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Citation: 2003TCC501
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Date: 20030724
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Dockets: 2002-3291(GST)I
2002-3293(GST)I
2002-3294(GST)I
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BETWEEN:
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3859681 CANADA INC.,
ZELLERS INC.,
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Appellants,
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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
Campbell, J.
Background and Issue:
[1] These three appeals were heard
together under the Informal Procedure. No witnesses were called
and counsel for each party presented submissions only.
[2] The Appellants are corporations
incorporated under the Federal Laws of Canada. They carry on
business across Canada as department store retailers, operating
under the name "Zellers Stores". Periodically Zellers
moves employees to other locations within the country. This is a
regular part of its business operations as a mass retail
merchant. To assist employees in these relocations, Zellers
reimburses the employees their direct or actual moving expenses
(such as moving truck, travel expenses). In addition Zellers pays
an allowance to the relocated employees, consisting of 10% of the
employee's previous year's salary, net of bonuses. The
following paragraph 8 in each notice of appeal lists the
additional costs which this 10% allowance is to cover:
...the cost of registering vehicles or obtaining licenses in a
new province; the installation of telephone, internet, cable and
satellite services; connection fees for hydro, water, gas and
other utilities; purchases of food stuffs, paint, firewood and
cleaners that cannot be transported from the old location;
transportation and boarding of pets; temporary housekeeping
services; the cost of duplicate school uniforms if children are
relocated during the same school year; disconnection and
installation of stove, refrigerator, washer, dryer, dishwasher;
cleaning services and minor repairs of the old and new
properties; conversion of electrical or gas equipment to meet
requirements in the new location; window dressing and floor
coverings; forwarding of valuable property/collectibles; and
transportation of recreational vehicles.
[3] Counsel for the Appellants and the
Respondent agree that the 10% amounts paid to such employees are
allowances and that the amount of these allowances is reasonable.
It was also agreed that these moving allowances are taxable to
the employee for income tax purposes pursuant to section 6 of the
Income Tax Act and as such are included on an
employee's T4 form.
[4] Each Appellant, being the
employer, filed a rebate claim to recover income tax credits
(ITC's) in respect to GST. They filed these claims pursuant
to sections 169 and 174 of the Excise Tax Act (the
"Act") on the basis that as the employers they
were deemed to have paid the GST in respect to the moving
allowances. The Minister disallowed the tax rebate claims on the
basis that the moving allowances, paid to employees were personal
expenses incurred by the employees and that the supplies were not
in relation to activities engaged in by the Appellants pursuant
to paragraph 174(a)(iv) of the Act.
[5] The issue is whether the
Appellants are entitled to claim input tax credits, pursuant to
section 174 of the Act, in respect to these employee
relocations and in particular whether the supplies of property or
services acquired by the employees in the move were in relation
to activities engaged in by the employer, Zellers, pursuant to
paragraph 174(a)(iv) of the Act. Respondent also argued
that section 170 and in particular paragraph 170(1)(b) of
the Act precluded any entitlement to input tax credits in
respect to these allowances.
Submissions of Appellants and
Respondent:
[6] Respondent has submitted that
sections 169, 170 and 174 provide the statutory framework within
which these issues must be reviewed. Section 169 provides the
general rule and formula for determining entitlement to
ITC's. From my understanding of the Respondent's
argument, Zellers has a problem fitting into section 169 to claim
ITC's as these expense items were not for consumption, use or
supply in the course of its commercial activities.
Section 169 begins with the words "subject to this
part". This is appropriate as there are other provisions
here which can have an effect on a claim for these credits. One
of these provisions is section 174, part of which contains
deeming provisions. Respondent argued that if we momentarily
deleted section 174, Zellers would not be entitled to claim
ITC's for personal expenses because section 169 determines
entitlement to ITC's based on whether the property or service
was consumed, used or supplied in the course of commercial
activities of Zellers. Respondent submitted that despite the
deeming provisions of section 174, this section does not give
Zellers the right to claim ITC's in respect to moving
expenses that have a largely personal element attached to them.
The Respondent argued that section 174 is the only vehicle by
which Zellers could claim ITC's under section 169, as Zellers
did not acquire the supplies directly or pay tax on them directly
and in particular did not use them in the course of its
commercial activities. Section 174 contains a number of
deeming provisions but before getting to those provisions you
must meet the other requirements of section 174. The Respondent
agreed that Zellers paid an allowance to the relocated employees
and that all or substantially all of these items were taxable
supplies. However the Respondent argued that there must be a
relation or connection test which would directly connect the
supply for which the tax is paid to the commercial or business
activities of Zellers. Respondent argued that items such as
internet hook up, cable connection or window dressings are
clearly not related to Zellers' business activities but are
for the exclusive personal use and enjoyment of the relocated
employees of Zellers. Therefore, according to the Respondent, the
requirements of section 169 are not met. Because section 174
is the only section that the Appellant can utilize to get into
section 169 to claim ITC's, the Appellant has failed, as the
moving expense supplies, on which GST was paid by the employees,
are strictly personal to the employees. Therefore section 174,
the Respondent argues, does not apply.
[7] The purpose of section 174 is to
deem certain things to be a reality. The Respondent argues that
before one gets to the deeming provisions in section 174, the
requirements of paragraph 174(a)(iv) must be met but in this case
they are not, as the moving expenses are personal to the
employees and are not in any way related to the employer's
commercial activities. Therefore according to the
Respondent's argument, we never get to the deeming provisions
of (d), (e) and (f) of section 174 because not all of the
requirements contained in (a), (b) and (c) of section 174 are
met. As there is no connection between the personal expenditure
by the employees and the commercial activities of Zellers, the
requirements of subsections 174(a), (b) and (c) and in particular
paragraph 174(a)(iv) are not met which prevents the application
of the deeming provisions in section 174. Without section 174,
Respondent argues that the Appellants do not qualify for
ITC's under Part 9 of the Act or more particularly
section 169.
[8] The Respondent contends that even
if this Court is persuaded that section 174 does apply,
paragraph 170(1)(b) denies the ITC. Respondent argues that
paragraph 170(1)(b) simply states that there is no ITC
respecting any supply on which tax is paid, where the supply is
exclusively for the personal consumption, use, or enjoyment of
the employee. In this case Respondent argued that all of the
expenses are clearly for the exclusive personal use of the
employees. Respondent went on to argue that there are two
exceptions listed in section 170 at subparagraphs (1)(b)(i) and
(1)(b)(ii). The applicable subparagraph here is 170(1)(b)(ii). To
determine if the exception at subparagraph 170(1)(b)(ii)
permits an ITC, Respondent argued that one must also look to
section 6 of the Income Tax Act. According to the
Respondent's argument, subparagraph 170(1)(b)(ii), which
would allow an ITC where it is otherwise precluded, only operates
if an employee does not have to include in income that particular
amount pursuant to section 6 of the Income Tax Act. The
Income Tax Act is relevant therefore for the purposes of
paragraph 170(1)(b), because we must look to that Act
to determine if the exception will permit an ITC. According to
the Respondent, subparagraph 170(1)(b)(ii) permits an ITC
provided an employee does not have to include any benefit, under
section 6 of the Income Tax Act in computing the
employee's income under that Act. Here the employees
do include the allowances as income pursuant to section 6 of the
Income Tax Act.
[9] The Appellant contends that all of
the conditions of section 174 are met, that is subsections
174(a), (b) and (c), which in turn triggers the deeming
provisions that then enable Zellers to claim the ITC's under
section 169. Once Zellers falls within section 174, these deeming
provisions will apply for the purposes of all of Part 9 of the
Act. The Appellants argue that the requirements of
paragraph 174(a)(iv) have been met. Of course it is the
final phrase of this subsection "... in relation to
activities engaged in by the person" that is in contention.
Counsel for the Appellants argues that the relocation of
employees is integral to the success of the business operations
of Zellers and as such the allowances paid to the employees, to
assist in their moving, are incurred in the course of the
commercial activities of Zellers. This moves Zellers, according
to the Appellant, into the deeming provisions of section 174.
According to the operation of these deeming provisions, Zellers
would be deemed to have received the supply of the property or
services pursuant to subsection 174(d), would also be deemed
to have consumed or used the property or service pursuant to
subsection 174(e) and finally would be deemed to have paid tax on
that property or service pursuant to subsection 174(f).
[10] The Appellant argues that payment of
this allowance, as part of the employee moving expenses, is
essential to the success of Zellers business operations and for
this reason the allowances are incurred in the course of the
commercial activities of Zellers. Appellant submits therefore
that Zellers is entitled to claim ITC's for these moving
allowances pursuant to section 174 and paragraph 169(1)(c). The
Appellant also argued that the Minister incorrectly applied
paragraph 170(1)(b) to deny rebate claims, when in the
Minister's Notice of Decision of May 24, 2002, Zellers was
informed that this paragraph denied ITC's because the supply
was incurred personally by the employees in their relocation.
Since the allowances were incurred in the course of the
commercial activities of Zellers, the requirements of subsections
174(a), (b) and (c) are met. Therefore pursuant to subsections
174(d), (e) and (f), Zellers is deemed to have received and
consumed or used a supply of property or service and to have paid
GST on these moving allowances. There is nothing in
section 174 which subject these deeming provisions to any
other section of the Act. The Respondent is incorrect,
Appellant argues, in its application of paragraph
170(1)(b) because the deeming provisions of section 174
operate to remove any personal element that could be attributed
to the employee under paragraph 170(1)(b).
Analysis
[11] The key provision here is section 174.
This section contains deeming provisions. These deeming
provisions connect the employer directly to the supply so that
the employer, Zellers in this case, can claim ITC's under
section 169, as if the employer had consumed, used or enjoyed the
supply directly. If the requirements of (a), (b) and (c) of
section 174 are met, the deeming provisions in (d), (e) and (f)
of section 174 come into operation, thereby effectively deeming
the employer to have received the supply of the property or
service, not the employee, and to have paid GST on that amount,
not the employee. Whether these deeming provisions should apply
here is dependent on whether the conditions in (a), (b) and (c)
of section 174 are first met. If the conditions are met,
then the deeming provisions are triggered, enabling an employer
to claim ITC's. The relevant portions of section 174, in
respect to the facts of this case, are as follows:
For the purposes of this Part, where
(a) a person pays an
allowance
(i) to an
employee of the person,
...
for
(iv) supplies all or substantially all
of which are taxable supplies (other then zero-rated supplies) of
property or services acquired in Canada by the employee, member
or volunteer in relation to activities engaged in by the
person, or
(emphasis added)
...
the following rules apply:
(d) the person is
deemed to have received a supply of the property or service,
(e) any consumption
or use of the property or service by the employee, member or
volunteer is deemed to be consumption or use by the person and
not by the employee, member or volunteer, and
(f) the person
is deemed to have paid, at the time the allowance is paid, tax in
respect of the supply equal to the amount determined by the
formula
A X B
where ...
[12] The Respondent contends that the
conditions of paragraph 174(a)(iv) are not met as the facts
relate to the following clause:
...in relation to activities engaged in by the person,
It was agreed that the other conditions in this section are
satisfied on the facts.
[13] In summary only subsection 174(a)
applies to the facts in these appeals and it is only the last
phrase of paragraph 174(a)(iv) that is in dispute. If the
Appellant has been successful in persuading me that the
contentious phrase in paragraph 174(a)(iv) is satisfied then we
look to the deeming provisions of section 174 contained in
subsections (d), (e) and (f). If paragraph 174(a)(iv) is
satisfied, subsection 174(d) deems Zellers to have received the
supply of property or service; subsection 174(e) deems Zellers to
have consumed or used it; and subsection 174(f) deems Zellers to
have paid the tax.
[14] The moving allowance is provided to
employees so the employees can purchase certain items required as
a result of relocation. These items attract GST. Zellers has paid
GST through the payment of the allowance to its employees.
Provided the contentious provision of paragraph 174(a)(iv) is
satisfied, these deeming provisions would permit Zellers to claim
ITC's, as a portion of the allowance would be GST. So the
first step is to determine if paragraph 174(a)(iv) is
satisfied. Again it is only the last few words or phrase at the
end of paragraph 174(a)(iv) which is in issue here.
[15] The Respondent has argued that this
condition is not met because the allowance was used by the
employees to purchase items that are exclusively for their
personal consumption. The Appellant argued that employee
relocations and consequently payment of allowances were integral
to Zellers business operations and were therefore incurred in the
course of the commercial activities of Zellers.
[16] I agree with the Appellants'
submissions that employee promotions and relocations to other
geographical regions go hand in hand. These elements are
essential to the growth and economic viability of this national
retailer. Such allowances foster and support good
employer/employee relations allowing upward mobility within the
corporate structure, although at the expense of a relocation.
Each employee was reimbursed the direct expenses attributable to
such a move and also paid an allowance of 10% of salary to cover
those expenses not directly receiptable. I agree with the
Appellant that there is no personal benefit or employee perk
here. The executive compensation package is provided to make the
employees whole again after their move. More importantly I agree
that there is the definite benefit to Zellers of promoting
deserving employees while inducing them to remain with the
company by paying allowances that would return them to somewhat
the same level financially as before the move. Employee promotion
might well be contingent upon moving, possibly to an undesirable
location from the perspective of the employee. There is an
element of reciprocity here and Zellers definitely benefits by
having its employees stay with the company and accept
relocations.
[17] From the employee's perspective, if
they wanted a promotion and accepted a move, they were simply put
in the same position financially that they were in prior to the
move. This would be accomplished through reimbursement of direct
moving expenses and the payment of a specific allowance for those
types of expenses listed in paragraph 8 of the Reply to Notice of
Appeal. This can never completely compensate an employee for the
upheaval of a move, which in many instances could involve a move
to a less desirable location from the employee's perspective.
Since relocation is an integral part of corporate operations,
Zellers must ensure continuity of management in potentially less
than ideal geographical locations, through payment of these
allowances. This ensures the continued viability, growth and
health of the company. Zellers would certainly view payment of
these allowances as a prerequisite to retention of essential
staff and as key to its future economic stability. I conclude
that these allowances relate directly to the corporate operations
of Zellers. They simply enhance employee dedication and loyalty
and foster better employee/employer long-term relationships.
[18] Appellant's counsel referred me to
GST Ruling 11650-7, entitled Input Tax Credit Entitlement and
Removal Expenses (issued February 16, 1996). This ruling deals
with section 175 not 174. Section 175 deals with employer
reimbursements of employee expenses, specifically legal fees and
real estate commissions, but does not deal with allowances.
However both sections 174 and 175 are similarly structured. The
ruling stated that an employer should be able to claim ITC's
for reimbursements of relocation expenses incurred by employees
pursuant to sections 169 and 175. CCRA ruled that these
reimbursements would be considered to have been made in the
course of the registrant's commercial activities. Appellant
argued that this ruling was directly on point. Respondent
distinguished this ruling on the basis that it dealt with
reimbursements not allowances. I agree with Respondent that this
ruling is dealing with an entirely different section (section
175) and an entirely different topic (reimbursements).
[19] I conclude that Zellers pays these
allowances to relocated employees in relation to its commercial
activities. Requirements of subparagraph 174(a)(iv) have
therefore been met and the deeming provisions are now engaged for
the purposes of Part 9 of the Act. The opening phrase of
section 174 ("For the purposes of this Part") is a
reference to Part 9 of the Act and dictates the scope for
the application of these deeming provisions.
[20] Appellant's counsel referred me to
comments by Driedger (Sullivan and Driedger on the Construction
of Statutes, Fourth Edition, by Ruth Sullivan Butterworths) on
deeming provisions. At page 69 Driedger states:
When "deems" is used to create a legal fiction, the
fiction cannot be rebutted. The facts as declared by the
legislature govern even in the face of irrefutable evidence to
the contrary. The difficulty that arises in interpreting legal
fictions is determining the scope of the fiction.
[21] In the facts of the case, it is clear
that the relocated employee received the cable hook up, for
example, not Zellers, the employer. The deeming provisions
however operate to create the legal fiction, which allow Zellers
to claim the ITC's.
[22] The deeming provisions of section 174
create a legal fiction that the employer, Zellers, and not the
employee, used the moving allowance to directly pay for property
and services and that it was Zellers, not the employee, that
consumed or used the property or services. Therefore pursuant to
subsections 174(d) and (e) Zellers is deemed to be the
recipient of the supply of property or services, not the
employee. Subsection 174(f) then deems that Zellers paid the tax
on the property or services. Section 169, which permits a
registrant to claim ITC's, begins with the phrase
"Subject to this Part". I conclude that this
essentially means "subject to everything else in Part
9", which would include these deeming provisions contained
in section 174.
[23] I believe this is sufficient to dispose
of these appeals and to allow them and refer them back to the
Minister for reassessment. However Respondent counsel made
representations respecting paragraph 170(1)(b) which I believe
should be addressed.
[24] The Minister's Notice of Decision
dated May 24, 2002 made the following ruling:
Your entitlement is based on Section 174 of the Excise Tax
Act, which allows a registrant to claim ITC equal to 7/107 on
certain allowances. Upon further review, paragraph 170(1)(b)
denies eligibility for an ITC if the supply is used for the
personal use of an officer or employee. The moving allowance in
question was granted to cover personal expenses of an officer or
employee involved in a move. These expenses include, for example,
school uniforms, personal cable and phone connections, and a host
of other personal use items.
[25] There is nothing within the wording of
section 174 which makes it (and in particular the deeming
provisions of the section) subject in any way to any other
section or provision in the Act. It operates within the
scope of Part 9 of the Act and having concluded that
Zellers meets the requirements set out in section 174, the
deeming provisions take effect to deem that Zellers was the
recipient of the supply, that Zellers consumed or used the supply
and that Zellers paid the tax. Respondent counsel argued that
section 170 is to be interpreted in conjunction with section
174.
[26] Respondent argued that:
... the deeming provision does not remove the fact or change
the fact they are still cable services, Internet services,
housekeeping or school uniforms. Those are still personal type
expenditures, not qualifying for input tax credits under Part 9
of the Excise Tax Act, more particularly section 169 of the
Excise Tax Act, without even referring to section 170, which we
will get to.
(transcript pages 49-50)
[27] Respondent goes on to argue that
because these moving allowances are included as taxable benefits
to the employees pursuant to section 6 of the Income Tax
Act, then we must refer to paragraph 170(1)(b). This section
sets out certain restrictions in claiming ITC's with respect
to a supply on which tax is paid, where the supply is exclusively
for the personal consumption, use, or enjoyment of the employee.
The requirement of paragraph 170(1)(b) is that the supply be
acquired for an employee's exclusive personal consumption or
use. Respondent argued that all of the items in this case were
clearly and exclusively for the personal consumption of the
employees. Respondent referred me to the definition of
"exclusive" contained in paragraph 123(1)(a) of the
Act:
"exclusive" means
(a) in respect of
the consumption, use or supply of property or a service by a
person that is not a financial institution, all or substantially
all of the consumption, use or supply of the property or service,
and
(b) in respect of
the consumption, use or supply of property or a service by a
financial institution, all of the consumption, use or supply of
the property or service;
[28] Subsection 123(1) has defined the term
"exclusive" to mean "all or substantially
all". While CCRA has interpreted this to mean 90% or more,
this Court is not bound by that departmental interpretation.
[29] Now if we return, as Respondent would
have me do, to paragraph 170(1)(b), his argument follows
that by incorporating this definition and looking again at the
wording of paragraph 170(1)(b), as the tax is paid by the
employee on these items under section 6 of the Income Tax
Act (the parties agreed that they are included as taxable
benefits), and the supply is exclusively for the personal use of
the employee, there can be no claim for ITC's by Zellers.
There are two exceptions to paragraph 170(1)(b) listed at
subparagraphs (1)(b)(i) and (1)(b)(ii). Only subparagraph
(1)(b)(ii) applies in this case and it states that an ITC may be
claimed provided there is not an amount payable by the employee
in respect to a taxable benefit under section 6 of the Income
Tax Act. Certainly I agree with the Respondent that section 6
is relevant for the purposes of applying paragraph 170(1)(b), in
determining if an ITC is payable. I also agree that it was
Parliament's intent to deny ITC's for any item that is
exclusively for the employee's personal use, consumption or
employment within the context of that section.
[30] I have concluded however that it is
section 174 that applies to the facts of this case, not section
170, and with the requirements of paragraph 174(a)(iv) having
been satisfied, this automatically triggers the deeming
provisions in subsections 174(d), (e) and (f). The deeming
provisions operate to allow Zellers to claim ITC's without
anything further. I believe that this section was specifically
included in Part 9 of the Act to address this very type of
case which is before me. Once the deeming provisions are engaged,
section 174 applies and that is the end of the matter. There is
no personal consumption, use or enjoyment which implicates
section 170. Section 170 just does not apply here.
[31] Respondent, in an alternative argument,
submitted that if I did find that the requirements of paragraph
174(a)(iv) are met, then "...the deeming provision does not
go so far as to remove the inherent 'personal
consumptive' element of that expenditure"
(Respondent's submissions paragraph 16). Respondent is dead
wrong in his interpretation of these deeming provisions. If he
were right, in any sense of the word, there would simply be no
reason to include the deeming provisions in the section.
[32] And finally Appellants' counsel
referred me to the case of BJ Services Company Canada et al v.
The Queen, [2002] G.S.T.C. 124 (T.C.C.) which dealt with fees
incurred for particular types of professional business advice and
legal fees as a result of a merger and acquisition. This case was
not particularly helpful as it not only involved entirely
different expenses from those in the present case but BJ
Services centered around entirely different sections of the
Act.
[33] Respondent's counsel referred to
the case of Attorney General of Canada v. MacDonald,
94 DTC 6262. This case can be distinguished because it dealt
with a housing subsidy or allowance, which I view as an entirely
different type of allowance from those provided in the present
case.
[34] In summary once the requirements of
section 174 are met, the deeming provisions become operative. The
deeming provisions cannot be clearer. The intent is unequivocal
and paragraph 170(1)(b) is shut out from applying in these
appeals.
[35] The appeals are allowed, with one set
of costs, and are referred back to the Minister for reassessment
and reconsideration on the basis that the Appellants are entitled
to claim ITC's for moving allowances paid to employees,
pursuant to sections 174 and 169 of the Act.
Signed at Charlottetown, Prince Edward Island, this 24th day
of July 2003.
Campbell, J
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