Citation: 2006TCC339
Date: 20060614
Dockets: 2005-1573(GST)G
2005‑1584(GST)G
BETWEEN:
CORPORATION DES LOISIRS DE NEUFCHÂTEL, SECTEUR OUEST
and
LOISIRS LEBOURGNEUF INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] These appeals were heard on common
evidence. Both cases involve an assessment under the Excise Tax Act
("the Act") for the period from January 1, 2000, to December 31,
2003.
[2] The issue is
whether the sums of money that the Ville de Québec ("the City") paid to the appellants in
connection with the "Programme Vacances Été Terrains de Jeux" ("summer
vacation playgrounds program") ("PVE") were paid in consideration
of a taxable supply.
[3] The following is
the appellants' position as set out in paragraph 24 of the Notice of
Appeal:
[translation]
24. The
appellant submits that it did not make any "supply" to the City.
In other words, the Grant paid by the City is not consideration paid under a
management services contract with respect to the PVE.
[4] The respondent's
position as stated in paragraphs 34 to 36 of the Reply to the Notice of Appeal
is as follows:
[translation]
34 - He submits that the amounts that the
City paid to the appellant constituted consideration for the supply of a
service, namely, organizing and implementing PVEs for the City.
35 - He submits that there is a direct link
between the payments to the appellant and the supply of services to the City,
and consequently the payments are the consideration for the supply.
36 - He submits that the supply was for the
benefit of the City and that the payments were related exclusively to the
supply and had no public purpose.
[5] The penalties assessed
were not debated in court and are not mentioned in the Notice of Appeal.
[6] Sylvie Althot, president of Loisirs
Neufchâtel ("LN"), explained that her organization worked with
neighbourhood residents, offering courses as well as recreational and community
activities.
[7] LN, which has been operating under its
current name since April 1990, was created under a different name in April
1975. Its purposes are as follows:
[translation]
1. To bring
interested persons, especially parents, together to promote healthy use of
leisure time.
2. To organize a
variety of leisure activities for children, teens and adults.
3. To promote
healthy use of leisure time by all useful and appropriate means.
[8] The agreements in
question between the City and LN were produced at Tab 12 of Exhibit A‑1
and Tab 2 of Exhibit I‑1.
[9] Article 1 pertains
to the purpose of the agreement. It states that the organization undertakes to
provide programming and activity leadership to the City's complete satisfaction
at the places and times set out in the agreement.
[10] Article 2 is headed [translation] "General
obligations". It provides that, each week, the organization shall offer no
less than the minimum number of hours of operation set out in the various operation
and intervention specifications. It specifies that the sums allocated to
programming are estimates and may be increased or decreased depending on the
actual number of City residents who participate.
[11] Article 3 sets out the [translation] "Specific
obligations". It describes the clientele, specifies the duration of the
program, and deals with registration, staff recruitment, enrolment fees, and
the reports to be submitted to the City's recreation department.
[12] Article 3 states the
following with respect to enrolment fees:
[translation]
q
Enrolment fees
To make up for the gap between the CITY's
contribution and the level of services delivered, the ORGANIZATION may charge a
fee for enrolling in a program.
This fee shall take account of the CITY's
contribution for its residents. The enrolment fee for non-residents shall
reflect a significant difference in order that it can cover the full cost of
the services that such non‑residents receive. At the CITY's request, the
ORGANIZATION shall provide proof that the CITY's contribution is being used
exclusively for the benefit of its residents.
[13] Article 5 deals with the [translation] "Consideration".
The last part of the article states: [translation]
"the final payment shall be made when the organization has met all the
requirements of this contract and has submitted all the required reports."
[14] Article 6 has to do with what can
happen if the organization fails to deliver the program in accordance with the
contract's specifications.
[15] Appendices A and B to the agreement (Tab
15 of Exhibit A-1 and Tab 3 of Exhibit I‑1) are dated February
2003 and are the operation specifications and the support program for the
participation of children with disabilities in regular activities.
[16] The specifications prepared
by the Service des loisirs et
de la vie communautaire ("Recreation and Community Life Department") ("SLVC")
were produced at Tab 13 of Exhibit A‑1 and Tab 4 of
Exhibit I‑1. Article 4.3.3 is the description of the PVE. The
PVE's clients are, in particular, community-based recreational
organizations recognized by the City. The PVE's objectives are
to enable children to participate in a variety of recreational activities in a
safe and enriching environment, to help program-delivering organizations plan,
deliver and evaluate their programming, and to keep enrolment costs as
affordable as possible. The terms and conditions part states that direct
financial assistance will be granted to program-delivering organizations and
that these are responsible for program development, for enrolment, and for program
delivery and evaluation.
[17] Ms. Althot, LN's
president, explained that a summer vacation program has always been part of the
activities organized by LN. LN has offered such programs since its inception
because that is in keeping with its actual mission. Ms. Althot noted that LN creates its own program
for the purposes of the City’s PVE, and is responsible for delivering that
program.
[18] In her view, the
City's role is to support the LN's mission through a subsidy. The City also
provides logistical support in the form of access to City‑owned swimming pools
and playgrounds. Nonetheless,
the LN provides its own equipment. For example, it provides the tents for any
camping trips that it organizes as part of the PVE.
[19] The receipt of a
subsidy is conditional upon compliance with the agreements. Ms. Althot
does not know why the term [translation] "contract for services" was used. She
considers the agreement as a commitment to comply with the conditions for
obtaining a subsidy. The organization charges parents a reasonable fee, the
amount of which it itself determines.
[20] Ginette Bouchard, the executive
director of the appellant Loisirs Lebourgneuf ("LL"), testified that this
appellant, which has been operating under its current name since 1994, was
created under a different name in January 1977. Its purposes are:
[translation]
1. To coordinate
and hold socio-cultural, artistic, sporting, social, outdoor or any other
activities directly or indirectly related to recreation.
2. To inform,
interest and involve all residents of Charlesbourg‑Ouest in recreation.
3. To promote and
organize educational and recreational leisure-time activities in Charlesbourg‑Ouest.
4. To promote
sports and physical education in general.
5. To establish
and maintain recreation centres for activities that provide healthy and smart
diversions to the residents of Charlesbourg‑Ouest and to do so for purely
charitable and philanthropic purposes.
6. To acquire, hold,
administer and alienate any movable or immovable property, by any lawful means
and on any basis, for the above purposes.
7. To accept any
gifts, bequests or other acts of liberality.
[21] Ms. Bouchard
explained that LL is a non-profit organization whose mission is to organize
socio-cultural, sporting and community activities for residents of the
Lebourgneuf neighbourhood. The PVE is part of its mission to help children have
a healthy summer.
[22] LL recruits its activity
leaders, develops its activity program, plans its trips and determines its
budget. The City makes the park, the lodge and the community centre available
to LL for the PVE.
[23] The agreement,
drafted by the City, establishes the requirements that must be met in order to
receive subsidies. The City grants a subsidy to help keep the costs affordable for
the residents of the neighbourhood. Parents pay roughly 60% of the cost per
child. The City's subsidy makes up the difference.
[24] Nicole Belleau
is a recreational technician with the Arrondissement des Rivières of Quebec
City. She provides technical and professional support to a group of
organizations, primarily in the city's Lebourgneuf and Neufchâtel
neighbourhoods.
[25] She said that she
works daily with partner organizations that offer recreational activities to
residents. She is responsible for roughly 20 organizations, such as the Scouts,
the Fermières, and seniors' clubs. These are volunteer associations. The role
of the SLVC is to support them.
[26] Ms. Belleau also
plays a support role with respect to the PVE, specifically with regard to
premises and equipment, and sometimes applications for subsidies.
In addition, she checks whether the terms and conditions of the PVE are
being complied with.
[27] Tab 17 of
Exhibit A‑1 contains a memo to city council written by
Ms. Belleau. The subject of the memo is [translation] "Implementation
of summer vacation, playground and outdoor pool program —
Summer 2003." The memo briefly describes the situation and requests
that the council authorize the granting of subsidies to the listed community
recreational organizations for the implementation of the PVEs.
[28] The resolution of the
council of Arrondissement 2, Les Rivières, is at Tab 19 of Exhibit A‑1.
It provides for the granting of a subsidy to the community recreational
organizations named therein for the purpose of implementation of the PVEs for
the 2003 season, on the conditions set out in the memorandum, and authorizes
the council chairman and the secretary and assistant clerk to sign the
requisite contracts for these purposes.
[29] Alain Cantin is
a programs section head with the City. He confirmed that the organizations
in question do indeed organize the activities and trips, recruit their activity
leaders, do their own advertising and basically decide what services to provide
and who is responsible for them. Any complaints are directed to the
organization.
[30] It is true that in
order to receive subsidies, one must meet the requirements set out in the
agreements. With regard to advertising, it is possible that it is included in
the City's advertising. According to Mr. Cantin, the PVE program sets the parameters
within which the organization must deliver its services if it is to receive the
subsidies. The rules or requirements must be known and complied with.
[31] Isabelle Tremblay,
an auditor with Revenu Québec, began her audit in January 2004. She
assessed the appellants on the basis of the agreements. The operation
specifications set out in Appendix A to these agreements describe them as
contracts for services, and she sees no reason to regard them as anything else.
[32] On
cross-examination, she stated that the amounts paid by the parents were not
taxable because they constituted exempt income under section 12 of Part VI of
Schedule V of the Act. The program is an educational and instructional
program provided primarily to children 14 years of age or under.
Arguments
[33] Counsel for the appellants
submits that the historical context of the organizations' work must be taken
into account. In his submission, the City's grants are financial assistance
given to the organizations in order to enable them to fulfil their mission. He
argues that the organizations supplied services not to the City, but to
children or their parents.
[34] According to
counsel, the testimony shows that the PVE service is provided to the parents.
And, as the Minister's auditor stated, the service provided to the parents was
exempt. There is no tax on the portion paid by the parents. Counsel referred to
section 12 of Part VI of Schedule V, which reads as follows:
12. [Recreational services for children,
disabled or underprivileged] –A supply made by a public sector body of a membership in, or
services supplied as part of, a program established and operated by the body
that consists of a series of supervised instructional classes or activities
involving athletics, outdoor recreation, music, dance, arts, crafts or other
hobbies or recreational pursuits where
(a) it
may reasonably be expected, given the nature of the classes or activities or
the degree of relevant skill or ability required for participation in them,
that the program will be provided primarily to children 14 years of age or
under, except where the program involves overnight supervision throughout a
substantial portion of the program; or
(b) the
program is provided primarily for underprivileged individuals or individuals
with a disability.
[35] A subsidy can, as
the Federal Court of Appeal held in Commission Scolaire Des Chênes v.
The Queen, [2002] G.S.T.C. 11, constitute
consideration for the supply of a service to parents.
[36] According to counsel
for the appellants, the respondent is arguing that there are two supplies here:
one made to the City, and the other to the parents. He finds this reasoning difficult
to reconcile with GST/HST Technical Information Bulletin B‑067, entitled
"Goods and Services Tax Treatment of Grants and Subsidies".
[37] In particular,
counsel for the appellants refers to the following passage, at pages 2 and
3:
In general, transfer payments made in the
public interest or for charitable purposes will not be regarded as
consideration for a supply.
However, if there is a direct link
between a transfer payment received by a person and a supply provided by that
person, either to the grantor of the transfer payment or to third parties, the
transfer payment will be regarded as consideration for the supply. If a
transfer payment is consideration for a supply, then it must be determined
whether or not the supply is taxable.
. . .
A recipient may use a transfer payment to
provide a supply of goods or services to one or more third parties rather than
to the grantor of the payment. In this case, if it is established that a direct
link exists between the transfer payment and the supplies provided to the third
parties, the transfer payment will be regarded as consideration for those
supplies. If the recipient of the transfer payment is a registrant and the
supplies are taxable, the recipient of the transfer payment must charge and
collect tax from the grantor of the transfer payment.
. . .
A direct link may not always be apparent and therefore it will be
necessary to consider the circumstances surrounding each case. For example, it
is necessary to examine the agreement between the parties, the conduct of the
parties and the objectives or policy statements of the grantor. In addition,
the legislation, by-laws and any applicable regulation under which the payment
is made should be examined, along with payment documents, reports and any
applicable documentation. . . .
[38] With respect to the
nature of a subsidy, counsel for the appellants refers to paragraph 33 of the
decision of the Federal Court of Appeal in Ghali v. The Queen, 2005 DTC 5472.
The word "grant" is not defined. Since it is not a term of
art, it must be given its ordinary meaning. The dictionary Le Petit Robert
defines "subvention" ("grant") as follows: "[translation]
A subsidy asked for or required by the government to meet an unexpected expense
(loan, tax). Assistance granted to a group, a person, by the government or an
association (public or private)." The dictionary Le Petit Larousse
defines "subvention" as follows: "[translation]
Financial aid paid by the government or a public entity to a private person
with the aim of promoting an activity of general interest in which that person
is engaged." Finally, the Termium Plus electronic terminology bank
cites the following definition of "subvention": "[translation]
An amount paid occasionally or regularly to an individual or a group as
assistance, aid or a subvention in payment for certain services, etc."
[39] In conclusion, the appellants'
position is that there is only one supply: the exempt supply of a PVE
service to the parents.
[40] Counsel for the respondent
states that the assessment was based on the agreements between the City and the
appellants. He argues that even the City called the agreement a [translation] "contract for
services." The City, he says, hired the services of non-profit corporations
for the purposes of the PVEs.
[41] It is submitted that
what we have here is a contract for services in which the obligations, and the
price for the service, are stipulated. The organization must perform its
obligations in order to receive the subsidy amount. The City exercises control
to ensure that the organization does so. Further, counsel does not believe
that specifications are drafted where a subsidy is involved. In his view, the
payments in issue are not in the nature of a subsidy. Counsel for the respondent
considers the appellants' activity as consisting of two supplies. These two
supplies, he submits, are made at two different levels, and no not have the
same purpose.
[42] Even though he is
not certain that the payments are in the nature of subsidies, counsel for the respondent
also referred to GST/HST Technical Information Bulletin B‑067:
Under a capital expenditure program, a
municipality makes a grant to a registered charity which is an animal
protection organization. In addition to its other activities, the charity
provides pound-keeping services such as euthanasia, adoption and stray animal
services.
While the residents of the municipality benefit
from the provision of service, the charity is providing services which the
municipality itself would have otherwise been required to provide. In other
words, the municipality used a grant to purchase services. In this example, the
payment is consideration for a supply. . . .
[43] Counsel submits that
the link is a direct one. The City has recreational obligations to its
community, and purchases services from organizations so that it can supply its
recreational services.
Analysis and conclusion
[44] In my opinion, the
evidence clearly discloses that this is not an instance in which the City is
delivering recreational services to children in its own name. Rather, the appellants
are delivering the services in their own name. The City is contributing to the
price of the summer recreational service that the appellants are supplying to
the parents.
[45] Although the operation
specifications characterize the agreements between the City and the appellants
as "contracts for services", and some clauses may be suggestive of
contracts for services, other clauses, and important ones, state the actual
nature of these agreements, namely, subsidy agreements to complement the price
of a service to be provided to third parties. In particular, I refer to
the clause headed "enrolment fees", reproduced at paragraph 12 of
these Reasons for Judgment.
[46] It is quite clear
from a reading of this clause that what the City is paying is in the nature of
a subsidy in respect of the amount of the consideration paid for the appellants'
supply of services to third parties. This is also shown by the specifications,
the memo of recommendation to city council and council's resolution granting
the subsidy (referred to in paragraphs 16, 27 and 28 of these Reasons for
Judgment).
[47] Some subsidies may
be granted with no or very few conditions, whereas others are granted within a
stricter framework. A subsidy may be granted for the operation of an
organization, for the purchase of equipment or with respect to the price of a
service delivered to third parties. The subsidy can fully or partially cover
the cost of the property or service. In the instant case the latter is true.
[48] The agreements in
issue are subsidy agreements respecting services to be delivered to third
parties within a clearly-defined framework and, thanks to the subsidy, at a
reduced cost. Since there is a direct link between the subsidy and the cost of
the supply, it must be regarded as having been paid in consideration of the
service supplied to the third parties.
[49] Subsection 165(1) of
the Act read as follows:
165(1) Imposition of goods and services tax -- Subject to this Part, every recipient
of a taxable supply made in Canada shall pay to Her Majesty in right of Canada
tax in respect of the supply calculated at the rate of 7% on the value of the
consideration for the supply.
[50] The term "recipient"
is defined as follows in subsection 123(1) of the Act:
"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
(c) where no consideration is payable
for the supply,
(i) in the case of a supply of property by way of sale,
the person to whom the property is delivered or made available,
(ii) in the case of a supply of property
otherwise than by way of sale, the person to whom possession or use of the
property is given or made available, and
(iii) in the case of a supply of a service, the
person to whom the service is rendered,
and any reference to a person to whom a
supply is made shall be read as a reference to the recipient of the supply.
[51] A recipient is the
person liable under an agreement for a supply to pay the consideration for that
supply. The recipient of a taxable supply is liable to pay the tax on the value
of the consideration for the supply.
[52] Under the subsidy
agreement, the City is liable to pay a part of the consideration for the
service delivered by the appellants. In this sense, it is, in part, the
recipient of the service delivered to the third parties. The third party is
also a recipient of the service, whether he has to pay part of the price or
nothing at all. If the service delivered to the children is a taxable supply,
the recipients are liable to pay the tax on the value of the consideration.
[53] In fact, GST/HST
Technical Information Bulletin B-067 is consistent with this in stating as
follows:
However, if there is a direct link
between a transfer payment received by a person and a supply provided by that
person, either to the grantor of the transfer payment or to third parties, the
transfer payment will be regarded as consideration for the supply. If a
transfer payment is consideration for a supply, then it must be determined
whether or not the supply is taxable.
[54] Where there is a
direct link between the subsidy and the price of the service, the subsidy must
be regarded as the consideration, or part of the consideration, for the
service, and it is taxable if the service is taxable.
[55] Here, the Minister
determined that the supply of the services to the children was an exempt supply
within the meaning of section 12 of Part VI of Schedule V. (In fact, the
exempt nature of the supply of this service was not debated in court, and I am
of the opinion that I must accept this determination, despite the doubts
expressed in limine litis by counsel for the respondent). Consequently,
the subsidy, which constituted part of the consideration for the supply of the
service, is not taxable.
[56] The appeals are
accordingly allowed, with costs.
Signed at Ottawa, Canada, this 14th day of June 2006.
"Louise Lamarre Proulx"
on this 27th day of June 2008.
Erich Klein, Revisor
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