Citation: 2011 TCC 233
Date: 20110428
Docket: 2009-2324(GST)G
BETWEEN:
RONALD BAILEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2009-1576(GST)I
GABRIEL PAYEUR,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
Docket: 2009-2591(GST)I
SÉBASTIEN DION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR ORDER
Boyle J.
[1]
The three Appellants
have brought motions to strike the Respondent’s Replies to their Notices of
Appeal on the basis that the Replies do not disclose any reasonable ground for
opposing the appeal or, alternatively, will prejudice or delay the fair hearing
of the appeal. As described in greater detail below, each of the Appellants has
been reassessed on the basis that they failed to remit goods and services tax
(“GST”) on their revenues from illegal cocaine or cannabis sales. It is the
Appellants’ position in their Notices of Appeal and on this motion that, even
if they did derive revenues from illegal cocaine or cannabis sales, and even if
their drug trafficking constituted taxable supplies for GST purposes, the
product they sold, cocaine in the case of Mr. Bailey and cannabis in the
cases of Mr. Dion and Mr. Payeur, was zero‑rated under the provisions
of the Excise Tax Act (Canada) governing GST (the “GST legislation”).
I. The Facts
[2]
Ronald Bailey’s
appeal is governed by the Court’s General Procedure Rules and his motion is
brought pursuant to Rule 53(a) and Rule 58(1)(b).
Mr. Bailey and his son Sylvain were assessed on the basis that together
they sold cocaine from 2005 to 2007. The Reply alleges that Mr. Bailey
pleaded guilty to criminal drug trafficking charges. The Appellant argues in
his Notice of Appeal that he could not be an agent of the Crown for the purposes
of collecting GST if he was engaged in an illegal business contrary to public
order. Further, according to the Notice of Appeal, the partnership upon which
the assessment is based could not exist under Quebec
law because its cause and object would have been illegal and contrary to public
order. In the further alternative, the Notice of Appeal raises the zero‑rated
supply argument which is the subject of this motion. Finally, the Appellant’s
position in his Notice of Appeal is that the amounts on which the assessment is
based are incorrect since they are merely extrapolations for a two‑year period
derived from evidence collected through wiretaps conducted over a few months
only.
[3]
Gabriel Payeur’s
appeal is governed by the Court’s Informal Procedure. According to the Amended
Reply, Mr. Payeur’s assessments are in respect of his involvement in the
production and sale of cannabis in 2006. According to the Amended Reply, he was
charged criminally with producing and growing cannabis and with drug
trafficking. His revenues were presumed to have come from two outside growing
operations. The issues raised in Mr. Payeur’s Amended Notice of Appeal are
as follows: (i) is the supply of cannabis a zero‑rated supply?;
(ii) could a partnership have existed amongst Mr. Payeur and others
as that would have had an unlawful cause and object and would have been contrary
to public order?; and (iii) if he is found guilty, are the amounts attributed
to him too high and based solely upon the results of the police investigation?
[4]
Sébastien Dion’s
appeal is also governed by the Court’s Informal Procedure. According to the
Amended Reply in his case, Mr. Dion’s assessment also a consequence of his
involvement, with others, in the production and sale of cannabis in 2003
through 2006. According to the Reply, Mr. Dion was charged criminally with
trafficking in narcotics and the production of cannabis. The issues raised in
Mr. Dion’s Amended Notice of Appeal are as follows: (i) is the supply
of cannabis a zero‑rated supply?; and (ii) if he is found guilty, have
the amounts of his supplies and tax been correctly calculated since the only
evidence of sales involved came from the results of the police investigation?
[5]
The motions of
Mr. Dion and Mr. Payeur came on for hearing on
September 9, 2010. However their Notices of Appeal were amended by
their counsel that day on consent so that the zero‑rated supply argument
could be raised. These amendments allowed the Respondent a period of time
within which to revise its Replies. For this reason, it became premature to
hear a motion to strike the Replies on the basis that they did not disclose any
reasonable ground for opposing the appeals. It became therefore necessary to
adjourn the scheduled hearing and it was agreed and ordered that written
submissions would be filed in respect of the motions, that a similar motion
would be filed by Mr. Bailey, and that the three motions would be argued
together.
II. The Law
[6]
It is the Appellants’
position that the supply of cannabis and cocaine are zero‑rated supplies.
A zero‑rated supply is defined in subsection 123(1) of the GST
legislation as a supply included in Schedule VI.
[7]
Part I of
Schedule VI is headed “Prescription Drugs and Biologicals”. Section 2
of Part I lists the supply of “(d) a drug that contains a substance
included in the schedule to the Narcotics Control Regulations, other
than a drug or mixture of drugs that may be sold to a consumer without a
prescription pursuant to the Controlled Drugs and Substances Act. . .”.
(Paragraph (d) was revised in 2008 to add to the excluding phrase a
reference to exemptions by the Minister of Health in respect of the so‑called
medical use of marihuana.)
[8]
The Narcotics
Control Regulations under the Controlled Drugs and Substances Act
include:
2. Coca (Erythroxylon), its preparations,
derivatives, alkaloids and salts, including:
(1)
Coca leaves
(2)
Cocaine (benzoylmethylecgonine)
(3)
Ecgonine (3–hydroxy–2–tropane carboxylic acid)
. . .
17. Cannabis, its preparations, derivatives and similar synthetic
preparations, including:
(1)
Cannabis resin
(2)
Cannabis (marihuana)
(3)
Cannabidiol (2–[3–methyl–6–(1–methylethenyl)–2–cyclohexen–1‑yl]‑5‑pentyl–1,3–benzenediol)
(4)
Cannabinol (3–n–amyl–6,6,9–trimethyl–6–dibenzopyran–1–ol)
(5)
Nabilone ((±)–trans–3–(1,1–dimethylheptyl)–6,6a,
7,8,10,10a–hexahydro–1–hydroxy–6,6–dimethyl–9H–dibenzo[b,d]pyran–9–one)
(6)
Pyrahexyl (3–n–hexyl–6,6,9–trimethyl–7,8,9,
10–tetrahydro–6–dibenzopyran–1–ol)
(7)
Tetrahydrocannabinol (tetrahydro–6,6,9–trimethyl–3–pentyl–6H–dibenzo[b,d]pyran–1–ol)
(7.1)
3-(1,2-dimethylheptyl)-7,8,9,10-tetrahydro-6,6,9-trimethyl-6H-
dibenzo[b,d]pyran-1-ol
(DMHP)
but not
including
(8)
Non–viable Cannabis seed, with the exception of
its derivatives
(9)
Mature Cannabis stalks that do not include
leaves, flowers, seeds or branches; and fiber derived from such stalks
[9]
The Canada Revenue
Agency (the “CRA”) has published GST/HST Memorandum 4.1 on Drugs and
Biologicals. GST/HST Memoranda are not law but constitute an administrative general
commentary on the law. Paragraph 12 of this memorandum deals with the zero‑rating
of drugs that contain a substance included in the Narcotics Control
Regulations. The Appellants point out that paragraph 12 includes the
sentence “[t]hese drugs or substances are zero‑rated throughout the production
and distribution chain (i.e., regardless of who sells them)”. The Appellants
submit that this supports their interpretation that the zero‑rating
extends to illegal sales of narcotic drugs. Specifically, they argue that this
indicates the Ministère du Revenu du Québec (the “MRQ”), which administers the
GST in the province of Quebec on behalf of the federal government, has assessed
the Appellants contrary to the CRA’s administrative position.
[10]
The jurisprudence is
well‑settled: illegal drug sales constitute taxable transactions (taxable
supplies of goods for GST purposes). See Molenaar v. The Queen,
2003 TCC 468, 2005 DTC 857, [2005] G.S.T.C. 56,
affirmed by the Federal Court of Appeal 2004 FCA 349, 2005 DTC 5307,
[2005] G.S.T.C. 112, and Ouellette v. The Queen,
2009 TCC 443, [2010] G.S.T.C. 11.
[11]
The decision of this
Court in Lavie v. The Queen, 2006 TCC 655, [2008] G.S.T.C. 44,
pertained to the computation of illegal drug revenues and is an example of a
situation where the Appellant was able to rebut the Minister’s assumptions
which were based almost entirely upon the results of a police investigation
into illegal drug activities.
[12]
The decision of this
Court in Centre hospitalier Le Gardeur v. The Queen, 2007 TCC 425,
[2007] G.S.T.C. 170, involved a number of Quebec hospitals arguing
that in vitro diagnostic kits are zero‑rated by virtue of
paragraph 2(a) of Part I of Schedule VI of the GST
legislation since they are drugs included in Schedule D to the Food and
Drugs Act. It can be noted that Centre hospitalier involved lawful
sales of these goods. In that case, the Court gave the words “drug” and “drogue” in the GST legislation the meaning it
had in the Food and Drugs Act since it was defined for the purposes of
that Act. Specifically, the Court equated the words “drug” and “drogue” with “medication”.
It can be noted that in that case, the Controlled Drugs and Substances Act
was in issue and that the words “drug” and “drogue” are used in its title and
in its opening preamble, and that those words are not defined in the remainder
of the legislation. Similarly, the words “drug” and “drogue” are used in the
GST legislation to describe the zero‑rated supplies in question. It is
also noted that in Schedule VI, Part I uses the word “médicament” in
French for the English word drug.
[13]
The decision of the
Cour du Québec in Robitaille c. Québec (Sous-ministre du Revenu), [2010]
J.Q. No. 11046 (QL), 2010 QCCQ 9283, was rendered since the initial
motion date. In issue in Robitaille were the application of the Quebec
provincial income tax and provincial sales tax (“TVQ”) on unlawful sales of
cocaine in the course of trafficking in narcotics.
[14]
In Robitaille,
the Court again followed such cases as Molenaar and Ouellette in
holding that illegal drug sales are taxable transactions and held cocaine sales
to be taxable supplies for TVQ purposes. The Court appears to have, at least in
obiter, expressly rejected the argument that persons acting illegally
cannot be considered to be the agent of the MRQ for purposes of collecting the
TVQ.
[15]
It is important to note
that the Cour du Québec, in Robitaille, had to consider the argument
that cocaine sales were zero‑rated supplies for purposes of the TVQ. The
TVQ zero‑rating regime applicable to drugs is similar to that of the GST
legislation. The Court rejected the argument that cocaine was zero‑rated
as follows:
81 Par ailleurs, l'article 16 L.T.V.Q. prévoit que toute
fourniture taxable effectuée au Québec est assujettie à la TVQ au taux de 7,5 %
à moins d'être considérée comme une fourniture détaxée, auquel cas le taux de
la TVQ est nul.
82 Selon l'article 1 L.T.V.Q., une fourniture est détaxée lorsqu'elle
est visée au chapitre IV de la Loi. Or, l'article 174(1)d/
L.T.V.Q. énonce :
174. « Les fournitures suivantes sont détaxées :
1. La fourniture d'une des drogues suivantes, sauf
si elle est étiquetée ou fournie uniquement pour être utilisée en agriculture
ou en médecine vétérinaire;
d) Une drogue contenant une substance visée à
l'annexe du Règlement sur les stupéfiants adopté en vertu de la Loi
réglementant certaines drogues et autres substances (Loi du Canada,
1996, chapitre 19), sauf une drogue ou un mélange de drogues pouvant être
vendu à un consommateur sans prescription conformément à cette loi à tout règlement
adopté en vertu de cette loi. »
83 À cet égard, le paragraphe de l'annexe 1 adopté en
vertu de l'article 60 de la Loi réglementant certaines drogues et
autres substances mentionne explicitement la cocaïne.
84 Ainsi, selon ces dispositions, la volonté du législateur
est de détaxer non pas les stupéfiants, telle la cocaïne, mais un médicament
c'est‑à‑dire une drogue au sens de la Loi sur les aliments et
drogues qui contient un stupéfiant et qui est prescrit par un médecin.
85 En ce sens, la Cour canadienne de l'impôt dans Centre
hospitalier Le Gardeur c. La Reine, s'exprime comme suit :
« [49] L'exemple de l'alinéa 2d) nous aidera en
partie à comprendre le sens grammatical et ordinaire à octroyer à
« drogue » à l'alinéa 2a). L'alinéa 2d) indique
« les drogues contenant un stupéfiant figurant à l'annexe du Règlement
sur les stupéfiants [...] ». La Cour ne voit pas comment elle pourrait
alors donner la signification restrictive à « drogue », que veut lui
donner l'intimée. En effet, si une drogue correspond à la définition de « matière
première » comme le propose l'intimée, comment pourrait-elle contenir
autre chose tel un stupéfiant, tel qu'on le dit à l'alinéa 2d)? Une
matière première est une substance provenant de la nature ou produite par la
nature en totalité. Lorsqu'on commence à y intégrer autre chose, elle n'est
plus un « matériau d'origine naturelle » mais bien un autre produit,
un produit transformé. En ce sens, la définition de « drogue » qui
peut contenir un stupéfiant est celle de la LAD. De plus, la même
logique peut trouver une application à l'article 3 de la partie I de
l'Annexe VI. En effet, dans cet article on vise la « fourniture de
drogues destinées à la consommation humaine et délivrées par un médecin
[...] ». Selon la définition de l'intimée, on viserait la fourniture de
« matière première employée pour les préparations médicamenteuses »,
destinée à la consommation humaine. Selon la définition des appelants, on
viserait plutôt un mélange de substances vendu comme pouvant servir au
traitement d'une maladie, soit une drogue au sens de la LAD. À notre
avis, puisque la matière première est destinée à la fabrication d'un
médicament, elle ne peut donc être du même coup destinée à la consommation
humaine. Nous devrions donc privilégier la définition de « drogue »
de la LAD pour l'article 3 de la partie I de l'Annexe VI.
En ce sens, en considérant le sens grammatical et ordinaire de
« drogue » à l'alinéa 2a), en fonction de son contexte,
et en privilégiant une signification commune de « drogue » à
l'intérieur de la partie I de l'Annexe VI, il semble bien que la Cour
doive privilégier la définition de « drogue » contenue à la LAD
proposée par les appelants au détriment de la définition de « matière
première » préconisée par l'intimée. »
« [50] L'alinéa 2a) fait partie de la
partie I de l'Annexe VI. Le titre de la partie I de
l'Annexe VI de la LTA s'intitule « Médicaments sur ordonnance
et substances biologiques » (en anglais « Prescription drugs and
biologicals »). L'auteur Pierre‑André Côté indique que le titre
d'une partie contenant une disposition ambiguë, comme c'est le cas en l'espèce,
est pertinent quand il s'agit d'interpréter cette disposition. Puisque le titre
de la partie en question traite de médicaments sur ordonnance et de substances
biologiques, il est logique de penser que l'on traitera de ces deux thèmes à
l'intérieur de la dite partie. En ce qui concerne les substances biologiques,
on sait que cette partie du titre fut ajoutée en raison de l'ajout de
l'article 5 à cette partie. En ce qui concerne les autres articles de la
Partie I, on en déduit donc que ce sont des médicaments sur ordonnance
qu'on voulait traiter. Puisque le législateur n'a utilisé à aucun endroit le terme
« médicament » dans la partie I, on peut penser que d'autres
termes jouent alors ce rôle. À notre avis, comme le laissent entendre les
appelants avec la définition de « drogue » et de « drug »
dans la LAD, et la définition de « drug » dans les dictionnaires,
nous croyons que « drogue » telle qu'utilisée à l'alinéa 2a)
signifie alors « médicament ». C'est là une conclusion logique à
laquelle on peut en arriver de manière à concilier le titre français de la
partie I avec le contenu de cette même partie. En anglais, la question ne
se pose pas vraiment, puisque « drug » peut vouloir signifier
« médicament » tant en vertu des dictionnaires que de la LAD. »
[16]
The Cour du Québec’s
decision has not been appealed from and the appeal deadline has since expired. It
is the Appellant’s submission that Robitaille was wrongly decided.
III. Considerations Applicable to the Motion
[17]
The Court is not being
asked to conduct a reference by agreement of the parties under section 310
of the GST legislation. Nor is it being referred a question by the Minister
under section 311. The Bailey motion has been brought under Rules 53
and 58. These are motions by the Appellants to strike the Respondent’s Replies
on the basis that they disclose no reasonable grounds for opposing the motion
or will contribute to delay. The applicable threshold is quite high: such
motions can only be granted if the Court is satisfied that it is plain and
obvious, or manifestly evident, from the Replies, that no reasonable grounds
for opposing the appeals exist. As set out by the Appellants in
paragraph 7 of their written submissions:
Les critères applicables concernant le rejet ou la radiation d’un
avis d’appel selon les articles 53 et 58b) des Règles ne sont pas
différents. L’avis d’appel sera rejeté ou radié lorsqu’il est évident et
manifeste qu’il n’y a aucune chance de succès. Voici ce que le juge Miller
précise dans l’affaire Gauthier (Gisborn) c. La Reine,
2006 CCI 290 :
[5] Quel est donc le critère d’application de l’article 53
des Règles? Je pense qu’il n’est pas différent du critère de
l’article 58 des Règles, selon lequel un acte de procédure sera
radié s’il est évident et manifeste qu’il n’a aucune chance de succès.
Contrairement à de nombreuses autres cours, les Règles de la Cour
canadienne de l’impôt comprennent des dispositions différentes pour, d’une
part, radier un acte de procédure entier au motif qu’il ne révèle aucun moyen
raisonnable d’action (article 58 des Règles) et pour, d’autre part,
radier des parties d’un acte de procédure aux motifs énumérés à l’article 53
des Règles cité ci‑dessus. L’arrêt de principe en la matière est
la décision de la Cour suprême du Canada dans l’affaire Hunt c. Carey Canada
Inc., dans laquelle le critère a été énoncé de la façon suivante:
Ainsi, au Canada, le critère régissant l'application de dispositions
comme la règle 19(24)a) des Rules of Court de la Colombie‑Britannique
est le même que celui régissant une requête présentée en vertu de la règle 19
de l'ordonnance 18 des R.S.C. : dans l'hypothèse où les faits
mentionnés dans la déclaration peuvent être prouvés, est‑il
« évident et manifeste » que la déclaration du demandeur ne révèle
aucune cause d'action raisonnable? Comme en Angleterre, s'il y a une chance
que le demandeur ait gain de cause, alors il ne devrait pas être « privé
d'un jugement ». La longueur et la complexité des questions, la nouveauté
de la cause d'action ou la possibilité que les défendeurs présentent une
défense solide ne devraient pas empêcher le demandeur d'intenter son action. Ce
n'est que si l'action est vouée à l'échec parce qu'elle contient un vice
fondamental qui se range parmi les autres énumérés à la règle 19(24) des Rules
of Court de la Colombie‑Britannique que les parties pertinentes de la
déclaration du demandeur devraient être radiées en application de la règle 19(24)a).
[18]
In Carma Developers
Ltd. v. The Queen, 96 DTC 1803, Christie A.C.J. of this
Court wrote:
In Moriarity et al. v. Slater et al., 67 O.R.
(2d) 758, Mr. Justice White said at page 764:
I am of the view that, as in an application under
rule 21.01(1)(b) (of the Ontario Rules of Civil Procedure),
that is an application to strike out a pleading on the ground that it discloses
no reasonable cause of action, so in an application under rule 21.01(1)(a)
that is an application for the determination before trial of a question of law
raised by a pleading, that caution and prudence should govern the exercise of
the court's discretion.
In summary, I am of the opinion that paragraph 58(1)(a)
of the Rules is not intended as an easily accessible alternative to a trial for
the disposition of complex and contentious disputes about the rights and
liabilities of litigants. It is to be invoked when it is clear that the
determination of all or part of a dispute by trial would be essentially
redundant. . .
[19]
Carma Developers was referred to by the
Federal Court of Appeal with approval in The Queen v. Jurchison et al.,
2001 DTC 5301.
[20]
The Federal Court in O’Neil
v. The Queen, 95 DTC 5060, described the test for a similar rule
as follows: (i) is it plain and obvious that the pleading discloses no
reasonable cause of action?; and (ii) is the action so futile that it does
not have the slightest chance of success or will not lead to any practical
result?
[21]
In The Queen v. Special
Risks Holdings Inc., 89 DTC 5039, the Federal Court of Appeal stated
that, under that test, a court must ask whether there is at least a possibility
of a cause of action based on the allegations in the pleading. In Glenmaroon
Holdings (1986) Limited v. The Queen, 97 DTC 857 (TCC), aff’d
99 DTC 5185 (FCA), this Court stated that, under that test, a court
must ask whether the outcome of the case is beyond reasonable doubt. Similarly
in the Queen v. Ferner, 74 DTC 6216, the Federal Court stated
that a court must ask whether there is at least an arguable case.
[22]
In Main Rehabilitation
Co. Ltd. v. The Queen, 2003 TCC 454, 2004 DTC 2099, aff’d
2004 FCA 403, 2004 DTC 6762 (leave to appeal to the Supreme
Court of Canada dismissed), this Court held that the threshold of application
of section 53 of the Rules is high: that provision is not to be applied
unless the issue raised in the Notice of Appeal clearly has no merit.
[23]
In Sentinel Hill
Productions (1999) Corporation v. The Queen,
2007 TCC 742, 2008 DTC 2544, former Chief Justice
Bowman of this Court wrote that “[t]o strike out a pleading or part of a
pleading under Rule 53 it must be plain and obvious that the position has
no hope of succeeding. The test is a stringent one and the power to strike out
a pleading must be exercised with great care.”
[24]
With respect to the
issue of unduly delaying the resolution of the appeal, the Appellants’ position
is that given the approaches taken by the MRQ in the assessments to estimating
sales revenues, the taxpayers will be required to adduce considerable evidence,
including, potentially, expert evidence, in order to discharge their burden of
proof with respect to the issues of quantum.
[25]
The Dion and Payeur
motions are under the Informal Procedure. However, where Rules 53 and 58 are
applied by analogy in accordance with Rules 19(1) and 19(4) on a
suppletive basis, the threshold tests are essentially the same.
[26]
The Respondent’s
position in the Replies that illegal drug sales are not zero‑rated
supplies has already persuaded the Cour du Québec. It would be therefore inappropriate
for this Court to conclude that this same argument is without merit and does
not have any chance of success. It may be that the Cour du Québec’s decision
ultimately will not be followed by this Court for whatever reason. However, it
is premature to conclude that it is manifestly evident or plain and obvious
that the Respondent’s Replies do not set out a reasonable basis for opposing
the appeals. Judicial comity
requires that this Court at least acknowledge a decision of a provincial court
having essentially coordinate jurisdiction over the same subject matter which
decision upholds the Respondent’s legal position. How can it be plain and evident
that no reasonable ground with any prospect of success has been advanced when
the Cour du Québec has decided in Robitaille to uphold comparable
assessments under Quebec provincial sale tax legislation? In Robitaille
the Cour du Québec expressly rejected the argument that cannabis sales are zero‑rated
supplies. In doing so it relied upon a decision of this Court, Centre hospitalier,
which equated the word drug with medication.
[27]
To quote again from
Bowman C.J. in Sentinel Hill:
“Where senior and experienced counsel advances a proposition of fact
or law in a pleading that merits serious consideration by a trial judge, it is
at least presumptuous and at most insulting and offensive to force counsel to
face the argument that the position is so lacking in merit that it does not
even deserve to be considered by a trial judge.”
[28]
This applies all the
more so to a decision of the Cour du Québec.
[29]
For the above reasons, in
these cases, it would not be appropriate to decide the issue raised by the
Appellants on a motion. Unless the parties agree to a common reference or the
Minister refers a question to the Court, the determination of the issue raised
in these motions must be left to the trial judge. Even if the Minister were to
refer this question to the Court under section 311, it is not clear that
the Court would proceed to a determination of the question given that, if the
question were answered in the negative and the illegal sale of drugs held not to
be a zero‑rated supply, substantial issues requiring a trial in any event
would remain between the parties.
[30]
Further, it can be
observed that, with respect to the appeals in Dion and Payeur, the definition
of cannabis in the Narcotics Control Regulations excludes several forms
of cannabis whereas the pleadings only refer to cannabis. The definition of
cannabis may require further evidence that is was not amongst the three
excluded types of cannabis.
[31]
The motions are denied,
with costs.
Signed at Toronto, Ontario, this 28th day of April 2011.
"Patrick Boyle"
Translation certified true
On this 3rd day of May 2011
François Brunet, Revisor
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