October 07, 2011

Nowsco Well Service Ltd. (Plaintiff) v. Her Majesty The Queen (Defendant)

88 DTC 6300
Federal Court-Trial Division
May 6, 1988

(Court File No. T-2848-84.)

Deductions — Manufacturing or processing profits — Whether goods processed “for sale” — Investment tax credit — Whether equipment qualified property — Capital cost allowance — Categorization of property — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(a), 125.1(3)(b), and 127(10) — Income Tax Regulations, Sched. II, Class 29.

The taxpayer corporation was engaged in the business of oil well servicing, and its activities included the preparation and pumping into well sites of special mixtures of cement, fracturing materials, acid, and nitrogen. These materials were used to facilitate the extraction of oil. The taxpayer reported its profits as “manufacturing or processing” profits. The Minister disagreed and contended that the taxpayer was essentially providing a service wherein the passage of title to goods was only incidental. The taxpayer further claimed investment tax credits on equipment used in its activities. The Minister raised the same objection that the equipment was not used for manufacturing or processing, and that the tax credits were therefore not available to the taxpayer. A third issue involved the classification of certain equipment for the purpose of capital cost allowance and in particular whether the taxpayer was entitled to accelerated capital cost allowance. The taxpayer appealed in respect of all three issues to the Federal Court-Trial Division.

Held: The taxpayer’s appeal was allowed. The Court found it inappropriate to adopt a fragmented view that when the blending has been completed, there is a finished good, and that pumping constitutes the delivery of a finished good, and the delivery of a finished good is not a manufacturing or processing activity. The better view was that the taxpayer’s activities constituted a continuous process; and all aspects of it including the blending, mixing, pressurizing, and pumping were one and the same process. The activities at the well head were conducted by a “mobile factory”, and this mobility should not disentitle the taxpayer to the tax benefits enjoyed by a processing plant which is always at one location. It followed that the equipment of the taxpayer used in the processing of goods for sale ought to be subject to investment tax credits. The Court found further that the equipment fell into Class 29 of Schedule B, thus entitling the taxpayer to an accelerated capital cost allowance.