Her Majesty the Queen v. Stuart House Canada Limited, [1976] CTC 37, 76 DTC 6033

Addy, J:—The issue in this case is the liability of the defendant for payment of excise tax as a manufacturer or a producer of aluminum foil. There is no question as to the amount due if liability is found to exist, the parties being agreed as to the total amount of tax which, together with penalty to January 31, 1976, would amount to $19,974.26 representing tax in the amount of $17,263.05 and penalties in the amount of $2,711.21.

No oral evidence was adduced at the trial, the parties having filed an agreed statement of facts which is annexed hereto. There is therefore no requirement for any finding of fact.

On examining the agreed statement of facts, it is evident that the only thing which the defendant does to the aluminum foil itself is to cut it into shorter lengths and re-roll it on cardboard tubes. The boxes, in which these tubes with the foil on them are packed, are received by the defendant already printed, precreased for folding and equipped with a cutting edge. The defendant bends the flattened boxes along the creases, forms them into boxes and puts glue on the flaps at each end to seal them. A roll of foil is then inserted into each box and the completed product is marketed.

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It is important to note here that the aluminum foil is delivered to the defendant in rolls of two widths, that is, twelve inches and eighteen inches, and that the width of the foil is not altered in any way, but merely its length.

it has been settled that the words “produced” and “manufactured” are not words of any precise meaning and that an article may be considered as having been produced without having been manufactured. Refer R v Vandeweghe Limited, [1934] SCR 244, at 248; [1928-34] CTC 257, at 260; 1 DTC 265, and, more particularly, Gruen Watch Company of Canada Limited et al v The Attorney-General of Canada, [1950] OR 429; [1950] CTC 440; 4 DTC 784, where McRuer, CJHC stated at page 442 [454]:

I cannot find that the simple operation of putting a watch movement into a watch case is “manufacturing” a watch in the “ordinary, popular and natural sense” of the word, but 1 feel clear that the plaintiffs “produced” watches “adapted to household or personal use”. It may well be that, as counsel for the plaintiffs argued, the movement as imported in the tin or aluminum case will keep time and could be used as a watch. This would be, however, with great inconvenience. It is not a watch “adapted to household or personal use” as the term is used in its ordinary and popular sense, and the movement in the aluminum case would be quite unsaleable as such.

This statement was approved by the Supreme Court of Canada in R v York Marble, Tile and Terrazzo Limited, [1968] SCR 140; [1968] CTC 44; 68 DTC 5001, where Spence, J, in delivering the judgment of the Court, stated at page 147 [50, 5004] of the report:

... I adopt the course of McRuer CJHC, in Gruen Watch Co v Attorney General of Canada in holding that an article may be “produced” although it is not “manufactured”. In that case, although he was unable to come to the conclusion that the mere insertion of the movement into the watch case was the manufacture of the watch, he found no difficulty in determining that such a process was the production of a watch.

There can be no question of the defendant in the case at Bar having manufactured the foil but there is an issue as between the parties whether or not it might be producing foil.

The simple question therefore is whether or not the operations performed by the defendant constitute the production of foil. Sveral cases were cited by counsel for the plaintiff. In the Gruen Watch Co case, supra, watchworks were imported and were inserted into watchcases by the plaintiff and it was held that this constituted the production of watches. It is to be noted however that what the plaintiff received was not watches but watchworks and watchcases and what resulted from its intervention were different articles, that is, completed watches. McRuer, CJHC at page 442 [454] of the above-mentioned report stated:

I therefore find that for the purposes of the Excise Tax Act the watch movements as imported were not watches.

This, of course, cannot be said of the aluminum foil: what was received was foil and what was sold was the same foil.

Similarly, in the case of R v Vandeweghe Limited, supra, at 248 [260], what was received were raw furs or skins and what was produced were dressed and dyed furs. In the York Marble case, supra, the following operations were performed on marble slabs by the taxpayer: book matching, grouting, rodding, gluing, grinding, rough polishing, fine polishing, cutting and edge finishing. These operations are described in full on pages 143 and 144 [46 and 47, 5002] of the above-mentioned report of the case. There is not the slightest doubt that, on the facts, the taxpayer was, at the very least, producing something quite different from the raw marble.

In the case of Quebec Hydro-Electric Commission \/ The Deputy Minister of National Revenue for Customs and Excise, [19701 SCR 30; [1969] CTC 574; 69 DTC 5372, eleciricity was transformed from one type of alternating current to what was described in the findings of fact by the Tariff Board at pages 33 and 34 [576, 5374] as follows:

By electromagnetic induction, initiated by the electrical energy of the primary alternating current, a new and separate alternating current is produced in the secondary winding of a transformer. The current in the secondary circuit usually differs, not in the number of watts or of cycles, but in the number of volts and of amperes.

This finding of fact was evidently relied on by the Supreme Court of Canada in allowing the appeal from the Exchequer Court and reinstating the decision of the Tariff Board. Abbott, J, in delivering the opinion of the majority of the Court (Pigeon, J having dissented), Stated at page 34 [577]:

Because [1] it is the transformation in issue that turns the electrical energy into a form* that can be used by the customer, this transformation must be considered to be part of the manufacture and production of electricity.

The word “form” here, in my view, goes to the very nature of the product which before being “transformed” could not be used by the ordinary consumer. This fundamental distinction becomes more evident when one considers the very recent and as yet unreported decision of the Supreme Court of Canada, in the case of The Consumers’ Gas Company et al v Deputy Minister of National Revenue for Customs and Excise (October 7, 1975), where that Court, in agreeing with the finding of the Tariff Board and of the Federal Court of Appeal, felt that the Hydro-Quebec case, supra, was not applicable. The grounds for the distinction were that there was merely a change of pressure in the gas-pipe and all the appellant company did was to ", . .. merely cause the gas to pass, go, be conveyed or conducted from the high pressure pipes to lower pressure pipes, instead of producing a new current at a different voltage which was the function of the transformers as it was seen in the Hydro-Quebec case.” (Per Pigeon, J at page 2 of the reasons.) In other words, there was no difference in the nature of the gas itself or in its form, properties and qualities following the operation performed by the appellant.

Another case in point is the case of R v E J Piggott Enterprises Ltd, [1973] CTC 65; 73 DTC 5013. This case dealt with the production of audio-tape cartridges. The tape was purchased separately as well as the various components of the container cartridges. These components consisted of a top and a bottom of the container, a spool, a pressure pad and a spring. The parts were then fixed together with a screw. After assembly of the cartridge parts, the tape was wound on the cartridge spool and the whole was sold as a Ferropak cartridge. The defendant engaged in another operation which consisted of registering music from a master tape onto blank tapes for background music purposes, in other words, reproducing copies from the master tape. In the first operation, the tape could not be used unless it was in a cartridge and in the second, it is evident that a tape with music on it is quite different from a blank tape. In both of these operations something new was produced, possessing new form, qualities and properties.

In the same manner, in the case of R v Canadian Pacific Railway Company, [1971] SCR 821; [1971] CTC 163; 71 DTC 5078, ties were creosoted by the respondent to increase their life span by approximately twenty-five years. Ties were also bored in order to receive spikes. The Court held that the ties were given new form, qualities and properties and were therefore products which were manufactured or, if not manufactured, then produced in the ordinary sense in which that word is used.

The expression “new form, qualities and properties or combinations” has been used not only in this case but in other cases such as the case of R v Piggott Enterprises Ltd, supra, at page 73 [5019] and in the York Marble Tile case, supra, at page 145 [48, 5003].

I do not agree with counsel for the plaintiff that all these words are to be used disjunctively nor can I consider that the cutting of aluminum foil into shorter lengths can be considered as giving new form to the foil. There certainly has been no change in the quality or in the properties of the foil. Because of my finding that the plaintiff has neither changed the form, the qualities nor the properties of the material, it is perhaps not necessary for me to determine whether the words in that expression are to be considered disjunctively or conjunctively. I wish, nevertheless, to state that, in my view, they should be considered conjunctively: they are all applicable in all of the cases which were referred to me and which I was able to discover, where it has been held that the taxpayer was either manufacturing or producing something within the meaning of the Excise Tax Act, RSC 1970, c E-13. The only two words in that expression, which may be considered as alternatives, are the words “properties” and “combinations”, thus, there must be some change in the form, in the qualities and in the properties of the material or in the form, in the qualities and in the combinations of the materials used in order to constitute either manufacture or production in the ordinary meaning of these words. I am not referring of course to cases where the Act might specifically define a certain operation as being taxable.

It is trite to say that a taxing statute should be strictly interpreted against the taxing authority and, although the word “produced” must be considered as having been used in its ordinary meaning, it would be, I feel, grossly violating the use of the word when employed in its usual sense to hold that in the case at Bar, the defendant is producing aluminum foil, merely because he is packaging it in smaller and handier packages which are capable of cutting it without the use of scissors, and has thus made the product more marketable or more saleabie to the ordinary consumer than if it were sold in the original 450-foot or 900-foot rolls weighing approximately 100 pounds.

As to the other and comparatively minor part (about 5%) of the defendant’s operation mentioned in the agreed statement of facts, wherein large uncut rolls of foil are repacked in single boxes with a rod inserted in the roll, for sale to the restaurant trade, since even less work was performed and the foil was not cut, the operation can certainly not, in my view, be classified as the production of aluminum foil.

For the above reasons, the action is dismissed with costs.

AGREED STATEMENT OF FACTS

1. The Defendant is a company incorporated pursuant to the laws of the Province of Ontario with corporate head office in the Municipality of Metropolitan Toronto, and carries on business in Canada in the said Province.

2. For the purposes of this action, the operations of the Defendant Company with respect to aluminum foil are carried out at a plant in the Municipality of Metropolitan Toronto.

3. The Defendant Company has at all material times held a manufacturer’s licence numbered SL 0445 Ext. under the provisions of the Excise Tax Act, R.S.C. 1970, Chapter E-13, for purposes other than the operations with respect to aluminum foil which are in question in the present action.

4. The Defendant Company purchases aluminum foil in bulk rolls weighing approximately one hundred pounds, in widths of twelve and eighteen inches. The bulk rolls which are twelve inches wide are purchased in thicknesses of .0005, .00065 and .0007 inches, and the bulk rolls which are eighteen inches wide are purchased in thicknesses of .0007, .0009 and .001 inches.

5. The bulk rolls of aluminum foil are purchased from aluminum foil manufacturers tax paid and are delivered to the Defendant Company’s plant in the Municipality of Metropolitan Toronto in wooden boxes which consist of three interlocking sections mounted on top of one another and bound by three metal straps. The top section is comprised of the top third of the sides and top as a unit, and to open and remove the bulk rolls of aluminum foil the top section of the box is removed by hand.

6. The bulk rolls of aluminum foil arrive at the Defendant Company’s plant wound: on a hollow metal core, three inches in diameter, and in order to prevent damage are suspended within the wooden shipping box by means of a wooden core inserted through the centre of the hollow metal core, which rests on the wooden sides of the shipping box. Each bulk roll is wrapped in paper and the number of bulk rolls contained in a particular shipping box is variable.

7. The wooden shipping boxes containing bulk rolls of aluminum foil are unloaded from the delivery trucks by the Defendant Company by means of a forklift truck and are taken to a storage area in the Defendant Company's plant, immediately in front of the packaging area.

8. When it becomes necessary to use a bulk roll of aluminum foil In the Defendant Company’s operation, the lid of the wooden shipping box is removed by hand and the bulk rolls are lifted, one at a time, by means of a mechanical hoist. The hoist is connected to an overhead track which runs the length of the packaging area and once a bulk roll is hoisted from its shipping box it is moved by means of the hoist to a position in front of one of the six Schultz Winding machines in the packaging area of the Defendant Company’s plant.

9. Once the bulk roll is in position in front of a Schultz Winding machine, the wrapping paper is removed from the roll and the wooden core is removed from the hollow metal core on which the aluminum foil is wound. A bar Is then inserted through the hollow metal core to act as an axle on the Schultz Winding machine and the roll is lifted into position and the bar is attached to the machine. All of these operations are done manually.

10.: A Schultz Winding machine accommodates one roll of bulk aluminum foil at a time and can cut the bulk roll into lengths of twenty-five, fifty, seventy-five or one hundred feet. A footage gear on the machine is adjusted by an employee of the Defendant Company to produce the desired length of aluminum foil and plastic guides on the packing table are altered to accommodate the rolls of foil. A machine is adjusted during the course of a day but usually turns out approximately 7,200 rolls of cut aluminum foil of 25 ft length.

11. A bulk roll of foil weighs approximately 100 lbs and produces approximately 400 25 foot rolls which when packaged are in cases of 24 rolls per case, each 25 foot roll weighing approximately % of a pound.

12. When the roll of bulk foil has been positioned on the machine and the axle has been attached, the machine is set into operation. It pulls the aluminum foil from the bulk roll and starts to wind it on a hollow cardboard core approximately one inch in diameter and approximately one-eighth inch longer than the width of the foil being wound, that is, one-eighth inch longer than either the twelve-inch or eighteen inches. When the desired length of aluminum foil has been wound onto the cardboard core the machine cuts the foil and the wound roll is ejected from the machine. The wound roll is then picked up manually and put into a cardboard package and the package is closed manually, but not sealed, and the finished package is placed in a corrugated shipping carton. When the shipping carton is full, it is sealed and placed on a pallet for shipping.

13. The cardboard cores referred to in paragraph 12 hereof are purchased by the Defendant Company and are delivered to the Defendant Company’s plant in cardboard boxes containing, on the average, approximately one thousand cardboard cores. In order to place the cardboard cores in the Schultz Winding machine, the shipping carton is lifted manually and placed upside down on the top of the machine and the tape securing the top of the shipping carton is slit by hand. The cores drop down to the winding machine automatically, although it is occasionally necessary for an employee of the Defendant Company to start feeding the cores into the machine in order to ensure that the selection process commences smoothly.

14. The cardboard packages in which the wound foil is placed, referred to In paragraph 12 hereof, are purchased by the Defendant Company and are delivered to the Defendant Company’s plant printed, creased and precut but in a flat, unformed condition to save space. The exterior of the packages is fully printed to identify the goods as aluminum foil and indicates that the goods have emanated from the Defendant Company. For the convenience of the ultimate consumer of the aluminum foil, there is a metallic strip on one flap of the package which, when the package has been formed and the wound aluminum foil placed inside, acts as a cutting edge when foil is unwound from the cardboard core and torn against the flap on the exterior of the package.

15. The packages in which the wound foil is placed are formed by a machine and as soon as the package is formed into its shape glue is applied automatically by meta! rollers on the machine to flaps at either end of the package and the package is sealed at its ends. The package then falls from the forming machine into a large box and when the box is full of formed packages it is moved by an employee of the Defendant Company to a position beside a Schultz Winding machine, so that the formed packages are available to the employee responsible for placing the wound foil in the packages.

16. The packages, when formed, are in two sizes, to accommodate the two widths of aluminum foil used in the Defendant Company’s operation, that is, one size is slightly longer than twelve inches and the other size is slightly longer than eighteen inches. The two package sizes are of relatively uniform height, being approximately two inches in height. The formed packages are intended to be sturdy enough to hold up under use by the ultimate consumer.

17. The glue used in the forming of the packages into which the wound foil is placed, referred to in paragraph 15 hereof, is purchased by. the Defendant Company in drums which, when full, weigh approximately three hundred pounds and are usually of a capacity of forty-five gallons. The drums are equipped with a valve to remove the contents. The glue is transferred from the drums to the glue troughs on the forming machine manually by plastic containers of one quart capacity.

18. Of the total amount of aluminum foil packaged by the Defendant Company, more than ninety-five per cent is dealt with in the manner described in paragraphs 4 to 17 inclusive hereof, and is sold primarily to wholesale grocers, grocery chain stores and variety chain stores, and never directly to consumers. The remainder, constituting less than five per cent of the Defendant Company’s business, is purchased by the Defendant Company in rolls 450 feet long by 18 inches wide and 900 feet long by 12 inches wide, and is neither cut nor rewound by the Defendant Company. It arrives already on a heavy cardboard core and each individual roll is placed in a heavy corrugated cardboard box equipped with a metal cutting edge, which has previously been shaped by hand. The roll is suspended in the box by resting the cardboard core on slots at each end of the box. Four such corrugated boxes are then placed in a larger case for shipping to the restaurant trade or wholesale trades which Supply to restaurants, hotels and other institutions.

19. If the processes described herein constitute manufacture or production of aluminum foil within the meaning of Section 27(1 )(a) of the Excise Tax Act, R.S.C. 1970, Chapter E-13, then the amount remaining unpaid, due and owing to the Plaintiff by the Defendant to the 31st day of January, 1976, is as follows:

Tax unpaid November 1, 1973
to February 28, 1974	$17,263.05
Penalty on said tax to
January 31, 1976	2,711.21
	$19,974.26

20. The effect of such tax would under present market conditions which are determined in the main by suppliers of aluminum foi! reduce the profit margin of Stuart House from 5% to 2% before income tax.

DATED at Toronto this 12th day of January, 1976.