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Citation: 2005TCC358
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Date: 20050520
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Docket: 2002‑3517(GST)G
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BETWEEN:
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VILLE DE GATINEAU
(COMMUNAUTÉ URBAINE DE
L'OUTAOUAIS),
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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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[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] This is an appeal
from an assessment in which the Minister of National Revenue
("Minister") disallowed the Appellant input tax credits
("ITC") totalling $304,594.97, claimed during the period from
January 1, 1998, to June 30, 2000, under section 169 of the Excise
Tax Act ("ETA"), in addition to assessing penalties and
interest under section 280 of the ETA.
[2] The
Appellant initially claimed ITCs of $312,994.07 in order to recover the surplus
of the goods and services tax ("GST") paid by it on the acquisition
of goods and services used in the operation of its waste water treatment plant,
on the amount of GST refunded under section 259 of the ETA (which
entitles the Appellant to a rebate of the tax payable in accordance with the
percentage prescribed by regulation; that rate was 57.14 percent of the
non‑creditable tax during the period in issue). Of the $312,994.07 of
ITCs claimed, the Minister allowed only $8,399.10, the balance being disallowed
on the ground that, under paragraph 28(c), Part VI, of
Schedule V of the ETA, that amount related to an exempt supply.
Statutory
and Regulatory Provisions Related to the ETA
[3] The statutory and
regulatory provisions applicable during the period in issue read as follows:
EXCISE TAX ACT (GST)
R.S., 1985, c. E‑15, as
amended
PART IX ‑ GOODS AND SERVICES
TAX
DIVISION I – INTERPRETATION
123. (1) Definitions – In section 121,
this Part and Schedules V to X,
[…]
"commercial activity" of a
person means
(a) a
business carried on by the person [...] except to the extent to which the business
involves the making of exempt supplies by the person,
[...]
"exempt supply" means a supply
included in Schedule V;
[...]
"municipality" means
(a) an
incorporated city, [...] or other incorporated municipal body however
designated,
[...]
"public service body" means
a non‑profit organization, a charity, a municipality, a school authority,
a hospital authority, a public college or a university;
[…]
"recipient" of a
supply of property or a service means
(a) where
consideration for the supply is payable under an agreement for the supply, the
person who is liable under the agreement to pay that consideration,
(b) where
paragraph (a) does not apply and consideration is payable for the supply,
the person who is liable to pay that consideration, and
(c) where
no consideration is payable for the supply,
(i) in
the case of a supply of property by way of sale, the person to whom the
property is delivered or made available,
(ii) in
the case of a supply of property otherwise than by way of sale, the person to
whom possession or use of the property is given or made available, and
(iii) in
the case of a supply of service, the person to whom the service is rendered,
and
any reference to a person to whom a supply is made shall be read as a reference
to the recipient of the supply;
[…]
"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;
[…]
"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;
[...]
Subdivision b
Input tax credits
169. (1) General rule for credits – Subject
to this Part, where a person acquires or imports property or a service or
brings it into a participating province and, during a reporting period of the
person during which the person is a registrant, tax in respect of the supply,
importation or bringing in becomes payable by the person or is paid by the
person without having become payable, the amount determined by the following
formula is an input tax credit of the person in respect of the property or
service for the period:
A x B
where
A is the tax in respect of the supply, importation or bringing in, as
the case may be, that becomes payable by the person during the reporting period
or that is paid by the person during the period without having become payable;
and
B [...]
(c) in
any other case, the extent (expressed as a percentage) to which the person
acquired or imported the property or service or brought it into the
participating province, as the case may be, for consumption, use or supply in
the course of commercial activities of the person.
[...]
259. (1) Definitions – In
this section,
"municipality" includes a person
designated by the Minister, for the purposes of this section, to be a
municipality, but only in respect of activities, specified in the designation,
that involve the making of supplies (other than taxable supplies) by the person
of municipal services;
[…]
"selected public service body"
means
[...]
(e) a
municipality;
[...]
(3) Rebate for persons other than designated municipalities ‑ If a person [...] is, on the last day of a claim period of the person or
of the person's fiscal year that includes that claim period, a selected public
service body, charity or qualifying non‑profit organization, the Minister
shall [...] pay a rebate to the person equal to the specified percentage of the
non‑creditable tax charged in respect of property or a service (other
than a prescribed property or service) for the claim period.
[...]
SCHEDULE V – EXEMPT SUPPLIES
Subsection 123(1)
Part VI – Public Sector Bodies
1. [Definitions] – In
this Part,
[...]
"local municipality" of a
regional municipality means a municipality that has jurisdiction over an area
that is within the area over which the regional municipality has jurisdiction;
[...]
28. [Supplies between various entities] – A supply between
[...]
(c) a
regional municipality and any of its local municipalities or any para‑municipal
organization of any of those local municipalities,
PUBLIC SERVICE BODY REBATE (GST/HST) REGULATIONS
[...]
1. Short title – These Regulations may be
cited as the Public Service Body Rebate (GST/HST) Regulations.
[...]
REBATE PERCENTAGES
5. For
the purpose of determining a rebate payable to a person under section 259
of the Act, the prescribed percentage is
[...]
(e) where
the person is a municipality, 57.14%.
Preliminary Remark
[4] The
Communauté urbaine de l'Outaouais ("CUO") was established as a legal
person in the public interest, consisting of five municipalities (Aylmer, Hull,
Gatineau, Buckingham and Masson‑Angers) and of the inhabitants and
taxpayers of the territories of those municipalities, under the Act
respecting the Communauté urbaine de l'Outaouais (the "ACUO"),
R.S.Q., chapter C‑37.1. The ACUO was repealed on
January 1, 2002, by passage of the Loi portant réforme de
l'organisation territoriale municipale des régions métropolitaines de Montréal,
de Québec et de l'Outaouais (2000, c. 56). By that act, the new
City of Gatineau was established as a legal person and took on the rights,
obligations and responsibilities of the CUO, as well as those of the cities of
Aylmer, Buckingham, Gatineau, Hull and Masson‑Angers, as they existed on
December 31, 2001. The new City of Gatineau became,
without continuance of suit, party to every proceeding, in place of the CUO or,
as the case may be, of each of the municipalities which it succeeded. As a
result, the instant case, which concerns the years 1998 to 2000, involves the
CUO as it existed at the time, but the new City of Gatineau has become
a party to this proceeding as a result of the abrogation of the CUO. The City
of Gatineau has thus become the Appellant, for and on behalf of the
CUO.
Point at
Issue
[5] The only point
for determination is whether the CUO was entitled to the total amount of ITCs
claimed, that is $312,994.07, or whether the Respondent is correct in claiming
that it is entitled to an amount of only $8,399.10. To summarize the facts
briefly, during the period in issue, the CUO received at its waste treatment
plant the waste water of three of its constituent municipalities, the cities of
Gatineau, Aylmer and Hull, as they existed at that time. To dispose of that waste
water, the three municipalities paid the CUO a lump-sum amount of approximately
$9 million a year, in accordance with the share established for each of
them by the CUO each year. The CUO proceeded with purification of the water
and, once that water was filtered, buried the solid wastes (which are also
called sludge) or converted a portion of that waste (varying between
approximately 70 and 85 percent) to make granules that were then resold on
the market, to be spread on farmland in particular. The Minister admits that
the process of converting sludge intro granules ("granulation") for
commercial purposes constitutes a commercial activity within the meaning of
section 123 of the ETA, and that the tax paid on that portion of
the operating cost of the granulation plant grants entitlement to ITCs under
section 169 of the ETA. The Minister calculated that the ITCs attributable
to the granulation process amounted to $8,399.10.
[6] However, the
Minister considers that the entire waste water purification process, as well as
the treatment of wastes prior to the granulation process, constitutes a supply
of services between a regional municipality (the CUO) and its local
municipalities (the three cities of Aylmer, Hull and Gatineau).
Accordingly, in the Respondent's view, this constitutes an exempt supply of
services within the meaning of paragraph 28(c), Part VI,
Schedule V, of the ETA, which does not grant entitlement to ITCs
under section 169 or the definition of "commercial activity" in
subsection 123(1) of the ETA.
[7] In the
Appellant's view, the only exempt supply made by the CUO, that is to say the
only service rendered to the three municipalities by the CUO, was to accept the
waste water. Apart from the transfer of ownership of the waster water between
the three municipalities and the CUO, the Appellant contends that the CUO
rendered no service to them and that the entire water purification process
therefore cannot constitute an exempt supply for the purposes of the ETA.
In the Appellant's view, since the purification process is necessary to the
granulation of marketable sludge, it is therefore entitled to all the ITCs
initially claimed.
Facts
[8] Jacques Nadeau,
director of the water treatment and residual materials management service for
the public works and environment branch of the City of Gatineau, explained,
with the aid of a document filed as Exhibit A‑1, how the CUO's waste
water treatment plant, with its sludge drying and granulation process,
operates. First, each municipality collects waste water through its sewer
system. That waste water is forwarded to the treatment plant by the main
interceptor, which is owned by the CUO. The CUO becomes responsible for the
waste water from the moment it receives it. The purpose of the purification
process is to purify the water, that is to say to remove suspended materials
and debris.
[9] To do this, the
raw water undergoes a pre‑treatment involving two operations. First,
coarse screening is conducted as the water enters the pumping station, and this
procedure protects the pumps by preventing large floating objects that may
block the various pieces of equipment from entering. The water is then pumped
to the fine screen by means of four pumps. The fine screen is used to extract
fibrous materials and other debris found in the sludge extraction equipment and
in the granules, thus affecting the quality of the finished product, which is a
source of income for the CUO. In fact, the fine-screening stage has been added
in recent years to improve sludge quality.
[10] After screening,
the waste water is forwarded by gravity to the grit removers. The purpose of
grit removal is to remove more or less fine gravel, sand and mineral particles.
This prevents deposits in the channels and pipes, protects the pumps and other
devices from abrasions and also thickens the sludge.
[11] The pre‑treated
effluent then flows by gravity to the primary settling tanks, which allow
suspended particles and settlable solids to settle out and make it possible to
remove floating material such as grease, scum and oil. This is the first stage
in the extraction of sludge that is recovered from the bottom of the settling
tank.
[12] Settled sludge is
then pumped to the sludge treatment unit, and the second purification stage
then begins. The first operation is performed in an aeration tank, in which the
development of bacterial flock (activated sludge) is stimulated. In this tank,
the sludge is mixed by surface aerators to maintain it in suspension and to
provide it with the oxygen necessary for the proliferation of aerobic micro‑organisms.
The mixture is then forwarded to a settling tank to separate treated water from
sludge. The sludge is returned to the aeration tank in order to maintain a
sufficient concentration of activated sludge. Excess sludge is extracted and
forwarded to sludge treatment. At that point, the water is discharged into the
Ottawa River.
[13] Sludge treatment
continues, and the sludge is then forwarded to the thickeners. This is another
settling process. The thickened sludge is then pumped into the digesters, where
anaerobic digestion takes place. This process occurs in the absence of air, thus
without oxygen, resulting in an approximate 30 percent reduction of sludge
volume. Among other things, anaerobic digestion produces methane gas, which is
captured for the treatment plant (to heat the digesters and buildings; the gas
can also fuel the rotary dryer of the sludge drying and granulation unit).
[14] The digested
sludge is then concentrated by centrifugation and forwarded to the sludge
drying and granulation unit. The granules are then sold for agricultural
purposes.
[15] Mr. Nadeau
explained that, when the treatment plant was built in 1982, the sludge was
buried. The CUO subsequently considered processing the sludge, and the
granulation plant went into operation in 1992. Only the fine-screening and
granulation stages were added to the water purification process existing at the
time. A new thickener and a new digester were also added. According to
Mr. Nadeau, the CUO has been using the sludge extraction process to
convert sludge since 1992. Waste water is essential to fertilizer production.
In a way, it constitutes the raw material for producing granules. The CUO earns
between $30,000 and $60,000 in income each year from the sale of this
fertilizer. Another 13 to 27 percent of the sludge is not transformed into
granules, but is buried instead. In addition, of the 20 thousand tonnes of
sludge that enter the treatment plant, two to three percent of that solid
material is intercepted at the coarse-screening stage and systematically buried
(sand, gravel and wood).
[16] Before 1992, the
thickener, anaerobic digester and centrifugal dryer were installed for sludge
digestion and ultimately for methane gas production (as explained above). In
addition, the centrifugation stage following secondary settling was also used
to bury the sludge (otherwise a liquid was produced that was not buried).
However, the digesters were not essential to burial, but could be used to
reduce the quantity of materials buried. Mr. Nadeau added that it was
relatively less costly for the CUO to bury materials than to manufacture granular
fertilizer.
[17] The CUO set a
budget each year and determined the share of each municipality based on the
estimated flow of its waste water volume. Each municipality was billed for its
share. If the actual flow of each municipality varied, the share of the total
budget initially established by the CUO could vary depending on the
municipality, but the CUO absorbed any surplus or deficit relative to the pre‑established
initial budget.
Legislation
on Water Purification
[18] According to the ACUO,
the CUO had competence in the area of water purification (section 84),
which was addressed by sections 113 to 127. Those sections read in part as
follows:
DIVISION VI
COMPETENCE OF THE COMMUNITY
[CUO]
Competence of the Community.
84. The Community has such competence as is
provided in this Act in the following fields:
[...]
2. Water purification and drinking water supply
[...]
§ 2. — Water purification and drinking
water supply
By‑law for standards of
work.
113. The Community, by by‑law, may establish
minimum standards for all of its territory respecting the methods of carrying
out all work respecting waterworks, sewers, and the construction of water
treatment plants or works, and the materials used in the carrying out of such
works. Such by‑laws shall be binding upon all the municipalities in its
territory; they shall not come into force except upon the approval of the
Minister of the Environment.
Certain projects submitted
for approval.
114. Such municipalities shall submit to the Council
for approval any project for the construction, enlargement or alteration of a
waterworks system, sewers and of plants or works for water treatment, before
passing the resolution or the by‑law necessary for implementing such
project.
Nature of project.
Within 30 days
after receiving the application, the Council shall determine whether the
project is of a purely local nature or has any intermunicipal repercussions.
Intermunicipal repercussions.
If the
Council decides that the project has intermunicipal repercussions, the Council
may, by resolution, subject to the approval of the Minister of the Environment,
order such alterations as it deems expedient to the plans and specifications of
the proposed works and authorize the municipality to carry out such work. Failing
an agreement between the Community and the municipalities involved concerning
the apportionment of the cost of the work, the apportionment is fixed by the
Minister of the Environment, at the request of the Community or any
municipality concerned.
Restricted powers.
115. In no case may the Minister of the Environment,
as regards waterworks, sewers or plants or water treatment works, exercise in
respect of a municipality whose territory is included in that of the Community
any power provided in section 29, 32, 34, 35, 41 or 43 of the Environment
Quality Act (chapter Q‑2) before calling upon the Community to make
the representations to him it considers appropriate.
Execution of intermunicipal
work.
Where the
Minister of the Environment exercises the powers provided in section 35 of
the Environment Quality Act, he shall order the execution of intermunicipal
work by such municipalities as he may designate, unless the Community has
indicated to the Minister that it consents to execute it. If the Community
consents to execute the work, the Minister shall not then order its execution
except by the Community. The Minister shall not establish the apportionment of
the cost of the works, and the cost of maintenance and operation thereof,
determine the mode of payment or fix the indemnity, periodic or otherwise,
payable by the municipalities for the use of the works or services provided
before calling upon the Community to make its representations on this matter.
Order.
116. Subject to
the Environment Quality Act (chapter Q‑2), the Community may, by by‑law,
order the carrying out, even outside its territory, of works relating to water
treatment plants or works or water mains or main sewers intended to serve the
territories of two or more municipalities included in its territory.
Order.
117. Subject to the Environment Quality Act (chapter
Q‑2), the Community may, by by‑law, order the carrying out of works
contemplated in section 116 even if the plants, works or mains being the
subject thereof are not intended to serve the territories of two or more
municipalities.
Exclusion.
A by‑law
made by the Community under the first paragraph excludes the competence of a
municipality over the works contemplated by the by‑law.
Acquisition of water works.
118. The Community may, by by‑law, acquire,
with the approval of the Minister of the Environment, the ownership of any
water treatment works or plant, or any water main or main sewer owned by a
municipality whose territory is included in that of the Community and serving or
capable of serving the territories of one or more such municipalities.
Exclusion.
A by‑law
made by the Community under the first paragraph excludes the competence of a
municipality over any plant, works or main acquired by the Community.
Intermunicipal water system.
119. The filtration plants and sewage treatment
plants of the Community and the works located between the plants and the source
of water supply, in the case of a filtration plant, and the works located
between the plants and the place where purified water is discharged in the case
of a sewage treatment plant, constitute intermunicipal parts of the drinking
water supply system or, as the case may be, of the water purification system of
the Community.
By‑laws.
The Community shall, by by‑law,
(1) determine
that part of its drinking water or waste water conduit system which is of an
intermunicipal nature or which, owing to the importance of its main function
within the system, must be subject to the same rules as the intermunicipal
part;
(2) determine
the other components of its drinking water or waste water conduit system which
must be considered to be for the sole benefit of the municipality in whose
territory they are situated.
[...]
Apportionment of expenses.
120. The expenses of the Community incurred in the
exercise of a power provided for in sections 116 to 118 and relating to
the intermunicipal part of its system, and the expenses arising from the
operation and maintenance of that part of the system are apportioned among the municipalities
in proportion to the volume of water consumed by each of them, respectively, as
regards expenses relating to drinking water supply, and in proportion to the
volume of water discharged by each of them, respectively, as regards the
expenses relating to water purification.
Payment of expenses.
The expenses
of the Community relating to each component of its system contemplated in a by‑law
made under subparagraph 2 of the second paragraph of section 119 are
payable by the municipality in whose territory that component is situated.
[...]
Apportionment.
120.1. Notwithstanding
section 120, the Community may, by by‑law passed by a three‑quarters
majority of the votes cast by the representatives of the municipalities whose
territories are served, establish a different apportionment of the expenses
contemplated in section 120.
Power to establish works
forfeited.
121. When all the water treatment works or plants of
a municipality in the territory of the Community are acquired by the Community,
such municipality shall no longer have power to establish such works or plants.
Powers not restricted.
This Act does
not have the effect of restricting the power of a municipality to distribute to
its territory drinking water supplied to it by the Community or to collect
waste water from that territory to convey such waste water to the works of the
Community.
[...]
Waste water.
123. The Community may receive for treatment
purposes, from a person other than a municipality, waste water from its
territory or elsewhere.
Consent.
Before making
any contract for such purpose, the Community shall obtain the consent of the
local municipality in whose territory the waste water originates.
Consent of the Community.
124. From the date of coming into force of a by‑law
made under section 118, no municipality which receives water from the
Community or conveys waste water to the works of the Community, may supply
water to the territory of another municipality or receive, for treatment
purposes, waste water from the territory of another municipality, without the
consent of the Community.
Prior contracts.
125. Nothing in
section 124 shall be construed as preventing any municipality from
supplying water to the territory of another municipality, or receiving waste
water from the territory of another municipality by virtue of contracts made
before the date referred to in section 124 if the plants, works or
conduits necessary to do so have not been acquired by the Community.
By‑laws.
126. The Community may make by‑laws to:
(1) supply
drinking water in the territory of the municipalities, receive waste water from
their territory; and dispose of sludge from septic installations;
(2) maintain,
manage and operate its water treatment plants or works, water mains or main
sewers;
[...]
[19] It is also helpful here to reproduce certain provisions
of the Environment Quality Act, R.S.Q., chapter Q‑2.
R.S.Q.,
chapter Q‑2
ENVIRONMENT QUALITY ACT
CHAPTER I
PROVISIONS OF GENERAL APPLICATION
DIVISION I
DEFINITIONS
Interpretation:
1. In this Act, unless the context indicates a
different meaning, the following words and expressions mean or designate:
"water";
(1) "water":
surface water and underground water wherever located;
[...]
"environment";
(4) "environment":
the water, atmosphere and soil or a combination of any of them or, generally,
the ambient milieu with which living species have dynamic relations;
"contaminant";
(5) "contaminant":
a solid, liquid or gaseous matter, a microorganism, a sound, a vibration, rays,
heat, an odour, a radiation or a combination of any of them likely to alter the
quality of the environment in any way;
"pollutant";
(6) "pollutant":
a contaminant or a mixture of several contaminants present in the environment
in a concentration or quantity greater than the permissible level determined by
regulation of the Government, or whose presence in the environment is
prohibited by regulation of the Government;
[...]
"source of
contamination";
(8) "source
of contamination": any activity or condition causing the emission of a
contaminant into the environment;
[...]
"municipality";
(10) "municipality":
any municipality, the Communauté métropolitaine de Montréal, the Communauté
métropolitaine de Québec, as well as an intermunicipal management board;
[...]
"Minister";
(18) "Minister":
the Minister of the Environment;
[...]
DIVISION II
FUNCTIONS AND POWERS OF THE MINISTER
Power.
2. The
Minister may:
[...]
(c) prepare
plans and programmes for the conservation, protection and management of the
environment and emergency plans to fight any form of contamination or
destruction of the environment and, with the authorization of the Government,
see to the carrying out of those plans and programmes;
[...]
(j) devise
and implement a programme to abate the discharge of contaminants resulting from
the operation of industrial establishments and to monitor the discharge of
contaminants resulting from the operation of municipal wastewater treatment
works.
[...]
DIVISION IV
PROTECTION OF THE ENVIRONMENT
Emission of a
contaminant.
20. No one may
emit, deposit, issue or discharge or allow the emission, deposit, issuance or
discharge into the environment of a contaminant in a greater quantity or
concentration than that provided for by regulation of the Government.
Emission of a
contaminant.
The
same prohibition applies to the emission, deposit, issuance or discharge of any
contaminant the presence of which in the environment is prohibited by
regulation of the Government or is likely to affect the life, health, safety,
welfare or comfort of human beings, or to cause damage to or otherwise impair
the quality of the soil, vegetation, wildlife or property.
[...]
Order.
29. The Minister
may, after inquiry, order a municipality to exercise the powers relating to the
quality of the environment conferred on such municipality by this Act or by any
other general law or special Act.
[...]
Regulations.
31. The Government may make regulations to:
[...]
(c) prohibit,
limit and control sources of contamination as well as the emission, deposit,
issuance or discharge into the environment of any class of contaminants
throughout all or part of the territory of Québec;
(d) determine
for any class of contaminants or sources of contamination a maximum permissible
quantity or concentration of emission, deposit, issuance or discharge into the
environment throughout all or part of the territory of Québec;
(e) define
standards for the protection and quality of the environment or any of its parts
throughout all or part of the territory of Québec;
(e.1) establish
measures providing for the use of economic instruments, including tradeable
permits, emission, effluent and waste-disposal fees or charges, advance
elimination fees or charges, and fees or charges related to the use, management
or purification of water, for the purpose of protecting the environment and
achieving environmental quality objectives for all or any part of the territory
of Québec, and establish any rule necessary or relevant to the functioning of
the measures pertaining in particular to the determination of the persons or
municipalities required to pay such fees or charges, the conditions applicable
to their collection and the interest and penalties exigible in case of
non-payment;
[...]
Depollution
attestation to municipalities.
31.33. The Minister
shall issue a depollution attestation to every municipality which operates
wastewater treatment works.
Depollution
attestation.
31.34. Every
depollution attestation shall set out the following elements:
(1) the
nature, quantity, quality and concentration of every contaminant emitted,
deposited, released or discharged into the environment, which results from the
operation of municipal wastewater treatment works;
(2) the
nature, origin and quality of the wastewater treated by municipal wastewater
treatment works;
(3) the
contaminant discharge standards prescribed by regulation under paragraphs c and d of
section 31 and paragraphs c and f of section 46, for every contaminant emitted,
deposited, released or discharged into the environment, which results from the
operation of municipal wastewater treatment works, except those standards which
are incompatible with those set down by the Minister under section 31.37;
(4) the
standards prescribed by regulation under paragraph e of section 31, paragraph g of section 46 and section 70, as well as
those standards with respect to the operation of a sewer or water treatment
system prescribed by regulation under paragraph d
of section 46, to the extent that such standards apply to municipal
wastewater treatment works;
[...]
(6) any
other element prescribed by regulation.
[...]
Responsibilities
of attestation holder.
31.38. The holder of a depollution attestation shall:
(1) comply
with every element set out in its attestation;
(2) furnish,
at the request of the Minister, any information necessary to ascertain
compliance of the contaminant discharge with the standards referred to in
paragraph 3 of section 31.34 and in paragraph 1 of
section 31.35;
[...]
34. [...]
Orders.
The Minister
may, as regards a municipality, issue those orders he deems necessary in
matters respecting the supplying of drinking water and the management of waste
water.
[...]
Integration.
35. When the
Minister, after inquiry made on his own initiative or upon the application of
anyone interested, considers that necessity or advantage requires that two or
more municipalities have a common waterworks, sewer system or water treatment
plant, he may prescribe the necessary measures.
Orders.
He may in particular order:
(1) that
the execution, maintenance and operation of the works be done jointly by all
the municipalities concerned or in whole or in part by a single municipality,
or
(2) that
the works in the territory of one or more of such municipalities be used, or
(3) that
the service be furnished in whole or in part by one municipality to the other
or others. [Emphasis added.]
Costs.
In all such
cases, the Minister may establish the cost and apportionment of the cost
of the works and the maintenance and operating costs and the mode of payment or
fix the indemnity, periodic or otherwise, payable for the use of the works or for
the service provided by a municipality. [Emphasis added.]
[...]
Regulations.
46. The Government may make regulations to:
[...]
(c) determine,
for every class of contaminant or source of contamination, the maximum quantity
or concentration the discharge of which is allowed into water either for all
the territory or for a region, constant or intermittent watercourse, lake,
pond, marsh, swamp, bog or underground body of water;
(d) determine
the standards of quality for any source of water supply and the standards of
operation for any waterworks, sewer or water treatment service;
[...]
(g) determine
the mode of discharging and treatment of waste water;
[...]
(l) determine
construction standards for waterworks, sewer and water treatment systems;
[...]
Appellant's Argument
[20] Counsel
for the Appellant contends that, under its incorporating act (ACUO), the
CUO has an obligation to receive the municipalities' waste‑water and to
treat it before returning the purified water to the river. The CUO has taken
the initiative of commercializing the dried sludge resulting from the waster
water purification process. The Appellant admits that granule production occurs
only at the end of the purification process and that the costs associated with
that commercial activity constitute only a small percentage of the total cost
of operating the waste‑water treatment plant. However, considering that
the CUO makes no exempt supply after receiving the waste‑water, as the
Appellant claims, the operating cost of the treatment plant is thus part of the
overall process for ultimately manufacturing granular fertilizer, and the whole
thus constitutes a commercial activity granting entitlement to ITCs.
[21] In the
Appellant's view, the CUO makes no exempt supply under paragraph 28(c),
Part VI, Schedule V, of the ETA. That paragraph provides that
supplies between the regional municipality (the CUO) and its local
municipalities (Hull, Gatineau and Aylmer) are exempt supplies.
However, for there to be a supply, in this case, services must be provided by
the CUO to the three municipalities that receive those services (see
definitions of "supply" and "recipient" in section 123
of the ETA). In the Appellant's view, by returning the purified water to
the river, the CUO renders no service to the three municipalities. In its
opinion, from the moment ownership of the waste water is transferred to the
CUO, the municipalities expect nothing further from the CUO, since that water
is not returned to them. The water is purified for the welfare of the
community, pursuant to an obligation conferred on the CUO by the ACUO.
[22] Furthermore,
as regards the treatment of sludge, that sludge becomes the property of the
CUO, which either buries or markets it. The sludge is not returned to the three
municipalities, and the CUO renders no service to them by treating or adding
value to the sludge in the manner it wishes. The Appellant contends that the
entire process triggered to purify the water and derive marketable sludge from
it is indivisible.
[23] The
approximately $9 million that the three municipalities pay annually
represents the cost to them to dispose of their waste water, in accordance with
the method provided for in section 120 of the ACUO. However, it is
not a consideration paid in respect of the purification of waste water, since
that operation is the responsibility of the CUO, and is carried out for the
welfare of the community.
Respondent's Argument
[24] The
Respondent is more of the view that the CUO provides a water purification
service to the three municipalities in return for a consideration provided for
in section 120 of the ACUO. That consideration is based on an allocation
of expenses based on the volume of water forwarded to the water treatment
plant. The three municipalities want to have their waste water purified, and
the CUO is competent to do so. The CUO thus renders that service to the three
municipalities. The fact that the purified water is not subsequently returned
to them or that the CUO has decided to market the dried sludge resulting from
water purification in no way alters the fact that the CUO has first rendered a
service to the three municipalities, which have agreed to pay the price set by
the CUO for the purification of their waste water. That service constitutes an
exempt supply within the meaning of paragraph 28(c), Part VI,
Schedule V, of the ETA. The raw material used by the CUO to
manufacture granular fertilizer is not the waste water it receives, but the
sludge derived from the purification of waste water. The water purification
service must therefore be considered separately, just as the collection of
recyclable materials (exempt supply) was considered in the context of the
recyclable materials sorting operation (which in itself constitutes a
commercial activity) in Montréal (City) v. Canada, [2003]
G.S.T.C. 131 (T.C.C.). Similarly, the construction of a real estate
complex to house employees in accordance with a municipal by‑law (exempt
supply) as part of the construction of a hotel complex (this last operation
constituting a commercial activity) also had to be considered separately (see 398722
Alberta Ltd. v. Canada, [2000] F.C.J. No. 644 (F.C.A.) (Q.L.)).
[25] In the
Respondent's view, from the moment a consideration is paid (which is the case
here under the ACUO), there is a supply within the meaning of the ETA.
That supply is the purification of water by the CUO. This is logical since the
cities send their waste water to the CUO's water treatment plant, not to a
sludge granulation and fertilizer plant. It is the treatment process that
generates the waste, which is subsequently buried or converted. In the
Respondent's view, the three municipalities clearly paid the annual sum of
approximately $9 million for the CUO to purify the water, not simply to
receive that water without providing the purification service.
[26] Since
the purification service is provided by the CUO for the three municipalities,
it is therefore an exempt supply. The Minister was thus correct in disallowing
the Appellant ITCs in respect of the tax it had paid on the goods and services
acquired for the operation of its waste water purification plant, before
addressing the granulation process which, as a commercial activity, grants
entitlement to ITCs of $8,399.10 for the period in issue.
Analysis
[27] I am of
the same view as the Respondent. It appears from the provincial legislation on
environmental quality, and more particularly on water purification, that all
municipalities must comply with the measures put in place by the provincial
government to protect the environment and to achieve environmental quality
objectives. Paragraph 31(e.1) of the Environment Quality Act
also provides that those municipalities may be required to pay fees or charges
for the operation of those measures.
[28] Section 35
of the Environment Quality Act provides inter alia that the
Minister of the Environment may order that the water treatment service be
supplied in whole or in part by one municipality to the other or others. In
that case, the Minister may establish the cost and the apportionment of the
cost of the works and the maintenance and operating costs and the mode of
payment payable for the service provided by a municipality. No statutory
instrument could be clearer. The legislator refers specifically to a water
treatment (or other) service provided by one municipality to other
municipalities under a government policy on water purification.
[29] This is
precisely what the ACUO provides for. Section 113 states that the
CUO, by by‑law, may establish minimum standards for all of its territory
(which covers those of the three municipalities here in question) respecting
the methods of carrying out all work related to waterworks. These by‑laws
are binding on all municipalities in its territory. In addition,
section 116 provides that the CUO may, by by‑law, order the carrying
out of work relating to water treatment plants or works intended to serve the
territories of more than one municipality. Also, section 118 provides that
the CUO may, by by‑law, acquire, with the approval of the Minister of the
Environment, the ownership of any water treatment works or plant, or any water
main owned by a municipality whose territory is included in that of the
Community and serving or capable of serving the territories of one or more such
municipalities. In those cases, the expenses of the CUO are apportioned among
the municipalities in proportion to the volume of water discharged by each of
them, respectively, as regards the expenses relating to water purification
(section 120 of the ACUO).
[30] It is
therefore clear from the legislation cited above that the three municipalities
of Hull, Aylmer and Gatineau, as they existed at
the time, paid an annual lump sum of $9 million to the CUO, in accordance
with their respective shares, so that the CUO would proceed with the
purification of their waste water. Each municipality was required to comply
with environmental legislation, and each municipality thus paid its share for
the CUO to proceed with the purification of their respective waste water. In Commission
scolaire Des Chênes v. Canada, [2001] F.C.J. No. 1559, the
Federal Court of Appeal held that, in order for a payment to constitute
consideration, it must have been made pursuant to a legal obligation and must
be closely enough linked to a supply that it can be regarded as having been
made for that supply (in accordance with the definition of "supply"
in section 123 of the ETA). In my view, it cannot be said in the
instant case that the three municipalities paid a consideration for the supply
of a service, within the meaning of the ETA, which service extends far
beyond the mere transfer of waste water to the CUO, as the Appellant claims.
[31] I
therefore conclude that the annual payment of $9 million made by the three
municipalities to the CUO is directly linked to the water purification service
rendered by the latter. Moreover, the three municipalities did not have to pay
GST on that amount which is a factor more clearly showing that all the parties
in issue considered that the water purification service rendered by the CUO was
an exempt supply.
[32] On the
question as to where the water purification service rendered by the CUO to the
municipalities stopped and the sludge marketing process began, I find that the
Appellant did not adduce sufficient evidence for me to conclude that the
Respondent's calculation was incorrect. Mr. Nadeau explained in his
testimony that only the fine-screening (at the very start of the water
purification process) and granulation (which occurs at the very end) stages
were added to the existing water treatment process. It is also apparent from
the evidence that water purification included sludge treatment since, even
before the CUO began marketing the sludge, it had to be treated before it was
buried. This is all the more true since Le Petit Larousse Illustré
(1998) defines the term "assainissement" [purification] as follows:
[TRANSLATION]
assainissement [purification]: [...]
2. Set of techniques for discharging and treating waste water and residual
sludge.
[33] It also
appears from Mr. Nadeau's testimony that the treatment plant already
included all the stages he described (with the exception of fine screening and
granulation) before granular fertilizer was marketed. The full process was
necessary in order to be able to bury the sludge. Even now, between 13 and
27 percent of sludge that is not processed is buried.
[34] Moreover,
counsel for the Appellant himself admitted in his argument that granule
production occurs only at the end of the purification process and that the cost
associated with that commercial activity constitutes only a small percentage of
the total cost of operating the waste‑water purification plant. Although
Mr. Nadeau mentioned that the waste water was the raw material for the
ultimate manufacturing of granules, that does not alter the fact that the
municipalities had an obligation to purify their waste water. As I noted above,
the CUO provided that service to them. It was only once the purification
process had been made functional that the CUO decided to market the settled
sludge resulting from the water purification process. The CUO had the option of
burying that sludge or marketing it in the form of granules. In my view, it was
only at that point, once the sludge had settled and was ready to move on to the
granulation process, that the CUO's commercial activity began, and not before.
[35] In my
view, Midland Hutterian Brethren v. Canada, [2000] F.C.J.
No. 2098 (Q.L.), cited by counsel for the Appellant, cannot be applied in
the context of the instant case. In that case, the Minister had disallowed ITCs
in respect of the purchase price of material used to make work clothing for its
members to use in its farming business. The issue in that case was whether the
cloth had been acquired by the communal colony for at least partial use in the
context of its farming business. The ITCs claimed in respect of the work cloth
were disallowed on the ground that the cloth had not been acquired for use in
the context of the commercial activity, but mainly for personal use. The
Federal Court of Appeal considered how close an expense had to be to the
commercial activity itself. In a majority decision, the Court held that, once
an item is found to be acquired and used in connection with the commercial
activities of a GST registrant, and that item directly or indirectly
contributes to the production of articles or the provision of services that are
taxable, then an ITC is available under subsection 169(1) of the ETA.
The Court had to conclude that the cloth in question contributed to the
commercial activities of the communal colony in that it saved the colony money
over the long term. Given that the Respondent had previously conceded that the
acquisition of other items such as work gloves and boots granted entitlement to
ITCs, it was held that the connection with the work cloth in issue was not too
remote.
[36] In the
instant case, I have come to the conclusion that the commercial activity begins
only once the purification process is completed. I find that the granulation
process, the commercial activity as such, cannot be said to begin until the
sludge is extracted at the end of the purification process (following
centrifugation), settled and suitable for making granular fertilizer. The
entire water purification process, including sludge extraction, is part of the
water purification service rendered by the CUO to the three municipalities in
consideration for the annual sum of $9 million. As I stated above, this
constitutes an exempt supply within the meaning of paragraph 28(c),
Part VI, Schedule V, of the ETA. The supplies acquired in the
context of purification and sludge extraction are not acquired in the context
of a commercial activity. The definition of commercial activity in
section 123 of the ETA clearly states that a commercial activity
means a business carried on, except to the extent to which the business
involves the making of exempt supplies by the person.
[37] In 398722
Alberta Ltd., supra, the Federal Court of Appeal held as follows at
paragraphs 21 and 22:
¶ 21 [...]
Thus, the
question is whether the Respondent's business involves, to any extent, the
making of exempt supplies.
¶ 22 Any
business may consist of a number of components, each of which is integral to
the business as a whole. The definition of "commercial activity"
recognizes that possibility but requires, for GST purposes, that any part of
the business that consists of making exempt supplies be notionally
severed. [...]
[38] As the
purification of waste water constitutes an exempt supply in the instant case,
that activity must be notionally severed and is not part of the commercial
activity of selling granules. All the costs related to the water purification
service before the granulation stage are thus costs connected with an exempt
supply, which cannot grant entitlement to ITCs. Those costs are not incurred in
the context of a commercial activity, but rather in the context of an exempt
supply.
[39] Furthermore,
I am aware that the CUO has not been in existence since January 1, 2002,
and that the new City of Gatineau has taken over the water purification process under the
act under which it was created. Paragraph 28(c) of Part VI,
Schedule V, of the ETA thus no longer applies, since that service
is rendered by the new City of Gatineau for other municipalities. However, this does not alter the
legislation as it previously stood.
[40] I
therefore find that the Appellant did not show on a balance of probabilities
that the assessment in appeal was unfounded.
[41] The
appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 20th day of May 2005.
Lamarre J.
Translation
certified true
on this 11th
day of January 2006.
Garth
McLeod, Translator
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