MCDOUGALL J. :—In this action, claim is made by the Dominion Government, under the provisions of the Special War Revenue Act, 1915 and amendments, for sales or consumption, and excise taxes upon certain goods, described as toilet articles and cosmetic preparations, manufactured by the defendants, and which were sold during the periods commencing May 1933 and ending July 1st, 1934 (as to the principal demand), and from July 1934 to May 1935 (as to the incidental demand.) The total amount sought to be recovered, including arrears of taxes and penalty interest, is $11,233.97. The amount so claimed represents the difference, with penalties added, between the tax payments made by the defendant Companies and the sum which the Department of National Revenue contends should have been paid had the defendants made true and faithful returns of their operations under the provisions of the relevant statutes.
At the outset, it may be well to point out that the action proceeds both by allegation and argument upon the basis of a collusive attempt on the part of the defendants to defeat the payment of the full taxes to which they are bound.
Paragraph 33 of the declaration leaves no doubt as to this. It reads:
"‘Les défenderesses ont conspiré entre elles et elles sont de connivence pour frustrer le Gouvernement de ses droits à la taxe de vente et à la taxe d’accise, et les prix fixés entre les défenderesses pour les marchandises qu’elles se sont vendues mutuellement, sont fictifs et ne représentent en aucune façon les prix réels des articles de toilette et des préparations cosmétiques vendus dans le commerce généralement.”
Again, in his argument, Counsel for plaintiff made the following statement, as noted by the Court:
All the circumstances open the door to suspicion leading to the presumption that the conduct of the defendants amounted to a conspiracy to avoid paying what was due.
Conspiracy, therefore, is the gravamen of the charge levelled against the defendants. It is conceded that if there has been no collusion, no illegal conspiracy to defraud the revenue, and that the transactions between the defendants have been honest and bona fide, the proper returns have been made and the full taxes have been paid. With the action so framed, it may not be amiss at once to state the guiding principle, in cases of this nature, by quoting the striking words of Lord Loreburn, in Sweeney v. Coote [1907] A.C., at p. 222:
“It is an action for conspiracy, and no other ground is relied upon. In such a proceeding it is necessary for the plaintiff to prove a design common to the defendant and to others, to damage the plaintiff, without just cause or excuse. That, at all events, it is necessary to prove. Now, a conclusion of that kind is not to be arrived at by a light conjecture; it must be plainly established. It may, like other conclusions, be established as a matter of inference from proved facts, but the point is not whether you can draw that particular inference, but whether the facts are such that they cannot fairly admit of any other inference being drawn from them.”
In the light of this authority, therefore, the facts brought forward in evidence must be scrutinized to determine whether the conduct of the defendants cannot fairly admit of any other interpretation than that it was actuated by intent to defraud and inspired by a desire to defeat the legitimate claims of the Government.
3- hi.
The defendant, J. T. Wait Co. Ld., is a manufacturer of and dealer in toilet articles and cosmetic preparations, carrying on business in Montreal, in premises, which it holds under lease, at No. 427 St. François Xavier Street. It was organized in 1928, and the defendant took over the then existing business of Stenhouse Ld.
The defendant, Crystal Products Company Ld., of Canada, was incorporated by Dominion Letters Patent on March 24th,
e
1932, as a subsidiary of a larger corporation, carrying on business
in the United States, and known as the Crystal Corporation of New York, engaged in a line of business similar to that carried on by the other defendant. Its products were well and
widely known under the trade-name of ‘‘Outdoor Girl.’’ From 1 widely known under the trade-name of “Outdoor Girl.” From
similarity of interest the Canadian Company so formed, through its American officials, arranged that operations should be carried on in the local premises of J. T. Wait Co. Ld. During the year 1932, Crystal Products Co Ld., of Canada, sold its products in Canada through the Wait Co., but later, early in 1933, for a few months, the Crystal Co. manufactured its products in the ‘ premises of the Wait Co. chiefly the toilet articles known under the trade-name in question. It is clearly in evidence that the two corporations were entirely separate and distinct. There was no interlocking directorate, nor does it appear that either company held any financial or directive interest in the other. The J. T. Wait Co. received a fixed sum of money per month for the facilities which it afforded to the other company. Having much in common, frequent meetings took place between the officials of both companies and Mr. J. T. Wait, of the J. T. Wait Co. Ld., from his experience in the trade, exercised a supervisory role in the activities of the Crystal Co. He was interested in doing so by reason of a selling commission which his company
received 6 received upon sales of the Crystal products. The Crystal Co.
thus manufactured its goods in Montreal for some few months. During this time, however, the two defendants were in frequent treaty as to a possible change in the method of carrying on these operations, to ensure better results. It was thought that a larger volume of business could be done, with more uniform distribution, were the goods to be manufactured by the Wait Co. for the Crystal Co. Finally, it was decided that this course should be adopted, and, beginning in July 1933, the Wait Co. began the regular manufacture of the Crystal Company’s products in Montreal. Previous to this time, beginning May 25th, 1933, on certain specified orders, the Wait Co. had made up goods for Crystal. The agreement covering this change was not reduced to writing until January 25th, 1934, but, as far as the
record goes, the change went into effect in July 1933. The stock of finished material then on hand with Crystal Co. was sold to the Wait Co. and the goods, when manufactured, were invoiced to the former company. Under an agreement entered into, in writing, at the same time, January 25th, 1934, but which had been in operation verbally for some considerable time, the Wait Co. continued to act as the selling agents, upon a commission basis, for the Crystal Co.
As will be seen from the voluminous statements produced, it was this change which brought about the divergence in view as to the taxes payable. Up till July 1933, no complaint is made. The returns made by both companies and the taxes paid were accepted by the Department. Refusing to recognize that any change in the methods of production had, in fact, been effected, and insisting that the defendants had fictitiously set up such new method of operation as a subterfuge in order to avoid payment of taxes, the Department instructed that the returns must be made shewing the Crystal Co. still as a manufacturer and the sale price subject to taxation as the price at which such goods were sold to independent customers,—not, as contended by defendants, the wholesale or bulk price charged by the Wait Co. to the Crystal Co. as a free purchaser from the manufacturer. Stress is laid upon the unalleged fact that the Minister of National Revenue, in virtue of section 98 of the Act, Regulation No. 6, by a ruling issued on November 26th, 1934, declared that the taxes payable by defendants should be based upon the price at which the goods manufactured are sold to independent customers. Defendants were not advised of such ruling, and it can play little part in the determination of the controversy.
The focal point in the case may thus be resolved into the question: Who was the manufacturer of these goods as and from July 1st, 1933?
Section 86 of the Special War Revenue Act provides, in part, as to the sales or consumption tax:
“ “ 86. There shall be imposed, levied and collected a consumption or sales tax of eight per cent. on the sale price of all goods ;
a) produced or manufactured in Canada, payable by the producer or manufacturer at the time of delivery of such goods, to the purchaser thereof. ‘ ‘
The excise tax is covered by section 80 of the same Act and provides, in respect of goods of the category now under consideration (Schedule 1, par. 2 of Act) that a tax of ten per cent. shall be imposed, levied and collected upon goods— "‘manufactured or produced in Canada and sold — computed upon the duty paid, value, or the sale price, as the case may be. ‘ ‘ In defining the words ‘‘manufactured or produced in Canada,’’ subsection 7 of section 80, continues,
“shall be deemed to apply to any such articles, which are, in Canada, wrapped, packaged, put up in boxes, bottles or jars, or otherwise prepared for sale, and the tax hereby imposed, shall be levied and collected upon the price at which any such articles so prepared for sale are sold in Canada. ‘ ‘
J. T. Wait Co. Ld., at all material dates, held the manufacturing licence required by the Act. During the period of its manufacture, Crystal Products Co. Ld., of Canada, also held such licence. Apparently, however, without being requested to do so, for the year 1934-35, the Department issued a licence to the latter company, applying certain refunds due to the company in payment of the necessary fee, notwithstanding protests from the said company and the reiterated statement that they were no longer engaged in manufacturing.
As early as August 28th, 1933, the J. T. Wait Co. Ld. notified the Department that they had taken over the manufacture of the goods in question, previously manufactured by the Crystal Co. From the terms of this letter it would also appear that the Departmental Auditor, Mr. Thompson, had already been advised of the change, but that he insisted that the tax must be paid as theretofore, 1.e., on the selling price by the Crystal Co., because the labels and Jars shew the latter company as the manufacturers. Unconvinced as to the genuineness of the professed change, extended negotiations transpired between officials of the affected companies and the officers of the Department, terminated, for all practical purposes, by the Department’s telegrams of January 3rd and 4th, 1934. The telegram of January 3rd reads:
“Ottawa, January 3rd, 1934. J. T. Wait Co. Ltd.,
427 St. François Xavier St.,
Montreal, Que.
Retel Department regards Crystal Products as manufacturers or producers under provisions Section Eighty-six A and Section Ninety-nine of Special War Revenue Act. Regret if departmental action necessitates cancellation of contract but in fairness to competing Canadian manufacturers cannot give your Company preferential treatment.
H. D. SCULLY,
Commissioner of Excise.’’
The telegram of January 4th, merely adds the reference to section 98 of the Act.
In refusing to concede that the Crystal Co. was no longer a manufacturer, and intimating that there had been illegal connivance to have it so appear, the plaintiff relies upon the inferences which it contends must be drawn from the facts disclosed. In part, these are said to be:
a) The Companies were closely affiliated, occupied the same premises, were under the same direction and engaged in the same line of business.
There is no substance in fact to this argument. The Companies were separate, distinct legal entities and were free to conduct their business as they saw fit, provided no fraud was practised.
In circumstances revealing a much closer affiliation or relationship between two companies, Mr. Justice Maclean, in the Exchequer Court, in the case of The King v. B.C. Brick and Tile Co., November 29th, 1935( [19386] Ex. C.R. 71 at p. 74), refused to accede to the demand that the purchasing company, which paid a wholesale price for the goods, be held to pay upon the selling price to the consumer. His Lordship says, inter alia:
" 4 That the defendant company sells its entire annual output of bricks to the Victoria Company does not appear to me to be an irregular or unusual thing, or of itself suggestive of a concealed effort to defeat the revenue; in all the circumstances it was not unnatural to find the Victoria Company a willing customer of the defendant company. It would be going to dangerous limits to say, that because the officers and shareholders of the two companies were much the same, and because the companies had business relations the one with the other, that therefore the one was the mere agent of the other; there must, in my opinion, be a state of facts established outside that disclosed here, to make the defendant company liable for the sales tax on the basis of the price received by the Victoria Company, and not upon the price at which in fact the defendant company sold its bricks to the Victoria Company.”
b) Although the defendants pretend that the change in manufacture become effective by agreement in July 1933, it was only in January 1934 that this agreement was reduced to writing. It can be no mere coincidence, it is urged, that this date is after the Department notification by telegram of January 3rd.
The proof of the existence of such an agreement in 1933 has been made, and the Court can see no reason to find in the tardy writing which evidences it, any fraud on the part of the de- fendants. As above pointed out, the Department was advised of the existence of such arrangement at least as early as August 28th, 1933.
Bearing out the defendant’s contention that the question of manufacture by the Wait Company of Crystal Company products had been discussed early in 1933, Exhibit D-18 may be referred to. This is a letter, dated February 6th, 1933, dealing with the handling of Crystal Company’s business in Canada, in the way of supervision, receiving and shipping, invoicing, bookkeeping, and leasing of space in the Wait Company’s premises and defining the remuneration to be received for such services, as also the commissions to be paid, and containing a reference to discussions as to manufacture.
It is admitted that the arrangement consummated in 1933 was tentative in nature, until it should be ascertained whether the plan would work out profitably for both companies. Fraud is not to be presumed and the Court would require much firmer ground than the circumstances of a post-dated agreement to rest upon in reaching the conclusion that fraud had in fact been intended and practised.
c) The Wait Company acted as selling agents for the Crystal Company, kept its books, and assisted in the transaction of its business by receiving and depositing funds, supervising shipments and making certain limited payments for the latter.
The selling agreement had been in existence for a long period and was quite independent of the manufacturing features of the business. Whatever assistance the Wait Company furnished was paid for by the Crystal Company. There was no division of profits or sharing of losses between the two companies, and the Court is at a loss to find collusive action by the defendants from this point of view.
These and other acts attesting a somewhat close business association, such, for instance, as employment of some of the same individuals in the business enterprises of both companies, as also the use of labels of the Crystal Company, are urged as the grounds upon which the Court is asked to conclude that ‘‘the facts are such that they cannot fairly admit of any other inference being drawn from them.’’ (per Lord Loreburn, supra. )
But, it is clear to the Court that such conclusion does not necessarily or naturally follow. It must ever be borne in mind, as pointed out in many cases, that in all fiscal legislation :
1 " If the person sought to be taxed comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be; on the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.’’ Per Lord Cairns in Partington v. Attorney-General, L.R. 4 H.L. p. 100 at p. 122. (See also Versailles Sweets v. Attorney-General [1924] S.C.R. 466; Foss Lumber v. The King, 47 S.C.R. 130.)
It is equally clear in principle that statutes which encroach on the rights of the subjects, whether as regards persons or property, are subject to a strict construction.
As indicating the position taken by the Department and the considerations which influenced the institution of these proceedings, a citation from the evidence of Mr. V. C. Nauman, Assistant Commissioner of Excise, taken before trial, may be cited. At page 38 of his deposition, he voices his suspicions, as follows:
"‘I would think personally that one of the strongest grounds would be the fact that we found this Company paying taxes on the selling prices which we say are required under the Statute, from the inception of the cosmetic tax until July, 1933. We found them paying the sales tax on what we claim is a correct basis, until that date. Then, suddenly we find a division between them, and the tax is being paid on a different basis. ‘ ‘
The Court is in no doubt, under the influence of the authorities noted, that the plaintiff has not been successful in converting this suspicion of wrong-doing into a certainty that an illegal conspiracy was entered into between the defendants to frustrate the Government’s claim.
Subjected to investigation, the defendants freely gave the Departmental Auditor, Mr. Thompson, access to all their records and books. He readily concedes that such was the ease. and adds, in reply to a question, that he found no trace of any conspiracy or illegal connivance on the part of the defendants.
While the taxing authority may quite properly regard with disfavour the attempt of the taxpayer to bring himself outside the tax enactments, the Courts do not, in general, visit with condemnation his effort to alleviate the rigour of the tax burden imposed upon him. It is surely no discredit for a business man, fairly and honestly. to modify his method of operations in order to accomplish some measure of relief in his tax payments even though he be impelled thereto by tax consideration. See Hawker v. Compton 8 T.C. at p. 313, Sankey, J.—
• Hard things have been said about this partnership. I quite agree with what the learned Attorney-General said, which is this—I have said it. already twice this morning—that it is perfectly open for persons to evade this particular tax if they can do so legally. I again say I do not use the word "‘evade’’ with any dishonourable suggestion about it. If certain documents are drawn up, and the result of those documents is that persons are not liable to a particular duty, so much the better for them. ‘ ‘
See Dickenson v. Gross, 11 T.C. at p. 620, per Rowlatt, J.:
4 As I pointed out in the case Mr. Bremmer cited to me—and as has often been pointed out before—people can arrange their affairs, if they do really arrange them, so as to produce a state of facts in which the taxation is different, and it is no answer—it is perfectly immaterial—to say that they have done it for that purpose.”
See Levene v. Commissioners of Inland Revenue, 13 T.C., at p. 501, Viscount Sumner in the House of Lords:
“It is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements so that their cases may fall outside the scope of the taxing Acts. They incur no legal penalties and, strictly speaking, no moral censure, if, having considered the lines drawn by the Legislature for the imposition of taxes, they make it their business to walk outside them. ‘ ‘
On the whole, therefore, the Court is of opinion that the plaintiff, in his quality, has failed to shew that the Crystal Products Company Limited, of Canada, at material dates, was a manufacturer, or that any collusive conspiracy existed between the defendants to defeat the legitimate claims of the Government.
In this view of the case, it becomes unnecessary to consider the question raised by the defendants as to the status of the plaintiff, as described, to institute the present proceedings.
For which reasons :
Considering that the plaintiff has failed to establish the essential allegations of his action and incidental demand and that the defendants have made good their defences ;
The Court doth dismiss the plaintiff's action, as also the incidental demand, with the recommendation, usual in such cases, that the Crown, in the right of the Dominion of Canada, pay the defendants’ costs.
Action dismissed.