Tolko Industries Ltd. v. British Columbia – Clarifying “non-qualifying activity” under the Provincial Sales Tax Exemption and Refund Regulation

Published by Adrian Zee

The British Columbia Supreme Court recently clarified the definition of “non-qualifying activity” under subsection 90(1) of the Provincial Sales Tax Exemption and Refund Regulation, BC Reg 97/2013 (the “PSTERR”) in Tolko Industries Ltd. v. British Columbia 2024 BCSC 599. The issue was whether pipes used to move steam (“Steam Pipes”) at Tolko’s place of business qualified for an exemption from Provincial Sales Tax (the “PST”) under section 101 of the PSTERR.

The Steam Pipes were used at a fully integrated manufacturing site (the “Site”) that Tolko operated.  At the Site, Tolko produced electricity and wood products for sale, as well as steam, compressed air, and electricity for its own use.  The steam was produced at a Co-Generation Plant on the Site and was used in part to produce electricity and in part in the manufacture of the wood products. The Steam Pipes in issue were used at the Site to transfer the steam from the Co-Generation Plant over to the wood products production plants.

Section 37 of the Provincial Sales Tax Act, SBC 2012, c 35 (the “PSTA”) subjects purchases of tangible personal property (“TPP”), which include the Steam Pipes , to PST at the rate of 7%. However, the PSTERR relieves certain machinery and equipment from this PST. The Court noted that the PSTERR:

… is intended to encourage a more favourable and competitive business environment by carving out targeted PST exemptions … Part of the rationale is to provide an incentive for manufacturers to invest in the acquisition of production infrastructure that will generate taxable sales to customers yielding government revenues …

Section 101 relieves machinery and equipment from PST where:

  • the machinery or equipment is obtained by the manufacturer for use in BC primarily and directly in the transmission or distribution of TPP at the qualifying part of the manufacturer’s manufacturing site;
  • the TPP to be transmitted or distributed is primarily qualifying TPP; and
  • the machinery or equipment is obtained for use primarily at the qualifying part of the manufacturing site.

At trial, there was no dispute that the Steam Pipes were: a) used primarily and directly in the transmission or distribution of TPP; and b) obtained for use primarily at the qualifying part of a manufacturing site. The parties disagreed on whether the steam met the definition of “qualifying TPP”, which requires the petitioner to “manufacture” it. “Manufacture” cannot include a “non-qualifying activity” unless the process “is combined with another activity that is not a non-qualifying activity”. A “non-qualifying activity” includes “transforming [TPP] from a gaseous, liquid, or solid state to another one of those states by means of change in temperature or pressure”.

Past the plethora of definitions, the core issue was whether the manufacturing of steam was “combined” with an activity that was not a non-qualifying activity – i.e., the creation of wood products and electricity for sale. Tolko argued that the steam production was part of a “fully integrated ‘continuous loop’ of manufacturing activities which, combined together, power the processing facilities and produce its wood products and electricity for sale.” The Court agreed and held that the phrase “not a non-qualifying activity” does not require the “qualifying activity” to be part of the steam production itself, but instead required reference to the larger process at the integrated manufacturing Site.  The Court ultimately ruled that:

    1. the steam production in the Co-Generation Plant was “combined with” qualifying manufacturing activities, which resulted in the petitioner’s saleable products;
    2. the steam production was thus a qualifying activity;
    3. the steam production met the definition of “manufacture”; and
    4. the steam transferred in the Steam Pipes was therefore qualifying TPP.

Exemptions from the PSTERR are a common way to incentivize BC businesses to reinvest in their operations and make them more competitive on the national and international stage. However, these exemptions are complex and highly specific. The decision has clarified the meaning of “non-qualifying activities” in a manner that is consonant with modern manufacturing processes.  In addition, the decision stands as a further rebuke of the narrow interpretive approach the Province has typically taken in administering PSTERR exemptions.