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Citation: 2008TCC117
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Date: 20080222
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Docket: 2004-3594(GST)G
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BETWEEN:
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GENERAL MOTORS OF CANADA LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] This
appeal is in respect to an assessment, under the Excise Tax Act (the “Act”)
for the period November 1, 1997 to December 31, 1999, which denied the
Appellant’s claim for input tax credits (“ITCs”).
[2] The
Appellant, General Motors of Canada Limited (“GMCL”), is a Canadian corporation
engaged in the business of manufacturing, assembling and selling of automobiles
and trucks. GMCL provides various pension plans to its employees. The contributions
to these plans are invested and administered using the services of investment managers
(“Investment Managers”), who in turn charge investment management fees,
together with goods and services tax (“GST”), in respect to those services.
Between 1997 and 1999, a number of Investment Managers provided services to
GMCL in respect to the management of the pension assets, pursuant to investment
management agreements (“Investment Management Agreements”), which were between
individual managers and GMCL. It is the GST on these investment management
services (“Investment Management Services”) and the adjustment to the Appellant’s
net tax to deny the ITC claim that form the basis for this appeal.
[3] GMCL
is the administrator of two registered pension plans, funded through trusts,
created by GMCL to hold and invest the assets of these plans (the “Pension Plan
Trusts”). As part of the compensation package for its hourly and salaried
employees, GMCL established the following:
(a) The General
Motors Canadian Retirement Program for Salaried Employees (together with any
amendment thereof, the “Salaried Plan”); and
(b) The General
Motors Canadian Hourly-Rate Employees Pension Plan (together with any
amendments thereof, the “Hourly Plan”).
[4] The
Salaried Plan provided benefits to those salaried employees of GMCL and certain
affiliated corporations of GMCL. The Hourly Plan was created pursuant to the
terms of a collective agreement between GMCL and the National Automobile,
Aerospace and Agricultural Implement Workers Union of Canada for the benefit of
GMCL’s hourly employees. The Salaried Plan was funded primarily by employer
contributions with a very small portion funded by the employees. The Hourly
Plan was a single employer plan funded by employer contributions only.
[5] Pursuant
to the constating documents of the Salaried Plan, GMCL was appointed as the
plan’s administrator and was granted “all powers and authority necessary to
properly administer the Plan…” (Exhibit A-2, Tab 1, Article 16). Similarly, the
constating documents of the Hourly Plan provided that “The general
administration of the Plan shall be vested exclusively in the Company…”
(Exhibit‑A-2, Tab 2, Article IV). The powers and duties of GMCL as
administrator, including the power to retain Investment Management Services,
originate in these constating documents. Additionally, the Ontario Pension
Benefits Act (the “OPBA”), R.S.O. 1990 c.P.8, imposes specific
statutory responsibilities on GMCL as an administrator of these pension plans.
In particular, section 22 of the OPBA imposes a general duty to exercise
care, skill and due diligence in the investment of pension funds.
[6] As
administrator, GMCL’s contractual and statutory responsibilities were in
relation to the overall operation of the pension plans and included the calculation
and payment of pension entitlements, disclosure of information to members of
respective Plans, submitting required filings within specified time limits,
ensuring the content and accuracy of required reports, investing the assets, and
ensuring that all required contributions were made and that fees and expenses were
reasonable.
[7] The
first witness was Craig William Marven, a Chartered Accountant, employed by
GMCL during this period as a senior financial analyst in the compensation
activities group. As company appointed administrator for over five years, he
was responsible for the overall functioning of the Plans, including confirming
that contributions were timely, that pertinent filings were made on time and
that the Investment Managers were performing according to expectations. GMCL
met with these managers twice annually to review their performance and to
ensure that they were investing in the appropriate classes of assets as well as
following asset allocation policies. In addition, the Investment Managers
reported monthly on the performance of the assets and were compensated based on
the value of the assets they managed.
[8] Mr.
Marven explained that the role of the pension plans was to provide another form
of compensation that would allow GMCL to attract and retain the highest quality
employees. He considered GMCL to be at the top of the hierarchy or the
“backstop” of the Plans, with the result that GMCL was responsible for the
assets contained in the Plans. He referred to the Plans as “defined‑benefit
plans”, meaning that GMCL was obligated to account for the difference if there
was a funding shortfall. Mr. Marven’s evidence‑in‑chief consisted
primarily of taking the Court through the pension plan trust structures used
for investing and administering the pension funds.
[9] For
each of the Pension Plans, the relevant Master Trust arrangements were
two-tiered. First, GMCL paid into the Master Trusts the required contributions
in respect to each of the Plans (in the case of the Salaried Plan, each
affiliated corporation paid contributions commensurate with coverage provided
to its employees). Second, the funds in each of the Master Trusts were invested
in units of unitized trusts (the “Unitized Trusts”).
[10] For the purpose of funding benefits accrued under the two pension
plans, GMCL created two Master Trusts, pursuant to trust agreements, which were
amended and restated in their entirety on September 1, 1993 (the “Master Trust
Agreements”):
- The General
Motors Canadian Retirement Program for Salaried Employees Pension Plan Trust
Agreement between GMCL, GMMD, GMAC, E.D.S., MIC, and Royal Trust Corporation of
Canada (“Royal Trust”), which was the Master Trust Agreement for the trust fund
created under the Salaried Plan (the “Salaried Master Trust”) (Exhibit A-2, Tab 3).
- The General
Motors Canadian Hourly-Rate Employees Pension Plan Trust Agreement between GMCL
and Royal Trust, which was the Master Trust Agreement for the trust fund
created under the Hourly Plan (the “Hourly Master Plan”) (Exhibit A-2, Tab 4).
[11] Under each of the Master Trusts, two Unitized Trusts existed as vehicles
for the pooling of assets which were invested in both foreign and domestic
investments. Mr. Marven testified that the flow of funds from the Master
Trusts into the Unitized Trusts was “virtually seamless”. On September 1, 1993,
GMCL entered into four Unitized Trust Agreements:
(a) The General
Motors Canadian Retirement Program for Salaried Employees Unitized Trust
Agreement – Foreign Pension Investments between GMCL, GMMD, GMAC, E.D.S., MIC,
and Royal Trust, which established a Unitized Trust to invest in foreign
investments, the units of which were held by the Salaried Master Trust (Exhibit
A-2, Tab 5).
(b) The
General Motors Canadian Retirement Program for Salaried Employees Unitized Trust Agreement – Domestic Pension
Investments between GMCL, GMMD, GMAC, E.D.S., MIC and Royal Trust, which
established a Unitized Trust to invest in domestic investments, the units of
which were held by the Salaried Master Trust (Exhibit A-2, Tab 6).
(c)
The General Motors
Canadian Hourly-Rate Employees Pension Plan Unitized Trust Agreement – Foreign
Pension Investments between GMCL and Royal Trust, which established a Unitized
Trust to invest in foreign investments, the units of which were held by the
Hourly Rate Master Trust (Exhibit A-2, Tab 7).
(d)
The General Motors
Canadian Hourly-Rate Employees Pension Plan Unitized Trust Agreement – Domestic
Pension Investments between GMCL and Royal Trust, which established a Unitized
Trust to invest in domestic investments, the units of which were held by the
Hourly Master Trust (Exhibit A-2, Tab 8).
[12] Royal Trust was appointed as trustee of the Master
Trusts and the Unitized Trusts. Although GMCL did not call a representative
from Royal Trust, it is clear from the evidence that Royal Trust took bare
legal title to the assets of the Unitized Trusts and discharged various duties
including maintaining custody, safekeeping and registration of securities,
transferring funds and processing information from third parties.
[13] Allocation of assets to broad categories of
investments, for both the Hourly and Salaried Plans, was determined by GMCL.
Following GMCL’s decision to allocate certain portions of Unitized Trust assets
to particular categories of investment, GMCL entered into various Investment
Management Agreements, pursuant to which Investment Managers were retained to
manage the investment of funds within one or more of the asset categories of
domestic equity, foreign equity, domestic fixed income, domestic short‑term
fixed income and domestic cash equivalents. The Investment Managers had
discretion to purchase, receive or subscribe for securities, to retain such
securities in trust, to purchase, enter, hold and generally deal in any contractual
manner with contracts for the immediate or future delivery of financial
instruments and to convert monies into Canadian and foreign currencies. This
discretion, however, was moderated by and subject to investment guidelines
established by GMCL and which were contained in Schedule “A” of the
Agreements. These guidelines governed the nature and extent of the investments,
which Investment Managers could be involved with, in the context of their power
as full discretionary Investment Managers. They were also subject to the
Trustee’s ongoing monitoring and authority to approve or deny the buy/sell orders
because the Investment Managers had no access to the funds.
[14] While Royal Trust
was the main trustee for the majority of the eight billion dollars held in
trust assets, GMCL also had a separate Agreement, similar to the other
Investment Management Agreements, with Standard Life Assurance Company
(“Standard Life”) which held several hundred million dollars of trust assets
(Exhibit A-3, Tab 38). Mr. Marven referred to these assets as segregated funds,
with Standard Life acting in a capacity similar to an Investment Manager.
Although Standard Life was in the unique and slightly different position of
having both investment management and custodial responsibilities, it had the
right to be paid its fees directly from the fund.
[15] The second witness, Owen Phillips, has
approximately 20 years of experience in investment management and is currently
employed with Legg Mason, Canada formerly Perigee Investment Counsel Inc.
(“Perigee”). He provided evidence with respect to the services provided by
Investment Managers. Because of the similarity of the terms and conditions of
all of the Investment Management Agreements, pursuant to which the Investment
Managers were retained by GMCL, the evidence of Mr. Phillips provided an
adequate and representative sample of the terms of all of these Agreements. He
personally managed the domestic cash equivalents and, to some degree, the fixed
income investments for the Hourly Plan.
[16] Although the exhibits contain numerous Investment
Management Agreements relating to the Salaried and Hourly Rate Employees for
the various asset categories, the Agreement dated December 1, 1997, between GMCL
and Perigee (Exhibit A‑3, Tab 33) is representative of the
collection. Clause 4 of this Agreement sets out the extensive “powers of the investment
manager”. Schedule “A” to the Agreement provided various investment
guidelines to be used in managing the investments on behalf of GMCL. Mr.
Phillips testified that Perigee made decisions about portfolios without
consulting GMCL on buying and selling specific financial instruments. In other
words, Perigee was a discretionary money manager that could buy and sell on
behalf of the account without the need to seek prior approval. A portion of the
preamble to the Agreement states:
And whereas, pursuant to its appointment
hereunder, the Investment Manager shall manage those assets of the Unitized
Trust Fund allocated to an investment account (the “Investment Account”) by GM
Canada, in accordance with the Unitized Trust Agreement and shall provide
investment advice and other related administrative services as requested
from time to time by GM Canada. (emphasis added) (Exhibit A-3, Tab 33)
[17] The Investment Managers received performance
reviews twice yearly from GMCL. They were required to meet performance
standards that not only outperformed an objective benchmark, but that also respected
the boundaries of the prescribed investment guidelines outlined in Schedule “A”
of the Investment Management Agreements. According to these agreements,
Investment Managers were also required to provide monthly statements to GMCL
“indicating all investments” (Transcript p. 288).
[18] Articles 16 and 17 of the Salaried Plan, the
Seventh Article of the Master Trust Agreement and the Thirteenth Article of the
Unitized Trust Agreements set out the mechanism for payment of the cost of the
administration of the pension plan and the pension fund as being:
(a)
Payment directly by
GMCL to the Investment Manager, with reimbursement directed to GMCL from the
trust; or
(b)
Payment directly by the
relevant Master Trust or Unitized Trust to the Investment Manager upon the
direction of GMCL.
[19] With respect to the Unitized Trust Agreement,
Article 13 provided that:
Expenses and fees relating to the
administration of the Unitized Trust Fund incurred (either internally or
through external appointments) by the Company, including expenses and fees
incurred in retaining Investment Managers, investment advisors, consultants,
sub-trustees and sub-custodians, and reasonable and proper counsel fees of the
Company, to the extent permitted by Pension Law, shall, at the direction of
the Company or its delegate, be withdrawn and paid by the Trustee out of the
Unitized Trust Fund if not otherwise paid by the Company or the Trust Fund;
provided, however, that if the Company has paid such expenses and fees it
shall, upon direction to the Trustee, be reimbursed for such payments out of
the Unitized Trust Fund. (emphasis added) (Exhibit A-2, Tab 5)
[20] At paragraph 17 of Perigee’s Investment Management
Agreement, it stated:
17. Compensation for Services
Hereunder. The Investment Manager shall be entitled to receive as
compensation for services rendered hereunder, a fee determined and paid in
accordance with a separate written agreement between GM Canada and the
Investment Manager; provided that if and as soon as the Investment Manager
charges a fee to other clients for the management of portfolios having similar
characteristics or that are managed by a substantially similar process with
substantially the same services under a fee rate schedule that would reduce the
fee paid hereunder, then the Investment Manager shall promptly so notify GM Canada
and the fee hereunder shall be reduced accordingly.
[21] The parties then entered into a separate written
agreement (Exhibit A-3, Tab 39A), as referred to in the preceding clause
17, that set out various rates of fees dependent upon the size of the
investment portfolio and that provided a GMCL address to which the Investment
Manager was instructed to forward invoices for approval.
[22] This documentation is consistent with Mr. Marven’s
testimony. He explained that the Investment Managers forwarded the invoices to
GMCL for review and approval, after which GMCL would direct that the pension
fund trust pay these obligations. He explained that the Investment Managers
billed GMCL for their services because the legal agreements for the management
of the funds are between GMCL and the Investment Managers. Mr. Marven described
the payment mechanism as follows:
If we sign off on saying that the cheque is
to be paid, that is part of the issuance of the cheque whether or not we cut
the cheque. I am not sure what distinction you are making. Did we print the
cheque? No, we did not print the cheque. Did we tell Royal Trust to print the
cheque? We did tell Royal Trust to print the cheque. (Transcript p. 60)
[23] When asked why the payments were paid out of the
trust rather than by GMCL directly, he explained that, with GMCL’s size, there
were policies and procedures for everything. As well, on cross-examination the
following exchange occurred:
Q: Why doesn't General Motors take the money
and reduce any operating deficits?
A: We could not, no. No. There are laws
against that.
Q: You really can't deal with the money. That
is, General Motors can't deal with the money in these pension plans other than
for purposes of paying pensions, is that a fair statement?
A: Yes, we cannot.
That money is earmarked for pensions, yes.
(Transcript p. 67)
[24] Mr. Phillips, in examination-in-chief, described
this situation as follows:
Q: Why are these invoices being sent to
General Motors of Canada Limited, when the assets you are managing are sitting
in the unitized trust?
A: General Motors is the client and they are the ones who
paid us to do this. They are paying us. They are the ones that we charge.
(Transcript pp. 229-230)
[25] The third witness was Aaron Wong, the auditor. His
evidence focused primarily on whether or not, in reassessing, he made the
assumption of fact contained at paragraph 5(f) of the Reply.
[26] The Appellant argued
that this assumption of fact was never made by the Minister because Mr. Wong’s
evidence established that the sole basis of the assessment was the Advance Tax
Ruling (Exhibit A-4), which did not address the issue of whether the Investment
Management Services fell within the definition of financial services contained
in paragraphs 123(1)(a) to (m). During Mr. Wong’s testimony, there were
numerous lengthy objections by both Appellant and Respondent counsel. While it
is clear that objections served an essential tool in protecting the client’s
interests during the hearing, they also severely disrupted the flow of the
hearing, consequently hindering the proceedings. I intend to address Mr. Wong’s
testimony in the context of deciding several preliminary matters. My decisions
in those matters are essential to my approach respecting the two issues in this
appeal.
Issues
[27] This appeal raised
two issues:
(1)
Whether
GMCL is entitled to claim input tax credits, pursuant to section 169 of
the Act, in respect to GST paid to Investment Managers for the supply of
Investment Management Services.
(2)
Alternatively,
whether the Investment Management Services are an exempt “financial service” as
defined in subsection 123(1) of the Act such that GMCL is entitled to a
rebate of tax paid in error on those services.
Preliminary Matters
[28] The following two preliminary matters were the subject of much debate
during the hearing:
(1)
The Appellant argues
that the Respondent’s submissions are comprised overwhelmingly of arguments
that are not properly before this Court as they were not pleaded in the Reply.
(2)
The Appellant alleges
that the Minister improperly included assumption 5(f) in the Reply and
should not be permitted to defend the assessment on this basis.
Preliminary Matter #1 – Crown’s Arguments not
Properly Before the Court and Issue # 1 – Is GMCL Entitled to Claim ITCs paid
to Investment Managers?
[29] The general test for ITC entitlement is found in section 169 of the Act.
The relevant parts of this section are:
169. General rule for credits
(1) [General rule for credits]
Subject to this Part, where a person acquires …
property or a service … tax in respect of the supply, … in becomes
payable by the person or is paid by the person without having become
payable, the amount determined by the following formula is an input tax credit
of the person in respect of the property or service for the period:
A x B
where
A is the tax in respect of the supply, …, that becomes
payable by the person during the reporting period or that is paid by the person
during the period without having become payable; and
B is
…
c) … the extent (expressed as a percentage) to which
the person acquired … the property or service …, for
consumption, use or supply in the course of commercial activities of the person.
(emphasis added)
[30] In order for GMCL to be eligible to claim an ITC, pursuant to
subsection 169(1) in respect of GST payable by it on receipt of Investment
Management Services, three conditions must be satisfied:
(1) The claimant
(GMCL) must have acquired the supply (the Investment Management
Services);
(2) The GST must be payable
or was paid by the claimant (GMCL) on the supply (the Investment Management
Services);
(3) The claimant
(GMCL) must have acquired the supply (the Investment Management Services) for consumption
or use in the course of its commercial activity.
[31] The Respondent argued that the Appellant must satisfy all three elements
of this test for ITC entitlement. The Appellant argued that only the third
element of that test is at issue because the Advance Ruling, issued by Canada
Revenue Agency (“CRA”) which denied the Appellant’s claim for an ITC, conceded
that GMCL acquired the Investment Management Services (the first
condition of the test) and that GMCL was liable to pay for these
Services and the applicable GST (the second condition of the test). The relevant
portions of the Ruling stated:
RULING GIVEN
Based on the facts set out above,
we rule that:
…
2. GMCL is not
entitled to claim ITCs with respect to investment management services that is
procured under agreements with investment managers because these services
are acquired by GMCL solely for consumption by the registered pension
trusts resident in Canada …
EXPLANATION
…
… When contracting for the supply
of services to the trusts, prior to April 18, 2000, GMCL as the person
liable under the agreement to pay the consideration for the supply of
investment management services, is the ‘recipient,’ under the terms of the ETA,
of the investment management services…
Section 165 imposes GST/HST on the
‘recipient’ of a ‘taxable supply’. The supplies from the investment managers
to GMCL are taxable supplies and GMCL is liable for the GST/HST relating to
these supplies. Subsection 169(1) sets out the general rule for ITCs.
GMCL is not entitled to claim input tax credits (ITCs) with respect to
investment management services procured by virtue of agreements with investment
managers because, GMCL as the administrator of the GMCL pension plans, has
acquired the investment managers’ services for use otherwise than in the
course of GMCL’s commercial activities… GMCL acquires these services in
order to fulfil its responsibilities under paragraph 22(1)(a) of the Ontario
Pension Benefits Act, which sets out that the administrator of a pension
plan has a fiduciary duty relating to the administration and investment of
the pension fund. For these reasons, it is our view that the services are
acquired by GMCL in its role as administrator of the trusts, solely for
consumption by the trusts … and not for use, consumption or supply by GMCL in
the course of GMCL’s commercial activities. [emphasis added] (Appellant’s
Reply, page 3)
[32] The Appellant summarized its argument at page 4 of the Appellant’s
Reply:
9. The Reply to the Notice
of Appeal put the Crown’s position in this appeal on the same footing as the
assessment – that GMCL is not entitled to the input tax credit solely
because the services were acquired for the consumption or use of the Plan
trusts and not GMCL. This is clear in assumption 5(d) and in the reasons,
paragraph 11.
10. The parties have now
closed their cases and GMCL has filed its written argument to answer the case
that was put to it in the Crown’s reply. It would be completely unfair to allow
the Crown to now put into issue these new matters. Raising these matters at
this stage in an abuse of process of the Court.
[33] In Zelinski v. The Queen, 2002 DTC 1204 (T.C.C.) at paragraph 4,
Bowie J. summarized the purpose of pleadings to be:
The purpose of pleadings is to define the
issues in dispute between the parties for the purposes of production, discovery
and trial. …
[34] In Status‑One Investments Inc. v. The Queen, 2005 DTC 821
(T.C.C.) at paragraph 8, Rip J. as he was then, stated:
Pleadings fulfil several functions. Among
other things, when drafted well, they enable the judge to determine clearly the
matter submitted to him for decision, they enable the defendant (or respondent)
to know what the plaintiff (or appellant) is alleging against him, and they
enable the claimant to know what defences will be raised in answer to his
claim. [FOOTNOTE 2] In addition, pleadings often give their drafters a better
understanding of their case. After an exchange of pleadings, the parties should
know exactly which points are in issue and what proof each of them will have to
make.
[35] In D. Casson’s Odgers on High Court Pleading and Practice, 23rd
ed. (London: Sweet and Maxwell/Stevens, 1991) at pages 123 – 24, the purpose of
pleadings was described as follows:
…The pleadings should always be
conducted so as to evolve some clearly defined issues, that is, some
definite propositions of law or fact, asserted by one party and denied by the
other, but which both agree to be the points which they wish to have decided in
the action.
…
The function of pleadings then is
to ascertain with precision the matters on which the parties differ and the
points on which they agree; and thus to arrive at certain clear issues on which
both parties desire a judicial decision.
[36] Based on my review of the case comments and of the wording contained
in the Reply, I conclude that the Respondent has sufficiently defined the
issues involved in this appeal to allow me to address all three components of
the subsection 169(1) test. Paragraph 6 of the Reply succinctly states that the
Respondent believes the issue to be: whether or not the Appellant can claim
ITCs with respect to GST payable on the Investment Management Services. This is
a broad enough statement to have put the Appellant on notice and to therefore allow
the Respondent to put in issue all three elements of the test under section 169.
I make this conclusion, which is favourable to the Respondent, despite my
rejection of the Respondent’s argument that the Respondent did not know all of
the facts prior to the hearing, particularly in respect to the payment of the
invoices. That is simply not the case. It appears from the evidence that the
Rulings Officer had the same documentation that I have before me.
(1)
The first element of
the subsection 169(1) test for eligibility by GMCL to claim ITCs: Did GMCL acquire
the Investment Management Services?
[37] The Advance Tax Ruling states that GMCL, as administrator of the Plans
and by virtue of agreements with Investment Managers, has “acquired” the
services. Although the language contained in the Ruling is straightforward, I
am not bound by an admission in a failed Ruling.
[38] The Respondent did not address the first element of this test from the
perspective of dealing with the key word “acquires”. Instead, the Respondent
relied on the argument that acts done by GMCL, in acquiring the services, are
deemed by section 267.1 of the Act to be acts of the Plan Trusts, not
acts of GMCL, because GMCL is in essence a trustee of the Plan Trusts. Since section 267.1
recognizes that acts done by a person who represents a trust are really acts of
the trust, then GMCL’s acts on behalf of the trust are, for GST purposes, acts
of the trust. The Respondent defined the issue under this first element of the
test as “whether GMCL should be considered a trustee so that section 267.1 can
apply”. Essentially the Respondent’s argument is that:
(a) subsection 123(1) provides that
a “person” includes a trust;
(b) the trust, not GMCL, acquired the
services;
(c) section 267.1 deems acts of the
trustee to be those of the trust; and
(d) GMCL’s role in
respect to the trust funds is no different than the role that a trustee would
play, except that GMCL’s role is defined by the OPBA and, under that
statute, GMCL is called an administrator instead of a trustee.
[39] Underhill, Law of Trusts and Trustees, 11th ed.,
provides a widely accepted and often quoted definition of a trust:
A trust is an equitable obligation,
binding a person (who is called a trustee) to deal with property over which he
has control (which is called the trust property) for the benefit of persons (or
are called the beneficiaries or cestuis que trust), of whom he may
himself be one, and any one of whom may enforce the obligation.
[40] Black’s Law Dictionary, 8th ed.
(St. Paul, Minn.: West Pub. Co., 2004) defines trust and trustee as:
trust, n. 1. The
right, enforceable solely in equity, to the beneficial enjoyment of property to
which another person holds the legal title; a property interest held by one
person (the trustee) at the request of another (the settler) for
the benefit of a third party (the beneficiary) …
trustee, n. 1. One
who, having legal title to property, holds it in trust for the benefit
of another and owes a fiduciary duty to that beneficiary … (emphasis added)
[41] In section 1 of the OPBA, administrator
is defined as the person or persons that administer the pension plan.
[42] Section 267.1 has no application here. There was
no evidence produced during the hearing that would suggest that GMCL took
title, legal or otherwise, to the assets under the deed of trust. All of the
Agreements reference Royal Trust as the legal title holder. Thus GMCL cannot
fall within the ambit of the definition of trustee. The trust agreements
expressly established Royal Trust as the trustee. Clearly GMCL’s role, in
relation to the trusts, was as an administrator, as defined and contemplated
under the OPBA. It did not include, nor was it intended to include, the
role of trustee in relation to the trusts. For the purposes of section 267.1,
the role of GMCL was that of an administrator to these plans. The roles and
respective duties of GMCL, as administrator, and Royal Trust, as the trustee,
were entirely separate. While GMCL may have exercised some fiduciary duties as
the plan’s administrator, that does not mean that GMCL was a trustee of the
trust. The only trustee of these pension plans can be Royal Trust, the Custodial
Trustee, which, according to the definition of “trustee” and the evidence,
holds legal title. Consequently, it was GMCL that contracted for and acquired
the services of the Investment Managers.
(2)
The second element of
the subsection 169(1) test for eligibility by GMCL to claim ITCs: Was GST “payable”
by GMCL?
[43] The Respondent’s position is that GST was not paid by GMCL because the
actual payment of GST on the services was paid to the Investment Managers out
of the trust funds and GMCL only “approved” payment of the invoices. In
addition, the Respondent argued that, since GMCL was not liable to pay the
consideration, under the various agreements, no GST could be payable by GMCL.
Since section 169 does not expressly contain the word “recipient”, the
Respondent argued that the definition of “recipient” is not relevant to my
determination. Alternatively, the Respondent claimed that GMCL would not be the
recipient as GMCL had no personal liability under the trust agreements.
[44] Again the Ruling presupposed that GMCL was the recipient of the
Investment Management Services.
[45] Under the Act, whether tax will be “payable” by GMCL depends on
whether GMCL was the “recipient” of the services. Subsection 169(1) was amended
in 1997. The phrase “supplied to” was replaced with the term “acquires”. There is an abundance of CRA
administrative policy emphasizing that the determination of the recipient is
essential to an ITC entitlement. There has also been much debate about whether
the term “acquires” imports a new requirement in the Act in respect to
the meaning of recipient.
[46] David Schlesinger described the issue as follows:
While we understand from Finance’s
Technical Notes that the intent may not have been to change the original scope
of the subsection, the word “acquires” was introduced and may be interpreted by
some as to introduce a new requirement. We understand that the CRA agrees that
the “recipient” of a supply is the person that may be able to claim an ITC for
GST/HST paid on the supply. However, based on the meaning given by the CRA to
the word “acquires” and the recent jurisprudence on the meaning of “recipient”,
the recipient of a supply may not necessarily be the person that “acquires” the
supply.
[47] Contrary to an abundance of CRA administrative
policy which appears to state otherwise, the Respondent now contends that the
determination of the “recipient” is not germane to an ITC entitlement, as the
word “recipient” is not found in subsection 169(1).
[48] Subsection 165(1), the charging provision,
provides that a “recipient” of a supply “shall pay tax” with respect to that
supply.
[49] Subsection 123(1) defines recipient as:
“recipient” of a supply
of property or a service means
(a) where
consideration for the supply is payable under an agreement for the supply, the
person who is liable under the agreement to pay that consideration,
(b) where
paragraph (a) does not apply and consideration is payable for the
supply, the person who is liable to pay that consideration, and … (emphasis
added)
[50] It appears that, where a person is the recipient
of the supply, the Act expressly contemplates that GST is payable by
that person.
[51] Subsection 152(1) of the Act places
emphasis on the issuance of an invoice and section 168 provides that:
Tax …
is payable by the recipient on … the day the consideration for the supply
becomes due.
[52] While the amendment to subsection 169(1) in
April 1997 replaced the phrase “supplied to” with the term “acquires”, a
determination as to who is the recipient of the supply remains directly
relevant in dealing with the question “was GST payable by GMCL?” I do not
believe that the 1997 amendment replaced the focus on the central determination
in this appeal of which party is contractually liable to pay GST pursuant to
the Agreements.
[53] This determination is one of both fact and law.
GMCL and the relevant Investment Managers were the parties to all of the Fee Agreements.
According to Mr. Phillips, GMCL, as the client, was solely liable to pay
their accounts. No evidence whatsoever was adduced to suggest that the Plan Trusts
were a party to the Investment Management and Fee Agreements that made GMCL
liable to pay, or that GMCL entered into an Investment Management Agreement as
an agent on behalf of the Plan Trusts. The Fee Agreements, pursuant to which
consideration was calculated with respect to the Investment Management
Agreements, were solely between GMCL and the respective Investment Managers.
The Investment Managers issued invoices, pursuant to the Agreements, solely to
GMCL. GMCL approved the amounts invoiced in accordance with the Fee Agreements and
then instructed the Trust to pay the Investment Managers from the funds it had
placed in the pension plans. This in no way converts or transfers the liability
for payment of the invoices to the trustee.
[54] Contractually, GMCL is the only party that carried
the liability to pay this consideration to the Investment Managers. The
Investment Management and Fee Agreements are definitive on this point. The
Investment Managers invoiced only GMCL. Generally, liability crystallizes upon
the issuance of an invoice. If GMCL did not pay the invoice, the Managers could
sue only GMCL, not the Plan Trust. Only GMCL is liable to pay these invoices.
Since the trust was never vested with responsibility for managing the assets,
it had no requirement for the services of Investment Managers. The Managers can
look only to GMCL for payment. Thus, GMCL is the recipient of the supply of the
services of the Investment Managers and GST was “payable” by GMCL. Under
subsection 169(1), ITCs are available only to the person who “acquires” the
supply if tax is payable by that person. While tax will be payable by the
recipient under subsection 165(1), it does not necessarily follow that the eventual
recipient will always be the person who “acquired” the supply. Subsection
123(1) states that “recipient” will be the person to whom a supply is made.
Therefore in certain circumstances the person who acquired the supply (GMCL)
may not be the person to whom the supply is eventually made (the pension trusts).
GMCL has satisfied this requirement under subsection 169(1) since it is the
only person liable to pay the consideration for the supply of services of the
Investment Managers under the relevant Agreements. Although some of the
financial statements of the Hourly and Salaried Plans suggest that payments are
treated as being made by the trust, these accounting documents are subordinate
to the primary Investment and Fee Agreements and do not alter the contractual
provisions in those Agreements. The pension trusts are not liable to pay for
the services and cannot be the recipient, although the supply of services was
eventually re‑directed to the assets in the trusts. I also believe that
the conclusion reached by Dussault J. in 163410 Canada Inc. v. The Queen, [1998] T.C.J. No. 827, supports my
reasons in this appeal, contrary to the view of both counsel for the Appellant
and the Respondent. In that decision, although the facts were confusing, in
determining that the Appellant was entitled to claim ITCs, Dussault J. focused
on the Agreement which identified the Appellant as the party liable to pay.
Dussault J. determined that regardless of the nature of the ancillary agreement
between Midland and the Appellant respecting the payment of the Appellant’s
legal services and regardless of the fact that Midland was identified
as the supplier’s client, and not the Appellant, it was the Appellant that
remained liable to pay the consideration for the services. This was so, even
though Midland was instructed to pay for the services with the
Appellant’s funds. Following Dussault’s reasoning then, even if the investment
advice had been given directly by the managers to the pension plans (which it
was not), where the fees were invoiced to GMCL, by virtue of the Fee
Agreements, this liability to pay would prevail.
[55] In the course of the proceeding, both Respondent
and Appellant addressed my findings in Bondfield Construction Company (1983) Limited v. The Queen, 2005 TCC 78. In
that decision, I canvassed the former subsection 169(1) as well as the meaning
of recipient, as I am doing in the present appeal. The determination of ITC
entitlement in Bondfield focused on which person was the recipient. I
found it to be the person who was ultimately liable to pay the supply. Bondfield
is certainly distinguishable from the present appeal on the facts and it is not
necessary to review that decision, except to state that my reference to
“ultimately liable” in the Bondfield decision should not be taken to
mean that the definition of recipient requires a determination of the person
who ultimately receives the supply but rather to a determination of the person who
is ultimately liable under the agreements, to pay consideration.
[56] Finally, it
should be noted that the parties to this appeal did not have an opportunity to
address the decision in Y.S.I.’S Yacht Sales
International Ltd. v. The Queen, 2007 TCC 306, which
was rendered subsequent to this hearing. In that decision Justice Woods stated
the following at paragraphs 56 and 57:
[56] … In my view, YSI is the only person that is liable for the
consideration under the agreements with suppliers. Mr. Huntingford testified
that he requested that Platinum
provide a source of funds up front so that he would not have to chase Platinum
when YSI needed money to pay its suppliers. This banking arrangement was
nothing more than a funding mechanism, which is entirely consistent with YSI
purchasing for purpose of a resupply to Platinum.
[57] The
bottom line is this: A person is not a recipient under the Excise Tax Act
unless they are liable to pay the consideration under the agreement. In this case, Platinum was not liable to pay
the consideration under the agreements with suppliers.
[57] It follows from these comments that, although
GMCL re-supplied the investment services to the trusts, and despite a
reimbursement to GMCL by the Trust in the event that GMCL paid these fees
directly, GMCL was still the person liable for payment of the supply of these
services by the Investment Managers, pursuant to the terms of the Agreements
between GMCL and the Managers. The origin of the payment of the fees is
irrelevant because the bottom line, as reiterated by Woods J. in Y.S.I.’S Yacht Sales, is that the person who satisfies the requirement at subsection 169(1),
and who carries the contractual liability to pay, will be the person entitled
to claim ITCs.
(3) The third and final element of the
subsection 169(1) test for eligibility by GMCL to claim ITCs: Did GMCL acquire
the Investment Management Services for Consumption or Use in the course of
its commercial activities?
[58] The Respondent submits that GMCL acquired the Investment Management Services
on behalf of the Trust Funds and not for use in its own commercial activities.
Technical Information Bulletin B-032R, “Registered Pension Plans” (June 8,
1993) provides background in respect to CRA’s position on ITC claims by
employers with employee pension plans. It provides for a separation between
“Employer Expenses” and “Plan Trust Expenses” where “only the employer, and not
the plan trust, is entitled to claim an ITC on Employer Expenses to the extent
they are acquired or imported by the employer for consumption or use in the
course of its commercial activities and the GST on the Employer Expenses is
paid or payable by the employer”.
[59] The GST Headquarters Letters 59990 “Application of the Excise Tax
Act” (June 15, 2006) reflects the Respondent’s position:
…
If a trust is engaged in commercial activities it will be entitled to claim
input tax credits to the extent the property and services are for consumption,
use or supply in the course of commercial activities of the trust and all the
requirements are met in order to claim input tax credits under section 169 of
the ETA. Otherwise, the trust may not claim any input tax credits in respect of
property or services acquired in the administration of the pension plan and
trust.
Where
the employer invoices the trust, and the trust pays the invoice from the trust
assets, the trust is paying the employer to undertake activities in respect of
the plan and trust, and therefore generally the amount is consideration for a
taxable supply made by the employer to the trust. The employer is either
supplying or re-supplying property or services, as the case may be, to the
trust. The only exception to this situation is where the employer is the
administrator of the plan and it has acquired property or services from a third
party (as opposed to supplying property or services itself, e.g. it using its
own employees to provide investment management services to the trust instead of
acquiring the services from a third party for the trust) in its fiduciary
capacity of administrator of, and for the benefit of the plan and trust. Where
the employer acquires a particular property or a service from a third party in
its capacity of administrator and the trust pays for the supply directly, or
indirectly by reimbursing the employer for the amount, and thus the amount is
charged against the trust assets, the property or service is considered to have
been acquired by the employer in its fiduciary capacity of administrator of,
and for the benefit of the plan and trust, and therefore for consumption, use
or supply by the trust. The employer is not considered to have acquired the
property or service for consumption, use or supply in the course of its
commercial activities and is not entitled to an input tax credit in respect of
the tax paid on the consideration for the supply. [emphasis added]
[60] “Commercial Activity” is defined in subsection 123(1) as:
(a) a business carried on by the person
(other than a business carried on without a reasonable expectation of profit by
an individual, a personal trust or a partnership, all of the members of which
are individuals), except to the extent to which the business involves the
making of exempt supplies by the person, (emphasis added)
[61] Although the term “business” is also defined in subsection 123(1), the
Act does not define the phrase “in the course of”. However, the Courts,
in considering this phrase, have given wide latitude to those words emphasizing
“…that only the smallest connection to employment is required to trigger the
operation of the section” (The Queen v. Blanchard, 95 DTC 5479 (F.C.A.).
As well, in reference to deductions for expenses incurred “in the course of
issuing and selling shares”, the Federal Court of Appeal in M.N.R. v.
Yonge-Eglington Building Ltd., 74 DTC 6180, at page 6184 observed that:
… the words … are used in the sense of 'in
connection with' or 'incidental to' or 'arising from' and refer to the process
of carrying out the borrowing for or in connection with which the expenses are
incurred.
[62] A definite nexus exists between the services supplied by the
Investment Managers and the commercial activities of GMCL. However, this alone
is insufficient. The question, therefore, becomes twofold: (1) whether that
particular nexus meets the threshold embodied in the phrase “in the course of”;
and (2) whether GMCL used or consumed the services of the Investment Managers
in the course of its commercial activities. My answer to both of these queries
is in the affirmative.
[63] The various Plan Agreements, the statutory provisions under the OPBA
and the responsibilities that GMCL had to its employees, all support my
conclusion that GMCL used the services in the course of its commercial
activities.
[64] All of the documentary evidence clearly establishes that the Custodial
Trustee took bare legal title to the Plan assets. GMCL is the only person,
according to the oral and documentary evidence, that bears any responsibility
whatsoever for the financial well-being of the Plan assets and the only person
that can use the services of the Investment Managers. The Custodial Trustee
certainly had no authority, contractual or statutory, to contract these same
services. The transfer of legal title of the assets to the Custodial Trustee in
no way diminishes the responsibility of GMCL to its employees to manage these
assets prudently. How could this be otherwise when the Master Trust Agreements
contain explicit provisions that Royal Trust is not accountable for the proper
investment of the trust assets and consequently has no liability for loss
resulting from the investment decisions of the Investment Managers. According
to the Agreements, it was the Investment Managers who had the authority to
manage the Plan assets. The Respondent’s argument that the services are
consumed or used by the Custodial Trustee is simply untenable because the
Trustee bears no liability for the success or loss that could be associated with
the investments. This was clearly the evidence of Mr. Marven who explained
that under a defined-benefit plan, GMCL is at the top of the hierarchy or the
Plan’s “backstop”. In other words, the buck stopped there. Funding pension plan
financial shortfalls was GMCL’s problem. Since GMCL is the only person
responsible for the assets, it is the only person who could use or consume the
services of the Investment Managers. The Custodial Trustee could not
contractually use these services, which the Investment Managers legally
supplied to GMCL “in relation to the Trust Assets”. I do not accept that
because assets are held in a pension trust, which is artificially deemed to be
a person under subsection 267.1(5), that it is fatal to the claim by GMCL for ITCs.
To do so, would be to ignore the contractual and statutory obligations of all
parties, GMCL, the Custodial Trustee, and the Investment Managers.
[65] The responsibility of GMCL to properly manage the Pension Plan assets
is not only derived through the Agreements but also through its duties as an
Administrator under the OPBA and its duties to provide pension benefits
to its employees.
[66] Pursuant to the OPBA, GMCL, the employer acting as a plan
administrator of pension assets, assumes various fiduciary responsibilities in
connection with the Plan’s administration and management. Non-compliance by
GMCL under the OPBA equates to non-compliance with the law. Under the OPBA,
liability for the successful management of the pension assets rests squarely
with the Plan’s Administrator, GMCL. GMCL is also the employer under the Plans
and consequently liable for funding deficiencies in addition to successful
management performance. To limit liability, GMCL contracts for the expertise of
the Investment Managers.
[67] In addition to these contractual and statutory obligations, GMCL has
agreed to provide, maintain and administer a compensation package, not only as
one of the terms of employment extended to its employees, but as a vehicle for
attracting and keeping the most qualified individuals within its organization.
Without a profitable pension plan, GMCL’s capacity to successfully compete in
the market is substantially diminished. While the expenses associated with the
administration of these pension assets may be viewed as being only indirectly
related to the manufacture of vehicles, they are nonetheless an integral
component to the overall success of GMCL’s commercial activities in the market
place. According to Mr. Marven’s evidence, he likened the provision of a
pension plan to other forms of employee compensation such as the provision of
health care benefits. The only logical, common sense conclusion is that all of
the functions of GMCL, in relation to these pension assets, are for the sole
benefit of its employees, both the salaried and hourly employees and, consequently,
they are an essential component to GMCL’s business activities. Therefore, GMCL
acquired the services of the Investment Managers for use in its commercial
activities. As such, while GMCL does not directly utilize the services in
making GST supplies in its operations, those services are part of its inputs
toward its employee compensation program, which is a necessary adjunct of its
infrastructure to making taxable sales. The expenses are not personal in
nature. They are ancillary to the primary business activities of GMCL and meet
the need of attracting and maintaining an adequate employee base to support its
primary business operations. Therefore these expenses, although indirect
expenses to GMCL’s business, qualify as expenses paid for in the consumption or
use in the course of the commercial activities of GMCL. Subsection 169(1) does
not require that managing a pension plan be the sole commercial activity
of a person, only that the supply be consumed or used “in the course of
commercial activities”. To divorce the services of the Investment Managers from
the commercial activities of GMCL, in the manner that the Respondent would have
me do, ignores not only the contractual and statutory obligations of GMCL but
also the commercial realities of a competitive marketplace.
[68] On a final note, both parties addressed the principles in several
United Kingdom Valued Added Tax (“VAT”) cases, which have allowed an employer
to claim ITCs on investment management fees on the basis that where an employer
is responsible for the trust asset management, those expenses are part of the
business activities. Although I feel no need to place reliance upon these
decisions to support my conclusions, and although they do address substantially
similar issues, the statutory scheme in the United Kingdom differs from the Excise Tax Act in that the U.K. legislation does not deem trusts to be a separate
person from the trustee.
[69] Although my conclusions with regard to the first issue effectively
dispense with this appeal, I intend to address the second preliminary matter
and issue, for the sake of thoroughness, and because a substantial portion of
the hearing, together with most of Mr. Wong’s evidence, was devoted to these
matters.
Preliminary Matter #2 – Improper Pleading of
Assumption 5(f);
and Issue # 2 – Are the Investment Management
Services an Exempt Financial Service?
[70] Paragraph 5(f) of the Reply states:
5. In
assessing the Appellant to deny the input tax credits claimed by the Appellant,
as pleaded in paragraph 10 of the Notice of Appeal, the Minister of National
Revenue (the “Minister”) relied on, inter alia, the following
assumptions or findings of fact:
….
(f)
the investment management services were not a service listed in paragraphs (a)
to (m) of the definition of a financial service under the Act; …
[71] This is not the first time I have considered
this assumption of fact. In a pre‑hearing Motion, the Appellant requested
the Court to either instruct the auditor, Aaron Wong, to answer questions posed
to him during the examination for discovery concerning paragraph 5(f) or to
strike paragraph 5(f). Although I concluded that it would be premature to
strike the paragraph, I ruled that those questions posed to Mr. Wong by
Appellant counsel had been properly put to him and that the examination for
discovery should be continued to give Mr. Wong an opportunity to respond. I
also concluded that Respondent counsel’s objections were inappropriate and
amounted to interference by counselling and cuing the witness to give
essentially the same response of “the services are taxable” to all of those
questions.
[72] It was the Appellant that called Mr. Wong as a
witness. It is clear from his evidence that the voluntary disclosure provided
by GMCL to CRA was the sole basis of the initial assessment. However, this
disclosure made no reference to whether the supply of Investment Management Services
was a financial service as referenced in paragraph 5(f) of the Reply. Instead
it dealt only with the subsection 169(1) issue. In response to questioning
by both Appellant and Respondent counsel, it is evident that Mr. Wong never
considered or addressed in any manner whether these services were exempt
financial services under the Act. His repeated parroting of the response
that “the services were taxable” was entirely non-responsive. It comes nowhere
close to a consideration of whether those Investment Management Services fell
within each of the paragraphs (a) through (m) of subsection 123(1) of the Act.
It was apparent that Appellant counsel was frustrated with this response, and
with good reason, particularly given my directions subsequent to the hearing of
the Motion. What is conspicuously offensive here is the approach which Respondent
counsel took with this issue. After hearing the Motion, I concluded that
counsel’s actions were tantamount to cuing and coaching Mr. Wong to state
that “the services were taxable”. Mr. Wong was true to this response and kept
to his script during the hearing of the appeal.
[73] Respondent counsel argued that the Appellant’s
position of the Respondent improperly pleading paragraph 5(f) in the Reply, is
both “irrelevant and wrong” (Respondent’s Written Submissions, p. 21). I am
quite frankly shocked by the Respondent’s position. Essentially the position of
the Respondent was that since sufficient evidence was adduced during the
hearing, issues of assumptions and burden of proof became merely academic.
While this, on its face, is true, it cannot transform the Crown’s actions,
which I consider to be intrinsically appalling, into something that is right
and therefore acceptable.
[74] Respondent counsel argued that the
cross-examination of Mr. Phillips elicited sufficient facts pertaining to the
specifics of the Investment Management Services to enable the Court to
determine whether those services are a financial service as contemplated by
subsection 123(1). While this may be true, it does not assist the Respondent in
defending its position that in fact this assumption was made.
[75] In reviewing the transcripts, I believe I have
sufficient testimony together with documentary evidence to make a determination
on whether the supply was a financial service. However, this line of reasoning
does not negate the fact that the Crown was wrong in pleading assumption 5(f)
in the first place which became more blatantly evident after the Motion and the
continuation of the examination for discovery.
[76] Respondent counsel also relied on a quote of
Justice Bowman, as he was then, from Cadillac Fairview Corporation Limited
v. The Queen, 97 DTC 405 (TCC) at page 407:
… An inordinate amount of time is
wasted in income tax appeals on questions of onus of proof and on chasing the
will-o’-the-wisp of what the Minister may or may not have “assumed”. …
In that case, the Court was dealing with
an argument by the taxpayer that the Crown could not rely on something that had
not been pleaded in an assumption. Justice Bowman was simply stating that if
all material facts have been adduced in evidence, the Court must dispose of the
appeal on its merits without regard to the Minister’s assumptions. Respondent
counsel, in relying on this quote, has taken it out of context because I do not
believe that this quote can or should be used to support the position that the
Minister can plead any assumptions in the Reply whether or not they were
actually made.
[77] Since the decision in Cadillac Fairview,
both Chief Justice Bowman and Associate Chief Justice Rip have been abundantly
clear in their judgments that it is improper to plead assumptions that were
never made. In Holm et al. v. The Queen, 2003 DTC 755 (TCC), at
paragraph 18, Justice Bowman stated:
It is undeniable that
there is a strongly held view in this court that to plead as assumptions facts
that were not assumed on assessing is improper and reprehensible. Also, it seems the
practice is widespread. In an appropriate case I would have no hesitation in
allowing an appeal, striking out a reply or awarding costs on a solicitor and
client basis either against the respondent or, in a flagrant case, against a
counsel who drafted a misleading reply. … (emphasis added)
[78] In Anchor Pointe Energy Limited v. The Queen,
2002 DTC 2071 (TCC), at paragraph 26, Justice Rip stated the following with
respect to the Crown’s inaccurate allegations regarding the Minister’s
assumptions:
The Crown has a serious obligation
to set out honestly and fully the actual assumptions upon which the Minister
acted in making the assessment, whether they support the assessment or not.
Pleading that the Minister assumed facts that he could not possibly have
assumed is not a fulfilment of that obligation. …
[79] In confirming the decision of Justice Rip, the
Federal Court of Appeal (2003 DTC 5512 (FCA) at paragraph 23) stated the
following:
The pleading of assumptions gives
the Crown the powerful tool of shifting the onus to the taxpayer to demolish
the Minister’s assumptions. The facts pleaded as assumptions must be precise
and accurate so that the taxpayer knows exactly the case it has to meet.
There is no reason why the requirement for precision and accuracy does not
apply to the Crown accurately stating the circumstances in which the
assumptions arose, that is, on an assessment, reassessment or confirmation. …
(emphasis added)
[80] The most recent Anchor Pointe decision
(2007 FCA 188) again reiterates the importance of pleading assumptions honestly
and accurately.
[81] Respondent counsel also argued that paragraph
5(f) of the Reply was “implicitly assumed” by Mr. Wong when the assessment was
made. The Respondent’s position is that when the Appellant made the request to
CRA for a ruling on input tax credits, an assumption, that the services were
taxable supplies, implicitly attached to the request. Paragraph 47(d) of the
Respondent’s Written Admissions states:
(d) The Appellant is wrong to
assert that the Minister made no assumption with respect to the tax status of
the investment management services. Implicit in the Appellant’s filing position
was the assertion that the services were taxable; the Minister’s assumption can
hardly be less well established than the filing position of the Appellant from
which it is derived.
[82] This is an interesting argument. In Exhibit A-4
at page 7, the Ruling states that “The supplies from the investment managers to
GMCL are taxable supplies …”. A taxable supply is defined in section 123
to mean a supply that is made in the course of a commercial activity. In
section 123 “commercial activity” of a person means (a) a business carried on
by the person … except to the extent to which the business involves the making
of exempt supplies by the person.” In section 123 “exempt supply” means a
supply included in Schedule V. Schedule V, Part VII, s.1 states “A supply of a
financial service that is not included in Part IX of Schedule VI”. “Financial
Service” is defined according to paragraphs (a) through (m) of
section 123. Therefore a finding that a supply is a taxable supply, by
extension, means, according to the Respondent’s argument, that the supply is
considered not to be a financial service. I think this reasoning is weak but it
could provide some foundation for the Respondent to argue that the nature of
the supply was considered prior to the assessment being raised. The question is
whether this procedurally implicit assumption may be sufficient to support
assumption 5(f) in the Reply. The Respondent could have called the CRA official
responsible for the Ruling, which might have assisted with this position, but
they did not and I reject this argument as it is insufficient to support the
inclusion of assumption 5(f) in the Reply.
[83] Paragraph 5(f) of the Reply explicitly refers to
the various sub-provisions of the definition of financial services. This
undoubtedly gives the impression that the Minister had put his mind to the
various components of the definition, going through each and every
subparagraph, before finally concluding that the service in question did not
fall under each individual subcomponent of that definition. Although Mr. Wong’s
testimony for the most part was simply of no assistance, he did admit that he
did not review each of the paragraphs (a) through (m) of subsection 123(1) and
therefore did not consider whether the Investment Management Services fit under
any of them. At page 113 of the Transcript, the following exchange occurred
between Appellant counsel and Mr. Wong:
Q: … I am putting to you did not
ask yourself that question. I want you to answer the precise question I am
asking. Not that you thought it was taxable. I know you thought it was taxable.
That is not what the assumption says. The assumption doesn’t say it is taxable.
The assumption speaks specifically as to whether it is a financial service
under (a) to (m). You did not ask yourself that question, did you, sir?
A: No.
Q: Your answer was no, I think?
A: No.
Q: In fact, sir, you did not open
the sections, the definition in 123, and say to yourself, what is the
investment management service and then ask yourself does it fit in (a)? What is
the investment management service, does it fit into (b)? You didn’t do that
because your audit was only about the input tax credit. Would you agree with
me, sir?
A: Yes.
[84] I believe that my directions were very clear in
the Order issued in the pre‑hearing Motion and as a result the Respondent
should have been on notice of the impugned assumption.
[85] At the subsequent examination of Mr. Wong, it
should also have been abundantly clear to Respondent counsel, if it was not
previously, that Mr. Wong never considered in any manner the financial service
issue. The proper next step was to amend the Reply to delete this assumption of
fact. This step was not taken and I consider this to be a very serious matter.
[86] The Respondent cannot be permitted to trivialize
the inclusion of assumption 5(f) in its pleadings and I am not persuaded by any
of its arguments. There were ample warning signs along the way. They were all
ignored. The fact that there is sufficient evidence before me to make a factual
determination of the issue does not negate the Respondent’s duty to honestly
plead assumptions at the outset or to amend the pleadings once it becomes
abundantly clear that an assumption had not been made. Assumptions relied upon
in pleadings must be stated fairly, honestly and accurately. That was not done
here.
[87] So what is the appropriate remedy where the
Minister improperly pleads an assumption of fact, but where there is sufficient
evidence before the Court to make a determination of the issue? Appellant
counsel argued that the Respondent ought to be prevented from defending the
assessment based on the argument that the investment services were not
financial services as contemplated by paragraphs 123(1)(a) to (m).
Although I agree with Appellant counsel that the breach here is flagrant, I do
not agree or support one of Mr. Meghji’s arguments on this point. His position
was that the breach in this appeal is all the more serious because “the within
appeal is a serious, general procedure case” (paragraph 27(i), page 10 of Appellant’s
Reply) as opposed to the informal cases, which contain many of this Court’s
pronouncements to the Crown respecting this very issue. Of course this view
implies that in some way this type of approach may be more acceptable in the
informal cases because it would be a less serious breach. I take strong
exception to that position. The duty which is upon the Crown to honestly plead
assumptions is no less important in the informal procedure than in the general
and in fact may be far more important because of the detrimental effect it may
have on a taxpayer that is often self-represented. At paragraph 19 of Holm,
Bowman J. (as he was then) states:
The practice is reprehensible
whenever it occurs but it is particularly pernicious in informal procedure
cases where the taxpayer is often self-represented. …
[88] Although this may be a case akin to what Justice
Bowman in Holm described as “flagrant and reprehensible behaviour”, I
believe that I can and should address this issue pleaded in the alternative, based
on the evidence adduced through Mr. Phillips, and that I can best deal with the
seriousness of the Respondent’s actions and the attempt to trivialize this
issue through an award of elevated costs. The Appellant cannot claim to be
completely unaware of this potential argument because the wording of paragraph
9 of the Reply under the heading “Grounds Relied and Relief Sought” clearly
references paragraphs (a) to (m) of subsection 123(1):
The investment management services
are not included in any of paragraphs (a) to (m) of the definition of the term
“financial service” in subsection 123(1) of the Act and hence are not an exempt
supply for purposes of the Act.
In addition, in the Notice of Appeal, the
Appellant submits that the services provided by the Investment Managers were
GST exempt financial services, as defined in subsection 123(1).
[89] The Appellant’s
position is that Investment Management Services, although not specifically
referenced in paragraphs (a) to (m), may be included under paragraphs (a), (d)
and (l) when the nature of the services are considered. The evidence of Mr.
Phillips and the documentary evidence potentially support the finding that the
provision of Investment Management Services involves the provision of financial
services. The Appellant likened this to brokerage and investment banking
services which are not specifically itemized in paragraphs (a) to (m) but which
include the provision of financial services. The Appellant argues that these
services involve the transfer of ownership of financial instruments, the
transfer or receipt of money and the arrangement for or provision of such
services. Relying on Mr. Phillips’ evidence, the Appellant contends that the
services of the Investment Managers were comprised of the essential components
of buying and selling of securities. As such, the services of the Investment
Managers fall within the definition of subsection 123(1) so that they remain
GST exempt supplies, and further, they do not fall within the exclusions paragraph
(p) or (q) of subsection 123(1). Therefore GST has been paid in error.
[90] The Respondent’s
position is that the supply was investment management expertise to the trusts
and that this element was the dominant element of the supply. The Respondent
argued that a brokerage firm could, and in fact did, execute trade orders
subject to the expertise and knowledge of the Investment Managers. Since the
services do not fall within any of the paragraphs (a) to (m) of the definition
of financial services, there is no need to consider the exclusions in
subsection 123(1).
[91] The Appellant’s position places great reliance
on the decision in The College of Applied Arts & Technology Pension Plan v. The Queen (“CAAT”), 2003 GSTC 143. The narrow issue
discussed in CAAT was whether the Appellant’s principal activity was the
investing of funds as required by paragraph (q) of the definition of
“financial service”. Bowie J. stated at the end of paragraph 9 that:
… In my view, the measure of
“principal activity” must be the importance of the activity to the achievement
of the organization’s goals or purposes.
[92] Bowie J. concluded that the investment function
was not the principal activity of the plan trusts. The Appellant contended that
CAAT decided that the services of discretionary investment managers were
financial services within paragraphs (a) to (m) of the definition and that this
finding remains unaltered by the legislative amendment to paragraph (q) on July
29, 1998. However, I disagree with the Appellant’s view of CAAT because
the decision did not deal with paragraphs (a) to (m). There was no argument
before the Court respecting these paragraphs as reliance on those paragraphs had
been withdrawn after discoveries. Another distinguishing point was that the
Appellant in CAAT was the trust plan itself, not the plan administrator
as in the present appeal; therefore, it is GMCL’s principal activity which
would warrant analysis under paragraph (q), since the supply was provided to
that “corporation”, and not to the investment plan. Finally, it is important to
note that CAAT was decided based upon former versions of paragraph (q).
Neither of these former versions made reference, as the present version does,
to an “investment plan” as defined in subsection 149(5). Although the facts are
similar to those in this appeal, the applicability of CAAT to this
appeal is diminished to a great extent by these factors.
[93] While the
purchase and sale of securities is a necessary component to the provision of
the services, in actual fact, it was not the Investment Managers who were
completing the actual buying and selling. It was brokers or traders. Although Mr. Phillips
testified that managing the assets meant making decisions and then going on to
buy and sell the securities, it was Mr. Phillips’ own evidence that he issued
buy/sell orders to brokers to complete the financial transactions. Royal Trust,
which always held the money, then proceeded to review the orders, and provide
funds to the broker to do the deal. According to the Investment Management Agreements,
the Investment Managers had the authority to buy and sell securities but they never
engaged in the actual buying and selling. On cross‑examination, Mr.
Phillips stated that Perigee did not purchase or sell securities but forwarded
buy/sell orders to Royal Trust and the brokers. Although these documents give
the Investment Managers this discretionary authority, according to the
uncontradicted evidence of Mr. Phillips, it was not exercised to that
degree. The brokers were directed to perform the acquisition/sale after the
decision‑making by the Investment Managers. How could it have been
otherwise since Royal Trust exclusively maintained control of the funds.
Brokers’ claims could only be settled by the Trustee. At page 270 of the
Transcript Mr. Phillips states:
A. … We have expertise and that is what the clients are
paying us for.
Q. They are paying you for that expertise?
A. They are paying us to beat the benchmark.
And at pages
281-83, he goes on to state:
Q. Did
Royal Trust hold all of this money as the trustee that you described, this
billion dollars?
A. They
are the trustee for the fund.
Q. They would hold it, actually?
A. Yes. They have a fiduciary responsibility. They
wouldn't release funds. Basically, they are told by General Motors officially
by letter, by written consent, that Perigee Investment Counsel are managing the
funds. They should allow for all buy and sell tickets that are sent to them,
that they should settle all the trades.
…
The thing I also always liked the best
about the trustee is we never physically touch the money. There is no way I
could ever have called up and say, "Send $10 million over to my
account," or "Send us money over." Everything had to be done
through GM. The trustee holds on to the money. The money moves between
General Motors and the trustee or between the trustee and the brokers who are
settling the trades that we have done. (emphasis added)
[94] In Appellant counsel’s submissions, he summarized Mr. Phillips’
evidence as:
I do all the smart thinking and
then I do the trade. That is how I deliver results. However the service
provided to GMCL is primarily for the “smart thinking” of Mr. Phillips together
with the arranging for the trade. However, the fee charged is for the “smart
thinking” and not the actual trade. As Mr. Phillips explained on
cross-examination, the brokers were contacted to do the trade and they received
a commission for completing the trade. (emphasis added) (Transcript p. 293)
[95] The Appellant submitted that the value provided through knowledge and
expertise could not change the essential nature of the supply provided.
The Appellant relied on an analogy of the supply of a 99¢ McDonald’s hamburger
to the $40.00 hamburger at an exclusive restaurant, where they have value differentials
but their character remains the same. The supplies are distinguished as the
$40.00 hamburger represents a supply of expertise and skill which accounts for
the higher price. Applied to the facts here, and according to the Appellant, GMCL’s
purchase of financial services was in respect to the purchase and sale of
securities but only in respect to the high‑end variety. This argument is
misleading because GMCL is not paying for the acquisition/sale of higher‑end
securities but for portfolio management that would maximize returns. As
Mr. Phillips testified, the Investment Managers were paid to “beat the
benchmark”.
[96] The Appellant argued that the services provided are exempt financial
services based on paragraphs (a), (d) and (l) of subsection 123(1). A review of
many of the cases respecting financial services discloses that financial
services tend to be characterized as transactional in nature (for example
cheque writing, tracking payments). Drug Trading Co. v. R., [2001] G.S.T.C. 48 (T.C.C.); Elgin Mills Leslie Holdings Ltd. v.
Canada, [2000] G.S.T.C. 8 (T.C.C.); Collins v. R., [2002] G.S.T.C.
66 (T.C.C.); Locator of Missing Heirs Inc. v. Canada, [1995] G.S.T.C. 63
(T.C.C.), aff’d. [1997] G.S.T.C. 16 (F.C.A.). In this last case quoted, the
Court found that the transfer of property was incidental to the research
involved in locating missing persons. As a result, this was characterized as a
single supply that did not fall within the definition of financial services.
[97] In the recent decision in Banque Canadienne Impériale de Commerce
v. The Queen, 2006 TCC 336, although Justice Angers found some overlap
between the elements of the services of debt collection and the broad
definition of financial services, he nevertheless concluded that the service
did not fall under the definition of financial services and was taxable because
the “dominant element” of the supply by the collection agencies was the
provision of the services of debt collection. Also in O.A. Brown Ltd. v. The
Queen, [1995] G.S.T.C. 40 (T.C.C.), where other expenses were incurred in
the purchase and supply of livestock that could have been a taxable supply, the
Court held that the separate expenses were so interconnected to the purchase
service and so integral to the entire service that it was one composite
service. The reasons in O.A. Brown for this single supply theory were
approved by the Court of Appeal in Hidden Valley
Golf Resort Assn. v. R.,
[2000] G.S.T.C. 42.
[98] In Royal Bank of Canada v. R., 2007 FCA 72, [2007] G.S.T.C. 18, 2007 G.T.C.
1554, the FCA recently determined that the actual selling of financial
instruments on behalf of another party, did constitute a financial service and
went beyond mere advice. The FCA agreed with the Tax Court judge’s finding that
the selling of these securities was the dominant element of the supply
provided:
9 In essence, the Judge concluded
that the services provided by the Appellant consisted in the distribution or
arranging for the distribution of Units of the mutual funds. …
12 The services provided by the
Appellant were much more than clerical in nature and advice. It was agreed by
the parties that the services should be treated as a single supply of services
and not be broken down. It is obvious that the dominant and, we would say essential,
characteristic of this supply of services by personnel duly licensed in
conformity with the regulatory scheme was the selling of securities on behalf
of RMFI, i.e. the distribution of the units of the Funds.
The Investment Managers in the appeal before me do not sell or buy. They
merely provide buy/sell orders, which are decisions by the Investment Managers
which the Trustee may or may not abide by. As per Mr. Philips’ testimony at
page 282, Royal Trust, in fulfilling its fiduciary responsibility toward the
Pension Plans and after receiving instructions to provide funds to brokers for
a security transaction, could: "call General Motors of Canada and say:
Did you know that
Perigee Investment Counsel is buying this weird bank that we have never heard of?
Is that ok with you? Should we settle this?"
[99] In reviewing the facts, at paragraph 16 of my reasons, I quoted a
portion of the Preamble to one of the Investment Management Agreements. In that
Preamble it clearly states that the Investment Managers are to “provide
investment advice and other related administrative services”. At paragraph 4 of
that Agreement, it states:
Powers of Investment
Manager. The Investment Manager shall have the following powers … Such powers
shall be exercised by providing written or electronic direction to Royal Trust,
provided that the purchase or sale of securities may be effectuated by direct
communication between the Investment Manager and the broker handling the transaction … (Exhibit A-3, Tab 33)
(emphasis added)
An entire paragraph in this Agreement is devoted to the brokerage aspect.
At paragraph 10 it states:
Brokerage. The Investment
Manager will endeavour to secure the best available execution and terms
of brokerage transactions for the Unitized Trust Fund with due regard to
the quality of research and other services provided by the broker to the
Investment Manager on behalf of the Unitized Trust Fund. Except as otherwise
specifically directed by GM Canada, the Investment Manager shall have complete discretion
to select any broker or dealer to effect securities transactions under the
Investment Account, provided that if the Investment Manager or an affiliate
is selected to effect such transactions, GM Canada must approve any such
arrangement in accordance with a separate agreement. Prior to the execution of
such separate agreement, the Investment Manager shall have furnished GM
Canada with a description of its brokerage placement practices and shall have
disclosed any and all “soft dollar” or other directed commission arrangements.
(Exhibit
A-3, Tab 33) (emphasis added)
It is clear that GMCL contemplates that certain services will be supplied
by the brokers and that a certain level of competency is anticipated. The
Investment Manager has discretion to select the best broker but it is the
broker that will be “handling” and effecting the transaction. It is interesting
that this paragraph contemplates a situation where the Investment Managers
might be “effecting” such transactions themselves, as per paragraph 4 which gives
them that inherent power. However, in this instance, GMCL must approve such an
arrangement by way of a separate agreement. If this had occurred it may well
have been that the Investment Managers were “arranging for” the transfer of
securities in some instances. But the evidence does not support that this ever
occurred. The Investment Managers were clearly employed to apply their
knowledge, skill and expertise in picking the securities. This is the value of
the Managers to GMCL – the “smart thinking” as Appellant counsel characterized
it. If they exercised the inherent power to arrange for the completion of a
transaction, whatever that entailed, GMCL thought it significant enough and
sufficiently separate an activity to impose its approval according to the terms
of another agreement. This is another example of Mr. Phillips’ evidence that
“everything had to be done through GM”. In fact according to the evidence, the
brokers dealt directly with GMCL in respect to their commissions. The
Investment Managers did not complete the buying and selling. Once they applied
their expertise and made the calls to Royal Trust and the broker, the deal came
together as a result of the activities that flowed between these two latter entities,
which completed the arranging for the purchase/sale of the security for GMCL.
The evidence additionally provided that GMCL insisted that any changes in the
relevant personnel with the Investment Managers, which might alter “the nature
of the firm” be brought to its attention (Transcript p. 285). The evidence as a
whole points conclusively to the fact that the Investment Managers, in reality,
did not exercise exclusive authority over the investment choices, and did not
possess access to the funds to permit the “arranging for” transfers of
financial instruments. Given that no less than two additional parties, the
Trustee and GMCL, could veto the execution of the buy/sell orders, and the fact
that the Investment Managers did not have access to the funds, support my
determination, on a balance of probabilities, that the Investment Managers did
not possess the authority nor the means to “arrange for” the transfer of
financial instruments for GMCL. The English and French versions of paragraph
(l) read as follows:
(l) the agreeing
to provide, or the arranging for, a service referred to in any of paragraphs
(a) to (i), or
l) le fait de
consentir à effectuer un service visé à l’un des alinéas a) à i) ou de prendre
les mesures en vue de l’effectuer;
The
French version refers to taking measures to effectuate one of the services
outlined in paragraphs (a) to (i). Neither version causes divergence or
ambiguity in the interpretation of this paragraph.
[100] I therefore cannot conclude that the services supplied by the Investment
Managers fall within paragraphs (a), (d) and (l) or for that matter within any
of the remaining paragraphs of subsection 123(1). Based on the evidence, the
Investment Managers are not providing any of these items listed in paragraph (a)
or (d). The role of the Investment Managers was clearly and precisely described
by Mr. Phillips. The “arranging for a service” aspect was confined to a
call to a broker to complete the trade and, according to his evidence, the
Investment Managers never physically touched the money because it moved between
GMCL and the trustee or between the trustee and the brokers.
[101] GMCL was paying for the highly developed skill, knowledge and expertise
of the Investment Managers as GMCL did not possess that itself. This is the
primary dominant element of the supply of the services of the managers. The
balance of the necessary infrastructure for the transfer of Plan assets, as it
occurred in the facts of this appeal, was provided for by GMCL, the Plans’
Trustee and the brokers. Mr. Phillips testified at length respecting his
expertise in the market. The application of this expertise resulted in the
decision for the acquisition/sale of the security. That decision was
communicated to a broker who acted on those instructions and conducted the
necessary arrangements to complete the transaction. When that decision is
communicated to the broker, the Investment Manager is no longer involved,
directly or indirectly, in the purchase/sale of the financial instruments. The
actual acquisition/sale is connected, but connected in such a way to be merely
ancillary to the primary service provided, that is, the use of the knowledge
and expertise of the Investment Managers to determine which trade to complete.
Although there appears to be some overlapping between the subordinate component
of the service and the broad definition of financial service, the essential
element for which the service is employed, the supply of knowledge and
expertise, does not fall within any of the paragraphs (a) to (m) and therefore
it is not a financial service within subsection 123(1). The supply is merely
one of knowledge and expertise in investment choices and portfolio management, and
therefore is not one which is captured by subsection 123(1).
[102] Based on my conclusion, I need not consider whether the services are
excluded from the definition by virtue of paragraph (p) or (q), because the
supply must first fall within paragraphs (a) to (m) before those exclusions
will be considered. At any rate, the intent of the legislator is very clear in
this section of the Act, paragraph (p) clearly excludes advice, (which
includes the provision of skill and expertise or “smart thinking”), from the
definition of a financial service.
[103] In conclusion, GMCL will be entitled to claim ITCs in respect to the provision
of the Investment Management Services.
[104] The parties shall have thirty days from the date of this judgment to
provide the Court with written submissions respecting a disposition on the
issue of costs.
Signed at Ottawa, Canada, this 22nd
day of February 2008.
Campbell J.
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