Citation: 2009 TCC 130
Date: 20090319
Docket:2007-2623(GST)G
BETWEEN:
VILLE DE GATINEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
(These
Amended Reasons for Judgment are issued in substitution for the Reasons for
Judgment signed on March 4, 2009 to amend the amount set out in paragraphs 7
and 29. In all other respects, the Reasons for Judgment remain the same.)
Paris, J.
[1]
This is an appeal from an
assessment under Part IX of the Excise Tax Act (the “Act”) which
disallowed input tax credits (“ITCs”) claimed by the Appellant under subsection 169(1)
of the Act.
[2]
The Appellant was established on
January 1, 2002 by amalgamation of the cities of Aylmer, Buckingham, Gatineau, Hull and
Masson-Angers. By virtue of the amalgamation, the Appellant took over from the
Communauté urbaine de l’Outaouais (“CUO”) as owner and operator of a waste
water treatment plant that processes waste water collected from Aylmer,
Gatineau and Hull. An addition to the plant converts the solid waste (referred
to as “sludge”) that is produced from the waste water into fertilizer pellets
that are sold to third parties. The Appellant receives approximately $60,000 a
year from the sale of the fertilizer pellets.
[3]
The
Minister of National Revenue (the “Minister”) accepts that the part of the
water treatment process by which the sludge is converted into fertilizer
pellets is a commercial activity carried on by the Appellant and he has allowed
the Appellant full ITCs for the GST paid by it on supplies used to operate that
part of the water treatment plant. The Minister also allowed the Appellant a
public service body rebate under section 259 of the Act amounting
to 57.14% of the total GST in operating the remaining part of the plant.
[4]
The Appellant has claimed
additional ITCs of $138,576.83 in respect of supplies acquired to operate the
treatment plant from 2002 to 2004 and $770,119.48 in respect of supplies
acquired for capital additions to the plant from 1991 to 2004. These amounts
represent the difference between the ITCs that have already been allowed by the
Minister and 100% of the GST paid by the Appellant on expenditures incurred to
run the entire plant and on all capital expenditures related to it.
[5]
The Minister denied the claim for
additional ITCs on the basis that the water treatment operations (except for
the production of the fertilizer pellets) were a supply of a municipal service
made by the Appellant to the owners or occupants of property in its territory
and were therefore an exempt supply under section 21 of Part VI of
Schedule V to the Act.
[6]
The Appellant takes the position
that none of the activities carried on at the treatment plant is an exempt
supply.
Concessions
[7]
At the hearing, the Respondent
conceded that there was an error in the calculation of the allowable ITCs
relating to the processing of the sludge into fertilizer pellets and that the Appellant
was entitled to an additional $2,756.29 of ITCs for this part of the
process.
[8]
The Appellant conceded that it was
not entitled to any ITCs on capital expenditures on the water treatment plant
from 1991 to December 31, 2001, since it was not the owner of the treatment
plant during that period of time. According to counsel for the Respondent if
the former owner, the CUO, was entitled to any ITCs in relation to the capital
expenditures on the water treatment plant from 1991 to 2002, this would be
reflected in a calculation of the basic tax content of the plant at the time it
was transferred to the Appellant. If I find that the water treatment activities
in issue were not exempt supplies, the parties agree that the matter should be
referred back to the Minister for re-determination of the basic tax content of
the plant at the material time.
Legislation
[9]
In order to receive ITCs, a
registrant must have paid GST on a property or a service acquired for
consumption, use or supply in the course of the registrant's commercial
activities. This is set out in subsection 169(1) of the Act:
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.
[10]
"Commercial activity" includes
a business carried on by a person, except to the extent to which the business
involves the making of exempt supplies. The full definition of is set out as
follows in subsection 123(1) of the Act:
“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 or 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;
[11]
The term "exempt supply"
is defined in subsection 123(1) of the Act to mean “a supply included in
Schedule V” to the Act.
[12]
Under section 21 of Part VI
of Schedule V, any supply of a municipal service that is made by a municipality
to occupants of real property in its territory and which they have no option
but to receive is an exempt supply. That section reads as follows:
21.
[Municipal services] -- A supply of
a municipal service, if
(a) the
supply is
(i) made by
a government or municipality to a recipient that is an owner or occupant of
real property situated in a particular geographic area, or
(ii) made
on behalf of a government or municipality to a recipient that is an owner or
occupant of real property situated in a particular geographic area and that is
not the government or municipality;
(b) the
service is
(i) one
which the owner or occupant has no option but to receive, or
(ii) supplied because of a failure by the owner or occupant to
comply with an obligation imposed under a law; and
(c)
the service is not one of testing or inspecting any property for the purpose of
verifying or certifying that the property meets particular standards of quality
or is suitable for consumption, use or supply in a particular manner.
Issue
[13]
The issue in this appeal is
whether the water treatment done at the treatment plant (except to the extent
that it produced fertilizer pellets) is a supply “made... to a recipient that
is an owner or occupant of real property situated in a particular geographic
area” in accordance with the wording of paragraph 21(a)(i) of
Part VI of Schedule V. If it is, it is an exempt supply, and is not a
commercial activity of the Appellant and does not give rise to ITCs.
[14]
The Appellant concedes that if the
water treatment activity is found to be a supply made to the owners or
occupants of property in the Appellant’s territory, the remaining conditions of
section 21 have been met and the supply would be an exempt supply and that
it would not be entitled to the ITCs in issue.
[15]
The Respondent attempted to argue,
in the alternative, that the water treatment activity was an exempt supply
under section 10 of Part VI of Schedule V to the Act, which
deals with supplies made by a public service body for no consideration, but
this was not raised in the Reply to Notice of Appeal and no request to amend
the Reply was made. I therefore decline to deal with that issue.
Facts
[16]
In an earlier GST appeal, the previous original
owner and operator of the treatment plant, the CUO, challenged the Minister’s
disallowance of its claim for ITCs for all GST paid on supplies used in the
entire operation of the plant for the years 1998, 1999 and 2000. The plant
operated in the same manner as the years under appeal here, and produced and
sold fertilizer pellets. However, in those years the CUO was a separate legal
entity from the cities of Aylmer, Hull and Gatineau and the provision under which the ITCs were
disallowed was different from the one in issue before me. The Minister relied
on section 28 of Part VI of Schedule V to the Act, which provides that
“a supply between... a regional municipality and any of its local
municipalities or any para-municipal organization of any of those local
municipalities” is an exempt supply. Since the amalgamation of the CUO and the
five municipalities in 2002 into a single entity - the Appellant -
section 28 is no longer applicable to the water treatment plant
operations.
[17]
The parties agreed to make evidence
from the previous appeal which described how the water treatment plant operates
evidence in these proceedings. A copy of the transcript of the testimony of Mr.
Jacques Nadeau, who at that time was Director of Water Treatment Services for
the Appellant, was entered into the record.
[18]
According to Mr. Nadeau, waste
water is collected through the sewer system in Aylmer, Gatineau and Hull and
forwarded to the treatment plant. At the plant, the waste water undergoes two
stages of screening to remove debris, and is sent through grit removers to take
out fine gravel, sand and mineral particles. The water then flows into settling
tanks. The sludge that settles on the bottom of the tanks is pumped to a
treatment unit, where it is aerated to promote the growth of micro‑organisms.
The mixture is allowed to settle, and the water that is separated and purified
in the process is pumped into the Ottawa River. The settled sludge is
extracted, thickened through various procedures, concentrated and dried. Most
of the dried sludge is made into pellets that are sold for agricultural
purposes, although anywhere from 13 to 27 per cent of it is buried. Prior to
the addition of the pelletization facilities and related equipment all of the
dried sludge was buried. Sales of the fertilizer pellets ranged from $30,000 to
$60,000 per year.
[19]
Ms. Louise Lavoie, Director of
Environmental Services testified for the Appellant. She confirmed that Mr.
Nadeau’s description of the water treatment process was still accurate for the
periods under appeal and the fertilizer sales were in the same range. She
testified that the property tax bills sent out by the Appellant to property
owners did not specify any amount as payable for water treatment services, and
that the operating costs for the treatment plant were taken from general
revenues. She also stated that in her view the property owners did not care about
what the Appellant did with the waste water after it left their property.
[20]
In cross-examination, Ms. Lavoie
said that the property owners had no choice but to have their waste water
treated by the Appellant, because once the water was collected by the sewer
system it was sent to the treatment plant for treatment.
Appellant’s arguments
[21]
The Appellant takes the position
that the activities of collecting waste water from the owners or occupants of
property in the Appellant’s territory are separate and distinct from the
subsequent treatment of the water at the treatment plant and that the owners or
occupants of real property were not the “recipients” of any service from the Appellant
beyond the collection of the waste water. Counsel referred to the definition of
“recipient” in subsection 123(1) of the Act:
"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 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;
[22]
Since it was agreed by the parties
that the owners or occupants of property in the Appellant’s territory did not
pay for any waste water treatment, they could only be the recipient of the
service if they fell within subparagraph 123(1)(c)(iii) of the
definition of “recipient” and were persons to whom the service was “rendered”.
Counsel for the Appellant referred to an editorial note written by David
Sherman, the well-known GST author, in the case of Invera Inc. v. The Queen,
[2005] G.S.T.C. 163-1 in which Sherman
commented that a service is rendered to an individual if the individual receives
the supply personally.
[23]
The Appellant’s counsel says that
the owners or occupants of property in the Appellant’s territory do not receive
any water treatment services personally, and therefore that no water treatment
services are “rendered to” them as required by subparagraph 123(1)(c)(iii)
of the definition of “recipient” in subsection 123(1) of the Act, and
therefore that they are not the recipient of that service. Counsel submitted
that no service was rendered to property owners or occupants by cleaning the
waste water and returning the clean water to the river. He said that this was a
common-sense view of what took place at the treatment plant and was supported
by the evidence of Ms. Lavoie who said that the owners and occupants did not
care what happened to the waste water once it left their homes. In addition,
they did not receive any of the clean water back.
Analysis
[24]
I do not agree that the owners and
occupants of property in the Appellant’s territory are not the recipient of the
water treatment service performed at the treatment plant. The owners or
occupants of properties that are connected to the Appellant’s sewers are
obliged to send their waste into the sewer system that has been set up by the Appellant.
That system includes a water treatment process. All water that goes into the
sewer system is treated at the plant, and therefore the owners or occupants, by
sending waste water into the sewer are at the same time sending the water for treatment.
An owner or occupant of property cannot have their waste water collected
without having the water treated at the plant to remove the waste. Therefore,
the service supplied to the owners and occupants is a comprehensive one,
entailing both collection and treatment.
[25]
Despite the views of Ms. Lavoie,
one would like to think that the residents of the Appellant do care about what
happens to the waste that they send into the sewer system, and would choose to
have the water cleaned, but even if they did not, they are still required to
use a system that includes the waste water treatment plant.
[26]
With respect to the case comment
in Invera cited by the Appellant, it appears to me that Mr. Sherman was
making the point that a service is only rendered to a person within the meaning
of subparagraph 123(1)(c)(iii) of the definition of “recipient” in
section 123 if that person receives the service for his or her own benefit,
rather than for the benefit of someone else such as an employer. The relevant
portion of the casenote reads as follows:
References to
a supply “made to” a person are to the person being the “recipient” of the supply
as defined in subsection 123(1), as provided in the closing words of that
definition. The definition of “recipient” refers to the person who is legally
obligated to pay for the supply. Thus a supply is “made to” an individual if
that individual is required to pay for it (usually measured by being invoiced
for it). A supply is “rendered to” an individual if the individual receives the
supply personally. Nevertheless, where an employee receives a supply for
purposes of their employment duties, the supply should be considered rendered
to the employer.
[27]
In this case the owners and
occupants receive the benefit of the waste water system by being able to
dispose of their waste water into it. Use of the system frees them from having
to deal with the waste themselves. They receive the benefit of the water treatment
service provided by the Appellant and are the recipients of it within the
meaning of that term in section 123 of the Act.
[28]
This conclusion is sufficient to
dispose of the appeal.
[29]
The appeal is allowed in part to
allow additional ITCs of $2,756.29 as conceded by the Respondent, and
costs are awarded to the Respondent.
Signed at Ottawa, Canada, this 19th day of March 2009.
“B.Paris”
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