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Johnson & Johnson Inc. v. The Minister of Finance*

[Indexed as: Johnson & Johnson Inc. v. Ontario (Minister of Finance)]

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63 O.R. (3d) 675

[2003] O.J. No. 676

Docket No. C36825

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Court of Appeal for Ontario

Carthy, Abella and Gillese JJ.A.

February 28, 2003

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• Vous trouverez traduction fran‡aise de la d‚cision ci-dessous … 63 O.R. (3d) 683.

Taxation -- Sales tax -- Section 7(1)37 of Retail Sales Tax Act exempting from sales tax "optical appliances when sold on the prescription of a physician or an optometrist" -- Distributor of disposable contact lenses providing free contact lenses as sales promotion -- Free contact lenses provided through physicians and optometrists rather than directly to customers in order to comply with Regulated Health Professions Act -- Sales tax exemption in s. 7(1)37 of Retail Sales Tax Act applying to distributor's free provision of contact lenses -- Regulated Health Professions Act, 1991, S.O. 1991, c. 18 -- Retail Sales Tax Act, R.S.O. 1990, c. R.31, s. 7(1)37.

The appellant imported and distributed disposable contact lenses within Canada. In order to promote its brand of contact lenses to end users, the appellant supplied a limited number of disposable contact lenses free of charge. Because the Regulated Health Professions Act, 1991, S.O. 1991, c. 18 makes the prescribing and dispensing of contact lenses a "controlled act", so that contact lenses can only be prescribed or dispensed by an optometrist, a physician or an optician on the prescription of an optometrist or physician ("authorized practitioners"), the appellant provided the free contact lenses to authorized practitioners rather than directly to customers. The Minister of Finance assessed retail sales tax on contact lenses that the appellant had distributed free of charge. The appellant objected, relying on s. 7(1)37 of the Retail Sales Tax Act, which provides that the purchaser of "optical appliances when sold on the prescription of a physician or an optometrist . . ." is exempt from sales tax. The objection was dismissed. On appeal by the appellant, which proceeded by way of a trial, the trial judge held that the exemption in s. 7(1) 37 of the Retail Sales Tax Act did not apply as the transaction in question was between the appellant and authorized practitioners and there was no prescription, which was a prerequisite for the application of the exemption. The appellant appealed.

Held, the appeal should be allowed.

The appellant conceded that it was a "purchaser" within the meaning of the definition section of the Retail Sales Tax Act. It was an error, however, to assume that because the appellant was a purchaser, it was the purchaser for the purposes of s. 7(1)37 of the Act. The "sale" of free lenses occurred when a patient received the free contact lenses that the appellant provided. Thus, the purchaser for the purposes of s. 7(1)37 was the patient. As there was no dispute that the free contact lenses were dispensed to patients on the prescription of an authorized practitioner, the exemption in s. 7(1)37 applied and the provision of free contact lenses was tax exempt. The trial judge's error in the interpretation of the legislation arose as a result of incorrectly viewing the provision of free lenses as consisting of two transactions and then looking at the first transaction in isolation. Section 2(6) of the Act is clear in stipulating that a purchaser shall pay tax at the time of sale. The promotional distribution did not occur until the merchandise found its way into the hands of the [page676] intended consumer. Indeed, the Act contemplates the use of an intermediary by defining a promotional distributor to include situations where the supplier "causes to be provided" a product. Viewing the provision of free lenses from the appellant to authorized practitioners in isolation led the trial judge to conclude that the appellant was simultaneously supplier and purchaser. Such an interpretation of the legislation was both artificial and at odds with the clear legislative intent that the provision of contact lenses is to be tax exempt.

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Cases referred to

Belanger v. R. (1916), 1916 87 (SCC), 54 S.C.R. 265, 34 D.L.R. 221, 20 C.R.C. 343; Qu‚bec (Communaut‚ urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, 63 Q.A.C. 161, 171 N.R. 161, 95 D.T.C. 5017

Statutes referred to

Regulated Health Professions Act, 1991, S.O. 1991, c. 18, s. 27(2)9

Retail Sales Tax Act, R.S.O. 1990, c. R.31, ss. 1(1) "promotional distribution", "promotional distributor", "purchaser", "sale", 2(1), (6), 7(1)31, 7(1)37

Rules and regulations referred to

R.R.O. 1990, Reg. 1013 ("Retail Sales Act"), s. 1 "drugs and medicines when sold on the prescription of a physician, dentist or veterinarian"

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APPEAL from a judgment of McWatt J., [2001] O.J. No. 2970 (S.C.J.) dismissing an appeal from an assessment of retail sales tax.

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J.A. Prestage and Allan Gelkopf, for appellant.

Anita C. Veiga-Minhinnett, for respondent.

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The judgment of the court was delivered by

[1] GILLESE J.A.: -- When contact lenses are purchased in Ontario, the lenses are exempt from retail sales tax. When the lenses are provided free, does the sales tax exemption still apply? It is that question which lies at the heart of this appeal.

[2] The respondent Minister of Finance, who is responsible for the administration of the Retail Sales Tax Act, R.S.O. 1990, c. R.31, is of the view that retail sales tax is payable on free contact lenses. The Minister assessed Johnson & Johnson Inc. retail sales tax of $85,899 on contact lenses that it had distributed free of charge between September 1, 1992 and April 30, 1995 (the "relevant period"). Johnson & Johnson objected to the assessment. A review led to the dismissal of the objection. Johnson & Johnson appealed. The matter proceeded to trial by way of an action. The trial judge agreed with the Minister in a judgment released on July 20, 2001. Johnson & Johnson appeals from that judgment. [page677]

Background

[3] Johnson & Johnson is a corporation that develops, manufactures and sells a wide variety of personal care, medical and pharmaceutical products. Through its Vistakon division, it imports and distributes disposable contact lenses within Canada. It is one of approximately six suppliers of contact lenses in Ontario.

[4] The Regulated Health Professions Act, 1991, S.O. 1991, c. 18, s. 27(2)9 makes the prescribing and dispensing of contact lenses a "controlled act" with the result that contact lenses can only be prescribed or dispensed by an optometrist, a physician or an optician on the prescription of an optometrist or physician ("authorized practitioners").

[5] As Johnson & Johnson is not permitted to distribute disposable contact lenses directly to consumers, it distributes the lenses to authorized practitioners who, in turn, dispense them to patients.

[6] Subsection 2(1) of the Retail Sales Tax Act, supra, (the "Act") places the obligation to pay retail sales tax upon purchasers of tangible personal property.

[7] When an authorized practitioner dispenses disposable contact lenses for monetary consideration, the Minister does not collect provincial sales tax because such transactions are exempt pursuant to s. 7(1)37 of the Act. Subsection 7(1)37 reads as follows:

7(1) The purchaser of the following classes of tangible personal property and taxable services is exempt from the tax imposed by section 2:

37. Optical appliances when sold on the prescription of a physician or an optometrist, and repair parts for such appliances.

[8] It was agreed, for the purposes of this proceeding, that Vistakon disposable contact lenses are "optical appliances" within the meaning of the Act.

[9] Johnson & Johnson promotes its brand of contact lenses to end users in a variety of ways, including through its "Diagnostic Lens Program" (the "program"). Under the program, Johnson & Johnson supplies a limited number of disposable contact lenses to authorized practitioners free of charge. One free multi-pack is made available to an authorized practitioner for every eight multi-packs purchased by the authorized practitioner.

[10] The contact lenses provided free by Johnson & Johnson are identical in all respects to the disposable contact lenses sold for monetary consideration, except for the packaging. The words "Free Sample. Not for Sale" appears on each no-charge lens package. [page678]

[11] When an authorized practitioner's patient considers using contact lenses, an assessment is undertaken to ensure that the patient is an appropriate candidate to wear contact lenses. The assessment involves a consideration of the health of the eye, measurement of the cornea and a fitting procedure.

[12] Based on the assessment, the patient is fitted with lenses from the lens inventory that has been provided free by Johnson & Johnson. If there is no initial discomfort or irritation, the patient leaves the office with the lenses in his or her eyes and schedules a return appointment for reassessment. The patient is not charged for the lenses.

[13] The program is designed to aid in the fitting of new patients with disposable contact lenses and to encourage people who wear glasses to convert to using Johnson & Johnson contact lenses.

[14] The parties are agreed that contact lenses distributed through the program were dispensed upon presentation of a prescription by a patient.

[15] From Johnson & Johnson's perspective, the main objective of providing the free disposable contact lenses is to facilitate growth in the number of contact lens wearers and build brand loyalty. The advantage to patients lies in their ability to experience the use of disposable contact lenses at no cost.

[16] During the relevant period, Johnson & Johnson distributed over $1 million worth of disposable contact lenses free to practitioners. As mentioned above, the Minister assessed retail sales tax of $85,899 in respect of those contact lenses.

[17] Johnson & Johnson argues that, based on the wording of s. 7(1)37, free contact lenses are exempt from retail sales tax. In support of its position, it points to s. 7(1)31 of the Act, which has very similar wording to that in s. 7(1)37 and pursuant to which the Minister treats drugs and medicines provided free by pharmaceutical companies to physicians for distribution to patients as tax exempt.

[18] Paragraph 7(1)31 reads as follows:

7(1) The purchaser of the following classes of tangible personal property and taxable services is exempt from the tax imposed by section 2:

31. Drugs and medicines when sold on the prescription of a physician, dentist or veterinarian.

[19] "Purchaser" is defined in s. 1 of the Act to include a "promotional distributor". Johnson & Johnson concedes that it is a promotional distributor and therefore falls within the definition of "purchaser". [page679]

[20] The Minister argued as follows. All purchasers are required to pay retail sales tax except those that fall within the exemptions set out in s. 7(1) of the Act. Johnson & Johnson is a purchaser but it is not a purchaser pursuant to "the prescription of a physician or an optometrist". Therefore, the exemption in s. 7(1)37 does not apply to it. Absent the exemption, Johnson & Johnson is liable to pay retail sales tax on the lenses it provides free to authorized practitioners.

[21] The Minister does not charge retail sales tax on drugs and medicines provided free by pharmaceutical companies to physicians. He relies upon the wording of s. 7(1)31, which is identical in all material ways to s. 7(1)37, and s. 1 of R.R.O. 1990, Reg. 1013 (the "regulations") to justify exempting drugs provided free by pharmaceutical companies to doctors for provision to patients while refusing to exempt lenses provided free by Johnson & Johnson to authorized practitioners for provision to patients. Section 1 of the regulations defines "drugs and medicines when sold on the prescription of a physician, dentist or veterinarian" to include drugs and medicines administered by a physician, dentist or veterinarian. It does not differentiate between drugs and medicine provided free and those provided for consideration. There is no comparable definition for "optical appliances when sold on the prescription of a physician or an optometrist" in the regulations.

The decision below

[22] The trial judge began her analysis of the legislation by stating that:

The sole issue in this case is whether J&J fits within the exemption from tax provision of the Act at s. 7(1)37.

[23] She found that the program consists of two transactions: the first transaction occurs when Johnson & Johnson provides free contact lenses to the authorized practitioner and the second takes place when the authorized practitioner provides the lenses free to the patient. She focused on the first transaction and, relying upon the "time of sale" as defined in s. 2(6) of the Act, held:

Although J&J's ultimate target may be the consuming public, this transaction is between J&J and the practitioner. These practitioners are, in effect, the customers; and there is no prescription, which is a prerequisite for the exemption of tax to apply. The no-charge lenses are being used by J&J for promotional distribution at its own expense.

[24] Having concluded that the first transaction constituted a "sale", the trial judge held that it gave rise to an obligation to pay tax because provision of the free lenses was not made pursuant to a prescription. [page680]

[25] Earlier in her reasons she noted,

The Minister has acknowledged that the legislation may create an inequity between the taxation of contact lenses, on one hand, and drugs and medicines on the other.

and stated, "I agree." Nonetheless, she upheld the decision of the Minister on the basis that Johnson & Johnson had not brought itself within [s.] 7(1)37.

[26] The trial judge accepted the Minister's submission that the meaning of [s.] 7(1)31 had been qualified by s. 1 of the regulations.

Issue

[27] In order to decide this appeal, it must be determined whether the trial judge erred in law in her analysis of the legislation and her determination that the exemption in s. 7(1) 37 does not apply to Johnson & Johnson's provision of free contact lenses.

Analysis

[28] Liability for retail sales tax arises from s. 2(1) of the Act which provides that:

2(1) Every purchaser of tangible personal property . . . shall pay to Her Majesty in right of Ontario a tax in respect of the consumption or use thereof, computed at the rate of 8 per cent of the fair value thereof.

[29] Pursuant to s. 2(6) of the Act, the obligation to pay tax arises at the point of sale.

2(6) A purchaser shall pay the tax imposed by this Act at the time of the sale or the promotional distribution of an admission.

[30] "Sale" is defined in s. 1(1) of the Act to include:

(h) the provision by way of promotional distribution of any tangible personal property or taxable service,

[31] As conceded by Johnson & Johnson, the program is a "promotional distribution" and it is a "promotional distributor" within the meaning of the Act.

1(1) In this Act,

"promotional distribution" means the provision by any person to others of any tangible personal property, taxable service or admission to a place of amusement (other than any provision thereof that is prescribed by the Minister to be excluded from the application of this paragraph) that is, in the opinion of the Minister, provided for any one or more of the following purposes:

. . . . . [page681]

(b) to describe, or to promote or encourage the purchase, consumption or use of, any goods, wares, services or property of any kind,

"promotional distributor" means any person who is a resident of, or carries on business in, Ontario and who, by way of promotional distribution, provides or causes to be provided to any person in Ontario any tangible personal property, taxable service or admission to a place of amusement the full fair value or full price of admission of which is not specifically charged to, and required to be paid by, the person to whom such tangible personal property, taxable service or admission to a place of amusement is provided;

(Emphasis added)

[32] Johnson & Johnson also concedes that it is a "purchaser" within the meaning of the Act. This definition has been revised over the years in ways that are not material to this action. [See Note 1 at end of document] I refer to the definition as it read in 1994.

"purchaser" means a consumer or person who acquires tangible personal property anywhere, or who acquires or receives a taxable service at a sale in Ontario, for his, her or its own consumption or use, or for the consumption or use in Ontario of other persons at his, her or its expense, or on behalf of or as agent for a principal who desires to acquire such property or service for consumption or use in Ontario by such principal or other persons at his or its expense, and includes a person who, at his, her or its expense, purchases admission to a place of amusement for himself, herself or itself or for another person and includes also a promotional distributor to the extent that the full fair value or full price of admission of any tangible personal property, taxable service or admission to a place of amusement provided by way of promotional distribution exceeds any payment specifically made therefor by the person to whom such property, service or distribution is so provided and includes a person who, for the purpose of repairing, replacing, servicing or maintaining tangible personal property pursuant to a warranty or guarantee or to a contract for the service, maintenance or warranty of tangible personal property, acquires tangible property anywhere or acquires or receives a taxable service at a sale in Ontario;

(Emphasis added)

[33] It is an error, however, to assume that because Johnson & Johnson is a purchaser within the meaning of the definition section, it is the purchaser for the purposes of s. 7(1)37. Who, then, is the purchaser within the meaning of s. 7(1)37? The answer to that question depends upon when the free lenses were "sold". Did the "sale" of the free contact lenses occur when Johnson & Johnson provided them to the authorized practitioners or when the lenses were dispensed to patients?

[34] As can be seen from the extracted part of the definition of "sale", set out above, a promotional distribution is a sale even though there is no consideration given for the item. [page682]

[35] The whole goal of the program is to provide patients with free contact lenses. The authorized practitioners are only a conduit, albeit a necessary one, given the provisions of the Regulated Health Professions Act, 1991, set out above. As a result, in my view, the "sale" of the free lenses occurs when a patient receives the free lenses that Johnson & Johnson provides. Thus, the purchaser for purposes of s. 7(1)37 is the patient. As there is no dispute that the free contact lenses were dispensed to patients on the prescription of an authorized practitioner, the exemption in s. 7(1)37 applies and the provision of free contact lenses is tax exempt.

[36] This interpretation of s. 7(1)37 is based on a plain reading of the words. It is consonant with the express intent of the legislation to make contact lenses tax exempt and with the substance of the program.

[37] The trial judge erred in her interpretation of the legislation. The error arose as a result of incorrectly viewing the provision of free lenses as consisting of two transactions and then looking at the first transaction in isolation. Subsection 2(6) is clear in stipulating that a purchaser shall pay tax at the time of sale. The promotional distribution did not occur until the merchandise found its way into the hands of the intended consumer. Indeed, the Act contemplates the use of an intermediary by defining a promotional distributor to include situations where the supplier "causes to be provided" a product. Viewing the provision of free lenses from Johnson & Johnson to authorized practitioners in isolation led the trial judge to conclude that Johnson & Johnson was simultaneously supplier and purchaser. Such an interpretation of the legislation is both artificial and at odds with the clear legislative intent that the provision of contact lenses is to be tax exempt.

[38] Having resolved the appeal on the basis of the plain meaning of s. 7(1)37, there is no need for recourse to the residual presumption in favour of taxpayers. Had the court been compelled, however, to choose between two equally valid interpretations, recourse to the presumption would have resulted in the matter being resolved in favour of the taxpayer. See Quebec (Communaut‚ urbaine) v. Corp. Notre-Dame de Bon-Secours, 1994 58 (SCC), [1994] 3 S.C.R. 3, 171 N.R. 161.

[39] In light of my conclusions, there is no need to consider the arguments arising from the Minister's apparent inequity in have some difficulty in accepting the proposition put forward by the Crown that because the phrase "drugs and medicines when sold on the prescription of a physician, dentist or veterinarian" is defined in s. 1 of the Regulations but the phrase "optical appliances when [page683] sold on the prescription of a physician or an optometrist" is not, that it is entitled to interpret identically worded provisions in the legislation differently. That appears to me to be an attempt at the impermissible, namely, using a regulation to alter the terms of its governing legislation. See Belanger v. R. (1916), 1916 87 (SCC), 54 S.C.R. 265, 34 D.L.R. 221.

[40] I am further troubled by the Minister's reliance upon the definition as justification for applying the tax exemptions in s. 7(1)31 and 37 in an inequitable and inconsistent manner as among taxpayers. In my view, it would take clear and express language to alter the Minister's obligation to treat taxpayers fairly, equitably and consistently.

Disposition

[41] For these reasons, I would allow the appeal, set aside the judgment below and order the Minister to refund to Johnson & Johnson $85,899 plus interest.

[42] The appellant shall have its trial costs, as assessed, and costs of the appeal fixed in the amount of $10,000.

Appeal allowed.

Notes

Note 1: See S.O. 1994, c. 13 and S.O. 2000, c. 10.

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