CITATION: Grand River Enterprises v. Ontario (Min. Finance), 2016 ONSC 2061

COURT FILE NO.: 531-14

DATE: 20160331

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

LEDERMAN, D.L. CORBETT and C.T. HACKLAND JJ.

B E T W E E N:

GRAND RIVER ENTERPRISES SIX NATIONS LTD. Applicant

• and -

THE MINISTER OF FINANCE FOR ONTARIO Respondent

Counsel: Ben A. Jetten, Brian Duxbury and Helen F. Richards, for the Applicant Lise Favreau, Michael Dunn, Daniel Huffaker and Meagan Williams, for the Respondent

Heard at Toronto March 30, 2015

DECISION

D.L. Corbett J.:

[1] The applicant (“GRE”) manufactures tobacco products. Since 1998 it has done so under federal government regulation and pursuant to two permits it has held under the Ontario Tobacco Tax Act.[^1]

[2] GRE sells its products exclusively to on-reserve First Nations retailers in Canada, and by export outside Canada. On this basis, GRE sells none of its products to Ontario consumers and thus is not liable to pay tax under the TTA.

[3] In 2014, as a result of amendments to the TTA, the Minister of Finance for Ontario (the “Minister”) issued permits to GRE to purchase and sell unmarked fine cut tobacco for export and for sale to First Nations retailers, sales that are not subject to tax under the TTA.

[4] After issuing the permits, the Minister advised GRE that he seeks security from GRE pursuant to s.12(2)(f.1) of the TTA, even though GRE’s sales are not subject to tax under the TTA. On September 30, 2014, the Minister made formal demand for security of $3,209,900. In January 2015, after communications with GRE, the Minister reduced the security demanded to $1,397,000.

[5] GRE challenges the Minister’s demand for security on two bases. First, it argues that the demand is not authorized by law and thus was made without jurisdiction. Second and in the alternative, GRE asks that the demand be set aside because:

(a) the security demanded was calculated on the basis of irrelevant considerations and on an erroneous interpretation of TTA, s. 12(2)(f.1);

(b) the demand was made in bad faith for an improper purpose; and

(c) the amount demanded is arbitrary and unreasonable.

[6] The Minister argues that GRE’s position is based on the faulty premise that security required under the TTA is only intended to secure the payor’s tax liability for intended taxable sales of tobacco products. The Minister puts his position as follows:

These security requirements [under the TTA] are meant to address the risk of unpaid taxes that may be payable under the TTA. This includes the risk that tobacco products not meant for the Ontario taxable market, such as unmarked fine cut tobacco, may be diverted back into the Ontario market and that taxes will be unpaid on such tobacco.[^2]

… The requirement to pay security in respect to products that are not destined for the Ontario taxable market protects the Ministry against the consequences of tobacco product diversion.[^3]

Summary and Disposition

[7] This case turns on the plain meaning of TTA s.12(2)(f.1). This provision stipulates that unmarked fine cut tobacco is to be treated as marked tobacco for the purposes of calculating the required security. Implicit in this wording is that security is required for tobacco that is not intended for sale in taxable transactions. The Minister’s reading to this effect is reasonable, and is entitled to deference in this court. With respect, GRE’s reading of the provision is not consistent with the plain language of s.12(2)(f.1).

[8] Given this finding of the meaning and effect of TTA, s.12(2)(f.1), it follows that the Minister has exercised his discretion to require far less security than could be required from GRE under s.12(2)(f.1). The Minister’s decision to demand reduced security, a decision favourable to GRE, is well within the range of possible reasonable outcomes and is entitled to deference in this court. There is no basis on which to interfere with it.

[9] Therefore, for the reasons that follow, the application is dismissed, with costs.

Jurisdiction of this Court

[10] The Minister’s demand for security obliges GRE to do something which, but for the demand, GRE would not be obliged to do. Thus the demand is subject to judicial review before this court.[^4]

Standard of Review

[11] Issues of the jurisdiction of the Minister are decided by this court on a correctness standard.[^5]

[12] GRE characterizes the Minister’s decision to demand security as a matter of jurisdiction. I do not agree: questions of true jurisdiction are rare and this is not one of them.[^6] TTA, s.12(2)(f.1), on its face, requires the Minister to demand security of GRE. There is no tenable argument that the Minister lacks jurisdiction to do that which expressly he is required to do by statute.

[13] Since the Minister has jurisdiction to demand security, his determination of the quantum of security required is reviewable on a standard of reasonableness: see Dunsmuir v. New Brunswick.[^7]

The Tobacco Tax Act

The General Scheme of the TTA and its Regulation

[14] The TTA regulates the entire tobacco industry in Ontario with a view to ensuring that the taxes payable under the TTA are collected and remitted to the Minister.

[15] The tax levied under the TTA is a consumption tax collected from “consumers” in Ontario: s.2(1) of the TTA provides that every consumer shall pay 11.1 cents tax on every cigarette, or on every gram or part of a gram of tobacco product other than cigarettes and cigars. Subsection 2(2) provides that this tax is paid by the consumer to a retail dealer at the time of sale to the consumer.

[16] All “consumers” in Ontario are liable to pay this tax on the tobacco products they purchase as consumers with one exception: tobacco products sold to “Indians”, on any “Indian reserve”, for personal use by “Indians”, are not subject to the tax.

[17] The federal government and Ontario have adopted a “marking” system in order to account for products on which tax is payable. These “markings” indicate whether tax has been paid or pre-collected.

[18] All tobacco products manufactured in or imported into Canada must carry an excise stamp with the words “Canada Duty Paid”. The colour of the stamp is prescribed by provincial legislation. In Ontario this stamp is yellow and must carry the code “ON” as well as “Canada Duty Paid”.[^8]

[19] Products destined for consumers in Canada who are exempt from paying provincial taxes carry a peach-coloured stamp throughout Canada.

[20] The TTA now requires all persons involved in the tobacco supply chain to register and account for their tobacco supplies, including tobacco that is not destined for taxable sale in Ontario. Thus GRE is obliged to register under the TTA and to account for its tobacco, even if it is all intended for export or for sale on a tax-exempt basis on Indian reserves.

Regulated Roles

[21] Persons may have multiple roles within the tobacco industry. For example, GRE is an “importer” when it brings tobacco in bulk into Ontario from outside Ontario. It is a “manufacturer” when it manufactures tobacco products. It is an “exporter” when it sells tobacco in bulk outside Ontario. It is a “wholesaler” when it sells tobacco products to a “retail dealer” which in turn sells those products to “consumers”. It would be a “retail dealer” if it sold its tobacco products to “consumers”. All participants in the tobacco supply chain are required to register with the Minister and/or obtain a permit for each of the activities in which they participate in this supply chain.

(a) Importers and Exporters

[22] Subsection 5(1) provides that every “importer” and “exporter” of “tobacco in bulk” must register with the Minister.

[23] Subsections 5(9) and (10) provide that exporters must provide the Minister with information about the tobacco products they plan to export, and a return and “evidence satisfactory to the Minister that the tobacco has been exported out of Ontario”. An exporter that does not comply with this requirement is liable to pay a penalty equal to the tax that would have been payable on the exported tobacco if it had been sold to consumers in Ontario, pursuant to s.5(11).

(b) Wholesalers

[24] Subsection 3(1) provides that a wholesaler’s permit is required to sell or deliver in Ontario a tobacco product for resale.

[25] Subsection 3(4) provides that wholesalers may not sell, deliver, or cause to be delivered tobacco products to persons other than authorized retail dealers.

(c) Retail Dealers

[26] Section 3.1 provides that no person other than a retail dealer may sell tobacco products to consumers in Ontario, and that retail dealers must obtain licenses to sell tobacco products to consumers from the Minister.

[27] Subsection 3.1(5) provides that a person authorized under ss.4(3) or 5(3) of O.Reg. 649/93 (Sales of Unmarked Cigarettes on Indian Reserves) to purchase an allocated amount of unmarked cigarettes is deemed to hold a retail dealer’s permit.

The Requirement for Security

[28] Section 9.0.1(1) of the TTA provides that

No person shall purchase, possess, store or sell unmarked fine cut tobacco in Ontario unless the person has applied for and been issued a permit to purchase and sell unmarked fine cut tobacco under the regulations.

[29] A requirement for security is set out in s.12(2) of the TTA, which provides:

The Minister shall demand security in a form acceptable to the Minister from,

(f.1) every person who applies for or is the holder of a permit to purchase or sell unmarked fine cut tobacco in an amount equal to the greater of $500,000 or the average three months’ tax that would be collectable or payable by the person calculated on the basis of the 12-month period preceding the Ministers demand, if the persons acquisition of unmarked fine cut tobacco were marked fine cut tobacco that was sold to consumers in Ontario during the 12-month period….

[30] The TTA Regulation (O. Reg. 1034) provides that certain tobacco products are excluded from the TTA. Subsection 24(1) of that Regulation provides:

The following tobacco products are excluded from the TTA:

3. Unmarked cigarettes, unmarked fine cut tobacco or tobacco products other than cigarettes or fine cut tobacco that are exported from Ontario for sale in bulk by a manufacturer for shipment to,

ii. an establishment or facility of another person located outside Ontario provided that the manufacturer has applied for and received the approval of the Minister prior to making such export,

where the person operating the establishment or facility is authorized to collect taxes on tobacco on behalf of the jurisdiction to which the tobacco is to be ultimately exported and in which it is sold to consumers.

[31] “Tobacco products” are defined as “tobacco in any form which it is used or consumed” and includes “fine cut tobacco”.

[32] “Fine cut tobacco” is defined as “loose tobacco product that has been refined to a point where it could be formed into a cigarette”.[^9]

[33] “Unmarked tobacco” is stamped with a federal peach-coloured stamp to indicate that it is not subject to provincial consumption tax.

[34] “Marked tobacco” is tobacco stamped with a yellow stamp to indicate that it is subject to Ontario consumption tax under the TTA.[^10]

The Plain Meaning of TTA s.12(2)(f.1)

[35] TTA s.12(2)(f.1) requires the Minister to demand security: “the Minister shall demand security” in the circumstances described in the provision.

[36] This requirement applies to every person who holds a permit “to purchase or sell unmarked fine cut tobacco.” GRE holds such a permit. The Minister is thus required to demand security from GRE under s.12(2)(f.1).

[37] The amount of the security is calculated on the basis that the permit holder’s “acquisition of unmarked fine cut tobacco” was “marked fine cut tobacco that was sold to consumers in Ontario….” That is, the amount of security is calculated on the basis that all the unmarked fine cut tobacco would be subject to Ontario tax.

[38] By its express language, s.12(2(f.1) requires the Minister to obtain security in respect to tobacco products that will not be subject to Ontario tax if those products are sold as intended.

Arguments Raised by GRE

[39] GRE makes the following arguments:

(1) The Minister does not have the authority to demand security in respect to GRE tobacco destined for export or for sale to First Nations consumers.

(2) The Minister’s demand for security is contrary to the express wording of s.24(1) of the TTA Regulation.

(3) The Minister exercised his discretion in an arbitrary and improper manner in demanding security of $1,397,000.

(1) The Minister Has Authority to Demand the Security

[40] On a plain reading of s.12(2)(f.1), non-taxable unmarked fine cut tobacco is to be treated as if it was destined for taxable sale to Ontario consumers. GRE argues that this is not the meaning of this provision. It argues that the legislature would have used the phrase “as if” rather than the word “if” to convey such an intention. I see no difference in the meaning of the provision, with or without the word “as”. The provision directs the Minister to collect security on the basis that unmarked fine cut tobacco may be sold to Ontario consumers.

[41] GRE argues that there is no statutory authority for collecting security in respect to tobacco that is destined for non-taxable sale by GRE. GRE argues that s.12(2) of the TTA “allows the Minister to obtain security in respect of taxes that are or will be payable in certain circumstances”. That is not what the provision says. TTA, s.12(2)(f.1) is not premised on a finding that taxes “are or will be payable” on unmarked fine cut tobacco. GRE is stating a general purpose of the security provisions of the TTA (which is nowhere stated in the TTA), and then using this general purpose to undercut the express wording of the provision.

[42] Paul Devnich, Senior Manager, Advisory Services Group in the Advisory and Compliance Branch of the Ontario Ministry of Finance, in his affidavit, provides a different general purpose for the security requirements in the TTA:

The Ministry holds the security for two purposes. The first is to protect the Ministry against possible loss by providing a source of funds in the event that a registrant is unable or unwilling to collect or remit tax contrary to the requirements of the Act. The second is to provide a source of funds to help offset an amount owed to the Minister because of a penalty or assessment imposed on individuals who divert product from the legitimate distribution chain without accounting for tax.[^11]

GRE criticizes this summary as being without “statutory or other legal authority”.[^12] It has as much direct authority as GRE’s statement that the sole purpose of security is to secure taxes payable on the basis of intended disposition of the tobacco by the permit holder. On the plain language of s.12(2)(f.1), it is clear that the legislature intended that security be provided for tax payable as a result of possible diversion of tobacco products, and that security is not limited to taxes that will be collectable on intended taxable sales to consumers.

[43] This argument is restated in various ways by GRE:

(i) The purpose of the TTA is to collect taxes, and therefore it logically follows that the purpose of the security provisions is to secure taxes payable.[^13]

(ii) The Minister has no jurisdiction to require security in respect to potential penalties or assessments.[^14]

(iii) The sole basis for security under the TTA is “to secure taxes that are or will be payable”.[^15]

The argument does not improve through repetition. The authority for the Minister’s demand is the express language of s.12(2)(f.1). The demand is in accordance with the plain meaning of the provision.

[44] GRE relies upon this court’s decision in Bomberry v. Ontario for the proposition that the Minister must have legal authority to impose restrictions upon businesses conducted by wholesalers and retailers, including Indian retailers on reserve. Unless a restriction is authorized by law, it must be struck down.[^16]

[45] Bomberry has no application to the present case. In Bomberry the court concluded that regulations establishing a quota system were not authorized by legislation. In the present case, the Minister’s decision was made under and was authorized by legislation: s.12(2)(f.1) of the TTA.

[46] The Minister’s reading of s.12(2)(f.1) accords with that provision’s plain and ordinary meaning. It is reasonable.

(2) GRE’s Tobacco is Not Subject to a Security Requirement because it is exempted from the TTA by s.24(1) of the TTA Regulation

[47] Subsection 24(1) excludes certain tobacco products from the operation of the TTA. Excluded products include certain unmarked fine cut tobacco exported from Ontario for sale in bulk by a manufacturer. That language would seem to apply to GRE’s exports. However, the exclusion is contingent: it only applies where “the manufacturer has applied for and received the approval of the Minister prior to making such export”. GRE did not apply for and receive approval from the Minister prior to making its exports, and therefore the exemption does not apply.

[48] GRE argues that the Minister has approved its exports by granting GRE an Exporter Registration Certificate every year since 1998. This argument cannot succeed. These permits authorized GRE to export product under the TTA. They do not exclude GRE’s exports from the operation of the TTA.

[49] The TTA applies to tobacco intended for export. Every exporter must have a permit. If GRE’s reading of the provision was correct, then all tobacco intended for export by an exporter would be exempted from the TTA, rendering inclusion of exports in the TTA nugatory. Subsection 24(1) of the Regulation allows exports to be excluded from the TTA, on a case-by-case basis, with prior approval from the Minister. GRE has not applied for this approval and so s.24(1) of the Regulation does not apply.

[50] The Minister’s reading of these provisions is reasonable and is entitled to deference in this court.

(3) The Quantum of Security is Not Arbitrary

[51] The amount of security required by s.12(2)(f.1) is the greater of (a) $500,000 and (b) three months’ tax based on a monthly average of the registrant’s acquisition of fine cut tobacco over the previous year, treating this unmarked fine cut tobacco as if it was sold to consumers in Ontario.

[52] The Minister has discretion to increase or decrease the amount of security: TTA, s.12(4).

[53] The Minister has exercised his discretion to decrease the security required from GRE. GRE is Canada’s largest exporter of tobacco. If security was demanded solely on the basis of all of GRE’s permits and its annual acquisition of tobacco, the security required would be about $198 million.

[54] However, the Minister has a “general approach” to exercising his discretion to decrease the amount of security required. The Minister’s general approach to registrants who deal with products that are not taxable is (i) to calculate the volume of products produced or acquired in an average three month period, (ii) to reduce this volume by 50 per cent, and (iii) to demand security based upon the amount of tax that would be payable for a 40-day period on this reduced volume.

[55] The Minister also generally does not demand cumulative security from registrants that hold multiple permits: the Minister calculates the security required under each of the registrant’s permits, but only demands the highest security amount rather than the sum of all security amounts.

[56] If security was demanded from GRE on the basis of these “general approaches” taken by the Minister, then the total amount of security demanded would be about $47 million.

[57] When GRE commenced operations in 1998, the Minister demanded security of $550,000. GRE posted this security, which has remained in place ever since. Prior to the events at issue in this application, the Minister has never demanded increased security from GRE.

[58] On December 6, 2013, the Ministry issued two permits to GRE: one to export fine cut tobacco outside Ontario and the other to sell unmarked fine cut tobacco to authorized retailers on First Nations reserves. At the same time, the Ministry also advised GRE that the security required under s.12(2)(f.1) was $16,339,000, but that the Minister had exercised his discretion to reduce the required security to $3,209,900.

[59] Following this correspondence, there was a series of communications between the Ministry and GRE. The Minister considered GRE’s submissions and decided to further reduce the security demanded to $1,397,000.

[60] GRE’s attack on the Minister’s exercise of discretion to reduce security to $1,397,000 is premised on its argument that security may not be demanded to secure against loss arising from possible diversion of tobacco products from non-taxable transactions to taxable sales to consumers. As I have already concluded, this premise is flawed. Within this context, the Minister’s exercise of discretion is within the range of reasonable potential outcomes and is entitled to deference in this court.

Constitutional Issues

[61] GRE has not challenged the constitutional validity of s.12(2)(f.1) in this application. In separate legal proceedings it has raised constitutional issue with the TTA and its purported application to it. Those proceedings are being case-managed by Belobaba J. and, as of the time of this decision, are apparently scheduled for a hearing in December 2016.

[62] There is no tenable argument that the Minister has acted in a manner that is constitutionally infirm: he has exercised his discretion to reduce GRE’s required security on the basis of s.12(2)(f.1). Had the Minister not exercised his discretion, he would have been required to demand the full amount of the security prescribed by s.12(2)(f.1). There is nothing in the record to suggest that the impugned demand for security will have anything more than an “incidental effect” on GRE’s business. Therefore, GRE is not entitled to exemption from Ontario’s regulation of tobacco in Ontario because GRE’s products are destined for export.[^17]

[63] GRE argued that the Minister’s interpretation of s.12(2)(f.1) may create a “significant burden” on exporters. GRE has not provided evidence that a “significant burden” has been created for it as a result of the impugned demand for security. GRE has not produced evidence to show that the impugned demand would have a material effect on its business, and it refused to answer questions about its finances on the basis that these finances are irrelevant to the application.

[64] In all of these circumstances, a constitutional attack on the Minister’s demand for security would have to be premised on a constitutional challenge, not to the Minister’s exercise of discretion, but to the TTA itself, a challenge that is not raised on this application.

Order

[65] The decision of the Minister is upheld. The application is dismissed. As agreed by the parties at the conclusion of oral argument, GRE shall pay costs of this application to the Minister fixed at $75,000, inclusive, payable within thirty days.

D.L. Corbett J.

Lederman J.

C.T. Hackland J.

Released: 20160331

[^1]: R.S.O. 1990, c. T.10 (the “TTA”). [^2]: Respondent’s Factum, para. 2. [^3]: Respondent’s Factum, para. 4. [^4]: Judicial Review Procedure Act, R.S.O. 1990, c. J.1, ss. 1, 2(1). [^5]: Dunsmuir v. New Brunswick, 2008 SCC 9, para. 59. [^6]: Alberta Information and Privacy Commissioner) v. Alberta Teachers’ Association, [2011] 3 S.C.R. 61 at para. 34. [^7]: Dunsmuir v. New Brunswick, 2008 SCC 9, para. 47. [^8]: Excise Act, 2001, S.C. 2002, c.22, ss. 34-35; O. Reg. 1034, ss. 21, 21.1. [^9]: O. Reg. 1034, s.1. [^10]: O. Reg. 1034, s.21.1. [^11]: Devnich Affidavit, para. 21. [^12]: Applicant’s Factum, para. 26. [^13]: Applicant’s Factum, para. 29. [^14]: Applicant’s Factum, s.30. [^15]: Applicant’s Factum, para.32. [^16]: Bomberry v. Ontario, 1989 4300 (ON SC), [1989] O.J. No. 989, para. 44. [^17]: Carnation Co. v. Quebec (Agriculture Marketing Board), 1968 82 (SCC), [1968] S.C.R. 238 at 253-54; Federation des producteurs du volailles du Quebec v. Pelland, 2005 SCC 20 at para. 22.