REASONS
FOR JUDGMENT
Campbell J.
Introduction
[1]
British Columbia Ferry
Services Inc. (“BCF”) operates and administers
one of the largest and most complex fleet of ferries in the world, based on the
number of passengers transported annually and the supporting transportation
infrastructure (Exhibit A‑1, Tab 2). On some of its routes along the British Columbia coast, it provides the service of ferry transportation only, which is an
exempt supply. On other routes, along with this core ferry service, BCF also
provides certain commercial or ancillary services which are taxable supplies.
[2]
The ancillary services include the following:
10. …
a. Catering (buffet restaurants, snack bars, cafeterias);
b.
Specialty lounges (eg. The Seawest Lounge, and the Raven??? [sic]
Lounge on the Northern Routes);
c. Retail store;
d. Massage chairs;
e. Stateroom rentals (northern vessels and spirit class);
f. Conference room rentals;
g. Vending machines (throughout the fleet);
h. Video arcades;
i. ATM machines, and,
j. Third party advertising.
(Appellant’s Brief, Part 1, paragraph 10)
[3]
BCF is entitled to claim input tax credits (“ITCs”) but only to the extent they are used in the course of
providing those taxable supplies, the ancillary commercial activities. However,
the Minister of National Revenue (the “Minister”) took issue with how BCF
allocated certain inputs between the provision of its exempt and taxable
supplies. The monthly Goods and Services Tax (“GST”)
reporting periods that are in issue are those periods from April 2, 2003
to June 30, 2005 (the “First Period”) and the
period of March, 2007 (the “Second Period”)
(collectively the “Periods”).
[4]
There are several issues which arose in these appeals.
The first related to the categorization of the infrastructure decks and
staterooms located on some of the ferries. While the Minister categorized these
as exempt supplies, BCF treated the propulsion and steering-related decks, as
well as those decks containing the overnight staterooms, as providing a common
service that would be both taxable and exempt. As well, BCF categorized the
stateroom deck on the vessel, the Northern Adventure, as taxable. The ITCs
which BCF claimed, in respect of fuel and lubricants, were also an issue. BCF
submitted that fuel is a common input, acquired and consumed in the provision
of both taxable and exempt supplies. The Minister contended that substantially
all of the fuel and lubricants were acquired and consumed to provide ferry
transportation, an exempt supply. Finally, BCF claimed ITCs, equal to 100
percent of the GST paid in the acquisition and importation of the Northern
Adventure vessel, because it calculated that over 50 percent of the
vessel’s area was used in making a taxable supply. The Minister submitted that
this vessel was acquired primarily to provide exempt ferry transportation and,
therefore, BCF is not entitled to any of the ITCs it has claimed.
The Facts
[5]
The parties submitted an Agreed Statement of
Facts, which I have attached as Schedule “A” to these reasons.
A. BCF
[6]
BCF provided core ferry services for vehicles
and passengers on 25 routes, along the coast of British Columbia, supported by
37 vessels and 47 terminals.
[7]
From 1977 until April 2003, BCF existed as a
provincial Crown corporation which was not assessed GST. On April 2, 2003, BCF
was incorporated by way of statutory conversion pursuant to the Coastal
Ferry Act, [SBC 2003] C. 14, (the “CFA”).
This act redefined the legislative framework for the operation of the Province’s
ferry system. When BCF was converted to a company under the Business
Corporations Act (British Columbia), it became liable to pay federal taxes,
including GST.
B. The
British Columbia Ferry Authority
[8]
Under the CFA, the British Columbia Ferry
Authority (the “BCFA”), a no-share capital
corporation and not-for-profit entity, was established. The directors of BCFA
also served as directors of BCF. Consequently, BCFA owns and controls BCF. Upon
dissolution of the BCFA, all of its assets, if any, would vest in the Province.
BCFA’s annual reports and general meetings were required to be open to the
public.
[9]
Under provincial law, the activities of BCF are
separated in respect to the core provision of ferry services and the provision
of ancillary commercial services on some vessels. The CFA defines ferry transportation
services as “the transportation of vehicles and
passengers on designated ferry routes” but specifically excludes ancillary
services from this definition (CFA, Part 1 – Interpretation). The
regulatory scheme, provided for in the CFA, applies only to the core
ferry service that BCF provides, but does not apply to the ancillary services
provided. This was in keeping with the reasons respecting the transition of BCF
from a Crown corporation to a private corporation which required BCF to operate
the ferry service system in a commercially viable manner.
C. The Coastal Ferry Service Contract
[10]
BCF operates in a highly-regulated environment.
When the BCF was incorporated in 2003, it entered into the Coastal Ferry
Services Contract (the “Contract”) with the
Province. This Contract regulated the operation and the activities of the
Province’s ferry system and provided for the payment by the Province of service
fees to BCF in exchange for, among other things, the provision of core ferry
service levels. Under the CFA, BCF was required to operate its ferry
services according to commercially viable principles. Consequently, although
BCF was to be independent from government, it was required to operate on a commercial
basis. (the Contract, page 1). This Contract also contained a number of
prohibitions. BCF could not, without the Province’s consent, adjust the ferry
schedule, adjust core service levels or assign the Contract. If for any reason
the Contract was terminated, any rights granted to BCF under the Contract, or
the CFA, vested in the Province.
D. The
British Columbia Ferries Commissioner
[11]
Under the jurisdiction of the CFA, the
provincial British Columbia Cabinet appointed a Commissioner to regulate BCF’s
provision of core ferry services and to establish a price cap on the tariffs
that could be charged for such services. The Commissioner, however, had no
regulatory powers over the ancillary services provided by BCF, although he possessed
extensive powers otherwise to regulate BCF’s ferry transportation services. In
summary, the provision of these core ferry services is subject to, not only the
Provincial statute, the CFA, but also, its provincially owned parent,
the BCFA, the terms of the Contract with the Province as well as the regulation
of its watchdog, the Commissioner. Although the BCF provides ancillary
commercial services onboard some of its vessels, which are meant to subsidize the
core ferry transportation services, the Commissioner is specifically prohibited
from regulating these ancillary services. Generally, BCF is entitled to claim
ITCs for GST paid on its inputs to the extent that those were acquired for
consumption, use or supply in the course of its ancillary or commercial
activities.
E. BCF’s
Allocation Method
[12]
To the extent that an input was used directly
and exclusively in BCF’s commercial activities, it was entitled to claim a full
ITC. Similarly, where an input was used directly and exclusively in BCF’s
exempt activities, it was not entitled to claim any ITCs. Where BCF was unable
to directly attribute its inputs to taxable supplies, it was entitled to choose
a “fair and reasonable” method to allocate
common ITCs between taxable and exempt supplies. Initially, between April 2,
2003 and May 31, 2005, BCF employed the output method to calculate the
percentage of its operations that related to taxable supplies in order to
determine its ITC entitlement. This method “… prorated
the amount of taxable revenue from ancillary services against the exempt Core
Ferry Service revenue on each route. These amounts were then prorated in
totality to determine an overall percentage which was then applied to inputs
associated with general operating expenses (eg. head office, etc.)”
(Appellant’s Brief, paragraph 61).
[13]
In 2005, and upon the advice of a tax
consultant, BCF switched its ITC allocation method to the input method. Where
possible, BCF directly attributed what it considered to be single-use inputs to
either exempt or taxable supplies. BCF attributed the cost of goods sold in food
and retail operations, catering supplies and expenditures related to food and
retail services together with paid terminal parking to its taxable activities
for which it claimed and was allowed 100 percent of ITCs on which GST had been
paid. BCF then calculated a taxable supply percentage for each vessel and each
terminal in order to allocate non‑single use, or common, inputs between
taxable and exempt activities. The various decks on the relevant vessels and
the areas at each terminal utilized by BCF were classified into one of three
categories: exempt areas, used only in the making of exempt supplies, taxable
areas, used only in the making of taxable supplies and common areas, used in the
making of both taxable and exempt supplies.
[14]
In respect to the terminals, BCF measured the
area that was devoted to each of these three categories. Areas with paid
parking, retail and restaurants were categorized as taxable while the ramp
areas and holding areas for cars and passengers were determined to be exempt.
The terminal areas relating to administration and electrical buildings, as well
as employee parking areas, were categorized as common. There was no dispute
respecting BCF’s entitlement to ITCs using this method of allocation in respect
to its terminals.
[15]
The percentage of taxable use on ferries was
calculated using a “deck by deck” method. Each
vessel deck was categorized as belonging to one of the three categories, that
is, exempt, taxable or common, and then the entire area of that deck was attributed
to that particular category.
[16]
The Minister did not dispute the “deck by deck” method as being fair and reasonable.
The issue arose over how BCF categorized some of the decks on certain vessels.
[17]
There is no dispute respecting BCF’s
categorization of the car decks as exempt or the passenger decks, where
ancillary services occurred, as taxable. However, the dispute arose over the
categorization of the infrastructure and stateroom decks.
F. Classification
of Infrastructure and Stateroom Decks
[18]
BCF categorized those decks containing the
infrastructure, that is, the propulsion and steering, as common because they constituted
both a direct and indirect input to the provision of ancillary services. The
provision of staterooms was treated as part of a taxable supply. The Minister
contended that BCF’s categorization was neither fair nor reasonable and that
all decks in issue provide exempt services related to the core ferry services for
which no ITCs can be claimed.
[19]
BCF calculated a percentage of each vessel and
terminal used in the making of taxable supplies using the following formula:
|
total taxable area in square
metres
|
x 100
|
|
total area – total common area
|
(Agreed Statement of Facts, para 71)
[20]
Based on this formula, BCF calculated that 13
vessels and 11 terminals had taxable use percentages of less than 10 percent.
Therefore, BCF was not entitled to claim any further ITCs beyond those in its
direct attribution claims. For the remaining ferries and terminals, BCF claimed
ITCs based on the taxable use percentages that it calculated for each according
to the formula.
G. Fuel
and Lubricants
[21]
BCF submitted that fuel consumption serves a
dual purpose. In addition to propulsion of the vessels, fuel supports the
provision of ancillary services because those commercial activities require
additional weight and space onboard the vessels. Therefore, not all fuel is
used for propulsion. Consequently, since fuel and lubricants can be viewed as
common inputs in the provision of both taxable and exempt supplies, BCF claimed
ITCs proportional to the percentage of commercial activity on each vessel.
[22]
The Minister’s position was that these items
constitute a single use input, substantially all of which is consumed in the
propulsion of the vessels and, therefore, they relate to the provision of
exempt ferry transportation services.
H. The
Importation of the Northern Adventure
[23]
When the Queen of the North vessel sank in
March, 2006, BCF commenced a search for a replacement vessel to service its
northern routes. Without another vessel, BCF could not meet its contractual
obligations with the Province to provide core ferry service levels. In July,
2006, BCF requested and obtained from the Commissioner a declaration respecting
the expenditure of $233 million for a replacement vessel. In October,
2006, the Northern Adventure vessel was acquired from a company outside of Canada.
[24]
The parties agreed that the Northern Adventure
was a capital asset that was to be used on the northern routes. When a
registrant imports a capital asset, it may claim 100 percent of the related GST
as ITCs provided the asset is acquired for use “primarily”
in its commercial activities. However, if it is acquired and imported “primarily” for use in exempt activities, then ITCs
cannot be claimed.
[25]
The Northern Adventure was purchased for $51
million and imported into Canada in March, 2007. BCF paid approximately $13.1
million in customs duty and $3.9 million in GST. BCF applied for and received
remission from the Federal Government in respect of the customs duty. BCF
claimed ITCs of $3.9 million because it claimed that the Northern
Adventure was imported primarily for use in its commercial activities on the
basis that, pursuant to the allocation method calculation, over 50 percent of
the vessel’s space was used in the making of its taxable supplies. The
Minister’s position was that this vessel was imported for use primarily in the
provision of exempt ferry transportation services and therefore no ITCs could
be claimed.
The Evidence
[26]
BCF relied on the testimony of James Murray, its
Comptroller, and Mark Collins, its Vice-President of Engineering. Both individuals
have held these positions since 2004. The Respondent relied on the testimony of
Richard Young and Annette Coles, the auditors responsible for the audits of the
First Period and Second Period, respectively.
[27]
Mr. Murray explained that BCF’s conversion from
a Crown corporation was meant to address the manner in which BCF undertook
capital expenditures in the ferry transportation system. As a Crown
corporation, it was not conducive to expanding its capital spending as it was
competing for funding with other provincial priorities, such as health care,
which were considered more pressing matters for government to address.
Throughout the Periods under appeal, revenue had increased, with much of it
attributable to the ancillary services. For example, revenue from retail sales
in the fiscal year ending March 31, 2006 grew to $68.8 million from $63.2
million in 2004 (Exhibit A-1, Tab 4). The significant role that ancillary
services played in BCF’s operations is reflected in the number of staff
dedicated to the provision of these services. “In any
given year, approximately one-half of the total number of crew members on the
vessels deployed on substantial commercial routes, are engaged directly and
exclusively in the provision of commercial services.” (Exhibit A-4, Tab
8).
[28]
Mr. Murray explained the nexus between
propulsion of the vessels and their commercial activities carried out onboard
in the following manner:
If the ship does
not move customers will not come. We will not sell anything on board our ships
or at our terminals.
(Transcript, Volume 1, page 95)
Essentially, the movement of vessels on the routes provides BCF with
a high customer turnover, creating a captive market on board the vessels while they
are sailing. These factors boost sales of ancillary services that are offered
on some vessels. As a consequence of this nexus, BCF’s allocation method
categorized all infrastructure decks as common, although Mr. Murray
acknowledged that no commercial activities actually occurred on those decks
(Transcript, Volume 2, page 193).
[29]
According to Mr. Murray, this nexus between
propulsion of the vessel and commercial activity was also the reason BCF
claimed ITCs on fuel and lubricants, BCF’s largest input cost for operating its
vessels, apart from wages:
Well, we’ve –
we’ve claimed input tax credits and fuel and lubricants because of the
importance of the – of the - the fact that the vessel moves from Point A to
Point B. Without that movement no customers. Without that movement we do not
sell.
(Transcript, Volume 1, page 92)
[30]
On cross-examination, however, Mr. Murray conceded
that the primary use of the fuel was to propel the ferries (Transcript, Volume
2, page 201).
[31]
In respect to the stateroom rentals, Mr. Murray
testified that they were not part of the ferrying services and were not charged
to passengers as part of the cost of basic service for ferrying:
… It’s an extra
charge. Those charges are not regulated by the ferry’s commissioner so it’s not
part of core ferry services, its ancillary service.
… the purchase of
a cabin is totally optional.
(Transcript, Volume 1, page 96)
[32]
The testimony of Mark Collins was largely
technical. He stated that the design and operation of the BCF vessels in issue
are inextricably linked to the level of ancillary services on board each
vessel. Ancillary services make the design and operation of a vessel
exponentially more complex. Invariably, vessels get larger, heavier and their
systems more complex in order to accommodate ancillary commercial services. For
example, the water and electrical systems on a vessel with significant
ancillary services will be much larger and heavier than the same systems on those
vessels without commercial activities. Consequently, more fuel will be consumed
on vessels with ancillary operations because such activities consume more
energy.
[33]
However, Mr. Collins acknowledged that
individual fuel consumption of a particular component or system within the
engine room would be difficult to determine. No breakdown method exists that
can be used in the calculation of how much fuel might be consumed by ancillary
services.
[34]
On cross-examination, Mr. Collins admitted that
the primary use of the infrastructure decks was to provide transportation.
Nevertheless, his evidence established that, to some extent, those decks do
play a role in supporting the ancillary services aboard each vessel.
[35]
Richard Young, the auditor for the First Period,
testified that the infrastructure decks are properly characterized as exempt
because the entire infrastructure would exist regardless of the vessel’s
commercial activity. Annette Coles was the auditor for the Second Period and
specifically in respect to the importation of the Northern Adventure. It was
her position that this vessel had been acquired to satisfy the terms of the
Contract, that is, the provision of ferry services, even though taxable
activities occurred on the vessel.
The Issues
[36]
The first issue is whether BCF used a fair and
reasonable method to allocate ITCs between its taxable and exempt supplies in
respect to its infrastructure decks for the First Period. This issue involves a
determination of whether infrastructure decks should be characterized as common
in that they provide both taxable and exempt supplies. In addition, it must be
determined if rental of the staterooms can be characterized as taxable. If they
are taxable, then as a sub issue to the stateroom characterization, the Respondent
has taken the position that any claim by BCF for ITCs should be offset by the GST
that BCF failed to collect.
[37]
The next issue is whether BCF is entitled to
ITCs in respect to fuel and lubricants consumed in the operation of the vessels
in respect to the First Period. A determination respecting fuel and lubricants
is dependant on whether “substantially all” of
the fuel and lubricants was acquired and consumed by BCF to provide only an
exempt supply or to provide both taxable and exempt supplies.
[38]
The final issue is whether BCF is entitled to
ITCs in respect to the acquisition and importation of the Northern Adventure
vessel. This involves a determination of whether that vessel was imported for
use “primarily” for commercial activities, as
quantitatively calculated by BCF’s “deck by deck”
allocation method, or imported for use primarily in providing exempt ferry
transportation services.
Analysis
A. Statutory Framework and Caselaw
[39]
The issues in these appeals are governed
primarily according to the application of the following provisions of the Excise
Tax Act (the “Act”): subsection 169(1), section
141, section 141.01 and paragraph 199(2)(a). As well, the definitions of “commercial
activity”, “exempt supply” and “short term accommodation”, contained in section
123, are also relevant. The Appellant also relied on Schedule V, Part VIII,
paragraph 1 in respect to its position on the acquisition of the Northern
Adventure vessel.
[40]
There are a
number of provisions contained in the CFA that are also applicable to
the issues.
[41]
The GST is
considered to be a consumption tax which is meant to be paid by the end
consumer of the goods and services. Subsection 165(1) is the key liability
provision in this regard. In CIBC World Markets Inc. v The Queen, 2011
FCA 270, [2011] FCJ No. 1378, at paragraphs 7 to 15, the Court provided a
review of the general scheme and purpose of the GST provision contained in the Act:
(2) The key liability provision: subsection
165(1) of the Act
[7] Subsection
165(1) of the Act sets out a general rule: those who receive services or
property, such as goods, in the course of a commercial activity (known under
the Act as a “taxable supply”) are liable to pay GST.
(3) Who is subject to GST
[8] The
general rule in subsection 165(1) of the Act applies to all, even those who are
not final consumers.
[9] In
particular, each recipient of taxable goods and services is potentially liable
to pay GST, even if it, as an intermediary, ultimately delivers those goods and
services to others. For example, a wholesaler may supply goods to a retailer
who supplies them to a consumer. The retailer is liable to pay GST under the
general rule in subsection 165(1).
[10] Were
the matter left there, the GST would lose its character as a consumption tax
imposed on the final consumers of goods and services. It would attach, full
force, to each party in a chain of transactions culminating in the final
receipt by consumers.
(4) Input tax credits: the general concept
[11] One way
in which the Act prevents this consequence is by giving parties credits for
“inputs” that they receive.
[12] For
example, for the purpose of the selling of goods to consumers, a retailer might
receive “inputs,” such as inventory. That “input” to the retailer is necessary
in order for it to make a supply of the goods to the consumer. Depending on the
particular business, there may be all sorts of necessary “inputs.”
[13] Obviously,
if, in the example above, the retailer were not given credit for the GST paid
on inputs needed for the making of a taxable supply of goods to a consumer, the
GST would be imposed full force on it and, for that matter, on every
intermediary in the chain of distribution. If that happened, the GST would lose
its character as a consumption tax imposed on the final consumer of goods and
services.
[14] To
achieve the purpose of taxing the final consumers of goods and services, the
Act allows tax credits for inputs received by parties to make an onward taxable
supply. These credits are called input tax credits.
[15] The
input tax credits, as explained above, ensure that the fundamental character of
the GST as a consumption tax on final consumers is maintained. In the words of
the Minister: (Canada Revenue Agency, GST Memorandum 8.1 - General Eligibility
Rules (May 2005) at paragraph 1)
A fundamental principle underlying the
GST/HST is that no tax should be included in the cost of property and services
acquired, imported or brought into a participating province by a registrant to
make taxable supplies … in the course of the commercial activities of the
registrant. To ensure that a property or service consumed, used or supplied in the
course of commercial activities effectively bears no GST/HST, registrants are
generally eligible to claim an input tax credit (ITC) for the GST/HST paid or
payable on such property or service. Consequently, the ITC enables each
registrant to recover the tax incurred in that registrant’s stage of the
production and distribution process.
[42]
The general rule contained in subsection 165(1)
applies to all registrants, even to intermediaries who are not the final
consumers. For example, a wholesaler may supply goods to a retailer, who is
liable to pay GST, but who in turn will be supplying those goods to a consumer.
To retain the character of the GST as a consumption tax in respect to the final
consumer of the product or service, the Act allows tax credits for “inputs” received by parties in order to make an
onward supply. The general rule for calculation of ITCs is contained in
subsection 169(1) of the Act. Essentially, if a registrant supplies only
taxable services, that registrant will be entitled to 100 percent of ITCs used
or consumed in the provision of that supply. If only exempt supplies are made,
ITCs cannot be claimed.
[43]
The additional scenario that may arise is the
case of a registrant that makes both a taxable and exempt supply. Since a claim
may still be made for ITCs in respect to those goods and services required and
used for making the taxable supply portion, the Act allows a registrant
to adopt an apportionment or allocation method. This means that any part of a
business that consists of making exempt supplies must be “notionally severed” for GST purposes. Subsection
141.01(5) allows registrants to freely adopt a method provided it is “fair and reasonable” and “used
consistently by the person throughout the year.” Although the Act
does not offer any guidelines in respect to choosing an allocation method, it
is clear that not all methods will be acceptable depending on the
circumstances, including the intent and purpose for which the input was
acquired. This clearly comes down to a question of fact.
[44]
There are also two deeming provisions in
respect to claims for ITCs that are relevant. First, pursuant to section 141,
if substantially all of the consumption of property or a service is used or
intended to be used in a particular activity, taxable or exempt, then the Act
deems all of the property to be in the course of those activities. The view of
the Canada Revenue Agency (“CRA”) is that the
term “substantially all” means 90 percent or
more. Generally, if 90 percent is used or intended to be used in either taxable
or exempt activities, then it will be deemed to be used in 100 percent of that
activity. Second, subsection 199(2) overrides subsection 169(1) in respect of
ITCs claimed for the acquisition or importation of capital property. If such
property is acquired or imported “primarily” for
use in commercial activity, the registrant is entitled to claim all of the
ITCs. If not, the registrant will be entitled to none. “Primarily”
has been interpreted to mean either “more than 50
percent” or “first in importance.”
[45]
In Magog (City
of) v The Queen, 2001 FCA 210, [2001] FCJ No. 1259, Noël J. held that,
although the Act does not specify a specific allocation method in
respect to subsection 141.01(5), a registrant will be permitted to select a
method to allocate ITCs provided it is fair and reasonable. At paragraph 17,
the following comments were made:
[17] It is important in this regard to note that the Act does
not require the appellant to establish the type of accounting systems that
would enable it to separate out each property or service that is consumed or
used in the context of its mixed activities. Parliament was aware that such a
requirement could result in compliance expenses that would exceed the tax
yielded. So it left it to the taxpayer to select an appropriate method, while
requiring that the method chosen be “fair and
reasonable”.
[46]
The only prerequisite is that the chosen method
be fair and reasonable having regard to all of the circumstances. However,
there is no requirement that a registrant pick the “best”
available allocation method. These principles were discussed in detail in Bay
Ferries Limited v The Queen, 2004 TCC 663, [2004] TCJ No. 507. In that
case, the appellant maintained a ferry operation similar, but not identical, to
the vessels in the present appeals. The Court in Bay Ferries made the
following comments, at paragraphs 39 to 41:
[39] The
Minister cannot substitute its own allocation method, simply because it appears
to be more representative of the situation or the better method. This reasoning
establishes a degree of deference to be given a taxpayer in choosing a method
that is fair and reasonable.
[40] Of
course I believe that a taxpayer must always be able to satisfactorily
substantiate that the chosen method is, in fact, fair and reasonable and
consistent. But if he is able to do so, subsection 141.01(5) allows a
registrant a broad latitude of flexibility in choosing a method, provided it
can be shown to be fair and reasonable. This implies that the chosen method
will reasonably reflect the actual use of the property and services and the
manner in which it conducts its business generally.
[41] There are no methods specified in the Act which are
to be used as guidelines. Again, it comes down to a review of the facts in each
case. It is generally accepted that the preferred method is direct allocation,
where the property or service can be directly allocated to the activities. The
direct method will produce the most accurate results. In some circumstances
this method cannot be applied. It was not practical for the Appellant in this
case to utilize the direct application method because of shared overhead.
[47]
In concluding in Bay Ferries that the appellant’s
method of allocating between taxable and exempt activities was fair and reasonable,
four guiding principles for such a determination were established. First,
whether a particular allocation method chosen by a registrant will be fair and
reasonable is a question of fact (paragraph 6). Second, and relying on the Magog
decision, the Court does not have to decide whether the best or most
appropriate method has been chosen by the Minister or the taxpayer, but simply
whether the method chosen by the taxpayer is fair and reasonable (paragraph
37). Third, a degree of deference is to be accorded to the taxpayer in choosing
a method that is fair and reasonable as well as consistent (paragraph 39).
Fourth, regardless of such deference, a registrant must always be able to
satisfactorily substantiate that the chosen method is, in fact, fair, reasonable
and consistent. The chosen method must reasonably reflect the actual use of the
property and services and the manner in which it conducts its business
activities generally (paragraph 40).
[48]
The Court, in Îles-de-la-Madeleine (Municipalité régionale
de comté) v The Queen, 2006 TCC 235, [2006] TCJ No. 166, relied on the
reasoning in Magog and Bay Ferries in concluding that a chosen
method need not be a perfect one and that it cannot be rejected solely on the
ground that it is not the ideal method. The Court also noted that the
assessment of the fairness and reasonableness of a method involves a “subjective dimension” (paragraph 78).
B. Infrastructure
Decks
[49]
In respect to the appeals before me, the question is whether
BCF’s categorization of the infrastructure decks is fair and reasonable. A fair
and reasonable allocation method should realistically reflect the actual use of
the property and services and the manner in which BCF conducts its business
generally. Both the Appellant and Respondent agreed that the “deck by deck” method chosen
by BCF is fair and reasonable. However, the parties disagreed on the
classification of some of the decks, that is, whether it is fair and reasonable
to consider the infrastructure decks, used for propulsion and steering, on those
vessels providing commercial activities, as inputs in the provision of both
taxable supplies and exempt supplies.
[50]
BCF characterized the infrastructure decks as common and argued
that there is a direct nexus between the propulsion activity and the commercial
operations on each vessel. BCF’s view is that its operations are fully
integrated but that the method it employed to apportion the supplies and claim
ITCs resulted in a notional severance of the exempt portions that is both fair
and reasonable in the resulting allocation. The propulsion of these vessels,
therefore, does not occur in isolation from the commercial activities in which
it engages.
[51]
BCF conceded that it will not be entitled to ITCs on vessels
where propulsion occurs in isolation from commercial activities. However, with
respect to the vessels at issue, there exists this direct nexus between the
ferrying transportation services and its taxable supplies.
[52]
The Respondent submitted that BCF’s allocation method does not
reasonably reflect the actual use of these infrastructure decks. Therefore,
claims for ITCs in respect to these decks do not reasonably reflect their
actual use or the manner in which BCF conducted its business operations. Mr.
Murray agreed, on cross-examination, that no commercial activities were
actually taking place on those particular infrastructure decks. Consequently,
the Respondent submitted that they do not contribute to those activities and
that their inclusion distorts the financial reality of those activities.
[53]
BCF, on the other hand, relied on the evidence of Mr. Murray, who
testified that the propulsion and steering support the onboard commercial
activities by creating a high volume of customer turnover and a captive market.
On that basis, BCF categorized all infrastructure decks on those vessels as
common to both taxable and exempt activities because they are essential to move
the commercial areas onboard.
[54]
Subsection 141.01(5) addresses the allocation between taxable and
exempt supplies for a registrant who engages in both activities. It is
connected to subsection 169(1), which allows ITCs only to the extent that they
were acquired for the consumption or use in the course of commercial activity.
A method must be chosen that fairly, reasonably and consistently restricts the
ITCs that are claimed to reflect those goods and services acquired for or used
in the making of taxable supplies. That method must reasonably reflect the
actual use of the property and services and the manner in which the business is
conducted. In addition, it should not distort the financial reality of the
commercial activity (Bay Ferries, at paragraph 40).
[55]
An input, therefore, must contribute to the ultimate production
of the taxable supply. The decision in Midland Hutterian Brethren v
The Queen, [2000] FCJ No. 2098, dealt with the threshold level of
contribution. The issue was whether a religious colony could claim an ITC for
50 percent of the GST incurred on cloth that was allocated to its members in
order to make both church clothing and work clothing used in the colony’s
commercial farming activities. The Federal Court of Appeal, in allowing the
colony to claim an ITC for the work cloth, framed the issue, at paragraph 2, as
follows:
… There is no
dispute that the applicant carries on a commercial activity, that is farming,
and produces non-exempt supplies. The disagreement is about whether the cloth
was used in the course of commercial activities. The issue is one of
remoteness. How closely tied to an output does an expense have to be before it
qualifies for an ITC? (Emphasis added)
[56]
Once it is determined that an item is acquired and used in
connection with a commercial activity of a GST registrant and that item
directly or indirectly contributes to the production of articles or the
provision of services that are taxable supplies, then an ITC will be available
using a formula in accordance with subsection 141.01(5) of the Act.
[57]
While I agree with the Respondent that the primary use of those
decks is for the propulsion of the vessels and that they support and are
connected, therefore, to exempt services, the evidence was clear and
uncontradicted that some portion of those decks is indirectly connected and
necessary to BCF’s commercial activities conducted onboard the vessels. The
evidence supports a conclusion that there is a nexus between the propulsion,
steering and infrastructure decks and BCF’s commercial activities. The
ancillary services onboard could not occur without the support of the equipment
and systems located on the infrastructure decks. The uncontradicted evidence,
of both Mr. Murray and Mr. Collins, established that the decks in issue
support the entire vessel and not just the act of propulsion. Most of the decks
in issue are located below the passenger decks on each vessel. While these decks
on all vessels will contain water, sewer and heating systems, the evidence
supports that, on those vessels where commercial activities occur, those
systems are specially designed and scaled in size and weight to support the
additional requirements of those operations. Such vessels are either
specifically built or purchased with these particular structural designations
in place so that the commercial activities can be properly supported. The
greater the scale of commercial activities on a vessel, the greater the
requirement will be for items such as electricity, heating, air conditioning,
water, sewerage, deck area and overall vessel stability. For example, larger
water tanks will be required if restaurants are located onboard and these tanks
will be required to be maintained separately from water tanks used elsewhere on
the vessel because of different intended uses. By contrast, a vessel, without commercial
activities onboard, will require smaller water tanks, that are fewer in number
and with less water pumping capacity, as those water systems will likely be
supplying water to a few washrooms only. Mr. Collins also explained how voids
or open spaces in the hull of a vessel must be larger in volume to support commercial
activities because they add weight to a vessel. These open spaces are essential
for buoyancy and consequently are tied to the weight of the vessel.
[58]
The jurisprudence in this area supports a standard of review that
is deferential to registrants. The method does not have to be the best available
method and its application does not have to be infallible. Nor can the Minister
substitute a method of its own choosing simply because it feels that another
method more accurately reflects the actual use of an input. The test is whether
the allocation method is fair and reasonable and not whether it is the best of
all possible methods.
[59]
According to the evidence, a central focus of BCF’s business plan
is the ancillary activities. Significant capital investments have been made in
the provision of these services. On many routes, almost half of the crew is
employed in providing those services. In recent years, there has been some
increase in the average spending per passenger. Other than the northern route
vessels, the taxable use calculated pursuant to BCF’s chosen method ranges
between 18 percent and 30 percent. With uncontradicted evidence before me
respecting the pivotal role that ancillary activities have onboard these
vessels, based on the facts, those percentages reflect a fair and reasonable
allocation method employed in a large and complex business operation that
provides both taxable and exempt supplies integrated within each vessel’s
systems. It is certainly not unreasonable to conclude that these decks support not
only the transportation systems but also the ancillary activities, nor does the
application of the method result in either unfair or unreasonable claims for
ITCs.
[60]
There may well be a more reliable method of allocation in these
circumstances but the test is not to find the best method or to substitute my
opinion or the Minister’s for that of the registrant. As long as the method satisfies
the test of being both fair and reasonable in the circumstances, does not
distort the financial reality of BCF’s activities and reasonably reflects the
actual use of the vessels, the categorization of the infrastructure decks as a
common input, directly and indirectly connected to the commercial activities
onboard, will be permitted.
C. Staterooms
[61]
The Respondent submitted that the rental of staterooms is an exempt
supply because it is part of the single supply of ferrying transportation
services. BCF contended that they are a separate and taxable supply because, as
an optional supply, they are not integral to the core ferrying services
provided.
[62]
The test to be applied in order to determine whether a supplier
has made a single supply or multiple supplies was discussed in detail by Rip A.C.J.
(as he was then) in O.A. Brown Ltd. v Canada, [1995] TCJ No. 678 and that
test was also recently affirmed by the Supreme Court of Canada in Calgary
(City) v The Queen, 2012 SCC 20, [2012] 1 S.C.R. 689. The test adopted in O.A.
Brown was whether, in substance and reality, an alleged separate supply is
an integral component of the overall supply. Citing O.A. Brown, the
Supreme Court in Calgary (City), at paragraphs 36 to 38, stated:
[36] When reaching his
decision, Justice Rip made the following observation:
… one should look at the degree to which the services
alleged to constitute a single supply are interconnected, the extent of their
interdependence and intertwining, whether each is an integral part or component
of a composite whole. [p. 40-6]
(Citing Mercantile
Contracts Ltd. v. Customs & Excise Commissioners, File No. LON/88/786, U.K. (unreported).)
[37] Justice Rip also
noted the importance of common sense when the determination is made. McArthur
T.C.J. made a similar observation in Gin Max Enterprises Inc. v. R.,
2007 TCC 223, [2007] G.S.T.C. 56, at para. 18:
From a review of the case law, the question of whether
two elements constitute a single supply or two or multiple supplies requires an
analysis of the true nature of the transactions and it is a question of fact
determined with a generous application of common sense.
[38] Applying the test,
Justice Rip found that the disbursements and commission were not charged for
services that were “distinct supplies, independent of the whole activity” (p.
40-8). Only if taken together did the activities of buying, branding,
inoculation, and other disbursements form a useful service. He concluded:
In
substance and reality, the alleged separate supply, that of a buying service,
is an integral part of the overall supply, being the supply of livestock. The
alleged separate supplies cannot be realistically omitted from the overall supply
and in fact are the essence of the overall supply. The alleged separate
supplies are interconnected with the supply of livestock to such a degree that
the extent of their interdependence is an integral part of the composite whole.
. . . The appellant is making a single supply of livestock and the commission
and disbursements charged are part and parcel of the consideration for that
supply. They do not amount to separate supplies. [pp. 40-8 to 40-9]
[63]
Conversely, a factor indicative of multiple supplies is whether
each alleged separate supply could be purchased individually and still be
useful or, as Rip A.C.J. stated in O.A. Brown, at paragraphs 22 and 23:
[22] One factor to be
considered is whether or not the alleged separate supply can be realistically
omitted from the overall supply. This is not conclusive…
[23] … In each case it is useful to consider whether it would be possible
to purchase each of the various elements separately and still end up with a
useful article or service. For if it is not possible then it is a necessary
conclusion that the supply is a compound supply which cannot be split up for
tax purposes.
[64]
Applying the test enunciated in O.A. Brown and adopted by
the Supreme Court of Canada in Calgary (City) to the facts before
me, the question is whether the alleged separate supply of the rental of
staterooms is, in substance and reality, an integral part or component of the
overall supply of the ferrying transportation services.
[65]
I am of the view that the provision of stateroom rentals is a separate
supply. Common sense dictates that the provision of ferrying services remains a
useful and valuable supply minus the rental of staterooms. Staterooms are not
an essential component to the overall supply of transportation services. In
fact, there are insufficient numbers of staterooms to accommodate every
passenger, even if all of the passengers on any route wished to purchase a
stateroom. The provision of staterooms can be, and frequently is, omitted from
the supply of ferry services. It is only logical to conclude that it must be a
separate supply. It can be purchased separately and still result in a useful
service for a particular passenger. It is a “stand alone” product
independent of the ferrying service. There is such a lack of interconnectedness
that it is very easy to identify these stateroom supplies as distinct
components from the supply of transportation services that get a passenger from
Point A to Point B. The rental of staterooms falls within the Act’s
definition of short-term accommodations and, in any event, can easily be
separated from the overall supply, leaving a useful product or service intact.
[66]
Given the conclusion that the stateroom rentals are a separate
supply from ferry services, are they taxable or exempt? The evidence of Mr. Collins
established that many ferry operations exist elsewhere which have itineraries
similar in duration to those offered by BCF but that do not offer stateroom
rentals. In addition, the provisions of the CFA support the conclusion
that the rentals are a taxable supply. The CFA considers the stateroom
rentals to be an ancillary service, not directly related to the transportation
of passengers and vehicles. Unlike the basic ferry fees, the cost of stateroom
rentals is not regulated by the Commissioner. The Appellant placed considerable
weight on this provincial legislation. Justice Jorré, in Angels of Flight
Canada Inc. v The Queen, 2009 TCC 279, [2009] TCJ No. 192, concluded that
weight should be accorded provincial law when interpreting provisions of the Act.
In these appeals, the CFA defines “ancillary services” as “any services that are not directly related to the transportation of
vehicles and passengers …” (CFA,
Part 1 - Interpretation). Access to a stateroom is an upgrade that is purchased
separately from the basic ferry ticket, which moves passengers between two
destinations. The staterooms exist to provide upgraded amenities, while being
transported onboard a vessel, to those passengers who choose such an upgrade
beyond the basic ticket purchase relating to the provision of core services.
[67]
The wording contained in the provincial legislation, the fact that
the staterooms are paid for separately and that they are an optional purchase,
support my conclusion that such rentals retain a separate and distinct identity
from the supply of the ferrying services and, as such, are taxable supplies for
which ITCs may be claimed.
[68]
The Respondent argued that, if the stateroom rentals were held to
be taxable supplies, then BCF’s entitlement to ITCs should be offset by the GST
that BCF should have, but did not, collect on those rentals during this period.
BCF claimed that the Respondent’s contention amounts to an assessment for
failure to collect GST, which would fall outside the normal reassessment
period. I agree with the Appellant in this regard. Subsection 298(4) permits
the Minister to assess “at any time”
provided the Minister can show that there has been a misrepresentation
attributable to carelessness, neglect or willful default or committed fraud. In
these appeals, the Minister has neither included any argument in this regard in
its pleadings nor raised an argument in submissions or otherwise that addresses
the two elements that would permit the Minister to assess BCF for uncollected
GST for this period. I agree with the Appellant’s submission that the
Minister’s inability to recover the GST that BCF should have charged on the
stateroom rentals, such that the ITC refund can be offset, is “simply the risk associated with having
taken a position that was wrong in law” (Appellant’s Brief,
paragraph 250).
D. Fuel and Lubricants
[69]
BCF submitted that it is entitled to claim ITCs for fuel and
lubricants which directly and indirectly contribute to the provision of taxable
supplies, the ancillary services, by providing the electricity, heat, hot
water, lighting and other infrastructure inputs. Mr. Collins explained that,
because all such commercial services consume more energy than a vessel without those
services onboard, there is an interconnectedness between fuel consumption and
the ancillary activities. According to Mr. Collins, the fuel system is common
to all energy consumption. Mr. Murray testified that fuel contributes to the
propulsion of the vessel which is essential in creating a captive market and
high volume turnover of customers who will utilize the ancillary services.
Without movement of the vessel, there would be no customers and no sales.
[70]
These facts appear to support a conclusion that BCF should be
entitled to a proportion of ITCs in respect of the fuel and lubricants. However,
the Respondent relied on the following key assumptions respecting ITCs relating
to fuel and lubricants in the Reply to the Amended Notice of Appeal:
11. […]
ss) less
than 10% of the Appellant’s consumption and use of fuel and engine lubricants
was attributable to the provision of taxable services;
tt) substantially
all of the Appellant’s consumption and use of fuel and engine lubricants was
attributable to the provision of exempt services;
[…]
[71]
The Minister has assumed that less than
10 percent of fuel and lubricants were consumed in commercial activities and,
consequently, “substantially all” of the consumption would be attributable to the supply of exempt
services. Subsection 141(3) of the Act states:
141. (3)
Use in other activities – For the purposes of this Part, where
substantially all of the consumption or use of property or a service by a
person, other than a financial institution, is in the course of particular
activities of the person that are not commercial activities, all of the
consumption or use of the property or service by the person shall be deemed to
be in the course of those particular activities.
Therefore,
subsection 141(3) would apply to deem that all of the fuel and lubricants were
used in the provision of the exempt activity. The Respondent argued that BCF is
unable to prove, on a balance of probabilities, that more than 10 percent of
the fuel and lubricants was used directly to support the ancillary activities.
Therefore, these items must be a direct and exempt input as substantially all
of the fuel was consumed in propulsion.
[72]
I agree with the Respondent’s argument. BCF has simply failed to
produce evidence that could demolish the Minister’s assumptions in this regard.
At paragraph 80 of the Agreed Statement of Facts, BCF admitted that
substantially all of the fuel that was consumed was for propulsion. BCF also
admitted that it was unable to prove, on a balance of probabilities, that over
10 percent of the fuel was consumed directly in the provision of the vessel’s
commercial activities. Surprisingly, BCF went on to concede that it would not
challenge that assumption.
[73]
During the hearing, Mr. Murray made essentially the same
concession:
Q. And BC
Ferries agrees that substantially all the fuel was used for propulsion?
A. That is something
that is a matter of – we weren’t able to absolutely prove that 10 per cent or
more was used on any of the vessels, at this point.
(Transcript,
Volume 2, page 175)
[74]
Mr. Collins explained the practicalities of why BCF made the
concessions it did and why it was unable to challenge the Minister’s
assumptions:
Q. So the
engines are drawing from the same place as the generators?
A. Correct.
Q. Do you have
a measurement system in place to determine how much fuel is coming for the
generators versus the engines?
A. Not really.
It’s very difficult to determine the individual fuel consumption of a
particular component within the engine room. We can tell you how much the ship
as a whole, as an integrated unit consumes, but it’s very difficult to break it
up in between. There is just not the kind of measuring equipment installed on
the ships which gives you back (sic) kind of breakdown.
(Transcript, Volume 2, page 272)
BCF will
therefore not be permitted to claim any ITCs in respect of the fuel and
lubricants. Although, in recent decisions, I have criticized the Crown’s
problematic pleadings, these assumptions are an example of proper drafting of
pleadings, the result, I assume, of care and attention to detail by the Counsel
involved. The result is that the Appellant is unable to meet the onus of
overcoming those assumptions in respect to this issue.
E. The Importation of
the Northern Adventure
[75]
The issue of the ITC entitlement in respect to the acquisition
and importation of this vessel arises out of the special rules for capital
property contained in paragraph 199(2)(a) of the Act. That provision
states:
199. (2) Acquisition of capital
personal property – Where a registrant acquires or imports personal
property or brings it into a participating province for use as a capital
property,
(a) the tax payable by the registrant in
respect of the acquisition, importation or bringing in of the property shall
not be included in determining an input tax credit of the registrant for any
reporting period unless the property was acquired, imported or brought in, as
the case may be, for use primarily in commercial activities of the registrant;
If BCF imported
this vessel for use “primarily”
in its commercial activities, it will be deemed to have imported it for use
exclusively in its commercial activities. Consequently, BCF would then be
entitled to 100 percent of the ITCs claimed. On the other hand, if the vessel
was imported for use “primarily”
in its exempt activities, then BCF will be deemed to have imported it for use
exclusively in its exempt activities and it will not be entitled to any claim
for ITCs.
[76]
The Respondent contended that BCF’s intention and purpose in
acquiring and importing the Northern Adventure was for use primarily in its
exempt ferry transportation services. In fact, it acquired this vessel to
replace the Queen of the North and, therefore, to be able to resume its
transportation services on those northern routes. BCF submitted that the
primary use of the capital property is inextricably bound to the method it has
chosen to allocate ITCs pursuant to section 141.02. BCF relied on the decision
of Îles-de-la-Madeleine in order to claim that its entitlement to ITCs should
be based on a percentage of use attributed to its commercial activities. Based
on this method, where more than 50 percent of the capital property is used in
its commercial activities, then it must be considered to be used “primarily” in
its commercial activities for the purposes of paragraph 199(2)(a). BCF’s method
allocates 56.6 percent of the vessel as being used for commercial activities.
BCF’s position, therefore, is that it should be entitled to all of the claimed
ITCs.
[77]
This issue requires a determination respecting the application of
the term “primarily” to
the facts in these appeals. The term was defined “qualitatively” in the decision of Mid-West Feed
Limited et al v Minister of National Revenue, 87 DTC 394, as “of first important, principle or chief”.
However, the decision in City of Calgary v The Queen, 2009
TCC 272, [2009] TCJ No. 195, considered that the term “primarily” could also be interpreted “quantitatively” to mean more than 50 percent of the use.
[78]
Angers J.A., in Foote v The Queen, 2007 TCC 46, [2007] TCJ
No. 17, provided a detailed review of the jurisprudence respecting the
interpretation of the term “primarily”
at paragraphs 11 to 12:
[11] The question of the
meaning of "primarily" has been addressed by the courts in previous
decisions. In Mid-West Feed Ltd. v. M.N.R., 87 DTC 394, Chief Judge
Couture (as he then was) of the Tax Court of Canada held that the world
"primarily" means in excess of 50% of the total use of the asset.
Mr. Justice Pratte of the Federal Court of Appeal wrote in Mother's
Pizza Parlour (London) Ltd. v. The Queen, 88 DTC 6397, that when different
parts of the same building are permanently used for what are considered to be
two different purposes, the most important factor in determining the purpose
for which the building is primarily used is the amount of space in the building
that is used for each one of those two purposes.
[12] In
the present case, two units of the three-storey complex are used for the
purpose of earning rental income. As much as I can appreciate the fact that,
for the appellant, the object of the project was to build herself a residence,
I cannot ignore the other use of the complex. A qualitative assessment may
nevertheless be relevant. The Federal Court of Appeal in Burger King
Restaurants of Canada Inc. v. The Queen, 2000 DTC 6061, said that the
qualitative evidence must be sufficiently persuasive and must be capable of
being analysed in such a way as to cause the court to displace the result of
the quantitative space test. Although, the appellant may have invested more
money in her own unit, the evidence is insufficient to allow this court to
analyse such a possibility and conclude that the qualitative evidence displaces
the result of the quantitative space test. …
[79]
Based on the reasoning in Foote, it is preferable to
employ the application of a quantitative space test unless qualitative
evidence is sufficiently persuasive to displace it. If the quantitative
approach is applied in the interpretation of “primarily”, BCF would be allowed to claim 100 percent
of the ITCs it is claiming because BCF’s chosen method allocates more than 50
percent of the Northern Adventure for use in its commercial activities.
[80]
The Respondent submitted that subsection 199(2) requires that
this Court consider BCF’s intention at the time of its purchase. The
Respondent’s position is, in fact, supported by the decision of Chief Justice
Bowman, as he was then, in Coburn Realty Ltd. v The Queen, 2006 TCC 245,
[2006] TCJ No. 184. At paragraphs 9 to 12, he held the following:
[9] The words in subsection
199(2) "... for use primarily in commercial activities..." imply purpose
or intent. The French version of the provision is consistent with this
interpretation:
"... en vue d'être utilisé
principalement dans le cadre de ses activités commerciales."
[10] Statements by a taxpayer
of his or her subjective purpose and intent are not necessarily and in every
case the most reliable basis upon which such a question can be determined. The
actual use is frequently the best evidence of the purpose of the acquisition.
In 510628 Ontario Limited v. The Queen, 2000 GTC 877, the following was
said:
[11] It should be
noted that the expression "for use primarily ..." (en vue d'être
utilisé) requires the determination of the purpose of the acquisition, not the
actual use. Nonetheless, I should think that as a practical matter if property
is in fact used primarily for commercial purposes it is a reasonable inference
that it was acquired for that purpose.
[11] I shall turn then to the
actual use that was made of the boat. Mr. Coburn testified that the boat was
used for entertaining clients and for rewarding his sales staff. He stated that
the appellant was seeking to expand its business to cottage country. I accept
that he wished to expand the appellant's business but I am not persuaded that
the boat was used or was intended to be used primarily for business purposes. Although
I think there was probably an element of business in some of its use, the
evidence of its actual use does not support the conclusion that the primary
purpose of its acquisition was for use in the appellant's business.
[12] The word
"primarily" is generally taken to mean over 50%. The problem is,
however, to determine what one should apply the 51% to: time, number of trips,
distance travelled, number of passengers, length of voyage, the amount of
business generated, the number of potential sales locations visited? All of
these factors may have a bearing but they illustrate the difficulty in applying
a mechanical sort of test. Ultimately, it boils down to a question of
judgement and common sense.
(Emphasis added)
[81]
Considering the comments in Coburn Realty, with which I am
in agreement, I conclude that the Northern Adventure was imported primarily for
use in the provision of its exempt ferrying services. BCF’s core business is
providing ferry transportation of passengers and vehicles. The ancillary
services are just that – ancillary, that is, subordinate to its core business
activities. With the sinking of the Queen of the North vessel, BCF was required
to locate a replacement to provide ferry services on its northern routes.
Otherwise, it risked being in breach of its Contract with the Province to
provide ferry services on all designated routes as well as exposing itself to
the potential implications that a contractual breach would bring.
[82]
My conclusion, that the main reason that BCF acquired the
Northern Adventure was to be able to use it for its transportation services on
the routes originally serviced by the Queen of the North, is also supported by
correspondence sent by David L. Hahn, the President and CEO of BCF, to The
Honourable Jim Flaherty, then Minister of Finance, in support of its remission
application of December 12, 2006 (Exhibit R-1, Tab 65). Specifically, Mr. Hahn
states in his letter:
On behalf of British Columbia
Ferry Services Inc. (BC Ferries), I am writing to inform you that we are
submitting the attached request to Finance Canada for duty relief on the
purchase of the used vessel MV Sonia which is required to provide
safe, reliable and essential marine transportation services along the North
Coast of British Columbia. (Emphasis added)
[…]
In the
Executive Summary, attached to Mr. Hahn’s correspondence, it states:
[…]
In order to
continue to provide safe, efficient, and reliable ferry service, and return
service to a reasonable level to meet the economic and social needs of the
communities of the north coast of BC, it was critical for BC Ferries to find a
replacement vessel as quickly as possible. …
[…]
[83]
In addition, I have before me the admission of Mr. Murray that
the Northern Adventure was imported primarily for use in its ferrying of
passengers and vehicles. During discovery, he made the following statement:
Question 1061: So the “Northern Adventure” was
acquired and imported primarily for use in ferrying passengers?
Answer: Yes, passengers and vehicles.
(Transcript,
Volume 2, page 240)
During the
hearing, Mr. Murray testified to the truth of that statement. These facts
provide sufficiently persuasive evidence to, not only displace BCF’s stated
intention, that the vessel was imported primarily for use in its commercial
activities, but also to replace the use of the quantitative approach, advocated
to determine the primary function of a particular space, with the qualitative
approach.
[84]
As a result, BCF will not be entitled to claim ITCs in respect to
the importation of the Northern Adventure.
Conclusion
[85]
The appeals will be allowed in part. I am making no order as to
costs because each party has achieved partial success. The allocation method
that BCF chose to categorize the infrastructure decks as common to both taxable
and exempt supplies is both fair and reasonable in the circumstances and in
accordance with the facts that were before me. The evidence, of both Mr. Murray
and Mr. Collins, was uncontradicted and it supported my conclusion that these decks
are directly and indirectly connected to the commercial activities conducted
onboard certain vessels. The Minister does not dispute the “deck by deck” input
allocation method which BCF utilized as being fair and reasonable. The Minister
did, however, dispute how those decks were categorized in order to calculate
the areas that were used in relation to the making of taxable supplies as
opposed to exempt supplies. Based on the facts, BCF’s categorization of the
infrastructure decks as common cannot be considered unfair or unreasonable. BCF
will therefore be entitled to claim ITCs in accordance with its chosen method.
[86]
I also accept BCF’s categorization of staterooms as separate
taxable supplies. The facts support that they were not an integral component of
the overall supply of ferrying services provided by BCF. My conclusion that the
provision of stateroom rentals is a taxable supply is not only grounded in
common sense but is also supported by both the evidence of Mr. Murray and
Mr. Collins and the provisions of the CFA. BCF cannot be assessed
in respect to the net tax that should have been charged on the stateroom
rentals in order to offset its claim for ITCs because the normal reassessment
periods have expired and the Minister in any event made no reference to this in
its pleadings.
[87]
BCF will not be entitled to claim ITCs in respect to fuel and
lubricants. The Minister’s assumptions in this regard have not been demolished
and BCF has therefore failed to discharge the onus which is upon it in these
appeals. BCF has failed to prove, on a balance of probabilities, that over 10
percent of the fuel was directly consumed in its provision of commercial
activities. Consequently, substantially all of the fuel and lubricants consumed
onboard was, as the Respondent contended, for propulsion.
[88]
Finally, the Northern Adventure vessel was acquired and imported
by BCF primarily for use in its exempt transportation services and not, as BCF
contended, for use primarily in its commercial activities based on its chosen
allocation method. Therefore, BCF will not be entitled to any of the ITCs
claimed in respect to the importation of the Northern Adventure.
[89]
In conclusion, I wish to commend Counsel on both sides for
working together in providing an Agreed Statement of Facts, for providing
concise and well-drafted written argument and in presenting straightforward
oral submissions.
Signed at Ottawa, Canada, this 14th day of October 2014.
“Diane
Campbell”
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