Citation: 2007TCC415
Date: 20071217
Docket: 2006-2304(GST)I
BETWEEN:
SLM DIRECT MARKETING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Rip, A.C.J.
[1] SLM Direct Marketing Ltd. has appealed from an assessment
under Part IX of the Excise Tax Act ("ETA")
pertaining to the period April 1, 2002 to September 30, 2004, inclusive, in
which the Minister of National Revenue ("Minister") assessed the
appellant on the basis that its costs of postage (or mailing costs) to
destinations outside of Canada were inputs to resupplies of a service to
various clients, that the resupplies were taxable supplies and Goods and Services
Tax ("GST") is applicable on the entire resupply.
Facts
[2] SLM describes itself as a service company. It provides bulk
mail processing including data base management, printing, folding, envelope
insertions and tabbing. SLM distributes client's products such as letters and
annual reports for a fee. SLM will address envelopes, fold material, laser
client's letters and material, insert the material into envelopes and packages
and finally deliver it for acceptance to a carrier such as Canada Post, the
United States Postal Service ("USPS") or a "remailer" for
delivery to its ultimate destination. "Usually", said Mr. Robin
Shorn, General Manager of SLM, "this is where [our] responsibility
ends". It is the client's choice whether to send material for destination
outside Canada by Canada Post, the USPS or through a remail provider.
[3] An example of a service provided by SLM for a client who is
a public corporation sending its annual report to shareholders in Canada and
the United States is the following: SLM, among other things, addresses the
envelopes, inserts the annual report into the envelope, sorts the mailing based
on names and addresses as required by Canada Post, essentially saving Canada
Post from sorting the mailing, and delivers the mailing to Canada Post and USPS
depots for mailing.
[4] Where mail is to be delivered outside of Canada, SLM may
pay the cost of mailing to Canada Post, the USPS or a remailer and in its
invoice to the client includes the postage it paid as a reimbursement charge. Or, the client may have
provided in advance SLM with money to pay for the postage or provide SLM with a
cheque payable to the USPS. SLM did not charge GST to the client for mailings
outside of Canada. SLM does charge GST on mailings to
destinations within Canada. The Minister has assessed SLM on its failure
to charge GST for postage it paid for the clients to Canada Post, the USPS and
the remailers and for which it was reimbursed. SLM's position is that it does
not mail any material or pay postage for mailings on its own account but,
rather, for the account of its clients; SLM is the agent of the client.
[5] Mr. Shorn stated that most of SLM's larger clients prefer
to mail the material themselves. In such a situation SLM prepares the material
for delivery but the larger client is billed directly by Canada Post.
[6] Also, SLM prepares material for mailing by the USPS in
situations where the client may want to show the recipient of the material that
the mail originates in the United States. Also, the USPS may
charge less than Canada Post. In these circumstances the client pays the cost
of mailing to the USPS, which could be paid directly by cheque to the USPS or to
SLM as a deposit. If the client provided a cheque payable to the USPS, there is
no reference to the payment on SLM's invoice to the client. Or, SLM may pay the
cost of mailing and mail the material and enter the cost on its invoice to the
client. In the former, no GST is payable, in the latter, according to the
Minister, GST is payable. It appears that the Minister is of the view that if
SLM enters the cost of postage on an invoice, then GST is payable. Absent the
charge on the invoice, there is no GST. Whether it invoices the client or not,
SLM is performing the same task. The same situation is present when SLM
arranges postage and mailing with Canada Post.
[7] Mr. Shorn declared that Canada Post will not mail
material unless the client has an account with Canada Post even if the material
is mailed by, and paid for, by SLM. Mr. Shorn produced a Canada Post
"Int'l/U.S.A. Incentive Letter – post Statement of Mailing". This
statement is provided to Canada Post by the mailer, in this case, SLM, and
describes the service paid for, the number of pieces of mail being mailed, the
weight of the mailing and the various prices and total costs. The statement
includes both the appellant's Canada Post account number and the client's
account number. SLM is identified as the customer who mailed the material and
the client is identified as the person on whose behalf the material is mailed.
The Statement also indicates the customer paying for the postage, in this case,
SLM.
[8] In cross-examination Mr. Shorn explained that SLM charges
for addressing envelopes, sortation and other services separately from mailing
costs. An invoice from SLM, for example, shows charges for each of collating,
inserting, sealing, delivery to postal depot and payment for postage. SLM does
not charge a fee to the client for mailing costs it pays to Canada Post, the
USPS or a remailer; SLM only seeks reimbursement of the actual costs of
mailing.
[9] The appellant
claims it is the agent of the client when it purchases postage (or pays mailing
costs) for its clients and mails the material to destinations outside Canada. SLM also submits that it is not liable for GST on the
postage costs for material shipped to a destination outside of Canada since these
services have a zero rate tax pursuant to section 6 of Part VII of
Schedule VI of the ETA. A supply is zero rated if it is a "a supply
of a freight transportation service in respect of the transportation of
tangible personal property from a place in Canada to a place outside Canada
whether the value of the consideration for the supply is $5 or more".
[10] It is the Crown's view that the cost of mail in excess of
$5 to a destination outside Canada that was paid by SLM
and for which it invoiced the client constituted an input to a resupply of a
service which is taxable and applied GST on the whole amount of the supply. In
the Minister's view, contrary to that of SLM, no agency relationship existed
between SLM and its client. SLM was assessed as a resupplier of a service.
[11] The facts leading to this appeal are the result of some
clients' preference for SLM, rather than itself, to mail the material and be
billed by Canada Post, the USPS or the remailer and for SLM then to invoice the
client for its services and postage.
[12] Mr. Shorn testified that "we mail nothing . . .
the clients do the mailing and we send [it] on their behalf". SLM is a
"conduit" for the client.
[13] The appellant claimed input tax credit on any GST it paid
even if the GST was charged back to the client. SLM maintains one bank account
for all deposits made by the clients.
[14] Counsel for the respondent produced print-outs from SLM's
website. In its website, SLM describes to potential clients the work it can do
on their behalf. For example, SLM can provide incentive rates through Canada
Post or the USPS. It can provide sortation for both Canada Post and the USPS
and can deliver U.S. destined mail directly to a USPS depot
or a third party courier.
Analysis
[15] If SLM were an agent of its clients when it purchased
postage and mailed the material for its clients, then SLM would not be liable
to pay the GST. In Fridman’s Law of Agency, the author explains when the law of
agency may apply:
First,
it is meant to indicate that although there may be many situations in which one
person represents or acts on behalf of another, it is only when such
representation or action on another’s behalf affects the latter’s legal
position, that is to say his rights against, and liabilities towards, other
people, that the law of agency applies. The law of agency has no relevance to
social or other non-legal obligations. Thus, the law of agency has no
application to the kind of situation in which, for example, a man sends his
wife to represent him at a wedding, and to congratulate on his behalf the bride
and groom. For in such circumstances the representation is intended to serve a
social purpose, not a legal one. However, the legal purpose intended to be
achieved by the employment of an agent need not be a complex or a sophisticated
one. A mother who tells her son to buy milk from the milkman is making an agent
from him, in the same way as a company makes agents of directors who enter into
contractual obligations on behalf of the company.
[Emphasis
added.]
[16] The authors of Bowstead & Reynolds on Agency define agency as:
. .
. the fiduciary relationship which exists between two persons, one of whom
expressly or impliedly consents that the other should act on his behalf so as
to affect his relations with third parties, and the other of whom similarly
consents or so acts. […]
In respect of the acts which the principal expressly or
impliedly consents that the agent shall so do on the principal’s behalf, the
agent is said to have authority to act; and this authority constitutes a power
to affect the principal’s legal relations with third parties.
[17] The
existence of an agency relationship was considered by
the Federal Court of Appeal in Glengarry Bingo Assn. v. Canada.
In relying
on Policy Statement P‑182R released by the Canada Revenue Agency, the
Court of Appeal identified three essential factors required for finding of an
agency: (1) the consent of the principal and agent, (2) the authority of the
agent to affect the principal’s legal position and (3) the principal’s control
of the agent’s actions. In addition, the Appeal Court also identified risk as a
significant factor in determining whether an agency relationship exists.
[18] In the appeal at bar, the evidence of Mr. Shorn was
that SLM did not receive any consideration for purchasing postage for its
clients. Bowstead & Reynolds states that the relationship of an
agent and its principal is "commercially related rather than commercially
adverse" that the agent be remunerated by commission for his or her
services "and not take his own undisclosed profit as an independent
intermediary".
That SLM took no remuneration of any kind to perform the service in question does
not affect its relationship with its clients one way or another. SLM was
compensated for its other services to the clients and the evidence suggests it
took on the mailing and purchase of the postage as a favour to clients and
included all charges and costs in one invoice. In Glengarry, supra,
the association charged the charities for its employees' time and for use of
its equipment and so it was required to charge GST since no agency relationship
was found to exist.
[19] The three factors
of agency enumerated in Glengarry are present in the appeal at bar. Mr.
Shorn testified that SLM’s clients had an option of
either mailing the packages themselves, or using SLM’s services. SLM's larger
clients opted for the former. There is no doubt that when SLM was engaged by a
client to arrange a mailing, both SLM and the client consented to this
relationship.
[20] When SLM purchased postage and mailed the material it had
its client's authority to do so on the client's behalf; the client's legal
position was affected. In Glengarry,
supra, the Court of Appeal could not find that the legal position of the
Bingo Association members was affected by the appellant’s actions and
consequently found no existence of agency. At paragraph 33, Sexton J. stated:
33 The most common example
of how an agent might affect the legal position of its principal is by entering
a contract on the principal's behalf. It is clear here that GBA was not
authorized to enter contracts with third parties on behalf of the members. For
instance, GBA could not have entered into a contract for purchase of bingo
equipment on behalf of its Members. It was only empowered to bind itself.
In the contract of purchase, GBA bound itself; it did not purport to act for
its Members nor did it expose them to risk. The fact that the Members were
insulated from risk is demonstrated by the reaction of ABS when GBA was in
arrears on its equipment payments: ABS made no attempt to seek compensation
from the Members and the Members did not entertain the idea that they might be
liable. These events illustrate that GBA could not effect [sic] the
legal position of its Members, which demonstrates that an essential element of
agency was not present.
[Emphasis
added.]
[21] Where the identity of the principal is not made known by
the agent to the third party, leading the latter to believe that the agent is
the other party, the common law permits an undisclosed principal to acquire
rights and be subjected to liabilities as a consequence of a contract made by
his agent on his behalf. This will be true if the identity of the contracting
party is not important to the third party transacting with the agent, if the
agent was authorized in what he did, and if the existence of some other
principal is expressly or impliedly not excluded by the contract between agent
and third party: see G.H.L. Fridman, The Law of Contract in Canada. In the case at bar, Canada Post
requires the person on whose behalf the material is being mailed to have an
account with Canada Post. The name of the client is identified and its account
number is noted on the "Int'l/U.S.A. Incentive Letter – post Statement of
Mailing". The Statement of Mailing describes the service including the
price paid for postage. I assume Canada Post knows who the principal is. To the
extent the client's name may not have been disclosed to the USPS or a remailer,
SLM was nevertheless engaged by the client to mail the material and to pay the cost
of mailing on its behalf.
[22] In
the appeal at bar, after SLM did what it was engaged to do, some clients
authorized SLM to do one thing more, to attend at a postal facility, mail the
material and pay the costs of mailing for the client. In Bowstead &
Reynolds on Agency
it is stated that when agents are authorized only to do specific things, the
principal’s only control lies in his power to revoke the authority. SLM was
authorized by its clients to perform a specific task which consisted of
purchasing postage and making arrangements with carriers and remailers for
delivery of the mailings to their ultimate destinations. SLM sought
reimbursement from its clients by way of an invoice. A client's control was
mainly in the power to revoke the authority of SLM to purchase the postage if
it changed its mind and opted to attend to the mailing itself.
[23] A SLM
client had limited exposure to risk, that SLM may be negligent in mailing
material, for example. SLM was exposed to risk to the extent that it may pay the
costs of mailing and the client is late in reimbursing the costs.
[24] SLM
was an agent of its clients when it paid the costs of its clients' mailings to
destinations outside Canada and mailed the material. SLM had
completed the work for which it primarily was engaged: to address envelopes,
fold material, insert the material into envelopes and deliver the material to a
carrier or prepare for a carrier to pick-up. It was then the client's choice
whether to mail the material and pay the cost of mailing on its own account or
to authorize SLM to do so at no cost. When SLM paid the costs of mailing, it
did so on behalf of the client, not for itself; SLM was the client's authorized
representative, its client's agent. SLM was no different from the son whose
mother tells him to buy milk: SLM and the son are agents of the client and
mother, respectively.
[25] Therefore,
the appeal will be allowed without costs. I need not consider whether
the cost of mailing by SLM was a resupply, whether the services supplied by SLM
were multiple supplies or whether, if SLM supplied a service of paying postage
costs, the service was zero-rated.
Signed at Ottawa, Canada, this 17th day of December 2007.
"Gerald J. Rip"
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