Date: 20060510
Docket: T-361-05 and
T-362-05
Citation: 2006 FC 583
Ottawa, Ontario, May 10, 2006
PRESENT: The Honourable Mr. Justice John A. O'Keefe
BETWEEN:
TENASKA MARKETING CANADA,
a Division of TMV Corp.
Applicant
- and -
THE MINISTER OF PUBLIC SAFETY AND
EMERGENCY PREPAREDNESS (CANADA)
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
O'KEEFE J.
[1] This is an application for judicial review of a decision of the Canada Border Services Agency (the CBSA) in two detailed adjustment statements dated January 27, 2005 (the DASs). The DASs assessed the applicant goods and services tax (GST) and interest in respect of shipments of natural gas shipped by pipeline from western Canada to eastern Canada, via pipeline passing through the U.S. The CBSA takes the position that the natural gas was subject to GST on re-entering Canada, while the applicant takes the position that provisions in the Customs Act, R.S.C. 1985 (2d Supp.), c. 1 (the Customs Act) and the Excise Tax Act, R.S.C. 1985, c. E-15 (the Excise Tax Act) deem no importation to have occurred and thus no GST to be applicable.
[2] The applicant seeks:
1. a declaration that no GST was exigible on the importation of the shipments of the natural gas in question;
2. an order of certiorari quashing and setting aside the DASs; and
3. an order of mandamus requiring the respondent to repay to the applicant the amount assessed in the DASs as interest, which was prescribed interest assessed by the respondent and since paid by the applicant, all pursuant to the Customs Act, together with interest thereon from the date of the applicant's payment of the prescribed interest to the respondent, calculated in accordance with the Customs Act as if the DASs being quashed were DASs in respect of tariff classification.
Background
[3] Tenaska Marketing Canada, a division of Tenaska Marketing Ventures Corp. which is a Nebraska corporation (the applicant), is in the business of trading natural gas in Canada. The applicant purchases natural gas in western Canada, and then transports the natural gas to its customers in eastern Canada via the Great Lakes Pipeline, which stretches from the Manitoba-Minnesota border through Minnesota, Wisconsin and Michigan, before re-entering Canada at Sault Ste. Marie or St. Clair, Ontario.
[4] In July 2003, what is now the CBSA (formerly the Canada Customs and Revenue Agency), an agency under the portfolio of the Minister of Public Safety and Emergency Preparedness (the respondent), initiated a verification of the applicant's compliance with customs legislation in respect of importations of natural gas effected by the applicant in the 2002 calendar year. During the course of the verification, the applicant submitted several documents concerning 24 importations of natural gas. Among the documents filed was a copy of a contract executed January 15, 1996 between the applicant and a U.S. affiliate (the purchase and sales contract). The purchase and sales contract transferred title to the natural gas to the U.S. affiliate when the gas crossed the border into the U.S. Title was transferred back to the applicant when the natural gas re-entered Canada in Ontario. The applicant asserted that these were simply "transfers of convenience" effected to comply with the Federal Energy Regulatory Commission (FERC) guidelines in the U.S.
[5] With respect to 12 of the 24 importations of natural gas, the applicant reported that the natural gas originated from the U.S. and conceded that it is subject to GST upon importation. With respect to the other 12 importations of gas (which the applicant referred to as in-transit gas), the applicant reported that the natural gas originated from Canada, should be classified under tariff item no. 9813.00.00.92 (goods, originating in Canada, exported and returned) and therefore should be exempt from GST.
[6] On January 27, 2005, the CBSA issued two DASs pursuant to paragraph 59(1)(a) of the Customs Act to correct the errors in tariff classification that were identified during the verification. The DASs assessed the applicant $2,693,622 in GST and $555,324 in prescribed interest (collectively, the assessment) on the basis that the applicant ought to have paid GST on its importations of in-transit gas in 2002 at the time the natural gas re-entered Canada.
[7] The reasons for this assessment can be found in the letters and reports prepared by Mark Kapiczowski, a compliance verification officer of the CBSA. In the final verification report dated January 21, 2005, Kapiczowski advised that because the in-transit gas entered the Great Lakes Pipeline where it was combined or commingled with gas from U.S. sources, it must be classified under tariff item no. 2711.21.00.00 (natural gas) and is subject to GST upon importation.
[8] Kapiczowski also noted that even if the in-transit gas could be verified as having originated in Canada, there was a transfer of ownership at the Manitoba border and the gas was supplied outside of Canada by way of sale. Therefore, GST was payable upon reimportation.
[9] The applicant paid the assessment and has since recovered the GST portion of the assessment by taking an input tax credit, but has not recovered the interest portion. The applicant brought this application for judicial review to challenge the assessment. According to the applicant, there are no other appeal mechanisms in the Excise Tax Act or the Customs Act. The respondent did not take issue with the availability of judicial review in this case.
Issue
[10] The issue as framed by the applicant is: Does section 144.01 of the Excise Tax Act deem the in-transit gas not to have been imported for GST purposes? This issue turns on two points:
1. Do the fungible nature and commingling of natural gas preclude the application of section 144.01 of the Excise Tax Act?
2. Do the transfers of convenience conducted by the applicant preclude the application of section 144.01 of the Excise Tax Act?
[11] The issue as framed by the respondent is: Was the decision to assess GST on the in-transit gas legally correct on the basis of the factual record before the decision-maker? This issue turns on two points:
1. Did the decision-maker err in concluding that the evidentiary record provided by the applicant did not show that the natural gas imported by the applicant into Canada from the U.S. was the same gas the applicant had exported earlier from Canada?
2. Given the fact that the applicant sold the natural gas in issue to another company which then had this gas available for potential re-sale to third parties in the U.S., did the respondent err by not finding that the gas is exempt from GST?
The respondent submitted that if either 1 or 2 are answered in the negative, this application must be dismissed.
Applicant's Submissions
[12] The applicant took the position that subsection 144.01(a) of the Excise Tax Act relieved the importation of in-transit gas from GST, and that this provision was ignored by the CBSA in issuing the assessment. Subsection 144.01(a) provides that for GST purposes, if a continuous transmission commodity is transported by means of a wire, pipeline or other conduit, outside Canada in the course of, and solely for the purpose of, being delivered by that means from a place in Canada to another place in Canada, the commodity is deemed not to be exported or imported in the course of that transportation or further transportation. The applicant submitted that its transport of the in-transit gas falls within the wording of subsection 144.01(a), and neither the commingling of natural gas nor the transfers of convenience preclude the application of subsection 144.01(a).
[13] The applicant submitted that natural gas, along with other commodities like crude oil and electricity, is a fungible commodity that becomes commingled with other natural gas molecules when shipped in a pipeline. What the shipper gets back from the pipeline is the same general volume and quality of natural gas that was initially delivered to the pipeline at the upstream point, but not the same physical molecules.
[14] The applicant submitted that the transfers of convenience were carried out (1) to comply with the FERC guidelines requiring the shipper of natural gas in a U.S. pipeline to have transportation capacity, and (2) for tax and business purposes, to ensure that the applicant was not viewed as shipping natural gas in the U.S. or otherwise carrying on business in the U.S. It was submitted that the words "solely for the purpose of" in subsection 144.01(a) were not meant to preclude application of that provision to situations where title to or ownership of natural gas is transferred during the course of its transportation.
Respondent's Submissions
[15] The respondent submitted that the burden of demonstrating compliance with the Customs Act, the origin of goods and the manner, time or place of importing or exporting goods lies with the importer (Customs Act, subsection 152(3)). The respondent submitted that section 144.01 of the Excise Tax Act did not exempt the natural gas in issue from GST for two reasons. First, the applicant had not demonstrated that the imported natural gas was the same gas it had exported earlier from Canada. Second, the applicant did not demonstrate that the sole purpose of transporting the natural gas through the U.S. was to deliver it from one point in Canada to another place in Canada.
[16] (a) Imported gas was not the same gas exported earlier from Canada
The respondent submitted that notwithstanding that the natural gas travelled through an American pipeline with multiple delivery points within the U.S., it should be possible to establish the origin of imported gas by reference to the volumes of gas picked-up and delivered by all the shippers who use the pipeline. However, at best, the applicant's evidence showed that it exported some gas at various times at the Manitoba border, and it imported some gas at various other times at the Ontario border. It was highly probable that the imported gas was not the same gas due to extensive commingling of the Canadian gas with American gas.
[17] (b) Natural gas was not transported for the sole purpose of being delivered from a place in Canadato another place in Canada
The respondent submitted that even if the applicant had proven that the natural gas it imported at the Ontario border was the same gas that it earlier exported at the Manitoba border, the assessment of GST and interest was still correct in law because the gas was not transported through the U.S. for the sole purpose of being delivered from one place in Canada to another place in Canada. The respondent submitted that the applicant has ingenuously characterized the purchase and sales contract between the applicant and its U.S. affiliate as mere transfers of convenience. The respondent submitted that the U.S. affiliate was a genuine gas marketing company and the transfer was conducted to make the natural gas potentially available for sale in the U.S. Therefore the "sole purpose" test in subsection 144.01(a) was not met.
Analysis and Decision
[18] I would frame the issues as follows:
1. What is the appropriate standard of review?
2. Did the CBSA err in its assessment of GST and interest on the importations of the in-transit gas?
[19] Issue 1
What is the appropriate standard of review?
With respect to determining a standard of review, the Supreme Court of Canada, in Law Society of New Brunswick v. 2003 SCC 20">Ryan 2003 SCC 20, stated at paragraph 27:
The pragmatic and functional approach determines the standard of review in relation to four contextual factors: (1) the presence or absence of a privative clause or statutory right of appeal; (2) the expertise of the tribunal relative to that of the reviewing court on the issue in question; (3) the purposes of the legislation and the provision in particular; and (4) the nature of the question - law, fact, or mixed law and fact (Pushpanathan, supra, at paras. 29-38; Dr. Q, supra, at para. 26).
I will apply these four factors to the present case to determine the appropriate standard of review.
[20] (i) The presence or absence of a privative clause
There is no privative clause in either the Customs Act or the Excise Tax Act and no right of appeal for this particular type of decision. This factor would result in less deference being given to the decision-maker.
[21] (ii) The expertise of the decision-maker
Under this factor, what is to be determined is whether the decision-maker has greater expertise than the Court in relation to the question at issue. Here, the question being reviewed is the applicability of a statutory provision, namely, subsection 144.01(a) of the Excise Tax Act. The decision-maker would have less expertise in this area than the Court.
[22] (iii) Purpose of the legislation
Neither the Customs Act nor the Excise Tax Act contain a purposive clause. However, before subsection 144.01(a) of the Excise Tax Act was enacted, the then Minister of Finance, Mr. Martin, released a Backgrounder on August 7, 1998, which stated:
Backgrounder
Oil, Gas and Electricity
The following proposals are aimed at simplifying compliance with the Goods and Services Tax and Harmonized Sales Tax (GST/HST) and at ensuring the continued competitiveness of the Canadian energy sector:
§ simplifying export documentation requirements;
§ zero-rating natural gas and outbound transportation where the gas is processed prior to export;
§ zero-rating the storage of natural gas prior to export;
§ removing the tax on certain exchanges at straddle plants;
§ zero-rating cross-border exchanges and flows of oil and gas shipped by pipeline and electricity transported by power-line; and
§ removing the tax on specified exchanges of property and services under farm-out arrangements.
Export documentation requirements
. . .
In order to treat a supply of goods as a zero-rated supply, the supplier must maintain satisfactory proof of export of the goods. If a supplier of crude oil, natural gas or electricity treats a sale as zero-rated based on the purchaser's stated intention to export the product and the purchaser does not provide proof of export to the supplier, the supplier remains liable for the tax on the sale. The fungible character of crude oil, natural gas, electricity and other goods shipped by pipeline, power-line or other conduit can result in difficulties for suppliers in satisfying the export documentation requirement. The problem is of particular concern where the purchaser acquires like product from several suppliers.
An alternative approach to deal with export documentation requirements is proposed for continuous transmission commodities. The proposal addresses suppliers' compliance difficulties while taking into account potential revenue and competitive equity concerns that could arise as a result of diversions of zero-rated products into the Canadian market. For purposes of these measures, the term "continuous transmission commodity" refers to crude oil, natural gas, electricity, or any tangible personal property, that is transportable by means of a pipeline, power-line or other conduit.
. . .
Another important aspect of this arrangement is that Revenue Canada's administration recognizes the fungible nature of continuous transmission commodities - i.e., if gas is purchased from different suppliers during a period it may not be possible, because of the sameness of the product, to track the destination of a particular purchase. In these circumstances, Revenue Canada will compare the amount of product purchased under certificate with the amount actually exported during a period by a purchaser.
Cross-Border Flows
Continuous transmission commodities sold in Canada for use or resale in another part of the country may cross and re-cross the Canada-United States border when shipped by pipeline or power-line before reaching their destination. Similarly, product acquired in the United States for shipment to another part of the United States may be shipped through Canada. The physical flow of the product is a result of the pipeline's or power-line's route.
. . .
It is proposed that the GST/HST legislation be amended to ensure that the tax will not apply to imports where physical cross-border flows of continuous transmission commodities are solely as a result of the pipeline or power-line's route. . . .
Also, it is proposed that where a continuous transmission commodity is transported by power-line, pipeline or other conduit from a place in Canada to a place outside Canada where it is stored until it is transported back to Canada, the commodity will not be regarded as having been exported or imported. . . .
These measures are proposed to apply to the transportation of a continuous transmission commodity from a place of origin to a destination, including any intermediate transportation to or from a place of storage, where the transportation from the place of origin begins after Announcement Date.
[23] Clearly, the purpose of section 144.01 of the Excise Tax Act is to make it simpler for those dealing in continuous transmission commodities to carry on their business dealings. As such, it is important that the decision-maker be correct in deciding whether the provision applies to a certain fact situation. I believe that the same purpose could be given to section 23 of the Customs Act. The purpose of the legislation indicates a lower degree of deference to the decision-maker.
[24] (iv) Nature of the question in dispute: law, fact or mixed law and fact
The matter in dispute is whether a certain provision applies to the situation at hand. This matter involves an interpretation of the sections of the Acts. This is a question of law, which calls for a more in-depth review.
[25] Having considered the four factors, I am of the view that the standard of review should be correctness.
[26] Issue 2
Did the CBSA err in its assessment of GST and interest on the importations of the in-transit gas?
For ease of reference, I will set out the key statutory provisions below. Subsection 123(1) and subsection 144.01(a) of the Excise Tax Act state:
123. (1) In section 121, this Part and Schedules V to X,
. . .
"continuous transmission commodity" means electricity, crude oil, natural gas, or any tangible personal property, that is transportable by means of a wire, pipeline or other conduit; . . .
144.01 For the purposes of this Part (other than sections 4, 15.3 and 15.4 of Part V of Schedule VI), if a continuous transmission commodity is transported by means of a wire, pipeline or other conduit
(a) outside Canada in the course of, and solely for the purpose of, being delivered by that means from a place in Canada to another place in Canada, . . .
the commodity is deemed not to be exported or imported in the course of that transportation or further transportation.
[27] Section 23 of the Customs Act states:
23. Goods that are transported from one place in Canada to another place in Canada over territory or waters outside Canada in accordance with such terms and conditions and subject to such bonds or other security as may be prescribed shall be treated, with respect to their liability to or exemption from duties, as if they had been transported entirely within Canada
[28] For the purposes of this application, there is no dispute that the natural gas in question is a "continuous transmission commodity". There is also no dispute that the natural gas is a fungible commodity, in the sense that once natural gas is delivered to a pipeline for transport, the natural gas becomes commingled with other natural gas. In other words, it cannot be distinguished from other natural gas in the pipeline.
[29] Prior to the enactment of section 144.01 of the Excise Tax Act, reporting and accounting for a "continuous transmission commodity" (CTC) was not required. Revenue Canada's memorandum R-17-1-21, which predates section 144.01, stated in part as follows:
Ottawa, June 14, 1991
PROCEDURES FOR IMPORTATION OF CONTINUOUS TRANSMISSION COMMODITIES
Definitions
1. For the purpose of this procedure, the following definitions apply:
. . .
"Continuous Transmission Commodity (CTC)" is defined as crude oil, natural gas and their derivatives, and other liquids and gases transported through a pipeline, and electricity transported over an electric transmission line;
. . .
Scope
2. This procedure applies only to foreign sourced CTCs transported through a pipeline or hydro electric transmission line.
3. Report and accounting is not required in the following instances:
(a) CTCs sourced domestically and transported through the U.S.A. for reimportation at a destination in Canada; . . .
[30] I have reviewed the officer's decision and I cannot find in the decision any reference to either section 144.01 of the Excise Tax Act or section 23 of the Customs Act. The officer did not apply these sections to the facts of this case. I must now determine whether these sections should have been considered by the officer in making his decision. I would note, although not necessary for my findings, the officer on cross-examination stated he did not consider section 23 of the Customs Act and he was not permitted to answer whether he considered section 144.01 of the Excise Tax Act in reaching his decision.
[31] The natural gas in question is transportable by means of a pipeline. Therefore, the natural gas is a CTC within the meaning of section 123 of the Excise Tax Act. Section 144.01 speaks of a CTC that is transported by pipeline. That is what happened in this case. The natural gas was put in the pipeline in Manitoba and almost all of the natural gas was then taken via the Great Lakes Pipeline to Ontario. As part of the pipeline is in the United States, the natural gas, in the course of its journey to Ontario, travelled through the United States. If the requirements of section 144.01 of the Excise Tax Act are met, the natural gas is deemed not to be imported or exported, and hence, no GST is payable.
[32] The respondent urged upon me that section 144.01 did not apply to this case because of the commingling of the gas. In other words, the applicant did not prove that the imported gas was the same gas that it put in the pipeline earlier in Canada. However, it seems to me that the Minister's Backgrounder to section 144.01 contemplates that gas would not be identifiable from other gas in a pipeline because of its fungible nature. As well, the Backgrounder refers to difficulties with tracking the product through the pipeline. For ease of reference, I will repeat the relevant section of the Backgrounder:
Another important aspect of this arrangement is that Revenue Canada's administration recognizes the fungible nature of continuous transmission commodities - i.e., if gas is purchased from different suppliers during a period it may not be possible, because of the sameness of the product, to track the destination of a particular purchase. In these circumstances, Revenue Canada will compare the amount of product purchased under certificate with the amount actually exported during a period by a purchaser.
[33] Further, the explanatory notes to the bill which brought in section 144.01 include the following comments:
June 1999
ETA
144.01
Continuous transmission commodities (i.e., oil, natural gas or electricity transported by pipeline or power-line) may be transported across the Canadian border more than once en route to a delivery point in or outside Canada solely because of the route the pipeline or power-line must take. In this situation, the administrative position has been to base the tax treatment on the origin and ultimate destination of the commodity and not on the in-transit border crossings. In other words, tax does not apply where such a commodity crosses the border solely for the purpose of being transported by pipeline or power-line from a place outside Canada to another place outside Canada or from a place in Canada to another place in Canada. Section 144.01 is added to codify the administrative practice for greater certainty.
[34] I would further note that section 144.01 does not state that it does not apply to commingled natural gas.
[35] In my view, section 144.01 applies to natural gas, even though it is commingled with other natural gas. The officer should have applied section 144.01 to the facts of this particular situation to determine if the natural gas in question met the requirements of the section. If it did meet the requirements, then there would be no applicable GST as the gas is deemed not to have been imported or exported.
[36] The respondent's arguments with respect to sole purpose and the sale of the gas when it entered the United States should be dealt with as part of the analysis under section 144.01 of the Excise Tax Act. That is, the officer is to consider whether the sale of the gas (transfer of convenience) to the United Statesaffiliate and sale back to the applicant causes the applicant to not fit within section 144.01.
[37] I agree with the applicant that the decision with respect to the application of the facts of this case to section 144.01 is to be made by the officer and not by counsel or by the Court.
[38] It is my view that the officer was not correct when he failed to apply section 144.01 to the facts of this case. His decision must therefore be set aside.
[39] The application for judicial review is therefore allowed, the officer's decisions with respect to the two DASs are set aside, and the matter is referred to a different officer for re-determination. The applicant shall have its costs of the application.
[40] Because of my finding on subsection 144.01(a) of the Excise Tax Act, I will not deal with the arguments relating to section 23 of the Customs Act.
[41] I am not prepared to grant the declaratory relief requested by the applicant as I am of the view that the officer should apply the facts of this case to subsection 144.01(a) and make a decision on the matter.
[42] I am also not prepared to issue an order of mandamus.
JUDGMENT
[43] IT IS ORDERED that:
1. The application for judicial review is allowed, the officer's decisions with respect to the two detailed adjustment statements are set aside and the matter is referred to a different officer for re-determination.
2. The applicant shall have its costs of the application.
"John A. O'Keefe"
ANNEX
Relevant Statutory Provisions
The relevant provisions of the Customs Act, R.S.C. 1985 (2d Supp.), c. 1, are as follows:
| 23. Goods that are transported from one place in Canada to another place in Canada over territory or waters outside Canada in accordance with such terms and conditions and subject to such bonds or other security as may be prescribed shall be treated, with respect to their liability to or exemption from duties, as if they had been transported entirely within Canada.
59. (1) An officer, or any officer within a class of officers, designated by the Minister for the purposes of this section may
(a) in the case of a determination under section 57.01 or 58, re-determine the origin, tariff classification, value for duty or marking determination of any imported goods at any time within
(i) four years after the date of the determination, on the basis of an audit or examination under section 42, a verification under section 42.01 or a verification of origin under section 42.1, or
(ii) four years after the date of the determination, if the Minister considers it advisable to make the re-determination; and
. . .
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23. Le transport de marchandises effectué, aux conditions et sous les cautions ou autres garanties réglementaires, d'un point à un autre du Canada en passant par l'extérieur du Canada est assimilé, quant à l'assujettissement aux droits afférents ou à leur exemption, à un transport entièrement effectué à l'intérieur du Canada.
59. (1) L'agent chargé par le ministre - individuellement ou au titre de son appartenance à une catégorie déterminée - de l'application du présent article peut:
a) dans le cas d'une décision prévue à l'article 57.01 ou d'une détermination prévue à l'article 58, réviser l'origine, le classement tarifaire ou la valeur en douane des marchandises importées, ou procéder à la révision de la décision sur la conformité des marques de ces marchandises, dans les délais suivants:
(i) dans les quatre années suivant la date de la détermination, d'après les résultats de la vérification ou de l'examen visé à l'article 42, de la vérification prévue à l'article 42.01 ou de la vérification de l'origine prévue à l'article 42.1,
(ii) dans les quatre années suivant la date de la détermination, si le ministre l'estime indiqué;
. . .
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The relevant provisions of the Excise Tax Act, R.S.C. 1985, c. E-15 are as follows:
| 123. (1) In section 121, this Part and Schedules V to X,
"continuous transmission commodity" means electricity, crude oil, natural gas, or any tangible personal property, that is transportable by means of a wire, pipeline or other conduit;
144.01 For the purposes of this Part (other than sections 4, 15.3 and 15.4 of Part V of Schedule VI), if a continuous transmission commodity is transported by means of a wire, pipeline or other conduit
(a) outside Canada in the course of, and solely for the purpose of, being delivered by that means from a place in Canada to another place in Canada,
. . .
the commodity is deemed not to be exported or imported in the course of that transportation or further transportation.
212. Subject to this Part, every person who is liable under the Customs Act to pay duty on imported goods, or who would be so liable if the goods were subject to duty, shall pay to Her Majesty in right of Canada tax on the goods calculated at the rate of 7% on the value of the goods.
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123. (1) Les définitions qui suivent s'appliquent à l'article 121, à la présente partie et aux annexes V à X.
« produit transporté en continu » L'électricité, le pétrole brut, le gaz naturel ou tout bien meuble corporel, qui est transportable au moyen d'un fil, d'un pipeline ou d'une autre canalisation.
144.01 Pour l'application de la présente partie, sauf les articles 4, 15.3 et 15.4 de la partie V de l'annexe VI, est réputé n'être ni exporté ni importé au cours de son transport ou nouveau transport au moyen d'un fil, d'un pipeline ou d'une autre canalisation le produit transporté en continu qui, selon le cas:
a) passe par l'étranger au cours de sa livraison par ce moyen d'un endroit au Canada à un autre endroit au Canada et seulement aux fins de cette livraison;
212. Sous réserve des autres dispositions de la présente partie, la personne qui est redevable de droits imposés, en vertu de la Loi sur les douanes, sur des produits importés, ou qui serait ainsi redevable si les produits étaient frappés de droits, est tenue de payer à Sa Majesté du chef du Canada un taxe calculée au taux de 7 % sur la valeur des produits.
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