r v. L'AGENCE DE REVENU DU QU, 2012 QCCQ 6701

Lockwood Manufacturing Inc. c. Agence de revenu du Québec 2012 QCCQ 6701 COURT OF QUEBEC CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL TOWN OF MONTREAL Civil Division No: 500-80-013513-099 DATE: June 19, 2012 ______________________________________________________________________ BY THE HONOURABLE DAVID L. CAMERON, J.C.Q. ______________________________________________________________________ LOCKWOOD MANUFACTURING INC. Petitioner v.

L'AGENCE DE REVENU DU QUÉBEC Respondent ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] The Petitioner, Lockwood Manufacturing Inc. ("Lockwood") appeals to this Court to have an assessment made under an Act Respecting the Quebec Sales Tax [1] and confirmed by the Respondent vacated or varied. [ 2 ] The assessment, appearing in a Notice of Assessment, number 2595021 (P-1), in respect to the period from September 1, 2003 to June 30 th , 2007, denies the Petitioner an input tax refund (ITR) in the amount of $57,418.87 for Quebec sales tax paid by the Petitioner on the supply of energy it used at its plant situated at 8104 Montview, town of Mount Royal, Quebec (the "Montreal Facility"). [ 3 ] It is not in issue between the parties that the Petitioner is a large business because of its sales in excess of 10 million dollars and as such is subject to the exclusion from input tax refund set out in

article 206.1 of an Act Respecting the Quebec Sales Tax which reads as follows: 206.1 Exclusions from input tax refund In determining an input tax refund of a registrant, no amount shall be included in respect of the tax payable by the registrant in respect of the supply or bringing into Québec of the following property or services: […] (3) electricity, gas, combustibles or steam; 206.1 Dans le calcul du remboursement de la taxe sur les intrants d'un inscrit, aucun montant ne doit être inclus à l'égard de la taxe payable par celui-ci relativement à la fourniture, ou à l'apport au Québec, des biens ou des services suivants: […] 3 l'électricité, le gaz, le combustible ou la vapeur; [ 4 ] This exclusion is subject to the exception set out

article 206.3:

206.3. Exception – Paragraph 3 of

section 206.1 does not apply to the portion of electricity, gas combustibles of steam that is, without reference to sections 43 and 44, used for a purpose such that the exemption provided for in paragraph aa of

section 17 of the Retail Sales Tax Act (Chapter I-1) would apply in respect thereof but for

section 49 of that Act. For the purpose of the first paragraph, the expression "sales of electricity, gas or fuel" and "other than meals and services including telephone service" in paragraph aa of

section 17 of the Retail Sales Tax Act (R.S.Q.,

chapter I-1) shall read "sales of electricity, gas combustibles or steam" and "other than meals, mobile homes and services including telephone service", respectively. (Underlining added for emphasis.) 206.3 Exception –

Le paragraphe 3 de l'article 206.1 ne s'applique pas à l'égard des biens visés à ce paragraphe, dans le cas où l'exception prévue au paragraphe aa de l'

article 17 de la Loi concernant l'impôt sur la vente en détail (L.R.Q., c. I-1 ) s'appliquerait relativement à ces biens, si ce n'était de l'article 49 de cette loi. Interprétation. - Pour l'application du premier alinéa les expressions «la vente d'électricité, de gaz ou de combustible» et «autres que les repas et les services dont celui du téléphone» prévues a paragraphe aa de l'

article 17 de la Loi concernant l'impôt sur la vente en détail , doivent se lire «la vente d'électricité, de gaz, de combustible ou de vapeur» et «autres que les repas, les maisons mobiles et les services dont celui du téléphone» . [ 5 ]

Section 49 states that the law ceases to apply in respect of any sale made after a certain date, to correspond with the implementation of the new QSTA. [ 6 ] The exception to which paragraph 206.3 applies, is found in sections 17 and 18.3 of the Retail Sales Tax Act [2] (the "RSTA") read with the specific definition of "production" found at

section 17 of that Act. [ 7 ] The relevant provisions read as follows: 17 . The tax provided for by this

chapter does not apply to the following: […] (aa) Subject to

section 19, sales of electricity, gas or fuel which a person of a category other than those determined by the Minister under

section 20 uses to produce movable property other than meals and services including telephone service, intended for sale or for the design or production of production equipment or conditioning materials used for the production of such movable property, either as an agent of production or to operate production equipment; this exemption does not apply to sales of electricity, gas or fuel used in equipment for the air conditioning, lighting, heating or ventilation of the production site; 17 . La taxe prévue par le présent

chapitre ne s'applique pas: […] (aa) sous réserve de l'article 19, à la vente d'électricité, de gaz ou de combustible qu'une personne d'une catégorie autre que celles que détermine le ministre en vertu de l'article 20 utilise à la production de biens mobiliers, autres que les repas et les services dont celui du téléphone, destinés à la vente ou à la conception ou à la production de matériel de production ou de matières de conditionnement utilisés à la production de tels biens mobiliers, soit comme agent de production, soit pour actionner du matériel de production; cette exemption ne s'applique pas à la vente d'électricité, de gaz ou de combustible utilisé à l'alimentation du matériel de climatisation, d'éclairage, de chauffage ou de ventilation des lieux de production;

18.3 . For the purposes of paragraphs y , z and aa of

section 17 and of this section, the following mean: […] (c) “production”: all those activities consisting of the assembling, processing or conditioning of property from which is derived other property that is different from the first property by its nature or characteristics, the restoring of movable property by its owner, the taping of pictures or the recording of sound and the generating of electricity, the building and maintenance of forest access roads in the course of carrying on a timber business, the piling up, at a first point of depot, of residues of carrying on mine business derived from the first stage of concentration, including, whenever performed by the same person in conjunction with the preceding activities: 18.3.

Aux fins des paragraphes y , z et aa de l'

article 17 et du présent article, on entend par: […]

c) «production» : l'ensemble des activités d'assemblage, de transformation ou de conditionnement de biens desquelles résultent d'autres biens différents des premiers par leur nature ou leurs propriétés, la remise en état de biens mobiliers par leur propriétaire, l'enregistrement d'images ou de son, la génération d'électricité, la construction et l'entretien de voies d'accès en forêt effectués dans le cadre de l'exploitation forestière, le tassement à un premier point de dépôt des résidus provenant du premier stade de concentration d'une exploitation minière, incluant, lorsqu'effectués par une même personne en corrélation avec les activités précédentes: [ 8 ] The Respondent disallowed the ITRs claimed by the Petitioner because of its view that none of the Petitioner's operations at its Montréal facility constitute production of moveable property intended for sale. [ 9 ] The Respondent takes the position that the commercial activities of the Petitioner at its Montréal facility are limited to services of cleaning and restoring baking pans that belong to its clients, something that the Respondent argues is not production as defined in these provisions. [ 10 ] Although it was not raised in the written defence, the Respondent's attorney also argued quite vigorously a subsidiary issue that was not formally part of the Minister's decision, although it was raised in the "Mémoire sur l'opposition " attached to the Minister's decision, that is to say the argument that the energy actually consumed by the Petitioner does not qualify as being in connection with production. [ 11 ] At the hearing, the Respondent argued that the criteria in

article 19 of the Retail Sales Act was not met by the proof, i.e. that the Petitioner had failed to establish, to the satisfaction of the Minister, the value of electricity or gas subject to the exemption. ISSUES [ 12 ] To decide whether the Petitioner is entitled to its ITRs in respect of the Quebec Sales Tax paid on electricity and gas used at its Montreal facility, the Court must give its opinion on the following questions.

a) Do the Petitioner's industrial activities carried out at the Montreal Facility constitute production within the meaning of the RSTA

section 18.3 (c)?

b) Do these activities constitute the production of moveable property intended for sale?

c) If the answer to the above questions is in the affirmative, is the exemption of

article 17 nevertheless inapplicable because the electricity and gas are used for the air conditioning, lighting, heating or ventilation of the production site as opposed to the production itself?

d) If the exemption does apply, do the deeming provisions of the QSTA

article 43 or 45 apply to either qualify all of the consumption as exempted or all of the consumption as being excluded from the exemption; or, if the proof is insufficient:

i) should the appeal be dismissed or; ii) should the hearing before this Court be reconvened to permit additional proof or iii) should the file be returned to the agency to permit the Petitioner to make proof of the proportion of its total energy use of electricity and gas that is involved in the production and that which is merely used in the air conditioning, lighting or heating or ventilation of the production site.

FACTS [ 13 ] Lockwood was, at all relevant times, a manufacturer and seller of commercial baking pans to the food-service and baking industries in Canada and in the United States, with several establishments in various parts of Canada. [ 14 ] In addition to selling new baking pans to its customers, typically supermarkets, food-service providers and retail and wholesale commercial bakeries, Lockwood also caries out, for the benefit of its clients, in its Montreal facility, the application of new coatings onto

commercial baking pans owned by its customers that Lockwood originally sold or onto pans its customers acquired elsewhere. [ 15 ] To recoat the baking pans, the Petitioner receives them, cleans and straightens them, blends the components required to achieve the correct formulation of the coating, applies the coating to the cleaned and straightened baking pans, cures the coating through the application of heat and then ships the finished product to its customer. [ 16 ] The Court heard the testimony of William Boswell, an assistant general manager of Lockwood.

Mr Boswell made the point that the Montreal Facility does not manufacture pans but it applies high-end coatings to pre-existing pans by cleaning them and re-glazing them. [ 17 ] In more detail, when a pan comes in from the bakery, Lockwood removes the residue of carbon and takes off the pre-existing coating by converting it into a powder form that settles in the tank; the pan is subjected to wash cycles and then a new coating is applied. [ 18 ] Lockwood chiefly uses a silicon coating made from a silicone base carried with a solvent, sprayed onto the pan. [ 19 ] Lockwood also offers Teflon (polymer coatings) and rubberised coatings. [ 20 ] The specific gravity of the solution is monitored hourly with hydrometers. [ 21 ] To carry out its activities, Lockwood must maintain the room temperature between 68 and 75 degrees; Lockwood targets 72 degrees (Fahrenheit). [ 22 ] Air temperature is critical because the solution of silicone base and solvent is volatile.

Without a constant control of temperature, the specific gravity of the solution would be compromised. [ 23 ] The desired property of the coating is that it makes the baking pan better at releasing the baked product without generating burnt material and waste. [ 24 ] Baking pans may be used without any coating in which case other means of providing release are used such as parchment paper, constant washing, continual running, or the application of oil spays. [ 25 ] Mr Boswell summarises that the costs of the coating material itself represents approximately 50% of the total cost of the operation. [ 26 ] Lockwood purchases the silicone material in liquid form.

It is delivered from a U.S. supplier in drums. Lockwood then mixes it with the solvent to produce the formulation required for application to the metal pans. Energy use [ 27 ] Two sources of energy are used at Lockwood's Montreal Facility, natural gas and electricity. - Natural gas [ 28 ] 70% of the natural gas is used in the heating of the tank system, where the carbon residue, as well as the remaining coating are removed and also in the wash cycles. [ 29 ] Natural gas is also used in the ovens used for the curing process whereby, after the silicone carrier solution is applied to the pan, it is baked at 425 o F.

For 1½ hours removing the solvent and curing the silicone solid onto its surface. [ 30 ] As well, gas is used in an air make-up system to maintain the air temperature. For environmental reasons, the tanks have to be exhausted, which removes a great deal of air from the premises. This air has to be replaced by air brought in through a ventilation system and heated. The air make-up system consists of exhaust fans, intake fans and radiant heaters. [ 31 ] Because of environmental laws, the solvents must be burned off before being discharged into the outside air.

The after-burner operates at 725 degrees Celsius. - Electricity [ 32 ] Electricity is used for the motors in the exhaust systems and in the pan washing system, the hoist and in lighting. Only a small proportion of the electricity is used for things other than the motors' exhaust systems, pan washing, the hoist, etc, i.e. in the lighting of the premises and the operation of computer system, etc. [ 33 ] When asked how much, Mr Boswell answered: "I would say no more than 10%". [ 34 ] To maintain the air temperature, the problem is one of heating, not of cooling.

Despite the fact that an enormous amount of energy is used to heat both in the boiler system and in the curing process, the use of an exhaust system to remove the contaminated air results in an intake of cold air, which must be reheated. [ 35 ] The witness spoke of 12 exchanges of air per minute. [ 36 ] In the warmer periods in the year, heating is less of a problem because the blend of silicone and solvent can be modified to deal with it.

[ 37 ] There are, however, periods where the plant is simply closed because it does not have the air-cooling capacity that would be required to maintain the ambient temperature within the required range. ANALYSIS Production [ 38 ] Does the activity carried out by Lockwood constitute production as defined in the RSTA,

section 18.3 c)? [ 39 ] The question can be examined with respect to the raw material used by Lockwood from its inventory, the silicone, or the existing product remitted by the client, the baking pan. [ 40 ] All of the activities described by Mr Boswell fall easily into the ordinary meanings of the words "assembling, processing and conditioning of property from which is derived other property that is different from the first property by its nature and characteristics". [ 41 ] The pans are processed both by the cleaning and the re-glazing.

They are conditioned by these same activities. [ 42 ] All of the terms "assembling, processing and conditioning" are reflected in what is done at the Montreal facility. [ 43 ] There are two elements of property involved: the silicone and the pans. The silicone is transformed from its liquid state as a raw material, to its finished state as a solid glazing, through a process of dissolving it in solvent, applying it to the pan and curing it under high temperature.

Its nature and characteristics are thus transformed. [ 44 ] The pans also undergo a transformation, process or conditioning from bent, carbonised and dirty to straight, cleaned and coated. [ 45 ] The respondent's point that the pan is "restored" (mise en état) is accurate, in relation to the pans, but not necessarily applicable in relation to the silicone coating that Lockwood is providing. [ 46 ] The addition of the silicone can be seen as part of a restoration service, or as the supply of silicone as a finished coating on an unfinished part. [ 47 ] The attorney for the Respondent conceded that the inclusion in the definition in 18.3(

c) of "the restoring of movable property by its owner" does not indicate a legislative intent to exclude activities that would otherwise quality as production simply because they have the effect of restoring the moveable property. In other words, the elements making up the definition are not mutually exclusive. A restoration of the pan can also be the processing of silicone into a coating. Depending on your vantage point, the silicone is processed, the pan is conditioned and the pan and the silicone together are assembled. [ 48 ] It would really do violence to the words used in 18.3

c) to interpret them to not include the activity carried out by Lockwood at the Montreal facility. Sale [ 49 ] The more subtle question is whether the production is of moveable property "intended for sale" as required by 17(aa). [ 50 ] It becomes necessary to consider the meaning of the word "sale" in the fiscal statutes as compared with the Civil Code . [ 51 ] Lockwood argues that a teleological approach must be taken given the continuation of language coming from a prior taxation scheme in its new setting.

Whereas the Retail Sales Tax was a tax on "sales" , the Act respecting Sales Tax is about taxing a "supply" regardless of whether or not that supply is a sale. Tax is applied when the supply is made because of a "sale" or a "service" as those words are defined in the QSTA,

section 1: “Sale”, in respect of property, includes, but for the purposes of subparagraph 2 of the second paragraph of

section 17 , any transfer of the ownership of the property and any transfer of the possession of the property under an agreement to transfer ownership of the property; «Vente», à l'égard d'un bien, comprend, sauf pour l'application du paragraphe 2° du deuxième alinéa de l'

article 17 , tout transfert de la propriété du bien et tout transfert de la possession du bien en vertu d'une convention visant à transférer la propriété du bien; “Service” means anything other than property, money and anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to his office or employment; «Service» signifie tout ce qui n'est pas un bien, ni de l'argent, ni tout ce qui est fourni à un employeur par une personne qui est son salarié, ou qui accepte de le devenir, dans le cadre de la charge ou de l'emploi de la personne ou relativement à cette charge ou à cet emploi; “Supply” means the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, lease, gift or alienation; «Fourniture» signifie la délivrance d'un bien ou la prestation d'un service, de quelque manière que ce soit, y compris par vente, transfert, troc, échange, licence, louage, donation ou aliénation;

[ 52 ] The retention of the RSTA provisions that we are currently examining is problematic, because the purpose of the former act was to tax "sales" as that term was defined in the Act, not supply, encompassing both sale and service. [ 53 ] Lockwood argues that "intended for sale" should be read in this light, and that it should therefore not matter that it does not sell the pans to its customers, who already own them, because the production of the moveable property, the transformed pans, is for the supply to the customer. In a sense, the argument is that

section 17 must be read mutatis matandis in order to make it work properly in the environment of the QSTA. "Intended for sale" should be read to mean "intended for supply". [ 54 ] The respondent argues that it is precisely because the Lockwood does not own the pans that it cannot intend them for sale. Implicit in this argument is that sale must be understood in the usual civil-law meaning of an onerous transfer of ownership. [ 55 ] It is interesting to step back momentarily from the tax issue and consider the nature of the contract in play in civil law.

The owner of the used pans does not sell them to Lockwood and then buy them back once cleaned and re-glazed, although, if it did, the practical and economic result would be identical. [ 56 ] The silicone coating is not sold separately from its application to the pans. The legal relationship is that of a contract of enterprise or for services as defined in

article 2098 and following C.C.Q.: 2098. A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay. 2098.

Le contrat d'entreprise ou de service est celui par lequel une personne, selon le cas l'entrepreneur ou le prestataire de services, s'engage envers une autre personne, le client, à réaliser un ouvrage matériel ou intellectuel ou à fournir un service moyennant un prix que le client s'oblige à lui payer. [ 57 ] There are two types of contracts created by 2098 and following: those that are only about service and those that also have a component of furnishing property. [ 58 ] Articles 2103 and 2104 contemplate the contractor or the client (and, therefore both) "furnishing" "the property necessary for the performance of the contract" . [ 59 ]

Article 2103 reads: 2103. The contractor or the provider of services furnishes the property necessary for the performance of the contract, unless the parties have stipulated that only his work is required. He shall furnish only property of good quality; he is bound by the same warranties in respect of the property as a seller. A contract is a contract of sale, and not a contract of enterprise or for services, where the work or service is merely accessory to the value of the property supplied. 2103.

L'entrepreneur ou le prestataire de services fournit les biens nécessaires à l'exécution du contrat, à moins que les parties n'aient stipulé qu'il ne fournirait que son travail. Les biens qu'il fournit doivent être de bonne qualité; il est tenu, quant à ces biens, des mêmes garanties que le vendeur. Il y a contrat de vente, et non contrat d'entreprise ou de service, lorsque l'ouvrage ou le service n'est qu'un accessoire par rapport à la valeur des biens fournis. [ 60 ] Mr Boswell testified that the cost of the coating material represents approximately 50% of the total cost of the operation.

Conversely 50% of the cost relates to the rest of the operation: cleaning and preparation and recoating and curing, not a mere accessory to the value of the silicone supplied. [ 61 ] One type of contract of enterprise, contemplated at

article 2110 and following, involves "works" which may be movable or immovable. [ 62 ] Whether the works be movable or immovable, the contract is completed by the acceptance of the work at its completion. 2110. The client is bound to accept the work when work is completed; work is completed when the work has been produced and is ready to be used for its intended purpose. Acceptance of the work is the act by which the client declares that he accepts it, with or without reservation. 2110.

Le client est tenu de recevoir l'ouvrage à la fin des travaux; celle-ci a lieu lorsque l'ouvrage est exécuté et en état de servir conformément à l'usage auquel on le destine. La réception de l'ouvrage est l'acte par lequel le client déclare l'accepter, avec ou sans réserve. [ 63 ] Acceptance is a concept distinct from the notion of delivery found in the case of sale or lease. Because works can be moveable or immovable, and because of the way in which they involve property from different sources, there may or may not be a physical transfer of possession at the time of acceptance.

Acceptance is not necessarily a form of delivery, and its legal effects are more complex. [ 64 ] Another difference is that in sale, transfer of title is of the essence:

1708. Sale is a contract by which a person, the seller, transfers ownership of property to another person, the buyer, for a price in money which the latter obligates himself to pay. A dismemberment of the right of ownership, or any other right held by the person, may also be transferred by sale. 1708. La vente est le contrat par lequel une personne, le vendeur, transfère la propriété d'un bien à une autre personne, l'acheteur, moyennant un prix en argent que cette dernière s'oblige à payer.

Le transfert peut aussi porter sur un démembrement du droit de propriété ou sur tout autre droit dont on est titulaire. [ 65 ] Transfer of ownership is not essential to the contract of enterprise. In our case, for example, there is a transfer of ownership of one component: the silicone, but no transfer of ownership of the other, the pan. [ 66 ] So the respondent is correct in assessing the contract as not being one of sale in the definition of the civil law. What of the

definitions in the statutes we are considering? [ 67 ] In the RSTA, the

definitions of "sale" and "sale price" are much broader than the civil-law meanings, except that there is a limitation to movable property. This was perhaps inherent in the policy objectives of the RSTA , to make it more inclusive of contracts bearing a similarity to sale: but only with respect to moveable property. 2 . In this Act and the regulations, unless the context indicates a different meaning, […] 2.

Dans la présente loi et les règlements, à moins que le contexte n'indique un sens différent: […] (7) “sale price” or “purchase price” means a price in money, and also the value of services rendered, the actual value of the thing exchanged, and other considerations or prestations accepted by the vendor as the price of the thing covered by the contract of sale. It includes the charges for the installation of the thing sold, for service, for customs, for excise and for transportation costs and all taxes paid or payable under the Excise Tax Act (Revised Statutes of Canada, 1985,

chapter E-15 ) determined, in the case of the tax paid or payable under

Part IX of the said Act, without reference to the input tax credit provided for in that Part, even when such are not shown separately on the invoice or in the vendor's books; […] 7° «prix de vente» ou «prix d'achat» signifie le prix en argent, et aussi la valeur de services rendus, la valeur réelle de l'objet échangé, et toute considération ou prestation acceptée par le vendeur comme prix de l'objet du contrat de vente. Ceci inclut tous frais d'installation de l'objet vendu, tous frais de service, tous frais de douane, d'accise et de transport et toute taxe payée ou à payer en vertu de la

Loi sur la taxe d'accise (Lois révisées du Canada (1985),

chapitre E-15 ) déterminée, dans le cas de la taxe payée ou à payer en vertu de la

partie IX de cette loi, sans égard au crédit de taxe sur les intrants prévu à cette partie, même si aucune mention distincte n'en est faite sur la facture ou dans les livres du vendeur; […] (9) “sale” includes a sale pure and simple, a conditional sale, a sale by instalments, an exchange, a lease or any other contract whereby, for a price or other consideration, a person delivers or binds himself to deliver, to another, movable property ; it also includes any contract whereby a person grants to another the enjoyment of movable property for a certain time for a rental or price which the latter binds himself to pay him but it does not include any such contract when it is provided that the movable property is furnished with the services of its operator; (underlining added for emphasis) 9° «vente» comprend une vente pure et simple, une vente conditionnelle, une vente à tempérament, un échange, un bail et tout contrat où, pour un prix ou toute autre considération, une personne livre ou s'oblige à livrer à une autre personne un bien mobilier , ainsi que tout autre contrat par lequel une personne accorde à une autre personne la jouissance d'un bien mobilier pendant un certain temps moyennant un loyer ou prix que celle-ci s'oblige à lui payer mais ne comprend pas un tel autre contrat lorsqu'il y est prévu que le bien mobilier est fourni avec les services de son opérateur; [ 68 ] In the contract of sale, the transfer of possession is referred to in the Civil Code of Quebec as "delivery" , in French "la deliverance" . 1717.

The obligation to deliver the property is fulfilled when the seller puts the buyer in possession of the property or consents to his taking possession of it and all hindrances are removed. 1717. L'obligation de délivrer le bien est remplie lorsque le vendeur met l'acheteur en possession du bien ou consent à ce qu'il en prenne possession, tous obstacles étant écartés. [ 69 ] The contract of lease also has as one of its essential obligations "delivery"/"la deliverance" but without transfer of ownership.

1854. The lessor is bound to deliver the leased property to the lessee in a good state of repair in all respects and to provide him with peaceable enjoyment of the property throughout the term of the lease. He is also bound to warrant the lessee that the property may be used for the purpose for which it was leased and to maintain the property for that purpose throughout the term of the lease. 1854. Le locateur est tenu de délivrer au locataire le bien loué en bon état de réparation de toute espèce et de lui en procurer la jouissance paisible pendant toute la durée du bail.

Il est aussi tenu de garantir au locataire que le bien peut servir à l'usage pour lequel il est loué, et de l'entretenir à cette fin pendant toute la durée du bail. [ 70 ] In comparing the civil-code articles on sale and those on lease, it can be seen that delivery does not necessarily involve a transfer of title, and it is common to sale and to lease.

Delivery is distinct from the concept of acceptance, which is a difference between sale and lease on the one had, and the contract of enterprise for works on the other. [ 71 ] Because of the way the sections 206.1 and 206.3 of the QSTA make sections 17 and 18.3 of the RSTA apply, i.e. by deeming the law to still apply, the Court is of the view that the definition of "sale" found in the RSTA should still apply, not that of the QSTA. In other words, the old rule exists in the confines of its own vocabulary.

If Lockwood's contract can be defined as a "sale" as that term is defined in the RSTA, the exemption applies. [ 72 ] Applying that definition to the present case, the contract here, which does involve a production, does not qualify as a production of movable property intended for sale, because it is a contract for enterprise involving a work. The juridical act is accomplished by the acceptance when the work is completed, not by delivery, as is the case for a sale or a lease.

Although the definition of sale in the RSTA is broader than the civil-code definition, it is not broad enough to include Lockwood's contract. [ 73 ] In holding this view, the Court is aware that the Agence adheres to jurisprudence that seems to establish a similar opinion. In Pneus Dominic inc. c. Québec (Sous-ministre du Revenu) [3] , the retreading of tires was considered by this Court to not constitute production in the sense of « remise en état de biens mobiliers par leur propriétaire » .

In the present case, however, the Agence conceded that the components of the definition should not be considered mutually exclusive, as mentioned above in paragraph 47. [ 74 ] That case is also based on the notion that the retreaded tire does not change its nature, « ce sera toujours un pneu » (para 26). The facts are distinguishable, because of the specific process of coating as described in the facts of the present case referred to above in paragraphs 38 to 47.

This case is not, in our respectful opinion, applicable on the issue of production [ 75 ] In obiter, Mr Justice Pinard J.C.Q. refers to the expression « destinés à la vente » , citing the case of Crown Tire Service Ltd. c. La Reine [4] , where the analysis is based on the requirement that a contract of sale involve a transfer of title. In that case however, there was no mention of a specific statutory definition of sale, it was simply a matter of applying the common law, as explained in an English textbook on the subject.

A similar approach was taken by the majority of the Supreme Court of Canada in Will-Kare Paving & Contracting Ltd. c. Canada , [5] but again, this is a different statute there is no statutory definition in play. [ 76 ] With respect, the line of authority referred to may provide some comfort, but it is not really applicable because it is based on common-law notions of sale rather than on a statutory definition to be interpreted in the context of Quebec law. [ 77 ] In our view the correct approach is to actually apply the definition that the legislation provides.

In the context of Quebec law, the deliberate use of the term "delivery of movable property", as a requirement of the broad definition of sale in

article 2. (9) of the RTSA rather than "acceptance" , shows an intention to exclude contracts of enterprise or for service, where the notion of delivery is not operative, as opposed to an intention to exclude contracts where there is no transfer of title. [ 78 ] In our case there is a transfer of title of some moveable property, but not a delivery in the usual legal sense of that term.

The Court is aware that Lockwood probably ships the finished product to the client, but that is a modality of the acceptance of the work, not a delivery in the ordinary meaning of that word in Quebec law. [ 79 ] In coming to this conclusion, the Court is mindful of the perceivable inconsistency of the sale/non sale distinction in the context of a fiscal regime that taxes supply, rather than sale only, but the legislator decided to apply an old exception as if it was still operating in the former statutory setting, without using an adaptive mutatis mutandis interpretive wording.

This reveals an intention not to depart from the old regime completely, for reasons that may not be apparent in this particular case. Use of the energy for production [ 80 ] On the facts of this case, the Court would have found that the energy was used in production, as opposed to the heating, ventilation and lighting of the production site.

The need for temperature control, ventilation and the heating of materials as well as the washing process creates an energy use that is directly related to the production itself, as opposed to the maintenance of an ordinary workspace. [ 81 ] As well, the evidence was, in the Court's view sufficient to meet the test of

article 19 of the RSTA :

19. For the purposes of paragraph aa of

section 17 , every person contemplated in the said paragraph must establish to the satisfaction of the Minister the value of electricity, gas or fuel subject to the exemption provided for in the said paragraph. 19. Aux fins du paragraphe aa de l'

article 17 , toute personne visée à ce paragraphe doit établir à la satisfaction du ministre la valeur de l'électricité, du gaz ou du combustible sujette à l'exemption prévue par ce paragraphe. [ 82 ] The testimony of Lockwood's witness was succinct, but credible, given his vast experience. The attorney for the Defendant did not delve into the matter in cross-examination nor did he present evidence to contradict the testimony. In the evidentiary process of the Court, credible, probative evidence demonstrating a fact is sufficient, and a stricter burden of proof is not called for. [ 83 ] The deeming provision of the QSTA,

section 43, applies: 43. Where substantially all of the consumption or use of property or a service by a person is in the course of the person's commercial activities, all of the consumption or use of the property or service by the person is deemed to be in the course of those activities. 43.

Dans le cas où la presque totalité de la consommation ou de l'utilisation d'un bien ou d'un service par une personne est faite dans le cadre de ses activités commerciales, cette consommation ou cette utilisation est réputée faite en totalité dans ce cadre. [ 84 ] That test was not met by the testimony. [ 85 ] Because of the novelty of the case, an application of an old rule in a new setting with little guidance from the case-law, each party will pay its own costs. FOR THESE REASONS, THE COURT: DISMISSES the motion, each party paying its own costs. __________________________________ DAVID L. CAMERON, J.C.Q.

Mtre Tetiana M. Gerych PHILLIPS FRIEDMAN KOTLER Attorneys for the Plaintiff Mtre Danny Galarneau LARIVIÈRE MEUNIER Attorney for the Defendant Date of hearing: January 12, 2012