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Citation: 2004TCC443
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Date: 20040708
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Docket: 2002-4404(GST)G
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BETWEEN:
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SUTTER SALMON CLUB LTD.,
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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
Margeson, J.
[1] The Minister of National Revenue
("Minister") assessed the Appellant by Notice of
Assessment Number 01EE0102530, dated February 27, 2002, in the
amounts of $33,676.19 tax, $4,682.68 interest, and $5,724.91
penalty in respect of goods and services tax ("GST")
for the period January 1, 1998 to December 31, 2000. The
basis of the assessment was subsection 123(1) of the
Excise Tax Act, Revised Statutes of Canada 1985, chapter
15 ("Act").
[2] The Minister contended that the
capital contributions of the shareholders were deemed to be
consideration for the supply of a membership pursuant to
section 140 of the Act. The supply of a membership is
subject to tax pursuant to section 165 of the Act. He
submitted that the right of the shareholders to the use of the
fishing lodge was a "membership" as that term is
defined in subsection 123(1) of the Act.
[3] The parties agreed to the
following statement of facts:
b) the
Appellant is a GST registrant with GST
Account No. 139863260;
c) the
Appellant is registered as an extra-provincial corporation
carrying on business in the province of New Brunswick;
d) at all
times relevant to this appeal the Appellant owned and operated a
fishing lodge in New Brunswick;
e) for the
period relevant to this appeal the Appellant had nine
shareholders, each of which held 10% of the shares except one
that held 20%;
f) all
shareholders during the period in question were American
residents;
g) the
shareholders paid $50,000 per share as an initial investment in
the Appellant;
h) a Unanimous
Shareholder Agreement ("the Agreement") was entered
into on January 1, 1997;
i) the
Agreement provided, among other things, for the following:
i) the
Board of Directors was to consist of all the shareholders with
votes proportionate to their shareholder interest in the
Appellant;
ii) the
transfer of shares in the Appellant was restricted; and
iii) the
shareholders were required to make operating or capital fund
contributions;
j) ...
the Agreement required each shareholder to contribute,
proportionate to their shareholdings, funds to the Appellant to
cover any shortfalls in operating or capital funds by the
Appellant (the "capital contribution");
k) the
Agreement provided that failure by a shareholder to make the
capital contribution as required would result in a dilution of
his or her shareholder interest in favour of the other
shareholders who have met the requirement;
l) in
1997 three shares were sent to each shareholder (six to the
shareholder holding a 20% interest) - one for the initial
purchase contribution of $50,000 and one each for the capital
contribution made in 1996 and 1997;
m) shares were not
issued for capital contributions in years subsequent to 1997;
n) each
shareholder was entitled to use the fishing lodge for a fee of
US$6,800 per person;
o) the fee
included for seven days:
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the use of the lodge, which contains 3 bedrooms, a living
and dining room and a kitchen,
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the use of 2 [sic] cabins each containing one to two
bedrooms and a bathroom,
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meals, cooking, cleaning, the services of a guide, and the use of
3 vehicles - a 1991 Blazer, a 1989 Suburban and a
1999 Suburban
p) when not
being used by the shareholders the lodge was rented to third
parties at market rates;
q) the
Appellant did not collect HST on the fees from shareholders or
the capital contributions from shareholders;
r) the
reason for the Appellant's existence was to provide
recreational benefits to its shareholders through their access to
and use of the fishing lodge;
s) in 1998,
1999 and 2000 capital contributions were made by the shareholders
and the Appellant failed to collect and to remit tax as
follows:
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Capital Contribution
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HST @ 15%
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1998
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$37,702.36
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$4,905.35
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1999
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24,961.44
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3,744.22
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2000
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25,616.25
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3,842.44
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$12,492.01
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Issues to be Decided
[4] The issues to be decided are:
1. Whether the capital
contributions were membership fees subject to tax as defined in
subsection 123(1) of the Act;
2. Were the capital
contributions deemed to be consideration for the supply of the
membership pursuant to section 140 of the Act?
3. Was the supply of the
membership subject to tax pursuant to section 165 of the
Act?
Argument on Behalf of the Appellant
[5] The Appellant submitted written
argument as follows:
15. The Appellant submits
that the Capital Contributions are not subject to HST.
16. In its Reply, the
Respondent has stated that it is relying, in part, on section 140
of the Excise Tax Act, R.S.C. 1985, c-15. Section 140
states as follows:
For the purposes of this Part, where
(a) a person
makes a supply of a share, bond, debenture or other security
(other than a share in a credit union or in a cooperative
corporation the main purpose of which is not to provide dining,
recreational or sporting facilities) that represents capital
stock or debt of a particular organization, and
(b) ownership
of the security by the recipient of the supply is a condition of
the recipient's, or another person's, obtaining a
membership, or a right to acquire a membership, in the particular
organization or in another organization that is related to the
particular organization,
the supply of the security shall be deemed to be a supply of a
membership and not a supply of a financial service.
17. The Respondent has
also indicted [sic] that is relying on the definition of
"membership" in subsection 123(1) of the Act. The
definition is as follows:
"membership" includes a right granted by a
particular person that entitles another person to services that
are provided by, or to the use of facilities that are operated
by, the particular person and that are not available, or are not
available to the same extent or for the same fee or charge, to
persons to whom such a right has not been granted, and also
includes such a right that is conditional on the acquisition or
ownership of a share, bond, debenture or other security;
18. The Appellant submits
that, in order for section 140 to apply, there must have been the
supply of a share, bond, debenture or other security. As agreed
by the Respondent, no shares were issued by the Appellant for
Capital Contributions made by the Shareholders in the years in
question. Therefore, subsection 140(a) does not apply.
19. It is noted that
subsections 140(1) and (b) are conjunctive, therefore if (a) does
not apply, there is no need to go further. However, in any event,
the Appellant submits that subsection 140(b) also does not apply,
as payment by the Shareholders of the Capital Contribution was
not a condition of the Shareholder's obtaining a membership
in the Appellant.
20. The Appellant is a
share capital corporation. It submits that it does not have
"members"; it has shareholders. Further, if the
Shareholders are to be considered "members", which the
Appellant submits they are not, it is clear that they were
members prior to the years in question. Therefore, making the
Capital Contributions in the years 1998, 1999 and 2000 was not a
condition of obtaining membership, or the right to acquire
membership, as required by subsection 140(b).
21. The Appellant submits
that, in determining whether the Shareholders were
"members" of the Appellant, as defined in subsection
123(1), it must be determined whether they had the
"right" to services provided by the Appellant, or to
the use [sic] the Facilities, which right was not
available, or not available to the same extent or for the same
fee, to persons to whom such a right had not been granted.
22. A "right" is
defined in Black's Law Dictionary, 6th ed. as
follows:
An interest or title in an object or property; a just and
legal claim to hold, use, or enjoy it, or to convey or donate it,
as he may please.
A legally enforceable claim of one person against another,
that the other shall do a given act, or shall not do a given
act.
23. In determining whether
such a "right" existed, one must look to the relevant
documentary evidence. The fact that the Appellant had a practice
whereby the Shareholders would each use the Facilities for one
week per year does not mean the Shareholders had a legally
enforceable right to do so. The Appellant submits that a practice
is clearly different from a legally enforceable right.
24. The relevant
documents, the Appellant submits, in determining the
Shareholders' rights, are the incorporation documents of the
Appellant, its Bylaws, and the Unanimous Shareholder Agreement.
In none of these documents is it stated that the Shareholders
have a right to services provided by the Appellant or to use of
the Facilities. Further, nowhere is it stated that Shareholders
are entitled to pay less for the Appellant's services or for
use of the Facilities than are non-shareholders.
25. In Riverside
Country Club v. Canada, [2002] T.C.J. No. 424, the Court
considered section 140 and the definition of
"membership" in subsection 123(1) of the Act in the
context of some members of a golf club providing a loan to the
club, in order for the Club to make capital improvement. The loan
was in addition to the member's payment of membership fees.
Rowe D.T.C.J. stated as follows at paragraph 11:
It is apparent that the loan - as the term was used by the
appellant - or the lump sum payment, as preferred by counsel for
the respondent, was not a share, bond, debenture or other
security and even if it were, the evidence is clear that
participation in the loan option program was not a condition of
obtaining a membership or the right to acquire a membership in
the Club.
26. The Appellant submits
that this is similar to the case at bar. The Shareholders were
not issued shares in exchange for their Capital Contributions,
and payment of same was not a condition of their obtaining
membership in the Appellant.
27. Further, the Appellant
states that the Respondent has plead nothing in relation to what
qualifies as a "taxable supply", or how it concludes
that supply of a membership is taxable. If understood correctly,
the Respondent's position is that:
· the Capital
Contributions are deemed to be consideration for the supply of a
membership pursuant to section 140 of the Act;
· the
Shareholders shall pay tax, as recipients of a "taxable
supply", as per subsection 165(1) of the Act; and
· the
Appellant, having made a "taxable supply", shall
collect the tax payable thereon, as per subsection 221(1) of
the Act.
28. There is nothing plead
by the Respondent to link the assumptions made by the Minister to
"taxable supply". As such, the Appellant submits that
their appeal should be allowed.
[6] In addition to the written
argument counsel said that even if it was a membership, there is
still a question as to whether it is taxable. The question should
be "was it a taxable supply?"
Argument on Behalf of the Respondent
[7] Counsel for the Respondent
submitted that the right of the shareholders to the use of the
fishing lodge was a "membership" as that term is
defined in subsection 123(1) of the Act. He further
submitted that making the capital contributions was a requirement
of a shareholder and that being a shareholder was a condition of
having the right to use the fishing lodge. Consequently, the
capital contributions are deemed to be consideration for the
supply of the membership pursuant to section 140 of the
Act. He further submitted that the supply of the
membership is subject to tax pursuant to section 165 of the
Act.
[8] In oral submission counsel said
that Sutter Salmon Club Ltd. members had the right to the use of
the lodge at the best time in the year as they selected it.
Others who were not members did not have that right. The periods
of time left over after members selected their choice periods of
time went to others.
[9] He said that the shareholders have
this right under the Articles. They were paying the capital in
order to have the right of choice. If that were not the case, why
would they pay the capital?
[10] For what other reason would they make
capital contributions? Counsel had to admit that this was not set
out in the Articles or by way of agreement but it was the
practice of the corporation. He referred to presumptions
contained in paragraph 5 p) of the Reply which said:
when not being used by the shareholders the lodge was rented
to third parties at market rates;
and r) which said:
the reason for the Appellant's existence is to provide
recreational benefits to its shareholders through their access to
and use of the fishing lodge;
He said that these presumptions have not been rebutted. He
referred to paragraph 5 of the Unanimous Shareholder
Agreement, which provided for additional funding. This section
said as follows:
5.1 The Shareholders agree
with one another that any additional operating or capital funds
or other financial support required by the Corporation shall be
provided by them proportionately with their then current equity
interest in the Corporation.
5.2 If any Shareholder
fails to provide the funding or financial support required by the
Corporation, the defaulting Shareholder shall be liable to a
proportionate dilution of his or her Common Share interest in the
Corporation in favor [sic] of the other Shareholder who has met
the funding requirement, such dilution to be based on a
comparison of the total amount of support in the form of
guarantees and loans provided to the Corporation by each
Shareholder.
[11] This was an incentive for the
shareholders to maintain their capital funds, otherwise their
holdings would be diluted.
[12] Therefore there was an impetus to pay
their capital funds and thereby preserve their preferential use
of the lodge.
[13] If the shareholders did not keep up
their capital, they could reach the point where they would no
longer be a member and could not use the facility for the annual
fee.
[14] The payments to the capital in question
here were disguised membership fees. They would not have paid
that money just to have rights at a meeting. He also referred to
paragraph 1.1 of the Unanimous Shareholder Agreement, entitled
"General and Administrative", which gave each
shareholder the right to be a director or to nominate a
director.
[15] In reply, counsel for the Appellant
said that if the shareholders did not keep up the capital
contribution, they would lose authority but not all of their
authority because they would always be a shareholder.
[16] She also suggested that there may be
different reasons why one would invest in the corporation other
than the purpose that counsel for the Respondent suggested. Such
reasons might be the obtaining of dividends or the right to share
in the profits if the property was sold.
[17] She also indicated that it was
significant that no shares were issued in the years under
consideration here. Nothing was issued for the contributions.
Therefore, there should be no tax. She referred to subsection
140(a) of the Act in that regard.
Analysis and Decision
[18] The following provisions of the
Act are applicable.
The definition of "membership" is found in
subsection 123.(1) of the Act as follows:
includes a right granted by a particular person that entitles
another person to services that are provided by, or to the use of
facilities that are operated by, the particular person and that
are not available, or are not available to the same extent or for
the same fee or charge, to persons to whom such a right has not
been granted, and also includes such a right that is conditional
on the acquisition or ownership of a share, bond, debenture or
other security;
Section 140.:
For the purposes of this Part, where
(a) a person makes a
supply of a share, bond, debenture or other security (other than
a share in a credit union or in a cooperative corporation the
main purpose of which is not to provide dining, recreational or
sporting facilities) that represents capital stock or debt of a
particular organization, and
(b) ownership of the
security by the recipient of the supply is a condition of the
recipient's, or another person's, obtaining a membership,
or a right to acquire a membership, in the particular
organization or in another organization that is related to the
particular organization,
the supply of the security shall be deemed to be a supply of a
membership and not a supply of a financial service.
Subsection 165.(1):
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.
Subsection 221.(1):
Every person who makes a taxable supply shall, as agent of
Her Majesty in right of Canada, collect the tax under
Division II payable by the recipient in respect of the
supply.
[19] In order for the Appellant to be
subject to taxation for the years it question, it must have
provided a "taxable supply". In the Respondent's
submission the taxable supply was the membership and the cost of
that membership was the capital contributions that were made in
the years in question. These capital contributions, according to
the Respondent, should be deemed to be consideration for
the supply of the membership under the provisions of section 140
of the Act. The basis for this argument is that the
members were paying the capital contribution in order to obtain a
right. It was not available, or available to the same extent or
for the same fee or charge, to persons other than the members.
This right was one of preference to be able to use the facilities
when the members wanted to use them regardless of the time of the
year and this brought the contributors under the definition of
"membership" under subsection 123(1) of the
Act.
[20] In other words to describe the payments
as capital payments was just a disguise for the payment and they
were, in reality, membership fees. In the event that the
contributors did not keep up their contributions (capital
payments or membership fees) they might no longer be members and
could lose the right to use the facility for the annual fee at
the choice time of the year. This was the impetus to keep up the
payments as there could be no other reason for it.
[21] The making of the capital contributions
was a requirement of being a shareholder and being a shareholder
was a condition of having the right to use the fishing lodge.
Consequently the capital contributions are deemed to be
consideration for supply of a membership pursuant to section
140.
[22] However, in order for tax to be payable
there must have been a taxable supply. Counsel for the Respondent
has assumed that the supply of a membership is a taxable supply
and counsel for the Appellant takes issue with this on the basis
that the Respondent has not plead any facts nor made any
presumptions in the Reply to allow the Court to conclude that
this was a taxable supply.
[23] The Court is satisfied that if the
taxpayer received a membership in return for the consideration of
paying the capital contributions, then it is a taxable supply
unless it is otherwise shown not to be a taxable supply, it is
exempt or zero-rated. The Court would conclude that there
was a taxable supply if it were satisfied that what the taxpayers
received for the payment of their capital contributions in the
years in question amounted to a membership under section 140
or subsection 123(1).
[24] There is some difficulty for the
Respondent in satisfying the Court in that respect because in
order for section 140 to apply there must have been the
"supply of a share, bond, debenture or other security".
It would seem reasonable to conclude that there must have been
consideration paid for the supply of that share and the
consideration, which is alleged to be the subject matter of the
tax, must have been the amount of the capital contributions.
[25] It is common ground that no shares were
issued by the Appellant for the capital contributions made by the
shareholders in the years in question and consequently the Court
cannot see how subsection 140(a) has been fulfilled in this
case.
[26] Further, the Court agrees with counsel
for the Appellant that subparagraphs (a) and (b) of section
140 are conjunctive and therefore this argument on behalf of the
Respondent would fail if either subparagraph (a) or (b) was not
fulfilled.
[27] In any event, the Court is satisfied,
that subsection 140(b) does not apply because there is no
evidence whatsoever that the payment of the capital contributions
by the shareholders was a condition of the shareholders obtaining
a membership in the Appellant.
[28] Further, there is nothing in any of the
evidence submitted to the Court that would suggest that any of
these contributors were considered to be members. They were
always considered to be shareholders. If they were members, then
they were members prior to the years in question. Therefore,
making the capital contributions in the years 1998, 1999 and 2000
was not a condition of obtaining a membership, or the right to
acquire a membership, as required by subsection 140(b).
[29] The Respondent's position is
further complicated by the definition of "membership"
under subsection 123(1) of the Act. As counsel for the
Appellant argued, there was nothing in the evidence that would
establish that the contributors had the "right" to
services provided by the Appellant, or to the use of the
facilities, which right was not available, or not available to
the same extent, or for the same fee, to persons to whom such a
right had not been granted, which is one of the requirements of
this subsection. The most that can be said is that there was a
practice whereby the shareholders would each use the facilities
for one week per year (obviously in preference to
non-shareholder use). But there was nothing in the Articles
of the Corporation nor in the Shareholders' Agreement to
satisfy the Court that such practice amounted to a "legally
enforceable right".
[30] In Riverside Country Club v.
Canada, [2001] T.C.J. No. 424, section 140 was
considered by Rowe, D.T.C.J. and he concluded that a lump sum
payment, or loan, was not a share, bond, debenture or other
security under subsection 123(1) of the Act and, even if
it were, participation in the loan option program was not a
condition of obtaining a membership or the right to acquire
membership in the club.
[31] This case is similar to the case at bar
because the Court is satisfied that the shareholders were not
issued shares in exchange for their capital contributions and
although the payment or non-payment of same had some
financial consequences for the shareholders, the Court is
satisfied that the payment of the capital was not a condition of
obtaining membership in the Appellant, even if this Court were to
conclude that they had acquired a membership. That membership had
already existed before the years in question.
[32] In the end result, the appeal will be
allowed, with costs, the answers to the three questions posed as
the issues in this case are answered in the negative and the
matter is referred back to the Minister for reassessment and
reconsideration on the basis that the capital contributions are
not subject to Harmonized Sales Tax ("HST").
Signed
at New Glasgow, Nova Scotia, this 8th day of July,
2004.
Margeson, J.
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