Terra Nova Industries Limited

It was March 1992 and Forbes Adams, president of Terra Nova Industries Ltd, sat in his office reviewing correspondence to and from the Department of Finance, contemplating his next move. He had written them on several occasions in an attempt to determine the procedures and rationale for the Retail Tax System. Their responses were not what he wanted to hear and his frustration was enhanced by their preoccupation with another issue. ( See Exhibit 1 for summary of letter contents. )

Background Information

Forbes Adams had incorporated Terra Nova Industries Ltd in 1978 after having worked in the aggregate-manufacturing business for twenty-one years. The Company's head office was located in Glovertown, Newfoundland. According to Forbes, the Company crushes approximately three-quarters of a million tonnes of aggregates in a typical six-month period, its main products being Class A, Class B, Concrete Sand and Asphalt Aggregate. In one six-week period in 1991 the Company crushed 240,000 tonnes of aggregates.

Twenty to thirty shiftings of men and equipment to different parts of Newfoundland and Labrador are not unusual each year. A typical shifting might include: a labourer (who also works as watchman when necessary), a loader operator, a dozer operator, two crusher operators, a welder, a foreman, a truck driver, two superintendents -- all of

This case was prepared by Stanley Sparkes for tile Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

whom would be on the job site regularly. Many of these workers were versatile so that, for example, the truck driver might be also the loader operator. Back at the office there was an office manager and a clerk; in addition, Forbes, the Manager of Operations, would be in charge of everything and would make all major decisions. Sometimes when a shifting was taking place, another job may be finishing up so that at peak times there have been as many as twenty-three on the payroll. Because of the highly mobile nature of the business, some workers would not travel to out-of-town places and local people in the work area would be hired. During the crushing season, it was not unusual for the Company to employ upwards of thirty-five different people.

The Problem

Here are two comments by Forbes that put succinctly both his Company's role in Newfoundland and his concern that the Provincial Sales Tax (PST) treats his business unfairly:

"Our Company expanded quickly so that we have become Newfoundland's largest maker of aggregate products. We have built up a fleet of highly mobile equipment including crushers, front end loaders, dozers, vans, trailers. We move across Newfoundland and Labrador crushing and stockpiling aggregates and sands for private contractors and governments." (See Exhibit 2 for fleet details.)

"But I am very concerned about the tax system, especially that part of the PST legislation which charges PST two different ways for aggregates. We are burdened down with taxes and our firm is put at a great disadvantage by PST being charged two different ways for Class A and Class B." (See Exhibits 3, 4, and 5.)

After reviewing the correspondence from the Department of Finance, Forbes reflected on the contents of the various letters and wondered what he ought to do next. On March 16, 1992 he telephoned the Department of Finance and, on the same day, sent them a letter in which he repeated his case.

The main points in the telephone call and letter were:

  1. His Company has to charge 12% PST on its crushing price for Class A and Class B.
  2. His Company must NOT charge 12% PST on aggregates it crushes for asphalt mix.
  3. His Company's customers are required to pay PST on the asphalt mix at the rate of $1.53 and $1.31 per tonne.
  4. If contractors crush their own aggregates they pay PST at the rate of 26 cents per tonne on Class A and 18 cents per tonne on Class B.
  5. For Concrete Sand if the product is sold as a finished product his Company has to pay 12% PST on the selling price; if his Company sells it to a firm that will use it to make a final product that firm is responsible for collecting the PST.
  6. The system is complicated and clumsy, not tailor made to suit small businesses, which are the backbone of the Newfoundland economy.
  7. Particularly upsetting is the fact that the PST system costs contractors more in PST to get his Company to do the crushing than it would if they did their own crushing. Consequently, his Company is put at a disadvantage through the tax system.

In his letter, Forbes provided the example given below to make the main part of his case very explicit. (Note that the $3.50/tonne and $2.75/tonne are selling prices.)


60,000 tonnes Class A @ $ 3.50 per tonne

= $210,000

110,000 tonnes Class B @ $ 2.75 per tonne

= $302,500


= $512,500

PST @ 12%

= $61,500


60,000 tonnes Class A @ $0.26 per tonne

= $15,600

110,000 tonnes Class B @ $0.18 per tonne

= $19 800


= $35 400


Never one to look at a problem with no solution in mind, Forbes suggested a solution to the Department of Finance. He suggested that the Department of Finance not charge his company any PST at all for manufacturing aggregates. Rather, they should charge his customers and the rate should be the same for all customers; furthermore, the rate in each case should be based on the gross tonnage. This would not complicate matters at all. Those companies using aggregates they had crushed themselves would pay the tax on the aggregates they used on their own jobs; for the aggregates they sold to others, the PST would be paid by the users.


Forbes was very upset when the Department of Finance had not replied to his letter one year after it was written. He put his frustration this way:

I really thought the provincial government existed to serve the people and small businesses. I wouldn't mind if it took them a few days or even a week or two. But here it is over a year later and I still have no reply. I want to create jobs for people. Contractors would sooner I did the crushing than have to buy their own equipment, find pits, get permits and generally do the kinds of things my Company specializes in, but you can't blame them for trying to find a way to save on taxes. We must convince the Government to change the tax system so that companies like mine will not only stay in, but will also expand their enterprises."

Study Questions

  1. a) If Terra Nova Industries Ltd crushes and sells 100,000 tonnes of Class A at $3.78 per tonne and 145,000 tonnes of Class B at $2.87 per tonne, what will it pay the Department of Finance in PST?

    b) If a contractor crushes the same amount and uses it on her/his own job, what PST will be paid?

    c) Using the dollar amounts calculated in La) and Lb), suggest why, when bidding for an aggregates job, Terra Nova Industries Ltd would be put at a disadvantage by the presence of a firm that crushes its own aggregates?
  2. Identify several strengths Forbes' Company has that enables it to stay in business in spite of the tax system. What expenses and worries might contractors have if they crush their own aggregates in an attempt to lower their PST costs?
  3. Discuss the solution proposed by Forbes, and the implications for the government should it decide to adopt the solution.
  4. What alternatives does Forbes Adams have now, a year after his proposed solution to Government without any response? What do you suggest he do next?


Exhibit 1

Summary of Contents of Letters
From Department of Finance

Date Respondent Message
March 1, 1990 Regional Tax Administrator Must charge 12% PST on total price of materials sold.
May 24, 1990 Tax Auditor II PST Security bond muyst be raised to $75,000.
August 9, 1990 Regional Tax Administrator You may sell tangible personal property to a customer tax exempt by providing the customer;s seller's number; please increase security from $10,000 to $75,000.
March 11, 1992 Tax Interpretation and Training Officer You may pay PST on selling price including delivery charges if product delivered by you; if customer buying from you will resell, you do not have to pay the PST but must quote the re-seller's number.

Exhibit 2

Fleet of Equipment

  1. 1988 544 Cedar Rapids crushing plant
  2. 1989 1213 Eljay cone crushing plant
  3. 1989 2236 Cedar Rapids Primary crushing plan
  4. 1990 36" EIjay cone crushing plant
  5. 1989 Extec screening plant
  6. 1990 36" washing sand screw
  7. 1989 WA500 front end loader
  8. 1990 WA500 front end loader
  9. 1990 WA470 front end loader
  10. 1978 D8H cat dozer
  11. 1992 B train Belly dump
  12. 1977 Trailmobile semi-dump
  13. 1984 International truck
  14. 1988 Mack truck
  15. 1988 White truck
  16. 1986 low bed float trailer

Exhibit 3

Taxes and Tax Equivalents
Paid Annually by Terra Nova Industries Ltd

  1. Property Tax
  2. Water and Sewer Service Fee
  3. Business Tax
  4. Payroll Tax
  5. Workers Compensation Premium
  6. Unemployment Insurance Employer's Share
  7. Canada Pension Plan
  8. Federal Income Tax
  9. Provincial Income Tax
  10. Surtax
  11. Corporation Tax
  12. Dividend Tax
  13. Retail Sales Tax
  14. Goods & Services Tax
  15. Excise Tax
  16. Duty

Exhibit 4

PST Comparison on Aggregates

Exhibit 5

PST on Aggregates