In Re Taxation Act and Income Tax Act and >>in Re Assessments of Firestone Tire and >>rubber Company of Canada, Limited., [1940-41] CTC 342

Murphy J.:—The Firestone Tire & Rubber Co., hereinafter referred to as the ‘‘Firestone Company,’’ is a company incorporated under the laws of the Dominion. It manufactures pneumatic passenger and truck type casings and tubes, solid tires, tire accessories, repair materials and repair equipment, hereinafter referred to as ‘‘Firestone products,’’ at Hamilton Ont. Mackenzie, White & Dunsmuir Ltd., hereinafter referred to as the "‘Distributor,’’ is an incorporated company carrying on a wholesale business in the Province of British Columbia with head office in the City of Vancouver. It deals at wholesale in various lines of goods. The Distributor has had since 1924 a contract with the Firestone Company whereby it has the exclusive right to sell Firestone products in a large portion of the Province of British Columbia and the reciprocal obligation not to handle any pneumatic passenger and truck type casings and tubes, cushions and regular solid tires, accessories, repair ma- terial and repair equipment other than Firestone products. The contract was reduced to writing. The copy (ex. 3) produced at the hearing herein is dated September 1, 1932; but it is admitted that this document contains the terms of the contract which existed between the Firestone Company and the Distributor from 1924 on. The Firestone Company has made profits from its dealings with the Distributor.

The Minister of Finance [of British Columbia] has decided that the Firestone Company must pay income tax on all these profits from October 31, 1927 to October 31, 1931 inclusive and from October 31, 1932 to October 31, 1937 inclusive under the provisions of the Taxation Act, R.S.B.C. 1924, c. 254 and amendments and of the Income Tax Act, R.S.B.C. 1936, c. 280 and amendments. From this decision the Firestone Company appealed and the appeal came on for hearing before me. There is no difference in the wording of these Acts insofar as the question involved herein is concerned. Both enact that ‘‘income earned within the province of persons not resident in the province” shall be liable to taxation.

The contract between the Firestone Company and the Distributor makes a distinction between accessories, repair material and repair equipment on the one hand and casings, tubes and solid tires on the other. This latter class will be hereafter referred to as ‘‘inventoried goods.’’ Tire accessories, repair material and repair equipment are to be purchased outright from the company and paid for on the 20th day of the calendar month following the date of shipment. Counsel for the Minister of Finance conceded that under the decision of Grainger & Sons v. Gough, [1896] A.C. 325 profits made by the Firestone Company from these sales are not taxable as income earned in British Columbia as the sales from which profits were made, resulting in income to the Firestone Company, were made wholly outside the Province.

The course of dealing with regard to inventoried goods, as carried on between the Firestone Company and the Distributor, is set out in the evidence of Dunsmuir given on the appeal hearing. The Distributor sends from Vancouver what is called a specification to the Firestone Company at Hamilton. Exhibit 5 is a sample. This document sets out the inventoried goods which the Distributor wishes the Firestone Company to ship to it. The Firestone Company pays the freight if the goods are shipped in carload lots. Less than carload lots and express shipments are forwarded freight charges ‘‘collect’’ but the Company refunds to the Distributor in respect to such shipments an amount equal to the carload freight. When the goods are shipped the Fire- stone Company sends to the Distributor what is called a memorandum invoice. Exhibit 6 is a sample. Inspection will show that the price of the goods forwarded is not set out in this memorandum invoice. The reason is, as para. 6 of the contract and Dunsmuir’s evidence show, that the Distributor is not obligated to pay for the specific goods covered by such invoice on a definite date at the time they are shipped. The contract however does state the event, the happening of which will fix the date on which they must be paid for. That event is the disappearance of the goods from the inventory hereinafter discussed. Similarly as to price. The Firestone Company fixes the price of inventoried goods from time to time. Though there is accordingly a fixed price in force at the time when specific goods are shipped that is not necessarily the price which the Distributor must pay for them as will be shown later on in this judgment. But again the contract states the event the happening of which will set the price. It is the same event, i.e., the disappearance of the goods from inventory. So far as the happening of this event depends on the act of Distributor it is under covenant to cause such happening as speedily as possible by pushing sales of the goods in the exclusive territory assigned to it.

The Distributor is bound to receive and warehouse the goods set out in the memorandum invoice and so long as they remain in its warehouse or in its possession such goods are at the risk of the Distributor but the right, title, ownership and property therein remain in the Firestone Company so long as they remain in the warehoused stock and have not been sold or otherwise disposed or by the Distributor. The Distributor has no right to return inventoried goods once they are received before it has sold them. The ‘‘returned goods’’ referred to in para. 6 of the contract are, as I construe the contract, inventoried goods which have been sold by the Distributor and taken back where an adjustment under the Firestone Company’s guarantee of its goods has been made. The Distributor under the contract must return such goods to the Firestone Company.

On the 20th of each month the Distributor makes an inventory of the quantity of casings, tubes and solid tires, i.e., of the inventoried goods warehoused by it under the contract. On the 20th day of the following month it takes another inventory. It then sends on the 23rd a document called ‘‘Monthly Inventory and Sales Report’’ to the Firestone Company at Hamilton. For the sake of clarity I will deal with a specific sample of this Monthly Inventory and Sales Report filed on the appeal as ex. 7. Taking, as an example, the third item on the first page, this document shows that according to the inventory taken on September 20, 1937, 52 casings of a particular type were in the Distributor’s warehouse at Vancouver. Between September 20th and October 20th twenty additional casings of this type were received by the Distributor from the Firestone Company. The document shows that on October 20, 1937 there were 62 casings of this type in the Distributor’s warehouse. Ten casings of this type had therefore disappeared from the inventory during the month that elapsed between the taking of the inventories. The Distributor was obliged to pay for these ten casings and for them only in casings of this type. The due date for such payment was November 20, 1937. The casings so withdrawn are shown in ex. 7 under the heading ‘‘ Net Sales. ’ ’ The Monthly Inventory and Sales Report is forwarded by the Distributor to the Firestone Company in duplicate. When forwarded from Vancouver it does not contain the two columns of figures set out on the right-hand side of ex. 7. These are inserted by the Firestone Company in Hamilton. They are the prices per unit of the goods that have disappeared from inventory and the total amount payable on each type of goods by the Distributor for the goods that have so disappeared. One copy of the document is then sent back by the Firestone Company to the Distributor in Vancouver. The Firestone Company then invoices the Distributor for the goods that the Monthly Inventory and Sales Report shows to have disappeared from inventory. Exhibit 8 is a sample. This is a regular trade invoice except that the goods which have disappeared from inventory are not set out in detail but are referred to as ‘‘Sales,’’ the debit figures being obtained from those placed on the Monthly Inventory and Sales Report by the Firestone Company at Hamilton. Payment is to be made on the 20th of the following month.

The price to be paid by the Distributor for the goods which have disappeared from inventory is fixed by the Firestone Company from time to time and may be changed by it at any moment. If during the currency of any month between the taking of inventories a change of price is so made by the Firestone Company the Distributor is notified by wire. It then immediately takes an inventory. For all inventoried goods which have disappeared up to the date of receipt of the wire it pays at the old price. For all goods which have so disappeared after such receipt it pays at the new price. Any inventoried goods sold by the Distributor in the exclusive territory assigned to it under the contract must be sold at prices fixed by the Firestone Company. The Distributor takes all the profits and bears all the losses resulting from these sales made by it. The Firestone Company has no control over the conduct of this business save as to price and adjustments made under the contract.

On these facts counsel for the Finance Minister contends that the Firestone Company must pay income tax on the profits it makes on inventoried goods on the ground that the Distributor is an agent for making sales of such goods on behalf of the Firestone Company in British Columbia. He argues that the first sale of the inventoried goods is the sale made by the Distributor to its customers in British Columbia. The question to be decided under the above Acts is whether or not the Firestone Company has earned an income within British Columbia on the inventoried goods sent by it to the Distributor. It is evident I think that the Firestone Company can only earn an income in British Columbia upon the inventoried goods by selling them at a profit within the Province.

I cannot agree that the Distributor in selling the inventoried goods in British Columbia is doing so as the Firestone Company’s agent. If it were its obligation to pay money to the Firestone Company could arise only because of such sales or at any rate in connection with such sales. But this is not the case, as I view the facts. The evidence of Dunsmuir and para. 6 of the contract show that the Distributor’s liability to pay for inventoried goods on a definite date arises aS soon as and to the extent that such goods disappear from inventory. That disappearance may not be the result of any act done by Distributor. Fire, theft or other occurrences may bring it about. Again the act of the Distributor which creates an obligation to pay on a definite date may not be a sale or connected with a sale. If it drops goods from inventory its obligation to pay for goods so dropped on a definite date arises whether or not a sale is involved. Further para. 14 of the Schedule of Covenants and Conditions stipulates that the inventoried goods in Distributor’s warehouse or possession shall be at the sole risk of Distributor. The stipulation in the contract relied upon by counsel for the Minister of Finance as to retention of title and property in the inventoried goods by the Firestone Company, obligation on the Distributor to insure them in the Firestone Company’s name and compulsion to sell them at a price fixed by the Firestone Company were all present in the contract considered in the case of John Deere Plow Co. v. Agnew (1913), 10 D.L.R. 576, 48 S.C.R. 208, yet it was held not to be an agency contract.

His contention that para. 2 of the Schedule of Covenants and Conditions stipulates that inventoried goods are to be paid for on the 20th day of the month following shipment from Distribu

tor’s warehouse is I think untenable. This paragraph applies to purchase of all Firestone products and ‘‘shipment,’’ in my opinion clearly refers to shipment from Hamilton, Ont. Further the contract must be read as a whole. Paragraph 6 of the contract must be considered in conhection with para. 2 of the Schedule. Payment, in my opinion, can only be demanded by the Firestone Company from the Distributor for such amounts as can be charged to the Distributor and para. 6 of the contract shows that only the amount arrived at by computing the price of the inventoried goods that have disappeared from inventory can be so charged, not the amount that represents the price of all inventoried goods shipped from Hamilton previous to the date when the inventory was made up.

Distributor is bound to deliver inventoried goods to the Ford Motor Company and to the Dominion Government which the Firestone Company has sold to these parties by contracts made outside British Columbia and counsel for the Minister of Finance adduces this as further proof of agency. Here again, in my opinion, the Distributor is not acting as agent for the Firestone Company but is selling such goods to the Firestone Company for under its contract it debits to the Firestone Company inventoried goods so delivered at the price fixed under its contract by the Firestone Company payable by Distributor for goods which have disappeared from inventory plus an agreed profit as shown by ex. 10. The fact that the Firestone Company does not pay for such goods in cash but by a merchandise credit does not alter the real nature of the transaction. Distributor’s obligation to make such deliveries arises I think from its covenant to do so and affects the conduct of its own business just as the covenant to sell goods at prices fixed by the vendor was held to operate in John Deere Plow Co. v. Agnew, supra.

In my view the inventoried goods were sold to the Distributor in Hamilton, Ont., on the basis of deferred payments involving possible price changes which did not call for any act to be done within British Columbia by the Firestone Company from which it can be said to have earned an income within the Province. The Firestone Company had the right not to ship the full amount of inventoried goods requested by the Distributor at any one time as shown by Dunsmuir’s evidence. The reason for this stipulation was I think to provide against the deferred payments arrangement operating to the financial detriment of the Firestone Company. Because of such stipulation it could exercise its Judgment as to what amount of inventoried goods the market in the Distributor’s exclusive territory would obsorb at a given time, thereby obviating loss to it through large stocks of inventoried goods remaining in Distributor’s warehouse which had been sold to Distributor but payment for which could not be insisted upon under the terms of the contract until they had disappeared from inventory.

The appeal is allowed.