Citation: 2010 TCC 96
Date: 20100622
Docket: 2009-2784(GST)I
BETWEEN:
COSMOPOLITAN INDUSTRIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
____________________________________________________________________
|
Agent for the Appellant:
|
Peter Gerrard
|
|
Counsel for the Respondent:
|
Lyle Bouvier (January
28, 2010)
Jamie Hammersmith (February
12, 2010)
|
____________________________________________________________________
ORAL REASONS FOR JUDGMENT
(Delivered orally
by conference call on
February 12, 2010, at Ottawa, Ontario,
modified for clarity and accuracy)
(Corrected to show counsel at hearing)
[1]
The Appellant, Cosmopolitan Industries Ltd.,
referred to as “Cosmopolitan”, has appealed an assessment by the Minister in
respect of Cosmopolitan’s GST reporting period of October 1, 2007
to December 31, 2007.
[2]
The issue before the Court is whether the supply
of recyclable paper by Cosmopolitan constituted a taxable or exempt supply
under Part IX of the Excise Tax Act, which will be referred to as
the Act.
[3]
Cosmopolitan has taken the position that the
supply of the recyclable paper constituted a taxable supply. As a result, it
collected GST on the consideration charged for supplies of the recyclable paper
that were made in Canada and
claimed input tax credits for GST paid on goods and services acquired by it for
consumption or use in the course of making the supplies of the recyclable
paper.
[4]
The Minister has taken the position that the
supply of the recyclable paper constituted an exempt supply under Section 1 of
Part V.1 of Schedule V to the Act. As a result, when assessing
Cosmopolitan, the Minister disallowed $2,853.96 of input tax credits claimed by
Cosmopolitan on the basis that the related supplies were acquired for
consumption or use in the course of making exempt supplies.
[5]
I will first summarize the facts.
[6]
Cosmopolitan is a GST registrant and a
registered charity. It collects recyclable paper in the City of Saskatoon for eventual sale to third
parties.
[7]
Mr. Peter Gerrard, the Executive Director of the
Appellant, was the only witness at the hearing. He used photos and a video to
explain the operations of the Appellant.
[8]
The recyclable paper was collected by the
Appellant from the following sources: from the residents of Saskatoon who placed the recyclable paper
in central collection bins located throughout the city, directly from
businesses, through the use of commercial mobile shredders, and from third
parties who provided private curb-side pickup services to certain residences of
Saskatoon.
[9]
The recyclable paper was comprised of newsprint,
cardboard, office paper and mixed paper.
[10]
Once the recyclable paper arrived at the
Appellant’s premises it was dumped into a general collection area. It was then
placed on a conveyor belt. The conveyor belt passed over what was referred
to as a star wheel sorter. The sorter separated the cardboard from all
other paper.
[11]
The paper then moved to two parallel sort lines.
The persons performing the sorting removed waste and paper that was not old
newspaper. The paper then passed through transfer belts, with old newspaper
moving in one direction and mixed waste paper moving in a different
direction.
[12]
The sorted paper was then placed in a baler
where it was baled.
[13]
The Appellant sold the bails of recyclable paper
to various third parties. The selling price obtained depended on the grade
of paper in the bale. It appears that the primary grades of paper sold by the
Appellant were old newspaper, office paper, mixed paper and a mixture of old
newspaper and mixed paper.
[14]
The Appellant also purchased recyclable paper
from certain printing companies who shipped the paper directly to the
Appellant’s customers.
[15]
I will now turn to the position of the parties.
[16]
The agent for the Appellant argued that the
process employed by the Appellant resulted in the creation of a new
product, a product that was manufactured or produced. He focused on the
fact that the sorting added significant value to the product. He argued that
when the paper first arrived at the plant it was worthless, just garbage.
[17]
The process of sorting the paper converted into
something of value, bales of old newspapers, cardboard, office paper and
mixed use paper. These bales could be stored and subsequently sold on the open
market; a market that offered different pricing depending on the quality of paper
contained in a specific bale.
[18]
Counsel for the Respondent argued that the
activities of the Appellant did not constitute manufacturing or
processing. The product contained in the bales was the same product that
entered the sorting facilities. The Appellant did not make a new product.
It merely processed an existing product.
[19]
I will now summarize the law. Section 1 of Part
V.1 of Schedule V to the Act provides that a supply made by a charity of
any property or service constitutes an exempt supply, subject to certain
exclusions.
[20]
One of the exclusions is contained in paragraph
1(d) of the Schedule. It excludes from Section 1 tangible personal
property that was acquired, manufactured or produced by the charity for the
purpose of making a supply of the property, provided the property was neither
donated to the charity, nor used by another person before its acquisition by
the charity. Also excluded is certain leased property.
[21]
The issue before the Court is whether the
Appellant manufactured or produced the recyclable paper that it sold to
third parties.
[22]
The exclusion for tangible personal property
acquired for the purpose of making a supply did not apply to the recycled paper
since, as noted by counsel for the Respondent, the recycled paper had been used
by another person before it was acquired by the Appellant.
[23]
Counsel for the Respondent noted that there was
very little jurisprudence with respect to the meaning of manufactured or
produced. Such a statement is simply not correct. There is a substantial
body of jurisprudence dealing with the meaning of manufactured or produced,
including a number of decisions of the Supreme Court of Canada. It is not clear
to me why these cases were not provided to the Court.
[24]
The leading case is the decision of the Supreme
Court of Canada in Canada v. York Marble, Tile and Terrazzo Limited,
[1968] S.C.R. 140.
[25]
The Court was required, in this case, to
determine when something was manufactured or produced for purposes of
subsection 30(1) of the Excise Tax Act which levied the old federal sales
tax on all goods manufactured or produced in Canada.
[26]
When delivering the decision of the court,
Justice Spence noted the following at paragraph 10:
Manufacture is the production of articles
for use from raw or prepared materials by giving to these materials new forms,
qualities and properties or combinations whether by hand or machinery.
[27]
The key question is whether the form, quality or
properties of the raw or prepared material differ from their point of
arrival to their point of departure.
[28]
The definition of “manufacture” in York
Marble was later confirmed by another Supreme Court of Canada decision, Royal
Bank of Canada v. Canada (Deputy Minister of National Revenue, Customs and
Excise), [1981] 2 S.C.R. 139.
[29]
In Deputy Minister of National Revenue v. Skega
Canada Ltd., [1986] 72 N.R. 280 (Fed. C.A.) at
page 285, the Federal Court of Appeal provided
the following definition of the phrase “prepared material” as it appeared in
the York Marble definition of “manufacture”:
… the reference to prepared materials
contemplates that the material employed in the production of a final end use
product may be raw materials or intermediate materials … which … had no end use
of their own.
[30]
In the York Marble case, Justice Spence
at paragraph 15 also dealt with the meaning of the word produce. He noted that
“manufacture” is not synonymous with “produce”. The two terms are different and
mean different things. An article can be produced even if it is not
manufactured.
[31]
In Enseignes Imperial Signs Ltée v. Minister of
National Revenue, [1991] 1 C.T.C.
229, the Federal Court of Appeal addressed the
issue of when something is produced. The Court, at page 3, held as follows:
What matters is not the complexity of the
operation but its result. A thing is produced if what a person does has a
result of producing something new; and a thing is new when it can perform a
function that could not be performed by the things which existed previously.
A
mechanic who resells used cars after repairing and repainting them
is not producing or manufacturing a new car.
A car which a mechanic has repaired and
repainted has exactly the same function as before, it is the same car…
[32]
I will now apply the law to the facts before me.
I will first consider whether the Appellant manufactured the recycled paper.
[33]
As the Supreme Court noted in the York Marble
case, the key question is whether the form, quality or properties of the
recyclable materials differed from the time they were dumped in the general
collection area of the Appellant’s facility to the time they were shipped as
bails of recyclable paper.
[34]
While I accept that the processing operations of
the Appellant were substantial, they did not, in my view, change the form,
quality or properties of the recyclable paper.
[35]
For example, while cardboard may have been
separated from the other materials, the Appellant did not transform the
cardboard into a new product. The cardboard that entered the facility had
the same end use as the cardboard that left the facility in bales.
[36]
While the sorting activities of the Appellant
may have prepared the recyclable material for sale, there was no
processing performed on the actual material that entered the Appellant’s
facility.
[37]
As the Federal Court of Appeal noted in Ford
Motor Co. of Canada v. Minister of National Revenue, [1997] 3
C.T.C. 80 at pages 114 to 115:
… for a good to be considered
“manufactured” by an individual, it had to be given new form, qualities,
or properties by the activities of that individual.
[38]
This simply did not occur in the present case.
The sorting activities of the Appellant did not result in the creation of an
article which had its own use.
[39]
The individual pieces of recyclable papers that
left the facility had the same form, qualities and properties as the individual
pieces that entered the facility.
[40]
Having concluded that the Appellant did not
manufacture a new product, I will now consider whether it produced
something.
[41]
In the Imperial Signs case, the Court of
Appeal stated that a thing can be produced by carrying out a very simple
operation. The Court referred to the example referenced in the York Marble
case of someone who imported watch cases and movements separately and then
placed the movements in the watch cases. The person was found not to be
manufacturing the watches; however, he was found to be producing the
watches.
[42]
The difficulty I have in the current situation
is that the Appellant did not perform any activities on the actual material
that entered its facilities. While its activities prepared the materials for
distribution, the activities did not produce anything new. The recyclable paper
that left the Appellant’s facilities in bales had the same function as the
recyclable paper that entered its facility.
[43]
For the foregoing reasons, the appeal is
dismissed without costs.
Signed
at Ottawa, Canada, this 22nd day of June 2010.
“S. D’Arcy”
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