Citation: 2012 TCC 298
Date: 20120816
Docket: 2010-383(GST)G
BETWEEN:
THE CITY OF WHITEHORSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan J.
[1]
The issue is whether pursuant to
sections 259 and 174 of the Excise Tax Act, the Appellant is entitled to
a GST rebate of $137,399.80 on an allowance (“Yukon Bonus Travel Allowance”) paid
to its employees for round-trip airline tickets and related travel expenses from
Whitehorse to a designated southern Canadian city (“Yukon Flights”).
[2]
The parties filed an Agreed
Statement of Facts:
The parties to this
appeal agree, for the purposes of this appeal only, to the hereinafter recited
facts. All parties are at liberty to adduce any further or other evidence which
is not inconsistent with this Agreed Statement of Facts.
1.
The Appellant is a municipality incorporated under the laws of Yukon.
2.
The Appellant is located in Whitehorse, Yukon.
3.
The Appellant registered under Part IX of the Excise Tax Act,
R.S.C. 1985, c. E-15 (the “ETA”), effective January 1, 1991, and was assigned a
Goods and Services Tax (“GST”) registration number.
4.
At all material times, the Appellant was required to file GST returns on
a quarterly basis.
5.
At all material times, the Appellant provided both taxable and exempt
supplies.
6.
At all material times, the Appellant claimed input tax credits (“ITCs”)
with respect to its taxable supplies.
7.
The Appellant filed applications for GST/HST public service bodies’
rebates and claimed rebates as a municipality at the rate of 100% on the GST
that became payable after January 31, 2004 in respect of its exempt supplies.
8.
In October 2008, the Appellant claimed a public service bodies’ rebate
totalling $400,741.35 for the period of July 1, 2008 to September 30, 2008 (the
“Period”).
9.
Of the public service bodies’ rebate claim for the Period, $137,399.80
of the total claim of $400,741.35 related to the Appellant’s payment to certain
of its employees of a Yukon Bonus travel allowance (the “Yukon Bonus Travel
Allowance”) during 2004 through 2007 (the “Rebate”).
10.
On February 20, 2009 the Minister of National Revenue (the “Minister”)
assessed the Appellant to deny the Rebate and accordingly issued Notice of
Assessment Number 0830450851237003 dated February 20, 2009.
11.
During 2004 through 2007, the Appellant paid to its employees the
following amounts with respect to the Yukon Bonus Travel Allowance:
a.
$547,201.42 in 2004;
b.
$545,635.69 in 2005;
c.
$577,974.54 in 2006; and
d.
$586,361.04 in 2007.
12.
The Appellant calculated the Rebate as follows:
|
Year
|
Yukon Bonus Travel
Allowance
Paid
|
GST rate
|
Rebate
claimed
|
|
2004
|
$547,201.42
|
7/107
|
$35,798.22
|
|
2005
|
$545,635.69
|
7/107
|
$35,695.79
|
|
2006
|
$577,974.54
|
6/106
|
$32,715.54
|
|
2007
|
$586,361.04
|
6/106
|
$33,190.25
|
|
Total Rebate
|
|
|
$137,399.80
|
13.
The Appellant paid the Yukon Bonus Travel Allowance to employees based
on which of the following groups the employee belonged to:
a.
the Public Service Alliance of Canada, Local Y022 (“Y022”);
b.
the Public Service Alliance of Canada, Local Y023 (“Y023”);
c.
the International Association of Fire Fighters, Local 2217 (“2217”);
and
d.
Management and Confidential Employees (later known as Management and
Management Staff) (“Management”).
14.
For the employees in Y022, Y023 and 2217, the entitlement to the Yukon
Bonus Travel Allowance was stipulated by collective agreements entered into
between the groups and the Appellant.
15.
For the Management employees, the entitlement to the Yukon Bonus Travel
Allowance was stipulated by by-law.
16.
The Yukon Bonus Travel Allowance was intended to fund the employees’
travel costs associated with travelling away from Whitehorse to a southern
Canadian city (either Edmonton or Vancouver).
17.
Collective agreements and by-laws dating back to 1992 evidence that the
amount of the Yukon Bonus Travel Allowance was originally based on the
equivalent of the cost of two return adult airfares from Whitehorse to Edmonton
or Vancouver. The amount paid in the Yukon Bonus Travel Allowance increased
over the years. In 1996 the amount paid was increased to $2,474.70 based on an
increase in the price of airfare.
18.
In order to receive the Yukon Bonus Travel Allowance, employees had to
have completed at least two years of service if they were in Y022 and Y023, at
least one year of service if they were in Management and at least one or two
years of service (depending on when they were hired) if they were in 2217.
19.
The Yukon Bonus Travel Allowance was income from employment to the
employees within the meaning of section 6 of the Income Tax Act, R.S.C.
1985, c.1 (5th Supp.) (the “ITA”) as amended.
20.
Under the ITA, the employees of the Appellant were entitled to an income
tax deduction for the travel expenses that they incurred to travel to and from Whitehorse in respect of their use of the Yukon Bonus Travel Allowance, provided they met
the relevant criteria and completed CRA Form T2222 (E).
21.
In order to receive the Yukon Bonus Travel Allowance, the employees had
to complete an application form and return it to the Appellant’s payroll
department. Paragraph 3 of the application form included the following election
for the employee:
“I elect NOT to
have taxes deducted at the source and further certify and agree that the money
claimed will be spent for the purpose of travelling and that I will be
responsible to Revenue Canada for any taxes owed on this money”.
22.
The application form also included the option of electing to have taxes
taken off at source at a rate of 25%, in which case the employee was not
required to certify and agree that the money claimed would be spent for the
purpose of travelling.
23.
The Appellant provided the employees who received the Yukon Bonus Travel
Allowance with T4 slips which included the Yukon Bonus Travel Allowance in box 14 as “Employment income” and in box 32 as “Travel in a prescribed zone”.
24.
Canada Pension Plan contributions and Employment Insurance premiums were
deducted from the Yukon Bonus Travel Allowance amounts paid to the employees.
25.
The employees lived in and worked in Whitehorse or its environs.
26.
The travel that the Yukon Bonus Travel Allowance was intended to pay for
was the employees’ personal travel.
27.
The Yukon Bonus Travel Allowance was not for business travel.
28.
Employees were reimbursed if they needed to travel for business.
29.
How the Yukon Bonus Travel Allowance would be spent was at the
discretion of the employee who received it.
Legislation
[3]
Because the City of Whitehorse is a municipality, its claim for the recovery of tax paid in respect of the
Yukon Bonus Travel Allowance is governed by subsection 259(4) of the Excise
Tax Act which, in certain circumstances, permits the payment of a rebate:
259.(4) If a person
is … designated to be a municipality for the purposes of this section in
respect of activities (in this subsection referred to as the “designated
activities”) specified in the designation, the Minister shall … pay a rebate to
the person in respect of property or service (other than a prescribed
property or service) equal to the total of
(a) all
amounts, each of which is determined by the formula
A x
B x C
where
A is the specified
percentage
B is … an
amount deemed to have been paid … at any time by the person …, and
C is the extent
(expressed as a percentage) to which the person intended, at that time, to
consume, use or supply the property or service in the course of the designated
activities … [Emphasis added.]
[4]
The term “prescribed property or
service” which appears in subsection 259(4) is defined in paragraph 4(1)(g)
of The Public Service Body Rebate (GST/HST) Regulations (SOR/99-367) (“Rebate
Regulations”), the relevant portions of which read:
4.(1)
For the purpose of determining a rebate payable to a particular person under
section 259 of the Act, a prescribed property or service is
…
(g) property
or a service that is acquired … by the particular person exclusively for the
personal consumption, use or enjoyment … of a particular individual who was
… an … employee …
…
[5]
Returning to the rebate formula in
subsection 259(4), where allowances are concerned, the reference in ‘B’ to “an
amount deemed to have been paid” requires regard to section 174. Where the
conditions of section 174 are met, an employer is deemed to have received a
supply of the property or service for which the allowance was paid; any
consumption or use of the property or service by its employees is deemed to be
that of the employer; and the employer is deemed to have paid the tax in
accordance with the formula in section 174. The only provision relevant to the
present appeal is subparagraph 174(a)(iv) which requires that the supply
for which the allowance was paid be “in relation to” the employer’s activities:
174. For the
purposes of this Part, where
(a) a
person pays an allowance
(i)
to an employee of the person, …
…
for
…
(iv) supplies … of
property or services acquired … by the employee, … in relation to activities
engaged in by the person [Emphasis added.],or
(v) the use in Canada, in relation to activities
engaged in by the person, of a motor vehicle,
(b) an amount in
respect of the allowance is deductible in computing the income of the person
for a taxation year of the person for the purposes of the Income Tax Act,
or would have been so deductible if the person were a taxpayer under that Act
and the activity were a business,
(c) in the case of an allowance to which
subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of that Act would apply
(i) if the allowance were a reasonable allowance for
the purposes of that subparagraph, and
(ii) where the person is a partnership and the
allowance is paid to a member of the partnership, if the member were an
employee of the partnership, or, where the person is a charity or a public
institution and the allowance is paid to a volunteer, if the volunteer were an
employee of the charity or institution,
the person considered, at the time the allowance was
paid, that the allowance would be a reasonable allowance for those purposes and
it is reasonable for the person to have considered, at that time, that the
allowance would be a reasonable allowance for those purposes,
the following rules apply:
(d) the person
is deemed to have received a supply of the property or service,
(e) any consumption or use of the property or
service by the employee, member or volunteer is deemed to be consumption or use
by the person and not by the employee, member or volunteer, and
(f) the person is deemed to have paid, at the time
the allowance is paid, tax in respect of the supply equal to the amount
determined by the formula
A × (B/C)
where
A is the amount
of the allowance,
B is
(i) the
total of the rate set out in subsection 165(1) and the tax rate for a
participating province if
(A)
all or substantially all of the
supplies for which the allowance is paid were made in participating provinces,
or
(B)
the allowance is paid for the
use of the motor vehicle in participating provinces, and
ii) in any
other case, the rate set out in subsection 165(1), and
C is the total
of 100% and the percentage determined for B.
Appellant’s
Position
[6]
Both parties cited the Federal Court of Appeal decision ExxonMobil
Canada Ltd. v. R., 2010 FCA 1 for the principle that under subparagraph
174(a)(iv), it is the supply, not the allowance used to acquire it, that
must be “in relation to” the employer’s activities:
50 … If
meaning is to be given to the words of subparagraph 174(a)(iv), regard must
be had to the particular property or services contemplated and their intended
use. Applying these criteria, property or services which are intended by the
employer for the exclusive personal use of the employees and which lend
themselves to such a use bear no relationship to the employer’s activities. In
contrast, property or services which can be used by the employees in the course
of their employment activities, and which are intended for such a use, are in
relation to the employer’s activities.
[Emphasis added.]
[7]
The property or
services at issue in ExxonMobil were certain incidental moving costs for
which its employees received an allowance:
8 … in
addition to paying and/or reimbursing direct moving expenses incurred by
relocated employees, [ExxonMobil] paid the employees a moving allowance of up
to a maximum of 15% of their salary. The moving allowance was intended to
compensate relocated employees for incidental expenses related to the move that
were not reimbursable as moving expenses.
9 The
appellants suggest, and the respondent accepts, that such expenses would
include for example: "draperies, blinds and carpeting for the new
premises; removal and installation of lighting fixtures; disconnection and
reconnection of utilities (e.g., hydro, water, and gas), computers, antennae
and satellite dishes; penalties for early cancellation of service contracts
(e.g., cell phones, pagers, home security systems, Internet service providers),
initial house cleaning, redirection of mail, the cost of registering vehicles
or obtaining licenses in a new province; children's school uniforms and books;
disassembly and reassembly of items for shipment; replacement of items that
cannot be shipped (e.g., dangerous goods, frozen goods, plants); and additional
insurance costs for valuable items shipped"… [Referred to in these Reasons
for Judgment as “Incidental Moving Costs”]
[8]
On these facts, the Court held that the
Incidental Moving Costs were for the “exclusive” personal use of the employees and
accordingly, were not “in relation to” its activities as required under
subparagraph 174(a)(iv).
[9]
While acknowledging
that like the Incidental Moving Costs the Yukon Flights were for the personal use of the Appellant’s employees, counsel for the Appellant contended they
were not exclusively so as contemplated
by the test in ExxonMobil.
[10]
Counsel argued further
that the determination of the “exclusive”
nature of a personal use supply required the application of the test
established in an earlier Federal Court of Appeal decision, Midland
Hutterian Brethren v. Canada, [2000] F.C.J. No. 2098. In that case, the Court allowed a claim by a Hutterite colony for ITCs
in respect of the GST paid on cloth used to make work clothes (“Work Cloth”).
In overturning the Tax Court judge’s finding that the Work Cloth had not
been acquired for the “consumption, use or supply in the course of commercial
activity”, the majority of the Federal Court of Appeal held that:
25 There is
no language in subsection 169(1) that requires the use in question to be
exclusively commercial … Once an item is found to be acquired and used in
connection with the commercial activities of a GST registrant and that item
directly or indirectly contributes to the production of articles or the
provision of services that are taxable, then an ITC is available using the
formula in that subsection. …
26 Here, the
evidence is clear. The [Work Cloth] was supplied by the Colony to its members
because of its durability and longevity. The long-wearing nature of the [Work
Cloth] saved the Colony money over the long term when compared to other
materials. In this way, it contributed both to the Colony’s commercial
activities and bottom line. Given that a Crown witness admitted that the
Minister allows for ITCs for certain items such as work gloves and boots
acquired by other farm registrants for use by their employees, I am of the
opinion that the connection for the [Work Cloth] … is not too remote.
[11]
In a strong dissent, Evans, JA rejected
the majority’s conclusion but accepted its analysis that “… for the goods to be
acquired for use ‘in the course of commercial activities’, there must be a functional
connection between the needs of the business and the goods.” On his view of the facts,
no such connection existed:
68 No doubt it
will not always be easy to draw the line between an ITC-eligible good consumed
in the process of the commercial activity … and … one that is not because it
satisfies a personal need of the registrant and has only a tenuous connection
with the registrant’s commercial activities.
69 Whether a
good was acquired for use “in the course of commercial activities” may often
require an assessment of the whole factual context, and a weighing of the
various factors indicative of the good’s functional integration into the
commercial activity. To the extent that this exercise involves findings of
fact, the Court should be reluctant to intervene, in the absence of “palpable
and overriding error” by the Tax Court Judge.
[12]
The Midland Hutterian Brethren decision
was not considered by the Federal Court of Appeal in ExxonMobil. However,
counsel for the Appellant submitted that the ExxonMobil test is consistent
with the Midland Hutterian Brethren "functional connection" test
as both require a finding of “exclusive” personal use before the supply can be
precluded from being “in relation to” the claimant’s activities.
[13]
Applying Justice Evans’ criteria
in Midland Hutterian Brethren to the present facts, counsel for the
Appellant argued that notwithstanding the personal nature of the Yukon Flights,
“an assessment of the whole factual context, and a weighing of the various
factors indicative of the good’s functional integration into the commercial
activity”
showed them not to be for the employees’ exclusive personal use. Because the Yukon
Flights enhanced the Appellant’s capacity to recruit and retain employees, they
provided an indirect benefit to the Appellant and therefore, were “used” in
relation to its activities. In support of this contention, counsel noted the
Appellant’s duties under the municipal bylaws
to ensure proper administration of the municipality and the Appellant’s
location in a “prescribed zone” for the purposes of the Income Tax Act. She
also referred the Court to federal policy recognizing the economic challenges
faced by northern employers, including their ability to recruit and retain
employees, and justifying special tax treatment to address such concerns. Taken in this context, counsel
submitted, the Yukon Flights acquired by the Appellant’s employees with the Yukon
Bonus Travel Allowance formed part and parcel of the Appellant’s strategy for
the management of its activities. In this regard, they were clearly
distinguishable from the purely personal Incidental Moving Costs in ExxonMobil. On the facts of the present case, the Yukon Flights were “in relation to” its activities
as required under subparagraph 174(a)(iv) and the Appellant ought to be
entitled to a rebate under subsection 259(4) of the Act.
Respondent’s Position
[14]
The Respondent rejected the Appellant’s
position arguing that it blurred the distinction between the objectives of the
Yukon Bonus Travel Allowance and the nature of the supply acquired with it, the
Yukon Flights. Regardless of
the policy behind their payment, counsel for the Respondent cited the following
agreed facts in support of the Crown’s contention that the Yukon Flights themselves
were for the “exclusive” personal use of the Appellant’s employees:
…
16. The Yukon Bonus Travel Allowance was intended to fund the employees’ travel costs associated
with travelling away from Whitehorse to a southern Canadian city (either Edmonton or Vancouver).
…
25. The employees
lived in and worked in Whitehorse or its environs.
26. The travel that
the Yukon Bonus Travel Allowance was intended to pay for was the employees’
personal travel.
27. The Yukon Bonus Travel Allowance was not for business travel.
28. Employees were
reimbursed if they needed to travel for business.
29. How the Yukon
Bonus Travel Allowance would be spent was at the discretion of the employee who
received it.
[15]
Although not relying on the Midland
Hutterian Brethren decision, counsel for the Respondent argued that whether
applying the “functional connection” test or the ExxonMobil test, the outcome
would be the same: the purely discretionary nature of the Yukon Flights rendered
their supply “too remote” from the Appellant’s activities to be considered anything
other than for its employees’ “exclusive” personal use. In this regard, the Yukon
Flights were akin to the Incidental Moving Costs in ExxonMobil. As in
that case, the Appellant’s argument confused the business purpose of the
allowance with the exclusively personal nature of the supply acquired with it. Thus,
even if the Yukon Bonus Travel Allowance was paid to enhance the Appellant’s
capacity to recruit and retain employees, that did not diminish the exclusively
personal quality of the Yukon Flights.
[16]
As the conditions of subparagraph
174(a)(iv) had not been met, counsel for the Respondent submitted, no
amount was “deemed to have been paid” as required under subsection 259(4)B and
no rebate was payable.
Analysis
[17]
In Midland Hutterian Brethren,
Justice Evans prefaced his formulation of the “functional connection” test by
acknowledging the difficulty in determining where, on the spectrum between being
in relation to an employer’s activities or for its employees’ exclusive
personal use, a particular supply ought to fall. In respect of a supply acquired
with an allowance under subparagraph 174(a)(iv), ExxonMobil provides
some assistance in this determination by noting that it is the supply and not
the allowance used to acquire it that must be “in relation to” the employer’s
activities. In that case, having specifically recognized the link between the
purpose behind the allowance and the company’s activities, Noël, JA rejected ExxonMobil’s
claim that the Incidental Moving Costs themselves were in relation to its activities,:
7
The appellants [ExxonMobil] carry on business in the
oil and gas industry. Domestically, their business extends to nearly every
province and territory in Canada. As part of their business, the appellants are
required to relocate their employees to different locations across the country,
some of which are remote. There is no issue that the ongoing relocation of
employees, particularly skilled professionals, is an essential component of the
appellants' business operations and that the relocation policy adopted by the
appellants was intended to facilitate employee transfers by allowing such
transfers to take place with minimal disruption to the employees. … [Emphasis
added.]
[18]
In the present matter, there is
little dispute that the payment of the Yukon Bonus Travel Allowance was based
on similarly valid management objectives. The question, however, is whether the
Yukon Flights acquired with the Yukon Bonus Travel Allowance were sufficiently
connected to the Appellant’s activities to preclude a finding under the first
prong of the ExxonMobil test that they were for the employees’ exclusive
personal use. For ease of reference, the ExxonMobil test is set out
again below:
… property or
services which are intended by the employer for the exclusive personal use of
the employees and which lend themselves to such a use bear no relationship to
the employer’s activities. …
[19]
I agree with counsel for the
Appellant that the Yukon Flights are not quite on the same footing as the Incidental
Moving Costs in ExxonMobil; it somehow rankles to equate the purchase of
school uniforms for the children of corporate executives with annual flights for
municipal employees out of an officially recognized remote community. What the
Yukon Flights do have in common with the Incidental Moving Costs, however, is a
tenuous link to the activities of the employer. Indeed, the Yukon Flights were
intended to give the employees a break from their regular employment duties in
the north; they allowed the employees to spend their time as they wished in
southern centres far removed from their place of work. In this regard, the
Yukon Flights bore little resemblance to the funded travel more typically
related to business activities, for example, to meet with clients or to attend
professional conferences or job interviews.
[20]
Counsel for the Appellant
countered with the example of meal allowances or employee “break” rooms. In respect of meal
allowances, counsel argued that even though the meals constitute a supply intended
to be consumed exclusively by employees, they are accepted as being “in
relation to” a registrant’s activities. Similarly, the comfortable furniture
and television that might furnish a staff room are supplies intended to provide
a place for employees to relax while on a break. It seems to me, however, that
this argument overlooks the fact that in either case, the employees are
consuming/using the meals/break rooms while required to be on the job. Expressed
in terms of Midland Hutterian Brethren, there is a “functional
connection” between the supply and the performance of employment duties; under ExxonMobil,
that connection would preclude a finding that the meals were for the
“exclusive” personal use of the employees.
[21]
As for the second prong of the ExxonMobil
test, airline flights and related travel costs in general lend themselves
equally to work-related or personal purposes. In the present circumstances, the
Yukon Flights lent themselves to an exclusive personal use.
[22]
In my view, the facts of this
appeal fall into the difficult category anticipated by Justice Evans in Midland Hutterian Brethren. However, on balance, I am unable to conclude that
there exists a sufficient nexus between the Yukon Flights and the Appellant’s
activities. Accordingly, the appeal is dismissed, with costs to the Respondent.
Signed at Ottawa, Canada this 16th
day of August 2012.
“G. A. Sheridan”
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