MacMillen Bloedel Limited v. Her Majesty the Queen, [1991] 1 CTC 204

McNair, J.:—This action is an appeal by the plaintiff from the Minister of National Revenue's reassessment of the amount of federal sales tax levied or imposed on the importation of three shipments of diesel fuel from the United States in the spring of 1986. The plaintiff also appeals the Minister's notice of determination rejecting its application for refund in respect of sales tax imposed on the third shipment of diesel fuel. The plaintiff concedes that if any federal sales tax is due on the shipments, then the most that could have been assessed was $195,463.48. The defendant, on the other hand, maintains that the $399,846.17 of federal sales tax actually imposed was properly computed. There is a sharp difference of $204,382.69 between the two amounts. The dispute between the parties, however, hinges on questions of law involving the proper interpretation of subsection 27(1) and paragraph 27(1.1)(c) of the Excise Tax Act, R.S.C. 1970, c. E-13, as amended by S.C. 1986, c. 54.

Counsel for the plaintiff argues that the charging provision contained in paragraph 27(1.1)(c) of the Act is so ambiguous as to render it totally inapplicable to the present case, inasmuch as the application of the formula for the imposition of tax leads to a nonsensical result. It therefore follows, in his submission, that there is either no tax owing at all or, alternatively, the amount is much less by virtue of being determinable under paragraph 27(1.1)(d) of the Act. Counsel for the defendant acknowledges the gap or anomaly in the legislative provisions, which she says are attributable to drafting error. Consequently, she urges me to disregard or judicially rectify any noted deficiencies in that regard. Essentially, the question is how far the court can go in construing legislation by adding or ignoring words to achieve the result which the Crown says was intended.

The parties submitted an agreed statement of facts, which reads as follows:

1. The Plaintiff is a corporation incorporated pursuant to the laws of the Province of British Columbia, and carries on an integrated forest products business in that Province and elsewhere in Canada.

2. The Plaintiff uses and consumes diesel fuel in its operations in British Columbia.

3. On or about March 14, 1986, the Plaintiff purchased diesel fuel in Washington State for importation into Canada. The Plaintiff imported the diesel fuel at Vancouver, British Columbia, pursuant to Canada Customs 33 Import Entry Coding Form L178451 (hereinafter referred to as“ "Shipment No. 1”).

4. The relevant details of Shipment No. 1 are as follows (all dollar references in this Agreed Statement of Facts are to Canadian dollars, unless otherwise stated):

(a) Volume of Diesel Fuel	3,998,645.73 litres
(b) Purchase Price (U.S. Dollars)	U.S. $441,450.49
(c) Exchange Rate (Canadian/U.S. Dollars)	$	1.42
(d) "Duty Paid Value”	$626,860.00
(e) Sales tax charged at 11% of Duty Paid Value	$ 68,954.56
(f) Excise Tax at $0.02 per Litre	$ 79,972.91
(g) Total Sales and Excise Taxes	$148,927.47

5. The Plaintiff paid the sales and excise taxes referred to in paragraph 4 herein upon importation.

6. On or about April 3, 1986, the Plaintiff purchased diesel fuel in Washington State for importation into Canada. The Plaintiff imported the diesel fuel at Nanaimo, British Columbia, pursuant to Canada Customs BB Import Entry Coding Form V300070 (hereinafter referred to as "Shipment No. 2”).

7. The relevant details of Shipment No. 2 are as follows:

(a) Volume of Diesel Fuel	3,194,164 litres
(b) Purchase Price (U.S. Dollars)	U.S. $352,635.70
(c) Exchange Rate (Canadian/U.S. Dollars)	$	1.40
(d) "Duty Paid Value”	$493,690.00
(e) Sales tax charged at 11% of Duty Paid Value	$ 54,305.90
(f) Excise Tax at $0.02 per Litre	$ 63,883.28
(g) Total Sales and Excise Taxes	$118,189.18

8. The Plaintiff paid the sales and excise taxes referred to in paragraph 7 herein upon importation.

9. On or about May 15, 1986, the Plaintiff purchased diesel fuel in Washington State for importation into Canada. The Plaintiff imported the diesel fuel at Nanaimo, British Columbia, pursuant to Canada Customs 83 Import Entry Coding Form V300795 (hereinafter referred to as “ Shipment No. 3”).

10. The relevant details of Shipment No. 3 are as follows:

(a) Volume of Diesel Fuel	4,400,134 litres
(b) Purchase Price (U.S. Dollars)	U.S. $436,007.71
(c) Exchange Rate (Canadian/U.S. Dollars)	$	1.38
(d) “Duty Paid Value”	$601,691.00
(e) Sales tax charged at $0.0366 per Litre	$161,044.92
(f) Excise Tax at $0.02 per Litre	$ 88,002.68
(g) Total Sales and Excise Taxes	$249,047.60

11. The Plaintiff paid the sales and excise taxes referred to in paragraph 10 herein upon importation.

12. By way of Notice of Assessment No. 53 dated July 9, 1986, the Minister of National Revenue (hereinafter"the Minister”) assessed additional sales tax on the Plaintiff's purchases of Shipments Nos. 1 and 2. The assessment was based upon the assumption that the sales tax imposed by Subsection 27(1) of the Excise Tax Act should properly have been calculated and imposed according to the provisions of Paragraph 27(1.1)(c) of the Act on the basis of the specified rate ($.0332) per litre of diesel fuel imported and not on the basis calculated by the Plaintiff which was in accordance with the provisions of Paragraph 27(1.1)(d) of the Act at a rate of 11 percent of the "duty paid value" of the diesel fuel imported.

13. The Plaintiff paid the taxes as assessed.

14. The Plaintiff duly objected to the assessment by way of a Notice of Objection dated July 23, 1986. The Minister confirmed the assessment by way of a Notice of Decision dated March 3, 1987. The Plaintiff appealed therefrom to this Honourable Court pursuant to Section 51.2 of the Excise Tax Act.

15. The Plaintiff filed a refund application with respect to Shipment No. 3 on July 11, 1986, claiming a refund which the parties now agree would have been in the amount of $88,842.00 if allowed. The Plaintiff's refund claim was based upon its position that the sales tax payable in respect of Shipment No. 3 should properly have been calculated and imposed on the basis of a rate of 12 percent of the” duty paid value” of the diesel fuel imported and not on the basis of a rate per litre as asserted by the Minister.

16. By way of Notice of Determination No. 03094 dated September 5, 1986, the Minister rejected the Plaintiff's refund claim on the basis that the sales tax was properly calculated and imposed upon the basis of the specified rate ($0.366) per litre of diesel fuel imported and not upon the basis asserted by the Plaintiff.

17. The Plaintiff duly objected to the determination by way of Notice of Objection dated October 6, 1986. The Minister confirmed the determination by way of Notice of Decision dated March 3, 1987. The Plaintiff appealed therefrom to this Honourable Court pursuant to section 51.2 of the Excise Tax Act.

18. Based upon the method employed by the Plaintiff, the federal sales tax due upon the importation of shipments Nos. 1, 2 and 3 should have been $195,463.48.

19. Based upon the method employed by the Minister, the federal sales taxes actually imposed total $399,846.17, a difference of $204,382.69.

Although the facts are relatively straightforward, the statutory provisions in question are not so clear. The relevant sections under review read as follows:

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

(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; .. . .

27. (1.1) Tax imposed by subsection (1) is imposed

(c) in the case of regular gasoline, unleaded gasoline, premium leaded gasoline, premium unleaded gasoline and diesel fuel, at the rate set opposite the applicable item in Schedule 11.1, adjusted according to subsection 27.1(1) and multiplied by the rate of tax specified in paragraph (d), expressed as a decimal number and multiplied by one hundred; and

(d) in any other case, at the rate of eleven per cent.

Schedule 11.1 Specific Tax Rates On Petroleum Products (Subsection 27(1.1))

1. Gasoline, regular	$0.0032 per litre.
2. Gasoline, unleaded	$0.0035 per litre.
3. Gasoline, premium leaded	$0.0036 per litre.
4. Gasoline, premium unleaded	$0.0036 per litre.
5. Diesel fuel	$0.0029 per litre.

There are also several definitions in the Act which are worth noting:

"sale price", for the purpose of determining the consumption or sales tax, means . . . in the case of imported goods, the sale price shall be deemed to be the duty paid value thereof, and . . .

"duty paid value” means the value of the article as it would be determined for the purpose of calculating an ad valorem duty upon the importation of such article into Canada under the laws relating to the customs and the Customs Tariff whether such article is in fact subject to ad valorem or other duty or not, plus the amount of the customs duties, if any, payable thereon; .. . .

Both counsel were in agreement that the error or anomaly in legislative drafting stems from the fact that subsection 27(1) purports to impose sales tax "on the sale price of all goods" at the rate specified in subsection 27(1.1). Unfortunately, the formula prescribed by paragraph 27(1.1)(c) for calculating the consumption or sales tax on diesel fuel, when combined with the applicable rate set out in Schedule 11.1, leads to a result expressed in terms of price per litre. Incidentally, the formula requires the basic rate found in Schedule 11.1 of the Act to be adjusted for industry performance levels and then to be multiplied by the rate expressed in paragraph 27(1.1)(d). As a matter of fact, this latter rate was fixed at 11 per cent for the first two shipments of fuel purchased by the plaintiff, and at 12 per cent for the third shipment. In final analysis, the formula calculations prescribed by paragraph 27(1.1)(c) require that a dollar value be multiplied by a dollar per litre rate, thus yielding in turn "squared dollars” and a nonsensical mathematical result.

The error or anomaly contained in subsection 27(1) of the Act has since been corrected. In An Act to Amend the Excise Tax Act and the Excise Act, S.C. 1986, c. 54, s. 4, Parliament added the words "or on the volume" immediately after the words "on the sale price” appearing therein. The addition of these four words served to fill the gap and effectively impose a tax on a per volume basis, where no coherent scheme existed before. The amendment was given retroactive effect, but only to June 12, 1986. As the plaintiff's three shipments all occurred prior to that date, they do not fall within the scope of the amendment. Cases such as the plaintiff's were left to be resolved by the courts.

The old rules calling for a strict interpretation of taxing statutes have fallen into disfavour in recent times. In Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305, Estey, J., speaking for the majority, thus explained the more modern approach at 315-16 (D.T.C. 6322-23; S.C.R. 576-78):

In all this, one must keep in mind the rules of statutory interpretation, for many years called a strict interpretation, whereby any ambiguities in the charging provisions of a tax statute were to be resolved in favour of the taxpayer; the taxing statute was classified as a penal statute. See Grover & lacobucci, Materials on Canadian Income Tax, 5th ed., (1983), pp. 62-65.

At one time, the House of Lords, as interpreted by Professor John Willis, had ruled that it was "not only legal but moral to dodge the Inland Revenue” (15 Can. Bar Rev. 1 at 26), referring to Inland Revenue Commissioners v. Levene, [1928] A.C. 217, at 227. This was the high water mark reached in the application of Lord Cairns' pronouncement in Partington v. Attorney General (1869), L.R., 3 H.L. 100 at 122: . . .

Professor Willis, in his article, supra, accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable. See Whiteman and Wheatcroft, supra, at 37.

While not directing his observations exclusively to taxing statutes the learned author of Construction of Statutes, 2nd ed., (1983), at 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

However, this is not to say that all presumption of doubt in favour of the taxpayer has been totally abolished. Rather, it would seem to be the case that it has become much more attenuated. In Johns-Manville Canada v. The Queen, [1985] 2 S.C.R. 46; [1985] C.T.C. 111; D.T.C. 5373, the question on appeal, as framed by Estey, J. in delivering the judgment of the court, was “whether the taxpayer-appellant ha[d] the right under the Income Tax Act of Canada to charge to expense, rather than to capital, the cost of purchase of land at the periphery of an open pit mine, in the course of its mining operations". The court held that he had. Estey, J. conducted an extensive review of the authorities, and concluded at page 126 (D.T.C. 5384; S.C.R. 72):

. . . the appropriate taxation treatment is to allocate these expenditures to the revenue account and not to capital. Such a determination is, furthermore, consistent with another basic concept in tax law that where the taxing statute is not explicit, reasonable uncertainty or factual ambiguity resulting from lack of explicitness in the statute should be resolved in favour of the taxpayer. This residual principle must be the more readily applicable in this appeal where otherwise annually recurring expenditures, completely connected to the daily business operation of the taxpayer, afford the taxpayer no credit against tax either by way of capital cost or depletion allowance with reference to a capital expenditure, or an expense deduction against revenue.

[Emphasis added.]

If I apprehend the matter correctly, the " residual principle” referred to by Mr. Justice Estey simply means that in cases where a statutory ambiguity cannot be resolved by the contemporary "words-in-total-context" approach to the scheme of the Act as a whole, then any reasonable doubt still persisting may be resolved in favour of the taxpayer.

Côté, The Interpretation of Legislation in Canada [Yvon Blais, 1984], gives this analysis of the contemporary approach to statutory interpretation at page 398:

If the taxpayer receives the benefit of the doubt, such a "doubt" must nevertheless be reasonable. A taxation statute should be “reasonably clear". This criterion is not satisfied if the usual rules of interpretation have not already been applied in an attempt to clarify the problem. The meaning of the enactment must first be ascertained, and only where this proves impossible can that more favourable to the taxpayer be chosen. The presumption in favour of the taxpayer is now merely a subsidiary one.

See also Driedger, Construction of Statutes, 2nd ed., at pages 203-207.

As previously mentioned, counsel for the plaintiff argued that paragraph 27(1.1)(c) of the Act was unclear and ambiguous, conduced to an absurd or nonsensical result, and therefore ought not to be applied. He submitted that while Parliament may have intended to levy a tax on a volume basis, it had failed to do so in clear and explicit terms. The result was that no tax could be levied. He further submitted that long-standing canons of interpretation required that any reasonable uncertainty or factual ambiguity be resolved in favour of the taxpayer. Failing these arguments, he urged the court to find that the plaintiff had acted reasonably in paying sales tax at the percentage rate prescribed by paragraph 27(1.1)(d) of the Act, which imposes a flat percentage rate of tax in all cases not covered by paragraphs 27(1.1)(a), (b) or (c) thereof.

Crown counsel presented two arguments in support of the Minister's factual assumptions regarding the applicability of paragraph 27(1.1)(c) of the Excise Tax Act. Her first argument was based on the principle or maxim generalia specialibus non derogant which, being literally translated, simply means general words do not derogate from special. The application of this principle, in her submission, makes it possible to view the tax rate prescribed by paragraph 27(1.1)(c) as a specific exemption to the general scheme of subsection 27(1) under which a rate of tax was to be levied on the sale price of all goods. Counsel urged that paragraph 27(1.1)(c) effectively established a specific scheme to tax diesel and other fuels based on the volume of the goods in question rather than on their sale price, and that this interpretation was manifestly what Parliament intended. She buttressed her argument with case law to the effect that courts have applied the principle generalia specialibus non derogant in order to give effect to the legislative intent, even in cases where such a construction did result in some repugnancy or apparent conflict between general and specific statutory provisions: see R. v. Mullin, [1947] 2 D.L.R. 682; 87 C.C.C. 394 (N.B.C.A.); Re Lynn Terminals Ltd.'s Appeal (1963), 44 W.W.R. 604; 40 D.L.R. (2d) 925 (B.C.S.C.); and T.K.Worgan & Son Ltd. v. Gloucestershire County Council, [1961] 2 Q.B. 123 (C.A.).

In my view, the authorities cited by Crown counsel are not at all persuasive. This is not a case where a statutory provision gives specific and precise directions for something which another more general provision contradicts. Paragraph 27(1.1)(c) of the Act is neither specific nor precise in mandating an operative tax scheme. Regardless of any general legislative intent to tax imported diesel fuel, the fundamental basis for the imposition of such tax was left very much in the air. Moreover, reading the words of paragraph 27(1.1)(c) in the context of the whole Act does little to solve the conundrum. In my opinion, the combined effect of subsections 27(1) and 27(1.1), with section 27.1 and Schedule 11.1, even on the most liberal words-in-total-context approach, fails to provide a coherent and lucid scheme for the taxation of diesel fuel on a volume basis.

This brings me to Crown counsel's alternative argument. The gist of it is that the present case is one where the court could properly exercise its power of rectification and read into subsection 27(1.1) the omitted words "or on the volume” in order to give effect to Parliament's intention to tax transportation fuels. Counsel acknowledged that rectification is a narrowly limited power, more so in England than in Canada, but nevertheless is one which the courts may use in appropriate circumstances. She alluded to the innovative directions given by the British House of Lords in Federal Steam Navigation Co. v. Dept, of Trade and Industry, [1974] 2 All E.R. 97; and Wentworth Securities Ltd. v. Jones, [1980] A.C. 74, and submitted that these authorities postulate the following four conditions for the exercise of the power of rectification, viz.:

— Without rectification, the provision in question would have to be unintelligible, absurd or repugnant to another provision, or create an unreasonable result.

— It would have to be possible to determine, within the context of the statute as a whole, what the mischief was that Parliament intended to remedy or, put more simply, the purpose and object of the provision would have to be clear from the whole context.

— Due to drafting omission, error or inadvertence, the plain language of the provision would have to be irreconcilable, as it reads, with the parliamentary intent.

— It must be possible to determine with certainty what the draftsman would have inserted and what Parliament would have approved, if the error or omission had been recognized at the time the enactment passed into law.

Counsel for the defendant submitted that the present case met all the above conditions. She emphasized, however, that Canadian courts have been less disposed toward imposing such stringent tests as their English counterparts. In her submission, Canadian courts have read in or deleted words from a statute in cases where there is an obvious repugnancy or absurdity in the face

of a clear legislative intent. She cited in this regard the following cases: City of Ottawa v. Hunter (1900), 31 S.C.R. 7; Ontario Minister of Transport v. Phoenix Assurance Ltd. (1973), 39 D.L.R. (3d) 481; 1 O.R. (2d) 113; Ass'n of Parents for Fairness in Education v. Minority Language School Bd. No. 50 (1987), 40 D.L.R.

(4th) 704; 82 N.B.R. (2d) 360 (sub nom. Société des Acadiens du Nouveau- Brunswick Inc. c. Minority Language School Bd., No. 50) (N.B.C.A.); Saskatchewan Government Insurance Office v. Anderson (1966), 57 W.W.R. 633; affd (1967), 59 W.W.R. 313; 61 D.L.R. (2d) 255 (Man. C.A.) (Man. Cty. Ct.); and Massey-Harris Co. v. Strasbourg, [1941] 4 D.L.R. 620; [1941] 3 W.W.R. 586 (Sask. C.A.).

Before stating my final conclusion on the point, I must stress first of all that the rectification of a legislative text is a drastic step for any court to undertake. With respect, I feel compelled to reject the alternative submission of defendant's counsel. I agree with the submission of plaintiff's counsel that the present case is one where Parliament may well have intended to levy a sales tax on imported diesel fuel, but failed to do so in sufficiently clear terms on the present wording of subsection 27(1) and paragraph 27(1.1)(c) of the Act, before the amendment. Moreover, I am of the opinion that any judicial power of rectification with respect to legislation ought only to be exercised in the rarest of circumstances, that is, where absolutely necessary to achieve the clear manifestation of legislative intent in the face of obstacles created by very minor and patently obvious imperfections of language. To fill the gap by writing in the words'"or on the volume” would constitute, in my opinion, an arbitrary and unwarranted intrusion on the role of Parliament. Notwithstanding that the gap or omission was corrected by the subsequent amendment enacted by Parliament, I am not prepared to extend the therapeutic effect of such amendment beyond its given retroactive date of July 12, 1986.

I conclude, therefore, that the plaintiff has discharged the onus of proving that the Minister's assessment was erroneous. However, that is not to say that the plaintiff may escape scot-free from all tax liability. Although paragraph 27(1.1)(c) of the Act cannot be applied to support the present basis of assessment, the Minister may still impose the percentage rate of tax prescribed by paragraph 27(1.1)(d) on the three shipments of diesel fuel. In the result, the duty paid value of the first two shipments would be taxed at 11 per cent and, in the case of the third shipment, at 12 per cent. According to the plaintiff's calculations, the result would be a federal sales tax amount of $195,463.48.

For the foregoing reasons, the plaintiff's appeal is allowed in the main, with costs.

Appeal allowed.