Judgments

     T-1512-00

    2003 FC 1244

Dominion Sample Limited (Applicant)

v.

The Commissioner of the Canada Customs and Revenue Agency (formerly the Deputy Minister of National Revenue) (Respondent)

Indexed as: Dominion Sample Ltd.v. Canada (Commissioner, Customs and Revenue agency) (F.C.)

Federal Court, Blais J.--Montréal, October 14; Ottawa, October 23, 2003.

Customs and Excise -- Customs Tariff -- Judicial review of decision terminating remission of duty certificate, retroactively imposing duty, penalties, interest -- Applicant imports flooring materials from U.S.A., cuts it up for samples put into boxes, binders or chained -- Samples exported to American commercial customers -- "[T]he lesser of" rule under NAFTA, art. 303 -- "Same condition" exception -- Whether goods exported to U.S.A. "in the same condition" as when imported -- Standard of review -- Statutory construction no part of respondent's specialized knowledge -- Words in dispute: "provided that such operations do not materially alter the characteristics of the good" -- Transformation of flooring into samples makes it unusable by consumer -- Goods not exported in same condition -- Customs Tariff, s. 118, relied upon by respondent -- For s. 118 to apply, taxpayer must have failed to comply with condition existing when certificate issued, not here the case -- Law unchanged, respondent changing mind as to what constituting compliance -- In retroactively claiming duties, penalties, interest, Minister acting unfairly, arbitrarily, unlawfully.

Construction of Statutes -- Customs Tariff -- "Same condition" exception in NAFTA, art. 303, para. 6 -- Whether goods exported to U.S.A. in same condition as when imported -- Taxpayer imports flooring, cuts it up, puts pieces in sample books for flooring retailers -- Whether characteristics of flooring materially altered -- Question of statutory construction, outside respondent's expertise -- Ordinary meaning of words -- Dictionary definition -- Reference to French version -- Context in which words found -- Flooring samples unusable by consumer, very function of product has changed -- Goods not exported in same condition.

This was an application seeking an order in the nature of certiorari to quash a decision rendered on behalf of the Commissioner of the Canada Customs and Revenue Agency and for mandamus requiring the Commissioner to grant customs remission.

Applicant, a company located at Montréal, manufactures flooring samples for its American customers. Applicant's commercial customers purchase the raw materials and while applicant imports the raw materials into Canada, it does not own them. The applicant cuts the raw materials and places samples in boxes, binders or strings them on a chain. These are exported to applicant's American customers and no charge is made for the raw materials which already belong to the customers.

The Commissioner had granted applicant a certificate which allowed it to import the raw materials with remission of duty and GST but the duty remission privilege was later retroactively terminated and interest and a penalty were imposed as well.

Two issues had to be determined upon this application for judicial review: (1) was applicant entitled to duty drawback under Customs Tariff, section 89 and the exemption provided by NAFTA Chapter III, Article 303.6(b); and, (2) should the Minister's decision be applied retroactively?

Article 303 contains what is referred to "the lesser of" rule. Under that provision, the exporter is entitled to a drawback (refund) equal to the lesser of (i) the total Canadian customs duty paid or payable on goods imported into Canada; and (ii) the total customs duties paid to the U.S. Customs Service on the goods that have subsequently been exported to the U.S.A. Article 303, paragraph 6 provides the "same condition" exception to that rule. If the imported goods are exported to the U.S.A. in the same condition, the "lesser of" rule is inapplicable. In such case, relief from duties is granted under Customs Tariff, section 89. Under paragraph 8, section F of Article X of the NAFTA Uniform Regulations, goods are considered to be in the same condition ifsubjected only to trimming, filing, slitting or cutting, repackaging or labelling. So the first issue herein turns entirely on the question whether the goods exported were "in the same condition" as when imported into Canada.

Held, the application should be dismissed as to the first issue but allowed as to the second.

As held by the Supreme Court of Canada in Pushpanathan, the appropriate standard of review had to be determined by a "pragmatic and functional approach". In Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc., it was said by Major J. that the determination of pure questions of law requiring application of statutory interpretation principles is traditionally the province of the courts, and a matter in respect of which an administrative tribunal may not possess any particular expertise. The same could be said with regard to both issues in the case at bar. The appropriate review standard herein was that of correctness. Actually, respondent's determination of the condition of goods issue had to be upheld regardless of the review standard adopted.

The words here in dispute were: "provided that such operations do not materially alter the characteristics of the good". The ordinary meaning of these words in the context of Section F, Article X, paragraph 8 supported respondent's interpretation. Respondent's argument was that, in losing its properties as flooring material, the characteristics of the goods had been changed to a considerable degree. Flooring had been made into a sample book. It was irrelevant that the flooring material had not been physically changed. What was important was that the characteristics of the product had been changed to such a degree that it could no longer fulfill its original purpose.

Turning to the context in which the words were found, the disputed phrase was clearly meant to restrict allowable operations to those that would not change a product's use but only its appearance or presentation. So it was not conclusive that the list of operations included cutting and trimming.

If applicant were entitled to a drawback, it would be under Customs Tariff, subsection 89(1). The French version of section 9 of the Duties Relief Regulations employs the word "sensiblement" rather than "de façon substantielle". This suggests that "materially" does not mean "relating to material things and conditions, physically", but means "to a considerable degree".

While there was no case law directly on point, the authorities seemed to support the interpretation just given. In the instant case, the raw material was neither simply reduced in size to make it more manageable for the consumer nor packaged for ease of distribution. Indeed, transformation of the flooring into samples made it unusable by the consumer: the samples were for the use of flooring retailers. There was no commonality between the use that the raw materials would be put to and the use that the samples serve. Not only had the target customer changed; the very function of the product had changed. The Court could only conclude that the raw materials imported were not exported to the U.S.A. in the same condition.

As to retroactive application of the Minister's decision, section 114 of the Customs Tariff had originally been invoked. Respondent subsequently said that section 118 was the applicable provision. Respondent suggested that this mistake should not be held against it because the applicant knew the reason for cancellation of the drawback certificate. It was further argued that liability to tax depends upon the statute, not an assessment. But, if the Court allowed the imposition of retroactive duties, applicant would be penalized for seeking a statutory exemption even though it had neither concealed anything nor changed its method of doing business. For section 118 to apply, taxpayer must have failed to comply with a condition as it existed when the certificate was issued. Such was not here the case. The Court could not accept respondent's interpretation of the Act--that if a certificate is cancelled, its effect while in force is retroactively cancelled. Parliament would have expressly provided for retroactivity had such been its intention.

This was not a case where the law had been changed. Rather, what happened was that respondent had a change of mind as to what constituted compliance. It would be unfair to permit respondent to reopen actions not only carried out in good faith but also with respondent's approval. This opinion found support in the Exchequer Court decision in Oakes, Elizabeth Cornell v. The Queen, in which the Canadian Pension Commission sought reimbursement of a pension paid to the widow of a serviceman killed on duty after she successfully sued the Crown for damages. The Court held that if the Commission were to be empowered to retroactively cancel a pension properly granted and recover the money as overpayments, Parliament would have clearly and expressly conferred such power.

It would, of course, be otherwise if a certificate holder knowingly failed to comply with the rules accepted at the outset.

In the case at bar, the Minister's decision to retroactively claim amounts by way of duties, penalties and interest was arbitrary and unlawful.

statutes and regulations judicially

considered

Customs Act, R.S.C., 1985 (2nd Supp.), c. 1, s. 32 (as am. by S.C. 1992, c. 28, s. 5; 1995, c. 41, s. 8; 2001, c. 25, s. 21).

Customs Tariff, S.C. 1997, c. 36, ss. 89(1), 90, 114, 118.

Duties Relief Regulations, SOR/96-44, s. 9.

Income Tax Act, S.C. 1970-71-72, c. 63, s. 125.1 (as enacted by S.C. 1973-74, c. 29, s. 1).

North American Free Trade Agreement Between the Government of Canada, the Government of the United Mexican States and the Government of the United States of America, December 17, 1992, [1994] Can. T.S. No. 2, Art. 303.

cases judicially considered

applied:

Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc., [2001] 2 S.C.R. 100; (2001), 199 D.L.R. (4th) 598; 29 Admin. L.R. (3d) 56; 12 C.P.R. (4th) 417; 270 N.R. 153; 816392 Ontario Ltd. (c.o.b. Freedom Motors) v. Canada (Deputy Minister of National Revenue -- M.N.R.), [1996] C.I.T.T. No. 86 (QL); Barrie Public Utilities v. Canadian Cable Television Assn., [2003] 1 S.C.R. 476; (2003), 225 D.L.R. (4th) 206; 49 Admin. L.R. (3d) 161; 304 N.R. 1; Oakes, Elizabeth Cornell v. The Queen, [1954] Ex. C.R. 572.

distinguished:

The Queen v. Stuart House Canada Ltd., [1976] 2 F.C. 421; [1976] CTC 37; (1976), 76 DTC 6033 (T.D.); Harvey C. Smith Drugs Ltd. v. Canada, [1995] 1 C.T.C. 143; (1994), 95 DTC 5026; 178 N.R. 34 (F.C.A.); Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 S.C.R. 271; (1975), 66 D.L.R. (3d) 449; [1976] CTC 1; 75 DTC 5451; 7 N.R. 401; Air Canada v. British Columbia, [1989] 1 S.C.R. 1161; (1989), 59 D.L.R. (4th) 161; [1989] 4 W.W.R. 97.

considered:

Queen, The v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140; (1967), 65 D.L.R. (2d) 449; [1968] CTC 44; 68 DTC 5001.

referred to:

Pushpanathan v. Canada (Minister of Citizenship and Immigration), [1998] 1 S.C.R. 982; (1998), 160 D.L.R. (4th) 193; 11 Admin. L.R. (3d) 1; 43 Imm. L.R. (2d) 117; 226 N.R. 201; The Queen v. Simard-Beaudry Inc. et al., [1971] F.C. 396; (1971), 71 DTC 5511 (T.D.).

authors cited

Canada Border Services Agency. Memorandum D7-4-3, April 12, 1996. NAFTA Requirements for Drawback and Duty Deferral, Appendix E--Section F, Article X (Drawback and Duty Deferral Programs) of the Uniform Regulations for the Interpretation, Application, and Administration of Chapters Three (National Treatment and Market Access for Goods) and Five (Customs Procedures) of the North American Free Trade Agreement. Ottawa.

Random House Webster's Unabridged Dictionary, 2nd ed. New York: Random House, 1998.

APPLICATION for judicial review of a decision rendered for the Commissioner of the Canada Customs and Revenue Agency regarding entitlement to a duty drawback under Customs Tariff, section 89 and the retroactive imposition of duties, penalties and interest. Application denied as to entitlement to the drawback but allowed as to retroactive application.

appearances:

Michael D. Kaylor for applicant.

Jacques Mimar for respondent.

solicitors of record:

Lapointe Rosenstein, Montréal, for applicant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for order and order rendered in English by

[1]Blais J.: This is an application for judicial review under sections 18 [as am. by S.C. 1990, c. 8, s. 4] and 18.1 [as enacted idem, s. 5] of the Federal Court Act [R.S.C., 1985, c. F-7] of a decision rendered on behalf of the Commissioner of the Canada Customs and Revenue Agency.

[2]The applicant, Dominion Samples Ltd. (the applicant) seeks an order in the nature of certiorari quashing or setting aside the decision of the respondent, the Commissioner of the Canada Customs and Revenue Agency (the respondent), dated July 24, 2000, in the form of a detailed adjustment statement for customs duties owing.

[3]The applicant also seeks an order in the nature of mandamus requiring the respondent to grant the applicant's entitlement to customs remission for the period covered by the decision of the respondent, which perio d is from February 14, 1998 forward.

FACTS

[4]The applicant is a company located in Montréal, Quebec, which is in the business of making booklets, sample boxes and chained samples of flooring (linoleum and vinyl tiles) for various commercia l customers located in the United States. These commercial customers use the samples to show to their own customers who can then order a particular style of flooring based on the samples viewed.

[5]The commercial customers purchase the linoleum in rolls and the vinyl tiles (the raw materials) from various manufacturers located outside the United States. The applicant imports the raw materials into Canada, but does not own them. The raw materials belong to the commercial customers.

[6]The applicant cuts the raw materials at its facility in Montréal and mounts the cut-up pieces on paper-based backing; the samples are labelled and can then be mounted in binders, strung on a chain or placed in cardboard boxes. The various paper prod ucts used for these purposes are sourced in Canada.

[7]The parties agree that the cutting of the raw materials into samples has rendered the products unusable as flooring.

[8]The sample booklets, boxes of samples and chained samples are sold and exported to the applicant's commercial customers in the United States. The price does not include the cost of the raw materials from which the samples are cut, since the raw materials a lready belong to the commercial customers.

[9]The samples are imported into the United States under tariff number 9811.00.60, and the non-NAFTA originating materials, of which the samples are made, are imported into Canada under the tariff items listed in Annex A.

[10]The applicant received from the respondent a certificate No. 87-016M0224 which allowed it to import, with the privilege of remission of duty and GST, the raw materials, pursuant to Customs Memoranda D-7-4-1 and D-7-4-3.

[11]The privilege of remission of duty was terminated, with retroactive effect from January 1, 1999 to July 13, 2000, by the decision of the respondent dated July 24, 2000, which resulted in an assessment against the applicant to recover the duty, interest and penalty which respondent alleges applicant owes to respondent.

ISSUES

[12](1)     Is the applicant entitled to the benefit of duty drawback under section 89 of the Customs Tariff and entitled to the exemption provided by Article 303.6(b) of Chapter III of the North American Free Trade Agreement (NAFTA)?

(2)     Should the decision of the Minister of Finance (the Minister) of July 24, 2000 be applied retroactively?

LEGISLATION

[13]Article 303 [of the North American Free Trade Agreement Between the Government of Canada, the Government of the United Mexican States and the Government of the United States of America, December 17, 1992, [1994] Can. T.S. No. 2] is titled Restriction on Drawback and Duty Deferral Programs and the relevant provisions read as follows:

1. Except as otherwise provided in this Article, no Party may refund the amount of customs duties paid, or waive or reduce the amount of customs duties owed, on a good imported into its territory, on condition that the good is:

a. subsequently exported to the territory of another Party,

b. used as a material in the production of another good that is subsequently exported to the territory of another Party, or

c. substituted by an identical or similar good used as a material in the production of another good that is subsequently exported to the territory of another Party,

d. in an amount that exceeds the lesser of the total amount of customs duties paid or owed on the good on importation into its territory and the total amount of customs duties paid to another Party on the good that has been subsequently exported to the territory of that other Party.

    . . .

6. This Article does not apply to:

a. a good entered under bond for transportation and exportation to the territory of another Party;

b. a good exported to the territory of another Party in the same condition as when imported into the territory of the Party from which the good was exported (processes such as testing, cleaning, repacking or inspecting the good, or preserving it in its same condition, shall not be considered to change a good's condition). Except as provided in Annex 703.2, Section A, paragraph 12, where such a good has been commingled with fungible goods and exported in the same condition, its origin for purposes of this subparagraph may be determined on the basis of the inventory methods provided for in the Uniform Regulations established under Article 511 (Uniform Regulations). [Emphasis added.]

[14]The rule stated in Article 303(1) is colloquially called "the lesser of" rule. Effective January 1, 1996, under NAFTA, the person who has imported goods into Canada which are subsequently exported to the U.S. must calculate two amounts:

(i) the total Canadian customs duty paid or payable on goods imported into Canada; and

(ii) the total customs duties paid to the U.S. Customs Service on the goods that have subsequently been exported to the U.S.

[15]The exporter is entitled to a drawback (refund) equal to the lesser of (i) and (ii) above. To the extent that the rate of duty on the goods exported to the U.S. has been reduced to zero under NAFTA, the Canadian exporter is not entitled to any duty drawback.

[16]Paragraph 6 of Article 303 provides an exception to this rule, the "same condition" exception. Where the imported goods are exported to the U.S. in the same condition as they were imported, the "lesser of" rule does not apply. Rather, relief from duties is granted to the importer under section 89 of the Customs Tariff [S.C. 1997, c. 36].

[17]Paragraph 89(1)(a) of the Customs Tariff reads as follows:

89. (1) Subject to subsection (2), section 95 and any regulations made under section 99, if an application for relief is made within the prescribed time, in accordance with subsection (4), by a person of a prescribed class, relief may be granted from the payment of duties that would but for this section be payable in respect of imported goods that are

(a) released and subsequently exported in the same condition in which they were imported;

[18]Section 90 deals with the certificate granting relief of duties:

90. (1) Subject to regulations made under paragraph 99(e), the Minister of National Revenue may issue a numbered certificate to a person of a prescribed class referred to in section 89.

(2) The Minister of National Revenue may, subject to regulations made under paragraph 99(e), amend, suspend, renew, cancel or reinstate a certificate issued under subsection (1).

(3) Goods in respect of which relief is granted under section 89 may be released without payment of the duties relieved under that section if the number of the certificate issued under subsection (1) is disclosed when the goods are accounted for under section 32 of the Customs Act and the certificate is in force at that time.

[19]Section 9 of the Duties Relief Regulations, SOR/96-44, provides the following:

9. For the purposes of paragraph 89(1)(a) of the Act, goods are considered to be in the same condition in which they were imported after they

(a) undergo any of the processes described in Article 303(6)(b) of NAFTA or any of the operations described in paragraph 8 of Article X of Section F of the Uniform Regulations for the Interpretation, Application, and Administration of Chapters Three (National Treatment and Market Access for Goods) and Five (Customs Procedures) of the North American Free Trade Agreement, if those processes or operations do not materially alter the characteristics of the goods;

[20]Paragraph 8 of Section F of Article X (Drawback and Duty Deferral Programs) of the Uniform Regulations for the Interpretation, Application, and Administration of Chapters Three (National Treatment and Market Access for Goods) and Five (Customs Procedures) of the North American Free Trade Agreement (Uniform Regulations) reads:

8. For the purposes of Article 303.6(b) of the Agreement, the circumstances under which a good shall be considered to be in the same condition include the following:

(a) mere dilution with water or another substance;

(b) cleaning, including removal of rust, grease, paint or other coatings;

(c) application of preservative, including lubricants, protective encapsulation, or preservation paint;

(d) trimming, filing, slitting or cutting;

(e) putting up in measured doses, or packing, repacking, packaging or repackaging; or

(f) testing, marking, labelling, sorting or grading,

provided that such operations do not materially alter the characteristics of the good. [Emphasis added.]

ANALYSIS

[21]The parties agree that the first issue revolves entirely around determining whether the goods exported to the U.S. are "in the same condition" as when they were imported into Canada.

Standard of review

[22]The applicable standard of review has been defined by the Supreme Court of Canada (see e.g. Pushpanathan v. Canada (Minister of Citizenship and Immigration), [1998] 1 S.C.R. 982) as being determined by a "pragmatic and functional approach". This means that in deciding what is the appropriate standard, the reviewing judge takes into account a host of factors, in the context of the decision he or she is reviewing. The "pragmatic and functional approach" is discussed at length in Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc ., [2001] 2 S.C.R. 100. In that case, Major J., writing on behalf of the Court, makes a number of statements that are relevant to the case at bar [at paragraphs 27-28, 32]:

. . . where there is no privative clause and where there is a statutory right of appeal, the concept of the specialization of duties requires that deference be shown to decisions of specialized tribunals on matters which fall squarely within the tribunal's expertise (Bell Canada v. Canada (Canadian Radio-Television and Telecommunications Commission), [1989] 1 S.C.R. 1722, at pp. 1746-47; United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at p. 335; Pezim, supra, at p. 591; and Asbestos, supra, at para. 49). In general, different standards of review will apply to different legal questions depending on the nature of the question to be determined and the relative expertise of the tribunal in those particular matters.

Determining the tribunal's relative expertise is "the most important of the factors that a court must consider in settling on a standard of review" (Southam, supra, at para. 50; see also Bradco, supra, at p. 335). The central inquiry in an assessment of the expertise factor is whether a tribunal has been constituted with a particular expertise with respect to achieving the aims of an Act: Pushpanathan, supra, at para. 32. This may involve several considerations, including the specialized knowledge of its decision makers, . . .

    . . .

The criteria of expertise and the nature of the problem are closely interrelated (Pushpanathan, supra, at para. 33). It is necessary "to focus on the specific question of law at issue to determine whether it falls within the tribunal's expertise and whether deference is warranted" (Pezim, supra, at p. 596).

[23]Major J. concludes in Mattel that the questions to be decided are not of a technical nature (in that case, the Court had to interpret "sale of goods for export to Canada", and "a condition of the sale of the goods". These expressions, wrote Major J. (at paragraph 33), were

. . . pure questions of law that require the application of principles of statutory interpretation and other concepts which are intrinsic to commercial law. Such matters are traditionally the province of the Courts and there is nothing to suggest that the CITT has any particular expertise in respect of these matters.

[24]Such considerations appear to apply to the case at bar. The respondent and the applicant disagree on whether or not the processes or operations that the imported raw materials have been subjected to can be said to "materially alter the characteristics of the good s". This issue is not within the specialized knowledge of the respondent. It requires the application of principles of statutory interpretation, and this Court is equally qualified to pronounce on the matter.

[25]The second issue in this case is the retroactive effect of the cancellation of the certificate which had been granted to the applicant, that is, whether the duty remitted while the certificate was in force is now owed to CCRA. Again, I believe that this matter comes under the construction of statute and is not part of the specialized knowledge of the respondent. For this reason, I would hold that the standard of review to be applied is that of correctness.

(1) Is the applicant entitled to the benefit of duty drawback under section 89 of the Customs Tariff and entitled to the exemption provided by Article 303(6)(b) of Chapter III of the North American Free Trade Agreement (NAFTA)?

[26]The standard of review needed to be addressed since both parties had raised it. However, it does not matter in this instance, since I believe that whatever the standard of review, the decision of the respondent as to the condition of the goods should stand. My reasons for this holding follow.

[27]The modern approach to statutory interpretation is well established, and recently restated in Barrie Public Utilities v. Canadian Cable Television Assn., [2003] 1 S.C.R. 476, at paragraph 20:

The starting point for statutory interpretation in Canada is Driedger's definitive formulation in his Construction of Statutes (2nd ed. 1983), at p. 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

[28]The starting point is the grammatical and ordinary sense of the words, which must be able to be reconciled with the scheme of the legislation as a whole.

[29]Here, the words in dispute are "provided that such operations do not materially alter the characteristics of the good". The Uniform Regulati ons allow for some operations which may be applied to goods while still maintaining these goods in the "same condition". Both parties argue that the ordinary meaning of "materially alter the characteristics of the good" supports their interpretation. I agr ee that the ordinary meaning of the words in the context of Section F, Article X, paragraph 8 suffices to decide the issue, and I believe that the ordinary meaning of the words in their context confirms the respondent's interpretation.

[30]To what extent can a good be changed before being transformed to the point that its characteristics have been materially altered? It would seem that to answer that question it is necessary to define "materially", "alter" and "characteristics". All definitions are drawn from Random House Webster's Unabridged Dictionary, 2nd edition, Random House, New York, 1998.

materially . . . 1. to an important degree; considerably. . . . 2. with reference to matter of material things and conditions; physically.

alter . . . 1. to make different in some particular, as size, style, course or the like; modify.

characteristic . . . -- n. 2. a distinguishing feature or quality. 3. Syn. Feature, Characteristic, Peculiarity refer to a distinctive trait of an individual or of a class. . . . Characteristic means a distinguishing mark or quality (or one of such) always associated in one's mind with a particular person or thing.

[31]It would seem, then, that some operations, such as cutting or trimming, can occur while maintaining the good in the same condition, as long as the good has not been made different to a considerable degree, such that it loses its distinguishing features or qualities.

[32]The respondent argues that by losing its properties as flooring material (a statement in which both parties concur), the goods' characteristics have been changed to a considerable degree. I find it impossible not to agree with the respondent. As the respon dent succinctly put it in its memorandum of fact and law: "The former flooring has become a sample book" (page11).

[33]The applicant argues that changing the shape of the flooring (by cutting) has not altered the material. However, it seems to me that materially must be taken in its first meaning, i.e. considerably. I am supported in this conclusion by three considerations.

[34]First, the French version provides, for the phrase "do not materially alter the characteristics of th e good", the equivalent phrase "n'altè rent pas, de façon substantielle, les caractéristiques du produit" (emphasis added). In other words, for "materially" the French version uses "de façon substantielle", which, I would submit, is closer in meaning to "co nsiderably" than to "physically". The fact that the material itself, i.e. the flooring, has not been physically changed is not relevant to our purposes. What is important is that the characteristics of the product have been changed to such a degree that it can no longer fulfill its original purpose.

[35]Second, one needs to consider the context in which the words are found. The part of the Uniform Regulations which applies to the issue in this case states explicitly that it is meant to aid in the interpretation of Article 303(6)(b). The list is not exhaustive, but gives examples of operations that in and of themselves would not change the use of the product, but rather its appearance or presentation. The disputed phrase is clearly meant to restrict the possible operations. Therefore, to state that since cutting or trimming are included, the samples are covered, is not convincing. The provision considers, precisely, the possibility that all those examples of permissible operations could result in such a change that the good would no longer be considered to be in the "same condition". And I would agree with the respondent that by changing the functionality of the flooring, that is, the use to which it can be put, an important characteristic of the good has been altered or changed.

[36]Thirdly, again because of the French version, but this time in the spirit of contextual interpretation where the legislation must be read as a whole, keeping in mind the intent of the legislator, I believe that the Regulations under the Customs Tariff are also relevant. If it was decided that Article 303(6)(b) applies to the applicant, and thus that he is entitled to drawback, it would be under subsection 89(1) of the Customs Tariff, under which Duties Relief Regulations SOR/96-44 have been enacted.

[37]Section 9 deals with the interpretation of paragraph 89(1)(a) and what is meant by "same conditions". Again, in English, we find the phrase "do not materially alter the characteristics of th e goods", whereas in French, the translation differs slightly. Instead of "de façon substantielle", we find "sensiblement". This further confirms that "materially" is not meant to be understood as "relating to material things and conditions, physically". S ince there is no reason to believe that the words have a different meaning in English, we are left to conclude that the proper interpretation of "materially" must be "to a considerable degree".

[38]There does not seem to be any case law bearing directly on the issue before us. The case law which the applicant relies on can be easily distinguished on the facts before us, and the case law submitted by each of the parties, albeit in an indirect fashion, would appear to confirm the interpretation of the phrase I have just given.

[39]In The Queen v. Stuart House Canada Ltd., [1976] 2 F.C. 421 (T.D.), the Court had to determine whether the taxpayer was a manufacturer or producer for the purposes of the federal sales tax. The taxpayer bought bulk rolls of aluminum foil and cut them into shorter lengths, which were then re-rolled and marketed. The issue was whether the taxpayer had given "new form, qualities and properties" to the aluminum foil, which would have demonstrat ed manufacturing or production operations. The Court found that there was insufficient transformation to qualify as production or manufacturing. The foil remained as it was, and was cut to make it more manageable for the consumer; it lost neither its qualities nor its function as foil.

[40]The Court in Stuart House did distinguish Queen, The v. York Marble, Tile and Terrazzo Limited, [1968] S.C.R. 140, where the Supreme Court of Canada ruled that cutting marble to shape from imported raw marble did constitute manufacturing or producing for the purposes of the federal sales tax. The decision is not perfectly applicable to the facts in the case at bar, since the test in this decision, as in the decision cited by the applicant (Stuart House), is whether the taxpayer gave "new form, qualities and properties" to the raw material. However, for our purposes, it is germane to point out that t he fact of cutting was not determinative; rather, the use of the material, once cut, served to distinguish between a change that was sufficient or not for tax purposes.

[41]In Harvey C. Smith Drugs Ltd. v. Canada, [1995] 1 C.T.C. 143 (F.C.A.), the issue was whether dispensing tablets or capsules in containers was equivalent to processing the goods as understood in section 125.1 of the Income Tax Act [S.C. 1970-71-72, c. 63 (as enacted by S.C. 1973-74, c. 29, s. 1)], at paragraph 13, Desjardins J.A. writes:

There is no subjection and conversion of the original product from one state to another. The Trial Judge, in our view, correctly required that the product undergo a physical change in form or appearance for processing to occur. . . . In the case at bar, the tablet or capsule remains in the same form and dosage throughout. A simple reduction in numbers for marketability does not constitute "processing".

[42]Several points can be made in distinguishing the decision in Harvey C. Smith Drugs. First, what needed to be determined in that case was the meaning of "processing". Secondly, even if it could be argued that the test for processing could be applied to the case at bar, the conclusion fails to support the applicant's point. In Harvey C. Smith Drugs , the tablets remain unchanged, just as the foil remained unchanged in Stuart House, supra. The operations that apply to the raw materials in the instant case are not simply a matter of reducing the size to make it more manageable for the consumer, nor packaging it for ease of distribution.

[43]As a matter of fact, the transformation of the flooring into samples makes it unusable for the general consumer, because the flooring samples are not meant to be used by the general consumer, but rather by the retailer of flooring materials. It is doubtful that the results would have been the same in Stuart House and Harvey C. Smith Drugs, supra, if the Court had not been able to find that the cutting of the foil or the placing of the drugs in containers had little impact on the final consumer in terms of what uses the product would have.

[44]In 816392 Ontario Ltd. (c.o.b. Freedom Motors) v. Canada (Deputy Minister of National Revenue--M.N.R.), [1996] C.I.T.T. No. 86 (QL), the Canadian International Trade Tribunal (CITT) had to determine whether changes made to a motor vehicle fell within the ordinary meaning of "alterations". The issue concerned the exportation to the United States of a motor vehicle for alterations to make it accessib le to wheelchair users, and subsequent re-importation into Canada. The CITT could decide one of two things: either the exported vehicle had simply been altered, in which case the same vehicle was re-entering Canada, or a new, commercially different good was entering Canada, in which case the duty to be paid would be considerably higher.

[45]The applicant, a company specializing in custom-built motor vehicles for wheelchair users, argued that the essential characteristic of the vehicle had not been changed: it remained a personal transportation vehicle, albeit customized for a certain population. The respondent countered that the change in target customers meant a change in an essential characteristic.

[46]The CITT ruled that the vehicle, when altered, remained essentially the same, with the same functionality. The fact that the customers of the vehicle were a particular subgroup did not change the fact that the vehicle would be used for the same purpose, altered or not.

[47]Although the provisions at issue in the Freedom Motors case are not the same, nor does the notion of alterations carry the same import, yet the case is applicable to the extent that "essential characteristics" are defined in terms of the use that the good will serve. In the case at bar, there is no commonality between the use that the raw materials would be put to and the use that the samples serve. They are no longer flooring, but a means to sell a commercial product. Not only has the target customer changed, the very function of the product has changed.

[48]I find that Article 303(6)(b) of NAFTA does not apply to the applicant, because the raw materials that were imported were not exported to the U.S. in the same condition.

(2) Should the decision of the Minister of July 24, 2000 be applied retroactively?

Section 114 or section 118

[49]In both the detailed statement of adjustment dated July 24, 2000, and the original memorandum of fact and law submitted by the respondent on October 1, 2001, the respondent justified the statement of adjustment by invoking section 114 of the Customs Tariff. In a supplementary memorandum of fact and law submitted by the applicant on September 18, 2002, the applicant correctly pointed out that this was an error, and that section 114 did not apply to the applicant.

[50]In an additional memorandum of fact and law submitted by the respondent on October 30, 2002, the respondent acknowledged the mistake and stated that the correct section was section 118 of the Customs Tariff. The respondent contended that this mistake should not be held against it, since the applicant knew the grounds for cancelling the certificate allowing the drawback.

[51]The respondent argued that section 118 provided that remission of duties granted under the Act had to be repaid if a condition to which the relief or submission was subject was not complied with. The respondent further argued that, as stated in The Queen v. Simard-Beaudry Inc. et al., [1971] F.C. 396 (T.D.), the liability to pay taxes stems from the Act, not from any assessment.

[52]To this, counsel for the applicant replied that it would be quite unfair for CCRA to claim retroactively duties from which the applicant had previously been exempted. Moreover, for retroactivity to apply, it should be clearly established in the Act or in the Regulations.

[53]By following the respondent's argument, it would seem that every time a certificate for relief or remission of duties is granted, there always remains the possibility that the exemption could be cancelled, with retroactiv e consequences.

[54]In the instant case, the respondent could have claimed duties going 10 years back, since apparently, the applicant never qualified for the exemption. As a matter of fact, the respondent has chosen to claim duties for a little more than a year. Moreover the respondent informed the Court during the hearing that new amendments introduced since the year 2000 meant that the applicant now qualified for a new exemption.

[55]If retroactive duties were imposed, it would appear that the applicant is being penalized for applying for, and obtaining, an exemption under the Act. The applicant has not changed his way of doing business, has hidden nothing from the CCRA. What entitled him to an exemption suddenly no longer applies, by a decision of the CCRA, and the remission of duties, to which in good faith he thought he was entitled, is abruptly withdrawn.

[56]Section 118 of the Customs Tariff reads as follows:

118. (1) If relief from, or remission of, duties is granted under this Act, other than under section 92, or if remission of duties is granted under section 23 of the Financial Administration Act and a condition to which the relief or remission is subject is not complied with, the person who did not comply with the condition shall, within 90 days or such other period as may be prescribed after the day of the failure to comply,

(a) report the failure to comply to an officer at a customs office; and

(b) pay to Her Majesty in right of Canada an amount equal to the amount of the duties in respect of which the relief or remission was granted, unless that person can provide evidence satisfactory to the Minister of National Revenue that

(i) at the time of the failure to comply with the condition, a refund or drawback would otherwise have been granted if duties had been paid, or

(ii) the goods in respect of which the relief or remission was granted qualify in some other manner for relief or remission under this Act or the Financial Administration Act.

    . . .

(3) An amount referred to in paragraph (1)(b) or (2)(b), while it remains unpaid, is deemed to be a debt owing to Her Majesty in right of Canada under the Customs Act.

(4) The Governor in Council may make regulations

(a) on the recommendation of the Minister of National Revenue, prescribing time limits for the application of subsection (1) and the goods or classes of goods in respect of which, or the circumstances in which, those limits apply; and

(b) on the recommendation of the Minister, prescribing the circumstances in which certain goods are exempted from the application of subsection (1) and the goods or classes of goods in respect of which, and the period for which and the conditions under which, those exemptions apply.

[57]I gather from reading this section that where "a condition to which the relief or remission is subject is not complied with, the person who did not comply with the condition shall . . . (a ) report the failure to comply to an officer at a customs office; and (b) pay to Her Majesty in right of Canada an amount equal to the amount of the duties in respect of which the relief or remission was granted".

[58]I think that for section 118 to apply, the person must have failed to comply with a condition as it existed when the certificate was issued, which is not the case here. Rather, it is the respondent who has unilaterally decided that the applicant no longer fits the criteria which would allow it to enjoy the certificate for exemption of duties.

[59]According to the evidence before the Court, the certificate allowed the applicant to import goods, in this case flooring material, and to have the goods released without having to pay duties on them. The goods were subsequently re-exported, and the applicant had to report to the customs officer within 60 days.

[60]In this case, the applicant re-exported the goods without paying the duties of which he was relieved because of the certificate in force. Section 90 of the Customs Tariff provides (1) for the issuing of the certificate, (2) that the Minister may amend, suspend, renew, cancel or reinstate a certificate, and finally (3) that the goods in respect of which relief is granted may be released without payment of the duties relieved under that section if the number of the certificate issued under subsection (1) is disclosed when the goods are accounted for under section 32 [as am. by S.C. 1992, c. 28, s. 5; 1995, c. 41, s. 8; 2001, c. 25, s. 21] of the Customs Act [R.S.C., 1985 (2nd Supp.), c. 1] and the certificate is in force at that time.

[61]Following the respondent's logic, the applicant is relieved of the payment of duties if he holds a valid certificate at the time the relief is granted. If the certificate were to be amended or cancel led, its effect while it was in force would also be cancelled, retroactively. I cannot agree with this construction of the Act. That would mean that all holders of valid certificates could at any moment have their privilege withdrawn by a unilateral decision of the respondent, who could then claim from them arrears in duties for an arbitrary period of time.

[62]Parliament cannot have intended such an interpretation. If it had intended for the cancellation of the certificate to be retroactive, without the holder having done anything to bring about the cancellation, Parliament would no doubt have provided explicit provisions to give retroactive effect.

[63]The retroactive application of an Act of Parliament has been dealt with in case law, most notably Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 S.C.R. 271 and Air Canada v. British Columbia, [1989] 1 S.C.R. 1161. I find these cases apply, however, to the retroactive effect of an Act when it is changed, that is, where the issue is to determine at what time the amendment comes into effect for the purpose of the matter being litigated.

[64]In the case at bar, there has been no change in the law (except to the extent that the relevant NAFTA provisions came into force January 1, 1996). What has happened is that the respondent has determined that the applicant is not complying with a given condition relevant to the certificate. The applicant has not changed his way of doing things, has not hidden any information from the respondent. What once was considered by the respondent to be compliance no longer is. Would it be fair to allow the change to reach back to actions done in good faith, with the approval of the respondent? I do not believe so.

[65]A similar case of the Crown acting retroactively against a person who had obtained an advantage in good faith can be found in Oakes, Elizabeth Cornell v. The Queen, [1954] Ex. C.R. 572. In that case, the wife of a Canadian serviceman who had been accidentally killed while on duty received a pension from the Canadian Pension Commission, for herself and her two small children. Following a successful suit against Her Majesty for the accidental death, she was awarded a substantial amount in damages. The Canadian Pension Commission cancelled her pension, and sought to be reimbursed for the amount that had been paid during the period between the death of the husband and the award in the successful suit. The Exchequer Court ruled that payments validly made could not retroactively be claimed as debt by the Crown, in the absence of clear statutory authority to that effect (at pages 581-583):

When the Canadian Pension Commission awarded pensions to the suppliant and her two children it did so with full knowledge that the suppliant's husband had been killed as the result of the negligence of LAC Hitsman and it must be assumed, as a matter of law, that it knew that she and her children had a cause of action against him and could, consequently, bring a petition of right against the Crown under section 19(c) of the Exchequer Court Act because of the responsibility of the Crown for the negligence of its servant. The pensions paid to the suppliant and her children were thus properly paid and received. There was no fraud or misrepresentation or concealment of material facts on the part of the suppliant such as would bring the case within section 60 of the Act. Nor were the pensions awarded as a result of error. In every respect the payments were validly made. Moreover, they continued to be so made for approximately six years. Under the circumstances, it seems anomalous to me that amounts that were validly and properly paid to the suppliant with full knowledge of her rights and those of her children should by reason of a subsequent event that was foreseeable, be turned into overpayments to her, that is to say, amounts which she was not entitled to retain but was obliged to repay as if they had been improperly paid to her. The possibility of such a conversion of proper and valid payments into overpayments with a statutory right of recovery of them should not be accepted unless there is clear and express statutory authority for it.

In my judgment, there is no provision in the Pension Act whereby the Canadian Pension Commission is empowered to convert a payment of pension into, an overpayment that was not basically an overpayment when it was made. Proper payments of pension under the Pension Act cannot retroactively become overpayments. . . .

    . . .

Moreover, if it had been intended that the Canadian Pension Commission should be able to cancel proper pensions retroactively to their commencement and make their amounts recoverable as overpayments Parliament should have conferred such a power expressly and clearly. [Emphasis added.]

[66]In the case at bar, as in the above case, a financial advantage was obtained with the full knowledge and consent of the Crown. The Minister may, as the Customs Tariff provides, cancel the certificate. He may not, however, absent clear authority to the contrary, retroactively charge the importer-exporter for duties which had previously been remitted under a valid certificate, and where both parties were content that the conditions for the certificate were being fulfilled.

[67]Obviously, where the holder of the certificate knowingly does not comply with the conditions of the certificate, cancelling the certificate could lead to duties becoming payable. For instance, if the certificate holder were to change his method of assembly or of processing the imported goods, or if he did not re-export the goods in the prescribed time period, he could be subject to duties payable.

[68]There is however a major difference between the certificate holder who knowingly does not comply with the rules he accepted at the start, and the applicant in the case at bar who obtained a certificate more than 10 years ago and who has not in any way changed his method of doing business. All of a sudden, without notice, the exemption certificate is withdrawn by a unilateral decision.

[69]Not only is the certificate withdrawn, but he finds himself owing duties for goods that he has already sold to his clients, thus making the amount payable irretrievable. On top of that, he is being asked to pay penalties and interest for a situation which he could not possibly foresee. And finally, the claim covers a little over a year, without any explanation given as to the reason why the Minister has chosen one year instead of three, or five, or the full ten years during which time the certificate was in force.

[70]I have no hesitation in concluding that the part of the Minister's decision wh ich retroactively claims duties, penalties and interest is unlawful, unfair and arbitrary, and based on an erroneous finding of fact and law.

[71]On the first issue, as to the ineligibility of the applicant under the terms of Article 303(6)(b) of NAFTA, I have no choice but to conclude that the application for judicial review of the decision from the Commissioner of the Canada Customs and Revenue Agency must be dismissed. Nevertheless, on the second issue, the application is allowed, and the part of the decision dealing with the repayment by the applicant of duties, penalties and interest shall be set aside for being without a basis in fact or law.

[72]No costs awarded given that both parties succeeded in part.

    ORDER

THIS COURT ORDERS THAT:

-     This application for judicial review is allowed in part as to the second issue;

-     The file should be referred back to another officer of the respondent to be reassessed in light of the reasons stating that the Minister's decision cannot be applied retroactively;

-     The decision of the Minister denying the entitlement to the benefit of duty drawback is upheld;

-     Without costs, given that both parties succeeded in part.