T. Eaton Co. v. Minister of Revenue, [1989] 1 CTC 269 (Ont CA)

Finlayson, J.A.:— This is an appeal from the decision of the Honourable Madame Justice Boland pronounced the 15th day of October, 1986, with respect to an assessment for retail sales tax issued by the respondent Minister on August 7, 1979 against the appellant, The T. Eaton Company Limited ("Eaton's").

The Minister's assessment was for rebates of sales tax claimed by Eaton's for defaulting customer credit card purchases and for purchases wherein Eaton's had accepted cheques which were N.S.F. Counsel for Eaton's abandoned its appeal with respect to the N.S.F. cheques and we are concerned only with the validity of the claim for rebates with respect to the credit card transactions.

The court here and below had the advantage of an agreed statement of facts and I propose to refer to it briefly.

Eaton's is a retailer of goods and services which operates its own stores under the name Eaton's. To members of the general public, all of the operations within the Eaton's store appear as a fully integrated single business operation.

Sales are by cash but, if a customer wishes to make a credit purchase in its stores, an Eaton's credit card may be used, regardless of whether or not the department is operated directly by Eaton's, through a wholly-owned subsidiary, or through a concession location. The customer can charge both the purchase price and the sales tax payable on the goods. Although customers of Eaton's and its subsidiary corporations can purchase goods on credit by the use of an Eaton's credit card, the card cannot be used outside Eaton's own stores.

I will later deal more specifically with the provisions of the Retail Sales Tax Act, R.S.O. 1970, c. 415, as amended, ("the Act") but, in overview, it is clear that on sales by Eaton's to its customers there is an obligation on the customer to pay sales tax and there is an obligation on Eaton's to collect it. This obligation to collect and remit the tax arises at the time of the sale and is imposed regardless of whether the sale is for cash or on credit. Eaton's has remitted all tax with respect to sales of merchandise whether cash or credit. The issue here is Eaton's right to claim rebates with respect to taxes remitted where there has been a default as between the customer and Eaton's on the customer's credit card obligations.

To enable Eaton's to generate the financing required to deal with the large volume of credit card purchases at its numerous stores, Eaton's incorporated The T. Eaton Acceptance Company Limited (“Acceptance”) on January 6, 1954 to operate as a financing arm with respect to the credit card purchases. Acceptance purchases customer accounts arising from credit sales by Eaton's and its subsidiaries.

The arrangement that we are concerned with here is the transfer of the account from Eaton’s to Acceptance. Customers apply to Eaton's for credit, and their obligation under that agreement is to Eaton's and Eaton's alone. The receivables are then transferred to Acceptance but no notice of that assignment is given to the customer. Under the agreement between Eaton's and Acceptance, there is no recourse with respect to these assignments but Eaton's has the obligation to pursue and collect the accounts as against the customer. Any suit against the customer is brought in the name of Eaton's and only Eaton's is in a position to grant a discharge of the debt.

Eaton's maintains that, having exhausted all reasonable attempts to recover a debt, it is entitled to write it off and claim a rebate with respect to the sales tax which it paid on the particular transaction. The Minister maintains that, since Eaton's assigned the debt to Acceptance for 100 per cent of its value and without recourse, it suffers no loss when the customer defaults because it has been fully compensated for the debt, including sales tax, by Acceptance.

Certain sections of the Act are of particular relevance:

1. In this Act,

20. "vendor" means a person who, in the ordinary course of his business,

(a) sells tangible personal property;

2. (5) A purchaser shall pay the tax imposed by this Act at the time of the sale.

8. (1) Every vendor is an agent of the Minister and as such shall levy and collect the taxes imposed by this Act upon the purchaser or consumer.

9. The taxes imposed by this Act, whether the purchase price be stipulated to be payable in cash or on terms or by instalments or otherwise, shall be collected at the time of the sale on the whole amount of the purchase price and be remitted to the Treasurer of Ontario at the times and in the manner prescribed by the regulations.

10. All taxes collected by a vendor under this Act shall be remitted to the Treasurer of Ontario at the time or times and in such manner as are prescribed by the regulations.

The provisions for rebates are set out in the Regulations, R.R.O. 1970, Reg. 785, as am. (now R.R.O. 1980, Reg. 904) and the following particular subsections are relevant:

23.(1) Subject to subsection (2), where a vendor has loaned money or given credit to a purchaser with respect to the purchase price of tangible personal property, of a taxable service, or a price of admission together with retail sales tax payable on any of them and where the vendor on behalf of such purchaser has paid to the Treasurer the tax imposed on such transaction by the Act, the Treasurer may rebate to the vendor any or all of the tax imposed by the Act on such a transaction if the purchaser is shown to have defaulted in repaying to the vendor all or any of the loan or credit given, but no rebate under this section shall be made of any tax where the tangible personal property, taxable service or price of admission on which the tax was imposed was,

(a) purchased by the purchaser through his use of a credit card or other credit arrangement that permitted credit purchases from vendors other than the vendor who made the sale; or

(b) purchased from the vendor more than 180 days prior to the date of the

purchaser's last credit purchase from the vendor who made the sale.

(2) No rebate under subsection (1) shall be made where, at the time of the application for such rebate, the indebtedness to the vendor by the purchaser with respect to the purchase price of tangible personal property, a taxable service, or a price of admission together with the tax imposed by the Act on any such transactions, is still included as an asset of the vendor's business or as an account receivable by him in his books of account.

Read literally, there is no reason why Eaton's does not fall within the Regulations. It is apparent that the customer's obligation is to Eaton's and that any default is a default in the payments owed to Eaton's. Counsel for the Minister contends that the court must read into these Regulations that the default by the customer to the vendor must result in a loss to the vendor. I am not prepared to read such language into a statute which imposes a statutory obligation on vendors to act as tax collectors.

Counsel for the Minister submitted that Eaton's is receiving a windfall in these rebates because it has already received credit from Acceptance for the full amount of tax it has remitted and therefore the loss will be borne by Acceptance. This ignores the agreement between Eaton's and Acceptance, its wholly-owned subsidiary. Eaton's has assigned the receivables to Acceptance and is not entitled to retain any sums it receives in carrying out its contractual obligation on behalf of Acceptance to recover the debt from the customer. To the extent that it effects recovery from any source with respect to funds which it has assigned, its obligation clearly is to remit that recovery to its assignee.

I do not think it is necessary to become involved in any discussion about the business relationship between Eaton's and its wholly-owned subsidiaries, or the legal effect of these assignments. I think that, on the strict reading of the Regulations, Eaton's qualifies for the rebates. I cannot think of any reason why Eaton's, a vendor which has remitted the sales tax on the transaction, should not be entitled to claim a rebate when there has been a default.

I find it extraordinary that the respondent Minister would contend, through counsel, that Eaton's, as a statutory agent, would have a higher obligation to its principal than as an agent under the usual principal and agent agreement. Eaton's, as a vendor, is obliged by statute to collect and remit the sales tax but, after exhausting all reasonable means to recompense itself, I can see no reason why it, as the agent, should bear the loss rather than its principal, the respondent Minister. I have examined a number of texts on this subject (Bowstead on Agency, 15th ed. (1985); Fridman, The Law of Agency, 5th ed. (1983); Markesinis and Munday, An Outline of the Law of Agency, 2nd ed. (1986)) but can find no support for the position of counsel for the Minister.

As to Regulation 23(2), counsel for the Minister submitted that it was necessary that Eaton's write the debt off its own books before being entitled to the rebate. However, it is not on Eaton's books as a debt to Eaton's because it has been assigned to Acceptance and ultimately will be written off Acceptance's books. Regulation 23(2) does not say the vendor must write the debt off its books. It says that it is not entitled to the rebate “if the debt is still included as an asset" on Eaton's books. Once again, the Regulation is complied with and, as a practical matter, the internal arrangements make no difference. Regulation 23(2) is designed to prevent double recovery and it does so in this case. If Eaton's receives the sales tax rebate, it cannot then maintain an action against the customer with respect to that sales tax. Alternatively, it has been conceded that, whatever the state of its books, Acceptance cannot maintain an action against the customer because it has never notified the customer of its assignment. Also, as far as the respondent Minister is concerned, Acceptance does not qualify as a vendor with respect to an application for rebate. There is, therefore, no chance of double recovery from that angle either. Eaton's, the vendor, will be the only person to recover tax paid on behalf of its defaulting customer.

There is a cross-appeal with respect to the decision of Boland, J. that any recovery by the Minister is restricted by the Act to three years from the date upon which such tax became collectible which, in this case, is April 14, 1976. I agree with Boland, J. that the right to be assessed with respect to rebates is under subsection 15a(1) of the Act which reads as follows:

15a. (1) The Minister may assess pursuant to this section any person who has received a refund or rebate under this Act or the regulations and who is not entitled to such refund or rebate, and such assessment shall before the amount of the refund or rebate to which the person is not entitled and shall be accompanied by a brief statement in writing of the grounds upon which the person assessed is claimed not to be entitled to the amount claimed in the assessment.

At the time this section was introduced, a new subsection 15(3) was also introduced imposing a three year limitation on assessment, save in the case of misrepresentation through neglect, carelessness, wilful default or fraud. There is no suggestion of any impropriety on the part of Eaton's.

Accordingly, I would allow the appeal with respect to the credit card transactions and order that the appellant is entitled to the return of the moneys paid by it to the respondent Minister for those transactions pursuant to Assessment No. 8099000-451 dated the 7th day of August, 1979, together with interest from the date of payment pursuant to subsection 33(2) of the Act.

I would also dismiss the cross-appeal. The appellant should receive its costs of both the appeal and the cross-appeal.

Appeal allowed.