Molson Newfoundland Brewery Ltd. v. Her Majesty the Queen, [1993] 2 CTC 141

Rothstein, J.:—

Introduction

The issue in this case is whether beer given away by a brewery as samples is subject to federal sales tax [1] .

By a refund claim dated February 23, 1987, the plaintiff claimed a refund of $218,936.562 [2] being the amount of federal sales tax paid in respect of beer given away as samples during the period January 31, 1983 to January 31, 1987. By notice of determination number ATL16931 dated April 15, 1987, the plaintiff's refund claim was disallowed. By notice of objection dated May 14, 1987, the plaintiff objected to the determination disallowing the refund claim. By notice of decision dated March 28, 1991, the plaintiff was informed that its notice of objection had been disallowed and that the notice of determination had been confirmed. The plaintiff has now appealed to the Federal Court of Canada pursuant to subsections 81.2(2) and 81.28(1) of the Excise Tax Act, R.S.C. 1985

c. E-15, as amended, and section 48 of the Federal Court Act, R.S.C. 1985, c. F-7 as amended.

The plaintiff makes four arguments, only two of which I consider it necessary to address:

1. The intent of the Excise Tax Act is not to impose federal sales tax on beer given away by breweries as samples.

2. The case of The King v. Henry K. Wampole and Co., [1931] S.C.R. 494 sets up a test of double taxation. In that decision, the Supreme Court of Canada ruled against double taxation. The plaintiff meets the Wampole test of double taxation and therefore should not be obliged to pay federal sales tax on beer which it gave away.

The defendant (the Minister of National Revenue), takes the position that by virtue of subparagraph 50(1)(a)(iii) of the Excise Tax Act, federal sales tax is payable on free beer. The Minister denies that there has been double taxation according to the test in the Wampole case.

The evidence

Evidence for the plaintiff was given by Edgar Anthony Parsons, the controller of Molson's Breweries in Newfoundland. He was responsible for federal sales tax in Newfoundland for the plaintiff.

At the relevant time, beer was sold to approximately 35 wholesalers who distributed the beer to licensed agents which were some 1,500 grocery stores and to licensed establishments which comprised some 1,200 bars and lounges. Beer was also sold through five beer stores in St. John’s which were run by the Brewery Association of Newfoundland.

Beer prices were regulated by the Newfoundland Liquor Corporation. All brands were sold for the same price although the price for a case of 24 bottles of beer was somewhat less than for two cases of 12 bottles of beer. Usually once per year the breweries applied to the Newfoundland Liquor Corporation for price increases based upon increased costs of production.

The retail price of beer consisted of (1) the charge made by the brewery, (2) bottle deposit, (3) provincial retail sales tax, (4) Newfoundland Liquor Corporation markup, called a packaging tax, and (5) federal sales tax and excise tax. Distributors were paid by the breweries by way of a discount from the retail price of beer.

The practice of giving away beer as samples free of charge has been an accepted practice in the brewing industry, as Mr. Parsons put it, "from the beginning of time”. All competitors in the beer market participate in this form of promotion. At the relevant time, the plaintiff would have given away five to ten per cent of the volume of beer it produced.

The channels through which, or the reasons for which, beer produced was given away or was not sold consisted of the following: (1) to distributors, (2) directly to customers, (3) to employees, (4) to truckers for extras on loan (intransit breakage between the plaintiff's premises and the distributors), (5) for consumption in the lounge of the plaintiff's manufacturing premises, (6) for consumption by employees in the lunch room at the plaintiffs premises, (7) to replace old beer with new beer, (8) to replace outdated or destroyed beer, (9) to use in the lab for quality control, (10) for breakage at the St. John's plant, (11) for breakage at a satellite warehouse.

The plaintiff paid federal sales tax on beer given away as samples in the first four categories: to distributors, to customers, to employees, and to trucks for extras on loads. No federal sales tax was paid on beer in the latter seven categories.

On beer sold, federal sales tax was calculated based on the gross selling price to distributors plus the bottle deposit less the packaging tax, freight and discount to distributors, and credit for bottle returns. The appropriate tax rate was applied to this figure. For the month of June 1986 for example, federal sales tax at the rate of 15/115 was applied to the taxable base for beer sold of $1,196,070.68. The tax payable was $156,009.22.

On beer given away as samples in the month of June 1986, the federal sales tax of 15/115 was applied to a taxable base of $53,384.17 for tax payable of $7,615.33. The taxable base for sample beer was calculated as the price of sale beer to distributors before discounts and other adjustments, less 12 /2 per cent) which was the amount the Minister had authorized as a discount.

Mr. Parsons testified that when beer is produced it is not identified or accounted for separately as sale beer or sample beer. Sample beer is only identified at the time it is given away. The cost of producing sample beer is part of the total cost of production. In the plaintiff's accounting records, expenses associated with sample beer were, for accounting purposes, allocated to the appropriate expense accounts, e.g., employee welfare, production costs, distribution, warehousing, delivery costs.

Mr. Parsons stated that he was of the view that the plaintiff was subjected to double taxation (the parties agreed that double taxation meant something more than one times the tax but not as much as two times the tax since, as indicated above, not all sample beer was taxed) in respect of beer given away as samples. The price of beer sold to distributors before adjustments reflects all costs of production including the cost of producing sample beer. This is the taxable base applicable to beer sold. According to Mr. Parsons, to also tax sample beer results in tax being paid on the sample beer twice, once because the cost of sample beer is included in the taxable base for beer sold, and the second time because of the tax on sample beer itself.

Mr. Lionel Robidoux testified for the defendant. He is now Director, FST Operations—Appeals Directorate, Excise Branch of Revenue Canada. At the relevant time, January 31,1983 to January 31, 1987, Mr. Robidoux was director of Appeals Directorate, Excise Branch of Revenue Canada.

Notwithstanding the defendant's original position that there was no double taxation in this case, Mr. Robidoux testified that there was indeed double taxation. However, in his view, the law provides for such double taxation. The following exchange between the Court and Mr. Robidoux appears in the transcript of evidence of May 5, 1993, at page 43:

[Illegible] in an accounting sense, am I wrong here when I I say that?

A. As the expression that's been used in the Court before, in a broad sense there is a double taxation, but not —

Q. Both from an accounting point of view and from viewing it strictly from the point of view of Wampole and Standard Brands?

A. In the broad sense, there is double taxation in this industry just like there is in any other industry.

Mr. Robidoux testified that there are a number of situations in which, in his view, there is double taxation. He gave as one example clothing acquired for employees. According to Mr. Robidoux, federal sales tax would have been paid by the plaintiff for such clothing and, in the same sense as sample beer, would be included in the sale price of beer sold. Such double taxation, in his view, was mandated by the Excise Tax Act.

The statutory scheme

The charging provision of the Excise Tax Act is section 50. The relevant portions of subsection (1) provide:

50.(1) There shall be imposed, levied and collected a consumption or sales tax of nine per cent on the sale price of all goods

(a) produced or manufactured in Canada

(i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property and the goods passes, whichever is the earlier,

(iii) payable, in a case where the goods are for use by the producer or manufacturer thereof, by the producer or manufacturer at the time the goods are appropriated for use;

Subparagraph (iii) was added by an Act to amend the Excise Tax Act, S.C. 1980-81-82-83, c. 68, subsection 10(3). [3]

Sale price is defined in section 42 of the Act:

"sale price", for purposes of determining the consumption or sales tax, means

(a) except in the case of wines, the aggregate of

(i) the amount charged as price before any amount payable in respect of any other tax under this Act is added thereto

The definition of sale price contemplates a sale from a manufacturer or producer to a purchaser. However, paragraph 52(1)(d) of the Act provides:

52.(1) Whenever goods are manufactured or produced in Canada under such circumstances or conditions as render it difficult to determine the value thereof for the consumption or sales tax because

(d) the goods are for use by the manufacturer or producer and not for sale

the Minister may determine the value for the tax under this Act and all those transactions shall for the purposes of this Act be regarded as sales.

Paragraph 52(1)(d) thus provides that goods for use by the manufacturer or producer shall, for the purposes of the Act, be regarded as sales and federal sales tax is therefore payable with respect thereto.

Counsel for the defendant argued that the introduction of subparagraph 50(1)(a)(iii) was significant to the issue in this case because it expressly dealt with sales tax on goods used by a manufacturer or producer and was recently enacted. However, I have come to the conclusion that subparagraph 50(1)(a)(iii) is not significant. Counsel for the plaintiff drew to my attention the decision of Collier, J. in British Columbia Railway Co. v. The Queen, [1979] C.T.C. 56, 79 D.T.C. 5020 (F.C.T.D.). In that decision it was determined that, at that time, there was no provision in the Excise Tax Act which specified when the tax payable by a producer or manufacturer who uses his own goods, was payable, and therefore there was no certainty and, as a consequence, no tax liability. Collier, J.'s decision was affirmed by the Federal Court of Appeal in The Queen, v. British Columbia Railway Co., [1981] C.T.C. 110, 81 D.T.C. 5089. In budget papers of October 28, 1980, issued by the Department of Finance, paragraph 29 states:

29. That the consumption or sales tax imposed on goods produced or manufactured in Canada for use by the producer or manufacturer be payable at the time the goods are appropriated for use.

[Emphasis added.]

Section 118 of the Act to Amend the Excise Tax Act, S.C. 1980-81-82-83, c. 68, deems subparagraph (iii) of paragraph 50(1)(a) to have come into force on April 1, 1975.

I am satisfied that subparagraph (iii) of paragraph 50(1)(a) of the Excise Tax Act was enacted, with retroactive effect, solely to fill the gap identified by Collier, J. in British Columbia Railway Co., supra. Its purpose was to establish the time when tax was payable by a producer or manufacturer who used his own goods. It was not intended to, and did not, substantively affect the liability for tax in such circumstances, which was already provided for in paragraph 52(1)(d) of the Act.

The Warn pole case

In the Wampole case, supra, the Supreme Court of Canada considered paragraph 87(d) of the Special War Revenue Act (later paragraph 52(1)(d) of the Excise Tax Act). It is apparent from the dictum of Anglin, C.J.C. for the majority, that where the cost of samples was included in the cost of products sold in respect of which sales tax had been imposed, double taxation would result if samples were also taxed. In such circumstances, Anglin, C.J.C. found that paragraph 87(d) was not to be interpreted so as to impose double taxation, as would be the case if samples were, themselves, taxed.

Anglin, C.J.C. stated at page 497:

But, in clause 4 of the Special Case, we find the following statement:

4. The cost of producing such samples was paid by the company as a necessary expense of business, and the company in its books treated such expense as a necessary cost of production of articles manufactured and sold, in respect of which last mentioned articles the company has paid sales tax.

It is obvious to me that it cannot have been the intention of the Legislature to tax the same property twice in the hands of the manufacturer. Having regard to the admission of paragraph 4, above quoted, such double taxation would ensue were we to hold the samples here in question to be now subject to the consumption or sales tax, it being there admitted that the cost of producing such samples is included in the

. . . cost of production of articles manufactured and sold, in respect of which . . . the company has paid sales tax.

If the cost or value of these goods used as samples has already been a subject of the sales tax in this way, it would seen to involve double taxation if they should now be held liable for sales tax on their distribution as free samples. But for the admission of paragraph 4, however, I should certainly have been prepared to hold that the "use" by the company of goods manufactured by it as free samples for advertising purposes is a "use" within clause (d) of section 87 of the Special War Revenue Act, R.S.C., 1927, ch. 179.

In this case the Minister has argued that the Wampole case is distinguishable. In the Minister's notice of decision of March 28, 1991, disallowing the plaintiff's objection, the notice states at page 2:

The Wampole judgment went on to dismiss the Crown's appeal on the basis of unintended double taxation; however, clause 4 of the Special Case was critical in that the Crown admitted the cost of producing the samples was a necessary expense of doing business and that the expense was treated in the company's books as a necessary cost of production of articles manufactured and sold and on which sales tax was paid.

At page 3 of the notice of decision, the decision states:

As for the double taxation issue, the Wampole judgment turned on a very specific admission of the Crown, a fact which was noted in the Armstrong case. The Minister does not make the same admission in your case in view of the number of years since the Wampole judgment during which accounting practices and marketing strategies have remained less than constant.

I find myself in disagreement with the Minister's notice of decision. The facts in the case at bar are the same as those in Wampole, supra, except that in Wampole, the goods at issue were pharmaceutical samples while in the case at bar they are beer samples. Mr. Parsons testified that the cost of producing sample beer was included in the taxable base of beer for sale and on which sales tax was paid. Mr. Robidoux agreed that to tax the samples results in double taxation, although he argued it was authorized by statute.

However, in a case in which the circumstances are the same as in Wampole, supra, I am bound by that decision of the Supreme Court of Canada. Counsel for the Minister argued that Wampole was out of date, but indeed, the legislation at issue in Wampole was virtually identical to the legislation under consideration in the case at bar. She also relied on The Queen v. W.D. Armstrong & Co., [1970] C.T.C. 175, 70 D.T.C. 6148 (Exch. Ct.), which distinguished Wampole. However, in that case, Walsh, J. found that there was no evidence that the cost of the goods being taxed (matrices) was included in the price of the final product (rubber stamps) on which sales tax was also paid. Also in Armstrong, Walsh, J. found that Wampole could be distinguished because, in Armstrong, the goods in question were not identical. However in the case at bar the evidence is that the cost of samples is included in the price of beer sold and that sample beer is identical to sale beer.

Based on the evidence before me, I find that the cost of producing beer samples was a necessary expense of doing business and that expense was treated in the plaintiff's books as a necessary cost of production of beer manufactured and sold on which sales tax was paid. Contrary to the assertion in the Minister’s notice of decision, there was no evidence of changes in “accounting practices" or“ marketing strategies" since the Wampole decision. I cannot distinguish the accounting and marketing practices of the plaintiff from those applicable in the Wampole case.

Mr. Robidoux’s argument that double taxation is imposed by statute is not convincing. I do not think Parliament intended that a producer or manufacturer be obligated to pay sales tax more than once on identical goods he produces.

Mr. Robidoux's example of a producer or manufacturer buying clothing for employees, paying sales tax on the clothing and then including these costs in the selling price of the goods manufacturée! and sold on which sales tax is also paid is not apt. Under the Excise Tax Act, the sales tax obligation is on the producer or manufacturer and not the purchaser. The example of clothing as an input to the production of beer is not parallel to identical goods being produced as samples and for sale. According to Wampole, supra, the scheme of the Excise Tax Act is not to tax the same product twice in the hands of the manufacturer. The legislation does not impose double taxation in the case of identical goods.

Legislative history

While the foregoing is sufficient to dispose of this case, I have also considered the legislative history pertaining to paragraph 52(1)(d), which lends sup- port to the conclusion I have reached. For this purpose, I will accept as arguable Mr. Robidoux's position, that notwithstanding the Wampole decision, paragraph 52(1)(d) might be construed to impose double taxation. There would thus be some ambiguity about the interpretation of the provision, i.e., the Wampole approach or the Robidoux approach. Such ambiguity would justify resort to interpretative assistance to explain the provision.

Authority for the Court having regard to legislative history and debates of the House of Commons was established by cases such as Attorney General of Canada v. Young, [1989] 3 F.C. 647, 100 N.R. 333, in which Heald, J.A. stated at page 657 (N.R. 338):

In interpreting the words of a statute, judges may "adopt a purposive interpretation if they can find in the statute read as a whole or in material to which they are permitted by law to refer as aids to interpretation an expression of Parliament's purpose or policy". Recent jurisprudence has made it clear that courts are entitled to look to the debates of the House of Commons in order to ascertain the “mischief” or "evil" that a particular enactment was designed to correct.

In Pepper (Inspector of Taxes) v. Hart, [1992] B.T.C. 591, [1993] 1 All E.R. 42 (H.L.), Lord Browne-Wilkinson stated at page 610 (All E.R. 64):

In my judgment, subject to the questions of the privileges of the House of Commons, reference to parliamentary material should be permitted as an aid to the construction of legislation which is ambiguous or obscure or the literal meaning of which leads to an absurdity. Even in such cases references in court to parliamentary material should only be permitted where such material clearly discloses the mischief aimed at or the legislative intention lying behind the ambiguous or obscure words. In the case of statements made in Parliament, as at present advised I cannot foresee that any statement other than the statement of the Minister or other promoter of the Bill is likely to meet these criteria.

The provision at issue in this case, paragraph 52(1)(d) of the Excise Tax Act, R.S.C. 1985, c. E-15, had its origin in 1923, at which time, by chapter 70, section 6 of an Act to amend the Special War Revenue Act, it was first enacted as paragraph 87(d) of the Special War Revenue Act. Its words were almost identical to the words in paragraph 52(1)(d) of the 1985 statute:

87. Whenever goods are manufactured or produced in Canada under such circumstances or conditions as render it difficult to determine the value thereof for the consumption or sales tax because

(d) such goods are for use by the manufacturer or producer and not for sale

the Minister may determine the value for the tax under this Act and all such transactions shall for the purposes of this Act be regarded as sales.

On June 13, 1931, the Supreme Court of Canada decided the Wampole case finding that the words of paragraph 87(d) did not contemplate taxation on samples when the result would be double taxation.

By an Act to amend the Special War Revenue Act, S.C. 1931, c. 54, section 12, assented to on August 3, 1931, Parliament added subsection (2) to section

87. Subsection 87(2) provided:

87(2) Whenever goods are manufactured or produced in Canada and used by the manufacturer or producer thereof and not sold, or are given away or distributed by the manufacturer or producer thereof without consideration, the Minister may determine the value for the tax under this Act and all such transactions shall, for the purposes of this Act, be deemed to be sales, and the time when such goods are used or taken into consumption by the manufacturer or producer thereof, or distributed or given away by the manufacturer or producer thereof shall be deemed to be the time of delivery.

This provision was the subject of judicial interpretation in The King v. Standard Brands, an unreported decision of MacLean, J. of the Exchequer Court rendered on July 10, 1934. The facts were essentially the same as in the Wampole case. In Standard Brands, MacLean, J. stated at page 7:

Section 87(2), I think, must be held to mean that sample goods, representative of saleable goods, distributed without consideration, are liable to the tax on delivery, that is, when given away or distributed, and which for the purposes of the Act are to be deemed as sales.

By an Act to amend the Special War Revenue Act, 25-26 George V, c. 33 assented to on June 13, 1935, Parliament repealed subsection 2 of section 87. In debates of the House of Commons, Volume II, 1935, the Honourable E.N. Rhodes, the Minister of Finance, stated at page 1987:

Two other alterations have been made in order to provide that goods given away or distributed free, that is to say, advertising samples, will not be subject to the sales tax and

This clear explanation is again given by Mr. Rhodes in the House of Commons Debates, 6th session, 17th Parliament, 25-26 George V, 1935, at page 3207:

5. That the said act be further amended by repealing subsection two of section eighty-seven thereof, as enacted by section twelve of chapter fifty-four of the statutes of 1931.

MR. RALSTON: I have forgotten what section is being struck out.

MR. RHODES: This has to do with the sales tax on samples. It removes the sales tax in the case of samples which are distributed gratuitously by manufacturers in Canada.

Resolution agreed to.

The sequence of events indicates that, immediately after the Wampole decision, Parliament enacted subsection 87(2) to expressly tax samples. Very shortly afterwards, subsection 87(2) was interpreted in Standard Brands, supra, to have that precise effect. Then Parliament repealed that subsection with the express intention, according to the Minister of Finance, that samples would not be subject to sales tax.

The legislative history supports the conclusion that samples, in circumstances the same or similar to those in Wampole, supra, are not to be subject to sales tax. In other words, Parliament intended the law, as established by Wampole, to subsist.

Conclusion

My consideration of the Wampole case and the relevant legislative history disposes of the issue at hand. It is not necessary for me to address the submissions of counsel on the subject matters of discrimination and whether the Minister determined a value under paragraph 52(1)(d) of the Excise Tax Act,

The plaintiff's appeal is allowed and the Minister's notice of determination should be varied so as to give effect to this decision. The amount of $221,996.26, which was agreed upon at trial, should be refunded to the plaintiff together with interest as provided by the Excise Tax Act and other relevant legislation. As the legislative authority for, and the computation of, interest was not argued before me, I shall remain seized of this matter to resolve any dispute in respect of interest. The plaintiff shall receive costs of this action from the defendant.

Counsel for the plaintiff shall prepare a formal judgment consistent with these reasons which shall be submitted to counsel for the defendant for approval as to form and content and then to me for signature. If this cannot be done within three weeks from the date of these reasons, the Court should be informed.

Appeal allowed.