J.P.L. International Diffusion Inc. v. Canada, docket T-3038-94

Date: 19980226

Docket: T-3038-94

BETWEEN:

     J.P.L. INTERNATIONAL DIFFUSION INC.

     Plaintiff

     - and -

     HER MAJESTY THE QUEEN

     Defendant

     REASONS FOR JUDGMENT

McGILLIS, J.

INTRODUCTION

[1]      The plaintiff J.P.L. International Diffusion Inc. ("J.P.L.") has alleged that it erroneously paid federal sales tax on the sales of its products to its distributors on the basis of advice received from various officials of Revenue Canada-Customs and Excise ("Revenue Canada") indicating that it was required to remit the tax. The question to be determined on this appeal by way of trial de novo is whether J.P.L. had an obligation, legally or by virtue of an industry agreement with Revenue Canada, to remit federal sales tax on the sales of its products to its distributors.

FACTS

[2]      The Allied Beauty Association ("Association") is a trade organization composed of manufacturers and distributors of beauty products in Canada. The Association promotes the beauty industry and engages in negotiations or discussions with the Government on matters concerning the industry. Most companies and people involved in the beauty industry are members of the Association.

[3]      In July 1981, the Government amended the Excise Tax Act, R.S.C. 1970, c. E-13, as amended, by enacting sections 1 to 47 of the Act to amend the Excise Tax Act and the Excise Act and to provide for a revenue tax in respect of petroleum and gas, S.C. 1980-81, c.68. Those amendments shifted the obligation to pay federal sales tax on cosmetics from the manufacturers to the distributors. Following the enactment of those amendments, the Association had discussions with Revenue Canada for a period of approximately two or three years concerning the method of payment for the federal sales tax due to problems experienced in the beauty industry. As a result of those discussions, it was agreed between the Association and Revenue Canada that a manufacturer selling products to a distributor could pay the federal sales tax. Furthermore, a distributor could pay the federal sales tax on only the mark-up portion of retail items sold by its customer, typically a beauty salon, for products sold at the retail level to consumers. In particular, it was agreed that products bottled in a container larger than 450 ml were considered to be destined for use by a beauty salon in its operations; products under the 450 ml size were considered to be sold at the retail level.

[4]      Following that agreement, Revenue Canada sent a communiqué to members of the Association informing them of the details of the arrangement, known as the Alternate Tax Accounting Method. Since that time, it has been the norm in the beauty industry for federal sales tax to be calculated and remitted by the manufacturer on its price to the distributor.

[5]      From 1980 to 1984, Jean-Pierre Louis worked as a sales consultant for Guay Beauté Inc., a distributor of professional hair care products to beauty salons in Montréal. In 1984, Mr. Louis established a sole proprietorship which was in the business of importing and selling professional hair care products to distributors across the country. In 1986, he incorporated J.P.L., and began manufacturing professional hair care products in Montréal. At that time, J.P.L. was the exclusive manufacturer of Paul Mitchell hair care products for Eastern Canada. Approximately 80% of its manufactured products consisted of shampoo, and the remainder was composed of conditioners, treatments and other hair care products; its products were manufactured in a variety of sizes, from 50 ml to gallon size bottles. J.P.L. sold "virtually 100%" of its manufactured products to distributors who resold the products to beauty salons. J.P.L.'s sales of the manufactured Paul Mitchell products accounted for over 90% of its business; less than 5% of its sales consisted of "jobbed goods" which were not manufactured by J.P.L., including products such as hairblowers and hairbrushes. After its incorporation in 1986, J.P.L. joined the Association.

[6]      Around the time that Mr. Louis incorporated J.P.L., he made inquiries with Revenue Canada concerning the issuance of a federal sales tax permit. On September 1, 1987, J.P.L. received its federal sales tax permit as a manufacturer, relating to its operations as a "manufacturer or producer" of cosmetics under the provisions of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended ("Act"). By letter dated September 28, 1987, an investigation agent from the Licensing Section - Fiscal Interpretations in Revenue Canada confirmed that, during his earlier meeting with Mr. Louis, he had provided copies of "...memoranda pertinent to [J.P.L.'s] operations..." and the necessary forms. He also advised Mr. Louis, among other things, of J.P.L.'s tax rate on goods which it manufactured or produced. Furthermore, he stated the following with respect to J.P.L.'s obligations:

With respect to sales exempt from tax, such sales must be supported by an exemption certificate which your client would have furnished to you or by any other acceptable proof showing that you have exported the goods as set out in memorandum ET308. Exemption certificates are described in memorandum ET301.

     ...

An individual tax return on form B-93, must be submitted for each calendar month, including a declaration of "nil" tax for the months during which no applicable sale tax had been collected. Pursuant to Section 50 of the Excise Tax Act, such declarations must be produced and eligible tax revenue must be remitted no later than the last day of the month which follows the month during which sales take place.

[7]      By letter dated October 26, 1987, the Regional Director of Fiscal Interpretations for Revenue Canada advised Mr. Louis that J.P.L. had been granted a permit as a manufacturer, and included information and memoranda concerning the federal sales tax, as well as the forms required to be submitted on a monthly basis. He also indicated in his letter, among other things, that J.P.L. was "...required pursuant to section 50 of the [Act] to submit each month a declaration, whether or not there have been any sales."

[8]      In April 1988, Mr. Louis purchased Clajac Disributors (Canada) ("Clajac"), the exclusive manufacturer for Paul Mitchell hair care products in Western Canada, in order to ensure that he would have the exclusive manufacturing rights for Paul Mitchell products throughout Canada. J.P.L. and Clajac "ran parallel" to each other for a few years, and operated in the same manner.

[9]      By letter dated October 17, 1988, an inspector from the Licensing Division, Fiscal Interpretation in Revenue Canada advised Mr. Louis, among other things, of Clajac's federal sales tax rate as a manufacturer, and forwarded to him information, forms and various memoranda concerning the federal sales tax. He also informed Mr. Louis of the exemption certificate required to exempt certain sales from tax. Finally, he indicated that a tax return must be submitted for each calendar month. As a result, Clajac paid federal sales tax on its manufactured products every month.

[10]      In 1989, Mr. Louis incorporated Tosca Research Laboratories Inc. ("Tosca"). By letter dated May 29, 1989, an inspector from the Licensing Service, Fiscal Interpretation in Revenue Canada provided Mr. Louis with essentially the same information concerning the federal sales tax that he had received previously on two other occasions.

[11]      In July 1989, Mr. Louis merged Clajac into J.P.L.

[12]      By letter dated July 17, 1989, the Regional Chief of Fiscal Interpretation for Revenue Canada forwarded the manufacturer's license for Tosca, together with forms for the remittance of federal sales tax. In his letter, he indicated the date by which Tosca was required to remit its first instalment of tax, and confirmed that payments were required on a monthly basis. Tosca did no business during the relevant time period.

[13]      In 1988 and 1989, J.P.L. had fifteen to twenty customers located across Canada, none of whom were beauty salons. As indicated previously, "virtually 100%" of its customers were wholesale distributors. Its annual sales were approximately $6,000,000.00 each year.

[14]      Every month, J.P.L. submitted the required forms to Revenue Canada and remitted its federal sales tax, on the basis of Mr. Louis' belief and understanding that his company was obliged by the Act to do so. Mr. Louis never discussed the payment of federal sales tax with any other manufacturer, with any customers or with anyone from the Association; he simply assumed that other companies "did the same". Furthermore, Mr. Louis never received any information from the Association or Revenue Canada concerning the Alternative Tax Accounting Method for the payment of federal sales tax. Indeed, in all of the materials provided to Mr. Louis by Revenue Canada in relation to all three of his companies, there was no mention of the Alternate Tax Accounting Method. Mr. Louis did not at any time seek advice from a lawyer or an accountant concerning his company's obligation to pay federal sales tax; rather, he simply followed the procedure outlined to him by the officials of Revenue Canada. Similarly, J.P.L.'s Vice-President (Finance) never discussed the question of federal sales tax with anyone, and he also assumed on the basis of the Revenue Canada letters that J.P.L. was required to remit it. As a result, J.P.L. included the federal sales tax in the sale price of its products; the tax was not shown on its invoices to its customers.

[15]      The distributors who purchased J.P.L.'s manufactured products in turn sold those products to beauty salons for their use and also for resale to consumers. The products most frequently offered for sale at the retail level by beauty salons to their customers were those in the 250 or 300 ml sizes. In accordance with the Alternate Tax Accounting Method, the distributors charged the beauty salons federal sales tax on those products destined for resale at the retail level, in particular for products bottled in sizes of 450 ml or smaller.

[16]      In 1990, J.P.L. retained Ninecan, a management consulting firm specializing in the payment of federal sales tax and other non-income tax matters, to conduct a review of its operations and to provide advice concerning possible opportunities for reducing its sales tax burden, including the federal sales tax. During the course of its audit, Ninecan confirmed that J.P.L. had remitted federal sales tax on a monthly basis, in conformity with the procedures specified in the letters from Revenue Canada. It further confirmed that J.P.L. had sold its products almost exclusively to distributors who resold the products to beauty salons. Ninecan examined the Revenue Canada Sales Tax Licensee book and confirmed that all of J.P.L.'s clients were registered licensed manufacturers under the provisions of the Act.¹ Following its review, Ninecan advised J.P.L. that, by virtue of paragraph 50(5)(g) of the Act, it appeared that J.P.L. was not required to pay the federal sales tax on the sale of its manufactured products, which are defined as "cosmetics", since its customers were distributors who were deemed under the Act to be licensed manufacturers.

[17]      In order to preserve J.P.L.'s rights under the statutory time period in the Act, Ninecan prepared an application for refund of federal sales tax, dated December 1, 1990, covering the period from July 1, 1989 to November 30, 1990. In that application, J.P.L. sought a refund under section 68 of the Act on the basis that it had paid the federal sales tax in error. The total amount of refund claimed was $1,140,586.10.

[18]      Ninecan also prepared an application for refund of federal sales tax for Clajac, for the period from July 1, 1988 to June 30, 1989, in the amount of $378,148.28. In that application, Clajac sought a refund under section 68 of the Act on the basis that it had paid the federal sales tax in error.

[19]      By memorandum dated February 25, 1991, J.P.L. wrote to all of its customers, requesting them to confirm that they were licensed for federal sales tax purposes, and that they remitted federal sales taxes. Between 97 and 99% of J.P.L.'s customers responded affirmatively to the questions posed by J.P.L.

[20]      At some point in time between March 1991 and July 1991, Ninecan met with an auditor from Revenue Canada concerning the J.P.L. refund application, provided her with all of the supporting documentation, and explained the basis for the application. Ninecan also met with a different auditor concerning Clajac's application for a refund.

[21]      Revenue Canada accepted Clajac's application for a refund of federal sales tax. By cheque dated April 18, 1991, the Government reimbursed Clajac in the amount of $314,253.39, for the federal sales tax which it had remitted in error.

[22]      On July 5, 1991, the Deputy Minister of National Revenue issued a Notice of Determination rejecting J.P.L.'s application for a refund. In the explanation portion of the Notice of Determination, the Deputy Minister stated as follows:

Explanation of Determination

The request has been rejected.

The vendors included in the definition of manufacturer or producer may chose to acquire merchandise on which the tax is imposed on the sale in bulk, resulting in the payment of the tax and the preservation of their stock. At the moment of sale of these goods to consumers, no other tax is imposed. In the case of sales to persons other than consumers, sales tax would apply to the actual sale price less the credit accorded for the federal sales tax paid by the supplier at the moment of the sale to the bulk vendor.

Code 3700/83-1

By virtue of the information we have obtained from different sources and the minimal amount of documentation available, we have come to the conclusion that the clients have opted to pay the sales tax.

[23]      Following receipt of the Notice of Determination, Ninecan considered the explanation offered by the Deputy Minister of National Revenue. In particular, it examined Revenue Canada's Ruling Card 3700/83-1, which read as follows:

SUBJECT: Alternative Tax Accounting Method for Retailers/Wholesalers of Goods Taxed at the Wholesale Level

PERTINENT FACTS: Persons who are licensed for selling goods taxed at the wholesale level are liable for tax on the sale price of such goods sold by them, including those goods sold to consumers. These people are operating in direct competition with retailers who purchase the same goods on a tax paid basis and have no further liability for tax.

In order to accommodate persons who operate as retailers/wholesalers into the existing tax structure on an equitable basis, an alternative tax accounting method has been developed for their use.

DECISION: Combination retailer/wholesalers who are included in the definition of manufacturer or producer may elect to purchase goods which are taxed at the wholesale level on a sales tax paid basis and to hold tax paid inventories of these goods. On their sales to consumers, no further tax would apply. On sales to other than consumers, sales tax would apply to the actual sale price less a credit allowed for the federal sales tax paid by the supplier on the sale to the retailer/wholesale. If the amount of the tax paid by the supplier is not known, the formula outlined in ET 313 may be used to determine the amount.

Should the combination retailer/wholesaler elect to maintain a tax free inventory, tax will be payable on the sale price on sales to all customers, including consumers.

If the alternative method of accounting is used it must be used in a consistent manner.

Physical manufacturers of taxable goods who also job goods taxed at the wholesale level may only elect to use the alternative method of accounting for tax for their jobbed lines.

[24]      Ninecan advised J.P.L. that, in its opinion, Ruling Card 3700/83-1 applied to wholesalers and retailers and not to manufacturers such as J.P.L. As a result, by Notice of Objection dated October 1, 1991, J.P.L. filed an objection to the Notice of Determination.

[25]      Ninecan subsequently met with an appeals officer from Revenue Canada in order to explain the basis for J.P.L.'s objection. In particular, Ninecan indicated that, in its opinion, Ruling Card 3700/83-1 did not apply to the actual manufacturer of cosmetics, but rather to wholesalers and retailers. It further explained that, in any event, J.P.L. was unaware of the existence of the Alternate Tax Accounting Method outlined in Ruling Card 3700/83-1.

[26]      By letter dated February 12, 1993, the appeals officer from Revenue Canada stated, among other things, the following to Ninecan:

You have enquired as to the scope and extent of the relieving provision in paragraph 50(5)(f) of the Excise Tax [Act]. This provision is seen as an in personam provision which means that a qualifying licensed purchaser who seeks tax relief must state or certify to the licensed supplier that the cosmetics being purchased meet the conditions set forth in said paragraph. This is available to a licensed manufacturer or producer who is otherwise liable for the tax imposed by paragraph 50(1)(a) of the Act on this sales of the goods.

Memorandum ET 301, Certificates of exemption, contains in paragraph 5 therein, proposed wording which accurately describe the situation.

Other available documentation from the purchaser which substantiates that the applicable exempting criteria have been met, may be accepted, where it equally and clearly refers to given purchases and supplier's sales invoices.

Under the Act, manufacturers or producers are liable for payment of the tax calculated on their sale price of the taxable goods of their manufacture or production unless they are in a position to provide evidence to substantiate bona fide tax free sales. In this respect, the provisions of section 116 of the Act must be borne in mind.

[27]      Ninecan reviewed the letter dated February 12, 1993, but failed to understand the reference to an "in personam " provision. It also examined memorandum ET-301, which was referred to in the letter, and determined that it applied only to exported goods. Since J.P.L. did not export goods from Canada, Ninecan concluded that memorandum ET-301 had no application to J.P.L.'s situation. Since the appeals officer made no reference in his letter to the Alternate Tax Accounting Method outlined in Ruling Card 3700/83-1, Ninecan believed that Revenue Canada had accepted the earlier submissions, made by Ninecan on behalf of J.P.L., that the Ruling Card did not apply to J.P.L.

[28]      By letter dated February 23, 1993, Ninecan stated as follows to the appeals officer:

It is our position that paragraph 50(5)(g) of the Excise Tax Act does not require a licensed manufacturer to state or certify in any form an "exemption certificate", to obtain cosmetics exempt of tax. There is no mention of the word "exemption certificate" in the Excise Tax Act. It is clear that both the supplier (JPL) and the purchaser (a customer of JPL) are both Licensed manufacturers, and the goods at issue are cosmetics.

Paragraph 50(5)(g) of the Excise Tax Act relieves JPL from paying the tax on goods sold to another licensed manufacturer, if the goods are cosmetics.

[29]      On June 11, 1993, the Minister of National Revenue rendered the following decision in relation to J.P.L.'s objection:

     NOTICE OF DECISION

Your objection to Determination Number MTL 10273, dated July 5, 1991, has been carefully considered in accordance with the relevant provisions of the Excise Tax Act.

The Minister of National Revenue has considered the information and reasons set forth in your Notice of Objection and renders the following decision.

Your objection is disallowed and the determination is confirmed.

Your representation is that you have paid tax in error under subsection 2(1) and you are seeking a refund for the overpayment. You explain separately that paragraph 50(5)(g) of the Act does not require a licensed manufacturer to state or certify in any form an "exemption certificate", to obtain cosmetics exempt of tax. It relieves your company from paying the tax on goods sold to another licensed manufacturer, if the goods are cosmetics.

The study of your file revealed that none of the purchasers of cosmetics sought tax relief at the time the sale and delivery of the goods took place nor did they provide you, as their supplier, with their manufacturer's sales tax licence and any certification or statement to that effect.

Consequently, there is no evidence that the in personam provisions of paragraph 50(4)(g) of the Act were complied with and as a result the tax payable and paid by you under subsection 50(1) of the Act cannot give rise to a refund. [Emphasis added]

[30]      The reasoning in the ministerial decision substantially reflected the position taken by the appeals officer in the letter dated February 12, 1993. In particular, the Minister noted that J.P.L.'s distributors did not seek tax relief and did not provide their manufacturer's sales tax licence and certificates of exemption. In other words, the Minister concluded that J.P.L. was required to obtain exemption certificates from its customers in order to avoid liability for the federal sales tax.

[31]      J.P.L. appealed the ministerial decision to the Canadian International Trade Tribunal. On August 31, 1994, the Tribunal dismissed J.P.L.'s appeal.

[32]      On December 22, 1994, J.P.L. appealed the decision of the Tribunal, under section 81.24 of the Act, by filing a Statement of Claim in the Court.

ISSUE

[33]      The question to be determined on this trial de novo is whether J.P.L. was liable to pay the federal sales tax on its sales to distributors.

ANALYSIS

i) Admissibility of Evidence subsequent to Notice of Determination

[34]      During the course of the trial, counsel for the defendant objected to the admissibility of all evidence concerning the actions of Revenue Canada subsequent to the Notice of Determination issued on July 5, 1991. In particular, he objected to the admissibility of the ministerial Notice of Decision made on June 11, 1993. In support of his objection, counsel for the defendant relied on subsection 81.31(1) of the Act which provides as follows:

81.31 (1) After hearing an appeal under this Part, the Federal Court -- Trial Division may dispose of the appeal by making such order, judgment, finding or declaration as the nature of the matter may require including, without limiting the generality of the foregoing, an order      (a) dismissing the appeal; or      (b) allowing the appeal in whole or in part and vacating or varying the assessment or determination or referring it back to the Minister for reconsideration

81.31(1) Après avoir entendu un appel prévu à la présente partie, la Section de première instance de la Cour fédérale peut statuer en rendant une ordonnance, un jugement, une décision ou une déclaration, selon la nature de l'affaire, y compris, sans préjudice de la portée générale de ce qui précède, un ordonnance      a) soit rejetant l'appel;      b) soit faisant droit à l'appel en totalité ou en partie et annulant ou modifiant la cotisation ou la détermination faisant l'objet de l'appel ou renvoyant l'affaire au ministre pour réexamen.

[35]      Counsel for the defendant noted that paragraph 81.31(1)(b) of the Act permits the Court, among other things, to vacate or vary the assessment or determination or to refer it back to the Minister. As a result, he argued that paragraph 81.31(1)(b) of the Act limits the jurisdiction of the Court by permitting it to consider only the original assessment or determination made by Revenue Canada. He therefore submitted that any actions or decision of the Minister subsequent to the original determination were inadmissible on the basis of irrelevance.

[36]      The argument advanced by counsel for the defendant has been made without regard to the statutory scheme. By virtue of subsection 81.17(1) of the Act, a person who objects to a determination made under sections 68 or 69 may serve a notice of objection on the Minister. Under subsection 81.17(4), the Minister must reconsider the determination and vacate, vary or confirm the determination. Once the Minister has reconsidered the decision, subsection 81.17(5) of the Act requires as follows:

81.17(5) After reconsidering a determination, the Minister shall send to the person objecting a notice of decision in the prescribed form setting out      (a) the date of the decision;      (b) the amount payable, if any, to the person objecting;      (c) a brief explanation of the decision, where the Minister rejects the objection in whole or in part; and      (d) the period within which an appeal may be taken under section 81.19 or 81.2

81.17(5) Après avoir réexaminé une détermination, le ministre doit envoyer à l'opposant un avis de décision en la forme prescrite, énonçant:      a) la date de la décision;      b) le montant, s'il en est, payable à l'opposant;      c) les raisons concises de sa décision, s'il rejette l'opposition en totalité ou en partie;      d) la période en cours de laquelle il peut être interjeté appel de la décision en vertu des articles 81.19 ou 81.2.

[37]      Section 81.19 of the Act provides the following right of appeal to the Canadian International Trade Tribunal to a person who has served a notice of objection:

81.19 Any person who has served a notice of objection under section 81.15 or 81.17, other than a notice in respect of Part I, may, within ninety days after the day on which the notice of decision on the objection is sent to him, appeal the assessment or determination to the Tribunal.

81.19 Toute personne qui a signifié un avis d'opposition en vertu de l'article 81.15 ou 81.17, autre qu'un avis à l'égard de la partie I, peut, dans les quatre-vingt-dix jours suivant la date d'envoi de l'avis de décision concernant l'opposition, appeler de la cotisation ou de la détermination au Tribunal.

[38]      By virtue of section 81.24 of the Act, a party to an appeal to the tribunal may appeal the decision to the Court.

[39]      A review of the relevant statutory provisions confirms that it is the ministerial reconsideration, made pursuant to subsection 81.17(4) of the Act, which triggers the appeal process. Indeed, under the express terms of section 81.19 of the Act, no appeal can be instituted unless a person has filed a notice of objection to the determination, and has received a notice of decision from the Minister. Furthermore, by virtue of subsection 81.17(4) and section 81.19 of the Act, it is the determination, as reconsidered by the Minister in the notice of decision, that is the subject of the appeal. In the circumstances, the evidence concerning the notice of objection and the ministerial decision is not only admissible, but it is the subject of the case under appeal.

ii) Legislative scheme and liability of J.P.L. to pay federal sales tax

[40]      Subparagraph 50(1)(a)(i) of the Act provides for the imposition of sales tax on manufactured goods in the following terms:

50(1)      There shall be imposed, levied and collected a consumption or sales tax at the rate prescribed in subsection (1.1) on the sale price or on the volume sold of all goods      (a) produced or manufactured in Canada                   (i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier,

50(1)      Est imposée, prélevée et perçue une taxe de consommation ou de vente au taux spécifié au paragraphe (1.1) sur le prix de vente ou sur la quantité vendue de toutes marchandises:      a) produites ou fabriquées au Canada                   (i) payable, dans tout cas autre que ceux mentionnés aux sous-alinéas (ii) ou (iii), par le producteur ou fabricant au momen où les marchandises sont livrées à l'acheteur ou au moment où la propriété des marchandises est transmises, en choisissant celle de ces dates qui est antérieure à l'autre.

[41]      However, paragraph 50(5)(g) of the Act exempts cosmetics from the payment of sales tax in the following circumstances:

50(5)      Notwithstanding anything in subsection (1), the consumption or sales tax shall not be payable on goods.      ...          (g) sold to or imported by a person described in paragraph (d) of the definition "manufacturer or producer" in subsection 2(1) who is a licensed manufacturer under this Act, if the goods are cosmetics;

50(5)      Par dérogation au paragraphe (1), la taxe de consommation ou de vente n'est pas exigible sur les marchandises suivantes:      ...          g) celles vendues ou importées par une personne visée à l'alinéa d) de la définition de "fabricant ou producteur" au paragraphe 2(1) qui est un fabricant titulaire de licence sous le régime de la présente loi, si elles sont des cosmétiques.

[42]      Under the definitions contained in subsection 2(1) of the Act, "cosmetics" include shampoos and similar preparations. Furthermore, subsection 2(1) of the Act defines "manufacturer or producer" as including the following:

"manufacturer or producer" includes               ...      (d) any person who sells, otherwise than in a retail store exclusively and directly to consumers, cosmetics that were not manufactured by him in Canada, other than a person who sells those cosmetics exclusively and directly to hairstylists, cosmeticians and other similar users for use in the provision of personal grooming services and not for resale,               ...      (f) any person who, by himself or through another person acting for him, prepares goods for sale by assembling, blending, mixing, cutting to size, diluting, bottling, packaging or repackaging the goods or by applying coatings or finishes to the goods, other than a person who so prepares goods in a retail store for sale in that store exclusively and directly to consumers,

"fabricant ou producteur" y sont assimilés :               ...      d) toute personne qui vend, autrement que dans un magasin de détail exclusivement et directement aux consommateurs, des cosmétiques qui n'ont pas été fabriqués par elle au Canada, à l'exclusion d'une personne qui vend ces cosmétiques exclusivement et directement aux coiffeurs, esthéticiens et autres usagers semblables pour utilisation lors de l'administration de soins personnels et non pour la revente;               ...      (f) toute personne qui, y compris par l'intermédiaire d'une autre personne agissant pour le compte de celle-ci, prépare des marchandises pour la vente, notamment en les assemblant, fusionnant, mélangeant, coupant sur mesure, diluant, embouteillant, emballant ou remballant, à l'exclusion d'une personne qui prépare ainsi des marchandises dans un magasin de détail afin de les y vendre exclusivement et directement aux consommateurs.

[43]      Under the definitions of "manufacturer or producer" in subsection 2(1) of the Act, J.P.L. was a manufacturer within the meaning of paragraph (f) and its distributors were manufacturers within the meaning of paragraph (d).

[44]      A review of the applicable provisions in the Act confirms that the statutory obligation to pay the federal sales tax on the shampoos and other products manufactured by J.P.L. rested on its distributors, who were deemed manufacturers by virtue of paragraph (2)(1)(d) of the Act. Indeed, by virtue of paragraph 50(5)(g) of the Act, J.P.L. had no liability to pay federal sales tax on the sales of its products to its distributors.

iii) Effect of industry agreement with Revenue Canada

[45]      The question therefore to be determined on this trial de novo is the effect, if any, of the beauty industry's agreement with Revenue Canada, known as the Alternate Tax Accounting Method, on J.P.L.'s statutory exemption under paragraph 50(5)(g) of the Act from liability to pay the federal sales tax on the sales of its products to its distributors.

[46]      The question of the effect of an industry agreement on the obligation of a party to pay taxes was considered by the Federal Court of Appeal in Jack Herdman Limited v. Minister of National Revenue, (No.1) (1983), D.T.C. 5274 (F.C.A.). In that case, the plaintiff Jack Herdman Limited ("Herdman") was a distributor of fuel. In 1974, it made inquiries with Revenue Canada concerning its obligation to pay the federal sales tax. Revenue Canada instructed Herdman to obtain a manufacturer's licence. Herdman obtained the licence and filed "nil" returns, as the only manufacturing it did involved the limited blending of fuels in the winter months. Revenue Canada eventually told Herdman that it was required to pay the federal sales tax from the date it acquired its licence. Herdman paid the taxes as directed by Revenue Canada. In 1980, Herdman was sold, and discovered that, under the provisions of the Act, its sales of fuel were exempt from federal sales tax. Herdman applied for a refund under subsection 44(1) of the Act (now section 68), on the basis that it had paid the tax in error. Revenue Canada denied the refund claim, noting in part that the petroleum industry had agreed that distributors such as Herdman would remit certain taxes, although they were not legally liable for their payment.

[47]      In his analysis on the question of the effect of an industry agreement, Thurlow C.J. stated as follows:

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 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.

[48]      LeDain, J.A. and Clement, D.J. wrote concurring reasons for judgment.

[49]      In my opinion, the analysis of Thurlow, C.J. is directly applicable to the circumstances of the present case, in which the beauty industry entered into an agreement with Revenue Canada which purported to alter the liability under the Act for the payment of the federal sales tax. Furthermore, J.P.L. had no knowledge whatsoever of the industry agreement, and believed, on the basis of advice received from officials of Revenue Canada, that it was required to pay the federal sales tax. In the circumstances, I am satisfied that J.P.L. had no legal or other obligation to pay the federal sales taxes in question, and that it paid the taxes in error within the meaning of section 68 of the Act.

iv) Quantum of Refund

[50]      In view of a matter which arose during the course of the trial, the question of the amount of the refund to be paid to J.P.L. must be addressed.

[51]      At the outset of the plaintiff's case, counsel for the plaintiff read into the record certain admissions from the defendant's examination for discovery, including the fact that the quantum of federal sales tax paid by J.P.L. was not in issue. In particular, he read into the record two different excerpts from the examination for discovery, conducted almost four years ago, in which counsel for the defendant expressly and unequivocally admitted that the quantum of federal sales tax paid by J.P.L. was not in dispute. Counsel for the defendant raised no objection on the two occasions when that admission was read into the record, and the plaintiff proceeded to tender its case at trial.

[52]      After the close of the plaintiff's case and during his opening statement, counsel for the defendant attempted to withdraw the admission concerning the quantum of tax. He further indicated that he would be required to give evidence in an attempt to explain the admissions which he had made on behalf of the defendant during the examination for discovery. Counsel for the plaintiff strongly objected to the defendant's attempt to withdraw the admission, on the ground that the plaintiff had prepared and tendered its case on the understanding that the quantum of taxes claimed in the Statement of Claim was not in dispute. At that point in the trial, I noted that the question of the quantum would only be relevant in the event that the plaintiff was successful in the action. In the circumstances, counsel agreed to proceed with the case, on the understanding that we would revisit the objection concerning the admission in the event that it became necessary.

[53]      At the conclusion of the closing arguments, I raised with counsel the request by counsel for the defendant to withdraw his admission concerning the quantum of tax. I heard further argument from counsel on that point, and indicated that I did not need to hear any evidence from counsel for the defendant.

[54]      Even if I were to assume that counsel for the defendant made the impugned admission without authority or by mistake, I have determined, in the exercise of my discretion, that it would not be appropriate to permit him to withdraw his admission, which was made almost four years ago, on the basis that it would cause serious inconvenience and prejudice to the plaintiff if the admission were withdrawn at this late stage in the proceedings. Furthermore, in 1991, J.P.L. provided a Revenue Canada auditor with all of the documentation in support of its application for a refund of federal sales tax. Since the defendant has had the relevant information in its possession for seven years, it cannot claim that it was unable to conduct the audit in a timely manner. For these reasons, the request by counsel for the defendant to withdraw his admission is denied.

DECISION

[55]      The appeal is allowed with costs and the decision of the Canadian International Trade Tribunal dated August 31, 1994 is quashed. The plaintiff is entitled to a refund of federal sales tax in the amount of $1,140,586.10, as claimed in its application for refund dated

December 1, 1990, together with interest calculated from the date which is sixty days from December 1, 1990.

Ottawa, Ontario                          ___________________

February 26, 1998                              Judge

__________________

     ¹      By virtue of paragraph 2(1)(d) in the Act , a distributor who sells hair care products to a beauty salon for resale to consumers at the retail level is defined as a "manufacturer or producer" for the purposes of the Act.