CANADA PROVINCE OF NOVA SCOTIA 1992 S.H. 72115 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: CONTINENTAL SEAFOODS LIMITED and THE MINISTER OF FINANCE Respondent HEARD: before the Honourable Mr. Justice F. B. W. Kelly, Supreme Court of Nova Scotia, Trial Division September 5, 1991 in Chambers. DECISION: September 5, 1991 COUNSEL: Mr. Harvey Morrison, Esq., for the applicant Mr. Duncan Beveridge, Esq., for the respondent DECISION RELEASED: March 25, 1992 CANADA PROVINCE OF NOVA SCOTIA 1992 S.H. 72115 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: CONTINENTAL SEAFOODS LIMITED Appellant and THE MINISTER OF FINANCE Respondent KELLY, J.: (Orally) This is an appeal pursuant to s. 19 of the Health Services Tax Act, R.S.N.S. 1967, c. 126 in respect of a decision of the Provincial Tax Commission to cancel a claim for a refund of health services tax by the applicant, Continental Seafoods Ltd. The Act has since been significantly amended by R.S.N.S. 1989, c. 198. Continental had applied to the Commission for a refund of the tax paid on certain refrigeration equipment which was installed in a new facility for pickled whole herring in Shelburne, Nova Scotia. This product was mainly to be supplied on contract to the Soviet Union. The contract contained stringent quality specifications governing the processing of this product which included a phase where the pickling occurs in a cooler facility for 28 to 45 days at a strictly controlled temperature of 0ºC to ‑2ºC. The new facility comprises roughly 38,000 square feet and includes three large cold rooms of similar capacity and dimension. The plant was intended to be used mainly to produce barrels of pickled salted herring for sale to Russia and eastern European countries. The plant was to be used both for production and also for storage of products produced elsewhere by Continental or its related companies. The cold storage rooms can be used for (a) refrigerator rooms for temperature control of the processing of pickled herring (b) cold storage of pickled herring or variety of products, and ©) storage of other frozen products. In fact, one of the cold rooms was used only for storage of frozen products that belonged to Continental and related companies and unrelated companies on fee for storage basis. When pickled herring is not being processed, the refrigeration equipment is used to provide air conditioning and cold storage capacity for Continental or these companies. In 1988 Continental contracted with J. H. Lock Sons Limited to furnish the labour, materials and equipment for the refrigeration system in the plant. The contract price of $550,467 included all provincial and federal government sales tax. Germain Mechanical and Electrical Limited acted as subcontractor for J. H. Lock to complete the contract work on the refrigeration system. It also contracted directly with Continental for various electrical and mechanical plumbing tasks. Health services tax was paid by Germain and J. H. Lock or subcontractors used by them on material and equipment used in relation to the construction of the cold storage processing plant at Shelburne. In early 1989, Continental applied for refund of health services tax paid on the refrigeration equipment in the amount of $58,791, which included work done by the two contractors, J. H. Lock and Germain. The Provincial Tax Commission advised Continental that the refund claim had been "cancelled as contract was for New Cold Storage System which does not qualify for exemption under s. 10(1)(h)(I)". Relevant parts of this section read as follows: 10(1) The following classes of tangible personal property are specifically exempted from the provisions of this Act: nan (h) machinery and apparatus and parts thereof which are to be used or which are used in the manufacture or production of goods for sale; (i) materials consumed or expended in the manufacture or production of goods for sale; (j) goods purchased for the purpose of being processed, fabricated, or manufactured into, or incorporated into goods for the purpose of sale; Section 1(ca) provides as follows: (ca) 'manufacture or production' means the transformation or conversion of raw or prepared material into different state or form from that in which it originally existed as raw or prepared material but does not include production or processing; Thus, under s. 10(1)(h) and (I) of the Act machinery and materials used in the 'manufacture or production' of goods for sale are exempt from taxation. Continental forwarded Notice of Objection relating to the cancellation to the Provincial Tax Commissioner which stated in part: In further support of our submission, we refer you to the Northland Fisheries decision, dated November 25, 1986 from which we quote "Raw fish must be protected from spoilage. Without the insulated boxes" (or in the instant case, refrigeration equipment) the fish would be transformed or converted into rather unmarketable product. Where it is necessary to move the raw fish from one area to another, these insulated boxes" or in the instant case, the refrigeration equipment "are necessary apparatus used to produce saleable product. nan In closing, it is readily understood that some of this refrigeration equipment capacity will serve as cold storage only while the main purpose for the expansion was to provide for the herring pickling operation and other curing and drying of salt fish as referred to in Mr. MacLean's letter. This firm did expect some reduction in the total amount claimed but however did not expect complete cancellation thereof. May we therefore suggest as compromise that the client is prepared to accept 50% safety margin to ensure that your Division has no unacceptable revenue loss. The Commissioner allowed the objection in part and indicated that rebate of $14,467.43 would be paid to Continental. This decision was based on disallowing any exemption for the mechanical plumbing and electrical services provided by Germain and by determining that only portion of the refrigeration capacity was used for production purposes. The Commissioner allowed 35% of the $41,335.50 tax paid by J. H. Lock to be rebated in the amount of $14,467.43. An appeal from this decision was made to the Minister of Finance pursuant to s. 18(5) of the Act in July of 1989 and the Minister discussed this appeal in decision dated January 26, 1990. This decision concludes as follows: Consideration of the exemption from health services tax claimed by the Appellant in respect of the equipment in the context of clauses 10(1)(h) and 1(ca) of the Act, as interpreted by the Supreme Court of Nova Scotia in Northland Fisheries Limited v. Nova Scotia (Minister of Finance), leads me to conclude that in order to be eligible for exemption from health services tax pursuant to clause 10(1)(h) of the Act, machinery and equipment must be used in the actual transformation or conversion of the product actually being produced for sale. Machinery or apparatus used prior or subsequent to that actual transformation or conversion is not eligible for the tax exemption. The function described by the Appellant of the equipment cannot, in my opinion, be reasonably said to be fully part of the manufacture or production of its product so as to bring it within, subject to the definition in clause 1(ca), the exemption available in clause 10(1)(h) of the Act. The appeal will therefore be dismissed and the assessment for health services tax, as varied by the Provincial Tax Commissioner, upheld. The appellant contends that the Minister and the Commissioner were incorrect in not allowing the exemption for the refrigeration equipment in full. The submission is that it was inappropriate to apportion the tax to be refunded if the equipment is exempt and is used in any degree in the manufacturing process. In Silver Spoons Desserts Enterprises Ltd. v. Nova Scotia (Minister of Finance) (1989), 89 N.S.R. (2d) 363; 227 A.P.R. 363 (S.C.A.D.) Jones, J.A. reviewed the history of the legislation and particularly s. 10(1)(h)(I) and (j) and noted that the exemption does not depend on the degree to which the goods are used in the manufacturing process. At p. 375 he noted with approval the comments of Jones, J. in Forest Products Terminal Corporation Ltd. v. New Brunswick (1985), 58 N.B.R. (2d) 371, at p. 380: Once it has been established that the machinery or apparatus is 'used directly in the process of manufacture or production, this is sufficient. The use of the machinery or apparatus need not be exclusively in the manufacturing or production process nor does it matter the percentage of use that it attributed to such process as opposed to other processes'. Irving Oil Limited v. Provincial Secretary of the Province of New Brunswick, 1980 CanLII 176 (SCC), [1980] S.C.R. 787, 29 N.B.R. (2d) 529; 66 A.P.R. 529; 31 N.R. 291; Pigeon, J., pp. 537 and 538 N.B.R.; Re Michelin Tires Manufacturing (Canada) Ltd. (1976), 15 N.S.R. (2d) 150; 14 A.P.R. 150; Cooper, J.A., p. 168. In Northland Fisheries Limited v. Nova Scotia (Minister of Finance) (1986), 77 N.S.R. (2d) 361; 191 A.P.R.361, Maclntosh, J. stated at pp. 364‑365: If it is the aim of the Legislature to narrow the scope of tax exemptions in this area, it is incumbent upon it to state its aim with clarity. Elimination of the word 'process' by the 1982 amendment tends to accomplish this aim to some degree. 'process' normally refers to some continuous operation and includes an operation which is merely incidental to the main purpose which is being served. (per Stroud's Judicial Dictionary (4th Ed.), p. 2130.) nan Despite its inept drafting, the definition section tends to exempt from taxation only that machinery or apparatus involved in the actual transformation or conversion of the material. Machinery or apparatus used prior or subsequent to this period of 'manufacture or production' is now, by virtue of the said 1982 amendment, not tax exempt. On the facts before him, Macintosh, J. held that insulated fish boxes were "involved in the active transformation" of fish because they were used to transform or convert the fish into different state; from perishable to non‑perishable. Here the use of the cold rooms was clearly part of the pickling process. The specification of the Russian contracts required that a significant part of the processing occur in a controlled almost freezing temperature, making it necessary for the use of refrigeration equipment. The use of a cold room in the process performed a function that was part of the manufacture or production of the product, pickled herring. With respect, the Minister was wrong in concluding otherwise. The Minister also upheld the Commissioner's decision to apportion the tax thus appearing to imply that the refrigeration facility was, at least in part, exempt from tax. The essence of the Commissioner's decision was that as part of the refrigeration process only was used in the manufacture or production of the pickled herring, he could exempt that portion and tax the rest. It would appear that the practice of apportionment of this kind has been rejected in Silver Spoons Desserts Enterprises Limited v. Nova Scotia (Minister of Finance), supra, (1989), 89 N.S.R. (2d) 363; 227 A.P.R. 363 (S.C.A.D.) which determined there is no power under the Act for the Commissioner to assess tax on prorated basis based on the extent the machinery or equipment is used in the manufacturing or production process. It would thus appear that even though only part of the refrigeration equipment was used in this process, all of it is exempt. Counsel for the Minister argued at the hearing that Continental was not entitled to an exemption for the refrigeration unit. The submission is that Continental paid no Health Services tax in that it was directly paid by the two contractors, J. H. Lock and Germain. The thrust of the submission was that the contracting companies were the "purchaser" under the Act and therefore they, not Continental, were the only parties with the right to seek refund. As authority for this proposition referencewas made to Installations Electriques, G. Bradley Ltee. v. Nova Scotia (Attorney General) (1987), 77 N.S.R. (2d) 327; 191 A.P.R.. 327 (S.C.T.D.); leave to appeal refused 89 N.S.R. (2d) 270. The applicant protests that this is new matter, not presented by the parties or considered by the Commissioner or the Minister, and is not proper consideration on appeal. Section 19 deals with the right of appeal from the decision of the Minister and the powers of the court on appeal are provided in 19(4); (4) The judge shall hear the appeal and the evidence adduced before him by the appellant and Her Majesty in summary manner, and shall decide the matter of the appeal. Upon the request made to the judge by any party to the appeal, the hearing may be held in camera. It is argued by the respondent that s. 19(4) should be applied in liberal way to allow additional grounds to be argued at this stage. This is judicial proceeding where the legislation does not provide much by way of procedural requirements and the practice of counsel is to accommodate the deficiencies of the Act to ensure as much procedural fairness as possible. In the absence of consent from the other party, do not feel it is appropriate in the circumstances to allow party to raise new ground not submitted to or argued before the Minister or Provincial Tax Commissioner. The information that was before the Commissioner and the Minister was the same information presented to this court. There well may be appropriate circumstances where the court might allow such new submission, but do not feel this is one. See Ponnamma v. Arumogam, [1905] A.C. 383 (C.P.C.), National Telephone Company Limited v. Postmaster General, [1913] A.C. 546 (H.L.) and United Dominions Trust Ltd., [1954] W.L.R. 1345 (M.R.). In the latter case Evershed M.R. stated at p. 1351; As matter of principle, the Court of Appeal has always been strict in applying the rule that an appellant from county court, unless the other party consents, cannot be allowed in this court to raise new point of law not raised below. After all, the county court is intended to serve litigants of relatively small means, and it is not in accordance with the public interest that party, who has fought case in county court and been defeated, should then come to this court and raise in this court new point, and put his case in an entirely different way as matter of law and so make the other party, hitherto successful, litigate the matter again at the risk of having to pay the costs not only below but in this court. The result of my findings above is that the decision of the Provincial Tax Commissioner, as upheld by the Minister, to allow refund on the refrigeration equipment is approved, but that the tax paid should not have been apportioned based on the use of the equipment in production. This would mean that the tax paid relevant to the J. H. Lock contract in the amount of $41,335.50 should be refunded. In the result, the appeal is allowed and the appellant is awarded its costs. J. Halifax, Nova Scotia CANADA PROVINCE OF NOVA SCOTIA 1992 S.H. 72115 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: CONTINENTAL SEAFOODS LIMITED and THE MINISTER OF FINANCE DECISION OF JUSTICE KELLY
The plaintiff appealed the defendant's decision to grant a partial tax refund only under the Health Services Tax Act. The plaintiff had sought a full refund of tax paid on refrigeration equipment at a pickled herring plant (whose product was to be supplied on contract overseas) on the ground the equipment was used in the 'manufacture or production of goods for sale.' The contract stipulated that most of the processing occur at controlled cold temperatures. The defendant apportioned tax based on the time the equipment was used in the actual 'transformation or conversion' of the product. For the plaintiff, that (1) the tax exemption did not depend on the extent to which the equipment was used in the manufacturing process; and (2) since the contract required most of the process to occur under refrigeration, the use of a cold room was part of the 'manufacture or production' of the product.