A-445-97
The Attorney General of Canada (Applicant)
v.
Consolidated Canadian Contractors Inc. (Respondent)
Indexed as: Canada (Attorney General)v. Consolidated Canadian Contractors Inc. (C.A.)
Court of Appeal, Strayer, Robertson and McDonald JJ.A."Toronto, June 3; Ottawa, September 29, 1998.
Customs and Excise — Excise Tax Act — Taxpayer building contractor using —zero rated— supplies — Supplies not GST exempt as part of entire construction project, not acquired by taxpayer as agent for school boards — T.C.C. finding in favour of Minister but setting aside 6% penalty as due diligence exercised by taxpayer in attempting to ascertain correct amount of GST — Whether —due diligence— defence available to persons subject to automatic penalty for failing to remit correct amount of GST under Excise Tax Act, s. 280 — S. 280 administrative penalty — Mens rea, strict liability, absolute liability offences distinguished — Administrative penalties giving rise to strict, absolute liability — Patent unfairness not sufficient reason to imply due diligence defence under s. 280 — Implied due diligence not contrary to legislative scheme, purposes underlying s. 280.
Construction of statutes — Taxpayer liable for underpayment of GST, assessed for additional tax, interest, 6% penalty under Excise Tax Act, s. 280(1) — Whether implied due diligence defence available where taxpayer exercising required standard of care — Conventional interpretative principles applicable in deciding whether due diligence defence available — —Modern— approach to statutory interpretation involving contextual, purposive analysis of legislation — Relevant factors to be considered in determining whether s. 280 gives rise to strict liability — S. 280 not giving rise to absolute liability — Implied due diligence not incompatible with legislative scheme — Presumption in favour of strict liability not rebutted.
Judges and Courts — Limits of judicial discretion in statutory interpretation and policy-making role of courts — Automatic penalty for insufficient GST remittance — Whether Court may read in due diligence defence — Statutory interpretation leading to absurd result, manifest injustice undermines public confidence in, respect for, judicial system — Reason for —golden rule— as qualification to literal rule of construction — Case law on what constitutes absurdity irreconcilable at time of Canadian legal realist movement — —Golden rule— device used by judges to achieve desired result — Whether concept of absurdity extends to consequences contradicting values considered important by courts (such as principle no punishment without fault) — Fear that statutory interpretation will dissolve into judge-made law — Influence of judicial values on interpretation of tax law — Historically, courts have resisted giving effect to statutes imposing absolute liability in absence of negligence — Common law principle no punishment without fault capable of giving rise to rebuttable presumption Parliament not intending to enact absolute liability under Excise Tax Act, s. 280 — Still, Court must consider legislative context, purpose of provision — Court justified in reading in to avoid unfairness, manifest injustice if relief granted compatible with legislative scheme, not frustrating purposes — These restrictions should silence argument Court exceeding constitutional role.
This was an application for judicial review of a Tax Court of Canada decision as to whether a "due diligence" defence is available to persons subject to an automatic penalty for failing to remit the correct amount of GST under the Excise Tax Act, and whether such a defence may be validly implied since that Act does not expressly provide for it. The respondent is a building contractor which, in the course of constructing two schools, used a number of supplies classified as "zero rated", meaning they would be GST exempt if purchased separately. As respondent had allegedly failed to calculate the correct amount of GST payable, it was assessed for the additional tax, interest and a penalty of 6% on the underpayment as prescribed by section 280 of the Act. With respect to whether the supplies in question were GST exempt, the Tax Court Judge found in favour of the Minister, as such supplies were unquestionably part of the entire construction project and were not acquired by the respondent as agent for the school boards. However, he set aside the 6% penalty having concluded that the respondent had exercised due diligence in attempting to ascertain the correct amount of GST to be remitted to the Receiver General. The Minister conceded that the respondent had exercised the required standard of care but challenged the Tax Court's "jurisdiction" to relieve registrants of penalties imposed under section 280 on the basis of an implied due diligence defence. Both the Tax Court Judge and the Minister relied upon the Supreme Court of Canada decision in R. on the information of Mark Caswell v. Corporation of City of Sault Ste. Marie , which involved the application of the due diligence defence in the context of a "regulatory offence". Four issues were raised herein: (1) whether the application of the due diligence defence is restricted to strict liability offences; (2) whether the concept of strict liability should be extended to administrative penalties; (3) whether manifest unfairness is a sufficient ground for implying the due diligence defence; (4) whether section 280 of the Act gives rise to strict or absolute liability.
Held, the application should be dismissed.
(1) Section 280 of the Excise Tax Act is not a regulatory offence, but an administrative penalty. In Sault Ste. Marie the Supreme Court of Canada was asked the basic question of whether Canadian law should embrace the concept of strict liability offences at all. To answer that question, it recognized three categories of offences. The first consists of offences which are criminal "in the true sense" and in which mens rea must be proved by the prosecution. The second consists of strict liability offences, such as public welfare or regulatory offences, for which there is no need to prove mens rea, but where it is open to an accused to prove that he exercised reasonable care. The third category consists of absolute liability offences in which it is not open to an accused to establish that he was "free of fault". The true precedential significance of Sault Ste. Marie lies in the fact that it recognizes strict liability offences for which the defence of due diligence is available, without saying that the defence of due diligence could be invoked only if a public welfare or regulatory offence is involved. Therefore, it was open to this Court to determine whether the defence of due diligence may, as a matter of principle, be raised in the context of administrative penalties.
(2) The Sault St. Marie case stands for the proposition that due diligence is a legitimate defence in the context of a public welfare offence, but does not say whether administrative penalties entail absolute or strict liability. There is no common law rule that would disallow a due diligence defence with respect to administrative penalties, and no valid basis for maintaining absolute liability for all administrative penalties. There is no evidence that absolute liability has the effect of causing adherence to a higher standard of care or that recognition of a due diligence defence would lead to inefficiency in the enforcement of legislation. Administrative penalties may give rise to either strict or absolute liability. In deciding whether a due diligence defence is available in any one case, the application of conventional interpretative principles cannot be avoided.
(3) The question of whether it is permissible to read in the due diligence defence on the sole ground that its absence conflicts with our understanding of fundamental justice is of paramount importance because it brings into issue the limits of judicial discretion in the interpretation of statutes and the policy-making role of courts. Since an interpretation which leads to an absurd result or manifest injustice undermines public confidence in and respect for the judicial system, it is understandable why the literal rule of construction was, with the passage of time, qualified by the "golden rule" which directs that the grammatical and ordinary sense of words need not be adhered to if their meaning leads to a "repugnance" or "inconsistency" with the rest of the instrument, or to an "absurdity". Applying the golden rule of interpretation herein, the issue was whether the lack of a due diligence defence qualified as an "absurdity", that is whether the manifest unfairness which results from imposing a penalty on a registrant, despite having taken all reasonable measures to avoid it, is a sufficient reason for importing a due diligence defence into the Excise Tax Act . It has been said that, at the height of the legal realist movement in Canada, the case law as to what constituted an absurdity was incapable of reconciliation. The golden rule was said then to have been employed by judges as a device to achieve a desired result. More recently, it has been suggested that the concept of absurdity has been extended to consequences thought to be undesirable as contradicting values considered important by courts. The underlying fear is that the line between statutory interpretation and policy-making will disappear and that statutory interpretation will dissolve into judge-made law. Tax law provides an illustration of the influence of judicial values upon the interpretative process. Lord Tomlin's comment in Inland Revenue Commissioner v. Westminster (Duke of) to the effect that a taxpayer is free to arrange his affairs so as to minimize tax liability, has had a lasting impact upon the law relating to tax avoidance. The judicial value being challenged is the general right of persons not to be punished without fault, which is consistent with the common law principle that there should be no liability without fault. Patent unfairness is not a sufficient reason to import a due diligence defence into section 280 of the Excise Tax Act. It was the Court's responsibility to consider the legislative context surrounding that provision and its purpose. To extend relief solely on grounds of unfairness would disregard the approach taken in Sault Ste. Marie and would be tantamount to declaring that all administrative penalties are subject to a due diligence defence provided that judges can identify a perceived "injustice".
(4) The "modern" approach to statutory interpretation adopted by the Supreme Court of Canada involves a contextual and purposive analysis of legislation. The principle that there is to be no punishment without fault translates into a rebuttable presumption that Parliament intended strict rather than absolute liability. While rejecting the idea that unfairness or manifest injustice is a sufficient reason for implying a due diligence defence, a court is justified in reading words into an Act to avoid such a result, if it can be shown that the relief being granted is compatible with the legislative scheme and neither frustrates nor undermines its purposes. These restrictions should silence any argument that the Court is acting outside its constitutional role. There are four relevant factors to be considered in determining whether section 280 gives rise to strict liability. The language of the statute is the first consideration in determining whether an offence should be categorized as a mens rea , strict liability or absolute liability offence. Mens rea offences are usually qualified by words such as "wilfully" or "knowingly" as in the criminal context. S. 280 does not use the type of precise and explicit language expected of a provision entailing absolute liability. The second factor is the importance of the penalty and its impact on registrants. When examining this factor, attention must be paid to the consequences to the registrant, as opposed to its significance to the Minister in terms of administering the Excise Tax Act . The amounts involved are substantial to the thousands of small businesses which act as agents of the Crown in collecting and remitting the tax. Therefore, the impact of a section 280 penalty on registrants could not be characterized as inconsequential. The third factor is the subject matter of the legislation, the purpose of section 280. The proposition that a due diligence defence will lead to a breakdown in the administration of the Excise Tax Act was untenable. A penalty and due diligence defence should have no impact on those who are already "conscientious". On the other hand, it is doubtful whether some registrants will consciously decide to remain indifferent to their legal obligations under the Excise Tax Act because they know that due diligence may be pleaded as a defence. There were no persuasive grounds for holding that an implied due diligence defence undermines the incentive goals of section 280. The last factor is the regulatory framework. The thrust of the Minister's argument was that the due diligence defence is incompatible with the overall scheme of the Excise Tax Act. The outcome of this case hinged on whether an implied due diligence defence is compatible with the Minister's statutory right to waive penalties under section 281.1 of the Act. By reading in a due diligence defence, the Tax Court was not actually waiving the 6% penalty. Rather, it was granting registrants the opportunity to exculpate themselves by demonstrating that they have exercised reasonable care in attempting to ascertain the correct amount of GST owing. If registrants fail to meet the required standard of care, they remain liable to pay the penalty. Thus, there are substantive differences between an implied due diligence defence and the Minister's statutory right to waive penalties. If the Minister chooses to circumscribe his discretion by not recognizing a due diligence defence under section 280, it is open to this Court to imply such defence. Thus, the Minister's right to waive penalties under section 281.1 of the Excise Tax Act does not conflict with an implied due diligence defence. Section 280 of the Act does not give rise to absolute liability. An implied due diligence defence is neither incompatible with the legislative scheme, nor does it frustrate or undermine the purposes underlying that scheme. The presumption in favour of strict liability has not been rebutted.
statutes and regulations judicially considered
Criminal Code, R.S.C., 1985, c. C-46, s. 19.
Excise Tax Act, R.S.C., 1985, c. E-13, ss. 124 (as enacted by S.C. 1990, c. 45, s. 12; 1993, c. 27, s. 11), 280 (as enacted by S.C. 1990, c. 45, s. 12; 1993, c. 27, s. 126; 1997, c. 10, s. 235), 281.1 (as enacted by S.C. 1993, c. 27, s. 127), 285 (as enacted by S.C. 1990, c. 45, s. 12), 298(1) (as enacted idem; S.C. 1993, c. 27, s. 131; 1997, c. 10, ss. 79, 238), 323 (as enacted by S.C. 1990, c. 45, s. 12; 1992, c. 27, s. 90; 1997, c. 10, s. 239), 327 (as enacted by S.C. 1990, c. 45, s. 12), 329 (as enacted idem).
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 163(2) (as am. by S.C. 1994, c. 7, Sch. VII, s. 17; c. 8, s. 26; 1995, c. 3, s. 48; 1996, c. 21, s. 43).
Ontario Water Resources Commission Act (The), R.S.O. 1970, c. 332, s. 32(1).
cases judicially considered
followed:
R. on the information of Mark Caswell v. Corporation of City of Sault Ste. Marie, [1978] 2 S.C.R. 1299; (1978), 85 D.L.R. (3d) 161; 40 C.C.C. (2d) 353; 7 C.E.L.R. 53; 3 C.R. (3d) 30; 21 N.R. 295.
applied:
Pillar Oilfield Projects Ltd. v. The Queen (1993), 2 GTC 1005 (T.C.C.); Upper Canada College v. Smith (1920), 61 S.C.R. 413; 57 D.L.R. 648; [1921] 1 W.W.R. 1154; Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.).
considered:
R. v. Pontes, [1995] 3 S.C.R. 44; (1995), 12 B.C.L.R. (3d) 201; 100 C.C.C. (3d) 353; 41 C.R. (4th) 201; 13 M.V.R. (3d) 145; 186 N.R. 81; Re B.C. Motor Vehicle Act, [1985] 2 S.C.R. 486; (1985), 24 D.L.R. (4th) 536; [1986] 1 W.W.R. 481; 69 B.C.L.R. 145; 23 C.C.C. (3d) 289; 48 C.R. (3d) 289; 18 C.R.R. 30; 36 M.V.R. 240; 63 N.R. 266.
referred to:
Locator of Missing Heirs Inc. v. The Queen (1997), 5 GTC 7167; 212 N.R. 391 (F.C.A.); A-G Canada v. 770373 Ontario Limited (1997), 5 GTC 7030 (F.C.A.); Locator of Missing Heirs Inc. v. Canada, [1995] T.C.J. No. 1304 (QL); R. v. Sault Ste. Marie (City of) (1976), 13 O.R. (2d) 113 (C.A.); R. v. Nickel City Transport (Sudbury) Ltd. (1993), 47 M.V.R. (2d) 20 (Ont. C.A.); Abley v. Dale (1851), 11 C.B. 378; 138 E.R. 519 (C.P.); Grey v. Pearson (1857), 6 H.L.C. 61; 10 E.R. 1216 (H.L.); Re Estabrooks Pontiac Buick Ltd. (1982), 44 N.B.R. (2d) 201; 144 D.L.R. (3d) 21; 116 A.P.R. 201; 7 C.R.R. 46 (C.A.); Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 S.C.R. 271; (1975), 66 D.L.R. (3d) 449; [1976] CTC 1; 75 DTC 5451; 7 N.R. 401; Apotex Inc. v. Canada (Attorney General), [1994] 1 F.C. 742; (1993), 18 Admin. L.R. (2d) 122; 51 C.P.R. (3d) 339; 162 N.R. 177 (C.A.); affd [1994] 3 S.C.R. 1100; (1994), 176 N.R. 1; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; (1984), 10 D.L.R. (4th) 1; [1984] CTC 294; 84 DTC 6305; 53 N.R. 241; Canada v. Antosko, [1994] 2 S.C.R. 312; [1994] 2 C.T.C. 25; (1994), 94 DTC 6314; 168 N.R. 16; Friesen v. Canada, [1995] 3 S.C.R. 103; (1995), 127 D.L.R. (4th) 193; [1995] 2 C.T.C. 369; 95 DTC 5551; 186 N.R. 243; Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336; (1997), 148 D.L.R. (4th) 1; 97 DTC 5363; 213 N.R. 81; Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795; (1998), 159 D.L.R. (4th) 457; 98 DTC 6334; 225 N.R. 241; Neuman v. M.N.R., [1998] 1 S.C.R. 770; (1998), 159 D.L.R. (4th) 1; 98 DTC 6297; 225 N.R. 190; River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743 (H.L.); Great Western Ry. Co. v. Mostyn (Owners of SS.), [1928] A.C. 57 (H.L.); Canadian Pacific Air Lines Ltd. v. British Columbia, [1989] 1 S.C.R. 1133; (1989), 59 D.L.R. (4th) 218; [1989] 4 W.W.R. 137; 36 B.C.L.R. (2d) 185; 96 N.R. 1; 2 T.C.T. 4170; Canada v. Nassau Walnut Investments Inc., [1997] 2 F.C. 279; (1996), 97 DTC 5051; 206 N.R. 386 (C.A.); Metro Exteriors Ltd. v. Canada, [1995] T.C.J. No. 1302 (QL); R. v. Docherty, [1989] 2 S.C.R. 941; (1989), 78 Nfld. & P.E.I.R. 315; 51 C.C.C. (3d) 1; 72 C.R. (3d) 1; 17 M.V.R. (2d) 161; 101 N.R. 161.
authors cited
Driedger, E. A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
GST Memorandum 500-3-2-1. Assessments and Penalties-Cancellation or Waiver of Penalties and Interest. March 14, 1994.
Sherman, David M. Canada GST Service. Scarborough, Ont.: Carswell, 1998.
Sullivan, Ruth. Driedger on the Construction of Statutes, 3rd ed. Toronto: Butterworths, 1994.
Technical Information Bulletin B-074. Guidelines for the Reduction of Penalty and Interest in —Wash Transaction— Situations. November 28, 1994.
Willis, John "Statute Interpretation in a Nutshell" (1938), 16 Can. Bar Rev. 1.
APPLICATION for judicial review of a Tax Court of Canada decision ((1997), 5 GTC 1074) that the respondent had exercised due diligence in attempting to ascertain the correct amount of GST to be remitted to the Receiver General and that the 6% penalty prescribed by subsection 280(1) of the Excise Tax Act should be set aside. Application dismissed.
appearances:
Harry Erlichman and Kevin G. Dias for applicant.
Nick Chitilian for respondent.
solicitors of record:
Deputy Attorney General of Canada for applicant.
The following are the reasons for judgment rendered in English by
Robertson J.A.: This judicial review application brings into issue the limits of judicial discretion in the interpretation of statutes and the policy-making role of courts. Specifically, we have been asked to determine whether a "due diligence" defence is available to persons otherwise subject to an automatic penalty for failing to remit the correct amount of goods and services tax (GST), as required under the Excise Tax Act [R.S.C., 1985, c. E-15]. As that Act does not expressly provide for such a defence, the issue turns on whether it may be validly implied.
Legal and factual background
At the centre of the controversy is Judge Bowman's influential decision in Pillar Oilfield Projects Ltd. v. The Queen (1993), 2 GTC 1005 (T.C.C.), in which he held that it would be contrary to the principles of "fundamental justice" and "fairness" to withhold the right to plead due diligence with regard to penalties imposed under section 280 [as enacted by S.C. 1990, c. 45, s. 12; 1993, c. 27, s. 126; 1997, c. 10, s. 235] of the Excise Tax Act . In support of that conclusion, Judge Bowman turned to the Supreme Court's seminal decision in R. on the information of Mark Caswell v. Corporation of City of Sault Ste. Marie, [1978] 2 S.C.R. 1299. He also expressed frustration at the lack of a due diligence defence in the following manner (at page 1009):
That a person should be susceptible of being penalized administratively by a public servant without any possibility of exculpating himself by demonstrating due diligence is not only extraordinary. It is abhorrent. It is no less abhorrent because it is mechanically and routinely imposed by anonymous revenue officials and therefore qualifies for the essentially meaningless rubric "administrative" rather than "criminal". A punishment is a punishment. Neither its nature nor its effect is tempered by the use of palliative modifiers.
The validity of the due diligence defence has been raised in this Court on two previous occasions: see Locator of Missing Heirs Inc. v. The Queen (1997), 5 GTC 7167 (F.C.A.) and A-G Canada v. 770373 Ontario Limited (1997), 5 GTC 7030 (F.C.A.). In both instances this Court found it unnecessary to decide the issue that is now squarely before us.
A survey of the voluminous case law in the Tax Court on this issue reveals that Pillar Oilfield has been widely approved. Fourteen judges have accepted the right of persons to plead the due diligence defence, while only three have ruled to the contrary. Three other judges remain uncommitted, having found it unnecessary to decide the matter in the particular cases before them: see D. M. Sherman, Canada GST Service (Scarborough, Ont.: Carswell, 1998), at pages 280-105 to 280-108.
A comparison of the approach taken under the Excise Tax Act with that mandated under the Income Tax Act [R.S.C., 1985 (5th Supp.), c. 1] may help to explain the high level of support in the Tax Court for the recognition of a due diligence defence. A person (or "registrant") who fails to collect and remit the exact amount of GST owing is obligated to pay the amount of any underpayment, together with interest thereon, calculated from the date the proper amount was due until the date it is paid. In this respect the Excise Tax Act is no different than the scheme imposed under the Income Tax Act and, in both instances, there is no room for complaint by either registrants or taxpayers. The Receiver General receives the amount that should have been remitted. However, when it comes to the problem of underpayment, these two Acts differ in one material respect. The Excise Tax Act imposes a further burden on registrants. In addition to the payment of interest, section 280 of that Act requires registrants to pay a 6% penalty on the amount of the underpayment of GST. By contrast, the Income Tax Act does not automatically prescribe a penalty for miscalculation and underpayment of tax. Only where a taxpayer knowingly makes an omission or is grossly negligent will he or she be subject to a penalty under subsection 163(2) [as am. by S.C. 1994, c. 7, Sch. VII, s. 17; c. 8, s. 26; 1995, c. 3, s. 48; 1996, c. 21, s. 43] of that Act, which is calculated as being equal to the greater of $100 and 50% of the amount of the underpayment.
As noted earlier, the Excise Tax Act does not expressly provide for a due diligence defence in the context of penalties imposed under section 280. Consequently, even if a registrant were to rely on legal opinions as to whether certain goods were GST exempt, he or she would be subject to the 6% penalty as long as the Minister's assessment stands. It is evident that the imposition of even a 6% penalty can have a significant financial impact on those responsible for the collection and remittance of GST. A casual review of the jurisprudence reveals penalties ranging from $400 to $95,000. A typical penalty is between $5,000 and $20,000. In particular, smaller businesses which do not have ready access to the technical expertise needed to ensure compliance with the Excise Tax Act are exposed to considerable financial risks. As the general audit period for GST assessments is four years, it is possible for a significant underpayment to accrue before it is discovered by an auditor. This problem is exacerbated by the fact that both the interest and penalty are subject to "daily compounding" requirements: see section 124 [as enacted by S.C. 1990, c. 45, s. 12; 1993, c. 27, s. 11] and subsection 298(1) [as enacted by S.C. 1990, c. 45, s. 12; 1993, c. 27, s. 131; 1997, c. 10, ss. 79, 238] of the Excise Tax Act .
In summary, an automatic penalty is mechanically imposed whenever the Minister's calculation of GST is greater than that of the registrant. It is within this context that the majority of Tax Court judges have supported the defence of due diligence as developed in Pillar Oilfield. The Minister now seeks a reversal of that decision and of the judgment below. The Minister has chosen to abandon all of the grounds raised in his notice of motion except for the validity of the due diligence defence. I turn now to a brief summary of the facts relevant to that issue.
The respondent in the present appeal is a building contractor. In the course of constructing two schools, the respondent used a number of supplies which are classified as "zero rated", meaning they would be GST exempt if they were purchased separately. For example, the respondent purchased an elevator, a zero-rated item, in the course of constructing a school. The Minister determined that because this item and other items were an integral part of the completed schools, the respondent should have calculated GST on the total price of the contract. Similarly, the Minister argued that the bonds and insurance premiums incurred by the respondent in the course of constructing the schools were services and, therefore, taxable expenses. Finally, the Minister argued, unsuccessfully, before Judge Bowman that the respondent should have included the PST paid on supplies in determining the value of the supplies for GST purposes. As the respondent had allegedly failed to calculate the correct amount of GST payable, it was assessed under the Excise Tax Act for the additional tax, interest and a penalty of 6% on the underpayment as prescribed by section 280, which reads in part:
280. (1) Subject to this section and section 281, where a person fails to remit or pay an amount to the Receiver General when required under this Part, the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first day following the day on or before which the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.
With respect to whether the supplies in question were GST exempt, Judge Bowman found in favour of the Minister [Consolidated Canadian Contractors v. The Queen (1997), 5 GTC 1074 (T.C.C.)], as such supplies were unquestionably part of the entire construction project and were not acquired by the respondent as agent for the school boards. If the respondent had acted in such capacity and supplied individual goods to the schools, such supplies would have been GST exempt. However, Judge Bowman set aside the 6% penalty having concluded that the respondent had exercised due diligence in attempting to ascertain the correct amount of GST to be remitted to the Receiver General. On this point, Judge Bowman made the following observations at page 1076 of his reasons:
. . . I have not seen a case recently in which a taxpayer has more amply demonstrated due diligence. He did everything that could reasonably be expected of him to ensure that the GST was properly collected and paid. He relied upon published bulletins and upon oral confirmation with officials of the Department of National Revenue.
Reiterating his position in Pillar Oilfield and Locator of Missing Heirs Inc. v. Canada [[1995] T.C.J. No. 1304 (QL)], Judge Bowman expressed abhorrence at the idea of penalizing innocent registrants who have demonstrated blameless conduct.
The issues
The Minister concedes that the respondent exercised the required standard of care. What the Minister challenges is the "jurisdiction" of the Tax Court to relieve registrants of penalties imposed under section 280 of the Excise Tax Act on the basis of an implied due diligence defence. He cites the Supreme Court's decision in Sault Ste. Marie as authority for the proposition that it cannot. That case involved the application of the due diligence defence in the context of a "regulatory offence". In the present appeal, we are dealing with an "administrative penalty". Given the reliance placed on Sault Ste. Marie by both Judge Bowman and the Minister, a full discussion of the Supreme Court's reasoning in that case is required.
(a) Does Sault Ste. Marie restrict the application of the due diligence defence to strict liability offences?
A principal submission of the Minister is that Sault Ste. Marie only allows a court to imply a due diligence defence if it identifies a public welfare or regulatory offence that qualifies as a strict liability offence. The Minister argues that the Tax Court lacks jurisdiction to read in a due diligence defence where administrative penalties are concerned. In other words, the Minister alleges that Pillar Oilfield is wrongly decided. Obviously, section 280 of the Excise Tax Act is not a regulatory offence, but an administrative penalty. In my respectful view, however, Sault Ste. Marie does not stand for the proposition cited by the Minister. To gain a proper appreciation of what the Supreme Court was being asked to decide in that case, it is first necessary to outline the law as it existed prior to that decision.
By the mid-nineteenth century, English courts had begun to view the common law requirement that the Crown establish mens rea in criminal prosecutions as an impediment to the efficient delivery of justice with respect to a number of petty police offences. In response to this concern, the judiciary gave birth to the concept of the public welfare offence in which liability was absolute, thereby relieving the Crown of the obligation to prove the requisite mental element on the part of the accused. With respect to this novel category of offences, the Crown had only to establish that the accused committed the prohibited act. Though well intentioned, the law effectively shifted from one extreme to the other. While the Crown was relieved of its evidentiary burden, the accused was unable to raise any exculpatory defence.
In time, however, a movement began toward middle ground, the so-called "half-way house", in some common law jurisdictions, most notably Australia. That development involved judicial recognition of strict liability offences in which an accused charged with a public welfare offence could raise the defence of reasonable care or due diligence. (Note that in Sault Ste. Marie , the terms "reasonable care" and "due diligence" are used interchangeably.) This third category of offences injected an element of flexibility into the law at the expense of certainty. To this day the legal challenge lies in distinguishing between mens rea , strict liability and absolute liability offences. But in Sault Ste. Marie the Supreme Court was asked to address a more basic question"whether Canadian law should embrace the concept of strict liability offences at all.
The facts of Sault Ste. Marie are straightforward. The City of Sault Ste. Marie was charged and convicted of a pollution offence pursuant to subsection 32(1) of The Ontario Water Resources Commission Act, R.S.O. 1970, c. 332. When the case reached the Ontario Court of Appeal [(1976), 13 O.R. (2d) 113], one of the two issues to be decided was whether the Crown had to establish mens rea on the part of the City. The Court of Appeal found that it did. The Supreme Court concluded otherwise, holding (at page 1325) that the pollution offence constituted a public welfare offence for which the Crown was relieved of the burden of establishing mens rea. The policy consideration which motivated the Court's finding was that, in most regulatory cases, it is virtually impossible for the Crown to satisfy that evidentiary burden. At the same time, the Supreme Court was not prepared to treat every regulatory offence as an absolute liability offence.
Justice Dickson (as he then was) dealt with three policy arguments advanced by the Crown in support of a rule prescribing absolute liability for all public welfare or regulatory offences. The first was that it promotes a higher standard of performance when it is known that ignorance or mistake will not excuse persons from liability. Thus, there is an incentive for persons to take precautionary measures beyond that which would otherwise be taken. The second policy argument involved administrative efficiency. The Crown maintained that to require the prosecution to prove individual guilt for every statutory offence would frustrate the effective enforcement of regulatory legislation. Absolute liability, the Crown urged, was the most efficient method of ensuring compliance with regulatory statutes. The third argument focused on the notion that public welfare offences, by their very nature, do not carry the stigma which attaches to true criminal cases. The social benefits of such legislation were said to outweigh the unfortunate result of punishing those who were free of any wrongdoing.
The Supreme Court ultimately rejected these three policy arguments. First, the Supreme Court acknowledged that there is no evidence to support the belief that absolute liability offences generate adherence to a higher standard of care. If a person is already taking every reasonable precautionary measure, why would he or she be compelled to take additional measures, knowing that they will not serve as a defence in the event of a regulatory breach? The argument that absolute liability promotes administrative efficiency also carried little weight with the Supreme Court. It reasoned that, because evidence of due diligence is admissible at the sentencing stage, it makes little sense to exclude it when considering whether the regulatory breach occurred in the first place. The Supreme Court was similarly dismissive of the notion that no stigma attaches to public welfare offences, as persons charged with such offences experience legal costs, loss of time, exposure to a criminal trial and the fear of conviction.
The reasons of Justice Dickson in Sault Ste. Marie also touch on three other matters relevant to the present case. The first is the general notion that there should be no punishment without fault, which remains a fundamental tenet of the common law. Second, he points out that the concepts of mens rea, absolute liability and strict liability are judicial creations. A third point is that there is merit in classifying public welfare offences as absolute liability offences where the legislation in question aims to promote public health or safety.
To summarize, the Supreme Court in Sault Ste. Marie recognized three categories of offences. The first consists of offences in which mens rea must be proved by the prosecution. Offences which are criminal "in the true sense" fall within this category. The second consists of strict liability offences for which there is no need to prove mens rea , but where it is open to an accused to prove that he or she exercised reasonable care. Public welfare or regulatory offences belong in this category, unless words such as "wilfully" or "with intent" are contained in the statutory provision, in which case the offence may be classified as a mens rea offence. The third category consists of absolute liability offences in which it is not open to an accused to establish that he or she was "free of fault". Dickson J. outlined the analytical framework for identifying absolute liability offences at page 1326:
Offences of absolute liability would be those in respect of which the Legislature had made it clear that guilt would follow proof merely of the proscribed act. The overall regulatory pattern adopted by the Legislature, the subject matter of the legislation, the importance of the penalty, and the precision of the language used will be primary considerations in determining whether the offence falls into the third category.
The Supreme Court in Sault Ste. Marie ultimately held that the pollution offence in question fell within the strict liability category. At page 1328, Dickson J. reasoned:
Since s. 32(1) creates a public welfare offence, without a clear indication that liability is absolute, and without any words such as "knowingly" or "wilfully" expressly to import mens rea , application of the criteria which I have outlined above undoubtedly places the offence in the category of strict liability.
In my opinion, the true precedential significance of Sault Ste. Marie lies in the fact that it recognizes strict liability offences for which the defence of due diligence is available. It does not stand for the proposition that the defence of due diligence can be invoked only if a public welfare or regulatory offence is involved. That issue was not before the Supreme Court. Hence, in my view, it is open to this Court to determine whether the defence of due diligence may, as a matter of principle, be raised in the context of administrative penalties.
(b) Should the concept of strict liability be extended to administrative penalties?
In the case before us, the Minister is arguing that the principles of Sault Ste. Marie are only applicable to regulatory offences and, since section 280 does not qualify as a regulatory offence, no due diligence defence is available. In my view, this is too restrictive a reading of Sault Ste. Marie. That case stands for the proposition that due diligence is a legitimate defence in the context of a public welfare offence. It does not address whether administrative penalties entail absolute or strict liability. I know of no common law rule that would disallow a due diligence defence with respect to administrative penalties. For greater certainty, I take the position that there is no valid basis for maintaining absolute liability for all administrative penalties. I would adopt the reasons of Justice Dickson in Sault Ste. Marie, in which he rejected the argument that strict liability was inapplicable to regulatory offences, and apply those reasons to administrative penalties.
To reiterate those reasons, there is no evidence that absolute liability has the effect of causing adherence to a higher standard of care. I am similarly unpersuaded that recognition of a due diligence defence would lead to inefficiency in the enforcement of legislation. With respect to penalties of an inconsequential nature, and cases where there is no convenient forum to determine whether due diligence has been established, absolute liability attaches according to the criteria set out in Sault Ste. Marie. (No one is going to accept, for example, that a due diligence is available for penalties imposed on overdue accounts payable, any more than one would expect to be able to plead due diligence with respect to parking meter violations.)
I admit that there is a significant difference between regulatory offences which give rise to the possibility of incarceration, and administrative penalties which are necessarily restricted to fines. I also accept that there is much less "stigma" attached to the payment of a penalty than to a conviction. Both of these factors were relevant in Sault Ste. Marie in deciding to recognize strict liability offences. However, I also realize that not every regulatory offence entails imprisonment. Indeed, the absence of incarceration as a penalty has not dissuaded the Supreme Court from adjudicating on whether an offence entailed strict as opposed to absolute liability: see for example R. v. Pontes, [1995] 3 S.C.R. 44, where the penalty for the absolute liability offence of driving without a licence was limited to a fine of not less than $300 and not more than $2,000; see also R. v. Nickel City Transport (Sudbury) Ltd. (1993), 47 M.V.R. (2d) 20 (Ont. C.A.).
In conclusion, I am of the opinion that administrative penalties may give rise to either strict or absolute liability. I am also of the view that, in deciding whether a due diligence defence is available in any one case, the application of conventional interpretative principles cannot be avoided. Thus, and as will be discussed below, the analytical framework outlined by Justice Dickson in Sault Ste. Marie is consistent with the "modern approach" to statutory interpretation, which involves a contextual and purposive analysis of the legislation in question.
(c) Is manifest unfairness a sufficient ground for implying the due diligence defence?
Recognition of the fact that the due diligence defence may be available in cases involving administrative penalties leads to a further question: Is it permissible to read in the due diligence defence solely on the ground that its absence conflicts with our understanding of "fundamental justice" or "fairness"? While the issue appears not to have been raised in Pillar Oilfield , it appears that Judge Bowman assumed as much. The question is of paramount importance because it brings into issue the limits of judicial discretion in the interpretation of statutes and the policy-making role of courts. It is as relevant today as it was when the literal and golden rules of construction constituted the accepted model of interpretation. Allow me to explain.
The "literal" or "plain meaning" rule of construction directs that if the words of the text are ambiguous on their face, then it is permissible to go beyond that immediate context to ascertain their meaning. However, "[i]f the precise words used are plain and unambiguous, . . . we are bound to construe them in their ordinary sense, even though it do lead . . . to an absurdity or manifest injustice" (Abley v. Dale (1851), 138 E.R. 519 (C.P.), at page 525).
An interpretation which leads to an absurd result or manifest injustice undermines public confidence and respect in the judicial system. Thus, it is not difficult to understand why the literal rule of construction would, with the passage of time, be qualified by the "golden rule" which directs that the grammatical and ordinary sense of words need not be adhered to if their meaning leads to a "repugnance" or "inconsistency" with the rest of the instrument, or to an "absurdity": see Grey v. Pearson (1857), 10 E.R. 1216 (H.L.), at page 1234. In short, a contextual approach has to be taken to determine whether the "plain meaning" leads to a repugnancy or inconsistency with the legislation. However, since the term "absurdity" is itself ambiguous, its use has always been a source of controversy.
Applying the golden rule of interpretation to the facts of this case, the issue is whether the lack of a due diligence defence qualifies as an "absurdity". In other words, is the manifest unfairness which results from imposing a penalty on a registrant, despite having taken all reasonable measures to avoid it, a sufficient reason for importing a due diligence defence into the Excise Tax Act ? During the height of the legal realist movement in Canada, Professor Willis observed that it was impossible to reconcile the case law as to what constitutes an absurdity: "It is infinitely more a matter of personal opinion and infinitely more susceptible to the influence of personal prejudice" (J. Willis, "Statute Interpretation In A Nutshell" (1938), 16 Can. Bar Rev. 1, at page 13). In his estimation, the golden rule was simply a device employed by judges to achieve a desired result. A half-century later, Professor Sullivan asks whether the concept of absurdity extends to "consequences that are judged to be undesirable because they contradict values or principles that are considered important by the courts". Her question has obvious relevance to the present case because of the reliance placed on the principle that there should be no punishment without fault: see R. Sullivan, Driedger on the Construction of Statutes , 3rd ed. (Toronto: Butterworths, 1994), at pages 85-86.
In addressing Professor Sullivan's question, one cannot escape the fact that the exercise of judicial discretion through the interpretation of statutes has traditionally been a source of unease. The underlying fear is that the line to be drawn between interpretation and policy making will disappear, and that statutory interpretation will dissolve into judge-made law. This contravenes our understanding of parliamentary sovereignty in which validly enacted legislation is considered paramount to judge-made law and courts are obliged to defer to the legislature's public policy choices as expressed in the language of the statute: see Sullivan, supra, at page 25.
I also recognize that the interpretative process is infused with judicial values which are not to be equated with the personal views of individual judges, but rather with those that the judiciary believes are shared by the general public. The concepts of individual liberty and private property, for example, continue to "inform our fundamental political arrangements"our Constitution", and give rise to strong rebuttable presumptions in favour of individual rights: see Re Estabrooks Pontiac Buick Ltd. (1982), 44 N.B.R. (2d) 201 (C.A.), at pages 210-211, La Forest J.A. [as he then was]. I would like to stress that these presumptions underlying statutory interpretation are not simply tie-breaking rules to be applied whenever the conventional rules are found to be inadequate. Rather, they should remind draftspersons that the clearest possible language must be employed if they seek to achieve ends which are antagonistic to fundamental common law values or principles. Unless such language is crystal clear, courts are not going to go out of their way to draw inferences from legislation with respect to Parliamentary intent that would negate those values.
For example, the presumption against retroactive legislation is well established and uncontroversial: see Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 S.C.R. 271. The rationale underlying this presumption was best explained by Duff J. in Upper Canada College v. Smith (1920), 61 S.C.R. 413 [at page 417], where he stated: "it would not only be widely inconvenient but a flagrant violation of natural justice to deprive people of rights acquired". (One cannot help but note at the similarity of language used by Judge Bowman in Pillar Oilfield .) Professor Sullivan notes that this presumption is "heavily weighted" and "difficult to rebut" (supra , at page 513). I agree; see Apotex Inc. v. Canada (Attorney General), [1994] 1 F.C. 742 (C.A.), at pages 794-798, affd [1994] 3 S.C.R. 1100.
If there is any doubt as to the influence which judicial values have on the interpretative process, one need only turn to tax law. Lord Tomlin's often-cited maxim in Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.), at page 19, is as influential today as it was when it was written some sixty years ago. It essentially states that taxpayers are entitled to arrange their affairs so as to minimize their tax liability. Without that interpretative guideline, the law of tax avoidance would, in my view, have taken a radically different course. In other legislative settings, it is generally accepted that one cannot achieve indirectly what cannot be done directly. With respect to the Supreme Court's continuing commitment to Lord Tomlin's maxim see: Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at page 540; Canada v. Antosko, [1994] 2 S.C.R. 312; Friesen v. Canada, [1995] 3 S.C.R. 103; Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, at pages 345-346; Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795; Neuman v. M.N.R., [1998] 1 S.C.R. 770; and compare with comments of Willis, supra, at pages 23-27.
In the present case, the judicial value being challenged is the general right of persons not to be punished without fault, which is consistent with the common law principle that there should be no liability without fault. I hasten to point out that this is not the first time that courts have balked at giving effect to a statutory provision which on its face imposes absolute liability in the absence of negligence: see River Wear Commissioners v. Adamson (1877), 2 App. Cas. 743 (H.L.) and compare with Great Western Ry. Co. v. Mostyn (Owners of SS.), [1928] A.C. 57 (H.L.).
This is the same value which motivated common law judges to require that mens rea be proven to support a criminal conviction. It also prompted the Supreme Court in Sault Ste. Marie to create a category of strict liability offences while continuing to preserve the common law notion of absolute liability. It comes as no surprise to me that courts are reluctant to accept a passive role in the application of penal provisions which impose a disproportionately heavy burden on persons where the legislative advantages are slight. It is the same attitude which compelled the courts of equity to provide relief from penalty and forfeiture clauses.
Returning to the question of whether patent unfairness is a sufficient reason to import a due diligence defence into section 280 of the Excise Tax Act, I must respond in the negative. The common law principle that there should be no punishment without fault is capable of supporting the concept of strict liability in cases involving administrative penalties. It is also capable of giving rise to a rebuttable presumption that Parliament did not intend to establish absolute liability in cases involving section 280 of the Excise Tax Act. However, it is the Court's responsibility to consider the legislative context surrounding that provision and its purpose. After all, Parliament may have decided to impose absolute liability on the understanding that its benefits outweighed any unfairness to registrants. To extend relief solely on grounds of unfairness would, in my view, disregard the approach taken in Sault Ste. Marie. It would also be tantamount to declaring that all administrative penalties are subject to a due diligence defence provided that judges can identify a perceived "injustice". If the distinction drawn in Sault Ste. Marie between absolute and strict liability offences is to be applied to administrative penalties, then so too must its analytical framework. This is not to suggest that the task of distinguishing between strict and absolute liability provisions is problem-free. The benefit derived from the application of an analytical framework is that it deflects criticism based on judicial arbitrariness.
(d) The analytical framework
In my opinion, Justice Dickson's analytical framework for identifying absolute liability offences is largely a reflection of what has become the "modern" approach to statutory interpretation. That approach involves a contextual and purposive analysis of legislation and was officially adopted by the Supreme Court in Stubart Investments , supra, per Estey J., at page 578 quoting from Driedger (2nd), at page 87 [Driedger, E.A. Construction of Statutes, 2nd ed.]. In Sault Ste. Marie, Justice Dickson held that before a statutory breach may be classified in terms of absolute liability, the court must consider: (1) the precision of the statutory language, (2) the importance of the penalty, (3) the subject-matter of the legislation, and (4) the overall regulatory pattern adopted by the legislature. In my view, the last two factors call for a contextual and purposive analysis of the relevant provisions of the legislation. At least, this is the way in which courts have generally applied those factors: see Nickel City Transport, supra. Having regard to the criteria set out in Sault Ste. Marie, I propose to pursue the main issue raised on this judicial review application by applying the following analytical framework.
The principle that there is to be no punishment without fault translates into a rebuttable presumption that Parliament did not "intend" to impose absolute liability. This presumption is also a logical extension of the understanding that penalties serve as an incentive to ensure that persons exercise a minimum standard of care in fulfilling their obligations imposed by law. The idea is to encourage people to exercise reasonable care so they can avoid breaching their legal obligations. If so, then the person being penalized should be able to plead that he or she acted in accordance with the required standard of care. Hence, it seems both fair and logical to assume that Parliament intended strict not absolute liability. This presumption, however, will be rebutted if the language chosen by the draftsperson is unequivocal that absolute liability was intended or where the penalty leads to trivial consequences. If the presumption is not rebutted on those grounds, then it is necessary to determine whether the due diligence defence is incompatible with the legislative scheme or whether it frustrates the purposes for which the penalty was imposed.
As much as I reject the idea that unfairness or manifest injustice is a sufficient reason for implying a due diligence defence, I am of the opinion that a court is justified in reading words into an Act to avoid such a result, if it can be shown that the relief being granted is compatible with the legislative scheme and neither frustrates nor undermines its purposes. These restrictions should silence any potential argument that the Court is acting contrary to its proper constitutional role: see Canadian Pacific Airlines Ltd. v. British Columbia, [1989] 1 S.C.R. 1133 and Canada v. Nassau Walnut Investments Inc., [1997] 2 F.C. 279 (C.A.).
If an implied due diligence defence does not run counter to what Parliament is seeking to achieve, the Minister has no room for complaint. On the other hand, if judicial recognition of the due diligence defence is contrary to the legislative scheme or purposes underlying section 280 of the Excise Tax Act, registrants must accept the financial consequences which flow from non-compliance with that provision. However, the onus is on the Minister to convince the Court that an implied due diligence defence will lead to consequences of the kind needed to displace the presumption in favour of strict liability.
(e) Section 280 of the Excise Tax Act"strict or absolute liability?
Accepting as a general principle that administrative penalties may be subject to a due diligence defence, it remains to be determined whether section 280 of the Excise Tax Act gives rise to strict, as opposed to absolute, liability. I turn now to the relevant factors to be considered in this determination.
(i) Precision of the language used
The language of the statute is the first consideration in determining whether an offence should be categorized as a mens rea, strict liability or absolute liability offence. Mens rea offences are usually qualified by words such as "wilfully" or "knowingly", as in the criminal context. The use of such terms in the regulatory sphere was the subject of appeal in Re B.C. Motor Vehicle Act , [1985] 2 S.C.R. 486, at pages 493-494, where the British Columbia legislature had amended its Motor Vehicle Act to expressly provide that it was an absolute liability offence to drive with a suspended driver's licence. Similarly, in R. v. Pontes, supra, the use of the word "automatic" in the statutory provision under scrutiny convinced the majority of the Supreme Court that the offence was one of absolute liability. In the present case, section 280 of the Excise Tax Act does not use the type of precise and explicit language that one would expect of a provision entailing absolute liability.
(ii) The importance of the penalty"its impact on registrants (the de minimis principle)
When examining the importance of the penalty, attention must be paid to the consequences to the registrant, as opposed to its significance to the Minister in terms of administering the Excise Tax Act. While the Minister concedes that penalties imposed under section 280 of the Excise Tax Act are not "trivial", he maintains that they are not so severe as to amount to a "true penal consequence". As noted at the outset, the amounts involved are substantial to the thousands of small businesses which act as agents of the Crown in collecting and remitting this relatively novel tax. If not, why has this issue occupied so much time and attention on the part of the Minister and the Tax Court? In my view, the impact of a section 280 penalty on registrants cannot be characterized as inconsequential. To this point the presumption in favour of strict liability has not been rebutted.
(iii) The subject matter of the legislation"the purpose of section 280
In Sault Ste. Marie, Justice Dickson noted that there is merit in classifying regulatory offences as absolute liability offences when the legislation seeks to promote the public interest in terms of health or safety matters. While the view that absolute liability offences generate adherence to a higher standard of care has been attacked in other contexts, it has greater persuasive force where public health and safety considerations are involved. The Excise Tax Act does not, of course, raise such considerations.
The Minister submits that the penalty under section 280 of the Excise Tax Act is intended to maintain internal discipline in a self-reporting and self-assessing system which depends on the honesty and integrity of registrants for its success. More specifically, the Minister argues that that section serves as a meaningful incentive to registrants to remit outstanding amounts of GST. Finally, the Minister maintains that without the 6% penalty "the system would break down from the administrative burden of attempting to enforce timely remittances of GST".
I cannot accept the proposition that a due diligence defence will lead to a breakdown in the administration of the Excise Tax Act for two reasons. First, there is no evidence to support such a domesday scenario. Second, if the Minister's argument is correct, it is difficult to understand why the Income Tax Act does not provide for the equivalent of a section 280 penalty. It too is a self-reporting and self-assessing system for the payment of both federal and provincial tax. At no time has it been suggested that the scheme under the Income Tax Act is suffering because taxpayers are not automatically penalized each time they fail to properly calculate and remit taxes owing within prescribed time frames. (Quaere: How many Canadians miscalculate and underpay income tax each year?) It must be remembered that registrants under the Excise Tax Act also file annual returns under the Income Tax Act and, in the case of businesses, these same persons are responsible for periodic remittances of employee deductions to the Receiver General. Both taxation regimes depend on the integrity and honesty of Canadians. GST may be the most controversial and unpopular tax ever levied on Canadians, but that is no reason to posit that businesses are less faithful in adhering to their legal obligations imposed under the Excise Tax Act than those imposed under the Income Tax Act. In my view, the Minister has failed to establish that the due diligence defence would hinder the effective enforcement of the Excise Tax Act. I turn now to the Minister's second argument: that the due diligence defence would undermine the "incentive" purposes underlying section 280.
Most lawyers and judges do not pretend to be behaviourial scientists and, for that reason, do not really know whether penalties generate a higher standard of care among the general public. Parliament, however, is entitled to legislate on the basis that penalties have such an effect. Therefore, we must assume that this penalty encourages greater care and the only question we can address is whether an implied due diligence defence undermines the behaviourial effect which penalties are intended to bring about. Once again there is no concrete evidence to support either of the two possible responses. Therefore, the answer must be based on reason and common sense.
Theoretically, a penalty and due diligence defence should have no impact on those who are already "conscientious". As Justice Dickson observed in Sault Ste. Marie , if a person is already taking every reasonable precaution, why would a penalty provision compel that person to take additional measures knowing that they will not serve as a defence? It is only with respect to those who are "indifferent" to their legal obligations that one might properly assert that penalties promote adherence to the required standard of care. The question we must address is whether some registrants will consciously decide to remain indifferent to their legal obligations under the Excise Tax Act because they know that due diligence may be pleaded as a defence. I doubt that this will occur. As noted at the outset, the costs of non-compliance are much greater than payment of a 6% penalty. There are costs associated with the obligation to pay restitutionary interest as well as the amount of the underpayment, both of which are subject to compound interest. Then there are the costs associated with an appeal from the Minister's assessment to the Tax Court. Even if the registrant is unrepresented by legal counsel, the costs in terms of lost time and personal stress arising from protracted litigation (three years in the present case) suggest that only fools will find consolation in an implied due diligence defence.
While the Minister is entitled to maintain that penalties have a positive behaviourial effect, he is not entitled to presume that the average registrant will refuse to exercise a modicum of common sense when weighing the cost of compliance with the cost of non-compliance. Parenthetically, I note that the majority of registrants have not been successful in invoking the due diligence defence in the Tax Court, as was the case in Pillar Oilfield: see Sherman, supra, at page 280-108. In my opinion, there are no persuasive grounds for holding that an implied due diligence defence undermines the incentive goals of section 280.
(iv) The regulatory framework"a contextual analysis
The thrust of the Minister's argument, as I understand it, is that the due diligence defence is incompatible with the overall scheme of the Excise Tax Act. Specifically, subsection 281.1(2) [as enacted by S.C. 1993, c. 27, s. 127] of the Act already empowers the Minister to waive or cancel penalties imposed under section 280. In addition, subsection 280(6) authorizes the Minister to write off a penalty and interest incurred during a reporting period if the amount is less than $25. Subsection 280(7) provides that the Minister may waive penalties and interest which accrue after a demand for payment has been made up to the date of payment. Section 285 [as enacted by S.C. 1990, c. 45, s. 12] imposes a monetary penalty on registrants who knowingly make false statements or are grossly negligent. Section 323 [as enacted idem; S.C. 1992, c. 27, s. 90; 1997, c. 10, s. 239] provides for the liability of directors of corporate registrants where there is a failure to comply with the remittance requirements. Sections 327 [as enacted by S.C. 1990, c. 45, s. 12] and 329 [as enacted idem] provide for summary conviction and indictable offences, respectively, for flagrant non-compliance with the Act. It is against this backdrop that the Minister maintains that there is no basis for the courts to read a due diligence defence into section 280. This argument has some merit.
In my view, the Minister's argument is really two-sided. First, it suggests that the aforementioned provisions demonstrate Parliament's intention to establish absolute liability with respect to the penalty provision in section 280. This is a reasonable inference which assists the Minister in discharging his onus to rebut the presumption in favour of strict liability: see Nassau Walnut Investments, supra, at page 299. But it is not dispositive of the issue. I say this because sections 285, 323 and 327 are distinguishable on the basis that they place a duty on the Minister to establish that a registrant's conduct falls within those provisions. By contrast, an implied due diligence defence with respect to section 280 places the onus on the registrant to establish that he or she had exercised reasonable care in remitting the correct amount of GST. With respect to section 323, it does not necessarily follow that because an Act expressly provides for a defence in one instance, it is not available in others: see Nassau Walnut, supra.
The second aspect of the Minister's argument relates to section 281.1 of the Act, which establishes the Minister's right to waive penalties imposed under section 280. In my view, the outcome of this case hinges on whether an implied due diligence defence is compatible with the Minister's statutory right to waive such penalties. If the Minister possesses the statutory right to waive penalties, is there any room for the Tax Court to grant relief through an implied due diligence defence?
I note that by reading in a due diligence defence, the Tax Court is not actually waiving the 6% penalty. Rather, it is granting registrants the opportunity to exculpate themselves by demonstrating that they exercised reasonable care in attempting to ascertain the correct amount of GST owing. If registrants fail to meet the required standard of care, they remain liable to pay the penalty. The Minister, on the other hand, is entitled to waive a penalty even if due diligence has not been established. Thus, there are substantive differences between an implied due diligence defence and the Minister's statutory right to waive penalties.
If there is any incompatibility between the Minister's right to waive penalties and a registrant's right to invoke the due diligence defence, it lies in the fact that the Minister could adopt a policy that penalties will be waived if registrants can establish that they acted with due diligence. If this occurred, it is arguable that the Tax Court and Minister cannot exercise concurrent jurisdiction over the elimination of a section 280 penalty. The question which remains is whether the Minister has adopted such a policy. The answer appears to be no.
Apparently, the Minister has adopted the position that due diligence is not a sufficient ground for waiving a section 280 penalty. I say this because the Minister's published guidelines indicate that relief under section 281.1 is restricted generally to events which are beyond the control of registrants. For example, a penalty may be waived because of non-compliance due to acts of God, incorrect written information provided by the Minister, or processing delays and errors attributable to the Minister: see GST Memorandum 500-3-2-1, Assessments and Penalties-Cancellation or Waiver of Penalties and Interest (March 14, 1994); Technical Information Bulletin B-074, Guidelines for the Reduction of Penalty and Interest in —Wash Transaction— Situations (November 28, 1994); and Revenue Canada News Release, November 28, 1996. Of course, neither the Minister nor this Court is bound by administrative guidelines.
Apparently, the Minister is unwilling to consider waiving a section 280 penalty where a registrant demonstrates due diligence. In fact, I am only aware of one case in which the Minister has even alluded to section 281.1: see Metro Exteriors Ltd. v. Canada, [1995] T.C.J. No. 1302 (QL). The argument that the respondent should have sought a waiver under section 281.1 was not raised by the Minister in this Court, perhaps wisely. This is not the place to debate whether the circumstances under which the Minister is prepared to waive penalties constitute a reviewable error of law. However, if the Minister chooses to circumscribe his discretion by not recognizing a due diligence defence under section 280, it is open to this Court to imply such defence. Thus, as the law is presently being interpreted and applied, the Minister's right to waive penalties under section 281.1 of the Excise Tax Act does not conflict with and is not incompatible with an implied due diligence defence. I cannot accept that the Minister's discretion to waive penalties is of any consequence when, in practice, such relief based on a plea of due diligence is non-existent.
For the sake of completeness and in the event the Minister seeks to pursue this case in another forum, there is one further issue which I would like to address. The Minister's submissions focus on the need to ensure timely remittance of GST; however, this is not the issue that was raised in Pillar Oilfield and in subsequent cases. The problem has always been framed in terms of a registrant's failure to calculate and remit the proper amount of GST because of uncertainty surrounding the application of the Excise Tax Act to certain goods. The problem is not that a registrant failed to pay on the required date, but that the amount submitted is less than that actually owed. As I understand it, these are not cases where a registrant objects to paying a 6% penalty for late filing of the proper amount. These are cases in which due diligence is being raised as a defence to a mistake induced by an error of law in determining the proper amount of GST to be remitted to the Receiver General.
In criminal law, ignorance of the law is no excuse, subject perhaps to a plea of "officially induced error": see R. v. Pontes , supra. This common law principle is now codified in section 19 of the Criminal Code [R.S.C., 1985, c. C-46]. The one established exception to this rule arises in cases where the knowledge that one's actions are contrary to law forms part of the mens rea of the offence: see R. v. Docherty, [1989] 2 S.C.R. 941. In cases involving regulatory offences, such as Sault Ste. Marie, the due diligence defence is typically pleaded with respect to a mistake of fact; however, the law is not entirely clear with respect to the relationship between due diligence and mistake of law: see R. v. Pontes, supra.
It would be presumptuous for me to leave the impression that the Minister is not aware of the "mistake of law" issue. It was raised at the trial level in Locator of Missing Heirs Inc. , supra, but rejected by Judge Bowman of the Tax Court. Like him, I am of the view that the application of criminal law concepts in the present context is inappropriate. A successful plea of due diligence in the context of regulatory offences would negate any form of punishment. By contrast, in cases involving section 280 of the Excise Tax Act, registrants are not seeking to plead mistake of law as a defence to payment of GST that they failed to collect and remit. That registrants remain liable for any underpayment and restitutionary interest has never been questioned. Indeed, the Act provides that registrants have the right to recover any amounts that should have been collected from those responsible for its payment. It is only the 6% automatic penalty that registrants find objectionable.
(v) Conclusion
Having regard to the analytical framework outlined in Sault Ste. Marie and to the arguments advanced by the Minister, I am not persuaded that section 280 of the Excise Tax Act gives rise to absolute liability. In my view, an implied due diligence is neither incompatible with the legislative scheme, nor does it frustrate or undermine the purposes underlying that scheme. The presumption in favour of strict liability has not been rebutted.
Disposition
The application for judicial review should be dismissed. The respondent is entitled to all reasonable and proper costs of this application.
Strayer J.A.: I agree.
McDonald J.A.: I agree.