Larry Penner Enterprises Inc v The Deputy Minister Date:, 2018 MBCA 78

Citation: Larry Penner Enterprises Inc v The Deputy Minister Date: 20180821 of Finance (Manitoba), 2018 MBCA 78 Docket: AI17-30-08962 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Freda M. Steel Madam Justice Holly C. Beard Mr. Justice Marc M. Monnin BETWEEN : LARRY PENNER ENTERPRISES INC. ) P. K. Grower ) for the Appellant ) (Applicant) Appellant ) S. D. Boyd and ) M. K. N. Stonyk - and - ) for the Respondent ) THE DEPUTY MINISTER OF FINANCE ) Appeal heard: (MANITOBA) ) June 11, 2018 ) ) Judgment delivered: (Respondent) Respondent ) August 21, 2018 On appeal from 2017 MBQB 148 BEARD JA I.

THE ISSUE [ 1 ] This is a second-level appeal by the applicant, Larry Penner Enterprises Inc. (Penner), of an order by the Tax Appeals Commission (the Commission) upholding a tax assessment by the Taxation Division of the Department of Finance (the Division).

That assessment required Penner to pay retail sales tax under The Retail Sales Tax Act , CCSM c R130 (the RSTA ), on fuel tanks and other equipment (the equipment) that it purchased as part of its business, being the bulk sale of fuel and other petroleum products (the petroleum products), and provided to certain of its customers (the retailers) for their use. The Commission’s order was upheld on statutory appeal to the Court of Queen’s Bench, which is the subject of this appeal. [ 2 ] The text of the relevant statutory provisions is set out in the attached appendix. II.

THE FACTS [ 3 ] By way of background, the RSTA imposes a retail sales tax, payable by a purchaser, on the price of goods and services that are designated as taxable in the legislation. A purchaser who purchases goods and services to resell or to lease to others may be exempt from paying the sales tax on those items. Penner claimed an exemption when it purchased the equipment and it did not pay any sales tax. [ 4 ] In 2014, the Division did an audit and concluded that Penner had purchased and used the equipment for promotional purposes.

It then assessed Penner for unpaid retail sales taxes, penalties and interest, which totalled $130,358.81. [ 5 ] Penner appealed that assessment to the Commission, which is a specialized administrative tribunal, pursuant to Division 4 of The Tax Administration and Miscellaneous Taxes Act , CCSM c T2 (the TAMTA ). The assessment was upheld by the Commission. Penner then appealed that decision to the Court of Queen’s Bench pursuant to sections 58 - 59 of the TAMTA .

The Court of Queen’s Bench judge (the appeal judge) upheld the assessment and Penner has now appealed that decision to this Court. [ 6 ] There is no disagreement between the parties as to the underlying facts or the law. Penner is a wholesale distributor of petroleum products. At issue before the Commission was the

interpretation of seven purchase/supply contracts (the contracts) that Penner entered into with retailers on reserves who were themselves exempt from paying retail sales tax pursuant to

section 87 of the Indian Act , RSC 1985, c I-5 and section 1(5) of the TAMTA . The contracts provided, among other things, that Penner would supply the

equipment to the retailers and maintain that equipment so long as the retailers dealt exclusively with it for the supply of all of the retailer’s petroleum products. [ 7 ] While Penner took the position that the equipment was being leased to the retailers and, therefore, tax exempt, the Commission found that there was no leasing arrangement. Rather, it found that the equipment was provided as a promotional distribution under the RSTA and was, therefore, taxable property. III. STANDARD OF REVIEW [ 8 ] There are several standard of review issues.

First, the matter proceeded in the Court of Queen’s Bench by way of a statutory appeal of an administrative decision, rather than by judicial review. It is now well settled that, even though the administrative decision was being appealed (see

section 56 of the TAMTA ), rather than reviewed by way of judicial review, the standard of review issues in that Court are those applicable on judicial review of an administrative decision and not those applicable on appeal. (See Mouvement laïque québécois v Saguenay (City) , 2015 SCC 16 at paras 22-44 ; Edmonton (City) v Edmonton East (Capilano) Shopping Centres Ltd , 2016 SCC 47 at paras 27-35 ; Groia v The Law Society of Upper Canada , 2016 ONCA 471 at para 54 , aff’d on other grounds 2018 SCC 27 ; The Armstrong’s Point Association Inc v The City of Winnipeg et al , 2013 MBCA 110 at para 3 ; Loewen v Manitoba Teachers’ Society , 2015 MBCA 13 at para 24 ; and Dorn v Association of Professional Engineers and Geoscientists of the Province of Manitoba , 2018 MBCA 18 at para 16 .) [ 9 ] The second issue is to determine the standard by which this Court will review the appeal judge’s decision.

This is also now well settled and is explained as follows in Donald JM Brown with the assistance of David Fairlie, Civil Appeals (Toronto: Thomson Reuters, 2017) vol 2 (loose-leaf release 2018-2) ch 14 (at para 14:7210): When an appeal is taken from an initial judicial review of administrative action, a question arises as to whether the standards of review set out in Housen [2002 SCC 33], apply to a reviewing court’s conclusion. The Supreme Court of Canada addressed that question directly in Dr. Q. v.

College of Physicians and Surgeons of British Columbia [2003 SCC 19], by indicating that while the Housen standards were to be applied, the question of “the right standard to select and apply is one of law and, therefore, must be answered correctly by a reviewing judge.” That response, however, in turn led to some uncertainty, other than where the reviewing court had selected the wrong standard, which obviously required that the appellate court select and then apply the correct one.

Specifically, the uncertainty was as to whether the application of a standard that had been correctly selected was to be reviewed for “palpable and overriding error.” The Court in Zenner [2005 SCC 77] answered that question by stating that, once having determined that the correct standard of review had been selected by the reviewing court, the question for an appellate court was “whether the standard of review was correctly applied.” In the result, today an appellate court will apply the standard of correctness both to the reviewing court’s selection of the standard of review of the administrative action, and to the reviewing court’s application of the correctly selected standard.

This effectively calls upon the appellate court to conduct its own standard of review analysis and then apply it without deference.

In other words, the appellate court simply stands in the shoes of the initial reviewing court. [ 10 ] To summarize, in reviewing the appeal judge’s decision, this Court must: - first determine whether the appeal judge identified the correct standard of review—correctness or reasonableness (see Dunsmuir v New Brunswick , 2008 SCC 9 at para 34 ); - next, determine whether the appeal judge applied the correct method of analysis in applying the standard of review to its review of the administrative decision (see Dunsmuir at para 47 regarding the application of the reasonableness standard and para 50 regarding the correctness standard; and Zenner v Prince Edward Island College of Optometrists , 2005 SCC 77 at para 43 ; and see also Guinn v Manitoba , 2009 MBCA 82 at paras 23-34 for an example of the incorrect application of the reasonableness standard); and - finally, determine whether the decision of the appeal judge as to the correctness or reasonableness of the administrative decision was, itself, correct—to do this, this Court must “stand in the shoes of the appeal judge” to review the administrative decision (see Zenner at paras 29-30 ; Merck Frosst Canada Ltd v Canada (Health) , 2012 SCC 3 at para 247 ; Agraira v Canada (Public Safety and Emergency Preparedness) , 2013 SCC 36 at paras 46-47 , 54; and Groia v Law Society of Upper Canada , 2018 SCC 27 at paras 43 , 57-58). (See also Dr Q v College of Physicians and Surgeons of British Columbia , 2003 SCC 19 at para 43 ; Guinn at para 21 ; Korsch v Human Rights Commission (Man) et al , 2012 MBCA 108 at para 8 ; Jiang v Manitoba (Minister of Labour and Immigration) et al , 2014 MBCA 27 at paras 15-16 ; Bourgouin v Rosser (Rural Municipality) , 2014 MBCA 103 at para 16 ; and Loewen at para 24 .) [ 11 ] The third issue is to determine the correct standard of review to be applied by the appeal judge to the Commission’s decision.

The Commission was required to interpret and apply the provisions of its home statutes and closely related statutes to the facts to determine whether to uphold or overturn the assessment.

In that situation, the presumption is that the reasonableness standard will apply, even where the tribunal must, to some extent, interpret and apply the common law. (See Barreau du Québec v Quebec (Attorney General) , 2017 SCC 56 at para 15 ; Delta Air Lines Inc v Lukács , 2018 SCC 2 at para 8 ; and Williams Lake Indian Band v Canada (Aboriginal Affairs and Northern Development) , 2018 SCC 4 at paras 27-28 .) Neither of the parties has identified any factors that would rebut that presumption.

While the question of the applicable standard was contested before the appeal judge, both parties now agree, as do I, that the standard to be applied by the appeal judge on the review of the Commission’s decision was that of reasonableness (which was the finding of the appeal judge). [ 12 ] The final issue is that of the proper application of the reasonableness standard.

This was explained by this Court in Manitoba v Russell Inns Ltd et al , 2013 MBCA 46 as follows (at para 81): The application of the reasonableness test requires that the reviewing court examine the tribunal’s reasoning and outcome to see whether the tribunal’s finding or conclusion comes within the set of rational outcomes that are defensible with respect to the facts and the law; that is, whether there is any line of analysis within the reasons that could adequately support the decision. If there is, then the

decision is reasonable, even if a different line of analysis would lead to a different result. It is an error to examine the reasons to determine whether there are sufficient errors to render the decision unreasonable. . . . [ 13 ] This sets out how the appeal judge must apply the reasonableness standard to his review of the administrative decision. IV. ANALYSIS [ 14 ] I am satisfied that the appeal judge both identified the correct standard for reviewing the Commission’s decision and applied that standard correctly.

As noted earlier, he found that the standard applicable to all aspects of the Commission’s decision was that of reasonableness, which he recognized was a deferential standard. He also stated that his role was not to determine his own outcome and then measure the Commission’s decision against that outcome (the correctness standard), but to begin with an analysis of the Commission’s decision.

Finally, he noted that not all questions have only one particular result; rather, there may be a number of reasonable conclusions or outcomes. (See paras 35-39.) [ 15 ] The appeal judge then looked at the Commission’s reasons, finding as follows (at paras 41-45): The analysis of the facts set out in the Reasons establish that consideration was given by the Commission to the nature of the legal arrangements between [Penner] and [the retailers] that were created by the written agreements the parties entered into.

The Commission concluded that the written agreements should be analyzed based on what an objective person would conclude was really happening and not the subjective intentions of the parties. The ultimate conclusion was that the Fuel Tanks were provided to [the retailers] by [Penner] to promote and encourage an exclusive business arrangement. The analysis and conclusions of the Commission are reasonable, in my view.

The Reasons conclude that the agreements between [Penner] and [the retailers] did not amount to a lease of the Fuel Tanks, and the provision of the Fuel Tanks was a promotional distribution which creates an obligation for [Penner] to remit tax under the RSTA . In making this determination, the Commission applied the law relating to

interpretation of contracts and found that the evidence should not be applied in the manner [Penner] suggested. The argument made by [Penner] that a violation of the Indian Act would occur based on the Minister’s

interpretation of the RSTA was also considered and rejected. The fact that I may have come to a different conclusion on the available evidence does not make the decision of the Commission unreasonable. The arguments submitted on behalf of [Penner] are not the only possible way one could reasonably interpret the statutes and apply the facts to the law. In my view, [Penner] is asking me to apply a correctness standard to the decision of the Commission, which the law does not permit in these circumstances.

All of these findings are well articulated in the Reasons and show that the arguments made by [Penner] were considered and held to be inadequate to support a conclusion favourable to it. The conclusions arrived at by the Commission as set out in the Reasons are all possible and acceptable outcomes that are defensible in respect of the facts and the law.

Therefore, taken as a whole, the conclusion reached by the Commission is, in my view, reasonable and I am dismissing the application of [Penner] to overturn the decision of the Commission. [ 16 ] Penner has not identified any errors in the appeal judge’s selection of the standard of review or in how he applied that standard to the Commission’s decision. Rather, it argues that the Commission’s findings were unreasonable and that the appeal judge erred in finding otherwise. [ 17 ] Was the Commission’s decision reasonable?

What was at the heart of the dispute as argued before the Commission and before the appeal judge was the Commission’s

interpretation of the terms of the seven contracts (which are, with a couple of small variations, essentially identical) and the Commission’s conclusion that the equipment was not leased by Penner to the retailers but, rather, was provided by it as a “promotional distribution” to the retailers and that Penner was a “promotional distributor” within the definition of those terms in section 1(1) of the RSTA . (See attached appendix.) [ 18 ] Penner raised a number of issues which were addressed by the Commission, those relevant to this appeal being the following: (

i) that the contracts were, essentially, two agreements—an agreement for the provision of petroleum products and an agreement to lease the equipment; (ii) that the evidence of Penner’s CFO and one of the retailers should have been admitted as extrinsic evidence or part of the surrounding circumstances to support a finding that the contracts included a lease payment for the equipment; (iii) that the value of the equipment, and in particular the fuel tanks, was so significant that it was nonsensical to say that they were a promotional distribution; and (iv) that, applying the reasoning in Johnson & Johnson Inc v Ontario (Minister of Finance) , 2003 CarswellOnt 595 (CA) , the promotional distribution took place when the equipment was used by the retailers by way of lease, not when Penner acquired it. [ 19 ] First, the Commission found that the wording of the agreement was clear and unambiguous and that it did not provide for the lease of the equipment on any reading of the words.

As the Commission noted, while none of the contracts mentions a lease of the equipment, one contract specifically refers to the retailer’s use of the equipment as a “[l]oan”. While Penner argues that a portion of the per-litre price is for equipment leasing, the components of the per-litre price are set out in the contracts and there is no reference in any contract to a component of the price being for the lease or use of the equipment.

The Commission’s rejection of this argument was reasonable. [ 20 ] Penner also argues that the consideration for the lease of the equipment was the retailer’s agreement that Penner would be its exclusive supplier of petroleum products. In support of this argument, it pointed out that the definition of a “lease” in section 1(1) of the RSTA includes “any other consideration whatsoever”. In my view, the question of the use of the equipment has to be interpreted in

the context of the contracts between Penner and the retailers. The Commission accepted the respondent (Manitoba)’s argument that there was a “lack of any words respecting the lease or rental of the [equipment], or a value or amount specifically charged to and required to be paid by the [retailers] for the use of the [equipment]” and that “no reasonable person could infer from the agreement that the parties [ sic ] intention was to lease or rent the [equipment].” In my view, when the wording of the contracts is considered as a whole and in context, this conclusion was within the range of reasonable

interpretations available to the Commission. [ 21 ] Second, the Commission refused to accept evidence from Penner’s CFO and one retailer that the fuel pricing included a per-litre amount for the lease of the equipment. First, the Commission found that the evidence was not admissible as extrinsic evidence because there was no ambiguity in the contracts.

I would agree that the contracts were not ambiguous, and the Commission’s finding that extrinsic evidence was not required to provide any explanation was reasonable. [ 22 ] In addition, the Commission found that the evidence was not admissible under King v Operating Engineers Training Institute of Manitoba Inc , 2011 MBCA 80 , as evidence of the factual matrix and surrounding circumstances.

It found that the proposed evidence was evidence of the subjective intention of the CFO and the retailer and, as such, it did not meet the criteria for admissibility under King , that being “objective evidence of the background facts at the time of the execution of the contract” (at para 70) (see also paras 58-73).

I would agree with the Commission’s finding that this evidence was not admissible, for the reasons that it set out. [ 23 ] Further, as the Commission noted, the evidence was prepared many years after the contract and in response to the audit by the Division, and the retailer’s evidence was from only one of seven retailers.

Even if admissible, the Commission’s finding that the evidence was of little weight was reasonable, given its findings as to the clear wording of the contract and the circumstances of the preparation of the affidavits. [ 24 ] Finally, Penner argued, for the first time before us, that the Commission’s evidentiary findings applied only to the retailer’s evidence and not to that of its CFO. That is not, in my view, a correct reading of the decision. The evidence of both witnesses was before the Commission.

There was one comment directly referencing the evidence of the retailer; otherwise, the decision refers only to “the evidence”, which I would find included that of both witnesses. Thus, I would not accept this argument. [ 25 ] Third, Penner argues that the value of the equipment, and in particular the fuel tanks, was so significant that it was nonsensical to say that they were for a promotional distribution. The Commission rejected that argument on the basis that the determination of whether property was for promotional distribution was to be based on the purpose for which it was provided and not its value.

A reading of the

definitions of “promotional distribution” and “tangible personal property” in section 1(1) of the RSTA shows that to be the correct

interpretation. In my view, the Commission’s finding that the equipment was provided to promote and encourage the retailers to contract for petroleum products exclusively from Penner, which is a “promotional distribution”, was reasonable. [ 26 ] Fourth, the Commission found that, due to the different facts, the reasoning in Johnson did not apply. Specifically, it noted that, in Johnson , ownership of the promotional product was transferred to the tax-exempt retail consumer, while, in this case, Penner retained ownership of the equipment. The Commission’s conclusion that the reasoning in Johnson was not of assistance to Penner for the reasons set out by the Commission was a reasonable

interpretation. [ 27 ] Penner raised a variation on these arguments for the first time on appeal.

While this Court will not generally entertain arguments raised for the first time on appeal, in this case, these arguments can be readily answered on the basis of material now before the Court. [ 28 ] Penner argues that it does not meet the definition of a purchaser by way of promotional distribution in the RSTA (which was the basis upon which the tax was assessed) because that definition includes a promotional distribution of property (here, the equipment) only “if [the property’s] fair value is greater than any amount paid for it by the person to whom it is provided” (at section 1(1) of the RSTA .) Penner’s position is that, if the retailers paid more than the fair market value of the property, then there was no promotional distribution for which it was the purchaser.

It agrees that this argument would fail if the Commission reasonably found that it was paid nothing for the equipment. [ 29 ] Penner argues that, while the Commission found that there was no lease, it never made any finding that it had not been paid for the equipment.

Its position is that the retailers paid a per-litre amount for the equipment that was included in the price of the fuel, and that the total amount paid exceeded the fair value of the equipment, thus exempting it as a promotional distribution within the definition of “purchaser”. [ 30 ] I would not accept the argument that the Commission did not find that there was no payment for the equipment; in my view, that finding was implicit in the findings that it did make. It must be remembered that this argument was not put to the Commission in this way, so it was not addressed directly.

First, the only evidence of a per-litre payment for the equipment was in the evidence of Penner’s CFO and the retailer. That evidence was rejected by the Commission, so there was no evidence of any payment for the equipment. [ 31 ] Further, the argument before the Commission was that the contracts included the lease of the equipment, and the Commission found that there was no lease of the equipment in the agreements.

If there was no lease of the equipment, there could be no lease payment. [ 32 ] Thus, in my view, the only conclusion that can be drawn from the Commission’s findings is that no amount was paid for the equipment. Therefore, this argument must fail. [ 33 ] In conclusion, Penner focussed its argument before the appeal judge on what it alleged were errors in the

interpretation and application of the legislation by the Commission. I do not agree that there were any such errors. The essential question, in my view, was more one of contractual

interpretation—whether the price set out in the contracts included a component for the lease of the equipment and whether the retailers were given the use of the equipment to encourage them to purchase their petroleum products exclusively from Penner. In my view, the Commission’s conclusion that the contracts are clear was reasonable. Further, as it reasonably found, the price in the contracts did not include any amount for the lease of the equipment and it was a reasonable

interpretation of the

contracts that the retailers were given the use of the equipment as an inducement to purchase its petroleum products exclusively from Penner. [ 34 ] Thus, I would agree with the appeal judge that the Commission’s findings were all reasonable. Further, I would reject the argument that Penner raised at the appeal hearing, when considered in light of the Commission’s findings regarding the extrinsic evidence and the lack of any lease of the equipment. V.

DECISION [ 35 ] For these reasons, I would find that the appeal judge was correct both in the standard of review that he applied and in his application of that standard to the reasons of the Commission. I would also find that he did not err in his determination that the Commission’s findings were reasonable, and I would reject the arguments that Penner raised before us. Thus, I would uphold the decision of the appeal judge and dismiss this appeal. [ 36 ] I would grant costs on the appeal to Manitoba. JA I agree: JA I agree: JA APPENDIX The Retail Sales Tax Act , CCSM c R130 Provisions

Definitions 1(1) In this Act, . . . “consumption” includes (

a) the consumption or use of tangible personal property, (

b) the incorporation of tangible personal property into real property including tangible personal property manufactured by the purchaser or further processed or otherwise improved by the purchaser for the purpose of incorporating it into real property, (

c) the receiving of the benefit, enjoyment, assistance or advantage of a service, and (

d) the provision by way of promotional distribution of any tangible personal property or service; . . . “lease” includes a contract for possession and profits of tangible personal property for a consideration whether the consideration is expressed as rental, licence fee, royalty or any other consideration whatsoever; . . .

“promotional distribution” includes the provision by any person to others of any tangible personal property or taxable service that is provided for any one or more of the following purposes: (

a) to promote or encourage the attendance at, or the patronage of, any business, undertaking, enterprise or place of amusement, or the contracting with any person, (

b) to describe, or to promote or encourage the purchase, use, or consumption of, or contracting for, any goods, wares, commodities, materials, lands, premises, property, facility, services, utility, accommodation, benefit, work, assistance, action or thing, (

c) to furnish to any person any directory, listing or compilation of persons, places, prices, goods, wares, commodities, materials, lands, premises, properties, facilities, services, utilities, accommodations, benefits, work, assistance, actions or things or of providers thereof or users thereof, (

d) for any function, use or purpose which, in the opinion of the minister, is a promotional distribution; “promotional distributor” means any person who is a resident of, or carries on business within the province and who, by way of promotional distribution, provides or causes to be provided to any person within the province any tangible personal property or taxable service the fair value of which is not specifically charged to, and required to be paid by, the person to whom the tangible personal property or taxable service is provided; . . . “purchaser” , except in sections 22.1 and 22.2, means any person who (

a) purchases, acquires, or leases tangible personal property at a retail sale in the province, or (

b) commands or receives a taxable service at a retail sale in the province, or (

c) in the case of a person residing or ordinarily resident or carrying on business or intending to carry on business in the province, brings into the province, or causes to be brought into the province, or receives delivery in the province, of tangible personal property purchased, acquired or leased by the person outside the province, (d) [repealed] S.M. 2009, c. 26 , s. 51, for consumption by the person at his or her own expense, by anyone else at the person’s expense, or by the person or anyone else at the expense of anyone for whom the person is acting as agent, and includes a promotional distributor in relation to tangible personal property or a taxable service provided by way of a promotional distribution if its fair value is greater than any amount paid for it by the person to whom it is provided; . . . “retail sale” means (

a) a sale of tangible personal property to a purchaser for the purposes of consumption and not for resale as tangible personal property, and . . .

“sale” includes . . . (

f) a sale under which tangible personal property is leased for a period or periods, whether or not it is agreed under the contract that the lessee will become or have the option of becoming the owner of the property on compliance with any terms of the contract, . . . (

j) the provision by way of promotional distribution of any tangible personal property or taxable service; . . . Tax on tangible personal property and taxable services 2(1) Every purchaser of tangible personal property or a taxable service must pay tax equal to the fair value of the property or service multiplied by the general sales tax rate. . . .

Tax on lease of tangible personal property 2(3) For the purposes of subsections (1), (1.1) and (2), where the tangible personal property is the subject of a lease, the tax is payable on the rental or other consideration payable from time to time for the use of the property leased, and shall be paid at the time each payment of the rental or other consideration is due.