Ottawa, Ontario, October 24, 2005
PRESENT: THE HONOURABLE MR. JUSTICE BEAUDRY
BETWEEN:
and
THE MINISTER OF NATIONAL REVENUE
REASONS FOR JUDGMENT AND JUDGMENT
[1] This is an appeal by way of action pursuant to section 81.2 of the Excise Tax Act (the Act) from a Notice of Assessment number OTT-1144 dated April 2, 2001 for the period from January 1, 1997 to April 30, 2000. The defendant claims an amount of $407, 731.16 in unpaid excise taxes, $49,608.51 in interest and a penalty of $56,655.83 for a total of $513, 995.50. The Plaintiff filed a Notice of Objection on April 24, 2001, and the defendant issued a Notice of Decision disallowing the plaintiff's objection on December 19, 2003.
ISSUE
[2] The issue is whether the plaintiff is liable to remit excise tax pursuant to subsection 23(9.1) of the Act on the sale of 10,193,219 litres of heating oil to customers who actually used it as diesel fuel in internal combustion engines of the compressor - ignition type.
[3] For the following reasons, I must answer the question in the affirmative.
BACKGROUND
[4] The plaintiff is a distributor of furnace and stove oil (commonly known as heating oil) and is also a distributor of other types of diesel fuel.
[5] The plaintiff is not a manufacturer, producer or importer of furnace oil, stove oil or diesel fuel.
[6] The plaintiff purchased fuel oil from various manufacturers who, acting in accordance with administrative practices issued by the defendant, did not remit $0.04 of excise tax per litre pursuant to subsection 23(1) of the Act and subsection 9.1 of Schedule I of the Act with respect to the sale of heating oil.
[7] Subsection 2(1) of the Act defines "diesel oil" as "any fuel oil that is suitable for use in internal combustion engines of the compression-ignition type, other than any such fuel oil that is intended for use and is actually used as heating oil".
[8] In some circumstances, the plaintiff resold the goods in issue to customers who used them as diesel fuel in internal combustion engines.
[9] The plaintiff also resold the goods in issue to customers who used it as heating oil.
[10] In preparing the Notice of Assessment, officials of the defendant calculated that the plaintiff had purchased 67,498,286 litres of fuel oil (which was purchased free of the $0.04 per litre excise tax) and had sold 57,265,127 litres as heating oil and which, according to the defendant (after an adjustment for an increase in inventory levels in the amount of 39,880 litres of heating oil) resulted in a net diversion in the amount of 10,193,279 litres, which were sold by the plaintiff to customers who did not use it as heating oil.
[11] The defendant's assessment for the excise tax allegedly owed and not remitted by the plaintiff is determined by multiplying the 10,193, 279 litres of "diverted" fuel oil times the rate of excise tax of $0.04 per litre for a total of $407,731.16. There is no dispute concerning the amount of litres involved, nor the monetary amount of the assessment.
[12] During the hearing, Jean-Marc Nadon, who is employed as the plaintiff's controller, testified that the plaintiff's delivery trucks had compartments for the different types of fuel oils it sells to its customers. If a customer ordered diesel oil and the delivery truck's diesel oil compartment were empty, the driver would simply deliver tax-exempt heating oil and the customer would be billed for the purchase of regular diesel oil. The plaintiff would then pocket the price difference, but it would also absorb the price difference if the customer had ordered tax-exempt heating oil and the driver delivered diesel oil for which the plaintiff had paid excise tax. Mr. Nadon testified that the plaintiff did not keep detailed records of its fuel purchases from its suppliers but only kept track of its fuel sales.
[13] Jeffrey Kennaway, who audited the plaintiff's records on behalf on the defendant, testified that the audit process involved the reconstitution of the plaintiff's purchase records, which were then compared to its sales records to produce the amount of diverted heating oil on which the plaintiff had failed to pay excise tax. Mr. Kennaway also credited the plaintiff for the transactions in which diesel oil for which the plaintiff had paid excise tax was sold as tax-exempt heating oil. During cross-examination, Mr. Kennaway stated that there had been no evidence of fraud or fraudulent intent on the plaintiff's part.
PLAINTIFF'S ARGUMENTS
[14] The plaintiff submits that excise tax should have been charged and remitted at the time of delivery by the manufacturer who sold the goods in issue to the plaintiff, since the plaintiff was unable to prove, at the time of delivery, that they would be "actually used" as heating oil as required by subsection 2(1) of the Act. Moreover, the plaintiff did not provide its supplier with any kind of end-use certificate certifying that the goods in issue would effectively be used as heating oil by the plaintiff's customers.
[15] The plaintiff also alleges that subsection 23(9.l) of the Act is inapplicable to the circumstances of the present appeal, since the "actually used" test had not been satisfied at the time of the purchase of the heating oil from the plaintiff's supplier. Subsection 2(1) of the Act imposes a two-pronged test (i.e. intended use and actual use), and the plaintiff argues that these two requirements must be met simultaneously, not sequentially. The subsequent diversion of the goods in issue as diesel fuel by its customers would therefore become irrelevant, since the necessary conditions for the transfer of liability for the payment of the excise tax from the manufacturer to the plaintiff set out in subsection 23(9.1) of the Act were absent at the time of delivery of the goods in issue by the manufacturer to the plaintiff.
[16] In order to assist in the interpretation of subsection 23(9.1) of the Act, the plaintiff also relies on its marginal note, which reads "diversion to taxable sale or use." Citing Justice Addy's interpretation of the word "diversion" in Thyssen Mining Construction of Canada Ltd. v. The Queen [1975] F.C. 81, the plaintiff urges that since it did not know the actual use its customers would make of the goods in issue at the time they were purchased or delivered by the manufacturer, there has been no diversion upon resale of the goods in issue to the plaintiff's customers in the circumstances of the present appeal.
[17] The plaintiff also argues that since the French version of subsection 23(9.1) of the Act contains no equivalent of the phrase "by the person who sells or appropriates it", which is present in the English version, it fails to identify the person who is liable for the excise tax in a resale situation, thus creating ambiguity and a narrower rule than that expressed by the English version. While the process of reconciliation favours the English version in the adoption of a common meaning (see R v. Daoust, [2004] 1 S.C.R. 217 at paragraph 70), the plaintiff argues that the failure of the French version to identify the person who is liable to pay the excise tax cannot be remedied without adding words, something a court cannot do.
[18] The plaintiff further submits that by applying the two-pronged test set out in subsection 2(1) sequentially instead of simultaneously, the defendant has chosen to follow its own administrative practice as set out in its Policy Statement EP-001, which contradicts the words of Parliament.
DEFENDANT'S ARGUMENTS
[19] The defendant alleges that Parliament did not create an obligation on the part of the manufacturers anywhere in subsections 23(1) and (2) of the Act to verify the actual use of fuel oil before it is deemed to be heating oil or diesel fuel.
[20] The defendant also submits that making all fuel sales by manufacturers taxable under the Act would reverse the test set forth in subsection 2(1) of the Act and would clearly go against the intention of Parliament.
[21] The defendant then urges that subsection 23(9.l) of the Act was specifically designed to reflect the possibility of the diversion of heating oil to diesel fuel, and clearly imposes on the person who sells fuel oil that was otherwise acquired exempt from excise tax the obligation to pay and remit the tax that would have been levied and paid by the manufacturer had the fuel been bought under the right pretence.
[22] In reply to the plaintiff's arguments, the defendant argues that the plaintiff not only misunderstands the mechanism of the taxation scheme but also fails to take into account normal commercial practices. The defendant argues that the two-pronged test set forth in subsection 2(1) of the Act (i.e. intended use and actual use) should be applied sequentially, not simultaneously.
[23] As regards the defendant's administrative practice as set out in Policy Statement EP-001 (April 29, 2002), the defendant contends that since this Policy Statement was introduced outside the period covered by the notice of assessment, discussions concerning its application are irrelevant to the present case.
ANALYSIS
[24] The relevant sections of the Act read as follows:
| 2.(1) [...]"diesel fuel" includes any fuel oil that is suitable for use in internal combustion engines of the compression-ignition type, other than any such fuel oil that is intended for use and is actually used as heating oil; |
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2.(1) [...] « combustible diesel » S'entend notamment de toute huile combustible qui peut être utilisée dans les moteurs à combustion interne de type allumage par compression, à l'exception de toute huile combustible destinée à être utilisée et utilisée de fait comme huile à chauffage. |
| 23. (1) Subject to subsections (6) to (8), whenever goods mentioned in Schedule I are imported or are manufactured or produced in Canada and delivered to a purchaser of those goods, there shall be imposed, levied and collected, in addition to any other duty or tax that may be payable under this or any other law, an excise tax in respect of the goods at the applicable rate set out in the applicable section of that Schedule, computed, if that rate is specified as a percentage, on the duty paid value or the sale price, as the case may be.
(2) Where goods are imported, the excise tax imposed by subsection (1) shall be paid in accordance with the provisions of the Customs Act by the importer, owner or other person liable to pay duties under that Act, and where goods are manufactured or produced and sold in Canada, the excise tax shall be payable by the manufacturer or producer at the time of delivery of the goods to the purchaser thereof. [...]
(9.1) Where fuel other than aviation gasoline has been purchased or imported for a use for which the tax imposed under this Part on diesel fuel or aviation fuel is not payable and the purchaser or importer sells or appropriates the fuel for a purpose for which the fuel could not have been purchased or imported without payment of the tax at the time he purchased or imported it, the tax imposed under this Part on diesel fuel or aviation fuel shall be payable by the person who sells or appropriates the fuel
(a) where the fuel is sold, at the time of delivery to the purchaser; and (b) where the fuel is appropriated, at the time of that appropriation.
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23. (1) Sous réserve des paragraphes (6) à (8), lorsque les marchandises énumérées à l'annexe I sont importées au Canada, ou y sont fabriquées ou produites, puis livrées à leur acheteur, il est imposé, prélevé et perçu, outre les autres droits et taxes exigibles en vertu de la présente loi ou de toute autre loi, une taxe d'accise sur ces marchandises, calculée selon le taux applicable figurant à l'article concerné de cette annexe. Lorsqu'il est précisé que ce taux est un pourcentage, il est appliqué à la valeur à l'acquitté ou au prix de vente, selon le cas.
(2) Lorsque les marchandises sont importées, la taxe d'accise prévue par le paragraphe (1) est payée conformément à la Loi sur les douanes, et lorsque les marchandises sont de fabrication ou de provenance canadienne et vendues au Canada, cette taxe d'accise est exigible du fabricant ou du producteur au moment de la livraison de ces marchandises à leur acheteur. [...]
(9.1) Lorsque du combustible autre que de l'essence d'aviation a été acheté ou importé à une fin pour laquelle la taxe imposée par la présente partie sur le combustible diesel ou le carburant aviation n'est pas payable et que l'acheteur ou l'importateur vend ou affecte le combustible à une fin pour laquelle il n'aurait pas pu alors l'acheter ou l'importer sans le paiement de la taxe au moment de l'achat ou de l'importation, la taxe imposée en vertu de la présente partie sur le combustible diesel ou le carburant aviation le devient au moment où il vend ou affecte le combustible : a) lorsque le combustible est vendu, au moment de la livraison à l'acheteur; b) lorsque le combustible est affecté, au moment de cette affectation.
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[25] Subsection 9.1 of Schedule 1 of the Act reads as follows:
| 9.1 Diesel fuel and aviation fuel, other than aviation gasoline, $0.04 per litre. |
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9.1 Combustible diesel et carburant d'aviation, autre que l'essence d'aviation, 0,04 $ le litre. |
[26] There being no questions of fact or credibility in this case, the only issue before this Court is a matter of law. The case at bar revolves around the statutory interpretation of subsections 2(1) and 23(9.1) of the Act. In Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, Justice Iacobucci wrote at page 40:
Although much has been written about the interpretation of legislation (see, e.g., Ruth Sullivan, Statutory Interpretation (1997); Elmer Driedger, Driedger on the Construction of Statutes (3rd ed. 1994) (hereinafter "Construction of Statutes"); Pierre-André Côté, The Interpretation of Legislation in Canada (2nd ed. 1991)), Elmer Driedger in Construction of Statutes (2nd ed. 1983) best encapsulates the approach upon which I prefer to rely. He recognizes that statutory interpretation cannot be founded on the wording of the legislation alone. At p. 87 he states:
Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
Recent cases which have cited the above passage with approval include: R. v. Hydro-Québec, [1997] 1 S.C.R. 213; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; Verdun v. Toronto-Dominion Bank, [1996] 3 S.C.R. 550; Friesen v. Canada, [1995] 3 S.C.R. 103.
[27] A contextual approach to the wording of the relevant provisions of the Excise Tax Act reveals that the purpose of subsection 23(9.1) of the Act was to address situations involving intermediary purchasers such as the plaintiff between manufacturers of fuel oil and consumers. Indeed, by placing the responsibility for the payment and remittance of the excise tax on the person who diverts tax-exempt fuel oil from the purpose the exemption in subsection 2(1) stemmed from, subsection 23(9.1) of the Act carves out an exception to the taxation scheme laid out in subsections 23(1) and (2), which makes excise tax payable by the manufacturer or importer of the fuel oil.
[28] The two-step test included (i.e. intended use and actual use) in the definition of "diesel fuel" in subsection 2(1) of the Act would be absurd if it were to be applied simultaneously, as the plaintiff suggests, since manufacturers and importers would practically always be unable to verify that the goods in issue are actually used for their intended purpose by consumers. In my opinion, manufacturers and importers can rely on prima facie indications of "intended use" of resellers and distributors like the plaintiff to meet the "intended use" test and not include the $0.04 excise tax per litre sold. Resellers and distributors are in a much better position to ensure that the "actual use" test is met, because they interact with the end-users. This is precisely why Parliament chose to enact subsection 23(9.1) of the Act.
[29] The two-step test cannot be applied simultaneously in a transaction between a manufacturer and a reseller, and the reseller thus becomes responsible for the payment of the excise tax if the intended use of the goods in issue upon resale is incompatible with the intended use that rendered the purchase exempt from the payment of the excise tax of $0.04 per litre in the first place. Furthermore, and though this has no direct bearing on the present case, subsection 23(9.1) of the Act would also apply to consumers whose use of tax-exempt heating oil do not meet the "actual use" test when they divert the oil from a furnace's tank to power a diesel combustion engine.
[30] Finally, despite the plaintiff's counsel's able arguments to the contrary, the meaning of the French version of subsection 23(9.1) of the Act is neither ambiguous, nor narrower than that of the English version. The identity of the person who must pay the excise tax ("the person who sells or appropriates the fuel" in the English version") is "l'acheteur ou l'importateur [qui] vend ou affecte le combustible". The personal pronoun "il" in the French version's "au moment où il vend ou affecte le combustible" simply relates to "l'acheteur ou l'importateur". In this case, "l'acheteur" (in English, the "purchaser") is the plaintiff, which therefore makes it liable to pay the excise tax. The plaintiff's counsel's proposed strict interpretation of the wording of subsection 23(9.l) goes against Justice Gonthier's approach to the interpretation of tax legislation in Québec (Communauté urbaine) v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3 at page 17:
[...] there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text Construction of Statutes (2nd ed. 1983), Driedger fittingly summarizes the basic principles: ". . . the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament". The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan's article "Stubart: What the Courts Did Next" (1987), 35 Can. Tax J. 155, at pp. 169-70, adequately summarizes my conclusion:
There has been one distinct change [after Stubart], however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer's favour and that an ambiguity in an exempting provision is resolved in the Crown's favour. Now an ambiguity is usually resolved openly by reference to legislative intent. [Emphasis added.]
The teleological approach makes it clear that in tax matters it is no longer possible to reduce the rules of interpretation to presumptions in favour of or against the taxpayer or to well-defined categories known to require a liberal, strict or literal interpretation. I refer to the passage from Dickson C.J., supra, when he says that the effort to determine the purpose of the legislation does not mean that a specific provision loses all its strictures. In other words, it is the teleological interpretation that will be the means of identifying the purpose underlying a specific legislative provision and the Act as a whole; and it is the purpose in question which will dictate in each case whether a strict or a liberal interpretation is appropriate or whether it is the tax department or the taxpayer which will be favoured.
[31] During the hearing, the plaintiff's counsel cited the Canadian International Trade Tribunal's (CITT) decision in Georges Beaulieu v. M.N.R., AP-92-204, in which the words "for the purpose" were found to "clearly indicate that a degree of fraudulent intent is required" to trigger the application of a similar provision of the Act. With great respect, I do not subscribe to the CITT's interpretation of the words "for the purpose", and I cannot find any implicit necessity of fraudulent intent in the wording of subsection 23(9.1) of the Act.
JUDGMENT
THIS COURT ORDERS that the appeal be dismissed, with costs to the defendant.
JUDGE
FEDERAL COURT
NAME OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-549-04
STYLE OF CAUSE: W.O. STINSON & SON LTD.
and
THE MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Montreal, Quebec
DATE OF HEARING: October 13, 2005
APPEARANCES:
SOLICITORS OF RECORD:
LAPOINTE ROSENSTEIN FOR PLAINTIFF
Montreal, Quebec
John H. Sims, Q.C. FOR DEFENDANT
Deputy Attorney General
Montreal, Quebec