Sunoco Inc. v. The Queen, 2001 FCT 731

Date: 20010629

Docket: T-1469-98

                                                                                        Neutral citation 2001 FCT 731

BETWEEN:                                      

                                                           SUNOCO INC.

Plaintiff

                                                                  - and -

                                              HER MAJESTY THE QUEEN

Defendant    

                                              REASONS FOR JUDGMENT

LEMIEUX J.:

Background

[1]                In this action, the plaintiff Sunoco Inc. ("Sunoco"), a manufacturer, distributor and retailer of gasoline and diesel fuel, seeks to set aside a May 31, 1997 assessment (Notice of Assessment No. 00093) made under the Excise Tax Act (hereinafter the "ETA") covering the period between August 1, 1994, and December 31, 1996, in the amount of $1,976,671.58 (excluding penalties and interest) after credits. The notice of assessment is based on an under remittance of tax "as a result of billing/remitting taxes on ambient volumes while otherwise billing for fuel on temperature-corrected volumes".

[2]                This action is to be determined on the basis of an agreed statement of facts and the legal question to be answered has been set out in the March 20, 2000 order of Prothonotary Aronovitch and is as follows:

Whether tax payable under subsection 23(1) of the Excise Tax Act is to be based on the actual volume or the temperature corrected volume of the fuel delivered? [emphasis mine]

[3]    The issue is whether Sunoco is required to remit excise tax on the temperature-corrected volume as claimed by Revenue Canada rather than the actual volume of all fuel delivered to customers when the price of fuel delivered was, in some cases, contractually adjusted to compensate for the variation in the energy content that occurs with variations in temperature at the time of delivery.

[4]    As will be seen from the agreed statement of facts, Sunoco invoiced its customers in two different ways: (1) on a temperature adjusted basis where the contract so specified; and (2) on a non temperature- adjusted or ambient basis where the contract did not provide for invoicing on a temperature adjusted basis. However, as will also be seen, Sunoco, regardless of the pricing to its customers, always collected from them and remitted to the defendant the excise tax on an actual delivered volume basis.

[5]    The relevant contractual clauses providing for a temperature-corrected adjustment and taxes in Sunoco's sales contracts read:

                                                    . . .

3.         The quantity or volume delivered shall be corrected for temperature to 15⁰C in accordance with co-efficients of expansion shown in ASTM-IP Petroleum Measurement Tables, D-1250, Table 54, or in the latest supplement thereto or revision thereof effective at the time of delivery.

Taxes

Any tax, duty, charge or fee including refund of crude compensation now or hereafter levied on the product sold hereunder, or required to be paid or collected by the party hereto delivering product hereunder by reason of the delivery, sale or use of said product, shall be paid by the buyer or the party hereto receiving such product in addition to the price specified herein, insofar as the same is not expressly included in such price. [emphasis mine]

[6]                  Exhibit "A" to the agreed statement of facts is a Sunoco temperature- adjusted invoice dated August 28, 1998. This invoice contains a column labelled "gross quantity" (34,998 litres) measuring the litres of fuel delivered and received on an ambient basis that is on the actual volume of fuel. The invoice contains another column labelled "net quantity", which is the quantity of fuel (34,791 litres) adjusted on account of temperature to 15 ^° C . In such a case, Sunoco bills for the fuel on the basis of the temperature-corrected volume, but the excise tax is calculated on the gross quantity or the actual or ambient volume.

The agreed statement of facts

[7]                  Set out below are the relevant paragraphs of the parties' agreed statement of facts:        

2.         During the relevant period, in addition to its sales of fuel at the retail pump to consumers, the Plaintiff sold fuel as a distributor to wholesalers, retailers and large volume end users (hereinafter referred as the "customers").

3.         The usual or normal unit of measurement for a quantity of fuel in Canada is the litre, a unit of measurement under the metric system.

4.         A "litre" is a measurement of capacity or volume, i.e. the amount of space that a substance occupies, that is equal to one cubic decimetre.

5.         The volume occupied by a given mass of fuel varies with changes in temperature, i.e., the volume occupied by a given mass of fuel increases with increases in temperature and the volume occupied by a given mass of fuel decreases with decreases in temperature.

6.         The energy content and thus the value of a given volume of fuel (for example, one litre) varies with temperature. That is, as temperature increases, the energy content of one litre of fuel measured on an ambient basis (i.e., the actual volume) decreases. Conversely, as temperature falls, the energy content of one litre of fuel measured on an ambient basis increases.

7.         Given the change in energy content and thus the value of a given volume of fuel at different temperatures, the practice has developed in Canada on some but not all sales of fuel of temperature correcting the actual volume of fuel measured at the time of delivery to the volume that would have been occupied by the delivered fuel had the temperature been 15⁰C at the time of delivery.

8.         In the petroleum industry, when one refers to a litre of fuel without qualification as to temperature correction, it is presumed to be a litre of fuel as actually measured on an ambient basis. The general trend in the industry is toward sales on a temperature-corrected basis.

9.         During the relevant period, the actual volume of fuel sold and delivered by the Plaintiff to its customers was measured in litres at the time of delivery and was shown by the Plaintiff on its invoices to its customers.

10.        On its delivery of fuel to its customers, the Plaintiff invoiced its customers pursuant to one of two contractual arrangements:

(i)         for certain customers, in determining the price and thus the amount to be invoiced, the contract provided that the volume of fuel delivered would be notionally corrected for temperature (i.e., to the volume the fuel would have occupied had the temperature been 15⁰C at the time of delivery) (see sample invoice and related contractual terms attached as Exhibit "A" hereto); and

(ii)         for other customers, whose contracts were silent as to temperature correction, there was no adjustment made to the price of fuel delivered. In these instances, the total delivered price paid by the purchaser was based on the actual volume delivered as measured in litres at the time of delivery (see sample invoice and related contractual terms attached as Exhibit "B" to this Request).

11.        Adjusting the volume of fuel to what it would have been at a temperature of 15⁰C is the mechanism used by the Plaintiff and its customers to adjust the price of the fuel purchased so as to account for the variability in energy content depending upon the temperature of the fuel at the time of delivery.

12.        The amount payable by customers for delivered fuel included federal and provincial taxes payable or collectible by the Plaintiff as a consequence of the sale and delivery of the fuel.

13.        The Plaintiff is required by subsection 23(1) of the Excise Tax Act (the "Act"), in conjunction with subsection 23(2) of the Act and Schedule 1 to the Act, to pay excise tax of so many cents per litre of fuel sold and delivered.

14.        The amount of excise tax paid by the Plaintiff under subsection 23(1) of the Act in respect of the sale and delivery of fuel under both invoicing arrangements described in paragraph 11 above was calculated based on the actual volume delivered to the customers as measured in litres at the time of delivery.

15.        The amount of excise tax so calculated (by applying the applicable rate set out in Schedule I to the Act to the actual volume of fuel delivered as measured in litres at the time of delivery) was shown by the Plaintiff on all invoices to its customers.

                                                    . . .

18.        For customers whose contract was silent as to temperature correction, as described in paragraph 10(ii) above, the Defendant accepts that excise tax under the Act was payable by the Plaintiff on the actual volume of fuel sold.

19.        The Act was amended, effective February 19, 1997 (S.C. 1997 c. 26 s. 87 assented to April 25, 1997) with the addition of section 23.01 (the "Amendment"), which provides that for the purposes of determining the excise tax imposed under subsection 23(1), the volume shall be (i) measured in accordance with the temperature-corrected method where that method was used to establish the amount charged to the purchaser, and (ii) measured in accordance with the uncompensated method (actual volume) where that method was used to establish the amount charged to the purchaser.

20.        As the transactions that were the subject of the Assessment occurred before February 19, 1997, the Amendment does not apply to any of the transactions that were the subject of the Assessment. [emphasis mine]

Legislation

[8]                At the time of the deliveries covered by the assessment, subsections 22, 23(1), (2) and (3) of the ETA read:

[9]                Paragraphs 9 and 9.1 of Schedule I to the Act read:

[10]            Section 23.01, effective February 19, 1997, reads as follows:

Arguments

[11]            The plaintiff submits the volume of fuel actually delivered is the basis for determining the excise tax imposed by subsection 23(1). Accordingly, absent specific provisions to the contrary, volume means the actual volume of fuel delivered. Thus, the plaintiff argues, the defendant's May 31, 1997 assessment is incorrect, since the excise tax is based on the temperature- corrected rather than the actual volume of the fuel delivered.

[12]            The defendant counters subsection 23(1) seeks to impose a specific tax rate that relates to the value of the goods. The defendant argues the temperature corrected quantity of fuel reflects the true value of the goods, because it reflects the parties' contractual intentions as to the number of litres considered to be delivered. The defendant further submits that to levy an excise tax on a volume that does not reflect the parties' intention as to the value of the goods delivered, promotes uncertainty and inconsistency in the ETA's application.

Analysis

(i) Statutory Construction

[13]            In Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, Iabobucci J. at pages 40-41, speaks to the relevant principle of statutory construction with respect to interpreting legislative dispositions:

Although much has been written about the interpretation of legislation (see, e.g., Ruth Sullivan, Statutory Interpretation (1997); Ruth Sullivan, Driedger on the Construction of Statutes (3rd ed. 1994) (hereinafter "Construction of Statutes"); Pierre-André Côté, The Interpretation of Legislation in Canada (2nd ed. 1991)), Elmer Driedger in Construction of Statutes (2nd ed. 1983) best encapsulates the approach upon which I prefer to rely. He recognizes that statutory interpretation cannot be founded on the wording of the legislation alone. At p. 87 he states:            

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

                                        . . .

I also rely upon s. 10 of the Interpretation Act, R.S.O. 1980, c. 219, which provides that every Act "shall be deemed to be remedial" and directs that every Act shall "receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Act according to its true intent, meaning and spirit".

Although the Court of Appeal looked to the plain meaning of the specific provisions in question in the present case, with respect, I believe that the court did not pay sufficient attention to the scheme of the ESA, its object or the intention of the legislature; nor was the context of the words in issue appropriately recognized. I now turn to a discussion of these issues.

[14]            I take the following principle of statutory interpretation from the Supreme Court of Canada's decision in Shell Canada Limited v. Her Majesty The Queen, [1999] 3 S.C.R. 622, when dealing with a taxing statute such as the Income Tax Act (and I add the Excise Tax Act) which was before that Court. McLachlin J., as she then was, made the following points:

[40]    Second, it is well established in this Court's tax jurisprudence that a searching inquiry for either the "economic realities" of a particular transaction or the general object and spirit of the provision at issue can never supplant a court's duty to apply an unambiguous provision of the Act to a taxpayer's transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied... .

                                        . . .

[43] . . . courts must therefore be cautious before finding within the clear provisions of the Act an unexpressed legislative intention: . . . under the guise of purposive interpretation runs the risk of upsetting the balance Parliament has attempted to strike.

[45] The Court ‘s role is to interpret and apply the Act as it was adopted by Parliament. [emphasis mine]

[15]            With specific respect to interpreting the ETA, I share the view of Malone J.A. in Her Majesty the Queen v. RJR MacDonald, [2001] 2 F.C. 191, where he states:

[5] Other panels of this Court have struggled with interpreting the provisions of the Excise Tax Act which has been the subject of numerous amendments. Those difficulties were recently identified by my colleague Décary J.A. in the following words:

When dealing with ... piecemeal legislation such as the Excise Tax Act, ... which, unlike, for example, the Income tax Act, has no coherent structure and contains no basic rules to start with and which is amended on a routine basis to accommodate or redress specific situations in a constantly evolving commercial reality, the Court should be reluctant to compare microscopically the words of provisions devised at different times and in a different context and meant to address distinct concerns.

[6] I share that reluctance given the Byzantine history of Parts III and VI of the Act, and the changing administrative policies advanced by the Department since 1935. My task then is to interpret the meaning of the words used in subsections 23 (1),(2) and (10) and their interrelationship so as to ascertain the true intention of Parliament. [emphasis mine]

(ii)        The scheme of the Excise Tax Act

[16]            As observed by Justice Malone in RJR MacDonald, supra, the Excise Tax Act is a complex statute containing many varied parts and schedules most of which appear self-standing in terms of excise tax imposition and collection. For example:

(a) Part I deals with a tax on insurable premiums;

(b) Part II imposes an air transportation tax;

(c) Part II.1 dealt with a telecommunications programming service tax now incorporated into the GST;

(d) Part III, with which we are concerned, is headed "Excise Taxes on Cosmetics, Jewellery, Radios, etc."; it is a tax on goods, i.e., those specified in the Schedule;

(e) Part IV imposes excise taxes on playing cards and wines;

(f) Part V creates a tobacco products inventory tax;

(g) Part VI structured a comprehensive scheme relating to a consumption or sales tax which is now subsumed into the GST;

(h)        Part VII contains general administrative provisions while Part VIII contains transitional provisions; and

(i)         Part IX enacts the goods and services tax.

[17]            The schedules to the Act are equally varied and self-containing and may be summarized for illustrative purposes without dealing with all of them:

(a)        Schedule I identifies the goods subject to tax and establishes the rates of tax under section 23 of the Act, as noted, the provision at issue here. Covered are such articles as clocks and watches, automobiles, certain air conditioners and gasoline as well as diesel and aviation fuel;

(b)        Schedule II also relates to section 23 of the Act and is headed "Tax rates on tobacco products";

(c)        Schedule II.1 implements the consumption or sales tax under section 50 and is headed "specific tax rates on petroleum products" referring to regular and premium gasoline at X cents per litre;

(d)        Schedule III deals with coverings and containers and creates exceptions to charging provisions as does Part II of the Schedule headed "Diplomatic".

[18]            The statutory scheme of the Excise Tax Act, in my view, tells us the following about the provisions of its Part III and Schedule I based on a plain reading of the words contained:

(1)        the tax imposed is on specified goods;

(2)        the tax applies to these goods when imported into Canada as well as on these goods when manufactured and sold in Canada and delivered to a purchaser;

(3)        the rate of tax is either expressed as a percentage or in monetary units (cents or dollars);

(4)        if the rate of tax is expressed as a percentage it is computed (or calculated) on the duty paid value for imports or the sale price when manufactured in Canada;

(5)        if the rate of tax is expressed in monetary terms the tax is computed by reference to units measured (litres or kgs);

(6)        the tax, in the case of imports, is payable in accordance with the provisions of the Customs Act by the importer, owner or person liable to pay the duties. That tax, in the case of goods manufactured and sold in Canada, is payable by the manufacturer at the time of delivery to the purchaser;

(7)        for gasoline and diesel fuel, subsection 23(3) deems delivery to a retail outlet on behalf of a manufacturer to "be deemed to have been sold and delivered to a purchaser thereof".

(iii)       The defendant's contextual approach

[19]            Defendant acknowledges Sunoco paid excise tax on the actual volume of all gasoline physically delivered to its customers whether on a temperature adjusted volume for pricing purposes or not.

[20]            Defendant argues a proper reading of the relevant provisions of Part III of the ETA requires Sunoco to pay tax on the volume of fuel for which it has, in the case of its sales agreement incorporating a notional volume adjustment at 15 ^° C temperature adjustment, sold/delivered to its customers. Defendant says it does not seek to tax Sunoco on the basis of the "sales price" of fuel conceding that the "sales price" as defined in Part III of the ETA is only the basis for the computation of tax where there is a percentage rate to be applied.

[21]            Defendant frames the issue as to what is the proper characterization of the volume of fuel delivered for the purpose of excise tax and this is where defendant's contextual approach comes into play.

[22]            This approach reaches back to the definitions of "duty paid value", "sale price" and their calculations in section 22 as well as looking to the provisions of section 23 especially subsection 23(3).

[23]            Defendant argues the term "litre" in paragraph 9 of Schedule I of the ETA, takes its meaning from this context -- a meaning not derived from the term "litre" per se but rather from the terms "sold" and "delivered" in subsections 23(1) and 23(3).

[24]            Defendant argues subsection 23(1) seeks, although through a specific rate, to impose a tax that relates to the value of the goods -- a value in cases such as fuel which is often a reflexion of its volume or quantity measured in litres.

Conclusions

[25]            I do not accept, for a number of reasons, the defendant's argument that, for the purpose of paragraph 9 of Schedule I of the ETA, the volume to be measured in litres should be the notional temperature-adjusted volume rather than the physical volume actually delivered by Sunoco even though in some cases Sunoco adjusts that volume for pricing purposes.

[26]            First, the defendant's theory that Part III of the ETA seeks to capture the value of the goods and to impose a tax on value is strained and, in my view, ignores the fact Parliament chose two bases for imposing excise taxes: (1) as a percentage of a certain value of goods (duty paid value in the case of imports, i.e., ad valorem) or as a percentage of sale price in the case of goods manufactured and sold in Canada and (2) as a fixed rate (in cents or dollars) per unit of measurement (kgs, litres, and gallons). The two bases of excise taxation clearly flow from subsection 23(1) by the use in the charging section of the words "... there shall be imposed, levied and collected, in addition to any other duty or tax that may be payable under this or any other Act or law, an excise tax in respect of those goods at the applicable rate set out in the applicable section in whichever of those Schedules is applicable computed, where that rate is specified as a percentage, on the duty paid value or the sale price, as the case may be".

[27]            In Canadian Turbo (1993) Ltd. v. Her Majesty The Queen, [1996] F.C.J. No. 1576, the issue before the Court of Appeal was whether the sales tax imposed on gasoline and diesel fuel pursuant to section 50 of the ETA was an ad valorem tax. That charging section read as follows:

      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

(a) produced or manufactured in Canada...

Subsection (1.1)(c) made a reference to Schedule II.1, as noted, and provided for an adjustment mechanism. Schedule II.1 of the ETA is structured in a manner similar to paragraph (9) of Schedule I.

[28]            Justice McDonald, for the Court, held the section 50 ETA tax on gasoline or fuel was not an ad valorem tax which was refundable under subsection 68.21(2) of the ETA. The trial judge in Canadian Turbo, supra, had relied upon several dictionary definitions to conclude, correctly in Justice McDonald's view, that ad valorem taxes are calculated on the basis of the price or value of the property being taxed, whereas a specific tax is assessed on the basis of the number of classifications or units of commodity being taxed. The issue in the case turned on the adjustment factor -- the tax rate was adjusted every three months to reflect the market price of gasoline and whether such adjustment factor transformed what would otherwise be a specific tax into an ad valorem tax. The trial judge had held the adjustment factor did in fact transform the specific tax into an ad valorem tax. The Minister appealed and argued the gasoline tax was imposed at a fixed rate per litre of fuel and therefore constitutes a tax on the volume of fuel sold rather than on its value not refundable under section 68. Justice McDonald agreed stating it was a basic rule of statutory construction that, where the words of a statute are clear and precise and contain no ambiguity, their ordinary meaning should be applied without further analysis. Justice McDonald held paragraphs (1) to (5) of Schedule II.1 of the Act "clearly established a flat rate of tax per litre".

[29]            While Canadian Turbo, supra, might be helpful to the defendant in terms of finding the section 50 ETA sales tax is a specific tax on the volume of gasoline sold, it must be recalled the words of the section 50 charging section are "the sales price or volume sold" words not found in section 23. Rather, section 23 of the ETA is framed as a tax on specified goods produced in Canada and calculated at the time of delivery.

[30]            In my view, the defendant's focus on subsection 23(3) does not transform the gasoline and diesel oil fuel tax into a value tax reflecting its sales price and as a result compelling a volume adjustment from the volume actually delivered.

[31]            The purpose of this subsection is a purpose related to subsection 23(2) which seeks to identify the goods caught by the tax, i.e., those goods, inter alia, manufactured and sold in Canada and not for export in the quantity determined at the time of delivery, which would exclude for example goods lost in transit or goods experiencing a weight loss in transportation.

[32]            To accept the defendant's argument in this case would be to do what the Supreme Court of Canada said should not be done where the words of the statute are a clear expression of Parliament's intention: levy a goods tax at a flat rate on the quantity delivered to a purchaser.

[33]            Second, a litre is a unit of measurement. It measures volume or capacity. The Weights and Measures Act defines a litre as one/one thousand cubic metre. Webster's Encyclopaedic Digest defines "litre" as the metric unit of capacity and Le Petit Larousse Illustré defines "litre" as "unité de volume pour les liquides ou les matières sèches équivalent à un décimetre cube". Schedule I, paragraph (9), sets out for gasoline a rate of cents per litre. In my view, on a plain reading of the Schedule, the function of a litre is to measure the actual quantity of gasoline delivered. In order to impose a specific tax on a quantity different than the actual quantity delivered, Parliament would have to specifically addressed that issue and it did so in the 1997 amendment.

[34]            My view that paragraph 9 of Schedule I of the ETA imposes a specific tax on the actual quantity of gasoline and diesel fuel delivered, unadjusted to a notional volume at a fixed temperature, unless otherwise provided by Parliament, fits with the statutory scheme and associated legislation. When Parliament wanted to account for fluctuations on account of temperature, so as to affect the measurement of volume, it provided the standard in legislation.

[35]            For example, section 27 of Part IV of the ETA reads as follows:

[36]            In the Excise Act, "volume of absolute ethyl alcohol" is defined to mean such volume measured at 20 degrees Celsius (20^m C). Under the Custom Tariff, the alcoholic strength by volume is to be determined at a temperature of 20^m C. Another reference in the Custom Tariff is tariff item 2710.00.20 which reads:

Other lubricating oils put in packings for retail sale, oils and preparations thereof, having a viscosity of 7.44 mm 2/sec or more at 37.8C other than white oils.

[37]            It seems to me the very object of the 1997 amendment was to achieve what could not be accomplished under section 23 of the ETA, unamended. The amendment to section 23 provides that for the purpose of determining the tax imposed under subsection 23(1) in respect of fuel, the volume of the fuel is to be measured in accordance with the temperature-compensated method where that method is used by a manufacturer of the fuel for the purpose of establishing the amount of fuel delivered and charged to the purchaser, or by the importer of the fuel to establish the amount of fuel imported.

[38]            "Temperature-compensated method" means the method involving the measurement of the volume of fuel in litres that are corrected to the reference temperature of 15 degrees.

[39]            "Uncompensated method" is defined to mean the method involving the measurement of the volume of fuel in litres that are not corrected to a reference temperature.

[40]            The 1997 amendment authorizes what could not previously be done -- vary the actual quantity delivered for purposes of determining the excise tax payable.

DISPOSITION

[41]            For these reasons, this appeal is allowed and the defendant's assessment is vacated. The plaintiff is entitled to costs on a party-party basis.

                                                                                            J U D G E        

OTTAWA, ONTARIO

JUNE 29, 2001