Reebok Canada v. Canada (Deputy Minister of National Revenue)

Reebok Canada v. Canada (Deputy Minister of National Revenue) Court (s) Database Federal Court of Appeal Decisions Date 2002-04-10 Neutral citation 2002 FCA 133 File numbers A-642-97 Notes Digest Decision Content Date: 20020410 Docket: A-642-97 Neutral citation: 2002 FCA 133 CORAM: STRAYER J.A. ROTHSTEIN J.A. SEXTON J.A. BETWEEN: REEBOK CANADA, a division of Avrecan International Inc. Appellant and THE DEPUTY MINISTER OF NATIONAL REVENUE FOR CUSTOMS AND EXCISE Respondent Heard at Ottawa, Ontario, on April 10, 2002. Judgment delivered from the Bench at Ottawa, Ontario, on April 10, 2002. REASONS FOR JUDGMENT BY: ROTHSTEIN J.A. Date: 20020410 Docket: A-642-97 Neutral citation: 2002 FCA 133 CORAM: STRAYER J.A. ROTHSTEIN J.A. SEXTON J.A. BETWEEN: REEBOK CANADA, a division of Avrecan International Inc. Appellant and THE DEPUTY MINISTER OF NATIONAL REVENUE FOR CUSTOMS AND EXCISE Respondent REASONS FOR JUDGMENT (Delivered from the Bench at Ottawa, Ontario, on April 10, 2002) ROTHSTEIN J.A. [1] This appeal from the Trial Division was adjourned pending the decision of the Supreme Court of Canada in Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc., [2001] 2 S.C.R. 100. The Mattel decision was issued by the Supreme Court on June 7, 2001 and, in our view, it is dispositive of this appeal. [2] The issue in the appeal is whether the duty that is payable on certain imported goods is to be calculated by adding to the price of the goods, royalties paid in respect of the goods. Paragraph 48(5)(a)(iv) of the Customs Act R.S.C. 1985, c. 1 (2d. Supp.) provides: 48(5)The price paid or payable in the sale of goods for export to Canada shall be adjusted (a) by adding thereto amounts, to the extent that each such amount is not already included in the price paid or payable for the goods, equal to [...] (iv) royalties and licence fees, including payments for patents, trade-marks and copyrights, in respect of the goods that the purchaser of the goods must pay, directly or indirectly, as a condition of the sale of the goods for export to Canada, exclusive of charges for the right to reproduce the goods in Canada. 48(5) Dans le cas d'une vente de marchandises pour exportation au Canada, le prix payé ou à payer est ajusté: a) par addition, dans la mesure où ils n'y ont pas déjà été inclus, des montants représentant: [...] (iv) les redevances et les droits de licence relatifs aux marchandises, y compris les paiements afférents aux brevets d'invention, marques de commerce et droits d'auteur, que l'acheteur est tenu d'aquitter directement ou indirectement en tant que condition de la vente des marchandises pour exportation au Canada, à l'exclusion des frais afférents au droit de reproduction de ces marchandises au Canada, [3] The question is whether the obligation to make royalty payments was a condition of the sale of the goods. [4] Here, the contract of sale between the vendor and purchaser was a purchase order. The respondent concedes that it was not an express condition in the purchase order that royalties be paid. [5] However, another agreement existed between the same vendor and purchaser for the payment of royalties. While there is no express reference in the purchase order to the royalty agreement or in the royalty agreement to the purchase order, the respondent says that the royalty agreement was a condition precedent to the purchase order - that is, that the vendor would not sell the goods to the purchaser if the royalties under the royalty agreement were not paid. Therefore, the royalty agreement constitutes a condition of the sale of the goods and royalties must be added to the price paid for the goods for the purpose of calculating duty. [6] In Mattel, supra, the circumstances were similar to those in the appeal at bar. There was a contract of sale and a separate contract respecting royalties and licence fees. However, in Mattel, supra, the vendor of the goods under the contract of sale and the licensor under the royalty agreement were separate persons. [7] Major J. found that the royalty payments did not fall within the ambit of paragraph 48(5)(a)(iv) of the Customs Act. At paragraph 62, he stated: The royalties in the present appeal were not paid as a condition of sale. If Mattel Canada refused to pay royalties to Licensor X, Mattel U.S. could not refuse to sell the licensed goods to Mattel Canada or repudiate the contract of sale. The sale contract and the royalties contract were separate agreements between different parties. [8] The respondent distinguishes Mattel, supra, on the grounds that, in the appeal at bar, the vendor and licensor are the same person. Counsel says that, in reality, even though there is nothing formal or written that connects the royalty agreement to the purchase order, the vendor would refuse to sell to the purchaser if royalties were not paid. Because the vendor could, and would, refuse to sell if royalties were not paid, the payment of royalties must be a condition of the sale of the goods and, therefore, royalties must be added to the purchase price of the goods for the purposes of calculating duty. [9] We agree that the vendor in the present case would probably refuse to sell to the purchaser if the purchaser was not making royalty payments. But that is because, according to the evidence, there is no continuing obligation to sell to the purchaser. If the purchaser sought to make future purchases, a new contract of sale would have to be agreed upon and in it, the vendor would make it a condition of the new sale that royalties be paid and, probably, that unpaid royalties also be paid. If not, the vendor would refuse to sell. [10] But that is not the refusal to sell referred to in Mattel, supra. The context there makes it plain that the refusal to sell, to which Major J. was referring, was a refusal to sell where there was a prior obligation on the vendor to sell - perhaps under an ongoing contract for sales that stipulated prices. At paragraph 68, he states: Unless a vendor is entitled to refuse to sell licensed goods to the purchaser or repudiate the contract of sale where the purchaser fails to pay royalties or licence fees, s. 48(5)(a)(iv) is inapplicable. Major J.'s reference to the vendor being "entitled to refuse to sell" implies a prior obligation from which the vendor is entitled to be relieved. To give any legal meaning to the term "refuse to sell" as used by Major J., it must be in the context of a prior obligation to sell. He could not have been referring to new and independent contracts of sale in which neither party had any obligation until the terms of the new contract were agreed. [11] The fact that Major J. referred to the sale contract and royalty contract being between different parties is an additional reason he found the requirement to pay royalties in Mattel, supra, was not a condition of the sale of the goods. However, even when the parties are the same, as in this case, it is not inevitable that the obligations under one agreement will automatically become obligations under the other. It will depend on the wording of the agreements. [12] In Mattel, supra, Major J., at paragraph 63, expressly rejected notions of "true connection", "effective control", "practical", and "logical" as arguments by which royalty payments in that case could constitute a condition of the sale for the purposes of paragraph 48(5)(a)(iv) of the Customs Act. At paragraph 64, he emphasises that when clear and unambiguous statutory provisions can be applied directly to the facts, it is not necessary to resort to an analysis of the economic realities of a transaction. In this appeal, the respondent is attempting to convince the Court to apply practicality or economic realities to the circumstances. It is not suggested paragraph 48(5)(a)(iv) is ambiguous. We must take the statute as we find it and apply it to the facts. On the facts here, the payment of royalties under the royalty agreement is not a condition of the sale under the purchase order. Accordingly, their payment is not a condition of the sale of the goods for purposes of paragraph 48(5)(a)(iv), and royalties are not to be added to the purchase price for the purpose of calculating duty. [13] The appeal will be allowed with costs here and in the Trial Division, the decision of the Deputy Minister of National Revenue will be set aside and the matter will be remitted to the Deputy Minister for reassessment in accordance with these reasons. "Marshall Rothstein" J.A. FEDERAL COURT OF CANADA APPEAL DIVISION NAMES OF SOLICITORS AND SOLICITORS ON THE RECORD DOCKET: A-642-97 APPEAL FROM THE JUDGMENT OF THE TRIAL DIVISION OF THE FEDERAL COURT OF CANADA, DELIVERED JUNE 30, 1997 IN DOCKET: T-864-94 STYLE OF CAUSE: REEBOK CANADA v. THE DEPUTY MINISTER OF NATIONAL REVENUE FOR CUSTOMS AND EXCISE PLACE OF HEARING: OTTAWA, ONTARIO DATE OF HEARING: April 10, 2002 REASONS FOR JUDGMENT OF THE COURT: ( Strayer, Rothstein, Sexton JJA.) DELIVERED FROM THE BENCH BY: Rothstein J.A. APPEARANCES: Mr. Nicholas P. McHaffie FOR THE APPELLANT Mr. Glenn A. Cranker Mr. Peter M. Southey FOR THE RESPONDENT SOLICITORS OF RECORD: Stikeman Elliott FOR THE APPELLANT Ottawa, Ontario Montreal, Quebec Mr. Morris Rosenberg FOR THE RESPONDENT Deputy Attorney General of Canada Ottawa, Ontario