Citation: 2009TCC272
Date: 20090521
Docket: 2006-1099(GST)G
BETWEEN:
CITY OF CALGARY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter A.C.J.
Introduction
[1]
The Appellant was required by statute to prepare
a report for the development of an integrated transportation system, and then
by bylaw to establish such a system. Any proposed acquisition or construction
was to be submitted for approval to the Province of Alberta (the
“Province”).
[2]
In order to finance such acquisitions and
construction, the Appellant entered into grant agreements with the Province. The
funding made available under these agreements enabled the Appellant to proceed
with the approved projects, which included, among other things, the extension
of the Light Rail Transportation System, and the acquisition of buses, light
rail transit (“LRT”) vehicles, and LRT communication systems.
[3]
The issue raised in this appeal concerns the
Appellant’s entitlement to input tax credits (“ITCs”) under the Excise Tax
Act (“ETA”). The ITCs claimed represent the difference between the
GST paid by the Appellant in the course of implementing these approved projects
and certain rebates already received. The Minister assessed the Appellant on
the basis that it is not entitled to the ITCs as claimed.
The Facts
[4]
Under section 92 of the Constitution Act, 1867,
the Province has jurisdiction over local works, undertakings and municipal
institutions within its boundaries. Pursuant to this jurisdiction, the Province
enacted the Municipal Government Act (Alberta) R.S.A. 2000, M-26, (“MGA”)
and the City
Transportation Act (Alberta) R.S.A. 2000 Chapter C 14 (“CTA”).
[5]
The Appellant is a body corporate under the MGA,
under which Act the Province confers powers and imposes duties on the
Appellant. Section 7 of the MGA provides that a municipality may pass
bylaws for municipal purposes in respect of, among other things, transport and
transportation systems and public utilities. Under sections 3 and 4 of the CTA,
the Province required the Appellant to prepare a comprehensive transportation
study report for the development of an integrated transportation system, and to
then, by bylaw, establish such a system. “Transportation system” is defined
in the CTA to mean a system of
transportation facilities including streets, highways, rapid transit and all types
of transportation facilities to which that Act applies on, above and below the ground. “Transportation facility” is
defined to mean everything necessary for the efficient transportation of
persons and goods in a particular manner.
[6]
The Province retained authority to accept, amend
or otherwise alter the transportation bylaw passed by the Appellant. If the
Appellant determined a transportation facility was to be constructed, the
Appellant was required under section 6 of the CTA to submit the proposal
to the Province. Following approval, the Province could enter into cost-sharing
agreements with the Appellant respecting the costs of establishing the
transportation facility.
[7]
Under the CTA, each city, including the
Appellant, is responsible for the costs of establishing and maintaining all
transportation facilities subject to its direction, control and management, but
may qualify for financial assistance from the Province by complying with the CTA.
The Appellant’s transit
facilities, known as the Calgary Transit System, were at all times owned by,
and under the direction, control and management of the Appellant. These
facilities included, among other things, LRT lines, stations and vehicles, as
well as buses. According to the MGA, unless another statute or agreement
provided otherwise, title to the
roadways within the Appellant’s geographic boundaries vested with the Appellant.
[8]
Prior to March 13, 2000, the Province provided
funding to the Appellant for the construction or acquisition of certain
transportation facilities within the City of Calgary under three separate grant agreements (“Previous Funding Agreements”).
These were the Basic Capital Grant Agreement, dated April 17, 1989 (“BCG
Agreement”); the Transit Capital Grant Agreement, dated November 24, 1998 (“TCG
Agreement”); and the Primary Highway Connectors Grant Agreement (“PHCG Agreement”)
dated November 23, 1993. These agreements made provision for the funding
of eligible transportation projects, subject to annual provincial budgetary
restrictions. According to the terms of the agreements, funding could only be
used to pay for expenditures related to transportation projects within the
Appellant’s boundaries that had been specifically approved by the Province. In
order to obtain approval, a particular process was followed, which included
providing the Province with detailed financial and technical information
concerning each project. Projects
approved under the Previous Funding Agreements included the construction or
improvement of roadways (the “Roadway Projects”), as well as various public
transit projects (the “Transit Projects”). The Transit Projects included the
acquisition of buses and LRT vehicles, and the construction of LRT facilities.
[9]
The Appellant accepted funding from the
Province under these agreements subject to certain additional terms and
conditions, including: an obligation to maintain a separate accounting for the
funds; an obligation to undertake all approved projects in accordance with the
CTA; timeframes for and restrictions on fund usage; an obligation to allow
access by the Province to project sites, engineering drawings and documents,
and all relevant books of account; and an obligation to repay certain funds to
the particular funding program such as income from the sale of buses or other
capital items that were originally purchased with proceeds from that particular
funding program.
[10]
The Appellant carried out all its obligations
pursuant to the Previous Funding Agreements with the Province. Each of the
funding agreements, save and except the PHCG Agreement, contained substantially
the same terms and conditions. Whereas the BCG and TCG Agreements provided for
an application and approval process, the PHCG Agreement related to a specific
roadway project to be constructed.
[11]
The Appellant and the Province entered into a
new agreement dated and effective March 13, 2000 for the construction and acquisition
of certain future transportation facilities within the boundaries of the
Appellant (the “New Agreement”). Funding under this agreement was subject to
terms and conditions similar to those in the Previous Funding Agreements,
although there were a number of differences.
[12]
Unlike under the Previous Funding Agreements,
funding under the New Agreement was not subject to the provincial annual budget
availability, but rather was based on a $0.05 per litre tax on the delivery of
gasoline and diesel products within the City of Calgary over a certain period of time. The agreement provided for a lump
sum advance payment over a three year period, which amount would be put into a “city
transportation fund”, as that expression is defined in the New Agreement. These
funds could be drawn down as and when required to fund projects approved by the
Province. The New Agreement differed from the Previous Funding Agreements in a
number of other ways, in particular: (1) it provided a fixed formula for
funding from the Province to the Appellant; (2) it allowed the Appellant to
move to a user‑pay concept; (3) it allowed for long term planning by the Appellant
with respect to the transit facilities; (4) the formula was embedded in a
written agreement between the Province and the Appellant for calculating the
amount that the Appellant was to receive and no change could be made to the
formula without a written amendment to the agreement; (5) there was no
termination on the agreement; and (6) the Appellant avoided different
percentages of funding on different types of grants which they had experienced
in previous agreements. Furthermore, the New Agreement expanded the scope of
eligible Transit Projects to include noise barriers, landscaping, upgrades to
security, and scheduling and communication systems for the LRT. During the
initial months under the New Agreement, the Province made a pre-payment of $170
million plus an additional $69 million into the city transportation fund.
[13]
The Appellant complied with the terms of the New
Agreement and fulfilled its obligations to the Province. During the period January 1,
2000 to December 31, 2002, the capital cost of the transit projects of the
Appellant were funded 69.5% from monies under the BCG Agreement, TCG Agreement and
the New Agreement. The remaining portion was funded by the Appellant, whose
source of funds included the fares paid by users of the transit facilities. To
put these figures in context, the fares paid by transit users were approximately
equivalent to 53% to 60% of the operating costs relating to the transit system,
which costs are born by the Appellant. In other words, the user fares collected
by the Appellant did not cover the day-to-day operating expenses of the transit
system, let alone its capital cost.
[14]
In the course of fulfilling its obligations
under the Previous Funding Agreements and the New Agreement, the Appellant
incurred expenditures and paid GST in respect of those expenditures. These
expenditures relate to specific transportation facilities, including LRT
extensions, refurbishment of equipment, LRT vehicle rebuilds, and the
acquisition of communication systems, signalling systems, buses, shuttle buses,
and LRT vehicles.
[15]
In its GST returns, the Appellant had generally
claimed ITCs in respect of the Roadway Projects, and partial public service
body rebates under section 259 of the ETA (amounting to 57.14% of the
GST paid) in respect of the Transit Projects. The Minister of National Revenue had
been assessing the Appellant for GST purposes in accordance with that approach.
[16]
On January 13, 2003, however, the Appellant
filed a GST return for the monthly reporting period ending December 31,
2002, in which it claimed ITCs in the amount of $6,351,967.00. This figure was
based on the difference between the GST paid in respect of the Transit Projects
up to December 31, 2002, less the rebates previously claimed (which amounted to
57.14% of the GST paid).
[17]
The Minister of National Revenue assessed the
Appellant on July 23, 2003 with respect to the GST return for the
reporting period of December 31, 2002, denying the Appellant’s entitlement
to the ITCs claimed in respect of the Transit Projects. The Appellant objected
to the assessment and appealed to this Court.
Issue
[18]
The issue is whether the Appellant is entitled
to the additional ITCs in respect of GST incurred in the course of constructing
transit facilities pursuant to its agreements with the Province.
Analysis
[19]
The formula for determining ITCs is set forth in
subsection 169(1) of the ETA. That subsection provides:
169(1) General rule for [input tax] credits -- 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 × 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
(a) where the tax is deemed under subsection 202(4) to
have been paid in respect of the property on the last day of a taxation year of
the person, the extent (expressed as a percentage of the total use of the property
in the course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,
(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.
[Emphasis added]
[20]
For the purposes of this appeal, the
requirements in order to claim an ITC under subsection 169(1) are (1) the
claimant is registered, (2) the claimant has acquired the goods or services for
consumption, use or supply in the course of commercial activities, and (3) the
claimant has paid, or is legally required to pay GST/HST in acquiring the goods or services.
[21]
The parties are in agreement that the Appellant
is registered and has paid GST in respect of the expenditures. The outcome of
this appeal hinges on whether the Appellant acquired the inputs in question for
consumption, use or supply in the course of its commercial activities.
[22]
The “commercial activity” of a person defined in
subsection 123(1) of the ETA as follows:
“commercial activity” of a person means
(a) a business
carried on by the person (other than a business carried on without a reasonable
expectation of profit by an individual, a personal trust or a partnership, all
of the members of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person,
(b) an adventure or
concern of the person in the nature of trade (other than an adventure of
concern engaged in without a reasonable expectation of profit by an individual,
a personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the adventure or concern 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;
[Emphasis added]
[23]
The relevant part of this definition for the
purposes of the present appeal is paragraph (a). Since the Appellant is not an
individual or a partnership, “commercial activity” in the present appeal means a
business carried on, except to the extent to which the business involves the
making of exempt supplies. “Exempt
supply” is defined in subsection 123(1) to mean a supply included in Schedule V
to the ETA.
[24]
The scope of “commercial activity” may also be affected
by section 141.01 of the ETA, which provides in part:
141.01 [Allocation of input tax credits] -- (1) Meaning
of “endeavour” -- In this section, "endeavour" of a person means
(a) a business of the person;
(b) an adventure or concern in the nature of trade of the
person; or
(c) the making of a 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.
(1.1) Meaning of “consideration” – In subsections (1.2),
(2) and (3), “consideration” does not include nominal consideration.
…
(2) Acquisition for purpose of making supplies
[limitation on ITCs] — 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.
[25]
The Appellant took the position that its
activities in performing the obligations under the BCG Agreement, the TCG
Agreement and the New Agreement constituted a business. The Appellant argued
that in acquiring, constructing and making public transportation facilities
available for the citizens of the City of Calgary, it made a taxable supply to the Province. It characterized the
funds advanced by the Province under the BCG Agreement, the TCG Agreement, and
the New Agreement as consideration in respect of this supply. Accordingly, the
Appellant argued that it is entitled to the ITCs as claimed, on the basis that
the property and services were acquired in the course of its commercial
activities.
[26]
The Respondent argued that the Appellant is not
entitled to the ITCs as claimed because the property and services on which the
tax was paid were not used or supplied in the course of its commercial
activities. In the Respondent’s view, the acquisition of property and services
was in relation to the making of an exempt supply, specifically the supply of a
municipal transit service to the public as described in section 24 of Part VI
of Schedule V to the ETA. Further to this, the Respondent stated that
the funding received under the various agreements did not constitute
consideration for a taxable supply.
[27]
The Appellant did not dispute that as a
consequence of fulfilling, on an on-going basis, its obligations under the
various agreements, it was ultimately in a position to make supplies of
municipal transit services to members of the public; however, it argued that
this constituted a separate and distinct supply from that made to the Province.
The Appellant further contended that since the inputs were acquired primarily
for use in making its taxable supply to the Province, the concurrent exempt
supply to members of the public is not fatal to its claim for the additional
ITCs.
[28]
The Respondent, on the other hand, argued the
exempt supply contemplated in section 24 of Part VI of Schedule V includes, by
necessity, the acquisition and construction of the transit system. In other
words, the Respondent argued that the supply of property and infrastructure
required in order that a municipal transit service may be provided is part and
parcel of the supply of the municipal transit service itself.
[29]
As indicated earlier in these reasons, the
outcome of this appeal hinges on whether the Appellant acquired the inputs in
question for consumption, use or supply in the course of its commercial
activities. The first requirement in paragraph (a) of the definition of
“commercial activity” in subsection 123(1) is that the inputs must have been
acquired in the course of a business.
[30]
“Business” is defined under subsection 123(1) of
the ETA to include:
“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, license or similar arrangement, but doest no
include an office or employment;
[Emphasis added]
[31]
The Respondent did not directly challenge,
either in its Reply or in oral argument, the Appellant’s position that its
activities in performing its obligations under the BCG Agreement, the TCG
Agreement and the New Agreement constituted a business. I would mention though
that the definition provided in the ETA, especially having regard to
language such as “undertaking of any kind whatsoever”, is quite broad. In my
view it is certainly broad enough to include these activities of the Appellant.
[32]
It follows that the Appellant’s activities in
performing its obligations under the BCG Agreement, the TCG Agreement and the
New Agreement fell within its commercial activities except to the extent to which these activities
involved the making of exempt supplies. As described
above, the activities under these agreements consisted of acquiring,
constructing and making public transportation facilities available for the
citizens of the City of Calgary.
[33]
The definition of “supply” under section 123(1) provides:
“supply” means, subject to sections 133
and 134, the provision of property or a service in any manner, including
sale, transfer, barter, exchange, licence, rental, lease, gift or disposition;
[Emphasis added]
[34]
Language such as “the provision of property or a
service in any manner” suggests that this definition should be viewed
expansively. “Service” is also
defined under subsection 123(1):
“service” means anything
other than
(a) property,
(b) money, and
(c)
anything that is supplied to an employer by a person who is or agrees to become
an employee of the employer in the course of or in relation to the office or
employment of that person;
[Emphasis added]
[35]
In the present appeal then, the provision of essentially
anything other than money would satisfy the definition of supply. Given the
wide scope of the definitions above, I am of the view that in acquiring,
constructing, and making available transit facilities, the Appellant made a
supply for the purposes of the ETA. The necessary and more difficult
question is: to whom was it made?
[36]
The ETA defines “recipient” under
subsection 123(1) as follows:
“recipient” of a supply of property or a service means
(a) where consideration for the supply is payable
under an agreement for the supply, the person who is liable under the agreement
to pay that consideration,
(b) where paragraph (a) does not apply and
consideration is payable for the supply, the person who is liable to pay that
consideration, and
(c) where no consideration is payable for the supply,
(i) in the case of a supply of property by way of sale,
the person to whom the property is delivered or made available,
(ii) in the case of a supply of property otherwise
than by way of sale, the person to whom possession or use of the property is
given or made available, and
(iii) in the case of a supply of a service, the person
to whom the service is rendered,
and any reference to a person to whom a
supply is made shall be read as a reference to the recipient of the supply;
[37]
Paragraphs (a) and (b) of the definition establish
that if a person has paid consideration for the supply, that person is the
recipient.
[38]
“Consideration” is
defined in subsection 123(1) of the ETA to include “any amount that is
payable for a supply by operation of law”. By its wording, this definition will
be satisfied if two requirements are met: (1) there must be a legal obligation
to pay an amount, and (2) that amount must be payable for a particular supply. This
statutory definition is not exhaustive however, and will
also include any amount that would be consideration under common law: see County of Lethbridge v. Canada, 2005 TCC 809, [2006] T.C.J. No. 56 (T.C.C.) at para. 95.
[39]
The question of whether, and in what
circumstances, a person’s undertaking of an activity for which the person
receives funding from a government body constitutes the making of a supply to
that body for consideration was considered by the Federal Court of Appeal in Des
Chênes (Commission scolaire) v. R., [2001] G.S.T.C. 120 (F.C.A.). In that
case, a school board in Québec provided bus transportation to students under
contracts negotiated with independent carriers. The funds used to pay the
consideration set out in the transportation contracts came from a subsidy paid
to the board by the Minister of Transport. Both parties in Des Chênes agreed
that if the subsidy did not constitute consideration within the meaning of the ETA,
the students would be the recipients of the transportation service, with the
result that the supply would have been exempt under section 5 of Part III of Schedule
V. Accordingly, the issue before the Court of Appeal was whether the subsidy
provided by the Minister of Transport was consideration within the meaning of
the ETA.
[40]
The Federal Court of Appeal stated at
paragraphs 19-20:
19
Under the Act, in order for a payment to constitute
consideration, it must have been made pursuant to a legal obligation
(contractual or otherwise) and must be closely enough linked to a supply that
it may be regarded as having been made "for" that supply … . That
is why a direct link is required.
20
A payment made under a contract will inevitably meet that
requirement since the very existence of the obligation to pay is conditional on
the co-contracting party fulfilling the corresponding obligation that rests on
him or her. However, when the payment is made otherwise than under a
contract, the purpose of the payment and the circumstances in which it is made
must be carefully analyzed to determine whether there is a direct link with the
supply; a payment will constitute consideration only where it is made
"for" or in return for that supply.
[Emphasis added]
[41]
Therefore in order for the funding provided by
the Province to the Appellant to constitute consideration, (1) it must have
been provided pursuant to a legal obligation (contractual or otherwise), and
(2) it must be closely enough linked to a supply that it may be regarded as
having been made “for” that supply.
[42]
In County of Lethbridge v. Canada, supra,
one of the issues before the Court was whether grant funding provided by the Province of Alberta to the County of Lethbridge was consideration for a supply. Bell J. considered each grant
agreement to determine whether under its terms the amount of the grant was
“payable” by the Province. He concluded, at paragraph 96, that an amount
is payable under a contract that makes payment of that amount enforceable, and
that such amounts constituted consideration for the purposes of the ETA.
[43]
The power to enforce
the terms of an agreement is a hallmark of a contract. When queries were made
of the Respondent as to whether or not either party could sue the other for
failure to carry out obligations under the agreements, the Respondent confirmed
that yes, they could. The parties undertook tough negotiations to reach the
agreements. When one looks at what actually transpired
as between the Province of Alberta and the Appellant, and examines the terms of
these agreements, it is evident that the agreements were in fact valid and
enforceable contracts.
[44]
I conclude that the provision of funding by the
Province to the Appellant according to the terms of the BCG Agreement, the TCG
Agreement and the New Agreement became a legal obligation of the Province. The
following provisions are particularly relevant in this regard:
·
In the BCG Agreement and the TCG Agreement, the
preamble is incorporated as an integral part of the agreement by paragraph 1,
and in the preamble it provides: “Whereas the Province has agreed to
conditionally grant to the City, 75% (seventy-five percent) of the funds
required … upon the terms and conditions contained herein”;
·
In the New Agreement, at paragraph 3 it
provides: “The Minister agrees to provide funds to the City for the City
Transportation Fund subject to the following eligibility criteria …”; and
·
In each of the BCG Agreement, the TCG Agreement,
and the New Agreement there is a term that provides “This Agreement shall … be
binding to the parties”.
[45]
It is also my view that there was a direct link
between the funding provided by the Province and the supply in question. As
noted by the Federal Court of Appeal in Des Chênes, supra, a
payment made under a contract will inevitably meet the requirement of a direct
link since the very existence of the obligation to pay is conditional on the
co-contracting party fulfilling the corresponding obligations under the terms
of the contract.
[46]
In the present appeal, the Province provided the
funding under a variety of agreements in direct response to proposals for
transit facilities submitted by the Appellant and approved by the Province. If
the transit facilities were not developed, the payments would stop. Under the
New Agreement for example, the funds were paid in advance and could only be
drawn upon by the Appellant for the development of transit facilities approved
by the Province. This service had to be provided or the monies could not be drawn
down -- therefore, the direct link. These circumstances are far from those in Regina
(City) v. Canada, [2001] T.C.J. No. 315, where Rip J. (as he then was)
found that unconditional grants paid by the Government of Saskatchewan to the
city of Regina were not related to any particular project the province agreed
to subsidize.
[47]
Furthermore, to state that the Province is not
receiving anything in return for the monies it made available for the
development of the transit facilities is incorrect. In Des Chênes, the
Respondent argued that the Minister of Transport did not receive anything in
return for the subsidy provided and did not benefit from it in any way. The
Federal Court of Appeal disagreed however, and reasoned at paragraph 33 as
follows:
Finally,
it is incorrect to say that the Minister of Transport did not receive anything
in return for the subsidy. Even though someone who pays a consideration is more
often than not seeking a personal benefit, he or she may also be seeking to
benefit someone else. In that case, the payment is just as much consideration …
In this case, what the Minister of Transport obtained from the appellant was
that it would provide its students with the free transportation service. That
is sufficient to make the subsidy consideration within the meaning of the Act.
[48]
In the present
circumstances, what the Minister of Transportation for Alberta obtained from the Appellant was the service of making available for its
citizens the transit facilities in accordance with the terms negotiated and
agreed upon between the Province and the Appellant.
[49]
The constitutional and statutory relationship
between the Province and the Appellant is also relevant to the issue of the
Province’s legal obligation to provide funding to the Appellant. The Province,
under section 92 of the Constitution Act has jurisdiction on local
works and undertakings:
92. In each Province the
Legislature may exclusively make Laws in relation to Matters coming within the
Classes of Subjects next hereinafter enumerated; that is to say,
…
10. Local Works and Undertakings …
[50]
As well, all municipal institutions are
delegates of Provincial jurisdiction. In Public School Boards’ Assn. of
Alberta v. Alberta (Attorney General), 2000 SCC 45, [2000] S.C.J. No. 45 at
paragraph 33, the Supreme Court of Canada stated as follows:
33 . . . However, municipal institutions take
various forms and are not identical. Although their characteristics and
historical backgrounds differ, all municipal institutions are delegates of
provincial jurisdiction under s. 92(8) of the Constitution Act, 1867. …
[51]
The Supreme Court held a similar view in Godbout
v. Longueuil (City), [1997] S.C.J. No. 95 where at paragraph 51, the
Supreme Court of Canada stated in part as follows:
Finally, and most
significantly, municipalities derive their existence and law-making authority
from the Provinces; that is, they exercise powers conferred on them by
provincial legislatures, powers and functions which they would otherwise have
to perform themselves.
[52]
There are some who would suggest that although
local works and undertakings are within the Province’s jurisdiction, it is not its
duty to carry them out. In Ladore et al. v. Bennett et al., [1939] 3
D.L.R. 1 (P.C.), the Privy Council stated:
… Sovereign within its constitutional powers, the Province
is charged with the local government of its inhabitants by means of municipal
institutions. If local government in any particular area becomes ineffective or
non-existent because of the financial difficulties of one or more municipal institutions,
or for any other reason, it is not only the right, but it would appear to be
the duty, of the Provincial Legislature to provide the necessary remedy, so
that the health of the inhabitants and the necessities of organized life in
communities should be preserved. … .
[53]
The Ladore case can be read to say the
provincial legislatures have a duty generally, but could also be read more
narrowly as providing that if a municipality, which is a creature of the
legislature, runs into financial difficulties, then the legislature has the
duty to ensure that the local inhabitants are provided with local government.
[54]
I am of the view that the Province, having been
granted jurisdiction under the Constitution Act for local works and
undertakings, has some responsibility in the area of that jurisdiction. Why
else would the founding fathers of Canada have given the Province such jurisdiction? If the Province does not
carry out local works and undertakings itself, it must delegate this
responsibility to some other authority. In the present case, the Province made
a determination to delegate some of its jurisdiction and responsibility to the
Appellant. The Province clearly has the authority to delegate in this manner: Brandon v. Municipal Commissioner
& Manitoba
(Attorney General), [1931] 4 D.L.R. 830 (Man.
C.A.), at page 404. This delegation was accomplished initially by statute under
the CTA, and followed up by the agreements referred to above. Once this
responsibility had been delegated to the Appellant, the Province had a legal
obligation to make adequate funding available.
[55]
In my view, this statutory and constitutional
framework supports my conclusions above regarding the legal obligation on the
part of the Province to make the funds available, and the direct link between
the funds and the transit projects they were intended to support.
[56]
For these reasons, I
conclude that the Appellant made a supply to the Province in acquiring, constructing, and making available transit facilities in
the City of Calgary. The
funding provided by the Province to the Appellant was consideration for this
supply.
[57]
I will also make a few comments respecting the
argument made by the Appellant at trial that in developing the transit
facilities, it acted as the quasi-agent or instrumentality of the Province.
Specifically, the Appellant argued that it acted on behalf of the Province. In
my view, notwithstanding the high degree of control exercised by the Province
over the development of the transit facilities, the Appellant was not acting as
its agent. The independence of the Appellant is evident from subsection 6(1) of
the CTA, which leaves the choice whether to proceed with the
construction of any given facility up to the Appellant:
6. (1) When a city considers
that a transportation facility included in the transportation system should be
constructed it shall submit the proposal to the Minister.
[58]
The Appellant was acting independently under
statutory and contractual obligation. In this regard I would also mention that
the fact that work is undertaken pursuant to a statutory obligation does not in
itself disqualify that work from the character of a commercial activity: Regina
(City) v. Canada, supra,
at paragraph 24.
[59]
The next issue is whether the supply made was an
exempt supply. It is clear that this supply does not fit within the terms of the
exempt supply under section 24 of Part VI of Schedule V. That section describes
the following supply:
24. [Municipal transit] — A supply made to a member of the public of
a municipal transit service or of a passenger transportation service designated
by the Minister to be a municipal transit service.
[Emphasis added]
[60]
I determined above by virtue of the definition
of “recipient” in subsection 123(1) that the Appellant made a supply to the
Province. This supply was not made “to a member of the public”. As the Respondent did not argue this
supply fits within the terms of any other section in Schedule V, I have assumed that none other applies. I conclude that the supply
to the Province was not an exempt supply.
[61]
As the Appellant’s activities in performing its
obligations under the various agreements constituted a business, and as the
supply made to the Province in the course of that business was not an exempt
supply, the requirements for commercial activity under paragraph (a) of the
definition in paragraph 123(1) have been met.
[62]
It remains to consider the effect of subsection
141.01(2). As observed by Rip J. (as he then was) at paragraph 38 of Regina
(City) v. Canada, supra,
“[s]ection 141.01 generally sets out the rules where, when a registrant’s
business involves making both taxable and exempt supplies, the registrant is
required to apportion tax on inputs in determining the amount of ITCs that the
registrant may claim.” The
Technical Notes of February 1994 issued by the Department of Finance accord
with this description, explaining that section 141.01 is designed to clarify and reinforce the requirement
to apportion inputs under subsection 169(1) based on the extent to which the
inputs are used in making taxable and non-taxable supplies. “Taxable supply” is defined in subsection 123(1) as “a supply made
in the course of a commercial activity”.
[63]
I note that there are
differing views respecting whether section 141.01 is a rule of general
application, and specifically whether subsection 141.01(2) imposes a
requirement that inputs be acquired for the purpose of making taxable supplies
in order for ITCs to be claimed. See, for example, Perfection Dairy Group
Ltd. v. Canada, 2008 TCC 342, [2008] T.C.J. No. 252 at paragraphs 19-33,
and BJ Services Co. v. Canada, [2002] T.C.J. No. 599 at paragraphs 51-62.
In light of my findings below regarding the scope of the Appellant’s business
however, I believe it is unnecessary for me to address this issue in the
present appeal. I would also note that neither this issue nor these decisions
were referred to by either party.
[64]
It is useful to state again the wording of
subsection 141.01(2), with my emphasis:
Where a person acquires or imports property or a service
… 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.
[65]
“Endeavour” is defined in subsection 141.01(1)
to include a business. The property and services at issue in this appeal were
acquired by the Appellant in the course of its business relating to the BCG
Agreement, the TCG Agreement and the New Agreement. In the context of this
business, it is clear that the Appellant acquired the property and services for
the purpose of making the supply to the Province which, given my findings
above, was a taxable supply for consideration. The supply of the municipal
transit service to the public, although it may have been facilitated by the
arrangement between the Appellant and the Province, was not made in the course
of that endeavour.
[66]
I find support for this approach in London
Life Insurance Co. v. Canada, [2000] F.C.J. No. 2121, [2000] G.S.T.C. 111.
In that case, London Life had leased commercial office space, and had
undertaken the construction of leasehold improvements on the leased premises using
funds provided by its landlords. In allowing the appeal, Rothstein J.A. (as he
then was) viewed the leasing transactions as independent from London Life’s
primary business, which was the exempt supply of financial services. He
reasoned at paragraph 33:
Certainly, the ultimate
purpose of London Life is to lease improved premises for its financial services
business of providing exempt supplies. But when the leasing transactions are
considered independently, London Life is supplying the leasehold improvements
to the landlords for the consideration of the leasehold improvement allowances.
In turn, the landlords are providing the improved leased premises to London
Life for its financial services business. In this way, London Life's provision
of leasehold improvements to the landlords constitutes a commercial activity.
[67]
Justice Miller discussed Rothstein J.A.’s
approach at paragraph 52 of BJ Services Co. v. Canada, supra:
In [London
Life Insurance Co. v. Canada], it was clear the basic business of London
Life was the provision of exempt supplies, but Justice Rothstein identified the
leasehold allowance received by London Life as more closely connected to the
supply of leasehold improvements by London Life back to the landlord. Justice
Rothstein found in effect that the acquisition of construction property and
services by London Life to make its leasehold improvements constituted a
separate business, a commercial activity involved in the making of taxable
supplies.
[68]
The supply of a municipal transit service to the
public is similarly separate from the Appellant’s business relating to the BCG
Agreement, the TCG Agreement and the New Agreement. In my view, the construction, acquisition, and
making available of the transit facilities reflected an independent commercial
activity. The Appellant’s business so described did not include the making of
exempt supplies. As such, the apportioning rule in subsection 141.01(2) does
not apply. Even if it were to apply as a rule of general application, paragraph
141.01(2)(a) would deem the Appellant to have acquired the property and
services at issue in the course of its commercial activities, without
apportionment, as they were acquired for the purpose of making a taxable supply
for consideration to the Province.
[69]
The Appellant also
argued that subsection 199(2) is applicable to the present appeal. That
subsection provides:
199. (2) Acquisition of capital personal property — Where a registrant acquires or imports personal
property or brings it into a participating Province for use as capital
property,
(a) the tax payable by the registrant in respect of
the acquisition, importation or bringing in of the property shall not be
included in determining an input tax credit of the registrant for any reporting
period unless the property was acquired, imported or brought in, as the case
may be, for use primarily in commercial activities of the registrant; and
(b) where the registrant acquires, imports or brings
in the property for use primarily in commercial activities of the
registrant, the registrant is deemed, for the purposes of this Part, to have
acquired, imported or brought in the property, as the case may be, for use
exclusively in commercial activities of the registrant.
[Emphasis added]
[70]
Paragraph 199(2)(b) contains what is sometimes
referred to as the “primary use test”, which is applicable to acquisitions of
personal property. Under this paragraph, if property is acquired primarily for
use in commercial activities, it is deemed to have been acquired for use
exclusively in commercial activities. The Appellant made reference to this
provision in connection with its position that as a consequence of acquiring, constructing and making the
transit facilities available within the City of Calgary, it was able to make an exempt supply to the public of a municipal
transit service.
[71]
The definition of “primarily” was considered by
this Court in Mid-West Feed Limited et al. v. M.N.R., 87 DTC 394
(T.C.C.). In that case, it was noted that “primarily” might be defined as of
first importance, principle, or chief. “Primarily” could also mean more than
50%. At the trial, evidence was presented showing that fees paid by users of
the transit services only covered 53% to 60% of the operating cost of the
system, without having regard to its capital cost. By contrast, the
consideration received from the Province covered approximately 70% of the cost of
acquiring and constructing the transit facilities. In addition, even if the
public had chosen never to use the transit service, the Appellant still would
have been under statutory and contractual obligation to the Province to make the
transit facilities available.
[72]
To the extent that paragraph 199(2)(b) applies
to the present appeal, I have concluded that the personal property acquired by
the Appellant was acquired primarily for use in the supply made to the Province
as opposed to that made to the general public, and as such primarily for use in
its commercial activities.
Disposition:
[73]
I conclude that the Appellant is entitled to the
additional ITCs as claimed, as it acquired the inputs in question for use in
the course of its commercial activities. The Appellant made a taxable supply
for consideration to the Province of Alberta in acquiring, constructing, and making available within the City of
Calgary the buses, light rail
transit vehicles and other related facilities. The appeal is allowed with costs
in favour of the Appellant.
Signed at Ottawa, Canada, this 21st day
of May, 2009.
"E. P. Rossiter"
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