Judgments

[2001] 2 F.C. 191

A-338-99

Her Majesty the Queen (Appellant) (Defendant)

v.

RJR-MacDonald Inc. (Respondent) (Plaintiff)

Indexed as: RJR-MacDonald Inc. v. Canada (C.A.)

Court of Appeal, Létourneau, Sexton and Malone JJ.A.—Toronto, December 14; Ottawa, December 22, 2000.

Customs and Excise — Excise Tax Act — Appeal from F.C.T.D. decision allowing appeal from MNR’s refusal of application for refund of excise tax paid on tobacco products respondent provided free for advertising, promotional purposes — Excise Tax Act, s. 23(1) imposing excise tax on goods mentioned in Schedules, manufactured or produced in Canada and delivered to purchaser — S. 23(2) providing excise tax on such goods payable at time of delivery of goods to purchaser — S. 23(10) providing goods in Schedule II manufactured, produced in Canada, for use by manufacturer, producer and not for sale, deemed delivered to purchaser, and delivery deemed to have taken place when goods used — If delivery to purchaser deemed, so too is purchase, and therefore sale — Element of sale F.C.T.D. Judge found missing in s. 23(1), (2) deemed by s. 23(10) — Where goods appropriated for manufacturer’s own use, all prerequisites to imposition of tax found in s. 23(1), (2), (10) — Provisions expressly deeming sale elsewhere in Act distinguishable from internal use situation — No double taxation if tax specific (i.e. payable at specified rate per quantity) because rate not increasing with price of goods — Excise tax on cigarettes, manufactured tobacco specific — Ad valorem tax (percentage of sale price) on cigars not enforceable because double taxation.

This was an appeal from a decision of the Trial Division allowing an appeal from the Minister of National Revenue’s refusal of the respondent’s application for a refund of excise tax paid on tobacco products which it provided free for advertising and promotional purposes. There was no difference between the products which were sold to customers in the normal course of business and the sample tobacco. Excise Tax Act, subsection 23(1) imposes an excise tax on goods mentioned in Schedules I and II, manufactured or produced in Canada and delivered to a purchaser. Subsection 23(2) provides that the excise tax on such goods is payable by the manufacturer or producer at the time of delivery of the goods to the purchaser. Subsection 23(10) provides that when goods mentioned in Schedule II are manufactured or produced in Canada and are for use by the manufacturer or producer and not for sale, they shall be deemed to have been delivered to a purchaser thereof, and the delivery shall be deemed to have taken place when the goods are used. The Trial Division Judge held that tax on the sample tobacco was not payable unless all the prerequisites of both subsections 23(1) and (2) were fulfilled, and since subsection 23(10), which purports to deal with unsold goods diverted to a manufacturer’s own use, failed to provide for a deemed sale, there was no sale in Canada, an essential element of the charging formula in subsections 23(1) and (2). He noted that subsection 23(10) does not provide an identification of the person liable to pay tax, although that might be irrelevant since only the manufacturer or producer has anything to do with the goods and it would make little if any sense for any other person to be liable for the tax. The issue was whether the Trial Judge erred in interpreting Excise Tax Act, subsections 23(1), (2) and (10).

Held, the appeal should be allowed with respect to cigarettes and manufactured tobacco, and dismissed with respect to cigars.

The Trial Judge correctly found that where one is dealing with the appropriation of goods for the manufacturer’s own use, it is not necessary to specify by whom the tax is payable, since only the manufacturer has anything to do with the goods and is clearly the only person who might be liable to pay the tax. But he incorrectly concluded that the prerequisites of subsection 23(2), particularly as they may require that goods be “sold”, had not been met. Subsection 23(10) provides that goods appropriated for the manufacturer’s own use shall be deemed to have been delivered to a purchaser thereof at the time of appropriation. If the delivery to a purchaser is deemed, so also must the purchase itself and therefore the sale. Consequently, the element of sale that the Trial Judge found to be missing is deemed by subsection 23(10). It follows that where goods are appropriated for the manufacturer’s own use, all of the prerequisites to the imposition of tax are found within the wording of subsections 23(1), (2) and (10).

The respondent argued that in the absence of express language deeming a sale to have taken place, subsections 23(1) and (2) result in an incomplete charging provision. Subsection 23(10) involves only one person, the manufacturer. The subsections dealing expressly with deemed sales are dealing with transactions involving more than one person. Thus the express deeming provisions for sales are distinguishable from the “internal use” situation as in each case a specific sales clause is necessary to cover a specific artificial transaction between two parties.

Further, the payment of excise tax in this case would not result in double taxation in the case of cigarettes and manufactured tobacco. The excise tax on cigarettes and manufactured tobacco is specific. It is payable at a rate specified per unit of quantity. No double taxation results where a manufacturer raises the price of a good to compensate for other costs of doing business, if the tax is specific because the rate does not increase with the price of the goods, but with their quantity. The appropriation of cigarettes and manufactured tobacco for the respondent’s own use, falls squarely within subsections 23(1) and (10) and is subject to a specific tax pursuant to Schedule II. However, the ad valorem tax (expressed as a percentage of sale price) on cigars manufactured by the respondent is not enforceable as it is in effect double taxation.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Excise Tax Act, R.S.C., 1985, c. E-15, ss. 23(1) (as am. by R.S.C., 1985 (2nd Supp.), c. 1, s. 187), (2) (as am. idem), (3)(a) (as am. by R.S.C., 1985 (4th Supp.), c. 12, s. 12), (3.1) (as am. by R.S.C., 1985 (1st Supp.), c. 15, s. 12), (10), 52(1) (as am. by R.S.C., 1985 (2nd Supp.), c. 7, s. 34), 68 (as am. by R.S.C., 1985 (1st Supp.), c. 15, s. 24; (2nd Supp), c. 1, s. 195; c. 7, ss. 23, 34), 72 (as am. idem; S.C. 1994, c. 29, s. 8), 81.22 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 81.28 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52).

CASES JUDICIALLY CONSIDERED

APPLIED:

W.R. McRae Co. v. R., [1997] 3 C.T.C. 337; (1997), 215 N.R. 233 (F.C.A.); Canadian Turbo (1993) Ltd. v. R., [1997] 1 C.T.C. 130; (1996), 206 N.R. 164 (F.C.A.).

DISTINGUISHED:

King, The v. Wampole (Henry K.) & Co. Ltd., [1931] S.C.R. 494; [1931] 3 D.L.R. 754.

REFERRED TO:

Suncor Inc. v. R., [1996] 2 C.T.C. 144 (F.C.A.).

APPEAL from the Trial Division judgment ([1999] 4 F.C. 3 (1999), 167 F.T.R. 33 (T.D.)), allowing an appeal from the Minister of National Revenue’s refusal of the respondent’s application for a refund of excise tax paid on tobacco products which it provided free for advertising and promotional purposes. Appeal allowed in part.

APPEARANCES:

F. B. Woyiwada for appellant.

W. Jack Millar and Dennis A. Wyslobicky for respondent.

SOLICITORS OF RECORD:

Deputy Attorney General of Canada for appellant.

Millar Wyslobicky Kreklewetz, Toronto for respondent.

The following are the reasons for judgment rendered in English by

Malone J.A.:

Introduction

[1]        This is an appeal from a decision of the Trial Division, delivered April 30, 1999 which allowed an appeal under sections 81.22 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52] and 81.28 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52] of the Excise Tax Act [R.S.C., 1985, c. E-15] (the Act).[1] The issue arose from a determination made by the Minister of National Revenue under section 72 [as am. by R.S.C., 1985 (2nd Supp.), c. 7, s. 34; S.C. 1994, c. 29, s. 8] of the Act.

[2]        The Minister refused RJR-MacDonald Inc.’s application (RJR or the respondent) under section 68 [as am. by R.S.C., 1985 (1st Supp.), c. 15, s. 24; (2nd Supp.), c. 1, s. 195; c. 7, ss. 23, 34] of the Act for a refund of excise tax paid. The respondent claimed entitlement to a refund of excise tax paid on tobacco products which it manufactured and provided free of charge to various persons for advertising and promotional purposes (the sample tobacco).

[3]        The issue in this appeal is whether the learned Trial Judge erred in interpreting subsections 23(1) [as am. by R.S.C., 1985 (2nd Supp.), c. 1, s. 187], (2) [as am. idem] and (10) of the Act so as to find that the sample tobacco produced by the respondent and appropriated for its own use was not subject to excise tax.

Factual Background

[4]        The case proceeded by way of agreed facts, the most relevant of which are as follows:

(A) RJR is a corporation subsisting under the laws of Canada. During the relevant period, it carried on the business of manufacturing and selling tobacco in Canada. The tobacco products that it manufactured included cigarettes, fine-cut tobacco, and cigars.

(B) In carrying on its business, RJR from time to time provided sample tobacco without charge for advertising and promotional purposes. These samples were distributed to employees, wholesalers, retailers and business contacts as well as during company and consumer events. These products were also used to satisfy consumer complaints and short shipments to customers. There was no difference between the products which were sold to customers in the normal course of business and the sample tobacco.

(C) RJR treated the sample tobacco in its books and records as a necessary business expense and included the costs of manufacturing the sample tobacco in calculating the costs and sale price of the tobacco products manufactured and sold to customers in the normal course of business.

(D) The respondent paid excise tax and federal sales tax under Parts III and VI of the Act on tobacco products manufactured and sold to customers in the normal course of business. It also paid federal sales tax and excise tax on the sample tobacco. The appellant has accepted that the sample tobacco was not subject to federal sales tax under Part VI and has paid the respondent’s refund claim for the federal sales tax thereon. The current action is in respect of the RJR refund claim for excise tax on the sample tobacco in the amount of $1,573,717.70 plus pre-judgment interest of $1,592,417.35.

(E) The learned Trial Judge gave judgment in favour of the respondent on the basis that subsection 23(10) of the Act, which purports to deal with unsold goods diverted to a manufacturer’s own use, failed to provide for a deemed sale; “an essential element of the charging formula in subsection 23(1) and (2) taken together”.[2]

Analysis

[5]        Other panels of this Court have struggled with interpreting the provisions of the Excise Tax Act which has been the subject of numerous amendments. Those difficulties were recently identified by my colleague Décary J.A. in the following words:[3]

When dealing with … piecemeal legislation such as the Excise Tax Act, … which, unlike, for example, the Income Tax Act, has no coherent structure and contains no basic rules to start with and which is amended on a routine basis to accommodate or redress specific situations in a constantly evolving commercial reality, the Court should be reluctant to compare microscopically the words of provisions devised at different times and in a different context and meant to address distinct concerns.

[6]        I share that reluctance given the Byzantine history of Parts III and VI of the Act, and the changing administrative policies advanced by the Department since 1935. My task then is to interpret the meaning of the words used in subsections 23(1), (2) and (10) and their interrelationship so as to ascertain the true intention of Parliament. As of December 31, 1987 these subsections read as follows.

23. (1) Whenever goods mentioned in Schedules I and II are imported into Canada or manufactured or produced in Canada and delivered to a purchaser thereof, there shall be imposed, levied and collected, in addition to any other duty or tax that may be payable under this or any other Act or law, an excise tax in respect of those goods at the rate set opposite the applicable item in whichever of those Schedules is applicable computed, where that rate is specified as a percentage, on the duty paid value or the sale price, as the case may be.

(2) Where goods are imported, the excise tax imposed by subsection (1) shall be paid in accordance with the provisions of the Customs Act by the importer, owner or other person liable to pay duties under that Act, and where goods are manufactured or produced and sold in Canada, the excise tax shall be payable by the manufacturer or producer at the time of delivery of the goods to the purchaser thereof.

…

(10) When goods of any class mentioned in Schedules I and II are manufactured or produced in Canada and are for use by the manufacturer or producer thereof and not for sale, the goods shall, for the purposes of this Part, be deemed to have been delivered to a purchaser thereof, and the delivery shall be deemed to have taken place when the goods are used or appropriated for use, and the Minister may determine the value of the goods for the tax.[4] [Emphasis added.]

[7]        The learned Trial Judge [at pages 18, 20-21] held that tax on the sample tobacco was not payable unless all the prerequisites of both subsections 23(1) and 23(2) were fulfilled:

… subsection 23(10) provides a special rule for goods manufactured or produced in Canada and otherwise subject to excise tax that are diverted to the use of the manufacturer or producer and are not sold. Subsection 23(10) deems those goods to have been delivered to a purchaser with the delivery deemed to have taken place when the goods are used or appropriated for use by the manufacturer or producer. It does not provide for a deemed sale, an essential element of the charging formula in subsections 23(1) and (2) taken together, and it does not provide an identification of the person liable to pay tax, although that might be irrelevant since only the manufacturer or producer has anything to do with the goods and it would make little if any sense for any other person to be liable for the tax.

…

In order for liability for tax to arise, all the elements of the charging provision, in this case as I have earlier determined, subsections 23(1) and (2) read together, must be fulfilled or be deemed to be fulfilled …. One essential charging component remains missing. There simply was no sale in Canada, nor was there a deemed sale in Canada …. In the absence of that element, I conclude that, in respect of the goods in issue, that is, Sample Tobacco manufactured or produced in Canada by the plaintiff, at the relevant time, the plaintiff was not liable to excise tax under Part III of the Excise Tax Act. [Emphasis added.]

[8]        In my view the Trial Judge was correct in finding that where one is dealing with the appropriation of goods for the manufacturer’s own use, it is not necessary to specify by whom the tax is payable, since only the manufacturer has anything to do with the goods and is clearly the only person who might be liable to pay the tax.

[9]        However, I am of the opinion that the Trial Judge incorrectly concluded that the prerequisites of subsection 23(2), particularly as they may require that goods be “sold”, had not been met.

[10]      Subsection 23(10) provides that in the applicable circumstances, goods appropriated for the manufacturer’s own use shall be deemed to have been delivered to a purchaser thereof at the time of appropriation. Delivery to a purchaser necessarily requires there to have been a purchaser. If the delivery to a purchaser is deemed, so also must the purchase itself and therefore the sale.[5] Consequently, the element of sale that the Trial Judge found to be missing in subsections 23(1) and (2) taken together is deemed by subsection 23(10). It follows that in the case of goods appropriated for the manufacturer’s own use, all of the prerequisites to the imposition of tax can plainly be found within the wording of subsections 23(1), 23(2) and 23(10).

[11]      Counsel for the respondent directed us to several other provisions of the Act which expressly deem a sale to have taken place. These were referred to as “artificial transactions”. It was urged that such language clearly illustrates that the Trial Judge was correct in concluding that in the absence of similar wording, subsections 23(1) and (2) taken together result in an incomplete charging provision.

[12]      While recalling the concerns expressed in paragraphs 5 and 6 herein about microscopic comparisons of the various subsections of the Act, several observations are worth making. First of all, the effect of subsection 23(10) is to provide for a deemed sale. It involves only one person, the manufacturer, as I have already found. On the other hand, the subsections dealing expressly with deemed sales are dealing with transactions or processes involving more than one person.

[13]      Subsection 23(3.1) [as enacted by R.S.C., 1985 (1st Supp.), c. 15, s. 12] is typical. It reads as follows:

23. …

(3.1) For the purposes of this Part, a person who, pursuant to a contract for labour, manufactures or produces goods mentioned in Schedule I and II from any article or material supplied by another person, other than a manufacturer licensed for the purposes of this Part, for delivery to that other person shall be deemed to have sold the goods, at a sale price equal to the charge made under the contract in respect of the goods, at the time they are delivered to that other person. [Emphasis added.]

[14]      Here Parliament is dealing with a specific situation where services are provided under a contract for labour involving articles or materials supplied by another which results in goods being manufactured as mentioned in Schedules I and II. This express wording covering a deemed sale is necessary to precisely establish the timing of the sale and amount of the sale price in circumstances where it is not evident that such service was sold.

[15]      Paragraph 23(3)(a) [as am. by R.S.C., 1985 (4th Supp.), c. 12, s. 12] is also an example of a special situation where Parliament has chosen to impose excise tax on gasoline or diesel fuel. In conjunction with subsections 23(1) and (2), the wording is specific to the petroleum industry, deeming the sale to have taken place between the manufacturer or producer and the retailer upon delivery to the retail outlet.

[16]      These express deeming provisions for sales are distinguishable from the “internal use” situation before us as in each case a specific sales clause is necessary to cover a specific artificial transaction between two parties.

[17]      Reference was made by the respondent to subsection 52(1) [as am. by R.S.C., 1985 (2nd Supp.), c. 7, s. 34] found in Part VI of the Act which covers deemed sales in certain circumstances. That provision is empowering only and is to be used by the Minister where circumstances or conditions render it difficult to determine the value of the goods in question. I agree with the Trial Judge’s conclusion that subsection 52(1) is not applicable to the facts of this case as the agreed facts disclose no evidence of valuation difficulties on the part of the Minister.

[18]      Further I am not persuaded that the payment of excise tax in this case would result in “tax on tax” or “double taxation” in the case of cigarettes and manufactured tobacco. The excise tax on cigarettes and manufactured tobacco is a specific tax, rather than an ad valorem tax. That is, instead of being expressed as a percentage of sale price, as is more common, the excise tax is payable at a rate specified as a particular dollar value per unit of quantity, e.g. 10.277 cents per 5 cigarettes or $6.254 per kilogram of manufactured tobacco. The Wampole[6] case ruled that but for the double taxation effect created in that case, the distribution of free samples would be taxable as an appropriation for the manufacturer’s own use. However, the tax at issue there (a federal sales tax) was an ad valorem tax.

[19]      As recently noted by this Court, no double taxation results where a manufacturer raises the price of a good to compensate for other costs of doing business, if the tax imposed on the good is a specific tax rather than the ad valorem as was at issue in the Wampole case.

In the case of a specific tax, however, the taxpayer will not be required to pay “tax on tax” because the rate does not increase with the price of the goods, but with their quantity. Thus specific tax need not be refunded to avoid the payment of “tax on tax”.[7]

[20]      In my analysis, the appropriation of cigarettes and manufactured tobacco for the respondent’s own use, falls squarely within the provisions of subsections 23(1), (2) and (10) of the Act and is subject to a specific tax pursuant to Schedule II of the Act. However, the ad valorem tax on cigars manufactured by the respondent is not enforceable being in effect double taxation.

[21]      I would allow the appeal with costs in relation to cigarettes and manufactured tobacco, set aside the decision of the Trial Division with respect of these products and dismiss with costs the respondent’s appeal with regard to these products. I would dismiss the appeal in relation to cigars.

Létourneau J.A.: I agree.

Sexton J.A.: I agree.

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