British Columbia Telephone Company v. Her Majesty the Queen, [1993] 1 CTC 351

Strayer, J.:—

Relief requested

This is an appeal against a determination by the Minister of National Revenue dated November 20, 1987 in which he refused a refund of $4,080,995.87 which had been paid by the plaintiff under the Excise Tax Act, R.S.C. 1985, c. E-13, and which he determined to be properly exigible under that Act. This amount had been paid based on the production cost of telephone directories, between October 31, 1983 and September 30, 1987, excluding May 1, 1985 to September 30, 1985 (this latter period being excluded from the plaintiff's claim for a refund because of relevant limitation periods for such a Claim).

Facts

The parties agreed on the following statement of facts.

The parties hereto by their respective solicitors admit the following facts, subject to the following conditions: (i) the admission is made for the purpose of this action only and may not be used against either party on any other occasion; and (ii) the parties may adduce further and other evidence relevant to the issues and not inconsistent with this agreement.

1. The plaintiff was incorporated by An Act to Incorporate the British Columbia Telephone Company, S.C. 1916, c. 66, a special Act of the parliament of Canada.

2. The primary business of the plaintiff is the provision of telecommunications services to subscribers in British Columbia.

3. As required by the Canadian Radio-Television and Telecommunications Commission, (C.R.T.C.), the plaintiff distributes telephone directories to its subscribers.

4. The plaintiffs subscribers are by C.R.T.C. regulations entitled to receive telephone directories without charge.

5. In addition to directories distributed to subscribers, the plaintiff publishes directories for sale primarily to other telecommunications companies, directories for use by the plaintiff's employees and directories for use at public telephones.

6. The telephone directories that are relevant to this action were published and distributed as follows. The plaintiff purchased the paper and the cover stock for the directories and had this material delivered directly to independent printers. The printers produced the directories using telephone record information supplied by the plaintiff and Yellow Page advertising information supplied by the plaintiff's sales agents. At all of the aforesaid times, the property in the paper and cover stock, as well as in the directories as they were being manufactured, remained in the plaintiff.

7. The great majority of the completed directories were then distributed to the plaintiff's subscribers by the plaintiff or its agents.

8. Between the months of October, 1983 and September 1987, excluding May, 1985 to August, 1985, the plaintiff remitted to Revenue Canada, Customs and Excise, in total, $4,080,995.87 by way of tax levied under the Excise Tax Act, R.S.C. 1970, c. E-13, with respect to the directories, as aforesaid. The said tax was calculated by a method prescribed by the Minister of National Revenue pursuant to subsection 28(1) of the Excise Tax Act as communicated to the plaintiff in writing on August 5, 1975, a copy of which is attached as Exhibit "A" hereto. The value for the purpose of calculating the tax for the directories was equal to the sum of:

(i) the production cost of the directories, and

(ii) 15 per cent of the total cost of paper used to make the directories.

The parties are in agreement that if the said tax was exigible pursuant to subparagraph 27(1)(a)(iii) and subsection 28(1) of the Excise Tax Act, the aforesaid amount is the correct amount of that tax.

9. The Minister of Nation Revenue determined the aforesaid amount of tax as having become exigible when the directories were delivered to its subscribers, as aforesaid, when they were sold, when they were made available for use by the plaintiff's employees or when they were installed at public telephones.

10. The approximate quantities of the aforesaid uses of the directories were as follows:

(a) 85 per cent distribution to subscribers; and

(b) 15 per cent to a combination of sales, employees’ used and installations at public telephones.

11. On October 30, 1987, the plaintiff filed an N15 refund claim for the said tax along with a letter from its agent explaining the basis of its claim (copies of the refund application and letter are attached as Exhibits "B" and "C", respectively). The parties are in agreement that 15 per cent of the said tax in issue in this case, i.e. the portion attributable to the uses of the directories mentioned in subparagraph 10(b) hereof, was properly paid if this honourable Court decides that sales tax is exigible by virtue of combination of paragraphs 27(1)(a) and 28(1)(d) of the Excise Tax Act.

12. By notice of determination (refund) dated November 20, 1987, Revenue Canada, Customs and Excise, denied the plaintiff's refund claim on the basis that the telephone directories were considered to be produced under the conditions outlined in subsection 28(1) of the Excise Tax Act. A copy of the notice of determination (refund) is attached as Exhibit"D" hereto.

13. On February 15, 1988 the plaintiff filed, by registered mail, a notice of objection to the notice of determination. It was received by the Minister of National Revenue on February 19, 1988. A copy of the notice of objection and attached memorandum are attached as Exhibit" E" hereto.

14. By letter dated April 21, 1988, Revenue Canada, Customs and Excise, acknowledged receipt of the notice of objection and requested a further explana tion of why the disputed tax was not payable, a copy of which letter is attached as Exhibit"F" hereto.

15. Counsel for the plaintiff replied by letter dated May 10, 1988 and a copy of that letter is attached as Exhibit "G" hereto.

16. The plaintiff commenced this action by statement of claim field on September 21, 1988.

Relevant legislation

The most relevant provisions of the Excise Tax Act in force during the time in question are as follows:

26.(1) In this Part,

"sale price”, for the purpose of determining the consumption or sales tax, means

(a) except in the case of wines, the aggregate of

(i) the amount charged as price before any amount payable in respect of any other tax under this Act is added thereto,

(ii) any amount that the purchaser is liable to pay to the vendor by reason of or in respect of the sale in addition to the amount charged as price (whether payable at the same or some other time) including, without limiting the generality of the foregoing, any amount charged for, or to make provision for, advertising, financing, servicing, warranty, commission or any other matter, and

(iii) the amount of the excise duties payable under the Excise Act whether the goods are sold in bond or not,

and, in the case of imported goods, the sale price shall be deemed to be the duty paid value thereof. . . .

27. (1) There shall be imposed, levied and collected a consumption or sales tax [at a prescribed rate] on the sale price of all goods [1]

(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,

(ii) payable, in a case where the contract for the sale of the goods (including a hire-purchase contract and any other contract under which property in the goods passes upon satisfaction of a condition) provides that the sale price or other consideration shall be paid to the manufacturer or producer by instalments (whether the contract provides that the goods are to be delivered or property in the goods is to pass before or after payment of any or all instalments), by the producer or manufacturer pro tanto at the time each of the instalments becomes payable in accordance with the terms of the contract, and

(iii) payable, in a case where the goods are for use by the producer or manufacturer thereof, by the producer or manufacturer at the time the goods are appropriated for use

28. (1) Whenever goods are manufactured or produced in Canada under such circumstances or conditions as render it difficult to determine the value thereof for the consumption or sales tax because

(a) a lease of such goods or the right of using the goods but not the right of property therein is sold or given,

(b) such goods having a royalty imposed thereon, the royalty is uncertain, or is not from other causes a reliable means of estimating the value of the goods,

(c) such goods are manufactured or produced under any unusual or peculiar manner or conditions, or

(d) such goods are for use by the manufacturer or producer and not for sale,

the Minister may determine the value for the tax under this Act and all such transactions shall for the purposes of this Act be regarded as sales.

Issues

1. Was any "sale price” determined by the Minister under subsection 28(1) on which the tax levied under subsection 27(1) could apply?

2. Was there any "use" by the plaintiff of the 85 per cent of the directories produced by it which were distributed to its telephone subscribers?

Paragraph 11 of the agreed statement of facts as quoted above notes that if the Court finds that there was a"sale price” to which the tax could be applied, then the plaintiff is liable for the tax on at least 15 per cent of the directories sold by the plaintiff or provided to its employees for their use or supplied at its public telephones. That is, the plaintiff concedes that it did use” that 15 per cent. It denies that it used the remaining 85 per cent.

Conclusions

"Sale price”

Essentially the plaintiff contends that the definition of “sale price" in subsection 26(1) as quoted above is exhaustive. The parties agree that that definition does not apply by its terms to the transactions in the directories which are in question here. Further the plaintiff argues that subsection 27(1), which is the only relevant charging section, simply imposes a sales tax on the" sale price" of goods. The definition of “sale price” in section 26 is not relevant to these goods, nor can the Minister purporting to act under subsection 28(1) determine a "sale price”. That subsection only enables him to determine a "value" of goods such as these directories.

While numerous authorities were cited to me on the interpretation of statutes, I think the basic modern approach in interpreting taxing statutes was authoritatively stated by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. Estey, J. writing on behalf of the majority of the panel hearing that case, reviewed some of the older jurisprudence which supported “ strict construction" of taxation statutes. He went on to say at page 578 (C.T.C. 316, D.T.C. 6323):

Professor Willis, in his article, supra, accurately forecast the demise of the strict interpretation rule for the construction of taxing statutes. Gradually, the role of the tax statute in the community changed, as we have seen, and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule, but in a substantive sense so that if a taxpayer is within the spirit of the charge, he may be held liable. See Whiteman and Wheatcroft, supra, at page 37.

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes, 2nd ed., (1983), at page 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

The question comes back to a determination of the proper role of the court in construing the Income Tax Act in circumstances such as these where the Crown relies on the general pattern of the Act and not upon any specific taxing provision. The Act is to be construed, of course, as a whole.

In a later case Estey, J. stated that in Stubart the Court:

. . recognized that in the construction of taxation statutes the law is not confined to a literal and virtually meaningless interpretation of the Act where the words will support on a broader construction a conclusion which is workable and in harmony with the evident purposes of the Act in question. Strict construction in the historic sense no longer finds a place in the canons of interpretation applicable to taxation statutes in an era such as the present, where taxation serves many purposes in addition to the old and traditional object of raising the cost of government from a somewhat unenthusiastic public. (See The Queen v. George Golden et al., [1986] 1 1S.C.R. 209, [1986] 1 C.T.C. 274, 86 D.T.C. 6138, at pages 214-15 (C.T.C. 276, D.T.C. 6140).

These various judicial statements, and authors cited with judicial approval, emphasize that strict construction is no longer required of taxing statutes and that one must, in construing any words in doubt, look at their context and the scheme of the Act as a whole.

Taking this approach I am satisfied that the Minister's determination of “value” under subsection 28(1) is, by the scheme of the Act, the legal equivalent of a determination of the "sale price” for the purposes of applying the tax imposed in subsection 27(1). It must first be noted that subsection 27(1) in its opening words imposes a“ "sales tax . . . on the sale price of all goods

(a) produced or manufactured in Canada

(iii) payable, in a case where the goods are for use by the producer or manufacturer thereof. . .at the time the goods are appropriated for use. . . .

Up to this point we have a clear indication of an intention by Parliament to impose a tax on the sale price of goods used by the producer or manufacturer thereof. At the very least it may be said that such purpose would be frustrated if the Act provides no mechanism for determining "sale price" or its equivalent. Subsection 28(1) provides that mechanism. That subsection applies to goods "manufactured or produced in Canada under such circumstances. . .as render it difficult to determine the value thereof for the consumption or sales tax because. . .(d) such goods are for use by the manufacturer or producer and not for sale. . .” in respect of which the Minister may "determine the value for the tax under this Act and all such transactions shall for the purposes of this Act be regarded as sales." There can be no doubt that subsection 28(1) has to do with the application of the sales tax to goods used by their manufacturer or producer. The Minister is mandated to determine the “value” of such goods for only one purpose, variously described as "for the . . . sales tax" or for the tax under this Act". Further the closing words of subsection 28(1) in effect deems use by the manufacturer or producer to be "sales".

It is impossible to read these two subsections without concluding that Parliament in using the word "value" in subsection 28(1) was doing it for one purpose: to establish a figure which could be treated as the equivalent of the sales price, because in this context there would be no other point in determining value "for the. . .sales tax" or "for the tax under this Act. . . .”

Counsel for the plaintiff concedes that there have been numerous decisions of the Supreme Court of Canada in which the “value” determined under section 28 or its equivalent was treated as a “sale price”. It is suggested, however, that as this specific point was not argued in those cases it is still open for consideration. [2] It would be equally open to speculate, however, that others did not think the argument worth making. [3] Those cases, it seems to me, quite clearly proceeded on a basic understanding as to the intention of Parliament. This was well stated in The King v. Fraser Companies Ltd., [1931] S.C.R. 490, 1 D.T.C. 215, at page 492 (D.T.C. 215) where it was said by Smith, J. that:

It seems to me clear that the real intention was to levy a consumption or sales tax of four per cent on the sale price of all goods produced or manufactured in Canada, whether the goods so produced should be sold by the manufacturer or consumed by himself for his own purposes.

Thurlow, C.J. in the B.C. Railway Co. case, supra, at page 113 (D.T.C. 5092), after reviewing various decisions of the Supreme Court including Fraser concluded:

In my view it is obvious that the wording of paragraph 28(1)(d) presents problems if one seeks to construe it strictly in applying it to situations such as the present one and those in the cases I have cited. Under subparagraph 27(1)(a)(i) tax is imposed on the price. In paragraph 28(1)(d) the word used is "value". But this did not prevent the Supreme Court from holding in effect that when the goods are used or consumed by the manufacturer the two words refer to the same thing

While this was part of a dissenting judgment, the real point in issue in that case was whether a time had been fixed by the statute for the tax to become payable, not whether “value” as determined under subsection 28(1) could be regarded as the "sale price” for the purpose of the application of the tax levied by subsection 27(1).

I do not think that the later amendments have demonstrated a change in the intention of Parliament that the valuation carried out under subsection 28(1) is to produce a "sale price" upon which the tax can be levied. Subparagraph 27(1)(a)(iii), added in 1981 [4] after the B.C. Railway decision, is primarily concerned with the time at which the tax becomes payable and if anything seems to reinforce the stated intention of Parliament that there could be a" sale price" with respect to goods used by the producer or manufacturer. It is true that at a time when many of the earlier decisions were made in which it was assumed that "value" could amount to “sale price”, the definition section which included “sale price" began with the words “In this Part, unless the context otherwise requires. ... ." [5] The modern equivalent of that section, section 26 as quoted above simply says that “In this Part . . ."sale price"...means. . .” without contemplating that the context might otherwise require. But I do not think that Parliament, by dropping the reference in section 26 to other possible meanings depending on context, meant to render meaningless subsections 27(1) and 28(1). Those subsections are clearly intended to provide a means for applying a sales tax on goods even where they are not sold but are used by the producer or manufacturer. It is true that the combination of what appears to be an exhaustive definition of "sale price” in subsection 26(1) with the special provisions for determining a "sale price” which appears not to be within that definition, as provided in subsections 27(1) and 28(1), is infelicitous. But one must presume that paragraph 27(1)(a) and subsection 28(1) have some purpose and one must therefore read subsection 28(1) especially as amounting to the deeming of a "sales price”. It requires that transactions such as use by the producer shall be regarded as a sale and the Minister is to determine the value of the goods which nave been constructively "sold" for the purpose of imposing the sales tax under this Act.

The plaintiff also argues that it is obvious that the previous subsection 28(1) was defective is not expressly providing for the determination of a "sale price" because Parliament in 1985 replaced it with the following wording:

28.(1) Where goods that were manufactured or produced in Canada are appropriated by the manufacturer or producer thereof for his own use, the sale price of the goods shall be deemed to be equal to the sale price that would have been reasonable in the circumstances if the goods had been sold, at the time of the appropriation, to a person with whom the manufacturer or producer was dealing at arm's length. [6]

One cannot automatically assume that an amendment is intended to change the law. [7] One must look at the context. Apart from the fact that, as I have demonstrated, the previous subsection 28(1) in context should be construed as producing the equivalent of “sale price", I cannot view the new subsection 28(1) as simply directed to providing for "sale price" in lieu of a "value". When one examines the new section 28 it is apparent that a new concept was introduced for determining the sale price of various goods not sold in the normal way. Thereafter the sale price or value was not to be determined by the Minister but by reference to an objective test based on the” price that would have been reasonable in the circumstances if the goods had been sold to a person with whom the manufacturer or producer was dealing at arm's length. . . .” Further, if as the plaintiff contends there can be no“ "sale price” of goods not fitting within the definition of “sale price” in section 26, then the new subsection 28(1) is equally ineffective to determine a "sale price" in respect of goods used by the producer thereof, and Parliament has failed once again to correct this defect!

Counsel for the plaintiff invoked the Supreme Court decision in Morguard Properties Ltd. v. The City of Winnipeg, [1983] 2 S.C.R. 493, 3 D.L.R. (4th) 1, at page 509 (D.L.R. 13), to the effect that for legislation adversely to affect a citizen's right "the Legislature must do so expressly". I am satisfied in the present case the legislation does expressly deal with the very situation in which the plaintiff finds itself.

I am therefore satisfied that the Minister in determining “value” under subsection 28(1) effectively determined a "sale price" for the purposes of applying the tax imposed by subsection 27(1).

"Use" by the plaintiff

As noted earlier this issue relates only to the 85 per cent of the directories which were distributed by the plaintiff to its telephone subscribers. The plaintiff contends that it was the subscribers, and not the telephone company, which used these directories.

lt appears to me that the jurisprudence has long recognized that a manufacturer or producer may “use” goods by giving them away in certain circumstances. In The King v. Henry K. Wampole & Co., [1931] S.C.R. 494 at pages 496-97, the Supreme Court had to consider whether a manufacturer of pharmaceutical preparations who gave free samples to physicians and druggists could be said to” use” those drugs within the meaning of then paragraph 87(d) of the Special War Revenue Act. [8] Anglin, C.J.C. stated:

I was, at the hearing of this appeal, strongly of the view that the sample goods in question were subject to the tax sought to be collected in this case. My construction of clause (d) of section 87 is that the “use” by the manufacturer or producer of goods not sold includes any use whatever that such manufacturer or producer may make of such goods, and is wide enough to cover their “ use” for advertising purposes by the distribution of them as free samples, as is the case here

While the particular situation dealt with there has long since been provided for through statutory amendments, the principle seems to me to be universal. I believe that an important factor in determining that the producer uses" his product is that he turns it to his own benefit even though not selling it. That is clearly the situation of the plaintiff with respect to the directories it gives to its subscribers. In the first place as stipulated in the agreed statement of facts the plaintiff is obliged by its licensing authority, the C.R.T.C., to produce and so distribute these directories. If that is the condition of its operation as a telephone company then it is clearly serving its own purposes in making the directories available. Secondly, it is not disputed that the distribution of directories makes the plaintiff's service much more attractive to potential customers and increases the use of its system. I think we can assume that there would be far less demand for telephone hook-ups if subscribers did not have ready access to the telephone numbers of dozens of businesses, friends, and acquaintances with whom they wish to be in contact. I think I can also take judicial note of the fact that were there not such directories in the hands of subscribers, the telephone company would have to provide information services whereby people could phone to get the numbers wanted and even with automation this would have to be a major burden on the company.

It cannot be denied, I think, that subscribers also "use" these directories. It is they who look up the numbers of businesses or individuals they wish to contact. They may even "use" these directories for purposes never contemplated by the telephone company. But this does not mean that the plaintiff does not" use” the directories within the meaning of the Excise Tax Act.

Counsel for the plaintiff sought some support in the language of subparagraph 27(1)(a)(iii) which, in fixing the time when the sales tax is payable on such goods, refers to “the time the goods are appropriated for use". Counsel sought to establish by a dictionary definition that "appropriated" must refer to personal use and not by provision of the directories for the use of others. But the dictionary relied upon by the plaintiff also recognizes once meaning of the verb "appropriate" as being “to assign to a special purpose". [9] In ordinary language it is said that Parliament "appropriates" funds for various purposes. This does not imply that Members of Parliament use the funds themselves. The language of the statute here is "appropriated for use” and I see nothing to preclude that describing the plaintiff supplying directories to its subscribers, in part for the benefit of the subscribers but in part for the company's own benefit in enabling it comply with the law and to enhance the market for its services.

Counsel cited other provisions in the Excise Tax Act where in other circumstances "use" seems to have a more limited meaning. I think those provisions must be looked at in their own particular context. Also counsel cited jurisprudence involving other taxing statutes, some of them provincial, where the meaning of "use" has been considered. Having looked at those cases I do not find them very helpful in interpreting the specific provisions of the Excise Tax Act in question here.

I therefore conclude that the plaintiff did "use" all of the directories produced by it, including the 85 per cent which were provided by it to its subscribers.

Disposition

The plaintiff having lost with respect to both issues, the appeal against the Minister's determination must be dismissed with costs.

Appeal dismissed.