Jack Cewe Ltd. v. Canada, docket T-3390-90

Date: 19990108

Docket: T-3390-90

BETWEEN:

JACK CEWE LTD.

Plaintiff

- and -

HER MAJESTY THE QUEEN

Defendant

     REASONS FOR ORDER

WETSTON J.

Agreed Statement of Facts

[1]      The plaintiff is a company incorporated under the laws of British Columbia, and carries on business as a general contractor and at all relevant times in 1985 and 1986 was licensed as a manufacturer of asphaltic concrete ["asphalt"].

[2]      In some instances, the plaintiff supplied all of the materials and manufactured the asphalt in its two plants in the Lower Mainland of B.C., then supplied and installed the asphalt for customers. Pursuant to the contract, the customer paid an all-inclusive price for the supply and installation of the asphalt.

[3]      In other instances, the customer, i.e. the Provincial Government, supplied the liquid asphalt and the plaintiff supplied the other ingredients, machinery and labour to manufacture the asphalt in its plants, and then supplied and installed that asphalt for the customer. Pursuant to the contract, the customer paid an all-inclusive price for the supply and installation of the asphalt.

[4]      On July 1, 1985, asphalt became subject to Federal sales tax pursuant to an amendment to Schedule V of the Excise Tax Act, R.S.C. 1985, c. E-15 (the "Act"). Accordingly, asphalt was subject to Federal sales tax when sold or used by the manufacturer or producer or when imported.

[5]      The defendant issued Excise Communique 110/T1 ["110/T1"] dated May 23, 1985 in which methods for determining the value for tax were stated. With respect to supply and install contracts, one method allowed was that of Fair Market Value ["FMV"] as determined in accordance with the paragraph 3(c) of Memorandum ET 207 ["ET 207"] as issued by the Minister.

[6]      By letter dated August 28, 1985, the defendant wrote to the plaintiff regarding the plaintiff's entitlements and obligations as a manufacturer or producer of asphalt. In particular, the defendant stated: "The current rate of tax applicable to asphalt is 6%. (Effective January 1, 1986 the rate of tax will be increased to 7%.) Subject to the exceptions listed below, the tax applies on your selling price. It will be calculated to 6% of your tax excluded selling price or at 6/106 (5.660%) of your tax included selling price. On sales of asphalt which are delivered and/or placed, and in which you supply all the elements, tax may be calculated at 6% on a value of $25.00 per metric tonne. On sales of asphalt where liquid asphalt is supplied by the Provincial Government or municipality, tax may be calculated at 6% on a value of $12.00 per metric tonne."

[7]      On August 29, 1985, the plaintiff informed the defendant that: "We have calculated the F.S.T. on the basis of $25.00 per tonne when we have purchased the liquid asphalt, and $12.00 per tonne when the Province of B.C. has supplied the liquid. We reserve the right to calculate the actual selling price at a later date if such is approved by legislation."

[8]      By letter dated April 11, 1986, the defendant confirmed his understanding of a recent phone conversation with the plaintiff regarding the plaintiff's operations and accounting methods. In particular, the defendant confirmed that: "With regard to a fair market value on your transfer of asphaltic paving mixture from your two asphalt plants to your Construction Division; it is understood you are now using the determined value of $25.00 or $12.00 per tonne as a value for tax. it [sic] is suggested you continue to use these values for tax purposes."

[9]      The plaintiff used the Determined Value Method when calculating Federal sales tax on asphalt between November 1985 and December 1986 inclusive.

[10]      In April 1987, the defendant issued Excise Communique 110-1/T1 ["110-1/T1"] which stated that it was to update and clarify the instructions concerning values for tax on asphalt paving mixtures as outlined in Excise Communique 110/T1.

[11]      By letter dated June 17, 1987, the plaintiff informed the defendant that it would be computing and remitting the F.S.T. on its asphalt production on a Fair Market Value Method in accordance with paragraph 3(c) of Memorandum ET 207.

[12]      By letter dated July 6, 1987, the defendant wrote to the plaintiff concerning the computation and remittance of federal sales tax on asphalt. In particular, the defendant stated that: "(a) tax applicable to supply and install contracts may be calculated in accordance with Memorandum ET 207 paragraph 3(c)".

[13]      By letter dated December 7, 1987, the plaintiff wrote to the defendant claiming a refund of $103,994.41 on tax paid with respect to the production of asphaltic mixtures in 1986. The amount of refund claimed represented the difference between the tax remitted as calculated by the Determined Value Method and liability arising pursuant to the Fair Market Value Method in paragraph 3(c) of Memorandum ET 207.

[14]      By Notice of Determination PAC 34291 dated January 22, 1988, the defendant allowed the plaintiff's refund and increased the claim by $2,034.00 for the months of November and December 1985. Accordingly, the defendant allowed the refund in the amount of $106,028.41.

[15]      By Notice of Assessment PAC 3764 dated January 22, 1988, the defendant informed the plaintiff that no tax, penalty, interest or other sum payable under the Excise Tax Act remains unpaid by the plaintiff and no amount payable or credit allowable is owed to the plaintiff for the period July 1, 1985 to November 30, 1987.

[16]      In April 1988, the defendant issued Excise Communique 110-2/T1 ["110-2/T1"], which stated in part: "Where a customer supplies some of the material relative to a supply and install contract, the licensed manufacturer of asphalt paving mixture is not permitted to use the valuation method as provided by Memorandum ET 207."

[17]      By letter dated September 26, 1988, the defendant informed the plaintiff that there was no provision for retroactive adjustments of a value for tax on asphalt paving mixtures pursuant to paragraph 4(c) of the Excise Communique 110-1/T1 or of an authorized value for tax used prior to the issuance of that Communique. Accordingly, the defendant informed the plaintiff that it would be reassessed in the amount of $106,028.41 for the refund paid in error.

[18]      The defendant issued Notices of Assessment PAC 6690 and PAC 6976 dated September 30, 1988 in the amount of $106,028.41 on the basis that the refund claim of December 7, 1987 was paid in error. The assessment provided that penalty and interest would be charged effective October 1, 1988 on any portion of the assessment remaining unpaid after September 30, 1988.

[19]      On November 29, 1988, the plaintiff filed a Notice of Objection with respect to the assessment.

[20]      By Notice of Assessment dated September 18, 1990, the defendant allowed in part the plaintiff's objection to the assessment. The defendant allowed the plaintiff to retroactively account for tax using the Fair Market Value Method as outlined in paragraph 3(c) or Memorandum ET 207 with respect to those cases where all the materials used in the manufacture of the asphalt paving mixture for the plaintiff's supply and install contracts were supplied by the plaintiff, thus reducing the amount of tax assessed by the defendant from $106,028.41 to $55,874.64 plus interest and penalties. The defendant confirmed the remainder of the assessment including interest and penalties with respect to those supply and install contracts performed by the plaintiff where materials were supplied by the plaintiff's customers.

[21]      Pursuant to s. 81.2 of the Act, the plaintiff has appealed to this Court that portion of the assessment regarding supply and install contracts performed by the plaintiff where materials were supplied by the plaintiff's customers.

Issues

[22]      The plaintiff submits that the only issue in this case is whether the plaintiff was permitted to use the FMV method for valuing asphalt for the purposes of the Excise Tax Act for the period of November-December 1985 and throughout 1986 when the oil was supplied by the Provincial Government.

The Plaintiff's Submissions:

[23]      The plaintiff makes numerous submissions. First, the plaintiff submits that under the various excise communiques and a bulletin for the years 1985, 1986, and 1987, it could use the FMV method of valuing asphalt when the customer supplied the oil for the period November and December 1985 and 1986. The plaintiff submits that those communiques and memorandum are policy or procedural statements issued by the Minister pursuant to a discretionary power granted under s. 28(1)(d) of the Act.

[24]      The plaintiff submits that the cost of materials used in ET 207 must refer to the costs to the manufacturer of the materials. The plaintiff submits that the costs referred to in paragraphs 3 and 4 of ET 207, direct labour and overhead costs, transportation and transportation insurance, are costs incurred by the manufacturer. The plaintiff submits that if the oil is supplied to the manufacturer, the cost to the manufacturer of that oil is zero, and that zero is the value that should be included in calculating the FMV under ET 207. The plaintiff submits that it is thus reasonable to use the FMV method if the oil is supplied by the province.

[25]      The plaintiff further submits that the cost of the materials should be the cost to the manufacturer because materials used in the course of manufacturing can go through several brokers with several different prices before they get to the manufacturer. The plaintiff argues that it should be the cost of the materials to the manufacturer because the manufacturer is the person who pays the tax.

[26]      The plaintiff argues that there is no logical reason why, prior to April 1988, one could not use the FMV method when the province supplied the oil because the tax is levied on the sale price and the sale price would be less when the province supplied the oil than when the manufacturer supplied the oil.

[27]      The plaintiff submits that ET 207 carries out Parliament's intent under subsection 28(1)(d) and section 27 in that the selling price must only include costs directly incurred by the manufacturer, plus an overhead cost and profit margin. The plaintiff submits that where a statute creates a means by which the Minister may create a policy or procedure, that policy must abide by the intention of the statute. The plaintiff notes paragraph 5 of ET 207 which recognizes that "the end user is regarded for sales tax purposes as the manufacturer of the goods" and argues that this is an acknowledgment that the cost of materials must be the cost of materials to the manufacturer.

[28]      In response to the defendant's submissions with respect to Allan G. Cook Limited v. M.N.R., [1989] 2 T.C.T. 1167 (CITT) ["Allan Cook"], the plaintiff distinguishes that case. The plaintiff argues that Allan Cook was concerned with s. 44(1) of the Excise Tax Act and whether the tax payer could refile because of an earlier error. The plaintiff also notes that the case dealt with a different taxation year than the case at bar, and argues, in any event, that the Canadian International Trade Tribunal's ("CITT") conclusion is not binding on the court.

[29]      The plaintiff submits that the first time it became aware that it was not allowed to use the FMV method was in September 1988, when it received a letter from the defendant informing it of the reassessment in the amount of $106,000 for the refund paid in error.

Retroactivity:

[30]      Next, the plaintiff submits that there was a retroactive change in policy in 110-2/T1 of April 1988 which was relied upon in the assessment of September 30, 1998. The plaintiff submits that 110-2/T1 of April 1988 is a complete change in ministerial policy contrary to that originally set out in 110/T1 and 110-1/T1 and that the Minister is now purporting to apply this new 1988 policy retroactively to the 1985 and 1986 taxation years. The plaintiff submits that to allow the retroactive application of this new policy would be unfair to the plaintiff and would in effect allow the Minister to act in an arbitrary and capricious manner. The plaintiff submits that 110-2/T1 does not provide for retroactivity to the taxation years 1985 and 1986. The plaintiff argues that statutes and regulations are not to be construed as having retroactive operation: [1977] 1 S.C.R. 271">Gustavson Drilling (1964) Ltd. v. M.N.R., [1977] 1 S.C.R. 271; Ludco Enterprises Ltd. v. Ministre du Revenu National, [1993] 72 F.T.R. 175.

[31]      The plaintiff submits that the Minister's power under s. 28(1)(d) is not entirely subjective or arbitrary and must be exercised by the Minister "within the four corners of his jurisdiction'. The plaintiff relies on Vanguard Coatings and Chemicals v. The Queen (1988), 3 F.C. 560 (F.C.A.) ["Vanguard Coatings"] and NSC International Inc. v. Canada. In Vanguard Coatings, the Federal Court of Appeal considered s. 34 of the Excise Tax Act, which the plaintiff submits is similar in language to s. 28(1)(d).

Estoppel:

[32]      Finally, the plaintiff submits that the defendant is estopped from retroactively changing the method of valuation of asphalt in respect of the 1985 and 1986 taxation years. The plaintiff submits that with respect to those years, the plaintiff acted in accordance with 110/T1 and 110-1/T1 and other representations provided to it through correspondence and meetings with the defendant. The plaintiff submits that the defendant represented that it permitted use of the fair market value method for the purpose of calculating the sales tax on asphalt in those circumstances where the plaintiff had supplied only some of the materials. The plaintiff submits that, in relying on those representations, it spent considerable time, effort and money in recalculating the value for tax of the asphalt under those circumstances.

[33]      The plaintiff submits that all three factors necessary to establish estoppel, as set out in [1970] S.C.R. 932">Canadian Superior Oil Co. Ltd. v. Hambly, [1970] S.C.R. 932, are present in the instant case. Those factors include: (1) a representation or conduct amounting to a representation intended to induce a course of conduct on the part of the person to whom representation is made; (2) an act or omission resulting from the representation whether actual or by conduct by the person to whom the representation is made; (3) detriment to such person as a consequence of the act or omission.

[34]      The plaintiff submits that case law which suggests that estoppel cannot override the law is not pertinent. It is not the law which is being interpreted but a discretionary power given to the Minister to set methods or policies for valuation. The plaintiff submits that the policy or procedural statements at issue here are an exercise of discretion by the Minister.

[35]      The plaintiff requests that the court set aside in its entirety the Notice of Assessment of the Minister dated September 30, 1988, and that it grant the plaintiff a refund of $106,000.00.

The Defendant's Submissions:

[36]      The defendant argues that the plaintiff must pay tax pursuant to the provisions of the Excise Tax Act and that in this case there was no overpayment of tax with respect to any of the provisions of the Act. The defendant submits that tax liability is ultimately determined by the Act and thus cannot be avoided by reliance on administrative policies which are not binding.

[37]      The defendant submits that it is not bound nor estopped by interpretation bulletins, rulings or other such documents. Communiques and memoranda are not regulations enacted pursuant to the statute. They are simply policy and procedural statements which, in some cases, may be an aid to interpretation of the statute. The defendant argues that these administrative policies are merely financial concessions set out by the Minister and that tax liability is ultimately determined by the legislation and cannot be contracted out of.

[38]      The defendant submits that s. 26(1) dictates that the sale price of supply and install contracts for the purpose of taxation pursuant to s. 27 is the ultimate price paid by the customer. Paragraph 26(1)(a) captures supply-and-install contracts and dictates that sale price on those contracts is the ultimate price paid by the customer, and that this price includes every service provided, including supply, installation and transportation. The defendant argues that it is not necessary to go beyond the Act in order to determine how such a contract should be taxed. There has been no overpayment as the plaintiff's tax liability was ultimately the sale price. The defendant submits that since there was no overpayment in the first place, the plaintiff cannot obtain any refund under s. 44.

[39]      The defendant argues that s. 28(1)(d) does not apply in the instant case and that the communiques were not issued pursuant to that authority. The Minister submits that s. 27(1) does apply in this case, as there was a sale and an acknowledged sale price by Mr. Home. It submits that this is not a case in which the manufacturer has goods for its own use and therefore there is no sale price. The defendant submits that the plaintiff had to choose one method of accounting and maintain that method consistently in order to comply with the law.

[40]      The defendant submits that ET 207 is based upon the Minister's discretion under s. 28(1) of the Act to provide some guidance to the industry as to what the Minister would consider to be a fair sale price when the good is for the manufacturer's own use and there is thus no sale price. In this regard, the defendant submits that there are three available methods for calculating tax set out by the Minister. The first applies where there is a sale price and involves invoking s. 26(1) to determine the sale price for the purposes of s. 27. The second allows the taxpayer to use the FMV as set out in para. 3(c) of ET 207, but cannot be used when the customer supplies some of the materials and the method must be used consistently. The third utilizes the determined values set out in ET 207 and this method also must be used consistently.

[41]      The defendant submits that the rule that FMV cannot be used where the customer supplies some of the materials arises under ET 207, para. 4, which specifies that materials referred to in paragraph 3 must include all materials that are incorporated into and become an integral or component part of the finished good. The defendant submits that in Allan Cook, supra, the CITT found that the language in paragraph 3(c) viewed in conjunction with paragraph 4 dictates that the FMV method is not to be used where part of the materials are supplied by the customer. The defendant argues, however, that in at least one aspect the Allan Cook decision is not correct law in that the CITT ignored the legal provisions of the Act and launched into an interpretation of the communiques and their application.

Retroactivity

[42]      The defendant argues that retroactivity does not arise as an issue pursuant to the provisions of the Act. The defendant submits that retroactivity only arises in the context of Communiques 110/T1 and 110-1/T1, which require that the taxpayer use its selected method consistently for a period of at least one year. The defendant submits that this appeal is from an assessment and not from a Notice of Decision, and thus it is the tax liability pursuant to the Act which is in dispute, not the reasons underlying the assessment.

Estoppel

[43]      The defendant submits that the communiques were applied fairly to the plaintiff. The defendant argues that it was always the Minister's position throughout that the taxpayer could not retroactively change its accounting method and that when materials were supplied by customers, the taxpayer could not use the FMV method in determining the sale price for the remittance of tax.

[44]      The defendant relies on the case Sunbeam Corp. (Canada) Ltd. v. Minister of National Revenue (Customs and Excise) (1993), 71 F.T.R. 199 ["Sunbeam"], in which the court held that it was not relevant how various taxpayers are treated as tax liability must be determined under the Act. The Court rejected a legitimate expectations argument. The plaintiff also relies on Granger v. Canada Employment and Immigration Commission, [1986] 3 F.C. 70 (C.A.); appeal dismissed, [1989] 1 S.C.R. 141 ["Granger"]. The defendant submits that in Granger, supra, the court held that the taxing provision prevails and that the Crown is not bound by representations given to taxpayers by authorized representatives of the department, if such representations are contrary to the statutory provisions. The defendant submits that Granger holds that the Minister cannot contract out of the legislation.

Analysis

[45]      Mr. George Home, V.P. Finance, testified for the plaintiff. Mr. Home first used the determined value method. He was aware of communiqué 110/T4 as well as ET 207. He wrote Revenue Canada, reserving his right to calculate the actual selling price because he thought the determined values would not hold up. In June 1987, Mr. Home met with Mr. Langley of Revenue Canada along with a consultant, Mr. Dunn, where by letter Mr. Home confirmed that the plaintiff "shall be computing and remitting the F.S.T. on its asphalt production in accordance with paragraph 3(c) of Memorandum ET 207."

[46]      It would appear that Mr. Lanley confirmed that the plaintiff could use the FMV method but an audit was required and was later done. Later, Mr. Home spent considerable time preparing the calculations. Mr. Home used zero for the material cost of oil where the oil was supplied by the Government. This was, in his opinion, the appropriate amount for the purposes of "the cost of all materials used" within paragraph 3(c) of ET 207. The plaintiff claimed a refund by letter dated December 7, 1987, which the auditor verified subsequently. The auditor increased the refund. It was only later that Mr. Home was made aware that the FMV method was not available when the Government supplied the oil. He was uncertain when he first became aware of communiqué 110-2/T1. The assessments followed later.

[47]      Mr. Home believes he was advised that he could change methods and obtain a refund. His letter does not reflect this understanding and Mr. Home explained that he does not write memos often. My decision on this matter does not depend on the outcome of this finding. In any event, I see no reason why his evidence should not be accepted. In any case, the refund, in part, depended on the future outcome of the audit.

[48]      The only issue before me is whether the plaintiff was permitted to use the FMV method for valuing asphalt for the purposes of the Act for the relevant period, when the oil was supplied by the customer. First, the defendant argues that the accounting method could not be changed. Moreover, and in any event, the defendant argues that it was the Minister's position throughout that the taxpayer could not use the FMV method in determining the sale price for the remittance of tax when materials were supplied by the customer. Memorandum ET 207 sets out the FMV method and, according to the defendant, outlines the circumstances in which that method may be used by the taxpayer.

[49]      At the outset I am of the opinion that Memorandum ET 207 in the excise tax bulletin was issued by the Minister pursuant to his discretionary power under paragraph 28(1)(d) of the Act. However, the Communiqués are administrative policies and were not issued pursuant to a discretionary power and may only be considered as concessions made by the Minister to resolve inequities within the Act. I agree that ET 207 is based upon paragraph 28(1)(d) and is issued on the Minister's discretion to provide guidance to the industry as to the method to calculate the tax when there is no sale price. In this case, there is a sale price and s. 27 applies to determine the tax liability. If there is no sale then alternative accounting methods are provided in the Minister's discretion in ET 207. It is evident that tax liability is to be determined pursuant to the Act. The Minister does, however, have a duty in issuing policies pursuant to a statutory discretion, such as Memorandum ET 207, to act in a manner which is "within the four corners of his jurisdiction" and not in any way arbitrary nor capricious: Vanguard Coatings, supra.

[50]      I agree with the defendant's submission that the plaintiff's tax liability is ultimately determined by the Act and thus cannot be contracted out of. Section 26 defines the sale price of the contract for the purpose of taxing pursuant to s. 27 as the ultimate price paid by the customer and includes deductions within the provisions of the Act. It was not necessary for the taxpayer to go beyond the Act in order to determine how this supply-and-install contract should be taxed. My review of communiqé 110-1/T1 suggests that ss. 26 and 27 of the Act are referred to therein. Alternatives are provided in the way of concessions, one of which refers to certain asphalt mixtures as described in accordance with ET 207(3)(c). Another concession made available by the Minister is the determined value accounting method. A taxpayer could rely on an administrave concession, if applicable, but if such reliance occurs then consistency of use of the method selected is a requirement.

[51]      The defendant argues that ET 207 clearly sets out that the FMV method may not be used where some of the materials are supplied by the customer. Paragraph 4 indicates that: "Materials referred to in paragraph 3 must include all materials that are incorporated into and become an integral or component part of the finished product". Paragraph 3 lists "the cost of all materials used" as one of the factors which must be included in calculating the value for tax under the FMV method.

[52]      The plaintiff argues that the "cost of all materials used" in paragraph 3 can only refer to the costs to the manufacturer of the materials. The plaintiff submits that if the oil is supplied by the manufacturer, then the cost to the manufacturer of that oil is zero, and that is the value that should be included in calculating the FMV under ET 207. I cannot agree with this submission. In my opinion, zero cost is not a cost as contemplated therein. Furthermore, the bulletin refers to the aggregate of the cost of "all" materials used, not the aggregate of the cost of "some" of the materials used.

[53]      The plaintiff contends that the sale price is not on the supply and install contract but rather a supply and install contract which includes asphalt and that it is upon the asphalt that the tax must be paid. It is contended therefore that the Minister issued the various communiqués to establish a sale price since it does not flow clearly and directly from subsection 26(3). I admit this is a most interesting argument but I cannot agree that s. 26 does not apply to a supply and install contract in the manner discussed in the various communiqués. These documents, of course, clearly reflect the understanding that the asphalt mixture is subject to the sales tax.

[54]      I agree with the defendant that the CITT in Allan G. Cook, supra, unnecessarily engaged in an interpretation of the communiqués of the Minister and how these should be applied. This approach led the Tribunal to suggest that communiqués somehow superseded the provisions of the Act. This was considered in the later CITT decision of Brigham Pipes v. [1977] 1 S.C.R. 271">M.N.R. (1992), CITT No. 83, which relied upon Granger, supra. In other respects, I agree with Allan G. Cook, supra, in which the Tribunal found that the FMV could be used only where the manufacturer supplies all the materials and may not be used when a customer supplies some of the materials relative to a supply and install contract.

[55]      I do not accept the plaintiff's arguments with respect to retroactivity. I agree with the defendant that the retroactivity which the plaintiff complains of was caused by the plaintiff's actions in changing from one method of accounting for tax to another. The communiqués clearly indicate that a taxpayer must use a method consistently, that is for a period of not less than one year. If the plaintiff had followed that requirement as set out by the Minister, no retroactivity would have resulted. As such, I agree that the communiqués were not applied unfairly or in an arbitrary manner.

[56]      Moreover, I find that the defendant is not estopped from changing the method of valuation of asphalt in respect of the 1985 and 1986 taxation years. I have considered the principles outlined in Sunbeam, supra, and Granger, supra. Tax liability is clearly determined under the Act and thus it is not relevant to this taxpayer how other taxpayers may have been treated in similar situations. The Minister is not bound by representations made by authorized officials within the Department, even if these are made contrary to the statutory provisions: Granger, supra, p. 86. The statute prevails over any such representations. Moreover, an appeal from an assessment is just that. It is not the reasons or basis upon which the assessment was made that is under appeal.

[57]      In conclusion, I do not accept that there was an overpayment with respect to the provisions of the Act and thus no refund is required under s.44 of the Act.

[58]      Accordingly, the appeal will be dismissed. However, under the circumstances of the apparent reliance upon representations made by officials at Revenue Canada to the plaintiff, in my opinion, this is an appropriate case for no costs award. Accordingly, there will be no order as to costs.

                                 Howard I. Wetston

Judge

Ottawa, Ontario

January 8, 1999