Federal Court Decisions

Date: 20060224

Docket: T-2203-04

            Citation: 2006 FC 253

Ottawa, Ontario, February 24, 2006

PRESENT:      The Honourable Mr. Justice Blanchard

BETWEEN:

HER MAJESTY THE QUEEN

Plaintiff

and

713460 ONTARIO LTD.

o/a HEIRLOOM CLOCK COMPANY

Defendant

REASONS FOR JUDGMENT AND JUDGMENT

1.          Introduction and Background Facts

[1]                This is an appeal by the Minister of National Revenue (the Minister), pursuant to section 81.24 of the Excise Tax Act, R.S. 1985, c. E-15 (the Act), from a decision of the Canadian International Trade Tribunal (the Tribunal) dated August 13, 2004. In its decision, the Tribunal held that the defendant company, 713460 Ontario Ltd. o/a Heirloom Clock Company (Heirloom), is not a manufacturer of clocks as defined under the Act, reversing the Minister's assessment of excise taxes against Heirloom.

[2]                I summarize here the agreed statement of facts. At all material times, Heirloom was in the business of manufacturing grandfather clocks and wall clocks and clock cabinets for sale under the Heirloom name or private brand names. It is common ground between the parties that a grandfather clock consists of a clock cabinet, a mechanism, a dial, a pendulum and weights to drive the pendulum, and that when a customer orders a grandfather clock Heirloom installs the mechanism and the dial in the clock cabinet before shipping it, but does not install the pendulum and weights.

[3]                The following facts in respect to prior proceedings in this matter are pleaded in the statement of claim and admitted in the statement of defence:

            a)         The Minister had determined Heirloom to be a manufacturer of clocks under paragraph 23(11)(a) of the Act. The Minister subsequently re-examined its prior determination based on additional information presented by Heirloom and came to the same conclusion the Minister had reached as a result of the previous examination.

            b)          On February 4, 2002, Heirloom requested a further re-determination of its classification under the Act. After re-examining Heirloom's classification, the Minister upheld this decision, and consequently issued Notice of Assessment SWO101 against Heirloom on June 26, 2002 for unpaid excise taxes.

            c)          Heirloom filed an objection to the Notice of Assessment. The objection was disallowed by the Minister and the assessment confirmed on February 21, 2003. On November 17, 2003, Heirloom then appealed to the Tribunal pursuant to section 81.19 of the Act.

            d)          The appeal was submitted in writing. On August 13, 2004, Heirloom's appeal was allowed by the Tribunal.

[4]                The Tribunal's decision and Tribunal record were not filed as part of the trial record. The Plaintiff adopted the position that since this appeal is to be conducted on a de novo basis, there was no need to consider the Tribunal's decision or record. The parties relied on an agreed statement of facts in this proceeding.

[5]                The Tribunal's decision was however filed with the Court in an earlier interlocutory proceeding in this matter. The Defendant, in a motion filed on February 9, 2005, sought leave to be represented by its president Mr. Peter A. Eickmeier. The motion record included the Tribunal's decision. While the Tribunal's reasons for decision were not dealt with in submissions before the Court, I think it useful nevertheless to reproduce the following paragraphs of the Tribunal's decision which essentially capture the Tribunal's reasons for allowing Heirloom's appeal.

20.       The Tribunal is of the view that the clock movement of a grandfather clock consists of all the moving parts of the clock, which include the weights and the pendulum. The Tribunal is also of the view that the movement of a clock is what renders it functional. Since the primary function of a clock is to keep time, the Tribunal is of the opinion that Heirloom had to install all the components of a grandfather clock in the clock cabinet to be considered as the person that is deemed to have manufactured the grandfather clocks. The evidence indicates that Heirloom does not install the pendulum and the weights in the clock cabinets before selling the grandfather clocks. Thus, the Tribunal finds that Heirloom is not deemed to have manufactured clocks, since it has not put a clock movement into a clock in accordance with the requirements of subsection 23(11) of the Act.

21.        The Tribunal also finds that Heirloom cannot be considered a manufacturer of clocks pursuant to subsection 23(1) of the Act. Pursuant to subsection 23(1) and paragraph 5(a) of Schedule 1 to the Act, excise tax is imposed on clocks that are manufactured or produced in Canada and delivered to a purchaser of those goods. The Tribunal is of the view that, in order for an object to be considered a manufactured clock, it must be able to keep time. The evidence indicates that all the components must be installed in order for a grandfather clock to be able to keep time. Since the grandfather clocks manufactured by Heirloom do not have the weights and pendulum and, as a result, are not able to keep time, Heirloom cannot be considered a manufacturer of clocks pursuant to subsection 23(1).

22.       The Tribunal also finds that Heirloom is not a deemed manufacturer pursuant to subsection 2(1) of the Act. In applying the rationale in Movado to the present case, Heirloom must have had manufactured functional clocks in order for it to be considered a manufacturer. Since the evidence indicates that Heirloom does not install all the components of a grandfather clock in its clock cabinets, and since the Tribunal has already found that a grandfather clock is only functional when all its components are installed, Heirloom is not a deemed manufacturer or producer pursuant to paragraph (f) of the definition of "manufacturer or producer" set out in subsection 2(1).

2.         Standard of Review and Burden of Proof

[6]                The Minister filed an appeal of the Tribunal's decision pursuant to sections 81.24 and 81.28 of the Act.

[7]                It is well-established in the jurisprudence that appeals of the Tribunal's decisions are conducted by the Court as hearings de novo. Justice François Lemieux canvassed the case law in Cast Terminals Inc. v. Canada(Minister of National Revenue), 2003 FCT 535, and stated at paragraph 58 of his decision that:

In Canadian National Railways Co. (C.N.R.) v. Canada, [1993] F.C.J. No. 258 (T.D.) (QL), Justice Denault said this about the appeals under the Act to this Court:

These appeals were heard together and deal with identical issues. The procedure on an appeal pursuant to section 81.24 and 81.28 of the Excise Tax Act is in the nature of an action, that is to say a trial de novo.

Justice Lemieux added that the same conclusion was reached by the Court in Shaklee Canada Inc. v. Canada, [1995] F.C.J. No. 330 (T.D.) (QL), and in Mustang Engineering and Construction Ltd. v. Canada (Minister of National Revenue), [2001] F.C.J. No. 49 (T.D.) (QL).

[8]                This appeal will therefore proceed on a de novo basis.

[9]                With respect to the burden of proof in this appeal, it is no different than the burden before the Tribunal. The onus is on Heirloom to show that the Minister's assessment was erroneous. In the circumstances, Heirloom must establish on a balance of probabilities that it does not fall within the classification of a manufacturer of clocks under the Act.

3.          Statutory Provisions

[10]            For ease of reference, I set out the relevant provisions of the Act:

Subsection 2(1) of the Act provides:

Subsection 23(1) of the Act provides:

Subsection 23(11) of the Act provides:

[11]            Section 5(a) in Schedule I of the Act prescribes the rate of excise tax applicable to clocks and watches; at the time Heirloom received the Notice of Assessment, the rate was 10 percent of the amount by which the sale price or duty-paid value exceeded $50.

4.         The Issue

[12]            The question before the Court is ultimately one of the application of these particular facts to the statutory provisions. In this case, the Court is asked to determine whether Heirloom is a manufacturer within the provisions of subsections 23(11), 2(1) or 23(1) of the Act.

5.          Analysis

[13]            There is no dispute that Heirloom supplied its customers with all of the necessary components of a grandfather clock: the cabinet, the mechanism, the dial, the pendulum and the weights. However, for shipping purposes, Heirloom did not install the pendulum and weights to the mechanism inside of the cabinet. Heirloom argues that the pendulum and weights are essential components of a grandfather clock, without which the clock cannot perform its only function, to tell time. It follows, argues Heirloom, that without these essential components assembled in the clock's case, the product Heirloom makes cannot be considered a clock for the purposes of the Act. As a consequence, Heirloom argues that it is not a manufacturer of clocks, nor can it be deemed to be one.

[14]            I respectfully disagree with Heirloom's argument for the following reasons. In the instant case the product at issue is for all intents and purposes a grandfather clock that is fully assembled save for its pendulum and weights which are not permanently installed until delivery to the buyer. These components are left out of the clock case essentially for shipping purposes. The evidence before me indicates that Heirloom "installed the mechanism and the dial in the clock cabinet before shipping it, but did not install the pendulum and weights." Although the evidence could have been clearer as to the reasons for not installing the pendulum and weights before shipping, it is obvious, in my view, that shipping the clock with the pendulum and weights inside the case would most likely lead to significant damage to the clock case, if not the mechanism of the clock, during shipping. In my view, the simplest way to avoid damaging the clock during shipping would be simply to not to finally install such parts in the clock. At the hearing, Heirloom conceded that installing the pendulum and weights would not require much effort and could be done by the consumer or a retailer who wished to display the clock in a retail establishment.

[15]            In my opinion, Heirloom clearly falls within the definition of "manufacturer or producer" set out in paragraph 2(1)(f) of the Act. Heirloom is a manufacturer of goods, namely, grandfather clocks that it prepares for sale by "assembling and/or packaging the goods". As such, it assembles all of the essential components necessary to make the clock functional but does not install the pendulum and weights for reasons set out above. In my view, its failure to install the pendulum and weights for these reasons does not render the product it makes any less a clock. A consumer taking delivery of a clock from Heirloom, in these circumstances, would not think that he was purchasing components of a clock for assembly. It seems clear to me that a consumer would consider that he purchased and took delivery of a grandfather clock.

[16]            Further, the term "goods" used in paragraph 2(1)(f) is not defined in the Act. Even if I were convinced, and I am not, that the "goods" manufactured by Heirloom could not be considered a grandfather clock because its pendulum and weights were not assembled at the time of shipping, this would not matter in determining whether Heirloom is a manufacturer or producer under subsection 2(1) of the Act. Heirloom's products are still goods prepared for sale by assembling or packaging pursuant to paragraph 2(1)(f) of the Act, even if certain of its components, such as the pendulum and weights, are not installed. This is so because full assembly and functionality of the goods are not prerequisites under the Act. Such an interpretation is consistent with the purpose of the Act which was amended in 1981 to expand the definition of "manufacturer and producer" in order to rectify what the government perceived as an inequity resulting from different points of taxation for importers and domestic manufacturers (see Ford Motor Co. of Canada, Ltd. v. Minister of National Revenue (C.A.), [1997] 3 F.C. 103 at paragraphs 2-3).

[17]            It follows, therefore, that as a manufacturer Heirloom is subject to the provisions of subsection 23(1) of the Act and is liable for the applicable taxes thereunder.

[18]            In order to be deemed a manufacturer or producer, pursuant to subsection 23(11) of the Act, the evidence must establish that Heirloom "put a clock movement in a clock case". "Clock movement" is not defined in the Act. Heirloom argues that by assembling into the clock case a clock mechanism and dial, but not installing the pendulum and weights, it cannot be said that a clock movement has been put into the clock case. Heirloom contends again that the pendulum and weights are essential components of the clock without which the clock cannot function; therefore the assembled components without the pendulum and weights do not constitute a clock movement.

[19]            It is not disputed that all of the essential components of "a clock movement" are supplied by Heirloom, namely: the mechanism, the dial, the pendulum and the weights. In my view, not installing the pendulum and weights in the grandfather clock in order to protect the clock from damages during shipping does not lead to the conclusion that no clock movement was put in the clock case. What is important is that these components were provided by Heirloom and could be ultimately installed by the purchaser without requiring any particular skill.

[20]            Inherent in the business of producing or manufacturing grandfather clocks is the ability to deliver these clocks to buyers undamaged. It appears obvious to me, given the physical nature of the different components of a grandfather clock, that it is preferable that the pendulum and weights be removed for safe shipping. Further, a consumer taking delivery of a grandfather clock would reasonably expect the weights and pendulum be installed after the clock is delivered and set up. In these circumstances to suggest that removing or not installing these components for shipping purposes would result in a finding that no clock movement was put in the clock is, in my view, perverse.

[21]            For the above reasons I conclude that Heirloom did "put a clock movement in a clock case" and, in the result, is deemed to be a manufacturer or producer of grandfather clocks pursuant to subsection 23(11) of the Act.

[22]            The Notice of Assessment is adduced as evidence of the outstanding taxes owing. The Notice identifies the person assessed as 713450 Ontario Limited, not 713460 Ontario Ltd., the Defendant herein. Heirloom filed a Notice of Objection to the said Notice which it identified at paragraph 11 of the agreed statement of facts as Notice no. SWO101, the same number indicated on the Notice of Assessment filed by the Minister as evidence of the taxes owing. At the hearing, the Defendant took no position on the issue. In the circumstances, I accept this to be a typographical error and of no consequence.

6.         Conclusion

[22]            For the above reasons, the appeal will be allowed with costs. The Minister is entitled to judgment in the amount of $ 59,918.48 plus penalty and interest.

JUDGMENT

            IT IS HEREBY ORDERED AND ADJUDGED that:

1.         The appeal is allowed with costs.

2.         The Defendant shall pay to the Plaintiff the sum of $59,918.48 plus penalty and interest.

"Edmond P. Blanchard"

FEDERAL COURT

NAME OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                           T-2203-04

STYLE OF CAUSE:                           HER MAJESTY THE QUEEN v. 713460 ONTARIO LTD. o/a HEIRLOOM CLOCK COMPANY

PLACE OF HEARING:                     Toronto, Ontario

DATE OF HEARING:                       February 13, 2006

REASONS FOR ORDER AND ORDER:             Blanchard J.

DATED:                                                                      February 24, 2006

APPEARANCES:

Ms. Sonia Barrette                                                                    FOR THE PLAINTIFF

Mr. Peter A. Eickmeier                                                              FOR THE DEFENDANT

SOLICITORS OF RECORD:

John H. Sims, Q.C.                                                                   FOR THE PLAINTIFF

Deputy Attorney General of Canada

Mr. Peter A. Eickmeier                                                              FOR THE DEFENDANT

Grimsby, Ontario