Amway of Canada Limited v. Her Majesty the Queen, [1995] 2 CTC 2488, 96 DTC 1237

O’Connor J.T.C.C.:—These appeals were heard in Toronto, Ontario on October 18, 1994 pursuant to the general procedure of this Court and relate to the taxation years of the appellant ("Amway") ended August 31, 1977 and August 31, 1978. No witnesses were heard but numerous documents were filed and several volumes of discovery testimony were filed and read in.

Issue

The issue is whether part of $45,000,000 paid by Amway to settle certain claims under the Customs Act, R.S.C. 1970, c. C-40 brought by The Queen is deductible for income tax purposes. This in turn, in these appeals, will be determined by whether a part of said sum is to be characterized as payment of customs duties and taxes or whether all of it is to be characterized as a non-deductible penalty as alleged by the respondent.

Facts

The principal facts are as follows:

1. Amway is a corporation originally incorporated under the laws of Canada. It was continued as an Ontario corporation in 1976;

2. Amway imported goods into Canada in the 1970s and paid certain customs duties as well as sales taxes imposed by the Excise Tax Act, R.S.C. 1970,

c. E-13 in respect of said importations. Subsequent investigations of those importations revealed that the goods had been under-valued with the result that the duties and taxes were considerably underpaid;

3. Because the imported goods were no longer available for seizure, Revenue Canada sought "deposits” pursuant to the Customs Act equal to their full "duty paid value”, i.e., the aggregate of the value of the goods plus applicable customs duty and sales taxes. By notices of seizure and/or ascertained forfeiture ("seizures”) issued in 1979 and 1980, Revenue Canada demanded certain deposits. The deposits so demanded were not paid;

4. In 1980 The Queen commenced four Federal Court actions by way of statements of claim ("1980 claims”), claiming forfeiture in the amounts mentioned below. In 1984 a fifth action ("1984 claim”) was similarly commenced seeking only duties and taxes. The 1980 claims and the 1984 claim are hereinafter collectively referred to as the "claims". These claims were against Amway and its U.S. parent, Amway Corporation. The details of the claims are as follows:

		DUTIES &	TOTAL
CLAIMS	PERIOD	VALUE

TAXE

1) T-64-80	Jan. 7/77 to	$7,535,367.89	$1,880,338.77	$9,415,706.66
	May 6/77
2) T-2207-80	May 6/77 to	$9,684,177.90	$2,407,541.87	$12,091,719.77
	Sept. 14/77
3) T-3346-80	Sept. 77 to	$14,056,243.05	$3,469,738.29	$17,525,981.34
	Jan. 12/78
4) T-5652-80	Jan. 10/78 to	$87,175,237.36	$21,834,691.45	$109,009,928.81
	Jan. 28/80
5) T-707-84	Mar. 26/74 to	-	$7,882,096.35	$7,882,096.35
	Jan. 10/77
TOTALS:		$118,451,026.20	$37,474,406.73	$155,925,432.93

TOTALS:

5. The numerical components of the 1980 claims were the same as those in the relevant seizures. For example, in claim #T-64-80, paragraphs 6 through 13 stated:

6. The defendants therefore passed false invoices in respect of the said goods through the Customs House and did thereby avoid payment of part of the duty properly payable on the said goods contrary to the provisions of paragraph 192(1 )(b) of the Customs Act.

7. The false invoices showed the fair market values of the goods...to be $2,341,608.76, which was $5,193,759.13 less than the true fair market value.

8. In the alternative, the defendants undervalued the said goods in the amount of $5,193,759.13 and did thereby defraud the revenue by avoiding payment of part of the duty payable on the said goods contrary to the provisions of paragraph 192(1 )(c) of the Customs Act.

9. The defendants are also liable to The Queen for the additional duties payable upon the said goods in the amount of $1,299,119.31, pursuant to section 102 of the Customs Act.

10. Since the goods were not found, but the value has been ascertained in the amount of $9,415,706.66, the defendants thereby incurred a forfeiture in the amount of $9,415,706.66.

11. The value of the said goods, ascertained to be in the amount of $9,415,706.66, as set out above, is the duty paid value and is computed as

follows:

12. Although demand has been made upon the defendants for payment of the amount specified in paragraphs 10 and 11 to date of filing this statement of claim, the defendants have failed to make such payment.

13. The Deputy Attorney General of Canada, on behalf of The Queen claims as follows:

(a) the sum of $9,415,706.66, by way of forfeiture;

(b) the costs of this action; and

(c) such further and other relief as to this Honourable Court may seem just.

6. Paragraphs 6 through 13 were repeated verbatim in each of the other three 1980 claims, with only the dollar amounts being changed;

7. As indicated the claims totalled $155,925,423.93 which figure was later adjusted to $148,018,478.48. Amway was also liable for the additional duties under section 102 of the Customs Act referred to in paragraph 9 of each of the 1980 claims. These additional duties totalled $20,943,610;

8. Moreover in 1983 in the Supreme Court of Ontario Amway and Amway Corporation were convicted of fraud under paragraph 338(1 )(a) of the Criminal Code in relation to the importations in question as well as earlier importations and were fined $5,000,000 and $20,000,000 respectively;

9. Amway and Amway Corporation in July and August 1984 filed defenses against the claims and amended same in 1985; also as early as 1982 settlement negotiations had commenced;

10. By "Ministerial decision" dated August 21, 1984 the Minister of National Revenue ("Minister") exercised his discretion pursuant to section 163 of the Customs Act to "remit", or reduce, the total amount of the 1980 claims. So far as material the Ministerial decision and the recommendation leading to that decision read as follows:

Ministerial Decision under the provisions of section 163 of the Customs Act

In re: CS 43757/LN-297

Amway of Canada Ltd.

London, Ontario

Having considered the evidence, the circumstances, and the report submitted under section 162 of the Customs Act in the above matter, it is my decision that:

(a) that the value of the goods imported by Amway of Canada Ltd. in the amount of $148,018,478.48 has been forfeited to The Queen;

(b) that the amount of $42,783,669.77 of the forfeiture is remitted, leaving the amount of $105,234,808.71 of the forfeiture unremitted.

Dated at Ottawa August 21, 1984

"R.F. Thompson" For the Minister of National Revenue

Deputy Ministerial Recommendation under the provisions of section 162 of the Customs Act Customs Seizure No. 43757

Amway of Canada Limited London, Ontario

The Department of Justice was instructed to file statements of claim which were filed in the Federal Court on the basis of four time periods. As an adjustment was made to the original assessment, the statements called for a total alleged forfeiture in the amount of $148,018,478.48.

Additional representations were received on behalf of the claimant stating the notices of seizure did not relate to seizures or deposits and could not serve as the foundation for any exercise of powers conferred on the Deputy Minister. It was further alleged that the claimant was being subjected to double punishment in view of the fact Amway was fined 25 million dollars during the criminal proceedings. It was submitted that such punishment was in contravention to the Charter of Rights and Freedoms.

In review of this matter, it is apparent from the documents found in the possession of the Amway Company that fraudulent information was submitted to the Department to obtain a favourable values ruling. This ruling enabled the Amway Company to import goods into Canada at a substantial undervaluation and resulted in the company defrauding the revenue of Canada. On this basis, I can find no grounds for mitigation other than to recommend a penalty based on the undervaluation rather than the full value of the goods. It is the normal practice to assess penalty equal to the undervaluation of the goods in cases of this nature.

I have considered and weighed the evidence, the representations received and all the circumstances of this case and it is my opinion that a forfeiture has been incurred as alleged.... On this basis the matter stands as follows:

The contents of this table are not yet imported to Tax Interpretations.

I recommend:

(a) that the value of the goods imported by Amway of Canada Limited in the amount of $148,018,478.48 has been forfeited to The Queen;

(b) that the amount of $42,783,669.77 of the forfeiture is remitted, leaving the amount of $105,234,808.71 of the forfeiture unremitted.

The "total alleged forfeiture" figures differ slightly from the totals of the 1980 claims mentioned above in paragraph 4 but the difference is immaterial and it was agreed that the figures in "total alleged forfeiture" are correct with one minor exception as follows: The total of the duty short paid and sales tax short paid ($11,872,036 + $9,067,310.66) is $20,939,347.38. It was agreed that the correct total was $20,943,612.04. Thus the total amounts attributable to unpaid duties and sales taxes was $28,825,708.39, being the said $20,943,612.04 plus the $7,882,096.35 claimed in the 1984 claim.

To complete the figures agreed to and remembering that the appellant’s year end was August 31, the $28,825,708 related to goods imported during the following periods and the pro rata allocation of such duties and taxes is thus:

11. Amway was not satisfied with the remission order, i.e., was not prepared to pay $105,234,808.71. Vigorous litigious sparring on preliminary matters, related principally to discoveries and production of documents continued from 1985 to 1989 in the Federal Court, Trial and Appeal Divisions and the Supreme Court of Canada. These proceedings ("incidental proceedings") will be reviewed later;

12. Finally by a settlement agreement ("settlement") dated September 15, 1989 Amway and the Minister settled the claims. The relevant provisions of the settlement are contained in a letter from the Minister’s representative and read:

We have been instructed to make the following settlement proposal in relation to the aforementioned five Federal Court actions brought against Amway Corporation and Amway of Canada Ltd.:

(1) Amway of Canada Ltd. shall pay to The Queen the sum of $45,000,000;

(2) …

(3) Upon payment of the total amount referred to in paragraph 1 hereof, The Queen shall, by Her authorized solicitors, wholly discontinue, pursuant to Rule 406(2) of the Federal Court Rules, Federal Court actions T-64-80, T-2207-80, T-3346-80, T-5652-80 and T-707-84 as against both Amway of Canada Ltd. and Amway Corporation, without costs, and Amway of Canada Ltd. and Amway Corporation shall, by their authorized solicitors, provide their respective consents to the discontinuance of the said actions without costs;

(4) ...

(5) Upon payment...The Queen shall execute and deliver the release annexed hereto as Attachment I....

Attachment I Release

Know all persons by these presents that The Queen (hereinafter referred to as the releasor) for and in consideration of the payment of $45,000,000 of lawful money of Canada, the receipt of which is hereby acknowledged, does hereby fully and forever remise, release and discharge Amway of Canada Ltd....and Amway Corporation, and each and all of their subsidiaries and affiliated corporations, companies and divisions, and each of their predecessors, successors and assigns, and their respective directors, stockholders, officers, employees and agents, (hereinafter referred to as the releasees) of and from any and all claims, demands, actions, suits, causes of action, obligations, controversies, debts, costs, expenses, accounts, damages, judgments, losses and liabilities, of whatsoever kind or nature, in law, equity or otherwise, whether known or unknown, whether or not concealed or hidden, which against the releasees or any of them, the releasor has had, may have had or now has, to and including the date hereof relating to all issues and matters arising out of or connected with the importation of goods into Canada prior to January 28, 1980, including those issues which were the subject matter of Federal Court actions T-64-80, T-2207-80, T-3346-80, T-5652-80 and T-707-84.

In witness whereof this release has been executed on behalf of The Queen this September, 1989.

As contemplated in the settlement the $45,000,000 was paid, the release was signed and the claims were discontinued. As mentioned above the issue is whether any part of the $45,000,000 is to be characterized as payment of duties and taxes and thus deductible. The Minister conceded that the 1984 claim was strictly for duties and taxes and permitted a deduction of the portion of that total claim of $7,882,096 allocable to the year ended August 31, 1977, namely $1,347,307.

Position of appellant

The appellant submits that although the 1980 claims were technically in the nature of forfeiture, one must consider (a) the components of the amounts claimed as detailed in the seizures, the claims, the remission order and certain other documents, and (b) the effect of the $45,000,000 settlement of the claims. Counsel argues that it is clear from the seizures, the claims and the remission order that $28,825,708.59 in total represents duties and taxes, that these duties and taxes came into existence at the time of importation pursuant to sections 102 and 22 of the Customs Act and section 58 of the Excise Tax Act. He argues further that those portions of the said sum of $28,825,708.39 in customs duties and taxes attributable to the fiscal years ended August 31, 1977 and August 31, 1978 which the Minister disallowed, namely $2,825,405 for 1977 (1.e., $4,172,712 less the amount allowed of $1,347,307) and $7,049,136 for 1978 are therefore deductible for income tax purposes for those years on the basis that the outlays were incurred by Amway for the purposes of gaining or producing income from business or property.

The appellant also submits that in the negotiations carried on prior to the settlement of September 15, 1989, the appellant wished to have the settlement indicate that a part of the $45,000,000 was to be characterized as duties and taxes. The Minister’s representatives refused, acknowledging that if that were done the amount so allocated would in all likelihood be deductible for income tax purposes. The appellant points out on the other hand, that it was not prepared to settle if the agreement had characterized the payment as total penalty as requested by the Minister’s representatives.

The appellant submits that it was the consistent position of the respondent in the incidental proceedings that the claims related in part to duties and taxes and more particularly that they were in part aimed at recovering the statutory debt imposed by section 102 of the Customs Act. Therefore the respondent, having taken the position in the incidental proceedings that part of the claims was for duty and taxes, is estoppedin these appeals from taking the opposite position. The appellant refers to the Crown’s factum before the Supreme Court of Canada in the incidental proceedings which stated as follows:

61. The appellant submits that the Federal Court of Appeal erred in failing to find that the prayer for general relief in the appellant’s statement of claim may be properly construed as including the claim for additional duties and taxes payable on the imported goods, apart from the claim for forfeiture of their duty paid value.

65. In such circumstances and as noted by the learned trial judge, this Court may order an examination for discovery of the requested officers of the respondent relating to the claim brought pursuant to section 102 of the Customs Act regardless of this Court’s determination of the other issues that arise herein.

The appellant submits in the alternative that it relied upon representations made by the Minister’s representatives during the negotiations leading up to the settlement to the effect that portions of the $45,000,000 would be deductible for income tax purposes as duties and sales taxes and that consequently the Minister is now estopped from characterizing the amounts sought to be deducted in 1977 and 1978 as simply forfeiture or penalty.

Position of the respondent

Respondent takes the position that the forfeiture liability arose automatically at the time of importation as contemplated in subsection 192(1) and in the definition of "seized and forfeited" in section 2 of the Customs Act; that this forfeiture characterization remained unaffected by the component breakdowns in the seizures, the claims and the remission order. Therefore the total amount of $45,000,000, less the $7,882,096.35 in the 1984 claim was forfeiture and is in the nature of a non-deductible penalty. (See IT-104R2 of May 28, 1993 and IT-104R of June 5, 1978.) Respondent adds that the inclusions of the amounts of customs duties and taxes detailed in the seizures, claims and remission order are simply to supply the necessary information to the taxpayer to allow it to understand how the forfeiture is calculated.

Respondent also submits that the Federal Court of Appeal had already determined prior to the Settlement that the 1980 Claims were of a penal nature and that Amway, to change that, should have insisted in characterizing part of the Settlement as duties and taxes. Respondent further argues that because Amway, in the Incidental Proceedings, took the position that the 1980 Claims were penal, it is estopped from now arguing that they are not.

Respondent also submits that it was clear on a review of the documentation, correspondence and meetings preceding the settlement that the Minister was not prepared to categorize part of the settlement as payment of duties and taxes. The settlement is silent on the characterization and counsel for respondent argues that this silence should be interpreted as a concession by appellant on the point. Appellant disagrees as discussed above.

As to the effect of the remission order, respondent refers to Canadian Law of Customs and Excise, Eaton & Chalmers, 1968, page 29, where it is stated:

In ascertained value forfeiture cases the claimant may seek to raise some question as to the accuracy of the valuation relied upon by the department. By virtue of paragraph 2(1 )(r) "value" in respect of any forfeiture based upon the value of any goods means their duty paid value at the time of the commission of the offence. Duty paid value is not defined in the Customs Act (it is in paragraph 29(1 )(a) of the Excise Tax Act for the purposes of Part VI of that statute). It is understood in departmental practice, however, to mean the appraised value of the goods plus the amount of duty and taxes, whether sales or excise or both, due on importation. The Department rely on section 56 of the Excise Tax Act, R.S.C. 1952, c. 100, in regard to the taxes. However, the Department do not ordinarily seek payment of duty and taxes as well as duty paid value, although they are entitled to do so. Therefore, if any question is raised in regard to the inclusion of taxes in the ascertained value, the departmental answer might well be to claim them as such. (Note section 56 became section 58 quoted below.)

Law

The most relevant provisions of the Customs Act are 2, 18, 20, 22, 51, 102, 160, 161 to 163, 180, 192(1)(b) and 192(1)(c). The only relevant provision of the Excise Tax Act is section 58. The relevant provisions of the Income Tax Act are subsection 9(1) and paragraph 18(l)(a). All these provisions read as follows:

Customs Act

2. "seized and forfeited", "liable to forfeiture" or "subject to forfeiture", or any other expression that might of itself imply that some act subsequent to the commission of the offence is necessary to work the forfeiture, shall not be construed as rendering any such subsequent act necessary, but the forfeiture shall accrue at the time and by the commission of the offence, in respect of which the penalty of forfeiture is imposed;

"value" in respect of any penalty, punishment or forfeiture imposed by this Act and based upon the value of any goods or articles, means the duty-paid value of such goods or articles at the time of the commission of the offence by which such penalty, punishment or forfeiture is incurred;

"value for duty" means the value of the article as it would be determined for the purpose of calculating an ad valorem duty upon the importation of such article into Canada under the laws relating to the customs and the Customs Tariff, whether such article is in fact subject to ad valorem or other duty or not....

18. Every person in charge of a vehicle arriving in Canada...shall

(a) come to the custom-house...

(b) before unloading or in any manner disposing thereof, make a report in writing to the collector or proper officer at such custom-house...of all goods in his charge or custody or in the vehicle...and of the quantities and values of such goods...and

(c) then and there truly answer all such questions respecting the articles mentioned in paragraph (b) as the collector or proper officer requires of him and make due entry thereof as required by law.

20. The person entering any goods inwards shall deliver to the collector or other proper officer

(a) an invoice of such goods showing the place and date of purchase and the name or the style of the firm or person from whom the goods were purchased, and a full description thereof in detail, giving the quantity and value of each kind of goods so imported; and

(b) a bill of entry of such goods...containing the name of the importer...and the description of the goods, and the marks and numbers and contents of the packages, and the place from which the goods are imported, and of what country or place such goods are the growth, produce or manufacture.

22(1) Unless the goods are to be warehoused in the manner provided by this Act, the importer shall, at the time of entry,

(a) pay or cause to be so paid, all duties upon all goods entered inwards; or....

51(1) Every invoice delivered pursuant to this Act or any regulation shall exhibit, in the currency of the country of export, the fair market value of the goods to which it relates, determined in accordance with sections 36 to 42, and the true price at which such goods were sold by the vendor to the purchaser; and in computing the value for duty of the goods in Canadian currency the rate of exchange shall be such as may be declared from time to time by the Bank of Canada.

(3) All such invoices shall faithfully exhibit the transaction between the exporter and the importer, and contain a true and full statement of the actual price payable for the goods…

102. The true amount of customs duties payable to Her Majesty with respect to any goods imported into Canada...from and after the time when such duties should have been paid or accounted for, constitutes a debt due and payable to Her Majesty, jointly and severally, from the owner of the goods at the time of the importation...thereof, and from the importer...thereof...and such debt may, at any time, be recovered with full costs of suit, in any court of competent jurisdiction....

160. Whenever any vessel, vehicle, goods or thing has been seized or detained under this Act or any law relating to the customs, or when it is alleged that any penalty or forfeiture has been incurred under this Act or any law relating to the customs, the collector or the proper officer shall forthwith report the circumstances of the case to the Deputy Minister.

161(1) The Deputy Minister may thereupon notify the owner or claimant of the thing seized or detained, or his agent, or the person alleged to have incurred the penalty or forfeiture, or his agent, of the reasons for the seizure, detention, penalty, or forfeiture, and call upon him to furnish, within thirty days from the date of the notice, such evidence in the matter as he desires to furnish.

162. After the expiration of the thirty days referred to in section 161, or sooner, if the person called upon to furnish evidence so desires, the Deputy Minister or such other officer as the Minister may designate may consider and weigh the circumstances of the case, and report his opinion and recommendation thereon to the Minister.

163(1) The Minister may thereupon either give his decision in the matter respecting the seizure, detention, penalty or forfeiture, and the terms, if any, upon which the thing seized or detained may be released or the penalty or forfeiture remitted, or may refer the matter to the court for decision.

180(1) Where the person in charge or custody of any article mentioned in paragraph 18(b) has failed to comply with any of the requirements of section 18, all the articles mentioned in paragraph (b) of that section in the charge or custody of such person shall be forfeited and may be seized and dealt with accordingly.

(2) If the articles so forfeited or any of them are not found, the owner at the time of importation and the importer, and every other person who has been in any way connected with the unlawful importation of such articles shall forfeit a sum equal to the value of the articles....

192(1) If any person

(a) smuggles...

(b) makes out or passes or attempts to pass through the custom-house, any

false, forged or fraudulent invoice of any goods of whatever value; or

(c) in any way attempts to defraud the revenue by avoiding the payment of

the duty or any part of the duty on any goods of whatever value;

such goods if found shall be seized and forfeited, or if not found but the value thereof has been ascertained, the person so offending shall forfeit the value thereof as ascertained....

(2) Every such person shall, in addition to any other penalty to which he is subject for any such offence,

(a) forfeit a sum equal to the value of such goods, which sum may be recovered in any court of competent jurisdiction; and....

Excise Tax Act

58. Where an excise tax is payable under this Act upon the importation of any article into Canada, the Customs Act is applicable in the same way and to the same extent as if that tax were payable under the Customs Tariff.

Income Tax Act

9(1) Subject to this Part, a taxpayer’s income for a taxation year from a business or property is his profit therefrom for the year.

18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Analysis

As a preliminary comment it is to be noted that neither party has submitted that if deductions are allowed in whole or in part they should be taken in 1989 when the settlement and payment occurred. They have accepted that the deductions relate to the 1977 and 1978 years when the liabilities arose.

In the first place the Court finds that the parties are not estopped from arguing as they have in these appeals. The alleged representations of the Minister’s representatives in the negotiations leading to the settlement were not proved. Further the positions taken by the appellant and respondent in the incidental proceedings, which are the exact opposite of their positions in these appeals, do not in my opinion estop either of them. The incidental proceedings issue was whether the 1980 claims were penal in the context of whether or not the officers of Amway Corporation had to testify or furnish documents, i.e., incriminate themselves and/or Amway Corporation. The issue here is one of deductibility under the Income Tax Act. Moreover the issue in the incidental proceedings related strictly to the nature of the 1980 claims prior to the settlement. It had nothing to do with the characterization of the payment made pursuant to the settlement. Again although the Federal Court of Appeal characterized the general nature of the 1980 claims as penal it did not analyze the components of the 1980 claims. The Supreme Court did not decide on the issue at all. Moreover in the Federal Court of Appeal and the Supreme Court of Canada the appellant was not a party.

Consequently I find that there were no estoppels; nor do I accept that the judgment in the Federal Court of Appeal as to the general nature of the 1980 claims is res judicata in these appeals.

With respect to the main arguments the Court finds that although the liability under subsection 192(1) of the Customs Act arises at the time and as a result of the importation the extent of that liability was altered by the remission order and its nature was affected by the settlement. [1]

I believe that in these appeals the Court is entitled, in determining the true nature of the $45,000,000 payment, to examine the component parts set forth in the seizures, the 1980 claims and the remission order. I believe that this is the proper approach in cases of this nature.

The examination for discovery of Edward Short ("Short"), an appeals officer with Revenue Canada, dated May 19, 1994 (Exhibit A-l, Tab 2, pages 24-25) is clear to the effect that, in his view, the alternate conclusion in the 1980 claims as to "such other relief" was sufficiently broad to allow the Minister to claim duties and taxes in the event that the forfeiture was not allowed. On this point he stated as follows:

66. A. ...What my understanding was...and even now, is that...they were seeking the penalties that is the forfeitures, but they did not want to be limited if a decision was made that they were not entitled to the forfeitures; that is, that...Canada Customs...if they were not successful in claiming forfeitures, they still wanted to have the opportunity to be able to claim at least the amount of duties and sales taxes that they alleged were underpaid.

I have concluded that this view of Short is correct in law. In other words the claims for "such other relief" were sufficiently broad to permit the Crown to claim duties and taxes. See, inter alia, the cases of The Queen v. Greenway (1981), 122 D.L.R. (3d) 554, [1982] 1 F.C. 259, 35 N.R. 344 (F.C.A.); Duryea v. Kaufman (1910), 21 O.L.R. 161 and Slater v. Canada Central R.W. Co. (1878), 25 Gr. 363 (Ont. H.C.). Therefore, in my opinion, the 1980 claims were for both forfeiture and for duties and taxes under section 102 of the Customs Act.

Most importantly, it is clear that after the payment of $45,000,000 was made there was no longer any liability for duties and taxes nor for penalty. On discovery, Amway’s counsel, Mr. Finkelstein posed various questions to Short. The Minister’s counsel was Mr. Olsson.

246. Q. That payment of $45 million settled all claims by Revenue Canada against Amway in relation to the undervaluation and the duties and taxes owing, correct?

A. In respect to those importations, yes, that’s right.

247. Q. So that the payment of $45 million by Amway to Revenue Canada erased the $28,825,708.39 debt to Her Majesty for duties and taxes, correct?

A.Yes, that’s right.

250. Q. But you agree with me that Revenue Canada’s position is that Amway owed Revenue Canada $28,825,708.39 in respect of duties and taxes in respect of the importations dealt with in the claims in Exhibit 1, tabs 1A through E, correct?

A. That’s right. In addition to the amounts of the forfeitures to the claim.

251. Q. And you agree with me that the obligation on the part of Amway to pay $28,825,708.39 in duties and taxes, was erased by the payment of $45 million to Revenue Canada in settlement of these claims?

A. The liability was erased and also what this did was preclude any future possible actions or any future possible claims for those duties and sales taxes. 256. Q. Now, in this case, the $28,825.708.39 in duties and taxes, I take it were a debt owed by Amway to Revenue Canada pursuant to section 102 of the Customs Act as it then stood?

A. Yes, that’s right.

257. Q. And I think you have told me this, but that statutory debt was erased then by the payment of the $45 million?

A. It was erased by the settlement-it was erased by the settlement document at tab 64.

258. Q. And the payment of $45 million?

A. That’s part of the settlement, yes.

259. Mr. Finkelstein: But the fact of the matter is, the payment of the $45 million in this settlement that we are dealing with, the settlement that’s documented at Exhibit 2, tab 64, satisfied the statutory liability for the $28 million, pursuant to section 102 of the Customs Act, whether you would have actually sought payment of it or not?

Mr. Olsson: It think that is an issue between us here. This $45 million satisfied a forfeiture in the-a forfeiture in a compromised or reduced amount of $45 million which had stood at $105 million, but the Crown accepted $45 million instead, and it’s an issue between us whether that satisfied any claim for duties and taxes.

260. Mr. Finkelstein: Are you saying that Amway owes the $28 million today or not?

Mr. Olsson: No. I’m conceding that after the release, we were no longer in a position to claim duty and taxes, but I’m disputing that the $45 million satisfied the claim for duties and taxes because such a claim had not been asserted only a forfeiture claim-

261. Mr. Finkelstein: We are not talking about a claim here, Mr. Olsson.

By Mr. Finkelstein:

262. Q. We have agreed I thought that a statutory debt for duties and taxes of $28 million existed pursuant to section 102 of the Customs Act, correct?

A. Yes.

263. Q. And we agree that that statutory debt for $28 million no longer exists, correct?

A. Yes.

264. Q. And we agree that the reason that it no longer exists is because this matter was settled by the documentation at Exhibit 2, tab 64, correct?

A. Yes.

265. Q. And part of that was a payment by Amway to Revenue Canada of $45 million?

Mr. Olsson: That is where we disagree. We agree that the release extinguished whatever debt there was in regard to duty and taxes. We do not agree that the $45 million satisfied any such debt for duty and taxes.

266. Mr. Finkelstein: You agree that part of the settlement was required, the payment of $45 million by Amway to Revenue Canada, right?

Mr. Olsson: Yes. And we say that was for $45 million of forfeiture.

267. Mr. Finkelstein: I’m not arguing with you how we characterize it. I just want to get the facts straight. You agree that Amway no longer owes a debt for duties and taxes of $28 million pursuant to section 102. You have already agreed with that two or three times.

Mr. Olsson: We agree with that.

268. Mr. Finkelstein: And you will agree that the reason is that the matter was settled.

Mr. Olsson: The reason is that the release covers it.

By Mr. Finkelstein:

269. Q. And you wouldn’t have given the release, let’s put it that way, without the payment by Amway of $45 million?

A. I think that’s fair to say.

Reference is also made to a letter from R.F. Thompson, Director Adjudications to Ephram S. Gerber dated October 2, 1989 which reads as follows:

Thank you for your memorandum of September 25, 1989.

I wish to draw to your attention that this division was only responsible for the ascertained forfeiture collection relating to Amway and no set-offs were made as the debt had to be confirmed by judgment.

It is my understanding that the Investigations Division was responsible for the other claim involving outstanding duties and for which set-offs were being made. In my opinion, since the 45 million dollar settlement was for all claims, Amway is no longer in debt to the Department....

In my opinion, since the 1980 claims were for both forfeiture and for duties and taxes and since there was no longer any liability for duties and taxes after the settlement and payment of the $45,000,000, it follows that part of the settlement must be considered as being in payment of duties and taxes. This was certainly true for the duties and taxes claimed in the 1984 claim and in my opinion it is also true for the other duties and taxes in issue here.

Several cases were canvassed but in my opinion the most relevant are the following. In The Queen v. Gicleurs Astra Ltée, [1987] 1 C.T.C. 161, (F.C.T.C.) [1987] 2 C.T.C. 15, Pinard J. of the Federal Court-Trial Division dismissed the taxpayer’s appeal on procedural grounds. However he also stated the following at page 167 et seq.:

In the case at bar, however, it is clear from the summaries at the bottom of list A and the amended list B, in support of the notice of forfeiture, that the customs duties and sales tax are separated, that they are added to the penalty and that they are thus included in the total sum of $291,301.05 which is the subject-matter of the forfeiture. By reducing the amount of the forfeiture as he did, pursuant to section 163 of the Act, the Minister could lay down the conditions of the remission and the Court has to conclude that he regarded the payment of $291,301.05 by the defendant as including the payment of customs duties and sales tax.

The plaintiff was also justified, as her counsel explained, in protecting herself and claiming the amounts of customs duties and sales tax separately in the event that the court decided to ignore the lack of notice under section 164 of the Act and in addition dismissed the action for a penalty; however, as these events have not occurred, and in view of the reasons given above, the plaintiff cannot obtain here any more than the sum of $291,301.05.

In 383783 Ontario Ltd. v. M.N.R., [1991] T.C.J. No. 353 goods had been seized and the taxpayer made a deposit to secure their release. The case is therefore distinguishable on the facts but on the principles involved, my brother Beaubier J.T.C.C. stated as follows:

In relation to the appellant’s claim to deduct $80,196 in 1981 on account of the Jay tex partnership’s payment in that year, the appellant states that either the money was paid as duty, interest, compensation and expenses and costs of The Queen, or it was to purchase inventory for resale since seizure had vested title in The Queen. The Minister states that the whole amount constitutes a penalty for failure to pay duty and that none of it was paid for the purpose of producing income.

The Court accepts the proposition that the entire payment of the appellant in 1981, $80,196, was for the purpose of producing income. Of this $16,418.42 (being 1/2 of the sum of $32,836.84 which was described in the statement of goods seized as being for duty) was paid for duty. It is the judgment of this Court that the sum of $16,418.42 so paid and specified is deductible.

[Emphasis added. I

Having decided that a part of the $45,000,000 settlement is to be characterized as deductible duties and taxes, it remains to determine what part. Counsel for the respondent, although not wanting any part to be so characterized suggested a formula which resulted in only a relatively small amount being deductible for the two years in question combined. Counsel for the appellant insisted that the full amount of duties and taxes, namely $28,825,708 be accepted (which for the years in question would result in the additional deductions claimed of $2,825,405 for 1977 and $7,049,136 for 1978). He suggested however, if I concluded otherwise, that a different formula be used.

In my view the proper approach is to determine what was satisfied by the $45,000,000 payment. Firstly there is no dispute that it satisfied the $7,882,096 duties and taxes of the 1984 claim. Thus the balance, namely $37,117,903 settled a total amount as established in the remission order re the 1980 claims of $105,234,809, $20,943,612 of which was duties and taxes. I believe it is correct to base the calculations on the amounts of the remission order with the minor adjustments discussed earlier, i.e., not rely on the figures in the claims. Therefore the proportion of the $37,117,903 representing duties and taxes 1s:

20,943.612 x $37,117,903 == $7,387,127.57 105,234,809

This amount of $7,387,127.57 settled duties and taxes for the years ending August 31, 1974 through August 31, 1980. Only portions of that amount relate to the years ended August 31, 1977 and August 31, 1978. The proportions applicable to the said years are as follows:

for the year ending August 31, 1977; and

for the year ending August 31, 1978.

Consequently, both appeals are allowed, with costs, to the extent of permitting deductions of $996,562.92 for the year ending August 31, 1977 and $2,486,336.50 for the year ending August 31, 1978.

Appeals allowed with costs.