Giesecke & Devrient Security Card Systems, Inc. v. Canada
T-2728-95
McGillis J.
3/7/98
26 pp.
Appeal by way of trial de novo from CITT decision, arguing erroneously paid federal sales tax (FST) in 1990 on embossing and encoding services-Plaintiff manufacturing plastic cards for customers, and providing embossing and encoding services-Operations divided in two: (1) manufacturing; (2) embossing and encoding services-In manufacturing operations, invoice sent to customer after cards completed, except for embossing and encoding to be done by itself, customer or competitor-Plaintiff paid FST on cards invoiced to customers-Embossing and encoding done with information and data provided and owned by customer-Plaintiff also paid FST on embossing and encoding services performed for customers-In 1990, plaintiff's sales as follows: 5% for "bare" plastic cards, 10% for embossing and encoding services for plastic cards it did not manufacture, 85% "complete" plastic cards, including manufacturing, embossing and encoding-In 1992, plaintiff submitted application for refund of FST in amount of $329,263, alleging had paid taxes in error, on basis clients licensed manufacturers and embossing professional service exempt from tax-Revenue Canada disallowed refund application-CITT allowed appeal solely in relation to transactions in which plaintiff embossed and encoded plastic cards manufactured by other licensed manufacturers-CITT found manufacturing, embossing and encoding single, continuous process-Issues (1) whether embossing and encoding for cards manufactured by plaintiff part of manufacture of cards for purposes of imposition of FST under Excise Tax Act, s. 50(1); (2) whether plaintiff's customers "manufacturer or producer" of cards within meaning of Act, s. 2(1)(b); (3) whether plaintiff liable for payment of FST as "marginal manufacturer" within meaning of Act, s. 2(1)(f); and with respect to cards provided by unlicensed manufacturers under contract of labour for purposes of embossing and encoding, (4) whether such services provided pursuant to contract of labour, within meaning of Act, s. 45.1; (5) if so, whether unlicensed manufacturer customers "manufacturer or producer" within meaning of Act, s. 2(1)(b)-Appeal allowed in part-(1) Case law on definition of "manufacture" establishing manufacturing process may have more than one constituent part-Furthermore, "manufacture" must result in creation of article which has use or capable or performing new or different function-In applying principles enunciated in case law to facts of case, embossing and encoding services performed by plaintiff on cards manufactured by it falling within meaning of "manufacture" as enunciated by S.C.C. in The Queen v. York Marble, Tile & Terrazzo Ltd., [1968] S.C.R. 140-In plaintiff's system, plastic cards created in initial stage of manufacturing process could perform no useful function-Embossing and encoding process resulted in creation of fully functional card, personalized for use by end-user, therefore constituting integral part of manufacture of plastic cards-On evidence, title to cards did not pass to customer at time of invoicing, and embossing and encoding services did not constitute separate and distinct commercial activity in relation to goods owned by customer-(2) Plaintiff's customers "manufacturer or producer" within meaning of Act, s. 2(1)(b)-Case law confirming that existence of "sales or other right" one of predominant considerations in determining whether purchaser of manufactured goods "manufacturer or producer"-"Sales right" found to exist where circumstances established purchaser of manufactured goods had exclusive right to purchase goods in question-Other relevant considerations: extent to which purchaser provided specific instructions, purchased or provided equipment used in manufacture of goods, or otherwise exercised control over process-Customers herein had sole and exclusive right to purchase embossed and encoded plastic cards manufactured by plaintiff-Customers also exercised high degree of control over entire manufacturing process, including embossing and encoding stage-Proprietary artwork, information, material and equipment owned by customer figured prominently throughout embossing and encoding stage of manufacturing process-Plaintiff therefore erroneously paid FST on embossing and encoding services for cards manufactured by it-(3) Plaintiff not "marginal manufacturer"-(4) Parties agreed Act, s. 45.1 applied in circumstances where plaintiff embossed and encoded cards provided to it by unlicensed manufacturer customer-S. 45.1 imposing on plaintiff liability for payment of FST where contract of labour entered into between it and unlicensed manufacturer for embossing and encoding services-Plaintiff therefore did not erroneously pay FST for embossing and encoding plastic cards provided to it by unlicensed manufacturer under contract of labour-In conclusion, plaintiff erroneously paid FST on embossing and encoding services for plastic cards manufactured by it-However, plaintiff liable for and did not erroneously pay FST for embossing and encoding plastic cards provided to it by unlicensed manufacturer under contract of labour-Excise Tax Act, R.S.C., 1985, c. E-15, ss. 2(1) "manufacturer or producer" (as am. by R.S.C., 1985 (1st Supp.), c. 15, s. 1; S.C. 1990, c. 45, s. 1), 45.1 (as enacted by R.S.C., 1985 (1st Supp.), c. 15, s. 17), 50(1) (as am. by R.S.C., 1985 (2nd Supp.), c. 1, s. 190; c. 42, s. 4).