Executive Summary: Key Legal and Evidentiary Issues

• Characterization of Lainco’s activities as manufacturing of steel structures and parts for sale versus construction services integrated into building projects
• Determination of whether the specialized equipment purchased in 2015, 2016 and 2017 was “primarily used” for fabricating articles destined for sale, as required for investment tax credits
• Application of the statutory presumption of validity of tax assessments and whether Lainco’s evidence was sufficient to “demolish” the ARQ’s factual assumptions
• Evaluation of detailed quantitative evidence (revenues, costs, subcontracting, crane rentals) to distinguish fabrication in a plant from on-site construction activities
• Legal qualification of Lainco’s contracts with clients as contracts of sale of fabricated steel products, with ancillary installation, rather than pure contracts for services
• Impact of these findings on Lainco’s entitlement to investment tax credits and related manufacturing SME deductions and reductions for the 2015–2017 tax years

Facts of the case
Lainco inc. is a Québec-based company that designs and fabricates steel structures, frames, and metal components. It operates primarily as a manufacturer, producing custom steel structures and pieces either according to client or general contractor specifications, or under its own proprietary structural concept known as Design Built or HighRidge. These concepts were developed after the 1998 ice storm to provide structurally robust steel frames capable of withstanding extreme conditions and are protected by copyright and trademarks in Québec and the Maritimes. The typical uses of these structures include sports centres, soccer fields, arenas, aircraft hangars and similar facilities. Lainco’s business model is project based and highly customized. The company does not maintain inventory because each structure or piece is fabricated for a specific client order. Its clients include general contractors, other metal fabricators, and steel erectors. The company has several departments, including engineering, shop drawings, fabrication (cutting, producing frames and sub-parts, welding, painting, handling, and preparation for delivery), illustrating that its core activity takes place in its plant. When a client does not provide engineering plans, Lainco prepares them subject to the client’s approval; the raw steel may be supplied either by the client or by Lainco through its suppliers.
Lainco occasionally offers “turnkey” service in the sense that, after fabricating the steel structures, it coordinates installation by subcontractors. Two or three project managers oversee each contract from order to delivery, including supervising subcontractors’ installation work and crane rentals where required. However, Lainco does not own cranes and relies on external crane services; its internal equipment list for the relevant years contains plant machinery such as compressors, a CNC “angle line” (Punching and Shearing System for Angles), and Gemini machines, but no cranes. The evidence showed that project managers spend only a small portion of their time supervising on-site installation and that this installation supervision is a relatively limited part of the company’s total activity.
For the 2015, 2016 and 2017 taxation years, Lainco purchased specialized manufacturing equipment and claimed Québec investment tax credits (crédits d’impôt pour investissement) under the Loi sur les impôts and its regulations. These machines were: a Cambreuse BC 900 acquired in 2015 for $54,000 to bend beams and create curves to increase the strength of steel members, particularly for Design Built/HighRidge concepts; a CNC Punching and Shearing System for Angles purchased in 2016 to produce small L-shaped steel pieces and to replace obsolete machinery, notably in view of a contract to supply pieces for the refurbishment of the Jacques-Cartier Bridge; and, in 2017, a Gemini 25 HPE machine costing $616,378, used to fabricate and drill pieces without burning or punching them, at the request of a client and ultimately for other orders as well. The parties agreed that the applicable credit rate itself was not in dispute; only eligibility was contested.
The Agence du revenu du Québec (ARQ) issued three notices of assessment dated 28 August 2018, disallowing Lainco’s investment tax credits of $3,320 (2015), $16,861 (2016) and $48,310 (2017) related to this equipment, as well as denying related additional deductions and reductions available to manufacturing SMEs. The ARQ took the position that Lainco was engaged in “construction” rather than manufacturing, and that its activities were carried on under contracts of services, not contracts of sale of goods. The ARQ also argued that for purposes of the investment tax credit, what mattered was the nature of the taxpayer’s activities, not the use of the equipment. Lainco appealed the three assessments to the Court of Québec, Civil Division.

Procedural background and burden of proof
Under Québec income tax law, tax assessments benefit from a statutory presumption of validity. The taxpayer bears the initial burden to “demolish” this presumption through prima facie evidence showing that the factual assumptions underpinning the assessments are incorrect. The Court summarized the settled jurisprudence: a taxpayer must provide clear, credible, and sufficiently precise evidence to demonstrate that the facts assumed by the tax authority are wrong; if such evidence is presented, the burden then shifts to the tax authority to prove, on a balance of probabilities, that the reassessment is justified. Mere denial of the tax authority’s factual assumptions is not enough; there must be some convincing factual basis that, if believed and not contradicted, requires the Court to accept the taxpayer’s version.
In this case, the presumption of validity attached to the ARQ’s three assessments. The Court therefore first examined whether Lainco had discharged its burden of presenting sufficient prima facie evidence that the ARQ’s underlying factual assumptions—primarily, that Lainco carried on construction activities and supplied services rather than selling manufactured goods—were incorrect. Only then would the onus shift back to the ARQ.

Statutory and regulatory framework for the investment tax credit
To qualify for the Québec investment tax credit, a taxpayer must acquire “eligible property” falling within specified capital cost allowance categories in Schedule B to the Regulation respecting the Taxation Act, including category 29 and 43, which cover certain manufacturing and processing equipment. An essential condition in Lainco’s case was that the equipment be used directly or indirectly, and primarily, for the fabrication or transformation of articles destined for sale. The Regulation defines “fabrication” and “transformation” in a way that explicitly excludes “construction,” so a clear distinction between manufacturing and construction was central to eligibility.
Lainco argued that the disputed equipment was used in its plant to manufacture steel structures and pieces that it then sold to clients. It maintained that it did not carry out construction work: the erection or installation of steel structures at job sites was executed by independent subcontractors, and Lainco’s role in installation was limited to supervision to ensure contractual and engineering requirements were met. Lainco also produced quantitative evidence, including financial statements, trial balances, and internal breakdowns of revenues by project type, to demonstrate that its revenues and costs during the relevant years mainly arose from the sale of manufactured structures and parts, not from construction activities.
The ARQ, relying on a verification report, countered that Lainco’s activities amounted to construction and that its equipment was therefore not used primarily for manufacturing articles for sale. It pointed to public records (business registry and construction regulator), newspaper articles, and Lainco’s marketing materials, which described Lainco in terms associated with construction. The ARQ’s auditor also reviewed a small sample of contracts and concluded that Lainco delivered completed building structures as part of integrated construction services.

Evidence regarding Lainco’s activities and use of the equipment
Lainco’s president and its vice president of finance testified at trial and gave detailed evidence about how the company operates. They explained the origin and technical features of the Design Built/HighRidge structural concept and how this proprietary system is integrated into projects such as arenas and sports centres. They described three broad categories of contracts: (1) steel structures fabricated according to a general contractor’s specifications; (2) steel structures using Lainco’s proprietary Design Built/HighRidge concept; and (3) steel pieces fabricated according to particular client specifications. In each category, Lainco’s role was to fabricate structures or parts in its plant for the client’s project.
The witnesses stressed that Lainco does not maintain stock; all structures and pieces are custom-made and tied to specific orders. They outlined the departmental organization of Lainco, highlighting that the bulk of its operations—engineering, shop drawings, cutting, assembly, welding, finishing, and preparation for delivery—occurred at the plant. Photographs and a floor plan supported this account. The project managers’ role was largely administrative and coordinative: following up on contracts, liaising with clients, and supervising subcontractors’ installation work to ensure compliance. Lainco demonstrated that the time devoted to on-site supervision represented a small fraction of total employee hours over the three taxation years.
Financial data were also key. Lainco identified, for each year, the costs of subcontracted work and crane rental for installation: these were significant but still only a portion of the total cost of goods sold. Lainco then presented a breakdown of revenues attributable specifically to the erection of structures (installation) as compared to total revenues, showing that erection-related revenues represented about 26% of total revenues in 2015, 19% in 2016 and 13% in 2017. In 2017, two large public-sector projects (Amos and Mirabel), where Lainco appeared as general contractor due to holding the requisite public procurement license, generated a substantial share of gross revenues; however, Lainco argued that even in those cases its core contribution remained fabrication of structural steel, with installation performed under subcontracted arrangements.
The Court accepted that Lainco’s plant equipment, including the Cambreuse BC 900, the CNC angle line, and the Gemini 25 HPE, was primarily used in the fabrication process for steel members and parts. For example, the angle line and Gemini machines were used to produce exacting pieces required for the Jacques-Cartier Bridge refurbishment, a contract that the auditor had not specifically analyzed. Lainco also filed a comprehensive equipment list for the relevant years that confirmed the absence of construction machinery such as cranes.

ARQ’s verification, factual assumptions, and evidentiary weaknesses
The ARQ’s case rested heavily on the testimony and report of its second assigned auditor. She concluded that Lainco was engaged in construction based on various external sources: the Québec Enterprise Register, the Régie du bâtiment du Québec, newspaper articles, and Lainco’s public communications, which portrayed the company as offering building-related services. She also reviewed five contracts requested from Lainco to support her revised position and inferred that Lainco was providing an integrated construction service, effectively “selling buildings” rather than discrete products. The auditor treated the steel structures as the skeleton or foundation of buildings and considered that their production was inseparable from the overall construction projects.
However, the Court found notable gaps and weaknesses in the ARQ’s evidence. The auditor’s detailed verification and written report focused exclusively on the 2016 year, and she simply applied the same conclusions to 2015 and 2017 via simplified verification reports, without undertaking a specific analysis of the equipment acquired or contracts performed in those years. In particular, she did not analyze the significant bridge-refurbishment contract in 2017 that had driven Lainco’s acquisition of some of the disputed equipment, and she admitted that she had not done further examination for 2015 and 2017 once she had decided that Lainco’s activities in 2016 were construction oriented.
The Court was also critical of certain legal assumptions made by the auditor. She took the view that when a company fabricates goods from raw materials it does not yet own at contract signing, the resulting transaction could not qualify as a sale of goods. She likewise suggested that if a contract was characterized as one for services, it could not simultaneously be treated as a sale for tax purposes. The Court regarded this as an overly rigid and inaccurate understanding of how contracts of sale and contracts of services can overlap, especially when the fabrication of customized goods is central and any installation is merely ancillary.

Court’s analysis on manufacturing versus construction
The Court first determined whether Lainco had produced enough evidence to overcome the presumption that the ARQ’s factual assumptions were valid. It concluded that Lainco had done so. The company’s documentary and oral evidence showed that it had primarily used the disputed equipment to fabricate steel structures and pieces for sale from its plant, rather than to perform construction activities at job sites. The financial metrics, including the relatively modest proportion of revenues and costs tied to on-site erection and crane services, supported the view that installation was secondary to manufacturing.
The Court also took into account interpretive guidance from tax authorities, including a federal interpretation bulletin indicating that manufacturing or processing could be considered part of a construction business only where substantially all of the production is used in the taxpayer’s own construction operations. In Lainco’s case, the evidence showed mixed projects and significant supply of fabricated steel products to various clients, including bridge-refurbishment work, not simply the company’s own construction sites. The judge found that the ARQ had not provided a preponderance of evidence to re-establish that Lainco’s equipment was used primarily in construction, as opposed to manufacturing for sale.
As a result, on a balance of probabilities, the Court held that Lainco’s activities in relation to the disputed machinery fell within “fabrication or transformation” of articles destined for sale, not “construction,” within the meaning of the Regulation. The specialized equipment, including the three specific machines acquired in 2015, 2016 and 2017, thus qualified as “eligible property” for the Québec investment tax credit.

Contracts of sale versus contracts for services
The second major legal question was whether, even assuming no construction activity, Lainco’s contracts with clients should be legally categorized as contracts of service rather than contracts of sale of goods. The ARQ argued that the integrated nature of the projects, including engineering, coordination and supervision of installation, meant that Lainco was essentially providing a service—producing an “ouvrage” under the Civil Code—rather than selling physical goods.
The Court rejected this characterization. It emphasized that Lainco’s central obligation was to fabricate steel structures and components tailored to client specifications. The value of on-site installation and erection work, including subcontracted services and crane rentals, was found to be accessory compared to the value of the fabricated steel products themselves. Under Québec civil law principles, when the provision and fabrication of a tangible thing predominate and any installation is merely incidental, the legal characterization remains a contract of sale, not a pure contract of service.
The judge also noted that, for the purposes of investment tax credits, the legal qualification of the contract does not negate the factual requirement that the taxpayer must primarily use the equipment to fabricate articles destined for sale. Here, the fabrication clearly preceded and was distinct from any installation, and the existence of post-fabrication services did not transform the underlying contracts into service-only arrangements. Accordingly, the Court held that Lainco supplied its clients with fabricated articles under contracts of sale and that these transactions satisfied the requirement that the equipment be used to manufacture goods for sale.

Outcome and monetary consequences
Having found that Lainco used the machines primarily in manufacturing articles for sale and that its contracts with clients were properly characterized as sales with ancillary installation, the Court held that Lainco met the statutory conditions for the Québec investment tax credit. It further concluded that Lainco had successfully rebutted the presumptions underpinning the ARQ’s three reassessments and that the ARQ had not, in turn, produced sufficient evidence to justify maintaining those assessments.
The Court therefore allowed Lainco’s appeal and set aside the three notices of assessment issued on 28 August 2018 for the 2015, 2016 and 2017 taxation years. In doing so, it restored Lainco’s entitlement to the disallowed investment tax credits of $3,320, $16,861 and $48,310, respectively, and confirmed that, in line with the parties’ agreement, Lainco was also entitled to the related additional deductions and reductions available to a manufacturing SME (including a $50,000 transport deduction and a further $19,153 reduction) tied to the same characterization of its activities. Lainco was awarded its costs of justice. However, the judgment does not calculate a single global monetary figure combining the tax credits, associated deductions/reductions, interest, and costs, so the precise total amount ultimately realized by Lainco cannot be determined from the decision alone.