Her Majesty the Queen v. Slalom Sports Canada Ltd., [1986] 1 CTC 512

Teitelbaum, J.:—This is an action by plaintiff, Her Majesty the Queen in Right of Canada, against the defendant, Slalom Sports Canada Ltd., for the total sum of $337,674.64. This sum for which plaintiff is claiming is composed of the sum of $185,824.23 as additional duties by virtue of the Customs Act, R.S.C. 1970, c. C-40, at the relevant rate provided for in the Customs Tariff Act. R.S.C. 1970, c. 41, plus the sum of $151,849.91 by way of penalties by virtue of the Customs Act, section 163.

Plaintiff alleges that defendant, between August 1, 1980 and June 21, 1983 imported into Canada items of ski clothing for which false Customs Authorities Declarations of entry were made, that is, defendant failed to declare the true value of the goods imported, the value declared being inferior to the actual purchase price paid by the purchaser in Canada of the goods imported. Plaintiff admits to having received from the defendant a sum of $10,495.10, being the value of duty and penalty assessed on merchandise seized by the plaintiff and later released to the defendant (Work Sheet No. 208 not filed).

The defendant, in its amended statement of defence, admits that the goods imported by it into Canada were subject to custom duties as provided by the Customs Tariff Act as per their value for duty within the meaning of the Customs Act but denies owing any sums to the plaintiff for the importation of the goods. Defendant further alleges in its amended statement of defence that it is a Canadian resident within the meaning of the Customs Act, it declared the true value of the merchandise imported into Canada, the true value being the fair market value of the merchandise in the United States. It is defendant’s contention that plaintiff does not evaluate the merchandise properly, plaintiff using the sale price to defendant's customers in Canada as the fair market value or true value for duties rather than the price paid by defendant to its supplier.

The defendant is making a counter-claim for the sum of $10,495.10 which defendant paid to plaintiff when defendant’s merchandise was seized by plaintiff, the sum having been paid “under protest” by defendant. The at- torney representing the plaintiff admits that the sum of $10,495.10 was paid "under protest" by defendant and paid in order to obtain the release of the merchandise under seizure.

For some time before 1978, there existed in the United States of America a skiwear manufacturer known as Slalom Skiwear Inc. whose head office and principal place of business is in Newport, Vermont, some ten miles from the Canadian border. At the present time this company employs approximately 250 people; the principal business of Slalom Skiwear Inc. is the selling of skiwear which it manufactures, selling sweaters which it imports from Hong Kong and selling ski hats manufactured for it by another company in Nebraska, U.S.A.

In 1978, the president of Slalom Skiwear Inc., Mr. Sephen Crisafulli met with a Mr. Fred Langendorf, in Vermont, to discuss the possibility of selling skiwear manufactured by Slalom Skiwear Inc. in Canada. Mr. Fred Langendorf was then living in Canada and wished to get back into the sporting goods business having been in the business for many years and having had to leave it.

It was agreed between Sephen Crisafulli and Fred Langendorf that a Canadian corporation would be incorporated for the purposes above mentioned.

In 1978, according to defendant’s witness Sephen Crisafulli, a Canadian company was incorporated, Slalom Sports Canada Ltd., the company having three directors, Sephen Crisafulli, an American, Fred Langendorf, a Canadian resident and Mr. David Campbell, a Canadian but who is also the attorney for the Canadian company.

I assume that Mr. David Campbell is not an active shareholder in the business but was only asked to remain on the board of directors as he was the company’s attorney. No proof was made before me as to any special role Mr. Campbell played in the company’s affairs.

The witness, Sephen Crisafulli also stated that Slalom Skiwear Inc. of Vermont owned 80 per cent of the issued shares and Fred Langendorf owned 20 per cent of the issued shares. That leaves no shares for David Campbell.

The Canadian company was incorporated under the name Slalom Sports Canada Ltd., and according to Mr. Crisafulli, the Canadian company was a subsidiary of the American company. Sephen Crisafulli was the president of the American company and vice-president of the Canadian company, Fred Langendorf was president of the Canadian company.

It must be remembered that the purpose of the Canadian company was to sell the skiwear manufactured by the American company in Canada as well as to sell the sweaters manufactured in Hong Kong in Canada. Although no proof was made, I assume the Canadian company, defendant herein, also sold the hats manufactured in Nebraska for the American company.

According to Fred Langendorf, after the Canadian company was incorporated and after it started its operations in Canada, the office and warehouse were situated in the basement part of his home in Bromont, Quebec. This lasted for a little less than one year when it was decided that larger space would be required and premises were leased in Rock Island, Quebec from where, according to Langendorf, the Canadian company carried on its business.

Mr. Langendorf stated that the company was a selling company, it hired four sales agencies in Canada to represent it on a commission basis, the sales being made at ski shows and visits to retail outlets selling skiwear and other sporting goods equipment.

In that the defendant company was selling skiwear manufactured by its “American Parent”, Mr. Sephen Crisafulli stating to me that the defendant was a subsidiary of the American company, it had to import the merchandise into Canada from the United States, from Slalom Skiwear Inc. of Newport, Vermont.

Plaintiff alleges that on work sheets 1 to 207, there were 207 illegal entries made by the defendant, the illegality being that the goods manufactured in the United States and imported into Canada from the United States did not disclose the proper value for duty, the proper value for duty being the purchase price paid by a purchaser in Canada. Plaintiff contends that although there exists an invoice from the American exporter, Slalom Skiwear Inc., to Slalom Sports Canada Ltd., the defendant, the value placed on this invoice is not the correct value as the defendant is not the purchaser in Canada, the true purchaser being the retail outlet to whom the goods were finally delivered.

Plaintiff makes the same claim with regard to work sheet No. 208, this work sheet refers specifically to the merchandise that plaintiff had seized. and for which the defendant had paid a sum of $10,495.10 duties and penalty.

With regard to work sheet No. 209, this work sheet contains nine separate entries, representing goods imported from Hong Kong for which plaintiff alleges that the true purchase price paid to the exporter was not truthfully declared to customs, which had a twofold effect, namely, to avoid the payment of duties and to avoid the licensing provisions of the Export and Import Permits Act, R.S.C. 1970, c. E-17 and amendments.

At the commencement of the hearing before me in Montreal, Quebec on April 15, 1986, I was informed that both plaintiff and defendant had agreed to limit the proof to certain work sheets as representative of the total transactions. Work sheets 127, 147 and 156 would be representative for the work sheets (entries 1 to 207) and that the calculations made by plaintiff on all the work sheets woud be correct if I find in favour of plaintiff.

Mention was made to me that work sheet No. 77 would also be involved as a further example of what transpired as it was the object of an examination on discovery. No examination on discovery was submitted to me nor was any part of an examination on discovery read into the record. I have nothing before me with regard to work sheet No. 77.

The issue that I am asked to answer is whether the defendant is a Canadian purchaser under the terms of the Customs Act, subsection 41(1) and secondly, whether any false declarations were made by the defendant or by persons for whom the defendant is responsible for any of the entries contained on work sheets 1 to 209 inclusively.

Subsection 41(1) of the Customs Act states:

41. (1) Notwithstanding anything in this Act, where the value for duty as determined under sections 36 to 40 is less than the amount for which the goods were sold to the purchaser in Canada, exclusive of all charges thereon after their shipment from the country of export, the value for duty shall be the amount for which the goods were sold, less the amount, if any, by which the fair market value of the goods has decreased between the time of purchase and the time of exportation.

In order to determine whether the defendant is a Canadian resident purchaser, certain guidelines have been established by the Minister of Revenue in documents known as memorandums.

Three Memorandums were filed by plaintiff, Exhibits P-4, P-5 and P-6. These Memorandums are to be used as guidelines to help determine who is the Canadian purchaser in Canada. It must be remembered that these Memorandums are not law but can be used as an aid in interpreting legislation where there may be a doubt.

In Exhibit P-6, Memorandum D-13-1-17 dated July 1, 1982 and which replaced Exhibit P-5 Memorandum D-34-80 dated November 18, 1981, one can see what considerations should be taken into account in order to determine who is a Canadian purchaser and the reason for same. Paragraphs 7 and 8 of Exhibit P-6 state:

7. It is Customs position that to be considered resident in Canada, the purchaser must, generally, be carrying on business in Canada. Some of the guidelines which are used to determine that the person is carrying on business are:

(a) maintains a place of business in Canada to which employees ordinarily report to work;

(b) maintains a buying and selling operation in Canada;

(c) exercises financial control and management in Canada over the buying and selling operation;

(d) maintains inventory or warehousing facilities in Canada; and

(e) carries out invoicing and accounting activities in Canada.

8. Occasionally, a vendor may establish a buying subsidiary in Canada who is acting merely as an agent for the vendor. Although the Customs documents may indicate that the vendor is selling directly to the subsidiary, in actual fact, the goods are sold to a third party prior to the time of importation. For Customs purposes then, the third party to whom such goods were sold at time of importation is considered to be the purchaser in Canada.

Plaintiffs only witness was a Mr. Joseph Blefari who informed the Court he was the “Administrateur, Service des Enquêtes, Ministère du Revenu, section Douanes et Accise".

Mr. Blefari informed me that he had personally conducted the bulk of the investigation into the affairs of the defendant which had commenced in January 1983 by a Mr. St. James. Mr. St. James was transferred, in April 1983, to Ottawa and from that time on the witness states he continued the investigation on his own. The witness informed me that during the time that he was conducting the investigation, March 1983 to September 1983, he found no documentation of the defendant's business in Canada and that this documentation was all in the office at Slalom Skiwear Inc. in Newport, Vermont. He stated he required, for the purpose of his investigation all custom declarations, accounting books and all other documents, including correspondence, having regard to the purchase and importations of the defendant from August 1, 1980 to September 22, 1983, the period being investigated. These documents were requested from Mr. Sephen Crisafulli in Newport, Vermont, on March 22, 1983.

The statement of Mr. Blefari that no documents were kept in Canada and that all documents were kept in the U.S. was contradicted by Mr. Fred Lan- gendorf when he stated in his testimony that he personally delivered most of the documents to the Customs Office and that these documents were from the defendant’s office in Rock Island, Quebec.

I am satisfied that the documents given to Canada Customs, after the request, were given on two separate occasions. Both Mr. Blefari and Mr. Langendorf agree to this. In Mr. Langendorf's testimony, he also stated that a Mrs. Norma Peck was a full-time employee of the U.S. company which, in my view, has a bearing on where the documentation of the defendant was kept.

If we examine Exhibits P-3(a) and P-3(b), it can be seen that these two letters, dated March 28, 1983 and May 3, 1983, are on stationery of the defendant company but signed by Norma R. Peck. The two letters are addressed to Revenue Canada, Customs and Excise, Sherbrooke, Quebec and state that they authorize the examination of certain documents of the defendant.

I have no proof that Norma R. Peck was in Rock Island when she signed the letters. I have proof that Norma R. Peck worked in Vermont for the “Parent” company and I therefore am satisfied that all the documents sent to Canada Customs in Sherbrooke, Quebec were sent from Vermont, and not from Rock Island as stated to me by Mr. Langendorf. It may be true that on one occasion the documents were brought to Canada Customs in Sherbrooke, Quebec by Mr. Langendorf but I am convinced he was not telling the truth when he stated that most of the documents delivered were in Canada in the office of the defendant in Rock Island, Quebec. Norma Peck was a full-time employee of Slalom Skiwear Inc. in Newport, Vermont, was its director of customer service and would have access to the documentation in Vermont, which was sent to Canada Customs in Sherbrooke, Quebec.

This was further confirmed when, on June 21, 1983 Blefari went to defendant's premises in Rock Island with a warrant for seizure of documents (Exhibit D-1) and found no documents in the premises.

Plaintiff also contends that not only were no documents of the defendant company in Canada but that all services performed for the company were performed in the United States. As proof of this, plaintiff submits Exhibit P-7, an invoice from Slalom Skiwear Inc., Newport, Vermont to Slalom Sports Canada Ltd. in the sum of $5,500 Cdn. or $4,565. U.S., the invoice being for services performed for and on behalf of the defendant.

The defendant explains this invoice by admitting that the administration of the defendant company was done in the United States, at the parent company’s office for the very practical reason that it was much cheaper for it to contract out this administrative work than to hire personnel to do the work in Canada. Defendant claims that it was too small to go into the expense of extra staff.

The defendant's explanation seems to me to be a reasonable one with regard to this particular question but in considering the total proof made by plaintiff, this particular fact, the administration is performed in Vermont at the parent company, is really a further indication that defendant is not a Canadian purchaser in accordance with the Customs Act.

The financial statement of the defendant company, Exhibit P-8, is still another indication that the defendant is not a Canadian purchaser as defined in the Customs Act.

The financial statement is made by an American accounting firm, A. M. Peisch & Company, whose offices are in three cities of Vermont and that the financial statement is addressed to the “Board of Directors, Slalom Sports Canada Ltd., Newport, Vermont” (the emphasis is mine).

Defendant tries to explain this away by stating, testimony of Sephen Cris- fulli, that the accounting work is done by Canadian accountants who, after completing the work, send the information to the American accounting firm. He states that this is done because of American tax laws, of which no proof was made. When asked for the name of the Canadian accounting firm he was unable to give the name stating that it was at the office and as soon as it was known he would let me know.

I would presume he never found the name as neither he nor Fred Lan- gendorf gave me this information.

The order form, Exhibit P-9 and the Bordereau d’Expédition — Acknowledgment, Exhibit P-10, are two further examples leading me to believe that the defendant is only a distribution centre for the American parent company.

The order form, Exhibit P-9 bears the telephone number of Slalom Skiwear Inc. in Newport, Vermont. No Canadian telephone number is to be found on this document. The address of the Canadian company is printed on the form.

Defendant's witness Langendorf explains the telephone number as being the American company’s due to his constantly being out of the office and it is necessary to have someone answer the telephone in case of an inquiry or a complaint.

This explanation is unreasonable. It goes, in my view, to show that the Canadian company is really part of the American company, with no autonomy whatsoever. I see no reason why, if the defendant were truly autonomous, the defendant would not have its own answering service. I believe that the American telephone number was used because it was Slalom Skiwear Inc., the American Parent, that was responsible for the orders and complaints.

Langendorf, in explaining the operation of the defendant, stated he would receive an order form in Rock Island, Quebec, checked the customer's credit and if he was satisfied he either sent the order form to Slalom Skiwear Inc. or personally brought it there where an acknowledgment of the order (Exhibit P-10) was sent out by the American company directly to the customer.

I believe that if I consider all the facts proven by plaintiff, as a whole and not separately, and consider the explanation of the defendant, the only conclusion I can come to is that the true purchaser in Canada is the customer to whom the goods were finally shipped and that the defendant was nothing more than, at best, a distribution centre for the American parent.

A further fact that I considered in coming to the conclusion that the defendant was a distributor or agent of the American company is that the Canadian company only sold skiwear manufactured by the American company and only sold sweaters that were imported from Hong Kong by the American parent Company.

The defendant witness, Langendorf, informed me that the defendant would hire part-time help, who happened to be full-time employees of the American parent company, during the heavy shipping season.

Mr. Sephen Cristafulli informed me that during the heaviest shipping season, from October to the end of the first week in November of each year, approximately five weeks, the merchandise was shipped in boxes to the Canadian border, pre-packaged and pre-addressed, given to a Canadian transporter and delivered directly to the retail store. The reason for this is “to cut down delivery time.”

If this is so, I find it difficult to believe the testimony of Mr. Langendorf when he stated he would be obliged to hire ten part-time employees during the heavy shipping season to come to Rock Island, Canada, and work in the Canadian premises. There was no need for these employees, the shipping was being done in Vermont. It may be that the Canadian company was charged for the pre-packaging and pre-addressing made in Vermont by full-time employees of the American parent company but this does not mean that the part-time help had to be in Canada. I believe that the part- time helpers, if there were any, were always on the premises of the U.S. Parent company.

If the Canadian company, defendant, did hire part-time help and they worked in Canada, then it, as any Canadian employer, would be obliged to deduct unemployment insurance, income tax, etc. No proof was made that any deductions at source were made nor were any documents made available to me to show that the defendant had any part-time employees in Canada.

I am not convinced by the testimony of Langendorf. There were too many contradictions or too many non-complete answers in his testimony.

Furthermore, with regard to work sheet No. 209, the witness Langendorf was simply not convincing. When asked about the invoices submitted to Canadian Customs for the importation of the sweaters, his answer was that the first time he had ever known of the company Oriental Star Mfg. Co. Ltd. was when he attended a meeting with Mr. Blefari, the plaintiff's investigator.

Exhibits P-15, P-15.1 and P-15.2 are work sheets with regard to the importation of sweaters from Hong Kong. Langendorf admits that it was the exporter who tried “to sneak the merchandise in”. The witness states he was in good faith.

I have great difficulty in believing the testimony of Mr. Langendorf. He surely knew that false invoices were being supplied to Canadian Customs. The invoice filed by defendant's custom broker, for whom defendant is responsible, Sections 106 and 107 of the Customs Act, is marked "For Customs Purposes Only” in Exhibit P-15.2. The value for 108 ladies’ sweaters is stated to be $972 Hong Kong dollars which was equivalent to approximately $228.59 dollars. Surely defendant knew that he was not paying approximately two dollars a sweater but was paying a sum far in excess of this amount. Langendorf knew that the price for 108 sweaters was $1,350 U.S. or $12.50 U.S. each (see Exhibit P-15.2 invoice No. 81/134 from Oriental Star Mfg. Co. Ltd. dated October 28, 1981).

The same type of transaction took place in the entry Exhibit P-15.1.

Defendant not only declared false values for the imported sweaters in Exhibit P-15.2, by declaring the value at less than $500 Canadian dollars, it only filed an "Appraisal Note” to avoid the laws under the Import and Export Permits Act, 1970 R.S.C., c. E-17.

After reviewing all of the facts in this case, I am of the view that the defendant was acting as a sales agency for the American parent company, Slalom Skiwear Inc. and, knowingly falsified the entries of sweaters from Hong Kong. The proof made by plaintiff is clear. The defendant made virtually no proof to rebut the plaintiff's claim.

Section 247 of the Customs Act states clearly that when it is shown that there exists double invoicing, as there exists in this case, Exhibit P-15.1 en liasse and Exhibit P-15.2 en liasse, fraud is presumed.

This section states:

247. The production or proof of the existence of any invoice, account, document or paper made or sent by any person or by his authority, wherein the goods or any of them are charged or entered at or mentioned as bearing a greater price than that set upon them in any other invoice, account, document or paper intended to cover the same goods or any part thereof, made or sent by the same person or by his authority, or in which the goods or any of them are given a different name or description from that stated in any other such invoice, account, document or paper, or in which the goods are falsely described, is prima facie evidence that the invoice, account, document or paper wherein is stated a lesser rice, or the false or incorrect name or description of the goods, was intended to be fraudulently used for customs purposes; but such intention or the actual fraudulent use of such invoice, account, document or paper may be proved by any other legal evidence. R.S., c. 58, s. 247.

The important words are ‘‘was intended to be fraudulently used." Where there is double invoicing there is, in my view, a strong prima facie case of a fraudulent intent and the burden to rebut this presumption is on the defendant.

Section 248 of the Customs Act states that the burden of proof lies with the person whose duty it was to comply with the terms of the Customs Act.

248. (1) In any proceedings instituted for any penalty, punishment or forfeiture or for the recovery of any duty under this Act, or any other law relating to the Customs or to trade and navigation, in case of any question of, or relating to the identity, origin, importation, lading or exportation of any goods or the payment of duties on any goods, or the compliance with the requirements of this Act with regard to the entry of any goods, or the doing or omission of anything by which such penalty, punishment, forfeiture or liability for duty would be incurred or avoided, the burden of proof lies upon the owner or claimant of the goods or the person whose duty it was to comply with this Act or in whose possession the goods were found, and not upon Her Majesty or upon the person representing Her Majesty.

(2) Similarly, in any proceedings instituted against Her Majesty or any officer for the recovery of any goods seized or money deposited under this Act or any other such law, if any such question arises, the burden of proof lies upon the claimant of the goods seized or money deposited, and not upon Her Majesty or upon the person representing Her Majesty. R.S. c. 58, s. 248.

The defendant’s witness, Langendorf, admitted that there were different invoices, one for custom purposes and one showing the true purchase price paid for the sweaters. He simply stated he did not know of this until confronted by Mr. Blefari who showed him the different invoices for the same merchandise.

The simple statement that “1 did not know of the double invoicing” is not sufficient to rebut the presumption created by the law. Some proof must be offered to satisfy me that there was no blameworthy conduct on the part of the defendant. This was not done.

In the unreported case of The Queen v. Jay Norris Canada Inc., Federal Court — Trial Division, February 12, 1986, T—1921-82 (now reported at [1986] 1 C.T.C. 361), Mr. Justice Joyal states (at 366):

. . . It is only to find that a simple assertion by a defendant that he was acting in good faith or in ignorance of the law is not sufficient to rebut or discharge the burden which a “false” declaration immediately creates and which subsection 248(1) enshrines.

The proof presented to me by the plaintiff and not rebutted by defendant makes me find in favour of plaintiff.

In that the defendant had agreed on the calculations made by plaintiff in the event I were to confirm plaintiff's claim, I hereby order defendant to pay to plaintiff the sum of $337,674.64 for duty owing and penalty as claimed.

I am not awarding interest nor am I awarding costs since neither interest nor costs were asked for in the conclusion of plaintiff’s amended statement of claim.

The counter-claim by defendant is dismissed without costs.

Judgment for the plaintiff; defendant's counter-claim dismissed.