REASONS
FOR JUDGMENT
Smith J.
[1]
The Appellant appeals from a Notice of
Reassessment issued by the Minister of National Revenue (the “Minister”) under
the Excise Tax Act, R.S.C., 1985, c. E‑15 (the “Act”) for the
reporting periods from May 1, 2009 to December 31, 2011.
I. Overview
[2]
The Act provides that food or basic groceries
are zero‑rated meaning that they are subject to GST at the rate of 0%.
However, it also provides a list of food items that are excluded and therefore
subject to GST at the regular rate.
[3]
The Minister alleges that the Appellant failed
to collect and remit GST on the sale of certain food products that were excluded
by virtue of section 1 of Part III of Schedule VI of the Act.
Those food products are as follows:
1.
Crystallized ginger;
2.
Sticks (made of wheat, rice and spelt);
3.
Granola.
[4]
For reasons set out below, the appeal should be
referred back to the Minister for reconsideration and reassessment on the basis
that the crystallized ginger and granola are zero-rated while the sticks are excluded
and thus taxable.
II. The Relevant Facts
[5]
The Appellant is a manufacturer and wholesale
distributor of natural food products carrying on business as “Left Coast
Naturals”. Ian Walker testified on its behalf. As one of the founders and its
current president, he described the company’s underlying philosophy as the
distribution of “organic natural healthy foods made from whole foods and
natural ingredients”.
[6]
The company started circa 1997 as a
manufacturer and distributor of proprietary natural food products but evolved
over time to include the manufacture of private label products for retailers
such as Loblaws, Trader Joe’s and Whole Foods. This eventually led to the
distribution of natural food ingredients in bulk that customers would use for
food preparation in their deli departments or for sale in their bulk bins.
Other customers, such as bakeries, used the bulk ingredients directly in their
baked products. The Appellant’s business also evolved to include the
distribution of pre-packaged organic food products made by various other manufacturers.
[7]
The three food products in question were all
sold in bulk to retailers for sale in their bulk bins. As will be noted below,
some were also sold in various pre-packaged sizes.
Crystallized
ginger
[8]
According to Mr. Walker, the Appellant
eventually became a large bulk distributor of crystallized ginger sourced from
a manufacturer in China. He explained that this product originated from the
ginger root, that it was peeled, cubed and boiled in a sugar syrup to reduce
the natural spiciness and then coated with sugar crystals to ensure that the
end product did not stick together in a clump.
[9]
The crystallized ginger was typically packaged
in clear plastic bags and delivered to customers in ten to twenty‑five
pound cardboard boxes. This was then put into bulk bins that were typically
labelled “Organic crystallized ginger” or used by customers in their deli
department to make food products such as buns, scones, muffins, etc. The
Appellant also sold this product in a 525 gram clear plastic re‑sealable
container.
[10]
In terms of classification for GST purposes, Mr. Walker
indicated that they consulted with and relied on their customs import broker.
They also considered the use of the product by their customers and determined
that it was mainly being used as a baking ingredient similar to dried fruit.
One particular customer, identified as Terra Breads, used the ginger directly
in its baked goods.
[11]
With respect to the 525 gram containers, Mr. Walker
explained that it was sold to natural food stores or grocery stores and
sometimes sold in the bulk bin department as a more convenient format based on
individual customer preferences.
[12]
In terms of marketing to its customers, the
crystallized ginger appeared in the Appellant’s product and price lists under
the category of “Baking Ingredients” for marketing material directed to
bakeries or under the category of “Organic Dried Fruit” for other customers who
typically placed it in their bulk bins.
[13]
During cross‑examination, Mr. Walker acknowledged
that the 525 gram packages contained a nutritional label identifying the
main product as ginger followed by sugar. It also specified that for every 40
grams serving, there was 30 grams of sugar. Mr. Walker clarified that
this included naturally occurring sugar. The actual percentage of added sugar
was not specified.
[14]
Mr. Walker resisted the suggestion that the
crystallized ginger could be used as a sweet treat or candy unless it was
candied ginger where sugar was the primary ingredient. His evidence was that
the Appellant had never sold crystallized ginger as a candy and that he had
never seen it being sold in the candy section of his customers’ bulk bins. He
did acknowledge that prior to the period in question, the Appellant had also distributed
160 gram packages of crystallized ginger under the brand name “Skeet and Ike’s Snacks”,
for which it likely charged GST. That package was not in issue in this appeal.
[15]
Rebecca Lawrence testified on behalf of the
Respondent and identified herself as an appeals officer with the Canada Revenue
Agency with a business degree and concentration in accounting. She indicated
that she had reached the conclusion that the crystallized ginger was excluded
from being zero‑rated on the basis that it was a candy or confectionary
that could be classed as a candy.
[16]
She indicated that she had sampled the ginger
sold by the Appellant and found it to be “very sweet” as it was coated with
sugar, but that it also had a slightly hot ginger flavour. She explained that
in her opinion, crystallized ginger could be either eaten as‑is or used
as a baking ingredient for various baked goods.
[17]
She also indicated that she had purchased
crystallized ginger from a local confectioner known as Purdy’s Chocolates. She
noted that it had the same nutritional value or sugar content per serving as
the Appellant’s ginger. The Appellant’s counsel objected to this testimony on
the basis of, inter alia, relevance.
Sticks
(made of wheat, rice and spelt)
[18]
The Appellant also sold three varieties of
“sticks” that Mr. Walker described as being a wheat-based “cracker like
product” with a “savoury but bland” taste. One included regular wheat while the
other included spelt, being an ancient variety of wheat with lower gluten. The third
variety was rice sticks that included “unbleached wheat flour, canola oil,
puffed wild rice, salt and turmeric”.
[19]
According to Mr. Walker, the “sticks” were
rectangular shaped and were made from a dough mixture that was sliced and then fried.
All three varieties were manufactured in the US by a company called Old School
Snacks.
[20]
The sticks were delivered to customers in clear
plastic bags of three to ten pounds packaged in a cardboard box. A smaller 150 gram
re‑sealable clear plastic tub was prepared in the Appellant’s facilities
with a label indicating “Left Coast Bulk Foods”. Most of the sticks were sold
to stores for their bulk bin business and, according to Mr. Walker,
located near the trail mix or rice crackers. They were included in a product
list under “Organic Snacks”.
[21]
During cross‑examination, Mr. Walker acknowledged
that these products were marketed as “sticks”, eaten as-is without further
preparation, and sold as an organic or natural snack. In terms of texture, the
sticks were described as “crunchy” with a slightly salty taste (the turmeric
was used as a preservative or colour‑enhancer).
[22]
Rebecca Lawrence testified that the sticks were
deemed excluded because of their properties and labelling and specifically
because of their description as “sticks”. She described them as “hard, crunchy
and brittle” with a texture “like a pretzel” and opined that they would
typically be eaten by the handful or bowlful.
[23]
During cross‑examination, Ms. Lawrence
acknowledged that the main reason for finding that they were excluded was the
use of the word “sticks” but also admitted that the preparation of the sticks
was similar to a cracker that was zero‑rated.
The
Granolas
[24]
The Appellant manufactured a granola product
that was sold in bulk to customers for their bulk bins. Although the Minister
initially treated this product as being excluded and therefore subject to GST,
she later accepted the Appellant’s position that it was zero‑rated since
most customers sold it in the cereal section of their bulk bins.
[25]
At issue are two pre‑packaged granola
products distributed by the Appellant and manufactured by a local BC company
known as “Martin’s Marvellous Naturals”. They were sold in 360 gram
cardboard packages that were rectangular in shape (approximately three inches
square and eight inches high) and had a few openings so it was possible to view
the granola wrapped in a cellophane bag. The package carried the list of
ingredients, the usual nutritional information and various other information
(i.e. gluten free, no nuts, only seeds, etc.) as well as the notation
“Marvellous with vanilla yogurt…or snack on it right out of the box!”
[26]
According to Mr. Walker, these products
were “sold in every single store in the cereal section, with the cereals”.
Since they were produced locally, they did not consult a customs broker but
noted that the manufacturer sold it as being zero‑rated.
[27]
He testified that the granola was a “loose‑flowing
cereal” and that it was “next to impossible to snack on it”, meaning right out
of the box, since there were no chunks. It would typically be eaten with milk
or yogurt.
[28]
During cross‑examination, he explained
that while there was no specific marketing material describing the granola
product as a cereal, there were promotional lists promoting the brand “Martin’s
Marvellous Naturals” with a list of their various products including the
subject granola under the “cereal section”.
[29]
Rebecca Lawrence confirmed that since there was
no labelling for the bulk granola sold in the bulk bins, the Minister accepted
that it was zero‑rated since it was sold with other cereals. The
difficulty she had with the Martin’s Marvellous granola packages was the absence
of labelling or packaging to suggest it was being sold as a cereal. The words
“cereal” or “breakfast cereal” did not appear on the packaging.
[30]
However, during cross‑examination, when
asked whether she agreed that the pre-packaged granola was sold in the breakfast
aisle of a typical grocery store, she admitted that “Yes, it might be”.
III. The legislative scheme and case law
[31]
Turning to the statutory framework, subsection 165(1)
of the Act sets out the basic rule for the imposition of GST calculated at the
rate of 5%. However, subsection 165(3) then provides that the rate on
goods that are zero‑rated is 0%.
[32]
Subsection 123(1) provides that a “zero‑rated
supply” (“fourniture détaxée”) refers to goods that are described in Schedule VI
of the Act that includes ten basic categories of which one is “Basic
Groceries”:
Basic Groceries
1
Supplies of food or beverages for human
consumption (including sweetening agents, seasonings and other ingredients to
be mixed with or used in the preparation of such food or beverages), other
than supplies of
(a)
wine, spirits, beer, malt liquor or other
alcoholic beverages;
(b)
[Repealed, 1997, c. 10, s. 137]
(c)
carbonated beverages;
(d)
non-carbonated fruit juice beverages or fruit
flavoured beverages, other than milk-based beverages, that contain less than
25% by volume of
(i) a
natural fruit juice or combination of natural fruit juices, or
(ii) a
natural fruit juice or combination of natural fruit juices that have been
reconstituted into the original state,
or goods that,
when added to water, produce a beverage included in this paragraph;
(e)
candies, confectionery that may be classed as
candy, or any goods sold as candies, such as candy floss, chewing gum and
chocolate, whether naturally or artificially sweetened, and including fruits,
seeds, nuts and popcorn when they are coated or treated with candy, chocolate,
honey, molasses, sugar, syrup or artificial sweeteners;
(f)
chips, crisps, puffs, curls or sticks (such
as potato chips, corn chips, cheese puffs, potato sticks, bacon crisps and
cheese curls), other similar snack foods or popcorn and brittle pretzels, but
not including any product that is sold primarily as a breakfast cereal;
(g)
salted nuts or salted seeds;
(h)
granola products, but not including any
product that is sold primarily as a breakfast cereal;
(i)
snack mixtures that contain cereals, nuts,
seeds, dried fruit or any other edible product, but not including any mixture
that is sold primarily as a breakfast cereal;
(j)
ice lollies, juice bars, flavoured, coloured or
sweetened ice waters, or similar products, whether frozen or not;
(k)
ice cream, ice milk, sherbet, frozen yoghurt or
frozen pudding, non-dairy substitutes for any of the foregoing, or any product
that contains any of the foregoing, when packaged or sold in single servings;
(l)
fruit bars, rolls or drops or similar
fruit-based snack foods;
(m) cakes, muffins, pies, pastries, tarts, cookies, doughnuts, brownies,
croissants with sweetened filling or coating, or similar products where
(i) they are
prepackaged for sale to consumers in quantities of less than six items each of
which is a single serving, or
(ii) they are
not prepackaged for sale to consumers and are sold as single servings in
quantities of less than six,
but not
including bread products, such as bagels, English muffins, croissants or bread
rolls, without sweetened filling or coating;
(n)
beverages (other than unflavoured milk) or
pudding, including flavoured gelatine, mousse, flavoured whipped dessert
product or any other products similar to pudding, except
(i) when
prepared and prepackaged specially for consumption by babies,
(ii) when
sold in multiples, prepackaged by the manufacturer or producer, of single
servings, or
(iii) when the
cans, bottles or other primary containers in which the beverages or products
are sold contain a quantity exceeding a single serving;
(o)
food or beverages heated for consumption;
(o.1) salads not
canned or vacuum sealed;
(o.2) sandwiches
and similar products other than when frozen;
(o.3) platters of
cheese, cold cuts, fruit or vegetables and other arrangements of prepared food;
(o.4) beverages
dispensed at the place where they are sold;
(o.5) food or
beverages sold under a contract for, or in conjunction with, catering services;
(p)
food or beverages sold through a vending
machine;
(q)
food or beverages when sold at an establishment
at which all or substantially all of the sales of food or beverages are sales
of food or beverages included in any of paragraphs (a) to (p) except where
(i) the food
or beverage is sold in a form not suitable for immediate consumption, having
regard to the nature of the product, the quantity sold or its packaging, or
(ii) in the
case of a product described in paragraph (m),
(A)
the product is prepackaged for sale to consumers
in quantities of more than five items each of which is a single serving, or
(B)
the product is not prepackaged for sale to
consumers and is sold as single servings in quantities of more than five,
and is not sold
for consumption at the establishment; and
(r)
unbottled water, other than ice.
[My emphasis.]
[33]
The term “Basic Groceries” itself is not defined
in the Act except that a reading of the opening statement of section 1 of Part III
of Schedule VI suggests that:
i)
a food or beverage must be for human
consumption; and
ii)
this includes “sweetening agents, seasonings and
other ingredients to be mixed with or used in the preparation of such food or
beverages”.
[34]
Thus at the first stage of the analysis, the
question will be whether the product in question is a food or beverage for
human consumption. For example, some decisions have determined that certain products
were not food for human consumption: Vincent Chow Crane Martial Arts Ltd. v.
R., (1999) G.S.T.C. 67 (TCC General Proceedings) and Kandawala v. R.,
2004 TCC 659.
[35]
Once it has been established that a food or
beverage is intended for human consumption (including seasoning and ingredients
to be mixed with or used in the preparation of such food), the next
consideration is whether that item has been specifically excluded. In other
words, has Parliament, in its wisdom, excluded such food or beverage in
paragraphs 1(a) to (r) noted above.
[36]
I will add that a further analysis may be
required to determine whether the statutory exclusion contains an overriding
exception, such as, for example, paragraphs 1(f), (h) or (i) that exclude
certain food items “unless they are sold primarily as a breakfast cereal”.
There are other overriding exceptions.
[37]
In 1146491 Ontario Ltd. v. Her Majesty the
Queen, [2002] T.C.J. No. 248, (2002) G.S.T.C. 54, Justice C. Miller
had to determine whether a salad kit (that included lettuce and various
ingredients wrapped in zip‑locked bags) for the preparation of a Caesar salad
or Greek salad, was zero‑rated as basic groceries or excluded as a
prepared food. He provided the following overview (para. 12):
[12] The
Government made it clear from the early days of the Goods and Services Tax that
basic groceries were not to be included in the tax base. Rather than attempting
to define what is included in basic groceries, subsection 1(o.1) of Part III of
Schedule VI sets out a list of exceptions from basic groceries. In reviewing
the list, two themes become evident as to what type of foods are not to be
considered basic groceries: snacks or junk food, including anything that most
people would not find particularly healthy; foods intended to be eaten immediately
after opening or removing from the packaging (…) Specifically, looking at the
foods contained in subsections 1(o.1), (o.2), (o.3), (o.4) and (o.5), the
common thread can perhaps more aptly be described as a total convenience food.
These are foods that require no preparation - it is all done for you.”
[38]
Justice Miller concluded that the salad kits
qualified as basic groceries since they had to be taken home to be assembled
and that, while they were certainly more convenient than a mere head of lettuce,
they were not ready‑made.
[39]
In Kandawala v. Her Majesty the Queen,
2004 TCC 659, 2004 G.T.C. 483 (Tax Court of Canada (Informal Procedure)),
Justice G. Rip (as he then was) reiterated that the correct approach was to
consider whether the food product in question was a supply of food for human
consumption and if it was, to determine “whether it was excluded by any of the
listed exceptions” (para. 6). He then listed several factors to be considered
to determine whether a particular food item was excluded (para. 14):
a)
whether the item is specifically exempted by the
enumerated list of exceptions found in Part III of Schedule VI to the Act;
b)
whether the item is one which would reasonably
be considered a convenience food;
c)
whether the item is intended to be consumed
immediately after opening or removing the packaging;
d)
whether the item requires the consumer to
undertake additional preparation prior to consumption;
e)
whether the item is one that will be consumed
(as opposed to, for instance, something that will be applied externally);
f)
whether the item is one that has traditionally
been thought of as a basic food item;
g) whether the item bears the attributes one normally associates with
food (i.e. it is tasteful, its packaging displays a list of ingredients, it
assuages hunger, etc.).
[40]
In Aliments Koyo Inc. v. Her Majesty the
Queen, 2004 TCC 286, 2004 G.T.C. 252, (Tax Court of Canada (Informal
Procedure)), 2004 CCI 286, Justice Lamarre Proulx had to determine whether a “strawberry‑flavoured
soy beverage” was “a zero‑rated supply” (para. 2). The Appellant in that
case referred to the product as “soy milk” and described it as “a healthy
highly nutritious vegetable alternative to dairy milk” (para. 5) that was not
captured by the statutory exclusions that are directed at foods “without good
nutritional value” (para. 9). Justice Lamarre Proulx rejected this argument
finding that the soy milk was excluded by paragraph 1(d), adding that:
[22] I do not read
Part III of Schedule VI as requiring that a criterion of wholesomeness be met as
a condition for obtaining the zero-rating of a supply, and I have neither the
discretion nor the power to read such a criterion into Part III. Although a soy
beverage may be a healthful food product, if it comes within one of the
exceptions, it will not be a zero-rated supply.
[41]
Counsel for the Respondent also referred to a
number of decisions from the Canadian International Trade Tribunal (CITT),
including General Mills Canada Inc. v. Deputy Minister of National Revenue,
1998 CarswellNat 6116 which involved the classification of goods for purposes
of the Customs Act, R.S.C. 1985, c.1 (2nd Supp.). The issue was whether
a snack food called “fruit roll‑up” was captured by the classification of
“fruit, nuts and other edible parts of plants, otherwise prepared or preserved,
whether or not containing added sugar or other sweetening matter or spirit…” or
whether, as argued by the Respondent, it was “in the nature of confectionary”.
The Tribunal concluded that (para. 17):
[17] (…) The evidence indicates that…[t]he
two major ingredients by weight are the malto-dextrin and the sugar. These
ingredients allow the goods in issue to be more like a confectionery than a
purée and, when combined with the purée, create the end product, which, in the
Tribunal’s view, is a product marketed and sold as a confectionery, as
reflected in their packaging and their description as cherry snacks made
with real fruit. Thus, in the Tribunal’s view, the evidence establishes that
the goods in issue are goods put up in the form of a sugar confectionary
(…).
[My emphasis.]
[42]
The Respondent also referred to the CITT
decision of Pfizer Canada Inc. v. Commissioner, CCRA, [2003] C.I.T.T.
No. 86, 8 T.T.R. (2d) 427, where the Tribunal was asked to determine
whether “Halls cough drops” were a medicament or a confectionery. It concluded
that based on “their marketing, packaging and use, which is for medicinal
purposes … the goods in issue do not fall within the meaning of
“confectionery” …”
[43]
The Respondent also raised the issue of
statutory interpretation for taxing statutes, citing Canada Trustco Mortgage
Co. v. Canada, 2005 SCC 54, [2005] S.C.J. 56:
11. (…) There is no doubt today that
all statutes, including the Income Tax Act, must be interpreted in a
textual, contextual and purposive way. However, the particularity and detail
of many tax provisions have often led to an emphasis on textual interpretation.
Where Parliament has specified precisely what conditions must be satisfied to
achieve a particular result, it is reasonable to assume that Parliament
intended that taxpayers would rely on such provisions to achieve the result
they prescribe.
(…)
13. The Income Tax Act remains an
instrument dominated by explicit provisions dictating specific consequences,
inviting a largely textual interpretation (…)
[My emphasis.]
[44]
Both parties submitted a number of definitions
of food products from various sources. In 1146491 Ontario Ltd., supra,
Justice C. Miller rejected various dictionary definitions of food products in
favour of “the common understanding of a word” (para. 10):
10. There was agreement between
counsel that the correct approach to this matter of interpretation can be found
in the decision of Shaklee Canada Inc. v. Minister of National Revenue
(1995), 191 N.R. 227 (Fed C.A.), which suggests it is appropriate to look at
the common understanding of a word. Having agreed on this, both counsel went on
to provide a number of dictionary definitions of salad. Frankly, these are of
little or no assistance (…) What I will do however is determine if the Market Fresh
salad kits are basic groceries or are exceptions to basic groceries.
[45]
Finally, as noted in Aliments Koyo Inc., supra,
“According to the rules of statutory interpretation, a word must be taken in
its ordinary meaning unless that word is given a specific meaning in the
statute”. (para. 24)
IV. Analysis
[46]
As noted above, there was no question that the
subject products were food for human consumption and the only issue before the
Court was whether they were excluded by section 1 of Part III of Schedule VI
of the Act.
[47]
In considering this matter, it is important to
keep in mind that while the Act is a general taxing statute the purpose of
which is to raise government revenues, it also incorporates important policy
objectives, one of which is to ensure that basic groceries are not subject to
GST. It does so by providing that they are zero‑rated.
[48]
To the extent that the exclusions listed in
section 1 of Part III of Schedule VI serve to exclude certain food
and beverages for human consumption, I am of the view that these provisions
should be narrowly construed. To take a broad interpretation of such exclusions
would defeat the policy objective noted above.
[49]
As indicated by Chief Justice Bowman (as he then
was) in United Parcel Service Canada Ltd. v. The Queen, 2006 TCC 450, at
paragraph 23:
23. In
interpreting any legislation, including the GST provisions as well as the Customs
Act, it is important to follow an approach that, where possible,
achieves a sensible, practical and common sense result (Maritime Life
Assurance Co. v. The Queen, [1999] G.S.T.C. 1 (T.C.C.), aff’d [2000]
G.S.T.C. 89 (F.C.A.)) and one that is consonant with the scheme of the Act
(Highway Sawmills Ltd. v. M.N.R., 66 DTC 5116, per Cartwright J.)
[My emphasis.]
[50]
I will add that, since food and beverages are marketed
and sold in an infinite variety of formats, it will be necessary to consider
various indicia including packaging, labelling and product placement to
determine whether such food or beverages can properly be characterized as basic
groceries or whether they have been specifically listed or described in the
statutory exclusions.
Crystallized
ginger
[51]
The Respondent takes the position that the
crystallized ginger distributed by the Appellant is excluded by section 1(e)
of the Act in that it is a “confectionery that may be classed as candy”. As
indicated above, a number of dictionary definitions were put before the Court
including “confectionery”, “comfit” and “sweetmeats” and it was argued that if
the Court concluded that it was a confectionery, as it should, it did not
matter that it was sold as a dried fruit or baking ingredient, since it was excluded.
It was not possible that it be both.
[52]
The Respondent’s witness acknowledged that she
had no training in food nutrition or consumer behaviour but testified that she
had on occasion eaten crystallized ginger as a snack suggesting that it was a
convenience food. She also indicated that she had recently purchased
crystallized ginger at a local confectioner. I find that her testimony on this
issue has limited probative value given her lack of expertise of the subject
matter. Moreover, there was no evidence as to whether the crystallized ginger
purchased by her was of the candied variety or not. It was established, in any
event, that it was not the Appellant’s product.
[53]
The Appellant argued that its crystallized
ginger was sold as either a “baking ingredient” or in the category of “organic
dried fruit” (although it was in fact a root). While acknowledging that ginger
could indeed be “candied”, Mr. Walker indicated that the sugar content
listed on the packaging label for its crystallized ginger included naturally
occurring sugar with a light sprinkling of sugar. The first ingredient was
still ginger.
[54]
The Appellant’s evidence was that it had never
sold this product as a candy or confectionery nor seen it sold as such by its
customers in their bulk bins.
[55]
Taking a textual approach to the interpretation
of section 1(e) of the Act, I find that the opening words “candies,
confectionery that may be classed as candy, or any goods sold as candies”,
clearly suggest that it is primarily intended to exclude food that is commonly
viewed and sold as candy where the first ingredient is in fact sugar or some
other natural or artificial sweetener.
[56]
As noted above, the Court must look at the
common understanding of a word. I find that an average consumer would agree
that a variety of dried fruit have naturally occurring sugar and can be eaten
as a snack and yet cannot be compared to such items as candy apple or “fruit
roll‑up” (as considered in General Mills Canada, supra,
where malto‑dextrin and sugar were found to be the two major
ingredients). While the ginger root is not a dried fruit, I accept the
Appellant’s position that it is similar to dried fruit and that it was properly
included in a list of items under the heading “Organic dried fruit”, the
primary use of which was as a baking ingredient.
[57]
I will add that Counsel for the Respondent
acknowledged that chocolate chips and baker’s chocolate are not captured by
section 1(e) as a result of a CRA administrative position. I find that it is
likely that most consumers would be surprised to learn that products sold in
the baking section of a typical grocery store, could be subject to GST because
they can be classified as candy or confectionery. I would have found that these
items were simply baking ingredients and therefore zero‑rated as basic
groceries.
[58]
Although there is little doubt that dried fruit,
including the ginger root, can be candied and sold by a confectioner or even
purchased and eaten as a snack, I am satisfied on a balance of probabilities
that the crystallized ginger sold by the Appellant was neither a candy nor a
confectionery for purposes of the exclusion set out in section 1(e). It
was sold as a baking ingredient similar to a dried fruit. On that basis, I
conclude that the Appellant’s crystallized ginger is zero‑rated for
purposes of the Act.
Sticks
[59]
As noted above, the sticks sold by the Appellant
were manufactured by a company called “Old School Snacks” and the evidence
clearly established that they were sold as snacks and eaten as‑is without
further preparation.
[60]
The Respondent argues that they fall within
section 1(f) of the Act as being “chips, crisps, curls or sticks” and
“other similar snack foods”. The Respondent maintains that they are basically a
convenience food and that nothing turns on their characterization as healthy
snacks.
[61]
The Appellant argues that the sticks are a wheat‑based
and cracker‑like product sold as an “organic snack”. The implication is
that they are basically a bread product that is both wholesome and healthy. The
significance of this description is that while section 1(m) excludes
“cakes, muffins, pies, pastries (…)” from basic groceries, it then provides an
exemption for “bread products”. In other words, bread products are considered
basic groceries and that would likely include crackers or even bakery‑style
bread sticks. The Respondent’s witness admitted that the sticks in question were
made like crackers that are zero‑rated.
[62]
The difficulty of course is that the Appellant’s
sticks were not sold as crackers or “bread sticks” or even as a bread product.
Moreover, although the Appellant’s witness explained that were made from “a
dough mixture”, he also stated that the pieces were then fried. I think most consumers
would agree that bread products including crackers are in fact oven‑baked
and not fried.
[63]
In the end, I find that nothing turns on the
fact that the sticks were marketed as a healthy organic snack. On balance, I
find that the sticks are a convenience food captured by the use of the words
“other similar snack foods” and more specifically the use of the word “sticks”
in section 1(f) of the Act.
The Granolas
[64]
As noted above, while the Minister initially
treated all the Appellant’s granola products as being excluded, it later
accepted that the granola sold for the bulk bins was zero‑rated.
[65]
The Respondent’s witness indicated that CRA had
given the Appellant the benefit of the doubt since the granola was neither
labelled nor packaged. I find it is likely that she also logically accepted the
Appellant’s position that all its retail customers included the granola in the
cereal section of their bulk bins.
[66]
At issue are the pre-packaged granola products
manufactured by “Martin’s Marvellous Naturals”. The difficulty with this
product is that the irregular-shaped package does not conform to what most
consumers would view as a typical cereal box. It is also unusual in that the
package has several eye‑shaped openings so that consumers can view the
product and finally, in addition to the usual listing of ingredients and
mandatory nutritional information, it has the notation “Marvellous with vanilla
yogurt…or snack on it right out of the box!” It is apparent that the
manufacturer intended to produce a package that would differentiate it in the
market place from other more conventional cereal packages that are typically
labelled “breakfast cereal”.
[67]
According to the Respondent, the labelling and
packaging lead to the conclusion that it was not “sold primarily as a breakfast
cereal” as set out in section 1(h) of the Act and that it was sold as a snack.
Moreover, the Respondent argued that the product was included on a product or
price list under the heading “cereals and granolas”, suggesting that it could
be one or the other.
[68]
The Appellant argued that the Martin’s Marvellous
product was sold by its retail customers in the cereal section of the store to
be eaten as a cereal. The Appellant’s witness maintained that even if the
packaging suggested it could be eaten “right out of the box”, it was not really
possible to do so given the loose consistency of the product. In any event, I am
of the view that most consumers would agree that many types of breakfast
cereals can be snacked “right out of the box” and the suggestion on the packaging
that you can do so, does not change a breakfast cereal into a snack item or
convenience food.
[69]
While both counsel provided a definition of
“breakfast cereal”, I find that the common understanding of that expression is
a cereal or similar product that is eaten with milk or hot water (as in
porridge) but also with yogurt.
[70]
While I agree that packaging and labelling will
generally carry the day, I find that product placement within the grocery store
is equally determinative. The Appellant’s evidence was that its customers sold
the product in question in the cereal aisle of the grocery store and the
Respondent’s witness did not dispute this.
[71]
On the basis of the foregoing, I conclude that
the Martin’s Marvellous granola products were sold primarily as breakfast
cereals. They are therefore zero‑rated by virtue of section 1(h) of
the Act.
V. Conclusion
[72]
To conclude, the crystallized ginger and granola
products are zero-rated and therefore not subject to GST while the sticks are
excluded and thus taxable. I find that this conclusion is consistent with the
authorities and underscores the importance of ensuring that the “Government’s
Policy of exempting basic groceries from tax is implemented sensibly and
appropriately.” (1146491 Ontario Ltd., supra, at para. 11)
[73]
The Appellant is entitled to costs in accordance
with the applicable Tariff reflecting its success on two of the three products.
Alternatively, the parties may choose to apportion costs pro-rata to the
volume of sales of the subject products during the reporting periods. If the
parties are unable to agree, written submissions shall be submitted to the
Court within 60 days from the date hereof.
Signed at Ottawa, Canada, this 12th day of April 2017.
“Guy Smith”
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