Attorney General of Canada v. Maltby Inc., [1991] 2 CTC 202

Jerome, A.C.J.:—This is an action by way of appeal pursuant to sections 51.24 and 51.28 of the Excise Tax Act, R.S.C. 1970, c. E-13, as amended. The Attorney General of Canada (the "plaintiff") appeals a decision of the Tariff Board [now the Canadian International Trade Tribunal] dated August 17, 1988 which allowed Maltby Inc.'s (the "defendant") appeal pursuant to section 51.19 of the Excise Tax Act from a decision of the Minister of National Revenue (the "Minister") dated February 26, 1987. The Minister had disallowed the defendant's claim for a refund of sales tax paid on the sale of wax earplugs packaged by the defendant in Canada. This matter came on for hearing at Toronto, Ontario on September 5, 1990 and I reserved judgment at that time. Subsequently on July 15, 1991, at Toronto, I rendered oral Reasons from the Bench and indicated that these written Reasons would follow.

The parties have filed an agreed statement of facts for the purpose of this action, the salient portions of which are as follows:

1. Brent Commercial Company ("Brent") imported Ohropaxbrand wax earplugs (the "Earplugs") into Canada from Apothecary Negwer KG of Bad Homburg, West Germany ("Negwer"). At the time of importation, the Earplugs had already been manufactured and packaged in West Germany [see Ex. DZ].

2. Brent sold the Earplugs without alteration to Maltby Inc. ("Maltby"). Brent and Maltby are unrelated corporations which deal with each other on an arm's length basis. Brent (the business name under which Alandor Inc. carries on business) is not licensed under the Excise Tax Act (the “Act’’). Maltby, through its predecessors in title, Maltby Brothers Ltd., has been a licensed manufacturer under the Act since as early as April 1, 1968.

3. During the Claim Period (as defined below) or portions thereof, Brent did pay federal sales tax ("FST") on the duty paid value of the earplugs at the time of importation.

4. When the Earplugs were received by Maltby, they were placed in cardboard packages [see Ex. D3] for sale to retail druggists. The earplugs were placed in these packages to prolong their shelf-life and further identify their intended use. The physical characteristics and qualities of the Earplugs themselves were not altered in any manner by Maltby.

5. Prior to June 1, 1981, Maltby was subject to an FST audit by Revenue Canada and advised that it was considered to be a marginal manufacturer in respect of the Earplugs under paragraph (f) of the definition of “manufacturer or producer" contained in subsection 2(1) of the Act (“Paragraph (f)"). Maltby was assessed FST for sales made subsequent to the introduction of the marginal manufacturer definition effective January 1, 1981 and advised that it was required to pay FST under paragraph 27(1)(a) of the Act on its selling price of the Earplugs.

6. Between June 1, 1982 and October 31, 1985 (the “Claim Period”), Maltby sold the subject Earplugs to retail druggists and paid FST on the sale price of the Earplugs.

7. Brent applied for refunds in respect of the FST paid by it in respect of the Earplugs on the basis of paragraph 44(1)(d) of the Act and the refund claims were paid.

8. On November 25, 1985, Maltby filed refund claim no. 4892 (the "Refund Claim") in respect of FST paid in error on the basis that the Earplugs were not produced or manufactured by Maltby in Canada and that FST was properly payable by Brent at the time of importation on the duty paid value of the Earplugs. Accordingly, the amount of the Refund Claim was $40,508.26, representing the total FST paid in error by Maltby on monthly tax remittances during the Claim Period less an estimate of the FST that would have been payable by Brent. This estimate was based on Brent's full selling price to Maltby.

9. By letter dated December 9, 1985, Maltby submitted that FST on the Earplugs was properly payable by Brent, as opposed to Maltby, on the foregoing basis. By letters dated January 27, 1986 and February 27, 1986, Revenue Canada indicated that it was the Department's intention not to honour the Refund Claim.

10. By letter dated May 2, 1986, further representations were made on Maltby's behalf in support of the position that Maltby was entitled to the Refund Claim. By letter dated May 16, 1986 Maltby was advised that the Department considers it to be the manufacturer or producer of the Earplugs under Paragraph (f) and that FST was properly payable by Maltby on its sale price of the Earplugs to the retail druggists. The required Notice of Determination, however, was not issued until December 8, 1986 when Notice of Determination TORW03445 was issued and the Refund Claim rejected because the Earplugs were considered to be goods of Maltby's manufacture under Paragraph (f).

11. On January 21, 1987, Maltby filed a Notice of Objection to the Notice of Determination with the Minister of National Revenue pursuant to section 51.17 of the Act.

12. Maltby received a Notice of Decision dated February 26, 1987, confirming the Notice of Determination. The Notice of Decision stated that Brent had, at the time of importation, a "conclusive" liability to pay the sales tax under paragraph 27(1)(b) of the Act” and that Maltby's “liability to pay sales tax at the time of sale is conclusive under paragraph 27(1)(a) of the Act”. The Notice of Decision indicated that Maltby's liability to pay sales tax arises because Maltby is considered to be the legal manufacturer of the Earplugs under Paragraph (f).

13. On May 22, 1987, an appeal of the Notice of Decision was filed with the Tariff Board pursuant to section 51.19 of the Act.

14. During the claim period or portions thereof Brant Commercial Company Limited ("Brent") did pay FST on the duty paid value of the earplugs on importation. Brent did apply for and receive refunds in respect of the said sales tax on the basis that the Earplugs were tax paid goods sold under tax exempt conditions to a licensed manufacturer, Maltby.

In its decision dated August 17, 1988, the Tariff Board allowed the defendant's appeal and referred the notice of decision dated February 26, 1987 back to the Minister for reconsideration and repayment to the defendant of FST paid on the sale of the Earplugs, reduced by an amount equal to the FST paid on the amount charged as the price for packaging together with appropriate interest. The Tariff Board reasoned that:

Brent was the importer of the earplugs and, by s. 27(1)(b), was liable for tax on their duty paid value unless s. 27(1) (a) be construed as relieving it of that responsibility and imposing on the appellant the liability to pay tax on the sale price of the goods by reason of the definition of "manufacturer or producer" in s. 2(1)(f) and the deeming provision in s. 2(4).

Although the appellant was a “manufacturer or producer" as defined in s. 2(1)(f), the deeming provisions of s. 2(4) apply only to goods imported by such manufacturer or producer. The earplugs were not imported by the appellant and are, therefore, not by s. 2(4) deemed to be "goods produced or manufactured in Canada and not imported goods" and were not subject to tax on their sale by the appellant. However, by virtue of ss. 26(6) and 27(1)(a) and 2(1)(f), the appellant is liable for sales tax on the amount charged as price for packaging the earplugs.

The plaintiff states that the defendant, in packaging the goods for retail sale, is pursuant to paragraph 2(1)(f) of the Act a manufacturer or producer of those goods and is, therefore, liable to pay the FST on the total sale price of those goods pursuant to subsection 26(6) and paragraph 27(1)(a) as there is no provision to relieve the defendant of this liability. In its statement of claim dated November 14, 1988 the plaintiff requests that this appeal be allowed, the Tariff Board's decision set aside, and the notice of decision dated February 26, 1987 confirmed.

The defendant states that the Tariff Board did not err in holding that subsection 2(4) did not deem the Earplugs to be "goods produced or manufactured in Canada". However, in its statement of defence dated March 14, 1989 the defendant requests that the Tariff Board's decision be varied to declare that it is not liable under paragraph 27(1)(a) for tax on its packaging of the Earplugs. Since subsection 26(6) makes tax payable on packaging only where sales tax is payable, the defendant suggests that it cannot be liable for tax on the value of its packaging of the earplugs.

Statutory Provisions

The following is a summary of the statutory provisions relevant to this action: paragraphs 27(1)(a) and (b), 2(1)(f) and subsections 2(4) and 26(6) of the Excise Tax Act [1]

Subsection 27(1) [Prior to June 1, 1985] 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. . .by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier. . .;

(b) imported into Canada, payable by the importer or transferee who take the goods out of bond for consumption at the time when the goods are imported or taken out of warehouse for consumption;

[From June 1, 1985] There shall be imposed, levied and collected a consumption or sales tax at the rate specified in subsection (1.1) on the sale price of all goods

(a) produced or manufactured in Canada

(i) payable. . .by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier. . .;

(b) imported into Canada, payable by the importer or transferee who takes the goods out of bond for consumption at the time when the goods are imported or taken out of warehouse for consumption;

Paragraph 2(1)(f) [Prior to February 16, 1984] "manufacturer or producer” includes

(f) any person who, by himself or through another person acting for him, assembles, blends, mixes, cuts to size, dilutes, bottles, packages, repackages or otherwise prepares goods for sale, other than a person who so prepared goods in a retail store for sale in that store exclusively and directly to consumers.

[From February 16, 1984] “manufacturer or producer" includes

(f) any person who, bY himself or through another person acting for him, prepares goods for sale by assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repackaging the goods or by applying coatings or finishes to the goods, other than a person who so prepares goods in a retail store for sale in that store exclusively and directly to consumers.

Paragraphs 2(1)(d), (e), (g), (h), (i)

"manufacturer or producer" includes

(d) any person who sells, otherwise than in a retail store exclusively and directly to consumers, cosmetics that were not manufactured by him in Canada, other than a person who sells such cosmetics exclusively and directly to hairstylists, cosmeticians and other similar users for use in the provision of personal grooming services and not for resale.

(e) any person who sells gasoline, diesel fuel or aviation fuel, other than a

person who sells such goods exclusively and directly to consumers, and

(g) any person who imports into Canada new motor vehicles designed for highway use, or chassis therefor,

(h) any person who sells, otherwise than predominantly to consumers, new motor vehicles designed for highway use, or chassis therefor;

(i) any person who sells health goods, other than a person who sells such goods exclusively and directly to consumers, and

— paragraph 2(1)(g) and (h) effective March 1, 1984

— paragraph 2(1)(i) effective July 1, 1985

Subsection 2(4) [From January 1, 1981 to February 15, 1984] (4) For the purposes of this Act, goods imported by a person referred to in paragraph (f) of the definition “manufacturer or producer” in subsection (1) that are, in Canada, assembled, blended, mixed, cut to size, diluted, bottled, packaged, repackaged or otherwise prepared for sale by or on behalf of that person shall be deemed to be goods produced or manufactured in Canada and not imported goods.

[From February 16, 1984 to October 31, 1985] (4) For the purposes of this Act, goods imported into Canada by a person who is a manufacturer or producer within the meaning of paragraph (f) of the definition of that term in subsection (1) that are prepared, as described in that paragraph, by or on behalf of that person in Canada for sale shall be deemed to be goods produced or manufactured in Canada and not imported goods.

[From November 1, 1985] (4) For the purposes of this Act, goods imported into Canada by a person who is a manufacturer or producer within the meaning of paragraph (f) of the definition of that term in subsection (1), other than a member of a class of small manufacturer or producer that is exempted by regulations made under subsection 31(2) from the requirement of subsection 31(1) to apply for a licence, that are prepared, as described in that paragraph, by or on behalf of that person in Canada for sale shall be deemed to be goods produced or manufactured in Canada and not imported goods.

Subsection 26(6) For the purpose of determining the consumption or sales tax payable under this Part,

(a) In calculating the sale price of goods manufactured or produced in Canada,

there shall be included the amount charged as price for or in respect of

(i) the wrapper, package, box, bottle or other container in which the goods are contained, and

(ii) any other goods contained in or attached to such wrapper, package, box, bottle or other container;

(b) in calculating the duty paid value of imported goods that, when imported, are wrapped, packaged, put up in boxes or bottles or otherwise prepared for sale, there shall be added to the value of the goods as determined in the manner prescribed in this Part the value, similarly determined, of the wrapper, package, box, bottle or other container in which the goods are contained;

Issue

The issue is whether the defendant is liable under paragraph 27(1)(a) of the Act to pay federal sales tax on the packaged Earplugs as “goods produced or manufactured in Canada" and, if so, whether the defendant is liable to pay FST on the total sale price of the Earplugs to retail druggists in Canada or simply on the amount charged as price for packaging the Earplugs?

Defendant's Argument

The defendant states that the tax imposed by subsection 27(1) is an in rem tax and that these factors must be identified before tax is payable: (1) the in rem character of the goods; (2) the identity of the taxpayer; and, (3) the specified time of payment. Here, neither the taxpayer nor the time of payment are at issue. Subsection 27(1) identifies the in rem character of the goods as (a) ”. . . goods produced or manufactured in Canada . . .” and (b) "goods imported into Canada". Because the Earplugs are “not produced or manufactured in Canada", paragraph 27(1)(a) does not apply to Maltby. The defendant suggests, however, that tax on the Earplugs as "goods imported into Canada" is payable under paragraph 27(1)(b) by the importer, Brent.

The defendant concedes that it is a producer or manufacturer within paragraph 2(1)(f) in that it has "packaged" the Earplugs. However, the defendant submits that paragraph 2(1)(f) does not make the Earplugs "goods manufactured or produced in Canada "within the meaning of paragraph 27(1)(a) of the Act. As recognized by Thurlow, C.J. in Coca-Cola Ltd. v. D/MNRCE, [1984] C.T.C. 75; 84 D.T.C. 6081 (F.C.A.), paragraph 2(1)(f) is "intended to identify a person who will be liable to pay the tax whether or not he manufactures or produces anything or is or is not a manufacturer or producer". Relying on Coca-Cola, the defendant states that paragraph 2(1)(f) does not give rise to "an inference that such functions necessarily constitute manufacture or production or manufacturing or producing within the meaning of any of the provisions of the Act.” Paragraph 2(1)(f), thus, only deems Maltby to be a manufacturer. It does not make the Earplugs "goods manufactured or produced in Canada" as required by paragraph 27(1)(a).

According to the defendant, the issue is whether the packaging of the Earplugs makes them "goods produced or manufactured in Canada" under paragraph 27(1)(a) as those terms have been interpreted in The Queen v. York Marble, Tile and Terrazzo Ltd., [1968] C.T.C. 44; 68 D.T.C. 5001 (S.C.C.) and The Queen v. Stuart House Canada Ltd., [1976] C.T.C. 37; 76 D.T.C. 6033 (F.C.A.). The defendant submits that the packaging activities do not give the Earplugs “new forms, qualities or properties or combinations’ and they, therefore, are not "manufactured or produced in Canada" under paragraph 27(1)(a).

The defendant suggests that Parliament specifically intended to limit the extended definition of "manufacture and production" in paragraph 2(1)(f) to situations where an importer performs the activities referred to in paragraph 2(1)(f) and that it was not an oversight that Parliament did not deem the goods to be goods manufactured and produced in Canada. While the combination of paragraph 2(1)(f) and subsection 2(4) would make an importer who also performs marginal manufacturing activity liable under paragraph 27(1)(a), subsection 2(4) does not apply to situations where the importer sells to an arm's length purchaser who then performs the activities listed in paragraph 2(1)(f). A review of the legislative history of subsection 2(1) and other relevant provisions suggests that Parliament introduced a scheme tying an extended definition of manufacturer or producer to a deeming provision relating to the goods involved. The defendant, therefore, submits that as in paragraphs 2(1)(e), (g), (h) and (i), a deeming provision, i.e., subsections 2(3), 2(5) and 2(6), is required to deem the goods to be "produced or manufactured in Canada" before they become taxable under paragraph 27(1)(a).

The defendant submits that Revenue Canada's position, as expressed in its decision dated February 26, 1987, that both the defendant and Brent be taxed, one under paragraph 27(1)(a) and the other under paragraph 27(1)(b), is contrary to the presumption against double taxation expressed by the Supreme Court of Canada in The King v. Wampole & Company, [1931] S.C.R. 494. Finally, according to the defendant, the "goods" subject to tax are the imported product and not the subsequent packaged product because the goods referred to in paragraph 2(1)(f) and subsection 2(4) are the earplugs before they are packaged or before they are prepared for sale.

Plaintiff's Argument

The plaintiff states that the issue is simply whether the taxpayer is caught by the combined effect of paragraph 2(1)(f) and paragraph 27(1)(a) and that, unless the taxpayer is able to fit within an exemption provision under the Act, it is liable to pay the tax. In this instance paragraph 2(1)(f) deems that Maltby Inc. is a manufacturer or producer in that it has packaged, repackaged or otherwise prepared the Earplugs for sale. It is implicit that the packaged Earplugs then become goods manufactured by the defendant and subject to tax under paragraph 27(1)(a). The plaintiff submits that it is illogical to suggest that the goods remain imported goods and that, if the defendant's interpretation is accepted, paragraph 2(1)(t) would have no meaning. This would be contrary to the presumption that "Parliament does not speak for nothing". The plaintiff distinguishes Coca-Cola on the basis that Thurlow, C.J. simply held that a deeming provision under one part of the Act does not automatically make that person a manufacturer or producer for all purposes under the Act, particularly where an exemption provision is concerned and the issue involves a question of fact as to whether the person is a producer or manufacturer.

The plaintiff states that the deeming provisions referred to by the defendant are designed to avoid double taxation where the importer and the deemed manufacturer are the same person. If subsection 2(4) did not exist, the importer would pay tax when the goods are imported under paragraph 27(1)(b) and, if he then repackages them or performs some other activity referred to in paragraph 2(1)(f), ne would again be liable to pay tax under paragraph 27(1)(a). However, subsection 2(4) does not apply here because the importer and the deemed manufacturer are not the same person.

The plaintiff states that the importer, Brent, was also liable to pay the tax under paragraph 27(1)(b) during the Claim Period but that a refund on tax paid was granted. There was no statutory provision allowing for the refund of tax to the importer until February 26, 1985 when section 44 was added. However, as a matter of internal policy, the Minister refunded tax in these situations to the importer. The plaintiff also states that the importer's liability under paragraph 27(1)(b) is not relevant here where the question is whether Maltby is liable under paragraph 27(1)(a). The issue of double taxation is also not relevant because the goods subject to tax under paragraphs 27(1)(a) and 27(1)(b), in this instance, are not identical.

Finally, the plaintiff submits that the "goods" subject to tax are not simply the raw Earplugs but the Earplugs as packaged and as sold by the defendant. Paragraph 2(1)(f) deems the defendant to be a "manufacturer", paragraph 27(1)(a) makes tax payable, and subsection 26(6) calculates the value of the "goods" for tax purposes and includes "the amount charged as the price for wrapper, package, box, bottle, . . .”. Therefore, tax is payable on the entire price of the imported goods plus the cost of packaging.

Analysis

Paragraph 2(1)(f) is colloquially referred to as the "marginal manufacturing” section of the Act and it is apparent that Parliament intended to tax the activities performed by a marginal manufacturer. In E.C.G. Canada Inc. v. The Queen, [1987] 1 C.T.C. 205; 87 D.T.C. 5133, Rouleau, J. considered the purpose and object of paragraph 2(1)(f) as expressed in Revenue Canada's administrative policy:

[at pages 209-210 (D.T.C. 5136-37)] There is no question that the literal approach is a well established one in statutory interpretation. Nevertheless, it is always open to the Court to look to the object or purpose of a statute, not for the purpose of changing what was said by Parliament, but in order to understand and determine what was said. The object of a statute and its factual setting are always relevant considerations and are not to be taken into account only in cases of doubt.

I have carefully reread what was stated in the Excise News issued by Revenue Canada in December 1980. There is no doubt that at the time they intended to expand the definition of manufacturer and created a new class called “marginal

manufacturing”. It is clearly stated in the policy that they wanted to bring within the definition any entity that performs one or more (packaging or repackaging) operations . . . that prepares goods for sale.

. . .The extended definition given to manufacturing was intended by Parliament to tax all procedures which are described in paragraph 2(1)(f). The words in the section are clear and unambiguous and were properly interpreted by the Minister.

[Emphasis added.]

He then went on to consider whether the plaintiff importer's repackaging of television tubes for the protection of the product was caught by paragraph 2(1)(f). He commented [at page 210 (D.T.C. 5137)]:

The amendments clearly enunciate those operations which are to be considered “marginal manufacturing”. Doubtless the tubes themselves were required to be placed in a container for the purposes of handling, storage and shipping and that this may have been the primary purpose of the intervening acts. Nevertheless these operations directly relate to the definition of "packaging or repackaging" in the plain meaning of the section.

Here, although the defendant's activities in packaging the Earplugs to prolong their shelf life and further identify their intended use do not constitute "manufacturing" on any plain understanding of the word, these activities nevertheless clearly fall within paragraph 2(1)(f). Therefore, the defendant is deemed to be a manufacturer or producer in that, in accordance with paragraph 2(1)(f), it has packaged or repackaged or otherwise prepared the earplugs for sale.

However, the fact that the definition in paragraph 2(1)(f) makes a taxpayer a "manufacturer" does not mean that he is subject to tax unless it is imposed by subsection 27(1), the general charging provision of Part V of the Act. The defendant argues that paragraph 2(1)(f) does not also deem the goods in question to be goods manufactured or produced in Canada as required by paragraph 27(1)(a) and, therefore, they are not taxable. A similar argument was considered and dispensed with by Walsh, J. in Caloil Inc. v. The Queen, 72 D.T.C. 6460 (F.C.T.D.). In Caloil, the plaintiff company was engaged in the business of importing and selling petroleum products. Relying on subsection 26(3) of the Act which provides that, in certain circumstances, an importer of fuels is deemed to be the manufacturer or producer of these goods and not the importer, the Crown levied federal sales tax under subsection 27(1) based on the plaintiff's sale prices to its customers and not on the duty paid value. The plaintiff argued that subsection 26(3) did not affect the character of the goods so as to make them manufactured rather than imported goods and that a deeming provision was, therefore, required. The plaintiff referred to subsection 26(2) which deemed a person who has put a clock or watch movement into a case or set or mounted stones in jewellery “to have manufactured or produced the watch, clock, ring, brooch or other article of jewellery in Canada".

Walsh, J. noted the “undoubtedly well-established principle that in a taxing statute the intention to tax must be expressed in unambiguous terms and that in case of reasonable doubt the Act must be interpreted in favour of the taxpayer” yet he observed that the clear intent of Parliament should be considered to give an ambiguous provision meaning and to avoid an absurd or incongruous result. Based on the following reasoning, Walsh, J. found that the goods were taxable under section 27 on the sale price and not simply on the duty paid value:

[at page 6463] On the other hand, there is extensive jurisprudence on interpretation of statutes generally to the effect that they must be interpreted in such a way as to give a meaning to them and that the legislation should not be reduced to futility, and that the entire enactment must be considered in order to interpret the meaning to be given to a specific section and that even the circumstances in which the statute was enacted and the mischief which it was intended to cure can be taken into consideration.

[at page 6464] A statute even more than a contract must be construed ut res magis valeat quam pereat so that the intentions of the legislature may not be treated in vain or left to operate in the air (Curtis v. Stovin, (1889) 22 QBD 513 pr Bowen L.J. at 517),. . .

It is true in the present case, it would have been a simple matter in drafting section 26(3) to add at the end of that section the words "and the said goods shall be deemed to be manufactured goods" or some similar words so as to avoid any possible misinterpretation of the legislature's intention. I cannot find, however, that the intention of this amendment was merely to require importers of petroleum products to be licensed as manufacturers and producers rather than as importers or wholesalers so as to exercise more control over them, and not with a view to taxing goods on their sale price when they are delivered to or property in them passes to the ultimate purchaser, as the case may be.

[at page 6465] It is because of the unfortunate wording of section 26(3) that we have this conflict between the fundamental rules of interpretation of statutes and the conflicting jurisprudence respecting the strict and literal interpretation of taxing statutes. . . .I believe that the clear intention of the amendment, although it may not have said so in express words, was to tax the goods in question as if they had been manufactured goods. It would be incongruous and defeat what I conceive to be the intention of the statute when read as a whole to deem the importer to be a producer or manufacturer and require him to be licensed as such, but bearing in mind the fact that plaintiff admittedly does no manufacturing whatsoever, to tax all the goods it so sells as a deemed manufacturer on their duty paid value as imported goods, and the alternative explanation given by the plaintiff of the possible purpose of section 26(3) is not in my view a satisfactory explanation sufficient to justify this amendment having been made.

[Emphasis added.]

The defendant, however, relies on the decision of the Federal Court of Appeal in Coca-Cola Ltd. v. D/MNRCE, supra, to suggest that the extended definition of manufacturer in paragraph 2(1)(f) does not expand the scope of the term in paragraph 27(1)(a). The issue in Coca-Cola was whether the appellant's soft drink cases and carriers were under subsection 29(1) and Schedule III, Part XIII, subparagraph 1(a)(ii) “machiner and apparatus sold to or imported by manufacturers or producers for use by them primarily and directly in the manufacture or production of goods" and exempt from tax imposed by subsection 27(1). The appellant has argued that the addition of paragraph (f) to the definition of "manufacturer or producer" in subsection 2(1) of the Act, extended the meaning of the expression "manufacture or production" in other sections of the Act (in that case an exemption provision), so as to include the essentially packaging operations referred to in paragraph (f). Thurlow, C.J. (as he then was) did not find that argument persuasive:

[pages 79-80 (D.T.C. 6084-85)] It appears to me that the expressions "manufacture or production” which are found in various places and contexts in the Act, are used for differing purposes and that it is wrong to try to interpret one by reference to what another means or has been held to include either in a particular context or in general. As it seems to me, the definition of "manufacturer or producer" in subsection 2(1) is intended to identify a person who will be liable to pay the tax whether or not he manufactures or produces anything or is or is not a manufacturer or producer. A reference to paragraphs (a) to (e) of the subsection and the class of persons described in them, I think, makes this clear. While the added paragraph (f), unlike the preceding paragraphs, further expands the definition by reference to functions carried out in connection with goods, it does not, in my opinion, give rise to an inference that such functions necessarily constitute "manufacture or production" or "manufacturing or producing" within the meaning of any of the provisions of the Act.

The meaning of “manufactured or produced” in subsection 27(1), which has been considered in numerous cases, also affords no sure guide to what is meant by “manufacture or production” in any other provision, including subparagraph 1(a)(i) of Part XIII of Schedule III. The expression "manufactured or produced" is used in subsection 27(1) adjectivally to prescribe or outline the scope of the class of goods on the sale of which tax is imposed. It refers to goods that have been "manufactured or produced”, not goods to be manufactured or produced. Whether goods have been "manufactured or produced" in Canada may be tested by what has happened to them in Canada. But the expression does not refer to and is not concerned with the means by which the goods have been manufactured or

produced. Moreover, decisions that turn on whether particular goods have been "manufactured or produced" in operations involving them or whether goods fall within the meaning of that expression in the Act are of little use in a case of this kind in which there is no issue as to whether the appellant is a "manufacturer or producer", within the meaning of the Act, of the bottled soft drink or as to the product of its operation being goods “manufactured or roduced” in Canada within the meaning of subsection 27(1). What is in issue is a different question, that of whether the cases and hand carriers are sold to or imported by the appellant for use by it “directl in the manufacture or production of goods", that is to say, its bottled soft drinks. These words must, in my opinion, be given their ordinary meaning in their context in the particular subparagraph 1(a)(i) of Part XIII of Schedule III.

Accordingly, I would reject the appellant’s submission based on paragraph (f) of the definition of “manufacturer or producer" in subsection 2(1).

[Emphasis added.]

He nevertheless held that the cases and carriers were apparatus sold to or imported by the appellant for use by it in the manufacture or production of goods within the meaning of the exemption provision and, therefore, exempt from tax imposed by subsection 27(1).

In my opinion, Thurlow, C.J. in Coca-Cola did not expressly or otherwise overrule the reasoning of Walsh, J. in Caloil. I note that Caloil was not considered or referred to in the Coca-Cola decision and that the Court of Appeal was dealing with an exemption provision and a situation where the taxpayer's status as a producer or manufacturer was not at issue. In any event, Thurlow, C.J. appears to have recognized that while the extended definition in paragraph 2(1)(f) is intended to identify the person liable to pay the tax, that person need not be a manufacturer or producer or manufacture or produce a product, as the case law dealing with paragraph 27(1)(a) has defined those terms, before he is taxable. The defendant's argument that the deemed manufacturer is not liable to tax because he has not manufactured anything subject to taxation in the ordinary sense of those terms is not supportable. In my opinion, it would certainly be incongruous for paragraph 2(1)(f) to identify the person liable to pay the tax whether or not he manufactures anything and then find that he is not liable for tax because he has not manufactured anything in the ordinary sense of that term.

Finally, subsection 26(6) appears to support the inference that Parliament intended to impose a tax on the "marginal manufacturing” activity. Parliament has clearly stipulated that, for the purpose of determining the tax payable under Part V, the amount charged for the price for, or in respect of, a wrapper, package, box, bottle or other container is to be included in the calculation of the sale price. The combined effect of paragraphs 27(1)(a), 2(1)(f) and subsection 26(6) clearly indicates that Parliament's intent was to impose tax liability on deemed marginal manufacturing activity. These provisions were designed to attach liability for tax to the manufacturer or the marginal manufacturer, as the case may be, on the final or end product offered for sale. Furthermore, the phrase, “prepares goods for sale by. ..”, found in paragraph 2(1)(f) must obviously refer to the product which is ultimately offered for sale. Tax should, therefore, be payable on the packaged, assembled, mixed or bottled product and, in this case, on the packaged Earplugs. I also note that in Caloil the Minister levied federal sales tax on the basis of the plaintiff's sale price to its customers. The plaintiff, of course, was both importer and deemed manufacturer in that instance.

The defendant states, however, that subsequent to the criticisms of Walsh, J. in Caloil, subsection 26(3) was repealed in 1980 and replaced by paragraph 2(1)(e) and subsection 2(3) and that other relevant provisions of the Act have been amended to include phrases stating that the party concerned "shall be deemed to be manufacturer or producer in Canada thereof and not the importer thereof" and "the goods shall be deemed to be goods produced or manufactured in Canada and not imported goods”. The defendant notes in particular the other paragraphs of subsection 2(1) which deal with such items as health goods, videos and motor vehicles. However, unlike paragraphs 2(1)(d), (e), (g), (h) and (i), which relate to taxpayers who either simply sell or import specific products, paragraph 2(1)(f) describes a person who actually performs a specific activity in relation to the goods to prepare them for sale. Therefore, while it is arguable that a deeming provision, i.e., 2(3), is required to deem that the goods imported or sold in the former paragraphs become "goods produced or manufactured in Canada", paragraph (f), by necessary implication and on the strength of the decision of Walsh, J. in Caloil, requires no such deeming provision. To the extent that the packaging activities are performed in Canada and the defendant is deemed to be a marginal manufacturer under paragraph 2(1)(f), the goods to the extent of the packaging activities logically become goods manufactured in Canada. Therefore, absent a provision that deems that the goods as imported become goods manufactured in Canada, i.e., s. 2(4), the goods are subject to tax under paragraph 27(1)(a) only to the extent of the marginal manufacturing activity under paragraph 2(1)(f).

I accept the plaintiff's submission that the "goods" subject to federal sales tax in this instance are the Earplugs plus the packaging. However, I have concluded, consistent with the findings of the Tariff Board, that the defendant is simply liable under paragraph 27(1)(a) for sales tax on the amount charged as price for packaging the Earplugs. In my opinion, the plaintiff's submission that the defendant is liable for tax on the entire sale price of the Earplugs is not supported by the clear wording of the Act. The plaintiff's line of reasoning also leads to some practical difficulties. A situation of double taxation might result in that the importer who initially pays tax on the duty paid value would in all likelihood have incorporated the tax into its sale price to the third-party marginal manufacturer. This refund of tax paid could also result in a windfall to the importer.

I am, however, troubled by the question of how the goods are not subject to tax on importation under paragraph 27(1)(b). Subsection 2(4) does not apply to the defendant or the importer in this case and it, therefore, does not operate to relieve the importer of liability for tax under paragraph 27(1)(b). I am not persuaded by the plaintiff's explanation of the seemingly "gratuitous" refund of tax paid by Brent under paragraph 27(1)(b) during the Claim Period. Furthermore, I question the Minister's action in providing a refund to the importer when there is apparently no basis in law to do so and yet he argues for a strict and very technical interpretation of the Act to find the defendant liable for the full amount of the tax. Nevertheless, I am not convinced that the fact that Brent is liable to pay the tax as an importer under paragraph 27(1)(b) but eligible for a refund as a matter of policy (and effective February 26, 1985, under section 44 of the Act), determines the question of the defendant's tax liability under paragraph 27(1)(a). In any event, the question of Brent's liability for tax under paragraph 27(1)(b) is not at issue here and I need not determine whether the Minister was correct in granting a refund to Brent.

Finally, following the hearing of this matter, counsel for the defendant (counsel for the plaintiff did not wish to respond) brought to my attention a recent decision of this Court in MacMillan Bloedel Limited v. Canada (1990), 3 T.C.T. 5359 and suggested that it outlines the approach to be taken in construing ambiguous provisions in a taxation statute, specifically subsection 27(1) and paragraph 27(1.1)(c) of the Act. In MacMillan Bloedel, the plaintiff had argued that paragraph 27(1.1)(c) of the Act was unclear and ambiguous and that while Parliament may have intended to levy a tax on a volume basis, it has failed to do so in clear and explicit terms. It was acknowledged that the formula calculations required by paragraph 27(1.1)(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. This error or anomaly had been corrected retroactively to June 12, 1986 by adding the words "or on the volume" immediately after the words “on the sale price". However, the dates of the shipments at issue preceded June 12, 1986. McNair, J. noted that "[rjegardless of any general legislative intent to tax imported diesel fuel, the fundamental basis for the imposition of such tax was left very much in the air" and in his opinion, “the combined effect of subsections 27(1) and 27(1.1), with section 27.1 and Schedule 11.1, even on the most liberal words-in-total context approach, fails to provide a coherent and lucid scheme for the taxation of diesel fuel on a volume basis.” He then considered the Crown's alternative argument with respect to "rectification" [at page 5364]:

The gist of it is that the present case is one where the court could properly exercise its power of rectification and read into subsection 27(1.1) the omitted words "or on the volume" in order to give effect to Parliament's intention to tax transportation fuels. . . .

Before stating my final conclusion on the point, I must stress first of all that the rectification of a legislative text is a drastic step for any court to undertake. With respect, I feel compelled to reject the alternative submission of defendant's counsel. I agree with the submission of plaintiff's counsel that the present case is one where Parliament may well have intended to levy a sales tax on imported diesel fuel, but failed to do so in sufficiently clear terms on the present wording of subsection 27(1) and paragraph 27(1.1)(c) of the Act, before the amendment. Moreover, I am of the opinion that any judicial power of rectification with respect to legislation ought only to be exercised in the rarest of circumstances, that is, where absolutely necessary to achieve the clear manifestation of legislative intent in the face of obstacles created by very minor and patently obvious imperfections of language. To fill the gap by writing in the words "or on the volume" would constitute, in my opinion, an arbitrary and unwarranted intrusion on the role of Parliament.

The situation here is not completely analogous to that in MacMillan Bloedel in that, as outlined above, a liberal words-in-total-context approach does not fail to provide a coherent and lucid scheme for the taxation of the packaged Earplugs. Here, paragraph 27(1)(a) operates together with paragraph 2(1)(f) and subsection 26(6) to make a marginal manufacturer taxpayer liable to pay the federal sales tax on that portion of the sale price of the goods that relates to the marginal manufacturing activity. I am not required to read anything into the statute to find that the goods dealt with by the deemed manufacturer become goods manufactured in Canada to the extent that they are "marginally manufactured" in Canada. Therefore, while McNair, J.'s latter comments in MacMillan Bloedel are instructive, they are not directly relevant here.

Conversely, if Parliament had intended that the tax would move from one party to another and that only one party, the party who performs the final activities with respect to the goods, would be liable for tax on the sale price of the final product, Parliament could have said so in sufficiently specific terms to warrant that outcome. It has not done so and I am left with having to interpret the effect of the wording that Parliament has used. In Lor-Wes Contracting Ltd. v. The Queen, [1986] 1 F.C. 346; [1985] C.T.C. 79; 85 D.T.C. 5310 (F.C.A.), MacGuigan, J.A. set out the modern approach to the interpretation of taxation statutes:

It seems clear from these cases that older authorities are no longer to be absolutely relied upon. The only principle of interpretation now recognized is a words- in-total-context approach with a view to determining the object and spirit of the taxing provisions.

Conclusion

I agree with the Tariff Board that the goods upon which tax is payable are the packaged Earplugs and not simply the Earplugs as purchased by the defendant from the importer. I have also concluded that the defendant is only liable under paragraph 27(1)(a) for federal sales tax on the amount charged as price for the packaging of the Earplugs. The defendant is deemed to be a manufacturer under paragraph 2(1)(f) in respect of its packaging activities, paragraph 27(1)(a) provides that tax shall be imposed, levied and collected "on the sale price of all goods" produced or manufactured in Canada, and subsection 26(6) specifically includes the costs associated with the packaging activity in the calculation of the sales price of the goods.

Accordingly, the plaintiff's appeal is dismissed with costs.

Appeal dismissed.