Citation: 2007TCC223
Date: 20070504
Docket: 2005-2981(GST)I
BETWEEN:
GIN MAX ENTERPRISES INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] This is an appeal under the Excise Tax Act (the “Act”) for the
period of September 1, 1999 to November 30, 2001. The Minister of National
Revenue (the Minister) reassessed the Appellant in the amounts of $90,324.64
for tax, $5,522.57 in interest, and a $7,546.60 penalty.
[2] The Appellant
was in the business, amongst other things, of collecting residential curbside
garbage in the New Brunswick municipalities (the “Municipalities”) of Quispamsis,
Grand Bay-Westfield, and Rothesay.
It collected Harmonized Sales Tax (HST)
on the garbage collection portion of its billing to homeowners, but not on the
“tipping fees”
imposed by the provincially owned and operated landfill facilities. Each municipality
used the local Crane Mountain Landfill owned and operated by Fundy Region Solid
Waste Commission (Fundy), which was created by the Province of New
Brunswick to operate a solid waste
facility. Fundy charged a tipping fee for persons who wished to dispose of
garbage at Crane Mountain; for small loads such as a few bags of garbage, a per
bag charge was levied; for larger loads, the charge was based on weight and
type of garbage. Local residents could either take their garbage to Crane Mountain
or hire a private contractor, such as the Appellant, to haul it for them.
[3] Briefly the
problem is this. About two-thirds of the cost of garbage removal to the
homeowners is the tipping fee.
If a homeowner took his or her garbage in the trunk of a car to Crane Mountain and paid the tipping fee directly to Fundy, the
tipping charge was GST-exempt pursuant to either section 20 or section 21 of
Part VI of Schedule V (section 21/VI/V) of the Act. When the
Appellant delivers a resident’s garbage and pays the tipping fee, the Minister
states that this is a supply of an entire service including the curbside pickup
and is not HST-exempt.
[4] The Appellant
filed a typical customer invoice that includes:
|
Quispamsis
|
Price
|
HST
|
Total
|
|
|
|
|
|
|
Landfill
Charge
|
$134.50
|
$0.00
|
$134.50
|
|
Garbage
Collection
|
$50.00
|
$7.50
|
$57.50
|
|
Total
|
|
|
$192.00
|
[5] Counsel for the
Appellant described the facts concisely as follows:
Gin Max is a
private hauler engaged in the disposal of solid waste which it collects from
residents of the municipalities which it serves. The Appellant billed homeowners
for this disposal service and the invoice broke the services into two
components: garbage for collection and tipping fees. The Appellant charged
sales tax on the collection service but not on the tipping fee.
[6] James
D’Entremont was the Appellant’s only witness. He was the Appellant’s general
manager during the relevant period and worked with the company for over 30
years. He stated that Fundy charged the Appellant a tipping fee for each truck
of refuse at Crane Mountain, based on the tonnage of garbage. Using
estimates from previous years, the Appellant would calculate the average fee
for each customer without regard to the actual amount collected at each
curbside; the Appellant charged the same tipping fee to each customer on the
route. Mr. D’Entremont testified that the Appellant did not have any
contracts with any of the Municipalities.
[7] The Respondent
called three witnesses: Michael Brennan, Bruce Gauld and Allison Walker.
Michael Brennan, a certified general accountant, was the Chief Administrative
Officer for the Town of Quispamsis during the relevant time period. He testified that
the Town did not have a budget for garbage collection and it did not enter the
garbage business as it was not financially feasible. Bruce Gauld, a
professional engineer, was the Works Commissioner for the Town of Grant Bay‑Westfield. He also testified that his Town was not involved in
the garbage collection or disposal business and there was no allocation in the
Town’s budget for such services. Allison Walker, a chartered accountant, is the
chairman for Fundy. Mr. Walker was referred to documents that were not prepared
by him since he was not employed by Fundy during the relevant time period. At
best, his testimony corroborated much of Mr. D’Entremont’s testimony. On
cross-examination, he made it clear that residents of the Municipalities cannot
choose to dump their garbage somewhere other than Crane Mountain.
Legislation
[8] Section 21/V/VI
of the Act states:
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.
[9] Before analyzing
the positions of the respective parties, it should be noted that in the Notice
of Appeal the Appellant had argued that it was the agent of either Fundy, the
Municipalities, or the resident customers. These arguments were made in an
attempt to fit the Appellant’s supply under the exemptions in paragraphs 20(h)
or 20(i) of Part VI of Schedule V of the Act, which only applies
to supplies made by a government or municipality, or a board, commission or
other body established by a government or municipality. At trial, it appeared
that the Appellant correctly abandoned this argument. I need only to rely on Glengarry
Bingo Association v. R.
Amongst other
defects, there was never any consent
provided by the Municipalities, Fundy, or the residential customers, to the
Appellant to act as agent on their behalf.
The
Appellant’s Position
[10] The Appellant
contends that it rendered an exempt service under section 21/VI/V of the Act,
as regards to the tipping service it provided to its customers. The Appellant
argues that it was supplying a non-optional, basic municipal service to the
residents of the Municipalities on behalf of the Municipalities. The Appellant
submits that had the customers gone directly to Fundy and tipped the garbage,
they would not have to pay sales tax. The Appellant notes that ultimately, the
residents would have to pay the sales tax on dumping if the Appellant has to
pay because that charge would be passed on to them.
The
Respondent’s Position
[11] The Respondent
submits that the Appellant was making a single supply of a garbage collection
service; it was not making a supply of a right to deposit refuse, either as an
agent, or otherwise. The Respondent contends that the tipping fee portion of
the bill was simply an element of the overall supply and not a stand alone
supply.
[12] The Respondent adds
that the garbage collection service was not exempt under section 21/VI/V of the
Act because the supply was made by the Appellant on its own behalf and
not on behalf of the municipality; as well, the residential clients had an
option not to receive the service.
[13] The issues to be decided are:
(a) Whether the garbage collection
and disposal are two elements of the same single supply or are they two
distinct supplies?
(b) Whether
the exempting provision in 21/V/VI of the Act applies?
Analysis
(a) Whether the garbage collection
and disposal are two elements of the same single supply or are they two
distinct supplies?
[14] At paragraph 9(x)
of the Reply, the Minister makes the assumption of fact that “the Appellant’s
service was a single, indivisible service” and contends that the different
elements of the Appellant’s service are so closely connected to each other as
to constitute a single and integrated supply. Subsection 123(1) of the Act
defines a “supply” as:
"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;
[15] There is a mountain
of jurisprudence on the question of a single supply, which is essentially a
combination of property or services considered all to be one supply. The decision of Rip J. in O.A. Brown Ltd.
v. Canada
is of assistance. The Appellant bought livestock for customers on its own
account and charged them a commission and disbursements in addition to the cost
of the livestock it had sold to them. The following lengthy analysis of Rip J. is
helpful in deciding if the garbage disposal was a single supply or two separate
supplies.
In
deciding this issue, it is first necessary to decide what has been supplied as
consideration for the payment made. It is then necessary to consider whether
the overall supply comprises one or more than one supply. The test to be
distilled from the English authorities is whether, in substance and reality,
the alleged separate supply is an integral part, integrant or component of the
overall supply. One must examine the true nature of the transaction to determine
the tax consequences. The test was set out by the Value Added Tax Tribunal
in the following fashion:
In our opinion,
where the parties enter into a transaction involving a supply by one to
another, the tax (if any) chargeable thereon falls to be determined by
reference to the substance of the transaction, but the substance of the
transaction is to be determined by reference to the real character of the
arrangements into which the parties have entered.
One
factor to be considered is whether or not the alleged separate supply can be
realistically omitted from the overall supply. This is not conclusive but is a
factor that assists in determining the substance of the transaction. The
position has been framed in the following terms:
What should
constitute a single supply of services as opposed to two separate supplies, is
not laid down in express terms by the value added tax enactments. It would
therefore be wrong to attempt to propound a rigid and precise definition
lacking statutory authority. One must, it seems to us, merely apply the
statutory language, interpreting its terminology, so far as the ordinary
meaning of the words allows, with the aim of making the statutory system of
value added tax a practical workable system. For this purpose one should look
at the degree to which the services alleged to constitute a single supply are
interconnected, the extent of their interdependence and intertwining, whether
each is an integral part or component of a composite whole. Whether the
services are rendered under a single contract, or for a single undivided
consideration, are matters to be considered, but for the reasons given above
are not conclusive. Taking the nature, content and method of execution of the
services, and all the circumstances, into consideration against the background
of the value added tax system, particularly its methods of accounting for and
payment of tax, if the services are found to be so interdependent and
intertwined, so much integral parts or mere components or items of a composite
whole, that they cannot sensibly be separated for value added tax purposes into
separate supplies of services, then Parliament, in enacting the value added tax
system, must be taken to have intended that they should be treated as a single
system, otherwise, they should be regarded for value added tax purposes as
separate supplies.
The
fact that a separate charge is made for one constituent part of a compound
supply does not alter the tax consequences of that element. Whether the tax is
charged or not charged is governed by the nature of the supply. In each case it
is useful to consider whether it would be possible to purchase each of the
various elements separately and still end up with a useful article or service.
For if it is not possible then it is a necessary conclusion that the supply is
a compound supply which cannot be split up for tax purposes.
[16] The approach taken in O.A. Brown was expressly
followed by the Federal Court of Appeal in Hidden Valley Golf Resort Assn. v. R.
and there are numerous Tax Court decisions on this issue.
[17] As well, the Canada Revenue Agency’s position, while
not binding on me, is helpful. It is set out in P-077R2 and states in
part:
… two or more
elements are part of a single supply when the elements are integral components;
the elements are inextricably bound up with each other; the elements are so
intertwined and interdependent that they must be supplied together; or one
element of the transaction is so dominated by another element that the first
element has lost any identity for fiscal purposes.
When performing
an analysis, it is important that the analysis be confined to the transaction
at issue, rather than referring to other possible transactions containing the
same or similar elements. This process should not involve artificially
splitting something that commercially is a single supply. Moreover, when
examining an agreement, it should not be viewed in isolation. Rather, it must
be examined in the context of other factors such as the intent of the parties,
the circumstances surrounding the transaction, and the supplier's usual
business practices. It may be appropriate in some cases to discount the terms
of an agreement if they do not reflect the reality of the transaction.
[18] From a review of
the case law, the question of whether two elements constitute a single supply
or two or multiple supplies requires an analysis of the true nature of the
transactions and it is a question of fact determined with a generous
application of common sense. It must be considered whether in substance and
reality the collection and disposal service are so intertwined and
interdependent that they must be supplied together. Justice Hershfield clarified
these considerations in 1219261 Ontario Inc.:
As recognized
by the English authorities cited in O.A. Brown Ltd., it would, lacking
statutory authority, be wrong to attempt to propound a rigid and precise
definition of a single (compound) supply. Factors include: the degree of
interconnectedness of constituent elements of a supply; the extent of
interdependence; and, whether each is an integral part or component of a
composite whole. Whether the services are rendered under a single contract, or
for a single undivided consideration, are matters to be considered but are not
conclusive. How can they be? To so find would mean the Minister could never
assess a separate taxable supply where it is coupled with a non-taxable supply
under one contract at one price.
[19] Similar to tests in Wiebe
Door Services Ltd. v. M.N.R., regarding the classification of an
employee or independent contractor relationship, no one test is conclusive and
this Court must examine and weigh all of the evidence.
[20] The fact that the Appellant separates the garbage
collection and disposal services in the invoices to the residential customers
is certainly not determinative. I must look to the question of whether the
supplies are so inextricably linked and interdependent that they constitute a single
supply. Having said that, the separation of the two services, in the invoices, is
one indicia of having separate supplies, albeit a weak one.
[21] The important test enunciated in O.A.
Brown asks whether it is possible or realistic to omit one component from
the overall supply. From the evidence, it is clear that to do the job intended
by the parties, the tipping or disposal service cannot be realistically offered
independently from the collection service.
[22] The Appellant did not offer the residential
clients the option of providing only one of the services, be it the collection or
disposal. It is does not make sense for a customer to ask for a tipping service
without the collection service. In essence, the only service offered was the entire
package. In conclusion, I find that the collection and disposal of garbage was
one supply. It is unnecessary to
determine whether one of those supplies is incidental to the other such that it
may be deemed to form part of a single supply pursuant to section 138 of the Act.
(b) Whether
the exempting provision in 21/V/VI of the Act applies?
[23] For section
21/V/VI exempting provision to apply to the Appellant, it must satisfy five
essential elements within the provision:
(i) There must be a supply;
(ii) The supply must be that of a
municipal service;
(iii) The supply must be made to
the owner or occupant of real property situated in a particular geographic
area;
(iv) The supply must be made “by or
on behalf of” a government or municipality; and
(v) The service must be one which
the occupant has no option to receive.
Only
the last two elements of the test are in dispute.
[24] For the reasons that follow I find that the supply was not made on behalf of a municipality.
[25] The June 2003
Technical Notes are helpful:
Under
restructured section 21, the second type of supply dealt with under the
section, namely a supply of a municipal service made by a person other than the
municipal authority, is referred to in subparagraph (a)(ii). This addresses
a situation where a person, such as a private sector company, acts as the legal
supplier in delivering the service to municipal residents, but does so "on
behalf of" the municipal authority in the sense that the provision of the
service would otherwise fall within the mandate of the municipal authority to
ensure that residents of its jurisdiction have access to that service. The
reference to the service being supplied "on behalf of" the municipal
authority thus qualifies the nature of the service covered by the provision.
[emphasis
added]
[26] “On behalf of” is
certainly broader than "agency" which was referred to earlier. The
representatives from both the Town of Quispamsis and Grand Bay-Westfield testified that they did not
have a garbage collection program, or any budgetary allocation for such a
program. As well, the Municipalities Act is permissive in nature as the
municipalities “may” provide a garbage service. None of the municipal
authorities had legal contracts or written agreements that the Appellant would
provide garbage collection services on behalf of the Municipalities for
ordinary curbside garbage collection.
There were no letters specifying the services to be provided. The bylaws did
not prevent individuals from bringing their own garbage to the landfill if they
chose to. In fact, some municipal residents did take their garbage to Crane Mountain. Grand-Bay Westfield had no bylaw regulating the
collection of garbage of any kind. As well, the Appellant contacted its
customers by its own advertising and not through or directed to by the
Municipalities.
[27] If I was wrong in finding that the Appellant did not provide a separate supply of a
disposal service, the Appellant would still fail on this ground because it did
not provide the disposal service on behalf of a government or municipality.
[28] The final
criteria the Appellant must satisfy is that it provides a service that the owner
or occupant has no option to receive.
[29] The evidence is
clear that at all times, municipal residents had the option of taking their
garbage to Crane Mountain on their own initiative. In summary, the Appellant did
not meet the exempting provisions of Part IV of the Act. In particular,
the Appellant failed to meet the tests set out in section 20 because it is not
a municipality or other specifically established body, and it did not act as
agent for either Fundy, the Municipalities or the municipal residents. As well,
the Appellant failed to meet the tests as set out in section 21 of Part IV as
the Appellant did not act on behalf of the municipalities, and the municipal
residents are not compelled to accept a garbage collection service. Finally, in
general, the Appellant failed to demolish many of the Minister’s assumptions.
There was simply no prima facie evidence adduced by the Appellant to
rebut most of the important assumptions.
Penalties
[30] The Minister's reassessment includes a $7,546.60
penalty for the period September 1, 1999 to November 30, 2001. This was not
seriously pursued by the Respondent. I presume the penalty was imposed under
section 280 for late GST remittances. The decision of Bowman J. affirmed in Pillar
Oilfield Projects Ltd. v. R.
by the Federal Court of Appeal in Consolidated Canadian Contractors Inc.
v. R.
concluded that the penalty under section 280 is not automatic. As Bowman J.
pointed out, it would be abhorrent without any possibility of exculpating
oneself by demonstrating due diligence.
[31] I have no difficulty in concluding that the Appellant
has met the high standard of due diligence set out in Pillar Oilfield. It
is understandable that the Appellant concluded that there were two separate
supplies, (i) the collection of garbage and (ii) the disposal of it. The
decision is neither simple nor crystal clear. The interlocking sections of the Excise
Tax Act are complex. I have no difficulty in waiving the penalties.
[32] The appeal is allowed only to the extent of the
penalties. No costs are awarded as the appeal being under the informal
procedure of this Court and the GST in issue being in excess of $7,500. In all
other respects, the appeal is dismissed.
Signed at Ottawa, Canada, this 4th day of May, 2007.
"C.H. McArthur"
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