Baladine Inc., Giovanni Management Ltd., Chelsea Girl (Division of Chelsea Girl Beauty Products Ltd.), Far East Canada Company and Harry Camp of Canada Ltd. v. Her Majesty the Queen, [1987] 1 CTC 38, 86 DTC 6616

Denault, J. [Translation]:—The plaintiffs are claiming a refund of excise tax paid in error on the importation of wigs. The point at issue is whether the defendant must refund the taxes paid within two years of the applica- tion for a refund (subsection 44(7) of the Excise Tax Act, R.S.C. c. E-13), in which case the plaintiffs will succeed in their action, or within a year only (subsection 59(4)), in which case the action will be dismissed since the defendant has already refunded the amounts covering this period.

Most of the facts out of which this case arose were the subject of admissions by the parties and may be summarized essentially as follows.

(1) Between 1974 and 1976 the plaintiffs imported wigs and paid the applicable excise taxes though they maintained that they were exempt from doing so because they regarded the articles as clothing: this the Department denied.

(2) In 1976 certain of the plaintiffs filed applications for refunds by an amended return, form 82, on the following dates respectively: Baladine Inc. on June 25, 1976, Giovanni Management Ltd. on June 30, 1976 and Chelsea Girl on April 1, 1976; and all three appealed to the Tariff Board on July 14, 1976 from the decision that these articles were subject to the tax. The plaintiffs Far East Canada Company and Harry Camp of Canada Ltd. filed their applications for a refund (82) on February 11 and February 28, 1977, respectively; both appealed to the Tariff Board on March 15,1977 (see Table D1).

(3) On November 3, 1977 the Tariff Board ruled on the matter and made an order that the wigs were clothing and so exempt from the import tax.

(4) Following this decision the defendant refunded to the plaintiffs the taxes overpaid within one year from the date of the appeal to the Tariff Board: in doing so she relied on subsection 59(4) of the Act. These amounts were duly paid and are not the subject of the action at bar.

(5) The plaintiffs allege, citing payment in error (44(1)(c) of the Act), that they are entitled to be refunded the amounts paid within two years of an application made pursuant to subsection 44(7), and the amounts to which each of the plaintiffs are entitled if their argument is correct are admitted. Thus, Baladine Inc. would be entitled to $20,306.13, Giovanni Management to $12,076.18, Chelsea Girl to $23,575.36, Far East Canada Company to $6,455.26 and Harry Camp of Canada Ltd. to $18,842.23, making a total of $81,255.16 which is the subject of the claim at bar.

Martin Lewis was the only witness heard at the trial. He is a customs broker and prepared for the plaintiffs all the amended returns (form BZ) which in fact constituted applications for refunds of amounts paid in error. He explained why he decided to make the following notation, found in essentially the same form on each of the applications for a refund:

The matter of Federal sales tax on wigs as coming within the scope of clothing will shortly be taken before the Tariff Board. This claim is being filed merely to protect the importers’ rights should a favourable ruling be handed down.

He said this notation was to give a reason for the application for a refund, so as to avoid its being simply dismissed and his having to file another application. He claimed that he acted in this way after receiving a letter from the Department (April 27, 1976) telling him that a simple letter of intent was insufficient to justify a claim.

At the time in question the Act provided that a tax paid in error would be refunded if the application was made in writing within two years of payment of the tax. The section (the Act has since been amended) then read as follows:

44.(1) A deduction from, or refund of, any of the taxes imposed by this Act may be granted

(c) where the tax was paid in error;

(7) If any person, whether by mistake of law or fact, has paid or overpaid to Her Majesty any moneys that have been taken to account as taxes imposed by this Act, such moneys shall not be refunded unless application has been made in writing within two years after the moneys were paid or overpaid.

[Emphasis added.]

The Act further provided that in case of doubt as to whether, under the Act, an article was covered by the Act and subject to tax, the question could be referred to the Tariff Board. Following this decision, if it was in favour of the taxpayer, the tax paid in error could not be refunded “unless the application mentioned in section 44 is made within twelve months after such taxes were paid" (59(4)). For a clear understanding of what follows, it is worth reproducing section 59 of the Act as it read at the time in question, several amendments having since been made:

59. (1) Where any difference arises or where any doubt exists as to whether any or what rate of tax is payable on any article or on transportation by air under this Act, the Tariff Board constituted by the Tariff Board Act may declare what rate of tax is payble thereon or that the article or transportation by air is exempt from tax under this Act.

(2) Before making a declaration under subsection (1) the Tariff Board shall provide for a hearing and shall publish a notice thereof in the Canada Gazette at least twenty-one days prior to the day of the hearing; and any person who, on or before that day, enters an appearance with the secretary of the Tariff Board may be heard at the hearing.

(3) A declaration by the Tariff Board under this section is final and conclusive, subject to appeal as provided in section 60.

(4) Notwithstanding the provisions of section 44 relating to the time within which an application for a refund or deduction may be made, no refund or deduction shall be made under that section as the result of any declaration of the Tariff Board under this section or an order or judgment under section 60 in respect of taxes paid prior to such declaration, order or judgment unless the application mentioned in section 44 is made within twelve months after such taxes were paid.

(5) An application to the Tariff Board for a declaration, or the entering of an appearance with the Secretary of the Tariff Board under subsection (2) of this section, shall, for the purposes of section 44, be deemed to be an application in writing.

[Emphasis added.]

In the submission of the plaintiffs’ counsel the legislature, by adopting sections 44 and 59 of the Act, gave taxpayers two distinct opportunities for asserting their rights, either by filing applications for refunds by means of amended returns (BZ) pursuant to section 44 of the Act, and if it was shown inter alia that the payment was made in error the two-year limitation would apply. If, on the other hand, the taxpayer opted for the right conferred by section 59 and decided to bring the matter before the Tariff Board, subsection 59(4) would apply and the refund would then be limited to one year’s arrears. However, the plaintiffs argued, they exercised both of the remedies provided by the Act in the case at bar, but as they filed their applications for a refund pursuant to section 44 first, this is the section which should apply even if the decision of the Tariff Board finding that there was a tax exemption was used to establish that the payment had been made in error. Subsection 59(5) does not apply in their case, they argued, because they had made an earlier application for a refund, and accordingly it was not their application to the Tariff Board which constituted the application in

writing: if they had made only this application to the Tariff Board, they would be subject to 59(4) (one-year limitation), but they said that was not their position because they had made an application under section 44. In support of their argument they referred to Tambrands Canada Inc. v. M.N.R., [1985] 2 C.T.C. 154; 85 D.T.C. 5323, Amoco Canada Petroleum Company Limited v. M.N.R., [1985] 1 C.T.C. 240; 85 D.T.C. 5169 and Bristol- Myers Canada Inc. v. The Queen, [1983] C.T.C. 228; 83 D.T.C. 5312.

Counsel for the plaintiff submitted that only section 44 creates a right to a refund of taxes paid in error. In counsel's submission subsection 59(4) does not create the right to a refund, it limits the scope of that right. He submitted that from reading the very wording of subsection 59(4) it appears that it applies not only to parties before the Tariff Board but also to third parties, and that it relates to all payments made before the decision of the Tariff Board, regardless of whether the application for a refund was made by form 82 (44(7)) or by a reference to the Tariff Board (59(4)).

There is no doubt that it is section 44 which creates the right to a refund.* [1] The legislature listed six specific cases in which the taxpayer can apply for a refund of the tax, including payment in error. In these cases, Parliament thought it advisable to extend the refund to taxes paid in both cases preceding the application.

A taxpayer who has any doubt as to whether the article is subject to tax can decide to refer the matter to the Tariff Board. An application to the Board is then deemed to be an application in writing “for the purposes of section 44" (59(5)), but it does not prevent an application for a refund being made expressly under that section: one application does not preclude the other. However the situation is quite different as regards obtaining a refund of the taxes paid in view of subsection 59(4). It can be seen simply from reading the wording of this section that the legislature intended to limit the refund to taxes paid before the declaration, order or judgment by the Tariff Board. In this regard the case at bar differs from the facts in Bristol-Myers, in which the taxes being claimed as a refund had been paid after the appeal to the Tariff Board.

Additionally, this section deals with refunds made as the result of a declaration by the Tariff Board and covers not only parties to proceedings before the Tariff Board but even third parties, such as those basing their application on section 44 of the Act. The scope of subsection 59(4) clearly cannot be limited solely to parties who have taken their dispute to the Tariff Board: the intent in referring to section 44 was to cover persons who had acted thereunder and the refund of taxes overpaid by such persons was made subject to a shorter period. Any other conclusion would create a flagrant injustice which Parliament clearly did not intend. It is inconceivable that taxpayers who took their dispute to the Tariff Board should be limited to a refund of one year’s taxes paid illegally and others who remained on the sidelines awaiting the decision could benefit from a two-year refund, without doing anything, but relying on the decision as the basis for their claim.

In the case at bar, though the plaintiffs filed their claim before taking their dispute to the Tariff Board, they specifically alleged as the reason in

support of it their inention to take the matter to the Board: they are now relying on this decision to establish payment in error, but seeking to repudiate it when the time comes to apply the limitation resulting from such a reference to the Board to their refund. This approach is inadmissible. If the decision is used to establish payment in error, its consequences must be accepted and the limitation resulting from it applied. The Court considers that the admissions in the record and the wording of the letter from the Department, dated April 22, 1976, do not provide a basis for accepting the testimony of the broker Lewis that the Department’s employees had agreed to cover two years’ arrears of taxes: when the letter was written the appeal to the Board had not been filed and there could be no question of applying subsection 59(4) of the Act.

Finally, though arguing that they are not subject to the subsection 59(4) time limit, the plaintiffs argued essentially that even if they are subject to that time limit, as their application was filed under section 44, which creates the right to the refund and entitles applicants to two years’ arrears, this limitation should prevail over the other which is only a procedural limitation. The Court does not share this view. Subsection 59(4) provides essentially that there should be no right to a refund unless the application mentioned in section 44 is made within 12 months after the payment of the taxes. Accordingly, the section not only limits the time within which an application for a refund may be filed, it sets limits to this right: in short, it is not merely a procedural but a substantive limitation* [2] as well, and on this ground there can be no question of regarding subsection 44(7) as having priority over subsection 59(4). On the contrary, not only does the latter section limit the right to the refund, the evidence established that the applications for a refund were made on the basis of an eventual appeal to the Tariff Board and on the decision subsequently made by the Board. It does not matter that the applications were made before the decision rather than after: the taxpayers are only entitled to a refund of the taxes paid within twelve months of their application.

The action is accordingly dismissed with costs.

Appeal dismissed.