REASONS
FOR JUDGMENT
Graham J.
[1]
The Appellant is a producer and distributor of
alcoholic beverages. In the periods in question, two of those beverages were
Okanagan Premium Cider and Extra Hard Cider. Pursuant to the Excise Act,
2001,
duty is payable on cider when it is packaged. There is an exemption from that
duty for cider produced in Canada and composed wholly of agricultural or plant
products grown in Canada.
[2]
In the periods in question a small portion of
each container of the Appellant’s cider contained apple juice concentrate that was
made from apples grown outside of Canada. That apple juice concentrate was
added after the cider was fermented but before the cider was packaged. The
Appellant took the position that the cider qualified for the exemption. Thus,
the Appellant did not remit any duty in respect of the cider. The Minister of
National Revenue concluded that, because the apple juice concentrate was an
agricultural or plant product and was not grown in Canada, the cider did not
qualify for the exemption. The Minister assessed the Appellant for over
$2,000,000 in duty for its reporting periods from September 1, 2010 to
August 31, 2012. The Appellant has appealed that assessment.
[3]
The appeal turns solely on an issue of
statutory interpretation. The facts are not in dispute. The parties agree how
the cider was made and what its ingredients were. The only issue is whether the
exemption can be interpreted to exclude the cider from duty in the
circumstances.
A. Imposition
of Duty
[4]
Before turning to the interpretation of the
exemption, it is first necessary to understand how the duty in question arises.
[5]
The Act does not contain specific provisions for
cider. It defines “alcohol” as “spirits or
wine”. “Spirits” are defined as “any material or substance containing more
than 0.5% absolute ethyl alcohol by volume”
other than certain listed types of alcohol. One of those listed types of
alcohol is “wine”. The definition of “wine” is more complex. “Wine” means:
(a)
a beverage, containing more than 0.5% absolute ethyl
alcohol by volume, that is produced without distillation, other than
distillation to reduce the absolute ethyl alcohol content, by the alcoholic
fermentation of
(i)
an agricultural
product other than grain,
(ii)
a plant or plant
product, other than grain, that is not an agricultural product, or
(iii)
a product wholly or
partially derived from an agricultural product or plant or plant product other
than grain;
(b)
sake; and
(c)
a beverage described
by paragraph (a) or (b) that is fortified not in excess of 22.9% absolute ethyl alcohol by
volume.
[Emphasis added]
[6]
Basic cider is caught by paragraph (a) of the
definition of wine. It is a beverage produced without distillation by the
alcoholic fermentation of apples. Apples are either an agricultural product or
a plant product.
[7]
The Appellant’s cider, in particular, was caught
by paragraph (c) of the definition of “wine”. Paragraph (c) refers to wine
that otherwise falls within the descriptions in paragraphs (a) or (b) but that
has been “fortified”. Fortification involves adding spirits to wine. The Appellant’s
beverages were made by fermenting apples to form apple cider and then adding various
other ingredients to the cider to form the beverages that were ultimately
packaged and sold. One of those ingredients was a spirit. Thus the Appellant’s
cider was fortified.
[8]
Subsection 135(1) imposes duty on wine that is
packaged in Canada. “Packaged” means put into containers of not more than 100 litres that are
ordinarily sold to consumers without the alcohol being repackaged. Duty is imposed at the time
the wine is packaged and is payable by the person who is responsible for the
wine immediately before that time.
[9]
The Appellant’s beverages were packaged for sale
to consumers in containers far smaller than 100 litres. The Appellant was the
person responsible for the beverages immediately before the time that they were
packaged. Therefore, the Appellant’s beverages were subject to duty under
subsection 135(1) unless they were covered by the exemption in subsection
135(2).
B. Exemption
From Duty
[10]
Paragraph 135(2)(a) exempts wine from duty under
subsection 135(1) if the wine is “produced in Canada and composed wholly of agricultural or plant
product grown in Canada”.
[11]
This exemption can be broken down into two
separate tests:
a)
Production Test: The
wine must be produced in Canada.
b) Ingredients Test: The wine must be composed
wholly of agricultural or plant products grown in Canada.
[12]
The Production Test is easy to interpret. The
word “produce” has a defined meaning in the Act. “Produce” is defined to mean, “in respect of wine, to bring into existence
by fermentation”.
Therefore, to meet the production test, the wine must be fermented in Canada.
The Appellant’s beverages meet this test. There is no dispute that the fermentation
of the Appellant’s beverages occurred in Canada. As a result, the issue in this
appeal centres around the application of the Ingredients Test.
[13]
The Ingredients Test is much more difficult to
interpret. There are two questions that arise. The first question is when
the Ingredients Test is to be applied. The second question is what
ingredients are covered. Does the test cover all ingredients that have gone
into the wine at the relevant point in time or just some of those ingredients?
C. Possible Interpretations
[14]
The parties agree that there are only two times
when the Ingredients Test could be applied: (1) when the wine is fermented; or (2)
when it is packaged. The Appellant submits that the Ingredients Test should be
applied when the wine is fermented. The Respondent submits that the Ingredients
Test should be applied when the wine is packaged.
[15]
With regard to the ingredients covered by the
Ingredients Test, there are really only four plausible interpretations. The
following four tests represent three interpretations supported by the
legislative history of the exemption and a fourth interpretation proposed by
the Respondent:
a) All Ingredients Test: This test would
examine all ingredients that went into the wine. It could be applied either at
fermentation or at packaging.
b) Fermented Ingredients Test: This test
would examine all ingredients that were fermented. Logically, it would only be
applied at fermentation.
c) Alcoholic Ingredients Test: This test
would examine all ingredients that were changed into alcohol. The test would
therefore catch ingredients used to make any spirits that were added to fortify
the wine. Logically, this test would only be applied at packaging since the
spirits would be added after fermentation.
d) Agricultural / Plant Ingredients Test:
This test would examine any agricultural or plant products in the wine. It
could be applied either at fermentation or at packaging.
[16]
As long as the Ingredients Test is applied when
the wine is fermented, the Appellant is indifferent as to which test is used. The
Appellant would pass any of the four tests at the time of fermentation since
the apple juice concentrate in question was added after fermentation. If the
test is to be applied at the time of packaging, the Appellant would accept an
Alcoholic Ingredients Test. Because the apple juice concentrate was not
converted into alcohol, it would not be caught by that test. The Appellant
would fail an All Ingredients Test or an Agricultural / Plant Ingredients Test
conducted at the time of packaging.
[17]
The Respondent supports an Agricultural / Plant
Ingredients Test conducted at the time of packaging. The Respondent takes the
position that any agricultural or plant products in the wine must be grown in
Canada but that all ingredients in the wine do not have to be agricultural or
plant products. The Respondent rejects the other three tests regardless of when
they are conducted.
[18]
In the circumstances, a textual, contextual and
purposive analysis is required to determine the appropriate test to apply and
when to apply it.
D. Textual
Analysis
[19]
I will begin the textual analysis by examining
the ingredients covered by the Ingredients Test and then move on to the timing
of the test.
Ingredients
covered by the Ingredients Test
[20]
The exemption requires that the wine be “composed wholly of agricultural or plant
product grown in Canada”. A textual analysis of the
wording strongly supports an All Ingredients Test.
[21]
The key words in the exemption are found in the
phrase “composed wholly of”. I will first consider the meaning of “composed of”
and then move on to consider the effect of the addition of the word “wholly”.
[22]
“Composed” means:
To be made up,
formed, compounded of (a material, or constituent elements); to be
constituted; to consist of.
[23]
The words “composed of” are used to introduce a
list of one or more things that make up the item that precedes the words. For
example, “Water is composed of
two hydrogen molecules and one oxygen molecule.”
“Composed of” does not indicate that the list that follows is a precise recipe. For
example, “Water is composed of
hydrogen and oxygen molecules” would be a
correct usage of the words even though the number of hydrogen molecules is not
set out.
[24]
It is debatable whether a list that follows the
words “composed of” has to be complete or just has to include the primary components.
Clearly, saying that “Water is
composed of two hydrogen molecules” is simply
wrong as a major component of water has been omitted. Similarly, in the
sentence “These pancakes are
composed of flour, sugar, baking powder, salt, milk, oil and eggs”, if “flour” were omitted, the sentence would be incorrect as flour is the
primary ingredient in pancakes. However, it is less clear whether omitting “salt” would
be problematic.
[25]
The words “composed of” can be contrasted with the
word “contains”. Where “composed
of” must, at a minimum, be followed by a list of
the primary components of the item that precedes those words, “contains”
can be followed by any component. For example, one could say “This pancake contains salt” or “This pancake
contains salt and baking powder”, but one would
not say “This pancake is
composed of salt” or “This pancake is composed of salt and baking
powder” since these are only minor ingredients
in the making of pancakes.
[26]
The words “composed of” can be modified to mean
something less than a complete list. For example, one could say that “Pop is composed principally of sugar and
water”. The adverb “principally”
modifies the verb “composed” and indicates that the list that follows is not a complete list of
the ingredients of pop, only a list of its principal ingredients.
[27]
As set out in paragraph 24, it is debatable
whether “composed of” must be followed by a complete list or need only be followed by a
list of the primary components. Parliament has removed any doubt in the
exemption by adding the adverb “wholly” to the words “composed of”.
Parliament did not say “composed substantially of”
or “composed primarily of” or “composed principally of”. Parliament said “composed wholly of”. With that choice of words, the
list that follows must be a complete list of all of the ingredients in the wine.
As a result, the use of the phrase “composed wholly of”
strongly supports an All Ingredients Test.
[28]
The Respondent, who favours an Agricultural /
Plant Ingredients Test, would like me to interpret the exemption as simply
requiring that any agricultural or plant products in the wine must be grown in
Canada. In other words, the Respondent would like me to read the exemption as
if it applied to wine that is “produced in Canada and not
composed of agricultural or plant product other than agricultural or plant
product grown in Canada”. This is a very different test than
examining all of the ingredients that make up the wine. I struggle to see how
an interpretation that effectively requires me to replace the word “wholly” with the words “not”
and “other than” could in any way be textually
consistent with the wording of the exemption.
[29]
The fact that the phrase “agricultural or plant product grown in Canada” which
follows the phrase “composed wholly of” contains
a number of different descriptions of the products does not alter the meaning
of “composed wholly of”. If the exemption referred
to wine “composed wholly of product” there would
be no question that every ingredient must be a product (although one might be
unsure what a product was). The addition of the phrase “agricultural
or plant” provides additional detail about the type of product. With
that detail, the exemption would refer to wine that is “composed
wholly of agricultural or plant product” and there would be no question
that every ingredient in the wine must be an agricultural or plant product. I
cannot see how the addition of the phrase “grown in
Canada” can change anything. “Grown in Canada”
simply provides further details about the agricultural or plant products. It
does not change the meaning of “composed wholly of”
any more than the addition of “agricultural or plant”
did.
[30]
The following exercise illustrates this point.
Imagine a pile of food on a table. The pile is “composed
wholly of Smarties”. Now let me describe the Smarties in more detail.
The pile is “composed wholly of red Smarties”.
What do you see? Now let me describe the Smarties in even more detail. The pile
is “composed wholly of red Smarties made in Canada”.
Did the pile just change colour in your mind? Did it go back to having green,
yellow and purple Smarties mixed in with it? Of course not. That is because the
addition of the description “made in Canada” did
not take away from the fact that the pile was composed wholly of red Smarties.
It did not indicate that other colours could now be present in the pile so long
as the red Smarties were made in Canada. In other words, it did not change the
sentence to mean the pile is “not composed of red
Smarties other than red Smarties made in Canada”.
[31]
In view of all of the foregoing, the phrase “composed wholly of” cannot textually support an Agricultural
/ Plant Ingredients Test.
[32]
The original draft of the exemption used the
phrase “wholly produced from” instead of “composed wholly of”.
It is worthwhile to conduct a textual analysis of those words in order to be
able to contrast their meaning with the meaning of the words that were
ultimately used. “Wholly produced from” has a very
different textual meaning than “composed wholly of”.
In respect of wine, “produce” is defined to mean
“to bring into existence by fermentation”. Thus, textually, “wholly produced from agricultural or plant product grown in
Canada” means “brought into existence wholly by
fermentation of agricultural or plant product grown in Canada”. Using
the phrase “wholly produced from” instead of “composed wholly of” would require the Ingredients Test
to examine whether all of the agricultural or plant products that were
fermented to make the wine were agricultural or plant products grown in Canada.
The same test could actually be achieved by simplifying the exemption so that
it read “produced in Canada from agricultural or plant
product grown in Canada”. Had either this phrase or “wholly produced from” been used, the textual analysis
would have strongly supported a Fermented Ingredients Test. However, as it is
written, the exemption does not support a Fermented Ingredients Test.
[33]
The budget, supplementary information and press
release relating to the introduction of the exemption used the phrase “made from 100 per cent”. It is worthwhile to conduct a
textual analysis of those words in order to be able to contrast their meaning
with the meaning of the words that were ultimately used. “Made from 100 per cent” has a very different textual
meaning than “composed wholly of”. “Made from” generally refers to a thing
being changed into something else through some process. For example, one would
say “Paper is made from wood”. Various
mechanical processes occur at a pulp mill to convert the wood fibre into paper.
During the process, chemicals may be added, catalysts may be introduced and
chemicals may be removed, but, ultimately, wood is converted into paper.
Similarly, glass is made from sand, flour is made from grain, wine is made from
grapes and apple cider is made from apples. Wood, sand, grapes and apples may
or may not be the only ingredients that go into making those things. They are,
however, at least the primary ingredient and they undergo a significant change
in the production process.
[34]
“Made from” is not simply a different way of saying “contains”.
A donut may “contain” peanuts, but it is not “made from” peanuts as peanuts are not the primary
ingredient and the peanuts do not undergo a change in the process of making the
donut. Peanut butter is “made from” peanuts.
[35]
“Made from” and “produced from” would generally
mean the same thing. However, because “produce”
has a defined meaning in the Act, their meaning differs. The defined meaning of
“produce” limits the process by which the wine
can be created to fermentation. Without that defined meaning, “produced from” would capture other ways in which the
wine could have come into existence. Most importantly, it would catch fortified
wine (i.e., wine that came into existence through fermentation that was then
fortified with spirits that came into existence through distillation or some
other process).
[36]
Using the phrase “made
from 100 per cent agricultural or plant products grown in Canada” would
require the Ingredients Test to examine whether all of the primary ingredient
or ingredients that were changed into wine through the beverage-making process
were agricultural or plant products grown in Canada. This would include both
the agricultural or plant products that were fermented and the agricultural or
plant products that were distilled or otherwise made into spirits. Had this
phrase been used, the textual analysis would have strongly supported an
Alcoholic Ingredients Test. However, as it is written, the exemption does not
support an Alcoholic Ingredients Test.
[37]
In summary, a textual analysis strongly supports
an All Ingredients Test. Since the ingredients that follow the phrase “composed wholly of” in the exemption are “agricultural or plant product grown in Canada”, the
text of the exemption clearly requires that, at whatever time the test is to be
applied, the wine must contain no ingredients other than agricultural or plant
products grown in Canada.
Timing of the
Ingredients Test
[38]
There is nothing in the text of the exemption
that indicates when the Ingredients Test is to be applied. The exemption covers
wine. As discussed above, a beverage qualifies as wine as soon as the
fermentation process is completed and continues to qualify as wine when it is
packaged. While both parties make arguments as to why the text of the exemption
supports their position, I do not find either of their arguments to be
convincing.
[39]
The Respondent submits that if Parliament had
intended the Ingredients Test to be applied at the time of production it could
easily have written the exemption as “produced in
Canada wholly from agricultural or plant product grown in Canada”. The
Respondent submits that the fact that Parliament did not do so indicates that
Parliament wanted the Ingredients Test to be applied at the time of packaging.
While I see the Respondent’s point, I could just as easily interpret the
drafting as an indication that Parliament believed “composed
wholly of” meant something different than “produced
from” and, accordingly, drafted the exemption in the manner it did, not
because it wanted the Ingredients Test to be applied at the time of packaging,
but rather because it wanted the Ingredients Test to capture a different set of
ingredients than the word “produce” would allow.
[40]
The Appellant submits that, because the
Production Test examines fermentation, Parliament must have intended the
Ingredients Test to be conducted at fermentation. I do not find this argument
convincing. They are two separate tests. The Production Test examines where
the wine was fermented. The Production Test is not conducted at any particular
point in time. I therefore do not find it useful in interpreting when
the Ingredients Test is to be applied.
Summary
[41]
In summary, the text of the exemption does not
indicate when the Ingredients Test is to be applied, but clearly indicates that,
whenever it is applied, it is an All Ingredients Test. In other words, the wine
must contain nothing but Canadian agricultural or plant products. I cannot see
any way that the words “composed wholly of”
could, in a textual interpretation, be interpreted in a manner consistent with
a Fermented Ingredients Test, an Alcoholic Ingredients Test or an Agricultural
/ Plant Ingredients Test.
E. Contextual
Analysis
[42]
Unfortunately, a contextual analysis offers
little assistance in interpreting the Ingredients Test. Strong contextual arguments
can be made for many different positions. Furthermore, the contextual analysis
does not reveal any ambiguities in the text.
[43]
The duty is imposed at the time that the wine is
packaged and is payable by the person who was responsible for the wine
immediately before it was packaged.
Since the exemption is designed to give relief from that duty, arguably, any
test to qualify for that relief should be applied to the wine at the time of
packaging. Similarly, the duty is applied to the entire volume of the packaged
beverage, not just the alcohol. Since the exemption is designed to give relief
from that duty, arguably, the test to qualify for that relief should be applied
to the entire volume of the wine, not just the ingredients that went into
making the alcohol (i.e., an All Ingredients Test or an Agricultural / Plant
Ingredients Test).
[44]
At the same time, the duty arises because the
beverage contains alcohol. Duty is not applied to grape juice. It is applied to
wine. This suggests that the Ingredients Test should only be applied to those
ingredients that went into making the alcohol (i.e., a Fermented Ingredients
Test or an Alcoholic Ingredients Test). The alcoholic content is created at the
fermentation stage, not the packaging stage. This suggests that the Ingredients
Test should be applied at the fermentation stage. However, wine is sometimes
fortified with spirits after the fermentation stage. This suggests that the
Ingredients Test should be applied at the packaging stage in order to catch
these spirits.
[45]
The reference in the exemption to “agricultural or plant product” parallels similar
references in the definition of “wine.” This
could suggest that the products that are being referred to in the exemption are
the ingredients that were fermented, rather than all ingredients. This supports
a Fermented Ingredients Test and supports the test being conducted at
fermentation. However, the definition of “wine”
specifically excludes grains whereas the exemption does not. This difference
suggests that the exemption is intended to apply to a broader set of
ingredients than simply those that go into the fermentation.
[46]
The Appellant points out that subsection 135(2)
provides three exemptions from the duty. Paragraphs 135(2)(a.1) and (b) both
refer to production and packaging. However, the exemption in issue (paragraph
135(2)(a)) only refers to production. Thus, the Appellant argues that the lack
of a reference to packaging in the exemption indicates that the Ingredients
Test is to be applied at the time of fermentation. It appears to me that the
word “packaged” in paragraphs 135(2)(a.1) and
(b) is used with a different purpose. Paragraph 135(2)(a.1) refers to wine “produced and packaged by an individual for their personal
use” and paragraph 135(2)(b) refers to wine “produced
by a wine licensee and packaged by or on behalf of the licensee during a fiscal
month”. Both of these exemptions are focused on who produced and
packaged the wine. Neither of them involves establishing the time at which a
particular test should be applied. In essence, the Appellant is arguing that
Parliament could have said “produced in Canada and, when
packaged, composed wholly of”. One could just as easily argue that
Parliament could have said “produced in Canada and, when
produced, composed wholly of”. I do not find it significant that
paragraphs 135(2)(a.1) and (b) use the word “packaged”
and paragraph 135(2)(a) does not.
[47]
Subsection 134(1) imposes duty on “bulk” wine that is “taken for
use”. “Bulk” wine means wine that is not
packaged.
“Taken for use” means consumed, analyzed or
destroyed, or used for a purpose that results in a product other than alcohol. Paragraph 134(3)(a) contains
an exemption from this duty for wine that is produced in Canada and composed
wholly of agricultural or plant product grown in Canada. Thus the same exemption
applies to both bulk wine taken for use and wine that is packaged. The
Appellant argues, in essence, that since the bulk wine is never packaged,
Parliament must have intended the Ingredients Test to be applied at
fermentation instead of packaging. I agree that bulk wine is never packaged. If
it were, it would no longer be bulk wine. However, the equivalent of packaging
for bulk wine is taking the wine for use. If a consumer visits a winery, the
winery can sell him or her a bottle of wine, in which case duty would already
have applied at the time the wine was packaged. Alternatively, the winery can pour
the consumer a glass of wine directly from a large vat at which point the wine would
have been taken for use and duty would apply. I do not see any difference between
these two scenarios that would help me to understand whether the Ingredients
Test should be applied at fermentation or at packaging / taking for use.
[48]
There are no provisions elsewhere in the Act
that cause me to question the textual meaning of the phrase “composed wholly of”. The only other place that the
phrase is used in the Act is in paragraph 134(3)(a). It is not used in a way
that suggests it has a different meaning or that creates ambiguity.
[49]
In summary, a contextual analysis offers little
guidance and does not reveal any ambiguities in the text.
F. Purposive
Analysis
[50]
A purposive analysis supports both the Alcoholic
Ingredients Test and the Agricultural / Plant Ingredients Test. It does not
reveal any ambiguities in the text.
History of
the exemption
[51]
In order to determine the purpose of the
provision, it is helpful to examine the history of the exemption.
[52]
The exemption received first reading in November
2005 in a private member’s bill. It was proposed that it be added as section
135.1 and that it read:
Notwithstanding sections
134 and 135, no duty shall be imposed on the first 900,000 litres of wine that
are, in the aggregate, packaged by or taken for use from a wine licensee in a
year if the wine is wholly produced from plants, plant products or
agricultural products grown in Canada.
[Emphasis added]
[53]
The first version never made it past first
reading. It died a few days later when a motion of non-confidence triggered an
election.
[54]
The exemption was reintroduced by the new
minority government in its May 2006 budget. The Budget Plan 2006 described the
exemption as follows:
Budget 2006
proposes to support the Canadian wine industry by providing excise duty relief
to wines made from 100-per-cent Canadian-grown product. Excise duty
reductions for small brewers are also proposed. These measures will help the
competitiveness of small and medium-sized vintners and brewers.
[Emphasis added]
[55]
The most significant changes in this version of
the exemption are the reduction of the cap from 900,000 litres to 500,000
litres and the use of the words “made from 100 per cent”
rather than “wholly produced from”.
[56]
The Supplementary Information to the budget
described the exemption as follows. Again, note the use of the words “made from 100 per cent”:
Budget 2006
proposes to exempt from duty the first 500,000 litres of wine produced and
packaged by a wine licensee per year made from 100 per cent
Canadian-grown agricultural products.
The proposed relief
will apply to all goods falling within the definition of wine in the Act
(including ciders, wine coolers, fruit wines and sake) made from 100 per
cent Canadian-grown agricultural products. The relief will be available to
wine licensees operating in Canada.
[Emphasis added]
[57]
In a press release dated just days before the
proposed effective date of the new legislation, the Department of Finance
announced that, after further consultations with the industry, the 500,000-litre
cap would be eliminated. The press release indicated that draft legislative
proposals were being released the same day.
The press release used the words “made from 100 per
cent” and gave no indication that the Department proposed to change the
exemption from a “made from 100 per cent”
exemption to a “composed wholly of” exemption.
However, the accompanying legislative proposals used the phrase “composed wholly of”.
[58]
A Notice of Ways and Means Motion in respect of
the exemption was issued in October 2006. It reflected the promised removal of
the 500,000-litre cap. It proposed the same language for the exemption,
including the phrase “composed wholly of” that
was ultimately enacted by Parliament.
The explanatory notes accompanying the Notice of Ways and Means Motion mimic
the “composed wholly of” language of the exemption.
[59]
The exemption was ultimately added to the Act in
2007, with effect after June 2006.
[60]
There is nothing in the history of the exemption
that suggests that Parliament ever considered employing an Agricultural / Plant
Ingredients Test. As set out above, there was a progression from the wine being
“wholly produced from” (a Fermented Ingredients
Test), to it being “made from 100 per cent” (an
Alcoholic Ingredients Test), to it being “composed wholly
of” (an All Ingredients Test).
[61]
The question that arises is whether, in using
the phrase “composed wholly of”, Parliament was
intentionally moving the Ingredients Test away from a Fermented Ingredients
Test to an All Ingredients Test. The fact that the wording from the first draft
was not reused in the new draft suggests that there was an intentional move
away from a Fermented Ingredients Test. This is particularly true because the
defined term “produced” was abandoned in favour
of a different term, “composed”. However, what
is unclear is whether Parliament’s use of the words “composed
of” instead of “made from” was an
intentional choice of an All Ingredients Test over an Alcoholic Ingredients
Test or simply a different choice of words.
[62]
In summary, the history of the exemption
supports an Alcoholic Ingredients Test or an All Ingredients Test. It does not
support the other two tests.
Problems with
various ingredients
[63]
There are strong purposive arguments against
Parliament having intentionally moved to an All Ingredients Test. Such a test would
have a number of consequences that I can only presume Parliament could not have
intended. A beverage that contained any ingredient that was not an
agricultural or plant product grown in Canada would not qualify for the
exemption. Consider the following ingredients:
a) Artificial preservatives, colours or flavours: There is no indication that Parliament’s intention was to create
an exemption that would only apply to organic beverages, yet that would be a
consequence of an All Ingredients Test. Artificial preservatives, colours or
flavours would all put a beverage offside.
b) Natural, non-agricultural or non-plant additives: Any natural additives that were not agricultural or plant products
would make the exemption unavailable. An example that comes to mind is salt.
Salt is a natural ingredient that is used as a beverage additive but is not an
agricultural or plant product.
c) Natural agricultural or plant additives not grown in Canada: All natural additives that did come from agricultural or plant
products would have to be derived from Canadian products. The Appellant used
citric acid to adjust the acidity of its beverages. I have a hard time
imagining that Parliament would have intended to deny the exemption to any
taxpayer who could not buy citric acid made from Canadian citrus fruits. The
Appellant used natural mango flavouring in its mango cider. I similarly have a hard time
imagining that Parliament would have intended to deny the exemption to the
Appellant unless the Appellant somehow sourced Canadian mangos. In legislation
clearly aimed at helping Canadian vintners and farmers, it would make little
political or economic sense to design an exemption that had the potential to
exclude products made with Canadian grapes and apples due to a shortage of
Canadian orange and mango groves.
d) Water: Water is the single largest
ingredient by volume in each of the Appellant’s beverages. There is no
indication that Parliament was concerned about the use of water in beverages,
but, since water is neither an agricultural nor a plant product, the addition
of even a small amount of water would prevent the exemption from being claimed.
What possible purpose could Parliament have been hoping to achieve in imposing
duty on alcoholic beverages that contain water? It would not help vintners. It
would not help farmers.
e) Carbonation: The Appellant’s beverages were
carbonated, as are many coolers, ciders and “hard”
fruit drinks. The carbonation was added in the form of carbon dioxide gas. It
cannot have been Parliament’s intention that vintners would have to obtain
their carbon dioxide gas from Canadian agricultural or plant products.
[64]
The concern in paragraph 63(c) regarding natural
agricultural or plant additives not grown in Canada would be present in an Agricultural
/ Plant Ingredients Test but the other concerns would not.
[65]
None of the above concerns would be present if a
Fermented Ingredients Test were used. In a Fermented Ingredients Test, if a
wine was fermented from grapes, the grapes would have had to be grown in
Canada. If a cider was fermented from apples, the apples would have had to be
grown in Canada. Since none of the offending ingredients described above would
have been fermented, their addition would not put a beverage outside the
exemption. Similarly, none of the above concerns would be present were an
Alcoholic Ingredients Test to be used. In an Alcoholic Ingredients Test, none
of the offending ingredients described above would have been fermented or
distilled, so their addition would not be problematic.
[66]
In summary, the above problems argue strongly
against an All Ingredients Test. They also favour a Fermented Ingredients Test
or an Alcoholic Ingredients Test over an Agricultural / Plant Ingredients Test.
Purpose of
the exemption
[67]
Overall, the purpose of the exemption argues
strongly against an All Ingredients Test but supports the other three tests.
[68]
It seems to me that the purpose of the exemption
was to support Canadian vintners and farmers. That said, the needs of the two
groups are in conflict. Farmers want to sell a lot of agricultural or plant
products at a high price. Vintners want to buy agricultural or plant products
at a low price. They also want to be able to easily meet the requirements of
the exemption so that they do not have to pay duty. Thus, vintners would prefer
a test that catches the fewest ingredients possible and that focuses on
ingredients readily available in Canada. Farmers would prefer a test that
catches a large number of ingredients but not so many ingredients that it makes
the exemption unachievable for vintners.
[69]
An All Ingredients Test harms vintners by unduly
restricting the ingredients that they can use in creating marketable beverages
and thus harms farmers by making vintners less interested in qualifying for the
exemption and thus less interested in buying the agricultural or plant products
that the farmers have to offer. For example, if vintners realized that they
could never qualify for the exemption because one of the ingredients in their
beverages was water, those vintners would be more likely to buy less expensive
imported apples than to buy more expensive Canadian ones, thus harming Canadian
farmers.
[70]
An Agricultural / Plant Ingredients Test removes
the undue restrictions imposed by an All Ingredients Test, but it still has the
potential to cause problems for vintners who use agricultural or plant products
such as citric acid or mango that are not easily sourced from products grown in
Canada. Farmers cannot benefit from a requirement to buy products that they do
not grow, but they do benefit from the inclusion of as many of their products
as possible.
[71]
A Fermented Ingredients Test is the least
restrictive test and thus helps vintners the most. However, it provides far
less support to farmers as it does not catch any agricultural or plant products
that are not fermented. In particular, as discussed in more detail below,
sugar, fruit juices and fruit juice concentrates added after fermentation would
not be caught. At the same time, the undue restrictions of an Agricultural /
Plant Ingredients Test are avoided.
[72]
An Alcoholic Ingredients Test helps farmers more
than a Fermented Ingredients Test because it catches the agricultural or plant
products used to make spirits that are used to fortify the wine, but it still
has the potential to leave a lot of agricultural or plant products out.
[73]
In summary, the purpose of the exemption argues
strongly against an All Ingredients Test, but supports all three of the
remaining tests. Generally, the goal of helping vintners is better achieved
with a Fermented Ingredients Test or an Alcoholic Ingredients Test and the goal
of helping farmers is better achieved with an Agricultural / Plant Ingredients
Test.
Fortified wine loophole
[74]
A Fermented Ingredients Test creates a loophole that
undermines the purpose of the exemption. That loophole is not present in the
other tests.
[75]
A Fermented Ingredients Test considers whether
the wine was “wholly produced from agricultural or
plant product grown in Canada”. Because “produced”
means “brought into existence through fermentation”,
a Fermented Ingredients Test examines whether the agricultural or plant product
that was fermented was grown in Canada. Any agricultural or plant products used
to create any spirits that are used to fortify the wine are not caught by a
Fermented Ingredients Test since those ingredients were not fermented.
[76]
As an example, let us assume that a wine made
with grapes is fortified with vodka made from distilled grain. The resulting “wine” is “made from”
grapes and grain, and is “composed of” grapes
and grain, but is “produced from” grapes. This
is because the grapes are fermented but the vodka is distilled.
[77]
This difference with fortified wines would
result in a significant loophole in the legislation if a Fermented Ingredients
Test were used. Imported spirits are subject to customs duties. Those duties
are relieved if the spirits are used to fortify wine. Thus, if a spirit were
imported and then used to fortify wine, no matter how little fermented wine
there was in the resulting beverage, so long as the fermented portion of the wine
had been made from Canadian agricultural or plant products, the beverage would
be exempt from duty. The import duty would have been relieved upon
fortification and an exemption designed to encourage Canadian vintners and
farmers would have applied to relieve duty on a beverage the alcoholic content
of which was made mostly from non-Canadian grain.
[78]
This loophole is not present with the other
three tests. In the above example, an Alcoholic Ingredients Test would catch
the imported vodka. The beverage would be “made from”
grapes and grain. Since the grain was not Canadian grain, the exemption would
not be available. An All Ingredients Test and an Agricultural / Plant
Ingredients Test would also catch the vodka because, although it was an
ingredient that would have been made from an agricultural or plant product,
that product would not have been Canadian.
[79]
This is not a theoretical concern. The vast
majority of the alcoholic content of the Appellant’s beverages comes from the
fortifying spirits added to the cider, not from the cider itself. A small number of the
Appellant’s beverages were made using imported spirits. The Appellant has
conceded that duty applies to those beverages. However, if the test to be
applied were a Fermented Ingredients Test, those beverages would not have been
subject to duty despite the vast majority of their alcoholic content having been
obtained from imported spirits.
[80]
Before moving on, I would like to make one other
comment on the loophole. The Respondent focused a portion of her argument on
the role of paragraph 131.2(1)(b), but it is not entirely clear to me why. Paragraph
131.2(1)(b) deals with the opposite of fortification. It applies to spirits
that have wine added to them but that remain spirits. It deems the production
of those spirits to occur when the wine and the spirits are blended. Paragraph
131.2(1)(b) is an essential part of the provisions that impose duty on spirits.
Duty is imposed on spirits at the time of production. It is paid on the volume of
the spirits produced. If wine is later added to the spirits, the volume of the
resulting spirits is increased. Thus, unless the time of production is deemed by
paragraph 131.2(1)(b) to be the time of blending, no duty will apply to that
extra alcoholic volume. This problem is not present for wine. Duty on wine is
imposed at packaging. Thus any spirits blended into the wine are already part
of the volume on which the duty is applied at packaging.
[81]
I do not think I can take any contextual or
purposive meaning from paragraph 131.2(1)(b), as the paragraph serves a purpose
(ensuring that the entire volume of spirits is subject to duty, as opposed to
only part of the volume) that is not relevant to wine. In the Appellant’s case,
either the entire volume of the wine will be exempt from duty because the
exemption applies or the entire volume of the wine will be subject to duty
because the exemption does not apply. There is no situation where the part of
the volume of the wine that came from fermented wine will be subject to duty
and the part that came from spirits will not, or vice versa. Thus I am not sure
what assistance paragraph 131.2(1)(b) can provide. I understand that a
provision like paragraph 131.2(1)(b) that deemed wine blended with spirits to
have been produced at blending would close the fortified wine loophole.
However, no such provision exists in the Act and I am certainly not about to
create one on behalf of Parliament. Since there is no exemption from duty for
spirits wholly composed of agricultural or plant product grown in Canada, the
purpose of paragraph 131.2(1)(b) is clearly not to close an equivalent loophole.
Thus I cannot even take from paragraph 131.2(1)(b) an intention on the part of
Parliament to avoid similar loopholes. In summary, while the Respondent relies
on paragraph 131.2(1)(b), I do not find it helpful.
Sugar, fruit juice and fruit juice concentrate
[82]
The treatment of sugar, fruit juice and fruit juice
concentrate is a significant issue. Fruit juice or fruit juice concentrate can
be fermented to create alcohol, but they can also be added after fermentation
to add flavour or increase sweetness. Sugar can be added during the
fermentation process to increase alcoholic content and sweetness, but it can
also be added after the fermentation process to increase sweetness.
[83]
It is difficult to discern how Parliament wanted
sugar, fruit juice and fruit juice concentrate treated. Parliament clearly
wanted to support Canadian farmers. Given the amount of fruit used in wine
making, it seems likely that Parliament’s goal was to support Canadian fruit
growers. As a result, it seems unlikely that Parliament would have wanted to
distinguish between fruit juice or fruit juice concentrate that was fermented
and fruit juice or fruit juice concentrate that was added for flavouring
purposes. Whether fermented or not, fruit juice and fruit juice concentrate
come from fruit and fruit growers grow fruit.
[84]
It seems less likely to me that Parliament’s
goal was to support Canadian sugar beet farmers, but I have no way of knowing
that. It may well be that Parliament hoped to support the Canadian sugar
industry as well.
[85]
It is difficult to imagine a test based on
agricultural or plant products that bears any relation to the text of the
exemption that would catch fruit juice and fruit juice concentrate but exclude
sugar. The two types of ingredients really go hand in hand. Both are
agricultural or plant products. Both can be added before or after fermentation.
Both add sweetness. Both can increase alcoholic content. The only real
difference is that fruit juice and fruit juice concentrate can also add
flavour.
[86]
An All Ingredients Test or an Agricultural /
Plant Ingredients Test would catch any sugar, fruit juice or fruit juice
concentrate added to the wine regardless of the reason that it was added since
all of these products are agricultural or plant products.
[87]
A Fermented Ingredients Test would catch any
fruit juice or fruit juice concentrate that was fermented but would not catch
any fruit juice or fruit juice concentrate added after the fermentation
process. While I believe that sugar added during the fermentation process is
itself fermented, I do not have enough information to be confident of that fact.
If it is, then any sugar added during fermentation would be caught by a
Fermented Ingredients Test. A Fermented Ingredients Test would not catch any
sugar added after fermentation.
[88]
An Alcoholic Ingredients Test would operate the
same way as a Fermented Ingredients Test. The only difference would be that any
spirits used to fortify the wine could not be made from non-Canadian sugar,
fruit juice or fruit juice concentrate. For example, if wine were fortified
with rum distilled from sugar, that sugar would have to be Canadian sugar.
[89]
In summary, if Parliament’s goal was to support
Canadian fruit farmers, that goal is best achieved by ensuring that fruit juice
and fruit juice concentrate are caught regardless when they are used in the
process. That goal favours an All Ingredients Test or an Agricultural / Plant
Ingredients Test. While Parliament may have wanted sugar treated differently
from fruit juice and fruit juice concentrate, unless sugar is not itself
fermented, none of the tests actually treats sugar, fruit juice and fruit juice
concentrate any differently from one another.
Enforcement of the exemption
[90]
While the parties have provided me with various
documents indicating the CRA’s views on the Ingredients Test, I have not relied
on those documents in determining the purpose of the exemption. It is clear to
me that these documents do not represent the CRA’s interpretation of the
exemption enacted by Parliament, but rather represent an exemption that the CRA
has itself designed with little regard for the actual wording of the
legislation. The CRA’s position appears to be what could best be described as an
Agricultural / Plant Ingredients Test that ignores the fact that sugar is an
agricultural or plant product and also ignores any agricultural or plant
products that are “incidental ingredients” or “food additives”, unless those ingredients or
additives happen to be fruit juice.
While the result may arguably be a practical test, it is not a test that is in
any way supported by the legislation.
Conclusion regarding ingredients covered by the Ingredients
Test
[91]
Overall, the purposive analysis supports either
an Alcoholic Ingredients Test or an Agricultural / Plant Ingredients Test.
[92]
The fact that the first draft of the exemption
used a Fermented Ingredients Test and the final version used an All Ingredients
Test indicates that Parliament was intentionally moving away from a Fermented
Ingredients Test. It may be that Parliament realized the loophole that a Fermented
Ingredients Test caused and was trying to avoid it. In any event, an
interpretation that undermines the purpose of the exemption by creating a
loophole should be avoided.
[93]
In using an All Ingredients Test, Parliament
walked into a number of significant problems that undermined the very purpose
it was trying to achieve.
[94]
An Alcoholic Ingredients Test and an Agricultural
/ Plant Ingredients Test both support the purpose of the exemption. The former
helps vintners more and the latter helps farmers more (particularly fruit
growers).
[95]
Whereas there is support for an Alcoholic
Ingredients Test in the budget, the supplementary information and the press
release related to the second attempt at passing the exemption, there is no
such support for an Agricultural / Plant Ingredients Test.
[96]
In light of all of the foregoing, the purposive
analysis supports either an Alcoholic Ingredients Test or an Agricultural /
Plant Ingredients Test with the former having more support in the legislative
history.
Timing of the ingredients test
[97]
I will now conduct a purposive analysis of the
timing of each of the four plausible tests.
[98]
An All Ingredients Test could be applied at
either fermentation or packaging. A purposive analysis suggests that an All
Ingredients Test should be applied at fermentation. The purpose of the
exemption is significantly impaired by an All Ingredients Test. Less harm would
come to the purpose if that test were applied at fermentation rather than at
packaging as fewer ingredients would be caught.
[99]
Since a Fermented Ingredients Test only
considers the agricultural or plant product that is fermented, there would be
no purpose to applying it at any time other than fermentation.
[100] An Alcoholic Ingredients Test or an Agricultural / Plant Ingredients
Test could be applied either at fermentation or packaging but, to the extent
that the purpose of the exemption is better achieved without the fortified wine
loophole, both tests would be better applied at packaging.
G. Conclusion of Textual, Contextual and Purposive Analysis
[101] In summary, while there is textual ambiguity as to when the Ingredients
Test is to be applied, there is absolutely no textual ambiguity as to what
ingredients it is to cover. The words “composed wholly
of” allow for no other meaning than that every ingredient in the wine
must meet the test. Their meaning is very different than “wholly produced from” and “made
from 100 per cent” and not even close to the meaning required to support
an Agricultural / Plant Ingredients Test. The contextual analysis does not
provide any assistance. The purposive analysis argues against a Fermented
Ingredients Test and strongly against an All Ingredients Test and supports an
Alcoholic Ingredients Test or an Agricultural / Plant Ingredients Test.
[102] In Canada Trustco Mortgage Co. v. The Queen, the Supreme Court of Canada made
it clear that, when interpreting a tax provision, a purposive analysis may
reveal patent ambiguity in apparently plain language. That has not happened in
this appeal. The purposive analysis has revealed that the plain language largely
undermines the purpose of the exemption, but the analysis has not revealed any
patent ambiguity in the text of the exemption. The language is still entirely
clear.
[103] If the purposive analysis had demonstrated that it was impossible to
make wine using only agricultural or plant products, a patent textual ambiguity
would have been revealed. The phrase “composed wholly
of” would have to have been given a meaning other than its normal
grammatical meaning. For example, if I say “this car is
composed wholly of steel made in Canada”, because you know that it is
impossible to make a car using only steel, you automatically adjust the
ordinary grammatical meaning of the sentence and interpret it to mean that any
steel in the car must have been made in Canada. In other words, your purposive
analysis of how cars are made reveals an ambiguity in your textual understanding
of the sentence and you therefore adjust the ordinary grammatical meaning of
the sentence so that it makes sense. The problem with the exemption in question
is that there is no evidence that it is either impossible or even difficult to
make wine using only agricultural or plant products. The Appellant fermented
cider using nothing but apples.
Yes, there are products like the Appellant’s that use other ingredients, but
there is no requirement to use such ingredients to create “wine”. Thus, while the purposive analysis has revealed
situations where ingredients that are added will prevent a beverage from
qualifying for the exemption, it has not revealed a patent ambiguity in the
text. The text, as written, can still apply.
[104] The fact that there is ambiguity over when the test is to be
applied does not create any ambiguity over what ingredients the test is
to cover. The test covers all ingredients. It may be textually unclear whether the
test applies to all ingredients at fermentation or to all ingredients at
packaging, but it is still clear that it applies to all ingredients.
[105] It is not my role to use a purposive analysis to override
unambiguous text. As the Supreme Court of Canada stated in Placer Dome Canada
Ltd. v. Ontario (Minister of Finance)
The interpretive approach is
thus informed by the level of precision and clarity with which a taxing
provision is drafted. Where such a provision admits of no ambiguity in its
meaning or in its application to the facts, it must simply be applied. Reference
to the purpose of the provision “cannot be used to create an unexpressed
exception to clear language”: see P. W. Hogg, J. E. Magee and J. Li, Principles
of Canadian Income Tax Law (5th ed. 2005), at p. 569; Shell Canada Ltd.
v. Canada, [1999] 3 S.C.R. 622. Where, as in this case, the provision
admits of more than one reasonable interpretation, greater emphasis must be
placed on the context, scheme and purpose of the Act. Thus, legislative
purpose may not be used to supplant clear statutory language, but to arrive
at the most plausible interpretation of an ambiguous statutory provision.
[Emphasis added]
[106] On the basis of all of the foregoing, I find that the Ingredients
Test is an All Ingredients Test.
[107] The question that remains is when the Ingredients Test is to be
applied. Neither the text nor the context provides any guidance on that issue.
I am therefore free to rely on the purpose of the exemption when considering
the timing. Applying the test at fermentation will cause less harm to the
purpose of the exemption than applying it at packaging. Therefore, I find that
the test should be applied at fermentation. I am aware that this leaves the
fortified wine loophole open, but I find that to be the lesser of two evils.
Better that a beverage containing imported spirits be duty-free than that a
beverage be subject to duty merely because water, carbonation, flavouring,
colouring, preservatives or other additives were added after fermentation.
[108] For clarity, under this conclusion, paragraph 135(2)(a) would be
read as if it applied to wine “produced in Canada and,
when produced, composed wholly of agricultural or plant product grown in
Canada”.
[109] I am aware that this decision will likely cause significant
production problems and/or financial hardships for many vintners. In particular,
if my understanding that sugar is fermented is correct, non-Canadian sugar that
is added at the fermentation stage will make the exemption unavailable.
Similarly, the addition of any preservative that is not an agricultural or
plant product grown in Canada will put a beverage offside. Presumably vintners
will ask Parliament to amend the text of the exemption to better align it with either
its intended purpose or a more practical purpose. It is not my role to make the
amendment for them.
H. Application
to the Appellant’s Beverages
[110] There is no dispute that the only ingredients that were added to the
Appellant’s cider during fermentation were agricultural or plant products grown
in Canada. The apple juice concentrate in issue was added after fermentation.
Therefore, the exemption applies to the Appellant’s cider.
[111] A small portion of the Appellant’s beverages were fortified with
imported spirits. The Appellant was assessed duty of $39,970.28 on those
beverages. The Appellant conceded that it was required to pay duty on those
beverages. Thus, that issue was no longer before me. Therefore, despite the
fact that I have concluded that those beverages would qualify for the
exemption, I cannot issue judgment to that effect.
I. Decision
[112] The Appeal is allowed and the matter referred back to the Minister
for reassessment on the basis that the Appellant’s duty be reduced by
$1,967,652.27 (being the $2,007,662.55 in duty assessed less the $39,970.28
concession made in respect of the beverages made with imported spirits).
J. Costs
[113] Costs are awarded to the Appellant. The parties shall have 60 days
from the date hereof to reach an agreement on costs, failing which they shall
have a further 30 days to file written submissions on costs. Any such
submissions shall not exceed 10 pages in length. If the parties do not advise
the Court that they have reached an agreement and no submissions are received,
costs shall be awarded to the Appellant as set out in the Tariff.
Signed
at Ottawa, Canada, this 26th day of July 2017.
“David E. Graham”
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