



COURT 
    OF APPEAL FOR BRITISH COLUMBIA




Citation:


Domtar 
          v. H.M.T.Q. (British Columbia),







2007 
          BCCA 49



Date: 20070119





Docket: CA033714

Between:

Domtar 
    Inc.

Respondent

(
Petitioner
)

And

Her 
    Majesty the Queen in Right

of 
    the Province of British Columbia

Appellant

(
Respondent
)










Before:


The 
          Honourable Chief Justice Finch




The 
          Honourable Mr. Justice Donald




The 
          Honourable Mr. Justice Low



Oral Reasons for Judgment




H.W. 
          Gordon

S. 
          Kirkpatrick




Counsel for the Appellant




J.H. 
          Goulden

A. 
          Robertson


Counsel for the Respondent




Place 
          and Date:


Vancouver, British Columbia




19 January 2007



[1]

FINCH, C.J.B.C.
: The Provincial Crown appeals the order of 
    the B.C. Supreme Court pronounced on 21 December 2005 allowing the petitioners 
    appeal from the decision of the Ministry of Provincial Revenue, assessing 
    Social Service Tax payable by the petitioner on the purchase of biocides, 
    chemical agents used to eliminate bacteria in the material the petitioner 
    processes to make paper.

[2]

The petitioner claimed that biocides are exempt from taxation under 
    Section 76(1)(b) of the
Social Service Tax Act
:

76(1) The following are exempted from taxes imposed by sections 5 to 25 
    and 112.3:

. . .

(b) 
    subject to subsections (2) and (5), a substance used as a catalyst, or as 
    a direct agent, in a chemical reaction for the transformation or manufacture 
    of a product for sale or lease and that is in contact with, or is temporarily 
    incorporated into, the material being transformed or manufactured into the 
    product;

[3]

The Crown says that the exemption is not applicable by virtue of s. 
    76(5):

76(5)    
    The exemption under subsection (1) (b) does not apply to a substance used 
    as a catalyst or direct agent if

(a)        
    the substance is not used directly in the transformation or manufacture of 
    a product or the contact between the substance and the material being transformed 
    or manufactured into a product is inconsequential to the transformation or 
    manufacture of the product

[4]

Direct agent is defined in s. 1 of the
Act
:

"direct agent"
means a substance that produces or modifies a chemical 
    reaction and that is consumed in the chemical reaction to the point of destruction 
    or dissipation or uselessness for any other purpose

[5]

The learned chambers judge held that the biocides were exempt from 
    taxation.  She concluded:

[34] The biocides are used as a direct agent in a chemical reaction for 
    the manufacture of paper for sale and are in contact with the material being 
    manufactured into paper.  The biocides are used directly in the manufacture 
    of the paper.

[6]

She therefore allowed the petition, and ordered a refund of tax paid 
    by the petitioner.  It is from that order that the Crown appeals.

[7]

The petition was decided on affidavit evidence, which included conflicting 
    opinions from experts in the pulp and paper industry.  The chambers judge 
    found the following facts, which are not in dispute:

[5] 
    The petitioner Domtar Inc. ("Domtar") produces fine coated paper 
    at its paper manufacturing plant in New Westminster, B.C.  Wood pulp fibre 
    is combined with various additives, including sizes and starches, in a white 
    water slurry.  The papermaking machine forms the slurry into a wet mat that 
    is then dried with pressure and heat to form a base sheet that is coated with 
    a mineral pigment-based coating.

[6] 
    During the papermaking process, the raw materials are generally maintained 
    at a temperature that is conducive to the development and growth of many kinds 
    of bacteria.  If left unchecked, the bacteria growth will result in:

(a) The creation of volatile fatty acids that will permanently contaminate 
    the paper product and result in an undesirable odour in the paper product 
    itself;

(b) The production of hydrogen sulphide gas within the plant where employees 
    work.  An environment in which there is hydrogen sulphide gas is not a safe 
    environment; and

(c) The rapid build up of slime on the papermaking machinery that will 
    physically contaminate the paper product and cause sheet holes, sheet spots 
    and paper breaks while the paper product is being manufactured.  It also requires 
    shutting down the contaminated machinery for expensive and time consuming 
    chemical cleaning.  The machinery can be permanently damaged by the bacteria 
    contamination.

[7] 
    The parties agree that saleable paper cannot be manufactured without the use 
    of biocides.

[8] 
    Biocides use five modes of action to kill or inhibit bacteria in the papermaking 
    process:

(a) Surface penetrating - the biocides disrupt the chemical bonds of a 
    cell wall causing cell leakage which leads to the death of the cell;

(b) Surface binding - the biocides form a barrier around the cell wall 
    by ionic bonding to the cell preventing food entering or waste leaving the 
    cell which leads to the death of the cell;

(c) Enzyme inhibition - the biocide enters the cell and interferes with 
    enzymes necessary for energy production within the cell which stops development 
    of the cell;

(d) Reproductive inhibition - the biocide enters the cell and interferes 
    with enzymes necessary for reproduction of the cell which stops multiplication 
    of the cell; and

(e) 
    Oxidizing - the biocide reacts with chemical bonds via electron transfer which 
    alters the chemical structure of the bacteria.

[8]

The Crown argues that biocides do not come within the exception to 
    the exemption provided by s. 76(5) because they are  not used directly in 
    the transformation or manufacture of a product.  The Crown says that to be 
    used directly within the meaning of that section the biocides must directly 
    result in converting the raw materials into paper. It says the prevention 
    of or reduction in the formation of bacteria in the raw materials does not 
    directly result in the conversion of the raw materials into paper.  It says 
    a substance will not qualify for exemption in a manufacturing process unless 
    it gives the raw materials used to make the paper (essentially the fibres, 
    pigment sizes and starches) a new form, quality and property such that the 
    end product is paper.

[9]

In support of this position the Crown relies on the opinion of its 
    expert, Dr. George Ionides.  In his opinion, biocides are process chemicals 
    as opposed to functional chemicals.  His opinion includes this:

[26] 
    In response to questions from counsel for the Crown.  Certain of the questions 
    and Dr. Ionides's answers are as follows:

A          . . .
The latter (process chemicals)
are added to optimize 
    the papermaking process or minimize undesirable side effects of the process.  
    However, they do not have any direct, functional impact on paper quality, 
    and they do not become integrated into the finished paper.  Examples of such 
    chemicals are defoamers (added to control foam build-up in pulp and paper 
    process lines), and biocides.  Biocides are used to inhibit undesirable bacterial 
    growth which results in inefficiencies and degradation of paper quality.  
    They do not contribute "functionally" to paper quality.

[Underlining in original.]

[10]

So the Crown argues that biocides are used indirectly in the manufacture 
    of paper, as opposed to directly.  The Crown says the use of a process chemical 
    to combat bacteria in the material may avoid inefficiencies or degradation 
    of paper quality, but that such a use is not a direct use in the manufacture 
    of paper.  The Crown says the words used directly in s. 76(5)(a) must be 
    read to mean that the substance will not come within the exemption unless 
    it gives the raw materials new forms, new qualities and new properties.  It 
    says that biocides do none of these things.  It says the biocides react with 
    bacteria, or prevent bacteria from forming.  As the bacteria is not a raw 
    material, the use of the biocides in paper manufacture is indirect.

[11]

In my respectful opinion, these arguments cannot be reconciled with 
    the facts found by the chambers judge.  If the bacteria in the material are 
    not destroyed, the paper product will be permanently contaminated by volatile 
    fatty acids, and will have an undesirable odour.  It is accepted that marketable 
    paper cannot be manufactured without the use of biocides.

[12]

It is therefore apparent that the biocides are a substance within 
    the meaning of s. 76(1)(b) used as a direct agent in a chemical reaction 
    for the manufacture of a product for sale.

[13]

It is not correct to say, as the Crown argues, that biocides do not 
    give the raw material new forms, new qualities or new properties.  The use 
    of biocides results in an odourless paper, and a paper that, but for their 
    use, would not be marketable.

[14]

The fact that the use of biocides has other beneficial consequences 
    for the work environment, and for the maintenance of paper making equipment, 
    does not alter the result.

[15]

The Crown advanced an argument based on legislative history, and judicial 
    interpretation taking account of cases previously decided under the
Act
as then in force.  It refers to
Highland Valley Copper v. H.M.T.Q.
, 
    1999 BCCA 0692 and
British Columbia v. Homestake
, 1999 BCCA 
    274.

[16]

I did not find these submissions persuasive, in light of the facts 
    found by the chambers judge, and the application of the present legislation 
    to those facts.

[17]

I would dismiss the appeal with costs to the respondent.

[18]

DONALD, J.A.
: I agree.

[19]

LOW, J.A.
: I agree.

[20]

FINCH, C.J.B.C.
: The appeal is dismissed.

The Honourable Chief Justice Finch


