More on the tax front: this time from the BC Supreme Court...

In Pacific National Processing Ltd. v. HMTQ (BC), released February 5, 2013, Madam Justice Adair of the BC Supreme Court clarified the application of the provincial Social Services Tax (“SST”) to the processing of whole, farmed salmon.

The issue in the case was whether cleaning and packing whole fish into boxes for transport and sale was properly classified as the manufacture of a product, so as to attract an exemption from SST.

Machinery or equipment for use primarily and directly in the manufacture of qualifying tangible personal property is exempt from taxation. The first issue before the court was whether the washing, grading, cleaning, weighing and packaging of whole dead fish resulted in a substantial change in the characteristics of the tangible personal property (the fish) such that the machinery and equipment used in those processes qualified for the tax exemption.

The processing plant argued that it transformed dead fish into marketable food, and this was a substantial change in the characteristics of the fish which allowed the processing equipment to be exempt. The court agreed and found that the equipment met the test of performing a complex operation which substantially changed the character of the fish, i.e. it was qualifying tangible personal property under the Regulations.

The court then addressed the second issue before it, namely whether the equipment was brought back into a taxable position by virtue of one of two relevant exclusions to the qualifying personal property exemption: 1) growing, harvesting or producing agriculture or aquaculture products, or 2) cleaning, grading, or packaging tangible personal property unless such activities occur immediately after or before the processing which created the initial qualifying personal property exemption.

The court found that eviscerating and packing dead fish did not fall within the meaning of the first exclusion. The court found that the salmon farm itself was the production phase in creating the fish for market. The court then found that while eviscerating fish is commonly known as “cleaning” fish, in fact the cleaning reference in the exclusion language was applicable to the initial washing of the exterior of the whole fish. Cleaning out the innards of the fish was not caught by the word “cleaning” in the Regulations.

Pacific National Processing Ltd. v. British Columbia, 2013 BCSC 279. The full text of the reasons can be found here: