Judgments

[1997] 3 F.C. 103

A-613-94

The Minister of National Revenue (Appellant) (Defendant)

v.

Ford Motor Company of Canada, Limited (Respondent) (Plaintiff)

Indexed as: Ford Motor Co. of Canada, Ltd. v. M.N.R. (C.A.)

Court of Appeal, Stone, Linden and McDonald JJ.A. —Toronto, March 5; Ottawa, April 25, 1997.

Customs and Excise — Excise Tax Act — Marginal manufacturing — Respondent not manufacturer or producer of imported vehicles within meaning of Excise Tax Act — Preparation and conditioning of vehicles at dealership not manufacturing for purposes of Act, not performed by dealer on behalf of respondent — Work performed by dealers not preparation of goods for sale as vehicle already sold by respondent to dealer — Minister’s treatment of other importers not determinative of tax liability of respondent.

Ford Canada was importing cars and light trucks from its American parent to Ford dealerships in Canada. A term of the sale agreement between Ford Canada and each of the dealers was that the vehicles would be delivered to the dealers with preparation and conditioning work outstanding. This work was to be performed by each dealer after delivery but prior to resale. It included an under the hood check, body check, chassis check, road test, appearance check and installation of any loose shipped items such as fog lights, antennas, CB mikes, cigarette lighters, door mats, hub caps and wheel covers, licence plate frames, luggage racks, and rear step bumpers.

Ford Canada paid sales tax based on duty paid value of these imported vehicles. Due to the exchange rate at that time, tax on the sale price would have been less than if calculated based on duty paid value. Ford Canada applied to the Department of Revenue to be included in the expanded definition of “manufacturer or producer” in the amended paragraph 2(1)(f) of the Excise Tax Act and pay tax on the sale price in Canada of imported vehicles rather than on the duty paid value. At issue was close to $32,000,000 in refund claims relating to sales tax paid by the respondent on the duty paid value of 366,000 vehicles imported by it from the United States and sold to its dealers in Canada between January 1981 and February 1984.

The Trial Judge held in favour of Ford Canada and declared that it was the manufacturer of all those passenger vehicles. He found that some inspections, adjustments, alterations and tests performed in the preparation and conditioning process clearly amounted to a meaningful step in the preparation of the vehicles for sale. He decided that the work was done on behalf of Ford Canada and that the dealerships were not retail stores, so that Ford Canada was not subject to the exclusion in the amended definition on this basis. He also found that there was no evidence to suggest that the application was not fairly considered. Finally, he found that the cost of transporting the imported vehicles to the dealerships was a cost incurred in delivery of the goods, and not a cost of manufacturing the goods. The Minister appealed that part of the decision finding that the respondent was a manufacturer or producer. If unsuccessful, Ford Canada argued on cross-appeal that the Minister acted unfairly in denying its application under subsection 26.1(1) of the Act to be considered as a manufacturer.

Held, the Minister’s appeal should be allowed and Ford Canada’s cross-appeal dismissed.

In order to qualify within the expanded definition of “manufacturer or producer”, Ford Canada had to establish (1) that the preparation and conditioning performed by the Ford dealers fitted within the phrase “or otherwise prepares goods” and could therefore be treated as manufacturing on that basis; (2) that the preparation and conditioning was performed by the dealer on behalf of Ford Canada; (3) that the work performed by the dealers prepared the goods for sale; and (4) that it was not excluded from the definition by virtue of the fact that the work was performed in a “retail store for sale in that store exclusively and directly to customers”.

(1) The work performed by Ford dealers did not constitute manufacturing or producing pursuant to paragraph 2(1)(f). The work performed by Ford dealers was almost entirely cosmetic and of a minor nature. The ordinary meaning of “manufacture” could not be stretched beyond the point of recognition. Finally, applying the ejusdem generis principle, the activities of the Canadian dealers could not be considered to fall within the intended scope of paragraph 2(1)(f). While this was enough to decide the case, other issues were examined.

(2) The work was not done on behalf of Ford Canada. The legal nature of the relationship between Ford Canada and its dealers was clearly one of sale rather than agency. The Sales and Service Agreement explicitly stipulated that there was no agency relationship between Ford Canada and the dealer. Furthermore, the transfer of title to a vehicle occurred between Ford Canada and the dealer when the vehicle was delivered to the dealership. Therefore, any work done by the dealer after that point was done on a vehicle which was owned by the dealer itself, and not by Ford Canada. The “Predelivery Service” clause in the Sales and Service Agreement clearly related the performance of preparation and conditioning work to the preparation of a vehicle for delivery by the dealer. It did not specify that the work performed by the dealer was to be done on behalf of Ford Canada. While Ford Canada maintained an interest in ensuring retail customer satisfaction, the fact remains that no “agency-type” arrangement existed between Ford Canada and the dealers for the performance of the work.

(3) The work was not done in preparation for sale. On the facts of this case, the dealers became the owners of the imported vehicles as soon as they arrived at the dealerships and so they could not have been performing the preparation and conditioning work for the purpose of sale, as that term is used in the paragraph. The Trial Judge erred in interpreting the word “sale”, as found in paragraph 2(1)(f), as referring to a retail sale. Clearly, the focal point of the taxing provision (27(1)(a)) was the sale by the manufacturer or producer.

(4) The retail store exception was not examined.

In view of the above findings, it was not necessary to consider whether Ford Canada, as manufacturer, continued to be entitled to this exclusion, or whether the refund sought by Ford Canada was required to be reduced by the amount of sales tax applicable to the freight costs incurred in shipping the vehicles from the U.S.A. to the Canadian Ford dealerships.

The Minister did not exercise his discretion improperly in rejecting Ford Canada’s application. Action taken pursuant to a broad statutory power must be exercised reasonably: Regional Trust Co. v. Canada (Superintendent of Insurance), [1987] 2 F.C. 271 (C.A.). The application was given full and fair consideration on behalf of the Minister. It was reasonably open to the Deputy Minister to conclude that the application should be rejected on the ground that it would reduce the revenue flowing to the federal treasury. There was no basis on which the Court could interfere with that decision. Finally, the Minister’s treatment of other importers (Chrysler Canada and American Motors Canada) under the Act was irrelevant to evaluating the Minister’s exercise of discretion in this case. A taxpayer must prove that it meets the requirements of the legislation on its own terms.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

An Act to amend the Excise Tax Act and the Excise Act and to provide for a revenue tax in respect of petroleum and gas, S.C. 1980-81-82-83, c. 68.

Excise Tax Act, R.S.C. 1970, c. E-13, ss. 2(1)(f) (as am. by S.C. 1980-81-82-83, c. 68, s. 1; 1985, c. 3, s. 1) “manufacturer or producer”, (4) (as am. by S.C. 1980-81-82-83, c. 68, s. 1), 26(6) (as am. idem , s. 8), 26.1(1) (as enacted idem, s. 9), 27(1)(a).

Excise Tax Act, R.S.C., 1985, c. E-15, s. 81.19 (as enacted by R.S.C., 1985 (2nd Supp.), c. 7, s. 38).

Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1.

CASES JUDICIALLY CONSIDERED

APPLIED:

Hawkes et al. v. The Queen (1996), 97 DTC 5060 (F.C.A.); Tee-Comm Electronics Inc. v. Minister of National Revenue, [1995] C.I.T.T. No. 24 (QL); Smed Manufacturing Inc. v. Minister of National Revenue, [1994] C.I.T.T. No. 84 (QL); Roberts v. Hopwood, [1925] A.C. 578 (H.L.); Regional Trust Co. v. Canada (Superintendent of Insurance), [1987] 2 F.C. 271 (1987), 34 D.L.R. (4th) 432; 72 N.R. 194 (C.A.); Ford Motors Co. of Canada v. M.N.R., [1991] F.C.J. No. 410 (T.D.) (QL); Harvey C. Smith Drugs Ltd. v. Canada, [1995] 1 C.T.C. 143; (1994), 95 DTC 5026; 178 N.R. 34 (F.C.A.).

CONSIDERED:

Fiat Auto Canada Ltd v The Queen, [1983] CTC 432 (F.C.T.D.).

REFERRED TO:

The Queen v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140; (1967), 65 D.L.R. (2d) 449; [1968] C.T.C. 44; 68 DTC 5001; Sunbeam Corp. (Canada) Ltd. v. Canada, [1994] 1 C.T.C. 294; (1993), 71 F.T.R. 199 (F.C.T.D.).

AUTHORS CITED

Canada. Department of Finance. Budget Papers. Notices of Ways and Means Motions and Supplementary Information on the Budget, October 28, 1980.

APPEAL from a Trial Division decision ((1994), 85 F.T.R. 116 (T.D.)) finding that the preparation and conditioning performed by Ford Canada dealers on imported vehicles qualified Ford Canada as manufacturer or producer within the meaning of paragraph 2(1)(f) of the Excise Tax Act. Appeal allowed.

COUNSEL:

Michael F. Ciavaglia, Edward Livingstone for appellant (defendant).

Joe W. Mik, Lisa S. Corne for respondent (plaintiff).

SOLICITORS:

Deputy Attorney General of Canada for appellant (defendant).

Blake, Cassels & Graydon, Toronto, for respondent (plaintiff).

The following are the reasons for judgment rendered in English by

Linden and McDonald JJ.A.: The issue in this appeal is whether Ford Motor Company of Canada, Limited (Ford Canada) ought to have been included in the expanded definition of “manufacturer or producer” in paragraph 2(1)(f) of the Excise Tax Act[1] (the Act) for the purposes of determining the tax payable on its imported vehicles. Paragraph 2(1)(f) provided:

2. (1) In this Act

…

“manufacturer or producer” includes

…

(f) any person who, by himself or through another person acting for him, assembles, blends, mixes, cuts to size, dilutes, bottles, packages, repackages or otherwise prepares goods for sale, other than a person who so prepares goods in a retail store for sale in that store exclusively and directly to consumers.

Subsection 2(4) [as am. idem] of the Act further specified:

2. …

(4) For the purposes of this Act, goods imported by a person referred to in paragraph (f) of the definition “manufacturer or producer” in subsection (1) that are, in Canada, assembled, blended, mixed, cut to size, diluted, bottled, packaged, repackaged or otherwise prepared for sale by or on behalf of that person shall be deemed to be goods produced or manufactured in Canada and not imported goods.

Effective January 1, 1981, the definition of “manufacturer or producer” in the Act was expanded to include what are generally referred to as “marginal manufacturers”.[2] The amendment was intended to rectify what the government perceived to be an inequity resulting from different points of taxation for importers and domestic manufacturers.[3] Prior to the amendment, importers paid tax on the basis of the duty paid value of the goods, and were not subject to tax for any work done on the goods once they were imported into Canada. Domestic manufacturers who often performed all of the work themselves, however, paid tax on the basis of the sale price of manufactured goods, and were unable to escape tax on any value added from finishing-off work performed in preparation for sale. The discriminatory effects of this inequity, according to the Budget Papers which introduced the amendment, were twofold:[4]

First, it discriminates against manufacturers who perform these activities themselves, as opposed to others who sell their goods in bulk or unassembled or unpackaged form. Second, it puts domestic producers at a competitive disadvantage relative to importers, as the practice of marginal manufacturing is more prevalent in the case of imported goods.

At the time the amendment came into effect, Ford Canada was importing cars and light trucks (vehicles) from its U.S. parent to Ford dealerships in Canada. A term of the sale agreement between Ford Canada and each of the dealers was that the vehicles would be delivered to the dealers with “preparation and conditioning” work outstanding.[5] This work was to be performed by each dealer after delivery but prior to resale. The vehicle base price included the cost of “preparation and conditioning” for which Ford Canada reimbursed the dealers for the work done at a standardized rate. The nature of the work to be performed was itemized on a standard checklist called a “Pre-Delivery Service Record” and included such things as an under the hood check, body check, chassis check, road test, appearance check and installation of any loose shipped items such as fog lights, antennas, CB mikes, cigarette lighters, door mats, hub caps and wheel covers, license plate frames, luggage racks, and rear step bumpers.[6] Ford Canada was paying sales tax on these imported vehicles on the basis of the duty paid value. Due to the high rate of exchange between Canada and the U.S. at that time, the amount of tax on the sale price of imported goods in Canada would have been significantly less than the amount of tax calculated on the basis of the duty paid value.

In advance submissions to the Department of Revenue, Ford Canada took the position that it ought to have been included within the amended paragraph 2(1)(f), with the effect that it ought to have been able to take advantage of the lower sale price for the calculation of sales tax.[7] Ultimately, by letter dated April 7, 1981, Revenue Canada responded to this request by stating that Ford Canada was exempted from the definition of “manufacturer or producer” because the dealers who were performing the work were operating retail stores.[8] Following this, by letter dated September 22, 1981, Ford Canada applied to the Deputy Minister, Customs and Excise, Revenue Canada, pursuant to subsection 26.1(1) [as enacted by S.C. 1980-81-82-83, c. 68, s. 9] of the Act to be considered as the manufacturer or producer of its imported vehicles on the basis that they were of the same type as those manufactured by it in Canada.[9] This application was rejected by Revenue Canada.[10] As a result, Ford Canada paid the sales tax on its imported vehicles in accordance with the position taken by Revenue Canada, but later filed refund claims for the extra amount it says it paid on 366,000 vehicles imported between January 1, 1981, when the amendment became effective, and February 29, 1984, when paragraph 2(1)(f) was again amended.[11]

Decision of the Trial Judge

The Trial Judge [(1994), 85 F.T.R. 116, at page 142] held in favour of Ford Canada and declared that “Ford Canada is the manufacturer of all passenger vehicles and light trucks imported by it from the United States between January 1, 1981 and February 29, 1984, that were sold by it to Ford Canada dealers and on which preparation and conditioning was performed by those dealers prior to delivery of the vehicles to retail customers”.

The Trial Judge found that [at page 136], although the tasks performed as “preparation and conditioning” were “not extensive, including as they did the installation of hubcaps, cigarette lighters, radio antennas and, in a much more limited range of cases, luggage racks, rear-step bumpers and `performance equipment’… the other inspections, adjustments, alterations and tests performed in the preparation and conditioning process clearly amounted to a meaningful step in the preparation of the vehicles for sale”.

He also decided that the work was done on behalf of Ford Canada, which, he felt, mandated the work to be done in detail and indirectly monitored the work through early post-delivery warranty claims. Further, he reasoned, preparation and conditioning was included as a cost in the invoice price to dealers, who were ultimately reimbursed for the work done.

The Trial Judge found, moreover, that the Ford dealerships were not retail stores, so that Ford Canada was not subject to the exclusion in the amended definition on this basis. He found as fact that the new car showroom comprised only a small part of the dealership facilities in relation to used car sales, parts sales and service, and was not the dominant revenue-producing element of the dealership. In arriving at this conclusion, the Trial Judge also referred to the fact that the public did not have access to the parts or service department of the dealerships.

The Trial Judge rejected Ford Canada’s submission that its application pursuant to subsection 26.1(1) of the Act, which allows a licensed manufacturer under paragraph 2(1)(f) of the Act to have all other goods it sells treated as the same class of goods which it prepares for sale was unfairly dealt with. He found that no criteria existed to guide the Minister in responding to such an application. Further, he concluded that there was no evidence to suggest that the application was not fairly considered. The Trial Judge reasoned that it was open to the Minister to [at page 140] “reject the application on the grounds that it would reduce the revenue flowing to the federal treasury”.

Finally, and contrary to the submissions of the appellant, the Trial Judge found that the cost of transporting the imported vehicles to the dealerships was a cost incurred in delivery of the goods, and not a cost of manufacturing the goods. The costs were at all times treated as “outward freight” and were recorded as a separate price on the vehicle invoice. As a result, the Trial Judge concluded that subsection 26(6) [as am. by S.C. 1980-81-82-83, c. 68, s. 8] of the Act ought to be applied to the transportation costs and permitted them to be excluded for the purposes of determining the sales tax payable under the Act.

The Issues on Appeal

In order to qualify within the expanded definition of “manufacturer or producer”, Ford Canada must succeed on four points. It must first prove that the preparation and conditioning performed by the Ford dealers fits within the phrase “or otherwise prepares goods” and can therefore be treated as manufacturing on that basis. Second, it must demonstrate that the preparation and conditioning was performed by the dealer on behalf of Ford Canada.[12] Third, Ford Canada must show that the work performed by the dealers prepared the goods for sale. Fourth, and finally, it must prove that Ford Canada is not excluded from the expanded definition by virtue of the fact that the work is performed in a “retail store for sale in that store exclusively and directly to consumers”.

If Ford Canada is successful on each of these points, the Minister takes the position that the respondent should not have been able to deduct the cost of transporting the vehicles to the dealerships from the sum on which tax payable is calculated and that the refund claim ought to be reduced by the sales tax applicable to those freight costs.

If Ford Canada is unsuccessful on any of the first four points, however, it argues in cross-appeal that the Minister acted unfairly in denying Ford Canada’s subsection 26.1(1) application to be considered as a manufacturer of all vehicles of the same class as it prepares for sale as described in paragraph 2(1)(f).

Analysis

For the reasons which follow, we find that this appeal should be allowed. We shall deal with each of the four components of paragraph 2(1)(f) in turn.

(1) Is Ford Canada a manufacturer of its imported vehicles?

(i) Did the work performed by Ford dealers constitute manufacturing or producing pursuant to paragraph 2(1)(f)?

The appellant has taken the position that the work performed by Ford dealers does not constitute manufacturing or producing as contemplated by paragraph 2(1)(f). In support of this proposition, the appellant urges that this Court interpret the term “manufacture” according to its everyday meaning. In the appellant’s submission, the activities undertaken by the Canadian dealers must have effected some change in the form, quality and/or properties of the vehicles in order for these goods to be properly considered to have been manufactured in Canada. Further, the vehicles are finished goods when they leave the United States, and are thus not subject to further manufacturing or producing in Canada. The activities undertaken by the dealer in Canada amount to minor installations and adjustments and are not sufficient to enable the taxpayer to claim that it was manufacturing.

In response, Ford Canada has taken the position that the wording of paragraph 2(1)(f) should be broadly construed. In other words, the intent of paragraph 2(1)(f) is to expand the ordinary scope of the term “manufacture”. In support of this proposition, the respondent directed the Court’s attention to several Revenue Canada memoranda as well as rulings issued to Chrysler Canada and American Motors. These documents lend support to the proposition that Revenue Canada viewed the activities of the dealer after delivery of the imported vehicles as manufacturing.

It is trite law that Revenue Canada memoranda are not binding on this Court. Further, Revenue Canada is neither estopped from proceeding nor bound to proceed in a certain manner by virtue of its treatment of similarly-situated taxpayers.[13] Thus, while the memoranda and rulings are instructive, they are not determinative of the issue.

The respondent seeks to have its activities included in the phase “or otherwise prepares goods” for sale. In our view, the work performed by Ford dealers does not constitute manufacturing or producing pursuant to paragraph 2(1)(f), as the work is almost entirely cosmetic and of a minor nature. It could not have been Parliament’s intent that work as minor as that undertaken by the dealers in this case could be considered manufacturing, even giving that term its widest interpretation.

This Court had occasion to consider what constituted manufacturing, albeit under a provision of the Income Tax Act [R.S.C., 1985 (5th Supp.), c. 1], in Harvey C. Smith Drugs Ltd. v. Canada.[14] In that case, a pharmacist sought to be considered a manufacturer on the grounds that he was manufacturing or processing goods. The pharmacist was engaging in activities such as sorting pills, repackaging in smaller bottles with safety caps, and printing labels. Desjardins J.A., speaking for the Court, held that these activities did not constitute manufacturing or processing. In her view, in order for a good to be considered “manufactured” by an individual, it had to be given new form, qualities, or properties by the activities of that individual. This approach is consistent with that of the Supreme Court of Canada in The Queen v. York Marble, Tile and Terrazzo Limited.[15]

The wording of the Income Tax Act provision in Harvey C. Smith was certainly narrower than that of the provision of the Act under consideration in this case. That having been said, we note that paragraph 2(1)(f) appears under the heading “manufacturer or producer.” As a simple matter of statutory interpretation, the heading must be instructive as to the scope of the paragraph. The ordinary meaning of “manufacture” cannot be stretched beyond the point of recognition.

Both parties have referred the Court to Fiat Auto Canada Ltd v The Queen.[16] In that case, the Court determined that the addition of radios to automobiles did not constitute manufacturing pursuant to paragraph 2(1)(f). In reaching this conclusion, the Trial Judge applied the ejusdem generis principle and interpreted the words “or otherwise prepares goods for sale” in the context of the preceding list of activities. He concluded in that case that the installation of radios did not fall within the types of tasks to which the provision refers.

In the case at bar, the Ford dealers undertook a variety of activities which, in our view, cannot be considered to be within the scope of paragraph 2(1)(f). Despite the somewhat broader language of paragraph 2(1)(f), we cannot agree that it encompasses activities such as those undertaken in this case. Applying the ejusdem generis principle, the activities of the Canadian dealers cannot be considered to fall within the intended scope of paragraph 2(1)(f).

(ii)        Was the work done on behalf of Ford Canada?

The appellant argues that the preparation and conditioning performed by Ford dealers could not have been done on Ford Canada’s behalf because no agency relationship existed between Ford Canada and the dealers. Rather, the transactions between Ford Canada and the dealers were sales pursuant to agreements which explicitly stated that the dealers did not act on behalf of Ford Canada. The appellant also relies on the fact that sale of the imported vehicles to the dealers occurred at the point when the vehicles were delivered to the dealerships. As a result, any preparation and conditioning was performed after the sale had been completed, and could not have been performed on behalf of Ford Canada.

The respondent submits that work specified by Ford Canada, which is contractually mandated as a term of sale and which is reimbursed by Ford Canada, is work which is done on behalf of Ford Canada. The respondent further submits that Ford Canada had a vital interest in ensuring that the preparation and conditioning was done to uniform and precise standards, and that it was able to monitor dealers’ compliance with those standards through early post-delivery warranty claims. As evidence of the inconsistency of the Minister’s current position, the respondent also points to a December 6, 1977 ruling by Revenue Canada in which it held to the effect that preparation and conditioning performed by the dealers on Ford Canada’s domestic vehicles was done on Ford Canada’s behalf.

Although it is not necessary for us to deal with this issue, we are in agreement with the submissions of the appellant on this issue. While Ford Canada undoubtedly had an interest in ensuring that its cars were subsequently resold to consumers in a well-finished state, this interest did not override the legal nature of the relationship between Ford Canada and its dealers, which was clearly one of sale rather than agency.

The fact that the work performed by Ford dealers was not done on behalf of Ford Canada as manufacturer, but rather in preparation for sale by Ford dealers to consumers is evidenced by a number of factors. First, the Sales and Service Agreement explicitly stipulates that there was no agency relationship between Ford Canada and the dealer:[17]

14. This agreement does not in any way create the relationship of principal and agent between the Company and the Dealer and under no circumstances shall the Dealer be considered to be an agent of the Company. The Dealer shall not act or attempt to act, or represent himself, directly or by implication, as agent of the Company or in any manner assume or create any obligation on behalf of or in the name of the Company.

Although such a declaration of intention in a provision such as this is not binding on the Court, it is evidence of the relationship which the parties to the contract intended to create. In this case, it indicates to the Court a clear desire to ensure that Ford dealers were not mistaken as being entitled to act on behalf of Ford Canada. In the face of this clearly worded provision, the respondent’s submission that the preparation and conditioning was nonetheless performed on behalf of Ford Canada rings hollow.

Second, the transfer of title of a vehicle occurred between Ford Canada and the dealer at the point where the vehicle was actually delivered to the dealership. Due to the impossibility of determining the exact point at which a vehicle would arrive at a dealership, however, for accounting purposes, Ford Canada recorded sales on the basis of an estimated “transit time allowance”, which attempted to approximate the actual delivery time. This is outlined in a letter setting out the “Revised Vehicle Terms of Sale”, dated March 16, 1979, which provides as follows:[18]

1. Legally the point of sale or commencement of the consignment period between the Company and you will occur when the vehicles are actually delivered to you or to your designated shipment location.

2. Because there is no practical method for us to determine the actual delivery date of every vehicle as it occurs on an ongoing basis, the sale or commencement of the consignment period will be recorded for accounting purposes based on an estimated transit time allowance. This estimated transit time allowance is already used for establishing the payment due date from your finance source.

Consequently, despite the fact that a sale may have been recorded for accounting purposes as occurring after the delivery of a vehicle to the dealership, as the letter sets out, the dealer became the legal owner of the vehicle when it actually arrived at the dealership. The significance of this fact is that any work done by the dealer after that point was done on a vehicle which was owned by the dealer itself, and not by Ford Canada. It is contrary to the plain meaning of the phrase to suggest that the preparation and conditioning was done “on behalf of” Ford Canada, despite the fact that it was no longer the legal owner of the vehicle. This conclusion is consistent with the position taken by Revenue Canada that “[g]oods are produced on behalf of another person where that person owns or controls the goods being packaged, bottled, assembled, etc.”.[19] Such is not the case here.

Third, the Ford Motor Company of Canada, Limited Dealer Sales and Service Agreement (the Sales and Service Agreement) specified, under the heading “Responsibilities with Respect to Service”, as follows:[20]

4.(a) Predelivery Service. The Dealer shall perform or be responsible for the performance of such inspection, conditioning and repair of each VEHICLE before delivery as may be prescribed for such VEHICLE in the Company’s applicable predelivery inspection and conditioning schedules furnished by the Company to the Dealer. The Dealer shall maintain or be responsible for the maintenance of adequate records of all predelivery inspection, conditioning and repair work performed by or for the Dealer.

This clause clearly related the performance of preparation and conditioning work to the preparation of a vehicle for delivery by the dealer. It did not specify that the work performed by the dealer was to be done on behalf of Ford Canada. This could not be because the sale between Ford Canada and the dealer had already occurred by the time the dealer began preparation and conditioning work on the vehicle, which was being done for itself, and not Ford Canada.

The respondent, in its argument, has referred to a December 6, 1977 ruling issued by Revenue Canada in which it held that Ford Canada was not entitled to receive a deduction in its sales tax for credits issued to its dealers for preparation and conditioning work performed by them on domestically manufactured vehicles.[21] The respondent has submitted that the Minister’s current position, when compared to his position on work performed by Ford dealers on domestically manufactured vehicles, is inconsistent with this 1977 ruling. In our view, however, the 1977 ruling and the Minister’s current position cannot be compared in the manner which the respondent has suggested. The 1977 ruling characterized the work performed by dealers on domestically manufactured vehicles. The Minister’s current position, however, addresses Ford Canada as importer, not as domestic manufacturer, and is meant to fulfil a specific legislative objective aimed at reconciling the differing characteristics of importers and domestic manufacturers. The different contexts in which each of these positions is rooted makes comparison of them inapt.

For these reasons, we conclude that, while Ford Canada certainly maintained an interest in the sale of Ford vehicles by dealers to retail consumers, the fact remains that no “agency-type” arrangement existed between Ford Canada and the dealers for the performance of the work. Instead, the work was performed by each dealer with a view to increasing the number and quality of its own retail sales. Ford Canada’s input into the preparation and conditioning process was a function of its interest in ensuring retail customer satisfaction. It did not, however, result in the work being performed by the Ford dealers on behalf of Ford Canada.

(iii)       Was the work done in preparation for sale?

Although it is not necessary for us to do so, we shall now consider the third issue of whether the work was performed in preparation for sale.

The appellant argues that the work performed by the dealers also fails to satisfy the requirements of paragraph 2(1)(f), particularly the words “for sale”, by virtue of the fact that it was performed on goods which had already been sold. The intent of paragraph 2(1)(f), it is submitted, is to include only that work which was done on goods which were intended to be sold in the future. The word “sale” as found in paragraph 2(1)(f) refers to the sale by the manufacturer. In this respect, it is argued that the Trial Judge erred in interpreting the word “sale” as found in paragraph 2(1)(f) to mean the sale of vehicles by the dealers to retail purchasers. The appellant relies on two decisions of the Canadian International Trade Tribunal, Tee-Comm Electronics Inc. v. Minister of National Revenue[22], and Smed Manufacturing Inc. v. Minister of National Revenue.[23] In both of these decisions, the Tribunal found that the combining or repackaging of parts in order to fill orders already made could not constitute preparation of goods for sale, as the goods in these cases had already been sold.[24] On the facts of this case, it is submitted that the dealers became the owners of the imported vehicles as soon as they arrived at the dealerships and so they could not have been performing the preparation and conditioning work for the purposes of sale, as that term is used in the paragraph.

We are persuaded by these submissions, and agree that the Trial Judge appears to have interpreted the word “sale”, as found in paragraph 2(1)(f), as referring to a retail sale. Such an interpretation cannot be supported in the context of a scheme which is designed to assess the tax payable upon sale by a manufacturer or marginal manufacturer, but not a retailer. Briefly, Part V of the Act imposes a sale or consumption tax on producers, manufacturers, importers and licensed wholesalers. Within that Part, section 27 determines the rate at which tax will be assessed. It also determines the point at which tax will be assessed depending on whether the goods at issue have been produced or manufactured, imported or sold by a licensed wholesaler.

Pursuant to paragraph 27(1)(a), a sales tax of nine per cent is imposed on the sale price of all goods produced or manufactured in Canada which was payable 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”. Clearly, the focal point of the taxing provision was the sale by the manufacturer or producer. In this case, the sale by Ford Canada occurred at the moment a vehicle arrived at the dealership. Any work performed after that point could not possibly be in preparation for sale by the manufacturer, even though, in some cases, the “transit time allowance” used to determine the transfer of title for accounting purposes may not have expired. Simply because Ford Canada submits that the dealerships are engaged in marginal manufacturing on its behalf does not mean that the sale which is relevant to the assessment of tax payable has changed. The relevant sale remains the sale by the manufacturer, not the retail sale.

Evidence adduced at trial from various dealers is useful in describing how the “preparation and conditioning” was done with a view to the retail sale of a vehicle. One dealer stated:[25]

[T]he pre-delivery inspection is an after-sale …. the process starts with selling a new vehicle, one of our franchise vehicles to a retail customers or a fleet customer. At that time, a work order is processed and it goes to the pre-delivery department.

Another dealer commented that, although “the best time to do a pre-delivery inspection is as soon as you get the car”, this is because:[26]

[I]n our business, there is a lot of impulse. A customer comes in and looks at the vehicle. If it has not been PDI’d, it has no wheel covers, there are stickers on the window, sometimes it needs those door adjustments that we mentioned, so what we do is as soon as a car is delivered, that night or that day, the clerk that books the car in writes a pre-delivery inspection order.

The purpose of “preparation and conditioning”, according to this testimony, is clearly directed at securing retail sales. Indeed, we do not see how it could have been for any other purpose once it is established that the sale by Ford Canada to the dealer had already taken place. In this respect, the decisions of Tee-Comm and Smed Manufacturing, as cited by the appellant, are similar. In each case, the preparation of goods which have already been sold cannot qualify as manufacturing or producing for sale pursuant to paragraph 2(1)(f).

(iv) Whether the dealers were engaged in preparation of goods in a retail store for sale exclusively and directly to consumers:

As stated at the outset, in order to characterize itself as a “manufacturer or producer” of its imported vehicles, Ford Canada must succeed on each of the four issues raised by the amended definition. Having failed to convince us that the work performed by the dealers was manufacturing done on behalf of Ford Canada in preparation for sale, it is not necessary for us to consider whether, if it had been successful in doing so, Ford Canada would nonetheless be excluded from the definition of “manufacturer or producer” by virtue of the “retail store” exception.

(2) Was Ford Canada entitled to deduct its freight costs in computing tax payable?

Subsection 26(6) of the Act provides:[27]

26. …

(6) For the purpose of determining the consumption or sales tax payable under this Part,

…

(c) in calculating the sale price of goods manufactured or produced in Canada, there may be excluded

…

(ii) under such circumstances as the Governor in Council may, by regulation, prescribe, an amount representing

…

(B) the cost of transportation of the goods incurred by the manufacturer or producer in delivering the goods from his premises to the purchaser where the goods are sold at a price that includes delivery to the purchaser,

determined in such manner as the Governor in Council may, by regulation, prescribe.

In light of our finding regarding Ford Canada’s failure to fit within the term “manufacturer or producer” as defined in paragraph 2(1)(f), it is not necessary to consider whether Ford Canada as manufacturer continued to be entitled to this exclusion, or whether the refund sought by Ford Canada was required to be reduced by the amount of sales tax applicable to the freight costs incurred in shipping the vehicles from the U.S. to the Canadian Ford dealerships.

(3) Ford Canada’s application pursuant to subsection 26.1(1):

We shall now consider the issue raised in the cross-appeal, that is, whether the Minister exercised his discretion properly in rejecting Ford Canada’s application.

Subsection 26.1(1) of the Act provides as follows:

26.1 (1) Any person referred to in paragraph (f) of the definition “manufacturer or producer” in subsection 2(1) who is a licensed manufacturer may make an application in writing to the Minister to be considered, for the purposes of this Act, as the manufacturer or producer of all other goods (in this section referred to as “similar goods”) he sells that are of the same class as the goods he prepares for sale as described in that paragraph.

…

(3) On receiving an application, the Minister shall decide whether to approve or reject the application and shall send to the applicant a notice in writing setting forth his decision and, where the Minister approves the application, the date on and after which the approval is effective.

To begin, Ford Canada was entitled to make an application pursuant to subsection 26.1(1), as it is a licensed manufacturer and, by virtue of its Canadian assembly plants, a person referred to in paragraph 2(1)(f). Resolution of this issue turns instead on whether the standard for the proper exercise of discretion was met by the Minister in refusing Ford Canada’s application pursuant to subsection 26.1(1). The content of the standard against which the decision of the Minister ought to be measured, with the exception of the relevance of the Minister’s treatment of other taxpayers, is not seriously disputed by the parties. It is perhaps most clearly expressed in the House of Lords decision Roberts v. Hopwood:[28]

A person in whom is vested a discretion must exercise his discretion upon reasonable grounds. A discretion does not empower a man to do what he likes merely because he is minded to do so—he must in the exercise of his discretion do not what he likes but what he ought. In other words, he must, by use of his reason, ascertain and follow the course which reason directs. He must act reasonably.

This standard for the exercise of discretion has been adopted by this Court in Regional Trust Co. v. Canada (Superintendent of Insurance).[29] In that case, Stone J.A. held that “the principle that action taken pursuant to a broad statutory power must be exercised reasonably is well-established on high authority”.[30] The parties do, however, disagree on the role to be served by subsection 26.1(1) in the context of the overall purposes of the legislation, and thus on whether the standard has been met in this case.

The cross-appellant (respondent) submits that by basing its decision on the ground of revenue generation, the Minister limited his discretion in a manner which was unjustified by the object and purpose of the amended legislation. There is no mention in the wording of subsection 26.1(1) that discretion is only to be exercised where it would result in a higher tax paid. To cite revenue generation as the basis for its decision, it is submitted, resulted in unfair discrimination between Ford Canada and other car manufacturers. In contrast, the Minister characterizes the objective of subsection 26.1(1) as being to respond to administrative difficulties arising for Canadian manufacturers who produce goods in Canada and also import similar goods. In this case, to treat Ford Canada as the manufacturer of its imported goods would have resulted in calculating Ford Canada’s sales tax on the basis of the temporarily lower domestic sale price, which would have been an unintended effect of the amended legislation. As a result, it is argued that the Minister was within his discretionary power to deny this unintended effect via subsection 26.1(1). On this issue, the Trial Judge found as follows [at page 140]:

On receipt of Ford Canada’s application, the Minister was empowered to decide whether to approve or reject the application. No criteria were provided by Parliament to guide the Minister in the decision as to whether to approve or reject such an application. On receipt of Ford Canada’s application, the evidence before me indicates that it was given full and fair consideration on behalf of the Minister. The Deputy Minister, acting on behalf of the Minister, concluded that he should reject the application on the grounds that it would reduce the revenue flowing to the federal treasury. I conclude that such a decision was reasonably open to him. I find no basis on which this Court should interfere with that decision.

We are in agreement with the reasons of the Trial Judge and wish to add only a few additional comments. In response to Ford Canada’s application, Revenue Canada explained the purpose of subsection 26.1(1) as follows:[31]

Section 26.1(1) of the Excise Tax Act was implemented to alleviate the administrative problems created when Canadian produced products were supplemented by importations. Some of the supplementary lines are sold directly as imported while others are “marginally manufactured”. This provision recognizes the difficulties such manufacturers would experience in maintaining segregated stocks and adequate records for audit purposes. Therefore, marginal manufacturers may be granted permission to account for tax on their entire line of goods on Canadian sale price. As you have stated in your letter, the granting of the licence under 26.1(1) should be optional, depending upon the intent of the legislation and the nature of the manufacturer’s operations.

Revenue Canada also provided specific reasons why Ford Canada’s application was rejected:[32]

As discussed with you and your colleagues, section 26 defines the base on which sales tax shall be levied and section 27 identifies those who are responsible for paying the tax. It is our interpretation that section 26.1(1) was not meant as a means of reducing the amount of tax required to be paid depending upon the type of license issued. After a great deal of discussion with officials and after receiving legal advice I have concluded that the intent of the legislation would not permit the Ford Motor Company of Canada to operate under the provisions of section 26.1(1) for imported vehicles as requested.

Ford Canada contends that it is an unfair exercise of the Minister’s discretion, in light of the object and purpose of the “marginal manufacturing” amendments, to refuse its application on the basis that subsection 26.1(1) “was not meant as a means of reducing the amount of tax required to be paid depending upon the type of license issued”. The crux of the cross-appellant’s complaint is that the reduction of tax payable is not a principled ground on which to deny its application in light of the fact that the purpose of the amended definition is to correct inequities of treatment between manufacturers and producers of similar products.

This submission, we believe, misinterprets the intended meaning of the Minister’s reply. The reference to using subsection 26.1(1) as a means of reducing tax payable was preceded by a discussion of the purpose for which subsection 26.1(1) was enacted, namely, as a mechanism for alleviating administrative problems in accounting for tax which would arise for manufacturers who sell some imports directly while others are marginally manufactured. The Minister is reasonably entitled to take the position that subsection 26.1(1) was not enacted to provide Ford Canada with a second chance to achieve a more advantageous tax position as a manufacturer of imported goods. Yet this is precisely the purpose for which the cross-appellant has attempted to use it, primarily by referring to the broad purposes for which paragraph 2(1)(f) was enacted, rather than the purposes which subsection 26.1(1) was designed to fill as an aid to the legislative amendments. It is in this context that the Minister is quite entitled to refuse to allow subsection 26.1(1) to be used as a “means of reducing the amount of tax required to be paid depending upon the type of license issued”.

Finally, we wish to comment on the issue of whether the Minister’s treatment of other importers under the Act is relevant to evaluating the Minister’s exercise of discretion in this case. The cross-appellant submits that the Minister’s failure to properly exercise his discretion is evidenced by his differential treatment of similarly situated importers such as Chrysler Canada and American Motors Canada in his administration of paragraph 2(1)(f). It argues that, pursuant to subsection 26.1(1), it was entitled to apply for similar treatment. The Minister’s refusal to treat Ford Canada in a manner similar to its competitors for tax purposes, it is submitted, is contrary to the purpose for which subsection 26.1(1) was enacted. The Minister argues in response that Ford Motors Co. of Canada v. M.N.R.[33] and Sunbeam Corp. (Canada) Ltd. v. Canada[34] stand for the proposition that the treatment of other taxpayers is of no relevance to the tax liability of Ford Canada.

Both Chrysler and American Motors were found by Revenue Canada to fit within paragraph 2(1)(f) as marginal manufacturers of their imported vehicles. According to the Trial Judge, however [at pages 125-126], “[t]he distinguishing feature … between Chrysler Canada’s and Ford Canada’s positions was that Chrysler Canada adapted to the new `marginal manufacturing’ rules, as interpreted by the defendant’s officials, by performing preparation and conditioning on passenger vehicles imported by it from the United States on its own premises and using its own employees. Thus, there could be no concern that preparation and conditioning was being done on behalf of Chrysler Canada in a retail store”. In response to this finding, we note first that it is difficult to classify Chrysler Canada as similarly situated to Ford Canada in light of this finding, particularly on the ground which we have decided this case. Second, and more importantly, we find that, whatever the similarities or dissimilarities between Ford Canada and its importing competitors, the Minister’s treatment of other taxpayers cannot be determinative of the tax liability of Ford Canada. The reasons which support this finding are amply expressed in the decision of the Associate Chief Justice on the interlocutory application in these proceedings [at pages 9-10 (QL)]:

The activities of other automotive manufacturers and the defendant’s treatment of those manufacturers is of no relevance to the plaintiff’s action. No matter how similar the activities of two businesses, if one company can frame its dispute in such a way as to make another company’s affairs relevant, the result would be chaos. In each individual case the plaintiff must prove that it meets the requirements of the legislation. Here, if the plaintiff establishes that its manufacturing activities fall within the definition in s. 2(1)(f), then it will be entitled to the consideration provided in s. 26.1 for “similar goods”. That entitlement does not flow from the fact that other automotive manufacturers have received it but rather from the fact that the plaintiff meets the requirements in the legislation.

We are in complete agreement that, as a matter of principle, a taxpayer must prove that it meets the requirements of the legislation on its own terms. Furthermore, the latter half of this passage echoes our concern, as articulated above, that what Ford Canada seeks to do in this cross-appeal is to secure indirectly what it failed to secure directly under paragraph 2(1)(f). The Minister’s tax treatment of its competitors cannot assist it in this endeavour.

For these reasons, we conclude that the Minister’s appeal should be allowed and the cross-appeal dismissed with costs, and the decision of the Trial Judge set aside. The respondent’s action in the Trial Division should be dismissed with costs.

Stone J.A.: I agree.

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