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Citation: 2005TCC738
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Date: 20051202
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Docket: 2004‑4331(GST)I
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BETWEEN:
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SCIERIE ST‑ELZÉAR INC.,
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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
Angers J.
[1] This
is an appeal from an assessment, notice of which bears the number 0254968.
The assessment was made under the Excise Tax Act ("the Act") on
March 24, 2004, and demands the payment of $19,466.43 in
tax plus $131.92 in interest and $263.73 in penalties. The assessment pertains
to the period from February 1, 2000, to July 31, 2003. In a decision on objection, dated
August 24, 2004, the Minister of National Revenue
("the Minister") confirmed the assessment that he had made.
However, the Appellant is only appealing from the refusal to grant an input tax
credit (ITC) of $1,120 in respect of fees related to
the preparation of financial statements for corporations affiliated with the
Appellant. The ground for that refusal was that the fees were not paid as part
of the Appellant's commercial activities within the meaning of
subsection 169(1) of the Act. It must be understood that the Appellant
pays the fees for the preparation of the financial statements and tax returns
of the management corporations, including, of course, the Goods and Services
Tax (GST) returns.
[2] The
Appellant, for its part, submits that the payment of fees for the maintenance
of its business structure is part of its commercial activities, because it
results in a significant reduction of financial costs, and, incidentally, the
structure ensures a bright future for the Appellant's shareholders, who can
benefit from the liquid assets that accrue within the group of corporations.
[3] The
structure in question was set up in 1996, the year that the Appellant was
incorporated. All of the Appellant's class A shares are held by Association coopérative
forestière de St‑Elzéar Inc. ("the Cooperative"), which has been
in existence since 1944. According to the testimony of the Appellant's
comptroller, a business corporation structure became necessary in order to
circumvent the problem stemming from the fact that the profits and liquid
assets that are realized by a cooperative cannot be retained because they are
either distributed to members or are deposited into what is called a general
reserve. In the latter situation, the profits are frozen.
[4] Without
actually reproducing the diagram of the business's structure, suffice it
to say that five management companies, the shares of which are held by the
Cooperative's members, were incorporated. These five management companies hold
a certain number of the Appellant's preferred shares. The Appellant, for its
part, holds shares of two other companies, whose role was not explained. This structure
has enabled the Cooperative to avoid the financial trouble that similar
forestry cooperatives are experiencing in Quebec; according to the witness, 75 to 80% of those cooperatives are
experiencing such trouble. Consequently, the Appellant enjoys access to
sufficient liquid assets for its operations, thereby significantly reducing the
financial costs associated with those operations. The Appellant can
finance its operations from within the group, without the need to resort to the
services of banks. The Respondent is not questioning the legality of this
approach.
[5] The
financial statements of the management companies, whose shares are held by the
Cooperative's members, support what has been stated about financing, and one
can see a reference to the undistributed profits in the financials. This approach
is considered an incentive for members to keep the money available for the
Appellant's operations, because they can start drawing on the money at
age 60. According to the Cooperative's financial statements as at
January 31, 2002, the preferred shareholders' equity represents 41%
of the net value, which totals approximately $6 million.
[6] The Appellant's day-to-day operations consist in
operating a sawmill and doing forest management. It also has timber rights. The
Appellant looks after sylviculture work and manages its personnel. It pays the
fees for the preparation of the financial statements, and the accounting fees
related to its operations. It also pays the same fees, and the GST associated
therewith, for the five management corporations. The Appellant recovered
input tax credits equal to the GST on the preparation of the five management
companies' financial statements, and the issue is whether it is entitled to
this credit. In order to determine whether it is entitled to those ITCs, one
must ascertain whether the payment of the fees for the services acquired for
the purpose of keeping the business's structure in place can be considered to
be related to an input acquired for consumption, use or supply in the course of
the commercial activities of the Appellant.
[7] The
relevant statutory provisions are contained in subsection 169(1) of the Act,
which articulates the general rule that a registrant may be entitled to an
input tax credit. The definition of "commercial activity" in
section 123 is also relevant.
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 × 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
is
(a) where the tax is deemed
under subsection 202(4) to have been paid in respect of the property on the
last day of a taxation year of the person, the extent (expressed as a
percentage of the total use of the property in the course of commercial
activities and businesses of the person during that taxation year) to which the
person used the property in the course of commercial activities of the person
during that taxation year,
(b) where the property or service is acquired,
imported or brought into the province, as the case may be, by the person for
use in improving capital property of the person, the extent (expressed as a
percentage) to which the person was using the capital property in the course of
commercial activities of the person immediately after the capital property or a
portion thereof was last acquired or imported by the person, and
(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.
123. (1) Definitions
"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 . . .
[8] The
Appellant and the Respondent both cited BJ Services Co. v. Canada, [2002]
T.C.J. No. 599 (QL), [2002] GSTC 124, in support of their
positions. There, Nowsco Well Services Ltd. (Nowsco), a very profitable
company, had to pay fees to financial and legal advisors following a hostile
takeover bid. Nowsco had claimed ITCs in respect of those fees, on which it had
paid GST. The claim was made on the basis that the fees were related to
inputs that had been used in the course of Nowsco's commercial activities. The
professional services had been retained by Nowsco for the purpose of maximizing
the value of its shares, which was the duty of the corporation's directors. The
respondent in BJ Services submitted that these expenses were incurred
solely to increase the value of the shares for the benefit of the shareholders,
and were not incurred in the course of commercial activities. However, the
Court held that the professional services in question were used in the course of
Nowsco's commercial activities because the services were acquired not only for
the benefit of the shareholders, but also to establish and maintain the
confidence of the capital markets, which was something that benefitted Nowsco.
[9] In the case at bar, the Respondent is
essentially relying on the same argument that it made in BJ Services, namely
that the input must be directly related to the supply of taxable services in
order for the registrant to be eligible for ITCs. The Respondent submits that
since the Appellant is in the forest management business and operates a
sawmill, it is impossible to make a connection between the input and the
Appellant's commercial activities. The Respondent is in effect asking whether
it can be claimed that the management companies' financial statements and tax
returns can be used in the course of the Appellant's commercial activities.
[10] It is not disputed that all the Appellant's supplies in the course of
its operations are taxable supplies. The only issue here is whether the inputs
were used in the course of the commercial activities of the business; it is not
a question of ascertaining whether a direct relationship exists between the input
and the taxable supplies. It is only when the registrant makes taxable and
exempt supplies that the question whether there is a direct relationship
between the input and the taxable supplies arises, because, in those instances,
such a relationship must exist in order for the registrant to be entitled to
the ITCs.
[11] According to the decision in BJ Services, where the registrant
makes no exempt supplies, the fees are considered expenses incurred in the
course of commercial activities unless they have a non-business or personal
element.
[12] BJ Services also stands for the proposition that four factors
must be considered in determining whether an input is commercial in nature: the
purpose of the input; who benefits from the input; the context; and the case
law.
[13] In my opinion, there is a clear distinction
between BJ Services and the case at bar. In BJ Services,
the professional services were retained by the directors and were necessary to
fulfil the directors' duty to maximize the value of the shares and maintain the
confidence of capital markets, whereas in the case at bar, the professional
services do not fulfil the Appellant's obligations, but, rather, the five
management companies' obligations to file tax returns and financial statements.
The five management companies are the ones that need professional services like
those rendered in the instant case, and, in my opinion, they are the ones that
should pay for them. The fact that the Appellant has agreed to foot the bill
for these services attests to its economic interest in maintaining the
management companies in existence, as opposed to pointing to a need or legal
duty on its part to ensure that its business operates soundly, which need or
duty would compel a finding that the payment is an integral part of the
Appellant's commercial activities. The purpose and context of the
input are not related to the Appellant's commercial activities, any more than
the fact that the Cooperative and its members are the ones that benefit from
the input by reason of the profit that will be distributed to the members at
age 60.
[14] I do not believe that the definition of commercial activity is broad
enough to encompass the payment of fees for services necessary for the
maintenance of distinct legal entities and to permit an ITC claim in respect of such fees. The economic
interest in maintaining the structure of the Appellant's business can justify
the payment of the fees in question, but, in my opinion, it would be an
exaggeration to say that such an expense is incurred in the course of its
commercial activities.
[15] For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 2nd day of December 2005.
Angers
J.
Translation
certified true
on this 30th day of
April 2008.
Brian McCordick,
Translator
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