Her Majesty the Queen v. Canadian Pacific Railway Company, [1971] CTC 163, 71 DTC 5078

SPENCE, J. (all concur) :—This is an appeal from the judgment of the Exchequer Court of Canada ([1969] C.T.C. 641) pronounced after trial by Dumoulin, J. on November 28, 1969.

Her Majesty the Queen by the Deputy Attorney General of Canada issued an Information under the provisions of the Exchequer Court Act and Rules thereof claiming from. the respondent the Canadian Pacific Railway Company the sum of $110,567.77. By the judgment of the Exchequer Court of Canada the information was dismissed except as to the sum of $4,122.55 for which sum the respondent admitted its liability.

The circumstances giving rise to the Information were as follows. Prior to June 14, 1963, the Excise Tax Act and Schedules thereto had granted exemption from consumption and sales tax to, inter alia, railway ties. This exemption was removed on the said June 14, 1963. At that time, the respondent had in its various yards a large supply of untreated railway ties. These ties had been cut to the desired size by various suppliers and had been shaped, that is, the edges had been rounded. Such untreated ties were capable of being used in their then state as railway ties. In fact, a very small percentage of such untreated ties was used in that state. It had, however, long before, been established that the ordinary life of such untreated ties when installed in a railway line with the rails spiked thereto was not more than ten years; however, by creosoting treatment the life of such ties could be increased to about thirty-five years. The respondent, therefore, had some time before made contracts with certain companies amongst which was the Dominion Tar and Chemical Company Limited, hereinafter referred to as Domtar, for the reception from the respondent of the untreated ties and for the application thereto of a series of procedures. Those procedures may be very briefiy described as follows:

1. On arrival of the untreated ties at the Domtar plant in Delson, Quebec, they were unloaded and piled in square piles and then left to season for some period up to twelve months in order to remove excess water from them.

2. The ties which were to be seasoned were cut from both hardwood and softwood. The seasoning had a tendency to check and split the hardwood ties so that there was driven into each at either one or both ends thereof an ‘‘S’’ shaped iron rod which tended to hold together the structure of the tie and limit the splitting thereof. The ties so seasoned and strengthened by the ‘ S ’ ’ irons are then milled, a process which has three different steps :

(a) Boring : Since the ties are to be used to hold up rails and are to be fastened to those rails by spikes, the ties are drilled for the reception of such spikes. The drilling is in three different patterns and rather elaborate machinery existed in the Domtar plant for drilling according to any one of the three desired patterns. This drilling, known as boring, has, according to the evidence, several advantages. Firstly, the spikes may be driven through the holes bored with greater ease than through an unbored tie. Driving spikes into the bored holes will result in less damage to the structure of the wood than would result from the driving of a spike into an unbored tie. Secondly, the spike driven into a tie so bored will hold more firmly. Thirdly, and the respondent stresses most importantly, the hole drilled in the tie will permit greater permeation by the creosoting liquid to which reference will be made hereafter.

(b) After the ties are bored they are automatically moved into position opposite the branders which brand or stamp one end of the tie with the letters ‘‘C.P.’’ and figures indicating the year, e.g., 67, and the other end with a capital letter A, B or C indicating the boring pattern used.

(c) Incising-. The fairly smooth sawn surface of the untreated tie presents to the creosoting liquid a surface which resists impregnation. Therefore, the ties are passed through heavy rollers which have on their face sharp claws or prods with the result that on all four surfaces of the ties there is cut a series of holes some inches apart and five-eighths of an inch in depth. This permits the creosoting liquid to get into the body of the wood and permeate the wood to a greater depth and more fully than would be the case were it applied, even under pressure, merely to the surface.

3. The ties so bored, branded and incised are then moved to the creosoting plant and into each tie under pressure is driven a quantity of about twenty-four and a half pounds of creosoting chemical. This treatment done in a plant with complicated and massive machinery driven by steam under great power carries out the necessary process in from six to seven hours. The preservative is forced into the ties to an average depth of about one inch beneath the outside surface and about one inch from the sides of the holes bored. Upon removal from the creosoting plant, the treated ties are ready for delivery to the respondent and for installation in a railway line so that the rails may be spiked thereto.

For the services summarized above, the respondent paid to Domtar fees which were based on: a cubic foot charge; this cubic, foot charge varied according to the size of the tie.

The Hacise Tax Act, R.S.C. 1952, ce. 100, as amended, in Section 30, assesses a “consumption or sales tax’’ of 8% on the sale price of all goods ‘‘(a) produced or manufactured in Canada’’. Section 31(1) (d) of the said Excise Tax Act provides :

31. (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

(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.

It therefore matters not whether the goods are to be sold by the producer or manufacturer or be used for the purposes of such producer or manufacturer and in either case the goods are taxable. Acting under such provisions, the Minister demanded payment of a tax covering the period from June 14, 1963 to December 31, 1964 of $128,233.78. The respondent replied to this demand by alleging that the ties so treated were neither “produced” nor ‘‘manufactured’’ and that, moreover, the Minister could not include in the determination of value goods which, at the date of their purchase, were legally exempt from consumption or sales tax as having been purchased prior to June 1963 or which had been purchased thereafter and on which the suppliers had already paid such consumption or sales tax. The Minister agreed only with the latter part of the answer and remitted the sum of $17,666.01 and therefore the Information claims only balance of $110,567.77.

It is apparent, therefore, that there were three problems before the learned judge of the Exchequer Court of Canada and now before this Court: (1) whether the railway ties so treated in the fashion which I have described above were “produced or manufactured’’, (2) whether, if the said ties were “produced or manufactured’’, the Minister in determining the value of the railway ties erred by including therein the value of untreated ties, lumber, creosote oil and petroleum purchased before June 14, 1963, and therefore exempt from sales tax, and (3) whether, even if the Minister so erred in so including the values of such original untaxable items, the respondent could challenge in the Exchequer Court the Minister’s determination of value.

The first problem is one which has been before the courts, including this court, on other occasions and is not free of difficulty. As pointed out by Duff, C.J. in The King v. Vandeweghe Limited, [1934] S.C.R. 244 at 248; [1928-34] C.T.C. 257 at 260:

The words “produced” and “manufactured” are not words of any very precise meaning and, consequently, we must look to the context for the purpose of ascertaining their meaning and application in the provisions we have to construe.

I have come to the conclusion that the problem may be dealt with by a detailed reference to the last decision on the same section of the Excise Tax Act in this court, The Queen v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140; [1968] C.T.C. 44. Such a course will require a less detailed reference to the authorities cited and analyzed in that case.

In the York Marble case, the court dealt with a situation where raw or partly processed material was received by the respondent and then it was subjected to a series of processes in the respondent’s plant before use by the respondent for installation in buildings on which it held contracts for the supply of marble finishes. So in that case there was no sale by the respondent and in this case the respondent, the Canadian Pacifie Railway Company, utilizes the treated ties for installation in its own railway lines.

It is useful to refer briefly to the processes which were carried out in the York Marble case (supra). The raw marble slabs were brought to the plant. These slabs were of varying sizes and some were very large being up to sixteen feet in length; the surface was rough and greyish in colour; the edges were rough and unfinished. The rough slabs certainly exhibited none of the beauty of the product after the processes had been completed. At the plant, each slab was matched against others sawn from the same block to provide a pattern of veining. Voids in the surface were filled with coloured cement, a process known as “grouting”. The slabs which were weak were reinforced with metal rods. Broken slabs were glued together. The surface of the slab was ground and reground and then polished, firstly, by rough polishing and then by fine polishing. The slabs were then cut to the size required for the particular purpose and edges were finished. So what had entered the plant as a rough slab of grey stone, albeit the stone being marble, left the plant as an accurately sized piece of beautiful, polished marble ready for installation in the walls, door or pillars of a building. In the York Marble case (supra), this court adopted, with approval, the definition of ‘‘manufacturer’’ used by Archambault, J. in M.N.R. v. Dominion Shuttle Company Limited (1933), 72 Que. S.C. 15, where the learned judge said:

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 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.

I emphasize particularly the words ‘‘the production of articles for use from raw or prepared material by giving to those materials new forms, qualities and properties or combinations whether by hand or machinery’’. In the York Marble case (supra), the court compared the finished product which left the plant with the raw product which arrived at the plant and found that there had resulted new forms, new qualities and new properties or combinations.

To apply the same analysis to the present case, what had arrived at the Domtar plant was an untreated tie which was, in fact, a piece of timber of a certain length, width and thickness with some rounding of the edges, although the photographs filed as exhibits to the agreed statement of facts show such rounding as minimal. What left the Domtar plant was a piece of timber of the same size and dimensions with at least one end bound by an ‘‘S’’ shaped iron, and one face bored in pre-determined exact pattern with a series of gouges on all four sides and impregnated with creosoting liquid to a depth of one inch into the lumber from any open face thereof. The form did not vary as much as the form in the York Marble case but there was some variation in the form, particularly by the addition of the holes bored in the face. The qualities and properties, however, in my opinion, varied markedly between the raw and the finished product. The raw product was a piece of unseasoned timber consisting only of wood fibres bound together in the process of nature and containing a very considerable amount of water; a product which when used as a tie into which spikes would be driven to hold the rails had a life of ten years. What left the plant was a timber from which the natural water had first been seasoned out and into which had been impregnated twenty-four and a half pounds of creosoting liquid to give that tie, under the same conditions of use, a life of thirty-five years. For this reason, I have come to the conclusion that the treated ties, as were the finished cross-pieces in the Dominion Shuttle case (supra), and the finished marble slabs in the York Marble case (supra), were products which had been given new form, qualities and properties and were therefore products which were “manufactured”.

As pointed out by McRuer, C.J.H.C. in Gruen Watch Company of Canada Ltd. et al. v. Attorney General of Canada, 1950

O.R. 429; [1950] C.T.C: 440, and adopted by this court in the York Marble case, the words used in the Excise Tax Act are ‘ produced or manufactured ’ and those words were not synonymous, that is, that a thing may. be “produced” even though it is not ‘‘manufactured’’; an example would be the growth of a crop from seed.

Again, as in the York Marble case, I would be strongly of the opinion that even if there had not been, in the present case, such an alteration of the forms, qualities and properties of the untreated tie as would justify it being described as “manufactured”, nevertheless, it should be said that it was “produced”. For this reason, I am of the opinion, with respect, that the learned trial judge was in error and it should be held that the process carried out by Domtar for the respondent did result in these untreated ties being ‘‘produced or manufactured’’.

Therefore, unlike the position in the Exchequer Court of Canada, where the decision was otherwise, this court is faced with the task of determining whether the Minister was entitled to include in his valuation of the ties, under Section 31(1) (d) of the Excise Tax Act, the value of the untreated ties and other material going into their treatment which said material was, at the time of its purchase, not subject to sales tax. Were this court to determine that the Exchequer Court of Canada did not have the jurisdiction to inquire into the performance by the Minister of his duty to arrive at a valuation then this court would not have to decide this issue. I am of the opinion, however, that it would be preferable to first consider the task of the Minister in making his valuation.

It must be remembered that the Minister is called upon to value the goods because no sale of such goods is contemplated but, nevertheless, such goods could have been produced and sold and then would have been subject to taxes as other like goods ‘“produced or manufactured’’ in Canada. In fact, a very few of the treated ties delivered to the respondent were hold to persons who were having constructed into their plants private sidings and, of course, required ties to put beneath the rails on such sidings. The task which the Minister faces is to value the finished product, the treated tie, and surely he cannot perform that task by finding that certain of the raw materials going into that finshed product were not taxable as a product upon purchase.

What the Minister is called upon to value is the treated tie, not the ingredients which went into the treated tie. I am, therefore, of the opinion that the Minister was entitled to value the treated tie without reference to the fact that the untreated ties which were used as raw material for the production and manufacture of the finally treated ties had not been subject to consumption or sales tax either as raw materials or products.

In view of this conclusion, I do not have to consider whether the Exchequer Court of Canada was entitled to inquire into the Minister’s valuation. Had it done so, it would have confirmed that valuation.

For these reasons, I am of the opinion that Her Majesty’s appeal should be allowed and that this court should make a declaration that Her Majesty is entitled to recover from the respondent $110,567.77 with such penalties as may be accrued to the date of payment. Her Majesty should recover costs in this court and in the Exchequer Court of Canada.