CITATION: Proctor & Gamble Inc. v. Ontario (Finance), 2007 ONCA 784
DATE: 20071116
DOCKET: C46030
COURT OF APPEAL FOR ONTARIO
LASKIN, MOLDAVER and LAFORME JJ.A.
BETWEEN:
PROCTOR & GAMBLE INC.
Applicant (Respondent, Appellant by way of cross-appeal)
and
THE MINISTER OF FINANCE FOR ONTARIO
Respondent (Appellant, Respondent by way of cross-appeal)
Walter Myrka and Cathy Shanahan for the appellant, respondent by way of cross-appeal
Chia-yi Chua and R. Brendan Bissell for the respondent, appellant by way of cross-appeal
Heard: September 11 & 12, 2007
On appeal from the judgment of Justice Edward Belobaba of the Superior Court of Justice dated August 30, 2006.
BY THE COURT:
[1] The Minister of Finance for Ontario appeals from the order of the application judge, Belobaba J., declaring that Proctor and Gamble Inc. (“P&G”) is exempt, under s. 7(1)41 of the Retail Sales Tax Act, R.S.O. 1990, c.R. 31 (the “Act”) from paying retail sales tax on wooden pallets it rents and then employs in the shipment of its commercial goods to large-scale retailers. Section 7(1)41 of the Act reads in part as follows:
The purchaser of the following classes of tangible personal property … is exempt from the tax imposed by s. 2:[^1]
- Tangible personal property purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into tangible personal property for the purpose of sale. [Emphasis added.]
However, this exemption does not apply with respect to
i. a returnable container for use or sale in Ontario.
[2] The application judge found that the pallets that P&G rents come within the exemption specified in s. 7(1)41. In particular, he found that:
• the pallets are tangible personal property as that term is defined in s. 1(1) of the Act;
• P&G purchases the pallets;[^2]
• the pallets are purchased for the purpose of being attached to or incorporated into tangible personal property (the consumer goods that P&G manufactures) for the purpose of sale (to P&G’s large-scale retail customers); and
• the pallets do not qualify as “returnable containers” as that term is defined in s. 1(1) of the Act.
[3] In arriving at that conclusion, the application judge outlined in some detail the uncontradicted evidence pertaining to P&G’s business and the use it makes of pallets in the sale of its commercial goods to large-scale retailers. The salient features of that evidence are repeated below.
P&G’s business and its use of pallets
[4] P&G is engaged in the manufacture, distribution, and marketing of various consumer products, including toiletries, household cleansers, baby and feminine care products, and food and beverages. P&G sells these products to high-volume retailers such as Costco, Wal-Mart, Loblaws, and Canadian Tire.
[5] When P&G ships commercial goods to its customers, it packages the goods in boxes and stacks the boxes on the flat wooden pallets that measure 48 inches by 40 inches. P&G then wraps the entire package, including the pallet, with an industrial-strength plastic stretch wrap. Because the pallets are basically flat wooden platforms, they can only be used to ship the consumer goods to customers once they have been attached to the consumer goods with the plastic stretch wrap. It is this unit (referred to by P&G as a “palletized product”) that P&G sells to its customers. Some customers, such as Costco, place the pallets with P&G’s product directly onto their sales floors, as part of a marketing technique that enables consumers to access the product more efficiently and with greater savings.
[6] P&G rents the pallets it needs from CHEP Canada Inc. and CHEP invoices P&G. P&G’s customers do not pay CHEP for the pallets, nor are they responsible for returning the pallets to CHEP once they have been unloaded. Instead, CHEP arranges for the pallets to be picked up from their business premises.
[7] After CHEP retrieves the pallets, it cleans, repairs, and stockpiles them for re-use. When P&G places a new order for pallets from CHEP, the orders are filled from a pool of generic CHEP pallets.
[8] Over the years, CHEP pallets, with their easy four-sided access for fork-lifts and hand-jacks, have become the preferred method for packaging and shipping large orders to many retailers. Indeed, many of P&G’s customers now require that P&G use only CHEP pallets in their shipments. Finally, while P&G does not charge its large-scale customers directly for their use of the pallets, the rental costs paid by P&G to CHEP are included in the price P&G charges for its product.
Findings made by the application judge
[9] Against that factual backdrop, the application judge made two critical findings.
[10] First, he found that the transfer of the pallets from P&G to its customers constitutes a “sale” as that term is defined under the Act. In so concluding, he observed that “sale” is defined in s. 1(1) of the Act as including “any transfer of possession … whereby at a price or other consideration a person delivers to another person tangible personal property.”
[11] The Minister has never disputed that P&G transfers possession of the pallets to its customers. The contentious issue before the application judge was whether it received “consideration” for doing so.
[12] The application judge resolved that issue in favour of P&G. At para. 36 of his reasons, he made the following finding:
I agree … that consideration for the pallets does pass from P&G’s customers to P&G because the evidence is that the rental charges for the pallets are included in the price. Something of value, however minimal, is therefore given to P&G by its customers for their receipt and use of the pallets.
[13] The application judge elaborated on that finding at para. 37 as follows:
One must also remember that the products that P&G’s customers purchase are not just the Consumer Goods, but a palletized (and plastic wrapped) shipment of Consumer Goods .… In accordance with the expectations of P&G’s customers who insist on a palletized package, the Consumer Goods are sold together with and attached to the pallets. Hence, it makes sense that the packaging material, i.e., the pallets and the plastic stretch wrap, would be included in the cost of the Consumer Goods.
[14] At para. 38, the application judge finalized this aspect of his analysis as follows:
[T]he transfer of the pallets to its [P&G’s] customers is a “sale” because consideration is provided by the customers in the overall price that is charged for the Consumer Goods and that includes the cost of the pallet rental.
[15] Second (and as an adjunct to the first finding), the application judge found that the CHEP pallets used by P&G were not to be considered in isolation but as part of a homogeneous package—pallet, product, and stretch wrap—that P&G was marketing to its large-scale customers. That finding, repeated time and again throughout his reasons, was central to his conclusion that the pallets come within the exemption in s. 7(1)41 of the Act. Two examples are found at paras. 54 and 56 as follows:
The product that is being sold to the large-store customers, as already noted, is a palletized and plastic-wrap package of consumer goods. The pallet is an essential part of the package being sold. [Emphasis added.]
A pallet-less shipping package with just the Consumer Goods and the plastic wrap would not be a marketable product given that P&G’s customers have made clear that they prefer, even require, a palletized product. [Emphasis added.]
[16] With that finding in place, the application judge had little difficulty concluding that the pallets are “attached to” or “incorporated into” P&G’s product for purposes of s. 7(1)41. At para. 59, he stated:
[T]he final product that P&G sells to Costco or Loblaws is a “palletized product” where the pallet is “attached to” the Consumer Goods by plastic stretch wrap. Or, putting it differently, the pallet is “incorporated into” a final palletized product, i.e. a pallet of P&G Consumer Goods secured by plastic stretch wrap.
[17] At para. 67, the application judge summarized his findings and conclusions as follows:
To sum up—the pallets are “attached to” the Consumer Goods or “incorporated into” a final palletized product consisting of the pallet, the Consumer Goods and the plastic stretch wrap. Either way, I am satisfied that P&G comes within the exemption in s. 7(1)41.
[18] Having made those findings, the only remaining question was whether the pallets qualified as “returnable containers” so as to preclude P&G from claiming the exemption created by s. 7(1)41. For reasons that need not be detailed, the application judge found that they did not and the Minister takes no issue with that finding on appeal.
The Minister’s Appeal
[19] The Minister submits that the application judge erred in declaring that P&G is exempt from paying Retail Sales Tax on the pallets under s. 7(1)41.
[20] The Minister submits that the pallets form no part of the product that P&G actually sells to its customers. P&G does not own the pallets and therefore it has no right to sell them. Moreover, the customers pay nothing for them. It follows, according to the Minister, that the application judge erred in two respects: first, in concluding that the pallets are “attached to” P&G’s product, or alternatively, that they are “incorporated into” a final product; and second, that the pallets form part of P&G’s product “for the purpose of sale”.
Analysis
[21] At the conclusion of argument, we informed the parties that the appeal was being dismissed, with reasons to follow. These are our reasons.[^3] They are brief, because in the end, we are of the view that the appeal is largely fact-driven.
[22] First, we are satisfied that it was open to the application judge to find that P&G’s customers paid some consideration for the pallets they received from P&G. As such, he was entitled to conclude that the transfer of the pallets from P&G to its customers constituted a “sale” under the Act. The Minister quarrels with that finding for two reasons.
[23] First, the Minister submits that P&G does not own the pallets and therefore cannot pass title in them to their customers. That submission is true as far as it goes. It fails, however, to consider the more expansive definition of “sale” found in s. 1(1) of the Act. That definition, it is recalled, includes any transfer of possession of tangible property for consideration. And that is precisely what the application judge found to be the case here. As indicated, we are satisfied that that finding was open to him.
[24] Second, the Minister submits that there was no “sale” here because the so-called “consideration” paid by P&G’s customers for the pallets is simply an overhead expense, not unlike lighting and heating expenses, that P&G builds into the final price it charges to its customers.
[25] With respect, the Minister’s submission is misconceived. It fails to recognize that under the Act, a “sale” requires more than mere consideration; it also requires the delivery of tangible personal property from one person to another.
[26] In this case, P&G transfers possession of the pallets to its customers and recoups the cost of the pallets in the sale price. That constitutes a “sale”. The fact that P&G may also recoup its heating and lighting costs is of no moment since it obviously does not transfer heat or lighting to its customers. Hence, those and other like overhead expenses cannot constitute a “sale” under the Act. Viewed that way, the Minister’s concern about opening floodgates as a result of adopting P&G’s proposed interpretation is unfounded.
[27] Second, we are satisfied that it was open to the application judge to find that the product P&G sells is a palletized “package”, consisting of a stretch-wrapped pallet stacked with consumer goods. P&G provided evidence to that effect and we find nothing remarkable about it. The phenomenon of the “big-box” store is upon us, and new and flexible marketing techniques are being employed to accommodate their needs. As the application judge so aptly put it at para. 56 of his reasons:
A pallet-less shipping package with just the Consumer Goods and the plastic wrap would not be a marketable product given that P&G’s customers have made it clear that they prefer, even require, a palletized product. [Emphasis added.]
[28] Whether the legislature contemplated such marketing techniques when it drafted the Act, we do not know. The record is silent in that regard. If the legislature did intend to tax the materials employed in these techniques—such as CHEP’s pallets—the Act falls short of the mark. If the legislature did not contemplate the techniques, then the Act can be amended to meet the realities of modern-day marketing and consumer demands. In the meantime, as indicated, we see no basis for interfering with the application judge’s characterization of the final product marketed by P&G as a “palletized” product.
[29] While we are on the subject of the wording of the Act, we note that s. 7(1)41 is not worded in the clearest of terms. Recall that this provision states:
Tangible personal property purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into tangible personal property for the purpose of sale. [Emphasis added.]
Both sides assumed that the phrase “for the purpose of sale” referred to the section’s first mention of “tangible personal property” (i.e. the pallets by themselves). Grammatically speaking, “for the purpose of sale” should modify a verb (or a series of verbs). Therefore, it could be read to modify “being processed, fabricated or manufactured into, attached to, or incorporated”. Although we do not need to finally decide the matter, under this interpretation of s. 7(1)41, the words “for the purpose of sale” would modify the section’s second mention of “tangible personal property” (i.e. the consumer goods or palletized product).
[30] Be that as it may, it seems to us that the Minister’s real concern here is that unlike the plastic stretch wrap—which the Minister does not seek to tax—the pallets pose a problem because they are not being discarded after they have served their purpose; rather, they are being recycled and re-leased by their owner CHEP. As such, they do not qualify as “returnable containers” under the Act and therefore, are not captured by the returnable container exception to the s. 7(1)41 exemption.
[31] Unfortunate though that may be from the Minister’s perspective, it can easily be rectified by amendment should the legislature see fit to do so.
[32] In the result, for the reasons of the application judge, with which we are in substantial agreement, as augmented by these reasons, we would dismiss the appeal. The cross-appeal is dismissed as abandoned without costs.
[33] P&G is entitled to its costs of the appeal in the amount, agreed upon by the parties, of $12,500 inclusive of G.S.T. and disbursements.
Signature: “John Laskin J.A.”
“M. J. Moldaver J.A.”
“H. S. LaForme J.A.”
RELEASED: “MJM” November 16, 2007
[^1]: Section 2(1) of the Act imposes the obligation to pay Retail Sales Tax. The provision states: “Every purchaser of tangible personal property, except the classes thereof referred to in subsection (2), 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.” [^2]: Under s. 1(1) of the Act, a “purchaser” includes a lessee of tangible personal property. [^3]: P&G cross-appealed on the basis that the application judge erred in holding that it was “a purchaser” under s. 2(1) of the Act. Upon being advised of our decision to dismiss the Minister’s appeal, P&G abandoned its cross-appeal, on the understanding that the merits of the cross-appeal would form no part of our decision.```