Zellers Inc. v. New Brunswick (Minister of Finance), [1998] 3 CTC 55

Russell J.:

The appellant taxpayer appeals from a decision of D.V. Bamford, a person designated by the Minister of Finance to hear appeals under the Revenue Administration Act, SNB 1983 and amendments C, R-10.22 whereby it was ordered to pay sales tax on “flyers” or promotional material it distributes in New Brunswick inter alia through the mail and as inserts in newspapers but which are produced in Quebec, on the basis of the total costs of production and not just on the printing costs.

Originally Zellers self-assessed and paid tax on the printing costs only but after an audit the Province re-assessed them on June 20, 1988 and Zellers appealed that assessment. W. G. Dyrlin Redstone, Director of Tax Review and Appeals, in a decision of September 9, 1988 wrote:

I have reviewed the statement of facts in your Notice of Objection to your June 28, 1988 assessment of $246,758.01 with respect to tax payable under the above Act.

The circulars brought into New Brunswick for consumption are taxable on their fair value not just their “printing” costs.

I, therefore, confirm the assessment of tax on the “production” costs portion of the value of circulars brought into New Brunswick for consumption.

A taxing statute has to be clear as to what value is used with the tax rate to compute the tax payable on taxable goods or services. Zellers manufactures or has manufactured advertising circulars for their consumption. The tax rate would apply to the total cost Zellers incurred in creating the circulars. This cost would include the “production” costs as well as the “printing” costs.

Zellers appealed and D. V. Bamford, the person designated by the Minister of Finance under the Revenue Administration Act, dismissed the appeal on 23 February, 1989 and wrote in part:

Position of the Appellant:

The appellant contends that the costs disclosed in the general ledger accounts included costs that cannot be considered in determining the “fair value” of the goods. The appellant suggests that not all the costs incurred, and accounted for by the appellant can be taken into consideration in arriving at the “fair value” of the goods subject to assessment. Such costs would include the following:

1. Preparation of roughs.

2. Separate purchase of model time.

3. Separate purchase of photos.

4. Separate purchase of translation services.

5. Separate purchase of transparencies.

6. Separate purchase of colour separations.

7. Cost of mail preparation.

8. Cost of freight.

With the exception of the costs incurred by the appellant to produce the rough illustration outlining the products that are to be included in the particular circular, all other costs incurred by Zeller’s are costs that have been separately contracted for and separately invoiced for by agencies that have provided goods or non-taxable services in the Province of Quebec. Such goods or services however were required so that the circular could be produced. Such costs are accounted for and identified as costs incurred for the promotional distribution.

Zeller’s maintains that the only costs that can attract N.B. tax are costs incurred by Zeller’s for printing the promotional distribution. All other costs incurred by Zeller’s that were necessarily incurred to produce the promotional distribution cannot be included in determining the “fair value” of the goods produced.

Furthermore, Zeller’s maintains that it is not a “manufacturer or producer” of goods. Therefore the only cost that can be included in the term “fair value” is the cost that Zeller’s incurs and pays to the printer upon receiving the printed goods for distribution in the Province of New Brunswick.

I am left with the overwhelming conclusion that the costs paid by the appellant for the promotional distribution represents the full “fair value” of the good sought to be taxed.

To suggest that Zeller’s could escape taxation by simply entering into separate contracts to have the services and goods provided on an individual basis to reduce the “fair value” of the circulars would place a strained interpretation on the definition of the term “fair value” as set forth in section 1 of the Sales Tax Act. Certainly any attempt used to artificially reduce the cost of the good for taxation purposes would justify the Tax Commissioner in making a determination of the fair value of the circulars pursuant to subsection 5.1(1) of the Sales Tax Act. The purpose and intent of the Sales Tax Act cannot be frustrated by such a scheme.

For the above reasons, the appeal of Zeller’s is dismissed. The decision of the Director of Tax Review and Appeals is affirmed.

Under Section 14 of the above mentioned Act, Zellers had 30 days to appeal Mr. Bamford’s decision to this court and by Notice of Appeal dated 23 March 1989 they did so. There was a flurry of activity in 1993 and 1994 when a judge of this Court and later the Court of Appeal rendered decisions allowing the Notice of Appeal to contain grounds of appeal not raised before Messrs. Redstone or Bamford. The decision of the Court of Appeal was rendered on October 21, 1993.

Nothing further on the record was done by either party until, by letter dated October 14, 1997, the solicitor for Zellers requested a date for the hearing of the appeal pursuant to Section 16 of the Revenue Administration Act. On October 20, 1997 this Court fixed January 19, 1997 as the date for hearing the appeal and it proceeded on that date. Section 16 of the Revenue Administration Act says:

16. Within fourteen days after the service upon the Minister of the notice of appeal the appellant shall apply to the judge for the appointment of a day for the hearing of the appeal, and shall serve upon the Minister not less than fourteen days before the hearing a written notice of the day appointed for the hearing.

Counsel could not explain satisfactorily why it took some 4 years to seek a hearing date — a function the legislation says should be completed within 14 days of the Notice of Appeal being filed — for a matter the facts of which are essentially undisputed.

While I have outlined the facts generally the parties did agree to an extensive Agreed Statement of Facts and Documents which is reproduced in part as follows:

3. During the period February 1, 1984 to January 31, 1988 (the “assessment period”) Zellers caused circulars to be distributed to potential customers in New Brunswick. The circulars were distributed door-to-door by independent distributors, by Canada Post (together with the regular mail) and as insertions in New Brunswick newspapers. Small quantities of Circulars were also made available to customers in Zellers stores in New Brunswick. Zellers made no charge to potential customers for the circulars.

4. The circulars for distribution throughout Canada were prepared entirely in the Province of Quebec. Zellers employees prepared the initial rough illustrations outlining the products that were to be included in a particular circular (i.e., their relative size, page, location, etc.) and the general way the circular was to look. Once the rough illustrations were prepared, Zellers contracted with local Quebec suppliers for the preparation of each circular as follows:

(a) Zellers contracted with an independent graphic arts studio (the “graphic studio”) to produce the colour separations and final film required for the circular. To do this, the graphic studio arranged for the required models with independent modelling agencies (the “modelling agencies”) and prepared transparencies” and “mechanicals” for the circular. The transparencies consisted of the pages of the circular on a type of photographic film. The mechanicals consisted of the required transparencies and product information placed on pieces of cardboard.

The transparencies and mechanicals produced by the graphic studio were forwarded by the graphic studio to an independent colour separator retained by the graphic studio (the “colour separator”) who used them to produce colour separations and the final film to be used for printing the circulars.

(b) The colour separations and final film produced by the colour separator were then provided by the colour separator, upon instructions from the graphic studio. to an independent printer hired by Zellers to print the circulars (the “printer”). The printer used the colour separations and final film to produce a printing plate, which was then used by the printer to print the number of circulars ordered by Zellers.

(c) Zellers also contracted with an independent party who received the circulars from the printer and folded and bundled them (the “folder/bundler”) in the format requested by Zellers so as to enable them to be transported as well as to make them suitable for the various means of distribution to potential customers (i.e., to put them in the physical form required for distribution door-to-door, by insertion in newspapers, via Canada Post and in Zellers stores). For example, circulars distributed door-to-door were folded into larger sizes and had more circulars per bundle than those distributed via Canada Post.

5. Zellers also contracted with various companies to ensure distribution of the circulars in New Brunswick as follows:

(a) Circulars to be distributed door-to-door by Canada Post were shipped by the folder/bundler in bulk to a Canada Post location in Montreal. Canada Post then arranged for them to be shipped in bulk to various locations in New Brunswick from which the circulars were distributed door-to-door by Canada Post personnel together with the regular mail.

(b) Circulars to be distributed by independent distributors were shipped by the folder/bundler via common carrier directly to independent distributors retained by Zellers to deliver circulars door-to-door.

(c) Circulars to be inserted in newspapers were shipped by the folder/bundler via common carrier directly to various newspaper producers in New Brunswick.

(d) Circulars were also shipped by the folder/bundler directly to each Zellers store in New Brunswick where they were made available to instore shoppers.

6. Zellers contracted with the graphic studio, printer, folder/bundler, common carriers, distributors and newspapers. The graphic studio charged Zellers an hourly fee for their services, plus disbursements, and instructed the modelling agencies and colour separators to send their invoices directly to Zellers for payment (as is the practice in the industry). The printers, folder/bundlers, common carriers, distributors and newspapers charged a fee per thousand circulars printed, folded/bundled, carried, delivered or inserted in newspapers.

7. The only tangible personal property which ever entered New Brunswick and which was provided to New Brunswick residents was the printed circular itself (i.e., the transparencies, mechanicals, colour separations, final film and printing plates never entered New Brunswick).

8. The circulars were, and continue to be, printed and distributed weekly. The circulars were inserted in various New Brunswick newspapers (e.g. the Evening Times globe (Saint John), the Daily Gleaner (Fredericton) and the Miramichi Leader (Chatham) and stated that they were supplements to the newspaper in which they were inserted, for the relevant day or week of publication. The circu- lars appeared as a supplement to a given newspaper on the same day of each week, although the specific day varied for different newspapers.

9. Zellers self-assessed tax under the Social Services and Education Tax Act (the “Act”) in respect of most circulars distributed in New Brunswick based on the amounts charged to Zellers by the printer.

13. Apart from tax in respect of the printer’s charges for the additional circulars mentioned above, the remainder of the assessment related to tax calculated on 4% of the aggregate of the amounts paid by Zellers to the following suppliers:

1. the graphic studios:

2. the modelling agencies;

3 the colour separators;

4. the folder/bundlers; and

5. the commons carriers who delivered circulars from the folder/bundler’s premises in Quebec to the required locations in New Brunswick i.e. to the door-to-door distributors, to the newspapers and to Zellers stores.

20. The amounts paid by Zellers to the graphic artists, modelling agencies, colour separators, folder/bundlers and commons carriers for each of the circulars explained in paragraphs 18 and 19 are not in dispute, although Zellers disputes that any portion of these amounts is subject to tax.

21. A review of column two on pages 3 to 7 of the audit report show that the amount paid to the printer per circular was less than 25 cents for all but one circular. A review of the entire audit report also indicates that the total cost per circular distributed in New Brunswick, having regard to all of the costs relating to the circulars (i.e., the cost of the printers, graphics studios, modelling agencies, colour separators, folder/bundlers and common carriers), ranged from about 6 cents to 31 cents per circular. Exhibit II illustrates how the 6 cents and 31 cents figures were calculated from the audit report.

Zellers, at the hearing of the appeal, proceeded on three grounds only. They are:

1) Whether any of the circulars were exempt from tax pursuant to paragraph 1 l(u) of the Act (“paragraph 1 l(u)”) because they were “goods purchased at a purchase price of twenty-five cents or less”.

2) Whether circulars inserted as supplements into newspapers prior to October 1, 1987 were exempt from tax pursuant to paragraph 1 l(q) of the Act (“paragraph 11 (q)”) because they constituted “goods purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into goods for the purpose of sale”.

3) To the extent any circulars were taxable, what was the “fair value” of such circulars upon which tax was payable?

Ground #1 — The 25 Cent Issue

Zellers maintains the circulars should be taxed only when they are distributed to the consumer and when this approach is taken (as opposed to valuing the circulars in bulk) a review of their costs reveals that, with one exception, the individual cost of each flyer was less than 25 cents. Section 1 l(u) of the Social Services and Education Tax Act, RSNB 1973, Ch. S-10 and amendments (hereafter “the Act”) says:

11. A consumer shall not be liable to pay the tax in respect of the consumption of the following goods:

(u) goods purchased at a purchase price of twenty-five cents or less.

In order to develop this argument Zellers linked three separate positions, that is that consumption begins when each circular is provided to a recipient; that the provision of each circular is a separate taxable event; and finally, that there is an exclusion for goods valued at less than 25 cents. For Zellers to have success on ground #1 it is necessary that there be a favourable determination on each of these elements.

In developing the first arm of the argument Zellers uses various sections of the Act as follows:

“consumer” means a person who

(a) utilizes or intends to utilize within the Province goods for his own consumption;

“consumption” and “use” is defined to include: “the provision by way of promotional distribution of any goods”;

“promotional distribution” is defined to mean: “the provision by any person to others of any goods” for promotional purposes.

“purchaser” means a consumer who acquires goods at a retail sale within the Province and includes also a promotional distributor to the extent that the full fair value of any goods provided by way of promotional distribution exceeds any payment specifically made therefor by the person to whom such goods are so provided.

“promotional distributor” means any person who is a resident of, or carries on business in the Province and who, by way of promotional distribution, provides or causes to be provided to any person in the Province any goods the full fair value of which is not specifically charged to, and required to be paid by, the person to whom such goods are provided.

“retail sale” means a sale to a consumer for the purpose of consumption ...

“sale” includes

(c) ... "the provision by way of promotional distribution of any goods”.

It is Zellers’ position that circulars which are not distributed are not taxable. For example, if a truckload of circulars was destroyed by accident there would not be any tax paid on them.

Assuming that argument is accepted, Zellers then goes on to the second branch of the contention which is to say that the provision of each circular to a New Brunswick resident is a separate taxable event. The appellant’s brief elucidates this argument as follows:

18. The Appellant also submits that the aforementioned definitions, and the definitions of “purchaser” and “promotional distributor” in particular, indicate that the Appellant becomes liable to pay tax under the Act on a circular by circular basis having regard to the circumstances of the specific transaction between the Appellant and each specific person to whom a circular is provided.

19. In this respect, a person is a “promotional distributor” if he “provides or causes to be provided to any person in the Province any goods the full fair value of which is not specifically charged to and required to be paid by, the person to whom such goods are provided”. Similarly, the promotional distributor is only liable to pay tax under section 5 as a “purchaser” “... to the extent that the full fair value of any goods provided by way of promotional distribution exceeds any payment specifically made therefor by the person to whom such goods are so provided”.

20. Accordingly, the Appellant’s liability for tax in respect of the circulars as a “promotional distributor” and “purchaser”, payable at the time of “purchase” (i.e., when consumption begins) is determined at the time the circular is provided to each recipient, having regard to the terms of the specific transaction between the Appellant and each specific person receiving the circular. That is, the Appellant’s liability for tax as a promotional distributor is determined by reference to the fair value of the specific goods provided to the recipient (i.e., the circular) and the payment, if any, specifically made therefore by the recipient.

Finally, the appellant uses Section 11 (u) to argue that the “fair value” of each of the circulars is less than 25 cents and therefore tax is not owed on this promotional literature. Although Section 11 (u) speaks of purchase price which is not defined in the Act, Zellers in its argument equates purchase price to fair value, which is defined. It’s argument on this point concludes thusly:

44. The Appellant therefore submits that while its potential liability for tax is on the fair value of each circular, the exemption in paragraph 11 (u) is calculated by reference to the “purchase price” of the circular. The Appellant submits that the Act, and the ordinary meaning of these words, indicates that the purchase price in this context is the consideration paid by the Appellant to the printer for each circular.

At the hearing the Appellant’s counsel went on to say that even if all the expenses were factored in, the cost of each flyer (with one exception) would be less than 25 cents.

It is this last branch of the argument that the respondent attacks most vigorously. Because the promotional distribution material does not have any purchase price it is fallacious to link the value to the 25 cent exemption. Because of the definition of promotional distribution in the Act the taxable event is not the sale of the material but rather its provision. The Province’s brief says:

Hence, the taxable event is not the sale of the promotional distribution but rather its provision. Moreover, if there is any sale of any of the material for which Zellers might possibly claim exemption, that sale takes place outside New Brunswick. The taxable event which takes place in New Brunswick is of course the provision of the goods. This becomes apparent when one examines Chapter 55 to note that the definition of sale was amended to include “the provision by way of promotional distribution to any goods”. The enhancement of the definition of sale makes it apparent that in terms of the charging provisions of section 4 which taxes “every consumer of goods consumed within the Province”, the consumption or taxable event which takes place within the Province is indeed the provision of promotional distribution. There is no sale of this material and consequently the exemption provisions of paragraph 1 l(u) have no application.

The judgment in Carling O'Keefe Breweries of Canada Ltd, v. Newfoundland (Attorney General) (1993), [1994] 2 G.T.C. 7031 (Nfld. T.D.), a case in the Newfoundland Supreme Court, is instructive. A question for determination in Carling was whether the brewery was taxable under the equivalent Newfoundland legislation for beer it gave away to members of the public for marketing and business promotion purposes. It was decided in 1993 well after the judgments in Simpsons-Sears Ltd. v. New Brunswick (Provincial Secretary), [1978] C.T.C. 296 (S.C.C.) (hereafter “Sears #1”) and New Brunswick (Minister of Finance) v. Simpsons-Sears Ltd., [1982] C.T.C. 85 (S.C.C.) (“Sears #2”) had been delivered by the Supreme Court of Canada and digested. In the light of those experiences Newfoundland had amended its sales tax legislation so that the Newfoundland Act and the New Brunswick Act bore some resemblance. The following words of Pud- dester J. at page 7046 in Carling (supra) are applicable here:

While the words actually used do not in the purely grammatical sense make that linkage, nevertheless in my view it is significant that the legislature has expressly associated with a concept originally defined to relate to a person who “acquires” goods, the concept of a person — the promotional distributor — who in connection with a promotional distribution transaction, provides or disposes of those goods. From this juxtaposition, it is apparent that the intention of the legislature is that even in the context of a two-party transaction involving a “seller” and a “purchaser”, the promotional distributor may be considered itself as the purchaser to the limited extent set out in the amended part of the definition.

In referring to Sears #2 Puddester J. said at page 7049:

... The decision of the Supreme Court of Canada implies, if it does not express, that a promotional distribution was not caught under the concept of “retail sale”, but under the broader concept of consumption as the actual language used in the charging section there.

When the definitions of “consumer”, “consumption and use”, “promotional distribution”, “promotional distributor”, “purchaser”, and “sale” in the Act are considered in light of Sears #2, coupled with the agreed facts here, it is evident the taxable event is not the sale of the items but rather their provision. Accordingly, the value of each brochure as a separate item is not relevant in the determination of the tax owing and the appellant’s initial argument fails.

Ground #2 — The Newspaper Issue

Before 1 October 1987 Section 11 (q) of the Act provided an exemption for:

(q) goods purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into goods for the purpose of sale.

After that date Section 1 l(q) said:

11. A consumer shall not be liable to pay the tax in respect of the consumption of the following goods:

(q) goods purchased by a manufacturer for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into goods for the purpose of sale.

This branch of the appellant’s argument only applies to those circulars distributed by newspaper and only those distributed by newspaper from the beginning of the assessment period to October 1, 1987. Zellers says the circulars placed in newspapers during the relevant time period were “purchased by the appellant ‘for the purpose of being attached to, or incorporated into goods for the purpose of sale.’”

The fallacy in that argument is that the newspapers like the mail system were distribution vehicles and nothing more. The circulars were not purchased by Zellers for the purpose of insertion in the newspapers but rather for distribution to the general public by the most expeditious and all-encompassing methods.

This argument fails.

Ground #3 — Fair Value

The appellant says the calculation of fair value as made by Mr. Bamford to include all the costs of production and distribution and not just the printers costs is wrong.

Because of the agreed statement of facts there is no doubt that Zellers incurred all the costs referred to including, inter alia, the cost of the graphic studios, the modelling agencies, the colour separators, the folder/bundlers and the common carriers as well as the printers’ charges in order to obtain the finished product and place it in the hands of as many members of the public as possible.

The definition of “fair value” in Section 1 of the Act is not exhaustive but expansive because the body of the definition is preceded by the word “includes”. This is consistent with standard rules of interpretation. Pud- dester J. made the following statement in Carling (supra) at page 7040:

... Where the words of a taxing statute are “plain” in their meaning, that is, where no ambiguity truly exists, it is inappropriate to “warp” the words based solely on what the court finds to be the underlying purpose or intention of the legislature: Mobil Oil Canada Ltd. v. Newfoundland (1987), 68 Nfld. & P.E.LR. 155 (Nfld. S.C., T.D.). This is consistent with the principle that the task of the court is to see whether the language used by the legislature accomplishes the underlying purpose, not to allow the underlying purpose to circumvent the language itself.

The underlying purpose of the statute was to tax the fair value of the circulars. There is no question in my mind that the circulars would not be available to prospective customers of Zellers in New Brunswick if, for example, the folder/bundlers did not do their part to create and distribute the flyers. Thus each of the established components is essential to the flyers existence and it seems to me laboured to pick out only the printers’ costs as reflecting the fair value of the end product.

Quite apart from my own view of the meaning of fair value in the context of the agreed facts it is evident that after 1978 the Commissioner has the power to “determine the fair value of any goods”. See: Section 5.1(1) of the Act. Prior to then he only had power to determine the fair value of “such” goods, that is goods which were sold and not goods which were promotionally distributed. See: Sears #1 & #2 (supra).

I cannot conclude that Mr. Bamford erred when he determined the fair value of the circulars to be the amount which was assessed after the audit. Accordingly, this element of the appeal is dismissed.

Conclusion

The appeal is dismissed. I conclude the respondent is entitled to costs pursuant to Section 19 of the Revenue Administration Act (supra) which I fix in the amount of $1,000.00, which includes disbursements.

Appeal dismissed.