Myer Franks LTD and Standard Oil Company of British Columbia Limited v. Her Majesty the Queen, [1974] CTC 128, 74 DTC 6121

Sheppard, DJ:—The issue is whether the plaintiff Myer Franks Ltd “produced or manufactured in Canada” within paragraph 27(1 )(a) of the Excise Tax Act so as to be liable to pay sales tax of 12%

From November 1, 1969 to February 29, 1970 the plaintiff Myer Franks Ltd of Vancouver, BC bought, cleaned, reconditioned and eventually sold to the co-plaintiff Standard Oil Company of British Columbia Ltd used oil drums and for that period paid a sales tax of $273.71 which is sought to be recovered, and for the period June 1, 1970 to August 31, 1970 was assessed $2,073.60 for such sales tax, all of which is alleged to be illegal and therefore the plaintiffs seek to recover the sales tax paid and to vacate that assessed.

For the period March 1, 1970 to May 30, 1970 no sales tax was levied but the defendant, by a counterclaim, now contends that under section 27 the plaintiff Myer Franks Ltd was liable for this last period. The facts were largely agreed upon. (Exhibit 1.)

During the period November 1, 1969 to August 31, 1970 the plaintiff Myer Franks Ltd carried on at Vancouver, BC the reconditioning of steel drums and manufacture of new drums. For that business it purchased used steel drums at a price of 50 cents to $3 per drum though not many were purchased above $2.25 per drum, and sold them to the public including the co-plaintiff Standard Oil Company of British Columbia Ltd after cleaning and reconditioning for a price of $4.75 to $7 per drum. After a used drum was received by Myer Franks Ltd the following reconditioning was made at its plant:

(1) Two circular plugs (bungs) were unscrewed from the top of each drum.

(2) Steam was inserted through a pipe to clean the interior of the drum. That process was called raw steaming.

(3) A heavy chain of 8 feet long was inserted in each drum which was then rotated on a chaining machine. This operation removed most of the rust and scale from the inside of each drum.

(4) Each drum was immersed in a 10% caustic solution which removed the grease from the outside of the drum and most of the paint from the outside.

(5) Each drum was filled with a caustic solution as part of the cleaning process.

(6) Each drum was flushed with fresh water.

(7) Each drum was candled with a light bulb inserted to see if any dirt remained and if so the cleaning process was repeated.

(8) Dents were removed from any drum so affected by inserting water and air pressure to 90 pounds. About 10 to 15 or 25% of the drums had dents removed.

(9) Each drum was inserted in a water tank to test for leaks. The test was carried on by means of air being inserted in each drum and when immersed in water any leak would cause bubbles. Leaks then discovered were welded. If the drum had several leaks so as to be beyond repair it was sold as scrap.

(10) The drums were then heated.

(11) Each drum was sprayed with paint on the outside, and for the co-plaintiff Standard Oil Company of British Columbia its colours of paint were applied.

(12) New gaskets were inserted if needed. The seat for the bungs in the top of each drum contained a gasket which might be faulty and about 4 to 5% of the drums had these gaskets removed and a new gasket inserted. A drum would last through 10 to 15 trips or if of heavier metal through 15 to 30 trips and drums have been seen 10 to 20 years old.

There is no definition in the statute of “produced or manufactured” within subsection 27(1) and therefore the words must receive that meaning which is inherent or to be derived from the context. The contexts in subsection 2(1) and section 26 do not materially assist.

In The Queen v York Marble, Tile and Terrazzo Ltd, [1968] SCR 140; [1968] CTC 44; 68 DTC 5001, the respondent company imported large slabs of marble which were then subjected to various processes including polishing, cutting and edging and then sold in the trade. Spence, J in delivering judgment of the Supreme Court of Canada quoted from Archambault, J in MNR v Dominion Shuttle Co Ltd (1933), 72 CS (Que) 15, page 48 [5003]:

“First, what is a manufacturer? There is no definition of the word “manufacturer” in the Act and it is practically impossible to find a definition which will be absolutely accurate, but from all the definitions contained in leading dictionaries, Corpus Juris, Encyclopedias, etc., the Court gathers that to manufacture is to fabricate; it is the act or process of making articles for use, it is the operation of making goods or wares of any kind; it is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery.”

Spence, J then stated (pp 48-9) [5003]):

For the present purposes, I wish to note and to adopt one of the definitions cited by the learned judge, ie, that “manufacture is the production of articles for use from raw or prepared material by giving to these materials new forms, qualities and properties or combinations whether by hand or machinery”. . . .

In my view, the application of this test alone would be sufficient justification to find that the marble pieces which left the respondent’s plant had been “produced” or “manufactured” there from the raw material of the rough slabs of marble which had arrived.

And later at page 5004 stated:

... I adopt the course of McRuer, CJHC, in Gruen Watch Co v Attorney General of Canada in holding that an article may be “produced” although it is not “manufactured”. In that case, although he was unable to come to the conclusion that the mere insertion of the movement into the watch case was the manufacture of the watch, he found no difficulty in determining that such a process was the production of a watch.

Applying those tests, the drums were “produced or manufactured” by Myer Franks Ltd. New forms were given to the drums. They were acquired by Myer Franks Ltd as used drums; were cleaned and repaired as to leaks and dents so that they were capable of being used. New qualities were added by Myer Franks Ltd. The drums sold by the plaintiff were not leaking. Any leaks found had been repaired. They were cleaned, dents removed, and the bungs made to fit tight. New properties were added by Myer Franks Ltd. When acquired each drum was incapable of use if leaking or dirty or at the most could be used only for that purpose for which it had been used previously. However, after being cleaned and made tight and with dents removed the drums were capable of any use to which a new drum could be used.

It was contended by Myer Franks Ltd that each drum was merely cleaned, and not “produced or manufactured’ ’and therefore was the same as material sent to a laundry or shoes to a shoe repairer. That process was readily distinguishable as in the case of a laundry or shoe repairer the contract is a mere bailment for a service to cleanse or repair. The process to which the drums were subjected exceeded that. Therefore the action will be dismissed.

As to the counterclaim, there is not alleged nor proven the amount of the sales by Myer Franks Ltd during the period* March 1, 1970 to May 30, 1970 and therefore the counterclaim must be regarded as asking for a declaratory judgment by the Court that Myer Franks Ltd is liable under subsection 27(1). It is therefore declared that the drums delivered by Myer Franks Ltd during the said period March 1, 1970 to May 30, 1970 were “produced or manufactured” within the meaning of subsection 27(1) of the Excise Tax Act and a sales tax of 12% is payable by Myer Franks Ltd under subsection 27(1).

The letters Exhibits 2 and 3 cannot effect an estoppel or prevent subsection 27(1) from operating according to its construction (Maritime Electric Co Ltd v General Dairies Ltd, [1937] AC 610, Lord Maughan at 620 and 621; In re Bankruptcy Notice, [1924] 2 Ch 76, Atkin, LJ at 97; Southend-on-Sea Corporation v Hodgson (Wickford) Ltd, [1962] 1 QB 416, Lord Parker, CJ at 422).

As to the costs, the action will be dismissed with costs payable by the plaintiffs to the defendant.

As to the counterclaim the defendant will have the costs beginning with the filing of the defence to the counterclaim.