2003BCSC0967

Before: The Honourable Mr. Justice McEwan

Reasons for Judgment

Counsel for the Petitioner	Scott G. Cordell
Counsel for the Respondent	Hunter W. Gordon
Date and Place of Hearing:	June 11, 2003
	Vancouver, B.C.

[1] The petitioner (“Emco”) is incorporated in Ontario and has a head office in Vancouver, British Columbia. It supplies plumbing, heating, air conditioning and fire protection equipment. It is a Vendor under the Social Services Tax Act, R.S.B.C. 1976, c. 431 (the Act). As such, it is constituted as an agent of the government for the collection of Social Services Tax (the S.S.T.) under the Act. Whenever Emco made a tax applicable sale, it credited the S.S.T. charged to the customer to its S.S.T. payable account and made monthly remittances as required by the Act to the Government of British Columbia.

[2] Throughout times relevant to this proceeding, Emco offered customers a 2% discount if their accounts were paid by the 20th of the following month.

[3] A typical invoice was used as an example in counsels’ submissions. It bore a date of “02/12/1996”, outlined “terms” described as “2% 20th MF”, showed a “total due” of “165.88,” and included a notice, “If paid on or before 03/20/96 Amount Due is 162.97.”

[4] On its face, the invoice was for two items totalling $145.50. To this was added P.S.T. “(S.S.T.)” of $10.19 and G.S.T. in the same amount, for a total of $165.88.

[5] The mathematics is that if $145.50 is discounted by 2%, the price is reduced by $2.91 and becomes $142.59. Adding back the P.S.T. (“S.S.T.”) and G.S.T. without reduction yields the figure $162.97.

[6] Emco submits that the proper way to view payments of such discounted amounts is as blended payments. Using the same example (but the Court’s mathematics) — this would make for a net purchase price of $142.78 and G.S.T. of $10.19 (G.S.T. is not reduced for discounts) and P.S.T. (S.S.T.) of $10.00. They submit that although the 2% discount was calculated on the sale price net of tax, and that tax was collected and remitted on the basis of 7% of the gross sale price rather than the discounted price, the proper characterization of the transaction is not that there was an overpayment of tax relative to the discounted amount paid, but that the actual discount was the number derived from that calculation (i.e. $162.97). In the petitioner’s submission, the “2% discount” is simply part of the formula the petitioner used to calculate the actual discount offered. Upon reflection, it can be seen that this treatment has the effect of reducing the actual discount offered on the price from 2% to about 1.75%, notwithstanding the representation of a 2% discount on the face of the petitioner’s invoices.

[7] The amounts used in this illustration are so small as to appear trivial. The effect, however, is not. The difference in the petitioner’s remittance of S.S.T., calculated on the basis of the gross sale price for transactions they say should be treated as “blended” payments, is a claim for a refund, over several years and many thousands of transactions, of some $523,143.68.

[8] The matter comes before the Court as an appeal from a decision of the Minister of Provincial Revenue affirming a ruling of the Commissioner denying the petitioner’s claim for a refund. The letter from the Commissioner includes the following explanation:

... we have become aware that the basis of your claim does not conform with our Branch policy dealing with cash discounts which have been calculated on the pretax selling price. In situations where purchaser takes a cash discount offered by the seller, that has been calculated on the pre tax selling price, then the cash discount is not considered to be tax included. Under these circumstances the purchaser, not the seller, is eligible for a refund.

Based on the information provided with your claim it is evident that the cash discounts offered by your company and taken by your customers was calculated on the pre tax selling price. Under these circumstances only your customers would be eligible for a refund of tax related to the cash discounts taken.

[9] The Minister’s letter affirming this decision includes the following observations:

The branch’s position is clear. There were overpayments of tax on the sales where an early payment discount was taken, but it is Emco’s customers who are eligible for refunds, provided they have appropriate documentation to support their refund claim. If Emco has evidence of any of its customers being denied the refund, Emco should advise these customers to re-apply.

[10] The appeal provisions of the Act are found in sections 118 and 119. Section 118 outlines the procedure for appeals from the Commissioner to the Minister. Section 119 deals with appeals from the Minister:

119(1) A decision of the minister under section 118(4) may be appealed to the Supreme Court by way of an originating application. ...

(4.1) An appeal under this section is a new hearing that is not limited to the evidence and issues that were before the minister.

(5) The court may

(a) dismiss the appeal,

(b) allow the appeal,

(d) refer the decision back to the commissioner for reconsideration.

[11] While it is obvious that this Court sitting in appeal of the Minister’s decision is not fettered in any way by a legal requirement for deference, but may take a fresh view of the matter, I think some assistance can be derived from the Tax Interpretation Manual the Ministry uses in administering the Act. The value and the limitations of such sources has been canvassed in cases such as Harel v. Department of Revenue of Quebec, [1978] 1 S.C.R. 851, and Vaillancourt v. The Queen, [1991] 3 F.C. 663 (C.A.). A brief quote from Vaillancourt will, I think, suffice:

It is well settled that Interpretation Bulletins only represent the opinion of the Department of National Revenue, do not bind either the Minister, the taxpayer or the courts and are only an important factor in interpreting the Act in the event of doubt as to the meaning of the legislation.

[12] In the present case, the statutory authority under which the petitioner proceeds is Section 82 of the Act:

82(1) If the commissioner is satisfied that taxes or a portion of taxes have been paid in error, other than an error that is a mistake of law, the commissioner must refund from the consolidated revenue fund the amount of the overpayment to the person entitled.

(1.1) If the commissioner is satisfied that a person has remitted to the commissioner an amount as collected taxes that the person neither collected nor was required to collect under this Act, the commissioner must refund the amount to the person from the consolidated revenue fund.

[13] The most recent of the Interpretation Bulletins issued within the Ministry on the subject of cash discounts is R.6, revised in May of 2001. It reads:

R.6 Cash Discounts (Revised: 2001/05)

When a cash discount is given at the time of sale, the discount should be taken off the gross selling price and then the tax applied to the net selling price. However, when a discount is not certain at the time of sale (eg., terms of 2% 10, net 30, where the discount will only be given if paid in 10 days), then the invoice should be made out for the gross amount plus tax and the discount allowed on this total, if payment is made by the discount date. The following Case A and Case B illustrate:

Case A (Discount Uncertain)

Case B (Discount Certain)

Price $100.00

Tax @ 7% 7.00

$107.00

Discount @ 5% (5.35)

Net Cost to Purchaser $101.65

Price $100.00

Discount @ 5% 5.00

$ 95.00

Tax @ 7% (6.65)

Net Cost to Purchaser $101.65

Where discounts are uncertain and are taken after the invoicing, the discount should be applied to both the gross purchase price and tax amount. This is outlined in Case A. Where the vendor has remitted the tax calculated on the pre-discount price, and the purchase has included the tax amount in the discount calculation, the vendor may debit its tax account for the tax included in the discount taken (i.e., in Case A, the vendor having remitted $7.00, would adjust its tax account by $0.35). The adjustment must be made in the reporting period in which the discount is recognized. Where a discount has been made in prior reporting periods, the vendor must apply to the branch for a refund rather than making an adjustment to its tax account. Vendors and purchasers are to be advised that this is the appropriate method of accounting for tax where discounts are offered.

Frequently, purchasers only take the discount on the gross purchase price and not the tax amount. In this case, the purchaser may claim a refund of tax based on the amount of the discount claimed, providing the vendor has not remitted a reduced amount of tax. The following Case C illustrates this scenario:

Therefore, where either a Case C or Case D apply, the vendor must be contacted to determine if a refund is applicable or not.

[14] Despite the able and determined efforts of counsel for Emco to persuade this court otherwise, I am of the view that what has occurred in this case matches “Case C” in the examples set out in the Interpretation Bulletin. The petitioner’s submission posits a formula that could be applied to any amount collected that was short of the full purchase price, since any discounted figure could be calculated as a blended amount. I reject the petitioner’s submission that the 2% discount was only used as a basis for calculation. It seems quite obvious that the petitioner offered a 2% discount but failed to apply a corresponding discount to the S.S.T. I recognize that there are timing issues related to the reporting period that may make dealing with the matter as set out in “Case A” in the Interpretation Bulletin awkward for vendors who wish to offer a discount for prompt payment. That may militate against the practicability of such incentives, but it does not justify the over-collection of tax from purchasers and the re-characterization of the amount collected as a “blended” payment to the benefit of the petitioner.

[15] The overpayments are due to the petitioner’s customers, the “purchasers”, in tax terms. The petitioner is not entitled to money it collected as agent for the Government. The Government acknowledges that there have been overpayments, but submits that the terms of the Act renders it liable to claims on those funds at the instance of purchasers.

[16] This situation is unusual in that, on the view I have taken of the facts, neither of the parties before the Court is actually entitled to the money that is the subject of the dispute, while no one with a potential claim is before the Court. The Minister, in effect, recognized the situation in his letter affirming the Commissioner’s disallowance, by suggesting that Emco advise its customers to seek a refund.

[17] In summary, the prayer for relief sought in the motion shall be disposed of on the following basis:

1. I decline to set aside the decision of the Minister disallowing the Petitioner’s claim for a refund.

2. I find that the Petitioner is not entitled to a refund under section 82 of the Act.

3. I am accordingly not in a position to make the orders sought in paragraphs 3, 4 and 5 of the Motion dealing with fixing the amount of the refund or sending the matter back for assessment.

[18] In accordance with Section 119 of the Act, the Appeal is dismissed.

[19] In the circumstances of this case, I am concerned that some form of notice of a potential claim to a refund ought to be given to the customers of the petitioner by the Government. This issue does not arise on the motion or in the materials, and Counsel have not had an opportunity to address it. It may be that there are reasons, jurisdictional or otherwise, why the Court should not attempt to do anything in this regard. I do, however, direct that the Registrar arrange a telephone conference with counsel to speak to this situation. It does appear to me, as a matter of fairness, that the case calls for some attempt to notify those who actually do have an interest in the funds in issue.

“T.M. McEwan, J.”
The Honourable Mr. Justice T.M. McEwan

Citation:	*Emco Limited v. H.M.T.Q.,*
	2003 BCSC 967