Molson Brewery B.C. Ltd. v. Canada, docket T-920-98

     Date: 20010125

     Docket: T-920-98

Between :

     MOLSON BREWERY B.C. LTD.

     Plaintiff

     - and -

     HER MAJESTY THE QUEEN

     Defendant

     REASONS FOR JUDGMENT

PINARD, J. :

[1]      This is an appeal, by way of an action, pursuant to sections 81.2, 81.15 and 81.28 of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended by R.S.C. 1985 (2^nd Supp.), c. 7 (hereinafter "the Act"), which was applicable at the relevant time. The relevant parts of these provisions state:

81.2 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, in lieu of appealing to the Board under section 81.19, appeal the assessment of determination to the Federal Court - Trial Division at any time when, under section 81.19, that person could have appealed to the Board. (2) Any person who has served a notice of objection under section 81.15 or 81.17 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 Federal Court - Trial Division.	81.2 (1) 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, au lieu d'en appeler à la Commission en vertu de l'article 81.19, appeler de la cotisation ou de la détermination à la Section de première instance de la Cour fédérale pendant la période au cours de laquelle elle aurait pu, en vertu de cet article, en appeler à la Commission. (2) Toute personne qui a signifié un avis d'opposition en vertu de l'article 81.15 ou 81.17 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 à la Section de première instance de la Cour fédérale.
81.15 (1) Any person who has been assessed, otherwise than pursuant to subsection (4) or 81.38(1), and who objects to the assessment may, within ninety days after the day on which the notice of assessment is sent to him, serve on the Minister a notice of objection in the prescribed form setting out the reasons for the objection and all relevant facts on which that person relies. [. . .] (5) After reconsidering an assessment, 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 owing or overpayment by the person objecting, where the Minister varies the assessment or makes a reassessment;      (c) a brief explanation of the decision; and      (d) the period within which an appeal may be made under section 81.19 or 81.2.
81.15 (1) Toute personne qui a fait l'objet d'une cotisation, sauf en application des paragraphes (4) ou 81.38(1), et qui s'oppose à la cotisation peut, dans un délai de quatre-vingt-dix jours suivant la date d'envoi de l'avis de cotisation, signifier au ministre un avis d'opposition en la forme prescrite énonçant les raisons de son opposition et tous les faits pertinents sur lesquels elle se fonde. [. . .] (5) Après avoir réexaminé une cotisation, le ministre doit envoyer à l'opposant un avis de décision en la forme prescrite, énonçant :      a) la date de la décision;      b) lorsqu'il modifie la cotisation ou en établit une nouvelle, le montant dû ou le paiement versé en trop par l'opposant;      c) les raisons concises de sa décision;      d) la période au cours de laquelle il peut être interjeté appel de la décision en vertu des articles 81.19 ou 81.2.
81.28 (1) An appeal to the Federal Court - Trial Division under section 81.2, 81.22 or 81.24 shall be instituted,      (a) in the case of an appeal by a person, other than the Minister, in the manner set out in section 48 of the Federal Court Act; and [. . .] (3) An appeal to the Federal Court - Trial Division under this Part shall be deemed to be an action in the Federal Court to which the Federal Court Act and the rules made pursuant thereto applicable to an ordinary action apply, . . .	81.28 (1) Un appel à la Section de première instance de la Cour fédérale en vertu des articles 81.2, 81.22 ou 81.24 doit être interjeté :      a) dans le cas d'un appel interjeté par une personne, autre que le ministre, de la manière énoncée à l'article 48 de la Loi sur la Cour fédérale; [. . .] (3) Un appel à la Section de première instance de la Cour fédérale en vertu de la présente partie est réputé être une action devant la Cour fédérale à laquelle la Loi sur la Cour fédérale et les règles établies conformément à cette loi s'appliquent comme pour une action ordinaire, . . .

[2]      In a document entitled "Agreed Statement of Facts and Related Documentation" filed in this action as Exhibit P-1, which includes Exhibits "A" to "N", the parties have agreed as to the following facts:

1.      The Plaintiff, Molson Brewery B.C. Ltd., is a company incorporated under the laws of British Columbia.

2.      Prior to August 1, 1989, the Plaintiff carried on the business of brewing and selling beer in British Columbia as agent for The Molson Companies Limited ("Molson"), a corporation incorporated under the laws of Canada. At all relevant times, Molson owned 100% of the Plaintiff's shares. The agency agreement (included at Tab 7 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "A".

3.      The Defendant is Her Majesty the Queen in Right of Canada, represented by the Minister of National Revenue (Canada Customs and Revenue Agency since November 1, 1999) in this action.

4.      As agent for Molson, the Plaintiff brewed, manufactured and produced beer in British Columbia prior to August 1, 1989. The Plaintiff (as agent for Molson) would then sell the finished beer to the British Columbia Liquor Distribution Branch and licensees (collectively referred to as "BCLDB") at a sales price which included a mark-up for profit (the "ordinary course of business sales price").

5.      Following negotiations, Molson and Carling O'Keefe Breweries of Canada Limited ("Carling O'Keefe") agreed on January 17, 1989 to form a 50/50 partnership effective August 1, 1989 to merge and carry on their respective brewing businesses throughout Canada under the name Molson Breweries ("Molson Breweries").

6.      Molson and Carling O'Keefe agreed that all of the assets, property and undertakings of the Molson and Carling O'Keefe brewing businesses, including the finished goods inventory ("beer inventory") of the Plaintiff (as agent for Molson), would become those of the Molson Breweries, effective August 1, 1989, pursuant to the Partnership Contribution Agreement dated January 17, 1989. As a result, Molson Breweries was formed by a Partnership Agreement dated August 1, 1989, which agreement was subsequently amended on October 18, 1989. The Partnership Contribution Agreement (included at Tab 10 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "B". The Partnership Contribution Amending Agreement (included at Tab 26 of the Defendant's affidavit of documents) is attached hereto as Exhibit "C". The Partnership Agreement (included at Tab 18 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "D".

7.      In the case of the beer inventory, Molson and Carling O'Keefe agreed that the sales price thereof, as at August 1, 1989, was the "book value" thereof, being an amount equal to the cost of producing the beer inventory and containing no mark-up for profit. A general conveyance and a bill of sale (included at Tabs 21 and 22 of the Plaintiff's affidavit of documents) are attached hereto as Exhibits "E" and "F", respectively.

8.      As required by subsection 54(1) of the Excise Tax Act (Canada) (the "Act"), an application was made for, and on July 27, 1989, effective August 1, 1989, the Minister of National Revenue licensed Molson Breweries as a manufacturer in accordance with the provisions of the Act and section 3 of the General Excise and Sales Tax Regulations. A copy of the August 1, 1989 licence (included at Tab 17 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "G". This licence was amended on August 30, 1990. A copy of the amended licence (included at Tab 40 of the Defendant's affidavit of documents) is attached hereto as Exhibit "H".

9.      The Plaintiff (as agent for Molson) paid federal sales tax ("FST") to the Defendant with respect to the August 1, 1989 beer inventory transaction. The Plaintiff calculated the amount of FST to be paid on the basis of the "book value" of 100% of the beer inventory.

10.      In the weeks following August 1, 1989, the beer inventory was sold to the BCLDB at the ordinary course of business sales price. This price included a mark-up for profit and was higher than the "book value" of the beer inventory on August 1, 1989. Neither the Plaintiff nor any other entity paid FST to the Defendant with respect to the sale of the beer inventory to the BCLDB.

11.      On April 26, 1991, the Defendant issued Notice of Assessment PAC-5359 to Molson Breweries (the "First Assessment"). A copy of the notice of assessment (included at Tab 29 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "I".

12.      On July 24, 1991, Molson Breweries objected to the First Assessment. A copy of the notice of objection (included at Tab 30 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "J".

13.      On July 30, 1993, the Defendant issued Notice of Assessment PAC-0259 to the Plaintiff (the "Second Assessment"). A copy of the assessment (included at Tab 31 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "K".

14.      On October 26, 1993, the Plaintiff objected to the Second Assessment. A copy of the notice of objection (included at Tab 32 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "L".

15.      On April 17, 1998, the Defendant issued a Notice of Decision with respect to the First Assessment, whereby the First Assessment was vacated in full. A copy of the notice of decision (included at Tab 35 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "M".

16.      On April 17, 1998, the Defendant issued a Notice of Decision with respect to the Second Assessment, whereby the Second Assessment was varied. A copy of the notice of decision (included at Tab 34 of the Plaintiff's affidavit of documents) is attached hereto as Exhibit "N".

17.      On April 29, 1998, the Plaintiff filed a statement of claim instituting the present action whereby the Plaintiff appeals the Second Assessment to the Federal Court (Trial Division).

18.      The parties agree that all documents produced in their respective affidavits of documents are authentic and will not be challenged vis a vis who sent and received them.

[3]      I would like to note that, in the following reasons for judgment, I have referred to the entities in the same terms as used in the Agreed Statement of Facts.

[4]      At the relevant time, the year 1989, subparagraph 50(1)(a)(i) of the Act imposed a sales tax ("FST") on the sale price of all goods produced in Canada payable by the producer 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. Subparagraph 50(1)(a)(i) reads:

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 moment où les marchandises sont livrées à l'acheteur ou au moment où la propriété des marchandises est transmise, en choisissant celle de ces dates qui est antérieure à l'autre,

[5]      The explanation of assessment, on the face of the Notice of Assessment PAC-0259 under appeal, reads as follows:

Federal Sales Tax payable on the taxable value of beer transferred on August 1, 1989 and subsequently sold to independent purchasers.

[6]      Further to the plaintiff's objection to this Notice of Assessment, the defendant's Notice of Decision, whereby the assessment was varied, reads in part as follows:

Your objection is allowed in part and the assessment is varied. The amount owing by you is as shown on the attached statement.

Your main representation is that the value for tax used to account for sales of inventory to the partnership on August 1, 1989, was appropriate. The transfer of the inventory is not accepted entirely as a sale of goods, nor is the value accepted entirely as an appropriate value for tax. The assessment has been adjusted to reflect a portion of the tax due based on the cost of the partnership and a portion of tax due based on the arms-length sale of the goods by the partnership.

The payment on account made by you has now been reflected in the revised assessment. Security posted by the company on March 6, 1992, has been taken into consideration in the penalty and interest calculations on the residual assessment.

     * * * * * * * * * *

[7]      The basis for the plaintiff's appeal is clearly stated in paragraphs 24 and 25 of the Statement of Claim. The plaintiff submits that as it was not a party to the transactions that were the subject matter of the assessment, being the resale of the inventory by Molson Breweries (a separately licensed taxpayer under the Act) to its customers subsequent to July 31, 1989, no FST was payable by the plaintiff in respect of such sales. The plaintiff further argues that as it sold the inventory to Molson Breweries on August 1, 1989, it was subject to tax in respect of that sale in accordance with subsection 50(1) of the Act on the sale price. The plaintiff states that it remitted FST on the sale price of the inventory as per the bill of sale, thus fully satisfying its liability under subsection 50(1) of the Act in respect of the sale of the inventory to Molson Breweries.

[8]      The defendant, in support of the assessment in question, as varied by its Notice of Decision issued on April 17, 1998, submits that because a partnership is not a distinct legal entity akin to a person or a corporation, the proper characterization of the August 1, 1989 transaction is a sale of 50% of the plaintiff's beer inventory to Carling O'Keefe. While acknowledging that the parties agree (albeit for different reasons) that the defendant correctly assessed the plaintiff for FST payable with respect to this sale of 50% of the latter's beer inventory to Carling O'Keefe, the defendant further submits that it correctly assessed the plaintiff for "FST payable with respect to 50% of the beer inventory held by the Plaintiff on August 1, 1989 which was later sold to the BCLDB at the ordinary course of business sale price."

     * * * * * * * * * *

[9]      It is well established that a partnership is not a distinct legal entity akin to a person or a corporation for the purposes of the common law or the Interpretation Act. Instead, a partnership is simply the relation that subsists between persons or partners carrying on business in common with a view to profit (see, for example, Sadler v. Whiteman, [1910] 1 K.B. 868 at 889, Thorne v. New Brunswick (Workmen's Compensation Board) (1962), 33 D.L.R. (2d) 167 (N.B.C.A.), Cattermole Timber v. British Columbia (Minister of Forests) (1994), 92 B.C.L.R. (2d) 382 at 384 (S.C.); aff'd (1995), 2 B.C.L.R. (3d) 108 (C.A.) and Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577 at 586-595 (C.A.)).

[10]      Under civil law, a similar partnership, which is not a corporation, has essentially the same legal status as that under common law, as it appears from the judgment of the Quebec Court of Appeal in Ville de Québec c. La Cie d'immeubles Allard Ltée et al., [1996] R.J.Q. 1566 at 1571:

La présente instance remet en cause la question fondamentale suivante : la société civile ou commerciale, autre que la société par actions, possède-t-elle une personnalité juridique propre, distincte de celle des associés, et, dans l'affirmative, peut-elle être propriétaire, par opposition à simple possesseur, d'un patrimoine propre et distinct de celui des associés ? La question pourrait être posée autrement, à savoir si ce sont les associés, par opposition à la société, qui continuent à détenir les droits de propriété indivis dans le patrimoine attribué à la gestion, sinon même à la possession de la société.

[. . .]

Pour les raisons qui suivent, et avec égards pour l'opinion contraire, dont celle du premier juge, je suis d'avis que la société civile ne constitue pas une personne juridique distincte de ses membres, et que, même si la société peut paraître posséder certains des attributs de la personnalité juridique, elle ne jouit pas de la propriété d'un patrimoine distinct de celui de ses associés.

[11]      I do not agree with the plaintiff's argument that a partnership is a person under the Act by reason of certain specific provisions in the Act, Regulations and the prevailing administrative practice of the Minister of licensing and assessing partnerships under the Act. The plaintiff, in support of this proposition, refers to subsections 2(1), 2(2.1), 2(2.2) and section 54 of the Act, Regulation 3(3) of the General Excise and Sales Tax Regulations, C.R.C. 1978, as amended, Memorandum ET 203: Reasonable Sale Price General Issues, paragraph 19 and Memorandum ET 313: Application for Refund, paragraph 24. I see nothing in these provisions which alters the principle that a partnership is not an independent legal entity for the limited purpose of imposing tax under the Act. It is also well established by the jurisprudence that the principle that a partnership is not a distinct legal entity is in no way affected by taxation statutes which appear to treat partnerships as having certain attributes also possessed by individuals or corporations (see, for example, Adams v. Canada (1998), 159 D.L.R. (4^th) 205 at 210-211 (F.C.A.), Metro-Can Construction Ltd v. Canada, [1998] T.C.J. No. 888 (QL), paras. 4, 6 and 7, Norco Development Ltd. v. R., [1985] 1 CTC 130 at 135-135 (F.C.T.D.), Seven Mile Dam Contractors v. R. in Right of British Columbia (1980), 25 B.C.L.R. 183 at 187(C.A.); conf. (1979) 104 D.L.R. (3d) 274 (B.C.S.C.) and Wildenburg Holdings Limited v. The Minister of Revenue (1998), 98 DTC 6462 at 6466-6467 (Ont. Ct. Gen. Div.); aff'd [2000] O.J. No. 2053 (QL) (C.A.)).

[12]      I, therefore, fully agree with the defendant that the following legal consequences flow from the fact that the partnership is not an independent legal entity with an existence separate from its partners:

(a)      partnerships cannot contract independently of their partners; instead, when someone who is an agent of the partnership enters into a contract on the partnership's behalf, all the partners become liable for the obligations which flow from the contract;

(b)      partnerships cannot own property independently of their partners; instead, partnership property is owned by the partners in a form of co-ownership whereby each partner owns a share of the property which is proportionate to that partner's share of the partnership; and

(c)      a partner cannot be a creditor or a debtor of the partnership.

[13]      In the case at bar, Molson and Carling O'Keefe entered into a 50/50 partnership agreement, whereby they agreed to carry on a business in common with a view to profit. While this partnership has a name (Molson Breweries), it is not a legal person.

[14]      Pursuant to the partnership agreement, Molson and Carling O'Keefe agreed to convey their respective assets to the partnership. As a matter of law, however, no sale ever took place between Molson and the Molson Breweries partnership or between Carling O'Keefe and the Molson Breweries partnership. Instead, on August 1, 1989 Molson and Carling O'Keefe effectively sold 50% of their respective assets to each other while retaining 50% of their respective assets themselves. The net result of the transaction is that on August 1, 1989, each party came to own 50% of the total collective assets of Molson and Carling O'Keefe.

[15]      It is based on this legal characterization of the August 1, 1989 transaction that the defendant submits that "the Plaintiff (as agent for Molson) sold 50% of its beer inventory to Carling O'Keefe on August 1, 1989 at a sales price equal to book value (i.e., cost) and then sold the remaining 50% of its beer inventory to the BCLDB in the weeks following August 1, 1989 at the higher ordinary course of business sales price."

[16]      The Court takes good note of the defendant's admission, which clearly flows from the Notice of Decision issued with respect to the assessment in question and from the defendant's written Outline of Argument, that the plaintiff properly remitted FST with respect to the 50% of the beer inventory which was sold to Carling O'Keefe on August 1, 1989. I also agree with the defendant's submission that the plaintiff was correctly assessed with respect to the FST which arised from this sale of 50% of the beer inventory to Carling O'Keefe at a sales price equal to book value/cost, and that, even though the paid sale was not, as specified by counsel for the defendant at the trial, "an arms-length sale".

[17]      With respect to the remaining 50% of the plaintiff's beer inventory, however, I fail to understand how the defendant can suggest that it was sold by the plaintiff to the BCLDB in the weeks following August 1, 1989. The proper legal characterization of the August 1, 1989 transaction proposed by the defendant herself rather demonstrates that not only did the plaintiff sell 50% of its beer inventory to Carling O'Keefe at a sales price equal to book value, but that at the same time, the plaintiff likewise sold the remaining 50% of its beer inventory to Molson (its principal) at a sales price also equal to book value. Unlike Molson Breweries, the plaintiff is not a partnership, but a corporation which is an independent legal entity, just like Molson and Carling O'Keefe. As such, when the plaintiff sold its beer inventory on August 1, 1989 to Molson Breweries, it did not sell only 50% of this inventory to 50% of the partners of Molson Breweries, but 50% of the inventory to each one of the partners, Carling O'Keefe and Molson. It is the latter partners who, in the weeks following August 1, 1989, sold the same beer inventory through their partnership, Molson Breweries, to the BCLDB. Consequently, the plaintiff could not be properly assessed for FST with respect to any portion of the beer inventory thus sold to BCLDB. The plaintiff could only be liable for FST with respect to the sale of 100% of the beer inventory it sold on August 1, 1989 to Carling O'Keefe and Molson.

[18]      In light of the defendant's admission that, as noted above, the plaintiff properly remitted FST with respect to the 50% of the beer inventory which was sold at book value to Carling O'Keefe on August 1, 1989, and that the defendant therefore correctly assessed the plaintiff in this regard, I must conclude that the plaintiff, in the circumstances, could only be similarly assessed at the book value sales price with respect to the remaining 50% of its beer inventory sold to Molson, Molson Breweries' other partner, on August 1, 1989. Given the agreed fact that, with respect to the August 1, 1989 beer inventory transaction, the plaintiff paid FST to the defendant on the basis of the book value of 100% of the beer inventory, the defendant's Notice of Assessment PAC-0259 cannot stand.

[19]      For all the above reasons, the plaintiff's action is maintained and the Notice of Assessment PAC-0259 issued by the defendant on July 30, 1993, is vacated. The costs are adjudicated in favour of the plaintiff.

                            

                                     JUDGE

OTTAWA, ONTARIO

January 25, 2001