Quinco Financial Inc. v. British Columbia, 2013 BCSC 1549

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Quinco Financial Inc. v. British Columbia, 2013 BCSC 1549 Date: 20130827 Docket: 03-0739 Registry: Victoria Between: Quinco Financial Inc. Petitioner And: Her Majesty the Queen in Right of the Province of British Columbia Respondent On judicial review from: An order of the Appeals Branch, Consumer Tax Branch, Ministry of Revenue, British Columbia, dated November 25, 2002 (The Brick Warehouse Corporation Provincial Sales Tax Assessment File Ref. No. 10045165M001SST , Notice No. L0002945262 (Registration No.

R793730) for the period March 1, 1996 to October 31, 2000) . Before: The Honourable Mr. Justice Bracken Reasons for Judgment Counsel for the Petitioner: D.L. Kiselbach Counsel for Respondent: S. Kirkpatrick Place and Date of Trial/Hearing: Victoria, B.C. July 4, 2013 Place and Date of Judgment: Victoria, B.C. August 27, 2013 [ 1 ] The petitioner seeks an order setting aside the decision of the Minister of Finance directing the petitioner to pay $209,473.32 as a penalty equivalent on account of taxes it failed to collect on the under the Social Service Tax Act , [1996] c. 431 (The “ Act ”).

The petitioner also asks for an order that the respondent refund to the petitioner any money it has already paid. The funds paid relate to the tax assessment period of March 1, 1996 to October 31, 2000. The amount of the penalty was determined after an audit of the petitioner. [ 2 ] The petitioner is a large furniture retail seller, which charged a service fee to arrange deferred payment financing for its customers. The offer represented that no down payment was required and that no interest would be charged prior to a stipulated date in the future.

The petitioner’s failure to collect taxes on the service fee led the audit branch of the Ministry to impose the penalty. The decision of the audit branch was affirmed by the Minister on appeal. The petitioner argues the services at issue were not taxable under the Act . [ 3 ] The petitioner submits the Administration fees it charged to its customers do not form a part of the purchase price paid by the customer for any tangible personal property as those terms are defined in s. 1 of the Act and the fees are therefore not subject to any provincial sales tax levied under the Act .

Facts [ 4 ] The petitioner owns and operates a national furniture retail business operating under the trade name “The Brick”. The Brick was initially incorporated under the name “The Brick Warehouse Corporation” in 1989; however, over the years it has undergone a series of amalgamations and corporate name changes. It is now incorporated under the name Quinco Financial Inc. (“Quinco”). [ 5 ] During the relevant tax assessment period, The Brick offered a deferred payment plan to its customers.

By taking advantage of the offer, a customer could defer payment on furniture or other items purchased for a set period of time. No interest accrued on the purchase price during the deferral period. An advertising flyer issued in May 2002 was placed in evidence and it invited customers of The Brick to buy its products on terms that included the words: “Do not pay until August 2003”. [ 6 ] To take advantage of the “Do Not Pay Until” offer, a customer had to sign up for a Brick Card (“the Card”).

The Card represented a line of credit between the customer and one of two third parties: Household Financial Corporation (“HFC”) or Trans Canada Retail Services Company (“TCRS”). The Brick did not normally provide the line of credit to customers itself; however, a Brick salesperson dealt with HFC and TCRS to establish the account.

[ 7 ] The Brick charged its customers what it called an “Administration fee” for the “service of arranging for and obtaining Brick Card financing for the customer. The fee varied depending which financing option the customer chose.

The options were: (a) $29.95 if the no interest and no payment period selected was 6 months or less; (b) $49.95 if the no interest and no payment period selected was 7 to 12 months; and (c) $69.95 if the no interest and no payment period selected was 13 months or more. [ 8 ] The fee did not vary with the price of the item purchased; however, a customer could not use the Brick Card financing for purchases under $250. [ 9 ] The services provided in relation to the Administration fee varied depending on whether the customer already had a Brick Card or was applying for one for the first time.

In his affidavit No. 1, Mr. Richard Barry Innes, the former Chief Financial Officer of The Brick, said that for a first-time applicant for the Card, a Brick employee would:

a) Explain the different plans available and their relevant terms;

b) Assist the customer in choosing an appropriate plan;

c) Have the customer review and sign the “Brick Account Holder Agreement”;

d) Obtain credit information and then complete an electronic loan application form which was then submitted to either HFC or TCRS for approval or decline;

e) Receive, within minutes, a response from HFC or TCRS. [ 10 ] If approved, the employee would then complete the sale, charging the purchase price of the item to the customer’s Brick Card. If application for the Card was declined by the first finance company, the employee would resubmit the application to the other finance company.

If again declined, the customer still might obtain financing directly through The Brick. [ 11 ] If a customer already had a Brick Card, the employee would: explain the different deferral plans and help the customer select one; update any personal information and submit that to either HFC or TCRS; verify the customer’s identification and ensure enough credit was available to cover the intended purchase; and then complete the sale by charging the purchase price to the customer’s Brick Card. [ 12 ] The appropriate Administration fee for these services was then immediately charged to the customer, although it was entered separately from the purchase price on a different invoice.

The Administration fee was accounted for separately from the purchase price in The Brick’s books and records. [ 13 ] In or around August 2000, a senior auditor of the Consumer Taxation Audit Branch of the Ministry of Finance (then the Ministry of Provincial Revenue) contacted The Brick and arranged to conduct an audit for the period of March 1, 1996 to October 31, 2000. [ 14 ] Upon conducting the audit, it was found that The Brick had not been collecting tax under the Act on the Administration fees described above.

The auditor concluded The Brick should have been collecting tax on those fees because “… the Administration fee was a part of the purchase price for specific furniture being purchased by a particular customer under a furniture sale from the [Brick] to the customer”. [ 15 ] The auditor determined that during the assessment period, The Brick had charged $2,421,265.70 in Administration fees, which resulted in $169,488.60 in uncollected tax. The auditor then assessed a proposed penalty of $209,473.32, an amount equivalent to the uncollected tax plus interest.

Despite a letter of protest sent by The Brick to the audit branch in 2001, this penalty was imposed pursuant to s. 115(5) of the Act in a Notice of Assessment dated February 27, 2002. [ 16 ] The Brick appealed this assessment to the Minister of Finance by letter on May 16, 2002. It submitted two sample flyers in support of its appeal. The Minister affirmed the assessment on November 25, 2002. [ 17 ] The Brick now appeals that decision to this court pursuant to s. 119 of the Act . That

section permits the court to allow the appeal, dismiss it, vary the decision of the Minister, or refer the decision back to the commissioner for reconsideration. The Minister’s Decision [ 18 ] During the relevant assessment period, the Social Service Tax Act required that a purchaser of “tangible personal property” pay tax on the purchase price of that property (ss. 5 and 6).

A seller of tangible personal property was deemed to be an agent for the Minister under the Act , and was therefore required to levy and collect this tax on the Minister’s behalf (s. 93(1)). [ 19 ] The question before the Minister was whether or not the Administration fee charged by the petitioner was taxable as part of the purchase price of the furniture and other items it sold.

The petitioner argued that the fees were independent from the purchase price of the property it sold and were therefore not taxable under the Act . [ 20 ] At the relevant time, the Act defined purchase price in s. 1(1) as: "purchase price", (

a) in relation to tangible personal property, means a price in money, and also the value of services rendered, the actual value of the

tangible personal property exchanged, acquired or repossessed, and other consideration accepted by the seller or person from whom the property passes as price or on account of the price of the tangible personal property covered by the sale, and includes (

i) any charges for (

A) transportation and installation of the tangible personal property sold, or (

B) interest, finance, service, customs and excise charges in relation to the tangible personal property sold that are incurred at or before the time that title to the tangible personal property covered by the sale passes under that sale, whether or not those charges are shown separately on the invoice recording the sale or in the seller’s books, [ 21 ] In his decision of November 2002, the Minister decided that the Administration fee qualified as “a service charge payable by the customer before title to the goods transfers to the customer” and was therefore a taxable part of the purchase price. [ 22 ] The Minister rejected the submission of the petitioner that the fees did not add to the cost of the goods, and noted that it did not matter that the fees were not described as a taxable service elsewhere in the Act .

He determined that it did not matter whether the fees were accounted for separately from the purchase price in The Brick’s books and accounts. [ 23 ] The Minister further rejected submissions that such a fee was not taxable in other jurisdictions, or that it is standard industry practice not to tax such fees. The Minister also rejected a division of powers argument relating to the ability of British Columbia to tax services when purchases were made in other provinces. [ 24 ] The Minister classified the Administration fee as a service under s. 1(a)(i)(

B) of the Act , and concluded that the penalty under s.115(5) of the Act was properly imposed. Issue [ 25 ] The question is whether or not the Minister was correct in determining that the Administration fees charged by The Brick formed part of the purchase price of the property sold. The answer turns on the

interpretation of “purchase price” under the Act . The petitioner’s argument [ 26 ] The petitioner submits that the Administration fees it charged were independent from the purchase price, saying that these fees were the separate and distinct sale of “the service of arranging and obtaining for its customers deferred financing from two third parties unrelated to the Petitioner”.

It says this is a non-taxable service that is unrelated to the sale of the furniture and other items it sold. [ 27 ] It points to the words in the definition “consideration accepted by the seller … as price or on account of the price” and notes that the Administration fee was a separate transaction from the sale of the furniture sold; it was not accepted “on account of the price” of that furniture. [ 28 ] In support of this submission, it points to the following: • That customers could buy furniture and other items without the use of a Brick Card by using cash or credit card; • That the Administration fee was identified separately on invoices and in The Brick’s books and accounts; • That the fee was only charged for the specific service of arranging financing with a third party, and that customers only paid this fee if they wanted to acquire such financing; • That the amount of the fee had no connection with the price of the good sold; • That customers could apply for and receive a Brick Card even if they were not purchasing goods. [ 29 ] The petitioner then submits that since the transaction is separate and was not accepted on account of price, for it to be within the definition of purchase price the transaction has to fit under ss. 1(1)(i)(

A) or (i)(B). Since the fee clearly does not relate to transportation or installation, it would have to be “… interest, finance, service, customs or excise charge in relation to the tangible personal property sold” to fit within the definition. [ 30 ] The petitioner says it is not a “finance” charge under the definition because The Brick was not providing the financing, it was providing the service of arranging financing. The petitioner then goes on to say that although the charge was for a service, it was for a service in relation to financing, not in relation to tangible personal property.

The petitioner argues that just because the Administration fee was charged at the same time the purchase was made does not mean it is a part of the purchase price. [ 31 ] The petitioner further submits that the scheme of the Act and related authorities support a restrictive

interpretation of both the terms “purchase price” and “services”. It argues that the Act generally taxed services only as an exception to the scheme of the Act and those exceptions are clearly stated in the Act . It says that the words “any charges for … finance and service … charges”, should be given a narrow

interpretation. [ 32 ] In support of this restrictive approach the petitioner says that if the word “service” under s. 1(1) (i)(

B) includes any and all services, that this would render subsection (i)(

A) superfluous. [ 33 ] Finally, the petitioner submits that any ambiguity that cannot be resolved on a plain reading or purposive approach should be resolved in its favour.

The respondent’s argument [34] The respondent submits that the administrative fee fits the general definition of purchase price and was accepted on “account ofprice” even without resort to s. 1(1)(i)(B). It submits the fee was part of the price in money accepted by The Brick for furniturepurchased by customers using the “Do Not Pay Until” financing program. [35] The respondent points to the fact that a customer could not take advantage of the “Do Not Pay Until” offer without paying thefee; the fee had to be paid directly on purchase; and it was charged at the same time as the furniture was purchased.

The respondentfurther argues that The Brick represented to customers that the fee was part of the total cost of furniture purchased. [36] In the alternative, the respondent submits that the charge was clearly either a charge for finance or a charge for service under s.1(1)(i)(

B) of the definition of purchase price. A charge for arranging financing is equivalent to a charge for finance. If the charge is moreproperly considered a service, then it clearly is in relation to the purchase of tangible personal property as it was provided incontemplation of the purchase of Brick furniture.

A customer could not take advantage of it without purchasing furniture of a value ofmore than $250 and the services provided were linked to a specific purchase of furniture. [37] Finally, the respondent says that the onus is on the petitioner to show that the underlying assumptions of fact and the assessmentof the Minister was wrong. Discussion [38] In Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20 at paras. 21 to 24, LeBel J. articulated the relevantprinciples for the

interpretation tax statutes. He said that: 21 In Stubart Investments Ltd. v. The Queen, (SCC), [1984] 1 S.C.R. 536, this Court rejected the strict approach tothe construction of taxation statutes and held that the modern approach applies to taxation statutes no less than it does to other statutes.That is, "the words of

an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with thescheme of the Act, the object of the Act, and the intention of Parliament" (p. 578): see 65302 British Columbia Ltd. v. Canada, (SCC), [1999] 3 S.C.R. 804, at para. 50. However, because of the degree of precision and detail characteristic of many taxprovisions, a greater emphasis has often been placed on textual

interpretation where taxation statutes are concerned: Canada TrustcoMortgage Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54, at para. 11. Taxpayers are entitled to rely on the clear meaning of taxationprovisions in structuring their affairs. Where the words of a statute are precise and unequivocal, those words will play a dominant role inthe interpretive process. 22 On the other hand, where the words of a statute give rise to more than one reasonable

interpretation, the ordinary meaning ofwords will play a lesser role, and greater recourse to the context and purpose of the Act may be necessary: Canada Trustco, at para. 10.Moreover, as McLachlin C.J. noted at para. 47, "[e]ven where the meaning of particular provisions may not appear to be ambiguous atfirst glance, statutory context and purpose may reveal or resolve latent ambiguities". The Chief Justice went on to explain that in order toresolve explicit and latent ambiguities in taxation legislation, "the courts must undertake a unified textual, contextual and purposiveapproach to statutory

interpretation". 23 The interpretive approach is thus informed by the level of precision and clarity with which a taxing provision is drafted. Wheresuch a provision admits of no ambiguity in its meaning or in its application to the facts, it must simply be applied. Reference to thepurpose of the provision "cannot be used to create an unexpressed exception to clear language": see P. W. Hogg, J. E. Magee and J. Li,Principles of Canadian Income Tax Law (5th ed. 2005), at p. 569; Shell Canada Ltd. v. Canada, (SCC), [1999] 3S.C.R. 622. Where, as in this case, the provision admits of more than one reasonable

interpretation, greater emphasis must be placed onthe context, scheme and purpose of the Act. Thus, legislative purpose may not be used to supplant clear statutory language, but to arriveat the most plausible

interpretation of an ambiguous statutory provision. 24 Although there is a residual presumption in favour of the taxpayer, it is residual only and applies in the exceptional case whereapplication of the ordinary principles of

interpretation does not resolve the issue: Notre-Dame de Bon-Secours, at p. 19. Any doubt aboutthe meaning of a taxation statute must be reasonable, and no recourse to the presumption lies unless the usual rules of

interpretation havebeen applied, to no avail, in an attempt to discern the meaning of the provision at issue. In my view, the residual presumption does notassist PDC in the present case because the ambiguity in the Mining Tax Act can be resolved through the application of the ordinaryprinciples of statutory

interpretation. I will say more on this below. [39] Thus, the modern approach described in Dreideger's Construction of Statutes applies, but because tax statutes often contain agreater degree of precision and detail, there is a greater emphasis on textual

interpretation. However, where the words give rise to severalreasonable

interpretations, the court should put less emphasis on the ordinary meaning of the words and greater emphasis on the contextand purpose of the Act. Further, regard to purpose and context may reveal ambiguity that is otherwise not visible. [40] Finally, there is a residual presumption in favour of the taxpayer, but this only applies in the exceptional case where theordinary principles of statutory

interpretation cannot resolve the ambiguity. [41] In the case at bar, the definition of “purchase price” is drafted broadly. It includes not only any consideration that is accepted bythe seller “as price or on account of the price” for the property sold, but also any additional charges for transportation, interest, finance,customs and excise charges in relation to that property. [42] In C-W Agencies Inc. v. British Columbia, 2003 BCCA 52, the Court considered this definition as it related to the definition of“sale” under the Act.

The question in that case was whether or not the sale of brochures from an advertising agency to lottery companiesamounted to a “sale” of tangible personal property under the Act even though the sale was part of a larger service contract and thebrochures were not itemized on any invoice. In concluding that it was a sale under the Act, Huddart J.A. compared the definition ofpurchase price to the definition of sale. She concluded that:

20 From these provisions, it is apparent the Legislature intended to capture for taxation purposes every transfer of a good betweenpersons for economic consideration, without regard to its form or to the amount or mode of payment. [Emphasis added.] [43] In Northland Dodge Chrysler Ltd. v. British Columbia, 2004 BCSC 767, the Court stated that “tax attaches to all amounts thatflow to the vendor from the sale” (para. 16). In that case, a car dealer received a cash rebate from the car manufacturer in addition to thepurchase price from the customer when a car was sold.

The Court held that the cash allowance was part of the purchase price and subjectto tax under the Act. [44] Thus, the wording suggests a broad and inclusive

interpretation that includes any consideration passing to the vendor so long asit is accepted on account of the price of the good. Further, as noted above, the definition is expanded to include additional charges suchas transportation, finance, and service charges. [45] The petitioner cites Canadian Pacific Ltd. v. British Columbia (1983), (BC CA), 45 B.C.L.R. 126 (C.A.) andThe Queen v. Westcoast Transmission Co. Ltd., (SCC), [1962] S.C.R. 125, in support of a restrictive

interpretation of“purchase price”. However, in reading those cases, I find no principles that assist in the

interpretation of the statute in this case. [46] In Canadian Pacific Ltd., the Court went through an exhaustive review of legislative history to determine the meaning of theterm “charge” under the definition, holding that it did not apply to internal charges within a company, but rather to external charges. I seenothing in that case that justifies an

interpretation of “purchase price” to include a fee such as the one here, charged by the vendor to thepurchaser. [47] Similarly, in Westcoast Transmission Co. Ltd., the Court considered whether terminal fees charged to the purchaser by a thirdparty were part of the purchase price and concluded that purchase price only included fees charged by the vendor itself, not thosecharged by a third party to the consumer.

Again, this is different than the fees charged in this case which were, in fact, charged andcollected by the vendor. [48] The petitioner further points to the scheme of the Act, which as a general rule does not tax charges for services. I do not find thisargument convincing. The Act clearly contemplates taxing all charges made in relation to the purchase of tangible personal property. Itmakes explicit reference to service charges when they are incurred in relation to such a purchase.

The fact that service charges are notcharged elsewhere in the Act is of no consequence, although I do think the type of service charges that are captured is limited. [49] In his decision, the Minister characterizes the Administration fee as part of this extended definition, specifically as a “servicecharge”. A service charge is taxable if it is “in relation to” the tangible personal property sold, and is incurred at or before the time thattitle to the property passes under the sale. [50] As was noted in R v. Nowegijick, (SCC), [1983] 1 S.C.R. 29, the phrase “in relation to” is capable of having avery wide scope.

This suggests that a charge merely connected to the sale of the property in some way would be sufficient to meet thedefinition. However, in Northern Thunderbird Air Ltd. v. Royal Oak Mines Inc., 2002 BCCA 58, the Court cautions against taking aplain meaning approach to the phrase “in relation to”. As Finch C.J.B.C. said at para. 21: … There is, in my view, considerable ambiguity in that phrase. It can be given a broad or narrow meaning.

Giving the words their “plainmeaning” without restriction would allow lien claims for services provided no matter how tenuous or indirect their connection to theimprovement might be. On the other hand, if one is to read the phrase more narrowly, the question is how any limitation on its meaningcan be expressed, consistent with applicable principles. [51] Finch C.J.B.C. decided that because of that ambiguity, the phrase must be interpreted in the manner best consistent with theintention of Parliament, the object of the Act, and the scheme of Act.

He decided that under the applicable legislation in that case, “inrelation to” meant a “direct” relationship. [52] In this case, the Act clearly is drafted to tax purchases of property not services. Service charges incurred independently ofpurchase price would not be caught. However, the legislation is drafted in such a way so as to prevent the circumvention of taxconsequences by characterizing the true price of a good as something else.

Thus, every service or finance charge incurred “in relation to”that piece of property is also taxed. [53] As in Northern Thunderbird Air Ltd., to achieve the correct balance, the words “in relation to” must be limited so as to avoidthe taxation of independent charges, but still be inclusive enough to avoid the circumvention of tax. I am inclined to adopt the approachtaken by Finch C.J.B.C. to the Builders Lien Act, S.B.C. 1997, c. 45, and interpret the words as requiring a “direct” link between thetangible personal property and the service charge. This will sufficiently address the concern of an overly broad

interpretation that mightcapture any and every service charge that is, in fact, independent from the purchase itself. For example, it would prevent the capturing ofthe charge for a haircut just because a hair product was bought at the same time. [54] This requirement of a direct link further allays any concerns of an

interpretation of “service charge” that would rendersubsection (i)(

A) superfluous. The

interpretation is not overly broad; it does not include any and every charge that could possibly berelated to the purchase. Also, I am not convinced that a broader

interpretation is problematic in any event. It is not uncommon for theLegislature, in the context of a list, to make reference to specific things not only to ensure its intent to include those items is clear, but toalso include a basket clause to broaden that list. [55] As I find the ambiguity can be resolved in reference to the purpose and scheme of the Act, there is no need to resort to theresidual presumption in favour of the taxpayer. [56] Applying this

interpretation of “service charge” to the case at bar, I note that the Administration fee was clearly incurred at thetime of sale. It is also related to the sale in that to take advantage of the advertised offer of payment deferral, a customer must incur this

charge to make a purchase. In the “small print”

section of the flyers submitted in evidence where the terms of credit are described, the Administration fee is defined and the “total cost” is described to include the Administration fee in the purchase price. [ 57 ] While the Administration fee was recorded separately from the goods purchased on an invoice and in the company books, it was directly related to the purchase of tangible personal property.

It is evidenced by the fact that an administrative fee was charged for every additional purchase, even if a customer already had a Brick Card. [ 58 ] Just because a customer could buy an item without using a Brick Card does not change the fact that the fee is part of the purchase price for those who did use one; the fee was an additional charge to the price so the customer could take advantage of deferred payment. [ 59 ] Another factor is that even if a customer already had a Card and chose to defer payment of the purchase price, the administration fee was still assessed.

Thus, the charge was not just for setting up the Card with one of the finance companies, it was assessed when an existing Card was used to defer the price. Evidence of that assertion is found in the cross-examination of Mr. Innes on his Affidavit No. 1 attached to the Affidavit of Kerra Jay, filed May 15, 2013, at pages 26 and 27. Q. So the customer only had to pay the Administration fee for those related services if it was going to use its Brick Card to finance its purchase of its Brick products? A. Correct, or get a Brick Card in order to take advantage of the offer.

There’s two circumstances: They either have a Brick Card and use it as part of the payment process or they have to apply for a Brick Card and get a line of credit which may or may not be more than the purchase to take advantage of, of the deferred financing. Q. And either way the customer has to pay the Administration fee for the related services? A. That is correct. … Q. So every time a customer makes a purchase using its Brick Card and takes advantage of a do-not-pay-until program that customer has to pay an Administration fee for the related services? A.

That is correct. [ 60 ] Further, although the fee related to arranging financing from a third party, The Brick arranged the financing as part of its role in completing a specific sale. The line of credit was not an independent one available to be used at any store.

In the Brick Card Account Holder Agreement, the third party lenders agree to “designate, such funds (an Advance) as are necessary to satisfy my indebtedness to The Brick for goods or services I purchase”. [Emphasis added.] Though a customer could apply for a Brick Card without making a purchase, the Card is only useful to purchase Brick goods. [ 61 ] I find that the administration fee charged by The Brick to its customers was a service charge directly related to the sale of tangible personal property and was therefore part of the definition of the purchase price under the Act .

There is, therefore, no need to consider whether the fee might otherwise be characterized as a finance charge or generally as consideration on account of price. [ 62 ] I therefore conclude that the Minister was correct in his

interpretation of the statute and his confirmation of the penalty imposed. Therefore, the appeal is dismissed. [ 63 ] Costs may be spoken to if necessary. “J.K. Bracken, J.” The Honourable Mr. Justice Bracken