Federal Court Decisions

Date: 19980225

Dockets: T-1539-93

T-1540-93

BETWEEN:

     IBM CANADA LIMITED,

     Plaintiff,

     - and -

     HER MAJESTY THE QUEEN,

     Defendant.

     REASONS FOR JUDGMENT

MULDOON, J.

[1]      There is no better way of establishing the pertinent facts in litigation then by repeating verbatim the parties agreed statement of facts. Here it is:

THE PARTIES, by their respective solicitors, agree upon the facts set out herein, subject to their relevance to the issues herein and their weight being determined by the Court.

A. HISTORY OF THE APPEALS

1.      Actions T-1539-93 and T-1540-93 are federal sales tax ("FST") appeals under section 81.2(1) of the Excise Tax Act (the "Act"), and are brought in accordance with section 81.28 of the Act and section 48 of the Federal Court Act.

2.      Both actions relate to two refund applications made by the Plaintiff under section 68.22 of the Act for tax paid on goods purchased and imported by the Plaintiff, and given away as free replacements parts from January 1, 1989 through December 31, 1991 (the "Period") and the Defendant's denial of those refund applications. Section 68.22 of the Act reads as follows:

68.22 Where tax under Part III or VI has been paid in respect of any goods that a licensed manufacturer gives away as free replacement parts under a written warranty given in respect of the goods into which the parts are to be incorporated and the amount, if any, charged for the warranty is included in the sale price charged by the licensed manufacturer for the goods into which the parts are to be incorporated or, if those goods are imported goods, in the duty paid value thereof, an amount equal to the amount of that tax shall, subject to this Part, be paid to that manufacturer if he applies therefor within two years after he gave away the goods.

3.      By an Order dated December 9, 1993 and signed by Peter A.K. Giles, the Associate Senior Prothonotary, actions T-1539-93 and T-1540-93 are to be heard together, subject to the right of the Judge at trial to order otherwise.

1. The First Refund Application

4.      The first refund application was made on December 20,1990 and received on December 28, 1990, and respected the tax paid on goods purchased and imported by the Plaintiff, and given away as free replacement parts from January 1, 1989 through November 30, 1990 (the "First Refund Claim").

5.      The Defendant disallowed the First Refund Claim on March 22,1991 by issuing Notice of Determination E TOR 00723.

6.      The Plaintiff subsequently filed a Notice of Objection on September 11, 1992, which was received on October 5, 1992, and the Defendant ultimately reaffirmed its initial decision on March 26, 1993 by issuing Notice of Decision 202628RE.

2. The Second Refund Claim

7.      The second refund application was made on September 3, 1992 and was received on September 8, 1992, and respected tax paid on goods purchased and imported by the Plaintiff, and given away as free replacement parts from October 1, 1990 through December 31, 1991 (the "Second Refund Claim").

8.      The defendant disallowed the Second Refund Claim on October 30, 1992 by issuing Notice of Determination E TOR 26530.

9.      The Plaintiff subsequently filed a notice of Objection on January 15, 1993, which was received on January 26, 1993, and the Defendant ultimately reaffirmed its initial decision on March 26, 1993 by issuing Notice of Decision 202884RE.

B. RELEVANT FACTS

10.      The Plaintiff carries on the business of selling and leasing computers and related equipment which it imports and manufactures.

11.      At all relevant times, the Plaintiff was a licensed manufacturer under the Act, and was not a licensed wholesaler under the Act.

12.      Before and during the period, the Plaintiff purchased and imported into Canada various computer equipment (the "Computer Equipment") and related parts (the "Parts") from its parent company, International Business Machines Corporation ("IBM Corp.").

13.      The Plaintiff did not manufacture the Computer Equipment or the Parts.

14.      When imported into Canada, the Plaintiff paid the federal sales tax ("FST") on the duty paid value of the Computer Equipment and the Parts pursuant to section 50(1)(b) of the Act.

15.      The Plaintiff subsequently sold the Computer Equipment to customers in Canada.

16.      Every sale of the Computer Equipment included a written warranty whereby the Plaintiff undertook to provide to its customers warranty service at no additional charge, including free replacement pats (the "Replacement Parts"), in the event that the Computer Equipment became a"failing machine" (i.e. a machine requiring warranty service) within the one year warranty period.

17.      From time to time during the period, the Plaintiff was called on to honour its warranty obligations, and replaced various parts in the Computer Equipment which were found to be defective (the "Defective Parts").

18.      The Plaintiff replaced the Defective Parts with the Replacement Parts, which were given away without charge, in accordance with the written warranty.

19.      The free Replacement Parts replacing the Defective Parts were taken from the inventory of imported Parts upon which FST had been paid and which the Plaintiff did not manufacture.

20.      The Replacement Parts in issue in this appeal relate only to Parts given away pursuant to the Plaintiff's warranty obligations, and do not relate to Parts provided by the Plaintiff under various product maintenance agreements entered into with its customers beyond the one year warranty period.

21.      At all relevant times, the Plaintiff has not claimed a refund of duties under section 76 of the Customs Act in respect of the Computer Equipment, the Defective Parts or the Replacement Parts.

(exhibit 1)

[2]      As can be seen from the above recited agreed statement, as well as from the amended statement of claim filed in each action on March 21, 1996, these appeals relate to the denials by the Minister of National Revenue (MNR, or Minister) of the plaintiff's applications of December 20, 1990 and of September 3, 1992, respectively, regarding the federal sales tax (FST) paid on goods purchased and imported by the plaintiff and given away as free replacement parts during the periods form January 1, 1989 through November 30, 1990, and from October 1, 1990 through December 31, 1991, respectively.

[3]      The Minister denied both claims by issuing notices of determination E TOR 00723 and E TOR 26530, respectively.

[4]      The plaintiff's refund claims are based upon section 68.22 of the Excise Tax Act (Canada) (the Act), which runs thus:

68.22 Payment where warranty - Where tax under Part III or VI has been paid in respect of any goods that a licensed manufacturer gives away as free replacement parts under a written warranty given in respect of the goods into which the parts are to be incorporated and the amount, if any, charged for the warranty is included in the sale price charged by the licensed manufacturer for the goods into which the parts are to be incorporated or, if those goods are imported goods, in the duty paid value thereof, an amount equal to the amount of that tax shall, subject to this Part, be paid to that manufacturer if he applies therefor within two years after he gave away the goods.

The expression of this provision is quite remarkably clear and unambiguous for a tax statute.

[5]      The plaintiff's posture herein appears to be favoured by the law and facts. However, the Minister's counsel told the Court that the plaintiff's position is anomalous, and that it in fact has other remedies which ought to have been considered. However, as to the question whether the plaintiff included a charge for its warranty in the sale price or duty paid value of its goods, the Minister's counsel conceded: "at this point that ought not to be an issue in this matter in today's proceeding".

THE COURT: If you take that position, then, as must be obvious to you, I shall take a position that there is an inference to be drawn from that paragraph in the agreed statement of facts that it, indeed, was [included].

COUNSEL (DNR): I think that is fair * * *.

(transcript, p. 60)

[6]      The Minister's counsel made lengthy submissions on the position of licensed wholesalers (transcript, pp. 85 to 96), but he noted, as well:

Now what I am suggesting, then, * * * is that the overall scheme of the legislation supports the Crown's position here. The overall scheme of the legislation shows that a licensed manufacturer has a remedy in relation to defective goods under section 68.22.

A licensed wholesaler has a remedy in respect of defective goods under subsection 2(5), and an importer has a remedy in relation to defective goods under section 76 of the Customs Act.

I am suggesting, therefore, that the overall scheme of the legislation would show that all of the commercial interests are properly dealt with.

The problem that IBM faces in this case is that it was not a licensed wholesaler of the goods.

(transcript, p. 91)

[7]      The Minister's counsel characterized the plaintiff's position on interpretation of the Act as leading to an absurdity. He postulated the example of two neighbouring wholesalers selling "widgets", under warranty, which are occasionally defective, requiring the wholesalers to give away free replacement parts under the warranty. Counsel for the MNR continued:

Now, let's suppose that one of those two widget wholesalers also manufactures buggy whips, and is a licensed manufacturer in respect of those buggy whips. What my friend is suggesting is that the licensed manufacturer of the buggy whips ought to be able to get a refund of the tax paid on the replacement parts for the widgets, even though the neighbouring wholesaler, who also sells widgets, would not be entitled to such a refund, and the reason, according to my friend, that that wholesaler would not be entitled to the refund, is simply because that wholesaler is not also a licensed manufacturer of some other totally unrelated good in that example.

What my friend has suggested, then, is that, in the example I have just given the licensed manufacturer of the buggy whips would have the advantage of a tax refund, if you will, on the replacement parts for widgets, where the neighbouring wholesaler, who is not a licensed manufacturer of anything, would not have that advantage.

I would suggest to the Court that two things: First of all, I would suggest that that was an absurd result, one that is clearly not intended by the Act, and secondly, that it is a result that is perfectly analogous to the situation that IBM is in this case.

There would well be here in Canada other wholesalers of imported computers and imported parts who are not licensed wholesalers, for whatever business reason, have chosen not to be licensed wholesalers of those goods, but who are giving away replacement parts for defective computers that they are importing. What IBM is suggesting here is that because they also happen to be licensed manufacturers, they ought to be able to receive the tax refund on replacement parts that they have imported, and not manufactured, even though a similar unlicensed wholesaler, who is not also a licensed manufacturer, could not do so.

(transcript, pp. 93 & 94)

Counsel argued that such "an absurd result * * * is clearly inconsistent and * * * inharmonious with the scheme of the Act and the intent of the Act, and therefore, [it] is simply not acceptable to use that term [with such] meaning as referred to in the Friesen case" [Jake Friesen v. The Queen, [1995] 3 S.C.R. 103]. One may note that section 54 of the Act requires, with one irrelevant exception, that all manufacturers be licensed manufacturers.

[8]      The Minister's purposive approach, this time in this case is not favoured by the Supreme Court of Canada where the language of that other tax statute, the Income Tax Act is clear and unambiguous. Mr. Justice Major, for the majority in Friesen, S.C.R. para. 11, is reported as writing this:

11.      The principle that the plain meaning of the relevant sections of the Income Tax Act is to prevail unless the transaction is a sham has recently been affirmed by this Court in Canada v. Antosko, [1994] 2 S.C.R. 312, Iacobucci J., writing for the Court, held at pp. 326-27 that:

While it is true that the courts must view discrete sections of the Income Tax Act in light of the other provisions of the Act and of the purpose of the legislation, and that they must analyze a given transaction, in the context of economic and commercial reality, such techniques cannot alter the result where the words of the statute are clear and plain and where the legal and practical effect of the transaction is undisputed: Mattabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175, at p. 194; see also Symes v. Canada, [1993] 4 S.C.R. 695.

I accept the following comments on the Antosko case in P.W. Hogg and J.E. Magee, Principles of Canadian Income Tax Law (1995) Section 22.3(c) "Strict and purposive interpretation", at pp. 453-54:

It would introduce intolerable uncertainty into the Income Tax Act if clear language in a detailed provision of the Act were to be qualified by unexpressed exceptions derived from a court's view of the object and purpose of the provision . . . [The Antosko case] is simply a recognition that "object and purpose" can play only a limited role in the interpretation of a statute that is as precise and detailed as the Income Tax Act. When a provision is couched in specific language that admits of no doubt or ambiguity in its application to the facts, then the provision must be applied regardless of its object and purpose. Only when the statutory language admits of some doubt or ambiguity in its application to the facts is it useful to resort to the object and purpose of the provision.

(S.C.R. at pp. 113-14, para. 11)

(Counsel on both sides referred to this case reported in Carswell Tax Partner Cases, where the above passage is quoted as paragraphs 16 and 17. Carswell arbitrarily changed Mr. Justice Major's paragraph structure, and it counts headlines as paragraphs.)

[9]      The plaintiff's counsel took issue with the Minister's counsel's position, complaining:

I took him to concede that there was no issue, as I was of the view with his predecessor, in terms of the second half of the section 68.22, but the only issue, then, is whether any goods a licensed manufacturer gives away as free replacement parts under a written warranty has been complied with here. Is that the case.

MR. WOYIWADA: Let me put it this way, My Lord. I would be prepared to have this case decided on that issue.

MR. KREKLEWETZ: Thank you very much.

(transcript, p. 98)

The main thrust of the plaintiff's position is that the words are clear and ought to be applied.

[10]      In the case of Alberta (Treasury Branches) v. M.N.R., [1996] 1 S.C.R. 963, Mr. Justice Cory, for the majority, is recorded at p. 975 as agreeing with the majority's principles of interpretation "clearly set out in Friesen v. Canada, [1995] 3 S.C.R. 103, at pp. 112-14. There the principles were summarized in these words [quoting]: * * *". (pp. 975-76 of Alberta (Treasury Branches), para. 14.) Mr. Justice Cory and the concurring judges in the Alberta (Treasury Branches) case then seemed to recede from the words above cited, for this passage is found at pp. 976-77:

Thus, when there is neither any doubt as to the meaning of the legislation nor any ambiguity in its application to the facts then the statutory provision must be applied regardless of its object or purpose. I recognize that agile legal minds could probably find an ambiguity in as simple a request as "close the door please" and most certainly in even the shortest and clearest of the ten commandments. However, the very history of this case with the clear differences of opinion expressed as between the trial judges and the Court of Appeal of Alberta indicates that for able and experienced legal minds, neither the meaning of the legislation nor its application to the facts is clear. It would therefore seem to be appropriate to consider the object and purpose of the legislation. Even if the ambiguity were not apparent, it is significant that in order to determine the clear and plain meaning of the statute it is always appropriate to consider the "scheme of the Act, the object of the Act, and the intention of Parliament". What then was Parliament's intention in enacting the 1990 legislation?

([1996] 1 S.C.R. at p. 976-77)

Indeed, recession from the bold words at the beginning of the above cited paragraph, seems to occur by the end of the same paragraph. It is truly puzzling.

[11]      This Court, however, considers section 68.22 to be without doubt as to its meaning in regard to the contentious issue herein, and without ambiguity in its application to the facts as stated at the beginning of Mr. Justice Cory's above recited para. 15 in the 1996 Alberta (Treasury Branches) judgment. The dissent in Royal Bank v. Sparrow Electric, [1997] 1 S.C.R. 411, also cited that passage. It is passing strange to agree with the analysis, but not the conclusion.

[12]      However, in the final analysis, the parties agree that the plaintiff is a licensed manufacturer under the Act. The goods referred to in paragraphs 13 to 20 of exhibit 1, the agreed fact, are part of the plaintiff's normal inventory. They are not buggy whips. The replacement parts given away by IBM pursuant to a written warranty are just not subject to tax on the plain meaning of the legislation, but they are in a tax-paid inventory. Section 68.22 operates to avoid double taxation upon licensed manufacturers, according to the Minister (transcript, p. 143).

[13]      There is one final observation to be made in this case. During the hearing, (transcript, pp. 25 et seq.), the plaintiff's counsel placed reliance on the decision of Mr. Justice McKeown in The Queen v. Tom Baird & Associates, (1996), 120 F.T.R. 218, for that learned judge's statement on the interpretation of taxation statutes, which accorded with Friesen earlier cited herein. It transpires that since the time of the hearing of the present case, the Court of Appeal has reviewed the decision of McKeown, J. The appeal case, same style of cause, A-866-96, was decided on November 18, 1997. The reasons begin with what Mr. Justice Létourneau wrote:

[1] Once again we are thrown back into the quagmire of the Excise Tax Act.

The Court of appeal unanimously dismissed the appeal and indeed upheld the interpretation of the Act performed by McKeown, J. on the same basis, it seems, as is stated herein. What Parliament enacted and how its words are formulated, unless patently (or even latently) absurd, impart the meaning of its legislation. Administrative policy is not needed nor admissible here. So be it in regard to section 68.22 of the Excise Tax Act.

[14]      For the foregoing reasons, the plaintiff's appeals are allowed and the party and party costs of the actions (with counsel fee for one, combined hearing) are to be paid by the defendant to the plaintiff.

[15]      Pursuant to rule 337(2)(b) the plaintiff's solicitors may prepare drafts of the appropriate judgments for commentary by the defendant's solicitors before submitting them for signature, or proceed precisely as provided in said rule.

                                

Judge

Ottawa, Ontario

February 25, 1998