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Case Comment: UPS v. Canada
Published in the April 2009 issue of Transportation Notes - View Article
In this edition we report on three final decisions which arose in a transportation context. The issues involved include the right of a customs broker to recover taxes paid in error, the responsibility of an approved maintenance organization for self-audits and the regulation of rail carrier revenues in the carriage of western grain.
United Parcel Service Canada Ltd. (“UPS”) won the final and decisive round of a match with the Minister of National Revenue. At issue was the obligation of the Minister to rebate Goods and Services Tax (“GST”) paid in error. In a two-year period beginning in early 1996, UPS overpaid approximately $3 million in GST. It did so in its capacity of licensed customs broker. For a variety of reasons (e.g., incorrect values for duty purposes, returned shipments, GST-free goods) errors were made in the original assessment and payment of GST. UPS, having paid more GST than was properly owing, would credit its customer’s account for the amount of the overpayment. Accordingly, at this point, it was UPS which was out of pocket for the tax paid. UPS would then deduct the overpayment of GST from its own GST liability, thus effectively reimbursing itself.
The Minister of National Revenue disagreed with this procedure and disallowed the deduction from UPS’s own GST liability. UPS appealed to the Tax Court and was successful, but this result was overturned in the Federal Court of Appeal which agreed with the Minister. UPS further appealed to the Supreme Court of Canada. On April 23, 2009, the highest court in Canada agreed with UPS and restored the decision of the Tax Court.
Of crucial importance was the admission, by the Minister, of a simple but essential fact: there had been an overpayment.
On our reading of the case, this is a concession which the Minister probably ought not to have made. It proved to be inconsistent with what was probably the strongest argument available to the Minister. While it cannot be determined from the decision, it appears that there is a possibility that some of the amounts in issue were properly payable by the customers of UPS. While no such tax liability was ever established, it is possible that that the Minister was not overpaid, but only received the funds from a party not obliged to make the payment. However, having admitted the fact of an overpayment, the Minister was foreclosed from making any such argument.
In support of its claim to retain the moneys paid in error, the Minister advanced three arguments. In the first place, it noted that the statutory provision which authorizes a rebate refers to “a person who has paid an amount”. UPS, the argument goes, acted as a customs broker and as an agent for its customers, the consignees. The liability for the GST was with the consignees. As reported in the decision, the Minister then argued that when the statute refers to a person “who has paid an amount” it really designates the person who has the legal liability to pay, not the person who simply transmits the money to the Minister. As far as one can tell from the reasons for decision, a simpler argument based on agency law was not advanced. It would appear that it could have been said that as UPS was agent for the consignees the money it transmitted to the Minister was the payment of its principals. Thus, the person “who has paid an amount” for the purpose of the authorizing statute is, in each case, the relevant customer of UPS.
In any event, the Court would not accept the argument as advanced and presumably would not have found the agency argument any more persuasive.
The Minister’s second argument was that no rebate is due until it is shown that the amount paid in fact is an amount which is “not payable”. This argument relies on the contention, advanced by the Minister, that an amount can only be classified as “not payable” pursuant to the determination of authorized customs officials. However, this argument clearly runs aground on the basis of the Minister’s admission that there had been an “overpayment”.
The final substantial argument raised by the Minister focuses on procedural considerations. On a proposed reading of the statutory scheme, UPS made its claim for reimbursement under the wrong section of the relevant Act. The statutory scheme provides that no rebate is payable under “A” to the extent it is “payable under B”. The Minister argued that UPS ought to have applied under “B”. Not having done so, it is disentitled from applying, as it actually did, under “A”. This the Court found to be a misconstruction. It pointed out that a rebate might be “available” under another provision if applied for. However, it is not “payable” under that provision unless an application is made. As UPS made no application under “B” no rebate was payable under “B” and there was nothing to preclude an application under “A”.
Towards the end of the decision there is a brief comment on what may have been the Minister’s overriding concern: it might be that some of UPS’s customers have claimed a rebate or input tax credit in respect of the same funds for which UPS seeks a rebate. The Minister could not learn of this without an audit of each customer. Thus, the Minister could actually be left with less tax revenue than is properly payable under the legislation. The Court rejected this argument. The Minister, having admitted to the overpayment, could not raise the possibility of fraudulent claims by customers of UPS to justify its entitlement to retain overpaid GST. Thus, UPS prevailed in this see-saw battle in a decision which most taxpayers will applaud.
In the second case we comment on in this edition, there was no similar story of alternating success and failure. Insight Instrument Corporation showed remarkable doggedness in a long struggle with Transport Canada, but the Supreme Court has now closed the door to any further appeal.
Insight is an Approved Maintenance Organization which manufactures specialty instruments for small aircraft. Under the provisions of its Quality Program Manual, a document approved by Transport Canada, it is required to carry out annual self audits. In 2003 it had discussions with Cessna Corporation with a view to gaining acceptance as an approved supplier. In an attempt to gain acceptance status, it carried out an audit for Cessna. It did not carry out a self audit according to the normal standard procedure.
In February 2004, Transport Canada issued a Notice of Assessment of a Monetary Penalty. Insight exhausted all avenues of appeal before the Transportation Appeal Tribunal without success. It then sought judicial review in the Federal Court of Canada. The Court found no reason to disturb the decisions below. It was reasonable to conclude that the audit conducted for the benefit of Cessna did not meet the regulatory requirement. Furthermore, the enforcement proceeding was commenced within the one-year limitation period set out in the Aeronautics Act. The application for judicial review was dismissed. When the Federal Court of Appeal refused to grant leave to appeal, Insight made one last attempt to have the matter heard by the Supreme Court of Canada. On April 23 the Supreme Court dismissed the leave application, with costs.
The last of our final determination cases involves a number of decisions, by the Canadian Transportation Agency, respecting the maximum revenues Canadian National Railway and Canadian Pacific Railway may earn in connection with the transportation of western grain. For over a hundred years this has been a political issue in Canada, and the controversy has often been extensive and sharp.
In 2000 there was a significant change in the way in which this regulation is effected. Previously, the rates charged by the railways were regulated. From August 1, 2000, the Agency was fixed with the responsibility for setting a maximum annual revenue for each railway. This maximum revenue is to be set by application of a formula which incorporates data for a base year and the current year. The Agency is required to consider average length of haul, tonnes shipped and revenue earned and to make adjustments by reference to a volume-related composite price index. The issue of contention in the most recent round of debates is determining how this price index should be calculated, and in particular how the costs of maintenance of hopper cars (such costs being an element of the index) should be calculated.
The controversy over maintenance costs has been brewing for over a decade. Many of the hopper cars used in the transportation of western grain are owned by the Government of Canada and are provided to the rail companies free of charge, to the extent these cars are used in transportation of western grain. In 1992 a review of costs was undertaken and resulted in what is referred to as an “embedded” cost. This in turn has an impact on the calculation of the index. Shippers have often voiced the view that the embedded costs do not reflect actual current maintenance costs. They have called for reform which would remove the embedded costs, require the use of actual current maintenance costs and thereby reduce the value of the index and the cost of transportation.
In May of 2006, the Minister of Transport announced an intention to reform the way in which costs are taken into account in determining the revenue caps, thereby potentially saving farmers approximately $2.00 per tonne of grain shipped. The Agency was given the job of implementing this policy and did so in a series of controversial decisions between June of 2007 and April of 2008.
The net impact of these decisions was to reduce the index and thus reduce the maximum revenues available to CN and CP. The carriers appealed the entire series of decisions to the Federal Court of Appeal which rejected all appeals in a decision of November 24, 2008. The carriers sought leave to appeal to the Supreme Court of Canada, but this was turned down on April 23, 2009, and accordingly the decision of the Agency is final.
Of particular interest is the fact that the Federal Court of Appeal reviewed all of the Agency’s decisions, including decisions respecting the interpretation of the relevant legislation, on a deferential standard. All that could properly be asked of the Agency was that its decisions be reasonable. As the Federal Court found this standard was met, the decisions were immune from attack. As usual, the Supreme Court of Canada did not give reasons for rejecting the application for leave.
United Parcel Service v. Canada, 2009 SCC 20;
Insight Instrument Corporation v. Minister, and
Canadian National v. CTA, SCC, 04-23-09