Ottawa, Ontario, March 17, 2006
PRESENT: The Honourable Mr. Justice Hugessen
BETWEEN:
and
HER MAJESTY THE QUEEN AS REPRESENTED BY
THE MINISTER OF NATIONAL REVENUE
REASONS FOR ORDER AND ORDER
[1] The question to be decided in this case is whether the plaintiff is entitled to claim a refund of federal sales tax paid by it on "imaged articles" or "pre-press materials" produced by it for its customers. The case was tried entirely on an agreed statement of facts of which I reproduce herewith the first 23 paragraphs:
BACKGROUND: The Plaintiff's Printing Process:
1. The plaintiff is a printer and was at all material times a licensed manufacturer of imaged articles and printed matter under the Excise Tax Act.
Pre-Press (Imaged Articles) and Printing:
2. The creation of imaged articles, otherwise known as pre-press, comprises the first of two major stages in the printing process and it includes any word done prior to a printing job being produced on a printing press.
3. An imaged article includes the initial camera-ready artwork and creative work, photographs, films and typesetting involved in producing an aluminium plate which carries an image or an impression that is used for reproduction of printed matter ('imaged articles").
4. Pre-press activities include all of the pre-printing operations from the design and artwork up to and including the creation of the plate.
5. The aluminium plate is the final imaged article.
6. The second stage in the printing process involves attaching the plate to a printing drum and transferring the plate image with ink on to paper stock.
7. Printed matter can only be produced if the final imaged article, represented by an impressed aluminium plate, has first been created.
Steps involved in Plaintiff's Customer Orders:
8. The plaintiff, at the request of its customers, manufacturers or produces imaged articles and then uses them to produce printed matter (i.e. flyers, newsletters, booklets etc.) for its customers.
9. To fulfill each custom order, the plaintiff manufactures and produces some or all of the following pre-press materials - photographs, typesetting, camera-ready art work and plate-ready colour-separated film - and then transfers negatives of each image on to an aluminium plate used for printing reproductions.
.
10. The imaged articles produced in an order are unique to each customer and are of no use to anyone else. The plate has the customer's name on it and can only be used for the exclusive purpose of producing printed matter for that particular customer and for no other purpose. No two jobs are the same.
11. The imaged articles are available anytime to the customer at its request.
12. Occasionally, the plaintiff re-uses the imaged articles for subsequent print runs (e.g., a second printing of a particular flyer).
13. Generally, the imaged articles are stored by the plaintiff and remain in the plaintiff's possession and rarely, are they returned to customers prior to being destroyed.
14. Given the time sensitive nature of the flyers and promotional materials printed by the plaintiff, the imaged articles were usually used for that one unique job and then destroyed by the plaintiff within a week following the printing job.
15. In some cases, the plaintiff obtained from its clients or purchased on an exempt basis some of the imaged article components - e.g., the artwork or design. The plaintiff further manufactured these partly manufactured goods and incorporated them into the final printing plate.
16. In all instances in issue, the plaintiff created the aluminium plate, the final imaged article necessary to produce printed matter.
Plaintiff's Customer Invoices:
17. The plaintiff generally produced two forms of invoices for its customers:
A. "Break-Out" invoices that identify one or more imaged article(s) and printed matter as separate components on the invoice, with either:
i. a separate price for imaged articles and printed matter; or
ii. an all-inclusive selling price for imaged articles and printed matter.
B. "Single All-Inclusive" invoices where printed matter alone is identified on the invoice with a single selling price.
18. The plaintiff had no uniform billing procedure and the form of the invoice was often determined by the salesman taking the order or by the customer's request.
19. In all instances in issue, regardless of the form of invoice used, the commercial reality of the transaction is the same - i.e.,
a. Customer requests a printing job and printer does an estimate;
b. That printing job includes both imaged articles and printed matter; and ;
c. Printer does one or more of the stages of the imaged articles;
d. Customer approves each stage of the imaged articles - most importantly the plate; and,
e. Printer then produces the printed matter and delivers it to the customer.
20. In all instances in issue, regardless of the form of invoice used, the plaintiff remitted federal sales tax on the total final selling price.
Calculation of Total Selling Price:
21. In calculating the final selling price of the printed matter to a customer, the plaintiff factored in all its costs associated with producing the printing matter - including the cost of producing imaged articles - and then added a gross profit margin or a mark-up.
22. The costs associated with producing the printed matter, as outlined in the expert report of Mr. Kevin Turnbull, dated June 24, 20051, include:
a. Overhead (which represents all costs that are not selling, administrative or financing costs and which includes depreciation on capital equipment, insurance, rent, repairs and maintenance, utilities and vehicle operating expenses);
b. Material purchases (including, paper, ink and other items); and,
c. Salaries and labour, for:
i. pre-press (imaged articles) manufacturing; and,
ii. printing production.
23. The plaintiff remitted federal sales tax on the total selling price of the printed matter sold to its customers, which included the value of the imaged articles.
[2] The parties have also agreed that if the defendant is found liable for the refund, the refund should be $272,797.00, plus taxable costs and applicable interest.
[3] Finally, counsel have narrowed the legal issue for the Court's determination to the single question of whether or not the plaintiff "sold" the imaged articles in question within the meaning of the Excise Tax Act.
[4] Federal sales tax was, at the relevant times, imposed by s. 50 of the Excise Tax Act which read in relevant part:
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,
...
(iii) payable, in a case where the goods are for use by the producer or manufacturer thereof, by the producer or manufacturer at the time the goods are appropriated for use;
[5] Section 51(1) creates an exemption when the tax does not apply:
51. (1) The tax imposed by section 50 does not apply to the sale or importation of the goods mentioned in Schedule III, other than those goods mentioned in Part XIII of that Schedule that are sold to or imported by persons exempt from consumption or sales tax under subsection 54(2).
[6] Section 4 of Part XIII of Schedule III of the Act exempts the following materials defined as imaged articles, from the federal sales tax:
Typesetting and composition, metal plates, cylinders, matrices, film, art work, designs, photographs, rubber material, plastic material and paper material, when impressed with or displaying or carrying an image for reproduction by printing, made or imported by or sold to a manufacturer or producer for use exclusively in the manufacture or production of printed matter.
[7] Plaintiff originally argued that it was entitled to the claimed exemption on the basis that the materials in question were "made" by it solely for use in the production of printed materials. That contention has now been properly abandoned: the wording of Section 4 of Part XIII of Schedule III of the Act cannot be divorced from the enacting words of s. 51(1) which requires that the materials be "sold to or imported by persons exempt from consumption or sales tax ...". So, as already indicated, the only question now remaining is to know whether the materials were "sold" by the plaintiff to its customers.
[8] In the course of argument both counsel concentrated their attention almost exclusively on what occurred after the materials had served their original purpose and the printed flyers or circulars had been produced and delivered to the customers. In my respectful view, that is a wrong approach. As I understand the facts, imaged articles are purpose made by the printer for and under the direction and overall control of the customer and their primary, and generally their only purpose, is to serve in the production process. Once the printing has been done their purpose is exhausted and they have virtually no residual value except in the rare event of a re-run.
[9] The pre-press materials are not generally delivered to the customer because neither he nor the producer is likely to have any further use for them. The only inference that I can draw from the agreed facts, especially paragraphs 10-13 set out above, is that they are then treated as scrap or waste material with virtually no utility or even salvage value. But what happens after the imaged materials have served their purpose cannot be determinative of the question of whether or not they have been sold by the producer to the customer. It is not at all surprising that the latter does not then usually require delivery because his need of them no longer exists. He has what he wanted: the flyers or brochures and the imaged articles were simply a necessary item that had to be acquired along the way in order for the end purpose to be achieved. But there can be no doubt that the customer alone has the right to direct how the imaged articles are to be disposed of, even if it rarely does so.
[10] In my opinion all the necessary elements of a sale under the Act (which does not define the term) are here present. The goods have been specifically designed and made at the customer's request and are exclusive to him. They were then used for him for the purposes of his business and he retains control over their disposition until they are ultimately destroyed, and a price has been paid which, as the documentation produced in support of the invoices clearly shows, undoubtedly includes not only the price of the final product, the flyers or circulars, but also that of the necessary intermediates which have become the property of the customer whose name is on them. Property in the goods has passed from the printer to the customer in return for a money consideration; that is in law a sale.
[11] I do not find anything contrary to this view in the decision of the Court of Appeal in the case of Canada v. Tom Baird & Associates Ltd., [1997] F.C.J. No. 1579. There, the taxpayer ordered and purchased imaged articles from a producer, sent them to a printer for production of advertising flyers, and then billed its client separately for both the printed materials and the imaged articles. As in the present case, once they had served their purpose the imaged articles were effectively treated as scrap. The Minister attempts to distinguish the Baird case on the basis that there was there a documented "sale" to the customer of the imaged articles and, indeed, he has made a refund to the present plaintiff in those, relatively rare, cases where the invoice breaks out and shows a separate cost of the imaged articles. In my view, however, the distinction is not a valid one since whether or not there was a sale cannot be made to depend upon the documentation which records the transaction after it is completed. That would indeed be a triumph of form over substance. In Baird, Justice Létourneau for the Court spoke of the customer's "proprietary right" in the imaged articles as supporting an argument that they had not been "used" by the producer in a subsequently documented sale to the customer.
[12] In my view such a sale must also be inferred from the agreed facts herein even in the absence of documentation. There could only be two possible owners of the imaged articles: the printer and the customer and only the latter had the right to direct their ultimate disposal, a necessary incident of ownership. While it is possible, as the Minister suggests, that Justice Létourneau was referring obliquely to the customer's intellectual property rights there is no doubt that someone other than the printer also acquired rights to the physical objects constituting the imaged articles and that that person could only be the customer.
[13] It will be apparent from the foregoing that I am in respectful disagreement with the decision of the Canadian International Trade Tribunal (C.I.T.T.) in the case of Staz Communications Inc. v. The Minister of National Revenue (2003), Appeal No. AP-2001-004. There the facts were almost identical to those in the present case and the Tribunal concluded that on the evidence it was not persuaded that there had been a sale of the imaged articles. That view, however, seems to have been based on the opinion that the taxpayer was required to "clearly" demonstrate the existence of a sale. That is an error of law for it sets the threshold too high. Counsel for the Minister before me did not dispute that the burden is simply that of the balance of probabilities, the normal civil test, namely whether it is more likely than not that a sale took place. The Tribunal also seems to have looked only at the direct evidence (as to whose credibility it seems to have had some doubts) and did not make any attempt to draw necessary inferences as to the commercial realities of what had taken place. As indicated, those realities in this case lead me to infer that there was a sale. The facts having been agreed, questions of credibility cannot arise.
[14] The action will be allowed with costs to be assessed. The parties have agreed that in such event the refund should be in the amount of $272,797.00 plus "applicable" interest. I assume that counsel have an agreement as to dates and rates of interest; failing agreement a motion for directions should be made pursuant to Rule 369.
ORDER
THIS COURT ORDERS that :
The defendant shall pay plaintiff the sum of $272,797.00 together with applicable interest and costs to be assessed.
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1753-04
STYLE OF CAUSE: WEB PRESS GRAPHICS LTD. v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: March 9, 2006
REASONS FOR ORDER: HUGESSEN J.
APPEARANCES:
| Mr. Meldon Ellis
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| Mr. Kris Klein
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SOLICITORS OF RECORD:
| Ellis Business Lawyers Vancouver, British Columbia
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| John Sims, QC Deputy Attorney General of Canada
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