Generally speaking, products we ingest like food, beverages, drugs and nutritional supplements are subject to basic regulations so we as consumers know what we are putting into our bodies. Things like ingredients, quantity, and source come to mind as basic information that should be available on packaging, or otherwise be readily discernable when interacting with these regulated products. Unfortunately, and to the detriment of consumers and producers alike, the legislation and administrative regimes in Canada that strive to ensure that food and beverage labeling and classification is intuitive and transparent remain works in progress. Shifting consumer demands and habits, developments in health and nutritional science, and lobbying efforts by industry, make appropriate government regulation in this area challenging.
One does not need to be particularly cynical to compare goods on supermarket shelves that appear to interchangeably use terms like “contains 100%”, “made from 100%” or “made with” and wonder if these phrases all mean same thing? Or do they have slightly different meanings? If so, are those differences in meaning significant? Whether one views issues of food and beverage classification and labeling through a lens informed by ethics and consumer choice, health and safety, or economic and tax treatment considerations, the result is the same: the applicable administrative regime should achieve its intended purpose through the consistent application of laws and policy that are reasonably discernable.
Recently Justice David E. Graham of the Tax Court of Canada grappled with this type of issue in a case involving Canadian-made alcoholic apple cider: The Mark Anthony Group Inc. v. Her Majesty the Queen. Though Mark Anthony Group was a tax case, dealing with an appeal from an assessment under the Excise Act, Justice Graham’s thorough analysis of the relevant section of the Act is illustrative for administrative law practitioners, and those interested in food and beverage law.
The Mark Anthony Group (“MAG”) was the producer and distributer of Okanagan Premium Cider and Extra Hard Cider between September 1, 2010 and August 31, 2012 (in November, 2015 MAG sold its brand of cider to Anheuser-Busch InBev).
Duty under the Excise Act is payable to Her Majesty when it is packaged. However, there is an exemption from that duty for cider produced in Canada and composed wholly of agricultural or plant products grown in Canada. At issue before the Tax Court was just what exactly does the aforementioned exemption mean?
The wording of the exemption is deceivingly simple. At first blush its application appears straightforward, and individuals not used to parsing regulatory language and interpreting statutory intent might initially conclude that the parliament’s choice of language, read in its grammatical and ordinary sense, ought to be easy to apply. As we shall see, recourse to the teachings of Elmer Driedger alone was not sufficient to decide the appeal.
The facts with respect to how MAG’s cider is made, and what its ingredients are, were not in dispute. The only issue was whether MAG’s cider fit within the exemption in the Excise Act for Canadian cider composed wholly of agricultural or plant products grown in Canada.
In the periods in question a small portion of each container of MAG’s cider contained apple juice concentrate that was made from apples grown outside of Canada. The concentrate was added after the cider was fermented but before the cider was packaged.
MAG determined that its cider qualified for the duty exemption, and thus for the period in question did not remit some $2 million in duty with respect to its Okanagan Premium Cider. The Minister of National Revenue determined that because the apple juice concentrate was an agricultural or plant product that was not grown in Canada, the cider did not qualify for the exemption.
The appeal turned solely on an issue of statutory interpretation; the very type of interpretation that regulators and consumers of food and beverage struggle with in other regulatory contexts frequently. At its simplest, the question is what does it mean when a manufacturer says its product is made “wholly” from something? As we shall see, in practice there was nothing simple or straightforward about applying the exemption.
Production and Ingredients
Justice Graham approached interpreting the exemption in an organized fashion by applying a series of tests. Initially he broke the exemption down into two separate components: a Production Test and an Ingredients Test.
The Production Test is readily interpreted and applied. Under the Excise Act cider is “produced” when it is fermented. MAG’s ciders are fermented in Canada, and so MAG’s ciders meet this component of the exemption without controversy. As a result, the issue before the Tax Court was solely interpreting the Ingredients Test which was broken down into two further considerations: when is the Ingredients Test applied? And what ingredients need be considered?
The Ingredients Test could be applied at two different times during the cider’s production:
- when it is being fermented (which would thus exclude the apple juice concentrate applied during packaging) or;
- at the time of packing (which would capture the concentrate).
With respect to the issue of what ingredients ought to be considered in the test, four possible interpretations emerge:
- All Ingredients (All ingredients that went into the cider, applied either at the fermentation or packaging stage);
- Fermented Ingredients (Only those ingredients that were fermented, applied only at the fermentation stage);
- Alcohol Ingredients: (Alcoholic ingredients, which would include not only fermented ingredients, but also any spirits added to the cider at the packaging stage); and
- Agricultural/Plant Ingredients: (Only agricultural or plant ingredients, applied either at the fermentation or packaging stage)
MAG’s cider qualifies for the exemption regardless of what ingredients test is used, provided the test is applied at the time of fermentation. If the test is applied at the time of packaging, MAG’s cider would qualify for the exemption if only alcoholic ingredients are considered (as the concentrate was not converted into alcohol) but would fail the test if the All Ingredients test was used or the Agricultural/Plant Ingredients test was applied.
To determine the appropriate test to apply, the court embarked on a textual, contextual, and purposive analysis of the legislation.
A plain reading of the language of the exemption, notably the phrase “composed wholly of” strongly supports the application of an All Ingredients test. The words “composed of” can be contrasted with the word “contains”. While it is debatable whether “composed of” must be followed by a complete list of a products ingredients (or only its primary components), Parliament removed any doubt in the exemption by adding the adverb “wholly” to the words “composed of”. Parliament did not say “composed primarily of” or “composed substantially of”. With that choice of words, a textual interpretation suggests that the list of ingredients that follow must be a complete list of all the ingredients in the cider.
There is nothing in the text of the exemption to suggest when the Ingredients Test is to be applied. The duty at issue is applied at the time the cider is packaged and is payable by the person who was responsible for the cider immediately before it was packaged. Since the exemption is designed to give relief from that duty, arguably, any test to qualify for that relief should be applied to the cider at the time of packaging.
At the same time, the duty arises because the beverage contains alcohol. Duty is not applied to apple juice. This suggests that the Ingredients Test should only be applied to those ingredients that went into making the alcohol (the Fermented Ingredients test or the Alcoholic Ingredients test), and applied at the fermentation stage. However, wines and ciders are sometimes fortified with spirits after the fermentation stage. This suggests that the Ingredients Test should be applied at the packaging stage in order to catch these ingredients.
There are strong purposive arguments against Parliament having intentionally created an All Ingredients Test. Such a test would have a number of unintended consequences that would deny Canadian producers of alcohol the exemption from duty. For example some beverages contain artificial preservatives, colours or flavours. Others contain natural, but non-agricultural, non-plant additives like salt, water or carbonation. Lastly other beverages contain natural agricultural or plant additives from sources outside Canada such as citric acid used to adjust the acidity of beverages. A Fermented Ingredients test, or Alcohol Ingredients test would avoid the issues raised above, as none of the aforementioned ingredients are fermented.
The purpose of the exemption appears to be to support Canadian vintners and farmers. That said, the needs of the two groups are in conflict: farmers want to sell a lot of agricultural or plant products at a high price. Vintners want to buy agricultural or plant products at a low price, and want to be able to easily meet the requirements of the exemption so that they do not have to pay duty.
An All Ingredients test harms vintners by restricting their ability to make marketable beverages which in turn harms farmers because vintners are less interested in buying Canadian agricultural or plant products when they know they cannot qualify for the exemption. Why would a cider maker buy more expensive local apples, if because its produce its carbonated it could never qualify for the duty exemption?
The court was faced with considerable food for thought.
The court concluded that the Ingredients Test must be an All Ingredients Test; while there is textual ambiguity as to when the Ingredients Test is to be applied, there is no ambiguity as to what ingredients the test is to cover.
As neither the language of the statute, nor its context, provided any guidance on the issue of when the All Ingredients Test was to be applied, the court was at liberty to rely on the purpose of the exemption when considering the timing issue. The court concluded that applying the test at the fermentation stage would cause less harm to the purpose of the exemption than applying it at the packaging stage.
The court reasoned that it was better to let fortified wines be free from duty than to subject a wholly Canadian made beverage to duty merely because water, carbonation, or in this instance American apple juice, was added after fermentation.
Under this conclusion the duty exemption at issue would be read “produced in Canada and, when produced, composed wholly of agricultural or plant product grown in Canada.”
Accordingly, the appeal was allowed, and the court ordered that MAG’s cider that contains American apple juice should be exempted from duty as if it were composed wholly of Canadian products. Does this interpretation align with your understanding of what it means to be a wholly Canadian product?