His Majesty the King v. Weir Manufacturing Company, Limited, [1940-41] CTC 469, [1941-1946] DTC 528

LENNOX, C.C.J.:—This is an action to recover sales taxes and penalties taken under and by virtue of the provisions of the Special War Revenue Act, R.S.C., 1927, ch. 179, and amendments.

The Department of National Revenue issues circulars to trades affected purporting to be for their guidance in respect of taxes to be paid to the Government, and under a circular, No. 783-C, dated November 20, 1936, certain provisions were set forth. Under this circular there was the following provision :

" " Sales to consumers only :

‘‘Manufacturers who sell to consumers or users only will be required to account for sales tax on the transfer of these goods to their retail stores on the regular list price to the consumer or user, less a discount of 30 per cent. ‘

This provision, as will be noted, only refers to what is to be done by such manufacturers in accounting for sales tax ‘‘on the transfer of these goods to their retail stores.'' The question mainly argued was whether the tax paid on the sale of goods by the defendant company to certain customers should be treated as on a sale by the defendant company to consumers or users, and consequently (according to both parties) whether the defendant company should pay the 8 per cent tax on the actual sale price of the goods to such customers or on such price, less a discount of 30 per cent. The case at Bar, in my opinion, should not be dealt with as coming under this particular provision as there was here no question of transfer by a manufacturer of goods to a retail store, even though it was taken for granted by both sides that the above question should be dealt with under same.

In the course of argument by counsel for the plaintiff, while he claimed that a sales tax on the total price of the goods sold (without discount) was payable under the said provision, he argued that the tax was payable under the Act on the total sale price notwithstanding this circular, as sec. 99 of the Special War Revenue Act, supra, does not permit the Minister of Finance or the Minister of National Revenue to make provisoes which would conflict with the imposition set forth in sec. 86(1) of the said Act. This latter section [as enacted by 1936, ch. 45, sec. 5] provides that :

“There shall be imposed, levied and collected a consumption or sales tax of eight per cent on the sale price of all goods,—

(a) produced or manufactured in Canada, payable by the producer or manufacturer at the time of the delivery of such goods to the purchaser thereof.”

See. 99 of the Act provides that the Minister of Finance or the Minister of National Revenue may make such regulations as he deems necessary or advisable ‘‘ for carrying out the provisions of this Act/ ‘ but it was submitted, and I think properly, that this does not permit regulations which would alter the basis on which the 8 per cent tax is to be paid, namely, i( the sale priced No doubt the Department found that hardships arose out of a strict adherence to the provision of said sec. 86(1) but, if so, that would be reason for altering or amending the Act and not for bureaucratic dogmatism : Atty.-Gen. for Can. v. Coleman Products Co., [1929] 1 D.L.R. 658, at 660.

The circumstances of this case are shortly these: The defendant company manufactures, in a small way, certain articles of clothing, mainly uniforms and coats or other coverings for specialized people such as barbers, nurses, restaurant waitresses, etc. It sells these goods, to a considerable extent of its manufacture, to large steam laundries. It appears that these laundries do not resell these garments, but do let them out to certain of their customers, and are recompensed for that service by charging an extra amount above the ordinary for the cleaning of these articles; the articles remaining in the ownership of the laundry.

Assuming that the said circular was intra vires, the first question asked to be determined was : Were the goods sold to a consumer or user? This question does not require to be decided as nowhere (in the Act or the circular) can I find that sales to a consumer is a reason for the deduction of 30 per cent by the seller from the purchase-price, before computing the amount of the tax. The Act makes no mention of it, and the circular under the heading ‘‘Sales to consumers only’’ does not say that manufacturers who sell to ‘‘consumers or users only’’ will be required to account for sales tax on the regular price list to the consumer or user less a discount of 30 per cent on such sale, but that such manufacturers can deduct the 30 per cent ‘‘on the transfer of these goods to their retail stores’’ (presumably to allow for the extra cost of retail stores handling, or for some other reason in the practical working of business).

It will be noted, however, that while counsel for the plaintiff maintained that there were no provisions for a discount on sales direct to the consumer, the Department of National Revenue per Mr. Telford “for Commissioner of Excise’’ states (see Ex. 3) in a letter to the defendant company on January 19, 1937, that the circular 783-C allows the discount to be taken on certain direct sales. The evidence of Mr. Booth (departmental auditor ) also is to the effect that if these were "‘consumer’’ sales the discount would have been properly made. From what I have said above, it seems to me that that was a wrong interpretation of the clause in the said circular. The effect, if any, of that ruling on the liability of the defendant company to pay the larger tax will be discussed later. As the question was argued at length, however, it may be as well that some notice should be taken of it. In my opinion the laundries were not consumers or users of the goods in a literal sense. The definition of the word "‘consumed’’ is ‘‘to use up’’ or to devour,’ ‘ and the word ‘‘user’’ would mean a person who used the goods for himself. For instance, in food or fuel the consumer would be the one who would eat or destroy the goods, whereas in clothing the user would be the one who wore the goods. It is beside the point to argue that a person might buy as a user and, nevertheless, part with the goods to others for their use, because the goods would be sold originally to the person expected to use them, or for the purpose for which they were sold. These laundries did not and could not use these garments in ‘that sense (namely, wear them) nor could they be used by the laundry for the purpose of making the laundering of goods more efficient.

I have come, therefore, to the conclusion on this point that the defendant company did not sell the goods to a “consumer or user’’ in the literal sense. However, I do not think that the words ‘‘consumers or users ‘ ‘ were meant to be construed in their literal sense. The circular in question deals with ‘‘clothing and wearing apparel ‘ and the words ‘‘sales to consumers only ‘ ‘ could not apply in the literal sense. I take it that this word

consumers ‘ ‘ was used in the sense of the public generally— the consuming public’’ as it is sometimes called—vide the oft- used advertisement ‘‘from manufacturer to consumer’’ (of any kind of article). Could large steam laundries using these garments in the way they did come under this generalization? I think not. The consumer public buy the goods (or are supposed to) for their own individual use and comfort. The laundries bought the goods to increase their business and so to make profit.

Whichever way it is looked at or defined, therefore, the defendant company was not entitled under the circular to make the 30 per cent discount before estimating the tax. But if they are not consumers in that sense, what are they? They are not wholesalers nor are they retailers. They might properly be designated ‘‘hirers’’ as they do lend out the garments and are recompensed for so doing by a charge made in excess of that which would be made for laundering the garment, if it belonged to their customer. There is no provision for making any discount from the purchase-price to a hirer before arriving at the tax to be paid on the sale.

The defendant company had several other submissions supporting its claim that the plaintiff is not entitled to payment, as follows :

(1) That ‘‘His Majesty The King as represented by the Attorney-General of Canada” is not the properly designated person entitled to sue and recover.

I find no merit in that submission.

(2) There was a motion to dismiss, on the conclusion of the plaintiff’s case, on the ground that no sale was proved and reference was made to Sarnia Brewing Co. v. Reg., [1929] S.C.R. 646, [1930] 1 D.L.R. 306.

That case found (on much less evidence than in this case) that a sale had been proved but that manufacturing had not been proved. In this case both have been amply proved both by the correspondence (in exhibits) and by examination for discovery of Mr. Mitchell.

I reserved on that motion and now find against it.

(3) That the defendant company acted as a collection agent for the Government, and as such could not be held liable to its principal for a bona-fide mistake in interpretation of its instructions—and that in this case there was no interpretation given by the plaintiff as to whether the laundries were to be classed as users or not, till after the audit in 1940—too late to recover from the laundries.

I find that submission untenable (without discussing an agent’s liability as set forth above) as under sec. 86 of the Act, supra, the manufacturer is not an agent but is the person who shall pay on the sale price (whether or not he may get relief from the purchaser). It is the Government that imposes, levies and collects.

(4) That, owing to the laxity of the Department in not definitely ruling that these laundries were not ‘‘consumers,’’ until after the audit in 1940 and that there was no way then for the defendant recovering the uncollected taxes from the laundries, the plaintiff should not now be entitled to collect such taxes and penalties. In any event that in the circumstances all penalties should be disallowed.

While I have very considerable sympathy with the defendant, looking to all the circumstances disclosed by the correspondence put in evidence (partly referred to supra) and the voluminous correspondence on the matter (referred to by both counsel but not put in as exhibits) I must find that (1) as all along the Department concerned held (for whatever reason) that the tax on the sales to the laundries had to be paid on the full sale price (without discount); (2) as the laundries are not “consumers or users;’’ (3) as there is nowhere any authority that 30 per cent is deductible from the sale price to ‘‘consumers or users,’’ and (4) as the Government is not bound by a mistaken interpretation by its Departments any more than by a mistaken interpretation by the tax-payer, the defendant company is liable for the taxes as claimed (amended) and for the penalties (amended ).

(5) That, even if the taxes should have been paid, the full penalties claimed could not be recovered as, under sec. 120 of the Act, suit to recover must be brought within three years after the offence is committed.

It was agreed that in view of this section no penalties could be recovered for any monthly non-payment prior to three years before June 18, 1940, and that, therefore, one-half of the tax arrears as set out on p. 5 of the answer to demand for particulars (namely, $49.49) should not be subject to penalties.

There will therefore be judgment for: Sales tax arrears, $98.46; stock transfer tax, 75 cents; penalty interest, $14.50, total, $113.71.

It seems to me that, looking to the mistaken interpretations, which were to a great extent responsible for this suit, there should be no costs, but that matter may be spoken to.