Date:
20021219
Docket:
1999-3572-GST-G
BETWEEN:
SASKATCHEWAN
WHEAT POOL,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Bowie
J.
[1]
This appeal is brought from an assessment for goods and services
tax (GST) under Part IX of the Excise Tax Act (the
Act). The assessment covers the period from January 1,
1991 to December 31, 1993. In general terms, the issue is whether
certain payments made to the Hartford Fire Insurance Company for
insurance coverage attract GST (I shall refer to that company and
the other members of the Hartford group of companies simply as
"Hartford"). The Minister of National Revenue has
assessed the Appellant on the basis that section 178 of the
Act applied to render these amounts subject to tax.
Section 178 was in force during the entire period covered by the
assessment under appeal. It was, however, repealed effective
April 24, 1996. It read:
178
For the purposes of this Part, where in making a supply of a
service a person incurs an expense for which the person is
reimbursed by the recipient of the supply, the reimbursement
shall be deemed to be part of the consideration for the supply of
the service, except to the extent that the expense was incurred
by the person as an agent of the recipient.
The reason
given by the government for its repeal was that it simply
expressed the position at common law, and so it was
redundant.
[2]
The Appellant's position is that the amounts were collected
by it from the persons actually insured in the capacity of agent
of Hartford, and that the payments were made by the insureds as
consideration for the supply by Hartford of a financial service
to the insureds. Counsel for the
Appellant quite rightly conceded during the trial that it is
liable to collect and remit GST on a percentage of the premiums
that it retained under its agreement with Hartford as
consideration for collecting those premiums, and perhaps also as
consideration for other services performed by the Appellant in
relation to the settlement of claims.
facts
[3]
The Appellant operates numerous stockyards in the Province of
Saskatchewan where cattle and other animals are sold at auction.
The cattle in question are transported to the yards from the
producers' farms by truck. Upon arrival there they are
unloaded into pens; from there the animals go to the auction
ring, where they are sold at auction to the highest bidder. Once
sold, they leave the ring, and they may be held for a short time
in pens again before being loaded on trucks to be transported to
their destination. That may be a farm, a feedlot, or a slaughter
house. It may be within the Province of Saskatchewan, elsewhere
in Canada or in the United States of America. The outbound
transit may be by truck, or in the case of those cattle going a
longer distance, by rail. Obviously, the movement of cattle in
trucks and their juxtaposition in pens raises considerable
potential for injury and death of the animals due to trauma of
many kinds. Prior to 1972, individual truckers and farmers bought
insurance against the risk of injury and death to their cattle in
transit. Hartford has always been a leader in this type of
insurance in Western Canada, and it offered policies covering
producers and buyers against potential loss on an individual
basis. In 1972, Hartford developed what was described in the
evidence as a blanket policy of insurance, under which losses due
to injury or death of livestock were covered, both during transit
to the yard and at the yard prior to sale. Hartford also
underwrote losses occurring after sale, either in the yard or
during transit to the ultimate destination of the animals. I
shall return in more detail to the terms of these policies. These
policies, although changed in their coverage somewhat from time
to time by a number of endorsements issued over the years,
remained in force in essentially their original form until April
1, 1993 when they were replaced by policy no. 87 LST
620002.
[4]
I heard evidence from Clarence Kuse, who was the senior manager
of Hartford in Saskatchewan between 1963 and 1995, when he
retired and was replaced by James Blahum. They both gave evidence
as to the formation, the history and the administration of the
relationship existing among Hartford, Saskatchewan Wheat Pool and
the producers, truckers and buyers during the period between 1963
and the present. Their evidence was consistent, and they are
disinterested witnesses. I accept their evidence completely. I
also heard evidence from Morton Allewell who retired in 1992
after 26 years working at the Appellant's livestock division.
For the latter part of that time he held the title of operations
manager. The other witness for the Appellant was Stewart Stone;
he is presently general manager of Heartland Livestock Services,
successor company to the livestock division of Saskatchewan Wheat
Pool. In 1993 he became manager of marketing and finance. All
these witnesses are knowledgeable as to the affairs of the
Appellant during the relevant period of time. Their evidence was
consistent and it was not shaken in cross-examination. I accept
their evidence as being an accurate description of the
longstanding and very important business relationship which
evolved among the Appellant, the producers and the buyers of
livestock, and Hartford in the period between 1960 and
1993.
the
business of the Appellant
[5]
The Appellant provides a number of services to its customers.
These include selling animals in the ring at auction; buying
animals for others at the auctions as an order buyer; arranging
outward transportation of animals purchased for the buyers;
branding, inoculating and ear tagging animals; and negotiating
direct sales of animals to packing houses for producers. The
Appellant also acts as a financier of cattle for producers under
what is called the feed finance program, and it purchases cattle
on its own account for market support reasons. It also owns and
raises horses which are ultimately sold directly by it into the
Japanese market.
the
policies
[6]
Hartford has been in the insurance business for many years and it
has been the dominant insurer of livestock in Western Canada for
half a century or more. Before 1972, producers had to insure
their animals directly with Hartford, each producer acting
independently to obtain a policy covering their own shipments.
Animals were covered in transit in the truck, and up to the point
of sale. Mr. Kuse testified that in 1972, he developed what
he described as the "special single", or blanket
insurance policy to cover animals during transit and in the yard
prior to sale under one policy. That policy was issued to
Saskatchewan Wheat Pool Livestock Division, and bore Hartford
number 9236. Under this policy, premiums were paid by shippers on
the basis of the number of cattle shipped and the distance that
they travelled to the yard. Premiums were invoiced to the
producers by the Appellant as one of several deductions made by
it from the selling price of the producer's cattle. A typical
settlement advice following a sale of cattle showed the proceeds
of the sale for the cattle shipped, less the Appellant's
selling commission, charges for any other services such as
inoculation that might have been provided, and less the
applicable charges for insurance. Hartford also issued policy
number 9237, a blanket policy designed to cover animals after
sale, from the point at which title passed to the buyer for the
remaining period that the animals were in the Appellant's
yard, and in transit from there to the buyer's premises.
Again, the premium was determined by the number of animals
insured and the distance they travelled. The risks covered by
these policies were death or injury to the animals from any cause
other than a pre-existing condition. Under this policy, too, the
insurance premium was collected by the Appellant, which invoiced
each buyer as part of the invoice for the purchase price of the
animal bought. The Appellant then remitted the premiums to
Hartford, retaining the agreed percentage for itself as
consideration for collecting the premium.
the
issue
[7]
The Respondent's position is that the real insured under the
Hartford policies of insurance is the Appellant, not the
producers and buyers of cattle, and that the amounts that the
Appellant invoiced to those producers and buyers for insurance
were in fact additional charges for its auction services, by
which it passed on to the producers and the buyers its own cost
of insurance coverage. If the charges were in fact consideration
for auction services, that would be a taxable supply. For the
reasons that follow, I have concluded that the persons insured
under the policies were the producers and buyers of cattle and
that the amounts invoiced to them were in fact premiums paid by
them to Hartford and collected for Hartford by the Appellant as
its agent for that purpose.
who is the
insured?
[8]
The witnesses were unanimous that it was considered desirable for
as many producers and buyers as possible to be covered by the
Hartford insurance. No action was required on the part of
producers or buyers to trigger coverage; all animals were
considered to be covered, and the premiums were invoiced to the
producers and to the buyers, unless they took positive steps to
opt out of the coverage. Buyers sometimes did opt out, because
they already had other coverage under their own individual
policies covering all the cattle purchased by them at the
Appellant's and at other livestock auctions. In that case
they were not charged premiums. Producers could also opt out of
the coverage, but few ever did so. Those who took positive steps
to opt out were not invoiced for the premiums. There is no
question that both the Appellant and Hartford have a strong
preference to see both buyers and shippers covered for the risk
of injury or death to their animals. For Hartford, it was simply
a matter of volume of business, and therefore profit. For the
Appellant, there was some direct financial advantage, as it
earned a portion of the insurance premiums for collecting them. I
have no doubt that there was also some incidental benefit to the
Appellant, in that its relations with the producers and with the
buyers would inevitably suffer if they incurred uninsured losses
through injury or death while the animals were in transit to the
stockyards, or held there pending sale and shipment
out.
[9]
Counsel for the Respondent attempted to establish in
cross-examination of the witnesses that the real insured under
these policies was the Appellant, and that the Appellant was
simply passing on to its producers and its purchasers the cost of
providing itself with insurance. Neither the oral evidence nor
the documents support this theory. The Appellant's risk was
minimal, because the terms upon which animals were accepted for
sale, and upon which they were sold, protected the Appellant from
liability unless it arose from the specific negligence of its
employees. The benefit to the Appellant was certainly increased
when an endorsement protecting it from subrogated claims that
might otherwise be made against it by Hartford was issued.
However, the evidence satisfies me that this was no more than an
incidental benefit of minimum and unspecified value to the
Appellant.
settlement
of claims
[10] If an
injury to an animal was detected upon unloading an arriving
shipment, or in the yard after unloading but prior to sale, a
report was obtained by the Appellant's employees from the
driver who delivered the shipment. The Appellant generally would
send this claim to the local Hartford office, indicating the
nature of the injury and the circumstances, and establishing the
amount of the loss. A badly injured animal would be sold to a
slaughter house for salvage. If Hartford paid the full value of
the animal then it was entitled to the salvage, and it would be
paid either by the slaughter house, or by the Appellant if the
Appellant had received it from the slaughter house. If the animal
were saleable then it would be sold, and the shipper would be
paid the proceeds of sale by the Appellant, and Hartford would
pay to the shipper the difference between the market value of a
healthy animal and the actual selling price of the injured
animal.
[11] Claims
after sale were looked after in different ways. Although policy
no. 9237 covered both losses in the yard after sale but
prior to shipment, and losses during outward transit, Hartford
assigned a separate policy number administratively to those
losses which occurred in the Appellant's yard prior to
shipment. The evidence is that no policy ever existed under this
separate number, but it was created by Hartford to keep track of
the losses incurred between the sale and the shipment of animals
for its own underwriting purposes. The grouping of these claims
for underwriting purposes has no bearing on the issues in this
appeal.
[12] Losses
arising after sale were reported to Hartford in much the same way
as those arising before sale. If the buyer of an animal which was
injured or died after sale had already been invoiced for that
animal, then Hartford would pay the claim directly to the buyer.
If the buyer had not been invoiced prior to the injury then the
Appellant, instead of invoicing the purchaser, invoiced Hartford
for the value of the animal. In that case, the buyer would never
be invoiced and would never pay for the animal. Hartford would
pay the value of the animal to the Appellant and the Appellant in
turn would pay that amount to the producer in the usual way.
Under this scenario, any salvage obtained for the animal would go
to Hartford. If an animal after sale was found to be slightly
injured but still saleable, it would be sent through the auction
ring again. As an injured animal, it would sell the second time
for a lower price. Hartford would then pay the difference between
the initial sale price and the second sale price to the producer.
Both Mr. Kuse and Mr. Blahum were quite definite in their
evidence that Hartford, as the insurer, had a strong preference
for paying claims directly to the owner of the dead or injured
animal rather than paying them indirectly through the Appellant.
Nevertheless, the Appellant did on occasion receive the insurance
money in trust for a producer.
the
policies
[13] The
original policies of insurance were written by Hartford on
February 14, 1972 showing the insured on the face of the policy
to be:
Saskatchewan Wheat Pool
Livestock
Division
Regina,
Saskatchewan
hereinafter
called "the trucker" for the account of the owners,
hereinafter called 'owner' or 'owners' of the
livestock transported as herein provided, ...
Policy no.
9236 contained an endorsement providing that:
The policy
to which this endorsement is attached is hereby altered and
limited to cover all livestock in which the Saskatchewan Wheat
Pool, Livestock Division, have an interest while in transit from
point of loading transported by truck suitably equipped for the
hauling of livestock to any Saskatchewan Wheat Pool, Livestock
Division, stockyard or sales agency listed below:
...
It is
important that Saskatchewan Wheat Pool is described as the
insured "for the account of the owners of the livestock
transported ...". The reference to livestock in which
Saskatchewan Wheat Pool have an interest must be taken to refer
to the producers and buyers, as only they have an interest in the
livestock before, during or after sale, except in the unusual
case where the Appellant is a buyer on its own account. Below
that are listed the ten facilities of the Appellant. The policy
then goes on to provide that:
This policy
insures against loss by reason of death or actual crippling
caused by the hazards of transportation ... on shipments of
livestock while in transit in automobile trucks, trailers or
semi-trailers until unloaded at any Saskatchewan Wheat Pool,
Livestock Division, Stockyard or Sales Agency listed
above.
The other
relevant provisions of the endorsement read as
follows:
It is agreed that
after unloading that the policy will continue to insure against
loss by reason of accidental crippling or death while such
livestock is passing through the alleys, pens, sheds, and barns
on the premises owned or leased by the insured or until the
animals are sold, or for a period of 48 hours, whichever occurs
first, except that there will be no liability under the policy
for any losses caused by fire, lightning, windstorm, tornado or
cyclone after the livestock insured hereunder is unloaded from
the trucks at destination named herein.
2.
Wherever the words, "the trucker" or "owner",
or "owners" appear in the printed conditions of the
policy to which this endorsement is attached, they shall be
substituted by "the assured"; and any conditions in the
printed portion of the policy in conflict with the conditions of
this endorsement shall be inoperative.
3.
...
4.
The paragraph in the printed condition of the policy, starting
with the words, "This policy also insures against loss
caused by theft, etc." is hereby changed to read as
follows:
"This
policy also insures against loss caused by so-called hi-jacking
of entire truckloads of livestock where such livestock is stolen
by the unlawful taking possession of the conveyance in which the
animals are being transported together with the animals
themselves, but this policy shall not cover against loss caused
by the theft or hi-jacking of any livestock by any person or
persons in the employ of the assured or in the employ of the
trucker engaged by the assured for transporting livestock or
representing such trucker or assured in any capacity; neither
does this policy insure, nor is it to be construed to insure,
against the theft of part of the livestock or against loss caused
by missing animals, except where all livestock in the shipment is
stolen or hi-jacked as above provided. Missing animals are not to
be interpreted to mean dead animals of record at the scene of any
wreck, collision, upset or accident."
5.
It is specially understood and agreed that the assured will
furnish monthly to this Company at its office at the Saskatoon
Public Stock Yards, Saskatoon, Saskatchewan, properly verified
statement in writing showing the total number of head of
livestock handled and pay premium thereon at the rates set forth
hereunder: ...
[14] Policy no.
9237 was also written on February 14, 1972. It covered livestock
after sale. It described the insured in exactly the same way as
did policy no. 9236. It provided that the coverage began upon
weighing of the livestock to the assured at the stockyard, and
continued until unloading at the destination. It provided a
premium varying from $.03 per head for weanlings to $1.00 per
head for boars over 350 pounds for coverage while being held at
the Appellant's stockyard, and for a premium based on the
mileage to the destination for livestock trucked from the
stockyard. Otherwise, the terms of the two policies were
essentially the same.
[15] There is no
doubt that there are inconsistencies in the language within the
original 1972 policies. However, giving a fair reading to the
policies as a whole, it seems inescapable that the intention was
that Hartford would insure the owners of the cattle from time to
time against losses through death, injury and hijacking, among
other things. Some endorsements issued at a later time provide
some benefits to the Appellant. These include the endorsement
protecting it from subrogated actions, and an endorsement to
protect against theft of cattle while in the care and custody of
the Appellant. With the latter, as with the former, the
Appellant's potential liability is minimized by the terms of
its contracts with sellers and buyers, so that it had little risk
to insure against. However, the evidence does not reveal any
intention to insure the Appellant, as opposed to the producers
and the buyers.
[16] The
problems with the policy language were not eliminated, but in
fact were exacerbated, by the language of the 1993 reissued
policy. However, both parties, and all the witnesses, took the
position that the policies issued in 1992 to replace those
written in 1972 were intended to provide the same coverage as
those that they replaced. Both parties agreed that the same
results should prevail for the period between January 1991 and
April 1, 1993, when the replacement policy no. 87 LST 620002 was
issued, as for the period from April 1, 1993 to December 31,
1993. In other words, they accept that no fundamental change in
the relationship was brought about by the reissued policy. The
following factors indicate that the insured under these policies
are the shippers and the purchasers of the animals, not the
Appellant:
(i)
The insurance was written initially in 1972 to replace individual
policies under which the truckers were the insured;
(ii)
The insurance in question is property insurance, not negligence
insurance. Therefore, the insured must be the owner of the
property from time to time, or a person who would be liable for
its loss;
(iii)
If the Appellant were insuring against the consequences of its
negligence, then the policies would be written in language
appropriate to negligence insurance.
(iv)
If the Appellant were the insured, and simply passing the cost of
the insurance along to its customers as the Crown contends, then
the cost of insurance would simply be included in the price of
the services or, alternatively, it would be billed separately,
but without the opportunity for shippers and purchasers to opt
out of the coverage;
(v)
The witnesses were unanimous in considering the owners of the
animals to be the insureds;
(vi)
The Appellant at no time has an ownership interest in the animals
shipped to it for sale. At most it is a baillee from time to
time, but its liability as a baillee is limited by the terms of
its contracts with the shippers and the buyers to specific acts
of negligence; and
(vii) A
letter dated February 26, 1976 written by Mr. Kuse on the
letterhead of Hartford to Mr. R.L. Harland, Chief Accountant of
the Appellant's livestock division, enclosed a two-page
summary of the coverage under the policies which makes it quite
clear that the incoming truck transit policy was to cover the
animals from loading at the point of origin until the time of
sale, and that the outgoing truck transit policy covered them
from the time of loading at the stockyard to their final
destination.
[17] It is well
settled that where goods or services are purchased through the
interposition of an agent between the seller and the buyer, there
is only one transaction. In the present case, the Appellant is an
agent in the transactions by which Hartford sells insurance to
the producers and to the purchasers of animals sold through its
facilities. The transactions are not subject to GST because they
consist only of the provision of insurance by Hartford to those
producers and buyers. One of several red herrings pursued in this
case was whether the Appellant, if an agent, was agent of the
insured or of the insurer. The answer to that question is quite
immaterial to the issue before me. What is material is that it
was not a principal. Also material is that it did provide to
Hartford a service in connection with the collection of premiums
and the settlement of claims. This service was altogether
separate from the sale of the insurance. The Appellant, as I have
said, conceded during the trial that it was liable to collect and
remit tax on the portion of the premiums retained by it as
payment from Hartford for these services. None of this is
affected by the fact that the Appellant negotiated the terms of
the policies with Hartford for the benefit of its customers. In
that capacity it was an unpaid agent for the insured shippers and
buyers.
[18] The appeal
is allowed and the assessment is referred back to the Minister of
National Revenue for reconsideration and reassessment on the
basis that the Appellant was liable to collect and remit GST only
in respect of that portion of the premiums collected by it for
Hartford that it retained as payment for its services to
Hartford. The Appellant has achieved substantial success and so
is entitled to its costs.
Signed at
Ottawa, Canada, this 19th day of December, 2002.
J.T.C.C.
COURT FILE
NO.:
1999-3572(GST)G
STYLE OF
CAUSE:
Saskatchewan Wheat Pool and
Her Majesty the Queen
PLACE OF
HEARING:
Regina, Saskatchewan
DATE OF
HEARING:
January 8, 9 and 10, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge E.A.
Bowie
DATE OF
JUDGMENT:
December 19, 2002
APPEARANCES:
Counsel
for the Appellant: Brian Scherman
Counsel
for the
Respondent:
Elaine Lee and
Crystal McLeod (Student-at-law)
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Brian Scherman
Firm:
Balfour Moss
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3572(GST)G
BETWEEN:
SASKATCHEWAN
WHEAT POOL,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on January 8, 9 and 10, 2002, at Regina, Saskatchewan,
by
the
Honourable Judge E.A. Bowie
Appearances
Counsel
for the
Appellant:
Brian Scherman
Counsel
for the
Respondent:
Elaine Lee and
Crystal McLeod (Student-at-law)
JUDGMENT
The appeal from the reassessment of tax made under the Excise
Tax Act, notice of which is dated May 7, 1999 and bears
number 09ES114483308, for the period January 1, 1991 to December
31, 1993, is allowed, with costs, and the reassessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant
was liable to collect and remit GST only in respect of that
portion of the premiums collected by it for Hartford Fire
Insurance Company that it retained as payment for its services to
Hartford.
Signed at
Ottawa, Canada, this 19th day of December, 2002.
J.T.C.C.
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