The Mark Anthony Group v. R. - TCC: Product added after fermentation of cider does not vitiate duty exemption

The Mark Anthony Group v. R. - TCC:  Product added after fermentation of cider does not vitiate duty exemption

The Mark Anthony Group Inc. v. The Queen (July 26, 2017 – 2017 TCC 141, Graham J.).

Précis:  The taxpayer manufactured fermented cider.  It claimed an exemption (roughly $2 million) under the Excise Act, 2001 (the “EA”) on the basis that all of the products used in the fermentation process were of Canadian origin.  CRA denied the exemption on the basis that non-Canadian product was added after the fermentation process.  The Tax Court decided that the Canadian content test applied only up to the end of the fermentation process and allowed the taxpayer’s appeal, with costs to the taxpayer.

Decision:  The point before the Court was extremely narrow:

[2]             In the periods in question a small portion of each container of the Appellant’s cider contained apple juice concentrate that was made from apples grown outside of Canada. That apple juice concentrate was added after the cider was fermented but before the cider was packaged. The Appellant took the position that the cider qualified for the exemption. Thus, the Appellant did not remit any duty in respect of the cider. The Minister of National Revenue concluded that, because the apple juice concentrate was an agricultural or plant product and was not grown in Canada, the cider did not qualify for the exemption. The Minister assessed the Appellant for over $2,000,000 in duty for its reporting periods from September 1, 2010 to August 31, 2012. The Appellant has appealed that assessment.

The Court concluded that the exemption was confined to the fermentation process and adding non-Canadian product after that process did not deprive the taxpayer of the exemption claimed:

[107]   The question that remains is when the Ingredients Test is to be applied. Neither the text nor the context provides any guidance on that issue. I am therefore free to rely on the purpose of the exemption when considering the timing. Applying the test at fermentation will cause less harm to the purpose of the exemption than applying it at packaging. Therefore, I find that the test should be applied at fermentation. I am aware that this leaves the fortified wine loophole open, but I find that to be the lesser of two evils. Better that a beverage containing imported spirits be duty-free than that a beverage be subject to duty merely because water, carbonation, flavouring, colouring, preservatives or other additives were added after fermentation.

[108]   For clarity, under this conclusion, paragraph 135(2)(a) would be read as if it applied to wine “produced in Canada and, when produced, composed wholly of agricultural or plant product grown in Canada”.

[109]   I am aware that this decision will likely cause significant production problems and/or financial hardships for many vintners. In particular, if my understanding that sugar is fermented is correct, non-Canadian sugar that is added at the fermentation stage will make the exemption unavailable. Similarly, the addition of any preservative that is not an agricultural or plant product grown in Canada will put a beverage offside. Presumably vintners will ask Parliament to amend the text of the exemption to better align it with either its intended purpose or a more practical purpose. It is not my role to make the amendment for them.

There was a small adjustment to be made on account of the non-Canadian concentrate:

[111]   A small portion of the Appellant’s beverages were fortified with imported spirits. The Appellant was assessed duty of $39,970.28 on those beverages. The Appellant conceded that it was required to pay duty on those beverages. Thus, that issue was no longer before me. Therefore, despite the fact that I have concluded that those beverages would qualify for the exemption, I cannot issue judgment to that effect.

In light of its substantial success, costs were awarded to the taxpayer:

[113]   Costs are awarded to the Appellant. The parties shall have 60 days from the date hereof to reach an agreement on costs, failing which they shall have a further 30 days to file written submissions on costs. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received, costs shall be awarded to the Appellant as set out in the Tariff.