Proof that you can't fight the taxman

National Post

2009-06-27


Some things may simply not be worth fighting for, especially when you're up against an opponent that can change the rules mid-game and then have them apply to you retroactively.

A case in point is the recent trials and tribulations of consumer giant Procter & Gamble's fight to recoup more than $2-million of Ontario sales tax it "incorrectly" paid on pallets to ship its products to various distributors such as Costco and Walmart.

Under the Ontario Retail Sales Tax Act, most purchases are subject to an 8% retail sales tax. There are some exemptions and one of them is when a purchaser buys something "for the purpose of being processed ... attached to or incorporated into ... property for the purpose of sale ... other than a returnable container."

The Ontario tax department argued, among other things, that the pallets on which P&G's goods were shipped were essentially returnable containers and thus the exemption did not apply.

The Ontario Superior Court, which first heard the case in July, 2006, looked to the definition of returnable container in the act which, at the time, was defined as "a container that is intended to be returned to be refilled by a manufacturer."

The court concluded that the pallets did not meet this definition and that P&G was entitled to a refund of the Ontario sales taxes paid.

That's when things started to get interesting.

The Ontario government, perhaps peeved about losing this case and worried about numerous claims by similar taxpayers, appealed the decision to the Court of Appeal, which heard the case in 2007.

The Court of Appeal also ruled in favour of P&G, finding that pallets were not returnable containers and therefore were not captured by this exception in the act. The court then suggested that this "problem" could "easily be rectified by amendment should the legislature see fit to do so."

Following the Court of Appeal's advice, this is exactly what the Ontario government did in its 2008 budget, amending the definition of returnable container to cover pallets, retroactive to 1997, "in response to a recent court interpretation."

While governments certainly have the power to bring in retroactive tax amendments, it's customary (but not obligatory) that the retroactive legislation not be applied to a taxpayer who has successfully won a case before the courts under the old rules.

Perhaps the most famous example of this was in 1998, when the Supreme Court of Canada struck down Ontario's probate fees as being "unconstitutional." The Ontario government responded by enacting a replacement tax, retroactive to 1950.

In doing so, however, it inserted the "Eurig clause," named after the successful Supreme Court litigant, which simply reads: "The estate of Donald Valentine Eurig, who died on or about Oct. 14, 1993, is exempt from tax under this act."

No such clause, however, was inserted for P&G, which was reassessed the Ontario retail tax under the retroactive legislation.

P&G once again went back to Ontario Superior Court last fall to argue that the retroactive change should not apply to its situation, but this time the court disagreed and concluded that the act was "validly amended and validly expressed."

Erin O'Toole, P&G's legal counsel, expressed disappointment over the decision. While he hopes to resolve the matter without having to go to court for the fourth time, an appeal has been filed to protect P&G's legal rights. "Adjudication by the courts should be respected," Mr. O'Toole says. "This is an issue of national importance."

While we may not have heard the end of this story, the moral, at least for those of us without deep pockets, is painfully obvious: When you are up against the taxman, who has the ability to change the rules retroactively, even a win can turn out to be a loss.