VALLEYBROOK GARDENS LTD.
THE MINISTER OF NATIONAL REVENUE
Appeal No. AP-91-186
TABLE OF CONTENTS
Ottawa, Monday, October 19, 1992
Appeal No. AP-91-186
IN THE MATTER OF an appeal heard on July 20, 1992, under section
81.19 of the Excise Tax Act, R.S.C. 1985, c. E-15, as
AND IN THE MATTER OF a decision of the Minister of National
Revenue dated December 23, 1991, with respect to a notice of
objection served under section 81.15 of the Excise
VALLEYBROOK GARDENS LTD.
THE MINISTER OF NATIONAL REVENUE
The appeal is allowed.
Robert C. Coates, Q.C. ______ Robert C. Coates, Q.C. Presiding
Kathleen E. Macmillan ______ Kathleen E. Macmillan Member
Charles A. Gracey ______ Charles A. Gracey Member
Michel P. Granger ______ Michel P. Granger Secretary
The appellant carries on a farming business producing
ornamental plants for sale. Its two main customers include
retail nurseries and landscapers. A rebate was claimed on
its behalf for the federal sales tax paid on plastic labels that
describe the type and characteristics of the plants that
they accompany. The rebate was disallowed on the basis that the
labels are not goods for sale, lease or rental to customers
in the appellant's ordinary course of business. The issue in this
appeal is whether the appellant is eligible for a federal
sales tax inventory rebate for the labels in accordance with
section 120 of the Excise Tax Act.
: The appeal is allowed.
Place of Hearing: Ottawa, Ontario Date of Hearing: July 20, 1992
Date of Decision: October 19, 1992
Tribunal Members: Robert C. Coates, Q.C., Presiding Member Kathleen
E. Macmillan, Member Charles A. Gracey, Member
Counsel for the Tribunal: David M. Attwater
Clerk of the Tribunal: Janet Rumball
Appearances: John Schroeder, for the appellant Wayne D.
Garnons-Williams, for the respondent
This is an appeal made pursuant to section 81.19 of the
Excise Tax Act  (the Act) which proceeded on the basis of an
agreed statement of facts and the written submissions of the
parties. The issue in this appeal is whether the appellant is
eligible for a federal sales tax inventory rebate in accordance
with section 120 
of the Act. Specifically, the Tribunal must determine whether
certain labels were held for taxable supply by way of sale, lease
or rental within the meaning of the rebate provisions of the
The appellant carries on a farming business producing ornamental
plants for sale. Its two main customers are retail nurseries and
landscapers. A rebate was claimed on its behalf for the federal
sales tax (FST) paid on plastic labels that describe the type and
characteristics of the plants that they accompany. The rebate was
disallowed on the basis that the labels are not goods for sale,
lease or rental to customers in the appellant's ordinary course of
business. On the basis of an objection, the Minister of National
Revenue (the Minister) confirmed that the goods were not held in
inventory, available for "taxable supply ... by way of sale." A
rebate of $245.28 was allowed, leaving an outstanding amount of
$4,664.34 for which the appellant appealed to this Tribunal.
When Parliament adopted the legislation establishing the Goods
and Services Tax (GST), it provided provisions in order to effect
an orderly transition to the new system. One of the main
transitional provisions relates to the refunding of FST on tax-paid
inventory. Very briefly, and for purposes of this appeal, upon
filing a claim, an FST rebate is paid to a GST registrant who had
tax-paid goods in inventory at the beginning of January 1, 1991.
"Inventory" includes items of tax-paid goods held in Canada for
taxable supply by way of sale, lease or rental to others in the
ordinary course of the person's business. "Tax-paid goods" include
new goods acquired before 1991 that have not been previously
written off in the accounting records of the person's business and
in respect of which tax imposed under subsection 50(1) of the Act
has been paid and is not recoverable except under section 120 of
the Act. "Taxable supply" means a supply that is made in the course
of a commercial activity, but does not include an exempt supply.
Finally, "supply" means the provision of property or a service in
any manner, including sale, transfer, barter, exchange, licence,
rental, lease, gift or disposition.
Counsel for the respondent submitted that the labels in the
appellant's inventory on January 1, 1991, were not held by the
appellant for the provision of property or a service by way of
sale, lease or rental to others in the ordinary course of business
and, thus, did not constitute a "taxable supply" within the meaning
of the Act. Counsel submitted that the labels were held as prepared
materials that are ancillary to a service.
Counsel referred to GST Memorandum 900 (the Memorandum) that
states, in part, that for goods to be considered to be held for
sale and, thus, qualify for an FST rebate, they must be offered for
sale by the GST registrant.  Counsel argued that the labels were not "offered
for sale by the registrant." Rather, they were used as an ancillary
piece to the main product being sold, that being the plants. He
further noted that, pursuant to the Memorandum, goods for sale,
lease or rental excludes goods that are ancillary to a service
performed.  Since
the labels are not an integral and essential part of the
appellant's products and since plants are saleable without the
printed plastic tags, they are not goods that qualify for an FST
inventory rebate. Counsel admitted that this administrative policy
and interpretation of the Act are not binding on the Tribunal, but
argued that they should be accorded weight and may serve as an
important factor in case of doubt about the meaning of the
Counsel noted that, pursuant to the respondent's interpretation
of the Act, there will be double taxation on part or all of the
labels held in inventory by the appellant on January 1, 1991. He
argued, however, that the Tribunal is bound to apply the law and
that it lacks the jurisdiction to grant equitable remedies.
The appellant's representative argued that the labels meet the
conditions of eligibility for the rebate. They are new goods,
tax-paid, held in inventory for sale and are not written off.
Plants are typically sold with tags describing their name, use and
characteristics. This was elaborated on in the appellant's response
to the respondent's brief, where it was asserted that when a price
is quoted to a landscaper, it is determined in part by whether
labels are required or not. Without labels, the price is lower. It
was argued, therefore, that if a customer has the choice of whether
or not to purchase the labels, then they are offered for sale.
The representative argued that the labels are a vital part of
the product being purchased by retail nursery shops. He claimed
that the quality of the label is a major reason for the appellant's
success in the marketplace. The entire goal of the farm is to
produce plants for sale, and the labels are an important element of
the product. They are not incidental or consumable items, nor are
they considered packaging.
It was contended that double taxation is to be avoided under
Canadian tax law. However, under the current interpretation by the
Minister, both FST and GST will be paid on the labels, a situation
that was not intended by the legislation.
In the Tribunal's view, this case parallels one of its earlier
decisions  that
dealt with the treatment of tax-paid goods held in inventory during
the period of transition from the FST to the GST. At issue is
whether goods held in inventory, labels in this instance, are held
for taxable supply by way of sale, lease or rental.
When the appellant sells a plant, the value of the accompanying
label is reflected in the price charged. This is demonstrated by
the fact that landscapers choosing to purchase plants without
labels are charged a lower price than if labels are included. The
printed labels are clearly incorporated into and form a part of the
finished product, properly labelled plants, which are taxable under
In the Tribunal's view, the printed labels constitute tax-paid
goods that are held for taxable supply by way of sale. As explained
in the Techtouch decision,  the Tribunal interprets "held ... for taxable
supply ... by way of sale, lease, or rental" broadly to include
tax-paid goods, such as these labels, that are essentially material
inputs to finished goods that are taxable under the GST.
Accordingly, the appeal is allowed.
[Table of Contents
1. R.S.C. 1985, c.
E-15, as amended.
2. Added by S.C. 1990,
c. 45, s. 12.
4. Clause 5(a)(iv)(D).
The examples given are shampoo used by a beauty salon and soft
drinks or alcoholic beverages used by restaurants and hotels in the
preparation of drinks for patrons.
5. Nowegijick v. The
Queen,  1 S.C.R. 29.
6. Techtouch Business
Systems Ltd. v. The Minister of National Revenue, Canadian
International Trade Tribunal, Appeal No. AP-91-206, September 18,
Initial publication: June 30, 1997