Johnson & Johnson Inc. v. D.MNR, 88 DTC 6235, [1988] 2CTC 1 (FCTD)

MacGuigan, J.:—This is an appeal, by leave, from the decision of the Tariff Board ("the Board”) on July 15, 1986, that STIM-U-DENT interdental stimulators are subject to and not exempt from the sales tax imposed under subsection 27(1) of the Excise Tax Act ("the Act").

Section 60 of the former Act, R.S.C. 1970, c. E-13, which provided for appeals under that Act, was repealed, along with other provisions relating to appeals, by S.C. 1987, c. 9. In its transitional provisions, the amended Act provides in subsection 55(2) as follows:

(2) Every application under any of sections 44 to 49.01 of the old law that has been rejected in whole or in part, or approved, by the Minister before the commencement day shall be dealt with under and in conformity with the procedures prescribed in or pursuant to the former Act.

Commencement day was May 1, 1986. When the application for leave to appeal to this Court was granted on July 15, 1986, final decision on the applicable law was expressly reserved to the hearing panel. Since the Minister's decision to reject the appellant's claim for sales tax remittance in relation to STIM-U-DENT interdental stimulators was made on October 8, 1985, well before the commencement day, by a departmental officer to whom the relevant powers of the Minister of National Revenue had been delegated by order-in-council (SOR/84-806), both parties to this appeal are in agreement that this Court has jurisdiction to entertain this appeal under the leave-to-appeal order granted, and I would so hold.

The sales tax is imposed by virtue of subsection 27(1) of the Act on the sale price of all goods, but subsection 29(1) provides that it does not apply to the sale or importation of goods mentioned in Schedule III. As the relevant time section 1 of Part VIII provided the following exemption for health goods: [1]

Schedule III

Part VIII

HEALTH

1. Any material, substance, mixture, compound or preparation, of whatever composition or in whatever form, including materials for use exclusively in the manufacture thereof, sold or represented for use in the diagnosis, treatment, mitigation or prevention of a disease, disorder, abnormal physical state, or the symptoms thereof, in humans or animals or for restoring, correcting or modifying organic functions in humans or animals, but not including cosmetics.

Cosmetics is defined by subsection 2(1) as follows:

2. (1) In this Act

"cosmetics" means goods, whether possessing therapeutic or prophylactic properties or not, commonly or commercially known as toilet articles, preparations or cosmetics, that are intended for use or application for toilet purposes, or for use in connection with care of the human body, including the hair, nails, eyes, teeth or any other part or parts thereof, whether for cleansing, deodorizing, beautifying, preserving or restoring, and includes toilet soaps, shaving soaps and shaving creams, skin creams and lotions, shampoos, mouth washes, oral rinses, toothpastes, tooth powders, denture creams and adhesives, antiseptics, bleaches, depilatories, perfumes, scents and similar preparations;

The majority of the Board described the goods in question as follows (Appeal Book, v. I, p. 147):

The goods in issue are STIM-U-DENT sticks that are manufactured of basswood in sets of twenty-five sticks held together by a thin layer of the wood, each of which can be detached easily from the set for separate and distinct use. Each stick is triangular in cross-section, approximately five centimetres long and double tapered at one end. The basswood has been slightly coloured and flavoured.

The Board majority went on to hold (Appeal Book, v. I, p. 152):

The goods are marketed through the dental profession as a means of preventing and treating gingivitis and on the package it states, "helps fight gum disease". The goods have been the subject of published research projects that establish that the goods are effective in mitigating or eliminating gingivitis, a recognized common disease of the gums. Further, at least one university clinic is using the goods for this purpose. Thus the Board finds that the goods meet the test of being sold or represented for use in the treatment, mitigation or prevention of a disease.

Nevertheless, the majority of the Board held on the basis of a second test that the goods were not exempt “health goods” (Appeal Book, v. I, pp. 153-4):

The final question is whether the goods are a material or substance, or an article as argued by the respondent. .

Schedule III, Part VII] of the Excise Tax Act refers specifically to both articles and material. Section 1 refers to:

"any material, substance, mixture, compound or preparation, of whatever composition or in whatever form, including materials for use exclusively in the manufacture thereof. . .".

In contrast, section 2 refers to:

"Articles and materials for the sole use . . ."

clearly differentiating the two. The Schedule deals with articles and materials as separate and distinct things, and articles are not provided for in section 1.

In Armalite Co. Ltd. et al. v. D.M.N.R. for Customs and Excise (1963), 3 T.B.R. 192, the Board accepted the argument that materials in its ordinary meaning refers to matters or substances considered as such, for example, metal, cloth, powders, pastes, etc., and not to things constructed from such materials into articles of a specific design, size and shape.

The Board's decision was upheld by The Exchequer Court of Canada in Her Majesty The Queen v. W.D. Armstrong & Co. Ltd., on March 20, 1970 (1970), 5 T.B.R. 1 and has been followed since in a number of cases.

A STIM-U-DENT stick is a skillfully and precisely manufactured device that functions because its design, size and shape permits it to fit into the interdental spaces. The instructional illustration on the package shows specifically how, by its shape, the goods are to be used. Because of the very precise design, there is a correct end and a correct side up. If the STIM-U-DENT stick was used end for end or upside down it would not be particularly effective.

The design of an article includes not only specifying the size and shape, but also specifying the weight, strength, hardness and rigidity of the material, to be used in the article’s manufacture in order to achieve the desired end results. The original STIM-U-DENTS were designed to be made of balsa wood. Subsequently, because of a shortage and rising cost of balsa wood, the manufacturer searched for an alternative material of suitable characteristics and chose basswood; not any basswood, but basswood with very specific grain characteristics.

As to whether a STIM-U-DENT stick is an article before it is detached from the set of twenty-five sticks or is a part of a block of wood, the block of wood is transformed by the milling process into twenty-five clearly identifiable STIM- U-DENT sticks of a very precise size and shape, which separate cleanly and easily. The cut between the individual STIM-U-DENT sticks has been deliberately left uncompleted so as to keep the set of twenty-five together as a convenience, much as postage stamps are produced in perforated sheets. The STIM-U-DENT sticks could be sold in a package of individual items and this would not, in any way, affect their effectiveness.

The Board concludes that the goods in issue are articles, manufactured of wood, the essential function of which derives from their design, size and shape, and therefore they do not fall within the excluding section 1, Part VIII, Schedule III of the Act.

Board member Beauchamp dissented from the majority view as follows (Appeal Book, v. I, pp. 155-7):

Where I respectfully part company with my colleague is in the exclusion of the goods from the tax exemption for health products on the grounds that the goods are an article. There is no argument that the goods as imported is a block of wood which has been ingeniously cut or carved (and slightly coloured to show up blood from gums seized of early gingivitis) so that a piece can be broken off with minimal effort to provide a stick precisely fashioned to a particular design and shape. This shape enables the stick, when moistened to relative softness, to reach the gums in the interdental areas which are subject to the disorder and cannot be reached properly by either toothbrush or dental floss, and there, stimulate the affected dental area effectively without the danger of wood splinters breaking the gum's fleshy surface, as in the case of toothpicks. . . .

The material in my view is more important than the mere, if relatively, precise design of the stick which could be said to resemble in a superficial way an ordinary toothpick, which is a toilet article for use to remove debris after meals. . . .

For all practical purposes there is no difference whether the sticks are separate or still part of a block. The material is the specific benefit and the design and shape are the modes of delivery for use. Medications that come in liquid or pill form are clearly material and preparations for use in the size and quantities required which are left to the user to administer.

The goods are not so different in essence from such materials and preparations to justify a summary finding that the design is more important than the material and that the semi-final state of the sticks while still part of the block justify considering the imported block of material as tantamount to the final and eventual article, the STIM-U-DENT stick, and therefore excluded from the exempting provision.

It is respectfully submitted that in borderline cases on whether goods are material or a preparation for health purposes or to be excluded from exemption as being an article, the clear, in this case, overwhelming, evidence that the goods are effective for health purposes at least in substantial part because of the material used would incline to the conclusion that such goods be exempted from duty [sic] as positive material providing health benefit to the public which is what the legislator intended.

It should be noted that the provision describing such material . . . etc. has discounted considerations of design or shape with the disclaimer, "of whatever composition or in whatever form".

I would find the goods accordingly to be material and a preparation for the health purposes intended by the exempting provision and accordingly to be exempt from the consumption of sales tax.

The respondent argued that the Board majority made no error in law and that the difference between the majority and minority views is merely a different way of looking at the facts, well within the discretion of an administrative tribunal. However, in the view I take of the matter the Board majority erred in law in adopting out of context the definition of "materials" found in its previous decision in Armalite Co. Ltd. et al. v. D.M.N.R. for Customs and Excise (1963), 3 T.B.R. 192 at 193, as follows (approved in result by Walsh, J. in The Queen v. W.D. Armstrong & Co. Ltd. (1970), 5 T.B.R. 1):

Counsel for the respondent argued that the word "materials" in its ordinary meaning refers to matter or substances considered as such, for example, metal, cloth, powders, pastes, etc., and not to things constructed from such materials into articles of a specific design, size and shape.

The Board accepts the argument of counsel for the respondent. Schedule II] mentions "articles and materials" in several places and “materials” only in others indicating that for the purposes of the schedule "materials" does not include "articles". In the Board's opinion the goods in issue are not "materials" within the meaning of the exempting provision.

[Emphasis added. I]

It may well have been correct for the Board in the Armalite case, in interpreting the word "materials" elsewhere in Schedule III, to adopt its ordinary meaning (although in a related case this Court refused to adopt the Board's reasoning as to the meaning of the word "materials" in another part of the schedule: Star Shipping (Canada) Ltd. v. Deputy Minister of National Revenue for Customs and Excise (1973), 5 T.B.R. 382). But one has only to read section 1 to realize that, at least for purposes of this section of the Schedule, there is an internal definition. “Material” is linked with "substance, mixture, compound or preparation." It is specified to include materials "of whatever composition or in whatever form" (in the French version “quelle que soit leur composition ou leur forme”). In other words, as long as a good retains its nature as a material it must still be considered a material for purposes of the exemption in section 1. In the case at bar the material is merely “slightly coloured and flavoured" and specifically shaped. Even if "the essential function” of the goods "derives from their design, size and shape," as the majority found, they are still exempt if they retain their nature as wood in another form or composition, a nature which the Board majority impliedly [implicitly] recognized that they retained.

Moreover, it is clear from the language of the section that health goods as thus broadly defined are being distinguished from cosmetics, which are not exempt from tax. It is cosmetics rather than articles which are denied the health goods exemption.

This is nowhere clearer than in the Department of National Revenue's own list of tax-exempt health goods, compiled as of January, 1985 (Appeal Book, v. Ill, pp. 379-396). Included in the exempt list are articulation paper (generic), bandaging materials (generic), cervical caps (generic), tampons (generic), and even dental floss (generic), all of them processed forms of materials, and in my view more extensively processed than the wood in STIM-U-DENT interdental stimulators. Nevertheless, all were considered exempt because they were still materials and were not for cosmetic use. Such a departmental interpretation is not, of course, determinative, but it is entitled to weight and can be an important factor in case of doubt about the meaning of legislation: Nowegijick v. The Queen, [1983] C.T.C. 20 at 24; 83 D.T.C. 5041 at 5044.

It must be admitted that ultimately there must be some implied limitation on the extension of the word "material" because some goods must fail to meet the test of a “material, substance, mixture, compound or preparation, of whatever composition or in whatever form”, but if one is to use the word "article" as the other pole, as the word usage of much of the schedule would suggest, for purposes of section 1 of Part VIII its meaning must be understood not in its ordinary sense but as subject to the very broad meaning given to "material" by the express words of that section.

I would therefore allow the appeal, set aside the decision of the Board, and declare that STIM-U-DENT interdental stimulators are exempt from tax under the Excise Tax Act by virtue of the provisions of section 1 of part VIII of Schedule III to the Act, as it read prior to July 1, 1985.