Citation: 2013 TCC 276
Date: 20130906
Docket: 2012-2336(EA)I
BETWEEN:
ANISSA FOLEY, BARRY FOLEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench
on August 20, 2013, at London, Ontario)
Pizzitelli J.
[1]
The Appellant was a
wine producer that held a licence under the Excise Act, 2001, of Canada, S.C. 2002, c. 22, as amended (the “Act”), that appeals reassessments of
excise duty by the Minister of National Revenue (the “Minister”) in respect of
19,471 litres of wine bottled from January 1, 2006 to December 31, 2007 (“First
Period”) and in respect of 10,383 litres of wine bottled from January 1, 2008
to April 30, 2009 (“Second Period”) resulting in excise duty of $12,222 assessed
in respect of the First Period and $6,720 assessed in respect of the Second Period.
As per the Act, duty at a rate of $0.5122 per litre was assessed for
that portion of the wine bottled from January 1, 2006 to June 30, 2006 and duty
at a rate of $0.62 per litre was assessed for that portion of the wine bottled
from July 1, 2006 to the end of the Second Period.
[2]
The Appellant argues it
was exempt from the assessed excise duty above on the basis of an exemption
contained in paragraph 135(2)(a) of the Act; namely arguing the
wine it produced was composed wholly of agricultural or plant product grown in
Canada. The Respondent argues that the Appellant used an additive composed of
ingredients grown outside of Canada in the production of its wines; namely a
syrup imported from Poland containing sugars and fruit juice that effectively
disqualified the wine from the aforesaid exemption.
[3]
The sole issue to be
decided then is whether the syrup used by the Appellant caused the wine it
bottled to fail to meet the requirement that the wine be composed wholly of
agricultural or plant product grown in Canada.
[4]
Most of the facts are
not in dispute and the Appellant has admitted the assumptions of the Minister
in paragraphs 9(a) to (d) inclusive of the Reply; namely that the Appellant
holds a valid wine licence under the Act, that it bottled the number of
litres during the First and Second Periods on which duty was reassessed and
that its wine contained more than 7% alcohol by volume giving rise to the duty
rates if no exemption applied. The Appellant also admitted the facts pleaded in
paragraph 10 of the Reply; namely that the wine bottled by the Appellant during
the Periods in question were packaged in bottles each less than 100 litres and
were not repackaged before being sold to consumers. The Appellant also admitted
that the wine contained additive produced in Poland although in evidence
testified that additive was only added when required, in about 75 to 80% of the
batches it produced.
[5]
The only assumptions of
the Minister in dispute were those found in paragraphs 9(e) and (f) of the
Reply which read as follows:
(e) The wine bottled by the appellant during the First and
Second Periods contained fruit juice/syrup produced in Poland and composed of
ingredients grown outside of Canada (the “Additive”); and
(f) The Additive was used to alter the flavour composition of
the wine packaged by the appellant, and was not used solely to facilitate the
fermentation of the wine.
[6]
In brief, the Appellant
takes the position that the Additive was not a fruit juice but a form of sugar
that was used in the fermentation process to allow sufficient level of sugar to
attain the desired level of sweetness not attained through the addition of
granular sugar through the initial fermentation process. The Respondent,
through its assumptions in dispute above, argues its purpose was mainly for
flavouring as an agricultural or plant product produced outside Canada. The difference in their respective characterization of the Additive may be relevant
if the Court finds the existence of the Additive per se does not disqualify the
wine from being subject to the exemption; or, in other words, finds that the
Additive does not prevent the wine from being composed wholly of agricultural
product grown in Canada but finds it consisted of fruit juice as a principal
component.
[7]
The evidence of the
Appellant is that the syrup imported from Poland was a sugar, composed of
glucose and fructose, types of sugar, that are used in a second stage of the
fermentation process to adjust the sweetness of the wine. There is no dispute
that the Appellant grew most of its own fruit; namely black currants,
strawberries, raspberries and blueberries on its farm in Ontario or purchased
other fruits such as cranberries grown in Canada that it used to make its
wines.
[8]
There is also no
dispute that in the production of wines, either conventionally using grapes, or
in the production of fruit-based wines as made by the Appellant, that granular
sugar is often added at the fermentation stage of production to increase the
level of fermentation and dictate both the alcohol content and sweetness of the
wine. The Respondent’s expert witness herself testified as to this fact and her
report clearly described the winemaking process in paragraphs 4 to 7 of her
report, which bear repeating here:
4. Wine
is produced by the alcoholic fermentation, without distillation, of the juice
of an agricultural product, other than grain or a derivative thereof. For simplicity’s
sake I refer to wine made principally from grapes, as it is the most widely
known.
5. Ripe
grapes are pressed to release the juice which is separated from the solid
matter, usually by decantation (pouring off the liquid). The concentration of
sugars in the juice is measured at this stage to determine whether it will be
necessary to add additional sugars to reach the desired alcohol content in the
finished wine, and if so, how much additional sugar is needed.
6. A
yeast culture is added to the liquid mixture (juice plus any added sugar) to
start the fermentation process. The yeast organism metabolizes the sugars in
the mixture to ethyl alcohol as well as other by-products such as carbon
dioxide. The amount of alcohol is directly related to the starting amount
of sugars in the liquid. The more sugar initially, the greater the amount of
alcohol produced.
7. When
the alcohol strength reaches the desired level, or if the winemaker wants to
leave residual sugar in the wine for sweetness, the fermentation process is
stopped, either by dropping the temperature of the mixture (“stunning” the
yeast”) or adding a preservative such as sodium bisulfite. At the point the
liquid may then be transferred to oak barrels or stainless steel containers (“unoaked”)
to be aged for several months after which it is filtered and bottled.
[9]
During her testimony,
the Respondent’s expert witness agreed that sugars may be added at later
stages, such as before bottling the wine, in order to increase the desired
level of sweetness, as did the Appellant in its process, rather than just
relying on the sugar level during fermentation. In fact, the Appellant’s process
was similar to the winemaking process described by the Respondent’s expert
witness for wine, with the exception that the Appellant added sugars when necessary
in liquid form to the mixture before bottling to fine tune the sweetness level
of the wine in addition to adding granular sugar to the mixture to increase the
level of sugar necessary for the fermentation process to start. The Appellant
testified that its fruit, unlike grapes, contain less sugar and that the
addition of granular sugar is necessary most of the time to stimulate the
fermentation process, which the Respondent’s witness found normal, and that to
have sweetness at the desired level, to add sugars in liquid form before
bottling if required.
[10]
What is clear from the
Appellant’s testimony, as confirmed by the Respondent’s expert testimony is
that sugar is a normal additive in the winemaking process as is yeast and that
the addition of sugars can be used to regulate sweetness both as part of the
fermentation process and afterwards. The Respondent itself implicitly
acknowledges this in its assumption in paragraph 9(f) wherein it assumes the
addition of the Additive was used to alter the flavour of the composition of
the wine instead of just used to facilitate the fermentation of the wine. The Minister
seems to take no offence to the use of sugars to aid fermentation or regulate
sweetness levels in this assumption, only to the use of additives to alter the
flavour in this particular assumption although argues in fact that the
interpretation of paragraph 135(2)(a) effectively makes any ingredients
not produced in Canada taint the wine from being “composed wholly of
agricultural or plant product grown in Canada”. Based on the Respondent’s argument
then it would seem clear to me the assumption in paragraph 9(f) is not relevant
to its main argument, but only its alternative arguments which will be
discussed later.
The Law
[11]
The relevant provisions
of the Act are found in sections 2 and 135.
[12]
Subsection 135(1)
reads:
135(1) Duty
is imposed on wine that is packaged in Canada at the rates set out in Schedule
6.
[13]
There is no dispute
that the wine in question was packaged in Canada as per the assumptions agreed
to and that Schedule 6 sets out the rates of duty that were applied by the
Minister.
[14]
Subsection 135(2) is an
exception of the charging provision of subsection 135(1), the relevant portions
of which read as follows:
(2)
Subsection (1) does not apply to wine that is
(a)
produced in Canada and composed wholly of agricultural or plant product
grown in Canada;
[15]
Section 2 is the
definition section of the Act and defines “wine” as follows:
“wine”
means
(a)
a beverage, containing more than 0.5% absolute ethyl alcohol by volume,
that is produced without distillation, other than distillation to reduce the
absolute ethyl alcohol content, by the alcoholic fermentation of
(i) an agricultural product other than grain,
(ii)
a plant or plant product, other than grain, that is not an agricultural
product, or
(iii)
a product wholly or partially derived from an agricultural product or
plan product other than grain; …
[16]
The Respondent argues
that paragraph 135(2)(a) effectively prohibits the use of any components
in wine that is not an agricultural or plant product grown in Canada, including
sugar, yeast or any flavouring or sweeteners for that matter. The Appellant
argues that paragraph 135(2)(a) only requires that the principal
ingredients used in the wine must be an agricultural plant or product grown in
Canada and that sugar or other incidental minor products are not caught by such
definition. The Appellant relies on Excise Duty Notice 15 or EDN 15 issued by
the Canada Revenue Agency (“CRA”) in June 2006 which states:
In
order to qualify for this exemption, wine that is packaged must be made from
100% Canadian-grown agricultural products. This means that all of the primary
ingredient that is fermented (e.g. grapes, berries, other fruit, honey, dandelions
and rice) must have been grown in Canada.
…
The
100% Canadian rule will apply to any juice added in the winemaking process, but
will not apply to incidental agricultural-based ingredients that are added in
the winemaking process (e.g. sugar).
[17]
Frankly, I am of the
view that the Appellant’s position as confirmed by the CRA’s EDN 15 is
consistent with the clear wording of paragraph 135(2)(a). There is no
question that the Appellant was producing wine in Canada. The only issue in
dispute is whether the wine was composed wholly of agricultural plant or product
grown in Canada. On first thought one might be tempted to assume that all
ingredients throughout the entire process should be included in analysing this
factor but this would be a ridiculous and impossible result for several
reasons.
[18]
Firstly, the definition
of wine itself refers to an agricultural or plant product that is subject to
the fermentation process. The terms agricultural or plant products referred to
in the section 2 definition section of wine are the same terms used in
paragraph 135(2)(a). A common sense interpretation would suggest that it
is the ingredients that are fermented that must be wholly grown in Canada, not the ingredients that cause the fermentation process such as sugars and yeast.
In the case at hand, the Respondent’s auditor acknowledged that the Appellant’s
fruit products that are the subject of fermentation were grown on the
Appellant’s farm in Canada or were grown on other farms in Canada and purchased by the Appellant and so I find this criteria to be met.
[19]
By requiring that the
agricultural or plant products be alcoholically fermented, Parliament has
clearly acknowledged that those products must undergo a process that it chose
not to restrict to ingredients grown or otherwise produced in Canada. If Parliament had intended that the sugars and yeast necessary for the process of
fermentation that is a requirement of the definition of wine and without which
wine could not be produced according to the testimony of the Respondent’s
expert witness; especially where the fruit used was not high enough in sugar
content to start off with, as is the case for the Appellant’s products the
majority of time, then it should have said so.
[20]
It follows as well that
if Parliament was only concerned that the products being fermented were grown
in Canada, then any ingredients added as sweeteners at later stages to raise
the sweetness level of wine or affect its flavour for that matter, are not
included as part of the agricultural or plant products that had to be grown in
Canada.
[21]
This is exactly
consistent with the interpretation given to the provision in EDN 15.
Accordingly, I find such interpretation bulletin to be consistent with the law
and not inconsistent with it so as to render it unenforceable as suggested by
the Respondent.
[22]
It is absolutely clear
on the evidence of both the Appellant and the Respondent’s expert witness that
the liquid syrup imported from Poland served the same function as sugar, and
consisted of glucose, fructose and maltose, all sugars per the Respondent’s
expert witness that accounted for between 93 and 98% of the dry weight content
of such products.
[23]
The Respondent’s expert
witness testified that the two samples of liquid syrup from Poland she was
asked to test only had fruit juice content of between 8 to 10%, so that if one
to two litres of such syrup was added to each wine batch as per the testimony
of the Appellant 75 to 80 % of the time, which I find credible, the volume of
fruit juice in the batch would only account for between 1 to 2% thereof in
total, hardly a principal ingredient nor one that could produce the volume of
litres the Minister reassessed on. Moreover, since the ingredient was added
after the fermentation process to increase the sweetness level, the timing of
which was not disputed by the Respondent, then such minor fruit juice was not
even the subject of the fermentation process as required above. In my view, it
is irrelevant whether such small amount affects the flavour of the wine. I accept
the Appellant’s testimony that liquid syrup used did not always match the fruit
that was the subject matter of the fermentation as the goal was to fine tune
sweetness of the wine not to impact its flavour. This evidence was not
contradicted and the opinion of the expert witness in her report that the
purpose was to affect flavour was, as per her own testimony, premised on the
assumptions given to her by the CRA official who retained her services.
[24]
Finally, it must be
said that based on the testimony of the Respondent’s expert witness, sugar is
commonly added to the liquid from the grapes or other fruit together with yeast
to ferment it. If, as she testified, Canadian sugar refineries use only about
10% Canadian sugar beet sugar mixed with sugar cane sugar in their product, it
would be almost impossible to buy 100% sugar on the market in Canada for use in
fermenting wine. There was no evidence proffered by the Respondent suggesting a
pure form of Canadian beet sugar is separately refined and sold, only that the
refineries blend it with non-Canadian product. It would make no sense to assume
Parliament intended to create an exception not readily obtainable or even
possibly so without using more specific language.
[25]
In conclusion, the
interpretation given to paragraph 135(2)(a) of the Act by the
Appellant as stated in the CRA’s EDN 15 is in my opinion consistent with the
plain meaning of the language of such paragraph and the definition of wine from
section 2 imported into that paragraph. The assumptions of the Minister,
including those contested in paragraphs 9(e) and (f) then, even if true, are
not capable of supporting the Minister’s reassessments Accordingly, the Appellant’s
appeal is allowed in full.
Signed
at Ottawa, Canada, this 6th day of September 2013.
“F.J. Pizzitelli”
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