The Queen v. Jennings, 94 DTC 6507, [1994] 2 CTC 106 (FCA)

Robertson J.A.:—The respondent is a "Class 1” farmer who in 1987 transferred all his farmin assets to a company incorporated for the purpose of facilitating a "rollover" to his son on the former's death. Simply stated, the issue raised on this judicial review application is whether the respondent is entitled to deduct, from is income for the 1989 taxation year, farm losses incurred by the corporation. Invoking the informal appeal procedure, the respondent was able to persuade the Tax Court judge that the Minister erred in disallowing the claimed deduction. The relevant portion of the Tax Court judge's oral reasons reads as follows:

Counsel for the Minister was not aware of Moauro v. M.N.R., [1992] 1 C.T.C. 2129, 92 D.T.C. 1071 (T.C.C.), during the brief evidence given by the appellant. However, if the respondent believes that I have found facts herein that were not before me, they can have a trial de novo by the Federal Court-Trial Division on appeals for 1987 and 1988.

The appellant was born on March 8, 1923. He is not a robust man at 69 years of age and is in failing health. He did not understand the trial process and was at a loss as to how to present his appeals.

Briefly, he has been a Class 1 farmer (as defined by Moldowan v. The Queen, [1978] 1 S.C.R. 480, [1977] C.T.C. 310, 77 D.T.C. 5213) all his life. In 1987 he incorporated 363693 Alberta Limited ("363693") under the provisions of the Business Corporations Act of Ontario, R.S.O. 1990, c. B-16. He then transferred all his farming assets to 363693, which included land, cattle and equipment, his stated purpose being to facilitate a rollover to a Class 1 farmer’s son on his death.

The appellant is the sole common shareholder and he has sole control over the company. He has carried on farming since 1987 the same as in prior years. If it was not for his meagre investment income being poured into the company, it would have ceased. He is not an employee of 363693 and has never received any money therefrom and has only poured money into 363693.

The finding of facts made by Walsh, J. of the Federal Court-Trial Division, in R. v. Kuhl, [1973] C.T.C. 846, 74 D.T.C. 6024, as reproduced by Hamlyn, J.T.C.C. in Moauro at page 2132 (D.T.C. 1073), I find herein.

On the evidence herein I find that the appellant is an independent farm contractor. There is no dispute that he, prior to incorporation, was a Class 1 farmer, and thus is entitled in the years in question to unrestricted farm losses.

The appeals are allowed.

Ironically, it is not the Minister who seeks to pierce the so-called "corporate veil" but rather the taxpayer. The applicant maintains that the respondent and his corporation are separate legal entities and that "the normal rule of a corporation being a separate and distinct legal entity from its shareholders . . . [should apply in the case at bar]"; per lacobucci, C.J. (as he then was) in The Queen v. MerBan Capital Corp., [1989] 2 C.T.C. 246, 89 D.T.C. 5404 (F.C.A.), at page 255 (D.T.C. 5410). On this issue, the decision of the Supreme Court of Canada in Kosmopoulosv. Constitution Insurance Co., [1987] 1 S.C.R. 2, 34 D.L.R. (4th) 208, is instructive. Writing for the majority (McIntyre J. concurring), Wilson J. observed at pages 10-11 (S.C.R.):

The law on when a Court may disregard. . .[the principle of separate corporate entities] by “lifting the corporate veil" and regarding the company as a mere "agent" or "puppet" of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result "too flagrantly opposed to justice, convenience or the interests of the Revenue".. . .

There is a persuasive argument that ''those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice". . . . Mr. Kosmopoulos was advised by a competent solicitor to incorporate his business in order to protect his personal assets and there is nothing in the evidence to indicate that his decision to secure the benefits of incorporation was not a genuine one. Having chosen to receive the benefits of incorporation, he should not be allowed to escape its burden. He should not be permitted to "blow hot and cold" at the same time.

[Emphasis is mine.]

Having regard to the meagre evidence adduced below and the limited arguments tendered by the respondent (who is unrepresented), we are all of the view that the Tax Court judge erred in law in permitting the losses of one legal entity to be used to offset the income of another. Only in the clearest of cases, and in compelling circumstances and after thorough legal analysis could the “normal rule” be displaced. In reaching this perfunctory conclusion, it is unnecessary to deal with a multitude of subsidiary issues. For example, how would a judgment allowing for corporate losses to be applied against the respondent's income be implemented given the fact that the taxation years of the respondent and his corporation do not coincide?

With respect to the legal authorities cited by the learned Tax Court judge, it is apparent that they do not address squarely the issue under consideration. They focus on whether a taxpayer, who has incorporated a company to carry on a business, is to be regarded as an employee of tnat corporation or as an independent contractor. A determination on this point is relevant only for the purpose of characterizing income that has been received by that taxpayer: see Moauro and Kuhl, supra, and Murray v. M.N.R., [1987] 2 C.T.C. 2284, 87 D.T.C. 559 (T.C.C.). The law reports do reveal, however, two cases which undermine the respondent's position: see K.J. Beamish Construction Co. v. M.N.R., [1990] 2 C.T.C. 2199, 90 D.T.C. 1584 (T.C.C.), at page 2215 (D.T.C. 1596); and Denison Mines Ltd. v. M.N.R., [1971] C.T.C. 640, 71 D.T.C. 5375 (F.C.T.D.) at page 662 (D.T.C. 5389).

For these reasons, the application for judicial review will be allowed, the decision of the Tax Court of Canada dated December 14, 1989 set aside and the matter referred back to the Tax Court of Canada for redetermination on the basis that the respondent's appeal from the Minister’s reassessment for the 1989 taxation year be dismissed.

Application allowed.

Minister of National Revenue v. Cassidy Limitée, Faema Distributeur [Indexed as: Russell Food Equipment Ltd. v. Canada]

Federal Court of Appeal (Hugessen, MacGuigan and Décary, JJ.A.), October 27, 1993 (Court File Nos. A-183/5-93), on appeals from judgments of the Federal Court-Trial Division, reported at [1993] 2 C.T.C. 56 for Faema and [1993] 2 C.T.C. 63 for Cassidy and Russell.

Sales tax—Federal—Excise Tax Act, R.S.C. 1985, c. E-15—50(1)(b), 51, Schedule III, Parts V

The three cases were heard together in both courts. In the Trial Division, Pinard J. held that the restaurant equipment sold to purchasers for commercial use was exempt from excise tax under Part V, section 3 of Schedule III of the Excise Tax Act but not under Part XIII of that schedule. The trial judge found the equipment sold to purchasers for use domestically not to be exempt. The Minister appealed as to the exempt findings and Faema cross appealed in respect of the domestically used equipment.

HELD:

The trial judge was clearly right as to the commercial category. The exemption in section 3 of Schedule Il covered this situation. References to words related to manufacturing and production have different meanings in various parts of the Excise Tax Act. As to the domestic category (relevant only to the Faema case), the Court also upheld the trial judge in denying the exemption. Appeals dismissed.

Michael Kaylor for the appellant.

Jean Lavigne for the respondents.

Cases referred to:

Controlled Foods Corp. Ltd. v. The Queen, [1980] C.T.C. 491, 80 D.T.C. 6373;

Coca-Cola Ltd. v. D./M.N.R. (Customs & Excise), [1984] C.T.C. 75, 84 D.T.C.

6081;

Entreprises Kato Inc. v. D./M.N.R.(Customs & Excise) (1983), 18 Ex. C.R. 31, [1983]

C.T.C. 416.

Hugessen J.A.:—These three appeals raise a problem that is common to all three cases. In addition, the appeal in file no. A-184-93, Faema Distributeur Inc., raises a question that is specific to that case.

All of the respondents import kitchen equipment that is intended for sale, and is in fact, sold to restaurant establishments. In addition, the respondent, Faema Distributeur Inc., imports kitchen equipment that is intended for sale, and is in fact sold, to people who will use it for strictly domestic and non-commercial purposes.

The respondents asked the Trial Division (Russell Food Equipment v. Canada, [1993] 2 C.T.C. 63, sub nom. Cassidy Ltée v. M.N.R. (1992), 62 F.T.R. 1) to declare whether or not the goods that they imported were taxable under Part VI of the Excise Tax Act, R.S.C. 1985, c. E-15 (consumption or sales tax). The trial judge’s answer was negative in respect of the "commercial" type equipment imported by all the respondents, and positive in respect of the “domestic” type equipment imported by the respondent Faema. The Minister appealed from the trial decision and the respondent Faema filed a cross-appeal with respect to the portion of the trial judgment that did not support its argument.

At the relevant time, the consumption or sales tax was imposed on all goods produced, manufactured or imported into Canada. The relevant legislative provision for our purposes was paragraph 50(1 )(b):

50(1) There shall be imposed, levied and collected a consumption or sales tax at the rate prescribed in subsection (1.1) on the sale price or on the volume sold of all goods

(b) imported into Canada, payable in accordance with the provisions of the Customs

Act by the importer, owner or other person liable to pay duties under that Act;

Some goods, however, were exempt from the tax under subsection 51(1):

51(1) The tax imposed by section 50 does not apply to the sale or importation of the goods mentioned in Schedule III. . . .

In the Trial Division, the respondents contended that the goods that they imported were exempt from the tax under two separate Parts of Schedule Ill, which is referred to in section 51, supra: Parts V and XIII. The relevant provisions are as follows:

SCHEDULE III

PART V

FOODSTUFFS

1. Food and drink for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of the food and drink),

3. Articles and materials for use exclusively in the manufacture or production of the tax exempt goods mentioned in sections 1 and 2 of this Part.

SCHEDULE III

PART XIII

PRODUCTION EQUIPMENT, PROCESSING MATERIALS AND PLANS

1. All the following:

(a) machinery and apparatus sold to or imported by manufacturers or producers for use by them primarily and directly in

(i) the manufacture or production of goods. . . .

[Emphasis added.]

It should be noted that the expressions "manufacture" and "production" appear in each of these exemptions, inter alia section 3 of Part V and subparagraph (i) of paragraph 1(a) of Part XIII. Moreover, the expression “manufacturers or producers" appears only in paragraph 1(a) of Part XIII.

The expression "manufacturer or producer" is defined generally for the purposes of the Excise Tax Act in subsection 2(1):

2(1). . . "manufacturer or producer" includes

(a) the assignee, trustee in bankruptcy, liquidator, executor or curator of any manufacturer or producer and, generally, any person who continues the business of a manufacturer or producer or disposes of his assets in any fiduciary capacity, including a bank exercising any powers conferred on it by the Bank Act and a trustee for bondholders,

(b) any person, firm or corporation that owns, holds, claims or uses any patent, proprietary, sales or other right to goods being manufactured, whether by them, in their name or for or on their behalf by others, whether that person, firm or corporation sells, distributes, consigns or otherwise disposes of the goods or not,

(c) any department of the government of Canada or any province, any board, commission, railway, public utility, manufactory, company or agency owned, controlled or operated by the government of Canada or any province, or under the authority of the legislature or the lieutenant governor in council of any province, that manufactures or produces taxable goods,

(d) any person who sells, otherwise than in a retail store exclusively and directly to consumers, cosmetics that were not manufactured by him in Canada, other than a person who sells those cosmetics exclusively and directly to hairstylists, cosmeticians and other similar users for use in the provision of personal grooming services and not for resale,

(e) [Repealed, R.S. 1985, c. 12 (4th Supp.), section 1]

(f) any person who, by himself or through another person acting for him, prepares goods for sale by assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repackaging the goods or by applying coatings or finishes to the goods, other than a person who so prepares goods in a retail store for sale in that store exclusively and directly to consumers,

(g) any person who imports into Canada new motor vehicles designed for highway use, or chassis therefor,

(h) any person who sells, otherwise than predominantly to consumers, new motor vehicles designed for highway use, or chassis therefor,

(i) any person who sells goods enumerated in Schedule 111.1, other than a person who sells those goods exclusively and directly to consumers, and

(j) any person who sells or leases prerecorded video cassettes that are new or have not been used in Canada, other than a person who sells or leases such goods exclusively and directly to consumers other than to consumers who lease such goods to other persons;

Similarly, the expression "producer or manufacturer" [1] is also defined in section 42 for the purposes of Part VI (consumption or sales tax) as follows:

42. . . ."producer or manufacturer” includes any printer, publisher, lithographer, engraver or commercial artist, but does not include, for the purposes of this Part and the Schedules, any restaurateur, caterer or other person engaged in the business of preparing in a restaurant, centralized kitchen or similar establishment food or drink, whether or not the food or drink is for consumption on the premises;

[Emphasis added.]

The trial judge rejected the respondent's argument in respect of Part XIII of Schedule III. He decided, correctly in my view, that the exclusion of restaurateurs from the definition of "producer or manufacturer" in section 42 had the effect of excluding the respondents' customers from the category of “manufacturers or producers" contemplated by paragraph 1(a). The respondents are not challenging this aspect of the decision of the trial judge.

On the other hand, the trial judge found for the respondents in respect of their argument under section 3 of Part V of Schedule III. In his view, the equipment imported by the respondents constituted "articles" for use “in the manufacture or production" of “food and drink for human consumption". They were therefore exempt from the tax.

In his appeal, the Minister attacks this last portion of the decision of the trial judge. He invites us to declare that the fact that a restaurateur is not a "producer or manufacturer" under the definition of these expressions in section 42 necessarily implies that the preparation of meals in a restaurant for consumption on the premises cannot constitute manufacture or production. In support of his argument, he relies on the decision of this Court in Controlled Foods Corp. Ltd. v. The Queen, [1980] C.T.C. 491, 80 D.T.C. 6373, and in particular the statement by Urie J.A., at page 497 (D.T.C. 6378), that "the preparation of food and particularly beverages for immediate retail sale on the restaurant premises is not manufacturing or producing within the meaning of the Act".

In my view, the Minister’s argument is not correct. In the first place, it is now well settled that the definition of “manufacturer or producer" in section 2 is in no way conclusive in resolving the issue of whether a particular operation constitutes manufacture or production. The following passage from the reasons of Thurlow C.J., speaking for the Court, in Coca-Cola Ltd. v. D./M.N.R. (Customs & Excise), [1984] C.T.C. 75, 84 D.T.C. 6081 (F.C.A.) is authoritative on this point at pages 79-80 (D.T.C. 6084-85):

It appears to me that the expressions "manufacturer or producer”, “manufactured or produced” and “manufacture or production”, which are found in various places and contexts in the Act, are used for differing purposes and that it is wrong to try to interpret one by reference to what another means or has been held to include either in a particular context or in general. As it seems to me, the definition of "manufacturer or producer" in subsection 2(1) is intended to identify a person who will be liable to pay that tax whether or not he manufactures or produces anything or is or is not a manufacturer or producer. A reference to paragraphs (a) to (e) of the subsection and the classes of person described in them, I think, makes this clear. While the added paragraph (f), unlike the preceding paragraphs, further expands the definition by reference to functions carried out in connection with goods, it does not, in my opinion, give rise to an inference that such functions necessarily constitute “manufacture or production” or “manufacturing or producing" within the meaning of any of the provisions of the Act.

The meaning of "manufactured or produced" in subsection 27(1) [now 50(1)], which has been considered in numerous cases, also affords no sure guide to what is meant by "manufacture or production" in any other provision, including subparagraph 1(a)(i) of Part XIII of Schedule III. The expression “manufactured or produced” is used in subsection 27(1) adjectivally to prescribe or outline the scope of the class of goods on the sale of which tax is imposed. It refers to goods that have been “manufactured or produced”, not goods to be manufactured or produced. Whether goods have been “manufactured or produced" in Canada may be tested by what has happened to them in Canada. But the expression does not refer to and is not concerned with the means by which the goods have been manufactured or produced. Moreover, decisions that turn on whether particular goods have been “manufactured or produced" in operations involving them or whether goods fall within the meaning of that expression in the Act are of little use in a case of this kind in which there is no issue as to whether the appellant is a “manufacturer or producer", within the meaning of the Act, of the bottled soft drink or as to the product of its operation being goods “manufactured or produced" in Canada within the meaning of subsection 27(1). What is here in issue is a different question, that of whether the cases and hand carriers are sold to or imported by the appellant for use by it “directly in the manufacture or production of goods", that is to say, its bottled soft drinks, These words must, in my opinion, be given their ordinary meaning in their context in the particular subparagraph 1(a)(i) of Part XIII of Schedule III.

[Emphasis added.]

With due respect for the contrary opinion, I believe that this reasoning also applies to the definition of "producer or manufacturer” in section 42. Moreover, it is apparent to me that in both definitions (sections 2 and 42) Parliament has included in the category of "producer or manufacturer” people who may, in fact, engage in no production or manufacturing activity (e.g., a trustee (paragraph 2(1 )(a)) or a publisher (section 42)). The corollary is also true: someone who is excluded from the category of "producer or manufacturer" may nonetheless engage in production or manufacturing. The question is not whether a restaurateur may engage in production or manufacture, but rather whether the respondents' customers do so on the facts of this case.

The problem therefore is one of fact, and the decision in Controlled Foods, supra, must be read in that context. The following passage from the reasons of Urie J.A. clearly indicates the true import of the decision at page 495 (D.T.C. 6377):

I am of the opinion that, as a matter of law, he correctly found that, to determine the questions here in issue, he was entitled to examine the generally accepted commercial view of the nature of a restaurant operation as well as the dictionary definitions of those terms. In ascertaining the commercial view, there was evidence before him from which he could infer, as he did, that the treatments and processes employed by the appellant in the preparation of the meals and beverages served to its customers would not generally be recognized as constituting "manufacturing or producing" in the accepter] sense of those terms or that it was, in so conducting its operations, a "manufacturer or producer".

[Emphasis added.]

There is nothing in the evidence in these cases on which I could reach the conclusion that was reached in Controlled Foods. On the contrary, in the proceedings before the Trial Division, it was specifically admitted that the equipment imported by the respondents was to be sold, and had in fact been sold, “to persons who use [it] exclusively in the manufacture or production in a restaurant, a centralized kitchen or similar establishment of food or drink, whether or not the food or drink is for consumption on the premises” (record, page 12).

In my view, this is an admission that the respondents' customers, whether or not they are defined as "producers or manufacturers", purchased the equipment in question for the purposes of manufacturing or producing food. This being the case, he said equipment is clearly covered by the exemption set out in section 3 of Part V of Schedule III and the trial judge was correct in so concluding.

The second question raised by this appeal relates only to the respondent Faema which contended, in its cross-appeal, that the trial judge erred when he refused to declare that the equipment intended for purely domestic use was also exempt from tax.

The trial judge had the following to say on this point (record, page 58):

It is important to note that the word used by Parliament in both paragraph 1 (a)(i) of Part XIII of Schedule III to the Act and section 3 of Part V of that Schedule to designate the subject matter of the “production or manufacture” is "goods". In my opinion, Parliament thus intended to establish that the tax exemptions set out in Parts V and XIII of Schedule III to the Act apply in the context of commercial, not domestic, “manufacture or production".

Mr. Justice Marceau, writing for the Federal Court of Appeal, which had been asked to interpret the word “goods” as it is used in the expression “goods. . . not subject to the consumption or sales tax” set out in section 1 of Part I of Schedule III to the Act, in Entreprises Kato Inc. v. D./M.N.R.(Customs & Excise) (1983), 18 Ex. C.R. 31, [1983] C.T.C. 416, at page 33 (C.T.C. 418), stated:

The ordinary and accepted meaning of the word "marchandises" (goods) is that of items circulated on the commercial market, items intended for sale.

In using the word "marchandises" and not a more general word such as “article” (article) (a word used elsewhere in the Act) or the word “bien” (good, item of property), in my opinion the legislator disclosed that the exemption was to apply only to containers in which are to be placed goods, items in circulation on the commercial market and destined to be sold, goods offered for sale.

Additionally, this is the only interpretation which is completely in keeping with the context in which the provision occurs . . . .

In my view, if Parliament had wished to extend the benefit of the tax exemption set out in section 3 of Part V of Schedule III to the Act, it would have used either the word “foodstuffs” or the words “food and drink" which are found in section 1, or it would simply have adopted wording similar to that which appears in Part XV of Schedule III, section 1 of which refers specifically to “domestic or commercial production".

I dissented in Les Entreprises Kato, supra, cited by the trial judge. However, I consider myself bound by the decision of the majority. Were it not for that decision, I would not today accept the Minister’s argument that the exemptions set out in Part V of Schedule III are applicable exclusively to commercial manufacture or production; rather, I would opt for the solution I adopted in my dissenting reasons. However, the Court has decided otherwise and I am unable to say that our decision was wrong to such a degree that I am not obliged to follow it.

I therefore conclude that the cross-appeal must be dismissed.

For all these reasons, I would dismiss the Minister's appeals in all the cases, and the cross-appeal of Faema in file no. A-184-93, without costs.

Appeals dismissed.