His Majesty the King, on the Information of the Attorney-General of Canada v. Dominion Engineering Company Limited,, [1943] CTC 5

ANGERS J.:—This is an information exhibited by the Attorney- General of Canada on behalf of His Majesty the King whereby it appears that the latter claims from the defendant the sum of $10,844.46 for sales tax, penalties as provided for by section 106 of the Special War Revenue Act (R.S.C. 1927), chapter 179, to the date of payment and costs.

The information alleges in substance that:

the defendant is a company incorporated under the provisions of the Companies Act (R.S.C. 1927, chapter 27) having its head office at the City of Lachine, Province of Quebec;

on or about June 5, 1937, at the City of Lachine aforesaid, the defendant entered into a contract with the Lake Sulphite Pulp Company Limited, a company incorporated under the laws of Ontario, whereby the defendant undertook to furnish to the latter certain goods manufactured in Canada by the defendant, namely one Dominion Pulp Drying Machine and accessories and spare parts therefor as specified in the said contract, for a total price of $488,335;

by the terms of the said contract the Lake Sulphite Pulp Company Limited undertook to pay the sale price to the defendant as follows: 9 monthly payments of $48,800. ech, commencing July 5, 1937, and continuing on the 5th day of each month thereafter until a total of $439,200. should have been paid, and the balance of $49,135. to be paid after the machine was placed in operation, but in no event later than six months from the date of final shipment or offer of shipment of the said machine, accessories and spare parts from the company’s works;

under the terms of the contract the property in the said goods was not to pass to the purchaser until all payments under the contract should be made;

the defendant had been granted a license as manufacturer pursuant to section 95 of the Special War Revenue Act and such license was in effect at all times material to the performance of the contract;

by the operation of section 86 of the Act the defendant became liable to pay sales tax at the rate of 8% on each instalment payable under the said contract at the time each of such instalments fell due and became payable; the defendant has made no payment on account of sales tax with respect to the instalments which fell due on January 5, February 5 and Merch 5, 1938, respectively, which payments should have been in the sum of $3,614.82 with respect to each of the instalments which fell due on the said dates and the defendant has omitted or refused to pay the said taxes; the total tax thus remaining unpaid is $10,844.64 (should be $10,844.46) ;

by the Special War Revenue Act all taxes or sums payable thereunder are recoverable at any time after the same ought to have been accounted for and paid as a debt to His Majesty in the Exchequer Court of Canada;

wherefore the Attorney-General claims the sum of $10,844.46 sales tax, the penalties provided for by section 106 of the Special War Revenue Act to the date of payment, such further relief as to this Court shall seem meet and the costs of the action.

In answer to the information the defendant says in substance as follows:

it admits the allegation concerning its incorporation and head office;

it admits that at all times material herein it has held a license as manufacturer under the provisions of the Special War Revenue Act;

it denies the other allegations of the information, execpt the one stating that in virtue of the contract the property in the goods was not to pass to the purchaser until all payments thereunder should be made, to which allegation no reference is made;

on or about June 5, 1937, it submitted to Lake Sulphite Pulp Company Limited a proposal to construct and supply to the latter one Dominion Pulp Drying Machine and spare parts, which said proposal was accepted on August 3, 1937;

the contract concluded bv said proposal and acceptance stipulated a total payment to the defendant of $488,335. being the price of said machine and spare parts and the cost of prepaying the freight on the same to Nipigon, Province of Ontario;

in said contract the defendant stipulated that the sum of $488,335. should be paid in nine monthly progress payments of $48,800. each commencing on July 5,1937, and continuing on the 5th day of each month thereafter until a total of $439,200. had been paid and that payment of the balance should be made after the machine was placed in operation, but in no event later than six months from the date of final shipment or offer of shipment of the apparatus from the company’s works;

the contract was made in the Province of Quebec and by its terms was to be wholly performed within said province;

by said contract the defendant undertook to proceed with the construction of the machine and parts so that final shipment might be made on or before March 5,1938, and the progress payments to be made were due and payable only as and when the construction of said machine and parts was carried on in compliance with that undertaking;

on or about January 5, 1938, the defendant was in arrears with the assembly of material and the shop work essential to the construction of the machine and parts and Lake Sulphite Pulp Company Limited refused to pay the progress payment which, had the progress schedule of the contract been adhered to, would have been payable on that date, and further refused to make any payment on February 5,1938, the defendant having failed to meet the progress schedule which would enable shipment to be made in accordance with its undertaking;

on February 22, 1938, a receiving order in bankruptcy was made against Lake Sulphite Pulp Company Limited and no further work has been done under said contract, nor have any payments been made in respect thereof since December 5, 1937, and the Receiver of Lake Sulphite Pulp Company Limited has disavowed said contract and refused to perform the same or to make any payments thereunder;

all payments made under said contract were by its terms, until full and final payment of the purchase price, made as rental for the apparatus and as liquidated damages for default and no sales tax was due until full and final payment of the total contract price;

it is not indebted to His Majesty in the sum claimed or in any part thereof or at all and asks that the information be dismissed with costs.

In his reply the plaintiff says in substance as follows:

he prays acte of the admissions contained in the statement of defence;

he admits that the total payment was to be $488,335. and that shipment of the goods was to be made at Nipigon, Ontario;

he is not aware of the fact that on January 5, 1938, the defendant was in arrears with the construction of the machine and that Lake Sulphite Pulp Company Limited refused to pay the progress payment which would have been payable on that date, had the progress schedule been adhered to, and that it further refused to make any payment on February 5, 1938, the defendant having failed to meet the progress schedule which would enable shipment to be made in accordance with its undertaking; he is not aware either of the fact that on February 22, 1938, a receiving order in bankruptcy was made against Lake Sulphite Pulp Company Limited and that no further work has been done under the contract and that no payments have been made in respect thereof since December 5, 1937, and that the receiver has disavowd the contract and refused to perform the same; in any event these facts are foreign to the issue, illegally pleaded and should be expunged from the record;

he denies the other allegations of the information;

all payments pursuant to the alleged understanding between defendant and Lake Sulphite Pulp Company Limited were made as instalments of the sale price and not as rental or liquidated damages;

never at any time was it contemplated in the said understanding that any certain progress would be made from time to time.

The contract, in the form of a proposal by the defendant to Lake Sulphite Pulp Company Limited and an acceptance by the latter, the first dated June 5, 1937, and the second, August 3, 1937, was filed as exhibit P 1.

The proposal made by the defendant, addressed to Lake Sulphite Pulp Company Limited, Montreal, contains at the outset the following stipulation:

"‘Dominion Engineering Company, Limited (hereinafter called the Company), proposes to furnish apparatus as follows, at the price, on the terms and under the conditions specified herein; it being agreed that wherever the word ‘apparatus’ appears herein, it shall be understood (wherever the context so permits) to comprise any and all of the goods; wares and merchandise which may be made the subject matter of the proposed contract :—

Description of apparatus

One (1) Dominion Pulp Drying Machine with Minton Vacuum Dryer, having a wire width of 168", in accordance with the attached specifications, but not including stock, white water or vacuum pumps, condenser equipment, screens, wires, deckles, felts, ropes or other clothing or any electrical equipment, unless specifically stated to be included.”

The contract provides that all plans and specifications thereto shall form part thereof. There is no plan attached to the contract but there is a specification, which has no bearing on the question at issue.

The contract provides that all plans and specifications thereto ed at the expense of the purchaser, unless otherwise agreed. It goes on to say that the services of engineers, millwrights or mechanics furnished by the company to superintend the erection or operation of the apparatus shall be reimbursed to the company by the purchaser monthly, independently of the contract account, at the company’s regular rates at the time the work is done. It adds that all labour and material required in connection with these services will be furnished by the purchaser.

Skipping over certain articles which, to my mind, have no materiality herein, I deem it apposite to reproduce verbatim the clause dealing with the payments and the right of property in the apparatus in question; it reads thus:

"The property and right of possession in the apparatus and the right to use the same under any and all patents relating to any of the apparatus herein specified shall not pass from the Company until all payments hereunder (including deferred payments and payments of notes and renewals thereof, if any), shall have been fully made in cash, and the apparatus herein specified shall remain the personal property of the Company, whatever may be the mode of its attachment to the realty or other property, until fully paid for in cash, and the Purchaser agrees to perform all acts which may be necessary to perfect and assure retention of title to the said apparatus in the Company. If default is made in any of the payments in the manner and form and at the times herein specified the Company may retain any and all partial payments, which have been made, as liquidated damages and as rental for the use of such apparatus, and the Company shall be entitled to the immediate possession, of said apparatus and shall be free to enter the premises where such apparatus may be located and remove the same as its property, without prejudice for recovery of any further damages which the Company may suffer from any cause . . .

The next clause in the contract offering some interest in the present case is the one concerning the price; it is worded as follows :

"The price of said apparatus is

Item No. 1:

For the machine complete as specified—Four HUNDRED AND SEVENTY-THREE THOUSAND, NINE HUNDRED and Twenty Dollars ($473,920.00).

Item No. 2:

For spare parts as listed in Page No. 3-A—Fourteen Thousand, FOUR HUNDRED and FIFTEEN Dollars ($14,415.00).

The above prices are F.O.B. the Company’s Works with freight allowed to Nipigon, Ontario, and including Dominion Government Sales Tax of 8%.’’

I do not think that it is necessary, nay even advantageous, to quote the list of spare parts referred to in item No. 2.

The following clause which has some importance is the one fixing the terms of payment, which states:

"‘The terms of payment are as follows:—

Nine (9) monthly progress payments of FORTY-EIGHT Thousand, Eight Hundred DOLLARS ($48,800.00) each, commencing July 5th, 1937, and continuing on the fifth of each month thereafter until a total of Four HUNDRED AND THIRTY-NINE Thousand, Two Hundred Dollars ($439,200.00) has been paid.

Final payment to be made after the machine is placed in operation but in no event later than six months from the date of final shipment or offer of shipment of the apparatus from the Company’s Works.’’

The contract then provides that all payments shall be made in funds at par Montreal and that, in case partial shipments are made, pro rata payments shall be made therefor and it adds :

"If the manufacture or shipment of the apparatus herein specified, or any material part thereof, is delayed from any cause for which the Purchaser is directly or indirectly accountable, the date of completion of the apparatus shall be regarded as the date of shipment in determining when payments for said apparatus are to be made, and the Company shall be entitled to receive reasonable compensation for storing the completed apparatus, which shall be held at Purchaser’s risk. The Purchaser shall reimburse the Company for any extra cost or expense incurred in the manufacture, delivery or installation of apparatus due to such delay.’’

Regarding the shipment the contract stipulates as follows: ‘‘The apparatus specified above will be shipped as follows :— Final shipment on or before March 5th, 1938.”

As appears from the information the claim is for $10,844.46 representing three monthly instalments of $3,614.82 each which allegedly fell due on January 5, February 5 and March 5, 1938, on account of sales tax in connection with the price of a Dominion pulp drying machine and spare parts, totalling $488,335., payable in nine monthly progress payments of $48,800. commencing July 5, 1937, and continuing on the fifth of each month thereafter until a total of $439,200. has been paid and a final payment of $49,135. to be made after the machine is placed in operation, but in no event later than six months from the date of final shipment or offer of shipment of the machine from the defendant’s factory.

The evidence discloses that the work on the construction of the machine started at the defendant’s plant on June 15, 1937, and that it stopped on February 11, 1938: see deposition J. Stanley Houston, Treasurer of the defendant company, on discovery, pp. 3 and 11, and the supplementary answers under his signature filed according to an agreement between counsel as exhibit P 2.

Notman, manager of manufacturing for the defendant company, said that the "job was taken on June 5th, 1937"’. He added that the first two months would be used in preparing the drawings and patterns, making the castings and getting material into the shop (dep., p. 28). Notman also stated that the work stopped on February 11, 1938 (dep., p. 32).

As stipulated in the contract, the machine was to be delivered on or before March 5, 1938.

When the work was stopped on February 11, 1938, the job was 62.51% complete, equivalent to a contractual value of $277,500. (dep. Notman, pp. 40 and 53). The defendant company was at that time entitled to $277,500. but had received $292,800 this sum is made up as follows (see exhibit P 2) :

The defendant company had accordingly been overpaid $15,300. (dep. Notman, p. 16),

The proof shows that the defendant company paid to plaintiff the sales tax as follows (see dep. Houston on discovery, pp. 4 and 7 and exhibit P 2) :

on the instalments of July and Aug. 1937 on September 30, 1937

The instalments maturing on January 5, February 5 and March 5, 1938, were not paid; nor was the final one which was stipulated payable after the machine was placed in operation, but in no event later than six months from the date of the final shipment or offer of shipment of the machine from the defendant company’s works. The sales tax on these instalments, which the defendant company did not receive, was not paid by the latter to plaintiff, as already stated, the plaintiff is claiming the sales tax on the first three of these instalments.

The evidence reveals that only the sole-plates, described by Houston as "‘little pieces of steel that you stick on the ground ‘‘ and estimated by him at about $1,200. (dep. on discovery, pp. 20, in fine, and 21) had been shipped by the defendant to Lake Sulphite Pulp Company Limited, the shipment being made on January 17, 1938, as set forth on exhibit P 2. The machine itself or at least the part thereof which had been made was not delivered; at the time of the trial it was still in the defendant company’s yard (dep. Houston on discovery, pp. 10 and 12).

The defendant company got behind in its work, principally due to two contracts taken prior to the one with which we are concerned. Notman, knowing that he would be asked to explain the delay, prepared a graph which he filed as exhibit D 1. This graph indicates the estimated number of machine shop hours which should have been put on the building of the pulp drying machine in order to fulfil the contract within the delay therein stipulated and the number of hours which had actually been spent on that work: the first, indicated by a blue line, from the 6th August, 1937, date on which the construction of the machine ought to have been commenced, to the 5th of March, 1938, date on which the final shipment was to have been made; the second, indicated by a red line, from the 24th of September, 1937, date on which the construction work proper was begun, to the 11th of February, 1938, date on which the work ceased.

Asked when he had prepared this graph Notman replied (p. 34) :

"‘About six weeks ago, from records which were presented to me by our accounting department, as the work progressed on this particular job.”

He said that he saw the work which was being done under the contract every day and that the records of what was actually put into the work were brought to him in the usual course of business, he prepared the graph from the information gathered from his own supervision of the work and from the records aforesaid (ibid., p. 35). Objection was taken to the production of this graph on the ground that Notman had not made it from direct information. I am satisfied that the witness had a personal knowledge of the facts about which he testified.

Reverting to the reasons of the delay incurred in the construction of the pulp drying machine for Lake Sulphite Pulp Company, Limited, it may be opposite to quote an extract from Notman’s testimony (p. 30) :

“In other words, why were you behind with this work?

A. For various reasons, the two principal ones being that we had taken two major contracts at the same time; one for the Steel Company of Canada,—a blooming. mill,—and another large contract for the Ontario Paper, for two newspring machines for Comeau Bay.

Q. Were those contracts taken prior in time to this contract Exhibit P-1?

A. Yes, both contracts were taken prior to this one. The Ontario Paper was taken on May 18th, 1936, and promised for shipment on October 1st, 1937. Actually, shipment was not made until early December or about two a half months late.

BY MR. OUIMET:

Q. What were the actual dates of shipment?

A. Early December, in the ease of the Ontario Paper. In the case of the Steel Company of Canada, the blooming mill, the order was taken on March 2, 1937, and called for shipment between November 1st and December 1st, 1937. Final shipment of this order was not made until early in May, or five months late.’’

And further (p. 37) :

"BY THE COURT:

Q. To sum up the situation, you undertook too much, your company did?

A. Well, apparently so. I may also say that machine tools that we had ordered were not delivered on time. One of them was, in fact, fourteen months late, and the fact that we ran into difficulties and delays, first of all, in getting the necessary materials, brought about the result that the blooming mill came in in November five months late, and we did not have the available machine tools to do this job, and we were just getting into the swing of it when the contract was cancelled.

BY MR. OUIMET:

Q. When which contract was cancelled?

A. Not cancelled,—I mean, when the Lake Sulphite job was held up.”

Considering the condition of the work done under the contract on the 5th of January, as indicated by the red curve on the graph (exhibit D 1), which in his estimate was equal to 48.61% of the total, Notman said it was a physical impossibility to ship the machine on the 5th of March. Even working at full capacity there would be a delay of two months. A brief quotation from his deposition seems expedient (p. 38) :

"‘We started off on that job with a very few hours per week, and gradually accelerated until we got to the maximum number of hours per week, which is a relative matter. In this particular case two to three thousand hours a week is the maximum and on February 4th, we still had a balance of 21,000 hours from 52,338 hours, or about 32,000 hours still to be put in, in four weeks. We could not possibly put in the necessary number of hours per week. We could not make shipments by March 5th, regardless of whether we wanted to or not. It was a physical impossibility. We all knew we were going to be late.

By MR. FORSYTH, K.C.:

Q. Now, how late were you going to be, utilizing your facilities at a maximum?

A. At a maximum, we were going to be two months late.

Notman stated that a percentage of 48.61% of the work done on the 5th of January represented a value of $213,500. He added that if the payment of $48,800. made on the 11th of January had been made on the 5th in accordance with the terms of the contract, the defendant company would have been overpaid a sum of $79,300. Notman said that on the 11th of February, which was the last day on which any work was done, the physical percentage of completion of the contract amounted to 62.51% The defendant company, according to the witness’ calculation which seems to me accurate, would have been entitled on that date to have received $277,500. on account when in fact it had received over $292,000. The defendant company had then been overpaid $15,300. (dep. Notman, p. 40).

John Stadler, pulp and paper engineer of thirty-nine years experience in Canada and vice-president of Lake Sulphite Pulp Company Limited, testified that he was familiar with the contract as he had drawn the specifications and had taken cognizance of and approved the contract. He said he had occasion from time to time to inspect the work as it was going on at the defendant’s shop and to consider what progress was being made. He noticed that ‘‘the work was away behind’’ (pp. 60 and 61). Asked if he had taken steps about payments when he had become aware of the delay, Stadler replied in the affirmative and supplemented his answer as follows (p. 61) :

“A. I advised Lake Sulphite secretary’s department, as early as November 22nd, that no further payment ought to be made to Dominion Engineering on some other supplies they were behind until they were approved by me.

Q. I would take it, Mr. Stadler, that you approved the payment made on the 11th of January to Dominion Engineering?

A. I regret to say, I did not approve it.

Q. But it was made, in any event?

A. It was made, yes.”

And further (p. 62) :

"‘As an engineer, did you take any steps with respect to payments after the 11th of January?

A. No, there was no payment approved. As an engineer I approved no payment after November 22nd.

Q. Could you, as an engineer, have approved any payment after that?

A. No, I could not.”

The witness added that he could not, "because the progress was not sufficient to justify additional payments’’ (ibid.).

Stadler stated that, after the payments had been stopped, he received a telephone from Houston, the treasurer of the defendant company, asking him to explain why he had refused to authorize the payments and that on March 7, 1939, he wrote him the letter filed as exhibit D 2. I may note that counsel for plaintiff objected to the production of this letter and that I reserved the objection. After considering the matter I see no reason why the filing of this letter should be disallowed. By itself it might not have much weight and might perhaps be considered as un afterthought; but there is evidence in the record that the execution of the contract was not progressing satisfactorily and the letter in question constitutes a mere confirmation of the statements made by the witnesses. The letter reads thus:

“In reference to telephone conversation regarding the above, I wish to confirm my statement to the effect that the reason we did not authorize progress payments on the Pulp Forming and Drying Machine contract for the above client, after December 1937, is due to the fact that the progress made on this work was considerably behind schedule.

In fact, it would appear, after a careful review of the whole situation, that Lake Sulphite Company has overpaid you. ‘ ‘

Referring to the letter exhibit D 2, counsel for the defendant asked Stadler from what he had drawn the conclusion that Lake Sulphite Pulp Company Limited had overpaid Dominion Engineering Company Limited ; the witness replied that this conclusion was drawn from the records in his office concerning the progress of the work actually completed. After some remarks which are not material, he concluded his answer as follows (p. 66) :

“Q. Certainly you did have the advantage of seeing the machine and the progress that had been made on it?

A. Yes, and on account of the progress not being up to date, being away behind,—we always expect machine builders to fall a little bit behind, but in this case they fell a little bit behind more than usual,—therefore, on the 22nd of November I instructed Lake Sulphite to make no further payment. Subse quently, a payment was made, which I told you I did not authorize.

Q. And in view of the fact a payment was made afterwards, which you did not authorize, did that cause you to conclude they were overpaid?

A. Yes."

In cross-examination Stadler, asked if the order given on November 22nd that his company should not pay Dominion Engineering Company Limited referred to the December payment, replied that his order was that no further payments should be made until he approved them.

Stadler said that he became president of Lake Sulphite Pulp Company Limited on December 28 or 29, 1937, and that, when the December payment was made on January 11, 1938, he was president (p. 68).

Asked if he was aware that this payment had been made, Stadler replied that it was conditional on a subscription by Dominion Engineering Company Limited to 1-year notes issued by Lake Sulphite Pulp Company Limited. According to him the payment of $48,800. on January 11, 1938, was made conditionally on the Dominion Engineering Company Limited buying some of these notes (pp. 68 and 69).

Another fact which in itself may not have much importance but which elucidates definitely why the construction of the pulp drying machine was not completed is that, in the early part of 1938, Lake Sulphite Pulp Company Limited was in financial difficulties and that a winding up order was made against it. A claim sworn to by Houston as treasurer of the defendant company was filed with the liquidators; it was produced as exhibit P 4.

A statement from the defendant company to G. S. Currie, receiver for Lake Sulphite Pulp Co. Ltd., showing a balance of $197,197.80 due on the pulp drying machine and spare parts at the time of receivership, was filed as exhibit P 3. It was agreed at trial that this statement was to be supplemented by a letter from Mr. Hansard, of defendant’s counsel, to Mr. Ouimet, counsel for plaintiff, and annexed to the statement. The production of this letter was overlooked by counsel and a copy thereof was filed on the 1st instant at my request.

Asked if he had told the defendant company that Lake Sulphite Pulp Company Limited would go into receivership, Stadler said that it would have been imprudent to give this information and that he had no duty to do it, especially since Dominion Engineering Company Limited had been overpaid.

Stadler said he knew that the defendant company had been overpaid before November, 1937.

Explaining the reason of the overpayment, Stadler made the following statements (p. 74) :

‘€ À. I would say yes, they were overpaid; but there is a certain thing in engineering, if you are in a hurry for a thing, the first thing that happens, if you stop payment, is that the manufacturer uses it as an excuse to delay the manufacturing. That is the reason why we allow a certain amount of overpayment, provided we can see the company is a responsible company, which I think Dominion Engineering is.’’

With reference to the letter exhibit D 2, Stadler stated that Houston had asked him to expose to him the facts as he had them on his records; he added that he would not have written if he had not been asked to do it, as, in his opinion, there was no need for it (p. 75).

Hubert Gray Welsford, managing director of Dominion Engineering Company Limited, declared that the first intimation which his company had that Lake Sulphite Pulp Company Limited had financial difficulties was towards the end of December 1937 when the witness Stadler and a Mr. Hanson came to see him and Mr. Angus (p. 82). Welsford added that Stadler and Hanson told them that their company had some difficulty in arranging the sale of its bond issue through the bank, that it required additional funds to complete the construction and that it proposed to sell $1,250,000. of notes and that Stadler and Hanson then asked them to subscribe to these notes.

Welsford stated that both he and Angus undertook to subscribe $50,000. of these notes through the Dominion Bridge Company and in combination with it. According to him each company was to take half, namley $25,000. (pp. 82 and 83).

Asked what condition he and Angus had imposed upon the company’s subscription, Welsford replied (p. 83):

"‘A. Well, we naturally did not feel*inclined to spend our money in carrying on the work to complete the machine unless we were assured the payments were going to be met, and as the December payment had not been made, we stipulated the payment to have been made on the 5th of December would have to be made, and that payment, I understand, was made on the 11th of January or thereabouts.

Q. When you made that stipulation, were you aware that your work was in arrears?

A. Yes, I was aware of that.”

Welsford said that when his company subscribed to notes of Lake Sulphite Pulp Company Limited, it had no. intimation that the latter was on the verge of liquidation. Indeed his company would hardly be likely to take $50,000. of these notes if it had any idea that Lake Sulphite Pulp Company Limited was going to fail (p. 88).

Welsford declared that he first became aware of the insolvency of Lake Sulphite Pulp Company Limited early in February, shortly before his company stopped work on the construction of the pulp drying machine. Welsford said that Stadler telephoned and told him that certain things had come to his knowledge with regard to the financial affairs of the company of which he was not aware at the time he had asked him to subscribe to the notes. The witness added that Stadler intimated to him at the time that Lake Sulphite Pulp Company Limited would not be able to meet its payments on the contract until some further arrangements had been made; and it was on the strength of this information that the defendant company stopped work on the contract, because payments were then owing.

Called as witness in rebuttal, Frederick A. Dean, of the firm of McDonald, Currie and Company, accountants, testified that

G. S. Currie, on of the senior partners, was appointed receiver to Lake Sulphite Pulp Company Limited in liquidation.

Dean was asked if he had taken communication of the records of Lake Sulphite Pulp Company Limited and if he had found a claim filed by Dominion Engineering Company Limited. Counsel for defendant objected to the question as not being rebuttal ; the objection was, in my view, well founded and so held. Counsel for plaintiff thereupon made an application to re-open his case, which was granted with the understanding that counsel for the defendant would be allowed, if desired, to contradict the new evidence adduced.

Dean filed a claim sworn to by J. S. Houston as treasurer of Dominion Engineering Company Limited, dated April 6, 1938, which was marked as exhibit P 4.

In cross-examination Dean said that the claim in question had been sent to the provisional liquidator, Donald McK. McClelland, of the firm of Price, Waterhouse and Company, and had been transmitted by the latter to McDonald, Currie and Company.

Dean could not say whether Dominion Engineering Company Limited had taken part in meetings of creditors and registered a vote regarding the sale of the assets; he was almost certain however that the company had not voted.

Also called by the plaintiff in rebuttal, J. S. Houston filed as exhibit P 5 a letter written by Dominion Engineering Company Limited under his signature as treasurer of the company, dated April 6, 1938, to Donald MeK. McClelland, c/o Price, Waterhouse and Company, giving particulars of the company’s claim against Lake Sulphite Pulp Company Limited and reading in part as follows:

"‘We have a contract with Lake Sulphite for the manufacture of a Pulp Drying Machine equipped with a Minton Vacuum Dryer, for a price of $489,997.80 which includes extras, sales tax and freight. Against this we have received payments on account amounting to $292,800.00, the balance remaining being $197,197.80.

No cancellation having taken place we submit as our claim the unpaid balance of the contract. If you wish us to formulate our claim on the basis of cancellation this will require some time because the question of damages arises.

For your information the work under the contract is approximately 75% complete.”

Asked if the statement contained in this letter that "'the contract is approximately 75% complete’’ was based upon investigation that he had made, Houston replied in the negative. He added that he since had an opportunity to check the figures with Notman and to verify that the figures stated by the latter in his testimony, viz. 62.15%, were correct.

In brief the evidence discloses the following material facts: Dominion Engineering Company Limited started to work on the pulp drying machine provided for in the contract on June 15, 1937, and the work ceased on February 11, 1938 ;

Dominion Engineering Company Limited got behind in its work mostly due to the fact that it had undertaken more than it could perform within the time agreed upon;

Lake Sulphite Pulp Company Limited made the monthly progress payments on the machine purchased from Dominion Engineering Company Limited falling due on the 5th day of July, August, September, October, November and December, 1937, on the following dates, viz. the first two on August 27, 1937, and the others on September 30, October 7, November 13, 1937, and January 11, 1938 ;

in view of the delay in the execution of the contract by Dominion Engineering Company Limited, Lake Sulphite Pulp Company Limited decided not to make any further payments after the one made on January 11, 1938, which, under the contract, fell due on December 5, 1937 ;

when the work was stopped on the building of the machine hy Dominion Engineering Company Limited on February 11, 1938, Lake Sulphite Pulp Company Limited had overpaid a sum of $15,300. ;

Lake Sulphite Pulp Company Limited was in financial difficulties towards the end of December 1937 and it went into liquidation at a time which has not been plainly specified, but on or about February 22, 1938; a provisional liquidator was said by counsel to have been appointed on February 5 ;

Dominion Engineering Company Limited paid the sales tax on the progress payments received from Lake Sulphite Pulp Company Limited on or about the last day of the month following the receipt thereof, to wit September 30, October 30, November 30 and December 31, 1937, and January 31, 1938 ;

Dominion Engineering Company Limited did not pay any sales tax on the sum of $15,300. overpaid by Lake Sulphite Pulp Company Limited.

Notwithstanding the fact that the defendant received only $15,300. on the progress payment falling due on January 5, 1938, and did not receive the progress payments falling due on February 5 and March 5, 1938, the plaintiff contends that he is entitled to the sales tax on the full amount thereof.

The plaintiff bases his claim on section 86 of the Special War Revenue Act (R.S.C., 1927, chap. 179, and amendments), the relevant provisions whereof reading thus :

"86. 1. 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 the delivery of such goods to the purchaser thereof.

Provided that in the case of any contract for the sale of goods wherein it is provided that the sale price shall be paid to the manufacturer or producer by instalments as the work progresses, or under any form of conditional sales agreement, contract of hire-purchase or any form of contract whereby the property in the goods sold does not pass to the purchaser thereof until a future date, notwithstanding partial payment by instalments, the said tax shall be payable pro tanto at the time each of such instalments falls due and becomes payable in accordance with the terms of the contract, and all such transactions shall, for the purposes of this section, be regarded as sales and deliveries.

Provided further that in any case where there is no physical delivery of the goods by the manufacturer or producer, the said tax shall be payable when the property in the said goods passes to the purchaser thereof.’’

As plaintiff claims in addition to the sales tax the penalties provided for by section 106 of the Act, it seems convenient to reproduce here the relevant part of this section :

• 4 106. 1. Every person liable for taxes under Parts XI, XII and XIII of this Act and every manufacturer or producer licensed under section ninety-five thereof, . . . . shall file each month a true return of his taxable sales for the last preceding month in accordance with regulations made by the Minister . . . .

2. If no taxable sales have been made during the last preceding month, a return verified as hereinbefore provided, shall be filed, stating that no such taxable sales have been made.

3. The penalty for failure to file the return required by subsections one and two of this section, within the time required by subsection four hereof, shall be a sum not less than ten dollars and not exceeding one hundred dollars.

4. The said return shall be filed and the tax paid not later than the last day of the first month succeeding that in which the sales were made.

5. In default of payment of the said tax or any portion thereof within the time prescribed by this Act or by regulations established thereunder, there shall be paid in addition to the amount in default, a penalty of two-thirds of one per centum of the amount in default, in respect of each month or fraction thereof, during which such default continues. ‘ ‘

Section 95 to which section 106 refers contains, among others, the following provisio :

<4 95. 1. Every manufacturer or producer shall take out an annual licence, for the purpose of this Part, and the Minister may prescribe a fee therefor, not exceeding two dollars.’’

It is agreed that defendant at all times material held a licence.

The Dominion Pulp Drying Machine which forms the object of the contract is either divisible or indivisible. If it is indivisible, the plaintiff has no claim against the defendant since the machine was not delivered, with the exception of the soleplates worth about $1,200., an infinitesimal proportion of the whole, when one considers that the price of the machine complete is $488,335. The tax indeed is payable by the producer or manufacturer of the goods at the time of the delivery thereof to the purchaser: Sec. 86, 1(a). If, on the contrary, the machine must be considered as divisible, the case is governed by the first proviso of section 86, 1(a). In this case the tax is payable pro tanto at the time each of the instalments on the purchase price falls due and becomes payable in accordance with the terms of the contract. Both conditions must exist in order that the tax be exigible.

The sales tax payments which became due in connection with the instalments on the purchase price which matured on July 5, August, 5, September 5, October 5, November 5, December 5, 1937, were made on the dates hereinabove mentioned.

The instalments falling due under the contract on January 5, February 5 and March 5 were not effected. On February 11 when the work was discontinued, Dominion Engineering Company Limited had received $15,300. in excess of the value of the work it had done and on this sum it did not pay any sales tax to the plaintiff.

Counsel for plaintiff referred to, but did not insist on, section 87 in order to show the legislators’ intentions as regards contracts which may be doubtful of interpretation. I do not think that section 87 has any application in the present case.

It was urged by counsel for plaintiff that the Special War Revenue Act being a taxing statute must be construed as "giv- ing the broadest authority to the Crown to exact taxation as provided therein ‘ The addition of the last words of the phrase "‘as provided therein’’ restricts, undoubtedly intentionally, in a very material way, the scope of the proposition; however I believe it is apposite to note that a taxing statute must be construed strictly: Maxwell on the Interpretation of Statutes, 8th ed., 250; Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 24; Partington v. Attorney-General (1869) L.R. 4 H.L. 100, 122; Tennant v. Smith, [1892] A.C. 150, 154; Coz v. Rabbits (1877-78), 3 App. Cas. 473, 478; Oriental Bank Corporation and Wright (1879-80), 5 App. Cas. 842, 856; Harris Co. Lid. v. Rural Municipality of Bjorkdale, [1929] 2 D.L.R. 507, 512.

I may add incidentally that taxation is the rule and that exemption constitutes a privilege which must be strictly construed: Roenisch v. Minister of National Revenue, [1931] Ex. C.R. 1, 4 ; Toronto General Trusts Corporation v. Corporation of City of Ottawa, [1935] S.C.R. 531, 536.

Counsel for plaintiff submitted that the tax claimed herein is proportionate to the amounts payable in instalments ‘‘ under any form of conditional sales agreement, contract of hire-purchase of any form, etc.” and that such instalments, under a fiction of the law, become individual sales and deliveries. Counsel thence contended that, under the provisions of section 86, 1(a), the moment instalments fell due, irrespective of the fact that they had not yet been obtained by the defendant, the tax on each of these fictional sales and deliveries had to be paid to the Crown, because the dates on which these instalments, became due and exigible, as stipulated in the contract, constituted the extreme limits agreed upon by the parties thereto. Counsel submitted that the parties to the contract had qualified and determined the so-called progress; and that this was the way which they had understood between themselves that the progress payments were to be made. Counsel maintained therefore that, as long as instalments became due on the dates mentioned in the contract, they constituted sales and deliveries under the provisions of section 86, 1(a) of the Act and that the defendant had to turn over to the Crown the amount of the sales tax on each of the progress payments of $48,800. specified in the contract, whether these payments were made or not.

I must say that I cannot agree with the learned counsel’s interpretation of section 86, 1(a) of the Act and cannot accept his proposition that the words ‘‘the said tax shall be payable pro tanto at the time each of such instalments falls due and becomes payable in accordance with the terms of the contract” are intended to impose the tax on instalments which have not been received. This, to my mind, would be most unfair and unreasonable.

The interpretation given to section 86, 1(a) of the Act by counsel for plaintiff is repugnant to justice and reason and I do not think that it should be countenanced. It would mean, assuming the worst, that, if the purchaser had paid in one progress payment ($48,800.) and defaulted on the eight others totalling $390,400., the vendor, having received a payment of $48,800., could be compelled to pay a sales tax of $35,136., i.e. 8% on a sum of $439,200., to wit nine payments of $48,800. each. I am unable to conceive that such was the legislators’ intention, notwithstanding the fact that there are innumerable pieces of legislation which, when construed literally, may lead to an absurdity. In this contention the following may be consulted beneficially: Maxwell on the Interpretation of Statutes, 8th ed., pp. 169, 177 and 228 ; Craies on Statute Law, 4th ed., pp. 85 et seq. ; Beal, Cardinal Rules of Legal Interpretation, 3rd ed., pp. 343 et seq.; Halsbury f s Laws of England, 2nd ed., vol. 31, v° Interpretation, no. 653; Bonham 9 s Case, 4 Coke’s Reports, 367, 375.

At page 169, Maxwell says:

"‘In determining either the general object of the Legislature, or the meaning of its language in any particular message, it is obvious that the intention which appears to be most in accord with convenience, reason, justice, and legal principles, should, in all cases of doubtful significance, be presumed to be the true one, An argument drawn from an inconvenience, it has been said, is forcible in law; and no less, but rather more, force is due to any drawn from an absurdity or injustice. But a Court of Law has nothing to do with the reasonableness or unreasonableness of a statutory provision, except so far as it may help it in interpreting what the Legislature has said (Lord Halsbury, Cooke v. Vogeler, [1901] A.C. 107).’’

And at page, 117, Maxwell makes the following comments:

"A sense of the possible injustice of an interpretation ought not to induce Judges to do violence to well-settled rules of con- sruction, but it may properly lead to the selection of one rather than the other of two reasonable interpretations (Lord Her- schell L.C., Arrow Shipping Co. v. Tyne Commissioners, [1894] A.C. 516). Whenever the language of the Legislature admits of two constructions and, if construed in one way, would lead to obvious injustice, the Courts act upon the view that such a result could not have been intended, unless the intention had been manifested in express words.’’

See the authorities cited in note (a) at the foot of page 177.

Counsel for plaintiff intimated that the defendant could have sought the annulment of the contract and thereby freed itself from the sales tax; he observed that instead the defendant let the contract run and kept on working on the construction of the machine, although Lake Sulphite Pulp Company Limited had defaulted twice in its payments; he added that as a matter of fact if continued working until the 11th of February, 1938, five days after Lake Sulphite Pulp Company Limited was in the hands of a provisional liquidator.

I must admit that I fail to see what bearing the recourse which the defendant might have had to seek the annulment of the contract can have on the question at issue.

I am inclined to believe that the defendant, which had got behind in the performance of its contract, was anxious to complete the machine and to get the balance of the progress payments. I think it acted wisely in continuing to build the machine until it became certain that the liquidator of Lake Sulphite Pulp Company Limited did not wish to complete tho payments and to take delivery of the machine for the benefit of the liquidation.

What became of the portion of the machine which had already been constructed on the 11th of February, 1938, when the work was stopped has not been divulged. There was an asset of some value which it seems likely could have been disposed of either in its present state or else completed.

Be that. as it may, I do not think that the question offers any interest in the present case. What the Court is concerned with is to determine whether defendant company is liable to pay

a. sales tax on instalments or progress payments which it did not receive.

Counsel for plaintiff suggested that the parties to the contract could have established a rate of progress, had they wished to do it, and could have inserted in the contract a clause stating what progress would have to be made between such and such a date ; he noted that nothing of the kind had been included in the contract or even been discussed by the parties. This seems to me irrelevant. What we have to consider is the contract in its present form.

Counsel further observed that Stadler, Notman and Welsford had all admitted that in the execution of such contracts there always were delays of two, three and even six months. Counsel concluded that in the present instance time is not of the essence of the contract in suit ; that on the contrary there is a clause in the contract (the first on page 3) stipulating that delay will not entitle the purchaser to damages.

Counsel pressed the point that the evidence discloses that it was due to the purchaser’s insolvency that the machine had not been finished and that the work would have gone on unhampered and the machine could have been completed within six weeks, had Lake Sulphite Pulp Company Limited been in a position to pay it.

Taking for granted that these facts are exact, I do not think that they have any bearing on the matter in litigation.

Counsel for plaintiff reiterated his statement that, under the provisions of section 86, 1(a), we are not concerned as to whe- ther or not the progress payments were received by the defendant. According to him, this section does not require that the payments shall have been received in order to be taxed ; it says that the tax "‘shall be payable pro tanto at the time each of such instalments falls due and becomes payable’’. In counsel’s view it is not material whether the instalment has been paid ; the moment it falls due and becomes payable there is a fictional sale and delivery and as such it is taxable.

It was finally submitted by counsel for plaintiff that if the defendant had wanted to be paid it could have sued under its contract, because Lake Sulphite Pulp Company Limited was behind in its payments. I may note in passing that this is not exact; the contrary is rather conformable to the truth. Counsel added that in turn Lake Sulphite Pulp Company Limited could not oppose any plea, because of the working of the contract, on the ground of delay. He emphasized the fact that the payments of January and February could have been exacted on their respective dates of maturity. He admitted however that, as regards the payment of March 5, it is a somewhat different proposition in view of the fact that Lake Sulphite Pulp Company Limited had gone into liquidation and was no longer in operation.

I must say that I cannot share this view, I do not think that it is judicially sound. Yet as the point seems to me to have no relevance to the question at issue, I do not deem it advisable to waste time in discussing it at length; it will suffice to refer to the statement of Mr. Justice Mignault in the case of Employers’ Liability Assurance Company v. Lefaivre, [1930] S.C.R. 1, 13, concerning the exception non adimpleti contractus. I may point out that Mr. Justice Mignault was dissenting in this case, but the observation he made with regard to this exception is not, as claimed by counsel for defendant, germane to the dissent. In fact Mr. Justice Rinfret, who delivered the judgment of the majority of the Court, expressed on this point a similar opinion: see pages 7-and following.

Counsel for plaintiff added that the defendant could have continued building the machine, had it been so directed by the liquidator of Lake Sulphite Pulp Company Limited authorized to that effect by the Court. This is quite possible, but it seems to me foreign to the matter in dispute. Again may I repeat that the question with which I am confronted is whether the defendant company is liable to pay a sales tax on progress payments which it has not collected.

It seems obvious to me that the plaintiff has no claim under the first paragraph of subsection 1(a) of section 86 which provides that "‘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 the delivery of such goods to the purchaser thereof’’.

The machine was never delivered, with the exception of the sole-plates valued at approximately $1,200. ; one of the essential conditions provided for in paragraph (a) of subsection 1 is lacking.

Has the plaintiff got a claim under the first proviso of article 86? According to his counsel’s submission he has, if we assume that the sales tax is payable on the progress payments at the time they fall due and become payable in accordance with the terms of the contract, independently of the fact that they have not been paid. As previously stated, such an interpretation of the first proviso in article 86, 1(a) seems to me thoroughly unjust and unreasonable. I may add that, in my view, it is not only repugnant to Justice and equity but even to simple common sense.

The legislators have used, in this proviso, two expressions which, at first sight, may perhaps appear to be synonymous, viz. “falls due’’ and "‘becomes payable Counsel for plaintiff has accepted them as such. I may say that I feel loath to believe that the legislators wittingly used two expressions having, in their opinion, exactly the same meaning and scope when one would have been sufficient. Our legislators are sometimes diffuse and redundant, but I dare not think that they would be to that extent. I believe that the phrase ‘‘falls due’’ is intended to cover the terms of payment as set forth in the contract and that the phrase "‘becomes payable’’ refers to the time when the progress payments will mature and become exigible in accordance with the progress effectively made in the building of the pulp drying machine. This seems to me to be the only just, equitable and reasonable view to take of the legislators ‘ intention.

Besides one must not overlook the provision contained in the second proviso of the said article, which reads thus :

" " Provided further that in any case where there is no physical delivery of the goods by the manufacturer or producer, the said tax shall be payable when the property in the said goods passes to the purchaser thereof.’’

There was no physical delivery of the machine by the defendant company, save for a very trifling portion thereof, viz. the sole-plates, worth about $1,200., and the property of the machine never passed to the purchaser. In virtue of the contract the property of the machine shall remain in the defendant company until all payments have been fully made. The clause of the contract dealing with the right of ownership is the seventh on page (2), which is hereinabove recited.

There being no physical delivery of the machine and the property therein having remained vested in the vendor, the plaintiff’s claim seems to me, for this additional reason, unfounded.

It was argued on behalf of defendant that, in order that the tax be exigible, the progress payments in respect of which it is claimed must have fallen due and become payable; in his view both conditions must exist.

The progress payments, under the terms of the contract fell due on the 5th of each month commencing on the 5th of July and continuing for nine consecutive months, the last payment falling due and being exigible when the machine was placed in operation but in no event later than six months from the date of final shipment or offer of shipment of the machine from the defendant company’s works. The progress payments, as the name implies, only became payable as the work progressed.

Lake Sulphite Pulp Company Limited made the payments fairly regularly each month, with the exception of the payment maturing on December 5, which was delayed considerably. The instalments which were payable on the 5th of July and the 5th of August were paid on the 27th of August; one must not overlook the fact that the work performed on the construction of the machine itself was only begun on or about the 3rd of September and that when the July and August instalments were paid there was no progress made on the machine at all. The payments maturing on September 5, October 5 and November 5 were made on September 30, October 7 and November 13. The progress payment which was longer deferred was the one falling due on December 5; it was only paid on January 11. At the time Lake Sulphite Pulp Company Limited had paid more than the progress of the work justified. On January 11, taking into account the payment of $48,800. made on that day, Lake Sulphite Pulp Company Limited had overpaid $79,300. to the defendant (dep. Notman, p. 40). The work was continued until February 11, 1938, when it ceased definitively. With the progress made in the work between the 11th of January and the 11th of February the overpayment was reduced to $15,300.

If one eliminates the word "progress'' from the clause relative to the terms of payment, the contract does not come within the purview of the first proviso of section 86, 1(a) which deals with contracts for the sale of goods wherein it is provided that the price shall be paid to the manufacturer or producer by instalments as the work progresses. In that case the contract would be subject to the first paragraph of section 86, 1(a) and, as there was no delivery, save for a negligible part of the ma- chine, viz. the sole-plates valued at approximately $1,200., no tax can be levied, imposed and collected.

It was contended by counsel for defendant that, if the manufacturer is unable to keep up to the progress stipulated in the contract, the obligation of the purchaser to pay is suspended until the manufacturer catches up with his work. This contention seems rational and sensible.

After due consideration I have reached the conclusion that the contract in suit is governed by the first proviso of section 86, 1(a), that the progress payments therein stipulated fell due and were exigible in the proportion the work progressed and that the sales tax thereon was payable pro tanto at the time such payments fell due and became payable. If there was no progress in the work there were no payments due and if there were no payments there was no tax leviable.

If the interpretation hereinabove given to the expressions “falls due” and " becomes payable’’ in the first proviso is not accepted, the case fails in virtue of the stipulations of the second proviso, seeing that there was no physical delivery and that the property of the machine did not pass to the purchaser.

After a careful perusal of the contract and other evidence, documentary and oral, of the law and of counsel’s argument, I do not think that the plaintiff is entitled to impose and levy a. sales tax on progress payments which were not made and which moreover were not exigible.

Regarding the sum of $15,300. which Lake Sulphite Pulp Company Limited overpaid to the defendant, it would normally have formed part of the progress payment falling due January 5, 1938, if the work had been continued ; as this payment never became payable and might perhaps be recovered by Lake Sulphite Company Limited in virtue of the provisions of article 1048 C.C.—a question which it is not within my competence to determine—I do not believe that any sales tax can be imposed and levied thereon.

For the aforesaid reasons there will be judgment dismissing the plaintiff’s action with costs.

Action dismissed.