Bam Packaging Ltd. v. The Queen, docket 2000-1606-GST-I (Informal Procedure)

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docket 2000-1606-GST-I

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Date: 20010605

Docket: 2000-1606-GST-I

BETWEEN:

BAM PACKAGING LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Hershfield, J.T.C.C.

[1] This is an appeal under the provisions of the Excise Tax Act (Canada) from a Notice of Assessment for the reporting period May 1, 1994 to January 31, 1998 in respect of which a Notice of Decision was issued on January 10, 2000 and from a Notice of Reassessment for that period also dated January 10, 2000.

[2] The Decision and Reassessment impose a liability to collect and remit goods and services tax in respect of goods and services supplied during the assessment period by the Appellant. The appeal puts at issue certain of the Appellant's supply transactions, namely supply transactions with Malina Trading Co. Limited (a Cyprus company, not resident in Canada), Brytex (a resident enterprise carrying on business in Canada) and Mancap Global Ventures Inc. (a company resident in Canada). While the Notice of Appeal refers generally to transactions with Malina and Brytex and to "other" transactions, evidence was only brought on specific transactions with Malina, Brytex and Mancap.

[3] The appeal is founded on supplies being zero-rated. A zero-rated supply is a supply included in Schedule VI to the Act. In respect of the Malina and Mancap transactions, the Appellant relies on section 7, Part VII of Schedule VI to the Act in asserting that its supplies are zero-rated. That section zero-rates freight transportation services performed in respect of goods being exported from Canada. This section does not apply to the Brytex transactions. In respect of the Brytex transactions, the Appellant relies on section 1 of Part V of Schedule VI of the Act. That section zero-rates goods acquired for export from Canada.

Background

[4] Mike Iles (Iles), a principal of the Appellant, testified on behalf of the Appellant. Iles gave evidence as to the background of the Appellant's business as well as on the specifics of the transactions under review. The Appellant also called Shirley Taylor as a witness. Ms. Taylor was the purchasing manager of Saracan Services Limited of Calgary, Alberta. Saracan was Malina's purchasing agent in Canada. Ms. Taylor was the sole employee of Saracan responsible for all of its day-to-day activities. Ms. Taylor was excluded from the Court during Iles' testimony and her testimony was fully corroborative of Iles' testimony. The testimony of both witnesses was candid and credible. It is important to note that the evidence of Ms. Taylor is direct evidence of the nature of the supply that the shipper, Malina, intended to contract for with the Appellant. This is important evidence in terms of establishing the essence of the overall supply to Malina.

[5] Through prior work experience, as an employee of Gulf Canada, Iles became knowledgeable about the movement of goods in the course of being exported out of Canada. Gulf had an interest in an oil and gas exploration venture in Russia which venture imported a variety of supplies from Canada. Iles' responsibilities with Gulf in Canada included receiving supplies acquired in Canada by the Russian venture and storing, staging, packing, handling and loading goods for delivery to Russia. He became familiar with, indeed developed an expertise in, import/export regulations and requirements relating to the movement of such goods in an international context. As well, he developed an expertise in the packing and loading of goods in the course of being transported by more than one mode of transportation (air, sea, rail and truck). Included in the goods being handled in the course of Iles' duties with Gulf, were hazardous and dangerous goods in respect of which there was significant national and international regulation concerning their transport and export. That is, transportation of such goods required specialized knowledge of regulatory and compliance regimes as well as specialized skills in terms of packaging and loading these goods so as to prevent damage, both to the goods being transported and to the environment around them during the course of their being transported. Iles saw a window for a business opportunity in the transportation of such goods and in 1993 his wife started Bam Packaging Ltd. to offer specialized services for packaging dangerous goods for transport, primarily out of Canada. Packaging in this context included, as well as appropriate crating and bracing, preparation of proper manifests and appropriate labelling to meet international standards respecting the transportation of dangerous goods and other regulatory considerations.

[6] In 1995 Iles joined his wife in the business full-time. Gulf was no longer involved in the venture in Russia which was now being operated by a large Russian exploration company (KomiArcticOil) which was desirous of continuing to import necessary supplies from Canada and wanted to continue to work with Iles in this regard. With the consent of Gulf, KomiArcticOil became a client of the Appellant. None of the Appellant's dealings with KomiArcticOil are in issue in this appeal. As business grew, Malina and Mancap became clients of the Appellant. Malina shipped oil and gas exploration supplies and equipment to Russia[1] and Mancap shipped building materials to Japan. Brytex was not such a client, at least not in respect of the transactions under review in this appeal. The Brytex transactions are simply container sale transactions.

[7] In the case of the Malina and Mancap transactions, the Appellant was engaged to take delivery of goods, bought by Mancap or Malina in Alberta for export, by sea, for loading by the Appellant into ocean shipping containers which I sometimes refer to as intermodal containers (20-foot, 40-foot and 40-foot high cube intermodal shipping containers).[2] Intermodal containers are used so that the goods being transported abroad can be moved, without being repacked or reloaded, by truck, rail and ship to their ultimate destination outside Canada, by simply stacking such containers on the flatbed, rail car or ship being used at each particular juncture of the journey abroad. Subject to meeting definitional requirements, each juncture of such journey is part of a continuous outbound freight movement. There is little doubt that the use of intermodal containers in the transport of such goods is an efficient and cost effective way to effect their export. If the Appellant's services in respect of such cost efficient use of containers are transportation services meeting the requirements of section 7 set out below, they will be zero-rated.

The Malina and Mancap Transactions

[8] The Appellant relies, in the main, on section 7 of Part VII of Schedule VI in respect of these transactions. Section 7 of this Part of Schedule VI provides as follows:

7. A supply made by a carrier of a freight transportation service in respect of the transportation of tangible personal property from a place in Canada to another place in Canada, where

(a) the shipper of the property provides the carrier with a declaration in prescribed form that the property is being shipped for export and that the freight transportation service to be supplied by the carrier is part of a continuous outbound freight movement in respect of the property;

(b) the property is exported and the service is part of a continuous outbound freight movement in respect of the property; and

the value of the consideration for the supply is $5 or more.

[9] In brief, it is the Respondent's position that the Appellant's services are pre-transportation services. It argues that the Appellant is not a "carrier", did not provide a "freight transportation service" or, if it did, that such service was not part of a "continuous outbound freight movement". These are defined terms in the Act and the determinations required in this matter will be whether the Appellant and its services in respect of the transactions under review during the assessment period fall within the scope of these defined terms. In respect of the Mancap transactions there is the additional issue that the requirement in paragraph 7(a) has not been met.

[10] Before analyzing the Malina and Mancap transactions separately in the context of section 7, it would be helpful to more fully describe the Appellant's services.

[11] Considerable time was spent by Iles at the trial explaining the Appellant's services in the loading of containers and the overall role it played for customers like Malina and Mancap. Whether the goods being transported were oil and gas equipment and supplies (barrels of drilling fluid, piping, heavy equipment including trucks and cranes, drilling tools, parts, etc.) being sent to Russia for Malina via Montreal and Finland or building supplies (lumber, windows, doors, roofing materials, etc.) being sent to Japan for Mancap via Vancouver, the Appellant receives at its yard near Edmonton goods bought by the shipper from various outlets (largely in Alberta). These goods are bought F.O.B. the supplier's outlet and the shipper has such goods transported to the Appellant's yard.[3] The Appellant unloads the goods, checks deliveries against orders (inspecting goods on arrival and expediting the assembly of the goods to be shipped), stores them for short periods, organizes the storing for strategic loading (staging and consolidation), packages or repackages certain items, dismantles certain items (for transportation), crates, loads and braces them in the containers as its expertise is to do.[4] Each item shipped needs to be separately identified and labelled in the preparation of a manifest. Particulars required to be detailed would vary depending on the custom's requirements of the destination country. The Appellant had the experience and knowledge to prepare such manifests.

[12] The Appellant's experience in the loading of shipping containers cannot be ignored. In the course of transporting containers, which might take four to six weeks or longer after leaving the Appellant's yard, the contents of a container are in a virtual agitator. Cranes lift and lower the containers at every link in the transportation chain. Then there is the starting and stopping associated with truck and rail transportation. Containers, on board ships, are stacked up to nine high and subjected to the turmoil of ocean movement, listing to up to 45 degrees on each side. Iles, with the aid of photographs, gave evidence of various packing and bracing techniques including special adaptations, designed and implemented by him, for transporting large pieces of equipment in containers. These loading techniques ensured safe and cost efficient transport of goods in their vessel of transportation, namely, the intermodal containers.

The Malina Transactions

[13] I will now deal specifically with the Malina transactions, of which there were nine, during the subject assessing period. As stated above, Saracan was Malina's purchasing agent in Canada. There is no question as to Saracan's agency status and that the Appellant's transactions through Saracan are transactions with Malina, a non-resident. That is, we have a non-resident person who, through its agent in Canada, would acquire goods in Canada for an oil and gas project in Russia and arrange for delivery there. Ms. Taylor testified that the Appellant's services were an essential aspect of the movement of the goods to their ultimate destination. Once the staging and consolidation of shipments were complete, the Appellant would load the goods into containers. A freight provider engaged by Malina would then arrange for shipping, including the Bills of Lading. Shipping included rail transport to Montreal, space on a ship departing Canada from Montreal, rail transport from Finland to Russia and trucking at both ends of this series of modes of transportation. The containers as loaded and sealed by the Appellant simply moved from one transportation mode to another undisturbed.

[14] Ms. Taylor testified that in addition to loading services, the Appellant provided the services described in paragraph 11 above. Further, Russian customs required verifying the place of manufacture of each item being shipped and its respective net and gross weights together with part numbers and serial numbers. These particulars were gathered by the Appellant and recorded on the shipment manifests. Such manifests had to be in a form acceptable to, or as required by Russian customs. A review of detailed invoices of the Malina transactions reveals different transactions involved more or less labour time on different service components depending largely on the shipment. A transaction that included hundreds of small parts from numerous suppliers required more warehousing time and more time for inspecting deliveries and identifying, weighing, labelling and packaging goods being shipped.[5] Actual loading and manifest documentation time might be less than half the total time invoiced in respect of such a transaction. At the other extreme, one transaction was the loading of a single piece of heavy equipment into a container. In that case the Appellant engineered the disassembly and modification of the equipment so that it could be containerized.[6] Without such input from the Appellant, the transportation of such free standing piece of equipment on the deck of a ship would take the space of as many as nine containers stacked one on top of the other and would be wholly impractical in terms of the ultimate cost to the end user in Russia. This is not just an example of a transaction where loading charges were a major part of the service but is a dramatic example of the cost-effectiveness of the Appellant's role in the transportation of goods acquired by Malina for export.

[15] For the Appellant's loading services to be effective, its preparation of manifests, labelling and other documentation services, relating to the regulatory regimes governing the export of goods from Canada and their import to Russia, had to stand up to the requirements and scrutiny of such regimes. Customs inspections and delays had to be minimized. Russian import regulations put strict deadlines on delivery times or shipments could be rejected. The Appellant's services were to effect the final loading of the containers and as such its services had to facilitate the arrival of the contents of the containers at their final destination not only safely but with minimal interruption and delay during their course of passage.

[16] The Appellant had S.G.S. certification which Ms. Taylor testified was an important aspect of Malina's contracting the services of the Appellant.[7] Every shipment to Russia required a Certificate of Compliance which, if the Appellant was not S.G.S. certified, would require every shipment to be inspected. As the Appellant was certified, Certificates of Compliance were issued without inspections except in cases where random spot checks were done. The Appellant, according to Ms. Taylor, sealed the containers on loading and such seals would not generally be broken until the container landed at its destination. Spot checks, based on the reputation of the Appellant and its certification, were rare. This was the testimony of Ms. Taylor who would have first hand knowledge of the movement of the containers after they left the Appellant's possession. The import of this testimony was that the Appellant had the experience, knowledge and standing to effect the efficient export of the goods. Its manifests were reliable. Further, the goods consistently arrived undamaged in spite of the abuse of transcontinental transport.

[17] Malina clearly regards the Appellant as part of the transportation chain required to move equipment and supplies overseas. Given Alberta's position in oil and gas exploration it is not surprising that oil companies from around the world might look to Alberta as a potential source of exploration equipment and supplies. The competitiveness of Alberta suppliers to export internationally not only depends on the suitability and quality of the goods but depends on competitive pricing, a large component of which is the cost of transportation. Ms. Taylor testified that Malina could not order goods from Canada without factoring in transportation costs which included all of the Appellant's services. The supplies of the Appellant only had value when taken together. The essence of the supply was to consolidate and load, once and for all, into sealed ocean containers properly documented goods en route to Russia. The efficiency of expertly loading ocean shipping containers in Alberta, where goods purchased in Alberta could be consolidated efficiently, was paramount in terms of the supply contracted for along with the Appellant's knowledge and standing in respect of the international regulation of exporting goods. Based on the decision of this Court in O.A. Brown v. The Queen,[8] this might, in effect, categorize all the Appellant's services to Malina as loading services. That case is authority for the proposition that the Act does not require that different aspects or parts of a supply be isolated as distinct supplies where the particular supply is only of value when the distinct parts or aspects are taken together. Such aspects of a supply are not incidental activities in respect of that supply. They are activities that when taken together constitute the supply contracted for. Contrary to the Respondent's position, the essence of the supply to Malina was not the order expediting and packaging services provided by the Appellant. The essence of the supply in respect of the Malina transactions is the final loading of ocean shipping containers for the transport of goods to Russia. The tax attaching to this supply attaches to all the Appellant's supplies that relate to such supply. The issue then is what tax attaches to this supply - the loading of ocean shipping containers with Malina's goods bought for export.

Analysis

[18] Section 7, set out in paragraph 5 above, provides for the zero-rating of the subject services. Keeping in mind that that section uses a number of defined terms, it prescribes seven requirements to be met for a supply to be zero-rated:

1. The service must be provided by a "carrier";

2. The service must be a supply of a "freight transportation service" in respect of the transportation of goods;

3. The supply in respect of the transportation of goods has to be "from a place in Canada to another place in Canada". (This requirement is not in issue);

4. The shipper must have provided the carrier with a prescribed form declaring that the subject goods are being shipped for export and that the service contracted for is part of the "continuous outbound freight movement" in respect of the goods. (This requirement is not in issue in respect of the Malina transactions);[9]

5. The goods must in fact be exported. (This requirement is not in issue);

6. The service performed must in fact have been part of a "continuous outbound freight movement" in respect of the goods; and

7. The value of the consideration for the supply is at least $5.00. (This requirement is not in issue.)

[19] The first requirement is that the Appellant be a "carrier". "Carrier" is defined in subsection 123(1) of the Act as follows:

"carrier" means a person who supplies a freight transportation service within the meaning assigned by subsection 1(1) of Part VII of Schedule VI;

[20] Whether the Appellant is a "carrier" depends only on whether it supplies a "freight transportation service".[10]

[21] "Freight transportation service" is defined in subsection 1(1) of Part VII of Schedule VI as follows:

"freight transportation service" means a particular service of transporting tangible personal property and, for greater certainty, includes

(a) a service of delivering mail, and

(b) any other property or service supplied to the recipient of the particular service by the person who supplies the particular service, where the other property or service is part of or incidental to the particular service, whether there is a separate charge for the other property or service,

but does not include a service provided by the supplier of a passenger transportation service of transporting an individual's baggage in connection with the passenger transportation service;

[22] Whether the Appellant's supplies are "freight transportation services" depends on whether a service provided by the Appellant, such as loading transporting vessels (ocean shipping containers) by which the conveyance of goods is effected, are properly included as "a particular service of transporting" goods. It will not be enough that all the Appellant's services be incidental to a service of transporting since for incidental services to be included in paragraph (b) of the definition of "freight transportation service", such services must be part of or incidental to another service (referred to as the particular service) also supplied by the Appellant. If there is a service in this case, such as loading, that is the particular "transporting" service, then all other services of the Appellant could be found to be a part of or incidental to that particular service and they would thereby be included as "freight transportation services".[11]

[23] While it seems apparent that loading a vessel of transportation such as an intermodal container is part of the transportation system, there are some general comments that might help to bring this finding squarely within the requirements of section 7. Consider firstly, the second use of the word "transportation" in the preamble to section 7 together with the use of the word "transporting" in the definition of "freight transportation services"; and, secondly, the use of the phrase "in respect of" in the preamble to section 7.

[24] As to use of the words "transportation" and "transporting", "transportation" is defined in the Concise Oxford Dictionary, New Edition (1990) as the act of conveying or "the process of being conveyed" or "a system of conveying".[12] "Processes" and more particularly "systems" embrace the necessary aspects that together effect the conveyance. A "system" includes the conveyance vessel and the loading of it. Whether the vessel is a rail car, a ship's cargo hole or an ocean shipping container, these are all vessels of transportation and the loading of them is a part of the system of transportation. Loading for uninterrupted safe shipping requires consolidation of goods being loaded, specialized packing and preparation of manifests with all information necessary for import-export regulatory compliance. This was the supply in the Malina transactions. If performed on a dock in Montreal, these supplies may not have come before me.[13] That someone in Edmonton can provide the service should not alter its character. That a mode of universal transporting (containers that can effectively serve as a transporting vessel for road, rail or sea transportation) can localize a service in Alberta does not prevent recognition of the service as being part of the transportation system or make it less a transporting service. In the context of a transportation system, the Appellant's loading services are "a particular service of transporting". Such construction of the words "transportation" and "transporting" are supported by the scheme of this Part of Schedule IV and by the clear purpose for the zero-rating of transportation services performed in the course of the exportation of goods.

[25] As to the use of the phrase "in respect of" in the preamble of section 7, it can be taken to embrace any activity related to the particular activity to which the phrase attaches.[14] A supply "in respect of the transportation" of goods means a supply related to the "transportation" of goods. "A supply in respect of" the transportation of goods "from a place in Canada to another place in Canada" means a supply related to the "transportation" of goods from place to place in Canada (en route to a place outside Canada when taken with requirements 5 and 6 above). That is, in general terms, although the "supply" which is to be zero-rated, has to fit within a defined term (freight transportation service), that supply should be consistent with the general requirement which is that it be related to the activity or series of activities contemplated in section 7. Taking the section as a whole, the critical required connection is that the supply principally relate to the process of moving goods from a point of origin in Canada to a place outside of Canada via a place in Canada. If the supply contracted for is principally connected to that movement it must, in my view, be "in respect of" that movement. Such construction is consistent with the policy for zero-rating transportation services relating to goods being exported. The intent of zero-rating such services is to ensure Canadian goods bought in Canada for use abroad will not suffer a competitive disadvantage by virtue of a 7% cost add-on. This add-on relates to the cost of the goods and certain costs of exporting them, including the cost of services "in respect of (their) transportation". The defined terms used in setting out the requirements for zero-rating under section 7 (such as "freight transportation service") should be given a meaning that is consistent with such scheme. The loading services provided by the Appellant in respect of the Malina transactions are principally connected to the movement of Malina's goods and are thereby properly described as a "particular service of transporting".

[26] The Respondent's position is that all the Malina transactions in question during the assessment period are for the provision of pre-transportation services and that the Appellant's primary role is that of a packager and warehouser. It argues that such services are consumed in Canada and are not transporting services. While its name and advertising literature do fit the Respondent's description of the Appellant, the facts of this case as they relate to the Malina transactions are that the essence of the services contracted for were the receiving of goods for loading into containers being shipped abroad. The containers were sealed for export by the Appellant. Its manifests helped ensure uninterrupted transit abroad. As stated, these are transporting services, in my view.

[27] Having concluded that the Appellant's services to Malina were transporting services, it follows that they were freight transportation services. This also qualifies the Appellant as a "carrier" in respect of the Malina transactions.

[28] There remains one last requirement to be satisfied for the Malina transactions to be zero-rated. The supply must be part of the "continuous outbound freight movement" of exported goods, That term is defined as follows:

"continuous outbound freight movement" means the transportation of tangible personal property by one or more carriers from a place in Canada

(a) to a place outside Canada, or

(b) to another place in Canada from which the property is to be exported,

where, after the shipper of the property transfers possession of the property to a carrier and before the property is exported, it is not further processed, transformed or altered in Canada, except to the extent that is reasonably necessary for its transportation;

[29] "Shipper" is defined as follows:

"shipper" of tangible personal property means the person who, in respect of a continuous freight movement or a continuous outbound freight movement, transfers possession of the property being shipped to a carrier at the origin of the freight movement and, for greater certainty, does not include a person who is a carrier of the property to which the freight movement relates;

[30] Although the word "origin" used in the definition of "shipper" is not defined in the context of "continuous outbound freight movement", it is defined in the context of "continuous freight movement". That definition is as follows:

(a) in respect of a continuous freight movement, the place where the first carrier that engaged in the continuous freight movement takes possession of the property being transported, and

(b) in respect of a continuous journey, the place where the passenger transportation service that is included in the continuous journey and that is first provided begins;

[31] Regardless that it is not defined in the context of "continuous outbound freight movement", the word "origin" (used in defining "shipper") might properly be taken to mean the place where the first carrier engaged in the continuous outbound freight movement takes possession of the property being transported. The party giving up possession at that point is the shipper. It is noted however that there is nothing in these provisions that prohibit the shipper so defined from maintaining or retaking control (or even retaking possession) of the goods after possession is given up to the first carrier. For example, the shipper may maintain contractual control over carriers in the chain. Such control would not impact the determination of who the shipper is, what the point of origin otherwise determined would be or whether a service provider was a carrier. That Malina arranged the carriage to and from the Appellant's site does not cause a break in the continuum of outbound movement. That it arguably takes back "possession" from one carrier to give it up to another (for the purpose of controlling the carriage and transporting services contractually) does not cause a break in that continuum. The first transfer of possession to the first carrier defines the point of origin of the movement. There is nothing in the definitions to suggest that a new point of origin is created every time the shipper engages the next carrier. That there are interliner rules to deal with the provision of services amongst various carriers where the shipper has not retained direct contractual control over various carriers (each providing a transporting service in the transportation continuum) does not suggest to me that the shipper cannot contract on its own with various carriers without causing a break in the continuum.[15] As I have already found, Malina has given up possession of goods to the Appellant to supply freight transportation services. That they are the first or second carrier to be so engaged is not relevant. What is relevant is that the first carrier engaged in the continuous outbound freight movement not be found to be a carrier engaged by Malina to provide freight transportation services after those provided by the Appellant; for example, a finding that the first carrier engaged in the continuous outbound freight movement of the subject goods was the carrier that picked up the containers after being loaded by the Appellant, would be fatal to the Appellant's appeal.[16] The requirement for continuous outbound freight movement is that the property being exported is not given up by the shipper for further processing, transformation or alteration except to the extent that it is reasonably necessary for its transportation. In the May 1990 Technical Notes to the Bill enacting this provision the following examples are given:

... For example, it may be necessary to freeze goods to ensure that they arrive at their destination in a usable condition, or to disassemble or pack items at a port to present in-transit damage to the goods. In each of these instances, the transformation or alteration of the goods is considered to be necessary to their transportation and, therefore, does not prevent the domestic shipment from qualifying as part of a continuous outbound freight movement. However, in the case of, say, a domestic shipment of iron ore to a steel manufacturer who, in turn, exports the steel produced from the ore, transforming the iron ore into steel is not necessary to its transportation. Hence, the domestic shipment of the ore to the steel refiner in this example would not qualify as being part of a continuous outbound freight movement.

[32] These examples illustrate that delivery to a packer to prevent in-transit damage, unlike transit to a production facility, is not intended to be a break in the continuum of transit.

[33] The Appellant argued that it, a carrier, took possession from Malina and that it was the first or second carrier to do so. If that is the case, its freight transportation services were "part of" the "transportation of tangible personal property by one or more carriers" from a place in Canada (either Calgary or Nisku) to another place in Canada (Montreal) from which the property was exported.[17] As such, the Appellant's freight transportation services were part of the continuous outbound movement of the goods being exported. I agree with the Appellant's position. Once it is determined that the Appellant is a carrier performing freight transportation services in respect the transportation of goods to a destination outside of Canada, such services will meet the requirements of paragraph 7(b) if the stream of freight transportation services are not interrupted. Loading services such as those provided by the Appellant to Malina are not an interruption in the outbound freight movement. Such finding seems wholly consistent with both the letter and intent of the subject zero-rating provision.

[34] The foregoing findings do not apply to all the Malina transactions. There are three Malina transactions that require separate analysis. Two transactions relate to the shipment of goods by air and the third transaction relates to the sale of a container. In respect of the shipments by air, Ms. Taylor again testified that the Appellant's services were a necessary part of the transportation of the goods to Russia. As in the case of transporting goods by rail and sea, using ocean containers, the shipper relied on the specialized services of the Appellant to load its goods for export. The only difference in the air cargo transactions was that delivery was time sensitive. The loading for the two air cargo shipments was at the Appellant's site. Transaction time records, as reflected on the detailed invoices, show crates were loaded and in one case S.G.S. inspected (and presumably sealed) at the Appellant's yard. While crating goods in preparation for transit might in some cases be found to be pre-transportation services,[18] I cannot, on the facts of this case and in light of the strong testimony of the witnesses as to the nature of the supplies that the Appellant provided this shipper, distinguish between supplies that differ only as a consequence of delivery timetables requiring occasional use of air freight. The essence or true nature of the supply in these two transactions is unchanged from that provided in the case of goods being shipped by sea. Accordingly, I would find that the air freight transactions are zero-rated.

[35] With respect to the third transaction not covered by the preceding analysis, that transaction involved only the sale of a container to Malina. I see no reason to distinguish it from the transactions engaged in by the Appellant with Brytex which I will deal with momentarily.[19] Accordingly, such a transaction (invoice 811) would not be zero-rated.

The Mancap Transactions

[36] The shipper in the 11 Mancap transactions occurring during the assessment period, did not provide the declaration required in paragraph 7(a) above. If the essence of a supply depends largely on the intentions and actions of the shipper, as I believe it does, the declaration of the shipper must be sought both as a statutory requirement and as an aid to making a necessary factual determination. Aside from factual differences in the Appellant's transactions with Malina (which may or may not have been material), Mancap's refusal to provide the declaration speaks loudly. Indeed it is fatal to the appeal under section 7. No other zero-rating provision was asserted to apply to these transactions and the evidence would not appear, in any event, to support the application of any other zero-rating provision.

[37] The Appellant argued that the prescribed form required by the subject paragraph 7(a) seemed suspect and may never have been properly prescribed. The basis of the argument was that the only place the form was available was in a Revenue Canada publication (New Memorandum 28-2 dated December 1998) and that a properly prescribed form should be otherwise traceable, perhaps to an order-in-council or gazette. The Respondent made no reply to this argument. If a case is to be made that a prescribed form has not been properly prescribed and that that being so renders the requirement in the Act ineffective, then the case should be better put than to merely suggest that if one cannot either find the form readily or readily find out how it came to be prescribed then one should not be required to comply with the terms of the Act. I also note that the prescribed form seems to have been available for some time.[20] In any event, I would not allow the appeal in respect of any of the Mancap transactions on the basis of the failure of Mancap to provide the declaration required by paragraph 7(a).

The Brytex Transactions

[38] The transactions with Brytex (of which there were two) were simply sales by the Appellant of ocean shipping "containers". Unattested to correspondence from Brytex tendered as an exhibit stated that the containers were used to ship "building packages" to Russia. The cost of the containers was billed by Brytex as part of the exported goods. Even accepting this evidence, it seems that the containers were exported in the course of the export of the contents loaded into them. A truck bought in Canada for transporting goods loaded here is used in Canada even when the truck is used as the vessel of transport to export such goods. The same applies to intermodal containers.

[39] The evidence is that aside from the sale, the Appellant provided no services at all in respect of the container sales to Brytex. The loading services were supplied by others. Based on this evidence, these transactions cannot be zero-rated under section 7 of Part VII of Schedule VI. Nor can they be zero-rated under section 1 of Part V of Schedule VI to the Act. I have no direct evidence to support any assertion that the containers were an "exported" good. Further, the sales were of goods to be used in Canada for the export of other goods. That they may have been priced as an exported good by Brytex cannot change the fact that they were used in Canada as containers for shipping other goods and as such were used in Canada before the exportation. Paragraph 1(b) of Part V of Schedule VI expressly prevents such supply from being zero-rated under section 1 of that Part of that Schedule. That paragraph excludes goods used in Canada. There is no other provision under that Part of that Schedule that would zero-rate these transactions.

Penalties

[40] The testimony of Iles was that on least two occasions the Appellant sought clarification and guidance from Revenue Canada as to its collection and remittance requirements in respect of the transactions covered by this appeal. The Appellant was told that the subject services were zero-rated. While I accept that testimony and concede the extraordinary complexities and difficulties associated with determining collection and remittance obligations in respect of transactions of the type under appeal, I would not allow the appeal in respect of the imposition of penalties on the Bytex and Mancap transactions. The due diligence defence requires affirmative proof that all reasonable care was exercised to ensure that errors were not made.[21] Phone calls and general inquiries, particularly in complex cases, are not sufficient and arguing that more diligence may not have been fruitful (due to the complexities of the case) would not excuse exercising less than reasonable care. The absence of shipper declarations in respect of the Malina transactions until well after the transactions were completed highlights the less than diligent approach of the Appellant in these matters. For these reasons I find that the due diligence defence is not available in respect of the Bytex and Mancap transactions and, as well, is not available in respect of the single Malina transaction that is not zero-rated pursuant to the foregoing findings (i.e. invoice 811).

Signed at Ottawa, Canada, this 5th day of June 2001.

"J.E. Hershfield"

J.T.C.C.

[1] More particularly it seems the Malina shipments were bound for Kazakhstan formerly of Russia.

[2] There are three exceptions in Malina's case: two transactions dealing with air freight to Russia and a transaction, like the Brytex transactions, dealing with the sale of a container itself.

[3] The pick up and delivery of goods bought by Malina in and near Edmonton was assigned to the Appellant who subcontracted such service to a third party and billed Malina. Ms. Taylor testified that supplier's had no experience in exporting goods so deliveries F.O.B. supplier's place of business was required. From Malina's perspective moving the goods from that point on were part of the exportation process.

[4] In the case of Malina the loading arrangements were left solely to the Appellant. In the case of Mancap the contents of particular containers was dictated by Mancap as the efficiencies of their home building project in Japan depended on particular materials for particular cites arriving together in a particular container. Such efficiencies to the construction project in Japan dictated more time consuming staging requirements for the Appellant at its facility. This generally meant that goods for Mancap were stored for longer periods than was the case for Malina. The Appellant's possession of shipments for Malina was in the range of 3-4 weeks during which the Appellant controlled the goods, whereas in the case of Mancap the Appellant may have held goods for several months under the direction of Mancap.

[5] These and other services set out in paragraph 11 above are arguably pre-transportation services, which the Respondent argues are the essence of the services provided by the Appellant. The evidence, most particularly Ms. Taylor's testimony, does not support this argument as to the essence of the services contracted for by Malina.

[6] The disassembly or dismantling services are themselves zero-rated under section 20 of Part V of Schedule VI.

[7] This was testified to by Ms. Taylor, not by Iles, who made no mention of it. Nor did he make mention of the nature of the seals that the Appellant was authorized to use in closing off the containers for Russian import purposes. S.G.S. certification is, according to Ms. Taylor, a certification provided by a shipping authority in Houston, Texas. No further particulars as to the nature of this certification were provided except that invoices recorded S.G.S. inspection time in some transactions. The Respondent made no attempt to challenge Ms. Taylor on this evidence which Ms. Taylor regarded of considerable importance.

[8] [1995] G.S.T.C. 40 (T.C.C.).

[9] No declaration was ever provided by Mancap. One was provided by Malina however the declaration provided by Malina was made after the transactions were carried out. The Respondent did not argue that the requirement in the Act was that the declaration be made before the transaction arose. While the requirement in paragraph 7(a) might be taken to be anticipatory of the service, the risk of not getting the declaration in advance is that the shipper might refuse to give it after. If the service was provided in anticipation of the declaration being provided and no tax was collected and remitted, the failure to get the declaration would result in a 7% tax imposed on a supplier in respect of its own services. That is, any anticipatory suggestion to be taken from the requirement might be taken as the anticipation that the supplier would in fact get the declaration in advance to protect itself. Failing to protect oneself in advance should not be taken as fatal unless the statute expressly makes it so. Paragraph 7(a) does not expressly state that the declaration be made in advance. The anticipatory aspect is derived from the tense of some of the actions described in the subject paragraph - most notably "to be supplied by". In the case of Malina the declaration was provided and that should be sufficient. Counsel for the Appellant suggested that the case Nassau Walnut Investments Inc. v. R., [1998] 1 C.T.C. 33 (F.C.A.) is helpful here and that, following the reasoning in that case, the how and the when of providing the declaration should not be critical. That may be as well, but no such finding is required in this case, in my view. The Respondent did not assert that the declaration was not timely provided and, as stated, I see no time limit expressly provided for in the subject paragraph. These provisions should be applied reasonably to give effect to their intent, which is make Canadian exports competitive.

[10] Dangerous Goods Packaging Ltd. v. The Queen, [1994] G.S.T.C. 87 (T.C.C.) has been cited as authority that to be a "carrier" the supplier of services needs to be a licensed carrier. I do not think this case stands for the proposition that a service provider need, in all circumstances, be a licensed carrier to be a "carrier" for the purposes of this part of the Act. The Act imposes no such condition and to impose one on the facts of this case would not be appropriate. If the Appellant has provided freight transportation services of a nature that clearly bring it into the transportation system, the terms of the Act will constitute it a "carrier". In such circumstances, persons who are not carriers in a "literal" sense, licensed or not, will be carriers under the Act because their services are part of the transportation scheme.

[11] The findings in O.A. Brown, if applied in the context of freight transportation services (see paragraph 17 above) may be more onerous than the statutory provisions. The rule in that case would require identifying the essence of the transaction and would attach the tax consequence accordingly. Under the definition of "freight transportation service", any transportation service (whether the essence of the overall service or not), can be a particular service making all other incidental services by the same supplier freight transportation services. Accordingly, transportation services that are not the essence of the supply contracted for might still be zero-rated. Where the essence of the supply is a transportation service, all the more compelling the reason to identify a particular service as a "service of transporting" for the purposes of meeting the requirements of section 7.

[12] See also the definition of transportation in the Canadian Law Dictionary. That definition, with respect to freight, includes the care, handling and storage of the freight. Handling would include loading and reloading freight into its vessel of transport. Reloading is administratively accepted by Revenue Canada as a transporting service. Loading for a mode of transportation that eliminates reloading requirements during transportation is surely part of the operation of a transport system as well. Counsel for the Respondent, defending the position of the Respondent that dockside reloading is a "transporting" service, argued that container loading services were distinguishable in that the former service (dockside reloading) was incidental to the transit of goods and occurred in the otherwise uninterrupted course of actual carriage whereas the latter loading services were incidental to packaging services occurring before the uninterrupted carriage of goods began. Such position not only ignores the evidence in this case as to the essence of the service contracted for but lacks common sense. The inefficiencies of reloading should not be taken to have been intended to be rewarded in our tax rating scheme by only zero rating such services. Loading services (where the loading is of goods into their final vessel of transport) are surely as much a transportation service as a reloading service.

[13] Revenue Canada's administrative practice seems to allow stevedoring services as zero-rated transporting services. At least this would be their practice if the service was performed by the carrier. The narrowness of the administrative practise derives from the narrowness of Revenue Canada's view of who a "carrier" can be. Regardless, I am of the view that in transactions such as the Malina transactions, loading goods for export is a particular service of transporting, making the service a freight transportation service. That would also make Malina a carrier whose loading services would then be zero-rated even under Revenue Canada's own guidelines (if the other requirements in section 7 are met).

[14] Nowegijick v. R., 83 DTC 5041 at 5045 (S.C.C.).

[15] The interliner rules are in subsection 1(2) of Part VII of Schedule VI.

[16] While the Respondent did not concede that the Appellant's services were part of the "continuous freight movement", no argument was advanced as to why they were not. It seems however that the Respondent's position would be that the first carrier was the carrier engaged to pick up the containers after being loaded by the Appellant. The freight forwarder responsible for the bill or bills of lading for the carriage of the goods to Montreal and then on to Finland and Russia would have arranged same in respect of the carriage of the goods after the Appellant's services were completed. The Respondent might have argued that this suggests that transportation services and hence the continuous freight movement commenced after the completion of the Appellant's services. Any such suggestion, were it made, would, in my view, be unwarranted. It would presume the Appellant is not a carrier providing a transportation service and that the shipper cannot independently arrange such services. None of the facts of this case nor the provisions of the Act nor the objectives of those provisions support such presumption.

[17] There is no suggestion that the definition of continuous outbound freight movement requires that only one transportation leg be within Canada. That is, "from a place in Canada .. to another place in Canada" can include more than one leg or more than one carrier's freight transportation services.

[18] A crate is arguably packaging material as opposed to a vessel of transport and crating services might be pre-transportation packaging services as opposed to freight transportation services. In such cases the supplier would not be a "carrier". The services in the case at bar however are fundamentally and principally loading services supplied as part of the transportation of goods being exported.

[19] Counsel for the Appellant pointed out that the Notice of Decision had indicated that cargo containers supplied to Malina were zero-rated according to section 12, Part V of Schedule VI. As a result of this position the objections were supposed to have been partly accepted and the assessment adjusted accordingly. Nonetheless, the reassessment made no adjustment for container sales. What I have to deal with is the reassessment and I see no basis for zero-rating container sales. It is noted, however, that in some of the transactions in respect of which I have found that section 7 applies, container sales were included. In these transactions there is evidence that these goods were actually part of the exported goods since containers sent to Russia were never returned. More importantly, the other transactions involved a particular service of transporting so that the supply of the container could be attached to such supply. In the context of O.A. Brown, the essence of the supply was loading. The provision of the container was incidental to that supply and should thereby not be carved out for separate scrutiny.

[20] The 1994 case of Dangerous Goods Packaging Ltd., supra, refers to this prescribed form which the supplier in that case located and completed without apparent difficulty. That is, the form is apparently available and being used. Further, in the case at bar, the Appellant eventually did find the required form and Malina signed it albeit well after the transactions had been performed. The evidence is that Mancap refused to sign the declaration.

[21] Pillar Oil Field Projects Ltd. v. The Queen, [1993] G.S.T.C. 49 (T.C.C.).

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Bam Packaging Ltd. v. The Queen, docket 2000-1606-GST-I (Informal Procedure)

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