Jack Herdman Limited v. Minister of National Revenue, [1983] CTC 283

Thurlow, C J:—This is the second of two applications under section 28 of the Federal Court Act to review and set aside refusals by the Minister of National Revenue of the applicant’s applications for refunds of amounts paid by the applicant as tax on sales of oil. The oil was useful as heating oil or as fuel for diesel engines. At the material times oil for heating was exempt from sales tax, that for use as diesel fuel was subject to tax.

The amounts in respect of which refunds were applied for had been paid by the applicant in respect of sales of oil which to the applicant’s knowledge would be used by the purchasers as diesel fuel. The earlier of the applications for refund was made on May 5, 1981, and claimed amounts totalling $16,582.53 paid by the applicant for the period from May to October, 1977. Its refusal on August 5, 1981, is the subject matter of the earlier of the two applications under section 28.

The other application for refund was made on January 27, 1982, and claimed amounts totalling $107,196.77 paid in respect of sales made during the period from November, 1977, to April, 1980. Its refusal on February 24, 1982, is the subject matter of this section 28 application.

With one exception, the material facts are the same with respect to both applications. Throughout the material times the applicant was an oil distributor. It simply bought oil from suppliers and sold it to customers. The exception was that in the months of December, 1977, and January and February, 1978, and in the months of December, 1979, and January and February, 1980, the applicant blended stove oil with the heating oil sold as diesel fuel to prevent jelling and maintain its usefulness as diesel fuel in cold weather. Amounts paid as taxes on sales of oil in those periods totalled $10,537.81 and were included in the second of the applications for refund.

The applicant’s suppliers were manufacturers or producers of oil. They were probably aware that some of the oil sold by the applicant would be sold by it for heating and some for diesel fuel. But they did not charge the applicant with federal sales taxes on any of the oil sold to the applicant and it is unlikely that they paid the sales tax on any of the oil. Nor did the applicant charge its diesel fuel customers with federal sales tax. Nothing in the evidence indicates that the applicant ever promised or represented to the supplier that the oil would be sold only for heating purposes or that tax would be paid by the applicant on behalf of the supplier on any of the oil sold for use as diesel fuel. Indeed, there is evidence that no such agreement or representation was ever made.

In 1974, on becoming an independent distributor (it had formerly been a distributor of Texaco products), the applicant had inquired of the Department as to its responsibility for the sales tax, and in November of that year, on the insistence of the Department, had applied for and received a sales tax licence under the Excise Tax Act. The respondent’s memorandum of argument asserts that the licence was issued after the applicant advised the Department of the blending. Thereafter, for some months, the applicant filed nil returns. What happened afterwards is described as follows in evidence giving by F M Herdman, the secretary-treasurer of the applicant, on discovery in another proceeding, which evidence, on consent, was used as part of the record on these applications.

Q All right, what happened after two or three months when you started sending in nil returns?

A Well, I got a frantic call one night about — I remember it was just before we went home so I figured it was about five o’clock at night — from the Department, and in the first place I was surprised because I didn’t know they worked that late. I’m sorry.

Mr Finlay: No, Mrs Herdman, that’s a valid observation, in my experience.

The Witness: No, it seemed it was a very frantic call because they said they decided after a lot of talking and this and that they decided yes, we did have to pay the tax, and not only that, they were going to make it retroactive to the date of licencing.

Q Mr James: And what did you do in response to that?

A I did what they told me. They said I had to pay the tax, so I paid it.

Q And did you pay under protest of any nature?

Mr Finlay: Just a second. You’re asking for a factual basis of this?

Mr James: Yes.

Mr Finlay: Do you understand the question? Did you pay under protest? Do you understand that question, Mrs Herdman?

The Witness: Well, yes, of course, I didn’t want to pay it.

Q Mr James: But did you send any correspondence protesting that you shouldn't have to pay the tax?

A Well, I don’t really understand the question. I didn’t know what I had to pay, you see. I asked them.

Q Did you seek any advice from anyone other than the Department?

A Our accountant, and he didn't know any more.

Q All right, anyone else?

A No, there was nobody else we could go to.

The applicant subsequently made payments in respect of all the oil sold for diesel fuel. Its accounts were audited early in 1977 and it was asessed by the Department both for additional taxes and for penalties. The particular amounts assessed are not involved in these proceedings.

On these facts I think it is apparent that, with the possible exception of sales of fuel oil that had been blended by the applicant with stove oil,

(1) the applicant was not the producer or manufacturer of the oil it sold,

(2) the sales made by the applicant were not the sales upon which liability for sales tax arises under subparagraph 27(1 )(a)(i) of the Excise Tax Act, [1]

(3) the applicant was not a person required by the Excise Tax Act to account for or pay sales tax,

(4) the applicant was not a person who was required by the Excise Tax Act to apply for or obtain a sales tax licence or to file returns with respect to its sales of oil,

(5) the payments made by the applicant were induced by and resulted from the representations made by the department officials that the applicant was liable for tax on its sales of fuel oil and their demands for returns and payment of taxes.

The reasons given for the refusal of the first application for a refund were stated as follows in the Department’s letter of August 5th, 1981:

DETAILS OF ADJUSTMENTS

Section 1(d) of Schedule IV of the Excise Tax Act levies tax on diesel fuel at 4.618 cents per gallon. There is no provision for a refund of the tax remitted on fuel oil purchased unconditionally exempt and diverted for resale as diesel fuel.

The reasons for refusal of the second application given by the Department’s letter of February 24th, 1982, simply repeated, under the heading “DETAILS OF ADJUSTMENTS", the second of the two sentences of the earlier reasons. In the meantime, in answer to a letter written on behalf of the applicant by Price Waterhouse, the Department said:

The exemption from tax for fuel for lighting or heating is not an unconditional exemption. The condition “but not including fuel when for use in internal combustion engines” clearly limits the exemption. Since fuel oil for use in internal combustion engines is specifically excluded from exemption, sales of fuel oil which include fuel oil for use in internal combustion engines are subject to tax at the time of sale by the manufacturer.

Since the exemption is conditional, fuel should have been purchased tax paid by distributors and exemption claimed on fuel used for lighting or heating. At the request of the petroleum industry, the Department agreed that all heating fuel could be sold tax exempt to distributors and the sales taxes owing on any fuel diverted to a taxable use would be remitted by the distributor to the Department either directly or via the manufacturer.

In the situation at hand there is no question that the sales tax paid was actually owing to the Crown. The fact that the tax was paid by a person other than the one who was legally liable for it does not affect the situation from the Department’s point of view. Had the sales tax been paid properly in the first place the tax would have been remitted by the manufacturer and billed to Herdman. If a refund of the sales tax was paid to Herdman and assessed to the manufacturer at this time, the manufacturer would recover the tax from Herdman for the sales tax assessment.

I should note at this point that the applicant’s case is not one of a claim for money paid under duress such as was before the Court in The Queen v Premier Mouton Products Inc. [2] and Mouton Processors (Canada) Ltd v The Queen. [3] It is founded on the provision for refunds contained in subsection 44(1) of the Excise Tax Act.

At the material times subsection 44(1) provided:

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

(a) where an overpayment has been made by the taxpayer;

(b) where a refund or adjustment has been made to the taxpayer by a licensed air carrier under Part II for the taxes collected or paid on any transportation of a person by air that has not been provided or only partially provided by the air carrier or that has been collected in error by the air carrier;

(c) where the tax was paid in error;

(d) where the original sale or importation was subject to tax, but exemption is provided on subsequent sale by this Act;

(e) where goods are exported, under regulations prescribed by the Minister;

(f) where, due to changes in statutory rates of tax or for other reasons, stamps are returned for exchange; or

(g) where the original receipt of marketable pipeline gas or natural gas liquids was subject to tax under Part IV.1, but exemption is provided on subsequent use by that Part.

Prior to July 8, 1981, subsection 44(7) applicable at the time of the first application read:

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

This provision was repealed on July 8, 1981, and substituted by a provision reading:

44 (7.1) Subject to subsection (7), no refund of moneys paid or overpaid in error, whether by reason of mistake of fact or law or otherwise, and taken into account as taxes imposed by this Act shall be granted under this section unless application in writing therefor is made to the Minister by the person entitled to the refund within four years after the time the moneys were paid or overpaid.

Further provisions of the amending Act were:

44 (7.2) An application under subsection (6), (7) or (7.1) shall be made in such form and in such manner as the Minister may prescribe.

(7.3) Where the Minister rejects in whole or in part an application under subsection (6), (7) or (7.1) for a refund, deduction or amount, the application ceases to have effect, for the purposes of determining whether the refund, or deduction may be granted or the amount may be paid, ninety days after notice of the rejection is sent to the applicant, unless, within that ninety day period, an application in respect of the refund, deduction or amount is made to the Tariff Board under section 59 or to the Federal Court under section 28 of the Federal Court Act.

The applicant’s case is that the amounts were paid as tax in error within the meaning of paragraph 44(1 )(c), that under that subsection when a payment of tax in error has been made, the payer is entitled to a refund which the Minister has no authority to refuse and that even if the authority of the subsection to make a refund is permissive, the refusal of the applicant’s applications was based on extraneous considerations, including the fact that the tax should have been paid on sale of the oil to the applicant, even though the applicant was not responsible for the payment of such tax and the alleged arrangement with “the petroleum industry”, of which the applicant was not aware, to forego collection of the tax from the oil producers as required by the statute in favour of collecting it from distributors.

The respondent’s answer, in summary, was that the refusals are not proper subjects for attack under section 28 of the Federal Court Act, that the Minister has a discretion under subsection 44(1) of the Excise Tax Act to refuse applications for refund and that the discretion to do so was properly exercised in respect of the applicant’s applications.

With respect to the respondent’s first point, it appears to me that there is in subsection 44(7.3) statutory recognition of the refusals, or rejections as the subsection calls them, as decisions that are reviewable under section 28. Accordingly, I am of the opinion that the court has jurisdiction to entertain the application.

With respect to the second point, sections 28 and 3 of the Interpretation Act provide:

28 In every enactment

“may” is to be construed as permissive;

“shall” is to be construed as imperative;

3 (1) Every provision of this Act extends and applies, unless a contrary intention appears, to every enactment, whether enacted before or after the commencement of this Act.

(2) The provisions of this Act apply to the interpretation of this Act.

(3) Nothing in this Act excludes the application to an enactment of a rule of construction applicable thereto and not inconsistent with this Act.

In view of these provisions and the decisions of the Privy Council in McHugh v Union Bank , of the Supreme Court in Smith & Rhuland Ltd v The Queen Ex Rel Brice Andrews et al [6] , and of this Court in The Queen v Stevenson Construction Co Ltd [7] , I am of the opinion that the authority of subsection 44(1) to make refunds is permissive and leaves the authority charged with its administration with a discretion whether or not to grant the refund.

But that is far from saying that the authority can be exercised arbitrarily or capriciously. The statute authorizes a refund in particular situations. It does not authorize refusal for anything but sound reasons, for example, reasons grounded on the conduct of the applicant in relation to its proper liability for tax or its claim for a refund. Where it is apparent that the applicant is entitled to the money, whether because he has made errors in his calculations or because he has been unlawfully required to pay taxes that he did not owe or for which he was not liable to the Crown it would take reasons of equal or greater weight to justify keeping his money and depriving him of it.

Here the reasons given in the letters refusing refunds are in my view untenable. They miss the point that the amounts claimed were paid in error by a person who was not responsible for them and who was induced to pay them by the representations of the Department that that person was liable to the Crown for them. The reasons given in the letter to Price Waterhouse are also untenable. An arrangement by the Department with the “petroleum industry”, of which the applicant is not shown to have been aware, under

[1913] AC 299.

which the Department would disregard the provisions of the statute and collect tax from distributors who were not liable under the Act for the tax, could scarcely be a reason for keeping the applicant’s money.

Nor can the Department, which demanded and exacted the tax from the applicant, be heard to say that the fact of payment by one not legally liable for the tax does not affect the situation from the Department’s point of view.

It was never brought home to the applicant that it was being required to pay tax on behalf of its supplier or anyone but the applicant itself. Further, what might result between the supplier and the applicant if the supplier were now assessed for the taxes besides being speculative is not a matter between the Department and the applicant. Moreover, in my view, save with respect to oil which the applicant blended, there is in the whole situation nothing that could serve to justify either the unlawful exaction by the Department from the applicant of tax of the amounts in question or the refusal to refund to the applicant what had been thus unlawfully exacted.

With respect to the oil which the applicant blended with stove oil before selling it, on such material as appears in the record, I am of the view that the applicant was liable to tax as a producer or manufacturer and that in the absence of facts indicating otherwise the refusal of a refund of the tax paid on sales of such oil has not been shown to be unjustified. That, as previously indicated, amount to $10,537.81 of the $107,196.77 claimed by the applicant’s second application.

I would set aside the refusals of refund and refer the matters back to the Minister for disposition on the basis that the applicant is entitled to the refund of $16,582.53 asked by its application of May 5, 1981, and to $96,658.96 of the refund asked by its application of January 27, 1982.

Le Dain, J:—This is a section 28 application to review and set aside the decision of the Minister of National Revenue rejecting an application for refund, under section 44 of the Excise Tax Act, RSC 1970, c E-13, of sales tax in the amount of $107,196.77 allegedly paid in error by the applicant during the period October 1,1977 to April 23,1980 in respect of the sale of fuel oil for use as diesel fuel. For the reasons given in A-682-81 with respect to the applicant’s other application for refund, I am of the opinion that the Minister erred in law in refusing this claim for refund, except for the amount of $10,537.81, which, I agree, must be regarded, on the record before us, as having been payable by the applicant in respect of the fuel oil that was blended by it. I would allow the section 28 application, set aside the Minister’s decision rejecting the applicant’s application for refund, and refer the matter back to the Minister for disposition upon the basis that the applicant is entitled to the refund of $96,658.96.

Clement, D J:—This appliation is concerned with the second claim made on 27 January, 1982 by Jack Herdman Limited for refund of amounts aggregating $107,196.77 paid by it as excise tax. I agree that the application should be granted in part, to the extent that the refusal of the Minister to refund $96,658.96 be referred back to him on the basis stated by the Chief Justice. In this, I am influenced by the considerations I expressed in my opinion on the first claim on the company made on 5 May, 1981. In respect of the remainder of $10, 537.81, it is apparent that those considerations are not applicable.

Application allowed.