Date: 20011030
Docket: T-403-98
Neutral citation: 2001 FCT 1175
BETWEEN:
IBM CANADA LIMITED
Plaintiff
and
HER MAJESTY THE QUEEN
Defendant
REASONS FOR ORDER
[1] This is an appeal, pursuant to subsection 81.2(1) of the Excise Tax Act, R.S.C. 1985, c. E-15 (the "Act"), from the Minister of National Revenue's Notice of Decision dated December 11, 1997 which denied the Plaintiff's application for a Federal Sales Tax (FST) inventory rebate pertaining to FST-paid replacement parts (the "Replacement Parts").
[2] The reasons for the Minister's decision are the following:
The Minister of National Revenue has carefully considered the information and reasons set forth in your Notice of Objection. The determination is hereby confirmed in accordance with subsection 81.17(4) of the Excise Tax Act.
The goods in question are not eligible for the FST inventory rebate pursuant to subsection 120(2.1) which clarifies that the FST inventory rebate is not available for that portion of the tax-paid goods that can reasonably be expected to be used or consumed by the supplier in providing a service.
[3] The issue in this appeal is whether the Replacement Parts qualify for a rebate under subsection 120(3) of the Act. More particularly, the question is whether the Replacement Parts meet the requirements of the definition of "inventory" set out at paragraph 120(1)(a) of the Act, as read in the overall context of section 120. Another issue is whether subsection 120(2.1) deprives the Plaintiff of the relief from double-taxation provided by subsection 120(3), on the basis that on January 1, 1991 the Replacement Parts were reasonably expected to be consumed or used by the Plaintiff.
Relevant Provisions of the Act
| Sales Tax Inventory Rebate Definitions 120. (1) In this section, ... "inventory" « inventaire » "inventory" of a person as of any time means items of tax-paid goods that are described in the person's inventory in Canada at that time and that are (a) held at that time for sale, lease or rental separately, for a price or rent in money, to others in the ordinary course of a commercial activity of the person, or (b) building materials held at that time for use by the person in a business of constructing, renovating or improving buildings or structures carried on by the person, but not including any such goods that before that time have been incorporated into new construction or a renovation or improvement or have otherwise been delivered to a construction, renovation or improvement job site, and that are not (c) capital properties of the person, (d) held by the person for use in the construction, renovation or improvement of property that is or is to be capital property of the person, or (e) included in the description of any other person's inventory at that time; ... Goods not expected to be sold (2.1) For the purposes of paragraph (a) of the definition "inventory" in subsection (1), that portion of the tax-paid goods that are described in a person's inventory in Canada at any time that can reasonably be expected to be consumed or used by the person shall be deemed not to be held at that time for sale, lease or rental. Rebate of sales tax (3) Subject to this section, where a person who, as of January 1, 1991, is registered under Subdivision d of Division V of Part IX has any tax-paid goods in inventory at the beginning of that day, (a) where the tax-paid goods are goods other than used goods, the Minister shall, on application made by the person, pay to that person a rebate in accordance with subsections (5) and (8); and (b) where the tax-paid goods are used goods, the goods shall be deemed, for the purposes of section 176, to be used tangible personal property supplied in Canada by way of sale on January 1, 1991 to the person in respect of which tax was not payable by the person and to have been acquired for the purpose of supply in the course of commercial activities of the person for consideration paid on that day equal to 50% of the amount at which the goods would be required to be valued on that date for the purpose of computing the person's income from a business for the purposes of the Income Tax Act. |
Remboursement de la taxe de vente à l'inventaire 120. (1) Les définitions qui suivent s'appliquent au présent article. ... « inventaire » "inventory" « inventaire » État descriptif des marchandises libérées de taxe d'une personne à un moment donné qui figurent à l'inventaire de la personne au Canada à ce moment et qui, à ce même moment, selon le cas : a) sont destinées à être vendues ou louées séparément pour un prix ou un loyer en argent, dans le cours normal d'une activité commerciale de la personne; b) sont des matériaux de construction réservés à l'usage de la personne dans le cadre d'une entreprise de construction, de rénovation ou d'amélioration de bâtiments ou de constructions qu'elle exploite, à l'exclusion de telles marchandises qui, avant ce moment, faisaient partie de constructions nouvelles ou de rénovations ou d'améliorations ou ont autrement été livrées à un chantier de construction, de rénovation ou d'amélioration. Ne sont pas de telles marchandises : c) les immobilisations de la personne; d) les marchandises que la personne destine à la construction, à la rénovation ou à l'amélioration d'un bien qui est son immobilisation ou doit le devenir; e) les marchandises figurant à l'inventaire d'une autre personne à ce moment. ... Vente improbable (2.1) Pour l'application de l'alinéa a) de la définition de « inventaire » au paragraphe (1), la partie des marchandises libérées de taxe qui figurent à l'inventaire d'une personne au Canada à un moment donné qui sera vraisemblablement consommée ou utilisée par la personne est réputée ne pas être destinée, à ce moment, à la vente ou à la location. Remboursement de la taxe de vente (3) Sous réserve du présent article, dans le cas où l'inventaire d'une personne inscrite aux termes de la sous-section d de la section V de la partie IX le 1er janvier 1991 comprend, au début de cette date, des marchandises libérées de taxe, les rèègles suivantes s'appliquent : a) si les marchandises libérées de taxe ne sont pas des marchandises d'occasion, le ministre verse à la personne, sur sa demande, un remboursement en conformité avec les paragraphes (5) et (8); b) si les marchandises libérées de taxe sont des marchandises d'occasion, elles sont réputées, pour l'application de l'article 176, être des biens meubles corporels d'occasion fournis par vente à la personne au Canada le 1er janvier 1991 relativement auxquels la taxe n'est pas payable par la personne, et avoir été acquises pour fourniture dans le cadre des activités commerciales de la personne pour une contrepartie payée à cette date égale à 50 % du montant auquel les marchandises seraient évaluées à cette date aux fins du calcul du revenu de la personne provenant d'une entreprise pour l'application de la Loi de l'impôôt sur le revenu. |
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[4] Before proceeding, I must say a few words about the statutory scheme put in place by the government on January 1, 1991. On that date, the Goods and Services Tax ("GST") came into effect in Canada, replacing the Federal Sales Tax ("FST").
[5] Under the FST regime, a tax was levied on the majority of manufactured and imported goods, which tax was remitted to the government by the manufacturer or the importer. Under the GST regime, businesses collect the tax from their customers at a rate of 7% calculated on the sale price of their goods and services and, in so doing, act as agent for the government. The amount collected is remitted to the government.
[6] Because of concerns regarding double taxation, i.e. goods upon which FST had been levied would be subject to the GST upon sale thereof, Parliament enacted section 120 of the Excise Tax Act and provided for a FST rebate on "inventory" goods. To qualify for the rebate under section 120, goods had to meet the following criteria:
(i) held for taxable supply (within the meaning assigned by subsection 123(1) by way of sale, lease or rental to others in the ordinary course of the person's business, or ...;
(ii) described in the person's inventory and not have been previously written off for income tax purposes;
(iii) in a new and unused condition;
(iv) acquired by the person prior to January 1, 1991 and FST paid; and
(v) in Canada as of January 1, 1991.
[7] In 1993, Parliament amended section 120 of the Act in the following respects. Firstly, the word "separately" was added to paragraph 120(1)(a) after the words "held at that time for sale, lease or rental". [1] Secondly, subsection 120(2.1) was added so as to provide that goods "consumed or used by the person" were deemed not to be held for sale, lease or rental.
[8] The amendments were made retroactive to December 17, 1991.
[4] I now turn to the facts relevant to the present determination. In June 1991, the Plaintiff applied for a federal sales tax inventory rebate in the sum of $6,139,502.00. The value of the goods in respect of which the rebate was claimed was $75,796,320.00. The application pertained to computer Replacement Parts held in the Plaintiff's inventory on January 1, 1991.
[5] There is no dispute between the parties that the Replacement Parts were to be supplied by the Plaintiff, after January 1, 1991, to its customers in fulfilment of its obligations under a parts and labour agreement entered into with each customer. Ms. Felepchuk, the government programmes executive for the Plaintiff, who occupied the position of commodity tax analyst in 1991, testified that the Replacement Parts were held in inventory by the Plaintiff for supply to its customers "in conjunction with our maintenance agreement". [2] By December 31, 1991, all of the Replacement Parts had been supplied by the Plaintiff to its customers. The maintenance agreements for the year ending December 31, 1991 generated approximately $369 million in revenue to the Plaintiff. On that sum, approximately $25 million of GST were remitted to the Government.
[6] On October 15, 1991 the Minister of National Revenue (the "Minister") issued a Notice of Determination dismissing the Plaintiff's application for a rebate on the following grounds:
Your application has been disallowed:
- Goods included in the rebate are not goods for sale, lease or rental to customers in your ordinary course of business.
[7] On January 7, 1992 the Plaintiff filed a Notice of Objection with the Appeal Directorate of the Department of National Revenue. The Statement of Facts and Reasons given by the Plaintiff in support of its Notice of Objection are:
This Notice of Objection is submitted in response to Notice of Determination 009627 dated October 15, 1991, a copy of which is enclosed.
Our application for Federal Sales Tax Inventory Rebate in the amount of $6,139,502. was for goods (warranty and maintenance parts) which are eligible for the rebate under the provisions of the Excise Tax Act.
Section 120 of the GST legislation provides that new and unused tax paid goods held for taxable supply, which are described in a person's inventory in Canada and are not capital property of the person, are eligible for the Federal Sales Tax Inventory Rebate.
The inventories in question are of new and unused tax paid goods. These goods are held for taxable supply as defined in Section 123 of the legislation. The parts are supplied in the course of a commercial activity and are provided to our customers as opposed to being consumed in the provision of a service. Title to these parts is actually transferred to the customer. The goods are described in inventory and are not capital property of the person. While inventoried, these goods are available for sale. A portion may later be allocated for use under a service contract, but that does not imply that the item was not available for sale while inventoried. In fact, a portion of these parts were actually sold to a separate legal entity in late 1991, which further illustrates the fact that the inventories are available for sale.
The interpretation of the law provided by this Notice of Determination results in an unfair competitive advantage being given to many of those who held wholesaler's or manufacturer's licences under the previous FST system. Many of these licensees were able to purchase their warranty and maintenance parts exempt of FST with the intent of self-assessing on the maintenance parts as they were removed from inventory. Consequently, their inventories were free of FST at January 1, 1991. Those who were not eligible to use these licences held inventories of FST-paid goods.
These inventories are now subject to double taxation, which was clearly not the intent of the legislation as outlined in the Explanatory Notes for Section 120. Most of the parts under discussion will be supplied under some form of maintenance or warranty agreement which will be provided to customers post-1990, therefore attracting GST. The cost of the parts provided under these agreements will include an amount of FST, hence the element of double taxation.
A further inequity exists in that warranty parts to be supplied by a dealer to a customer, under a manufacturer's warranty are eligible for the rebate, even though they would normally be considered to be goods held for use in service contracts. Consequently, those who supply warranty parts directly to customers are placed at a competitive disadvantage against dealers supplying the same parts under a manufacturer's warranty.
Based on the foregoing, we submit that the goods included in the application under discussion are indeed eligible for the Federal Sales Tax Inventory Rebate. We therefore request that the Notice of Determination be vacated by the Minister.
[8] On December 11, 1997 the Minister made the decision which the Plaintiff attacks by way of the present appeal commenced March 11, 1998. The Plaintiff seeks a decision setting aside the Minister's decision and ordering the Minister to pay to it the rebate claimed together with interest thereon. The Plaintiff also seeks costs.
[9] The Plaintiff's position is straightforward. It submits that the Replacement Parts were not held "to be consumed or used" within the meaning of subsection 120(2.1). The Plaintiff asserts that the Replacement Parts were held for the specific purpose of fulfilling its obligations to its customers pursuant to the parts and labour agreements. The Plaintiff submits that the Replacement Parts supplied to its customers became, at some point, the property of these customers and hence, there was a translation of property and a sale within the meaning of that expression in the definition of "inventory" in subsection 120(1). Consequently, according to the Plaintiff, as the Replacement Parts were "held for sale" within the meaning of paragraph 120(1)(a), it is entitled, pursuant to s. 120(3), to the rebate claimed.
[10] In the alternative, relying on sections 7 and 8 of the Canadian Charter of Rights and Freedoms (the "Charter"), the Plaintiff submits that subsection 120(2.1) amounts to an unreasonable search or seizure under section 8 of the Charter and / or does such violence to the principles of fundamental justice so as to give rise to the protection provided in section 7 of the Charter.
[11] The Defendant's position is as straightforward as that of the Plaintiff. In his written representations on behalf of the Defendant, Mr. Ciavaglia makes the following submissions:
IBM Canada Ltd. is suing the Crown for a rebate of Federal Sales Tax paid on computer replacement parts imported into Canada prior to 1991 and kept in inventory. IBM believes that it is entitled to the rebate because the parts were double taxed. They were allegedly subject to the Goods and Sales Tax, when they were sold to customers after 1991, when the GST came into effect.
However, in reality, GST was never imposed on the parts. The GST is a consumption tax imposed on the sale price of goods or services. The replacement parts were never sold to the customers. Rather, IBM supplied them in connection with maintenance services.
Accordingly, there is no basis for IBM's action and it should be dismissed.
[17] Specifically, the Defendant states that the Replacement Parts were not held by the Plaintiff for sale, separately or otherwise, and that the parts were used by the Plaintiff in providing a service to its customers.
[12] With respect to the Plaintiff's Charter arguments, the Defendant takes the position that those arguments are without merit. Firstly, the Defendant states that as the replacements were not goods held for sale, on January 1, 1991, the Plaintiff was not entitled to the rebate claimed under the pre-1993 legislation. Accordingly, the Defendant submits that in enacting subsection 120(2.1) Parliament did not interfere with the Plaintiff's vested rights. Secondly, the Defendant states that section 7 of the Charter does not apply to corporations and that it does not protect economic interests. Thirdly, the Defendant submits that since a "seizure" within the meaning of s. 8 of the Charter is a seizure of property for investigatory or evidentiary purposes, the retroactive legislation herein cannot constitute a seizure within that meaning.
[13] In order to determine the issues before me, it is important, if not crucial, to examine the agreements entered into by the Plaintiff with its customers. Under those agreements, which I will refer to as the maintenance agreements, the Plaintiff agreed to repair or exchange the computers covered by the agreement. Exhibit A-31, a copy the General Terms and Conditions of the Plaintiff's ServicePlan and Exhibit A-32, a copy of the Plaintiff's maintenance agreement under its ServicePlan-Maintenance Services, were adduced in evidence. Articles 1 and 3 of the maintenance agreement (Exhibit A-32) are relevant and I hereby reproduce them:
1. Associated Contract Documents
Contract documents associated with this Agreement are the IBM ServicePlan General Terms and Conditions.
...
3. Maintenance Service
IBM will provide maintenance service for a machine under one of the Types of Service described in the subsection entitled "Types of Service". IBM will provide maintenance service as required, by repairing or exchanging the machine under the Type of Service you selected from those available for a machine. For non-tag machines, you may subsequently select another available Type of Service to be effective upon 15 days notice to IBM. For tag machines, the Type of Service you selected will remain in effect for an annual period. When IBM receives payment of the applicable charges for a tag machine, IBM will send you a tag to identify the Type of Service you selected. You agree to affix the tag to the appropriate machine.
IBM will control and install engineering changes IBM determines to be applicable to machines at times mutually agreed to by you and IBM.
Repair
Under a Repair Type of Service, IBM will provide remedial maintenance to keep machines in, or restore them to, good working order. Such service may include preventive maintenance as IBM determines necessary. Repair Types of Service may include lubrication, adjustment and replacement of maintenance parts as IBM deems necessary. IBM will install maintenance parts, which may be new or used, on an exchange basis. Replaced parts become IBM's property.
Exchange
Under an Exchange Type of Service, IBM will provide an exchange machine. Such machine may not be new, but will be in good working order. You will acquire title to it at the time of exchange. IBM will acquire title to the failing machine at the time of exchange. You will ensure that a failing machine is free of any encumbrances at the time you present it to IBM.
IBM reserves the right to verify that a machine is acceptable for exchange. You will not present to IBM a machine which is defaced, altered, in need of repair not included in maintenance service or damaged beyond repair. However, if upon inspection IBM determines that it has received in exchange a failing machine in such condition you will be responsible for charges associated with the repair of damage or restoration of such machine. You are also responsible for repairs caused by missing parts.
...
[14] Article 1 of the maintenance agreement provides that the agreement is subject to the terms and conditions of the IBM ServicePlan General Terms and Conditions (A-31). Articles 2 and of the General Terms and Conditions provide the following:
2. Invoice and Payment
IBM will invoice you for charges as stated in the contract(s). You shall make payments as stated in the invoice or other billing document.
3. Taxes
In addition to the charges stated in a Supplement, you agree to pay amounts equal to any taxes, levies, assessments or charges of any kind resulting from an Offering, or any activities thereunder, exclusive of taxes based on IBM's net income. The charges stated in a Supplement include amounts for Federal Excise and Federal Sales Taxes and customs duties in effect as at the date of the Supplement. Notwithstanding any provision of a contract, you shall pay to IBM any amounts equal to any increase in duties or taxes included in the charges, as well as amounts equal to any new or modified duties, taxes, assessments or levies.
[15] I also reproduce Article 6 which provides:
...
THIS IS A SERVICE AGREEMENT. THERE ARE NO IBM WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABLE QUALITY AND FITNESS FOR A PARTICULAR PURPOSE UNLESS SPECIFIED IN A SPECIFIC CONTRACT.
[16] Under the maintenance agreements, the Plaintiff undertakes to provide protection to its customers, for an agreed period of time, against the failure of computer components covered by the agreements. Specifically, the Plaintiff undertakes to repair those parts of the computers which are defective. The costs of the labour required to effect the repair are also covered by the agreements.
[17] In consideration for the repair of defective components or the exchange of the computer, the Plaintiff's customers agree to pay a fixed fee, usually a monthly fee, whether or not there has been a need to repair defective components or to make an exchange. The GST is charged on the agreed monthly fee. Comprising Exhibits D-2 and D-3 are sample invoices from the Plaintiff to customers. For example, Exhibit D-2 is an invoice dated April 1, 1991 which shows the maintenance charge for the month of April 1991. That charge is $1542.00 to which has been added a sum of $107.94 for the GST.
[18] Should a computer part be in need of repair, the Plaintiff's customers will not be charged a sum in excess of the agreed monthly fee. Consequently, should the Plaintiff have to supply a part to one of its customers, there will be no charge for the supply of that part and, hence, no invoice will be sent to the customer, other than the invoice covering the monthly fee.
[19] Ms. Felepchuk, during her testimony, explained how the Plaintiff calculated the monthly or annual fee. At pages 92 and 93 of the April 2001 transcript, Ms. Felepchuk gave the following explanation:
Q. I would like to ask you about pricing. How, if at all, were charges made under these maintenance agreements?
A. We bill for them on generally a monthly basis, sometimes on an annual basis.
Q. And how were the prices determined?
A. The prices were developed by looking at our cost of providing the parts and labour under the agreement, so, for instance, we could determine our cost of the parts, we could determine our costs of the labour, and then we applied an appropriate uplift to ensure that we achieved our gross profit targets.
Q. What role, if any, did the replacement parts play in the pricing of the maintenance agreement charges?
A. They played a significant part because they're a very valuable and costly piece of what was being provided.
Q. What day are the charges for the maintenance services invoiced?
A. Generally the first of each month.
Q. Is GST charged for those amounts, as required?
A. Yes.
Q. Now do you have any idea what the relative value of the replacement part is compared to the value of the labour provided?
A. Yes, I do. We can go back into our audited financial statements and find that the parts are generally worth about twice what the labour is worth, so I'm going to round numbers, I guess, but if you had $66 worth of parts being provided, you have approximately $34 worth of labour.
Q. So you say generally. Is that a general number or do you have any specific basis for your evidence?
A. No. We used the financial statements to determine that, and they have been audited by our external auditors.
Q. So you have or you don's have a specific basis for your evidence?
A. I do have specific basis.
Q. Do you recall, how does the cost value -- you mentioned the 66 to 34 split. Howe does the cost compare to the relative value on revenue generation under the maintenance agreements?
A. It would be -- sorry. It would have a direct relationship because you would uplift both the parts and the labour to achieve the desired gross profit, so it would have a similar relationship on the revenue side as it did on the cost side.
Q. What do you mean by "uplift"?
A. You take your costs of the part, and take your cost of the labour, and determine how much profit you wanted to obtain from providing that, and you would uplift it to determine your price.
[20] According to Ms. Felepchuk, the fees charged by the Plaintiff to its customers with respect to the maintenance agreements, included the costs of the replacement parts.
[21] I will now address the grounds put forward by the Defendant in denying the Plaintiff's entitlement to a rebate. As I indicated earlier, the Defendant submits that the Replacement Parts were not held by the Plaintiff for sale, separately or otherwise, and that the Plaintiff used the parts to provide a service to its customers. In his written submissions, Mr. Kreklewetz, for the Plaintiff, framed the issues for determination in the following terms:
(1) Were the Replacement Parts "held for sale"?
(2) If the Replacements were "held for sale", the Court must determine whether section 120(2.1) of the Act operates to deem the goods not to be held for sale by the Plaintiff?
(3) If section 120(2.1) deems the Replacement Parts not to be "held for sale" by the Plaintiff, the final issue to be determined is whether section 120(2.1) contravenes the Plaintiff's rights under section 7 or 8 of the Charter of Rights and Freedoms, and is it therefore of no force or effect pursuant to section 52 of the Charter?
[22] With respect to the first issue, I will address it in the light of both the pre-1993 legislation and the 1993 amendments. I will begin my analysis with a brief discussion of the Supreme Court of Canada's decision in Will-Kare Paving & Contracting Limited v. Canada, [2000] 1 S.C.R. 915, on which both sides rely in support of their respective positions. Mr. Justice Major, who wrote the reasons for the majority, stated the issue before the Court, at page 921, in the following terms:
This appeal concerns the appellant's ability to claim two manufacturing and processing tax incentives in respect of its 1988, 1989 and 1990 taxation years based upon the capital cost of an asphalt plant it constructed in 1988. The availability of both incentives, an accelerated capital cost allowance and an investment tax credit, turns upon whether using the plant to produce asphalt to be supplied in connection with paving services constitutes use primarily for the purpose of manufacturing or processing goods for sale.
[23] More particularly, the Supreme Court had to decide whether the plant constructed by the appellant to produce asphalt which would be supplied by it in fulfilling its contracts, constituted property used to manufacture or process goods for sale. In summarising the relevant facts, Mr. Justice Major stated that the appellant's business was the paving of driveways, parking lots and small public roadways for commercial and residential customers. He also stated that 75% of the appellant's asphalt production was used in connection with its paving business and that 25% thereof was sold to third parties. At page 931, paragraph 26 of his reasons, Mr. Justice Major summarises as follows one of the arguments put forward by the appellant:
In this appeal, Will-Kare admits that asphalt supplied in connection with its paving services is provided pursuant to a contract for work and materials. Nevertheless, Will-Kare requests that we adopt the Halliburton and Nowsco ordinary meaning interpretation such that the manufacturing of goods for sale includes all manufactured goods supplied to a customer for consideration, regardless of whether paving services are provided in connection with that supply. To the contrary, the respondent asserts that, as noted in Crown Tire and Hawboldt Hydraulics, use of the term sale in the manufacturing and processing incentives necessarily imports common law and statutory sale of goods concepts.
[30] In Will-Kare,supra, the appellant, in order to succeed, had to demonstrate that the asphalt plant constructed by it constituted "qualified property" within the meaning of subsection 127(9) of the Income Tax Act, to be used directly or indirectly in Canada primarily in the manufacturing or processing of goods for sale. At pages 928 to 930 (paragraphs 19 to 22), Mr. Justice Major sets forth the conflicting views in the jurisprudence concerning the meaning of the word "sale" in the relevant legislation:
20 One point of view is expressed in Crown Tire Service Ltd. v. The Queen, [1984] 2 F.C. 219 (T.D.), where the court imports common law and provincial sale of goods law distinctions in defining the scope of the manufacturing and processing incentives' application. Only capital property used to manufacture or process goods to be furnished through contracts purely for the sale of such goods qualifies. Property used to manufacture or process goods to be supplied in connection with the provision of a service, namely through a contract for work and materials, is not viewed as being used directly or indirectly in Canada primarily in the manufacturing or processing of goods for sale, and as such, does not qualify for either the accelerated capital cost allowance or the investment tax credit.
21 The Crown Tire case related to whether the application of treads manufactured by the taxpayer to tires brought in by customers for repair constituted the manufacture or processing of goods for sale. Strayer J. (later J.A.) disallowed the taxpayer's claim to the s. 125.1 manufacturing and processing profits deduction as the manufactured tread was supplied through a contract for work and materials, a characterization based upon the method through which property transferred to the buyer.
...
23 Halliburton and Nowsco considered the form of contract entered into between the taxpayer and customer to be irrelevant. In both cases the Federal Court of Appeal quoted with approval language from Reed J.'s decision in Halliburton at the Trial Division that appears to suggest an alternative test based upon the source of the taxpayer's profit. As stated by Reed J., at p. 5338:
. . . I do not find any requirement that the contract which gives rise to the taxpayer's profit must be of a particular nature, eg: one for the sale of goods and not one of a more extensive nature involving work and labour as well as the goods or material supplied. In my view it is the source of the profit, (arising out of processing) that is important . . . not the nature of the taxpayer's contract with its customers.
[31] Mr. Justice Major concluded that the asphalt plant had been used primarily in the manufacturing or processing of goods supplied through contracts for work and materials, not through contracts of sale. In Mr. Justice Major's view, the meaning of the word "sale" had to be determined by reference to "the concepts of sale and lease as importing private law distinctions". In other words, Mr. Justice Major agreed with the position taken by Mr. Justice Strayer (as he then was) in Crown Tire Service Ltd. v. The Queen, [1984] 2 F.C. 219 (T.D.). Mr. Justice Major's rationale in reaching the above conclusion is found at paragraphs 31 to 36 of his reasons (pages 933 to 935) where he states:
31 To apply a "plain meaning" interpretation of the concept of a sale in the case at bar would assume that the Act operates in a vacuum, oblivious to the legal characterization of the broader commercial relationships it affects. It is not a commercial code in addition to a taxation statute. Previous jurisprudence of this Court has assumed that reference must be given to the broader commercial law to give meaning to words that, outside of the Act, are well-defined. See Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298. See also P. W. Hogg, J. E. Magee and T. Cook, Principles of Canadian Income Tax Law (3rd ed. 1999), at p. 2, where the authors note:
The Income Tax Act relies implicitly on the general law, especially the law of contract and property. ... Whether a person is an employee, independent contractor, partner, agent, beneficiary of a trust or shareholder of a corporation will usually have an effect on tax liability and will turn on concepts contained in the general law, usually provincial law.
32 Referring to the broader context of private commercial law in ascertaining the meaning to be ascribed to language used in the Act is also consistent with the modern purposive principle of statutory interpretation. As cited in E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical object of the Act, and the intention of Parliament.
See Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at para. 21. The modern approach to statutory interpretation has been applied by this Court to the interpretation of tax legislation. See 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at para. 5, per Bastarache J., and at para. 50, per Iacobucci J.; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 578.
33 The technical nature of the Act does not lend itself to broadening the principle of plain meaning to embrace popular meaning. The word sale has an established and accepted legal meaning.
34 Will-Kare's submissions essentially advocate the application of an economic realities test to the interpretation of what constitutes a sale for the purpose of the manufacturing and processing incentives. However, as noted above, in the absence of express legislative direction to the contrary, I view the incentives' reference to the concepts of sale and lease as importing private law distinctions. As such, the provisions at issue are clear and unambiguous and reference to economic realities is not warranted. See Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 40.
35 It would be open to Parliament to provide for a broadened definition of sale for the purpose of applying the incentives with clear language to that effect.Given, however, the provisions merely refer to sale, it cannot be concluded that a definition other than that which follows from common law and sale of goods legislation was envisioned.
36 For the taxation years in issue, approximately 75 percent of the asphalt produced by the Will-Kare's plant was supplied in connection with Will-Kare's paving services. Thus the plant was used primarily in the manufacturing or processing of goods supplied through contracts for work and materials, not through sale. Property in the asphalt transferred to Will-Kare's customers as a fixture to real property.
[Underlining added]
[24] The Defendant relies on the Supreme Court's decision in Will-Kare, supra, for the proposition that goods supplied in connection with the provision of a service, namely a contract for work and materials, are not goods for sale in the context of tax legislation. The Plaintiff disagrees with the Defendant's position on the meaning of the word "sale". The Plaintiff submits that the adoption by the Supreme Court of Canada in Will-Kare, supra of the definition of sale, which flows from the common law and the sale of goods legislation, is not appropriate when dealing with issues under the Excise Tax Act. Mr. Kreklewetz, in his written submissions, argued that "unlike the situation in the Income Tax Act - where ‘sale' had no established or legally accepted meaning - the word ‘sale' does have an established and legally accepted meaning in the other parts of the Excise Tax Act.
[25] In support of his submissions, Mr. Kreklewetzreferred me to a number of decisions rendered by this Court which have dealt with the meaning of the word "sale" in the context of the Excise Tax Act. He also referred me to the definition of the word "sale" found in subsection 123 (1) of the Act. The word "sale" is therein defined as follows:
|
... "sale", in respect of property, includes any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property; ... |
... « vente » Y sont assimilés le transfert de la propriété d'un bien et le transfert de la possession d'un bien en vertu d'une convention prévoyant le transfert de la propriété du bien. ... |
[34] In R. v. Stevenson Construction Co. Ltd., (1979) 24 N.R. 390 the issue before the Federal Court of Appeal was the interpretation of subsection 44(2) of the Excise Tax Act, a refund provision that required a purchase of goods. More particularly, the Court was called upon to define the word "purchase" in light of the Excise Tax Act as a whole. At page 397 Le Dain J., for the Court, held as follows:
10___ __The meaning of this passage, as I read it, is that having regard to the legislative intention disclosed by the deeming provision, a broad view is to be taken of the word "sold" in the refund provision, or the word "purchased" in the corresponding provision in s.44(2) of the Excise Tax Act, and that it is to include any transaction which effects a translation of the property in the goods to the provincial government.__As was said by Lord Hailsham L.C. in the Dominion Press case, to which reference was made by Duff C.J., the issue is not to turn on the common law distinction between a contract for sale and a contract for work and labour, but on what meaning should be given to the word "purchased" in the light of the statute as a whole.__In other words, the question is whether it is reasonable to conclude that by the word "purchased" Parliament contemplated any transaction which effects a translation of property.__As a matter of result, it would be quite illogical, I think, that a person should fall within the conditions for refund if he was the original manufacturer or producer of the goods that were incorporated or consumed in the work contracted for by the provincial government but not if he purchased them.__In both cases sales tax has been paid on the goods, and the nature of the transaction which entitles the person who bears the tax to a refund is identical.__There is no doubt that the effect of the contract in the present case was to translate the property in the goods to the provincial Crown. [3]
[35] In the event, the Federal Court of Appeal concluded that the government of the province of British Columbia had purchased materials even though the relevant contractual arrangement was for the construction, modification and repair of ferry terminals. The key issue, according to the Court of Appeal, was whether there had been, under the contract, a translation of property. In concluding as it did, the Court of Appeal relied, in part, on the decision of the Privy Council in Dominion Press v. Minister of Customs and Excise (1928) A.C. 340 where Lord Hailsham stated that the determination of the issue, i.e. whether there had been a sale, did not depend on the common law distinction between a contract for sale and a contract for work and labour.
[36] The next decision to which I was referred is this Court's decision in Canada v. Tom Baird & Associates Ltd. (1997), 1 C.T.C. 88 (F.C.T.D.), affirmed 1998 221 N.R. 201 (F.C.A.) The issue before the court was whether imaged articles that were used only for the manufacture of taxable printed matter as advertising and that would subsequently be sold by the company to its clients, were exempt from federal sales tax. For the determination of that issue, the trial judge, McKeown J., had to consider the meaning of the word "sale". At page 6245, he makes the following remarks:
In every other context of the Act the words "sale" and "use" are used for a different purpose and mean different things.__Thus, it is the "sale" of the goods by the manufacturer or producer thereof which triggers the tax and it is the intended use thereof which determines the applicability of the exemption from federal sales tax.__In the context of the Act, the term "sale" is equated with transfer of title. The word "use" in its most general sense includes a sale.__The word "use" in the context of the Act, however, is employed in a very different sense...
[37] The Minister appealed McKeown J.'s decision but his decision was affirmed by the Court of Appeal. Létourneau J.A., who wrote the decision for the Court of Appeal stated that he was in substantial agreement with the conclusion reached by McKeown J. on the interpretation issue.
[26] The decisions in Stevenson, supra, and Tom Baird, supra, coupled with the definition of "sale" found at subsection 123(1) of the Act lead to the conclusion that a "sale" is any transaction where the ownership of property is transferred. This appears to be the correct position in so far as the Excise Tax Act is concerned. I am, therefore, of the view that the majority decision of the Supreme Court in Will-Kare, supra, is not applicable to the facts of this case. The interpretation of the word "sale" reached in Stevenson and Tom Baird, supra, is in line with the dissenting opinion of Mr. Justice Binnie in Will-Kare. In that case, the learned Justice disagreed with the opinion of Major J. that in interpreting the word "sale" in the context of the Income Tax Act, regard had to be had to the common law and to the sale of goods legislation. At pages 936 and 943 (paragraphs 39 and 56), Mr. Justice Binnie expressed his disagreement, in part, in the following terms:
39 BINNIE J. (dissenting) -- The fundamental issue in this case is the interpretation of everyday words used by Parliament in the context of a tax regime based on self-assessment. In 1997, the last year for which precise statistics are available, 20,453,540 tax returns were filed with Revenue Canada. Most taxpayers are not (and likely have no desire to be) learned in the law. When confronted as here with the phrase "primarily in the manufacturing or processing of goods for sale or lease" under s. 127(9) of the Income Tax Act, S.C. 1970-71-72, c. 63 ("Act"), he or she is entitled, in my opinion, to the benefit of the plain meaning of an everyday word like "sale". The taxpayer was denied that benefit by the Minister in this case. The millions of taxpayers who are not lawyers cannot be expected to reach for Benjamin's Sale of Goods to research the difference between a contract for the sale of goods and a contract for work and materials and to apply these distinctions in the assessment of their own income tax liability. I would therefore allow the appeal.
...
56 Even less attractive, I think, is the attempt in the present case to narrow the words "sale or lease" by reference to technical legal distinctions among various types of disposal contracts which are totally extraneous to the Act and are not easily accessible to the self-assessing taxpayer. Apart from everything else, such imported technical distinctions may frustrate not only the plain meaning, but the legislative purpose of the tax provision. Where (as here) Parliament has spoken in language that continues to speak plainly despite "successive circles of context", I think the taxpayer is entitled to the benefit voted by Parliament. It is the Minister (or the Minister's colleague, the Minister of Finance) who recommended the particular wording to Parliament, and it is the Minister or his colleague who may recommend amendments to the Act if it is thought desirable to narrow the tax benefit.
[27] In Mr. Justice Binnie's view, the word "sale" should be interpreted on the basis of the plain meaning of the word and not on the distinction between a contract for the sale of goods and a contract for work and materials. In his view, the issue is whether title or ownership in the property has passed.
[28] I am, therefore, of the view that the answer to the question as to whether the Replacement Parts were "held for sale" depends on whether ownership in the Replacement Parts passed to the Plaintiff's customers.
[29] On the evidence before me, I am satisfied that title to the Replacement Parts passed to the Plaintiff's customers following the replacement of the parts pursuant to the maintenance agreements. Although Article 3 of the maintenance agreement does not expressly provide that the replacement parts are to become the property of the customers, I am satisfied that property in the replacement parts did pass to the Plaintiff's customers. How can it be otherwise? Although not determinative, that was the view held by Ms. Felepchuk.
[30] Article 3 of the maintenance agreement provides that the "replaced parts" become the Plaintiff's property. This part of clause 3 was, in all likelihood, inserted so as to avoid any doubt as to the ownership of the defective components. Without that proviso, it could have been reasonably argued by the customers that they remained owners of the defective parts. On the other hand, I doubt very much that the Plaintiff would be successful in arguing that it remains the owner of the replacement parts once these parts have been installed in its customers' computers. Consequently, my finding is that there was a translation of property when the replacement parts were installed in the Plaintiff's customers' computers.
[31] The evidence is clear that by the end of December 1991, all of the Replacement Parts had been supplied by the Plaintiff to its customers pursuant to the maintenance agreements. In my view, the fact that certain customers paid the fee under their maintenance agreements and were not supplied with replacement parts, is not relevant for the present determination. The relevant fact is that all of the replacement parts were supplied pursuant to the various agreements. In other words, the replacement parts were "sold" by the Plaintiff to its customers in that title to these parts passed from the time of replacement. It is clear from Ms. Felepchuk's evidence that the fees paid collectively by the Plaintiff's customers paid for the Replacement Parts. Ms. Felepchuk testified that the value of the parts was roughly twice the value of the labour required to replace the parts. On the evidence of Mr Ostrander and Mr. Vostarek, both employees of the Plaintiff, I am satisfied that the value of the parts greatly exceeds the value of the labour involved in replacing the defective parts.
[32] I am, therefore, of the view that the Plaintiff's replacement parts were "held for sale" within the meaning of those words in the pre-1993 legislation. I now turn to the 1993 amendments. As I have already indicated, section 120 of the Act was amended by adding the word "separately" to paragraph 120(1)(a) after the words "held at that time for sale, lease or rental" and subsection 120(2.1) was added so as to provide that goods "consumed and used by the person" are deemed not to be held for sale, lease or rental.
[33] Mr. Ciavaglia, for the Defendant, submitted that even if the replacement parts were found to be "held for sale", they nonetheless did not meet the statutory criteria because they were not held for sale separately. In support of that proposition, Mr. Ciavaglia referred me to the decision of the Canadian International Trade Tribunal in Light Touch Stenographic Services Ltd. v. The Minister of National Revenue (March 8, 1994) AP-91-182 (C.I.T.T.).
[46] In Light Touch, supra, the issue was similar to the issue before me. This is apparent from the reasons given by the Tribunal in disposing of the issue. At pages 3 and 4 of the decision, the Tribunal states:
Counsel for the respondent argued that the words "goods ... for sale [or] lease" were intended by Parliament to distinguish between a contract for the sale of goods and a contact for the supply of services.__The test for determining whether a contract is one for the sale of goods or for the supply of services is to ask the question:__what is the substance of the contract?__If the substance is the production of something to be sold and the transfer of property therein to a buyer, then the contract is for the sale of goods.__But, if the substance of the contract is the skill and labour of the supplier in the performance of work for another, then that is a contract for work and labour, notwithstanding that property and some materials may pass under the contract as an accessory thereto.__Counsel submitted that the appellant's inventory used in fulfilment of the maintenance agreements does not qualify as goods for sale.
______The goods in issue are held for use in a maintenance agreement and are not billed separately from the agreement. They are incidental to the supply of a service, which the appellant is required to perform under the terms of the agreements.__All the items included within these agreements are supplied for a fixed price (i.e. the total price of the agreement, which includes labour and materials).__Beyond the minor components, valued at $7, which are supplied as part of the annual reconditioning of machines covered by the silver and gold maintenance agreements, major, and some costly, inventory items are supplied under all three of the fixed price maintenance agreements in the event of a specified component failure.
______To date, the Tribunal has held that a person is entitled to an FST inventory rebate with respect to goods supplied to a customer while the person is providing a service to that customer. [See Note 3 below]__However, the reasoning of the Tribunal has been impacted by the retroactive amendments to the FST inventory rebate provisions of the Act. [See Note 4 below]__Specifically, the definition of "inventory" has been amended to require that goods must be "held ... for sale, lease or rental separately, for a price ... in money."__In addition, section 120 of the Act was further amended by adding subsection 120(2.1), which states that the portion of a person's tax-paid goods "that can reasonably be expected to be consumed or used by the person shall be deemed not to be held at that time for sale, lease or rental."
______The Tribunal interprets the requirement that goods be "held ... for sale ... separately, for a price" to exclude situations where the title to goods is transferred to a customer during the provision of services to that customer for a fixed price.__In addition, the Tribunal considers the goods used by the appellant under its maintenance agreements to be goods consumed or used in fulfilment of those agreements.__As such, subsection 120(2.1) of the Act deems those goods not to be held for sale, lease or rental.
[Footnotes not reproduced]
[34] It is quite clear, from the above reasons, that the Tribunal, until the 1993 amendments to the Act, was of the view that a person such as the Plaintiff was entitled to a FST inventory rebate "with respect to goods supplied to a customer while the person is providing a service to that customer". In other words, the Tribunal took the view that notwithstanding that the goods were supplied to a customer as part of a service agreement, a sale had taken place. That is the view which I have arrived at with regard to the pre-1993 legislation.
[35] The Tribunal, however, concluded that a transaction whereby title to goods was transferred by way of the provision of services to that customer, did not fall within the ambit of goods "held ... for sale ... separately, for a price". I agree.
[36] Concluding otherwise would require an interpretation which omits the words "separately, for a price" which were added in the 1993 amendment. It is therefore my view that the Replacement Parts were not "held for sale, ... separately, for a price", but were supplied to customers in the fulfilment of the Plaintiff's contractual obligations to these customers. Consequently, the Tribunal's conclusion that goods used to fulfil obligations under a maintenance agreement are goods "consumed or used by the person" is a proper construction of subsection 120(2.1), especially when read with paragraph 120(1)(a).
[37] I, therefore, conclude that the Replacement Parts were not goods "held at that time for sale, lease or rental separately, for a price or rent in money, to others in the ordinary course of a commercial activity of the person ...".
[38] This now takes me to the Plaintiff's Charter arguments. I have already summarised the position taken by both sides in regard to sections 7 and 8 of the Charter. In my view, the Plaintiff's Charter arguments are without merit. The Plaintiff, a corporation, cannot invoke section 7. The word "everyone" does not include a corporation. Further, section 7 does not afford protection to property rights or to purely economic interests, both of individuals and corporations.
[39] With respect to section 8, the 1993 amendments do not, in my view, constitute a "seizure". In his Constitutional Law of Canada, third edition 1992, Carswell, Peter W. Hogg states, at page 1054:
The word "seizure" in s. 8 takes its colour from its association with the word "search". A seizure within s. 8 is a seizure of property for investigatory or evidentiary purposes. Section 8 is not a general guarantee of property rights, filling the gap created by the omission of property rights from s. 7. For example, s. 8 does not extend to the taking of property by expropriation.
[40] Consequently, I conclude that the Plaintiff's Charter arguments fail.
[41] For these reasons, the Plaintiff's appeal from the Minister's decision dated December 11, 1997 will be dismissed. The Defendant shall have its costs.
(Sgd.) "Marc Nadon" Judge
Vancouver, British Columbia
October 30, 2001
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-403-98
STYLE OF CAUSE: IBM Canada Limited v. Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 2 & April 3, 2001
REASONS FOR ORDER OF THE COURT BY: Nadoon J.
DATED: October 30, 2001
APPEARANCES:
Robert G. Kreklewetz FOR PLAINTIFF
B. Murray
Michael Ciavaglia FOR DEFENDANT
Marie Crowley
SOLICITORS OF RECORD:
Millar Wyslobicky Kreklewetz LLP FOR PLAINTIFF
Toronto, Ontario
Deputy Attorney General of Canada FOR DEFENDANT
Department of Justice
Toronto, Ontario
[1] Prior to the 1993 amendments, the definition of "inventory" read, in part, as follows:
(1) Held at that time for taxable supply (within the meaning assigned by subsection 123(1) by way of sale, lease or rental to others in the ordinary course of the person's business, or ...
After the amendments, the definition reads as follows:
(1) Held at that time for sale, lease or rental separately, for a price or rent in money, to others in the ordinary course of a commercial activity of a person, or ...
[2] Page 46 of the April 2, 2001 transcript.
[3] The passage referred to by Le Dain J. is a quote taken from the opinion Duff C.J., in the R. v. Dominion Bridge Company Limited, [1940] S.C.R. 487 at 490