Citation: 2006TCC63
Date: 20060127
Docket: 2003-4048(GST)G
BETWEEN:
LES PROMOTIONS D.N.D. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre Proulx J.
[1] This is an appeal
from a reassessment for the period from December 1, 1997, to November 3, 2001.
[2] The issue is
whether certain activities of the appellant are in the nature of financial
services. Did the appellant arrange for a service referred to in one of
paragraphs (a) to (i) of the definition of
“financial service” in subsection 123(1) of the Excise Tax Act
(the “Act”)?
[3] For the appellant,
the issue arises in connection with a claim for an input tax credit (“ITC”).
According to subsection 169(1) of the Act, the input tax credit is based
on the use in the course of commercial activities of the goods or services
acquired.
[4] The meaning of
“commercial activity” in subsection 123(1) of the Act excludes an exempt
supply. According to this same subsection, an exempt supply is a supply
included in Schedule V of the Act. The supply of financial services is dealt
with in Part VII of Schedule V.
[5] I reproduce below
the statutory provisions that apply in this case with regard to the meaning of
“financial service”:
“financial service” means
(a)
the exchange, payment, issue, receipt or transfer of money, whether
effected by the exchange of currency, by crediting or debiting accounts or
otherwise,
(b)
the operation or maintenance of a savings, chequing, deposit, loan,
charge or other account,
(c) the
lending or borrowing of a financial instrument,
(d)
the issue, granting, allotment, acceptance, endorsement, renewal,
processing, variation, transfer of ownership or repayment of a financial
instrument,
(e)
the provision, variation, release or receipt of a guarantee, an acceptance
or an indemnity in respect of a financial instrument,
(f) the
payment or receipt of money as dividends (other than patronage dividends),
interest, principal, benefits or any similar payment or receipt of money in
respect of a financial instrument,
(f.1) the
payment or receipt of an amount in full or partial satisfaction of a claim
arising under an insurance policy,
(g)
the making of any advance, the granting of any credit or the lending of
money,
(h) the
underwriting of a financial instrument,
(i) any
service provided pursuant to the terms and conditions of any agreement relating
to payments of amounts for which a credit card voucher or charge card voucher
has been issued,
(j)
the service of investigating and recommending the compensation in satisfaction
of a claim where
(i) the
claim is made under a marine insurance policy, or
(ii) the claim is made under an insurance policy that is not in
the nature of accident and sickness or life insurance and
(A) the service is supplied by an insurer or by a person who is
licensed under the laws of a province to provide such a service, or
(B) the service is supplied to an insurer or a group of insurers by
a person who would be required to be so licensed but for the fact that the
person is relieved from that requirement under the laws of a province,
(j.1) the
service of providing an insurer or a person who supplies a service referred to
in paragraph (j) with an appraisal of the damage caused to property, or
in the case of a loss of property, the value of the property, where the
supplier of the appraisal inspects the property, or in the case of a loss of
the property, the last-known place where the property was situated before the
loss,
(k) any
supply deemed by subsection 150(1) or section 158 to be a supply of a financial
service,
(l)
the agreeing to provide, or the arranging for, a service referred to in
any of paragraphs (a) to (i), or
(m) a
prescribed service,
but
does not include
. . .
(t) a
prescribed service.
[6] Subsection 4(2) of
the Financial Services (GST/HST) Regulations (the “Regulations”) reads
as follows:
4. (1) In
this section,
. . .
(2) Subject to subsection (3), the
following services, other than a service described in section 3, are prescribed
for the purposes of paragraph (t) of the definition "financial
service" in subsection 123(1) of the Act:
(a) the
transfer, collection or processing of information, and
(b) any administrative service, including an
administrative service in relation to the payment or receipt of dividends,
interest, principal, claims, benefits or other amounts, other than solely the
making of the payment or the taking of the receipt.
[7] The facts on which
the Minister of National Revenue (the “Minister”)
relied in making his reassessment are set out in paragraph 21 of the Reply
to the Notice of Appeal (the “Reply”):
[TRANSLATION]
(a) the Appellant is a registrant for the
purposes of Part IX of the Excise Tax Act, R.S.C. 1985, c. E‑15
(hereinafter the “E.T.A.”), and submits its returns quarterly;
(b) during the period in question, the
Appellant claimed and obtained ITCs totalling $187,670.00,
which corresponds to the whole of the GST paid on the goods and services
acquired by the Appellant in the course of its business;
(c) the audit conducted by the
Minister showed that the business carried on by the Appellant is not carried on
in its entirety within the framework of commercial activities;
(d) indeed, the business carried on by the
Appellant involves the provision of services consisting in the solicitation of applications
for the credit cards of financial institutions and major stores, these being supplies
considered to be exempt under the E.T.A., and the provision of long-distance
and sub-contract services, which supplies are considered to be taxable under
the E.T.A.;
(e) the supplies made by the Appellant during
the period in question were accordingly analysed by the Minister to determine
the amount of taxable supplies and the amount of exempt supplies;
(f) following the calculation of the amount
of the exempt supplies made by the Appellant during the period in question,
adjustments of $166,312.07 to the ITCs claimed and initially obtained were
made in calculating the Appellant's net tax on the ground that the goods and
services were not acquired in the course of commercial activities;
(g) following the analysis of the Appellant’s
supporting documentation, adjustments of $523.46 were made to the ITCs in
calculating the Appellant's net tax on the ground that the Appellant was not the
recipient of the goods.
[8] The facts set out
in the Notice of Appeal are as
follows in paragraphs 3, 4, 7, 10, 11 and 12:
[TRANSLATION]
3. The Appellant is a company incorporated
under the Quebec Companies Act for the exclusive purpose of providing
marketing and promotion services to financial institutions and to businesses
providing credit-card-issuing services within the province of Quebec.
4. The Appellant’s activities are as follows:
(a) using its employees to distribute
applications for credit cards in a specific location;
(b) placing certain employees in shopping
centres in order to promote the acquisition of a particular credit card;
(c) having the potential client complete the
credit card application form handed to him or her by the Appellant;
(d) once the form is completed by the
potential client, forwarding the form to the Appellant’s client for a decision on
whether or not to issue the credit card;
(e) the Appellant makes no decision as to
whether or not to approve credit;
(f) the Appellant has no decision-making
power respecting acceptance of an application and makes no recommendation in
this regard.
. . .
7. On or about December 16, 2002, the
Appellant forwarded to the Quebec Department of Revenue a notice of objection
to this notice of assessment, asking the Quebec Department of Revenue to cancel
the assessment for the reasons given below:
“Furthermore, we made a request in July 2000 through the Canadian
Federation of Independent Business to the tax accounting unit to find out
whether we should invoice our clients for GST and describing in detail the type
of activity we carried on for our clients, and that unit clearly replied to us
(see copy of document attached) that we must indeed bill for the taxes (GST and
QST) on our services and that we were consequently entitled to claim our
inputs.
In short, we are firmly convinced that the status of ‘financial services business’
which the Department has given us clearly does not reflect reality because, as
we said earlier, we do not perform any function that can be considered to be a
‘financial service’. We therefore simply request
that the Department cancel assessment notice No. 5770891 and refund to us in
full the amounts that have already been paid.”
. . .
10. The Appellant has always acted
diligently and reasonably in applying the Act and in July 2002 even made a
request for an interpretation to the GST/QST Accounting Service through the
Canadian Federation of Independent Business.
11. The purpose of this request
was to obtain clarification of the Appellant’s situation, namely to determine
whether it should invoice its clients for GST and whether it could subsequently
claim input tax credits for the GST it had paid on the costs and expenditures
it incurred in providing services to its clients.
12. On August 16, 2000, the Department of
Revenue sent a written decision stating that the services provided by the
Appellant were taxable services and that the Appellant could thus claim tax
refunds (ITC).
[9] The auditor, Ngoc Ha Duong, was the first
witness for the Appellant. His report was filed as Exhibit A‑1. He
refused the claim for an input tax credit for the goods or services required in
order to make an exempt supply. He explained that he had concluded that the
Appellant’s services were exempt supplies because they were included in the
definition of “financial service” in subsection 123(1) of the Act. He
considered in this regard Policy Statement P‑239, filed as Exhibit A‑2,
especially the passage thereof entitled “Elements of an Arranging For Service”:
To qualify as a service of "arranging
for" the supply of a financial service, each of the following
elements should be present:
·
the
intermediary will help either the supplier or the recipient or both, in the
supply of a financial service,
·
the
supplier and/or the recipient count on one or more intermediaries for
assistance in the course of a supply of a financial service, and
·
the
intermediary is directly involved in the process of the provision of a
financial service and will therefore, expend the time and effort necessary with
the intent to effect a supply of a service described in paragraphs (a) to (i)
of the definition of financial service.
. . .
[10] He explained that,
according to his assessment of the facts, the appellant acted as an intermediary between the
financial institution and the purchaser in the supply of a financial service.
He referred to certain contracts between the appellant and the financial
institutions, including that with the Royal Bank of Canada (Exhibit A‑3)
and that with the Bank of Montreal (Exhibit A‑4).
[11] A letter from the appellant dated March 25,
2002, addressed to Mr. Duong (Exhibit A‑5) indicates that from
December 1, 1997, to November 30, 2001, it had seven clients. In addition to
those mentioned above, it had agreements with some major stores and with other
banks.
[12] Diane Nantel, the president of the appellant,
was the next witness for the appellant. She explained that the appellant was an
agency that, since 1989, had acted as an intermediary for banks or retailers in
promoting credit cards in public places such as shopping centres, fairs and
exhibition sites. Applicants were given a form and were told about the benefits
of the card; they then completed the form and were given a bonus gift. The appellant ensured
that the form was correctly completed and that it contained all the information
required, but it did not conduct the credit checks.
[13] The methods of
remuneration could depend on the actual number of applications or on the number
of applications accepted by the appellant’s client. In the latter case, the
client informed the appellant of the number of applications accepted and the appellant
invoiced the client accordingly. In either case, the appellant’s invoice
included an amount of tax.
[14] In 2000, at the
suggestion of her accountant, the president of the appellant made an inquiry of
the Canadian Federation of Independent Business. On July 18, 2000, the
Federation requested an interpretation from the GST/QST Accounting Service of
Revenu Québec (Exhibit A‑6).
[15] A reply dated August
16, 2000, was sent to the Canadian Federation of Independent Business
(Exhibit A‑7).
[16] This letter reads as
follows:
[TRANSLATION]
Dear Madam,
This is in response to your
letter dated July 18 concerning the soliciting and promotion services provided
by businesses belonging to your organization. You submitted the situation
described below.
A business providing solicitation/promotion
services receives a contract from a financial institution or a business
offering credit cards such as Visa, Master Card, the Hudson Bay Company or
Canadian Tire. The employee of the soliciting business must approach
individuals in various public places, such as shopping centres, to invite them
to apply for whatever credit card is being offered.
As part of his or her work, the employee,
in addition to soliciting potential clients, must fill out the applications and
return them, duly completed, to the financial institution or the credit company
concerned.
The soliciting business does not carry
out any credit check or give credit approval or make any promise to the
potential client.
The services rendered by the soliciting
business consist in the supply of a service that is taxable for GST and QST purposes,
regardless whether the services in question were provided to financial
institutions or commercial businesses.
Moreover, the soliciting business may
claim input tax credits (ITC) and input tax refunds (ITR) for the GST and QST
paid respectively on the acquisition of the goods and services used, consumed
or supplied in the course of its commercial activities.
The preceding comments constitute our
general opinion on the subject of your letter. Our interpretation could be
different if proposed or future amendments were made to the legislation. These
comments are not rulings and, in accordance with the guidelines in the GST/HST
Memoranda Series 1.4, they are not binding on the Department in respect of
any particular situation.
We hope these comments will answer all
your questions. Should you require further information, please do not hesitate
to contact us again.
[17] The president of the
appellant stated that she could have accepted a change in the Minister’s
position, but not one that was retroactive. Once the Minister informed her that
she was providing an exempt supply, she stopped charging the tax.
[18] The assessment dated
October 22, 2002, was filed as Exhibit A‑8. The total of the input tax
credits claimed from the taxpayer was $166,835.53 plus interest of
$17,874.07 for a total of $184,709.60. The period covered extended from
February 1998 to November 2001. The president of the appellant asserted that
for a small business like hers such an assessment was too onerous.
[19] On re-examination
concerning the letter dated August 16, 2000, the auditor stated that he felt
that there were some distinctions to be made between the activities described
in the letter from Revenu Québec and those carried on by the appellant. In any
event, he considered the letter to be incorrect.
[20] The date on which
Policy Statement P‑239 was issued was January 30, 2002.
Arguments
[21] Counsel for the appellant
referred to the decision on an objection dated August 11, 2003 (Exhibit A‑10),
which reads as follows:
[TRANSLATION]
. . .
the assessment was issued in accordance
with the provisions of the Act, in particular, but without restricting the
generality of the foregoing, in that the adjustments of $166,835.53 in
respect of the period from 1997‑12‑01 to 2001‑11‑30
were made correctly in accordance with the provisions of section 169 and
paragraph 123(1)(l) of the Excise Tax Act. Of these amounts, the
input credits of $166,312.07 were refused since the service of soliciting
clients and promoting credit cards provided by Les Promotions D.N.D. Inc. to
financial institutions and stores is covered by the meaning of the expression
“arranging for” in paragraph (l) of the definition of “financial
service” in subsection 123(1) of the Excise Tax Act. The supply is an
exempt supply.
[22] Counsel wondered
whether the Minister did not have a duty to indicate with which of paragraphs (a)
to (i) paragraph 123(1)(l), under which the appellant was
assessed, is linked.
[23] Counsel referred to
paragraph 123(1)(t), which excludes prescribed services from the
definition of “financial service”. He suggested that the services provided
by the appellant were in the nature of data collection or administrative
services.
[24] He asserted that the
services provided by the Appellant were in the nature of collection or
processing of information or administrative services.
[25] He also submitted
that a person who provides a financial service is a person who may influence
the process. The appellant was not a person who arranged for the granting of
credit.
[26] Concerning the
remark made by counsel for the appellant that the assessment did not specify
which of paragraphs (a) to (i) came into play, counsel for the respondent
stated that in both the audit report and the Reply, reference is made to
credit-granting activities. It was subsection (g) that was involved.
However, the assessment was based on subsection (l).
[27] Counsel for the
respondent admitted that the letter dated August 16, 2000, and the Policy
Statement dated January 30, 2002, were contradictory, but she asserted that an
interpretation made by an official is not binding on the Minister and cannot be
contrary to the Act. The Court’s role is to interpret the Act. Counsel relied
in this regard on the decision of Judge Sarchuk of this Court in Panar v.
Canada, [2001] T.C.J. No. 233 (QL).
[28] Counsel for the
Respondent argued that the service provided by the appellant was much more than
the mere collection of data. It included solicitation and preparing a properly
completed application form. It was at this stage that the appellant was
involved. It was an important service provided by the appellant as intermediary
between the recipient of the financial service and the supplier thereof. The
client’s application was essential for the conclusion of a credit contract.
Analysis and conclusion
[29] With respect to the
first point made by counsel for the appellant, it is my opinion that it is a
point that causes uncertainty as to the facts and should have been raised by
some means prior to the hearing. If it is a point of law, it should have been
mentioned in the pleadings as a legal argument.
[30] In my opinion, the
facts in this case and the basis for the assessment were clearly set out both
in the pleadings and in the evidence at the hearing itself. Nevertheless, I
consider it preferable to explicitly link paragraph (l) in the
definition of “financial service” to one of paragraphs (a) to (i)
describing such services.
[31] Concerning the
existence of the letter setting forth a different interpretation from that
which was applied in the assessment, regrettable though that is, I agree with
counsel for the respondent’s argument that this Court is not bound by
administrative interpretations of the Act. Because of this letter, counsel
asked this Court to cancel the interest and penalties. The assessment does not
include any penalties. With respect to the interest, the Act does not confer on
this Court any discretion to cancel all or part of the interest. Only the
Minister has this power under section 281.1 of the Act.
[32] Regarding the
application of subsection 4(2) of the Regulations, it seems sufficiently
clear to me that the services provided by the appellant are not in the nature
of the collection or processing of information, or of administrative services.
[33] We come now to the
meaning to be given to the expression “arranging for”. The expression used in
the French version of the Act is “prendre les mesures en vue de l’effectuer”.
[34] In the British
legislation, the original expression was “the making of arrangements”. It is
interesting to note that in 1999, this provision was amended to read “the
provision of intermediary services . . . by a person acting in an intermediary
capacity”, both of which expressions were subsequently defined as follows in Value
Added Tax Act 1994:
(5) For the purposes of item 5
"intermediary services" consist of bringing together with a view to
the provision of financial services—
(a) persons who are or may be seeking to
receive financial services, and
(b) persons who provide financial
services,
together with (in the case of financial
services falling within item 1, 2, 3 or 4) the performance of work
preparatory to the conclusion of contracts for the provision of those financial
services, but do not include the supply of any market research, product design,
advertising, promotional or similar services or the collection, collation and
provision of information in connection with such activities.
(5A) For the purposes of
item 5 a person is "acting in an intermediary capacity" wherever
he is acting as an intermediary, or one of the intermediaries, between—
(a) a person who provides financial
services, and
(b) a person who is or may be seeking to
receive financial services.
[35] Paragraph (l)
of the definition of “financial service” refers to two situations: the act
of agreeing to provide a service and the act of arranging for a service. It is
my view that the first situation concerns the person who, in the final
analysis, provides the service. The other situation concerns intermediary
persons.
[36] A person who agrees
to provide a service described in one of paragraphs (a) to (i)
may contract with the person acquiring the service without having to use
intermediaries. In the field of financial services, however, there are often
intermediaries. We need only think of brokers, insurance agents, etc. These
intermediaries may act for the seeker of a financial service or for the service
provider. They are, within the meaning of paragraph (l) of the
definition of “financial service”, the persons who arrange for a financial
service.
[37] The services
provided during the transition between the acquisition of the service and the
provision of the service sought are exempt, provided that they are linked in
their purpose. Thus, in this case, between the person obtaining credit and the
financial institution granting it there is an intermediary, and that is the appellant.
The appellant’s services are an integral part of the business of the person
agreeing to provide the service of granting credit.
[38] For all these
reasons, the appeal must be dismissed. In the circumstances of this appeal, I
do not award any costs.
Signed at Ottawa, Canada, this
27th day of January 2006.
“Louise Lamarre Proulx”
on this 16th day
of April 2007.
Erich Klein, Revisor
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