Wenger's Ltd. v. MNR, 92 DTC 2132, [1992] 2 CTC 2479 (TCC)

Rip, T.C.C.J.:—Wenger's Limited ("Wenger's") and Dorso Optics Ltd. (” Dorso"), the appellants, have appealed assessments of tax, dated March 23, 1983 and February 4, 1982, respectively, pursuant to subsection 215(6) [1] of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The Minister of National Revenue ("Minister"), the respondent, assessed the appellants on the basis each failed to deduct and remit tax on interest paid or credited to Vsesojuznoe Objedinenie Mashpriborintorg ("Mashpriborintorg") and Vseojuznoe Objedinenie Technointorg ("Technointorg"), non-residents of Canada, in accordance with paragraph 212(1)(b) [2] and subsection 215(1) [3] of the Act which are found in Part XIII of the Act. Wenger's has been assessed for failures to deduct and remit tax during 1977 to 1982 inclusive; Dorso has been assessed for failures to deduct and remit tax in 1977, 1978 and 1979.

The appeals of Wenger's and Dorso were heard on common evidence.

Background

At all relevant times Wenger's and Dorso were, and continue to be, residents of Canada. Wenger's and Dorso are affiliated corporations, having similar shareholders.

Wenger's was a manufacturer and importer of various products, including a line of wrist watches and watch movements from the Union of Soviet Socialist Republics (“Soviet Union”). The Soviet Union exporter was Mashpriborintorg. Wenger's imported assembled watches consisting of the movement, case and crown; Wenger's would perform quality control checks on the watches, then attach a strap, and sell to Canadian retailers.

At the same time Dorso imported binoculars and cameras from Mashpriborintorg for sale in Canada.

Mashpriborintorg at all relevant times was resident of the Soviet Union. Mr. Meyer Wenger CWenger"), president of Wenger's, testified that Mashpriborintorg was a trade organization that represented the watch, camera, optical, radio and television manufacturing and other industries in the Soviet Union and was part of the Soviet Trade Ministry ("Ministry"). However it is not known whether Mashpriborintorg was simply a branch of the Ministry or a person distinct from the Ministry, although controlled by it. There was no evidence as to the meaning of the words vsesojuznoe Objedinenie" and whether these words had some legal connotation similar to the words "incorporated", "corporation" and limited”, although Wenger said he believed they may be the equivalent of" limited”.

Products for export were sold through Mashpriborintorg. All details, including banking, were arranged through Mashpriborintorg. The foreign purchaser did not deal with individual factories. Mashpriborintorg's offices were in the building of Foreign Trade in Moscow. At all meetings between Wenger and Mashpriborintorg officials a representative of the Soviet Trade Ministry was also present. Any deviation from the terms of an agreement required the consent of the Ministry. It was the Ministry which fixed the quota of product for each of the foreign and domestic markets.

Wenger testified that eventually Mashpriborintorg became too unwieldy and in 1978 was divided up into other organizations along product lines. The appellants then began dealing with Technointorg which inherited the watch, camera and binocular lines. Negotiations between Wenger's and Dorso on one hand and Technointorg on the other carried on in the same manner as with Mashpriborintorg. [4]

Wenger recalled Wenger's first got involved with the Soviets in the early 1960s when Wenger's was having pricing problems in dealing with French, German and Swiss watch manufacturers.

Wenger went to Moscow in 1964 and after several false starts met an official of Mashpriborintorg who had authority to deal with him. A deal was struck and a contract, dated October 1965, effective January 1, 1966, was executed by which Wenger's guaranteed to purchase $25,000 worth of watches during the first year of the contract, $50,000 the second year and $75,000 the third year. If, at the end of three years, Wenger's could purchase $150,000 of watches and parts the contract would be extended for a further ten years; if Wenger could not purchase $150,000 of product, Mashpriborintorg would have the option to continue or not. The contract described seven different types of wrist watches that would be purchased and sold. Wenger's was to have exclusive distribution rights for Canada for all watches produced in the Soviet Union, said Wenger.

The contract of October, 1965 provided that the quantity of watches and watch movements to be purchased during the ten year extension would "be agreed upon additionally in the future". The contract was eventually extended.

Wenger described his relations with senior officials of Mashpriborintorg and indeed, the Ministry of Foreign Trade, as close. Deals were closed on a handshake and the contracts followed later. The Deputy Minister of Foreign Trade had told Wenger that if he had any problems with Mashpriborintorg, to get in touch with him personally.

Interest or surcharge

Facts

As the relationship with Mashpriborintorg evolved different “ situations” were created. The contract of October, 1965 appears to be a master agreement setting out the general terms between the parties and the types of product to be sold and prices of product. It does not specify terms of payment and assumes additional contracts for specific product purchases. As orders were made, terms of payment were addressed. Copies of contracts for specific product, dated October 21, 1971, January 1978, April 25, 1980 between Mashpriborintorg and Wenger's and contracts dated December 6, 1974 and April 29, 1975, between Mashpriborintorg and Dorso were produced by the appellants as typical examples of orders. A copy of a" Protocol” of negotiations between Mashpriborintorg and Wenger's, dated October 25, 1974, was also produced; this document, amongst other things, amended an agreement of April 18, 1972 and was effective for an eight-year period commencing November 1, 1974.

Wenger testified that initially the terms of payment were six months after delivery and included, in his words, "a surcharge” of three per cent. Wenger stated that the Soviets "said the three per cent was interest but to us (it) was a surcharge”. When the Soviets shipped merchandise to Wenger's and Dorso, the actual prices were quoted on the invoice. The purported interest or surcharge was not set out on the invoice. Shipping charges were included in the cost of the merchandise. Mashpriborintorg made no additional charge for shipping, Wenger said. However, Wenger added, the Soviets "complained if they gave us terms they have to buy the merchandise and lay out money . . . They wanted us to pay a surcharge for them laying out the money".

Wenger explained each of Wenger's and Dorso calculated its total cost of purchased product to include the invoice price, any shipping charges, duty and sales tax plus the surcharge. Also included in determining the cost of product were: quality control costs, strap or bracelet costs, costs of inspection for visible damage, packaging and ticketing costs, advertising costs (which were amortized "across the board”), salesmen's commissions, costs of gifts to people selling the watches, costs of guaranteed sales plans (i.e., guaranteeing stores could return a proportion of unsold watches) and overhead costs.

Merchandise was acquired "on consignment plus terms,” said Wenger, and "at final payment title (went) to us”. Generally, whatever terms applied to Wenger's also applied to Dorso. Terms of payment varied over the years as did the period of time goods were held in consignment.

Wenger explained that merchandise was first cleared throughCanada Customs and then placed in a bonded warehouse on Wenger's and Dorso's premises; at that point, he said, the merchandise was considered to be on consignment. Interest for the "surcharge" would be calculated once the merchandise was taken out of consignment, not on its arrival in Canada.

The contract dated October 21, 1971, between Wenger's and Mashpriborintorg sets out the quantity of product to be purchased. The purchase price is not set out but provides that:

Payment against the present contract is to be effected in U.S. Dollars against Bill of Exchange on 360 days after presentation by the seller to the Royal Bank of Canada of the necessary shipping documents. The Buyer is to pay three per cent annum interest for the granted credit. [5]

The three per cent is what Wenger describes as the "surcharge".

Wenger testified that earlier on in their relationship Mashpriborintorg had extended terms of payment to anywhere from six to 18 months after consignment.

The protocol of October 25, 1974, amended a contract dated April 18, 1972, which was to be effective for eight years. The protocol provided that:

The period of consignation is to be three months. The goods are to be fully paid not later than 24 months from the date of withdrawal of the goods from the consignment warehouse plus 6.25 per cent interest per annum.

Wenger testified the interest rate was increased to 6.25 per cent because the term of payment was increased from less than a year to 24 months. Apparently Mashpriborintorg paid the Soviet factories for watches and parts immediately but since it would not receive payments from the appellants for 24 months Mashpriborintorg added a "surcharge".

The protocol of October 25, 1974 also provided for Wenger's to provide free to Mashpriborintorg 1,400 square feet of showroom space in a building it was constructing. Wenger's did not have sufficient funds to construct the building and asked Mashpriborintorg for help. Mashpriborintorg was accommodating. Later in his testimony, Wenger said the 24 months given to Wenger's to pay for product was in response to Wenger's request for help to improve its cash flow and put up the building. In return, said Wenger, Mashpriborintorg received the right to the 1,400 square feet of showroom.

The January 1978 contract for sale of wrist watches and movements provided that the "Total amount of the present contract is $1,575,431 U.S. Dollars . . . .” Payment terms were subject to the protocol of October 25, 1974.

The contract of April 25, 1980 included a sale price for product and also provided:

The period of consignation is to be three months from the date of shipment. The goods are to be fully paid not later than 12 months from the date of withdrawal of the goods from the consignment warehouse plus three per cent interest per annum . . . The goods are considered seller’s property up to the moment they are fully paid for by buyer.

The agreement of December 6, 1974 between Dorso and Mashpriborintorg appears to be a master agreement setting out terms of payment and other procedures for the sale and purchase of product for one year, subject to renewal for an additional year. This agreement provided that goods ordered were to be:

. . . fully paid by the Buyer not later than 24 months from the date of withdrawal of the goods from the consignment warehouse plus 6.25 per cent interest per annum. . .

and that the goods were considered Mashpriborintorg's property “up to the moment they are fully paid" by Dorso. The agreement further required the bank draft to include the value of the goods withdrawn from consignment during a particular month” plus 6.25 per cent interest per annum for the period from the withdrawal (from consignment) up to the date of payment”. The consignment period was three months.

The contract of April 29, 1975 was for products to be purchased by Dorso in various quantities during the years 1976 to 1982 inclusive. The parties agreed that:

Payment against the present contract is to be effected in U.S. dollars on the 720th day of the date of acceptance by the buyer of the seller's bill of exchange submitted by the seller to the Royal Bank of Canada, Montreal, through the Bank for Foreign Trade of the U.S.S.R. with the necessary shipping documents. The buyer is to pay to the seller 6.25 per cent interest per annum for this credit.

Wenger's and Dorso soon learned Soviet quality control was poor, if it existed at all. Wenger stated, not one of the self-winding watches worked; they were "dead in the stockroom". Wenger's was able to sell the watches solely because of their low prices.

Wenger's, according to Wenger, demanded the Soviet send technicians to Montreal to check the watches. Wenger's paid their expenses in Canada; Mashpriborintorg paid their salaries. It took several months of checking before Wenger's could ship the merchandise to retailers.

Lead time between ordering the watches from Mashpriborintorg and their shipment was erratic; deliveries would be received anywhere from six to eighteen months after the order. (The Swiss and Japanese delivered within two to three months of the order.) As a result a large inventory had to be carried since, in Wenger's view, there was no way to forecast “when additional merchandise would arrive". Also an order once made, could not be cancelled. Wenger also testified the increase of payment terms from 6 to 12 months and then to 24 months was necessary because there was no way we could finance a situation where we have to buy for 12 to 18 months before we could ship to customers”.

In 1981 Wenger's was experiencing cash flow problems due to the poor economic situation at that time and payments to Technointorg on various contracts coming due at about the same time. Wenger's asked Technointorg for extended terms of payment and the Soviets agreed to extend payment on several orders aggregating over U.S. $1,000,000. One half of each payment was payable when due and the other half was extended by six months. No interest was Charged on the extensions.

Wenger testified neither appellant ever paid Mashpriborintorg prior to the due date because there was“ no reason for us to pay earlier". He explained the “whole concept of terms was to enable us to do quality control, sell the merchandise and get payment. . . then we would pay". [6]

Payments

Arthur Fineberg ("Fineberg"), a chartered accountant and Vice President, Finance of Wenger's also testified for the appellants corroborating much of Wenger's evidence, clarifying some, and adding his own. He started working for Wenger's at the end of 1977 and his responsibilities included banking, administration, computer systems and general control of the appellants' financial systems. He was involved in the transactions between the appellants and Mashpriborintorg and made payments to the Soviet exporters.

He explained that merchandise from the Soviet Union would arrive by parcel post at the appellants on a regular basis during the year but invoices were mailed to the appellants separate from the shipments. The invoice would indicate the purchase price less a 1 /2 per cent discount. The purported interest or surcharge was not indicated on any invoice for product; the interest was provided for in the master agreement between Mashpriborintorg and the appellants. (Copies of invoices produced by the appellants confirm Fineberg's evidence.) Fineberg would compare the invoice to the shipment after the merchandise cleared customs and then record the transaction in accounting records as purchases. At the end of each month a consignment declaration would be prepared.

Fineberg stated that the appellants would type up a bank draft when goods were taken out of consignment and forward the draft to the Royal Bank of Canada to hold until the due date, when the supplier's account would be credited. The draft would be prepared about a month after the month it covered, said Fineberg. The appellants would send the supplier, Mashpriborintorg, an acknowledgment of the draft as well as copies of the relevant consignment declarations. The amount of the bank draft included the invoice price, less a 1'/2 per cent discount, plus an amount of purported interest.

Allocation of costs

Allocation of expenses, Fineberg testified, is very important and ongoing at Wenger's. This allocation or “ear marking”, as he sometimes referred to it, would be done at least twice a year. The cost of the product paid to the supplier, as well as the purported interest, freight, insurance and labour would be identified as belonging to a particular product. Added to these costs would be expenses for commissions, promotion, advertising and cartage. Fineberg explained these expenses were' carefully identified to specific product groups on a daily or monthly basis”. Allocation assisted in determining product costing and, as a result, the pricing of the product. The profitability of each product line was able to be determined. For financial statement purposes, Fineberg said, allocation of expenses is not important.

Certain expenses, such as salary to the sales manager, could not be allocated to a specific product group. The sales manager directed sales of all product lines and his salary was included in general expenses.

Sale of product

Fineberg acknowledged that when product was sold by either Wenger's or Dorso before payment was due to Mashpriborintorg, even one month after the product was taken out of consignment, the cost of product to determine sale price would include the allocation of the interest. The sale would be recorded in the fiscal year it actually took place. In such circumstances the appellants would not pay Mashpriborintorg until the last day for payment called for under the contract, even if it was 23 months after the sale.

Financial statements

Fineberg testified that the item “interest and bank charges" in Wenger's financial statements for 1978, for example includes all amounts described as interest paid to the suppliers including the purported interest paid to Mashpriborintorg, as well as interest paid to the Royal Bank for operating loans. No part of the amount shown as interest and bank charges in 1978, for example, was allocated to a particular product line or included in purchases in the financial statements. In short, the cost of goods on the financial statements does not reflect the purported surcharge which is shown as interest and bank charges. The allocation of the amounts of interest in issue would have been allocated internally by management to a product line“ much earlier”, Fineberg explained, when costs were being allocated to determine product cost. The allocation had nothing to do with the financial statements, he repeated.

Fineberg stated the total liability for payment of the interest was recognized immediately upon the goods being taken out of consignment. The liability was the aggregate of the invoice price, less the 1 Æ per cent discount, plus the purported interest on balance of the invoice price. However, Fineberg explained, generally accepted accounting principles require that if an item is identified as interest, then the amount of the liability, the interest, must relate to the passage of time. Fineberg added that generally accepted accounting principles permitted the appellants to accrue the interest over the term, from taking the goods out of consignment to the date the amount was to be paid. He stated that the appellants' "auditors advised us (that) if only a portion of interest was to be accrued as cost. . . the result would be a more favourable statement" since only a portion of the interest or surcharge would be shown as earned by the supplier during that financial period. This was a means of reducing the amount of the liability recorded on the financial statement, he said. But in any event, Fineberg added, the appellants always paid on due date and never paid in advance.

Fineberg declared financial statements reflect profitability of an enterprise on an historic basis. The enterprise, however, does not depend on the financial statements to run its business. The statements are prepared for the bank and other lenders as well as the tax authorities.

Previous assessments

Wenger also testified that the Minister previously assessed Wenger's for failure to withhold and remit tax on payments which included the purported interest, made to Mashpriborintorg during 1969 to 1972 inclusive. Wenger's appealed the assessments to the Tax Review Board and the Minister consented to judgment in favour of Wenger's and the assessments were vacated. As a result Wenger concluded no withholding was required in the circumstances and therefore Wenger's (and Dorso) did not withhold any tax on payments to Mashpriborintorg in subsequent years. The Minister said he had consented to judgment because, in his view, to take the case further would require a great deal of research in international law and the assessment was in respect of a minimal amount of tax.

Submissions: interest or surcharge

By Appellant

Appellant's counsel, Mr. Angelopoulos, made three submissions. First, the amounts in issue were no interest but a surcharge and therefore the appellants were no required by subsection 215(1) to withhold any amount. Second, if the amounts were interest, they were paid to a foreign state and under the doctrine of foreign sovereign immunity the foreign government is not subject to Canadian income tax laws. Third, with respect to Wenger's appeals, the Minister has a responsibility to act fairly and cannot change his mind whenever he wants. The Minister previously assessed Wenger for failure to withhold tax on payments of interest made to Mashpriborintorg during the period 1969 to 1972 and upon Wenger's appealing the assessments to the Tax Review Board, the Minister consented to a judgment allowing the appeals. In carrying on business during the period 1977 to 1982 Wenger's assumed that on the basis of the consent judgment it was not required to withhold tax.

The appellants did not lead any evidence that Mashpriborintorg was part of the government of the Soviet Union and was not a legal entity controlled by, but distinct from, the Soviet government. Appellant's counsel conceded that the appellants could not prove that the exporter of goods to Wenger's and Dorso was the government of the U.S.S.R. itself and did not pursue the second submission.

With respect to his first submission, counsel argued the interest paid to Mashpriborintorg was a surcharge. The reality of the situation, he said, was that the purchase price was subject to percentage increase. He stated that if the Minister is correct, that the amount is interest, interest becomes a notional concept at all times during the carrying on of a business. As I understand his argument, he is advancing the theory that when any product is sold there exists in its sale price an interest component. Thus the Minister would have the right to exact the interest component for purposes of Part XIII any time a resident purchases product from a non-resident.

Counsel submitted the test as to whether the amounts in issue are interests or surcharges is one of substance and not form and therefore all circumstances must be reviewed. The fact that the contracts refer to interest or that the appellants recorded the amounts as interest in their books, counsel argued, is not determinative of the issue. He referred to Caldwell Trust v. M.N.R., [1990] 1 C.T.C. 2310 at 2314, 90 D.T.C. 1155 at 1159, where Bonner, T.C.C.J. declared that an accountant's description of a transaction is not conclusive of what in fact it is. [7] Counsel was very concerned that I may place too much reliance on the financial statements of the appellants and he therefore directed my attention to the reasons for judgment of Dubé, J. in Montfort Lakes Estates Inc. v. The Queen, supra, where, at page 30 (D.T.C. 5469) he considered the submissions of plaintiff that its financial statements are not properly to be relied upon in determining the nature of its assets. Defendant's counsel agreed that bookkeeping, by itself, is not conclusive. Dubé J. referred to Dominion Taxicab Assn. v. M.N.RA, [8] where, at pages 37-38 (D.T.C. 1021), Cartwright, J. said:

It is well settled that in considering whether a particular transaction brings a party within the terms of the Income Tax Acts its substance rather than its form is to be regarded.

The word “interest” in paragraph 212(1)(b) has a definite meaning. Lord Wright described the general characteristics of interest in Westminster Bank Ltd. v. Riches, [1947] A.C. 390, 28 T.C. 159 (H.L.) at page 400 [A.C.].

. . . the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation.

Also cited by appellants’ counsel was Re Farm Security Act, 1944, [1947] S.C.R. 394, where Rand, J., at page 411 stated:

Interest is, in general terms, the return or consideration or compensation for the use or retention by one person of a sum of money, belonging to, in a colloquial sense, or owed to, another.

Counsel stated that since ownership of product did not pass to the appellants until payment was made to Mashpriborintorg, the appellants were not indebted to Mashpriborintorg before that time. There was no lender-borrower relationship between Mashpriborintorg and the appellants.

In their view, the appellants owed nothing to Mashpriborintorg until the periods for payment set out in the various contracts expired. Appellants’ counsel suggested that Mashpriborintorg incurred the cost of carrying the accounts, which is a normal and customary trade practice. To say otherwise, he added, would include notional interest in a supplier's selling price. Paragraph 212(1)(b), he declared, is not designed for this.

Counsel referred to the reasons for judgment of the Supreme Court in M.N.R. v. T.E. McCool Ltd., supra, (see also: A.C. Simmonds & Sons Ltd. v. M.N.R., [1990] 1 C.T.C. 2087, 89 D.T.C. 707 (T.C.C.)) where the Court considered, amongst other things, whether a relationship of borrower and lender existed. A vendor sold property for $150,000 payable in consideration of the issue of shares and a demand note for $123,097.34, bearing interest at five per cent per annum. The purchaser claimed the interest on the note given to the vendor should be allowed as an operating expense on the ground that the note represents capital used in the business to earn income. Estey, J. stated, on page 708, that, “[I]t is necessary in determining whether that relationship exists to ascertain the true nature and character of the transaction" and in his view the relationship of lender and borrower did not exist in respect to the note since the note arose out of an exchange in which a purchase price was paid. Kellock, J. emphasized, on page 712, that a real loan and a real borrowing must exist for a taxpayer to deduct interest on money borrowed to earn income. Rand, J. explained, on page 713, that on the facts interest was part of the capital cost to the property. There was no borrowing and lending of money and no use of money for which interest would be the compensation.

Since Wenger's and Dorso purchased merchandise and did not borrow money, counsel submitted, for the reasons in McCool, supra, the purported interest is part of the cost of product.

M Angelopoulos also suggested the true nature of the transactions in issue is found in Lebern Jewellery Co. v. M.N.R., [1976] C.T.C. 2422, 76 D.T.C. 1313, at page 2426 (D.T.C. 1316) (T.R.B.). The Board held that the addition of “7.5 per cent interest per annum” on late payments of accounts by the taxpayer to its non-resident supplier did not constitute interest payments within the meaning of paragraph 106(1)(b) of the pre-amended Act (now paragraph 212(1)(b)). Chairman Cardin held that for the taxpayer “any additional amount paid to the suppliers for late payment is a surcharge agreed upon between the vendor and purchaser, and is therefore included in the cost to the appellant of the goods purchased. This is an ordinary commercial and business practice which is used to facilitate payment in contracts for the purchase and sale of goods required to carry on a business. . . .”.

The Minister appealed the Lebern, supra, decision but, counsel advised, Lebern became a bankrupt and the trustee in bankruptcy did not wish to defend the action. The taxpayer's defence was struck out.

Rouleau, J. approved the chairman's reasoning in Thyssen Canada Ltd. v. The Queen, [1984] C.T.C. 64, 600, 84 D.T.C. 6539, at page 603 (D.T.C. 6541) and finding the facts similar to that of Lebern, supra, allowed the appeal. The Crown appealed the decision of the Federal Court-Trial Division to the Federal Court of Appeal, [1987] 1 C.T.C. 112, 87 D.T.C. 5038 (F.C.A.). Thyssen Canada Limited, a Canadian corporation resident in Canada, purchased product from its non-resident parent for resale in Canada. The resident was liable to make payment to its parent on delivery of the product in Canada. However Thyssen Canada did not pay its parent until it in turn was paid by its customers for the product. The parent charged Thyssen Canada interest for the period between delivery in Canada and payment. In the Court of Appeal, Pratte, J. stated the facts of the appeal were different from those of Lebern, supra, in particular since the late payment charges were not included in the price of the product. The Court of Appeal found the late payment charges had all the characteristics of interest.

Counsel emphasized that the relationship between the appellants and Mashpriborintorg was one where interest was not a factor. For example, terms of payment were extended by Mashpriborintorg to Wenger's without any interest. Wenger's gave free space in its new building to Mashpriborintorg. It was suggested the extension terms of payment and the free space were somewhat linked. Furthermore, because of haphazard delivery schedules and poor quality control in the U.S.S.R., it was suggested the appellants required extended periods of payment since, as Wenger stated, there was “no way” Wenger would acquire merchandise 12 to 18 months before the merchandise can be shipped to its customers. This, according to counsel, indicated the Soviets were not charging interest but were adding a surcharge to the price. Another fact that reflected no interest was charged was the appellant's con- duct. The appellants never had any intention of paying for product before the due date and prepared bank drafts, which included the purported interest, to be paid at the last possible date under the contract. The appellants also treated the purported interest as part and parcel of its cost price of product.

By Respondent

Respondent's counsel, M Lamarre, submitted that the reasons for judgment in Westminster Bank v. Riches and Re Farm Security Act, 1944, supra, support her client’s position that the amounts in issue were on account of interest, as contemplated by paragraph 212(1)(b) and subsection 215(1) of the Act: the appellants owed a principal sum of moneys to Mashpriborintorg, the purchase price, and the amounts of purported interest were referrable to the obligations of the debtor to pay the purchase price at a fixed time.

The Minister agrees that the appellants were not required to make payments prior to the end of the particular period after the goods were taken out of consignment. In the Minister's view the payments were an obligation with a term in accordance with the Civil Code of Quebec. Article 1089 of the Civil Code states:

A term differs from a suspensive condition in as much as it does not suspend the obligation, but only delays the execution of it.

Article 1079 of the Civil Code describes a suspensive condition:

An obligation is conditional when it is made to depend upon an event future and uncertain . . . by suspending it until the event happens. .. . .

The fulfilment of the condition, according to Article 1085 of the Civil Code, has a retroactive effect to the day on which the obligation had been contracted. Hence, once payment is made to Mashpriborintorg, the sales to the appellants take place effective as of the time the goods were delivered into the power and possession of the appellants, that is, when they were taken out of consignment (Civil Code, Article 1492).

In his text, Les Obligations [9] , Professor Jean-Louis Baudouin, as he then was, at page 455, describes the terms "terme suspensif-terme extinctif' as follows:

Le terme est d'usage fréquent surtout en matière d'obligations pécuniaires, puisqu’il constitue alors la formule juridique classique du crédit. Le terme de droit . . . est un événement futur et certain dont dépend l'exigibilité ou l'extinction d’une obligation. . . Le terme suspensif retarde le moment où le créancier peut exiger le paiment du débiteur.

Later on, at page 458, he explains:

. . . l'obligation à terme prend donc naissance immédiatement, de la même façon que l'obligation pure et simple et a donc une vie juridique parfaite pendant toute la période allant de sa création à l'échéance. Un lien d'obligation se forme entre un créancier et un débiteur véritables. . .

Professor Baudouin adds, on pages 466 and 467, that when the condition is satisfied, that is, payment is made, the contract is effective not as at the time the condition is satisfied but at the time the agreement was entered. In contracts transferring property, therefore, the right of ownership is deemed to pass at the time the contract was perfected.

M Angelopoulos replied that the amount of interest is not interest contemplated by Part XIII of the Act since the appellants had not failed to make payment on any due date. They had not made any late payment. The due date for payment by the appellant was months subsequent to the time the goods were taken out of consignment. In Thyssen, supra, the price was due on delivery in Canada and the taxpayer failed to make payment when it was due. Thyssen Canada waited until its own customers paid it before it paid the nonresident; in the meantime Thyssen Canada was using money due to another. This, insisted counsel, was not the situation in which the appellants found themselves.

Whether amount part of purchase price

I agree with counsel for the appellants that I must review all the circumstances to determine whether in substance—not merely in form—the amounts in issue are interest payments or represent surcharges. One must look not only to the various transactions between the appellants and the Mashpriborintorg but also to the relationship between the appellants and Mashpriborintorg which helped colour and affect the true nature of the transactions.

There is no question in my mind that as business relations between the appellants and Mashpriborintorg matured an understanding existed between the vendor and the purchasers that the purchaser would not be paying for the goods until the very last moment it was required to do so under the particular contract. Wenger declared that the appellants never intended to pay before they were required to do so and I believe I may infer that Mashpriborintorg never expected payment prior to that date. Thus it is not surprising that when an appellant prepared a bank draft for payment to the vendor the amount of the draft would include the amount of purported interest.

Various contracts provided, and Wenger testified, that the appellants became owners of the goods purchased from Mashpriborintorg only when the purchase price was paid. Before that time, it was suggested, the appellants were not owners. Thus, the appellants argue, since a sale does not take place until the goods are paid for, no amount is due by the purchaser to the vendor before the sale. The purchaser cannot be said to have paid any interest to the vendor since the vendor, a creditor, has not been deprived of any money by the purchaser prior to actual payment.

Was this the arrangement, in substance, between the appellants and Mashpriborintorg? In my view it was not.

Article 406 of the Civil Code states'" ownership" . . ."is the right of enjoying and of disposing of things in the most absolute manner. . Z' [10]

The evidence leads me to conclude that once goods were taken out of consignment, the appellants became the owners of the goods. From that time on the appellants had all the attributes of ownership notwithstanding it was required to pay for the goods for periods varying in time between 6 months and 24 months. An appellant was capable of enjoying and disposing of the goods in the most absolute manner. Its possession of the goods and its dealings with the goods were unfettered and absolute. An appellant was free to sell the goods to his customers and receive the purchase price for the goods. An appellant was under no obligation to account to the vendor for any of the proceeds of the sale. Mashpriborintorg did not interfere with the appellants’ possession of the goods, once taken out of consignment. In fact an appellant would include in its sales for a fiscal period the proceeds of sale of the goods sold by it in that fiscal year notwithstanding it, itself, was not required to make payment to Mashpriborintorg for the goods until a subsequent fiscal period. There is no evidence the appellants treated unpaid merchandise any way differently from paid merchandise.

At least two of the contracts produced declare the interest to be paid by the purchaser is for "credit" [11] . The payment clauses in other contracts produced refer to a period after the goods are withdrawn from consignment for the goods to be "fully paid" and indicate an interest rate to accrue until payment is “fully” made by the purchaser.

The Shorter Oxford Dictionary on Historical Principals defines the word "credit" as ”. . . confidence in a buyer's ability and intention to pay at some future time, for goods, etc., entrusted to him without present payment".

The word "credit" assumes that the grantor of the credit, the creditor, is entitled to receive immediate payment but grants the debtor the right to pay at some later date. A creditor may receive interest because of the relationship he has with the debtor, such as vendor and purchaser [12] . In general, a vendor is entitled to interest on the unpaid purchase money until actual payment (Volume 42, paragraph 200).

Hannen and Farnsworth. [13] write that:

[l]nterest from money generally arrives where capital is lent or invested or is represented by unpaid purchase-money. Sometimes it takes the form or charges in respect of overdue debts . . . It may . . . be conveniently described as a reward or consideration or recompense for the actual or notional use of one person's money by another person . . . .

The authors refer to Westminster Bank Ltd. v. Riches, supra.

As I have stated, in my view the sales of goods from Mashpriborintorg were concluded at the time the goods were taken out of consignment. At that time the purchaser was indebted to the vendor and the amounts in issue represented the consideration or compensation for the use or retention by the purchaser of money owed to the vendor. The amounts were interest: /n Re Farm Security Act, supra. Under the circumstances I need not consider the submissions of the respondent.

There is no question that in the vast majority of transactions of purchase and sale vendors incur interest debts during the course of bringing their products to market. In some cases money has been borrowed to purchase supplies, in some cases supplies are paid for over time. Of course there are other circumstances where payments of interest may be attributed to product. [14] At the end of the day the amounts of such interest is one of many components, including profit, which the vendor considers and includes in determining cost of product to its customers. Once the purchase price is determined its components lose their identities. A purchaser does not pay any interest to the vendor and Part XIII of the Act is not relevant. Parliament did not contemplate that a bona fide purchase price be dissected to determine any interest component for the purposes of paragraph 212(1)(b). That provision does not look to notional interest. The amounts in issue were not part of the purchase price and at all times retained their quality of interest. The facts in the case at bar are not similar to those in McCool, supra.

I wish to comment on the appellants’ treatment of the amounts in issue in their financial statements. The appellants’ description of the amounts in its financial statements is not, of course, determinative of the issue, but what it does in these circumstances, is indicate to a third party that what the appellants thought they were paying to Mashpriborintorg was interest (see Montfort Lakes Estates v. The Queen, supra, and Caldwell Trust et al. v. M.N.R., supra). Simply because an amount of interest may be traced and may be capable of allocation by a taxpayer to a particular product line does not cause that amount to lose its character of interest. In the case at bar the amounts of interest in issue were payable because sales took place and payment of the purchase prices were delayed. The financial statements reflected the true state of affairs. Mr. Fineberg's view that audited financial statements may be prepared to reflect a state of affairs that is financially or fiscally advantageous and thoroughly ignore what he says are the true accounts of the corporation is not, in my view, a proper interpretation of an auditor's responsibility. One cannot suck and whistle at the same time. A taxpayer must make a decision with respect to its accounts and act on that decision on a consistent basis.

Submissions: relevance of previous assessments

By Appellant

Does the Tax Court of Canada have the jurisdiction to allow the appeals of Wenger's on the basis only that the Minister acted unfairly when assessing Wenger's since he had earlier consented to judgment vacating similar assessments? Wenger's is not arguing the Minister is estopped from assessing. Wenger's argues that as a result of the consent judgment, Wenger's, in good faith, was of the view that during 1977 to 1982 it was not required to withhold taxes from payments to Mashpriborintorg and remit the taxes to the respondent on behalf of Mashpriborintorg.

Wenger's counsel submitted, in short, that when withholding tax payable by a non-resident the Canadian resident is in an agency or mandatory relationship with the Minister. Wenger's was the agent of the principal, the Minister, or mandatory of the mandator, the Minister, and did not withhold and remit taxes on behalf of Mashpriborintorg because in the earlier years the Minister established that no withholding and remittance of tax was required in this situation. One of the many cases relied on by Wenger's counsel was Sous- ministre du Revenue du Québec v. Ciba-Geigy Canada Ltd., [1981] R.D.F.Q. 156, a decision of the Québec Court of Appeal.

In the Ciba-Geigy appeal, supra, the Deputy Minister of Revenue of Québec and the taxpayer had entered into an agreement whereby Ciba-Geigy for a period of ten years was exempt from provincial sales tax on advertising material produced in Québec. Nevertheless Revenue Québec assessed Ciba- Geigy retroactively. The appeal was allowed and in his reasons for judgment, Bisson, J., as he then was, speaking for the Court, concluded at page 159:

L'appelant avait durant de nombreuses années appliqué la loi de façon réfléchie et non déraisonnable. Je souligne que nous ne sommes pas en présence d’un cas où c'est par simple inadvertance du ministère qu'une taxe n'aurait pas été perçue. Ce n’est que mesure de justice pour le contribuable que si le ministère change d'attitude, il ne le fasse pas de façon rétroactive.

En présence de la force toujours grandissante des appareils administratifs des gouvernements, il est important pour le citoyen de savoir qu’il peut se fier sur la permanence des ententes qui lui sont proposées par l'administration dans le cadre de l'application d’une loi et ce jusqu'à ce qu'on prévienne qu'on y met fin.

The Québec Court of Appeal relied on the reasons of De Grandpré, J. in Harel v. Sous-ministre du Revenu du Québec, [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438 at pages 858, 859 [S.C.R.]. [15]

An organization exercising administrative powers has a duty to act fairly when dealing with persons subject to its administration, both on procedural as well as substantive grounds, counsel submitted. In support of this necessary and obvious proposition counsel cited Martineau v. Matsqui Disciplinary Bd., [1980] 1 S.C.R. 602, 30 N.R. 119, at page 622, per Dickson, J. (as he then was); Syndicat des employés de production du Québec et de l'Acadie v. Canada [1989] 2 S.C.R. 879, 62 D.L.R. (4th) 385, at pages 895-96 S.C.R., per Sopinka, J.; and Knight v. Indian Head Sch. Div. No. 19, [1990] 1 S.C.R. 653, 69 D.L.R. (4th) 489, at pages 682-87 S.C.R., per l'Heureux-Dubé, J.

The assessments in issue, according to counsel for Wenger's, also fly squarely in the face of the Minister’s policy concerning reassessments which, he declares, is grounded on the Minister’s own recognition of the duty to act fairly. In Information Circular 75-7R2, dated September 21, 1981, at paragraph 5, the Minister indicated to the public under what circumstances a taxpayer should reasonably expect not to be reassessed. Paragraph 5(c) read:

5. Normally a reassessment will not be issued if:

(c) The issues were reviewed and resolved on a previous occasion (unless new information of substance has come to light).

In the appellant's view the same policy considerations as those set out in paragraph 5(c) of the Circular should have been applied in the instant case because there are no substantial differences on the facts and on the issues between the earlier and current assessments. Appellant's counsel conceded the assessments being appealed are not reassessments", but in his view the principle is the same.

Wenger's thus concludes that the interpretation the appellant reasonably inferred from the Minister's actions in consenting to judgment with respect to assessments issued on transactions which took place between 1969 and 1972 and the purported mandate given to Wenger's not to withhold tax from payment made to Mashpriborintorg are sufficient to bar the Minister from "side-stepping his very own policy of not reopening issues that have already been reviewed and settled in the absence of "new information of substance” having come to light . . . and . . . retroactively altering the mandate given the Appellant with significant penalties imposed on the latter for essentially discharging its mandate according with its initial terms".

By Respondent

Counsel for the respondent stated that her client assessed Wenger's pursuant to subsection 227(10) of the Act as a result of its personal liability under subsection 215(1). She argued the respondent never made any representation to Wenger's that interest was not a component of any moneys paid to Mashpriborintorg during 1969 to 1972. Counsel submitted that when a taxpayer becomes liable for tax in accordance with the provisions of the Act the Minister has no alternative but to assess the taxpayer the amount of tax determined by the statute. The Minister cannot agree not to tax in such circumstances, even on the grounds of equity. The comments of Cameron, J. in Woon v. M.N.R., [1951] 1 Ex. C.R. 18, [1950] C.T.C. 263, 50 D.T.C. 871, at pages 270-71 (D.T.C. 874) are relevant to this question, notwithstanding he was discussing whether the Minister may be estopped from assessing:

. . . It is sufficient to state that the assessment here under appeal was made pursuant to the terms of a statute and that, therefore, it is not open to the appellant to set up an estoppel to prevent its operation. . . .

. . . Parliament has said that under certain circumstances certain things are deemed to be dividends and manifestly the Commissioner of Taxation had no power to declare otherwise or to settle the limit of taxation thereunder, other than according to the statute itself. . . .

Once the Minister determines an amount has been paid as "interest" for the purposes of the Act, counsel submitted, he does not have the capacity to declare otherwise or settle the limit of taxation with the taxpayer unless additional facts or law demonstrating he erred are presented to him. In other words, if the Minister is of the view an amount is interest, he must tax it as interest and not something else.

In Granger v. Canada Employment and Immigration Commission, [1986] 3 F.C. 70, Pratte, J. of the Federal Court of Appeal, at pages 76-77, was of the following view:

En premier lieu, il faut dire que les principes de justice naturelle n’ont rien à voir dans ce débat. L'expression « principes de justice naturelle » désigne en effet les principes fondamentaux de procédure que doivent observer ceux qui ont à prononcer des décisions quasi judiciaires et, dans bien des cas, des décisions administratives. Le véritable reproche que le requérant fait au juge-arbitre, ce n’est pas d'avoir violé les principes de justice naturelle, c'est tout simplement de n'avoir pas appliqué l'équité plutôt que la loi. Il est certain en effet que la Commission et ses représentants n’ont pas le pouvoir de modifier la loi et que, en conséquence, les interprétations qu'ils peuvent faire de la loi n’ont pas elles-mêmes force de loi. Il est également certain que l'engagement que prendrait la Commission ou ses représentants, qu'ils soient de bonne ou de mauvaise foi, d'agir autrement que ne le prescrit la loi, serait absolument nul et contraire à l’ordre public. En conséquence, la prétention du requérant ne peut être autre chose que celle-ci: le juge- arbitre s'est trompré parce qu'il aurait dû, pour éviter de causer préjudice au requérant, refuser d'appliquer la loi.

. . .Le juge est lié par la loi. Il ne peut, même pour des considérations d'équité, refuser de l'appliquer. Cette vérité élémentaire est, bien sûr, difficile à concilier avec l'arrêt de la Cour d'appel du Québec dans Transport Lessard et les affirmations de la Chambre des lords dans Ex parte Preston. C'est pourquoi j'incline à croire que ces deux arrêts ne sont pas à l’abri de toute critique. . . .

At page 86, Lacombe, J. stated:

En droit fiscal canadien, la jurisprudence est constante à l'effet que la Couronne n'est pas liée par les représentations faites et les interprétations données aux contribuables par les représentants autorisés du fisc, si telles représentations et interprétations sont contraires aux dispositions claires et impératives de la loi:

Woon, Bert W. v. M.N.R., [1951] R.C.E. 18, Stickel v. M.N.R., [1972] C.F. 672 (1 inst.)*, M.N.R. v. Inland Industries Limited, [1974] R.C.S. 514. La décision de la Cour suprême du Canada dans cette dernière cause fait toujours autorité et lie cette Cour tant et aussi longtemps que la Cour suprême ne décidera pas elle- même de s'en écarter. ll s'agissait dans cette affaire de la déductibilité de certaines contributions versées à des régimes de pension qui avaient reçu l'approbation préalable du Ministre. Le Ministre, plus tard, refusa les déductions et cotisa la contribuable en conséquence. Après avoir décidé que ces régimes de pension ne rencontraient pas les exigences de la Loi de l'impôt sur le revenu, le juge Pigeon disposa de l'argument de l’estoppel en disant à la page 523:

Toutefois, il me paraît clair qu’une approbation donnée sans que les conditions prescrites par la loi ne soient remplies ne lie pas le ministre.

The Supreme Court upheld the judgment of the Federal Court on other grounds ([1989] 1 S.C.R. 141, 91 N.R. 63).

M Angelopoulos replied, referring the Court to Bendahmane v. Canada (Minister of Employment and Immigration), [1989] 3 F.C. 16, 61 D.L.R. (4th) 313. In his view the Federal Court of Appeal in Bendahmane, supra, rendered a decision “diametrically opposed to Granger’. He thus submitted Pratte, J.'s "comments in Granger are no longer applicable".

Past assessments discussed

I cannot agree with Mr. Angelopoulos. The Supreme Court in Granger, supra, shared the opinion of Pratte, J.“. . . that neither the Board of Referees nor the Umpire has jurisdiction to order compensation for such damage". The decision of the Federal Court of Appeal in Bendahmane, supra was not, diametrically, or in any other way, opposed to the Court of Appeal's decision in Granger, supra. In Bendahmane, supra, the Court considered, inter alia, the Refugee Claims Backlog Regulations (SOR/86-701). In Granger, supra, the Court of Appeal considered the Labour Adjustment Benefits Act, S.C. 1980-81-82-83, c. 89. Hugessen, J.A., at pages 31 and 32, followed the Privy Council decision in Attorney General of Hong Kong v. Ng Yuen Shiu, [1983] 2 A.C. 629, that a public authority is bound by its undertakings as to the procedure it will follow, provided they do not conflict with its duty.

Subsection 220(1) of the Act states:

The Minister shall administer and enforce this Act and control and supervise all persons employed to carry out or enforce this Act and the Deputy Minister of National Revenue for Taxation may exercise all the powers and perform the duties of the Minister under this Act.

By consenting to judgment in 1974 the Minister did not make any undertaking to Wenger's as to any procedure it would follow in the future. Indeed, the Minister's act of assessing tax is not a procedural matter; it is the very essence of the Act. Any agreement by the Minister not to tax what the Act requires to be taxed would be a dereliction of his duty to enforce the Act. If, in prior years, he held a different view of the facts, he is entitled to change his mind. As Cattanach, J. stated in Admiral Investments Ltd. v. M.N.R., [1967] 2 Ex. C.R. 308, [1967] C.T.C. 165, 67 D.T.C. 5114, at page 174 (D.T.C. 5120):

. . . the fact that a concession may have been made to a taxpayer in one year, does not, in the absence of any statutory provisions to the contrary, preclude the Minister from taking a different view of the facts in a later year when he has more complete data on the subject matter. . . . An assessment is conclusive as between the parties only in relation to the assessment for the year which it was made.

This having been said, I appreciate that Wenger's may have been lulled into a false sense of security in concluding it was not liable to withhold and remit. I am confident it was not the intention of the respondent to mislead Wenger's since he had his reasons not to proceed with the appeals. However, I believe circumstances warrant the Minister to consider recommending to the Governor in Council, pursuant to subsection 23(2) of the Financial Administration Act, that the amount of interest assessed on March 23, 1983 on the amounts Wenger's failed to withhold and remit be remitted to Wenger's.

The appeals of both Wenger's and Dorso are dismissed.

Appeals dismissed.