Federal Court Decisions

     T-2659-92

BETWEEN:

     NCS INTERNATIONAL INC.,

     Plaintiff,

AND:

     HER MAJESTY THE QUEEN,

     Defendant.

     T-2661-92

BETWEEN:

     FRASER VALLEY MILK PRODUCERS

     COOPERATIVE ASSOCIATION,

     Plaintiff,

AND:

     HER MAJESTY THE QUEEN,

     Defendant.

     REASONS FOR JUDGMENT

JOYAL, J.:

     The issues raised in these cases are sufficiently similar in both fact and law as to warrant this Court, on February 5, 1996, to rule that they should both be heard at the same time.

The Facts:

     The plaintiffs in these actions have each filed a Statement of Agreed Facts. The Statement for NCS International Inc. ("NCS"), in file T-2659-92, reads as follows:

1.      The Plaintiff is a company incorporated under the laws of Canada.

2.      the Plaintiff is engaged in business including the sale of electric wire and cable.

3.      The Plaintiff is a licensed wholesaler under the Excise Tax Act, R.S.C. 1985, c. E-15.

4.      The Plaintiff was not a licensed manufacturer.

5.      The Plaintiff distributes its wire products on reusable reels.

6.      The Plaintiff purchases its wire product and the reusable reels from the same suppliers.

7.      The purchase price the Plaintiff paid for the wire and reusable reels included an amount for federal sales tax, which the Plaintiff's supplier was liable to pay. For the purpose of Memorandum ET302, paragraph 26, therefore, the Plaintiff purchased the reels "tax paid".

8.      The Plaintiff would return the reels to its suppliers of wire and reels, and receive a refund for the price charged in respect of the reels.

9.      the Plaintiff sold its wire products to manufacturers, other wholesalers and contractors. Approximately 1/3 of these sales were subject to federal sales tax. The Plaintiff collected and remitted to the Defendant the federal sales tax on these sales.

10.      the Plaintiff collected a deposit from its customers for the reels, which deposit was refunded when the reels were returned. The deposit was the same amount paid by the Plaintiff to its suppliers, that is, inclusive of federal sales tax.

11.      the Plaintiff did not charge any of its customers additional FST on the deposit paid for the reels whether the sales were taxable or tax exempt.

12.      The FST the Plaintiff remitted was in respect of its taxable sales of wire and cable products. It did not remit any FST in respect of the reusable reels.

13.      The Plaintiff applied to operate a returnable container account by letter dated December 28, 1990.

14.      Other taxpayers applying to the Minister of National Revenue (the "Minister") at the same time, that is, late December 1990, were approved by the Minister to operate returnable container accounts.

15.      The Plaintiff claimed a deduction for federal sales tax in the amount of $43,877.33 by return dated January 17, 1991, for the federal sales tax it had paid its suppliers in respect of the reusable reels in inventory, calculated as set out at page J-1-2 at Tab 18 of the Joint Book of Documents.

16.      The Plaintiff applied, by application dated January 25, 1991, for a refund of federal sales tax in respect of the reusable reels in inventory as of November 30, 1990, in the amount of $12,325.40, calculated as set out at Tab 3 of the Joint Book of Documents.

17.      The Plaintiff's suppliers charged the Plaintiff FST on any purchase of the reusable reels up to and including December 31, 1990. Tax so paid by the Plaintiff had to be remitted by the suppliers within sixty (60) days. Any FST levied and collected by the Plaintiff on its taxable sales had to be remitted to the Defendant within sixty (60) days, that is, by February 28, 1991.

18.      On the sales of its products after January 1, 1991, the Plaintiff was required to charge its customers and remit to the Defendant GST on the reusable reels. In the result the Plaintiff was unable to recoup, at any time, the federal sales tax paid by the Plaintiff on the reusable reels in inventory on December 31, 1990.

19.      In making the application, the Plaintiff hoped to gain a tax advantage.

20.      By letter dated March 7, 1991, the firm of Oates, Anderson & Associates, Consultants in Commodity Taxes and Duty, acting as agent for, among others, the Plaintiff, requested an explanation of Revenue Canada's policy with respect to returnable container accounts as set out in Memorandum ET302.

21.      By letter dated March 15, 1991, Rene Noel, Director, Tax Interpretations, Excise responded to the Plaintiff's queries concerning the Department's policy in respect of returnable container accounts.

22.      By letter dated March 21, 1991, the Plaintiff was advised that its request to operate a returnable container account was denied.

23.      Further letters, dated March 25, 1991, and May 16, 1991, were sent to Oates, Anderson and Associates by Mr. Noel concerning the Department's policy regarding returnable container accounts.

24.      By Notice of Determination Number PAC 07001 dated March 29, 1991, the Plaintiff's application for a refund of federal sales tax in the amount of $12,325.40 was denied.

25.      A memorandum dated August 26, 1991, was issued to all Regional Audit Managers, Excise by R.J. Courneyea, Director, Audit Excise/GST Operations concerning returnable containers.

26.      The Canadian International Trade Tribunal granted the Plaintiff an extension of time to file a Notice of Objection with respect to the Notice of Determination Number PAC 07001.

27.      By Notice of Assessment Number PAC 5149 dated November 14, 1991, the Minister of National Revenue assessed the Plaintiff for federal sales tax in the amount of $43,877.44, plus interest in the amount of $4,056.60 and penalty in the amount of $2,338.91 in respect of the deduction claimed for federal sales tax with respect to the reusable reels.

28.      By Notice of Objection dated December 3, 1991, the Plaintiff objected to the Notice of Determination Number PAC 07001 dated March 29, 1991.

29.      By Notice of Objection dated December 11, 1991, the Plaintiff objected to the Notice of Assessment Number PAC 5149.

30.      Another memorandum dated March 18, 1992, was issued to all Regional Directors, Excise by R.J. Courneyea, Director, Audit Excise/GST Operations concerning returnable containers.

31.      L.J. Robidoux, Director, FST Objections wrote a letter dated May 11, 1992 (incorrectly dated May 11, 1991) to Mr. Earl Coates, Director Appeals, Alberta Region, with a copy to L. Binet, Director, Appeals Operations, with respect to processing of objections relating to assessments or refunds on returnable containers.

32.      By Notice of Decision dated July 31, 1992, the Minister of National Revenue disallowed the Plaintiff's objection dated December 11, 1991, and confirmed Assessment Number PAC 5149.

33.      By Notice of Decision dated July 31, 1992, the Plaintiff's objection to Notice of Determination PAC 07001 was disallowed and the Notice of Determination Number 07001 was confirmed.

     The Statement of Agreed Facts for the plaintiff Fraser Valley Milk Producers Cooperative Association ("Fraser Valley"), in file T-2661-92, reads as follows:

1.      The Plaintiff is an association incorporated under the laws of British Columbia.

2.      The Plaintiff and Dairyland Foods are one and the same.

3.      The Plaintiff is engaged in the business of processing and distributing diary and some non-dairy products.

4.      The Plaintiff is a licensed manufacturer under the Excise Tax Act, R.S.C. 1985 c. E-15.

5.      The Plaintiff distributes its products in reusable plastic carrying cases and on reusable pallets.

6.      The Plaintiff applied to operate a returnable container account in respect of returnable plastic cases and pallets by letter dated December 21, 1990.

7.      The Plaintiff purchases 16 litre plastic cases from GHJ Industries Ltd., J & A Plastic Ltd. and Jamber and Associates.

8.      The Plaintiff purchased 9 litre plastic cases from GHJ Industries Ltd.

9.      The Plaintiff purchased pallets from Pacific Pallets.

10.      Federal sales tax was included in the purchase price the Plaintiff paid to the suppliers for its plastic cases and pallets. For the purposes of Memorandum ET302, paragraph 33, therefore, the Plaintiff "paid tax on their purchases of returnable containers".

11.      The 9 and 16 litre plastic cases and pallets were used for distributing milk.

12.      The majority of the products, essentially the dairy products, sold by the Plaintiff to its customers were federal sales tax exempt. Some products, for example, fruit flavoured drinks, were taxable. On those sales, the Plaintiff collected and remitted federal sales tax to the Defendant.

13.      The Plaintiff charged its customers a deposit on the returnable containers. the customer received a credit when the container was returned.

14.      The deposit the Plaintiff charged its customers did not include an FST component, nor did the Plaintiff remit FST in respect of the cases or pallets.

15.      On December 27, 1990, the Plaintiff applied for a refund of federal sales tax in the amount of $127,666.78, calculated as set out at Tab 2 in the Joint Book of Documents.

16.      Other taxpayers applying to the Defendant at the same time, that is, late December, 1990, were approved by the Defendant to operate returnable container accounts.

17.      The Plaintiff's request to operate a returnable container account was denied by letter dated February 8, 1991.

18.      By letter dated March 7, 1991, the firm of Oates, Anderson & Associates, Consultants in Commodity Taxes and Duty, acting as agents for, among others, the Plaintiff, requested an explanation of Revenue Canada's policy with respect to returnable container accounts as set out in Memorandum ET302.

19.      The Plaintiff's suppliers charged the Plaintiff FST on any purchase of the reusable reels [sic] up to and including December 31, 1990. Tax so paid by the Plaintiff had to be remitted by the suppliers within sixty (60) days. Any FST levied and collected by the Plaintiff on its taxable sales had to be remitted to the Defendant within sixty (60) days, that is, by February 28, 1991.

20.      The Plaintiff's application for refund of federal sales tax was denied by Notice of Determination dated March 13, 1991.

21.      By letter dated March 15, 1991, Rene Noel, Director, Tax Interpretations, Excise responded to the Plaintiff's queries concerning the Department's policy in respect of returnable container accounts.

22.      Further letters, dated March 25, 1991, and May 16, 1991, were sent to Oates, Anderson & Associates by Mr. Noel concerning the Department's policy regarding returnable container accounts.

23.      The Plaintiff objected to the Notice of Determination by Notice dated June 10, 1991.

24.      A memorandum dated August 26, 1991, was issued to all Regional Audit Managers, Excise by R.J. Courneyea, Director, Audit Excise/GST Operations concerning returnable containers.

25.      Another memorandum dated March 18, 1992, was issued to all Regional Directors, Excise by R.J. Courneyea, Director, Audit Excise/GST Operations concerning returnable containers.

26.      L.J. Robidoux, Director, FST Objections wrote a letter dated May 11, 1992, (incorrectly dated May 11, 1991) to Mr. Earl Coates, Director, Appeals, Alberta Region, with a copy to L. Binet, Director, Appeals Operations, with respect to processing of objections relating to assessments or refunds on returnable containers.

27.      By Notice of Decision dated July 31, 1992, the Minister of National Revenue disallowed the Plaintiff's objection and confirmed the determination denying the Plaintiff's application for a refund of federal sales tax.

28.      The Defendant's reason for not allowing a manufacturer of tax exempt products to operate a returnable container account is as set out in counsel for the Defendant's letter of June 20, 1996.

     In both the NCS and Fraser Valley cases, the plaintiffs' appeals are on grounds that the defendant Crown unlawfully refused to apply to them the policy outlined in paragraph 33 of Memorandum ET302, which states the following:

Licensed manufacturers who have paid tax on their purchases or importation of reusable containers may change over to accounting for tax at the time the containers were shipped out. In these circumstances, the licensed manufacturers may request permission from their local Excise office to take a deduction of the tax paid on these containers which are on hand at the date of the changeover and which were purchased or imported by them in new condition within two years from the changeover date. Licensed manufacturers may choose the method they wish to use in accounting for tax on returnable containers. However, they must use one method or the other in a consistent manner and not a combination of the two.

     It is noted on the facts of both cases that applications by the plaintiffs to avail themselves of the foregoing optional accounting method were filed in late December 1990. That was but a short time before January 1, 1991, when the Goods and Services Tax ("GST") became effective and imposed different taxing procedures. It was also the end of the Federal Sales Tax ("FST") regime.

     The applications for the changeover were refused by the defendant Crown. Admittedly, there was some degree of confusion between some local or regional Excise offices as to the grounds for refusal, and there was evidence that some applications were accepted. Nevertheless, by March 1991, the defendant Crown's Ottawa office was able to confirm to the plaintiffs that their applications were being refused. Among the reasons expressed in various documents, the following may be listed:

1.      That Section 50(1) of the Excise Tax Act imposes a tax on all goods manufactured or imported into Canada; not to impose tax on returnable containers under the proposed arrangement would be inequitable for others who have opted to pay the tax at time of purchase.

2.      That when a sales tax exemption is applied on goods for which reusable containers are issued, the sales tax could not be accounted for on the containers when the goods are issued.

3.      That the legislative provisions of the Excise Tax Act, on which Memorandum ET302 was based, were in fact repealed effective January 1, 1991.

     Documents filed by the parties contain a number of pieces of correspondence between the plaintiffs and the Crown, and it might be helpful to condense everything which was said by referring to a Notice of Decision of the Appeals Directorate of Customs and Excise, addressed to Fraser Valley and dated July 31, 1992 (Ex. 13). This document says in part:

Section 1 of Part I of Schedule III to the Excise Tax Act exempted from tax usual coverings and containers used in containing goods not subject to sales tax. Hence, Section 1 denied exemption to coverings or containers designed for dispensing goods for sale or designed for repeated use".

That document also states:

Memorandum ET302 allowed manufacturers who sold goods under taxable conditions to account for tax on returnable containers at the time the containers were shipped out, rather than at the time they were purchased or imported. Under the Memorandum, manufacturers were required to request permission from the Minister to take a deduction of the tax paid on those containers which were on hand at the date of the changeover. The evidence is that the goods for which the containers at issue are designed to deliver are goods which were exempt from sales tax and therefor, sales tax could not be accounted for on the containers when the goods are sold.

     In a similar letter of the same date addressed to the plaintiff NCS (Ex. 27), the defendant Crown stated as follows:

The conversion instruction in Memorandum ET302 was administrative in nature. Further, it was based on the assumption that the federal sales tax program would continue on an ongoing basis and sales tax would ultimately be collected on the full sale price, including the charge for the container, on all taxable goods sold under taxable conditions.

The letter continues:

[ ... ] The Minister subsequently rejected your refund application [ ... ] because the legislative provisions of the Excise Sales Tax under which Memorandum Et302 was based, were repealed effective January 1, 1991.

Plaintiffs' Position:

     In my respectful view, the position of the plaintiffs rests more importantly on the doctrine of equity and fair dealing. Assuming for the moment that the Crown's role in dealing with the plaintiff's application is discretionary, such power is not unfettered. Discretion may not be exercised out of whim or on the basis of extraneous matters.

There is no unlimited arbitrary power exercisable for any purpose, however capricious or irrelevant, regardless of the nature or purpose of the statute [...] Discretion necessarily implies good faith in discharging public duty [...] and any clear departure from its lines or objects is just as objectionable as fraud or corruption.

     The preceding and more may be found in the judgement of Rand J. of the Supreme Court of Canada in the well-known Roncarelli case¹.

     There is reliance also on a more recent decision of the Supreme Court in the Maple Lodge Farms case², where McIntyre J. stated that the exercise of discretion will be respected by the courts and the courts will not interfere where the power has been exercised in good faith and, if required, in accordance with the principles of natural justice, and where reliance has not been placed upon considerations irrelevant or extraneous to the statutory purpose.

     The doctrines expressed might be said to have particular relevance when considering that during the critical period of December 17, 1990, to January 1, 1991, a number of applications from similar manufacturers or wholesalers to invoke Memorandum ET302 were casually and expeditiously accepted.

     The plaintiffs, therefore, argue that the Crown has exercised its discretion in an arbitrary or discriminatory manner, that it has favoured some taxpayers over others, that it failed in the proper administration of the Excise Tax Act by permitting some of its regional or local offices to exercise their discretion in a different and completely contradictory manner.

     In effect, the judicial remedy requested by the plaintiffs is that the application for refund of federal sales tax claimed by them in late 1990 be granted, and that an Order issue to the Crown to refund the tax as claimed.

The Crown's Position:

     The Crown's basic position is that two wrongs do not make a right. If the plaintiffs, through their consultants, were able to obtain evidence of other taxpayers being granted ET302 treatment at approximately the same time, it is not evidence bearing on the proper exercise of discretion. It simply suggests that the concordance of statute, regulation and practice under two regimes is especially onerous and that some applications which did not merit favourable consideration were approved. Of course, there is no evidence as to what was done with those cases subsequently. The Court only notes that according to Crown counsel, those other taxpayers were not, any more than the plaintiffs, entitled to the relief which Memorandum ET302 otherwise provided.

     The Crown takes the position that the inconsistent treatment is irrelevant. There is no legal argument that ET302 was not in conformity with the Excise Tax Act as it existed prior to January 1, 1991, nor is there evidence that the Crown acted in a capricious or malicious manner, or that its action was arbitrary, or that it decided the issue on extraneous considerations.

     Further, says Crown counsel, the policy under ET302 was effectively changed with the adoption of the Goods and Services Tax on December 17, 1990, and its coming into force on January 1, 1991. That change of policy was necessary because it no longer enjoyed a valid statute base. There was no bad faith in abandoning it and indeed, says counsel, the plaintiffs were not entitled to the relief claimed.

Findings:

     I should firstly find that the policy set out in ET302 is purely administrative. It is an option which a qualified manufacturer may take up. It does not create a right per se, but whatever discretion is exercisable by the Crown, that discretion must be exercised equitably and responsibly.

     Secondly, although it is optional to a taxpayer to apply under ET302, that option may be exercised by way of an application requesting permission to do so. In the normal course of events, permission would be forthcoming, but there remains nevertheless a residue of discretionary authority dependent upon all sorts of surrounding circumstances.

     It is that kind of residual discretion which cannot be exercised arbitrarily, capriciously or discriminately and, on the strength of case law, these categories of decisions may be judicially challenged.

     Based on the evidence before me, I do not find grounds to attribute to the defendant Crown's refusal to endorse the application the kind of taint or error or breach otherwise charged against it. I am satisfied that the refusal, based on administrative exigencies and requirements, was adequately motivated by the pending entry into the statute books of a brand new taxation scheme. It might have been purely a judgment call by the Crown to refuse, but certain it is that one of the elements thrown into the hopper at that time was the maintenance of equity and fairness among all persons liable to the new tax.

     It is unfortunate that in the process of the changeover from the old to the new order, during the last days of 1990 and the first days of 1991, some applications came before regional or local offices who had possibly not been sufficiently briefed to refer them to Ottawa for action, or at least for consultation.

     Occurrences of different treatment always send a wrong message to taxpayers. Nevertheless, I am not satisfied that the incidents provide to the plaintiffs the necessary grounds to establish that a right to treatment under ET302 was thereby created³. It is my view that the underpinnings of ET302 were lost to the plaintiffs by January 1, 1991, when the new tax regime came into force.

Conclusion:

     Although the Court is conscious of the plaintiffs' sense of concern at the chronology of events, I must dismiss their respective appeals. Costs to the defendant Crown, if demanded.

     L-Marcel Joyal

     __________________________

     J U D G E

O T T A W A, Ontario

October 16, 1996.

__________________

     ¹      Frank Roncarelli v. The Honourable Maurice Duplessis, [1959] S.C.R. 121 at 140.

     ²      Maple Lodge Farms v. Govt. of Canada and Canadian Chicken Marketing Agency, [1982] 2 S.C.R. 2.

     ³      See, for example, Sunbeam Corp. (Canada) Ltd. v. Canada, [1993] 71 F.T.R. 199 (F.C.T.D.); Ford Motor Co. of Canada v. Canada (M.N.R.), [1994] 85 F.T.R. 116 (F.C.T.D.).