REASONS
FOR JUDGMENT
Owen J.
I.
Introduction
[1]
These reasons address an appeal by High-Crest
Enterprises Limited (“High-Crest”) from an assessment (the “Assessment”) under the Excise Tax
Act, R.S.C. 1985, c. E-15 (the “ETA”), by notice of assessment dated
July 16, 2010, for the reporting period from January 1, 2010 to March
31, 2010 (the “Period”). This appeal was originally heard by Justice Jorré of this Court.
With the consent of both parties, the matter is to be decided by me on the
basis of the transcript and the record.
[2]
The Assessment imposed harmonized sales tax (“HST”) on
High-Crest in respect of a 20-bed addition to a long-term care facility owned
by High-Crest and located in Springhill, Nova Scotia. The Assessment calculates
the HST by applying section 191.1 of the ETA to the taxable supply (the “self-supply”)
deemed to have been made and received by High-Crest in the Period by virtue of
subsection 191(4) of the ETA.
[3]
High-Crest says that the HST on the self-supply
should have been calculated using the fair market value rule in subsection
191(4) of the ETA and not the rule in section 191.1 of the ETA. The fair market
value of the addition and the amount of tax payable under subsection 191(4) of
the ETA are not in dispute and the only issue in this appeal is whether the
rule in section 191.1 applies to the self-supply.
[4]
Mr. Shannon Stephenson testified on behalf of
High-Crest. Mr. Stephenson is the president of High-Crest, a position he has
held since 1994.
II. Facts
A. Background
[5]
High-Crest is a for-profit corporation that owns
and operates five long-term senior care facilities in the province of Nova
Scotia. Two of the facilities are nursing homes and three are residential care
facilities. The facility in Springhill, Nova Scotia (the “Facility”) is
one of the two nursing homes.
[6]
The Facility was built in 1993, and prior to the
completion of the 20-bed addition described next, housed a total of 56 beds,
including one respite bed. Ten of the 55 full-time beds are occupied by
individuals under the purview of Veterans Affairs Canada and the remaining 45
full-time beds and the respite bed are occupied by individuals under the
purview of the Nova Scotia Department of Health (the “Department”).
B. The Request for Proposals
[7]
In March, 2007, the Continuing Care Branch of
the Department issued a request for proposals (the “RFP”)[1]
to “select an organization or organizations to provide the facilities and
services required to support 594 Level II Nursing Home beds and 210 Residential
Care Facility (RCF) beds throughout the Province.”[2] Section 1.2 of the
RFP, titled “Background”, states in part:
In May 2006, the
Nova Scotia government approved the Continuing Care Strategy for Nova Scotia
- Shaping the Future of Continuing Care. In the Strategy, the Government
has committed to build new long-term care homes to support the vision of living
well in a place you can call home. The Long Term Care Program Requirements
and the Space and Design Requirements documents complement one another
and were created to provide direction for the development of these new long
term care facilities from the perspectives of care and service, as well as
physical environment.
. . .
We are moving
towards the creation of vibrant, nurturing environments for the elderly that
support the elimination of loneliness, helplessness, and boredom. The emphasis
is on small living areas with residential features such as private bedroom and
bath, a living room with a central fireplace, an adjacent open kitchen and
dining area, and short halls to the living and dining areas. The emphasis is on
organizing care and activities around the resident and not on the institutional
schedule . . . .
[8]
The RFP referenced several appendices that were
issued in final form on July 25, 2007. Appendix B[3] and Appendix C,[4]
titled Long Term Care Facility Requirements and Long Term Care Facility Program
Requirements respectively, described in great detail the physical and operational
requirements of the new long-term care facilities. Section 3.0 of Appendix B
states:
The Service
Provider is being engaged to provide care services to the residents. This
document sets out minimum Facility Requirements. It is not intended to be a
complete inventory. It is the Service Provider’s responsibility to ensure that
the necessary space, equipment and furnishings are available to provide the
contracted service.
[9]
Section 2.3.4 of the RFP states that the RFP
will lead to the establishment of two agreements with each successful bidder: a
Development Agreement and a Service Agreement. The agreements were not attached
to the original RFP, but were released in final form on July 25, 2007 as
Appendix E1 and Appendix E2 to the RFP.[5]
[10]
According to section 2.3.4 of the RFP, the
Development Agreement covers the period of design and construction of the new
facility, and the annually renewable Service Agreement has a term of 25 years
and addresses the operation of the facility. The successful bidder is
identified in each of the agreements as the “Service Provider.”
[11]
Section 3.2.2 of the RFP states that the “financial proposal requirements will be
released to Suppliers in draft on June 13, 2007 and in final form on July 25,
2007.”
[12]
Mr. Stephenson explained that the financial
compensation to a Service Provider was in the form of a per diem rate that
could be charged for the occupancy of a bed supplied in accordance with the RFP.
The calculation of the per diem rate is reviewed below in the description of the
Service Agreement. In addition to the per diem rate, a Service Provider would
also receive an annual payment called a Capital Renewal Reserve.
[13]
High-Crest responded to the RFP with a proposal
for a 20-bed addition to the Facility (the “Addition”) that would meet level II nursing
home requirements. The proposal was accepted by the Department by a letter
dated January 7, 2008.[6]
An attachment to the letter (the “Per Diem Attachment”) explained the
components of the per diem rate of $264.47 that High-Crest could charge for the
occupancy of a bed in the Addition. By a letter dated January 15, 2008,[7]
High-Crest accepted this per diem rate and stated that the 20 beds would be
built as per the Facility Requirements in Appendix B of the RFP.
C. The Development Agreement
[14]
In February 2009, High-Crest entered into the
Development Agreement with the Province of Nova Scotia as represented by the
Minister of Health.[8]
Section 2.1 of the Development Agreement required High-Crest to build the
Addition in accordance with the agreement, its attachments and applicable law
and to operate and provide services[9]
for the 20 beds in the Addition pursuant to the terms of the Service Agreement.
[15]
Section 2.3 of the Development Agreement
required High-Crest to obtain mortgage financing in accordance with Schedule “A” at the
rate fixed by the Nova Scotia Housing Development Corporation (“NSHDC”) as of
August 1, 2007, which was 5.12% per annum. A spreadsheet attached to
the draft Development Agreement identifies a capital base for the financing of
$5,532,842 (which included $620,775 of HST at 13%), a term of 300 months and an
interest rate of 5.12% per annum. The spreadsheet also identifies a Capital
Renewal Reserve payable to High-Crest by the Department of $62,700 per annum.
[16]
Mr. Stephenson explained that High-Crest was not
required to obtain financing from any particular source as long as the
financing was at the approved interest rate for 25 years. Notwithstanding this,
High-Crest obtained the financing to fund the cost of the Addition from NSHDC, and
it was secured by a first mortgage on the Facility.
[17]
According to the Approved Budget issued by the
Department effective January 29, 2010 (the “2010 Budget”), the mortgage with
NSHDC had a term of 300 months and a principal amount of $5,533,250.[10]
The annual payments on the mortgage were $395,938. As will be seen, this annual
cost was factored into the determination of the per diem rate.
[18]
In addition to funding the construction of the
Addition, the financing provided by NSHDC was used to discharge a total of
$2,027,926.33 owed by High-Crest to the Toronto Dominion Bank and to pay to
NSHDC an amount of $40,992.90 that Mr. Stephenson testified had previously been
advanced to High-Crest by NSHDC.[11]
[19]
Article 4 of the Development Agreement describes
High-Crest’s obligations in respect of the Service Agreement. Section 4.1
required High-Crest to execute the Service Agreement substantially in the form of
the agreement to be provided by the Minister of Health. The Service Agreement
(and any replacement service agreement) was to include an express continuing
obligation on the Minister of Health to provide an Approved Budget and funding
conditions. As well, the agreement had to include an express continuing
obligation on High-Crest to operate the Facility and provide services to the
residents of the Facility.
[20]
The funding conditions are described in section
4.2 of the Development Agreement as follows:
4.2 Funding
Conditions
(a) The
Minister will confirm the Approved Budget for the Service Provider in
accordance with the Service Provider proposal in Schedule “B”, subject to:
(i) an executed Service Agreement; and
(ii) the issuance of a License to the Service Provider
pursuant to Section 3.3.
(b) Upon
the conditions of Section 4.2(a) being met, the Service Provider shall receive
Annual Funding from the Minister and may levy the Authorized Accommodation
Charge. In the event the Service Provider meets the requirements of Section
4.2(a) (i) and (ii) prior to the Occupancy Date, the Service Provider shall be
entitled to receive the Annual Funding and levy the Authorized Accommodation
Charge at the earlier date.
(c) In the
event the Service Provider receives an extended Occupancy Date pursuant to
Section 2.4(f), the Minister agrees to commence the Annual Funding on the Occupancy
Date. For greater certainty, this section only comes into effect where the
Occupancy Date delay is equal to the number of days the Minister exceeded the
Response Timelines.
Authorized
accommodation charge is defined in the Development Agreement to mean the “portion of the Accommodation Charge for long
term care that a Resident is approved to pay in accordance with the Resident
Charge Policy of the Policy Manual”. Approved
Budget is defined in the Development Agreement to mean the “total combined budget for the Protected and
Unprotected Envelopes”. These terms and others
relevant to the funding and operation of the Addition are addressed in the
review of the Service Agreement below.
D. The Service Agreement
[21]
High-Crest and the Minister of Health executed the
Service Agreement on February 24, 2009. The copy of the agreement and its
attachments entered into evidence is 335 pages long.
[22]
Section 1.1 of the Service Agreement includes
the following definitions which are important to understanding the agreement:
“Annual Funding”
is the total funding available to the Service Provider during each annual Term
of this Agreement and is provided through the Protected Envelope, the
Unprotected Envelope and the Capital Renewal Reserve;
“Approved Budget”
means the combined total budget for the Protected and Unprotected Envelopes;
“Capital Renewal
Reserve” is the reserve received and invested by the Service Provider to
support each Facility in the replacement of a Facility Component once the
Theoretical Life of that Facility Component, as defined in the policy, has been
reached in accordance with the process and definitions contained in Schedule
“F”;
“Occupancy” means
the admission of the first Person as a Resident of the Facility and the
commencement of the delivery of Services;
“Protected
Envelope” means the portion of the Approved Budget for Health Care Costs and
Raw Food Costs that is funded at approved rates prescribed by the Department of
Health and in accordance with Schedule “D”;
“Services”
includes accommodation; programs; dietary; goods; social work services;
physical, and occupational therapy; and personal and skilled nursing care;
“Unprotected
Envelope” means the portion of the Approved Budget for Facility and
Accommodation Services Costs that is funded at a non-prescribed rate and in
accordance with Schedule “E”.
[23]
Section 2.1 of the Service Agreement requires
High-Crest to operate 20 nursing home beds at the Facility and to operate the
Facility and provide the Services at the Facility.
[24]
Section 3.1 of the Service Agreement states that
the Minister of Health shall determine an Approved Budget for High-Crest, which
is subject to adjustment from time to time in accordance with the terms of the
agreement. Section 3.2 states that the Approved Budget will determine the Annual
Funding available to High-Crest. Annual Funding is the total compensation
available to High-Crest under the Service Agreement and, for the Addition, is
comprised of the per diem rate that High-Crest could charge for a bed in the
Addition and the annual Capital Renewal Reserve.
[25]
The per diem rate is based on the Approved
Budget, which is in turn comprised of the budgets determined by the Department
for the Protected Envelope and the Unprotected Envelope.
[26]
Generally speaking, the Department pays at least
two-thirds of the per diem rate to High-Crest. The balance, if any, of the per diem
rate is paid by the occupant of the bed. The amount paid by the occupant is
determined by the Department in accordance with the Resident Charge Policy,
which is part of the Department’s Long Term Care Policy Manual attached to the
Service Agreement as part of Schedule C thereto. The Resident Charge Policy is
reviewed under the next heading.
[27]
The rules for determining the budget for the
Protected Envelope services are set out in the Protected Envelope Funding
Policy attached as Schedule D to the Service Agreement. In general terms, the
budget for the Protected Envelope services is made up of two components.
[28]
The first component is the cost of the raw food
required to feed the occupants of the Addition. The second component is the
salaries, benefits and operational costs related to the provision of
professional health care to the occupants of the Addition. Professional health care
includes professional nursing, continuing care by continuing care assistants
and program support by dieticians, physiotherapists and occupational
therapists.
[29]
In determining the budget for the Protected
Envelope the Department uses prescribed rates to determine the cost of the
services that fall under that envelope.
[30]
The budget for the Protected Envelope is
translated into a per diem rate per bed based on an assumed occupancy rate. If
the per diem rate established for the Protected Envelope services proves too
high, High-Crest is required repay any surplus it has already received. If the
rate proves too low, High-Crest is required to bear the excess cost.
[31]
The rules for determining the budget for the Unprotected
Envelope services are set out in the Unprotected Envelope Funding Policy
attached as Schedule E to the Service Agreement.
[32]
In general terms, the budget for the Unprotected
Envelope services is comprised of two components. The first component is the
$395,938 of principal and interest payable each year by High-Crest to NSHDC.
[33]
The second component is called the Accommodation
Services Costs, which are defined as the salaries, benefits and operational
costs of administering, maintaining and managing the Addition and of providing
all dietary, laundry and housekeeping services to the occupants of the Addition. The dietary
services do not include the cost of raw food, which is included under the
budget for the Protected Envelope.
[34]
Section 4.2(1) of the Service Agreement fixed
the per diem rate for the Unprotected Envelope at $113.03, which is $0.14 lower
than the per diem stated in the Per Diem Attachment. The Per Diem Attachment
indicates that the annual payments of principal and interest to NSHDC accounted
for $54.64 of the original per diem of $113.17. The balance of $58.53 was for
the Accommodation Services Costs.
[35]
In determining the budget for the Unprotected
Envelope, the Department uses non-prescribed rates to determine the cost of the
services that fall under that envelope.
[36]
The budget for the Unprotected Envelope is
translated into a per diem rate per bed based on the assumed occupancy rate. If
the per diem rate established for the Unprotected Envelope proves too high,
High-Crest is entitled to retain any surplus. If the rate proves too low,
High-Crest is required to bear the excess cost.
[37]
The entitlement to keep any surplus provided
High-Crest with an opportunity to profit from the provision of the services
falling under the Unprotected Envelope. As the annual cost of the mortgage
financing was fixed, any profit would result from the efficient provision of
the services described in the definition of Accommodation Services Costs.
[38]
Under section 5.2 of the Service Agreement, the Capital
Renewal Reserve is payable in accordance with the Capital Renewal Reserve
Policy, which is attached to the agreement as Schedule F. This annual funding
had to be used by High-Crest to replace Facility Components that had failed or
were about to fail.
Facility Component is defined in section 3.0 of the Policy as “a component that is normally capitalized as
part of the original construction or generally used to provide service for more
than one year”. High-Crest is not required to
repay any amount received as a Capital Renewal Reserve payment even if the
Service Agreement expires or is terminated.
E. Funding Provided by the Department
to Residents
[39]
The funding provided by the Department to
occupants of a long-term care facility such as a nursing home is explained in
detail in the Resident Charge Policy. The document identifies three categories
of long-term care facility: nursing homes, residential care facilities and
community-based options. The Facility is in the nursing home category.
[40]
The Resident Charge Policy breaks down the cost
of staying at a long-term health care facility into two components: the health
care costs and the accommodation costs. Although different terminology is used
than in the Service Agreement, it appears that the health care costs are those
costs falling under the Protected Envelope and the accommodation costs are
those costs falling under the Unprotected Envelope.[19]
[41]
The Resident Charge Policy states that, subject
to limited exceptions, the Department funds the health care costs and the
individual occupying a bed in the facility assumes the accommodation costs.[20]
However, the occupant may be entitled to a subsidy from the Department to cover
part or all of his or her accommodation costs. As well, the maximum amount
payable by the occupant is not based on the actual accommodation costs of the
facility but on an average of the accommodation costs of all facilities in the
province that are in the same category. In the case of the Facility, the
average accommodation costs are lower than the actual accommodation costs.
[42]
To determine the average accommodation costs,
the Department first reviews the detailed budget of each long-term health care
facility in the province and sets a per diem rate for a bed in each facility
sufficient to cover the health care costs and the accommodation costs of the
facility. In the case of High-Crest, the per diem rate for a bed in the
Addition was initially set at $264.47, but this rate was amended to $286.41 by
the 2010 Budget issued at the time the beds in the Addition were first occupied
in January 2010.
[43]
The Department then determines the average of
the accommodation costs for each of the three categories of facility. This
average is used to determine what is called a Standard Accommodation Charge for
each category of facility. Effective November 1, 2008, the Standard
Accommodation Charge for a bed in a nursing home was $86.50 per day.[21]
The Standard Accommodation Charge is amended on November 1 of each year.[22]
[44]
According to the Resident Charge Policy, all
individuals requesting admission to a long-term care facility in Nova Scotia
must apply to the Department.[23]
An individual who is accepted in a long-term care facility but does not seek
financial assistance from the Department is required to pay to the facility the
Standard Accommodation Charge for that category of facility.
[45]
An individual who obtains financial assistance
from the Department is required to pay to the facility the Standard
Accommodation Charge less the amount of the assistance given to that individual
by the Department. The Department pays the balance directly to the facility. The
amount paid by the occupant is referred to as the authorized accommodation
charge. This appears to mirror the authorized accommodation charge defined in
the Development Agreement.
F. The Payments to High-Crest
[46]
The 2010 Budget fixed the annual Unprotected
Envelope costs and the annual Protected Envelope costs for the Addition at
$855,620 and $1,218,596 respectively, yielding an approved budget for the
Addition of $2,074,216 for the year. The budget for the Unprotected Envelope
includes the payment of $395,938 of principal and interest to NSHDC.
[47]
The 2010 Budget uses an assumed occupancy rate
of 99.2% to arrive at a per diem rate for the occupancy of a bed in the
Addition of $286.41. This per diem rate was averaged with the per diem that
High-Crest could charge for beds in the rest of the Facility that are funded by
the Department ($207.41) to produce an average per diem rate for a bed in the
Facility of $229.23.
[48]
Mr. Stephenson testified that the Department
makes biweekly payments to High-Crest based on the per diem per bed less the
amount that High-Crest is expected to recover from the occupants of the
Facility as accommodation charges.[24]
The biweekly payments are adjusted quarterly to reflect High-Crest’s actual
experience.[25]
[49]
Leaving aside special cases, the Department pays
to High-Crest the following amounts:
•
the health care component of the per diem;
•
for each occupant who is subsidized, the
subsidized portion of the Standard Accommodation Charge; and
•
the portion of the per diem that represents the
difference between the actual accommodation costs budgeted for the beds in the
Addition and the Standard Accommodation Charge for a nursing home bed.
[50]
The occupant pays to High-Crest the Standard
Accommodation Charge less any subsidy provided to the occupant by the
Department.
[51]
The payment of the authorized accommodation
charge by the occupant is provided for in a standard contract between
High-Crest and the occupant.[26]
Section 2.05 of the contract states:
The Resident and
the Guarantor jointly agrees [sic] to pay the daily accommodation charge
in an amount that may be determined by the Department of Health from time to
time.
[52]
In addition to the per diem, the Department pays
High-Crest the Capital Renewal Reserve, which was set at $62,700 per year.
G. Other Facts
[53]
High-Crest retained an architect and a
contractor to design and build the Addition in accordance with the
specifications set out in the RFP and the Development Agreement. The Addition
was substantially completed in January 2010 and seniors began to occupy the
units in the Addition during that month.
[54]
The Facility employs approximately 110
individuals, who work throughout the Facility. The occupants of the Facility
are almost all over 65 years of age. All of the occupants require nursing care
but the degree of care varies from individual to individual.
[55]
The Department licenses High-Crest, on an annual
basis, to operate the Facility. High-Crest must have a licence to operate the
Facility and in order to receive payments from the Department.
H. Position of the Appellant
[56]
High-Crest submits that in order for the payments
by the Department in respect of the 20-bed addition to be “government funding”
as defined in subsection 191.1(1) of the ETA, the amounts must have been paid
or payable for the sole purpose of making residential units in the Addition
available to seniors. High-Crest admits that the beds in the Addition were
residential units made available to seniors, but submits that the predominant
character of the supply by High-Crest is the provision of the Services under
the Service Agreement and that accommodation is an ancillary component of the
Services provided as consideration for the payments.
[57]
High-Crest submits that section 2.1 of the
Service Agreement and paragraph 3.0 of Appendix B to the RFP confirm that
High-Crest was being retained to provide the Services and that it was
High-Crest’s responsibility to ensure that it had a suitable facility to
provide the Services. The Addition had not been built at the time the RFP was
issued, and once High-Crest was approved as a service provider by the
Department High-Crest had to retain an architect and a contractor to construct
the Addition at its own cost. To finance the construction, High-Crest had to
obtain mortgage financing from NSHDC. Only High-Crest was at risk for these
costs.
[58]
High-Crest notes that the RFP required
High-Crest to enter into the Development Agreement, covering the period during
which the Addition was constructed, and the Service Agreement, covering the
period during which the Addition was to be operated. The Development Agreement
did not provide for any payments to High-Crest. Only the Service Agreement
provided for payments to High-Crest. Although the Service Agreement had an
initial 25-year term, a condition of the agreement was the existence of a
licence issued by the Department, which was renewable annually. High-Crest’s
entitlement to payment was therefore year to year, as the Services were
provided under the authority of the annual licence.
[59]
High-Crest submits that section 191.1 of the ETA
was not intended to apply to a situation where the grantor is paying a consideration
for the supply of something, in this case, the Services. The underlying theme
of the section is that the grantor is providing a benefit of sorts to the
builder. Here there is no benefit, only a quid pro quo.
[60]
The absence of a benefit is made clear when the
various elements of the per diem are examined. The Department pays the health
care costs, as it is required to do with all residents in the province. These
payments do not benefit High-Crest as it provides the health care services in
exchange for the payments. The accommodation charges are funded to varying
degrees by the Department but again High-Crest provides the accommodation
services in exchange for these payments. Any subsidy with respect to the
accommodation charge is a subsidy of the occupant and not High-Crest. Finally,
the Capital Renewal Reserve is paid to ensure that High-Crest can continue to
provide the Services.
I. The Position of the Respondent
[61]
The Respondent submits that the objective of the
Province in issuing the RFP was the construction of new long-term care homes. The
terms of the RFP clearly spelled out how the funding by the Department would be
structured. In January 2008, High-Crest was offered and accepted a per diem
rate, at which point it undertook to construct the Addition.
[62]
The Respondent submits that the offer made of
per diem funding was clearly predicated on High-Crest constructing the Addition
to the Facility. The per diem included the possibility of profit, which in turn
provided the incentive for High-Crest to tender a bid to build the Addition. As
well, the per diem included a capital component to cover the annual principal
and interest payable by High-Crest on the mortgage with NSHDC used to fund the
construction of the Addition. While the words used in the definition of
“government funding” are broad enough to cover funding that does not include a
capital component, the capital component reinforces the view that the payments
in this case were “government funding”.
[63]
The Respondent submits that High-Crest’s
entitlement to the government funding was established long before the deemed
self-supply in January 2010. Accordingly, in January 2010 High-Crest could
reasonably expect to receive government funding in respect of the Addition, as
required by paragraph 191.1(2)(c) of the ETA.
III. The
Statutory Provisions
[64]
The provisions of the ETA relevant to the issue
in this appeal are set out in Appendix A to these reasons.
IV. Analysis
[65]
By way of general background, goods and services
tax is paid by the recipient of goods or services. In most cases, the supplier
of the goods or services must collect this tax. If the recipient of the goods
or services uses them in a commercial activity, the recipient is in turn
entitled to claim an input tax credit to offset the tax it paid to acquire the
goods or services. The intended result is that tax is imposed on the value
added at each stage in the supply of goods or services until they reach the
final user or consumer, who bears the full economic burden of the tax. Where
the supply is made in a participating province such as Nova Scotia, the tax
imposed by the ETA is called the harmonized sales tax, or HST, rather than the
goods and services tax, or GST.
[66]
Sections 190 to 192 of the ETA set out special
rules applicable to real property. In general terms, subsection 191(4) of the
ETA addresses a situation where the builder of a new addition to a multiple
unit residential complex[27]
that is substantially completed gives a person possession or use of a
residential unit in the addition under a lease, licence or similar arrangement
for the purpose of occupying the unit as a place of residence and the person is
the first person to occupy the unit. Where subsection 191(4) applies, the
builder is deemed to have made and received a taxable supply of the addition
and is deemed to have paid and collected HST based on the fair market value of
the addition at the time of the deemed supply.
[67]
The rule in subsection 191(4) of the ETA is
commonly referred to as a self-supply rule because the builder is both the
supplier and the recipient of the supply for the purposes of calculating and
collecting HST in respect of the addition. The rule places the financial burden
of the HST on the builder.[28]
However, the builder may claim input tax credits in respect of the cost of
constructing the addition, as the addition has been deemed to be the subject of
a taxable supply.
[68]
High-Crest agrees that the self-supply rule in
subsection 191(4) applied to it in January 2010 when the Addition was
substantially completed and individuals began to occupy it. The issue is
whether the deeming rule in subsection 191.1(2) of the ETA applies to the
self-supply of the Addition. If that rule applies, the HST payable by
High-Crest on the self-supply under subsection 191(4) of the ETA is deemed to
be equal to the greater of the HST calculated on the fair market value of the
Addition at the time of the self-supply and the HST payable by High-Crest in
respect of the construction of the Addition.[29]
The parties agree that the former amount is $350,000 and the latter amount is
$646,304.
[69]
High-Crest agrees that the conditions in
paragraphs 191.1(2)(a) and (b) are satisfied in respect of the
Addition. Specifically:
•
The Facility is a residential complex and the
Addition is an addition to a residential complex;
•
High-Crest is the builder of the Addition;
•
By virtue of subsection 191(4) of the ETA,
High-Crest is deemed to have made a self-supply of the Addition in January
2010; and
•
Possession or use of at least 10% of the
residential units in the Facility is intended to be given for the purpose of
their occupancy as a place of residence or lodging by seniors.
[70]
This leaves only the question of whether
High-Crest received or could reasonably expect to receive “government funding
in respect of the complex” at the time of the self-supply in January 2010.[30]
[71]
The definition of “government funding” in
subsection 191.1(1) of the ETA states:
“government
funding”, in respect of a residential complex, means an amount of money
(including a forgivable loan but not including any other loan or a refund or
rebate of, or credit in respect of, taxes, duties or fees imposed under any
statute) paid or payable by
(a) a grantor, or
(b) an organization that received the amount from a grantor
or another organization that received the amount from a grantor,
to a builder of
the complex or of an addition thereto for the purpose of making residential
units in the complex available to individuals referred to in paragraph (2)(b).
[72]
The definition can be broken down into the
following requirements:
A.
There must be a
residential complex in respect of which the definition is being applied. “Residential
complex” is defined in subsection 123(1) of the ETA to mean, among other
things, the part of a building in which one or more “residential units” are
located. The definition of “residential unit” makes express reference to a
suite or room in a residence for seniors, individuals with a disability or
other individuals.[31]
The Facility is a residential complex.
B.
There must be an amount
of money. “Amount” is defined in subsection 123(1) of the ETA to mean money,
property or a service, expressed in terms of the amount of money or the value
in terms of money of the property or service. “Money” is defined in subsection
123(1) of the ETA to include any currency, cheque, promissory note, letter of
credit, draft, traveller’s cheque, bill of exchange, postal note, money order,
postal remittance and other similar instrument, whether Canadian or foreign. Since
the definition of money is inclusive, the ordinary meaning of money also
applies.
The use of the words amount and money
together means there is overlap as amount means money, etc. However, a
reasonable view is that the reference to both amount and money is to ensure
that only amounts paid or payable in the form of money are caught by the
definition. Amounts that are paid or payable in the form of property[32]
or services are not caught even if these amounts are expressed in terms of an
amount of money.
An “amount of money” includes a forgivable
loan. However, it does not include any other form of loan nor does it include a
refund, rebate or credit in respect of taxes, duties or fees imposed under any
statute.
The loan provided to High-Crest by NSHDC is
not forgivable and therefore is not an amount of money. On the other hand,
there is no doubt that the biweekly payments made by the Department to
High-Crest under the terms of the Service Agreement are amounts of money.
C.
The amount of money
must be paid or payable either by a grantor or by an organization that received
the amount either from a grantor or from another organization that received the
amount from a grantor. “Grantor” is defined to mean, among other things, a
government or municipality other than certain corporations.[33] The Department is a
department of the government of Nova Scotia and is represented in the Service
Agreement by the Minister of Health for Nova Scotia. Accordingly, the
Department is a grantor.
D.
The amount of money
must be paid or payable either to a builder of the residential complex in
respect of which the definition is being applied or to the builder of an
addition to that residential complex. The biweekly payments are made by the
Department to High-Crest, the builder of the Addition. Accordingly, the amount
of money is payable and paid to a builder of an addition to a residential
complex in respect of which the definition is being applied.
E.
The amount of money
must be paid or payable by the grantor or organization to the builder for the
purpose of making residential units in the residential complex available to
individuals described in paragraph 191.1(2)(b) of the ETA.
[73]
High-Crest agrees that the requirements of the
definition described in A to D above are satisfied, but argues that the
requirement described in E is not satisfied. Specifically, the argument is that
any amount of money that was payable to High-Crest in January 2010 under the
terms of the Service Agreement was not payable by the Department for the
purpose of making residential units in the Facility available to seniors.
Rather, the amount of money was payable for the purpose of securing the
Services that High-Crest was obligated to provide under the terms of the
Service Agreement.
[74]
High-Crest argues that this conclusion is
supported by three key facts. First, in order to receive the payments,
High-Crest had to successfully renew the annual licence issued by the
Department. Without the licence, High-Crest could not operate the Facility and
therefore would not receive any payments from the Department. Accordingly, the
payments were inextricably linked to the ongoing provision of the Services and
not to the availability to seniors of units in the Addition.
[75]
Second, the Development Agreement directly
addressed the construction of the Addition but did not provide for any funding
for that construction. All of the funding of the Addition was provided by
High-Crest using the mortgage financing provided to it by NSHDC.
[76]
Third, the occupants of the Addition were liable
for the Standard Accommodation Charge, and any subsidy for that charge was provided
to the occupant and not to High-Crest. The Standard Accommodation Charge
included an amount based on the average amortized cost of constructing long‑term
care facilities in Nova Scotia. Accordingly, any money payable to High-Crest
for accommodation in the Addition was payable by the occupant and was not
payable by the Department for the purpose of making units in the Addition
available to seniors.
[77]
To address the Appellant’s position, it is
necessary to consider the purpose test in the definition in some detail. The
word “purpose” is defined in the Oxford
English Dictionary (2nd ed.) as follows:
That which one
sets before oneself as a thing to be done or attained; the object which one has
in view.
[78]
The question then is what did the Department set
out to achieve when it agreed to pay High-Crest the amounts of money determined
in accordance with the terms of the Service Agreement? Was it securing the
Services, as contended by the Appellant, or was it making residential units in
the residential complex available to seniors, as contended by the Respondent?
[79]
The difficulty in answering this question lies
in the fact that, in agreeing to pay High-Crest the amounts specified in the
Service Agreement, the Department secured both results. Each is a substantial
result that is not incidental, ancillary or remote. However, in my view, only
one result is reflective of the purpose behind the arrangements and the
payments by the Department to High-Crest that are a part of those arrangements.
The other result merely reflects the means by which that purpose was achieved.
[80]
Before explaining this comment, it is helpful to
consider the text, context and purpose of the definition of “government funding”. As already stated, the text of
the definition requires the court to focus on “the
purpose” for which an amount of money was paid or payable by the grantor
or organization to the builder. In light of the focus on the purpose of a third
party - the grantor or organization - the use of the definite article “the” before the word “purpose”
suggests that the definition requires a determination of the main or dominant
purpose of the grantor or organization. Otherwise the builder would be faced
with the near impossible task of ruling out all other possible purposes.
[81]
The context of the definition is that it is part
of section 191.1 of the ETA and the defined term is used in paragraph 191.1(2)(c)
of the ETA. The purpose of the definition is to identify the type of funding
that the builder must receive or reasonably expect to receive in order to
satisfy the condition in paragraph 191.1(2)(c) of the ETA.
[82]
If the conditions in subsection 191.1(2) are
satisfied, then the builder must self-assess the HST in a manner that departs
from the standard fair market value rule in subsections 191(1) to (4) of the
ETA. Given that the definition is pivotal in identifying when to depart from
the standard rule, a reasonable degree of certainty in the scope of the
definition is to be preferred over an unworkably broad interpretation that
accepts any degree of purpose on the part of the grantor or organization. Such
an interpretation is also consonant with the general proposition that
certainty, predictability and fairness are the preferred outcome in the
interpretation of tax law. In effect, the context and purpose confirm that “the purpose” should be interpreted as the dominant
purpose of the grantor or organization.[34]
[83]
With respect to how to determine purpose in any
given case, in Ludco Enterprises the Supreme Court of Canada stated:[35]
. . . In the
interpretation of the Act, as in other areas of law, where purpose or intention
behind actions is to be ascertained, courts should objectively determine the
nature of the purpose, guided by both subjective and objective manifestations
of purpose . . . .
[84]
In this case, because of the amorphous nature of
the grantor and the absence of testimony from a representative of the grantor,
the determination of purpose is necessarily based on all of the circumstances
leading up to the occupancy of the Addition by seniors in January 2010. This
includes, in particular, the content of the RFP, the Development Agreement and
the Service Agreement and the various attachments to those documents as well as
any communications between the Department and High-Crest regarding the
Addition.
[85]
Returning to my earlier comment regarding the
two results achieved by the arrangements imposed by the Department, it is
important to recognize that the definition of “government
funding” does not dictate any particular means by which the described
purpose must be achieved. The definition instead focuses on the question of
whether the purpose (i.e., aim or object) of the grantor with respect to the
amount of money that was paid or payable to the builder was making residential
units in a residential complex available to individuals described in paragraph
191.1(2)(b) of the ETA. If that purpose is the driving force behind
arrangements that involve payments by the grantor to the builder, then the only
reasonable conclusion is that the payments have the same purpose or objective
as the arrangements.
[86]
The objective of the Department in entering into
the arrangements with High-Crest is described in the background section of the
RFP as follows:
In May 2006, the
Nova Scotia government approved the Continuing Care Strategy for Nova Scotia -
Shaping the Future of Continuing Care. In the Strategy, the Government has
committed to build new long-term care homes to support the vision of living
well in a place you can call home. The Long Term Care Program Requirements
and the Space and Design Requirements documents complement one another and were
created to provide direction for the development of these new long term care
facilities from the perspectives of care and service, as well as physical
environment. [Emphasis added.]
[87]
The RFP also states that the RFP process is
being employed to “select an organization or
organizations to provide the facilities and services required to support 594
Level II Nursing Home beds and 210 Residential Care Facility (RCF) beds
throughout the Province.” In other words, the province chose to use the
arrangements described in the RFP, the Development Agreement and the Service
Agreement to achieve its objective of building new long‑term care
facilities in Nova Scotia. These arrangements included payments to the
successful bidders for the provision of nursing home beds and the accompanying
services. In this circumstance, the purpose of the arrangements and the purpose
of the payments under those arrangements cannot readily be separated.
[88]
It is true that the means by which the
government achieved its objective of supplying additional long‑term care
beds to seniors in the province did not involve direct funding of the cost of
the Addition. However, direct funding of this cost is not required by the
definition of government funding. As already stated, the definition requires
that it be determined whether the purpose of the grantor was making residential
units in a residential complex available to seniors.
[89]
In this case, the Department’s stated objective
in pursuing the arrangements with bidders was “to build
new long-term care homes to support the vision of living well in a place you
can call home.” This objective is achieved through the arrangements set
out in the RFP, the Development Agreement and the Service Agreement, and these
arrangements call for significant payments of money by the Department to
High-Crest.
[90]
The terms and conditions of the arrangements
dictated by the Department in the RFP are extremely detailed, but at their core
are the provision of new long‑term care beds by the successful bidder and
the establishment of a per diem rate for the occupancy of the new beds, which
was to be paid in large part by the Department. For example, the offer by the
Department to High-Crest on January 7, 2008 awards High-Crest the 20‑bed
addition to its Facility in Springhill and details the per diem payable for the
occupancy of those beds. High-Crest is required to accept the per diem in
writing within one week of the offer. In its letter of January 15, 2008,
High-Crest accepts the per diem and agrees to construct a facility according to
the specifications in Appendix B to the RFP.
[91]
The per diem established under the arrangements
dictated by the Department covers the cost of building and operating the new
facility and provides High-Crest with an opportunity for profit on the
non-health care aspect of the operations. At the time of the offer to
High-Crest in January 2008, the per diem was fixed at $264.47. The Standard
Accommodation Charge (i.e., the portion of the per diem that was the
responsibility of the occupant) as of November 1, 2008 was $86.50 according to
the Resident Charge Policy included with Schedule C to the Service Agreement. Accordingly,
from the outset, the Department had agreed to pay at least 67.3% of the per
diem directly to High-Crest. In addition, the Department had agreed to pay
High-Crest any subsidy it awarded to an occupant and the Capital Renewal
Reserve.
[92]
High-Crest argued that the occupant was
responsible for the accommodation charges and that this supported the position
that the amounts paid by the Department were not for the purpose of making
additional nursing home beds available to seniors. However, the reality is that
the Department paid all but the authorized accommodation charge (i.e., the
Standard Accommodation Charge less any subsidy provided to the occupant) to
High-Crest. The agreement between High-Crest and the occupant reflected this
reality as it required the occupant to pay only the amount that the Department
permitted High-Crest to charge that particular occupant. In any event, the
definition of government funding does not require a tracing of the specific use
of the amount of money paid or payable by the grantor to the builder – it only
requires a determination of the purpose for which an amount of money is paid or
payable to the builder.
[93]
It is also true that High-Crest was required to
provide the Services as consideration for the payments it received from the
Department. However, this does not alter the fact that the dominant purpose of
the Department in entering into these arrangements and agreeing to make these
payments was to secure additional long‑term care beds for seniors in Nova
Scotia. The immediate result of the payments may have been the provision of the
Services but that was not the purpose behind the payments.
[94]
To summarize, the purpose of the arrangements
mandated by the Department is clear. The government of Nova Scotia as
represented by the Department needed new long‑term care facilities and
chose to partner with the private sector to bring that objective to fruition. The
means of achieving the desired objective was to provide for successful bidders a
guaranteed level of funding, which is payable under the terms of a service
contract. This means does not alter the objective that was sought to be
achieved by the government in unilaterally establishing the arrangements with
successful bidders.
[95]
The fact that High-Crest was subject to an
annual licensing requirement does not alter the purpose of the funding provided
by the Department to High-Crest. The annual licensing requirement is simply a
mechanism used to ensure ongoing compliance with the very detailed operating
parameters imposed by the Department in the RFP, the Development Agreement and
the Service Agreement.
[96]
As well, the fact that the Development Agreement
did not itself provide for funding of the Addition is not indicative of the
purpose of the payments under the Service Agreement. The RFP and the
Development Agreement each contemplated the execution of the Service Agreement,
and section 4.2 of the Development Agreement described the funding conditions.
Collectively, these three documents and their many attachments reflect the
means by which the Department achieved its objective of building new long-term
care facilities in Nova Scotia, and these means included significant payments
of money by the Department to High-Crest.
[97]
For the foregoing reasons, the appeal of
High-Crest is dismissed with costs to the Respondent.
Signed
at Ottawa, Canada, this 30th day of September 2015.
“J.R. Owen”
Appendix
A
Statutory Provisions
123(1) - Definitions
“amount” means money,
property or a service, expressed in terms of the amount of money or the value
in terms of money of the property or service;
“builder” of a
residential complex or of an addition to a multiple unit residential complex
means a person who
(a) at a time
when the person has an interest in the real property on which the complex is
situated, carries on or engages another person to carry on for the person
(i) in the case of an
addition to a multiple unit residential complex, the construction of the
addition to the multiple unit residential complex, and
(ii) [Repealed.]
(iii) in any other case,
the construction or substantial renovation of the complex,
. . .
“money” includes any
currency, cheque, promissory note, letter of credit, draft, traveller’s cheque,
bill of exchange, postal note, money order, postal remittance and other similar
instrument, whether Canadian or foreign, but does not include currency the fair
market value of which exceeds its stated value as legal tender in the country
of issuance or currency that is supplied or held for its numismatic value;
“multiple unit
residential complex” means a residential complex that contains more than one
residential unit, but does not include a condominium complex;
“residential complex”
means
(a) that part of
a building in which one or more residential units are located, together with
(i) that part of any
common areas and other appurtenances to the building and the land immediately
contiguous to the building that is reasonably necessary for the use and
enjoyment of the building as a place of residence for individuals, and
(ii) that proportion of
the land subjacent to the building that that part of the building is of the
whole building,
. .
.
“residential unit” means
(a) a detached
house, semi-detached house, rowhouse unit, condominium unit, mobile home,
floating home or apartment,
(b) a suite or
room in a hotel, a motel, an inn, a boarding house or a lodging house or in a
residence for students, seniors, individuals with a disability or other
individuals, or
(c) any other
similar premises,
or that part thereof that
(d) is occupied
by an individual as a place of residence or lodging,
(e) is supplied
by way of lease, licence or similar arrangement for the occupancy thereof as a
place of residence or lodging for individuals,
(f) is vacant,
but was last occupied or supplied as a place of residence or lodging for
individuals, or
(g) has never
been used or occupied for any purpose, but is intended to be used as a place of
residence or lodging for individuals;
191(4) Self-supply of
addition to multiple unit residential complex — For the purposes of this Part,
where
(a) the
construction of an addition to a multiple unit residential complex is
substantially completed,
(b) the builder
of the addition
(i) gives, to a
particular person who is not a purchaser under an agreement of purchase and
sale of the complex, possession or use of any residential unit in the addition
under a lease, licence or similar arrangement entered into for the purpose of
the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession
or use of any residential unit in the addition to a particular person under an
agreement for
(A) the supply by way of
sale of the building or part thereof forming part of the complex, and
(B) the supply by way of
lease of the land forming part of the complex or the supply of such a lease by
way of assignment, or
(ii) where the builder
is an individual, occupies any residential unit in the addition as a place of
residence, and
(c) the builder,
the particular person, or an individual who has entered into a lease, licence
or similar arrangement in respect of a residential unit in the addition with
the particular person, is the first individual to occupy a residential unit in
the addition as a place of residence after substantial completion of the
construction of the addition,
the builder shall be
deemed
(d) to have made
and received, at the later of the time the construction of the addition is
substantially completed and the time possession or use of the unit is so given
to the particular person or the unit is so occupied by the builder, a taxable
supply by way of sale of the addition, and
(e) to have paid
as a recipient and to have collected as a supplier, at the later of those
times, tax in respect of the supply calculated on the fair market value of the
addition at the later of those times.
191.1 (1) Definitions —
The definitions in this subsection apply in this section.
“government funding”, in
respect of a residential complex, means an amount of money (including a
forgivable loan but not including any other loan or a refund or rebate of, or
credit in respect of, taxes, duties or fees imposed under any statute) paid or
payable by
(a) a grantor, or
(b) an
organization that received the amount from a grantor or another organization
that received the amount from a grantor,
to a builder of the
complex or of an addition thereto for the purpose of making residential units
in the complex available to individuals referred to in paragraph (2)(b).
“grantor” means
(a) a government
or municipality, other than a corporation all or substantially all of whose
activities are commercial activities or the supply of financial services or any
combination thereof;
. . .
(2) Subsidized
residential complexes — For the purposes of subsections 191(1) to (4), where
(a) a builder of
a residential complex or an addition thereto is deemed under any of subsections
191(1) to (4) to have, at any time, made and received a supply of the complex
or addition,
(b) possession or
use of at least 10% of the residential units in the complex is intended to be
given for the purpose of their occupancy as a place of residence or lodging by
(i) seniors,
. . . and
(c) except where
the builder is a government or a municipality, the builder, at or before that
time, has received or can reasonably expect to receive government funding in
respect of the complex,
the amount of tax in
respect of the supply calculated on the fair market value of the complex or
addition, as the case may be, is deemed to be equal to the greater of
(d) the amount
that would, but for this subsection, be the tax calculated on that fair market
value, and
(e) the total of
all amounts each of which is tax that was payable by the builder in respect of
(i) real property that
forms part of the complex or addition, as the case may be, or
(ii) an improvement to
that real property.
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