Judgments

[2000] 3 F.C. 418

T-1525-95

Michelin North America (Canada) Inc. (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Michelin North America (Canada) Inc. v. Canada (T.D.)

Trial Division, Blais J.—Toronto, February 29; Ottawa, March 28, 2000.

Customs and Excise — Excise Tax Act — Refund under Excise Tax Act, s. 68.2 — Legally effective sale — General Anti-Avoidance Rule under ETA, s. 274 applied — Circumstances surrounding transactions fail to establish any bona fide purpose other than to obtain tax benefit — Transaction devoid of commercial objective.

This was an appeal from a decision of the Canadian International Trade Tribunal (CITT) dated March 22, 1995 affirming the MNR’s decision rejecting the appellant’s application for a federal sales tax (FST) refund pursuant to section 68.2 of the Excise Tax Act (ETA) with respect to a sale of imported tires by Michelin to Uniroyal in December 1990. The CITT concluded that although the transaction was a legally effective sale for the purpose of section 68.2 of the ETA, it met the necessary conditions of the general anti-avoidance rule (GAAR) set out in section 274 of the ETA, and that the MNR had rightly denied the refund.

The two issues were whether the transaction was a legally ineffective sale which disentitled the appellant to the refund claimed, and whether GAAR applied in the circumstances to deny the appellant the refund claimed.

Held, the appeal should be dismissed.

With the contract documents, the appellant has demonstrated, as it had the onus of doing, that the sale was legally effective for the purpose of section 68.2 of the ETA.

However, GAAR applied to deny the appellant the refund even though it was not mentioned in the decision. Section 68.2 was clearly retroactive. It was incumbent on the appellant to prove that it had the right to a refund pursuant to section 68.2 of the ETA. It had to satisfy the conditions set out in subsection 68.2(1), but remain outside the scope of subsection 68.2(2). Absent section 274, the transaction would have allowed the appellant to receive a full refund of the FST paid at the rate of 13.5%, instead of the prescribed rebate of 8.1%. The tax benefit (defined in section 274) would have been $800,521.20.

The circumstances surrounding the transaction fail to establish any bona fide purpose other than to obtain a tax benefit, and the appellant has not put forth any evidence which would contradict this conclusion. The appellant even conceded that the series of transactions with Uniroyal were conducted for the purpose of obtaining that tax benefit. The transaction was otherwise devoid of any commercial objective, and it had as its real purpose the avoidance of ordinary tax consequences.

The MNR was not precluded from raising GAAR at a later stage even though it had not even been mentioned in the notice of decision rejecting the refund application. The taxpayer’s liability is the same whether the notice of assessment is mistaken or is never sent at all. Subsection 274(7) did not create an obligation on the MNR to inform the taxpayer that GAAR was being applied. It did not create an obligation that was any different from his normal obligation to inform the taxpayer of the reason why an application for refund was being rejected.

It was obvious that the transaction, which was followed by another transaction a few days later with the result that the goods sold on December 28, 1990 were sold back to Michelin on January 2, 1991, demonstrated that Michelin’s objective behind the two transactions was to obtain a refund of 13.5% of the FST paid, whereas pursuant to the Federal Sales Tax Inventory Rebate Regulations, Michelin would have been entitled to a refund of 8.1%

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Civil Code of Lower Canada, Art. 1472.

Excise Tax Act, R.S.C., 1985, c. E-15, ss. 50(1) (as am. by R.S.C., 1985 (2nd Supp.), c. 42, s. 4), 68.2 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 34; S.C. 1993, c. 27, s. 2), 81.19 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 81.21 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 81.22 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 81.23 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 81.24 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52), 274 (as enacted by S.C. 1990, c. 45, s. 12).

Federal Sales Tax Inventory Rebate Regulations, SOR/91-52.

Income Tax Act, S.C. 1970-71-72, c. 63, s. 74(5) (as am. by S.C. 1986, c. 6, s. 37).

CASES JUDICIALLY CONSIDERED

APPLIED:

Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; (1984), 10 D.L.R. (4th) 1; [1984] CTC 294; 84 DTC 6305; 53 N.R. 241; OSFC Holdings Ltd. v. Canada (1999), 99 DTC 1044 (T.C.C.); RMM Canadian Enterprises Inc. v. Canada, [1998] 1 C.T.C. 2300; (1997), 97 DTC 302 (T.C.C.); Riendeau (L.) v. M.N.R., [1991] 2 C.T.C. 64; (1991), 91 DTC 5416; 132 N.R. 157 (F.C.A.); affg [1990] 1 C.T.C. 141; (1989), 90 DTC 6076; 31 F.T.R. 123 (F.C.T.D.); Haro Pacific Enterprises Ltd. v. Canada, [1990] 2 C.T.C. 493; (1990), 90 DTC 6583 (F.C.T.D.).

APPEAL from a decision of the Canadian International Trade Tribunal (Michelin Tires (Canada) Ltd. v. M.N.R., [1995] C.I.T.T. No. 20 (QL)) affirming the MNR’s decision rejecting the appellant’s application for a Federal Sales Tax refund pursuant to section 68.2 of the Excise Tax Act (ETA) with respect to a sale of imported tires by Michelin to Uniroyal. Appeal dismissed.

APPEARANCES:

Dalton J. Albrecht and Richard B. Thomas for appellant.

Michael F. Ciavaglia and Susanne G. Pereira for respondent.

SOLICITORS OF RECORD:

McMillan Binch, Toronto, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for order and order rendered in English by

[1]        Blais J.: This is an appeal by Michelin North America (Canada) Inc. (Michelin) pursuant to section 81.24 [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, as amended (ETA), of the decision of the Canadian International Trade Tribunal (CITT) dated March 23, 1995 [[1995] C.I.T.T. No. 20 (QL)] with respect to the denial by the Minister of National Revenue (Minister) of a refund pursuant to section 68.2 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 34; S.C. 1993, c. 27, s. 2] of the ETA. (Both parties have stated that the decision was March 23, 1995, however, the decision is dated March 22, 1995.)

[2]        Section 81.24 of the ETA states that any party to an appeal to the Tribunal under section 81.19 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52], 81.21 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52], 81.22 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52] or 81.23 [as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38; (4th Supp.), c. 47, s. 52] may, within 120 days after the day on which the decision of the Tribunal is sent to that party, appeal the decision to the Federal Court, Trial Division. The appeal to the Tribunal was brought pursuant to section 81.19 of the ETA.

FACTS

[3]        Both parties have agreed to file an agreed statement of facts.

DECISION OF THE CITT

[4]        The CITT concluded that the December 28, 1990 transaction constitutes a legally effective sale for the purpose of section 68.2 of the ETA.

[5]        After determining that it has jurisdiction to consider the applicability of the general anti-avoidance rule (GAAR), the Tribunal concluded that although there was a sale of the imported tires by Michelin to Uniroyal, the Tribunal was of the opinion that all the necessary conditions of section 274 [as enacted by S.C. 1990, c. 45, s. 12] of the Act had been met. Having held that GAAR applied, the Tribunal concluded that the Minister rightly denied the federal sales tax (FST) refund.

THE APPELLANT’S POSITION

[6]        The appellant asserts that the transaction was legal and that it is entitled to an FST refund in the amount of $2,265,929 pursuant to section 68.2 of the ETA.

[7]        The appellant further submits that the FST was paid in respect of the goods on which the application for a refund was based pursuant to subsection 50(1) [as am. by R.S.C., 1985 (2nd Supp.), c. 42, s. 4] of the ETA. The appellant points to the fact that the goods were sold on an FST exempt basis to Uniroyal and that the application for a refund was filed within the two-year limitation period.

[8]        The appellant submits that the GAAR provision cannot be invoked by the respondent since GAAR was not assessed by the respondent in rejecting the refund application.

[9]        Alternatively, the appellant submits that GAAR does not apply on its terms to the factual circumstances at hand and that the onus of proving the misuse of section 68.2 or an abuse of the ETA rests with the respondent.

THE RESPONDENT’S POSITION

[10]      It is the respondent’s position that, in all circumstances, the December 28, 1990 sale was legally ineffective, and that, therefore, the appellant was not entitled to claim a refund of FST under section 68.2 of the ETA.

[11]      Alternatively, if the sale was legally effective, it was subject to the application of GAAR as set out in section 274 of the ETA. The respondent submits that GAAR applies to disentitle the appellant to the full FST refund for which it applied for.

ISSUES

[12]      Referring to the pre-trial conference memorandum, there are two issues to be determined at trial:

1.         Whether the December 28, 1990, transaction was a legally ineffective sale which disentitled the appellant to the refund claimed under section 68.2 of the Excise Tax Act.

2.         Whether the general anti-avoidance rule (GAAR) set out in section 274 of the Excise Tax Act applies in the circumstances to deny the appellant the refund claimed under section 68.2 of the Excise Tax Act.

ANALYSIS

[13]      As to the first issue regarding the legality of the sale, the appellant has the burden of proof. It must demonstrate that the sale was legal.

[14]      Clause 10 of the contract between Uniroyal and Michelin states that the agreement will be in accordance with the law of Quebec. The Civil Code of Lower Canada states at Article 1472 that:

1472. Sale is a contract by which one party gives a thing to the other for a price in money which the latter obliges himself to pay for it.

[15]      In the present case, the tires were sold, both financial statements of the companies show the sale. Furthermore, there was a storage contract for which Uniroyal paid Michelin $30,000/week. Uniroyal also obtained insurance for the relevant period. Resolutions were passed on both sides authorizing the sales. There was no condition in the agreement to repurchase the tires.

[16]      Justice Wilson in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at page 540, explained:

I am also of the view that the business purpose test and the sham test are two distinct tests. A transaction may be effectual and not in any sense a sham (as in this case) but may have no business purpose other than the tax purpose. The question then is whether the Minister is entitled to ignore it on that ground alone. If he is, then a massive inroad is made into Lord Tomlin’s dictum that “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less then it otherwise would be”: Inland Revenue Commissioners v. Duke of Westminster, [1936] A.C. 1, at p. 19. Indeed, it seems to me that the business purpose test is a complete rejection of Lord Tomlin’s principle.

The appellant would clearly be liable to pay tax on the income from the flavourings business if the business purpose test is part of our law since it is freely admitted that the saving of tax for the Finlayson conglomerate was the sole motivation for the transaction. In my opinion, the Federal Court of Appeal in Minister of National Revenue v. Leon, [1977] 1 F.C. 249 characterized a transaction which had no business purpose other than the tax purpose as a sham and was in error in so doing. I do not view that case as introducing the business purpose test as a test distinct from that of sham into our law and, indeed, if it is to be so viewed, I do not think it should be followed. I think Lord Tomlin’s principle is far too deeply entrenched in our tax law for the courts to reject it in the absence of clear statutory authority. No such authority has been put to us in this case.

[17]      I have carefully reviewed the documents filed relating to the contract of December 28, 1990 and, in my view, the CITT was right when it concluded that the December 28, 1990 transaction constitutes a legally effective sale for the purpose of section 68.2 of the ETA.

[18]      Relating to the applicability of GAAR, the first argument submitted by the applicant to the effect that GAAR does not apply because it was not even mentioned in the decision is, in my view, not founded. Section 68.2 amended in 1993 is retroactive as it plainly sets out.

[19]      Section 274 of the ETA states:

274. (1) In this section,

“tax benefit” means a reduction, an avoidance or a deferral of tax or other amount payable under this Part or an increase in a refund or rebate of tax or other amount under this Part;

“tax consequences” to a person means the amount of tax, net tax, input tax credit, rebate or other amount payable by, or refundable to, the person under this Part, or any other amount that is relevant to the purposes of computing that amount;

“transaction” includes an arrangement or event.

(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that include that transaction.

(3) An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result directly or indirectly in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) For greater certainty, subsection (2) does not apply in respect of a transaction where it may reasonably be considered that the transaction would not result, directly or indirectly, in a misuse of the provisions of this Part or in an abuse having regard to the provisions of this Part (other than this section) read as a whole.

(5) Without restricting the generality of subsection (2),

(a) any input tax credit or any deduction in computing tax or net tax payable may be allowed or disallowed, in whole or in part,

(b) any such credit or deduction or a part thereof may be allocated to any person,

(c) the nature of any payment or other amount may be recharacterized, and

(d) the tax effects that would otherwise result from the application of other provisions of this Part may be ignored,

in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.

(6) Where, with respect to a transaction, a notice of assessment, reassessment or additional assessment involving the application of subsection (2) with respect to the transaction has been sent to a person, any person (other than a person to whom such a notice has been sent) shall be entitled, within one hundred and eighty days after the day of mailing of the notice, to request in writing that the Minister make an assessment, a reassessment or an additional assessment, applying subsection (2) with respect to that transaction.

(7) Notwithstanding any other provision of this Part, the tax consequences to any person following the application of this section shall only be determined through a notice of assessment, reassessment or additional assessment involving the application of this section.

(8) On receipt of a request by a person under subsection (6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsections 298(1) and (2), assess, reassess or make an additional assessment with respect to the person, except that an assessment, a reassessment or an additional assessment may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection (6).

[20]      Relating to the burden of proof: In my view, the burden of proof lies with the appellant. The appellant is trying to prove that it has a right to a refund pursuant to section 68.2 of the ETA. It must satisfy the conditions set out in subsection 68.2(1), but it must also be outside the scope of subsection 68.2(2).

[21]      Absent section 274, the December 1990 transaction would have allowed the appellant to receive a full refund of the FST paid at a rate of 13.5%, as opposed to the prescribed rebate of 8.1% available to other taxpayers in similar circumstances. This tax benefit would constitute a windfall to the appellant in the amount of $800,521.20.

[22]      As the respondent suggests, this windfall constitutes a tax benefit as contemplated by section 274.

[23]      The appellant bears the onus of establishing an objectively reasonable explanation that the primary purpose for the transactions was something other than to obtain the tax benefit. In OSFC Holdings Ltd. v. Canada, the Court provided:

I must answer the following questions in relation to the application of GAAR:

1.   But for the application of section 245, would the incorporation of 1004568, the formation of STIL II, and the sale by Standard of its interest in STIL II to the Appellant, or any of those transactions, have resulted in a tax benefit?

2.   If the answer to the first question is yes, may the transaction, or transactions, reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit?

3.   If the answer to the first question is yes, and the answer to the second is no, did the transaction, or transactions, result, directly or indirectly in a misuse of the provisions of the Act, or an abuse of the provisions of the Act read as a whole?

4.   If the first question is answered yes, the second no, and the third yes, then which of the remedies set out in subsection 245(5) is appropriate?[1]

[24]      The circumstances surrounding the transactions fail to establish any bona fide purpose other than to obtain a tax benefit, and the appellant has not put forth any evidence which would contradict this conclusion.

[25]      In fact, the appellant concedes that the series of transactions with Uniroyal were conducted for the purpose of obtaining a refund of FST at the rate of 13.5% rather than the 8.1% FST rebate.

To be in a position to obtain a refund of the 13.5% FST that Michelin actually paid upon importation of the Imported Products rather than the 8.1% FST rebate, Michelin proposed to sell and Uniroyal Goodrich agreed to purchase the entire 1990 year end (Michelin’s fiscal year ended on December 31) inventory of Imported Products on a tax-exempt basis.[2]

[26]      I agree with counsel for the respondent that the transaction is otherwise devoid of any commercial objective, and that it has as its real purpose the avoidance of ordinary tax consequences. In my opinion, it constitutes an abuse of the ETA as a whole.

A form of transaction that is otherwise devoid of any commercial objective, and that has as its real purpose the extraction of corporate surplus and the avoidance of the ordinary consequences of such a distribution, is an abuse of the Act as a whole.[3]

[27]      In my view, the appellant failed to demonstrate that the December 28, 1990 transaction was not an avoidance transaction to which section 274 of the ETA should be applied.

[28]      The appellant raised the fact that the Minister was precluded from raising GAAR at this stage of the proceedings before the CITT, because the notice of decision did not indicate that the appellant’s application for a refund was being rejected on the basis of GAAR.

[29]      In Riendeau (L.) v. M.N.R., [1991] 2 C.T.C. 64 (F.C.A.) (Riendeau), it was held at trial that as a matter of law, in the absence of some substantial and fundamental error on the Minister’s part, the Minister was entitled to confirm his reassessment as he had done, even though it had originally been based upon a repealed subsection of the Income Tax Act [S.C. 1970-71-72, c. 63, s. 74(5) (as am. by S.C. 1986, c. 6, s. 37)]. The Court of Appeal, dismissing the taxpayer’s appeal, found that a taxpayer’s liability to pay the tax is just the same whether a notice of assessment is mistaken or is never sent at all. Further, it matters little under what section of the Income Tax Act, an assessment is made. What does matter is that the tax is due. The CITT had noted that the Court was of the view that the Minister’s mental process in making an assessment cannot affect a taxpayer’s liability to pay the tax imposed by the Income Tax Act itself and the Minister may correct a mistake.

In our view, the Minister’s mental process in making an assessment cannot affect a taxpayers’s liability to pay the tax imposed by the Act itself. He may correct a mistake. The Trial Judge was right in rejecting the appellant’s argument and in determining that the Minister was entitled to confirm the reassessments in question.[4]

[30]      The CITT held that the Minister was not precluded from raising GAAR at that stage of the proceeding simply because the determination or decision did not indicate that GAAR was the basis for rejecting the application.

[31]      Counsel for the appellant has argued that under subsection 274(7) there is a legislated obligation on the Minister to inform the taxpayer at the time of the assessment or reassessment that GAAR is being applied. The CITT held that it was not persuaded that subsection 274(7) created an obligation of the Minister that is any different from his normal obligation to inform the taxpayer of the reason why an application for refund is being rejected. It noted that subsection 274(7) simply indicates that if the GAAR is to be applied, it must be done by means of assessment, reassessment, determination or redetermination, and that in its view, this obligation was no different from the obligation to determine tax liability through such means under other sections of the Act. The CITT then noted, again, that the Minister could not have been aware at the time of the notice of determination that the GAAR could be applied, and that furthermore, subsections 274(7) and 68.2(2) of the Excise Tax Act do not provide that the Minister might have such an obligation when issuing a notice of decision.

[32]      Thus, the CITT found that it did have jurisdiction to consider the applicability of GAAR. It then held that GAAR applied to deny the refund under section 68.2.

[33]      In my view, this analysis is reasonable, and I am convinced that the GAAR applies. I do not see any reason to intervene.

[34]      In Haro Pacific Enterprises Ltd. v. Canada, [1990] 2 C.T.C. 493 (F.C.T.D.), at page 496, Justice Reed clearly established that in an analysis of a transaction, the Court cannot consider as being irrelevant another transaction five days later that has the effect of highlighting the real consideration for the first transaction:

I agree that properties belonging to the plaintiff were transferred to the partnership, and this triggers the possibility of a section 97(2) election. The consideration received for that transfer was, however, as counsel for the defendant argues, both a partnership interest, and the $950,000.00 paid as a cash payment a few days after the transfer. To characterize the facts in any other fashion would be artificial in the extreme. Accordingly, section 85(1)(b) applies. The amount received by the taxpayer on transfer of the property to the partnership was greater than the amount agreed upon by the plaintiff and the partnership in their section 97(2) election. Thus, the Minister was correct in deeming the plaintiff’s proceeds of disposition of the property.

For the reasons given, the plaintiff’s claim is dismissed; the defendant shall recover her costs of the action.

CONCLUSION

[35]      In the present case, I am convinced that the transaction between Michelin and Uniroyal on December 28, 1990 is a sale pursuant to section 68.2 of the Act. Nevertheless, it is obvious that this transaction which was followed by another transaction a few days later with the result that the goods sold on December 28, 1990, were sold back to Michelin on January 2, 1991, demonstrates that Michelin’s objective behind the two transactions was to get the full refund of 13.5% of the FST paid, where pursuant to the Federal Sales Tax Inventory Rebate Regulations [SOR/91-52], Michelin would have only been allowed to get a refund of 8.1% of the FST paid.

[36]      Counsel for the appellant have clearly demonstrated that the appellant has paid 13.5% of FST on its inventory and the Minister’s decision through the Federal Sales Tax Inventory Rebate Regulations will have the effect of refunding the appellant only 8.1% of the FST paid. The consequences will be that the decision will leave the appellant with a tax overpayment of $800,521.20, but for the reasons given above, this Court cannot interfere.

[37]      For those reasons the appeal is dismissed with costs.

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