noted in
the Kimel case, is very broad. The ordinary dictionary
definition of that word encompasses a very wide
variety of activity. For the purposes of section 125.1,
it is necessary to narrow that broad scope in order for
the term to be meaningful. One factor which is useful
in such interpretation is the import and meaning of
the associated word "manufacturing". This, to me,
imports a requirement that the product being
processed undergo a physical change in form or
appearance and not merely be packaged.
In the present case, the pharmacist does not change
the form or appearance of the tablets and capsules.
They remain in the form in which they were received
from the manufacturer. While the pharmacist may
cull broken or discoloured units from the whole, I am
not prepared to categorize this as processing. I agree
with Brûlé J. in the Tax Court that the pharmacists'
dispensing activities cannot be classified as process
ing because there is no change in the form or appear
ance or other characteristic of the tablets and capsules
which are actually sold.
I place little reliance on the fact that sale of the
drugs, in counsel for the respondent's words, is
effected when the doctor writes a prescription. I have
some difficulty with the idea that a processing activ
ity loses its character as such, if it occurs after an
order is made rather than before. This argument
seems to flow from the assumption that processing
for section 125.1 purposes is synonymous with any
activity which "makes the product more marketable".
I do not read the jurisprudence as establishing this
criterion as an independent test. Such a test would be
very broad indeed. An activity which makes the prod
uct more marketable, in my view, can encompass
much that would not fall under the concept of
processing. I have no doubt that the activity engaged
in by the pharmacist renders the prescription drugs
more marketable. Indeed, they cannot be sold to the
ultimate consumer without the dispensing activity.
If rendering the product more marketable is an
independent test, then, the activity of a pharmacist in
dispensing prescription drugs qualifies. If I am wrong
and the two tests (change in form or appearance and
increase in marketability) are separate and alternative
tests, then I must conclude that the plaintiff's activity
falls into section 125.1. The drugs cannot be sold
without the activity undertaken by the druggist. The
fact that this is required by law rather than being
merely a personal requirement of the customer is not
significant.
This raises for consideration counsel for the plain
tiff's argument that regardless of the lack of any
change to the form or appearance of the actual tablets
and capsules, packaging itself is a process. He argues
that this follows from the text of the earlier section
40A of the Act which deemed packaging not to be
such. It is also implicitly accepted by the judgment of
the Tax Court in the present case (at page 2349):
Naturally, the sale of non-prescription pills is different. If,
for example, a drugstore were to purchase non-prescription
pills in bulk and package them in eye-catching containers
under their own brand name in perhaps quantities not normally
available then this would, it seems to me, increase the marketa
bility of the pills. This, I believe, was the intention of the origi
nal Interpretation Bulletin ...
I have considerable difficulty classifying packag
ing alone as a processing operation as contemplated
by section 125.1. The earlier, analogous provision in
section 40A may have deemed "packaging only" not
to be processing but I do not conclude that the
absence of such an admonition leads to a conclusion
that packaging must be considered a process under
section 125.1. The "deeming" clause in section 40A
can be interpreted as intending only to ensure that
what did not naturally fall within the concept of
processing for section 40A purposes would not in fact
do so. One can envisage that many production
processes involve as an end step the packaging of the
product being processed. This may very well legiti
mately be considered to be part of a processing of the
product. But, I am not convinced that packaging
alone, apart from such integrated activity, which
involves change in the form or appearance of the
product itself, can be classified as processing for sec
tion 125.1 purposes.
For the reasons given, the plaintiff's action will be
dismissed.
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.