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Citation: 2005TCC128
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Date: 20050214
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Docket: 2003-2567(GST)I
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BETWEEN:
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ROBIN AEROSPACE PRODUCTS LTD.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] In reassessing the Appellant under
the Excise Tax Act for the period January 1, 1998 to
October 31, 2000, the Minister of National Revenue (the Minister)
assessed additional goods and services tax (GST) in the amount of
$97,822.22, denied input tax credits claimed in the amount of
$50,205.78 and assessed penalties and interest of $16,419.36 and
$14,622.11, respectively. The Appellant appeals from this
assessment on the basis that the services provided were
zero-rated and are not subject to GST.
[2] Bruce F.J. Cossar was the owner
and chief executive officer of Robin Aerospace Products Ltd.
(Robin) during the relevant years. He described it as a brokerage
company which provided technical services in aerospace,
engineering and marketing fields. Robin's clientele included
American manufacturers of airplane components who wished to be
represented in Canada. In some instances, Robin acted as an agent
"where we would bring a company into Canada" which
subsequently formed a contract directly with a manufacturer such
as Bombardier Canada (Bombardier). In other instances, Robin
would buy product from its offshore client for resale to the
military, aircraft operators or repair shops in Canada. Cossar
made specific reference to two facts: first, Robin provided
technical consulting support as part of the service and most
usually so with respect to contracts with the Canadian Air Force;
second, Robin itself does not make or adjust, manufacture, repair
or otherwise work on "hardware". This, he said, stemmed
from a "liability issue and problems in obtaining insurance
as a result of which the decision was taken that Robin was not to
be in the repair, warranty or any business in which we would
require tools or technicians who actually worked on
aircraft".
[3] Leach International of California
(Leach) and Sundstrand Corporation (Sundstrand) were competitors.
Both were corporations resident in the United States that
manufactured electrical power distribution systems and
components. The Appellant was the sole Canadian sales
representative of Leach. Its role was to introduce Leach to
manufacturers of aircraft worldwide and to obtain for Leach
contracts for the supply of parts in respect of which it was paid
a commission. This relationship had existed for some time and, as
a result, Leach had been providing electronic products to
Bombardier since approximately 1981. During the early part of the
1990s, Bombardier was in the process of developing a new aircraft
referred to as the "Global Express" which was to be
Bombardier's flagship business jet. Cossar described the
development of this aircraft as rather a unique concept.
Bombardier had decided to build an aircraft per year and
according to Cossar, the only way it would be done was if it
brought in partners. As a result it asked the suppliers to:
"actually design an entire part of the airplane. So the
airplane was broken up into nine bits, and Leach bid on the power
distribution system; Parker Hannifin, who we also represented,
did the hydraulics, flight controls; Bombardier built part of the
airplane structure in Ireland; BMW/Rolls Royce did the engines in
Germany. It was truly a global product."
The bidding began in 1993 and the formal bid occurred in 1994.
In that year, Leach and Bombardier entered into a parts contract
for the supply of an electrical power distribution system and
components (the electrical system) for that aircraft. Robin, as
part of the services it provided to Leach, was involved in the
negotiations but was not a party to the contract. The next step,
according to Cossar, was that:
"All of these companies came together in Montreal and sent the
engineers to Montreal to design the aircraft together. And that
had never been done before and was the reason we ended up getting
into the situation we were in in providing assistance for onsite
support ..."
By onsite support, the Appellant meant that it was necessary
for the partners involved to have staff at Bombardier's
facilities while the product was being designed since it was
necessary to communicate with each other to ensure that each of
their respective systems would be compatible. As a result Leach
found itself flying people to Montreal, which was where the
program commenced. Leach was aware that Robin had access to
aerospace technicians and made an arrangement in which Robin
agreed to hire on Leach's behalf two technicians, James
Whittome and Robert Lorencz, specifically for the Global Express
project. Their functions were to be onsite and to attend and
record meetings where decisions of interface were being
considered. When the design was completed in 1996, production of
the aircraft began in Toronto. Whittome and Lorencz remained on
staff since both had the technical knowledge required to report
to Leach if there were any problems such as a defect in the
product, improper installation or improper testing.
[4] During the 1996-2000 period, the
construction of the aircraft was carried on by Bombardier in
Toronto. Leach's contract was to provide a certain number of
components each week during the production cycle. In 1996, Leach
had begun to deliver the first hardware to the program but at
some point in that year, it became apparent that it was in
financial difficulty and was substantially over its planned
budget. As a result, it sold the technology and the Bombardier
contract to Sundstrand and it continued to deliver the electrical
system. When delivered by Sundstrand, it became Bombardier's
"responsibility to take the product, put it in the aircraft,
hook it up, test it, and decide whether it's acceptable for
use". The Bombardier contract was very specific with respect
to the delivery process. Cossar described it as follows:
"They would physically accept the product into their facility,
and they set up a line here in Toronto at DeHavilland to build
these aircraft, and you would get a crib where your product would
get delivered to. But Bombardier was not accepting the product;
they were just allowing you to deliver it in a crib. And then,
when they drew that product out of the crib and installed it on
an airplane, they would then do what's called an
'Acceptance Test Procedure', which is a formal document
which is part of the contract which says when I turn this piece
of machinery on, it's going on, it's going to react in
the following way which we can observe. And having passed the
Acceptance Test Procedure then the Quality Assurance people would
sign off on the document which would end up somewhere in the
administrative system and you'd get paid. So a sale occurred
whenever Bombardier accepted the product as having met
specification."
As the supplier of the electrical system, Sundstrand set out
the Acceptance Test Procedures (ATPs) for the system and
submitted them to Bombardier. These documents meant that if the
product was subjected to the test outlined therein and was
accepted by Bombardier as sufficient for its purposes, that would
constitute compliance with the contract terms. All responsibility
for following the prescribed testing procedures was that of
Bombardier. If the test was satisfactory, Bombardier's
Quality Assurance people would sign off on the contract and at
that point would accept the product. If a part failed the test, a
Bombardier technician removed it from the aircraft and wrote up a
report. Whittome or Lorencz would also write a report and forward
it to Sundstrand. They were not authorized by Sundstrand and they
were not authorized by Sundstrand to work on the aircraft or on
any of the components being installed. In fact, Cossar stated
they would be fired if "they ever touched someone else's
product because our liability was too much. In addition to which
they were not authorized to work on any of the parts".
[5] The Whittome and Lorencz contracts
were with Robin because it had a contract to represent Leach in
Canada and thus if Leach wanted to do anything here, it was
necessary for it to work through Robin or it "would be in
breach of that contract". Cossar maintained that the
original arrangement was nothing more than a service to
accommodate Leach and was done solely because Robin had a
substantial revenue stream from it and agreed to provide the two
individuals on the basis that Leach would decide "what you
want to pay them and you can interview them and you can direct
them". Robin invoiced Leach for the subcontractors for their
hourly wages plus expenses and other direct costs including
Worker's Compensation and overhead charges. When Sundstrand
took over the project, it asked Robin whether they could keep
Whittome and Lorencz and, Cossar said, "I was going to lose
them in any case, so I said, fine". According to Cossar, the
arrangement did not change when Sundstrand took over and although
it was invoiced for the services of Whittome and Lorencz, Robin
was merely recovering its costs. He described the arrangement
as
"basically it was they got paid an hourly wage, there was a
consideration for overtime, and there was a per diem if you were
out of the country, and there was expenses if you had lunch,
whatever, and Whittome and ... would submit their expense
claims to us and their timesheet, and we would raise an invoice
based on the hours they worked, and then we would back-charge the
expenses."[1]
and maintained that Robin received no commissions from
Sundstrand but was only paid for its overhead costs relating to
the services of Whittome and Lorencz.
[6] The testimony of the
Respondent's auditor with respect to Thickson and Manojlovic
was not anticipated by the Appellant and counsel was granted
leave to re-examine Cossar. He testified that Thickson, an
engineer, was employed by Robin in the marketing department
assisting another member of the Bombardier consortium, Parker
Hannifin (Parker), a company based in Kalamazoo, Michigan.
Thickson worked for Parker which was successful in its bid for
the contract to produce the "flight controls" for the
Bombardier project. He noted that Thickson initially worked in
Canada as a "marketing person" for Parker until
"we finally got him whatever the requirement was so he could
work full-time in the States. He is now an employee of
ABEX/Parker Hannifen".[2] With respect to Manojlovic, Cossar testified
that he had been taken on to assist Leach during the design
period of 1995 and 1996 and noted that most of his work was
performed in the Leach factory in California when the prototype
electrical system was being constructed. He maintained that
Manojlovic spent approximately 95% of his time in California
"writing the ATPs and learning about the hardware and
design". To the best of his recollection, Cossar stated that
Manojlovic never worked in Montreal at any time because Whittome
and Lorencz had been retained for that specific task. His
engagement with the Appellant was terminated at some point of
time in 1998.
[7] Evidence was adduced on behalf of
the Respondent from D.M. Hutchison, an auditor with Canada
Revenue Agency. She conducted the audit in Montreal because it
was her understanding that all of the books and records were
maintained there. One of the specific items in the audit agenda
was what she described as the "Subcontract Revenue or
Management Revenue" issue. This related to transactions that
took place between Lorencz and Whittome and Robin as well as the
subsequent rebilling by Robin to Sundstrand. She testified that
"the auditor did not have general ledger printouts for each
account. Therefore, she is assuming that all credit accounts are
revenue and expenses are debits. She is also forced to allocate
the GST for the year by dividing the total GST for 1998 by
12 months". A document captioned "Subcontract
Revenue" was prepared with the objective of separating the
management revenue from the management expense and in order to do
so, she examined the general ledger accounts pertaining thereto.
In the course of the review of the 1998 year, she noted
subcontract revenue for a number of different accounts including
those of Whittome and Lorencz and two other subcontractors,
Thickson and Manojlovic.[3] All were taken into account in the Minister's
determination of the tax liability of the Appellant.[4] Hutchison made specific
reference to invoices from R. Lorencz Consulting Services and
James Whittome Consulting in which GST was charged to Robin for
services provided by them. She also noted that Robin claimed
input tax credits with respect to the GST paid to these two
subcontractors. These invoices also formed basis for her
conclusion that, absent any proof to the contrary, all of the
services in issue were performed in Canada.[5] In the course of
cross-examination, Hutchison conceded that she had no
knowledge as to where the services of the four individuals
mentioned in her working papers[6] were provided and finding no evidence to
indicate otherwise, "simply assessed the taxpayer for
services rendered to a non-resident in respect of property in
Canada as an assumption".
Appellant's submissions
[8] The Appellant contends that two
issues are before the Court. The first is whether the supply of
manpower to Sundstrand, Leach and Parker was the supply of an
advisory, consulting or professional service to a non-resident
person that is zero-rated. The second is whether the invoices
issued were for services rendered or whether they were invoices
for reimbursement of expenses incurred on behalf of non-resident
manufacturers.
[9] With respect to the first issue,
counsel argued that at all relevant times, the main aspect of the
Appellant's business was the provision of consulting and
marketing services to manufacturers of aircraft parts who wished
to sell their product in Canada. In offering such services, Robin
deliberately excluded any involvement in the manufacturing,
adjusting, repair or other work on the client's products.
This was the case with respect to the services provided by
Whittome and Lorencz which were entirely of an advisory,
professional or consulting nature. Although both were highly
trained technicians, the services they provided had absolutely
nothing to do with the development or construction of the
electrical system itself nor were they ever required to perform
any technical, mechanical or other work in relation to the
installation of the system into the aircraft. Counsel noted that
only licensed mechanics were permitted to work on aircraft or on
aircraft parts in Canada and neither Whittome or Lorencz were
licensed. As technical experts, they were the individuals who
were onsite specifically to ensure that there was technical
compliance with the detailed test procedures which were part of
the contract between Leach/Sundstrand and Bombardier. If either
one determined that the test was not done correctly, a report was
completed and forwarded directly to the manufacturer and not to
Bombardier. Furthermore, counsel noted, these two and indeed all
of the employees of Robin in this category were not allowed to
perform any work on hardware or on the aircraft upon threat of
dismissal. They had been specifically instructed that due to
ever-increasing insurance costs and the fact that the
Worker's Compensation Board did not cover them in working on
aircraft components, they were not permitted to take on any work
of any nature or do any warranty work.
[10] With respect to Thickson and
Manojlovic, counsel noted that the evidence established that,
during the relevant period of time, Thickson was working
virtually full-time in the United States and that on the
occasions when he was in Toronto, his function was marketing and
nothing more. With respect to Manojlovic, Cossar's testimony
was that he spent approximately 95% of his time in California and
his trips to Canada reflected the necessity to attend meetings as
a trouble-shooter. Given these facts, counsel argued that there
appeared to be no basis upon which a conclusion could be drawn
that either one performed any services in respect of tangible
personal property in Canada.
[11] In support of the Appellant's
position, counsel made reference to a CRA GST Policy Statement[7] in which several
sample rulings were discussed. In the first, a Canadian
GST-registered public accounting firm was retained by a
non-resident company that was the parent of a Canadian
subsidiary. The supply in issue related to an external audit of
the financial statements of the subsidiary. This audit procedure
required and included an inventory account. The GST ruling was
that the supply of the financial audit service was zero-rated
pursuant to Schedule VI, Part V, section 23 of the Act
because "the public accountant's responsibility was to
attest to the fairness, objectivity and comparability of the
financial statements and their conformity with generally accepted
accounting principals for the benefit of the owners
...". Counsel for the Appellant emphasized that the
ruling stated "that the service was undertaken, at least in
part, to fill a need or requirement related to property.
Therefore, a connection existed between the service and the
property". Notwithstanding that fact, the ruling issued was
that the service was zero-rated because "the examination of
inventory was just a part of the process. Also, the purpose of
the service was to express an opinion on the company's
financial statements, based on generally accepted accounting
principals. Therefore, the relationship between the service and
the property in inventory was not direct". Reference was
also made to a second ruling in which an accounting firm had been
retained by a non-resident parent of a Canadian subsidiary to
perform a "managerial audit". As was the case in the
previous example, this audit included an inventory count and the
ruling indicated that it was zero-rated because the relationship
between the audit service and the property was not direct.
Counsel submitted that the evidence adduced on behalf of the
Appellant clearly indicates that the four individuals involved
had never provided any services in respect of tangible personal
property related to the aircraft, the electrical system or the
flight controls. Their sole responsibility was to determine
whether test procedures which formed part of the contract with
Bombardier were properly carried out.
[12] In the event the Court concluded that
there was a service in respect of tangible property relating to
the electrical system components or any part of the aircraft
situated in Canada, then the Appellant's alternative
submission is that Robin was "nothing more than a conduit
between Whittome and Lorencz and Sundstrand, who might just as
easily have contracted with them or placed them directly on its
payroll". The Appellant concedes that it facilitated
Sundstrand by taking on the responsibility for the paperwork,
etc. in relation to these individuals but contends that
Sundstrand was not Robin's client and it did not earn
commissions from Sundstrand's sales of the electrical system
to Bombardier. Rather, they were facilitating Sundstrand with the
object of obtaining work from it in the future. In addition,
counsel noted, all Robin was doing was recovering the wages that
were being paid and additional expenses such as insurance-related
costs, overhead costs, travel, living expenses, automobile,
accommodation, etc., and the invoices for services rendered were
solely for the recovery of the actual out-of-pocket expenses
incurred on behalf of Sundstrand.
Respondent's submissions
[13] At the commencement of his submission,
counsel for the Respondent observed that the only period of time
relevant to this appeal was January 1, 1998 to December 31,
1999.[8] Although a
great deal of testimony was introduced with respect to the
relationship between Whittome, Lorencz and Robin as well as the
relationship between Robin and Leach and Sundstrand, it was
important to keep in mind that during the relevant period of
time, the relationship was solely between Robin and Sundstrand
and relates specifically to services provided during the
production stage. Furthermore, the evidence was clear that it was
an absolute requirement for the subcontractors, Whittome and
Lorencz, to be onsite during the period of time that the
equipment in issue was being installed to ensure that it was done
and tested correctly because Sundstrand maintained ownership of
the electrical system until these procedures were carried out and
Bombardier signed off. Counsel referred to the Offer of
Employment from Robin[9] that sets out in clear and unambiguous language the
duties that the individuals are required to perform. Reference
was made to subparagraph (b) which reads: "application of
technical knowledge to help solve problems, specifically
malfunctions of Principals' equipment onsite prior to
delivery to client;". Counsel argued that in order to do
that, the subcontractors may not have had to handle the tangible
personal property, i.e. the electrical system, but nonetheless
they were onsite providing a service to Sundstrand to ensure that
its interests were being represented and that the product was
being installed properly.
[14] Counsel, relying on the provisions of
paragraphs 7(b), 21 and 23(c) of Schedule VI, Part
V, "Exports", contends that in entering into contracts
with each of the four subcontractors for the provision of their
services to Sundstrand, Robin provided a service in respect of
tangible personal property situated in Canada and for that
reason, the assessment was correct.
[15] Statutory provisions:
Goods and Service Tax, Part IX, Division I
123(1) In this Part,
"service" means anything other than
(a)
property,
(b) money,
and
(c) anything
that is supplied to an employer by a person who is or agrees to
become an employee of the employer in the course of or in
relation to the office or employment of that person;
"zero-rated supply" means a supply included in Schedule
VI.
Division II, Subdivision a
165(1) Subject to this Part, every recipient of a
taxable supply made in Canada shall pay to Her Majesty in right
of Canada tax in respect of the supply calculated at the rate of
7% on the value of the consideration for the supply.
165(2) ...
165(3) The tax rate in respect of a taxable supply that
is a zero-rated supply is 0%.
Schedule VI, Part V, Exports
7 A
supply of a service made to a non-resident person, but not
including a supply of
...
(a) an
advisory, consulting or professional service;
23 A supply of an
advisory, professional or consulting service made to a
non-resident person, but not including a supply of
(a)
...
(c) a service
in respect of tangible personal property that is situated in
Canada at the time the service is performed; ...
Conclusion
[16] The issue before the Court is whether
Robin provided services to Sundstrand or to Parker in respect of
tangible personal property situated in Canada at the relevant
time. In this context, it is appropriate to consider the
contractual relationship which existed between the parties.
During the early stage of the Global Express project, the
Appellant represented Leach and Parker in Canada and on their
behalf, directed an "Offer of Employment"[10] to, in the case of
Leach, individuals with the necessary skills such as
"engineering level knowledge of primary and
secondary electrical power distribution systems for modern
aircraft, including solid state devices. (Eng. degree with three
years' related experience, or senior technician with a
minimum ten years' experience)"
The offers clearly indicate that their services would be
provided as subcontractors who would report administratively to
the Appellant but would take day-to-day directions from the
Principal with respect to duties which included but were not
restricted to the following:
(a) technical
knowledge of Principal's products through factory training on
schedule to be set by the Principal (at their expense);
(b) application of
technical knowledge to help solve problems, specifically,
malfunctions of principal's equipment on-site, prior to
delivery to client;
(c) assisting in
onsite development test plans to be reported back to the
factory;
(d) attending
planning and co-ordinating meetings representing Principal and
reporting action items arising;
(e) while
subcontractor is specifically prohibited from adjusting,
modifying, repairing or otherwise on Principals' equipment
while under agreement with RA, a hands-on knowledge of similar
equipment would be highly valuable in establishing credibility;
and
(f) providing
effective on-site troubleshooting as directed, by Principal
(within overall T & C's).
As a result, Whittome, Lorencz, Manojlovic and Thickson were
hired by Robin to provide assistance to its clients, Leach and
Parker. When Sundstrand entered the picture, Robin agreed to
provide it with the services of Whittome and Lorencz. Cossar also
noted that the Sundstrand agreement although signed in September
1998, had been in place continuously since the Leach exit, and
that the original Leach arrangement with the personnel was
documented by the Sundstrand agreement following its takeover
from Leach.[11]
[17] As a further example of the services
required of the subcontractors, reference can be made to
Sundstrand documents dated July 25, 1999 captioned
"Statement of Work for Jim Whittome/Bob Lorencz at Lucas
Aerospace".[12] In addition to confirming that one of them would be
scheduled to travel in mid-August 1999 to the Lucas plant
in England to assist with the "Global Express electrical
system test rig set up and associated efforts", the document
sets out the responsibility of the individual attending to
support the following:
·
Installation of the Hamilton Sundstrand EPDS equipment which is
made up by two Cockpit Display Units (CDU's), AC Power Center
(ACPC), DC Power Center (DCPC), APU Start Contractor Assembly,
Cockpit Circuit Breaker assembly and four Secondary Power
distribution assemblies (SPDA).
· Acceptance
test of the Hamilton Sundstrand equipment.
· Test
support.
· Repair of
equipment that results from test failures.
·
Incorporation of any field re-work orders directed by Hamilton
Sundstrand.
·
Installation of software into the CDI's, ACPC, DCPC and
SPDA's.
· Program and
install Field Programmable Gate Arrays (FPGA's) as necessary in
the CDI's, ACPC, DCPC and SPDA's.
·
Configuration management of the Hamilton Sundstrand EPDS
equipment.
· Write field
problem reports.
· Coordinate
with Hamilton Sundstrand manufacturing, Hamilton Sundstrand
program office Rockford, Bombardier Inc. design office Montreal,
Canada and bombardier Inc. flight test facility at Wichita,
Kansas.
Although Cossar maintained that the subcontractors were
limited strictly to observation and reporting to the Principal,
these documents suggest a much wider role.
[18] In the course of his testimony, Cossar
on several occasions, observed that Sundstrand's electrical
system was a very expensive product and that if the procedures
were not properly followed there could be damage both to
Bombardier's equipment as well as damage to the equipment of
the other partners and the resulting liability could be huge. He
emphasized that since Sundstrand was "doing power,
absolutely everyone of the other partners had an issue with the
power we were delivering, so you needed someone there daily to be
answering questions and going back to the factory and say, OK,
what can we do about this, how does this impact the
schedule?". While it is understandable that because of the
liability issue, the installation of the system would have been
carried out by Bombardier employees, it is equally clear that, as
Cossar noted, if the Sundstrand equipment was being installed
incorrectly, the subcontractor "might jump up and say,
don't do that". In fact, in this context he later
said:
"No. I meant they are going to offer advice, and their
job is to try and help - I mean, they are trying to sell the
product. So if it doesn't work and they say if you dust off
the cover and plug it in backwards then it might work, they would
try that. But, I mean, they're not there to take it apart and
rewire it or do any work on it."
What is quite evident from all of the testimony is that it was
necessary for Sundstrand, as well as the other partners in the
construction of the Global Express, to have personnel onsite
throughout the whole program because, as Cossar observed, during
the production period it was necessary "to have someone
onsite that could resolve an issue who wasn't just a totally
junior person that was just assisting. You needed someone there
that could actually make a decision".
[19] The Appellant also argued that it was
not Sundstrand's representative in Canada and furthermore,
that it was merely accommodating it in the hope of acquiring
further business and did not do so for the purpose of making a
profit. Whether that is correct or not is irrelevant. The
requisite services of Lorencz and the other three referred to in
the agreements as "contract employees" were provided by
Robin, as the "independent contractor" to Sundstrand[13] and with
respect to each of the employees in issue, a compensation
schedule was signed by Cliff Squires, Robin's president.[14] Furthermore,
Robin was quite careful to bill Sundstrand for amounts greater
than the subcontractors' remuneration and expenses. Cossar
referred to this as "a cost of doing business". When
asked whether there was a profit, he indicated that there may
have been, "but it wasn't - it was happenstancial". None
of the foregoing alters the fact that throughout the process,
Robin as contractor, was supplying the services for the
subcontractors in issue to Sundstrand and Parker.
[20] The Appellant's position is that the
services provided to Leach and Sundstrand are zero-rated supplies
as defined in the relevant provisions of the Act. More
specifically, it was argued that no such service was performed in
respect of tangible personal property situated in Canada as a
result of which the services provided are zero-rated and
therefore not subject to GST. Acceptance of this submission would
require the Court to give the words "services in respect
of" a markedly restricted meaning. As was noted by counsel
for the Respondent, the Supreme Court of Canada in Nowegijick
v. The Queen stated:[15]
The words "in respect of" are, in my opinion, words of
the widest possible scope. They import such meanings as "in
relation to", "with reference to" or "in
connection with". The phrase "in respect of" is
probably the widest of any expression intended to convey some
connection between two related subject matters.
I have concluded that there was substantially more than an
indirect or incidental nexus between the service provided by
Robin to Sundstrand and the tangible personal property. I refer
specifically to the role of Whittome, Lorencz and Thickson during
the Acceptance Test Procedures in respect of which Cossar's
evidence clearly established that they provided an advisory
service by way of expressing an opinion or recommending a plan or
course of action when necessary in relation to the installation
of the property in issue. The Contract Services Agreement
required the Appellant to provide services "as may be
requested in writing by the company", i.e. Sundstrand. I
make specific reference to the statement of work with respect to
the services provided by a Robin subcontractor at Lucas in
England which sets out a very substantial advisory role and could
have involved Whittome or Lorencz in the repair of equipment,
installation of software and "configuration management of
the Hamilton-Sundstrand EPDS Equipment". The purpose or
objective of the service as reflected in both the contractual
agreement with Sundstrand and the statement of work which flows
from that contract must be taken into consideration in
determining whether the consideration paid to Robin for the
service was or was not zero-rated. In my view, it is evident that
the service provided by the subcontractors was entirely related
to ensuring the acceptability of the electrical system in the
case of Sundstrand and the flight controls in the case of Parker
and thereby effecting acceptance by Bombardier. This service was
aimed at effecting the transfer of ownership of the personal
property in issue and for the foregoing reasons, is excluded from
the zero-rating provisions.
[21] One further issue remains, that being
whether the totality of the service provided by the
subcontractors was in Canada. Cossar initially testified that the
subcontractors, Whittome and Lorencz, spent approximately
two-thirds of their time out of Canada, either in the United
States at the Sundstrand or Parker plants or in England. He
subsequently qualified that by stating that was the case in the
earlier stages and conceded that they probably spent "more
time in the period of the audit" in Canada, but noted as
well that Sundstrand required their attendance at Lucas in
England to support it in the course of the process of
certification testing necessary to demonstrate design compliance
of the Global Express electrical system. Notwithstanding the lack
of additional documentation, I accept Cossar's testimony that
Whittome and Lorencz spent substantial periods of time in both
the United States and in England. Accordingly, I propose to
allocate one-third of the services as not subject to the
provisions of the relevant sections of the Excise Tax Act.
Thickson had the same responsibilities as Whittome and Lorencz
and the same allocation is appropriate. With respect to the
fourth subcontractor, Manojlovic, Cossar's testimony provided
very little assistance. Manojlovic was hired at the design stage
and initially worked in California at the Leach plant where
according to Cossar he spent 95% of his time. However, this
appears to have related to the period of time prior to the years
in issue. The only other information before the Court was that at
some point of time in 1998 Manojlovic was fired. With respect to
this employee, there is simply insufficient evidence to warrant
any adjustment of the Minister's assessment.
[22] The appeal is allowed to this limited
extent. Since the Respondent's witness, Hutchison, indicated that
the original assessment period for the 1999 year in the amount of
$45,844.16 was based on an erroneous exchange rate between
Canadian and American currency and as a result, the amount was
revised to $44,177.99, this will form the basis for the necessary
calculation.
Signed at Ottawa, Canada, this 14th day of February, 2005.
Sarchuk J.
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