British Columbia Railway Company v. Her Majesty the Queen, [1979] CTC 56, 79 DTC 5020

Collier, J:—These reasons are the determination, before trial, of a question of law.

The plaintiff’s action is for declaratory relief.

Paragraph 2 of the Statement of Claim alleges, and the defendant admits:

2. The Plaintiff at all material times purchased ties from various sources, transferred the ties to other parties to have preservative applied, and then utilized the finished ties in the maintenance and extension of its railway lines.

The Department of National Revenue, Customs and Excise Division, pursuant to the Excise Tax Act*, [1] assessed the plaintiff sales or consumption tax in respect of the railway ties. The taxes were assessed over the period June 14, 1963 to June 30, 1973. The amounts are substantial.

One particular aspect of the assessment gave rise to the present law suit. The plaintiff sent out is raw ties to another company to be creosoted. This is a relatively expensive process. The price charged the plaintiff for that service included a reasonable component for administrative costs and profit of that other company. The revenue department computed the value of the ties, for tax purposes, on the total of the cost of the raw ties, certain freight charges, the charges for creosoting, plus 15% on all that for supervision and profit. The plaintiff took issue with the 15% charge. This action followed.

The parties agreed to have the court determine two preliminary questions of law. The first question is not really related to the 15% calculation in respect of administration costs and profit. It goes to whether any tax is payable at all. The second question is more directly related to the 15% issue.

I set out, first, an agreed statement of factsf. [2]

1. The Plaintiff purchased raw railroad ties from suppliers along its railway line. 2. It delivered raw ties to a creosoting plant operated by Dominion Tar and Chemical Co Ltd (“Domtar”), whereupon Domtar creosoted the ties.

3. The Plaintiff then picked up the ties at Domtar’s plant and put them to use throughout its rail system.

4. Domtar charged the Plaintiff for the creosoting function performed by it an amount that was an arm’s length price for what Domtar did, including a reasonable component to cover administrative costs and profit.

5. By analogy with the decision of the Supreme Court of Canada in The Queen v Canadian Pacific Railway Company, [1971] CTC 163; 71 DTC 5078, the Plaintiff is considered to be the manufacturer for sales tax purposes of the ties creosoted in these circumstances by Domtar.

6. Pursuant to section 27 of the Excise Tax Act the Defendant has assessed the Plaintiff on the basis that it is to be treated as the manufacturer of the finished ties and has imposed tax on the basis of a determination pursuant to section 28 of the Excise Tax Act that the value on which the tax is to be imposed is the total of:

(a) Cost of the raw ties,

(b) amounts for freight for which no specific charge was made by the Plaintiff,

and

(c) charge by Domtar for creosoting,

and then to that total is added 15% for supervision and profit.

At the hearing, the parties further agreed that the defendant had selected, for the points in time when the tax became payable, the time the particular ties were physically installed into the plaintiff’s rail bed system—the time of consumption.

I set out, next, the questions of law for determination:

1. Did the Excise Tax Act fail to specify the time at which the consumption or sales tax was payable on the Plaintiff’s railroad ties, and if so, is there any liability on the Plaintiff for payment of the consumption or sales tax assessed by the Minister in this case?

2. Is the determination made by the Minister of National Revenue, pursuant to s 28 of the Excise Tax Act, RSC 1970, c E-13 (and amendments) and pursuant to s 31 of the Excise Tax Act, RSC 1952, c 100 (and amendments), of the value of the plaintiff’s railroad ties, for the consumption or sales tax, as calculated according to Schedule A of the amended statement of claim, reviewable by proceedings in the Trial Division of this Court?

The parties further agreed:

(a) if question 1 is answered in favor of the plaintiff, the assessments are to be vacated; if the answer is unfavorable, question 2 is to be determined.

(b) if question 2 is answered in favor of the defendant, the plaintiff’s action is dismissed; if the answer is in the affirmative, the action will proceed to trial.

When these questions came on for hearing, I stated, after discussion, question 1 would be argued and determined first.

I turn, then, to the submissions made on the first question.

Counsel referred at length to subsections 27(1) and (4), and subsection 28(1) of the Excise Tax Act*. [3] I set out those portions of the legislation:

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

(a) produced or manufactured in Canada

(i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property 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 the case of dressed or dressed and dyed furs, by the person to whom the furs are delivered by the dresser or dyer, at the time of such delivery, whether or not that person is a licensed wholesaler or licensed manufacturer, and the sale price of the goods shall be deemed to be either the aggregate of the current market value of the furs in their raw state and the dressing or dressing and dyeing charge, or the dyeing charge only where the furs delivered were dressed furs on which tax has been paid under this subparagraph or on importation, and the dresser or dyer shall, at the time the furs are so delivered, collect the tax in the form of a certified cheque made payable to the Receiver General and shall forthwith remit the same to the Receiver General;

(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;

(c) sold by a licensed wholesaler, payable by him at the time of delivery to the purchaser, and the tax shall be computed

(i) on the duty paid value of the goods, if they were imported by the licensed wholesaler, or

(ii) on the price for which the goods were purchased by the licensed wholesaler, if they were not imported by him, and such price shall include the amount of the excise duties on goods sold in bond; or

(d) retained by a licensed wholesaler for his own use or for rental by him to others, payable by the licensed wholesaler at the time the goods are put to his own use or first rented to others, and the said tax shall be computed

(i) on the duty paid value of the goods, if they were imported by the licensed wholesaler, or

(ii) on the price for which the goods were purchased by the licensed wholesaler, if

(4) Where a motor vehicle or tractor or a machine or tool for operation by a motor vehicle or tractor

(a) has been purchased or imported by a person who is the first purchaser or importer in Canada of the article for his own use and who purchased or imported the article for a use rendering such purchase or importation exempt from tax under this Part, or

(b) has been purchased as described in subsection 44(2);

the following rules apply:

(c) if within five years of such purchase or importation the article is applied by the purchaser or importer to any use (other than of a casual nature) for which it could not originally have been purchased or imported by the purchaser or importer exempt from tax under this Part, the purchaser or importer shall be deemed to have sold the article at the time of its application to that use and there shall be imposed, levied and collected a consumption or sales tax of nine per cent on the value of the article at the time of its application to that use, payable by the purchaser or importer at that time; and

(d) if within five years of such purchase or importation the article is sold or leased by the purchaser or importer to any person other than a licensed wholesaler, the purchaser or importer shall be deemed to have sold the article at the time of its sale or lease to such person and there shall be imposed, levied and collected a consumption or sales tax of nine per cent on the value of the article at the time of its sale or lease to such person, payable by the purchaser or importer at that time.

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

(a) a lease of such goods or the right of using the goods but not the right of property therein is sold or given;

(b) such goods having a royalty imposed thereon, the royalty is uncertain, or is not from other causes a reliable means of estimating the value of the goods;

(c) such goods are manufactured by contract for labour only and not including the value of the goods that enter into the same, or under any other unusual or peculiar manner or conditions; or

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

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

The defendant’s position, in assessing the plaintiff in respect of the railroad ties, was that it was difficult to determine their value, for tax purposes, because they were “manufactured or produced” by the plaintiff for use by it and not for sale*; [4] the purchase of untreated ties, the creosoting processes, and the eventual consumption or use in the plaintiff’s railroad system were “transactions” which, for the purposes of the Excise Tax Act, are regarded as sales of the tiesf. [5]

Counsel for the plaintiff questions whether the steps set out in the preceding paragraph can realistically, or legally, be said to fall within the expression “all such transactions”. The matters set out in paragraphs 28(1 )(a), (b) and (c) may each be characterized as a “transaction”, it is said, because they seem to envisage the transfer of goods from the manufacturer or producer to someone else; it is then not too difficult for them to “be regarded as sales.” But, it is contended, the manufacturing or producing of goods for one’s own use, without something further, cannot be a “transaction.”

I agree there is some awkwardness in the language of subsection 28(1). A court ought, nevertheless, to endeavor to give effect to the words used. “Transactions” include the doing or carrying on of activities. The manufacture or production of goods for one’s own use, and not for sale, can reasonably, to my mind, be characterized as a transaction.

The plaintiff’s main contention is that for a tax to be validly imposed, a time for its payment must be fixed. Counsel says when one goes to section 27, the charging section, there is no time of payment applicable to transactions falling within paragraph 28(1)(d).

The plaintiff points out, and I agree, that the legislators, in paragraphs 27(1)(a), (b), (c) and (d), and in subsection 27(4), have explicitly provided precisely when the tax is payable. Paragraph 27(1)(d) was singled out. Insofar as it deals with the case of a licensed wholesaler retaining goods for his own use, it is very similar to the factual situation in this case and to transactions falling within paragraph 28(1)(d). The tax on the goods of a licensed wholesaler who retains them for his own use is payable at the time the goods are put to his own use. In paragraph 27(4)(c), dealing with the tax payable in respect of motor vehicles and tractors, and certain types of machinery, there is a somewhat similar provision as to the time for payment.

The plaintiff says there is no provision anywhere in section 27, or Part V, which specifies when the tax, payable by a manufacturer or producer who uses his own goods, is payable; there is a gap or omission; there is therefore no certainty, and as a consequence, no liability.

It is of assistance, in my view, to look at other Parts of the Excise Tax Act.

Part I imposes a tax on premiums paid in respect of certain insurance contracts. Section 4 provides the tax is payable on, or before, a fixed date in each year.

Part II imposes an air transportation tax on the amount paid for certain air transportation. The tax is specified to be payable at the time when the transportation is paid for, or becomes payable (section 12). The tax collected by the air carriers is remitted monthly (section 17).

Part III of the legislation imposes a tax on various goods set out in Schedules 1 and 2 to the act. The tax imposed on, for example, cigarettes and tobacco, is set out in Schedule 2. The times for payment are specifically set out in subsection 21(2).

In this Part of the statute, subsection 21(4) is noteworthy:

(4) When goods of any class mentioned in Schedules I and II are manufactured or produced in Canada and are for use by the manufacturer or producer thereof and not for sale, such goods shall, for the purposes of this Part, be deemed to have been delivered to a purchaser thereof, and the delivery shall be deemed to have taken place when the goods are used or appropriated for use; the Minister may determine the value of the said goods for the tax.

There the legislators have, once more, specifically set out the time for payment of the tax, when certain classes of goods are manufactured or produced for one’s own use. I contrast that with the silence in section 27 in respect of paragraph 28(1)(d) goods.

Part IV deals with taxes on playing cards and wines. In the case of the former the precise time for payment is set out in subsection 23(2). In the case of wines, the times are set out in subsections 24(2) and 25(2).

I turn now to the submissions on behalf of the defendant.

It was argued there was no need to single out the goods falling within paragraph 28(1 )(d), and spell out, by deeming provisions such as those used in subsection 21(4), the time for payment of the tax; subparagraph 27(1 )(a)(i) covers the point; when a manufacturer or producer uses his own goods, the transaction is deemed a sale; the amount of tax is calculated and is payable at the time the goods are taken out of inventory and put into use; there is, in effect, at that instant, a deemed delivery to the manufacturer (purchaser) and a deemed transfer of property. Counsel submitted the times set out in the remaining subparagraphs of paragraph 27(1)(a) and in paragraphs 27(1)(b), (c) and (d) were necessary to cover those special situations, where there might be uncertainty as to when the tax was payable.

I cannot accept the defendant’s submissions.

To interpret sections 28 and 27 in the manner urged by the defendant is, as I see it, to insert words to make the provisions say “what the legislature could have said or would have said if [the] particular situation [the plaintiff’s ties] had been before it.’’* [6]

I was referred by the plaintiff, for the general proposition that statutes which impose pecuniary burdens are subject to strict construction, to older classical texts on construction of statutes.

I quote from Maxwell on Interpretation of Statutes^: [7]

Statutes imposing burdens

Statutes which impose pecuniary burdens are subject to the same rule of strict construction. It is a well-settled rule of law that all charges upon the subject must be imposed by clear and unambiguous language, because in some degree they operate as penalties: the subject is not to be taxed unless the language of the statute clearly imposes the obligation, and language must not be strained in order to tax a transaction which, had the legislature thought of it, would have been covered by appropriate words. “In a taxing Act,” said Rowlatt J, “one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.” But this strictness of interpretation may not always enure to the subject’s benefit, for “if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be.”

The judicial decisions cited in support of the above principles are of high authority. To similar effect is Craies on Statute Lawt. [8]

The strict construction rule was adopted by the Supreme Court of Canada in The King v Crabbs§. [9]

The authorities I have cited deal, generally, with the construction to be adopted in order to determine whether or not a tax is imposed, or exigible. The same construction rules should, in my view, be equally applicable in respect of time for payment of a tax. Under the Excise Tax Act, a taxpayer, such as the plaintiff, can be charged for failure to pay taxes||. [10] It seems to me that certainty as to the time of payment would be essential in order to secure a conviction.

Two more recent works on statutory interpretation take the view there are not, or ought not to be, special rules, or rules of strict construction, in respect of taxing statutes*. [11] As Mr Driedger points out, the Interpretation Actt [12] in this country requires:

11. Every enactment shall be deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects. 1967-68, c 7, s 11.

Applying just the ordinary rules of construction, (and not so-called strict construction) as set out in Mr Driedger’s text at pages 67, and 76-80T [13] and in Professor Cross’s text at page 43, I conclude that, for transactions falling within paragraph 28(1 )(d), no time for payment is set out in subsection 27(1). Further, that subparagraph 27(1)(a)(i) cannot be made applicable to the situation here. That subparagraph cannot, in my opinion, be interpreted, in the manner suggested by the defendant, in order to fix a time for payment of the deemed sale specified in paragraph 28(1 )(d).

The result of the existing statutory provisions is that a manufacturer or producer does not know when the tax becomes payable. It can be just as plausibly argued the notional sale takes place when the railroad ties are, after treatment, put in inventory; that the hypothetical sale is not at some date when they are put to use. The ties may not be used or consumed for months or years. They may increase or decrease in value over that period of time. A taxpayer must, as I see it, know the point in time when tax is payable. He can then comply with, or fulfil, his statutory duties. Here there is a gap or omission.

The defendant made reference to section 50 of the statute and suggested the time for payment is fixed by that section. The relevant subsections are as follows:

50.(1) Every person who is required by or pursuant to Part III, IV or V to pay taxes shall make each month a true return of his taxable sales for the last preceding month, containing such information in such form as the regulations require.

(2) Every person holding a licence granted under or in respect of Part III, IV or V Shall, if no taxable sales have been made during the last preceding month, make a return as required by subsection (1) stating that no taxable sales have been made.

(3) The return required by this section shall be filed and the tax payable shall be paid not later than the last day of the first month succeeding that in which the sales were made.

I do not agree.

Subsection 50(3) does not, in my opinion, fix, in this case, the time when the tax is payable by the plaintiff. It is merely a provision allowing the taxpayer to file a return and forward, on a monthly basis, to the tax gatherer, the taxes collected or earlier payable.

Counsel stated they had been unable to unearth any decisions which indicate, for a tax to be valid and collectable, the time for payment must be specified. I, too, have been unable to find any reported cases. In the second edition of Cooley, The Law of Taxation§ [14] the following appears at pp 8-9:

Maxims of policy. Writers on political economy lay down certain principles which should govern the imposition of taxes, but these are guides rather to the legislature than to the courts. The author of the “Wealth of Nations,” in particular, has enumerated certain maxims, the substance of which may be stated as follows: 1. That the subjects of every state ought to contribute to the support of the government as nearly as possible in proportion to the revenue which they respectively enjoy under its protection. 2. The tax which each is to pay ought, as respects the time and manner of payment, and the sum to be paid, to be certain and not arbitrary. 3. It ought to be levied at the time and in the manner in which it is most likely to be convenient to the contributor to pay it; and 4. It ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury.

The words of Adam Smith’s second maxim are*: [15]

II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty.

In the fourth edition of Cooley on the Law of Taxation} [16] the following statement is made in s 1311:

The time when taxes become due and payable and when they become delinquent is generally fixed by statute.

No reference is made to the Wealth of Nations. A number of American cases are cited.

I therefore answer question 1 *in favor of the plaintiff. The formal determination of that question of law will be as follows:

The Excise Tax Act failed to specify the time at which the consumption or sales tax was payable on the plaintiff’s railroad ties. There is no liability on the plaintiff for payment of the consumption or sales tax assessed by the Minister of National Revenue in the assessments set out in paragraph 3 of the statement of claim.

I have come to this conclusion with considerable reluctance. The sales tax on goods used, for his own purposes, by a manufacturer or producer of them, has been in effect for aproximately fifty-five yearst. [17] I am told the point now taken by the plaintiff has never before been raised with the revenue department; that manufacturers and producers, ostensibly chargeable by paragraph 28(1 )(d), have been faithfully paying sales or consumption tax for many years.

All that cannot deter a court from construing against what may have become an established tax practice, if the statutory construction reached is, in the opinion of the construer, clearly against the long prevailing assumption or understanding of many taxpayers and the revenue department*. [18]

I direct counsel for the plaintiff to draw the pronouncement giving effect to these reasons and to submit it to counsel for the defendant for comment. If agreement cannot be reached, counsel may speak to the matter.