Citation: 2009 TCC 369
Date: 20090717
Docket: 2007-4144(GST)G
BETWEEN:
THE CITY OF BRANDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
In the mid-1990s Maple
Leaf Meats Inc. sought proposals across Canada
for a location to build a hog-processing facility.
[2]
The City of Brandon felt
that if such a facility were built in Brandon it would
offer significant economic benefits, including a large number of new jobs.
[3]
The City and the Province of Manitoba wanted to encourage the construction of
the plant in Brandon and entered into a Memorandum of
Understanding with Maple Leaf in December 1997. One matter dealt with in the
Memorandum was the treatment of Maple Leaf’s wastewater.
[4]
The municipality’s existing
wastewater treatment plant would not be able to deal with the wastewater from
the proposed Maple Leaf facility and, as a result of the Memorandum as well as
arrangements between the City and the Province, Maple Leaf and the City entered
into an Agreement for Waste Water Treatment Services on March 31, 1999.
[5]
Pursuant to the
Agreement, the City was to build, own and operate a wastewater treatment plant (the
“new wastewater plant”) adjoining the hog‑processing facility that Maple
Leaf would build. The City would accept and treat wastewater from the facility.
Maple Leaf agreed that the wastewater would be pre-treated and that the wastewater sent to the City
facility would meet certain standards.
Maple Leaf also agreed to certain limitations regarding the quantity of water
per day and per week.
[6]
The Agreement provided
that the City would bear the cost of constructing the wastewater facility while Maple Leaf
would pay all the operating costs, including an amount for administrative
costs.
Issue
[7]
The City claimed input tax credits
(“ITCs”) with respect to the goods and services tax (the “GST”) it paid on the
expenditures for the construction of the wastewater treatment facility. There is no substantive
dispute as to the quantum.
[8]
The Respondent says that
the City is not entitled to claim the ITCs in issue because the wastewater
treatment services supplied to Maple Leaf are exempt supplies.
[9]
ITCs may only be claimed
to the extent that the City acquired the goods or services on which it paid GST,
potentially giving rise to ITCs, for use in the course of a “commercial
activity”.
“Commercial activity” is defined to include a business carried on by a person
except to the extent that it involves the making of “exempt supplies”. “Exempt
supplies” are defined to mean supplies included in Schedule V.
[10]
The Respondent says the
supplies made by the City to Maple Leaf are exempt supplies because they fall
within Schedule V, Part VI, section 21 of the Excise Tax Act (the “ETA”):
21. 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.
Alternatively the Respondent says that the supplies
are exempt supplies because they fall within Schedule V, Part VI, section 22:
22. A
supply of a service, made by a municipality or by an
organization that operates a water distribution, sewerage or drainage system
and that is designated by the Minister to be a municipality for the
purposes of this section, of installing, repairing, maintaining or interrupting
the operation of a water distribution, sewerage or drainage system.
[11]
The key portions of these two
sections for the purposes of this appeal are set out below:
21. A supply of a
municipal service, if
(a)
the supply is
(i) made by a . . .
municipality to a recipient that is an owner or occupant of real property
situated in a particular geographic area, or
. . . [and]
(b) the service
is
(i) one which the
owner or occupant has no option but to receive, or
. . .
22. A supply of a service, made by a municipality . . . of
installing, repairing, maintaining or interrupting the operation of a water
distribution, sewerage or drainage system.
[Emphasis
added.]
Facts and analysis
[12]
There is no substantive dispute as
to the facts.
[13]
There was one witness, Mr.
Theodore Snure. Mr. Snure has a Bachelor of Science in Civil Engineering
and is a registered professional engineer in Manitoba. He joined the City in
1981 as Assistant City Engineer. Subsequently, he became City Engineer and,
later, General Manager, Development Services. At the relevant times he was City
Engineer and his responsibilities included water distribution, wastewater
treatment and transit.
[14]
Mr. Snure testified that
originally Maple Leaf was going to own and operate the new wastewater treatment
facility. Ultimately, Maple Leaf decided that they were not in the business of
wastewater treatment and it was agreed that the City would build, own and
operate the facility.
[15]
There was no evidence that Maple
Leaf could not have chosen to set up its own wastewater treatment system or
that Maple Leaf could not have chosen to contract with a private company to
treat its wastewater.
[16]
The Agreement of March 31, 1999
between Maple Leaf and the City provided for the possibility that the City
could take other companies’ wastewater to the new wastewater plant built for
the Maple Leaf hog-processing plant.
[17]
The Agreement provided for
circumstances under which Maple Leaf could assume the operation, but not ownership,
of the wastewater facility. Before Maple Leaf could take over the operation of
the facility, it would have to meet a number of conditions. Maple Leaf would
have to demonstrate that it could operate the facility more economically or
efficiently than the City and it would have to meet the requirements of any
other (third-party) customers the City might then have who used the
new wastewater plant.
[18]
Mr. Snure also testified that
the new wastewater plant cost between $10 million and $12 million, that
the annual charge by the City to Maple Leaf was about $1 million and that
it took two to four employees to run the plant.
Section
21, Part VI, Schedule V
[19]
There was no dispute that the
condition in paragraph 21(a) was met: the supply was made by a
municipality.
[20]
The term “municipal service” is
not defined in the ETA. I am satisfied that, in receiving and dealing
with Maple Leaf’s wastewater, the City was providing a service falling within
what is commonly understood to be a “municipal service” and within the meaning
of that term as used in section 21. The City did not challenge this.
[21]
However, the City does not agree
that receiving and dealing with wastewater is inherently a municipal service within
the meaning of section 21 if the service is provided by a private company.
[22]
There is no suggestion that subparagraph
21(b)(ii) or paragraph 21(c) have any application.
[23]
Consequently, the core of the
dispute regarding section 21 turns on subparagraph 21(b)(i) and whether
or not “. . . the service is (i) one which [Maple Leaf had] no option but to
receive . . .”.
[24]
Under the relevant Manitoba
legislation, Maple Leaf could not operate the proposed hog-processing plant
unless the water was suitably treated to comply with environmental
requirements. The City does not contest this.
[25]
While the City agrees that Maple
Leaf had to treat the water, it says that Maple Leaf was not obliged to receive
the service from the municipality; Maple Leaf had a choice: it could do its own
treatment, it could contract with a private company, or it could contract with
the municipality.
[26]
The Respondent argues that the City
is, in effect, reading into subparagraph 21(b)(i) a requirement that the
service is one which the owner or occupant has no option but to receive from
the municipality. The Respondent says that there is no such
requirement; it is enough that the owner must have the wastewater treated and
that the municipality provides the services, even if the owner (Maple Leaf)
could have chosen another service provider.
[27]
The Respondent’s approach implies
a set of “municipal services” which are inherently such irrespective of who
provides them, and implies as well that if an owner must receive the particular
“municipal service” from someone, then the service is exempt if provided by the
municipality or government but taxable if provided by a private entity. Under
the City’s approach the particular service would be taxable whether provided by
a municipality or by a private company.
[28]
I have two difficulties with the
Respondent’s approach. First, this is on its face an exemption for “municipal
services”. The expression “municipal services” is undefined, and while there
are a number of services that are generally accepted as “municipal services” — such as garbage collection — it does not follow that each such service is
necessarily a municipal service when provided by a private entity.
[29]
Taking away wastewater and
treating it is not inherently a municipal service if it is not provided by or
on behalf of a municipality.
[30]
Second, on a plain reading of subparagraph
21(b)(i), its purpose is very simply to remove from the exemption
supplies by municipalities that are optional and would, in the absence of that
subparagraph, be included in the exemption.
This is a more plausible interpretation than one attributing to Parliament a
twofold intention of :
(a) excluding optional supplies by
municipalities of services that are not mandatory under any law and
(b) adding to the exemption supplies of
something that an owner is required by law to have done by someone if the
supplies happen to be made by a municipality, even though they would be taxable
if made by a private company.
[31]
In my view, section 21 does not
apply where, as here, Maple Leaf could have chosen a private supplier. I note
that this results in competitive neutrality as between a municipal supplier and
a private supplier.
Section 22, Part VI, Schedule V
[32]
With respect to this section the City
argues that:
(a) the supply
made by the City was the operation of the new wastewater plant and that this
cannot be characterized as “installing, repairing, maintaining or interrupting”;
and
(b) a “sewerage system” is the
network of pipes collecting sewage and does not include wastewater treatment.
Scope
of the term “sewerage system”
[33]
The City argues that the section
cannot apply because a sewerage system is limited to the series of pipes
collecting wastewater and does not include water treatment.
[34]
In response, the Respondent,
citing definitions of “sewage”, “sewage works”, “sewerage” and “system” found in
the Pocket Oxford Dictionary of Current English,reprinted in 1985, argues that sewerage is
the drainage of wastewater, that a system is a complex set of interconnected
parts and that, on its plain meaning in a modern environment, a sewerage system
includes wastewater treatment. I note that "Sewage
works" is defined as a place where sewage is treated.
[35]
While I agree with the City that
it is not determinative, consideration of provincial legislation may help
ascertain the meaning of terms.
Sewerage and wastewater fall in large measure under provincial legislation.
[36]
In Manitoba, where the wastewater
plant in issue is located, the current Water Works, Sewerage and Sewage
Disposal Regulation
provides that:
“sewerage system” means all sewers, appurtenances, pumping stations,
treatment works, and all physical properties of the system, but does not
include extensions to the collection systems.
I also note that in British Columbia, where the
hearing of this matter took place, section 1 of the Sewerage System
Regulations
provides that:
“sewerage system” means a system for treating domestic sewage that uses one or more
treatment methods and a discharge area, but does not include a holding tank or
a privy.
[37]
The City noted that the B.C.
regulation only refers to domestic sewage and that the plant in issue was
specifically for industrial wastewater of Maple Leaf.
[38]
While the B.C. regulation does
relate specifically to domestic sewage, it is still indicative of the fact that
sewerage systems not only take away wastewater but also treat it to an
acceptable state before general release into rivers. I do not see how the fact that
the plant in issue was used primarily for industrial wastewater or that, at the relevant
time, it served one customer — with the possibility
of additional future customers — would result in the
plant and pipes not being a “sewerage system”. I note that the other City
wastewater plant, which dealt with all wastewater other than that of Maple Leaf,
took wastewater from another industrial customer and treated it in a specific
lagoon cell dedicated to the other industrial customer.
[39]
I am satisfied that the Manitoba Water
Works, Sewerage and Sewage Disposal Regulation is reflective of the
contemporary meaning of “sewerage system” and that, accordingly, wastewater
treatment falls within the scope of a sewerage system.
“Installing,
repairing, maintaining or interrupting”
[40]
In substance, the service Maple
Leaf receives is this: the City takes its wastewater, treats it to ensure
compliance with environmental standards and disposes it. The City says that, in
effect, such a service amounts to “operating” a sewerage system.
[41]
The City, relying on dictionary
definitions of “install”, “repair”, “maintain” and “interrupt”, says that none
of those words include the actual operation of the plant. The City drew my
attention to the following definition of “maintain” taken from Merriam-Webster’s
Collegiate Dictionary, Tenth Edition, 2001:
1: to
keep in an existing state (as of repair, efficiency, or validity): preserve
from failure or decline <~ machinery> 2: to sustain against
opposition or danger: uphold and defend <~
a position> 3: to continue or persevere in: CARRY ON, KEEP UP
<couldn’t ~ his composure> 4 a: to support or provide for <has
a family to~> b: SUSTAIN <enough food to ~ life>5: to
affirm in or as if in argument: ASSERT <~ed that the earth is
flat>
[42]
In addition the City points out
that section 22 begins with a reference to operators of water and sewerage
systems, which shows that Parliament is quite conscious of the difference
between “operating” and “installing, repairing, maintaining or interrupting”.
[43]
The Respondent argues that, under
the Agreement of March 31, 1999, the City is obliged to “operate, maintain and
repair” the new wastewater plant and that this falls within “repairing,
maintaining or interrupting”. In support of this, the Respondent says that “maintain”
includes “causing to continue” and cites the Pocket Oxford Dictionary
of Current English, reprinted in 1985, which defines “maintain” as follows:
cause to
continue, continue one’s action in, retain in being; take action to preserve
(machine, house, etc.) in good order; support, provide sustenance for; provide
means for; assert as true.
[44]
The Canadian Oxford Dictionary,
Second Edition, 2004, defines “maintain” as follows:
1 cause
to continue; keep up, preserve (a state of affairs, an activity, etc.) (maintained
friendly relations). 2 (often foll. by in) support (life, a
condition, etc.) by work, nourishment, expenditure, etc. (maintained him in
comfort). 3 (often foll. by that + clause) support or uphold,
esp. in speech or argument (maintained that she was the best; his story was
true, he maintained). 4 preserve or provide for the preservation of
(a building, machine, road, etc.) in good repair. 5 give aid to (a
cause, party, etc.). 6 pay for the upkeep, repair, or equipping of (a
garrison, etc.).
[45]
When one reads individually the
words “installing, repairing, maintaining or interrupting” without considering
the wider meanings of “maintain” they do not appear to include “operation”.
[46]
However, when one reads section 22
as a whole “[a] supply of a service, . . . of installing, repairing,
maintaining or interrupting the operation of a water distribution, sewerage or
drainage system”, bearing in mind the wider senses of “maintain” (“cause to
continue” or “support by work” as in “maintain in life”), section 22 can also
be read as covering the whole operation of a municipal water or sewerage
system.
It is accordingly appropriate to take a purposeful and contextual approach and
consider the scheme and object of the ETA.
[47]
There are other considerations
which assist in the interpretation.
[48]
It is accepted that, while not
determinative, the views of the administrator have some weight and may be
considered.
It is also accepted that, while not determinative, Technical Notes are entitled
to consideration.
[49]
In the 2009 Canada Revenue Agency (the
“CRA”) publication, GST/HST Information for Municipalities, it is stated:
A supply of a service of installing, repairing, maintaining or
interrupting the operation of a water distribution, sewerage, or drainage
system, is not subject to GST/HST if the supply is made by a municipality or by
an organization designated as a municipality for this purpose.
A separate fee charged to a property owner or occupant for a service of
repairing or maintaining part of an existing sewer or water line is exempt.
Note
A supply of a service of operating or managing another person’s water
distribution, sewerage or drainage system, or collecting waste water, is
subject to GST/HST. Also, supplies where a user or connection fee is charged to
an owner or occupant of a property connected to a water distribution system are
subject to GST/HST unless the supplies are made on behalf of a
municipality. For more information, see “Residential services” on this page.
[50]
Although not certain, the quoted
passage appears to be directed at section 22. The note clearly states that
operating another person’s water system or collecting wastewater is taxable; it
implies that installing, repairing, maintaining or interrupting the operation
of another person’s water system is exempt when it is done by a municipality.
This appears to support the City’s contention that section 22 distinguishes
“operating” from “installing, repairing, maintaining or interrupting” and,
consequently, that section does not cover “operating” a sewerage system.
[51]
The May 1990 Technical Notes to the GST legislation
state in part, with respect to section 22:
Section 22 exempts basic water and sewerage system charges to
residents, including installation or hook-up fees.
However, where a municipality charges a separate fee to a property owner to
repair or maintain a part of an existing line which is for the sole use of the
property owner, GST applies.
[Emphasis added.]
[52]
The reference to exempting basic
water and sewerage charges is clearly a reference to the usual charges paid by
property owners for water and sewerage services. This clearly implies that
section 22 covers the operation of a sewerage system.
[53]
As originally enacted in the ETA,
section 22 reads as follows:
A supply of a
service, made by a municipality or by an organization designated by the
Minister to be a municipality for the purposes of this section, of installing,
repairing or maintaining a water distribution, sewerage or drainage system that
is for the use of all occupants and owners of real property situated in a
particular geographic area, other than a supply for which a separate charge is
made to the recipient of the supply, of a service of repairing or maintaining a
part of the system where the recipient is the owner or occupant of a particular
parcel of real property situated in the particular geographic area and the part
of the system is for the exclusive use of occupants and owners of the
particular parcel.
I
note that the original text has no reference to “operation” or “operate”.
[54]
It is surprising that a CRA
publication seems to suggest that one should exclude “operation” from section
22 while the Technical Notes by the Department of Finance suggest the contrary.
Although the CRA publication is subsequent to the year in issue, the Technical Notes
are prior to the year in issue and section 22 has been amended over the years,
the relevant portions of section 22, that is, the words “installing, repairing
or maintaining . . . a water distribution, sewerage or drainage system” remain
unchanged except for the addition of “interrupting the operation of” subsequent
to the original enactment. It is hard to see how those additional words could
justify a change of interpretation with regard to whether the words “installing,
repairing or maintaining” include “operation”.
Nothing else in the evolution of section 22 suggests that the meaning of the
portion of concern to us has changed.
[55]
However, where there is conflict
between the two, more weight should be given to the Technical Notes than to the
administrator’s stated view given that Parliament has the power to enact laws
and it was the Technical Notes that were before Parliament.
[56]
Given the Technical Notes, I have
concluded that the operation of the sewerage system falls within section 22.
There is however one further consideration which also leads to this conclusion.
[57]
Section 22, as originally enacted,
can be broken down into three parts:
1.
A supply of a service, made by a municipality or by an organization
designated by the Minister to be a municipality for the purposes of this
section, of installing, repairing or maintaining a water distribution, sewerage
or drainage system
2.
that is for the use of all occupants and owners of real property
situated in a particular geographic area,
3.
other than a supply for which a separate charge is made to the recipient
of the supply, of a service of repairing or maintaining a part of the system
where the recipient is the owner or occupant of a particular parcel of real
property situated in the particular geographic area and the part of the system
is for the exclusive use of occupants and owners of the particular parcel.
As
previously noted, the first part is, with respect to the portion thereof that
concerns us, substantially the same as the text that applies to this appeal,
apart from the subsequent addition of “interrupting” the operation of a system.
[58]
The second and third parts are,
however, interesting. If the words “installing, repairing or maintaining a
water distribution, sewerage or drainage system” in the first part do not cover
charges for the “operation” of the system for taking away and dealing with
wastewater, then, given the requirement of the second part and the restriction
in the third part, the original exemption would have been very narrow. Indeed,
all that would have been exempt would have been supplies of installation,
repair and maintenance services that were specifically billed and were
for the use of everyone in a specific geographic area.
[59]
I cannot accept that the original section
could have been read so narrowly. It would have produced the surprising result
that normal water and sewerage charges were taxable, as were repairs made to a
pipe serving an individual owner exclusively and billed separately, but the
repairs of pipe serving everyone in a particular geographic area would be
exempt if billed separately.
[60]
Given my conclusion that section
22 does exempt the operation of a sewerage system, the supplies in issue made
by the City to Maple Leaf are exempt supplies.
Conclusion
[61]
Accordingly, the appeal will be dismissed
with costs.
Signed at Ottawa, Canada, this 17th day of July 2009.
"Gaston Jorré"
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