Citation: 2007TCC73
Date: 20070207
Docket: 2005-3721(GST)I
BETWEEN:
MI SASK INDUSTRIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the Informal Procedure was heard at Saskatoon, Saskatchewan on January 24, 2007. The Appellant called Bernard Miazga, who owns the Appellant and was the field supervisor for the pipeline job in question at Medicine Hat, Albertain 2002 and 2003. He was the only witness.
[2] Paragraphs 8 to 10 of the Reply to the Notice of Appeal outline the matters in dispute. They read:
8. In so assessing the Appellant tax collected/collectible on the payment of $200,000.00 it received from the City and confirming the assessment, the Minister made the same assumptions of fact as follows:
(a) the Appellant is registered for the purposes of the Act under registration number BN 103712857;
(b) the City entered into a contract (the "Contract") with the Appellant to build pipeline crossings on certain waterways in Alberta;
(c) during the construction of the pipeline crossings damage occurred as a result of ice jams to the aqua-dams;
(d) under the terms of the Contract the City was to have maintained course of construction insurance (the "insurance");
(e) under the terms of the Contract the City was required to obtain the insurance from insurers licensed to underwrite insurance in Alberta and the insurance policy was to be signed by representatives licensed to do so in Alberta;
(f) the City did not obtain the insurance from a third party insurer;
(g) the City chose to "self-insure";
(h) the Appellant pursued compensation from the City for damages that occurred during construction of the pipeline crossings;
(i) a sub-contractor also pursued compensation for damages;
(j) the Appellant entered into a Settlement Agreement with the City on July 31, 2003 in respect of the compensation it sought from the City;
(k) under the Settlement Agreement the City was required to pay $200,000.00 to the Appellant and hold $50,000.00 in a bank account;
(l) with the City paying the $200,000.00 the Appellant released the City from any further claims for compensation existing as of the date of the Settlement Agreement;
(m) under the terms of the Settlement Agreement, the Appellant was to take care of actions brought against the City by subcontractors related to the City's requirement to obtain the insurance;
(n) the supply of services by the Appellant under the Contract was a taxable supply;
(o) the Appellant was required to report tax collected/collectible of $13,084.11 in its return for the reporting period ending August 31, 2003 in respect of the payment of $200,000.00 it received under the Settlement Agreement;
(p) the Appellant did not report the tax on the $200,000.00 payment it received from the City.
B. ISSUES TO BE DECIDED
9. The issue to be decided in this Appeal is whether tax applies/is included in the payment of $200,000.00 made by the City to the Appellant.
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
10. The Deputy Attorney General relies on subsections 123(1), 221(1) and 225(1) and sections 182, 224, 228, 296 and 299 of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended and section 18.3009 of the Tax Court of Canada Act.
[3] Assumptions 8(a), (b), (c), (d), (e), (f), (g), (j) and (k) were not refuted.
[4] The remaining assumptions are in dispute.
[5] The dispute turns on section 182 of the Excise Tax Act, which reads:
Forfeiture, extinguished debt, etc.
182. (1) For the purposes of this Part, where at any time, as a consequence of the breach, modification or termination after 1990 of an agreement for the making of a taxable supply (other than a zero-rated supply) of property or a service in Canada by a registrant to a person, an amount is paid or forfeited to the registrant otherwise than as consideration for the supply, or a debt or other obligation of the registrant is reduced or extinguished without payment on account of the debt or obligation,
(a) the person is deemed to have paid, at that time, an amount of consideration for the supply equal to the amount determined by the formula
(A/B) × C
where
A is 100%,
B is
(i) if tax under subsection 165(2) was payable in respect of the supply, the total of 100%, the rate set out in subsection 165(1) and the tax rate for the participating province in which the supply was made, and
(ii) in any other case, the total of 100% and the rate set out in subsection 165(1), and
C is the amount paid, forfeited or extinguished, or by which the debt or obligation was reduced, as the case may be; and
(b) the registrant is deemed to have collected, and the person is deemed to have paid, at that time, all tax in respect of the supply that is calculated on that consideration, which is deemed to be equal to
(i) where tax under subsection 165(2) was payable in respect of the supply, the total of the tax under that subsection and under subsection 165(1) calculated on that consideration, and
(ii) in any other case, tax under subsection 165(1) calculated on that consideration.
Transitional
(2) Paragraph (1)(b) does not apply in respect of amounts paid or forfeited, and debts or other obligations reduced or extinguished, as a consequence of a breach, modification or termination of an agreement where
(a) the agreement was entered into in writing before 1991;
(b) the amount is paid or forfeited, or the debt or other obligation is reduced or extinguished, as the case may be, after 1992; and
(c) tax in respect of the amount paid, forfeited or extinguished, or by which the debt or obligation was reduced, as the case may be, was not contemplated in the agreement.
Application of Division IX
(2.1) Division IX does not apply for the purposes of subsection (1).
Exception
(3) Subsection (1) does not apply to that part of any amount paid or forfeited in respect of the breach, modification or termination of an agreement for the making of a supply where that part is
(a) an additional amount that is charged to a person because the consideration for the supply is not paid within a reasonable period and is such an amount referred to in section 161;
(b) an amount paid by one railway corporation to another railway corporation as or on account of a penalty for failure to return rolling stock within a stipulated time; or
(c) an amount paid as or on account of demurrage.
1990, c. 45, s. 12; 1993, c. 27, s. 46; 1997, c. 10, ss. 32, 176; 2006, c. 4, s. 9.
[6] Thus, under subsection 182(1), "as a consequence of the breach ... of an agreement for the making of a taxable supply ... by a registrant to a person, an amount is paid ... to the registrant otherwise than as a consideration for the supply ...
(a) the person is deemed to have paid ... an amount of consideration for the supply ... and
(b) the registrant is deemed to have collected ... all tax in respect of the supply ... on that consideration ...
[7] The agreement between the Appellant and the City of Medicine Hat, Alberta, was breached by the City. It agreed in paragraph 11.2(c) (Exhibit R-1) that:
(c) Course of Construction Insurance
The City will maintain a Course of Construction Insurance Policy, naming the City, the Contractor, Subcontractors and the Engineer as additional named insureds, with a deductible not exceeding Two Thousand Five Hundred ($2,500.00) Dollars, for the full replacement value of the Work.
In fact, the City did not insure with a third party. As assumption 8 (g) states, it chose to "self-insure".
[8] The Appellant was paid the $200,000 in question pursuant to a "Settlement Agreement" executed under seal with the City of Medicine Hat dated 29 July, 2003, being Exhibit A-8 in this appeal. The pertinent paragraphs read as follows:
...
2. The City, through its legal counsel, will do the following:
(a) Subject to paragraphs 2 (a) (ii) and 2 (a) (iii), pay the total sum of $250,000.00 to or on behalf of the Contractor "Settlement Funds" as follows:
(i) The sum of $200,000.00 upon execution of this Settlement Agreement;
(ii) The sum of $50,000.00 upon the Contractor providing the City with an agreement satisfactory to the City's Chief Administrative Officer executed by Aqua Dam and Diversion Ltd., and which acknowledges that Aqua Dam and Diversion Ltd. has no claim against the City with respect to the Course of Construction Insurance Policy under the Contract,
...
In the event no claim is brought against the City in respect of the Course of Construction Insurance by August 30, 2005 (in respect of a loss that occurred before January 15, 2003) then the $50,000.00 plus interest shall be paid to the Contractor upon the Contractor providing proof satisfactory to the City that no claim has been brought against the City.
...
3.(1) Upon payment of the $200,000.00 described in paragraph 2 (a) (i) by the City, the Contractor, subject to paragraph 3(2), releases and forever discharges the City, its officers, employees, agents, elected officials and their respective insurers of and from any and all manner of actions, cause and causes of action, suits, debts, sums of money, expenses, damages, costs (including solicitor and client costs), claims, and demands of any and every nature whatsoever at law or in equity or under any statute which the Contractor has or may have arising from or relating in any way to the Contract, the Agreement, or otherwise as of the date of this Settlement Agreement. Without limiting the generality of the foregoing the Contractor forever releases and discharges the City from:
(a) All expenses and claims identified in letters from the Contractor's solicitor dated April 29, 2003 and May 2, 2003, and in a letter from the Contractor to the City dated May 21, 2003. A copy of each letter is attached hereto;
(b) All expenses and claims of Subcontractors arising out of or relating in any way to paragraph 11.2 (c) of the General Conditions of the Contract, including without limitation all expenses and claims of Aqua Dam and Diversion Ltd.
(c) All costs over and above those which the Contract requires the City to pay that may be incurred by the Contractor as the result of its use of a Subcontractor known as "Porta Dam Inc.", or its use of any other Subcontractor.
...
4. Upon payment of the $200,000.00 by the City as stated in paragraph 2(a)(i) and upon the City meeting its obligation to hold $50,000.00 in a bank account if required pursuant to paragraph 2(a)(ii), the Contractor shall indemnify, defend, and save harmless the City, its officers, employees, agents, and elected officials of and from any and all manner of actions, cause and causes of action, suits, debts, sums of money, expenses, damages, costs (including solicitor and client costs), claims, and demands of any and every nature whatsoever at law or in equity or under any statute, arising from or connected in any way to paragraph 11.2 (c) of the General Conditions of the Contract, brought against the City by a Subcontractor, or former Subcontractor, including without limitation Aqua Dam and Diversion Ltd. or any of its affiliates by August 30, 2005.
...
5. The Contractor agrees that the consideration granted by the City in this Settlement Agreement is not deemed or interpreted to be an admission of liability on the part of the City.
6. This Settlement Agreement does not replace the Contract. The Contract, including all Change Orders, remains in force in accordance with its terms and is not modified by this Settlement Agreement, except to the extent provided herein.
...
[9] The release in Exhibit A-8 by the Contractor (the Appellant) to the City in consideration of the $200,000 is from all claims identified in the letters described in subparagraph 3(1)(a) which are part of Exhibit A-8. The letter of April 29, 2003 claims a breach of the insurance clause on page 2. The letter of May 2, 2003 claims that breach again on pages 1 and 2. The letter of May 21, 2003 merely details the damage claim, but does not specify the source for its recovery.
[10] The result is that the payment to the Appellant of the $200,000 in question was a payment for breach of the contract exhibited as R-1, which arose when the City did not insure with a third party pursuant to subparagraph 11.2(c).
[11] Thus, the $200,000 falls within the provisions of subsection 182(1).
[12] For this reason, the appeal is dismissed.
Signed at Kelowna, British Columbia, this 7th day of February, 2007.
"D.W. Beaubier"
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