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Citation: 2003TCC618
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Date:20030904
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Docket: 2001-4181(GST)G
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BETWEEN:
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THE COLLEGES OF APPLIED ARTS and
TECHNOLOGY PENSION PLAN,
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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
BowieJ.
[1] This appeal arises out of an
application made by the Appellant to the Minister of National
Revenue (the Minister) for a refund of some $885,413 in goods and
services tax (GST). The Appellant paid the tax in question to
certain contractors, who were referred to in the evidence as
"service providers", who in turn remitted it to the
Receiver General of Canada. In June 1998, having decided that the
services provided to it by these individuals were not subject to
GST, the Appellant applied to the Minister for a refund of tax
paid for the period between July 1, 1994 and May 31, 1998. The
Minister refused the refund application by a Notice of Assessment
dated May 17, 1999, and it is from that assessment that the
present appeal is brought. The only issue in the appeal is
whether the services that were provided to the Appellant, and on
which GST was paid, were "financial services" as
defined in subsection 123(1) of the Excise Tax Act (the
Act), Part IX, as it then stood. If they were, then they
were exempt supplies, and not subject to the tax, and this appeal
must succeed. If they were not, then the appeal must fail.
[2] The relevant part of the
definition in question, as it stood prior to its amendment in
2000[1] read:
123(1) In section 121, this Part and Schedules V to
X,
...
"financial service" means
(a) the
exchange, payment, issue, receipt or transfer of money, whether
effected by the exchange of currency, by crediting or debiting
accounts or otherwise,
(b) the
operation or maintenance of a savings, chequing, deposit, loan,
charge or other account,
(c) the
lending or borrowing of a financial instrument,
(d) the
issue, granting, allotment, acceptance, endorsement, renewal,
processing, variation, transfer of ownership or repayment of a
financial instrument,
(e) the
provision, variation, release or receipt of a guarantee, an
acceptance or an indemnity in respect of a financial
instrument,
(f) the
payment or receipt of money as dividends (other than patronage
dividend), interest, principal, benefits or any similar payment
or receipt of money in respect of a financial instrument,
(f.1) the payment or receipt of
an amount in full or partial satisfaction of a claim arising
under an insurance policy,
(g) the
making of any advance, the granting of any credit or the lending
of money,
(h) the
underwriting of a financial instrument,
(i) any
service provided pursuant to the terms and conditions of any
agreement relating to payments of amount for which a credit card
voucher or charge card voucher has been issued,
...
(l) the
agreeing to provide, or the arranging for, a service referred to
in any of paragraphs (a) to (i), or
(m) a prescribed
service,
but does not include
...
(q) the
provision, to an investment plan (as defined in
subsection 149(5)) or any corporation, partnership or trust
whose principal activity is the investing of funds, of
(i) a
management or administrative service, or
(ii) any other
service (other than a prescribed service),
if the supplier is a person who provides management or
administrative service to the investment plan, corporation,
partnership or trust,
...
[3] It is agreed between the parties
that the services in question here meet the provisions of the
definition other than the exclusionary paragraph (q). The
Minister's position is that paragraph (q) applies in this
case, as the Appellant is a trust and its principal activity is
the investing of funds. The Appellant says that this is not its
principal activity, and that the services are, therefore,
financial services on which the tax is not exigible. The narrow
issue for decision, then, is whether, during the relevant period,
the Appellant's principal activity was the investing of funds
or something else. The Appellant's contention is that its
principal activity is the payment of pension benefits, or in the
alternative the collection of contributions.
[4] Two matters should be noted at
this point. The first is that if I am persuaded that the
investing of funds was not the Appellant's principal
activity, then it is entitled to succeed. There is no need, in
that case, to decide what was its principal activity. The second
is that since the definition was amended in 2000,[2] retroactive to 1991, the
decision in this case will have very limited application. The
amending legislation preserved the rights of taxpayers who, like
this Appellant, have claimed a refund before July 30, 1998. In
view of the limited application that this decision will have, and
also the fact that the parties have now agreed that the issue is
as narrow as it is, I do not propose to undertake the journey
through the convoluted path of the Act by which the
incidence of tax arises. It is sufficient to examine the evidence
as to the Appellant's activities, and decide whether the
investment of funds was its principal one during the relevant
period.
[5] The Appellant is a trust (the Plan
Trust), and it is governed by a multi-employer pension plan
(the Plan). The Plan Trust is registered under the Pension
Benefits Act[3] of Ontario and under the Income Tax
Act.[4] The
members of the Plan are the employees of Ontario's 25
Colleges of Applied Arts and Technology. At the relevant time, it
had more than 6,600 beneficiaries who were receiving pension
benefits, and more than 14,300 employees who were contributors.
It is a defined benefit plan, which is to say that the benefits
to which an employee becomes entitled on retirement are defined
by the Plan. The Plan Trust is regulated to ensure that its
funding is on a sound actuarial basis; if the assets for any
reason fall short of that which is required to meet its
obligations to provide for future benefits payable, then the
Board of Trustees must make the necessary increase in the
required contributions to remedy that.
[6] The Plan Trust is administered by
a Board of Trustees that sets policy and is responsible for the
overall operations. It operates through three committees, the
Administration Committee, the Audit Committee and the Investment
Committee, all of which are responsible to the full Board. The
day-to-day oversight of the operations are under the direction of
a Chief Executive Officer and Plan Manager, whose immediate
responsibility is to carry out the decisions of the Board, and,
of course, the functions that are required by the Trust
Agreement. These include collection of contributions from members
of the Plan, and from the employers, determination of the
benefits to which retirees are entitled, and payment of those
benefits, preparation and filing of returns and reports to
regulators, investment of the Plan Trust's funds that are not
immediately required in order to pay benefits, and communication
with members as to their rights and the benefits to which they
are or will become entitled. Much of this is done by employees of
the Plan Trust, of whom there were 23 at the relevant time. State
Street Trust Company Canada and CIBC Mellon Global Securities
Services Company were retained by the Plan Trust as custodians of
its assets, and to act as its banker. They received the
contributions directly, and issued the pension benefit cheques,
all under the direction of the largest single group of the
Appellant's employees.
[7] Benefits are paid by the Plan
Trust first from current contributions, and if necessary also
from income generated by investments, or from cash received from
the sale of invested assets. Contributions and other assets that
are not currently required to pay benefits are invested. The Plan
Trust has one employee whose responsibility is to supervise and
review the operations of several discretionary investment
managers who are retained to provide investment services to the
Plan Trust. Those investment managers are retained by the Board
of Directors and they are given authority to manage a specific
part of the Appellant's invested assets. They are paid a fee
based on a percentage of the funds that they have under their
management. The Directors establish the investment policy that
they are to apply, but they alone make the specific investment
decisions, and they place the buy and sell orders directly to
implement those decisions. It is on their services that the GST
here in dispute was paid. It is not necessary to go more deeply
into the evidence as to how these investment managers operate, as
the parties are agreed that it is the determination of the
principal activity of the Appellant that will decide whether
their services are financial services, and not the way in which
they carry out their functions.
[8] In construing the phrase
"principal activity", counsel differ not as to the
meaning of the word "principal", but as to whether it
is proper, in considering what is the Appellant's principal
activity, to have regard to the objects for which the Appellant
was created. The Canadian Oxford Dictionary[5] defines "principal" as:
1. first in rank or importance, chief; 2. main or leading.
This is consistent with the other dictionaries cited to me,
and in the present context it admits of no ambiguity.[6] Counsel for the
Appellant argued that as the purpose of the Plan Trust is to
provide retirement benefits to the employees of Ontario's
community colleges, its principal activity is the payment of
those benefits. Counsel for the Respondent points out that in the
period between 1994 and 1998 the Trust had between $2.25 and
$3.50 billion invested, and that the income from those
investments exceeded the Plan Trust's income from
contributions by as much as 75 per cent in one year, and never
less than 25 per cent. The expenses associated with those
investment activities varied between 58 per cent and 65 per cent
of the total expenses of the Plan Trust. The annual rate of
return on the invested assets varied between 1.7 per cent and
15.8 per cent. In this context, therefore, he argued the
principal activity must be the investment activity that occupies
so much of the operating budget, and produces so much of the
income, of the Appellant. The proof of this, according to counsel
for the Respondent, can be seen in the newsletters and reports
distributed by the Plan Trust to its members. They devote a great
deal of space to advising the membership about the investment
policy and results. He also argued that counsel for the Appellant
wrongly confuses "activity" with "purpose"
when she argues that the payment of pension benefits is the
Appellant's principal activity.
[9] Both parties agree that the
"principal activity" cannot simply be derived from the
number of employees engaged in one activity, or the number of
transactions that take place in connection with one activity. I
agree with that. The same may be said of the contribution of
investment income to total income, however. If Parliament had
intended that any such criteria should be determinative, it could
certainly have found more precise wording by which to express
that intention. In my view, the measure of the "principal
activity" must be the importance of the activity to the
achievement of the organization's goals or purposes.
[10] Counsel for the Respondent, perhaps
driven by necessity, went so far as to submit that the purpose
for which the Appellant was created and continues to exist is not
relevant and should not be looked at at all when considering what
is its principal activity. Not only do I disagree with that
submission, it seems to me contrary to both common sense and the
decision of the Supreme Court of Canada in M.N.R. v.
Consolidated Mogul Mines Ltd.,[7]where Spence J. placed
considerable importance on the purposes and objects for which
Mogul Mines was formed in ascertaining its principal business.
The Appellant exists only to carry out its objects, and its
principal, or most important, object is to provide pensions to
the employees of the community colleges after they retire. The
principal, or most important, activities of the Appellant must be
those that contribute most to achieving that. The
Respondent's position, as I understand it, is that the most
important activity is the one that, in the four years with which
the appeal is concerned, contributed most to the income of the
Plan Trust, absorbed most of the expenses, and was apparently the
subject of great interest to the readers of the annual reports
and newsletters. However, this submission ignores the fact that
the Appellant could, at least in theory, collect contributions
from employers and employees and pay those contributions out to
retirees without ever investing the funds. Granted, that would be
wasteful and inefficient, but it would nevertheless satisfy the
objects for which the Appellant was created, albeit poorly.
[11] The two activities without which the
Appellant simply could not operate, and could not accomplish its
objects, are the collection of the employer and employee
contributions, and the computation and payment of the pension
benefits to which retirees are entitled. This is not to detract
from the importance of the investment function; in most years it
produces substantial income[8] which, of course, goes to reduce the
contributions that are required from the employers and employees
in order to pay benefits and keep the Plan Trust on a sound
actuarial footing. But without contributions there would be
nothing to invest, and without payments to retirees the Plan
Trust could not in any degree be said to be fulfilling the
objects for which it was created.
[12] The appeal is allowed. The Appellant is
entitled to a refund of the GST collected and remitted by the
investment managers between July 1, 1994 and May 31, 1998. The
assessment is referred back to the Minister for reconsideration
and reassessment on that basis. The Appellant is entitled to
costs, with counsel fees for one leading counsel and one junior
counsel.
Signed at Ottawa, Canada, this 4th day of September, 2003.
Bowie J.
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