His Majesty the King v. Imperial Tobacco Company Limited, [1938-39] CTC 293

KERWIN, J.:—Section 119 of the Special War Revenue Act, R.S.C. 1927, ce. 179 enacts as follows: ‘‘ Everyone liable under this Act to pay to His Majesty any of the taxes hereby imposed, or to collect the same on His Majesty’s behalf, who collects, under colour of this Act, any sum of money in excess of such sum as he is hereby required to pay to His Majesty, shall pay to His Majesty all moneys so collected, and shall in addition be liable to a penalty not exceeding five hundred dollars.” (Amended 1934 (Can.), c. 42, s. 14).

Imperial Tobacco Co. of Canada Ltd., is a manufacturer and importer of cigars, cigarettes, tobacco, etc., and at all relevant times was the holder of the annual licence prescribed by s. 95 of the Act. It was liable under the Act to pay and did pay to His Majesty the King certain amounts as consumption or sales tax but it is alleged that it collected, under colour of the Act, sums of money in excess of the amounts it was liable to pay (and did pay), and a claim was made in the Exchequer Court under s. 119 for such sums and for the penalty. It was there determined that certain excess taxes had been collected under colour of the Act, and judgment was given for the penal sum of $500. The claim for such excess taxes was, however, dismissed on the ground that that part of s. 119 providing for the payment thereof to His Majesty was ultra vires the Dominion Parliament. His Majesty now appeals from the dismissal of that claim and the company cross-appeals from the judgment against it for the penalty.

Section 119 came into force on June 28, 1934; the claim for excess taxes covers the period from July 1 of that year to December 31, 1935, and relates to taxes payable by the company as a manufacturer and as an importer. The taxes were imposed by s-s. (1) of s. 86 of the Act (as enacted by the Statutes of 1932, c. 54, s. 11) on the sale price of all goods (a) produced or manufactured in Canada, payable by the producer or manufacturer at the time of the delivery of such goods to the purchaser thereof;’’ and (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. ‘ ‘

For the purpose of calculating the amount of the tax, “sale price’’ was defined in s. 85(a) (as enacted by the Statutes of 1932-3, ce. 50, s. 15), which included the statement that ‘‘in the ease of imported goods the sale price shall be deemed to be the duty paid value thereof.’’ The expression ‘‘duty paid value” was defined by s. 85(b) (as enacted by the Statutes of 1932-3,

e. 50, s. 15) as follows: ‘‘ ‘duty paid value’ shall mean 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 be in fact subject to ad valorem or other duty or not, and in addition the amount of the customs duties, if any, payable thereon: Provided that in computing the ‘duty paid value’ of tea purchased in bond in Great Britain the amount of the customs duty payable on tea for consumption in Great Britain shall not be included in the value of such tea for purposes of this Part; and that in the case of goods subject to the excise taxes imposed by Parts X and XII of this Act, the amount of such taxes shall be included in the duty paid value.’’

It is admitted by counsel for the appellant that s. 119 is not retroactive. What the company did after that section came into force, during the period in question, is beyond dispute. With reference to cigarettes, cigars, tobacco and cigarette papers, it continued to use the price list issued by it the previous January. On the cover of that price list was the statement " " Price includes sales tax’’ and in the body of the document, opposite the names of the various brands, appeared the cost thereof to its customers per thousand, pound, roll or carton, under the heading: ‘‘ Direct price plus 2% per M’’ or "per lb.,” or " i per roll, ‘‘or’ per ct ‘n, ‘ ‘ as the case might be. It billed its customers for purchases made by them at the rate quoted in the price list and added 2% to the total of the invoices opposite the wording ‘‘plus 2%.’’ At the foot of the invoices was the legend,—"Price includes freight and sales tax.’’ It thus made its price a "‘tax included’’ or composite price, in accordance with a legitimate business practice well understood by the officers of the National Revenue Department of the Government and admitted by them as being in accordance with the Act. As an example, 100,000 cigarettes were invoiced at $766 plus 2% or $15.32, making a total price to the customer $781.32. Upon that composite price the company paid a sales tax, at the current rate of 6%, of $44.22, ascertained by taking 6/106 of $781.32.

It is not suggested that the company was liable under s. 86 to pay more than this in taxes but, as already mentioned, the claim is that the company collected, under colour of the Act, more than it was liable to pay. Upon that footing, evidence was tendered and admitted, subject to objection, of what the company had done prior to the coming into force of s. 119. I fail to understand how such evidence was properly admissible. Disregarding it, there is nothing in the record to justify even a suspicion that the company infringed the provisions of s. 119 as all it did was to tell its customers that the price of its goods, both manufactured and imported, was 2% more than a quoted figure.

That conclusion renders it unnecessary to consider the attack made upon the validity of the statute and might well suffice to dispose of the matter. However, in view of the nature of the claims advanced by the appellant, it appears only right to say that the evidence, if admissible, fails to establish them. The evidence covered various periods when the rate of taxation was 1%, 4% and 6%, respectively, according to the following table:

During all this time the company sold its goods at a composite price and its invoices bore the legend already referred to " " price includes freight and sales tax. ‘ ‘

Dealing first with manufactured goods, when the rate was 1%, 100,000 cigarettes were invoiced at $975 and upon that the company paid, as taxes, 1/101 or $9.66. The same practice was followed when the rate was increased from 1% to 4% except that the tax paid was 4/104 or $37.50, upon the like quantity of cigarettes. When, however, the rate was increased to 6%, the company notified its customers by circular dated April 7, 1932, that it had found it necessary to add 2% to the invoices for all its goods. Considerable importance was attached by appellant to that circular and it is therefore reproduced textually :

"You are aware of the increase in the Sales Tax, from 4% to 6%, and other forms of taxation made effective today by the Federal Budget of yesterday.

"‘We had hoped that in view of the abnormal tax burdens put upon the tobacco industry, the Government would be able to give some special consideration to it and not impose this added tax.

"‘Last June when the Sales Tax was increased from 1% to 4%, we absorbed this whole amount and did not increase our prices; but with this additional tax burden, we have found it necessary to add 2 % to our invoices for all of our goods, effective today.

“We are preparing a re-sale price list for the jobbing trade and feel that in fairness, they cannot expect to maintain the same margin of profit that they have enjoyed in the past, and will have to share part of this burden and our suggested re-sale prices have been made up accordingly.

"‘Yours very truly,

"‘Imperial Tobacco Company of Canada, Limited,’’

Accordingly, from April 7, 1932, to August 17, 1932, the invoices bore a notation “add 2% on a/c sales tax,’’ with the appropriate amount added to the total of the invoice. From August 18, 1932, the notation was ‘‘plus 2%’’—again with the addition of the appropriate amount. The 2% added as a result of either of the notations ‘‘on a/c sales tax’’ or “plus 2% ” made the total $994.50, upon which the company paid sales tax of $56.29, i.e., 6/106 of $994.50. In November, 1932, the price was reduced from $975 to $766 which with the addition of the 2% made a total of $781.32. Upon this latter sum, the tax calculated at 6/106 of $781.32, or $44.23, was paid.

The appellant’s submission is that the company unalterably adopted as its sale price, upon which it could impose a percentage, the net sum received by it before the addition of the 2% when the rate of taxation was 4%, that is $975 less the tax, $37.50, or $937.50; and that therefore the sale price, after the addition of the 2% should be $937.50 plus $18.75, or $956.25, upon which the tax at 6% would be $57.37 instead of $56.29 as actually paid. Counsel for the appellant does not suggest that the company should have paid $57.37 but argues that, if the company had merely intended to increase the price of its goods by 2%, it would have adopted the system of invoicing above suggested ; and urges that the fact that it did not do so leads to the conclusion that the 2% was not added as an increase to the sale price but was for the purpose of collecting an additional amount as tax from the customer.

No valid reason has been advanced as to why the sale price should be taken as $937.50,—when the rate was 4%, rather than $965.34,—when the rate was 1%. If the latter figure were adopted, then when the rate became 6% the amount of the tax would be $57.92, which is less than was actually paid ; and it is not contended that the company should have paid any such amount. And what was to happen when the company in November, 1932, reduced its quoted list price from $975 to $766? No suggestion could be made,—no suggestion was made, that the tax should be computed, under those circumstances, on $937.50. Moreover, the circular of April 7, 1932, and the notations on the invoices of "‘add 2% an a/e sales tax’ or "‘plus 2 % ” make it clear that, with respect to manufactured goods, the company instead of collecting any sum of money in excess of such sum as it was required to pay under the Act, merely increased the price of its goods.

A fortiori the same result follows with respect to imported goods. The company invoiced imported goods in the manner already described with reference to manufactured goods. In accordance with s. 86(1) (b), the company had already paid the tax on the duty paid value at the time the imported goods were taken by it out of bond, at the rate then in force. No further sales tax was thereafter payable by the company with respect to these imported goods. The duty paid value was deemed to be the sale price for the purpose of calculating the amount of the tax but did not necessarily bear any relation to the actual cost to the company, or to the price at which it might determine the goods would be sold to its customers. In fact, in many cases the duty paid value upon which the sales tax was paid was more than the amount paid to the company by its customers, including the 2%.

The appeal should be dismissed, the cross-appeal allowed, and the action dismissed, with costs throughout.

CANNON, J.:—I agree with my brother Kerwin and I would dismiss the appeal, allow the cross-appeal and dismiss the action, with costs throughout.

Appeal dismissed. Cross-appeal allowed.