Citation: 2007TCC425
Date: 20070720
Dockets: 2004-3308(GST)G
2004-3309(GST)G
2004-3310(GST)G
2004-3721(GST)G
2004-3722(GST)G
2004-3724(GST)G
2005-3168(GST)G
BETWEEN:
CENTRE HOSPITALIER LE GARDEUR,
HÔTEL‑DIEU DE ST‑JÉRÔME,
CITÉ DE LA SANTÉ DE LAVAL,
COMPLEXE HOSPITALIER DE LA SAGAMIE,
CENTRE HOSPITALIER AFFILIÉ UNIVERSITAIRE DE QUÉBEC,
CENTRE HOSPITALIER RÉGIONAL DE RIMOUSKI,
CENTRE HOSPITALIER DE L'UNIVERSITÉ DE MONTRÉAL,
CAMPUS HÔTEL-DIEU DE MONTRÉAL,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] The seven above-listed appeals, heard
on common evidence, concern disputed goods and services tax amounts
(hereinafter "GST") with the respect to the acquisition of in vitro
diagnostic kits by the appellants.
THE FACTS
[2] The relevant facts in these appeals can be summarized as
follows. They are not disputed.
[3] The appellants each operate a hospital. They are considered to
be hospital authorities and therefore selected public service bodies within the
meaning of section 259 of the Excise Tax Act ("ETA").
[4] Over certain periods of time specific to each of them, the appellants
acquired in vitro diagnostic kits. On acquisition, they paid the suppliers of
the kits the applicable GST for which they had been billed. On various
occasions, the appellants also self-assessed GST on the goods in question, since
they came from outside Canada.
[5] The appellants claimed and obtained with respect to the
supplies of the in vitro diagnostic kits the partial GST rebate for public
service bodies. This rebate is to 83% of the GST paid on those supplies, as
prescribed by section 259 of the ETA and section 5 of the Public Service Body
Rebate (GST/HST) Regulations.
[6] Subsequently, the appellants,
through their representative,
Consultaxe Planification Ltée, filed with the respondent, through the Quebec
Minister of Revenue (hereinafter the "Minister"), using the
prescribed form (FP‑189), a general application for GST rebate with respect
to certain GST amounts they claimed to have paid by mistake or to have overpaid
during the relevant periods. These amounts correspond to the 17% of the GST on
the supplies in question that was not refunded with the partial GST rebate. In broad
terms, the appellants argue that these supplies are zero-rated for the purposes
of paragraph 2(a) of Part I of Schedule VI to the ETA, since they
are drugs included in Schedule D to the Food and Drugs Act
("FDA").
[7] The Minister later issued
with respect to the appellants, under Part IX of the ETA, assessments for their
respective periods in question refusing the rebates requested.
[8] The appellants
listed 862 products for which they are claiming a tax rebate. They filed an expert
report (Exhibit A-4) and had Dr. Raymond Lepage testify as an expert. He
explained that these products were all composed of drugs included in Schedule D
to the FDA, to which certain substances were added in the in vitro diagnostic
kits in order to, among other things, preserve the drug in its natural state.
This, combined with other substances or special material, allows the results of
the test to be seen or enables the performance of automated tests (a method that
is more effective and more sure to meet the growing demand for diagnoses than would
have been the case when everything was done manually by laboratory
technicians), or allows more complex tests to be performed, tests which require
the superimposing of several Schedule D drugs (called the "sandwich"
technique, used to detect allergies, as in ELISA tests, or the presence of the
AIDS virus antigen, to give but two examples). Moreover, there are control and
calibration tests to ensure that test results are not completely non-standard.
These control and calibration tests involve only Schedule D drugs (for example,
animal serum (the liquid part of the blood)).
[9] The four groups
analyzed by Dr. Lepage and included in Schedule D are:
|
(1)
|
monoclonal and polyclonal antibodies;
|
|
(2)
|
blood and blood derivatives;
|
|
(3)
|
snake venom; and
|
|
(4)
|
micro-organisms that are not antibiotics.
|
[10] From the outset, Dr.
Lepage said that none of these drugs could be used in their pure state. They
are necessarily mixed with another product to protect them and to place them in
a human cell environment. So whether the test is done "in vivo" by
injecting the drug directly into the human patient or "in vitro" in a
laboratory by taking a blood sample from the patient and having it react in a
tube with the monoclonal antibody, for example, in order to see or highlight
the test result, either radioactivity must be used (in the in vivo method) or
another substance must be added to the monoclonal antibody (in the in vitro
method). In both cases, the radioactive isotope or the added substance (the
substrate), are not necessarily listed in Schedule D. But these substances have
only a secondary role, because in any event the reaction sought occurs with the
Schedule D drug that is used. Dr. Lepage considers the products referred to in
Exhibit A-3 to be Schedule D products since their essential or main reactant is
itself a Schedule D product. Moreover, he eliminated from the list in Exhibit
A-3 certain products whose essential reactant was not composed solely of a
product from Schedule D. This is referred to in paragraph 19 of these reasons.
Preliminary question
[11] At the hearing, counsel for the respondent indicated that he
did not object to the appellants' witness Dr. Lepage being recognized as an
expert, but he challenged the filing of his report on the ground that it was
not an opinion report. He argued that the report only addressed general issues
whereas section 145 of the Tax Court of Canada Rules (General Procedure) states
that the report must fully set out the points at issue in the pleadings. In counsel's
opinion, the notices of appeal do not specify that the diagnostic test includes
a main reactant that is a drug from Schedule D to the FDA. Moreover, the report
does not specifically analyze each of the 862 products at issue.
[12] I overruled the respondent's objection raised at the hearing. Indeed,
according to the authors and case law cited by the respondent, the purpose of an expert's report is
to inform the court on a subject that is complex and specialized and that is
not general knowledge. The report deals with the use of the products and places
them in four categories taking in the 862 products listed in Exhibit A‑3.
The report explains what the essential reactants are in each of the four
categories and indicates that each of these essential reactants is associated
with one or more substances, present in minimal quantities, that allow the
essential reactants to be used for diagnostic or therapeutic purposes.
Moreover, each of the products in Exhibit A-3 is associated with a data sheet,
and these sheets were brought to the attention of counsel for the respondent at
the latest when the expert report was filed. Counsel for the respondent could
thus have asked the Court for leave to examine the expert, or a representative
of the appellants, for discovery if he had found it appropriate to do so. This
was not done. I therefore accept the expert report, which is considered read
and filed as Exhibit A‑4.
ISSUE
[13] Over the period of
time specific to each appellant, did the acquisition of the products in question,
called in vitro diagnostic kits in everyday language, constitute for the
purposes of paragraph 2(a)
of Part I of Schedule VI to the ETA (hereinafter "paragraph
2(a)") an acquisition of zero-rated supplies on which no GST is payable?
LEGISLATIVE PROVISIONS
[14] The relevant
legislative provisions are sections 123 and 165 of Part IX of the ETA and section 2 of Part I of
Schedule VI to the ETA. Schedule D to the FDA is also significant. At the relevant
time, these sections and Schedule D read as follows:
Excise Tax Act
PART IX
GOODS AND SERVICES TAX
Division II
Goods and Services Tax
Subdivision a
Imposition of tax
S. 165. Imposition of goods and services tax. − (1) Subject to this Part, every recipient of a taxable supply made
in Canada shall pay to Her Majesty in right of Canada tax in respect of the
supply calculated at the rate of 7% on the value of the consideration for the
supply.
(3) Zero-rated
supply. − The tax rate in respect of a taxable supply that is a
zero-rated supply is 0%.
S. 123. Definitions. − (1) In
section 121, this Part and Schedules V to X,
"zero-rated supply" means a supply included
in Schedule VI.
SCHEDULE VI
ZERO-RATED SUPPLIES
PART I
PRESCRIPTION DRUGS
AND BIOLOGICALS
S. 2. A supply of any of the following:
(a) a drug included in
Schedule C or D to the Food and Drugs Act,
(b) a drug included in
Schedule F to the Food and Drug Regulations, other than a drug or
mixture of drugs that may, pursuant to the Food and Drugs Act or those
Regulations, be sold to a consumer without a prescription,
(c) a drug or other substance
included in the schedule to Part G of the Food and Drug Regulations,
(d) a drug that contains a
substance included in the schedule to the Narcotic Control Regulations,
other than a drug or mixture of drugs that may be sold to a consumer without a
prescription pursuant to the Controlled Drugs and Substances Act or
regulations made under that Act,
(e) any of the following
drugs, namely,
(i) Digoxin,
(ii) Digitoxin,
(iii) Prenylamine,
(iv) Deslanoside,
(v) Erythrityl tetranitrate,
(vi) Isosorbide dinitrate,
(vii) Nitroglycerine,
(viii) Quinidine and its salts,
(ix) Medical oxygen,
(x) Epinephrine and its salts, and
(f) a drug the supply of which
is authorized under the Food and Drug Regulations for use in an
emergency treatment,
but not including a supply of a drug
when it is labelled or supplied for agricultural or veterinary use only.
Food
and Drugs Act
SCHEDULE
D
(section
12)
. . .
Blood and blood derivatives
Sang et dérivés du sang
. . .
Drugs, other than antibiotics,
prepared from micro-organisms
Drogues, sauf...
. . .
Monoclonal antibodies, their
conjugates and derivatives
Anticorps monoclonaux et leurs
dérivés et conjugués
. . .
Snake Venom
Venin de
serpent
PARTIES' SUBMISSIONS
[15] Before presenting his submissions, counsel for the appellants
reminded the Court of the various administrative interpretations adopted by the
authorities over the years with regard to the treatment of in vitro diagnostic
kits. In a letter dated May 1, 1995, Serge Bouchard replied to the first clear
question put to the Quebec Ministry of Revenue on the taxation or non-taxation
of in vitro diagnostic kits (Exhibit A‑1, Tab 3; shorthand
notes (hereinafter "s.n."), Volume 3, p. 3 et seq.). Mr.
Bouchard confirmed the following at that time:
[translation]
. . . the supply of in vitro
diagnostic products that are drugs included in Schedule D to the FDA is a
zero-rated supply under the provisions of paragraph 2(a) of Part I of
Schedule VI to the federal Act [ETA]. . . .
The fact that these products are not
subject to the drug regulations in Part C of the Food and Drug Regulations
but rather are subject to the Medical Devices Regulations does not make
the supply of these products taxable. Indeed, the criterion set out in paragraph
2(a) of Part I of Schedule VI to the federal Act whereby the supply of
drugs is zero-rated relates only to the fact that the drugs are included in
Schedule D to the FDA and has nothing to do with the regulations that apply to
them.
Some
time later, on May 14, 1997, Health Canada, through Lauraine Bégin from
the Health Protection Branch, essentially confirmed Mr. Bouchard's statements
(Exhibit A‑1, Tab 3; s.n., Volume 3, p. 10 et seq.).
Health Canada indicated that:
If a substance listed, on Schedule D
of the Food and Drugs Act is included in a kit which carries a claim or
is sold or advertised for the diagnostic of a disease or disorder in humans or
animals, the kit is considered to be a schedule D drug. . . . These products
are subject to the medical device notification. The kit in this case is still
however a schedule D drug.
Less
than seven months later, on December 9, 1997, Karolyn Lui of Health Canada
confirmed Ms. Bégin's statement (Exhibit A‑1, Tab 3, s.n.,
Volume 3, p. 11 et seq.). Finally, on September 8, 1999, Revenue
Canada, through Susan Eastman, confirmed the preceding administrative
interpretations by stating the following (Exhibit A‑1, Tab 6;
s.n., Volume 3, p. 12 et seq.):
Under paragraph 2(a)
of Part I of schedule VI to the Excise Tax Act, the supply of
a drug included in Schedule C or D to the Food and Drugs Act is a
zero-rated supply except where the drug is labelled or supplied solely for
agricultural or veterinary use. The interpretation of whether a product is a
“drug” and whether it is included in schedule D to the Food and Drugs Act
falls within the purview of Health Canada. Revenue Canada will adopt that
interpretation when determining whether a product is zero-rated pursuant to
paragraph 2(a) of Part II of Schedule VI to the Excise
Tax Act.
Consequently, where a diagnostic kit
is considered to be a Schedule D drug by Health Canada, i.e., the kit
contains a substance included in Schedule D to the Food and Drugs Act,
the supply of that kit will qualify for zero-rated status under the provisions
of paragraph 2(a) of Part II of Schedule VI to the Excise
Tax Act.
However, as of March 29, 2001, the Canada
Customs and Revenue Agency ("CCRA"), once again through
Susan Eastman, changed its administrative position and indicated that thenceforth
the supply of in vitro diagnostic kits would no longer be considered a
zero-rated supply. Indeed, this was all confirmed again in a letter dated
January 20, 2003, from the same source and the same person as the letter of March
29, 2001 (Exhibit A‑1, Tabs 7 and 8; s.n., Volume 3,
p. 13 et seq.).
[16] The basis for the
last administrative position adopted by the Canadian tax authorities can be
summarized as follows:
− An
in vitro diagnostic kit must be defined by the sum of its components, not by
one alone;
− The
sum of the components of an in vitro diagnostic kit results in a single or
unique supply, a "new" product;
− An
in vitro diagnostic kit is made subject by Health Canada to the Medical Devices Regulations and not the Food
and Drug Regulations ("Regulations"). This would thus exclude the
possibility of an in vitro diagnostic kit being considered a drug within the
meaning of paragraph 2(a). The fact that Heath Canada adopted the
administrative position that an in vitro diagnostic kit could be considered a
drug within the meaning of the FDA is irrelevant because the regulations governing
in vitro diagnostic kits have precedence over Health Canada's administrative
position, for the purposes of the ETA;
− The
fact that an in vitro diagnostic kit is a composite supply and is thus not covered
by Schedule C or D to the FDA prevents the product from qualifying as a drug
specifically included in those Schedules, as required by the ETA;
− Finally,
under section 29 of Part II of Schedule VI to the ETA, testing strips are
considered to be medical instruments and not drugs. It would therefore be
inappropriate to use section 29 of Part II of Schedule VI for the testing
strips that the CCRA characterizes as in vitro diagnostic kits when for other
in vitro diagnostic kits section 2 of Part I of Schedule VI would be used.
[17] Counsel for the appellants submits
that the position Revenue Canada adopted is tantamount to adding words to
paragraph 2(a), which contains no reference at all to the
above-mentioned regulations. The same applies to the definition of
"drug" in the FDA, which does not specify that only the in vivo
diagnostic kits are drugs and that in vitro diagnostic kits are not, but such,
according to counsel, is the result of the latest administrative interpretation
(s.n., Volume 3, p. 14 et seq.). Counsel relies on Friesen and Baird to support his submission that a court
should not accept an interpretation that requires the addition of words when
there is another acceptable interpretation that does not require any such
addition.
[18] Accordingly, counsel for the appellants asks that we use the
definition of "drug" found in the FDA (s.n., Volume 3, p. 27
et seq.) in interpreting the term "drug" in paragraph 2(a). Thus,
to resolve the issue of whether these are zero-rated supplies or not, it would suffice
to determine whether the in vitro diagnostic kits presented by the appellants
are drugs included in Schedule D to the FDA, which determination is to be made in
light of the definition of "drug" in the FDA. That definition is as
follows:
“drug” includes any substance or mixture of
substances manufactured, sold or represented for use in
(a) the diagnosis, treatment, mitigation or
prevention of a disease, disorder or abnormal physical state, or its symptoms,
in human beings or animals . . .
« drogue »
Sont compris parmi les drogues les substances ou mélanges de substances
fabriqués, vendus ou présentés comme pouvant servir :
a) au diagnostic, au traitement, à
l’atténuation ou à la prévention d’une maladie, d’un désordre, d’un état
physique anormal ou de leurs symptômes, chez l’être humain ou les animaux . . .
According
to counsel, this definition invites use of the "usable product"
concept. In this regard, one would not consider as coming within the definition
a situation where snakes were obtained and transported to a laboratory where
their venom was extracted directly and immediately incorporated with other
products. The drug must be obtainable in containers and be mixable with other
substances to maintain its stability. Moreover, there is a reason that the
definition of "drug" provides for mixtures of substances; mixtures
are necessary in order for one to be able to make diagnoses. On that point, Dr.
Lepage confirmed that no drug, whether in vivo or in vitro, comes in a pure
state. He also testified that the Schedule D drug is the main and essential element
of the diagnosis; and this holds true for almost all of the products presented
by the appellants in Exhibit A‑3 (s.n., Volume 3, p. 25 et
seq.).
[19] With regard to the
products presented by the appellants in Exhibit A‑3, counsel for the appellants suggested
dividing them into three categories, which the Court understands to be the following
(s.n., Volume 3, p. 30 et seq.):
Category
1− Products coming exclusively in one or more containers with a
Schedule D drug to which products to ensure the preservation and effective use
of the drug have been added;
Category
2− Products coming in one or more containers with a Schedule D drug to
which is attached another substance, or which is accompanied by another
substance, and serves solely to allow one to see the diagnosis found. Of
course, products ensuring the preservation and effective use of the Schedule D
drug have also been added. Category 2 products may include containers as
described for Category 1;
Category
3− Products coming in several containers including containers as
described for Categories 1 and 2 and containers that are not Schedule D drugs. Accordingly,
I accept among other things that, as specified by the appellants, mouse
hemoglobins, control solutions and calibration solutions are also Schedule D
drugs (s.n., Volume 3, p. 40).
[20] Counsel for the appellants submitted to this Court that, once
the products are divided into three categories, using the definition of
"drug" from the FDA confirms the zero-rating of the Category 1 and
Category 2 products (s.n., Volume 3, p. 32 et seq.). This is because
the definition of "drug" in the FDA includes "any substance or
mixture of substances", which would take in the products in Categories 1
and 2. Moreover, according to counsel, even without this definition The
Cookie Florist decision
would allow us to reach the same conclusion. In that case, although the value
of the cookies was less than one third of the value of the gift bouquet (gift
package), the Court held that if Parliament had wanted to place limits or
conditions on the zero-rating of cookies, it should have done so explicitly
(s.n., Volume 3, p. 33 et seq.). Thus, if Parliament had wanted to
set restrictions on the zero-rating of Schedule D drugs, it should have
specified in clear terms that a Schedule D drug combined with other substances
is not zero-rated; Parliament did not do so. Accordingly, in this case, when one
considers Dr. Lepage's statements that, for example, monoclonal antibodies will
always represent a considerable part of the value of in vitro diagnostic kits,
that these antibodies are what is used to make the diagnosis, and that the
other substances are only there to show the result or ensure that the
monoclonal antibodies can be used effectively, it is easy to understand why The
Cookie Florist decision would apply a fortiori to the Category
1 and 2 products (s.n., Volume 3, p. 36 et seq.).
[21] With regard to the
third category of products, counsel for the appellants puts forward an argument
involving the interpretation of the definition of "drug" in the FDA
and an argument based on a principle from the decision in O.A. Brown (s.n., Volume 3, p. 45 et seq.). The
argument involving the interpretation of the definition of "drug" in the
FDA suggests a medical, practical and realistic approach to what is meant by
Schedule D drug, that is to say, an approach like Health Canada's. Indeed, what
is sought when acquiring a Category 3 product is the Schedule D drug and not
the more or less important substance that serves only to show the result. That
which is accessory must therefore follow its principal and insomuch as the
incidental container is a substance or mixture of substances used for
diagnosis, it should be included in the interpretation to be given to the
definition, because drugs used for diagnoses are intended to be zero-rated; hence,
substances and mixtures of substances used for this purpose should also be
included (s.n., Volume 3, p. 42 et seq.). As for the principle from O.A.
Brown, it would have the same effect as the preceding argument regarding interpretation.
Thus, applying the principle from O.A. Brown to the Category 3 products,
one would have in this case a single acquisition, namely, of a Schedule D drug,
to which have been added other elements that cannot be removed, namely,
incidental substances that are practical and realistic components required for
a complete diagnosis, which leads to the conclusion that the Category 3
products are a single supply, that is, the supply of a Schedule D drug (s.n.,
Volume 3, p. 62 et seq.). This last category would therefore ipso facto
be zero-rated pursuant to paragraph 2(a).
[22] Adopting a practical and realistic approach, counsel for the appellants
highlighted three points concerning the Category 3 products (s.n., Volume 3, p.
49 et seq.):
(a) The
Schedule D drug is at the heart of the purchase;
(b) The
other substances (incidental) are essential to the diagnosis process;
(c) It
is unrealistic to require that the other substances be purchased separately.
Counsel
went on to further explain what he meant by stating in point (c) that it is
unrealistic to require that the other substances be purchased separately. For one
type of product, namely, "plastic blocks" for the hospitals'
machines, it is obvious, from a logical point of view, that the "plastic
blocks" should contain, in order, all the substances for which the machine
is configured so that a complete diagnostic test can be conducted. Therefore,
it is absolutely unrealistic to require, or even contemplate, that the other
substances be purchased separately. The advent of these machines in hospitals became
necessary, moreover, with the explosion of requests for diagnoses, to which
laboratory people and technicians could not respond using manual methods; a
machine, on the other hand, could perform several thousand diagnoses per day. With
regard to another type of product, not used in a machine — namely, well strips
used for ELISA tests, to diagnose allergies for example — the kit contains several
other substances that serve only to complete the test. All these other
substances are present in quantities calculated so that there is no residual
substance whatsoever when the number of diagnoses specified for the kit have
been completed. Moreover, although these incidental substances could theoretically
be purchased separately, hospitals do not have the financial means, the time
required, or the expertise to calibrate the various incidental substances with
the Schedule D drug (main reactant). Furthermore, hospitals cannot afford to
take on the responsibility involved in appropriately calibrating all these
incidental substances. Therefore, it is not a realistic option to ask hospitals
to purchase incidental substances separately in the case of well strips used
for ELISA tests (s.n., Volume 3, p. 50 et seq.).
[23] Thus, on the basis of O.A. Brown, points (b) and
(c) above raised by counsel for the appellants justify in his opinion the
conclusion that we are dealing with a single supply. Finally, by means of point
(a) counsel is able to "connect" the incidental substances with that
which is at the heart of the purchase of the product, that is, the Schedule D
drug, and thus characterize the whole as a Schedule D drug, as the courts did
in O.A. Brown, Hidden Valley Golf Resort and Canada Trustco Mortgage. He also relies on Hidden Valley Golf
Resort for the "common sense"
assessment of the facts and on Canada Trustco Mortgage for the
"raison d’être of the transaction".
[24] In the alternative, in the event that the Court were to find
that one or more multiple supplies are involved in the present case, counsel
for the appellants suggests that section 138 of the ETA should apply. That
section reads as follows:
S. 138. Incidental supplies – For the purposes of this Part,
where
(a) a particular property or service is supplied
together with any other property or service for a single consideration, and
(b) it may reasonably be regarded that the
provision of the other property or service is incidental to the provision of
the particular property or service,
the other property or service shall
be deemed to form part of the particular property or service so supplied.
In
his view, if there was a product more likely to give rise to the application of
section 138, it would be the Category 3 product, which is not used in a
machine. In support of his argument, he cites Interior Mediquip Ltd. as illustrating the application of
section 138 and of the principle that what is accessory must follow its
principal, and refers to Auberge La Calèche as illustrative of the application of
Quebec's version of section 138 and for the definition of the concept of
"incidental" (s.n., Volume 3, p. 64 et seq.).
[25] As regards the respondent, her counsel did not intend to challenge
the appellants' conclusion that the products in question are single supplies
acquired for a single consideration. This is in fact the conclusion that
counsel for the respondent himself recommended (s.n., Volume 3, p. 80 et
seq.).
[26] However, the parties differ in that counsel for the respondent asserts
that although there is a single supply, in the end it is not a Schedule D drug
but rather a different product, another product, a "new product", and
it is such as soon as a substance that is not a Schedule D drug accompanies the
Schedule D drug. Of course, one of the components of the "new"
product is a Schedule D drug, but the decision to tax or to zero-rate should be
based not on the components of a product but on the final product itself (s.n.,
Volume 3, p. 81 et seq.).
[27] Counsel for the respondent does not think that the definition of
"drug" in the FDA should be used to interpret the same word found in
paragraph 2(a). He states that the main principles of interpretation
prescribe two ways of determining the meaning of a term in an Act. First, one
must use the definition of the term found in the Act in which the term itself
appears. This does not apply in the present case because "drug" is
not defined in the ETA. Second, one must favour the ordinary meaning of the
term while at the same time taking into account its context, namely the Act in
which it is found (s.n., Volume 3, p. 94 et seq.). In this regard,
counsel suggests two definitions (s.n., Volume 3, p. 106 et seq.). The
first of these, a definition of the word "drogue", is as
follows:
Ingrédient, matière première employée
pour les préparations médicamenteuses confectionnées en officine de pharmacie.
The
second is the following definition of "drug":
A substance that is used as a
medicine or narcotic.
Coming back to the argument regarding the rejection
of the FDA definition, counsel stated that when Parliament wishes to refer to a
definition in another Act, it states that intent in very clear terms. As
examples, he cites the words "release," "self-contained domestic
establishment" and "capital property", all found in section 123
of the ETA, as instances where Parliament specifically indicates that the
meaning of the term is to be that assigned to it in a particular Act or section
of an Act (s.n., Volume 3, p. 98 et seq.). The word "drug" is
also used a number of times in section 2 of Part I of Schedule VI. By giving to
the term "drug" found in paragraph 2(a) the specific
definition from the FDA, we would end up with different meanings for the same
word in the same section. Parliament has not specifically expressed any such
intent in the statute and using the ordinary meaning of the term
"drug" would at least have the benefit of making its meaning uniform within
the section in question.
[28] Counsel for the respondent
argues that the reference in paragraph 2(a) to the FDA is of the type
described as follows by Pierre-André Côté (s.n.,
Volume 3, p.102):
. . . If, on the other hand, the
reference serves simply to incorporate certain provisions, the provisions
referred to may acquire an autonomous character, and exist independently of the
"parent" statute. . . .
[29] As for using the definition of a term from one statute in
another statute, as suggested by counsel for the appellants, counsel for the respondent
says that, according to Pierre‑André Côté, it is possible to do so,
but only in a limited way and for statutes in the same field. In the present case,
the ETA deals with taxation, which is absolutely not so for the FDA. The
possibility therefore does not exist here (s.n., Volume 3, p. 104 et
seq.).
[30] Counsel for the respondent then makes a comparison between
paragraph 2(a) and paragraph 2(d) in Part I of Schedule VI
(hereinafter "paragraph 2(d)"). Under paragraph 2(d),
"a drug that contains a substance included in the schedule to the Narcotic
Control Regulations . . .” is zero-rated. If Parliament had intended
to zero-rate products having as a component a drug included in Schedule D to the
FDA, it could have worded paragraph 2(a) as follows: "a drug
containing a drug included in Schedule D to the FDA". In that hypothetical
case, it would be clear that when a product contains a Schedule D drug it is
zero-rated (s.n., Volume 3, p. 111 et seq.). Since Parliament did not
word paragraph 2(a) this way, counsel for the respondent reiterates his
main argument that once a component is added to a Schedule D drug, a "new
product" is created which is not one that is included in Schedule D.
[31] While keeping in
mind that the Court should favour using the ordinary meaning of
"drug," counsel for the respondent asserts that the Court should not
seek to find the logic of a statute; the statute should be applied, even if
doing so leads to an absurd result. On this point, he refers to Aliments Koyo Inc. (s.n.,
Volume 3, pp. 126‑128).
[32] In support of his main argument
that we have here "new products," counsel for the respondent refers
to the leading case on the subject, namely, W.T. Hawkins (s.n.,
Volume 3, p. 131 et seq.). That case is the starting point for the
argument that what is acquired is the final product and not each of its
components. In Hawkins, the court upheld the view that it was a
"new product" that the purchaser acquired, namely popcorn, rather
than each of its components — corn kernels, salt and shortening — which were
specifically zero-rated. Two other cases, Charbonneau and Walt
Disney Music, are
also cited by counsel and they support W.T. Hawkins.
[33] Counsel for the respondent distinguishes The Cookie Florist,
which involved an exception to an exception. According to the judge in that
case, Parliament should have enacted a specific exception to the exception, which
was zero-rating a product, so as to return to the basic principle of taxing
products. Thus, if Parliament had wanted to make an exception to the exception
in paragraph 2(a), it would have done so in the same way as in paragraph
2(d). Since it did not do so, the product must be taxable. In regard to
section 138 of the ETA, counsel submits that it does not apply because the
component (the Schedule D drug) is absorbed into the new product (as an elevator
that is an integral part of a building, or an egg that blends into a cake).
This is not a case of that which is accessory following its principal. Counsel bases this argument
on Consolidated Canadian Contractors, Messageries Dynamiques and Productions de la Métairie inc. (s.n., Volume 3, p. 136 et
seq.).
[34] Lastly, counsel for the respondent submits that one cannot add
to the wording of a statute, contrary to counsel for the appellants' contention
based on Friesen, supra. As a result, since no reference to the
FDA is made with regard to the meaning of the word "drug", the Act
must be read as is, and applied accordingly. Counsel for the respondent adds that
this Court does not have jurisdiction to interfere in tax policy matters or to
question the reasons behind the taxation or non-taxation of certain products
(s.n., Volume 3, p. 144 et seq.).
[35] Counsel for the appellants responds
that in interpreting a statutory provision the Court must consider its purpose
and its objective. The Court must also put the statutory provision in context.
He then refers to the main decision on this point, Stubart Investments Ltd. (s.n., Volume 3, p. 152).
[36] Counsel for the appellants suggests that when two
interpretations are possible for the same statutory provision, the Court must favour
the most logical interpretation. In support of this argument, he cites
Pierre-André Côté
(s.n., Volume 3, p.152 et seq.).
[37] Counsel for the appellants continues with a few definitions of
the word "drug." One, a rather legal one, is as follows (s.n., Volume
3, p.154):
An article intended for use in the
diagnosis, cure, medication, treatment, or prevention of disease in man or
other animals . . . .
Another,
rather medical in nature, reads as follows (s.n., Volume 3, p. 154 et
seq.):
A therapeutic agent; any substance, other
than food, used in the prevention, diagnosis, alleviation, treatment, or cure
of disease in man and animal.
As
submitted by counsel for the appellants, it can be seen that these definitions
are highly similar to the definition provided in the FDA. Moreover, counsel says
that he does not see why the FDA definition of "drug" should not be preferred
given that paragraph 2(a) is included in a section on medication, drugs
and the field of medicine and that specific reference is made to the schedules to
the FDA and that these are connected with the FDA, which defines the word
"drug." This simply ties in with a logic that seeks Parliament's
intent, which would be to zero-rate medical products, but not pure snake venom,
for example (s.n., Volume 3, p. 153 et seq.).
[38] Regarding the
decisions relied on by the respondent in support of her position, counsel for
the appellants states that W.T.
Hawkins, supra, is
a decision from 1958, thus prior to the GST and prior to the principles of
interpretation that are recognized and applied today. As for Walt Disney
Music, he distinguishes it on the basis that it involved two items that did
not really need to be sold together.
ANALYSIS
[39] The analysis of the question
at issue will be done in two parts. First (PART I), paragraph 2(a) will
be interpreted to enable us to understand the meaning of zero-rated
"drugs." Second (PART II), we must decide whether the products presented
by the appellants are "drugs" included in Schedule D to the FDA or
whether they are "new products."
PART I – Interpretation of
paragraph 2(a)
[40] Since Parliament did not see fit to define in the ETA the
term "drug" used in paragraph 2(a), thus leaving room for more
than one interpretation, this Court will use the modern interpretation rule,
which involves considering the terms of an Act in their entire context and in
their grammatical and ordinary sense harmoniously with the scheme of the Act
and the intention of Parliament (see, in particular, 65302 British Columbia
Ltd. v. Canada, [1999] 3 S.C.R. 804, in which reference is made to Stubart
Investments Ltd., supra, p. 578).
[41] When it is a matter
of clarifying a concept that is not defined in the Act under consideration, as
is the case here, the courts are justified in intervening to give their
interpretation, but without straying into the field of law-making (see Canderel
Ltd. v. Canada, [1998] 1 S.C.R. 147).
(A) Grammatical
and ordinary sense of the words
[42] According to the
French version of paragraph 2(a):
2. La
fourniture des drogues suivantes [est détaxée] :
a) les drogues incluses aux annexes C ou D de la Loi
sur les aliments et drogues.
[43] The appellants' contention
is that "drogue" should be understood as having the meaning assigned
to that term in the definition in section 2 of the FDA. The respondent, on the
other hand, suggests that "drogue" means:
[i]ngrédient, matière première employée
pour les préparations médicamenteuses confectionnées en officine de pharmacie.
I also found the
following definition of "drogue", which is in line with that suggested
by the respondent:
Matière première spécifique qui est
essentielle à la fabrication d'un médicament officinal ou magistral.
[44] According to the
English version of paragraph 2(a):
2. A supply of any of the following
[is zero-rated]:
(a) a drug included in Schedule C
or D to the Food and Drugs Act.
The appellants submitted dictionary
definitions that support the definition of "drug" given in section 2
of the FDA.
[45] Before attempting to understand what should be the
grammatical and ordinary sense of the terms "drogue" and
"drug", it is relevant to remind ourselves of the principle of
interpretation that "[u]nless otherwise provided, differences between two
official versions of the same enactment are reconciled by educing the meaning
common to both. Should this prove to be impossible, or if the common meaning
seems incompatible with the intention of the legislature as indicated by the
ordinary rules of interpretation, the meaning arrived at by the ordinary rules
should be retained."
[46] To begin with, I
found a source that indicates how the dictionaries define "drogue"
and it seems to exclude the definition proposed by Parliament in the FDA. According
to the Grand dictionnaire terminologique of the Office québécois de la
langue française (hereinafter the Grand dictionnaire terminologique), the common meaning of the French term
"drogue" and the English term "drug" is that given
by the respondent. Indeed, it is stated in the Grand dictionnaire
terminologique that, [TRANSLATION] "[t]he word drogue does not
have the meaning of "medication" that the English word
"drug" can have. In French, the term "drogue" means
either a substance used abusively for non-medical purposes or the raw material
of certain medications. Thus,
since in French, it is the term "médicament " that includes
a [TRANSLATION] "[s]ubstance or composition that has curative or
preventive properties with regard to illnesses or that can be administered for
the purpose of establishing a medical diagnosis," and since the English term
"drug" can also have this meaning, one might think that the only
common meaning of "drogue" and "drug" would be that
stated by the respondent, namely [TRANSLATION] "[i]ngredient, raw material
used for medicinal preparations produced in the dispensary of a pharmacy".
[47] Next, I think it is
useful as well to consider the definition of "drug" in the FDA, advocated
by the appellants. Indeed, while dictionaries are an important source to
consider, Pierre‑André Côté
discusses the possibility, when interpreting legislation, of using the
definition that an Act provides for a term in order to understand its meaning
in another Act.
[48] We are thus faced with two legitimate sources that
could be used to find the ordinary and grammatical sense of "drug" in
paragraph 2(a). The modern rule of interpretation requires, however,
that these two sources must be considered in a contextual analysis to determine
which makes more sense. We will therefore look at which source is supported by
the terms used in the context of paragraph 2(a).
[49] The example of
paragraph 2(d) will help us in part understand the
grammatical and ordinary meaning to be given to the term "drug" in
paragraph 2(a). Paragraph 2(d) refers to "a drug that
contains a substance included in the schedule to the Narcotic Control
Regulations. . .". The Court therefore cannot see how it could give the
word "drug" the restrictive meaning the respondent wishes to give it.
Indeed, a drug is defined as a "raw material" as suggested by the respondent,
how could it contain something else, such as a narcotic, as stated at paragraph
2(d)? A raw material is a substance entirely from nature or produced entirely
by nature. Once you start integrating something else into it, it is no longer a
[TRANSLATION] "naturally occurring material" but is another
product, a processed product. In that sense, the definition of "drug"
as something that may contain a narcotic is that from the FDA. Moreover, the
same logic may apply to section 3 of Part 1 of Schedule VI, as this section deals
with the "supply of a drug when the drug is for human use and is dispensed
by a medical practitioner . . .". Under the respondent's definition, that
section would apply to the supply of a "raw material used for medicinal preparations"
when it is for human use. Under the appellants' definition, section 3 would
apply instead to a mixture of substances sold as something that can be used to
treat illness, that is, a drug within the meaning of the FDA. In my opinion,
since the raw material is for use in producing a medication, it cannot at the
same time be for human use. We should therefore prefer the definition of
"drug" in the FDA in the case of section 3 of Part I of Schedule VI.
Thus, considering the grammatical and ordinary sense of "drug" in
paragraph 2(a) in light of its context and giving preference to a common
meaning of "drug" within part I of Schedule VI, it would seem that
the Court must favour the definition of "drug" found in the FDA, as
suggested by the appellants, to the detriment of the "raw material" definition
advocated by the respondent.
(B) Structure of the Act
[50] Paragraph 2(a) is found in of Part I of
Schedule VI. The title of Part I of Schedule VI to the ETA is
"Prescription Drugs and Biologicals" (in French: "Médicaments
sur ordonnance et substances biologiques"). Pierre‑André Côté
states that the title of a part containing an ambiguous provision, as is the
present case, is relevant when it comes to interpreting that provision. Since the title
of the part in question refers to prescription drugs and biologicals, it is
logical to think that these two subjects will be dealt with in that part. As far
as biologicals are concerned, we know that the reference thereto was added to
the title because of the addition of section 5 to the part in question. As for the
other sections of Part I, it can be deduced that the intent was to deal therein
with prescription drugs. Since Parliament did not use the term "médicament"
("drug") anywhere in the French version of Part I, it can be assumed
that other terms have that meaning. In our opinion, as the appellants have
suggested by referring to the definitions of "drogue" and
"drug" in the FDA, and the dictionary definitions of
"drug", the word "drogue" as used in paragraph 2(a)
means "médicament" ("drug"). This is a logical
conclusion that would reconcile the French title of Part I with the content of
that part. In English, the question does not really arise because "drug"
can signify "medication" both according to its dictionary meanings
and under the FDA.
[51] As indicated in
paragraph 2(a),
Schedules C or D to the FDA must be consulted to find out which of the drugs
included are zero-rated. If we focus on Schedule D to the FDA, we can see that
it came into being because of section 12 of the FDA. Section 12 is subject to
the definitions found in section 2 of the FDA. Section 2 of the FDA defines
drug. Section 12 of the FDA makes reference to Schedule D "drugs".
These drugs must therefore be considered as having the meaning given in the FDA
definition. As a result, there is no doubt that the Schedule D drugs are those
that are defined in section 2 of the FDA. In this Court's opinion, Parliament
could not have been unaware of this fact when it made the reference in
paragraph 2(a) to Schedule D to the FDA. While the respondent's argument
on this point is interesting, I do not believe either that the reference in paragraph
2(a) has the effect of severing Schedule D from the Act in which it is
found, namely the FDA, and more specifically, from section 12 of the FDA.
Schedule D, section 12 and the definition of "drug" in the FDA are so
closely interconnected that, in this Court's opinion, if Parliament had wanted
to cast aside the FDA definition of "drug" it would have done so
explicitly so as to remove all doubt as to the possible meanings of that term. My
understanding of Côté's comments with regard to a schedule having force of law
only strengthens me in this conclusion.
Indeed, that Schedule D to the FDA is so named is a mere matter of form.
Schedule D drugs could have been included in the body of the statute; the
content of Schedule D has force of law, is mandatory and is defined
restrictively; the intent is not simply to suggest drugs regulated by section
12 of the FDA. In this regard, it can be said that "A schedule in an Act
is a mere question of drafting, a mere question of words. The schedule is as
much a part of the statute, and is as much an enactment, as any other part"
(footnote omitted).
Thus, if Schedule D to the FDA is part of that statute, it is directly subject
to the definition of "drug" in the FDA since this definition applies
to the entire FDA. We can therefore go directly from the definition of
"drug" in the FDA to Schedule D without having to consult section 12
of the FDA.
[52] For all these reasons, it seems that, given the
structure of the Act, the Court must give preference to the FDA definition of
"drug" over the respondent's "raw material" definition.
C Purpose of the Act and Parliament's intention
[53] In counsel for the respondent' submission it is not
for this Court to consider the purpose of the Act or Parliament's intention in
adopting paragraph 2(a). In this case, that argument cannot be accepted.
In the first place, the only cases where a court has chosen not to consider the
purpose of a statute and Parliament's intention are ones in which the statue
was clear and the court felt that it was not its role to "create" legislation.
In the second place, I have indicated how the statute in question here was not
clear and why we must favour the modern rule of interpretation. In the third
place, according to various judgments of the Supreme Court of Canada, even if a
statute is clear, it is possible to look at the purpose of the statute and its
context while observing the principle that where the statute is clear courts of
justice must refrain from legislating.
[54] According to
counsel for the appellants, we should adopt the premise that the products to be
zero-rated must be usable products. Thus, Dr. Lepage indicated, for example,
that monoclonal antibodies cannot be used in their pure state because they
would stick to the interior of the container and would be of no use. The same
can be said of blood, which, in its pure state would create problems related to
coagulation. As for snake venom, counsel indicated that Parliament surely did
not wish to zero-rate this product when just extracted from the snake's fang.
That would clearly be overly restrictive considering the part in which
paragraph 2(a) is found, namely that relating to health and drugs. As
for the argument that in vitro diagnostic kits are covered by other parts of
the ETA or the FDA, counsel for the appellants submits that Parliament could
not have intended to zero-rate only a minimal proportion of diagnostic kits (namely,
in vivo kits) when, as Dr. Lepage noted, the majority of the kits used are in
vitro diagnostic kits.
[55] The explanatory
notes to section 2 of Part I of Schedule VI may be useful in attempting to
determine Parliament's intent. According to Pierre‑André Côté, at a
time when the Supreme Court is making increasing use of legislative debates in
interpreting statutes, it is difficult to justify excluding the consideration
of explanatory notes. Proceeding
in chronological order, here, first of all, is an explanatory note to Bill
C-62:
This section contains a listing of
drugs to be unconditionally zero-rated at all levels of production and
distribution. Paragraphs (a) to (d) enumerate drugs that may only be sold on
prescription pursuant to the Food and Drugs Act and regulations
thereunder and the Narcotic Control Act and regulations made thereunder.
A number of non-prescription drugs used to treat life-threatening illnesses, enumerated
in paragraph (e) of the section, are also zero-rated.
This explanatory
note thus indicates that paragraph 2(a) lists drugs that may only be
sold by prescription pursuant to the FDA. As I understand it, in order to
determine what these drugs are, we have no choice but to refer to the
definition of drug in the FDA. This, in my opinion, is also the only suggested
definition that is consistent with the notion of "drugs to be
unconditionally zero-rated at all levels of production and distribution" because
"drugs" within the meaning of the FDA can be produced, but the same
cannot be said of raw materials.
[56] Here is another explanatory note, this one to Bill
C‑24:
Section 2 of Part I of Schedule VI
lists zero-rated supplies of a broad range of drugs that are regulated under
federal legislation. This section is amended to update cross-references as a
result of changes to the Food and Drugs Act and the Narcotic Control Act
and regulations made under those Acts.
Specifically, drugs formerly listed in
Schedule G to the Food and Drugs Act are now found in the schedule to
Part G of the Food and Drug Regulations. In addition, substances
previously listed in the schedule to the Narcotic Control Act are now
set out in the schedule to the Narcotic Control Regulations.
In addition, amended paragraph 2(d)
cross-references the Controlled Drugs and Substances Act instead of the Narcotic
Control Act to reflect current federal drug regulation
legislation.
These amendments are effective May
14, 1997, when the corresponding changes to the cross-referenced legislation
came into effect.
This explanatory note is interesting for its
statement that section 2 of Part I of Schedule VI lists zero-rated supplies of
a broad range of drugs that are regulated under federal legislation. Consequently,
to establish which drugs are regulated under federal legislation, we must know
what is meant by "drug" in that legislation. Given the reference to
drugs covered by a specific federal statute such as the FDA, it seems logical
to me to conclude that Parliament intended to give the word "drug"
found in paragraph 2(a) the meaning the reference Act gives it, namely,
the meaning that "drug" has in the FDA.
[57] In conclusion, the
analysis of paragraph 2(a) using the modern rule of interpretation leads
to the conclusion that we must accept the appellants' argument and give
preference to the FDA definition of "drug". Applying the three branches
of the modern rule of interpretation, namely the ordinary and grammatical
meaning of the words (in their context), the scheme of the Act, and the purpose
of the Act and Parliament's intent, the Court concludes that it is the
suggestion of counsel for the appellants, namely, that we use the definition of
"drug" from the FDA, that should be accepted. The reasoning is logical: in English, according to
the usual dictionaries, the term "drug" can signify
"medication" as well as "raw material essential to the
production of a medication." In French, although, in the usual
dictionaries, the term "drogue" is defined as a "raw
material essential to the production of a medication," I am of the opinion
that, considering the reasoning set out above, Parliament truly meant
"medication" in paragraph 2(a) and not "raw material
essential to the production of a medication." All these findings together
lead me to believe that it is the definition of "drug" in the FDA
that we should use.
[58] Moreover, a
comparison of the definition of "drogue" in the FDA with the
definitions of "drug" in its "medication" sense and the definitions
of "médicament" encompasses this concept. So to
summarize, the Court considers it appropriate to use the definition of "drug"
from the FDA to interpret the same term found in paragraph 2(a) and will
accordingly give that paragraph the meaning that results from this conclusion.
PART II – Are the products presented by the appellants "drugs"
within the meaning of Schedule D to the FDA or are they "new
products"?
[59] The object of this second
part of these reasons for judgment is to determine who, the appellants or the respondent,
is correct, in whole or in part, regarding the issue of whether the products presented
by the appellants are "drugs" within the meaning of Schedule D to the
FDA or "new products". On the one hand, counsel for the appellants
suggests an approach by category of product, as described in paragraph 19 of
these reasons. He states that the FDA definition of "drug", which I
adopted in the first part of these reasons for judgment, encompasses the
category 1 and 2 products. He adds that even without this definition, Cookie Florist, supra, would lead to the same result. As for the category 3 products, counsel
for the appellants argues that the FDA definition of "drug" applies
in the same way as for category 1 and 2 products, but also takes in substances
or mixtures of substances that are not Schedule D drugs because they are used
solely for diagnosis. He adds as well that even without this conclusion, O.A. Brown,
supra, among other cases, would produce an identical result. Counsel for
the respondent, on the other hand, counters that there is a "new
product" as soon as a substance that is not a Schedule D drug is included
with such a drug. He refers in this regard to W.T. Hawkins, supra,
among other cases.
[60] What I understand from paragraph 2(a) when the word
"drug" is taken as defined in the FDA is that supplies of substances
or mixtures of substances are zero-rated if they are used for diagnoses and if
they are covered by Schedule D to the FDA. For the purposes of this analysis, I
consider it more advisable to talk of mixtures of substances because Dr. Lepage
confirmed that Schedule D drugs cannot be found in a container in their pure
state.
The combination of the pure Schedule D drug and the other substances that must
accompany it thus results in a mixture of substances. Moreover, there is no
doubt that all the mixtures of substances found in the products presented by the
appellants were for diagnostic purposes, whether they were covered by Schedule
D or not. The issue is therefore whether what we have is a mixture of Schedule
D substances. In my opinion, if the main substance of a mixture is a substance referred
to in Schedule D to the FDA, then that mixture of substances will be considered
a whole and, accordingly, as a zero-rated supply. As stated in O.A. Brown,
supra, at paragraph 29 (QL), if the alleged separate supplies are interconnected
with the zero-rated supply to such a degree that the extent of their
interdependence is an integral part of the composite whole, they can be considered
to be a zero-rated single supply. Thus, in the absence of statutory provisions
to the contrary, a mixture of substances will be characterized according to its
main substance for the purposes of paragraph 2(a). As a result, the
supply of a mixture of substances, of which the main substance is from Schedule
D to the FDA, is zero-rated.
[61] Category 1 and 2 products may consist of one or more
containers. Each container creates a physical division inside the product,
meaning that each container holds a mixture of substances. A product with
several containers therefore has as many mixtures of substances as it has
containers.
[62] For the category 1 and 2 products with only one container, we
have a mixture of substances within the product. Dr. Lepage indicated that each
of the products presented had a Schedule D drug as its essential drug. Thus, we
can state with certainty that if a product with only a single mixture of
substances has a Schedule D drug as its essential drug, the main substance of
the mixture of substances will necessarily be this Schedule D drug. We could
have come to the same conclusion by looking at the description of the
categories of products. The other substances accompany the pure Schedule D drug
or are attached thereto. Moreover, the value and importance of these other
substances were stated to be minimal compared to the pure Schedule D drug. The
only logical conclusion, therefore, is that these category 1 and 2 products in
a single container are zero-rated because they are a mixture of substances, of
which the main substance is from Schedule D to the FDA.
[63] For the category 1 and 2
products with many containers,
we have, in all, as many mixtures of substances as we have containers. I have
said that each mixture of substances is to be categorized according to its main
substance. It must therefore be determined whether we have a single or multiple
supply according to the criteria set out in O.A. Brown, supra.
At this point, it can be stated that if I find that there were multiple
supplies, each mixture of substances in category 1 and 2 products with more
than one container will be zero-rated. This is the same reasoning as for mixtures
of substances in category 1 and 2 products having one container. However, if we
have a single supply, it will have to be classified either as a Schedule D drug
or as a "new product". It is then that we will know if the category 1
and 2 products having more than one container will be zero-rated or not.
[64] Furthermore, since
we know that the category 3 products necessarily comprise at least two
containers, they must also pass the O.A. Brown test.
[65] According to O.A. Brown, the first question to answer is: what was supplied
in consideration of the payment?
[66] In O.A. Brown, the appellant purchased
and sold livestock. The appellant fed, inoculated and branded the livestock for
its own purposes, then resold it to its client, including in the price all
costs and a 1% commission on the value of the livestock purchased. The appellant
did not charge GST on these amounts or on insurance and transportation costs.
Since the purchase of livestock is zero-rated, the Minister took the position
that all the other costs related to the livestock and charged to the clients
were taxable. The issue was thus whether the expenses other than for transportation
and insurance represented separate supplies or were part of a single supply.
21 In deciding this issue, it is first
necessary to decide what has been supplied as consideration for the payment
made. It is then necessary to consider whether the overall supply comprises one
or more than one supply. The test to be distilled from the English authorities
is whether, in substance and reality, the alleged separate supply is an
integral part, integrant or component of the overall supply. One must examine
the true nature of the transaction to determine the tax consequences. The test
was set out by the Value Added Tax Tribunal in the following fashion:
In our opinion,
where the parties enter into a transaction involving a supply by one to
another, the tax (if any) chargeable thereon falls to be determined by reference
to the substance of the transaction, but the substance of the transaction is to
be determined by reference to the real character of the arrangements into which
the parties have entered.
22 One factor to be considered is
whether or not the alleged separate supply can be realistically omitted from
the overall supply. This is not conclusive but is a factor that assists in
determining the substance of the transaction. The position has been framed in
the following terms:
What should
constitute a single supply of services as opposed to two separate supplies, is
not laid down in express terms by the value added tax enactments. It would
therefore be wrong to attempt to propound a rigid and precise definition
lacking statutory authority. One must, it seems to us, merely apply the
statutory language, interpreting its terminology, so far as the ordinary
meaning of the words allows, with the aim of making the statutory system of
value added tax a practical workable system. For this purpose one should look
at the degree to which the services alleged to constitute a single supply are
interconnected, the extent of their interdependence and intertwining, whether
each is an integral part or component of a composite whole. Whether the
services are rendered under a single contract, or for a single undivided
consideration, are matters to be considered, but for the reasons given above
are not conclusive. Taking the nature, content and method of execution of the
services, and all the circumstances, into consideration against the background
of the value added tax system, particularly its methods of accounting for and
payment of tax, if the services are found to be so interdependent and
intertwined, so much integral parts or mere components or items of a composite
whole, that they cannot sensibly be separated for value added tax purposes into
separate supplies of services, then Parliament, in enacting the value added tax
system, must be taken to have intended that they should be treated as a single
system, otherwise, they should be regarded for value added tax purposes as
separate supplies.
23 The fact that a separate charge is
made for one constituent part of a compound supply does not alter the tax
consequences of that element. Whether the tax is charged or not charged is
governed by the nature of the supply. In each case it is useful to consider
whether it would be possible to purchase each of the various elements
separately and still end up with a useful article or service. For if it is not
possible then it is a necessary conclusion that the supply is a compound supply
which cannot be split up for tax purposes.
[68] The same reasoning has
also been used in many other tax cases. As Judge Rip stated,
the first thing to be determined is what was supplied in consideration of the
payment made. Judge Rip answered this question through a common-sense assessment of the facts.
[69] In my opinion, with regard to the products in this
case, on a common-sense assessment of the facts, what was supplied in
consideration of the payment made was the container, whose mixture of
substances was characterized as the essential Schedule D drug used to establish
a precise diagnosis.
[70] Dr. Lepage's
testimony indicated that the appellants included all the products that
contained Schedule D drugs that were essential for establishing a diagnosis (as
opposed to products that were used solely for a secondary reaction) (s.n.,
Volume 1, p. 105). These can be found under the heading
"Description" in the summary of the appellants' data sheets (Exhibit
A-3). Where there was a single container with a Schedule D drug used in a main
reaction, for example product 32 described in Exhibit A-3, it was easy for Dr.
Lepage to confirm that it was the essential drug in the product, which he
classified under the heading [TRANSLATION] "Schedule D" in Exhibit
A-3. He was able to come to this conclusion by judging the role of the
containers in the diagnosis (main or secondary role).
[71] The situation becomes
somewhat complicated where there are two containers each with a Schedule D drug
used in a main reaction, for example product 23. In that case, if there were
two Schedule D drugs that were different, here monoclonal antibodies and
polyclonal antibodies (that are direct derivatives of blood), Dr. Lepage
decided on the basis of certain criteria which of the two was the essential
drug. For example, the monoclonal antibodies have priority over the polyclonals
because of their specificity, their cost and the complexity of their
preparation (Dr. Lepage's report, Exhibit A‑4; s.n., Volume 1,
p. 114, 166 and 167). It can thus be seen that Dr. Lepage took his reasoning
a bit further and determined which drug was essential for diagnosis. Since he
could only consider the role of the Schedule D drugs in determining which was
essential to diagnosis, he looked at the categories of Schedule D drugs to see
which appeared to him to be more important.
[72] The situation is
even more complicated where there are two containers each with a Schedule D
drug that is used in a main reaction, when these drugs are in the same
category, as is the case with product 50 (two monoclonal antibodies). In my
opinion, one need only go one step further, as Dr. Lepage did, and examine the
importance of each mixture of substances in order to determine which contains
the Schedule D drug that is essential for diagnosis. To that end, we could use
the same criteria of specificity, cost and complexity that Dr. Lepage used in determining
which category of drug should take precedence over another. That said, it is
not necessary to determine for the product 50 example which of the two containers
holds the Schedule D drug that is essential for diagnosis; we know that it is
one of the two, and that is enough to decide the present case.
[73] So what did the suppliers
provide to the hospitals in exchange for the payment made by the hospitals? The
only logical answer to this question posed in another way is that the suppliers
provided a container with an essential Schedule D drug used to establish a
precise diagnosis. It may well be that some of the containers are more complete
because they come with other containers, making life easier for everyone, but
the raison d'être of the transaction
between the suppliers and the hospitals is the purchase of a container with the
essential Schedule D drug to be used to make a precise diagnosis.
Product 31 (Exhibit A‑3) is an eloquent example of this. It is a
container of monoclonal antibodies labelled with an acridinium ester (classified
as the essential Schedule D drug used to establish a precise diagnosis) and a
solution of [TRANSLATION] "paramagnetic particles coupled to T3". The
container of antibodies is surely the raison d'être of the purchase because it is
what carries out the entire main reaction of the diagnosis. The solution of
particles only serves to reveal the result of the diagnosis that has already been
performed. The solution of particles is therefore only incidental. It is the
antibodies that one wants to purchase because they are of interest by virtue of
their value, specificity and complexity and the role they play in the diagnosis.
[74] Having answered
the first question in O.A. Brown, supra, it must now be
determined whether the containers that accompany the container with the
essential Schedule D drug used to establish a precise diagnosis are separate
supplies (multiple supply) or are an integral part of that container (single
supply).
[75] For category 3
products, and those from categories 1 and 2 having more than one container,
since certain containers in these products could be considered as separate
supplies, it is useful to apply the previously mentioned criteria from O.A.
Brown. The Court is dealing essentially with two types of products having
more than one container of substances. The first type of product is the
"plastic block" used with the machines. The second type is the product
with the well strips used for ELISA tests, done without machines. As regards these
two types of products, I consider the arguments made by counsel for the appellants
to be correct; these are set out in paragraphs 22 and 23 of these reasons.
[76] The various containers
which the "plastic block" comprises cannot realistically be left out
of the overall supply of the product. Indeed, the machines are specifically
configured to accept exactly all the containers of the "plastic
block". The containers are therefore necessarily part of a whole.
Moreover, it is impossible to acquire each of the various containers separately
and still receive useful service with respect to the operation in question,
since the containers come in a "plastic block" and cannot be
purchased separately (s.n., Volume 3, p. 51). The interdependence of the
various containers is also very important since each is adjusted in relation to
the others and is necessary to satisfactorily complete the operation in
question, namely, the process of making a diagnosis. The essence and reality of
things is such that we have no choice but to consider the "plastic
block" type of products as a single supply under O.A. Brown.
[77] As for the second
type of product, the type with well strips used for ELISA tests, which is used
without machines, none of the various containers can be omitted from the
overall supply of the product. Indeed, all the containers in this type of
product are necessary to carry out a complete and safe diagnostic test. The
containers are therefore necessarily part of a complete whole. Such is the
completeness of the whole that each container has the specific quantity of
substance required to carry out a specific number of tests. Moreover, it is
impossible to acquire each of the various containers separately and to still receive
useful service with respect to the operation in question, because the
containers are all calibrated in relation to each other so that a reliable
diagnosis may be made. Although hypothetically, some containers could be purchased
separately, the service received by so doing would not be useful because the
hospitals would have to calibrate their various individual purchases using
their own means. It was stated that the hospitals did not have the time or the
resources to do so. As for the interdependence of the various containers, the
situation is analogous to that of the "plastic block". Accordingly,
the essence and reality of things is such that I consider the products with
well strips used for ELISA tests to be single supplies under O.A. Brown.
[78] I therefore conclude
that, in the case of the category 3 products and of those from categories 1 and
2 with more than one container, there is a single supply, and the containers
that could have been considered as separate are an integral part of that which
was supplied in consideration of the payment, namely, the container with the
essential Schedule D drug used to make a precise diagnosis. The category 3
products and the products from categories 1 and 2 with more than one container
are therefore considered Schedule D drugs and are consequently zero-rated. The
same is true of the products from categories 1 and 2 having one container.
[79] Counsel for the respondent
states, however, that although there is a single supply in the case of all the
products the appellants presented, what we have ultimately is not a Schedule D
drug but a different product, another product, a "new product", and
this is so as soon as a substance that is not a Schedule D drug accompanies that
drug. There are some judgments supporting his argument.
[80] The first case
cited by counsel for the respondent is W.T. Hawkins, supra, which involved a product called
"Magic-Pop". This product contained three ingredients, corn kernels,
salt and shortening. The three ingredients were zero-rated when taken
individually. Here are the relevant excerpts showing the judge's analysis in
determining whether the product should be taxed or not:
. . . The
basic question is therefore – what is being sold? If it is salt that is being
sold, the article is exempt from tax as salt is named in the schedule. The same
result, of course, follows if shortening is sold or if grains and seeds in
their natural state are sold.
In this case,
it cannot be said that the appellant was selling salt or that it was selling
shortening, or that it was selling popping corn. What it sold was a single
article composed of three ingredients in carefully selected proportions and to
which it had given the name “Magic-Pop”. It was an entirely new product
differing in appearance, form and function from those of the three original
ingredients. . . .
In my opinion,
the appellant was producing an entirely new article – an article which
contained within itself all the ingredients necessary for a householder to use
in the preparation of popcorn – in effect a “ready-mix” article. . . .
Finally, it is
submitted that the article sold by the appellant is popping corn – a grain or
seed in its natural state. I cannot think that such is the case. If I attended
at a store to purchase popping corn, I would expect to receive popping corn
alone and not such an article as Exhibit 1-A – a slab of shortening filled with
popping corn and with salt added.
What I take from that judgment is that the
judge determined there was an "entirely new product" differing in
appearance, form and function from each of its three ingredients. The "new
product" therefore had to be taxed because there was no statutory provision
to the contrary.
[81] Applying the
criteria used by that judge to the facts in this case, I cannot see how we
could have a "new product" differing in appearance, form and function
from each of the containers of the product. First, the appearance, form and
function of each container are preserved even when they are sold together.
Nothing changes; each container remains distinct and independent within the
whole. The containers therefore retain their characteristics and the whole is
merely a reflection of these. In my opinion, we are thus very far from a "ready-mix article". Moreover, I
believe that here, unlike the situation depicted in the last paragraph of the above-cited
passage from W.T Hawkins, a person ordering a container with an
essential Schedule D drug used to make a precise diagnosis could expect to
receive a container such as those listed in evidence, given the complexity of
the methods of analysis and the fact that there are certain constraints to work
within (machine, time, resources, etc.).
CONCLUSION
[82] For these reasons, with respect
to the products listed in Schedule A to these reasons, whether under the
heading "Classification by category" or "Classification by
number of containers", which products correspond to the numbers attributed
to them in Exhibit A-3, I would allow the appeals and refer the assessments
back to the Minister for reconsideration and reassessment on the basis that all
these products, with the exception of products 120, 127, 128, 138, 139, 360,
366, 383, 409, 586, 651, 652 and 704, which were eliminated by Dr. Lepage, are
zero-rated supplies within the meaning of paragraph 2(a) of Part I
of Schedule VI to the ETA.
[83] There will be one set of costs to the seven appellants
against the respondent.
Signed at Ottawa, Canada, this
20th day of July 2007.
"Lucie Lamarre"
Lamarre J.
on this 30th day
of November 2007.
Erich Klein,
Revisor
SCHEDULE A
Results of the classification of the products
presented by the appellants in Exhibits A‑3 and
A‑2
Classification by
category:
Category 1: 1-22, 101, 167, 180, 185-223, 228, 229, 247, 254, 326-329, 344, 346,
348, 349, 351, 352, 354, 355, 358, 359, 362, 363, 365, 367, 369-371, 373, 374,
377-379, 384-408, 410‑567, 569-581, 583-585, 587-592, 596-598, 601-609,
611, 615-619, 640, 642-650, 653, 655, 656, 684, 746, 747, 761-764, 769-773,
778, 807-816, 818-827, 835-839, 844, 849-851, 854, 856, 857, 859, 860.
Category 2: 23-28, 37-44, 47-52, 54, 57-58, 83, 104-107, 111, 140-150, 153, 155,
158, 160, 170, 226, 238-240, 245, 246, 252, 253, 325, 335, 337-340, 582,
593-595, 600, 610, 612, 614, 621, 659, 735, 736, 751-760, 765, 766, 775, 781,
Category 3: 29-36, 45, 46, 53, 55, 56, 59-82, 84-100, 102, 103, 108-110,
112-119, 121-126, 129-137, 151, 152, 154, 156, 157, 159, 161-166, 168, 169,
171-179, 181-184, 224, 225, 227, 230-237, 241-244, 248-251, 255-324, 330-334,
336, 341-343, 345, 347, 350, 353, 356, 357, 361, 364, 368, 372, 375, 376,
380-382, 568, 599, 613, 620, 622-639, 641, 654, 657, 658, 660‑683,
685-703, 705-734, 737-745, 748-750, 767, 768, 774, 776, 777, 779, 780, 782-806,
817, 828-834, 840-843, 845-848, 852, 853, 855, 858, 861, 862.
Classification by
number of containers:
One container: 1-22, 101, 140-150, 153, 167, 180, 185-216, 221-223, 226, 228, 229,
240, 246, 254, 325-329, 346, 348, 349, 351, 352, 354, 355, 358, 359, 362, 363,
365, 367, 370, 371, 373, 374, 377-379, 384-408, 410-566, 569-581, 583-585,
587-592, 594-598, 600, 602-609, 611, 615-619, 621, 640, 642-650, 653, 655, 656,
735, 736, 746, 747, 751-766, 769, 772, 773, 775, 778, 807-816, 818-827, 835-839,
849-851, 854, 856, 857, 860.
More than one
container: 23-100, 102-119, 121-126, 129-137, 151, 152,
154-166, 168-179, 181-184, 217-220, 224, 225, 227, 230-239, 241-245, 247-253,
255-324, 330-345, 347, 350, 353, 356, 357, 361, 364, 368, 369, 372, 375, 376,
380-382, 567, 568, 582, 593, 599, 601, 610, 612-614, 620, 622-639, 641, 654,
657-703, 705-734, 737-745, 748-750, 767, 768, 770, 771, 774, 776, 777, 779-806,
817, 828-834, 840-848, 852, 853, 855, 858, 859, 861, 862.
Email this Content