Canadian Turbo (1993) Ltd. v. Her Majesty the Queen, [1995] 2 CTC 355

Reed J.:—The issue in this case is a narrow one: whether the tax imposed on the sale of gasoline and diesel fuel by subsection 50(1) and paragraph 50(1. l)(c) of Part VI of the Excise Tax Act, R.S.C. 1985, c. E-15 (the "Act") is an ad valorem tax. If it is, then, the plaintiff is entitled to a refund of the taxes paid with respect to amounts, which it has written off as bad debts, arising from the sale of those products. Subsection 68.21(2) of the Act provides for such refunds:

(2) Where ad valorem tax under Part III or VI has been paid by a licensed manufacturer in respect of an arm’s length sale occurring on or after February 16, 1984 and the manufacturer has established, in accordance with generally accepted accounting practices, that any debt owing to him in respect of the sale has become in whole or in part a bad debt and has accordingly written off the debt as a bad debt in his books of account, an amount equal to the proportion of the amount of that tax that the amount of the debt written off is of the price for which the goods were sold shall, subject to this Part, be paid to that manufacturer if he applies therefor in the two years after the end of his fiscal period during which the debt was so written off.

The term ad valorem is not defined in the Act. I was informed by counsel that there is no directly relevant Canadian jurisprudence. I was referred to a number of dictionary definitions and to some United States jurisprudence.

Ad valorem and specific taxes

The dictionary definitions to which I was referred are useful insofar as they describe, in general terms, the meaning of an ad valorem tax and distinguish it, again in general terms, from a specific tax. I understand those definitions to establish that an ad valorem tax is based on the value of the property in question, while a specific tax is based on classifying the property according to some characteristic and, then, applying a fixed rate thereto. I will quote some of the definitions to which I was referred. Black’s Law Dictionary (1979, 5th edition) states:

Duties are either ad valorem or specific', the former when the duty is laid in the form of a percentage on the value of the property; the latter where it is imposed as a fixed sum on each article of a class without regard to its value.

Jowitts Dictionary of English Law (1977, 2nd edition) defines the term:

Ad valorem, a term used in speaking of the duties or customs paid on certain goods; the duties on some articles are paid by the number, weight, measure, tale, etc., and those on others are paid ad valorem-that is, according to their value.

The publication American Jurisprudence (1973), 71 Am Jur 2d s. 20, page 355-perhaps not strictly speaking a dictionary as much as a digest-states:

Taxes may be specific or ad valorem. Specific taxes are of a fixed amount by the head or number, or by some standard of weight or measurement, and require no assessment other than a listing or classification of the subjects to be taxed. In comparison, an ad valorem tax is a tax of a fixed proportion of the value of the property with respect to which the tax is assessed, and requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. The fact that in imposing a specific tax, the value of the thing taxed is taken into consideration in determining the amount of it does not change the nature of the tax.

The phrase "ad valorem" means, literally, "according to the value," and is used in taxation to designate an assessment of taxes against property at a certain rate upon its value.

Counsel for the plaintiff refers to the dictionary definitions, including those set out above, for the proposition that an ad valorem tax is imposed on the value of the property and that the term ad valorem means "according to value". He argues that an ad valorem tax does not have to be transaction specific. Counsel for the defendant refers to the dictionary definitions, including those set out above, for the proposition that a specific tax does not lose its quality as such merely because the value of the property in question is taken into consideration when determining the rate of tax applicable and that an ad valorem tax does have to be transaction specific.

The U.S. jurisprudence, to which I was referred, developed in a constitutional context. The constitutions of some states prohibit the levying of ad valorem taxes by the state legislature. I was referred to Pacific Fruit Express Co. v. Oklahoma Tax Commission (1939), 27 Fed. Supp. 279 (Dist. Ct.); Von Ruden v. Miller (1982), 642 P.2d 91 (S.C. Kan.); Pingree, Governor v. Auditor General (1899), 78 N.W. Rep. 78 (S.C. Mich.); Shivel v. Vidro, County Treasurer of Kent County (1940), 294

N. W. Rep. 78 (S.C. Mich.); E. Conita Callaway v. City of Overland Park (1973), 508 P.2d 902 (S.C. Kan.).

I must note that, in this constitutional context, the courts strive to interpret the restrictions on the state legislatures as narrowly as possible. Thus, they will construe the definition of an ad valorem tax narrowly. For example, in the Von Ruden decision the following explanation is found:

Let us state at the outset the long-standing and well- established rules of this court when considering the constitutionality of a statute. Constitutionality is presumed, all doubts must be resolved in favor of the statute’s validity, and before a statute may be stricken down it must be clearly shown it violates the constitution. It is the court’s duty to uphold the statute under challenge, if possible, rather than defeat it, and if there is any reasonable way to construe the statute as constitutionally valid, that should be done.

I accept that an ad valorem tax is imposed on the value of the property while a specific tax operates on the basis of a classification of the property to which a fixed rate is applied. I accept that a specific tax does not cease to be such as a result of the value of the property being taken into consideration in setting the rate. I do not think "being taken into consideration" means, however, that within the classification the tax rate will vary with the value of the goods. I accept that an ad valorem tax does not have to be transaction specific, that the value can be assessed by someone other than the taxpayer and that the assessment of the value does not have to be contemporaneous with the date when the tax is imposed. Municipal property taxes, which are classic ad valorem taxes, exhibit all three of those characteristics. There is no transaction to which the tax relates. The taxpayer does not determine the assessed value of the property. The assessed value is usually determined in one calender year and then used for three consecutive years thereafter, without regard to actual fluctuation in the value of the property during that period of time.

The tax imposed

I turn then to the tax in issue. It is imposed by subsection 50(1) of the Act: 50(l)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 50(1.1) states:

50(1.1) Tax imposed by subsection (1) is imposed

(c) in the case of regular gasoline, unleaded gasoline, premium leaded gasoline, premium unleaded gasoline and diesel fuel, at the rate set opposite the applicable item in Schedule IL 1, adjusted according to subsection 50.1(1) and multiplied by the rate of tax specified in paragraph (d), expressed as a decimal number and multiplied by one hundred;

There is no doubt that if paragraph 50(1. l)(c) only required that the tax be calculated by reference to the rate set out in Schedule II. 1 that the tax would be a specific one. Counsel for the plaintiff argues, however, that when one looks at the adjustment required by reference to subsection 50.1 (I), [1] it becomes obvious that what is being taxed is the value of the property, albeit value determined in an indirect way.

I do not propose to discuss all the details of the adjustment factor. I do not think it is necessary. It is sufficient to note that the rate which is applied is adjusted on a quarterly basis by reference to the Industrial Product Price Index for gasoline and diesel oil. Thus, the rate of tax payable is adjusted by reference to the market value of gasoline and diesel oil. It is not directly related to the actual price for which the taxpayer sold the goods. It is based on a weighted average price of all sales of the product in the industry occurring over a one year period, a value calculated by reference to the average value of the product in the industry. Also, the adjustment does not vary simultaneously with variations in the industry average as they continually occur. Rather the value is calculated at three month intervals on the basis of a preceding 12 month industry average [2] and the value so established is used for the succeeding three months. Nevertheless, it is clear that as the market prices for the products change, the amount of tax to be paid changes in response thereto.

The question, then, is whether this is an ad valorem tax where the value is determined by way of a rough approximation or whether it is a specific tax which takes into account the value of the goods being taxed and adjusts the rate in accordance therewith on a periodic basis? In my view, it is not useful to try to answer this question in the abstract, it is necessary to consider it within the context of the legislation to which it relates.

Legislative context

I understood both counsel to agree that the purpose of allowing a refund of tax, when the tax is ad valorem and has been paid with respect to what eventually becomes a bad debt, is to avoid the consequence of a taxpayer having to pay tax on tax. When the bad debt is recouped, as it will be, as a component of the sale price of subsequent sales, if the value of the product is taxed, then, the tax increases as the price increases. The taxpayer therefore ends up paying tax on tax. Counsel for the plaintiff referred to the Report of the Federal Sales Tax Review Committee 1977 and the Report of the Federal Sales Tax Review Committee 1983 in this regard. This does not occur in the case of specific taxes because the amount of tax paid does not change in proportion to the value of the goods. No matter how much the price being charged for the product increases the tax remains the same-it is levied against the commodity unit not the value.

In the case of the gasoline and diesel fuel excise tax in question, in this case, tax on tax will be paid when bad debts are recouped but the amount of tax on tax paid will relate to the industry average experience with bad debts, not to the particular experience of the taxpayer. Counsel for the plaintiff argues that the classification of the tax in question, as an ad valorem tax, accords with the purpose of subsection 68.21(2). Counsel for the defendant argues that it does not.

Counsel for the defendant relies on the wording of subsection 50(1) which describes the tax as one imposed "on the sale price or on the volume sold" of all goods produced or manufactured in Canada. He argues that while a tax on sale price is clearly ad valorem, a tax on volume is not. Since the tax is levied as a price per litre, it is argued that it is a specific tax. Reliance on the wording "on the volume sold" is not too compelling when one considers those words in the light of the legislative history of subsection 50(1). The words "or on the volume sold" were added to the subsection in response to the decision in MacMillan Bloedel Ltd. v. Canada, [1991] 1 C.T.C. 204, 90 D.T.C. 6219, at C.T.C. page 208. In that case Mr. Justice McNair found that, in the absence of those words, the formula prescribed by paragraph 27(1. l)(c) [now 50(1. l)(c)] required "that a dollar value be multiplied by a dollar per litre rate, thus yielding in turn "squared dollars" and a nonsensical mathematical result". Thus the reference to volume can be seen as being designed to cure a legislative drafting difficulty rather than being a significant factor for determining the character of the tax.

Counsel for the defendant made reference to a Revenue Canada Memorandum and Ruling (Excise Memorandum ET-317, dated March 28, 1989; Ruling 5405/2, dated July 4, 1988). It is argued that these support the argument that the tax is specific and not ad valorem. He also referred to the heading found in Schedule IL 1 "Specific Tax Rates on Petroleum Products". It is trite law that memoranda and rulings do not carry great weight in considering matters of statutory interpretation. Also, there is no doubt that the tax rate set out in Schedule II. 1 is specific. That fact is not disputed. This does not answer, however, the contention that the taxpayer is not taxed under Schedule II.1. Schedule II. 1 is only one component of the tax imposed pursuant to paragraph 50(1. l)(c) and when the adjustment factor set out in subsection 50.1(1) is analyzed, it becomes clear that the tax imposed is one which varies in relation to the value of the goods in question and is therefore an ad valorem not a specific tax.

Statutory interpretation and principles

Since the decision of the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1. S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, the interpretation of taxing statutes in Canada has been subject to the ordinary rules of construction. The basic principles are summarized by Dreidger, E.A. in an oft- quoted statement from his text Construction of Statutes (2nd ed. 1983) at page 87:

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.

The applicable rules were recently reviewed in Notre-Dame de Bon-Secours (Corp.) v. Communauté urbaine de Québec [1995] 1 C.T.C. 241, 95 D.T.C. 5017 (S.C.C.). While I accept that one does not automatically interpret tax legislation in favour of a taxpayer, in my view, this case is one in which it is appropriate to apply that residual presumption.

Conclusion

I am of the view that the purpose of subsection 68.21(2) and the legislative context within which the reference to an "ad valorem" tax is found, favour the plaintiff’s position.

In addition when I apply the residual presumption that doubt should be resolved in favour of the taxpayer that conclusion becomes even stronger.

For the reasons given the plaintiff’s claim will be allowed and the Aassessment referred back to the Minister for redetermination in accordance with these reasons.

Plaintiff’s claim allowed.