Tricolor Prolab Ltd. (Formerly Tricolor Prolab (1979) Ltd.) v. Her Majesty the Queen, [1990] 2 CTC 370

Teitelbaum, J.:—The plaintiff, Tricolor Prolab Ltd., formerly known as Tricolor Prolab (1979) Ltd., is appealing, by means of a direct action, the assessment issued by the Minister of National Revenue dated February 6, 1987 requiring the payment of $26,924.39 in taxes ($21,911.41) interest ($3,118) and penalty ($1,894.98) for the period February 1, 1985 to August 31, 1986 (Exhibit P-15). The Minister relies on sections 26(7) and 27(1) of the Excise Tax Act, R.S.C. 1970, c. E-13 as amended (Act), as grounds for this assessment (see paragraph 8 of statement of defence). The plaintiff asserts that it is not liable under these provisions and that it had been told by the Minister's officials that the provision would not apply to it in the manner the Minister is presently alleging.

The plaintiff is involved in the film processing business and alleges that it is also in the business of leasing its processing equipment and providing management services to West Coast Photography Ltd. (West Coast). West Coast is in the business of taking school portraits and group pictures. In July 1984, the plaintiff alleges it received a ruling that under a projected agreement with West Coast, West Coast, and not the plaintiff, would be liable for taxes owing as a manufacturer of photographs. Relying on the June 1984 ruling, the plaintiff and West Coast entered into an agreement whereby West Coast would lease from the plaintiff its premises and equipment during night hours when plaintiff was inoperative and would provide West Coast with certain management services. West Coast would process its own film during that time and would hence be considered a manufacturer.

By an assessment of February 6, 1987, after an audit of the plaintiff, the Minister assessed the plaintiff and not West Coast for taxes as the manufacturer of the photographs. The Minister contends that the plaintiff had misrepresented the actual agreement to the Minister and that its July 1984 ruling had been given on the basis that all that was entailed was the rental of used photofinishing equipment to West Coast, so that West Coast could manufacture its own photographs. During the audit, the Minister concluded that:

(i) the school portraits of West Coast were processed on the plaintiff's photofinishing equipment located on the plaintiff's premises and that the plaintiff's staff exercised a significant degree of control over the work performed in the processing.

(ii) the charges made to West Coast on a monthly basis, calculated on a per unit basis, were equivalent to charges made by the plaintiff to other commercial customers.

Robert Sutcliffe had been employed by the plaintiff for approximately ten years. Before January 1985, he had been a one-third shareholder in the plaintiff company. He states that the plaintiff did business with professional photo studios and professional photographers. They did portrait finishing as well as processing films and prints. In early spring of 1984, plaintiff, through its representatives had discussions with a Mr. John Symonds of West Coast Photography Ltd. in order to obtain West Coast's business for the processing and printing of the school portraits and group pictures taken by West Coast. Plaintiff was unable to obtain the business as Mr. Symonds said he wanted to retain service control of the work in order to get a high quality product. As a result, plaintiff and West Coast developed a concept whereby West Coast would make use of plaintiff's equipment in plaintiff's premises when plaintiff would not be using its equipment and West Coast could do its own processing to keep control over the quality of the print. West Coast would hire its own staff to do the work and have the work done between the hours of 4:00 p.m. to midnight. The concept was agreed to but before Mr. Symonds was prepared to sign such an agreement, he wanted to obtain approval from Revenue Canada as to the proposed project of lease in order for West Coast to qualify as a “small manufacturer".

Mr. Sutcliffe, together with a Mr. Hook, another one-third shareholder in plaintiff company, went to Revenue Canada and met with a Ms. Margaret Whyte. They informed Ms. Whyte that plaintiff would like to make an arrangement with West Coast whereby West Coast could lease plaintiff's equipment and make use of plaintiff's premises during the "off" hours, it being understood that West Coast would hire its own employees and purchase its own paper and chemicals. A letter was requested from Revenue Canada.

On July 11, 1984, a letter was sent to plaintiff, to the attention of Bob Sutcliffe, whereby plaintiff is told:

Tax Interpretations,

Excise Branch, Pacific Region, P.O. Box 69090, Station "K",

Vancouver, B.C.,

Attention: Bob Sutcliffe	V5K 4X2
	July 11, 1984.
Dear Sir:

This has reference to your visit to our office on June 29, 1984 regarding the liabilities of a portrait photographer who does his own photofinishing.

It is understood that your company, Tricolor Prolabs (1979) Ltd. intends to rent its used photofinishing equipment to West Coast Photo. It is further understood that West Coast Photo is engaged exclusively in portrait photography (i.e. school pictures) and will be using the equipment to manufacture his own photographs.

For the purposes of the Excise Tax Act, portrait photographers are considered to be designated "small manufacturers", and are therefore not required to apply for a licence under Section 31 of the Excise Tax Act.

As West Coast Photo is engaged exclusively in portrait photography and the photofinishing thereof, he is not required to operate under a Manufacturer's Sales Tax Licence regardless of his sales volume nor is he entitled to purchase his raw materials, production equipment and processing materials exempt of federal sales tax. However, should West Coast Photo develop film provided to them by their customers, they would be considered to be a manufacturer or producer under Section 26(7) of the Act (copy enclosed).

Should you require further information regarding the application of federal sales tax, please do not hesitate to contact this office.

Yours truly,

Department of National Revenue,

Customs & Excise

M. Whyte,

Tax Interpretations,

Excise.

Having received this letter, plaintiff and West Coast finalized their dealings and an agreement came into effect on September 1, 1984. Sutcliffe was not involved in formalizing the final agreement. It was a Mr. Jacques Mailhot who represented plaintiff. He was the third shareholder of plaintiff. Mr. Mailhot did not appear as a witness.

According to Sutcliffe, from September 1, 1984 to December 14, 1984, plaintiff operated in its normal manner each day working to 4:00 p.m. After 4:00 p.m., West Coast's employees, a Mr. Bernie with three or four other employees would commence work for West Coast developing West Coast's films.

The process to develop the film from West Coast was different from working with ordinary film. Film used for school photography is 100 foot long film and must be developed in a special processor. The film is then "contacted", with contact print, edited and is then placed into a package printer to produce various packages ordered by the various schools.

On or about December 14, 1984, Mr. Symonds of West Coast expressed a desire to purchase the shares of plaintiff from the three shareholders. Between December 14, 1984 and December 30, 1984, the three shareholders of plaintiff, Sutcliffe, Hook and Mailhot, sold their shares to West Coast.

According to Sutcliffe from January 1, 1985 to June 1985, in terms of film which came from West Coast, this work only required one full-time designated employee. As Mr. Bernie had left West Coast's employment in the latter part of December 1984, another employee was designated to do the work. Mr. Symonds designated the employee who would put the film into the C-41 film developer machine and then this same person would print the developed film. After the printing was done it was inspected and then packaged. The same person did all of the above for West Coast.

If film came from some other company, that is film that did not come from West Coast, the same C-41 developer machine would be used but the work would be done by persons other than the "designated" person. It appears that Symonds wanted, since he controlled both plaintiff and West Coast after January 1, 1985, to segregate his costs and he thus attempted to do this by designating one person to process West Coast's film and to package it for the various schools.

West Coast's work, according to Sutcliffe, during the busy season for West Coast, starting in September 1985, was controlled and supervised by Mr. Symonds and was performed on a shift similar to the 1984 year, that is 4:00 p.m. to midnight. As well, from September 1985, according to Sutcliffe, three or four other employees worked exclusively on West Coast's film.

Sutcliffe gave evidence that the nature of the developing business of plaintiff was such that labour costs are reduced with volume and he believes that because of the volume of work which West Coast could give to plaintiff, West Coast would have received a 30 per cent discount off the regular prices of plaintiff.

In cross-examination, Mr. Sutcliffe was referred to Exhibits P-3 and P-4. Exhibit P-3 is an undated and unsigned document which is headed "Agreement Between West Coast Photography Ltd. and Tricolor Prolab (1979) Ltd.”.

I am satisfied that nothing can be gleaned from reading this document.

Exhibit P-4 is a document dated September 1, 1984 and signed by J.D. Symonds for West Coast. No one signed this document on behalf of plaintiff. This document purports to be the agreement entered into between plaintiff and West Coast. It states:

September 1, 1984.

Agreement between Tricolor Prolab (1979) Ltd. and West Coast Photography Ltd. for Fall 1984.

1. Prices as agreed on separate list.

2. Thirty-five per cent of processing, after discounts, will be owed by West Coast Photography Ltd. to Tricolor as follows:

20% for management fees

10% for premises rent

5% for equipment rent

3. West Coast Photography will pay provincial sales tax on equipment rent.

4. Sixty-five per cent of processing costs will be used by West Coast Photography to pay for paper @ 40% and contract labor @ 25%.

5. Any extra costs over those in (4) above will be deducted from Tricolor's management fee.

The prices mentioned in paragraph 1 of Exhibit P-4 are found on the attached list to the agreement:

September 1, 1984.

West Coast Photography Ltd. processing prices from Tricolor Prolab (1979) Ltd. for Fall 1984.

2 unit	— 1.22
1 unit	— 1.51
1 1 /2 units	— 1.80
2 units	— 2.08
2'/2 units	— 2.36
3 units	— 2.66
31/2 units	— 2.93
4 units	— 3.21
4 1 / units	— 3.49
5 units	— 3.77
5 1 /2 units	— 4,05
6 units	— 4.33
10 x 13 print	— .90
I.D. Card	-	.08
Rolodex Card	—	.10
Color Contact	—	.05
B & W Contact	—	.01
Gummed Tape	—	.02
groups	— .58

Above prices are for choose-a-pack. For consta-pack delete 35¢ from each unit price.

All prices above will be discounted by 15% if total number of packages in the fall exceed 20M.

It is interesting to note that West Coast would only get a 15 per cent discount for volume over 20 thousand packages and not a 30 per cent discount as stated by Sutcliffe.

When Sutcliffe was asked about the price list, he states he does not recall seeing the price list as the issue of pricing was left to Jacques Mailhot.

With regard to the letter from Ms. Whyte, Exhibit P-1, he states he “can see no problem in what it says", in fact, Sutcliffe agrees that Exhibit P-1 accurately sets out what he was told by Ms. Whyte. He also admits that Cindy Murphy, the employee who was "designated" to work on West Coast's film from January to June 1985 was, at that time, a full-time employee of plaintiff and that during this period the work of West Coast was done during the normal day shift. During the time when Cindy was working on West Coast's film, a second employee of plaintiff, a Laura Scaligine, who was a full-time employee of plaintiff, she was plaintiff's production supervisor, it was she who was in charge of film processing was also doing some work for West Coast.

Mr. John Symonds is a director and president of plaintiff. He is also the only or major shareholder of West Coast. It was on or about December 14, 1984 that West Coast acquired the shares of plaintiff. An organization chart can be found in Exhibit P-2.

Mr. Symonds states that before he did business with plaintiff West Coast was dealing with Canadian School Studies in Toronto. West Coast did approximately 30,000 individual portrait pictures and approximately 30,000 class pictures per year. West Coast was having a problem with the quality of the finished product because of a lack of control and as a result he commenced discussions with representatives of plaintiff in the spring of 1984 to have West Coast's work done by plaintiff in order to enable West Coast to do its own processing.

According to Symonds, plaintiff suggested this can only be done if West Coast would rent plaintiff's equipment and space when plaintiff would not be using it and West Coast would purchase its own materials and hire its own labour. As an explanation for the price list attached to Exhibit P-4, the agreement, Symonds states that the price list was there only to ensure that West Coast would know its costs from which the percentages mentioned on page one of the agreement would be calculated. The evidence indicates this not to be correct. The price list was the prices charged, the total was then divided into the percentages mentioned on page 1 of the agreement, Exhibit P-4.

West Coast did, at the beginning of the agreement, hire its own separate labour, and performed its work from 4:00 p.m. It also purchased most of its paper and film from Kodak Canada Ltd. (Exhibit 6) and “occasionally” West Coast would purchase paper from plaintiff. Exhibits 8 and 9 are examples of some invoices dated from September 30, 1984 to May 30, 1986 which represent purchases by West Coast from plaintiff for paper and photo mounts. On all these invoices it appears that West Coast paid a ten, 11 or 12 per cent federal sales tax. West Coast was invoiced, by plaintiff, for the rental of the premises and equipment from September 1, 1984 to December 31, 1984 and was charged a management fee of $9,445.20 for the same period of time (Exhibit 10). A 7 per cent provincial social service tax on rental of equipment was charged and paid by West Coast.

The person that West Coast hired to do its film processing from October 1, 1984 through to December 1984 was Mr. Arlen Bernie or his company Arlen Bernie Agencies Inc. In the latter part of December 1984, Arlen Bernie quit West Coast to take another job.

It may be just a coincidence that Mr. Bernie would leave his employment at the time when West Coast purchased the shares of the plaintiff or it may be that his services were no longer required as Sutcliffe testified, an employee of plaintiff, a certain Cindy Murphy, was designated to do West Coast's work from January 1985 to at least June 1985 and that this Cindy was an employee of plaintiff.

Plaintiff submits Exhibit P-7 as proof that Arlen Bernie Agencies Inc. did the work for West Coast and was paid by West Coast. Exhibit P-7 are three documents dated October 1, 1984, November 5, 1984 and December 21, 1984. The first of the three documents dated October 1, 1984 "For Processing Services of & Contract labour", is for $1,560.38 which sum was paid on October 4, 1984. I assume that the "contract labour” and "processing services” was done previous to the month of October as the second document dated November 5, 1984 is for the sum of $5,815.66 and is "For Contracted Photofinishing Labour in the month of October 1984”. A sum of $5,000 was paid on October 31, 1984.

The third document in Exhibit P-7 is dated December 21, 1984 and is a receipt for $7,000 "as an advance to November and December 1984 invoicing for contracted photofinishing labour".

I have not been told how much was invoiced and if the payment is for work up to December 21, 1984. I assume that Mr. Bernie left the employ of West Coast on December 21, 1984, one week after West Coast purchased the shares of Tricolor Prolab Inc.

Exhibit 11 is a series of 19 invoices from plaintiff to West Coast for equipment rental, rental of premises, management fees and for contract labour. The invoices are from February 28, 1985 to June 30, 1986. According to Mr. Symonds, the amounts on these invoices were arrived at by going to the percentages mentioned in paragraph 4 of Exhibit P-4, were adjusted and an amount was arrived at. Symonds states the West Coast work was seasonal and it would not need to make use of the premises or labour or equipment over the entire year so he worked out the percentages.

I am satisfied that what Mr. Symonds did is exactly what he wanted to do, that is, since he controlled, from December 14, 1984, both plaintiff and West Coast, he made the invoices when he wanted to and put in whatever figures he thought beneficial to himself.

With regard to the price list found on Exhibit P-4, Symonds states that he would not have given work to plaintiff at those prices. He explains this by stating that because of the large volume of work, West Coast would receive a larger discount elsewhere. He states that West Coast was 30 per cent to 40 per cent of plaintiff's total work and that this would have warranted a 25 to 30 per cent discount and not 15 per cent discount as shown on Exhibit P-4.

Symonds corrected some of the statements of Sutcliffe. He states that Cindy was an employee of plaintiff doing the work of West Coast in the spring of 1986. In 1985 it was Irena Osadchuk who was employed by plaintiff and did work for West Coast.

Who the employee is is immaterial. What is material is that an employee of plaintiff was doing work for West Coast after Mr. Bernie left West Coast when West Coast took over plaintiff.

A particular individual was always put in charge of West Coast's work because of that individual’s expertise and there being less chance that errors would occur.

After being referred to Exhibit P-1, the letter from Revenue Canada, Symonds states he first saw this letter in the summer of 1984, he states he requested this letter as “I said I wanted to do everything legally and above board”. After seeing the letter he proceeded to make the agreement Exhibit P-4. Some time after January 3, 1985, West Coast received a letter from Revenue Canada, Exhibit P-12, informing West Coast that because a new company was formed, the present plaintiff, it would be necessary to apply for a new Federal Sales and Excise Tax Licence. Symonds claims to have telephoned Adrienne Adair, the person who signed Exhibit P-12, and informed her that no new company was formed, only that West Coast purchased the shares of Tricolor Prolab (1979) Ltd. and that West Coast would continue to do its processing as before. He states he asked if this was permitted and was told West Coast could carry on with that arrangement. He also states he was told that West Coast could, if it wished, accept processing from other photographers up to a value of $50,000 annually.

On Exhibit P-12 is a notation of his conversation which is dated January 18, 1985. On January 25, 1985, because he states he was not satisfied with Ms. Adair's explanation he telephoned Margaret Whyte where he allegedly got permission for plaintiff to invoice West Coast for the use of plaintiff's staff. On January 28, 1985, Symonds wrote to Revenue Canada stating no new company was incorporated.

1985 01 28

Tax Interpretations

Excise Branch, Pacific Region

P.O. Box 69090, Station "K"

Vancouver, B.C,

V5K 4X2

Attention: Adrienne Adair

It is interesting to note that Mr. Symonds makes no mention of the alleged permission that he supposedly obtained from Ms. Adair or Ms. Whyte. No explanation of this omission was offered by Mr. Symonds.

Tricolor Prolab (1979) Ltd. was subsequently audited for the period February 1, 1985 to August 31, 1986. On February 9, 1987, Revenue Canada sent the following letter to Tricolor Prolab (1979) Ltd.

Tricolor Prolab (1979) Ltd.

T1100 Lansdowne Street

Coquitlam, B.C.

V3B 5E2

Pacific Region, Excise

#201-4664 Lougheed Hwy Burnaby, B.C.VSC 6C2

February 9, 1987

Attention: Mr. John Symonds

Dear Sir:

This will confirm the completion of the federal sales tax audit for the period February 1, 1985 — August 31, 1986.

During the audit, we discussed the following points:

(1) TriColor Prolab (1979) Ltd. is a licensed company that operates a commercial film processing business dealing with the general public.

(2) West Coast Photography Ltd. is engaged in taking school portraits—both individual and group. These photographs are being processed by TriColor Prolab (1979) Ltd. in the same manner as is with other independent customers of TriColor.

(3) TriColor Prolab (1979) Ltd. is invoicing West Coast for management, equipment rent and premises rent, instead of processing and development charges.

Under these circumstances, TriColor is regarded as the manufacturer for purposes of the Excise Tax Act, therefore the charge by TriColor to West Coast for processing is taxable and tax applies on the selling price.

Enclosed herewith please find:

(i) two Notice of Objection forms

(ii) two Refund Claim forms, and

(iii) a copy of the working papers showing the details of the assessment and the revised interest and penalty charges.

Yours truly,

Department of National Revenue

Customs and Excise

Margaret Cheung

District Auditor

(Exhibit P-14)

In cross-examination, Mr. Symonds states that the prices found on page 2 of Exhibit P-4 were the regular prices charged to plaintiff's other customers but that, at that point, September 1, 1984, he was to be given a 15 per cent discount. In explaining how the total price was calculated, that is, the price to be charged by plaintiff to West Coast from Sept. 1, 1984, I was referred to pages 76 and 77 of the examination for discovery of Symonds held on November 29, 1989.

Mr. Symonds, off the record we just clarified what I was trying to make clear so let's just put it on the record. In approaching the negotiations with Tricolor, you had in mind, West Coast had in mind various packages or products that you were going to be marketing. You knew the market price, you knew the profit margin you were looking at, therefore, you knew the total cost that you could live with and still make your profit and sell your product.

The total cost package then is something that I take it was negotiated with Tricolor, an agreement was reached. And then following agreement on the total cost, you and Tricolor broke it down into the elements of rental space and labour charges, is that correct?

Basically that is how it was done, yes.

And when you spoke of earlier today on the Discovery of after 1985, January when you took over Tricolor, in the spring of 85, in the fall of 85, and then in subsequent years until the agreement was terminated, you varied these percentages somewhat in response to varying the total cost that was occurring as time went by, the total cost increase, you then looked down and riddled with the percentages to reflect them, what was happening? Is that right?

I think the total cost was basically the same.

Why would you then change the percentages?

Because, on experience, and after going through the fall of 84 and then again in 85 and looking at our estimates of costs, we felt, I wanted to keep it as accurate as possible, and I felt that the percentages needed to be adjusted slightly.

Symonds also states, in his cross-examination, that after West Coast purchased the shares of plaintiff from the three shareholders, J.J. Mailhot remained with plaintiff to April or May 1985 and that Mr. Mailhot, although an employee of plaintiff, was involved with West Coast's work in the same way as he was involved with other customers of plaintiff. When Mr. Mailhot left plaintiff company, Laura Scaligine, another employee of plaintiff, took over as production supervisor. She was in charge of processing. It was Mr. Symonds who designated her as such, she not only supervised West Coast's work but also other work, although she did not have much to do for West Coast. Ms. Scaligine left plaintiff's employ in June 1987. During this same time, a Mr. Jim Brooks and a Cindy Murphy were full-time employees of plaintiff who did work for West Coast.

The answers given by Symonds on his examination on discovery, pages 80 and 81, confirm that employees of plaintiff were always doing work, during February 1, 1985 to August 31, 1986, for West Coast and that they also did work for other customers of plaintiff.

I am satisfied from the answers given by Symonds both before me at the trial and in his examination for discovery, page 80 questions 443 to 450, page 34 questions 184 to 188, pages 77 and 78 questions 428 to 436, that after January 1, 1985, plaintiff's staff was working on work for regular customers of plaintiff as well as work from West Coast, that the work was being performed during the same time and that the same materials were used in the processing and developing and printing of the film. The same work was being performed for West Coast as for at least two other customers of plaintiff.

The defendant filed five exhibits, D-1 to D-5. Mr. Symonds was questioned on these documents. According to Symonds, Exhibit D-1 is a typical work order created by plaintiff for West Coast, Exhibit D-2 is a typical work order created for Pope's Photography, Exhibit D-3 is one for M & A Photo. Both Pope's Photography and M & A Photo do the same business as West Coast, that is school portraits and group pictures.

Exhibit D-4 is a price list by plaintiff setting out prices to West Coast during the relevant periods and Exhibit D-5 is a price list during the same relevant period for M & A Photo.

In Exhibits D-1 to D-3 it appears all three customers were charged a ten per cent federal sales tax. Symonds states this was an error which was later corrected, that is, West Coast was not charged a ten per cent federal sales tax as was Pope's or M & A Photo.

It appears that the price lists, Exhibits D-4 and D-5, are very similar.

In speaking of Exhibit P-16, the financial statements of plaintiff and West Coast, Mr. Symonds explained that a Mr. East was the accountant who prepared these documents after extensive discussions with Symonds. In speaking of item #7, as found in both plaintiff's and West Coast's financial statement:

7. Related party transaction

During the year the Company provided processing services totalling $128,729 to its parent.

7. Related party transactions

During the period the Company purchased processing services totalling $128,779 from its subsidiary, Tricolor Prolab (1979) Ltd.

Symonds states he was told by Mr. East that it was necessary to set this out in both financial documents. He did not explain and could not explain why the words "processing services" were used.

Mr. East produced the working paper he used when preparing the financial statements found in Exhibit P-16. The working paper was filed as Exhibit P-17. East explains that Exhibit P-17 sets out, month by month, the work performed by plaintiff for West Coast. Plaintiff invoiced West Coast for (1) labour, (2) supplies, (3) supplies out of inventory, (4) management fees, (5) equipment rent, (6) premises rent and (7) miscellaneous. Items 4, 5 and 6 were included in the plaintiff's revenue while items 1, 2 and 3 caused a reduction in cost for plaintiff.

Mr. East states that the word "processing" as used in Note 7 on the financial statement does not correctly express what was really supplied by plaintiff to West Coast. He now states it was his error as he knew what kind of services were being provided. Mr. East states, as his reason for the description given, human error on his part or the "notes" of one year were carried over to the next year and could thus be a straight carry over.

Counsel for plaintiff read into the record a statement by Mr. Haig, counsel for defendant relating to why the period in issue commenced on February 1, 1985:

Well maybe it would be just as quick to clear up the specific questions which remained after the first round of this discovery.

You asked why the date of February 1st, 1985 was picked as the beginning of the audit period, and the answer to that question is that the last audit was done up to and including January 31st, 1985, and, therefore, the auditing question in this case was chosen to commence immediately after that last audit period.

(Transcript of examination for discovery of T. McEachern, April 11,1989)

Also read in from the examination were questions 159 to 182, 187 to 189 and questions 197 to 199. Mr. McEachern is the defendant's representative on the examination for discovery.

Defendant had one witness, Margaret Whyte, who in her examination in chief states that she has been with the Department of Excise since 1981. With regard to Exhibit P-1, she states she vaguely recalls the meeting with Sutcliffe on June 29, 1984, which was not a long one. Mr. Sutcliffe has come in with a second person. The issue discussed was the leasing of used equipment. She wrote Exhibit P-1 following the meeting. Ms. Whyte states, as per paragraph 2 of her letter of July 11, 1984, the only concern was that of rental of used photofinishing equipment. She has no recollection of anything else being said.

Ms. Whyte has no recollection of speaking to Mr. Symonds in January 1985 as he states he did after receiving a letter from the Department dated January 3, 1985 (Exhibit P-12).

I would now state that I am satisfied that since Ms. Whyte wrote the letter, Exhibit P-1, on July 11, 1984, a little less than two weeks after the meeting with Sutcliffe and that the letter was written with her notes of the meeting before her, the only concern discussed is that mentioned in paragraph 2 of the letter, that is, rental of used photofinishing equipment and nothing else. I am satisfied that what was understood was that West Coast would rent plaintiff's equipment and it would manufacture its own photographs.

The Issue

At issue is who did the actual processing. In its amended statement of claim, the plaintiff asserts in the alternative that even if it is deemed to be the actual processor manufacturer of the photographs that there is no charge made for such processing that could give rise to a deemed sales price on which the tax could be charged. Plaintiff also claims that the defendant is estopped from taking the position that West Coast was not the processor of the school portrait films because the plaintiff relied on and acted on the advice of the Minister, Ms. Whyte, in entering into the transaction.

Plaintiff's Submission

Counsel for plaintiff submits (1) that the evidence is such that it clearly shows that plaintiff did not process the film for West Coast and in fact, West Coast did all of its own processing; (2) that the evidence is such that no sale price on which a tax under the Excise Tax Act can be imposed and (3) the evidence is clear that the Minister is estopped, in the circumstances of this case, from imposing a tax on the plaintiff.

Counsel submits that the liability for the tax is imposed by section 27 of the Excise Tax Act.

27. (1) 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, 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 in the goods passes, whichever is the earlier,

(ii) payable, in a case where the contract for the sale of the goods (including a hire-purchase contract and any other contract under which property in the goods passes upon satisfaction of a condition) provides that the sale price or other consideration shall be paid to the manufacturer or producer by instalments (whether the contract provides that the goods are to be delivered or property in the goods is to pass before or after payment of any or all instalments), by the producer or manufacturer pro tanto at the time each of the instalments becomes payable in accordance with the terms of the contract, and

(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;

This section deals with a service. It is the provision which fixes the amount of sales tax owing on the sale price of the goods. The Minister relies on subsection 26(7) which provides as follows:

26. (7) Where a person has, in Canada,

(a) processed exposed photographic film supplied by a customer to make a negative, transparency, photographic print or other photographic related good,

(b) produced or manufactured a negative, transparency, photographic print or

other photographic related good from any good supplied by a customer, or

(c) sold a right to the processing, production or manufacture by him of goods described in paragraph (a) or (b)

he shall, for the purposes of this Part, be deemed to be the producer or manufacturer of the negative, transparency, photographic print or other photographic related good, and the goods shall be deemed to be sold

(d) in the case mentioned in paragraph (a) or (b), at the time the goods are delivered to the customer, and

(e) in the case mentioned in paragraph (c), at the time the right is sold,

and the charge made shall be deemed to be the sale price.

Counsel contends that the Minister states that West Coast is the customer and plaintiff is doing the processing. Plaintiff contends this is not so. Exhibits P-3, 4 and 5 are written evidence that the processing is to be done by West Coast. In addition, the oral evidence clearly indicates that plaintiff was to do nothing except lease or rent equipment, premises and management consultation. Furthermore, plaintiff submits that the conduct of plaintiff and West Coast was consistent with an arrangement of lease. Furthermore, there was no assessment for the period September 1, 1984 to December 31, 1984 and since the same arrangement continued after January 1, 1985, there should not be any assessment.

Counsel also submits that there is no sales price on which the tax can be imposed. If plaintiff is to be liable to a tax, the Minister must bring it within subsection 26(7) of the Act. Counsel submits that the critical phrase in the section is “charge made”. Counsel submits the definition of "charge made" is not found in the Excise Tax Act and therefore there is no charge upon which the tax can be imposed, as in this case, at best, only a service is being provided by plaintiff to West Coast. Counsel submits the only charges are those set out in the invoices, that is for rental, labour and management fees and nothing else as Symonds stated he would never have paid the amounts mentioned in the agreement for processing as they are much too high because of West Coast's volume of work. That the only reason West Coast entered the agreement was because it got control of its own processing and as a result was prepared to concede its discount. Counsel submits that pursuant to section 34 of the Excise Tax Act only the Minister can determine what the charge is to be if it believes a non-arm's length relationship exists.

34. Where goods subject to tax under this Part or under Part III are sold at a price that in the judgment of the Minister is less than the fair price on which the tax should be imposed the Minister has the power to determine the fair price and the taxpayer shall pay the tax on the price so determined.

Plaintiff contends the Minister failed to determine a fair price, that he must do so personally and that in this case this was not done. Counsel refers to the questions and answers on pages 34 to 37 of Mr. McEachern's examination for discovery to affirm this fact.

With regard to the issue of estoppel, counsel for plaintiff submits plaintiff relied on and acted on the advice of Ms. Whyte and then continued after having, in January 1985, spoken to Ms. Adair and Ms. Whyte. Therefore, counsel for plaintiff contends the Crown is estopped from doing anything.

Defendant's Submission

Counsel for defendant submits that the issue of who was doing the processing of the film brought in by West Coast for the period in issue, February 1, 1985 to August 31, 1986, is a question of fact. To determine this issue, counsel suggests that what has to be looked at is (1) who is performing the work, (2) who is supervising the work, (3) where is the work being performed and (4) who is setting the charge for the work (who determines the price to be charged). Counsel for defendant submits that it was the employees of plaintiff who did the whole processing of the film, the work was supervised by plain- tiff's employees, that all that Mr. Symonds did was that he kept an overview of the operation.

Counsel submits that Exhibits P-3 and 4 indicate that there did not exist a simple rental agreement. This agreement is one in which plaintiff set the price to be charged (page 2, Exhibit P-4), the prices as agreed and which prices were plaintiff's regular prices for school work and that from the total processing price, this total amount was then divided into various percentages for rental of equipment, rental of space and management fees.

Counsel submits that on the balance of probabilities, it appears that plaintiff was doing the processing for West Coast.

Counsel further submits that the evidence indicates that the total of the price charged was divided up by the percentages and that the total price charged should be considered the price charged for the work done. Counsel submits that it was Symonds' evidence that the charges made to West Coast were in line to the charges made to other customers.

With regard to the section 34 of the Excise Tax Act submission of plaintiff, counsel for defendant submits that this section allows the Minister to fix a fair price if it was the Minister's opinion that the price charged was less than the fair price. Counsel submits that the charge by plaintiff to West Coast was directly in line with other customers and thus the Minister did not have to make any decision as to what is a fair price.

With regard to the issue of estoppel, counsel for defendant submits that plaintiff is attempting to use the letter of Ms. Whyte, Exhibit P-1, as the basis for the claim of estoppel. She submits that the letter speaks only of the concept where West Coast would manufacture its own photographs. She submits that plaintiff is alleging that defendant is estopped from denying that West Coast is the manufacturer of the film and in order to do so, plaintiff must show (1) that Ms. Whyte stated that this to be so. What Ms. Whyte did was set out her understanding of what plaintiff was to put into place, (2) that plaintiff relied on her statement in Exhibit P-1 to alter their original position which in this case did not happen as plaintiff told Ms. Whyte what is to be in place, there was no change and (3) it is for the Court to weigh if the telephone conversation with Ms. Whyte on January 25, 1985 induced Symonds to do anything as the conversation only referred to labour.

Discussion & Conclusion

In deciding the present issue, I shall proceed to discuss the various aspects of this case in the same order as did counsel for plaintiff.

(1) Who did the processing?

Both counsel for plaintiff and counsel for defendant agree that this issue is one of fact alone. I agree.

The facts in this case lead me to conclude that it was plaintiff, Tricolor Prolab Ltd., that was doing the processing of films for West Coast. I am satisfied that from September 1,1984 to December 14, 1984 if not to December 31, 1984, it was West Coast that was processing its own film. From September 1, 1984 to December 31, 1984, the evidence from Sutcliffe and Symonds was that plaintiff did not do any work for West Coast. West Coast would use plaintiff's processing equipment from 4:00 p.m. to midnight when plaintiff would not be using the equipment. Furthermore, West Coast hired its own staff. West Coast hired a Mr. Arlen Bernie from Arlen Bernie Agencies Inc. to supply processing services and contract labour (Exhibit P-7) only to West Coast for West Coast's film and had, in addition two or three other persons doing West Coast's work. This situation drastically changed after January 1, 1985. Mr. Symonds arranged to have West Coast, a company controlled by Symonds, to purchase all of the issued and outstanding shares of Tricolor Prolab (1979) Ltd. This took place between December 14, 1984 and December 31, 1984. Almost immediately after the purchase, Mr. Bernie leaves his job at West Coast. I am told by Symonds that Mr. Bernie left because he found a better job. This may be so, but I find it a strange coincidence that Bernie found this other job just after West Coast purchased the shares of Tricolor Prolab (1979) Ltd. and not relate the finding of the new job to the purchase of the shares. Be that as it may, the evidence from Sutcliffe is clear. From January 1, 1985 to at least September 1, 1985, West Coast was now having its film processed on equipment belonging to plaintiff and that the employees of plaintiff were doing the work. While film of West Coast was being processed so was film of other customers of plaintiff and it was the same employees doing the work. I do not attach much importance to the fact that an employee of plaintiff may have been designated to supervise the processing of West Coast's film. All this means is that this person, whether it be Irena Osadchuk or Cindy Murphy or Laura Scaligine, is given the responsibility to take special care with West Coast's film. This is understandable. Mr. Symonds controls both plaintiff and West Coast so that he can make sure West Coast's work receives special care.

Exhibit P-3 is of no value. It is not signed nor is it dated. It was obviously never put into effect as there would have been no need for Exhibit P-4 if Exhibit P-3 was put into effect.

Exhibit P-4 was put into effect. The period of this agreement is only for fall 1984. This is stated in the title of the document “Agreement between Tricolor Prolab (1979) Ltd. and West Coast Photography Ltd. for Fall 1984”. On page 2 of the agreement are the prices to be charged. The arrangement as to price to be charged and that the breakdown into percentages as per paragraph 2 of Exhibit P-4 may have continued after January 1, 1985 but the pith and substance of the agreement changed after January 1, 1985. In 1984, according to the evidence found in Exhibits P-6, 8 and 9, with the exception of two small purchases, all material was purchased by West Coast from Kodak Canada Inc. After January 1, 1985, West Coast buys much more from plaintiff than previously indicating an intermingling of both companies.

With regard to the invoices sent by plaintiff to West Coast and found in Exhibit P-11, I am not convinced that because of the sending of these invoices one can conclude that West Coast was operating as it did before 1985. The evidence from Symonds is that he determined the breakdown of the percentages as he wished.

Furthermore, on Exhibit P-17, Mr. East clearly uses the words “processing services”. I understand he states that this is an error on his part. I also understand that Symonds saw the statements and discussed them with Mr. East and neither person changed the wording.

I am convinced that the evidence indicates that West Coast was having its film processed by plaintiff during the period in issue. The employees of plaintiff did all of the work involved in the processing procedure. Mr. Symonds and his wife only supervised, all he did was keep a control over the work.

(2) What was the price charged for the work?

Page 2 of Exhibit P-4 clearly sets out the prices to be charged for the processing work. These prices are plaintiff's regular prices. This was confirmed oy Sutcliffe although he did state he did not set these prices as this was done by his associate J.J. Mailhot.

In examining Exhibits D-4 and 5 it becomes evident that the charges listed on Exhibit D-4, Pricing—West Coast, and Exhibit D-5 for M & A appear to be similar or exactly the same in many instances.

In his cross-examination Symonds agreed that Exhibit D-4 is a handwritten document of plaintiff setting out the price list for West Coast for part of the relevant period if not for the whole relevant period and that Exhibit D-5 is a handwritten document setting out the prices for M & A Photography for the same type of school work for the relevant period.

I am satisfied that the prices found on page 2 of Exhibit P-4 and the prices found on Exhibits D-4 and 5 and the evidence of Sutcliffe indicate prices that plaintiff would normally charge its customers and could be used as a basis upon which to base an excise tax. I am satisfied that it was not necessary to have the Minister of National Revenue determine or set a fair price for the processing work pursuant to section 34 of the Excise Tax Act as the evidence indicates the prices charged to West Coast were the normal, regular prices to other customers of plaintiff. These customers would be Pope and M & A, both companies doing a similar business to West Coast.

I am not swayed by the fact that Mr. Symonds made out invoices to West Coast for rental of equipment, rental of premises or for labour supplied. This was done to try to reinforce plaintiff's contention that it was not doing the processing of West Coast's film.

Estoppel

In the case of Wilchar Construction Ltd. v. The Queen, [1981] C.T.C. 415; 81 D.T.C. 5318 at 420 (D.T.C. 5321), Mr. Justice Heald, speaking for the Federal Court of Appeal states what the essential elements of estoppel are. He states:

Having concluded that there is no legal bar to estoppel, the only remaining question to consider is whether, on the facts of this case, the necessary elements of estoppel have been established. In this regard, it is my opinion that the learned trial judge was correct in holding that the appellant was estopped from changing the basis upon which the uncertified progress claims are to be treated in the calculation of its profit for its 1968 taxation year. The essential elements of an estoppel have often been stated as follows:

(1) a representation intended to induce a course of conduct on the part of the person to whom the representation is made;

(2) an act resulting from the representation by the person to whom the representation was made; and

(3) detriment to such person as a consequence of the act (see Greenwood v Martins Bank, (1933) AC 51).

In Black's Law Dictionary it is possible to find many definitions of the word estoppel. Some of the relevant definitions are:

Estoppel is a bar or impediment which precludes allegation or denial of a certain fact or state of facts, in consequence of previous allegation or denial or conduct or admission, or in consequence of a final adjudication of the matter in a court of law. It operates to put party entitled to its benefits in same position as if thing represented were true.

Elements or essentials of estoppel include change of position of parties so that party against whom estoppel is invoked has received a profit or benefit or party invoking estoppel has changed his position to his detriment.

Acts and declarations. An "estoppel by acts and declarations” is such as arises from the acts and declarations of a person by which he designedly induces another to alter his position injuriously to himself.

The plaintiff relies on Exhibit P-1 as his ground for estoppel. Plaintiff, as previously stated herein, states that before entering into any agreement with West Coast two of its shareholders, Sutcliffe and Hook attended at a meeting with Ms. Whyte and were told that if they entered into an agreement with West Coast to lease its equipment and space after plaintiff completed its daily work, that is, at 4:00 p.m., West Coast would be designated a “small manufacturer” and would not be required to apply for a licence under section 31 of the Excise Tax Act.

I am satisfied that what Ms. Whyte was told by Sutcliffe and Hook is what Ms. Whyte wrote in the second paragraph of her July 11, 1984 letter, that is, that plaintiff intends to rent its used photofinishing equipment to West Coast who will be using the equipment to manufacture its own photographs.

Based on this information, plaintiff entered into the agreement with West Coast. The evidence before me does not indicate that anything said by Ms. Whyte induced plaintiff to alter a position that plaintiff held. Sutcliffe came for advice only.

Referring back to the Wilchar Construction Ltd. case, supra, did Ms. Whyte in her letter of July 11, 1984 or in any subsequent telephone conversation make a representation intended to induce a course of conduct on the part of plaintiff? I think not.

I am satisfied that had West Coast continued to lease the used equipment and space from plaintiff and continued to buy its materials from Kodak (this is not of great importance) and had continued to employ and use separate employees paid by West Coast and had continued to do its own processing after 4:00 p.m. and separately from the processing of plaintiff, the present situation may be different.

I cannot conclude from the facts before me that the defendant is prevented to make the assessment on plaintiff by reason of estoppel.

Neither party made any comment with regard to the assessment. Plaintiff states there should be no assessment but did not state that if an assessment is to be made, it should have been made differently than what was done by the Minister. I therefore will not interfere with the assessment.

Plaintiff's action is dismissed with costs in favour of defendant.

Action dismissed.