Walsh,
J:—These
proceedings
concern
the
tax
assessment
of
plaintiff
for
its
1973
taxation
year
and
the
interpretation
to
be
given
to
section
125.1
of
the
Income
Tax
Act
and
Regulations
5200
and
5202
made
by
virtue
thereof.
Pursuant
to
its
interpretation
of
these
regulations
plaintiff
included
in
computing
the
cost
of
its
manufacturing
and
processing
labour
salaries
paid
to
its
employees
who
performed
the
functions
of
news
gathering,
editorial
work,
portions
of
the
total
salaries
paid
to
advertising
personne!
in
connection
with
its
display
and
classified
advertising,
and
photographic
art
work
resulting
in
total
deductions
of
$111,263.50.
As
a
result
of
the
reassessment
by
the
Minister
a
portion
of
the
amounts
so
claimed
were
disallowed
resulting
in
a
claim
for
additional
taxation
under
this
heading
in
the
amount
of
$22,745.08.
It
is
this
reassessment
which
is
under
appeal.
Initially
objection
had
been
taken
by
plaintiff
to
the
Minister
of
National
Revenue’s
calculation
of
the
gross
cost
of
the
property
known
as
the
IOOF
Building,
but
this
is
no
longer
an
issue
as
appears
from
paragraph
7
of
the
reasons
for
appeal
in
the
statement
of
claim
herein.
In
preparation
for
trial
certain
minor
errors
were
found
and
adjustments
made
in
the
figures
shown
in
paragraph
5
of
the
statement
of
facts
section
of
the
statement
of
claim
which
gave
the
following
figures:
|
Advertising
—
display
|
$
76,137
|
|
—
Classified
|
41,532
|
|
Editorial
and
News
Gathering
|
328,971
|
|
Photographic
and
Art
|
45,743
|
|
Total
|
$492,433
|
being
the
amounts
allegedly
expended
by
plaintiff
as
part
of
the
cost
of
manufacturing
and
processing
labour.
These
figures
were
corrected
at
trial
so
as
to
read:
|
Advertising
—
display
|
$
69,772
|
|
—
Classified
|
51,434
|
|
Editorial
and
News
Gathering
|
323,134
|
|
Photographic
and
Art
|
45,715
|
|
Total
|
$490,055
|
Although
the
last
total
is
slightly
less
than
the
amount
claimed
and
hence
an
amendment
might
not
be
necessary,
an
amendment
was
made
in
open
court
with
the
consent
of
defendant
so
as
to
incorporate
the
corrected
figures.
The
sections
of
the
Act
and
regulations
the
interpretation
of
which
is
in
issue
are
as
follows:
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
Canadian
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,
.
.
The
definition
of
“Canadian
manufacturing
and
processing
profits”
appears
in
paragraph
125.1
(3)(a)
as
follows:
125.1.
(3)
In
this
section,
(a)
“Canadian
manufacturing
and
processing
profits”
of
a
corporation
for
a
taxation
year
means
such
portion
of
the
aggregate
of
all
amounts
each
of
which
is
the
income
of
the
corporation
for
the
year
from
an
active
business
carried
on
in
Canada
as
is
determined
under
rules
prescribed
for
that
purpose
by
regulation
made
on
the
recommendation
of
the
Minister
of
Finance
to
be
applicable
to
the
manufacturing
or
processing
in
Canada
of
goods
for
sale
or
lease;
.
.
.
Regulation
5200
reads
as
follows:
5200.
Subject
to
section
5201,
for
the
purpose
of
paragraph
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
processing
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
af
labour
for
the
year.
and
Regulation
5202
defines
“cost
of
manufacturing
and
processing
labour”
as:
“cost
of
manufacturing
and
processing
labour’’
of
a
corporation
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.
The
said
regulation
also
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,
cleaning,
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
including
the
activities
listed
in
subparagraphs
125.1
(3)(b)(i)
to
(ix)
of
the
Act)
in
Canada
of
goods
for
Sale
or
lease,
.
.
.
To
simplify
somewhat
the
calculation
it
can
be
stated
that
Regulation
5200
sets
up
a
fraction
of
which
the
numerator
is
the
aggregate
cost
of
manufacturing
and
processing
capital
and
labour
and
the
denominator
is
the
aggregate
cost
of
capital
and
labour
for
the
year
in
question.
The
capital
is
not
in
question
here
so
we
are
only
dealing
with
the
labour
element
of
this
fraction.
According
to
plaintiff’s
tax
return
the
calculation
of
the
cost
of
manufacturing
and
processing
labour
shows
a
total
of
salaries
and
wages
amounting
to
$2,320,733
of
which
according
to
its
calculations
$1,822,105
was
payable
to
employees
engaged
in
qualified
activities.
The
figure
$2,320,733
forms
the
denominator
of
the
fraction
and
by
the
application
of
Regulation
5202(a)
the
numerator
consists
of
the
lesser
of
100/75
of
$1,822,103
or
the
figure
of
$2,320,733.
Since
the
numerator
can
never
exceed
the
denominator
the
figure
of
$2,320,733
had
to
be
taken
as
the
cost
of
manufacturing
and
processing
labour.
In
its
tax
return
plaintiff
shows
in
its
computation
of
Canadian
manufacturing
and
processing
profits
a
formula
consisting
of
cost
of
manufacturing
and
processing
capital
in
the
amount
$299,114
plus
the
cost
of
manufacturing
and
processing
labour
in
the
amount
of
$2,320,733
as
the
numerator
over
the
sum
of
$343,357
as
the
cost
of
capital
plus
$2,320,733
as
the
cost
of
labour
and
multiplied
this
fraction
by
$1,260,051.63
being
plaintiff’s
adjusted
business
income
calculated
elsewhere
in
the
return
to
arrive
at
a
figure
of
$1,239,134.77.
Further
minor
adjustments
were
made
as
required
in
the
calculation
of
manufacturing
and
processing
profits
deductions
reducing
this
figure
to
$1,236,261.15
and
it
is
9%
of
this
figure
calculated
pursuant
to
subparagraph
125.1
(1
)(a)(i)
of
the
Act
which
resulted
in
the
deduction
of
$111,263.50
claimed.
The
Minister
does
not
dispute
any
of
the
figures
in
the
formula
save
for
the
numerator
figure
of
$2,320,733
representing
the
cost
of
manufacturing
and
processing
labour.
It
is
the
figure
of
$1,822,105
as
wages
paid
to
employees
engaged
in
“qualified
activities’’
which
defendant
reduces
with
the
result
that
the
Canadian
manufacturing
and
processing
profits
calculation
is
reduced
from
$1,236,261.15
to
$983,538
and
it
is
on
this
figure
that
the
9%
deduction
is
applied
resulting
in
the
deduction
of
only
$88,518.42
instead
of
$111,263.50
and
the
additional
assessment
of
$22,745.08.
In
dealing
with
wages
and
salaries
paid
in
its
advertising
department
plaintiff
attributed
45%
of
its
total
cost
of
labour
as
that
portion
deemed
to
be
directly
engaged
in
the
preparation
of
display
advertising,
and
80%
of
its
total
cost
of
labour
as
that
deemed
to
be
directly
engaged
in
the
preparation
of
classified
advertising,
conceding
that
the
rest
of
the
wages
paid
to
the
employees
in
those
two
departments
were
not
for
employees’
time
spent
in
“qualified
activities”.
These
percentages
are
empirical
figures
taken
on
the
basis
of
experience
and
were
supported
as
being,
if
anything,
on
the
moderate
side
by
the
evidence
of
senior
executives
of
the
company.
Plaintiff’s
contentions
are
fully
set
forth
in
the
section
entitled
Reasons
for
Appeal
in
its
statement
of
claim
which
reasons
read
as
follows:
B.
Reasons
for
Appeal
1.
One
of
the
activities
expressly
included
by
Regulation
5202
in
the
definition
of
“qualified
activities”
is
‘‘receiving
and
storing
of
raw
materials’’.
When
the
Plaintiff’s
reporters
are
researching
the
background
for
stories
and
articles,
interviewing
sources
and
writing,
they
are
receiving
and
storing
news,
which
is
the
raw
material
of
a
newspaper.
The
same
is
true
of
personnel
engaged
in
the
preparation
of
advertisements.
2.
Also
expressly
included
in
the
definition
of
‘‘qualified
activities”
is
“producing,
assembling
and
handling
of
goods
in
process”.
When
reporters
are
researching
and
writing
their
stories
and
articles,
when
editors
are
producing
their
editorials
and
when
advertising
personnel
are
collecting
and
assembling
information
to
produce
advertisements,
they
are
producing,
assembling
and
handling
“goods
in
process”.
The
term
“goods
in
process”
must
refer
(in
the
context
of
the
newspaper
industry)
to
the
newspaper
before
completion;
that
is,
while
the
component
parts
of
the
newspaper
(the
various
articles,
stories,
editorials
and
advertisements)
are
in
the
course
of
being
assembled
into
the
finished
product.
Gathering
and
reporting
news,
researching
and
preparing
editorials,
preparing
and
editing
copy,
preparing
advertisements
and
all
related
photographic
and
artistic
work
fall
specifically
within
the
category
of
“producing,
assembling
and
handling
of
goods
in
process’’.
3.
Another
prescribed
ingredient
of
the
term
“qualified
activities’’
is
“quality
and
production
control’’.
In
the
preparation
of
a
newspaper,
it
is
necessary
for
the
editorial
staff
to
scrutinize
and,
if
necessary,
reject,
revise
or
rewrite
stories
and
articles
prepared
by
reporters.
This
phase,
more
than
any
other
phase
of
the
production
of
a
newspaper,
is
where
quality
control
over
the
newspaper’s
content
is
exercised.
4.
The
opening
words
of
the
definition
of
“qualified
activities’’
are:
“qualified
activities”
means:
(a)
any
of
the
following
activities,
when
they
are
performed
in
Canada
in
connection
with
manufacturing
or
processing
.
.
.
in
Canada
of
goods
for
sale
.
.
.
(underlining
added)
The
underlined
phrase
“in
connection
with”
must
mean
that
so
long
as
the
enumerated
activities
(such
as
receiving
and
storing
raw
materials,
producing,
assembling
and
handling
goods
in
process,
quality
and
production
control,
etc.)
are
an
integral
part
of
the
manufacture
or
production
of
goods,
they
constitute
“qualified
activities”.
Gathering
and
reporting
news,
researching
and
preparing
editorials,
preparing
and
editing
copy,
preparing
advertisements
and
all
related
photographic
and
artistic
functions
are
interdependent
activities
which
form
an
integral
part
of
the
production
of
a
newspaper.
5.
The
definition
of
“qualified
activities”
also
encompasses,
in
paragraph
(b)
thereof,
all
activities.
other
than
those
expressly
enumerated
in
(a)
thereof
provided
they
are
“performed
in
Canada
directly
in
connection
with
manufacturing
or
processing
.
.
.
in
Canada
of
goods
for
sale
or
lease
.
.
.”.
This
phrase
refers,
in
the
context
of
the
production
of
a
newspaper,
to
such
activities
as
gathering
and
reporting
news,
researching
and
preparing
editorials,
preparing
and
editing
copy,
preparing
advertisements
and
all
related
photographic
and
artistic
work.
6.
In
summary,
therefore,
the
Plaintiff’s
preparing
advertisements,
gathering
and
reporting
news,
researching
and
preparing
editorials,
preparing
and
editing
the
copy
and
all
related
photographic
and
artistic
functions
are
activities
performed
in
Canada
directly
in
connection
with
manufacturing
or
processing
goods
for
sale
and
are
therefore
“qualified
activities”
for
the
purpose
of
computing
the
amount
of
the
Plaintiff’s
“Canadian
manufacturing
and
processing
profits”
for
its
1973
taxation
year
that
qualify
for
the
deduction
from
tax
payable
provided
by
section
125.1
of
the
Income
Tax
Act.
Two
witnesses
were
called
who
explained
the
duties
of
the
various
employees
and
gave
the
detailed
figures
on
which
plaintiff’s
claim
is
based.
Larry
Smith
who
has
been
editor-in-chief
since
1970
and
was
managing
editor
for
14
years
before
that
stated
that
the
St
Catharines
Standard
is
an
evening
paper
published
six
days
a
week,
with
a
daily
circulation
of
38,500
in
1973.
It
varies
in
size
from
40
to
80
or
90
pages.
In
addition
to
circulating
in
St
Catharines
it
circulates
in
Thorold,
Grimsby,
Niagara
on
the
Lake
and
other
neighbouring
towns.
He
testified
that
advertising
is
the
lifeblood
of
any
newspaper,
the
revenue
from
subscriptions
barely
covering
actual
printing
costs.
In
1973
the
news
matter
was
still
set
on
linotype
or
perforated
tape,
the
advertising
being
done
by
photo
composition,
which
involves
a
paste-
up
process
in
place
of
hot
metal.
Since
1973
a
complete
photo
composition
process
is
used.
News
stories
are
typed
by
the
reporters
on
a
special
type
of
paper
which
a
scanner
and
computer
then
reads
and
the
story
can
be
thrown
on
the
screen
if
desired.
He
introduced
the
list
of
employees
of
the
editorial
department
and
photographic
department
in
1973,
the
total
wage
bill
for
the
editorial
department
that
year
being
$323,134,
exclusive
of
a
pension
paid
to
a
former
employee,
which
is
not
being
claimed
as
part
of
the
manufacturing
and
processing
labour.
He
also
produced
a
list
of
employees
and
salaries
for
the
photographic
department
in
1973
totalling
$45,715.
He
testified
as
to
the
duties,
responsibilities,
and
nature
of
work
done
by
each
of
the
editors
and
reporters,
which
need
not
be
gone
into
in
detail
here,
the
main
purport
of
his
evidence
being
that
the
editors
have
discretionary
and
supervisory
responsibilities
over
what
stories
appear
in
the
paper,
editing,
and
correcting,
eliminating
some
of
the
copy
submitted
to
them,
as
well
as
in
many
cases
writing
editorials
or
feature
columns
themselves.
He
conceded
that
wire
service
material
not
used
is
destroyed
at
the
end
of
the
day
as
well
as
stories
coming
in
on
teletype
if
they
are
not
used.
Syndicated
features
arrive
for
the
most
part
by
mail
and
after
being
set
are
thrown
away
as
are
some
of.
the
photographs
which
are
not
used
although
some
are
kept
for
possible
future
use.
The
reporter’s
stories
after
being
edited
and
set
for
printing
would
also
be
destroyed
each
day.
Dummy
pages
are
made
up
indicating
where
the
stories
are
to
go
and
after
the
various
pages
have
been
set
mats
are
made
of
them
from
the
lead,
which
mats
are
kept
for
a
year,
the
lead
being
melted
down
each
day.
He
conceded
that
photos
sent
to
the
library
and
any
reporters’
notebooks
which
are
retained
or
any
material
received
from
the
wire
services
and
retained
are
not
shown
as
assets
in
the
balance
sheet,
the
sum
of
$118,814
appearing
on
the
balance
sheet
as
supplies
on
hand
at
cost
consisting
of
such
items
as
newsprint
and
ink.
Gordon
MacFarlane
who
was
the
advertising
manager
of
the
paper
in
1973
and
is
now
executive
vice-president,
having
been
advertising
manager
for
20
years
prior
to
1973,
testified
that
all
advertising
was
under
his
supervision.
The
display
advertising
department
employees
prepare
layouts,
write
the
copy
for
them,
and
put
in
the
illustrations
in
the
appropriate
places
in
accordance
with
the
instructions
from
their
clients,
the
retail
merchants
in
the
area.
He
stated
that
the
preparation
of
these
layouts
is
quite
difficult
and
that
in
his
opinion
the
production
work
in
connection
with
this
would
occupy
at
least
60%
of
their
time.
Further
time
would
be
involved
in
making
changes
so
as
to
fit
the
material
to
the
space
sold.
The
telephone
and
over
the
counter
ad
takers
would
deal
directly
with
customers
phoning
in
ads
or
bringing
them
to
the
office
and
would
also
prepare
the
layouts
themselves.
They
would
advise
customers
and
recommend
the
wording
of
ads
and
so
forth
and
he
considers
that
80%
of
their
time
would
be
involved
in
preparing
copy.
There
is
a
special
creative
function
employee
in
the
department
to
assist
in
an
advisory
capacity
and
make
suggstions
to
improve
the
appearance
of
display
ads.
One
hundred
per
cent
of
this
employee’s
time
would
be
involved
in
this,
and
similarly
for
the
library-despatch
employee
who
would
receive
all
the
layout
material,
assemble
it,
see
that
the
mats
,
were
prepared
and
later
returned
to
him
for
storage.
There
is
also
a
national
advertising
manager
who
would
receive
advertising
concerning
national
accounts
from
the
advertising
agencies
of
the
head
offices
of
the
companies.
Most
of
this
material
would
be
already
prepared
so
that
not
more
than
25%
of
his
time
would
be
involved
in
preparing
material.
Overall
the
total
salaries
for
the
display
advertising
department
totalled
$155,051
in
1973,
and
he
stated
that
he
considers
the
estimate
that
45%
of
this
time
was
spent
in
the
preparation
of
this
material
for
publication
is
on
the
low
side.
The
claim
of
45%
of
$155,051
results
in
the
amount
of
$69,772
being
the
amended
figure
included
in
the
claim
for
cost
of
manufacturing
and
processing
labour.
Turning
to
the
classified
advertising
section
of
the
department
he
Stated
that
the
work
of
the
classified
advertising
manager-
in
preparing
layouts,
compiling
and
classifying
advertisements
for
the
composing
room
each
day
resulted
in
about
90%
of
her
time
being
used
in
production
work.
The
over
the
counter
and
telephone
advertisement
takers
would
be
working
100%
on
productive
work
and
similarly
with
the
display
ad
takers
in
the
classified
section
where
display
ads
would
appear
for
the
homeowners,
automotive
and
real
estate
sales
sections,
sometimes
involving
the
use
of
photographs
and
some
layout
work.
With
respect
to
the
classified
salesman
he
goes
out
to
advise
accounts
and
seek
new
clients
so
that
only
60%
to
70%
of
his
time
would
be
involved
in
production
in
connection
with
the
new
ads
which
he
obtains.
The
tear
sheet
person
is
not
involved
in
any
way
in
preparation
for
publication
nor
are
the
accounts
receivable
personnel.
The
total
salaries
of
the
classified
advertising
section
for
1973
amounted
to
$64,293
and
taking
80%
of
this,
which
the
witness
testified
he
considered
to
be
the
proportion
of
the
employees’
time
devoted
to
production
activity,
results
in
the
figure
of
$51,435
included
in
plaintiff’s
claim
as
part
of
the
cost
of
both
manufacturing
and
processing
labour.
In
cross-examination
he
testified
that
in
connection
with
national
advertising
display
ads
the
only
change
which
might
have
to
be
made
to
copy
submitted
would'
be
to
change
prices
and
put
in
the
local
dealer’s
name
on
the
photo
composition
received.
The
newspaper
subscribes
through
a
service
from
which
to
get
pictures
of
objects
frequently
used
in
display
ads
and
sometimes
the
pictures
are
kept
as
they
will
be
used
repeatedly
in
similar
ads.
Copies
of
all
advertisements
are
kept
for
two
or
three
months
as
a
precaution.
In
the
portions
of
the
examination
for
discovery
Henry
Bartlett
Burgoyne,
president
and
publisher
of
the
St
Catharines
Standard
read
into
the
record
by
defendant
it
was
brought
out
that
although
it
was
contended
that
the
reporters
when
researching
and
writing
their
stories
and
articles
were
producing
and
assembling
and
handling
goods
in
process,
and
similarly
with
respect
to
the
advertising
personnel
on
collecting
and
assembling
information
to
produce
advertisements,
nothing
is
shown
on
the
balance
sheet
as
an
asset
representing
any
goods
in
process
in
connection
with
such
material
but
that
the
full
cost
of
the
salaries
in
each
case
is
deducted
as
an
expense
in
arriving
at
plaintiff’s
net
income
for
the
1973
taxation
year.
Plaintiff
in
contending
that
the
amounts
claimed
come
within
the
definition
of
“qualified
activities”
(supra)
relies
particularly
on
those
listed
in
(a)(ii),
(iii),
(vii)
and
(b)
reading
respectively
as
follows:
(a
.
.
.
(ii)
receiving
and
storing
of
raw
materials,
(iii)
producing,
assembling
and
handling
of
goods
in
process,
(vii)
quality
and
production
control,
(b)
all
other
activities
that
are
performed
in
Canada
directly
in
connection
with
manufacturing
or
processing
.
.
.
in
Canada
of
goods
for
sale
or
lease,
At
first
reading
of
the
sections
of
the
Act
and
regulations
in
question
it
is
evident
that
they
are
intended
to
encourage
the
development
of
manufacturing
and
processing
businesses
in
Canada
by
giving
certain
tax
advantages
with
respect
to
the
treatment
of
capital
and
labour
involved
therein
and
that
most
probably
no
special
consideration
was
given
to
whether
a
newspaper
would
be
considered
as
such
a
business
when
the
regulations
were
drawn.
Plaintiff
seeks
a
broad
interpretation
of
the
definition
of
‘‘qualified
activities”
in
Regulation
5202,
pointing
out
that
the
publishing
of
a
newspaper
is
a
unique
business
and
that
the
collection
of
news
and
preparation
of
same
and
similarly
for
the
advertising
material
is
a
necessary
part
of
the
production
process.
When
we
speak
of
the
London
Times
or
the
Manchester
Guardian
as
being
good
quality
newspapers
we
do
not
have
in
mind
the
quality
of
the
newsprint
used,
the
selection
of
the
type
fount
or
ink
or
the
quality
of
the
photographic
reproduction,
but
rather
of
the
quality
of
the
contents.
Without
the
contents
there
would
be
no
newspaper.
If
there
might
at
one
time
have
been
a
valid
issue
raised
as
to
whether
the
publishing
of
a
newspaper
is
a
“manufacturing
or
processing”
operation
or
whether
the
finished
paper
constitutes
“goods
for
sale”
within
the
definition
of
“qualified
activities”
these
arguments
are
apparently
no
longer
available
to
defendant.
The
only
case
having
any
bearing
on
the
issue,
and
it
is
not
directly
in
point
is
a
judgment
of
former
Associate
Chief
Justice
Noël
in
the
case
of
Le
Soleil
Limitée
v
MNR,
[1972]
FC
423;
[1972]
CTC
244;
72
DTC
6207,
which
dealt
with
the
provisions
of
section
40A
of
the
Income
Tax
Act
in
effect
at
the
time
which
section
had
been
incorporated
by
amendment
11
Eliz
Il,
c
8,
section
10,
which
permitted
deduction
from
the
tax
otherwise
payable
by
a
manufacturing
and
processing
corporation
of
certain
amounts
of
its
revenue
from
sales
provided
it
had
net
sales
from
the
sale
of
goods
processed
or
manufactured
in
Canada
amounting
to
at
least
50%
of
its
gross
revenue
for
the
year.
The
issue
was
not
whether
the
newspaper
was
a
manufacturing
and
processing
corporation
which
was
apparently
conceded,
but
whether
the
revenue
from
advertising
sales
could
be
included
in
determining
the
50%
proportion,
the
Minister
taking
the
view
that
the
appellant
did
not
derive
more
than
50%
of
its
sales
from
manufacturing.
In
his
judgment
the
learned
Associate
Chief
Justice
stated
at
pages
426-7
[247,
6209]:
Where
advertisements
and
news
are
concerned,
it
is
true
that
both
are
involved
in
production
of
a
newspaper,
and
that
production
is
continuous
from
the
time
the
news
is
first
compiled
and
put
into
written
form,
or,
in
the
case
of
advertisements,
from
the
time
the
employee
not
only
obtains
an
advertising
contract,
but
brings
the
advertisement
to
the
office
where
it
will
also
be
put
in
print.
It
is
probably
also
true
to
say
that
income
from
advertisements
and
from
readers
of
the
paper
is
income
from
sources
which
could
not
exist
without
each
other.
Both
operations
are
interdependent,
and
both
form
an
integral
part
of
the
manufacturing
and
processing
involved
in
the
production
of
a
newspaper,
and
it
is
even
possible
that
the
latter
could
not
be
done
profitably
or
satisfactorily
without
the
income
from
advertisements.
Furthermore,
the
manufacturing
of
a
newspaper
is
done
in
the
same
way
for
the
news
as
for
advertisements.
It
includes
the
collection
and
page-setting
of
news
for
the
information,
instruction
and
entertainment
of
the
readers
who
buy
the
paper,
but
it
also
covers
collection
of
information
from
those
desirous
of
paying
for
the
advertisements
inserted
in
the
newspaper.
This
collection
of
news
and
information
is
part
of
the
process
of
manufacturing
a
newspaper,
and
is
included
in
the
uninterrupted
sequence
of
operations
from
the
time
the
news
item
or
advertisement
is
collected
or
obtained
until
the
newspaper
is
in
the
purchaser’s
hands,
and
the
income
resulting
from
these
two
operations
undoubtedly
comes
from
manufactured
and
processed
goods.
Furthermore,
the
newspaper
vendor
who
buys
newspapers
for
resale
.will
have
for
sale,
in
his
stock,
goods
manufactured
and
processed
in
Canada.
Unfortunately
for
appellant,
however,
these
are
not
the
only
conditions
specified
in
order
to
qualify
for
the
deduction
provided
in
section
40A.
Indeed,
the
latter
does
not
say
that
a
manufacturing
and
processing
company
may
make
certain
deductions
from
its
income
tax
if
the
income
from
goods
which
it
has
processed
or
manufactured
in
Canada
amounts
to
at
least
50%
of
its
gross
income,
but
rather
that
it
may
make
these
deductions
if
the
net
sales
come
from
the
sale
of
goods
processed
or
manufactured
in
Canada.
The
income
must
therefore
come
from
the
sale
-of
goods
if
it
is
to
be
included
in
the
taxpayer’s
income
for
deduction
purposes.
He
found
that
the
publication
of
advertisements
in
a
newspaper
does
not
constitute
a
true
sale
of
“goods
processed
or
manufactured’’,
since
the
advertiser
is
really
paying.
for
services
rendered
and
not
for
goods
sold
and
receives
no
goods
except
the
benefit
of
using
the
newspaper
facilities
to
get
his
information
to
potential
customers.
Accordingly
he
dismissed
the
appeal.
It
is
particularly
significant
however
that
whereas
the
definition
of
a
manufacturing
and
processing
corporation
in
section
40A
of
the
Act
specifically
referred
to
“sale
of
goods
processed
or
manufactured
in
Canada’’,
the
definition
in
the
present
Regulation
5202
of
‘‘qualified
activities”
refers
to
the
“manufacturing
or
processing
in
Canada
of
goods
for
sale”,
the
goods
for
sale
in
this
case
being
the
newspaper.
In
the
appeal
judgment
in
the
Le
Soleil
case
([1973]
FC
97;
[1973]
CTC
91;
73
DTC
5093)
this
judgment
was
reversed,
reliance
being
placed
on
the
definition
of
“net
sales’’
in
subparagraph
40A(2)(b)(i)
of
the
Act
as
being
the
gross
revenue
of
the
corporation
for
the
year
from
sales,
which
was
found
to
be
wide
enough
to
include
in
the
case
of
a
newspaper
not
only
the
amounts
received
from
purchasers
of
the
newspaper
but
also
the
amounts
received
from
advertising
which
amounts
were
earned
only
when
the
newspapers
containing
the
advertisements
were
sold.
This
was
an
argument
which
had
not
been
raised
in
the
Trial
Division
and
Chief
Justice
Jackett
states
at
page
99
[92,
5094]:
We
are
in
complete
agreement
with
the
decision
of
the
Associate
Chief
Justice
on
the
appeal
as
it
was
argued
before
him
and
we
should
be
content
to
adopt
his
reasons.
Reference
was
made
at
page
101
[93,
5095]
to
section
40A
as
being
a
very
special
provision
for
a
very
special
purpose
and
that
the
terminology
should
therefore
not
be
interpreted
by
reference
to
the
meaning
of
technical
expressions
and
it
was
commented:
We
are
fortified
in
this
conclusion
by
the
fact
that
the
result,
in
the
case
of
a
daily
newspaper,
would
seem
to
be
more
in
accord
with
the
Parliamentary
purpose
of
section
40A
than
the
result
reflected
by
the
assessment.
Possibly
the
same
could
be
said
with
respect
to
the
parliamentary
purpose
of
section
125.1
of
the
Act
and
the
regulations
made
pursuant
thereto
in
the
case
of
a
daily
newspaper.
Once
it
is
conceded
as
it
is
here
that
the
publication
of
a
newspaper
is
a
manufacturing
or
processing
business
and
that
the
paper
constitutes
goods
for
sale,
and
since
there
is
no
dispute
between
the
parties
as
to
the
cost
of
manufacturing
and
processing
capital,
the
only
question
to
be
decided
is
what
portion
of
the
salaries
and
wages
paid
to
the
various
employees
in
the
editorial,
reporting,
photographing
and
advertising
department
comes
within
the
definition
of
“qualified
activities’’
in
Regulation
5202.
Defendant
contends
for
a
strict
and
restrictive
interpretation
of
this
regulation
saying
that
the
regulation
is
clearly
by
its
terms
only
intended
to
apply
to
the
processing
of
tangible
goods.
It
is
pointed
out
that
the
French
version
of
“qualified
activities’’
in
Regulation
5202(a)(iii)
uses
the
term
“marchandises
en
voie
de
transformation’’
for
the
English
term
“goods
in
process”
and
States
that
this
is
further
supported
by
the
accounting
evidence
which
indicates
that
none
of
the
value
of
the
photographs
or
advertisements
which
are
retained
are
shown
as
an
asset
in
the
balance
sheet,
which
is
usually
a
hallmark
of
outlays
made
in
connection
with
goods
in
process.
In
case
of
a
newspaper
this
is
not
surprising,
since
in
practice
it
is
processed
from
commencement
to
completion
each
day,
by
far
the
greater
portion
of
the
material
used
in
the
production
of
it
then
being
of
no
further
value.
with
only
a
very
few
items
being
retained
for
possible
future
use.
Once
it
is
conceded
that
the
publication
of
a
newspaper
is
a
manufacturing
or
processing
operation
then
it
appears
difficult
to
contend
that
producing,
assembling
and
handling
of
the
material
going
into
it
does
not
constitute
producing,
assembling
and
handling
of
goods
in
process,
and
while
the
French
version
may
reinforce
the
argument
that
the
definition
as
drafted
most
probably
did
not
have
in
mind
the
publishing
of
a
newspaper
which
is
a
unique
type
of
operation,
it
would
be
unreasonable
to
conclude
that
newspapers
were
intentionally
excluded
from
the
benefits
of
this
section
of
the
Act
and
regulations.
Reference
might
be
made
to
the
dictum
of
Associate
Chief
Justice
Noël,
approved
by
the
Court
of
Appeal
(supra),
where
he
said:
.
.
.
Furthermore,
the
manufacturing
of
a
newspaper
is
done
in
the
same
way
for
the
news
as
for
advertisements.
It
includes
the
collection
and
page-
setting
of
news
for
the
information,
instruction
and
entertainment
of
the
readers
who
buy
the
paper,
but
it
also
covers
collection
of
information
from
those
desirous
of
paying
for
the
advertisements
inserted
in
the
newspaper.
This
collection
of
news
and
information
is
part
of
the
process
of
manufacturing
a
newspaper,
and
is
included
in
the
uninterrupted
sequence
of
operations
from
the
time
the
news
item
or
advertisement
is
collected
or
obtained
until
the
newspaper
is
in
the
purchaser’s
hands,
and
the
income
resulting
from
these
two
operations
undoubtedly
comes
from
manufactured
and
processed
goods.*
Somewhat
similar
reasoning
can
I
believe
be
applied
to
the
interpretation
of
subparagraph
(a)(ii)
of
the
‘‘qualified
activities”
definition.
While
it
is
perhaps
stretching
the
normal
meaning
of
“raw
materials”
to
consider
the
editorials
written,
feature
articles,
news
stories
written
by
reporters
and
advertising
matter
as
such,
if
we
consider
this
in
the
context
of
the
operation
of
publishing
a
newspaper
it
must
be
held
that
these
constitute
the
raw
materials
which
go
into
a
paper
as
it
finally
appears.
Similarly
again
with
respect
to
subparagraph
(a)(vii)
which
is
perhaps
a
stronger
argument
in
plaintiff’s
favour
especially
with
respect
to
the
work
of
the
editor
whose
function
is
clearly
that
of
supervising
the
“quality”
of
the
material
which
goes
into
the
paper,
and
in
the
case
of
the
advertising
department
the
supervisors
who
have
to
assemble,
collate
and
control
the
material,
I
do
not
believe
that
this
section
can,
in
the
case
of
a
newspaper,
be
limited
to
the
control
of
the
quality
of
the
printing
itself
as
defendant
contends.
Finally
paragraph
(b)
is
a
comprehensive
section
covering
“all
other
activities”
in
the
event
that
they
do
not
come
within
one
of
the
enumerated
subparagraphs
of
paragraph
(a).
Defendant.
contends
that
for
this
section
to
apply
it
must
be
performed
“directly”
in
connection
with
the
manufacturing
or
processing.
I
consider
that
the
activities
which
were
outlined
in
plaintiff’s
evidence
and
claimed
by
it
to
be
“qualified
activities”
are
all
activities
which
can
properly
be
said
to
be
“performed
in
Canada
directly
in
connection
with
the
manufacturing
or
processing”
of
the
newspaper.
Plaintiff’s
action
will
therefore
be
maintained
with
costs
and
the
assessment
be
referred
back
to
the
Minister
for
reassessment
so
as
to
allow
the
deduction
for
tax
in
the
amount
of
$111,263.50
claimed
by
plaintiff
for
its
1973
taxation
year.
Email this Content