October 07, 2011

Her Majesty the Queen (Appellant) v. Nowsco Well Service Ltd. (Respondent)

90 DTC 6312
Federal Court of Appeal
April 10, 1990

(Court File No. A-636-88.)

Tax credits and capital cost allowance — Equipment used to provide on-site services to oil well operators — Whether goods processed for sale in the provision of services — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 20(1)(a), 125.1(3)(a), 125.1(3)(b), 127(5) and 127(10) — Income Tax Regulations, s. 1100, 4600(2) and 5201, and Schedule II, Classes 8, 10 and 29.

NW Ltd. was in the business of providing on-site services to oil well operators, mainly in terms of stimulating the flow of oil to facilitate its being pumped to the surface. In reassessing NW Ltd. in respect of its 1977, 1978 and 1979 taxation years, the Minister disallowed certain manufacturing and processing tax credits, and investment tax credits, which NW Ltd. had sought to deduct in respect of its on-site activities. The Minister further disallowed its claim for capital cost allowance in respect of certain equipment under Class 29 of Schedule II. NW Ltd.’s appeal to the Federal Court-Trial Division was allowed (88 DTC 6300). The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed. The taxpayer’s invoices indicated the billing of customers for both goods and services. The common-sense, realistic and business-like conclusion to be drawn from this was that the taxpayer did not enter into pure service contracts, but processed goods to their customers’ specification, which they then utilized in performing their specialized services for those customers. They were, therefore, processing goods for sale, within the meaning of s. 125.1(3)(a) of the Act, and it was inappropriate in this context to attempt to make a distinction between contracts for the sale of goods and for the sale of services. The taxpayer was thus entitled to the manufacturing and processing tax credit which it had sought to deduct for the taxation years in issue. NW Ltd. was also entitled to accord Class 29(a)(i) treatment for capital cost allowance purposes to the equipment used by it in its processing activities. Furthermore, the equipment was not automotive equipment falling within Class 10(a), as the Crown had sought to argue, since it was designed primarily for one particular purpose — to function at the well site. It therefore fell within Class 8(i) (“a tangible capital asset that is not included in another Class”), and thus within paragraph 4600(2)(c) of the Regulations (prescribed machinery used for processing goods for sale). It therefore qualified, under ss. 127(5) and 127(10) of the Act, for the investment tax credits which NW Ltd. had sought to deduct. The Crown’s appeals had therefore to be dismissed.