Date: 19980406
Docket: T-1092-93
BETWEEN:
HER MAJESTY THE QUEEN
Plaintiff
- and -
BASF COATINGS & INKS CANADA LTD.
Defendant
REASONS FOR JUDGMENT
ROULEAU, J.
[1] This is an appeal by the plaintiff pursuant to sections 81.24 and 81.28 of the Excise Tax Act, R.S.C. 1985, c. E-15, from a decision of the Canadian International Trade Tribunal ("CITT") dated January 18, 1993.
[2] The facts giving rise to the appeal are as follows. During the relevant time period, the defendant BASF, carried on the business of selling automotive solvents, thinners and various reducers. It operated only a small number of retail stores and did not maintain its own distribution network, relying instead on jobbers to distribute its products. The jobbers would purchase the products from BASF and then resell them to end users, such as body shops.
[3] When jobbers entered into a wholesaler relationship with BASF, they were given a manual outlining the rights and obligations existing between them. The manual outlined the entitlement to an abatement of the sale price for products sold by the jobbers to certain specialty purchasers, called "Special Market Purchasers". BASF developed a suggested price list for the jobbers to use when selling its products. However, the jobbers were under no obligation to follow the list. In order to encourage competitiveness among Specialty Market Purchasers, BASF suggested that the jobbers grant discounts to them.
[4] When a jobber actually sold a product to a Specialty Market Purchaser at or below the suggested discounted rate, the jobber was entitled to apply to BASF for a reduction of the selling price that it had previously paid. This was done by completing a monthly credit request form. The program whereby these price reductions were made available was known as the "Specialty Market Program". BASF then reduced the amount of its taxable sales by the amount of the subsidy, thereby reducing its tax liability.
[5] By Notice of Assessment dated September 12, 1989, the Minister of National Revenue disallowed the sale price reductions given to jobbers and assessed BASF for unpaid federal sales tax during the period of October 24, 1986, to June 21, 1989. The amount of the assessment, including interest and penalties, was $178,487.99 less a credit of $104,807.00, for a net amount owing of $73,680.99.
[6] BASF filed a Notice of Objection dated November 14, 1989, disputing the Assessment to the extent of $50,429.00 plus applicable interest and penalties. By Notice of Decision dated April 30, 1991, the Minister confirmed the Assessment.
[7] BASF then appealed to the Canadian International Trade Tribunal, which stated the issue before it in the following terms:
| The issue in this appeal is whether the adjustments to the price of the products sold under the SMP [Specialty Markets Program] should be recognized as legitimate reductions to the "sale price" of these goods for purposes of subsection 50(1) of the [Income Tax] Act. |
[8] The tribunal allowed BASF's appeal, stating its reasons at p. 5 of its decision as follows:
| . . . the Tribunal finds that the adjustments made by the appellant were directly related to, and necessary for, a determination of the actual amount it received on the sale of products to jobbers that were eventually purchased by specialty market purchasers. The appellant's program is well laid out for both jobbers and the appellant to follow, and the Tribunal finds no evidence to suggest that the program is directed towards avoiding the payment of any taxes owing. Rather, it is structured to reflect what the appellant actually receives on its sales in this new market which it is attempting to penetrate. |
[9] The Crown now appeals from that decision on the grounds that the credits issued by BASF to jobbers cannot be considered as "valid reductions" of sale price for the purpose of section 41 of the Excise Tax Act. There is, according to the plaintiff, no legislative authority to permit the exclusion of amounts representing advertising, promotional or other types of allowances, credits or rebates from the "sale price" in determining the tax payable in respect of transactions between the vendors and the purchasers.
[10] Sections 42 and 50 of the Excise Tax Act provide as follows:
| 42. "sale price", for the purpose of determining the consumption or sales tax, means |
| (a) except in the case of wines, the aggregate of |
| (i) the amount charged as price before any amount payable in respect of any other tax under this Act is added thereto, |
| (ii) any amount that the purchaser is liable to pay to the vendor by reason of or in respect of the sale in addition to the amount charged as price, whether payable at the same or any other time, including, without limiting the generality of the foregoing, any amount charged for, or to make provision for, advertising, financing, servicing, warranty, commission or any other matter, and |
| (iii) the amount of excise duties payable under the Excise Act whether the goods are sold in bond or not. |
| 50. (1) There shall be imposed, levied and collected a consumption or sales tax at the rate prescribed in subsection (1.1) on the sale price or on the volume sold of all goods |
| (a) produced or manufactured in Canada |
| (i) payable, in any case other than a case mentioned in subparagraph (ii) or (iii), by the producer or manufacturer at the time when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier. |
[11] In my view, the wording of these legislative provisions is clear, unambiguous and capable of interpretation according to the plain and ordinary meaning rule. Section 50 of the Act provides that the point at which the sales tax is to be calculated is "when the goods are delivered to the purchaser or at the time when the property in the goods passes, whichever is the earlier". Accordingly, it is the sale of a commodity from the manufacturer to the first purchaser in the distribution chain and the "sale price" paid on that transaction which determines the tax exigible. Here, title in the goods passed from BASF to the jobber at the time of receipt of the goods by the jobber. It is this transaction which gives rise to the defendant's tax liability and which forms the basis for calculation of the amount of tax owing.
[12] Furthermore, in determining the actual "sale price", it is necessary to look behind the initial transaction to the substantive nature of the commercial relationship between the contracting parties. The nature of the commercial relationship here is very different to that in Timmins Tire Sales v. M.N.R., [1992] 5 T.C.T. 1092, a case upon which the defendant relies in support of its position. Unlike the Timmins case, the subsidies paid by BASF to the jobbers under the Speciality Markets Program were promotional expenditures and therefore, have no relation to the sale price between the respondent and the jobbers. Both of the defendant's witnesses testified that the Special Markets Program was devised by BASF Marketing Division in order to break into new markets through the employment of a network of jobbers. The subsidies paid by BASF to the jobbers was simply an incentive designed to encourage jobbers to participate in the program.
[13] I am satisfied therefore, that there is no basis in law for BASF to retroactively reduce its sale price and as a result, its tax liability. It is clear that tax was exigible on the price charged by BASF to the jobbers and that the subsidies later provided by the defendant to jobbers did not reduce the "sale price" as that term is defined in the legislation. Accordingly, the defendant was properly assessed federal sales tax on the price paid by the jobber to BASF at the time of the sale between them.
[14] For these reasons, the plaintiff's appeal is allowed.
JUDGE
OTTAWA, Ontario
April 6, 1998