REASONS
FOR JUDGMENT
D'Arcy J.
I. Issue
[1]
The issue in these appeals is the extent to
which the Appellant acquired and subsequently used certain of its land in its GST
commercial activities.
This issue requires the Court to address the application of the general input
tax credit rule in subsection 169(1), the “fair and
reasonable” rule in subsection 141.01(5), and the input tax credit
apportionment rules in subsections 141.01(2) and (3) of the GST Act.
II.
Interrelationship with the University of Alberta’s
Appeals
[2]
These appeals and appeals by the University of Alberta were scheduled to be heard
over the same three-day period. The appeals of both Appellants raise the same
issue.
[3]
Counsel for the Appellant suggested, at the
commencement of the hearing of the appeals, that the Court hear the appeals of
the University of Calgary on common evidence with the appeals of the University
of Alberta. However, he asked that the Court issue two separate judgments.
[4]
Counsel for the Respondent was willing, for efficiency
purposes, to proceed in such a manner but had some concerns since each
Appellant would be presenting different facts to support its claim for input
tax credits.
[5]
I was not willing to follow counsel for the
Appellant’s suggestion for the simple reason that the evidence was not common
to both parties. Although the Appellants carried on very similar, if not
identical businesses, they engaged in different activities in the course of
their respective businesses. These activities determine their entitlement to
input tax credits.
[6]
However, I did recognize that the two Appellants
used very similar methodologies to determine their entitlement to input tax
credits. In addition, counsel for the Appellant informed the Court that, while
there was no evidence that was common to both appellants, there was “quite a bit of parallel in the evidence”.
[7]
As a result, the appeals of both Appellants proceeded
as follows:
-
The Court called the University of Calgary
appeals and both parties presented their evidence.
-
The Court adjourned these appeals.
-
The Court called the University of Alberta
appeals and both parties presented their evidence.
-
The Court called the appeals of both Appellants,
allowing the parties to present a single argument for the appeals of both Appellants.
III.
Summary of Facts
[8]
I heard from two witnesses. Mr. Bradley Klaiber
testified on behalf of the Appellant and Mr. Robert Kinzner testified on behalf
of the Respondent.
[9]
Mr. Klaiber, a chartered accountant, is the
Director of Financial Reporting for the Appellant. Mr. Kinzner, a certified
management accountant, is a CRA auditor.
[10]
I found both witnesses to be credible. However,
as I will discuss, I do not accept Mr. Kinzner’s application of subsections
141.01(2) and (3).
[11]
The University of Calgary is a public research
university located in Calgary, Alberta, with 31,500 students and 4,800 faculty
and staff. Founded in 1966, the university has 14 faculties and more than 85
research institutes and centres.
[12]
The Appellant owns several parcels of
real property in Calgary, which collectively constitute its land and premises. Mr. Klaiber described the main
campus of the university as follows: “It’s sort of like
a mini city . . . within Calgary where a number of people come to live, work,
study, complete research.”
[13]
Notwithstanding that the campus is predominantly
used for educational purposes, the University of Calgary also provides various
commercial and non‑educational services to students, staff and the
public.
[14]
The parties note the following in the PASF I at
paragraph 2,
At all relevant times, the University of Calgary was a “registrant”,
a “public service body” and a “public institution” as defined in subsection
123(1) of the Act. For the purposes of the Act, the University of Calgary makes
both taxable and exempt supplies in the course of conducting its activities.
[15]
The fact that the Appellant is a public service
body means that it is also a public sector body,
which is relevant for the purposes of the section 206 change‑in-use
rules.
[16]
These appeals involve three parcels of land
owned by the Appellant. I will refer to the three parcels of land and the
buildings located on the lands as, collectively, the “U
of C Properties”. The parties, at paragraph 4 of the PASF I,
describe each of the three parcels as follows:
-
“Plan 1935JK (“U of C
Child Development Centre”)”; I will refer to
this parcel of land and the buildings located on the land as the “CDC”.
-
“Plan 859JK (“U of C
Main Campus”)”; I will refer to this parcel of
land and the buildings located on the land as the “Main
Campus”.
-
“Plan 9410341 (“U of C
South Campus”)”; I will refer to this parcel of
land and the buildings located on the land as the “South
Campus”.
[17]
The Appellant made an election, effective
February 1, 2006, under section 211 of the Act in respect of each of the U of C
Properties.
I will discuss the effect of the elections shortly. The main consequence of the
elections, for the purposes of these appeals, is that the Appellant was deemed
to have received on February 1, 2006 a taxable supply of each of the properties
by way of sale and to have paid on that day tax in respect of each of the
deemed supplies.
[18]
Subsequent to February 1, 2006, the Appellant
made improvements to the U of C Properties. The tax in respect of the
improvements to the U of C Properties appears to have been paid
or to have become payable between February 2006 and March 2009.
[19]
As a result of the deemed acquisition of the U
of C Properties and the subsequent improvements to the properties, the
Appellant is required to determine, for input tax credit purposes, the extent
to which it acquired the U of C Properties, additions to the
properties or improvements to the properties for use in its GST commercial
activities.
[20]
The Appellant developed a methodology to
determine the extent to which it used the U of C Properties in its commercial
activities (the “Appellant’s Original Methodology”).
The parties provided the following general description of the Appellant’s Original
Methodology in the PASF I:
For each of the U of C Properties, the
University of Calgary took into account all of the structures on the property. It
identified within a particular structure all of the space (measured by square
meters) that was directly used in making taxable supplies for consideration,
exempt supplies, and a mix of the two activities.
. . .
The University of Calgary then developed a
ratio (expressed as a percentage) between taxable and exempt activities within
each structure and applied it to the mixed activities within the structure (i.e.,
internal common areas). The University of Calgary then aggregated all of the
activities from all the structures on the property to determine a ratio
(expressed as a percentage) to be applied to the remaining space on the
property (i.e., external common areas).
[21]
The Appellant, using this methodology, filed
numerous GST returns in which it claimed input tax credits in respect of the U
of C Properties on the basis that, during the relevant periods, the following
percentages represented the extent to which it acquired each property for use,
or used each property, in the course of its commercial activities:
-
CDC – 85.77%
-
Main Campus 43.2%
-
South Campus 27.52%
[22]
The Minister reassessed on the basis that three
adjustments are required to the Appellant’s Original Methodology in order for
the methodology to comply with the provisions of the GST Act, particularly
section 141.01.
[23]
First, the Minister disagrees with the
Appellant’s determination of the amount of space in specific buildings that the
Appellant used directly in the making of taxable supplies for consideration,
directly in the making of exempt supplies, and indirectly to make both taxable
and exempt supplies. Second, she disagrees with the Appellant’s treatment of
the external common areas on the U of C Properties (the “External Common Areas”). Third, she believes that the
Appellant’s Original Methodology should be amended to add a weighting or index
factor.
[24]
The Appellant accepts the changes proposed by
the Minister with respect to the allocation of space within specific buildings.
The PASF I states the following:
Subsequent to issuance of the Reassessments
under appeal, the Appellant agreed to some of the adjustments proposed by the
Minister (in applying the Appellant’s methodology). As a result, the Appellant
now claims the extent to which each U of C Property was being used in
commercial activities is as follows:
|
Properties
|
Extent
of Use
|
|
Child Development Centre
|
81.20%
|
|
Main Campus
|
41.33%
|
|
South Campus
|
25.86%
|
[25]
I will refer to the methodology used by the
Appellant to determine these percentages as the “Appellant’s
Final Methodology” and the resulting percentages as the “Appellant’s Final Percentages”.
[26]
The Appellant does not accept the Minister’s
treatment of the External Common Areas or the addition of an indexing factor.
[27]
The parties provided in the PASF I, the
following general description of the methodology developed by the Respondent
(the “Respondent’s Methodology”):
The Minister takes the position that the
entirety of each of the U of C Properties must be considered in calculating the
extent of use in commercial activity. The Minister takes the position that the
outdoor areas (other than parking areas) such as green space, roadways,
walkways, and landscaped areas were not for use in making taxable supplies for
consideration. Based on this view, the Minister takes the position that the U
of C Method must be applied in a manner that includes these outdoor areas when
calculating the extent of use in the commercial activity of the appellant.
The Minister takes the position that a
weighting or index system is required to take into account the different types
of space on each of the U of C Properties. The Minister has identified the
replacement costs of the various structures on each of the U of C Properties
and uses that information to apply an indexing factor to the U of C Properties.
[28]
The Minister, using the Respondent’s Methodology
and after making adjustments to the Appellant’s original calculation of the use
of space within specific buildings, determined the extent to which each of the
U of C Properties was used during the relevant period in commercial activities,
as follows (the “Respondent’s
Percentages”):
-
CDC – 69.91%
-
Main Campus – 18.06%
-
South Campus – 11.93%
[29]
This resulted in the Minister assessing the
Appellant to increase its net tax by approximately $3.9 million for the
relevant periods.
[30]
Although they disagree on the treatment of the
External Common Areas and the addition of a weighting or indexing factor to the
Appellant’s Final Methodology, the parties do agree on the actual use of the
space within each building situated on the U of C Properties. Specifically, the
Appellant’s Final Methodology and the Respondent’s Methodology use the same
determination of the extent (measured in square meters) to which the Appellant
used each building directly in the making of taxable supplies for
consideration, directly in the making of exempt supplies and indirectly in the making
of both taxable and exempt supplies.
IV.
The Appellant’s Methodology
[31]
Mr. Klaiber explained the Appellant’s Original
and Final Methodologies to the Court.
[32]
As noted in the PASF I, the Appellant identified
within a particular structure
situated on the U of C Properties all of the space (measured in square meters)
that was used directly in the making of taxable supplies for consideration,
directly in the making of exempt supplies and indirectly in the making of both
taxable and exempt supplies.
[33]
Mr. Klaiber explained the process used by the
Appellant to identify the use of particular space. He emphasized that the
Appellant tried to use “readily available information”.
[34]
His department first worked with the Appellant’s
Teams and Facilities Maintenance and Development group. This group has a
database containing information relating to the space on campus within the
Appellant’s structures and buildings. This database contains detailed
information for each building identifying each room in the building, the
physical size of the room, the name of the room and the Appellant’s use of the
room.
[35]
Mr. Klaiber and his staff reviewed all of the space
on each floor of each building and allocated the space in each room and each
common area to use directly in the making of exempt supplies, use directly in
the making of taxable supplies for consideration or indirect use in making both
exempt and taxable supplies (the “Internal Common
Areas”).
[36]
He noted that space used directly in the making
of exempt supplies included classrooms and research labs that were not leased
to third parties. Space used directly in the making of taxable supplies
included food establishments, bookstores, parking lots and space leased to third
parties.
[37]
The Internal Common Areas included utility
rooms, corridors and hallways, washrooms, etc. He explained that this space
supported the “directly
attributable activities” in the specific
building.
[38]
Exhibits A3, A4, and A5 summarize the Appellant’s
calculations for each room in each building on the three U of C Properties. These
exhibits contain 270 pages of calculations for thousands of rooms in 90
structures (including parking lots) comprising approximately 898,000 square
meters of space.
[39]
The Appellant then aggregated the amounts
calculated for the structures located on the U of C Properties. Specifically,
for each of the three pieces of land comprising the U of C Properties, it
calculated the square meters it used directly in making taxable supplies for
consideration, the square meters it used directly in making exempt supplies and
the square meters that comprised the Internal Common Areas.
[40]
At some point in time, the Appellant reviewed
these calculations with the CRA and accepted certain adjustments proposed by
the CRA with respect to the Appellant’s determination of the use of the space
within the structures. Exhibits B, C, and D to the PASF I contain the parties’
agreed allocation of space in each of the structures on the U of C Properties.
[41]
Exhibit B to the PASF I contains the numbers
agreed upon by the Appellant and the Respondent for the CDC land. The Appellant
identifies seven structures on the CDC land. Exhibit B shows the total of the
room-by-room calculation for each structure on the CDC land broken down according
to the square meters used directly in the making of taxable supplies for
consideration, the square meters used directly in the making of exempt supplies
and the square meters used indirectly in the making of both taxable and exempt
supplies (the Internal Common Areas).
[42]
The square meters for the seven structures are
then totalled, with the following result:
-
The Appellant used 30,261.78 square meters
directly in the making of taxable supplies for consideration.
-
The Appellant used 7,004.81 square meters
directly in the making of exempt supplies.
-
The Appellant used 1,582.81 square meters
indirectly in the making of both taxable and exempt supplies.
[43]
Exhibit C contains the same calculation for the
structures on the Main Campus. The Appellant identifies seventy-seven
structures on the Main Campus. The totals of the calculations for the
seventy-seven structures are as follows:
-
The Appellant used 258,842 square meters
directly in the making of taxable supplies for consideration.
-
The Appellant used 367,485 square meters
directly in the making of exempt supplies.
-
The Appellant used 27,863 square meters
indirectly in the making of both taxable and exempt supplies.
[44]
Exhibit D contains the same calculation for the
structures on the South Campus. The Appellant identifies six structures on the
South Campus. The totals of the calculations for the six structures are the
following:
-
The Appellant used 53,001.30 square meters
directly in the making of taxable supplies for consideration.
-
The Appellant used 151,941.60 square meters
directly in the making of exempt supplies.
[45]
It is the Appellant’s position that the extent
to which a specific piece of land was used in commercial activities is determined
by taking the total square meters of all of the structures on the specific
piece of land that were used directly in the making of taxable supplies for
consideration and dividing it by the total of the square meters of such land
used directly in the making of taxable supplies for consideration and the
square meters of such land used directly in the making of exempt supplies. Using
the numbers in Exhibits B, C and D results in the following (the Appellant’s
Final Percentages), which the Appellant argues represents the extent to which
each piece of land was used in commercial activities:
-
CDC - 30,261.78/(30,261.78+7,004.81) = 81.20%
-
Main Campus - 258,842/(258,842+367,485) = 41.33%
-
South Campus - 53,001.30/(53,001.30+151,941.60)
= 25.86%
[46]
It is the Appellant’s position that it is
entitled to the input tax credits resulting from the application of the
Appellant’s Final Percentages to the GST paid or deemed to have been paid in
the relevant reporting periods, as set out in Exhibit A to the PASF I.
[47]
For example, Exhibit A shows that the parties
have agreed that the GST in respect of which the Appellant is entitled to claim
an input tax credit as of August 2007 was $543,700. It is the Appellant’s
position that it was entitled to claim an input tax credit equal to 81.2% of
this amount.
[48]
The Appellant’s Final Methodology assumes that the
Appellant acquired all areas of the land on the U of C Properties for the
purpose of making either taxable or exempt supplies.
V.
The Respondent’s Methodology
[49]
The Respondent does not accept the Appellant’s
methodology. She does not believe it complies with section 141.01. She proposes
a methodology developed by the CRA that starts with the Appellant’s
calculations and makes two substantial adjustments. First, it treats the
External Common Areas as space that was “not for use in
making taxable supplies for consideration”. Second, it applies a
weighting or index factor based upon the replacement cost of the various
structures on the U of C Properties.
[50]
Mr. Kinzner explained the CRA’s methodology to
the Court.
[51]
The CRA started with the numbers contained in
Exhibits B, C, and D of the PASF I for each structure on the U of C Properties.
These are the numbers the Appellant used, in its Final Methodology, to
determine the extent to which it used the U of C Properties in commercial
activities. The numbers represent the square meters in each structure used
directly in the making of taxable supplies for consideration, the square meters
used directly in the making of exempt supplies, and the square meters used
indirectly in making both taxable and exempt supplies.
[52]
The CRA then adjusted the calculations in each
of Exhibits B, C and D of the PASF I on the assumption that the Appellant did
not use the External Common Areas indirectly to make taxable and exempt
supplies.
As noted in Exhibits B, C, and D respectively of the PASF I, the square meters
of the External Common Areas for each parcel of land are as follows:
-
168,420 square meters for the External Common
Areas on the CDC land.
-
567,183 square meters for the External Common
Areas on the Main Campus.
-
31,614 square meters for the External Common
Areas on the South Campus.
[53]
Mr. Kinzner testified that the Appellant used
the External Common Areas on the CDC Lands and the Main Campus in “exempt” activities.
He also testified that the Appellant used 22,795 of the square meters making up
the External Common Areas located on the South Campus in “exempt” activities.
The CRA determined that the Appellant did not use the remaining 8,819 square
meters of the External Common Areas on the South Campus in “exempt” activities,
but rather leased the land as part of the parking garage.
[54]
Mr. Kinzner took me to Exhibits R3, R4 and R5,
which show the adjustments the CRA made to the Appellant’s Final Methodology.
[55]
With respect to the CDC, Exhibit R3 shows that
the CRA did not change the square meters of space the Appellant used directly
in the making of taxable supplies for consideration or the square meters of
space within the structures that the Appellant used indirectly in the making of
both taxable and exempt supplies. However, the CRA did increase the number of
square meters the Appellant used directly in the making of exempt supplies by
the 168,420 square meters of External Common Areas, resulting in an increase
from 7,004.81 square meters to 175,424.81 meters.
[56]
Exhibit R4 sets out the similar adjustments the
CRA made to the Appellant’s numbers in Exhibit C of the PASF I with respect to
the Main Campus. The square meters used directly in the making of taxable
supplies and those used within structures indirectly for making both taxable
and exempt supplies do not change. The number of square meters used directly in
the making of exempt supplies increases by the 567,183 square meters of
External Common Areas, resulting in an increase from 367,485 to 934,669 square
meters.
[57]
The CRA made similar adjustments to the
Appellant’s numbers in Exhibit D of the PASF I with respect to the South
Campus. It increased the square meters used directly in the making of taxable
supplies by the 8,819 of the External Common Area that was leased as part of
the parking garage, resulting in an increase from 53,001 to 61,820 square
meters. It increased the number of square meters used directly in the making of
exempt supplies by the remaining 22,795 square meters of the External Common
Areas, resulting in an increase from 151,941 to 174,736 square meters.
[58]
After adjusting the Appellant’s calculations for
the External Common Areas, the CRA then applied what it refers to as a “weighting index” to its square meter calculations.
[59]
A CRA valuator, David Jang, estimated the
replacement costs for the buildings, parking lots, and landscaped areas located
on the U of C Properties (referred to in the PASF II as the improvements). Mr. Jang calculated the total
replacement cost of each of the improvements as of September 30, 2011.
[60]
The appendices to Exhibit R3 set out the
application of the CRA’s indexing factor to the CDC lands.
[61]
The CRA auditor, using the replacement cost
determined by the CRA valuator, determined a cost per square foot for each of
the seven structures and the External Common Areas on the CDC lands as follows:
-
CDC - $230.57 per square foot
-
Physical plant - $204.53 per square foot
-
General services building - $32.13 per square foot
-
Materials handling - $32.13 per square foot
-
The three parking lots - $5.05 per square foot
-
Green space (roads/sidewalks/landscaping/forest)
(the External Common Areas) - $4.25 per square foot
[62]
The CRA used the cost per square foot as a weighting
index and applied it to the square meter breakdown agreed to by the parties for
the seven structures on the CDC land.
[63]
For example, for the physical plant located on
the CDC land the parties agree that the Appellant used 1,867 square meters of
the plant directly in the making of taxable supplies for consideration and
3,592 square meters directly in the making of exempt supplies. The CRA applied its weighting
index as follows:
-
It first calculated a weighted commercial area
for the physical plant equal to the space used directly in the making of
taxable supplies for consideration times the weighted index (the cost per
square foot for the physical plant), i.e., 1,867 square meters x 204.53 =
381,857.51.
-
It then calculated a weighted exempt area for
the physical plant equal to the space used directly in the making of exempt
supplies times the weighted index (the cost per square foot for the physical
plant), i.e., 3,592.00 x 204.53 = 734,671.76.
-
The CRA then totalled these amounts to arrive at
a weighted total area for the physical plant of 1,116,529 (381,857 + 734,671).
[64]
The CRA completed the same calculation for each
of the other six structures on the CDC land.
[65]
A calculation was also done for the External
Common Areas. Specifically, the CRA auditor began with the 168,420 square
meters that the parties agreed was the size of the CDC External Common Areas. Since Mr. Kinzner assumed all
of this area was “exempt”, he calculated a weighted exempt area for the entire External Common
Areas equal to the size of the External Common Areas times the weighting index
(cost per square foot for improvements on the External Common Areas) i.e.,
168,420 x 4.25 = 715,785.
[66]
The CRA then totalled the calculated weighted
commercial area, the weighted exempt area, and the weighted total area for the
CDC lands with the following result:
-
Weighted square meters used in commercial
activities – 3,888,152.35
-
Weighted square meters used in exempt activities
- 1,673,408.46
-
Weighted total area – 5,561,560.81
[67]
The CRA used the same method to apply the indexing
factor to the Main Campus. It used the cost per square foot as a weighting
index and applied it to the agreed calculation of the square meters used
directly in the making of taxable supplies for consideration, the square meters
used directly in making exempt supplies and the square meters used indirectly
in the making of supplies for the structures on the Main Campus.
[68]
With respect to the External Common Areas, the
auditor began with the 567,183 square meters that the parties agreed was the
size of the External Common Areas on the Main Campus. Since the CRA auditor assumed
all of this area was “exempt”, he calculated a weighted exempt area for the entire External Common
Areas equal to the size of the External Common Areas times the weighted index
(cost per square foot for improvements on the External Common Areas) i.e.,
567,183 x 4.25 = 2,410,528.
[69]
The CRA then totalled the calculated weighted
commercial area, the weighted exempt area and the weighted total area for the
Main Campus, including the External Common Areas, with the following result:
-
Weighted square meters used in commercial
activities – 18,824,279
-
Weighted square meters used in exempt activities
– 85,426,040
-
Weighted total area – 104,250,320.
[70]
The CRA used the same indexing method for each
structure on the South Campus and for the South Campus External Common Areas,
with the following result:
-
Weighted square meters used in commercial
activities – 5,152,150
-
Weighted square meters used in exempt activities
– 38,016,992
-
Weighted total area 43,169,142
[71]
The CRA then determined the extent to which the
Appellant used each piece of land in commercial activities by taking, for each
of the three pieces of land, the amount it calculated as the total weighted
square meters used in making taxable supplies for consideration and dividing it
by the weighted total area for the piece of land. This resulted in the
following percentages (i.e., the Respondent’s Percentages),
-
CDC – 69.91% (3,888,152/5,561,561)
-
Main Campus 18.06% (18,824,279/104,250,320)
-
South Campus 11.93% (5,152,150/43,169,142 )
[72]
It is the Respondent’s position that the
Appellant is entitled to input tax credits calculated by applying the
Respondent’s Percentages to the agreed amount of GST that the Appellant paid or
was deemed to have paid on each property.
For example, Exhibit A of the PASF I shows that the eligible amount of GST for
the Appellant’s August 2007 reporting period for the CDC was $543,700.11. It is
the Minister’s position that the Appellant was entitled to claim an input tax
credit equal to 69.91% of this amount.
VI.
The Law
[73]
Subsection 169(1) of the Act contains the
general rules for the claiming of input tax credits. The applicable portions of
subsection 169(1) read as follows:
Subject to this Part, where a person
acquires or imports property or a service or brings it into a participating
province and, during a reporting period of the person during which the person
is a registrant, tax in respect of the supply, importation or bringing in
becomes payable by the person or is paid by the person without having become
payable, the amount determined by the following formula is an input tax credit
of the person in respect of the property or service for the period
A x B
where
A is the tax in respect of the supply, importation or bringing in,
as the case may be, that becomes payable by the person during the reporting period or that is
paid by the person during the period without having become payable; and
B is
. . .
(b) where the property or service is acquired, imported or brought into
the province, as the case may be, by the person for use in improving capital
property of the person, the extent (expressed as a percentage) to which the
person was using the capital property in the course of commercial activities of
the person immediately after the capital property or a portion thereof was last
acquired or imported by the person, and
(c) in any
other case, the extent (expressed as a percentage) to which the person acquired
or imported the property or service or brought it into the participating
province, as the case may be, for consumption, use or supply in the course of
commercial activities of the person.
[74]
These appeals relate to the Appellant’s ability
to claim input tax credits with respect to the acquisition of capital real
property and subsequent improvements to the real property. Under paragraph (c)
of the definition of B in subsection 169(1), a GST registrant is entitled to
claim an input tax credit for GST paid on the acquisition of capital real
property according to the extent to which it acquired the property for
consumption, use or supply in the course of its commercial activities. With
respect to improvements to the capital real property, paragraph (b) of
the definition of B in subsection 169(1) allows a person who is a registrant to
claim an input tax credit based upon the extent to which the person was using
the capital real property in the course of the person’s commercial activities
immediately after the capital real property was last acquired by the person.
[75]
Subsection 209(1) provides that subsections 199(2)
to (4) and 200(2) and (3) apply, with any modifications the circumstances
require, to certain real property acquired by a registrant that is a public
service body as if the real property were personal property. Those subsections
apply to real property acquired by the public service body for use as capital
property or, in the case of subsection 199(4), to improvements to capital real
property of the public service body.
[76]
The Appellant is a public service body. Therefore,
in the first instance, subsection 209(1) would apply to any acquisition of the
U of C Properties and to improvements to those properties.
[77]
Subsections 199(2) to (4) contain rules that are
generally referred to as the primary use test. The combined effect of those
provisions and subsection 209(1) is that tax payable by a registered public
service body in respect of the acquisition of capital real property is not
included in determining the input tax credit of the public service body unless
the real property was acquired for use primarily in commercial activities of
that body.
A similar rule applies for improvements to such real property. Any tax payable
in respect of improvements is not included in determining the input tax credit
of the public service body unless, at the time that such tax is paid or becomes
payable, the capital real property is used primarily in commercial activities
of the public service body.
[78]
It is my understanding that the Appellant prior
to making the section 211 elections on February 1, 2006, was not entitled
to claim input tax credits in respect of the U of C Properties since it was not
using the properties primarily in commercial activities.
[79]
Section 211 provides a mechanism whereby certain
public service bodies may claim input tax credits in respect of real property
that they do not use primarily in commercial activities. In addition, the
election results in certain exempt supplies of the real property becoming
taxable supplies.
[80]
Subsection 211(1) provides in part that, where a
public service body files an election with respect to real property that is
capital property of the body, section 209 does not apply to the property. As a
result, the public service body is entitled to claim input tax credits in
respect of such real property even if the real property is used primarily in
non-commercial activities.
[81]
In addition, supplies of the real property that
would otherwise be exempt because of the application of section 1 of Part V.1
of Schedule V
or the application of section 25 of Part VI of Schedule V are excluded from exemption
under these sections.
[82]
The evidence before me is that, prior to
February 1, 2006, the Appellant made significant exempt supplies of real
property by way of lease. As a result of the elections under section 211, these
supplies became taxable supplies.
[83]
Once a public service body makes an election
under subsection 211(1), it is deemed under paragraph 211(2)(a) to have
made, immediately before the effective date of the election, a supply of the
real property by way of sale and to have collected, on the particular day, tax
in respect of the supply equal the basic tax content of the property on the
particular day.
[84]
Paragraph 211(2)(b) deems the public service
body to have received on the effective date of the election a taxable supply of
the real property by way of sale and to have paid, on the particular day, tax
in respect of the supply equal to the basic tax content of the property on the
particular day.
[85]
Effective February 1, 2006, the Appellant made
elections under section 211 in respect of the CDC, the Main Campus, and the
South Campus. As a result, it was deemed to have made a supply of each property
immediately before February 1, 2006 and to have acquired each of the properties
on February 1, 2006.
[86]
There is no dispute before the Court with
respect to either the deemed supply under paragraph 211(1)(a) of each of
the three properties or the Appellant’s ability to claim an offsetting input
tax credit for the tax it was deemed to have collected.
[87]
The issue before the Court is the Appellant’s
ability to claim input tax credits for the tax it was deemed to have paid on
the exercise of the elections and for the GST it subsequently paid in respect
of improvements to the U of C Properties.
[88]
The majority of the input tax credits at issue
relate to the GST the Appellant was deemed under paragraph 211(2)(b) to
have paid on the deemed acquisition of the U of C Properties. Under subsection
169(1), the Appellant is entitled to claim a credit for such tax based on the
extent (expressed as a percentage) to which it acquired the real property for
use in the course of its commercial activities.
[89]
The parties also disagree on the amount of input
tax credits the Appellant is entitled to claim in respect of tax paid or
payable, after the deemed acquisition, on improvements to the properties. Since
the U of C Properties are capital real property of the Appellant and the
Appellant has made elections under subsection 211(1), paragraph 169(1)(b)
and the change-in-use rules in section 206 apply when determining the
Appellant’s entitlement to input tax credits for tax paid in respect of improvements
to the properties. These provisions look at the Appellant’s actual use of the
properties.
[90]
Regardless of which provisions apply, the
Appellant’s ability to claim input tax credits is dependent on its intended or
actual use of the properties in its commercial activities. Commercial activity
is defined in subsection 123(1). The relevant portions of the definition for
the purposes of these appeals are as follows:
(a) a business carried on by the person . . . except
to the extent to which the business involves the making of exempt supplies by
the person,
. . . and
(c) the
making of a supply (other than an exempt supply) by the person of real property
of the person, including anything done by the person in the course of or in
connection with the making of the supply.
[91]
Business is
defined in subsection 123(1) as follows:
“business”
includes a profession, calling, trade, manufacture or undertaking of any kind whatever,
whether the activity or undertaking is engaged in for profit, and any activity
engaged in on a regular or continuous basis that involves the supply of
property by way of lease, licence or similar arrangement, but does not include
an office or employment.
[92]
Under the GST Act, a person’s business is
broader than the person’s commercial activity. A business includes all of the
activities of a person regardless of whether the activities involve the making
of taxable supplies or of exempt supplies. This is an important distinction for
the purposes of various provisions of the Act, including the input tax credit
apportionment rules contained in section 141.01.
[93]
On the evidence before me, I have concluded that
the Appellant carried on a single business, namely, the operation of a
university, and that it carried on all of its activities in the course of this
business. All of the business constituted a commercial activity of the
Appellant, except to the extent to which the business involved the making of
exempt supplies.
[94]
The application of subsection 169(1) to tax paid
on property or services acquired by a registrant in the course of its business
for consumption or use directly in the making of a specific supply is
relatively straightforward. For example, if the registrant acquires the
property or service only for consumption or use directly in the making of a
taxable supply, then the property is consumed or used in the course of the
registrant’s commercial activity and the registrant is entitled to claim a full
input tax credit for the tax paid on the acquisition of the property or
service. Alternatively, no input tax credit is available if the registrant
acquires the property or service solely for consumption or use directly in the
making of exempt supplies.
[95]
The application of subsection 169(1) to “indirect costs”, that is, property and services that are not used directly in the
making of a taxable or an exempt supply, is not as straightforward. When making
a determination in this regard, one must consider the section 141.01 input tax
credit apportionment rules.
[96]
Indirect costs include such things as
administrative costs, overhead costs, and costs incurred in respect of common areas
in or around a building. For example, in most instances, the payroll department
of a corporation that makes both taxable and exempt supplies will not be
involved directly in the making of any supplies by the corporation.
[97]
The expenses of the payroll department are
incurred in the course of the registrant’s business. All of the registrant’s
business constitutes its commercial activity, except to the extent to which the
business involves the making of exempt supplies. It can be argued that, since
the payroll department is not involved directly in the making of exempt
supplies, it is not involved in the portion of the registrant’s business that
makes the exempt supplies. If this argument were accepted, then all of the
payroll department’s activities would be considered to have occurred in the
course of the registrant’s commercial activity. Such an interpretation would
allow a registrant who makes both taxable and exempt supplies to claim full
input tax credits for indirect costs such as costs incurred by its payroll
department.
[98]
Parliament addressed this issue when it added
section 141.01 in 1994, retroactive to the introduction of the GST. Subsections
141.01(2) and 141.01(3) clarify that, when determining input tax credits for a
registrant involved in both taxable and exempt activities, one must attribute
all costs of the registrant to the making of supplies.
[99]
Subsection 141.01(2) sets out a deeming rule
that applies on the acquisition of property or a service. The subsection reads as
follows:
Where a person acquires or imports property
or a service or brings it into a participating province for consumption or use
in the course of an endeavour of the person, the person shall, for the purposes
of this Part, be deemed to have acquired or imported the property or service or
brought it into the province, as the case may be,
(a) for
consumption or use in the course of commercial activities of the person, to the
extent that the property or service is acquired, imported or brought into the
province by the person for the purpose of making taxable supplies for
consideration in the course of that endeavour; and
(b) for
consumption or use otherwise than in the course of commercial activities of the
person, to the extent that the property or service is acquired, imported or
brought into the province by the person
(i) for the purpose of making supplies in
the course of that endeavour that are not taxable supplies made for
consideration, or
(ii) for a
purpose other than the making of supplies in the course of that endeavour.
[100] Endeavour of a person is defined in subsection 141.01(1) as meaning
a business of the person, an adventure or concern in the nature of trade of the
person, or the making of a supply of real property of the person.
[101] For example, the endeavour of a person carrying on a single business
is all of the activities of the business, including the making of taxable
supplies and the making of exempt supplies.
[102] Subsection 141.01(2) applies to property or a service acquired by the person for consumption
or use in the course of the business. Pursuant to paragraph 141.01(2)(a),
the person is deemed, for the purposes of the Act, to have acquired the property
or service for consumption or use in the course of commercial activities of the
person to the extent that the property or service is acquired by the person for
the purpose of making taxable supplies for consideration in the course of the
business.
[103] Alternatively, under subparagraph 141.01(2)(b)(i), the person
is deemed to have acquired the property or service for consumption or use
otherwise than in the course of commercial activities of the person to the
extent that the property or service is acquired by the person for the purpose
of making supplies in the course of the business that are not taxable supplies made
for consideration. Normally, this would be exempt supplies and taxable supplies
made for no consideration or nominal consideration.
[104] In addition, under subparagraph 141.01(2)(b)(ii), the person
is deemed to have acquired the property or service for consumption or use
otherwise than in the course of commercial activities of the person to the
extent that the property or service is acquired by the person for a purpose
other than the making of supplies in the course of the business. This provision
applies where a person incurs expenses that do not relate to the person’s
business. Normally, such expenses are personal expenses of the owner of the business
or a person related to the owner.
[105] Subsection 141.01(2) looks at the person’s purpose when acquiring
the property or service, in other words, the person’s intended consumption or use
of the property or service. In particular, it looks to see if the intention was
to use the property or service in the making of taxable supplies for
consideration, the making of exempt supplies or the making of a combination of such
supplies.
The person is only entitled to claim an input tax credit for tax paid on the property
or service to the extent that the person’s intention was to use the property or
service in the making of taxable supplies for consideration.
[106] In my view, if a corporation incurs an expense in the course of its
business (endeavour), then the expense will always be incurred for the purpose of
making one or more supplies. The purpose of the business is to earn revenue,
i.e., to make supplies. Therefore, the result of subsection 141.01 (2) is that
all costs incurred by a person in the course of the person’s business must be
traced to a specific supply or multiple supplies in respect of which the costs
were incurred.
[107] This is a relatively easy exercise for property or services that can
be traced directly to the making of a taxable or an exempt supply. The challenge
is to trace indirect costs to the various related supplies.
[108] My view is consistent with the Department of Finance’s February 1994
technical notes, which explain the purpose of section 141.01 with respect to
indirect costs as follows:
Many types of properties and services used
in the operation of a business are not directly used in the making of supplies.
These may be referred to as “indirect inputs”. Examples include items of
overhead and inputs used in the operation of “support” functions of a business
such as a personnel department or an internal audit department. The personnel,
management, administrative and other support functions of a business are
part of what is involved in the making of supplies since these functions are
undertaken in order for the business to achieve the ultimate end or purpose of
making supplies. . . .
New section 141.01 is added only to
reinforce this concept that the ultimate purpose of making supplies of some
kind involves all aspects of the business. The section, in effect, requires
an attribution of all costs to the making of supplies. . . .
[Emphasis added]
[109] Subsection 141.01(3) contains identical rules, except that it
applies to the actual consumption or use of the property or service rather than
the intended consumption or use of the property or service on its acquisition. This
subsection is relevant when applying provisions of the GST Act that look at the
actual use or consumption of property or a service in a specific period, such
as the section 206 change-in-use rules.
[110] The second input tax credit rule that is relevant for the purposes
of these appeals is subsection 141.01(5). Paragraph 141.01(5)(a) provides,
in part, that the method used by a person in a fiscal year to determine the
extent to which property or services are acquired by the person for the purpose
of making taxable supplies for consideration or for other purposes must be fair
and reasonable and is to be used consistently by the person throughout the
year.
[111] Paragraph 141.01(5)(b) provides an identical rule for actual
consumption or use of the property or service. It provides, in part, that the
method used by a person to determine the extent to which the consumption or use
of property or services is for the purpose of making taxable supplies for
consideration or for other purposes must be fair and reasonable and is to be
used consistently by the person throughout the year.
[112] The issue of what is fair and reasonable was recently addressed by
my colleague Justice Owen in Sun Life Assurance Company of Canada v. The
Queen.
He stated the following with respect to the method proposed by the Appellant, the
Sun Life Assurance Company:
[37] The definition of the word
“reasonable” in the Oxford English Dictionary (Second Edition) that is
in my view most appropriate is A.2.a: “Having sound judgement; sensible, sane.
. . . Also, not asking for too much.” The use of the word “raisonnables” in the French version of the
provision supports this interpretation.
[38] The use of a reasonableness
requirement in tax legislation has been considered in other contexts. In Bailey
v. M.N.R., [1989] T.C.J. No. 602 (QL), 89 DTC 416, the Court stated (at
page 420):
What is “reasonable” is not the
subjective view of either the respondent or appellant but the view of an
objective observer with a knowledge of all the pertinent facts: Canadian
Propane Gas & Oil Limited v. M.N.R., 73 DTC 5019 per Cattanach J. at
5028.
[39] In Maege v. The Queen, 2006 TCC
117, the Court adopted the general approach to determining reasonableness set
out in Tsiantoulas v. Canada, [1994] T.C.J. No. 984 (QL), where the
Court stated at paragraph 11:
Reasonableness is a question of fact
and requires the application of a measure of judgement and common sense.
[40] I can see
no reason why the general approach to determining reasonableness in these cases
would not also apply to determining whether a particular method is “fair and
reasonable”. That is to say, what is “fair and reasonable” is a question of
fact and requires the application of a measure of judgment and common sense.
The determination is not based on the subjective view of either the Appellant
or the Respondent but is based on the view of an objective observer with
knowledge of all the pertinent facts. It is also important to recognize that
the tax authorities cannot simply substitute their approach for that of Sun
Life and that there may be more than one method that is fair and reasonable in
the circumstances (see Ville de Magog v. The Queen, supra).
[113] In my view, this is an accurate statement of the law with respect to
the application of the subsection 141.01(5) fair and reasonable test.
VII.
Application of the Law to the Facts
A. Tax Paid or Payable
[114] Under subsection 169(1), the amount of the Appellant’s input tax
credits in the relevant reporting periods is dependent, in the first instance,
on the amount of tax that became payable by the Appellant during the relevant
reporting periods or that was paid during the periods without having become
payable.
[115] The parties agree on the amount of tax the Appellant was deemed to
have paid on February 1, 2006 in respect of its deemed acquisition of each of
the U of C Properties and on the amount of tax paid in subsequent
reporting periods in respect of improvements to the properties.
[116] The tax paid on the deemed acquisition is equal to the basic tax
content of the property on that date. Basic tax content is defined, as stated
earlier, in subsection 123(1). The definition is extremely long.
[117] Generally, the basic tax content of the U of C Properties on
February 1, 2006, was the tax the Appellant had paid in the past on the
acquisition of the properties and on any improvements to the properties,
provided such tax was not recoverable by way of rebate, refund or remission (the
“non-rebated GST”). It includes any tax paid by the Appellant in respect of which it
was entitled to claim or did claim an input tax credit.
[118] Paragraph 6 of the PASF I states the following: “A detailed description of the BTC [basic
tax content] for each property during the relevant reporting periods is provided
in Exhibit “A” [to the PASF I].”
[119] Mr. Kinzner clarified during his testimony that Exhibit A to the
PASF I is actually referring to incremental non-rebated GST for the
relevant reporting periods noted in Exhibit A.
For example, the first line in Exhibit A to the PASF I shows basic tax content
of $543,700.01 for the CDC during the Appellant’s August 2007 reporting period.
Mr. Kinzner explained that this was the basic tax content (as defined in
subsection 123(1)) for the property as of June 2007. In other words, it includes
the non-rebated GST paid prior to the February 1, 2006 deemed disposition and
the non-rebated tax paid on improvements subsequent to the deemed disposition. The fourth line in Exhibit A
shows what is referred to as basic tax content of $127,673.54 for the CDC
during the Appellant’s February 2009 reporting period. Mr. Kinzner explained that
this represents the non-rebated GST the Appellant paid between July 2007 and
March 2008 in respect of improvements to the property.
[120] The sixth line in Exhibit A shows what is referred to as basic tax
content of $23,459.98 for the CDC property during the Appellant’s December 2010
reporting period. Mr. Kinzner explained that this represents the portion of the
non-rebated GST the Appellant paid between April 2008 and March 2009 in respect
of improvements to the property.
[121] I am disappointed that counsel submitted a partial agreed statement
of facts that required “clarification” by a witness. Regardless, the parties have agreed on the amount of
tax the Appellant was deemed to have paid on the deemed disposition and that it
did pay on subsequent improvements.
B. The extent to which the U of C Properties were acquired for use or
used in commercial activities
[122] Having determined the amount of tax paid or payable in the relevant
periods, the Appellant must then determine the extent to which it used the U of C Properties
in its commercial activities. I will first consider the deemed acquisition, on
February 1, 2006, of the U of C Properties.
[123] The Appellant carries on a single business that makes both taxable
and exempt supplies. It acquired the U of C Properties in the course of
carrying on this business. In such a situation, the Appellant must determine
the extent to which it acquired the properties for use in the course of the
portion of the business that constitutes commercial activities and the extent
to which it acquired such properties for use in the course of the portion of
the business that involved the making of exempt supplies.
[124] For an entity such as the Appellant that carries on a large and
complex business, the determination of the extent to which it acquires real
property for use in the course of its commercial activities will never be
exact. It will always be an estimate. The question is not whether the
Appellant’s Final Methodology determines the exact extent to which the
Appellant acquired the U of C Properties for use in the course of its
commercial activities or whether the Respondent’s Methodology is better than
the Appellant’s Final Methodology.
[125] The question is whether the Appellant’s Final Methodology provides a
fair and reasonable estimate of the extent to which the Appellant acquired the
U of C Properties for use in the course of its commercial
activities. In most instances, there will be more than one method that is fair
and reasonable.
[126] The Appellant’s Final Methodology assumes that the Appellant
acquired all areas of the land that comprises the U of C Properties in the
course of its business for the purpose of making either taxable or exempt
supplies. Specifically, the Appellant assumes that it acquired all of the lands
that make up the U of C Properties for use directly in the making of taxable
supplies for consideration, for use directly in making exempt supplies or for
use indirectly in making both taxable and exempt supplies.
[127] This assumption is consistent with the evidence before me. The
Appellant’s evidence clearly shows that the Appellant acquired each of the U of
C Properties for use in the course of its business of operating a university. The
Respondent does not challenge this evidence. In fact, the methodology used by
the Respondent, the Respondent’s Methodology, is based on the same assumption.
[128] The result of the application of the Appellant’s Final Methodology
is that the extent to which the Appellant used the U of C Properties in its
commercial activities is based upon the amount of space on those properties that
was used directly in the making of taxable supplies for consideration and the
amount of such space that was used directly in the making of exempt supplies.
[129] In using this methodology to arrive at its percentages, the
Appellant looked at the physical space on each campus and determined whether it
used the space directly in the making of taxable supplies, directly in the
making of exempt supplies or indirectly in the making of supplies. With respect
to the space used directly in the making of supplies, the Appellant examined
thousands of rooms contained in the seven structures on the CDC land, the
seventy-seven structures on the Main Campus and the six structures on the South
Campus.
[130] The Appellant has assumed that the percentage that results from
comparing the space used directly in the making of taxable supplies for
consideration with the total space used directly in making taxable
supplies for consideration and exempt supplies reasonably reflects the extent
to which all of the land was acquired for use in the course of the Appellant’s
commercial activities.
[131] As a result, the Appellant determined the extent to which the
External Common Areas and the Internal Common Areas were used in commercial
activities by basing its determination upon the extent to which the space
within all of the structures on the U of C properties was used directly to make
taxable supplies for consideration. This is a reasonable assumption, since the
evidence before me shows that the Appellant used the common areas inside and
outside the buildings to facilitate and support the various taxable and exempt
supplies it made on the three pieces of land.
[132] In my view, a methodology based on the actual use of space that
involves a detailed review of the use of thousands of rooms comprising
approximately 898,000 square meters of space, is a fair and reasonable method
to determine the extent to which the Appellant acquired the U of C Properties
for use in its commercial activities.
[133] While the Respondent accepts that the methodology should be based
upon the use of space directly in the making of taxable supplies and directly
in the making of exempt supplies, she argues that the Appellant’s Final Methodology
results in an unfair and unreasonable allocation unless two adjustments are
made to the calculation.
[134] The first adjustment is to treat the External Common Areas as being
used only in exempt activities. Specifically, the Respondent’s Methodology
assumes that subsection 141.01(3) applies to the External Common Areas so as to
deem the use of such space to be otherwise than in the course of commercial
activities of the Appellant.
As a result, the Respondent’s Methodology assumes that all of the External Common
Areas were used directly in “exempt” activities.
[135] The second proposed adjustment is an attempt to recognize the amount
of GST paid on specific pieces of the U of C Properties. The Respondent’s
Methodology attempts to accomplish this by applying the indexing factor to the
calculation of the Appellant’s Final Percentages.
[136] I will first consider the parties’ treatment of the External Common
Areas.
C. External Common Areas
[137] Although the parties do not agree on the Appellant’s use of the
External Common Areas for the purpose of making supplies, they do agree on the
size of the External Common Areas and on the fact that they are comprised of
green space, roadways, walkways, and landscaped areas.
[138] The Appellant’s Final Methodology assumes that the Appellant used both
the Internal Common Areas and the External Common Areas indirectly to make both
taxable and exempt supplies.
[139] During his testimony, Mr. Klaiber, using maps, explained to the
Court the various uses of the External Common Areas. He explained that the primary
purpose of the External Common Areas is to support the activities that occur
within the structures located on the U of C Properties.
[140] He explained that the walkways and roadways are used for access to the
campus and to move throughout the campus. The walkways are used for access to all
of the buildings on campus and various outdoor spaces, such as playing fields
and parking lots. For example, he noted that the walkways are used to move
people from the City of Calgary’s LRT station, which is located adjacent to the
campus, to the various buildings on campus, to move people from various bus
stops located on campus to the various buildings located on campus and to
simply move people between buildings.
[141] Buses, commercial vehicles, and cars use the roadways.
[142] He described the system of roadways, walkways and pathways as
transportation corridors to not only give people access to the various
buildings and playing fields but also to allow the transportation of goods that
are brought in from outside campus and distributed throughout the campus.
[143] He explained how the External Common Areas have underground tunnels
that are used to connect all the buildings for heating and cooling purposes,
and he further explained that some telecommunications equipment runs through
those tunnels.
[144] He explained how people used the landscaped area on the campus as a
place to relax and as a meeting place. It also enhanced the look and feel of
the campus.
[145] Although this is not noted in the PASF I, the External Common Areas
also included some playing fields. Mr. Klaiber testified that various playing fields
were used by sports teams and students and were rented to third parties.
[146] The Appellant argues that this evidence clearly shows that the
External Common Areas supported all of the activities that occurred on the
U of C Properties. I agree with the Appellant.
[147] The Respondent did not present any evidence to contradict Mr.
Klaiber’s testimony. In fact, there is no evidence before me that the Appellant
acquired the portion of the U of C Properties that comprises the External
Common Areas for use outside of its business. The evidence before me is that
the External Common Areas were an essential part of the three campuses in that they
facilitated the making of supplies on the campuses.
[148] In summary, I have found, on the evidence before me, that the
ultimate purpose of the various activities that occurred on the External Common
Areas was to generate revenue from the Appellant’s business. In other words,
the Appellant’s purpose when acquiring the External Common Areas on February 1,
2006 was no different than its purpose when acquiring, at the same time, the
remaining portions of the U of C Properties: to use them for the purpose of
making both taxable and exempt supplies.
[149] It is not possible or practical to determine the extent to which the
Appellant used a specific portion of the Internal Common Areas or the External
Common Areas directly in the making of taxable or exempt supplies.
[150] The Internal Common Areas are comprised of stairwells, corridors,
washrooms, heating conduits, foyers and any other area in a specific building
that is not used directly to make a supply.
[151] The only way the Appellant could determine whether a person who
entered a building for the purpose of receiving a taxable supply used a specific
portion of the Internal Common Areas would be to physically monitor the
activities of the person. For example, someone would have to stand at the door
of each washroom and identify each person who entered the washroom. It was
clearly not practical for the Appellant to take such action.
[152] The Appellant faced the same issue with the External Common Areas. Mr. Klaiber
testified that, as with the common space within the buildings, it was not
possible to trace activity on the External Common Areas to specific supplies. The
Appellant simply did not have readily available information.
[153] Mr. Klaiber, in response to a question from the Respondent’s counsel
asking why the Appellant could identify space in the buildings that was used
directly in the making of supplies but could not identify such space within the
External Common Areas, stated the following:
I think the key
difference is the readily available information. I mean, with the buildings, we
have information on room by room what we use it for.
When we take a
look at a walkway, what percentage of that walkway is used from somebody going
from an office to get a coffee versus somebody going from a classroom to a
classroom? We don’t have that information as to what proportion of foot traffic
is for taxable supply and exempt supply.
So I mean, the information that we have around that foot traffic,
the best information that we have is around the space and how we use our space
and our buildings and structures. And that’s why we applied it.
[154] As a result, the Appellant was required to develop a methodology to
apportion the use of the various components of the Internal Common Areas and
the External Common Areas between their use in the making of taxable supplies
for consideration and their use in the making of exempt supplies.
[155] Mr. Klaiber’s testimony shows that, at the time of the deemed
acquisition of the U of C Properties, the Appellant intended to use the
Internal Common Areas and the External Common Areas in the same manner. I agree
with the Appellant that any methodology chosen must consider this fact.
[156] Since the Appellant acquired the U of C Properties for use in the
course of its business, it was deemed under paragraph 141.01(2)(a) to
have acquired the properties for use in the course of its commercial activities
to the extent that the properties were acquired for the purpose of making
taxable supplies for consideration in the course of its business.
[157] On the other hand, the Appellant was deemed under subparagraph
141.01(2)(b)(i) to have acquired the U of C Properties for use otherwise
than in the course of its commercial activities to the extent that it acquired
the properties for the purpose of making supplies in the course of its business
that were not taxable supplies made for consideration. There is no evidence before
me that the Appellant made supplies for no consideration or nominal
consideration. As a result, any supplies that it made that were not taxable
supplies made for consideration were exempt supplies made for consideration.
[158] Subparagraph 141.01(2)(b)(ii) does not apply to the fact
situation before me. Specifically, there was no evidence before me that the
Appellant acquired the U of C Properties for use outside of its business.
[159] In summary, subsection 141.01(2) required the Appellant to determine
the extent to which it acquired the U of C Properties, including the External
Common Areas, for the purpose of making taxable supplies for consideration and
the extent to which it acquired the U of C Properties for the purpose of making
exempt supplies.
[160] This is exactly what the Appellant’s Final Methodology attempts to
accomplish.
[161] The Appellant was able to determine the certain portions of the
U of C Properties that it acquired for direct use in making
taxable supplies and the certain portions that it acquired for direct use in
making exempt supplies.
[162] However, it did not use certain portions of the U of C Properties, i.e.,
the Internal Common Areas and the External Common Areas, directly in making
either taxable or exempt supplies. The Appellant used these portions of the properties
in the course of making both taxable and exempt supplies. In other words, the
Appellant acquired these portions of the U of C Properties for the purpose of
making both taxable and exempt supplies. As a result, it was required to
develop a methodology that apportioned the use thereof between the making of
taxable supplies for consideration and the making of exempt supplies.
[163] As discussed previously, the Appellant’s Final Methodology assumes
that the Appellant used the Internal Common Areas and the External Common Areas
for both taxable and exempt activities in the same relative proportion as it
used the space within the structures directly in the making of taxable supplies
for consideration and directly in the making of exempt supplies. Using this
assumption, the Appellant developed a methodology that resulted in the
Appellant’s Final Percentages, which are derived from the amount of space used
directly in the making of taxable supplies for consideration and the amount of
space used directly in the making of exempt supplies. The Appellant applied the
relevant final percentage to all GST paid during the relevant period in respect
of the relevant piece of land. This includes the GST paid in respect of the
Internal Common Areas and the External Common Areas.
[164] This ratio, derived using the Appellant’s Final Methodology,
satisfies the requirements of the provisions of subsection 141.01(2). It is
based upon the use of the space in making both taxable and exempt supplies. Further,
the Appellant consistently applied the Appellant’s Final Methodology to the
portions of the U of C Properties that it used in the same manner, such as
the Internal Common Areas and the External Common Areas. In my view, a
methodology that treats differently two areas that a registrant uses in the
same manner (i.e., the External Common Areas and the Internal Common Areas)
does not satisfy the subsection 141.01(5) fair and reasonable test.
[165] While the Respondent’s Methodology assumes that the Appellant
acquired the Internal Common Areas for use in making both taxable and exempt
supplies, it also assumes that the Appellant did not acquire the External
Common Areas for use in making taxable supplies for consideration. I have a difficult time
understanding the factual and/or statutory basis for this position.
[166] The evidence before me is that the Appellant acquired all of the
U of C Properties for use in its business, the purpose of which
is to make supplies. Further, these supplies include both taxable and exempt
supplies. There is no evidence before me that the Appellant only used the
External Common Areas to make exempt supplies. Since the External Common Areas
supported all activities on the U of C Properties, those areas must, as a
question of fact, have been used by persons who were receiving both taxable and
exempt supplies.
[167] Mr. Kinzner, the CRA auditor, during his in chief testimony,
provided the following explanation for why the Respondent’s Methodology treated
the External Common Areas (which are referred to as “green space”) as being used in what he called exempt activities,
Q With the green space, I didn’t ask
you, but we heard evidence on it this morning, what was your determination as
to we’ve agreed to 567,183 square metres, how is that dealt with?
A Yes, we -- we determined that the
green space, the roadways, walkways, landscape, the sports fields, et cetera,
comprised a total of 567,183 square metres of space on the -- on the main
campus. And that area had not been -- been accounted for in the calculations,
so we -- we added it in under the -- the heading “External Areas”. And we
classified it as -- as exempt.
Q Factually why did you do that? What
facts do you rely upon to classify it as exempt?
A We relied on pretty much the same
facts that we did for the -- the CDC title. That we could find no evidence of
-- of taxable supplies for consideration being made on any of this space.
In cross-examination, Mr. Kinzner explained
how the CRA differentiated the mixed-use space within the buildings (the Internal
Common Areas) from the mixed-use space outside the buildings (the External
Common Areas).
Q . . . let’s talk about the
MacEwan Students’ Centre.
A Okay?
Q And at appendix B, MacEwan Student
Centre has 23,291 square metres total area?
A Yes.
. . .
Q And the exempt activity area was
2,453 square metres?
A Yes.
Q And the commercial activity was
19,408 square metres?
A Correct.
Q And then there is a mixed activity of 1,429 square metres?
A Yes.
Q What was that mixed activity?
A The mixed activity, I believe was
the stairwells, the bathrooms and hallways.
Q And why don’t you treat that as
exempt?
A Because when we’re inside of a
building, we try to -- to use the building -- we try to -- I think that there
is a link to the -- to the use of that hallway and that bathroom within a
building to -- to link it to the -- to the exempt and commercial use within
that building.
Q Okay. So there is a link to either
the commercial or exempt activity?
A Yes, it was claimed that way and we
-- we accepted that -- that methodology.
Q And the logic being that there is a
-- a link between the commercial exempts?
A Yes.
Q There was not a direct activity of
commercial or exempt, it was a combination of both?
A Correct.
Q Now, sir, can I ask you this, if
the mixed activity is accepted within a structure, why not between buildings?
A The reason we did not do it
between the buildings was because there was no link that we could find that --
that would allow for the -- the exempt and the -- like, for a mixed use for
that area.
We had -- we had a roadmap, which
gave us a -- gave us direction to use the -- to allow in -- in buildings the --
the mixed use of the area.
Q What’s this roadmap?
A It is -- it is one of the
documents that -- it’s a -- it’s a roadmap that was prepared by -- by Headquarters?
. . .
Q CRA Headquarters developed this
roadmap?
A Correct.
Q And was this a public document?
A No, it was not. It was an internal
document.
Q Okay. And what did this roadmap
tell you about the external space?
A It told us that, the external space
was to be treated as -- unless you can find a commercial activity, there was no
-- it was treated as exempt.
Q Unless you can find a direct
commercial activity?
A Yes.
[168] The Respondent’s Methodology with respect to the External Common
Areas is based on the assumption that, if a specific area of land is not used
directly to make taxable supplies for consideration, under subsection 141.01(2) the area is deemed to be used
in “exempt” activities.
[169] The provisions of subsection 141.01(2) do not support such an
administrative position.
[170] The test is not whether the Appellant made taxable supplies for
consideration on a specific piece of the U of C Properties. The test is the
extent to which the specific piece of land was acquired or used for the purpose
of making taxable supplies for consideration. Subsection 141.01(2) recognizes
that property or services may be used indirectly, rather than directly, in the
making of supplies. For property used indirectly in the making of supplies the
subsection requires one to determine how the use of the property relates to the
aim or objective of making taxable supplies.
[171] A test based only on direct use of property or services would lead
to absurd results. For example, under such a test, the Appellant would not be
entitled to claim input tax credits for GST paid in respect of the External
Common Areas even if it only made taxable supplies. Clearly, this is not
consistent with the object and spirit of the GST Act. Under the GST Act, a
registrant who only makes taxable supplies is entitled to claim full input tax
credits for GST paid on property or services acquired for consumption or use in
its business.
[172] As I have stated previously, the evidence before me is that the Appellant
acquired the U of C Properties for the purpose of making supplies in the course
of its business. Subsections 169(1) and 141.01(2) allow the Appellant to claim
an input tax credit to the extent that the properties were acquired for use
directly or indirectly in the making of taxable supplies for
consideration.
[173] It is difficult for the Court to understand how the Minister could
conclude that the Appellant acquired the common areas located within the
buildings (the Internal Common Areas) for the purpose of making both taxable
supplies for consideration and exempt supplies and the common areas located
outside of the buildings (the External Common Areas) only for the purpose of
making exempt supplies. This appears to be an arbitrary administrative decision
rather than a decision based on applying the provisions of the GST Act to the
actual use of the External Common Areas.
[174] In summary, the treatment of the External Common Areas under the
Appellant’s Final Methodology is fair and reasonable and is consistent with the
provisions of the GST Act. However, the treatment of the External Common Areas
under the Respondent’s Methodology does not comply with the provisions of the
GST Act. As a result, the Respondent’s Methodology cannot be used to determine
the Appellant’s entitlement to input tax credits.
D.
The Indexing
Factor
[175] The second adjustment that the Respondent argues is required in
order for the Appellant’s Methodology to be fair and reasonable is the
application of the indexing factor.
[176] As I explained previously, the CRA calculated an indexing factor
based upon the replacement value of the U of C Campus on September 30, 2011. The
Respondent’s Methodology applies this indexing factor to the Appellant’s Final
Methodology (after first making the adjustment for the External Common Areas)
to determine the Appellant’s intended use of the U of C Properties in
commercial activities on February 1, 2006.
[177] The Respondent’s argument for the use of the indexing factor is set
out in her written submissions as follows (at paragraph 55):
The
respondent’s submission is that it is not fair and reasonable to compare a unit
of space with a lower value of improvements to a unit of space with a higher
value of improvements. Lower cost space contributes comparatively less GST
input cost and BTC [basic tax content] to a title than does higher cost space. A
correcting factor must be utilized to match spaces of the title upon which GST
was paid or payable, to areas from which ITCs [input tax credits] are sought to
be recovered.
[178] I do not agree with the Respondent that the use or non-use of the
indexing factor is a question of what is fair and reasonable as that term is
used in subsection 141.01(5). With respect to the acquisition of property, paragraph
141.01(5)(a) applies the fair and reasonable test to the determination
of the extent to which property was acquired for the purpose of making taxable
supplies for consideration or for other purposes.
[179] The addition of an indexing factor does not in any way help in the
determination of the purpose of the acquisition of the U of C Properties.
[180] Once the Appellant determines, using a fair and reasonable method,
the extent (expressed as a percentage) to which it acquired the U of C
Properties for the purpose of making taxable supplies for consideration, then,
under subsection 169(1), it is required to apply the percentage to the tax that
was deemed to have been paid (the basic tax content) on the deemed acquisition
of the U of C Properties.
[181] This is exactly what the Appellant did using the Appellant’s Final
Methodology and the basic tax content of each of the U of C Properties on the
date of the deemed acquisition.
[182] In my view, the Respondent is simply arguing that her method is
better than the Appellant’s method on the basis that it results in a more
accurate correlation between the use of the property by the Appellant, and the
tax paid by the Appellant.
[183] As my colleague Justice Owen noted in Sun Life, the CRA cannot
simply substitute its method for that of the GST registrant. A GST registrant
is entitled to use any method that is fair and reasonable provided it complies
with the provisions of the Act.
[184] Regardless, the Respondent’s use of the indexing factor has serious
shortcomings.
[185] First, the Respondent used the 2011 replacement cost to determine
the Appellant’s entitlement to input tax credits in 2006, five years earlier. I
would expect that costs would have changed over the five years, both in
absolute and in relative terms.
[186] Second, the use of the indexing factor ignores the fact that the
Appellant constructed several of the buildings prior to the introduction of the
GST. The Appellant did not pay GST on property or services acquired to
construct these buildings or to make pre-GST improvements to the buildings.
[187] The GST at issue is equal to the basic tax content on the date of
the deemed acquisition of the U of C Properties. It is the tax paid since the
introduction of the GST. The application of the indexing factor to buildings
constructed prior to the introduction of the GST seriously decreases the reliability
of the resulting ratios.
[188] For example the CRA calculated that the basic tax content of the
Main Campus on December 31, 2007 was $4,787,125 on the basis of expenditures of
approximately $224,500,000.
The $224,500,000 represents the expenditures the Appellant made with respect to
the Main Campus between the introduction of the GST and December 31, 2007.
[189] The CRA determined that the replacement cost for the Main Campus was
$1.282 billion.
The expenditures incurred between the introduction of the GST and the date of
the deemed acquisition represent only 17.5% of the total replacement costs. This
evidences the fact that the Appellant constructed a substantial portion of the
buildings prior to the introduction of the GST. This is consistent with the
fact that the university was founded in 1966.
[190] Another concern I have with respect to the use of the indexing
factor is that it requires the Appellant to hire a valuator in order to
determine its entitlement to input tax credits. This would place an
unreasonable financial burden on the Appellant and other GST registrants who would
be required to perform similar calculations. Further, if the Court accepted
this method, the Appellant would be required to retain a valuator each time the
section 206 change-in-use rules apply to its capital real property.
[191] In my view, a GST registrant should be entitled to determine its
input tax credits on the basis of information in its possession, without having
to resort to hiring expensive third parties, such as valuators.
[192] In summary, I do not accept the Respondent’s argument that the
Appellant’s Final Methodology requires an indexing factor in order to satisfy
the subsection 141.01(5) fair and reasonable test.
E.
Improvements
to the U of C Properties
[193] I will now address the input tax credits the Appellant is entitled
to claim with respect to GST paid on the improvements to the U of C Properties
that occurred after the deemed disposition.
[194] As discussed previously, the Appellant is entitled to claim input
tax credits for GST paid on improvements to the U of C Properties according to
the extent to which it was using the U of C Properties in the course of
commercial activities immediately after it last acquired the properties.
[195] Since the Appellant made the subsection 211(1) elections, the
section 206 change-in-use rules must be considered when determining the
Appellant’s entitlement to claim input tax credits for improvements to the U of
C Properties.
[196] The parties argue that either the single percentage determined under
the Appellant’s Final Methodology or the single percentage determined under the
Respondent’s Methodology should be used to determine the Appellant’s
entitlement to input tax credits at the time of the deemed acquisition and at
the time of subsequent improvements to the U of C Properties.
[197] This means the parties have accepted that there was no significant
change in the use of the U of C Properties during the relevant periods. Because
of the application of section 197, the Appellant would only have to change the Appellant’s
Final Percentage if it had changed its use of one of the three
U of C Properties by 10% or more of the total use of the
property.
[198] Therefore, in view of the finding that the Appellant’s Final
Methodology satisfies the provisions of the GST Act with respect to the
determination of the Appellant’s entitlement to input tax credits for the GST
it was deemed to have paid on the deemed acquisition, the methodology also
satisfies the provisions of the GST Act with respect to GST paid on subsequent
improvements to the U of C Properties.
VIII.
Disposition of Appeals
[199] For the foregoing reasons, the appeals from the reassessments made
under the Excise Tax Act and dated September 30, 2011, January 24, 2012,
February 2, 2012 and April 20, 2012 are allowed with costs. The reassessments are
referred back to the Minister for reconsideration and reassessment on the basis
that, during the relevant periods, the Appellant used the property identified
as Plan 1935JK to the extent of 81.2% in its commercial activities, the
property identified as Plan 859JK to the extent of 41.33% in its commercial
activities and the property identified as Plan 9410341 to the extent of 25.86%
in its commercial activities.
[200] The parties have thirty days from the date of this judgment to make
representations with respect to the amount of costs that the Court should award
to the Appellant. If no submissions are received, costs shall be awarded to the
Appellant as set out in the Tariff.
Signed at Ottawa,
Canada, this 11th day of December 2015.
“S. D’Arcy”
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