Date: 20010815
Docket: 2000-3555-GST-I
BETWEEN:
PENSION POSITIVE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Lamarre Proulx, J.T.C.C.
[1]
This is an appeal under the informal procedure from an assessment
for the period from April 1, 1997, to March 31, 1998. The appeal
concerns the calculation of the input tax credit under
subsections 169(1) and 141.01(5) of the Excise Tax Act
("the Act").
[2]
The facts on which the Minister of National Revenue ("the
Minister") based his reassessment are set out in paragraph 7
of the Reply to the Notice of Appeal ("the Reply") as
follows :
[TRANSLATION]
(a)
the facts set out above and admitted;
(b)
during the period under appeal, the appellant operated a business
that sold financial products;
(c)
during the period under appeal, the appellant offered the
following taxable supplies: accounting services, immigration
consulting and pension management consulting;
(d)
during the period under appeal, the appellant offered the
following zero-rated supplies: investment, life insurance
and mutual fund specialist services;
(e)
taxable supplies generated 6.7 percent of the appellant's
gross income during the period under appeal, while
zero-rated supplies generated 93.3 percent;
(f)
the appellant claimed 100 percent of the ITCs of $29,377.63
relating to the making of the taxable and zero-rated
supplies;
(g)
the appellant is entitled to $1,968.30 in ITCs, that is, 6.7
percent of the ITCs, namely those relating to the making of the
taxable supplies.
[3]
The reasons for the appeal are set out as follows in the Notice
of Appeal:
[TRANSLATION]
Pension Positive Inc. is a corporation that provides such
professional services as retirement planning, financial
consulting and insurance for various types of clients.
Financial services that are exempt from the GST under the Act
(Part VII of Schedule V) generate 93 percent of our income. That
portion of our income is collected from insurance companies. It
is commission income on which no GST is charged (because of the
exemption).
For the period from 01/04/97 to 31/03/98, Pension Positive
Inc. claimed a refund (ITC) of $26,667.42 that was denied by the
Department of Revenue.
We consider this discriminatory, since we deal with exempt
financial institutions. For example, a broker in another field
(such as real estate) can claim the ITC on the GST for the same
types of expenses that we incur, and yet that broker's income
is commission income just like ours.
[4]
Testimony was given by Marc Jémus, the
appellant's vice-president. He admitted subparagraphs
7(a) to (f) of the Reply. He also added the following
information: the taxable supplies referred to in subparagraph (c)
amounted to $38,717.29, while the zero-rated supplies
referred to in subparagraph (d) amounted to $546,000. Moreover,
with regard to subparagraph (d), he said that the term
"mutual fund specialist" should be changed to
"segregated fund specialist".
[5]
Marc Jémus explained that the appellant is owned by two
corporations, 3245501 Canada Inc. and 3364151 Canada Inc. The
first of those corporations belongs to Marc Jémus'
father, and it holds 67 percent of the appellant's shares.
The second, which holds 33 percent of the appellant's shares,
is owned by Marc Jémus.
[6]
The appellant's financial statements were filed as Exhibit
I-1. There, under [translation] "Operating
Expenses", an amount of $461,595 is shown for the item
[translation] "Subcontractors, Commissions and Management
Fees". Marc Jémus said that 90 percent of that
amount was made up of the management fees paid to the two
corporations. The appellant, he stated, does not pay either him
or his father a salary. He added that in fact the management fees
paid to the two corporations accounted for most of the
appellant's $518,750 in operating expenses. Accordingly, the
goods and services tax was paid mainly on those fees.
[7]
The appellant did not propose a method for determining the extent
to which it acquired properties or services for the purpose of
making taxable supplies (in proportion to the properties and
services it acquired to make all its taxable and zero-rated
supplies). It claimed 100 percent of the taxes relating to the
total supplies made by its business.
[8]
In so claiming, the appellant relied on the Declaration of
Taxpayer Rights published by Revenue Canada, and especially
on the part that reads as follows:
YOU HAVE THE RIGHT TO EVERY BENEFIT THE LAW ALLOWS
You are entitled to arrange your affairs to pay the least
amount of tax the law allows. We are committed to applying the
tax laws in a consistent and fair manner. . . .
[9]
The appellant's agent argued that it is not fair to treat
businesses that make zero-rated supplies differently from
those that make taxable supplies, since tax is payable on the
inputs for both types of supplies. Thus, the input tax credit
should apply to all inputs acquired for the business's
purposes.
[10] Counsel
for the respondent referred: (1) to the definition of
"commercial activity", which excludes "exempt
supplies", in subsection 123(1) of the Act;
(2) to the calculation in subsection 169(1) of the
Act of the tax credit for inputs used for commercial
activities, and (3) to the requirement under
subsection 141.01(5) of the Act that fair and
reasonable methods be used to determine the extent to which
properties and services have been acquired for the purpose of
making taxable supplies.
123(1)
"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,
(b)
. .
.
169(1)
Subject to the 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 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.
141.01(5)
The methods used by a person in a fiscal year to determine
(a)
the extent to which properties or services are acquired, imported
or brought into a participating province by the person for the
purpose of making taxable supplies for consideration or for other
purposes, and
(b)
the extent to which the consumption or use of properties or
services is for the purpose of making taxable supplies for
consideration or for other purposes,
shall be fair and reasonable and shall be used consistently by
the person throughout the year.
[11] Counsel
for the respondent argued that an exempt supply does not
constitute a commercial activity. The calculation of the input
tax credit takes into account the person's use of the
acquired property or service in the course of the person's
commercial activities in relation to the use made of the property
or service by the person in the whole of the person's
undertakings. It is that proportion which must be used to
determine the input tax credit to which a person is entitled, and
that proportion must be determined using fair and reasonable
methods.
[12] Counsel
for the respondent pointed out that the appellant chose not to
propose any allocation method, arguing instead that it is
entitled to the full input tax credit because not granting it the
full credit is unfair. Counsel argued that the same provisions
apply to everyone and that the Act must be applied as
enacted by Parliament. The Minister proposed a method, namely the
income-based method. It is a logical method and, in the
absence of any other reasonable suggestion, it is the one that
must be accepted.
Conclusion
[13] In my
view, the appellant's argument that the Act is unfair
because it does not treat makers of taxable supplies and makers
of zero-rated supplies the same way cannot be accepted.
Everyone who makes a zero-rated supply is treated the same.
Those who make such supplies know that they are not entitled to
any input tax credit for the portion of properties and services
used to make those supplies. They must take account of that fact
in determining the cost of the zero-rated supplies they
make. It was up to the appellant to propose a fair and reasonable
method within the meaning of subsection 141.01(5) of the
Act, which it did not do. In these circumstances, the
allocation method proposed by the Minister, namely the income
method, is one that seems logical, and it must be accepted absent
any other suggestion as to a fair and reasonable method.
[14]
Accordingly, the appeal is dismissed.
Signed at Ottawa, Canada, this 15th day of August 2001.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
[OFFICIAL ENGLISH TRANSLATION]
2000-3555(GST)I
BETWEEN:
PENSION POSITIVE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 27, 2001, at Ottawa,
Canada, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Agent for the
Appellant:
Marc Jémus
Counsel for the
Respondent:
Gatien Fournier
JUDGMENT
The appeal from the goods and services tax assessment made
under the Excise Tax Act, the notice of which is dated
January 18, 1999, and which bears number 00000001344, is
dismissed in accordance with the attached Reasons for
Judgment.
Signed at Ottawa, Canada, this 15th day of August 2001.
J.T.C.C.
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