Date: 20000316
Docket: T-2541-94
BETWEEN:
CAPITOL RECORDS A DIVISION OF TEMI CANADA INC.
Plaintiff
- and -
HER MAJESTY THE QUEEN
Defendant
REASONS FOR ORDER
GIBSON J.:
INTRODUCTION
[1] At the opening of the hearing of this appeal by way of trial de novo, counsel filed an agreed statement of facts which, among other things, describes the nature of the proceeding giving rise to these reasons. The agreed statement of facts is as follows:
| NATURE OF THE PROCEEDING |
| 1. This proceeding is an appeal by the Plaintiff, Capitol Records A Division of TEMI Canada Inc. ("Capitol Records"), as it was then known, pursuant to sections 81.24 and 81.28 of the Excise Tax Act , R.S.C. 1985, c. E-15, as amended, (the "Act") from a decision of the Canadian International Trade Tribunal (the "CITT") dated June 22, 1994. |
| 2. By refund claims dated February 27, 1987, July 6, 1987 and September 2, 1987 (the "Refund Claims"), Capitol Records applied for refunds of federal sales tax in connection with transactions involving records and tapes manufactured by it and distributed by its distributor Kensington Distributors Limited ("Kensington") between January 1983 and March 1987 (the "Refund Period"). The parties have agreed that, in the event Capitol is entitled to a refund, it is only entitled to that refund for the periods February 28, 1983 to May 24, 1985 and September 1, 1985 to March 1987. The amounts claimed in the Refund Claims were $47,053.88, $48,780.14 and $458,870.70 respectively. |
| 3. The Minister of National Revenue, Customs & Excise (the "Minister"), by Notices of Determination dated February 15, 1990, disallowed the Refund Claims on the basis that Capitol Records and Kensington were a single economic entity for the purposes of the Act. |
| 4. Capitol Records filed Notices of Objection dated April 19, 1990 to the Notices of Determination. By Notices of Decision dated March 31, 1993 the Notices of Objection were disallowed by the Minister on the basis that Capitol Records and Kensington operated as a single economic entity and no sale had occurred. |
| 5. Capitol Records appealed the Notices of Decision to the CITT on or about May 26, 1993. The CITT disallowed the appeal by a decision dated June 22, 1994. |
| 6. Commencing April 1, 1987, Capitol Records calculated and paid tax on its price to Kensington in all cases. |
| Capital Records |
| 7. Capitol Records, at all material times, was a Canadian corporation engaged in, among other things, the manufacture and sale of records and tapes. |
| 8. As a manufacturer, Capitol Records was subject to the federal sales tax provisions under then section 27(1) (now s.50(1)), of the Act. Section 27(1) required Capitol Records to pay tax on the sale of its products as follows: |
| "There shall be imposed, levied and collected a consumption or sales tax at the rate specified in subsection (1.1) on the sale price or on the volume sold of all goods |
| (a) produced or manufactured in Canada..." |
| [emphasis added] |
| Distribution and Pricing |
| 9. Prior to 1969, Capitol Records distributed its records and tapes pursuant to various distribution agreements with several independent distribution companies. Kensington was one of the independent distribution companies. The distribution companies, in turn, sold the records and tapes to their customers. |
| 10. Pursuant to various distribution agreements it had with Kensington prior to 1969, Capitol Records sold its records and tapes to Kensington at a sale price which was determined based on a percentage of Kensington"s price to its customers. Generally, Capital Records" price to Kensington was approximately 80% of Kensington"s price to its customers. |
| 11. In 1969, Capitol Records Inc., the grandparent of Capitol Records acquired Kensington. Following the acquisition, the relationship between the two companies was as follows: |
Capitol Records Inc.
Capitol Records Holdings
Electrical and Musical
Industries Canada Limited
Kensington
Capitol Records
| 12. Following the acquisition, Capitol Records and Kensington entered into a further distribution agreement dated June 16, 1969. Under the terms of the distribution agreement, Capitol Records" price to Kensington continued to be determined on the same percentage-based pricing structure as it had been before 1969. The result was that the distribution arrangements between Capitol Records and Kensington remained unchanged for pricing purposes. |
| 13. Both prior to and following the acquisition, Kensington"s customers included retailers and second-tier distributors known as rackjobbers in the record industry. Kensington"s price to rackjobbers was generally 10% less than its price to retailers. |
| Payment of Tax Beginning in 1970 |
| 14. By letter dated April 7, 1970 (the "April 1970 Letter"), Revenue Canada wrote to Capitol Records, in part, as follows: |
| "sales tax may be accounted for on the actual sale price [from Capitol to Kensington] ...provided the value, on which the tax payable is computed on such sales, remains not less than the equivalent of your current tax included list selling price to retailers less an all-inclusive discount of 22%." |
| 15. By further letter dated February 29, 1972, Revenue Canada wrote to Capitol Records, in part, that the value for tax purposes was as follows: |
| "the actual selling price to your associated distributing companies, regardless of the value you choose to sell the phonograph records to your associates, as long as the transfer value remains not less than the tax- included list selling price to retailers less an all inclusive discount of 22%... as this tax base for rack jobbers is less than the tax included list selling price to retailers less an all-inclusive discount of 22%, the tax base on sales of your product at rack jobber price would be the minimum base level, i.e. $2.96 [list price to retailers] - 22%. |
| 16. Beginning with the April 1970 Letter, Capitol Records calculated tax on the following values: |
| (a) sales to rackjobbers: - regular selling prices of Kensington to rackjobbers was set at the retailer price less an all-inclusive discount of 22%; |
| (b) sales to retailers: - regular selling prices of Kensington to retailers, less an all-inclusive discount of 20%. |
| 17. The price to rackjobbers was set to match Kensington"s price to retailers. The 22% discount was then applied. |
| 18. By further letter dated September 23, 1986, Revenue Canada wrote to Capitol Records, in part, as follows: |
| "the appropriate value for tax for the period under audit, June 26, 1982 to March 31, 1985, is that set in the Departmental Letters to you dated April 7, 1970 and November 1, 1982, ie. on not less than the equivalent of the regular list price to retailers by your associated company, Kensington Distributors Limited less an all-inclusive discount of 22%, with the sales tax to be computed as included in the remainder. In the event that your transfer price to Kensington exceeds the value described above, the tax is payable based on your transfer price." |
| 19. Revenue Canada accepted as accurate and relied upon the following: |
| (a) Kensington"s price to retailers less 20% was the price used by Capitol Records in respect of product to Kensington; |
| (b) Kensington"s price to rackjobbers less 20% was the actual price utilized by Capitol Records with respect to product from it to Kensington; and |
| (c) the rackjobber price was 10% less than the retail price. |
| In addition, the 22% determined value had the effect of producing a value for tax that was higher than the price used by Capitol to Kensington for the purpose of calculating sales tax in the case of sales to rackjobbers. |
| 20. On the basis of a survey of the phonograph record industry conducted by Revenue Canada in the late 1960's, the value of 22% had been determined to be the average spread between the selling price to retailers and the wholesale price. |
| 21. On January 7, 1970, Revenue Canada issued Ruling Card 3700/33-1 which dealt with the application of this value of 22%. The Ruling Card was issued pursuant to Excise Memorandum ET202. |
| Relationship Between Capitol Records and Kensington |
| 22. Prior to its acquisition, Kensington was one of several independent distributors through which Capitol Records distributed its products. Following the acquisition, Capitol Records began to distribute its products exclusively through Kensington. |
| 23. Following the acquisition, Capitol Records and Kensington entered into a distribution agreement. The agreement expressly stated that Kensington was not an agent of Capitol Records for the purposes of the agreement. |
| 24. Kensington and Capitol Records operated out of the same building. |
| 25. The building housed all of Capitol Records" and Kensington"s manufacturing, warehousing and office facilities. The costs and expenses associated with the operation of the building were allocated to Capitol Record and Kensington in accordance with each company"s use. |
| 26. Kensington had its own employees. Employees pay cheques were issued by Capitol Records. The cost of the employees was allocated to Kensington in the general ledger. Kensington had no payroll cheques of its own. |
| 27. During the Refund Period, Capitol Records and Kensington each had 5 to 9 directors. A majority of directors of Kensington were also directors of Capitol Records. On occasion, when written agreements were made between Capitol Records and Kensington, the same person executed them on behalf of both companies. |
| 28. Capitol Records and Kensington used the same general ledger software which identified and allocated each entry to either Capitol Records or Kensington such that they maintained independent general ledgers. Costs associated with sales by Kensington were attributed to Kensington. Office, promotional and other expenses associated with the distribution of the records and tapes were allocated 100% to Kensington. |
| 29. Kensington filed separate tax returns, prepared its own financial statements and maintained separate accounting records from Capitol Records. Kensington also maintained a separate bank account. Kensington wrote cheques on its bank account for payment of income tax. |
| Kensington"s Purchase and Sale of Records and Tapes |
| 30. An invoice would be sent from Kensington to the customer on the day following shipment. Invoices were not issued between Capitol Records and Kensington. Journal entries were used to record transactions between Capitol Records and Kensington at month-end. |
| 31. All invoices which went to purchasers of the records and tapes were issued by Kensington. Purchasers paid Kensington on the invoices and the proceeds were deposited in Kensington"s bank account. |
| Distribution for Independents |
| 32. During the Refund Period, Kensington also performed distribution functions pursuant to distribution contracts between Capitol Records and a number of independent record labels (the "Independents"). The Independents were deemed manufacturers under the Act and paid sales tax as manufacturers on actual sale price. |
| 33. The Independents" products were distributed by Kensington. The price paid to the Independents by Capitol Records was set at 80% of the price charged for the products by Kensington to its customers. |
| 34. The prices on which the Independents paid tax were roughly the same as the actual prices between Capitol Records and Kensington. |
| 35. The Independents acted at arm"s length. |
| 36. Revenue Canada did not require the Independents to remit sales tax on a basis other than their actual selling price. |
[2] In these reasons, I will utilize the contractions of terms that are adopted in the agreed statement of facts.
DECISION OF THE CANADIAN INTERNATIONAL TRADE TRIBUNAL
[3] In its decision that is here under appeal, dated the 22nd of June, 1994, the CITT described the issue before it as "...whether sales tax was paid in error within the meaning of the relevant provisions of the Act." The CITT noted that it viewed section 44 of the Act (section 68 at the time of the CITT"s decision) as fundamental to the appeal. At the relevant time, that section read as follows:
44. Where a person, otherwise than pursuant to an assessment, has paid any moneys in error, whether by reason of mistake of fact or law or otherwise, and the moneys have been taken into account as taxes, penalties, interest or other sums under this Act, an amount equal to the amount of those moneys shall, subject to this Part, be paid to that person if he applies therefor within two years after he paid the moneys.
44. Lorsqu"une personne, sauf à la suite d"une cotisation, a versé des sommes d"argent par erreur de fait ou de droit ou autrement, et qu"il a été tenue compte des sommes d"argent à titre de taxes, d"amendes, d"intérêts ou d"autre sommes en vertu de la présente loi, un montant égal à celui de ces sommes d"argent doit, sous réserve de la présente Partie, être payé à cette personne, si elle en fait la demande dans les deux ans suivant le paiement de ces sommes d"argent.
[4] The CITT concluded in the following terms:
| The Tribunal has reviewed the correspondence that passed between the parties from 1970 into the 1980s relating to the methods of calculation of sales tax in respect of sales of the appellant"s products. The Tribunal notes that virtually all of the correspondence either originated with or was sent to the appellant"s "in house" counsel, Mr. W. John MacLeod. The only exception to this pattern comes in the form of two letters sent to the respondent by D. Williamson, who is identified in the correspondence as the appellant"s "Chief Accountant". |
| Having reviewed the referenced correspondence, the Tribunal is not persuaded that the appellant paid sales tax in error. In the Tribunal"s view, the correspondence indicates that the appellant made a conscious and informed decision as to the manner in which its sales tax would be calculated. The Tribunal is of the view that the appellant, having made a conscious and informed decision, cannot be said to have made an error in the payment of sales tax. In the absence of an error in the payment of sales tax, the appellant has no basis upon which to pursue its claim under section 44 (now section 68) of the Act . |
| Accordingly, the appeal is dismissed. |
THE NATURE OF THIS APPEAL AND THE EVIDENCE
[5] As noted earlier, this appeal is in the nature of a trial de novo. At all relevant times, section 81.24 and the relevant portion of subsection 81.28(3) of the Act read as follows:
81.24 Any party to an appeal to the Tribunal under section 81.19, 81.21, 81.22 or 81.23 may, within one hundred and twenty 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.
81.24 Toute partie à un appel entendu par le Tribunal en vertu de l'article 81.19, 81.21, 81.22 ou 81.23 peut, dans un délai de cent vingt jours suivant la date d'envoi de la décision du Tribunal, en appeler de cette décision à la Section de première instance de la Cour fédérale.
...
...
81.28 (3) An appeal to the Federal Court"Trial Division under this Part shall be deemed to be an action in the Federal Court to which the Federal Court Act and the rules made pursuant thereto applicable to an ordinary action apply, except as varied by special rules made in respect of such appeals and except that
81.28 (3) Un appel à la Section de première instance de la Cour fédérale en vertu de la présente partie est réputé être une action devant la Cour fédérale à laquelle la Loi sur la Cour fédérale et les règles établies conformément à cette loi s'appliquent comme pour une action ordinaire, sauf dans la mesure où l'appel est modifié par des règles spéciales établies à l'égard de tels appels, sauf que_:
...
...
The exceptions provided in paragraphs (a) to (c) in subsection 81.28(3) are not relevant for the purpose of this appeal.
[6] The appeal to the CITT leading to the decision here under appeal was an appeal under section 81.19 of the Act. No "special rules" as that expression is used in subsection 81.28(3) have been made in respect of appeals such as this.
[7] Two witnesses gave evidence before the Court on behalf of Capitol Records. Between them, they substantially affirmed the agreed statement of facts, in somewhat more detail, and identified a substantial number of documents reflected in a two volume Joint Book of Documents filed by counsel at the opening of the hearing, and containing 54 documents.
[8] Counsel for Capitol Records further relied on a number of read-ins from the examination for discovery of Reid Villett, the defendant"s representative, an employee of Revenue Canada and, at the relevant time, an auditor involved with, among other things, federal sales tax issues who had done "...a regular federal sales tax audit with Capitol Records sometime in 1987...".
[9] Mr. Villett confirmed that a letter dated the 7th of April, 1970 established the basis upon which Capitol Records was to calculate and pay federal sales tax with respect to its record products. That letter1, addressed to a predecessor of Capitol Records , read in part as follows:
| Thank you for your letter of April 2, 1970 regarding the acceptable valuation basis for sales tax computation purposes for sales of phonograph records and tapes of which you are the manufacturer under the provisions of the Excise Tax Act. The detailed information which you submitted has proved most helpful. |
| You explain that sales of those products are now made by you exclusively to Kensington Distributors Ltd. (in western Canada) and Waco Sales Limited (in eastern Canada) and all three companies are related as they are owned by Capitol Records Incorporated of California. Previously, your sales had been to independent distributors. Under the new arrangement, however, the same pricing structure has been continued as was used for sales to the independent distributors. |
| In the circumstances outlined, and while conditions remain as at present, we confirm that on sales of phonograph records and tapes of your manufacture to Kensington Distributors Ltd. and to Waco Sales Limited, the sales tax may be accounted for on the actual sale price less cash discount and prepaid transportation as authorized by Regulation 27 of the General Excise and Sales Tax Regulations (Circular E.T. 1), provided the value, on which the tax payable is computed on such sales, remains not less than the equivalent of your current tax included list selling price to retailers less an all-inclusive discount of 22%. |
[10] Mr. Villett confirmed that, after a brief false start, sales tax was accounted for on "the actual sale price less cash discount" the first option provided in the April 7, 1970 letter quoted above, on records and tapes ultimately sold by Kensington to retailers. By contrast, sales tax was accounted for on the "formula basis", that is to say actual sale price less and all-inclusive discount of 22%, on records and tapes ultimately sold by Kensington to "rackjobbers".2
[11] Mr. Villett confirmed that correspondence from Revenue Canada to Capitol Records, throughout the relevant period, reflected no suggestion that Revenue Canada considered Capitol Records and Kensington to be a single economic unit or that sales or transfers between the two companies should be ignored by virtue of the relationship between them.
[12] Mr. Villett further acknowledged that the basis on which sales tax was accounted for by Capitol Records, during the relevant period, was in accordance with the relevant "Ruling Card" issued by Revenue Canada in accordance with the provisions of Revenue Canada"s Memorandum ET 202.
[13] Finally, Mr. Villett confirmed that the 22% ceiling or floor referred to in the previously identified Revenue Canada correspondence, in Memorandum ET 202 and in the "Ruling Card" was based on no authority in the Excise Tax Act and that Revenue Canada itself identified its letter of April 7, 1970, quoted above, as a "ruling", and thus, presumably, not something that left Capitol Records with alternative bases for calculating sales tax payable that were not described in the "ruling" itself.
THE ISSUES
[14] The issues on this appeal are relatively simply stated. The first is whether Capitol Records, in the relevant period which is to say January, 1983 to March, 1987, made overpayments of sales tax on sales of records and tapes manufactured by it in Canada. If the answer to the first issue question is in the affirmative, the second issue then arises, were the overpayments made in error? Both of the issue questions arise out of the terminology of section 44 of the Act, as it read at the relevant time and as it is quoted earlier in these reasons.
THE POSITION OF CAPITOL RECORDS
[15] Counsel for Capitol Records referred to the applicable charging provision of the Act which at the relevant time was subsection 27(1). The relevant portion of that subsection read as follows:
27. (1) There shall be imposed, levied and collected a consumption or sales tax of nine per cent on the sale price of all goods.
(a) produced or manufactured in Canada
| (i) payable, ... by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in goods passes, whichever is the earlier, |
| ... |
27. (1) Est imposée, prélevée et perçue une taxe de consommation ou de vente de neuf pour cent sur le prix de vente de toutes marchandises,
(a) produites ou fabriquées au Canada,
| (i) payable, ... par le producteur ou fabricant à l"époque où les marchandises sont livrées à l"acheteur ou à l"époque où la propriété des marchandises est transmise, en choisissant celle de ces dates qui est antérieure à l"autre, |
| ... |
Counsel urged that, contrary to the terms of subsection 27(1), Capitol Records, pursuant to a "ruling" from Revenue Canada, first imposed in 1970 and reaffirmed on a number of occasions thereafter, did not pay sales tax on its sale price to its distributor, Kensington, in respect of records and tapes ultimately sold to rackjobbers. Rather, by virtue of the ruling, it paid sales tax on a value determined in accordance with a formula established by Revenue Canada that resulted in a greater amount of tax then would have been the case if the tax had been calculated on its sale price to Kensington. In the result, Capitol Records remitted overpayments of sales tax in the relevant period and such overpayments were made in error, the error being an erroneous belief that under the "ruling" provided by National Revenue, it had no other alternative. The "error" only became apparent to Capitol Records when the decision of the Federal Court of Appeal in Vanguard Coatings and Chemicals Ltd. v. The Queen3 came to its attention. In Vanguard, MacGuigan J.A., for the majority, wrote at page 6385:
| As an aid to interpretation, the Minister has published Memorandum ET 202 ... on Values for Tax and a further Guidelines for Fair Price Cases Under Section 34 of the Excise Tax Act ... . Hannan conceded that there is no legal authority for ET 202 or the Guidelines ... . What we are driven back to is therefore section 34 itself. |
Section 34, which is not relevant on the facts of this matter, enables the Minister to determine a "fair price" where in his or her opinion the price at which goods are sold is less than a "fair price". The relevance of the quoted paragraph on the facts of this matter lies in the fact that Memorandum ET 202 is the basis on which the "rulings" and the ruling card "imposed" by Revenue Canada on Capitol Records, were based. If there were no authority in law for that Memorandum , there would be no authority in law for the "rulings" and ruling card.
THE POSITION OF THE DEFENDANT
[16] By contrast, counsel for the defendant urged that there was no overpayment of taxes by Capitol Records in the relevant period and that if there was, any overpayment was not made in error. Counsel for the defendant urged that there was no sale from Capitol Records to Kensington because the affairs of Capitol Records and Kensington were so intermingled that they in fact constituted a single business entity with the result that the first sale of records and tapes manufactured by Capitol Records was that made through Kensington to a retailer or a rackjobber. Since the "ruling" by Revenue Canada provided for calculation of sales tax on the basis of a discounted figure derived from that sale price, the Revenue Canada "ruling" based on Memorandum ET 202 and the ruling card provided an advantage to Capitol Records and resulted in a lower amount of tax than would have applied if the terms of subsection 27(1) of the Act were strictly applied. Counsel urged that the Vanguard case has no impact on the facts of this matter since it was always open to Revenue Canada to accept a lesser amount of tax than that strictly required by law. He urged that the Vanguard case only had an impact in circumstances where Memorandum ET 202 resulted in a greater amount of tax than would have been determined under the strict terms of subsection 27(1).
[17] Counsel urged that Capitol Records and its officers were at all times aware of the terms of subsection 27(1) of the Act and, if Capitol Records and its officers were convinced of its applicability, they could have paid tax in accordance with the strict terms of that subsection even if they were aware that Revenue Canada officials might have challenged such a course of action by virtue of the "ruling" that had been given to Capitol Records. Thus, any overpayment of tax, and none of course was conceded on behalf of the defendant, was not made in error.
ANALYSIS
[18] Counsel for the defendant relied on the following passage from the reasons of the Supreme Court of Canada in Palmolive Mfg. Co. (Ontario) Ltd. v. The King et al4:
| The above authorities satisfy me that we must, as matters of fact, identify the producer of the goods and determine the real price received by such producer when selling them to the public for consumption. In this case, it is abundantly clear that the Palmolive soap is produced and sold to the public by a combination of these two incorporated departments of a foreign company doing business here in order to reach the Canadian consumer. While the two companies are separate legal entities, yet in fact, and for all practical purposes, they are merged, the Ontario company being but a part of the Dominion company, acting merely as its agent and subject in all things to its proper direction and control. |
[19] While counsel for the defendant did not urge that Kensington was the agent of Capitol Records, he did urge that in all other respects, on the facts of this matter, the foregoing passage was applicable and that "...for all practical purposes, they are merged, ..." . As such, counsel urged that the first sale price for the purpose of calculation of sales tax should be the sale price from Kensington to retailers, and more importantly, to rack- jobbers.
[20] Counsel for Capitol Records urged an opposite result.
[21] In The King v. Plotkins et al.,5 Mr. Justice Maclean wrote at pages 135-136:
| The principal question for decision is whether it is against the selling prices of the Refinery, or those of Oils Ltd., that the tax should be levied, or whether the Refinery should be assessed upon the selling prices of Oils Ltd., and in fact it was the latter that was done. Cases of this type always contain perplexing features, and they are difficult to resolve with confidence. The statute imposes the tax upon the producer or manufacturer. The tax must be levied against the sales of the producer or manufacturer unless it be that he is but the agent of another for any of such purposes, and possibly there may be other exceptions. Imposing the tax upon other persons or companies, outwardly independent of but working in close co-operation with the manufacturer or producer, particularly in selling the goods of the latter, is bound to present difficulties, " first, because the former is not in fact the producer or manufacturer, and secondly, because the selling prices of the former will usually include some of the profit customarily exacted by wholesalers and retailers. In such cases very clear evidence should be required to shift the imposition of the tax from the producer or manufacturer to another. ... |
| I was referred to the Palmolive case, ..., but I do not think the facts there are similar to the facts of this case. There, it was held that the manufacturing company was merely the agent of the selling company and subject in all things to the direction and control of the latter, and that the operations of the former were the operations of the latter, and there was some evidence to support that finding. I do not think it is possible to say that in the case under consideration the Refinery was the manufacturing agent of Oils Ltd., but it might be argued that Oils Ltd. was merely the selling agent of the Refinery, and in fact that is one of the contentions here made by the plaintiff. It seems to me that the Refinery and Oils Ltd. must be held to be independent trading units, and the agreement and the facts concerning their several activities, I think, support that conclusion. Their business relations were of course intimate and probably so designed for their mutual advantage, but that does not of itself constitute them a single business enterprise for the purposes of the tax, or otherwise. That requires a state of facts that indubitably points to a business arrangement made to evade the tax, or, that one so dominated and controlled the business of the other that one is obliged to say that the existence of that other was apparent only and not real; I do not think that can be said here. [emphasis added] |
[22] While neither the facts in Palmolive nor those in Plotkins are identical to the facts here, I am satisfied that the facts here are closer to those in Plotkins. Capitol Records and Kensington are separate corporate entities. At one time while they were doing business with one-another, they were unrelated. Kensington was acquired by the American grandparent corporation of Capitol Records. They thus became related. They continued to do business together on essentially the same terms. For a time, Kensington maintained separate sales establishments in Alberta and Québec. It did not immediately become the sole distributor throughout Canada for Capitol Records" records and tapes although eventually it did. Its facilities in Alberta and Québec were closed. Its facilities in Toronto were consolidated with those of Capitol Records. The two companies had common directors but not all of their directors were common. They had common officers but not all of their officers were common. They had a common payroll system and salary cheques for all employees were issued by Capitol Records. While Kensington operated its own bank account, issued invoices for sales that it made, received payment for good sold and deposited those payments into its own bank account, its financial operations were closely integrated with those of Capitol Records. No invoices were issued between Capitol Records and Kensington. All of that being said, the intimacy of their business relationship, in the words of Mr. Justice Maclean, "...probably ...designed for their mutual advantage, ...does not of itself constitute them as single business enterprise for the purposes of sales tax, or otherwise." Once again to repeat the words of Mr. Justice Maclean in Plotkins :
| That requires a state of facts that indubitably points to a business arrangement made to evade the tax, or, that one so dominated and controlled the business of the other that one is obliged to say that the existence of that other was apparent only and not real. |
As did Mr. Justice Maclean, I reach the conclusion on the facts of this matter that such cannot be said here.
[23] In the result, I conclude that there was an overpayment of sales tax, in the relevant period, on records and tapes manufactured by Capitol Records and ultimately sold by Kensington to rackjobbers. The tax calculated in accordance with the formula imposed in respect of such sales by the ruling of Revenue Canada first imposed by letter dated the 7th of April, 1970 and subsequently reconfirmed on a number of occasions was higher than would have been the tax calculated in accordance with subsection 27(1) of the Act on sales of the same records and tapes from Capitol Records to Kensington.
[24] There remains the question of whether the overpayments were made in error. The testimony before me of a former official of Capitol Records and Kensington and of a current official of Capitol Records and Kensington convinces me that the overpayments were made in error. The former official and current official were intimately involved in the dealings of Capitol Records and Kensington with Revenue Canada. They were thoroughly familiar with the "rulings" consistently provided by Revenue Canada. I am satisfied having observed their demeanour and heard their testimony that they sincerely believed that they had no alternative but to calculate and pay sales tax on the basis of the rulings provided by Revenue Canada. It was only when they became aware of the decision of the Federal Court of Appeal in Vanguard6, that Capital Records realized there might have been an alternative available that would be more beneficial to it. At that time, Capitol Records moved with reasonable dispatch to file claims for refunds.
CONCLUSION
[25] Based upon the foregoing analysis, this appeal will be allowed. The refusals of refunds that are at the heart of this appeal are set aside.
[26] Counsel indicated that if I were to come to the result that I have, agreement could be reached as to the amount of the refunds due and interest thereon. In response to that agreement, draft reasons were distributed to counsel to provide an opportunity for them to provide to the Court amounts, including interest amounts, that could be used to finalize judgment.
[27] By letter dated the 9th of March, 2000, copied to counsel for the defendant, counsel for the plaintiff advised the Court that, on the basis of these reasons for judgment, agreement had been reached by the parties as follows:
| 1. The principal amount due and owing to the Plaintiff is $475,305.81; |
| 2. The interest due and owing to the Plaintiff is $672,953.32; and |
| 3. The total sum due and owing to the Plaintiff is $1,148,259.13. |
Judgment will go in favour of the plaintiff in the amount of $1,148,259.13, inclusive of principal and interest.
COSTS
[28] Counsel before me were in agreement that costs should follow the event. The plaintiff will have costs against the defendant assessed in accordance with the mid-column of Tariff B to the Federal Court Rules, 1998.
| ___________________________________ |
J.F.C.C.
Ottawa, Ontario
March 16, 2000
__________________
1 Joint Book of Documents, Volume I, Document 1.
2 Joint Book of Documents, Volume 1, Tab 5.