[OFFICIAL ENGLISH TRANSLATION]
Date: 20010816
Docket: 98-9207(GST)G
BETWEEN:
CORÉLO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal from a notice of
assessment dated March 24, 1995, concerning the goods and
services tax ("GST") for the period from
January 1st, 1991, to March 31, 1993.
[2] The Notice of Appeal and the Reply
to the Notice of Appeal clearly explain the facts and the nature
of the case. It is therefore appropriate to begin by reproducing
the main part of the Notice of Appeal:
[TRANSLATION]
1. This appeal
concerns the following assessment:
- Date of notice of
assessment:
March 24, 1995
- Taxation
years:
January 1, 1991, to
March 31, 1993
- Tax owed under the
assessment:
$76,039.54
2. The
appellant is a non-profit organization (NPO) incorporated under
Part III of the Quebec Companies Act for the sole purpose
of providing premises to institutions in the health and social
services network of the North Shore administrative region.
3. On or about
March 24, 1995, the appellant received a notice of assessment
numbered 0211805 from the Ministère du Revenu of Quebec
stating that taxes were being claimed from it as goods and
services tax (GST) for the period from January 1, 1991, to
March 31, 1993.
4. According
to the notice of assessment, the Ministère du Revenu of
Quebec was claiming $76,039.54 in GST, which the appellant paid
without prejudice to its rights on July 19, 1995.
5. On or about
June 13, 1995, the appellant sent the Ministère du Revenu
of Quebec a notice of objection to the notice of assessment
asking the Ministère du Revenu to vacate the assessment
for the reasons set out below.
6. On or about
June 12, 1997, the Ministère du Revenu of Quebec sent the
appellant a letter enclosing a decision on the objection, which
was the Ministère's reply to the appellant's
notice of objection. The decision read as follows:
[TRANSLATION]
The assessment was made in accordance with the provisions of the
Act, in particular-but without limiting the generality of
the foregoing-since the rebates claimed as a non-profit
organization cannot be granted because "Corélo
Inc." is not a qualifying non-profit organization
within the meaning of sections 259 et seq. of
the Excise Tax Act.
A person is a qualifying non-profit organization if it is a
non-profit organization whose percentage of government
funding for the year is at least 40 percent.
The Ministère's position is that the amounts of money
paid by the health care and social services institutions in
consideration of supplies of immovable property made to them by
Corélo Inc. by way of lease cannot be considered to be
government funding.
[3] The respondent replied by stating
that she had assumed the following facts in support of the
assessment:
[TRANSLATION]
(a) the appellant is
a GST registrant;
(b) the appellant
was incorporated under Part III of the Companies Act
(R.S.Q., c. C-38) for the purpose, inter alia, of
building, purchasing and leasing immovable property to be used as
residential premises for institutions in the health and social
affairs network;
(c) according to its
letters patent, the appellant is authorized to own $100,000,000
in immovable property;
(d) in accordance
with its corporate powers, the appellant makes supplies of
immovable property by way of lease mainly to health network
institutions ("the institutions") located in the North
Shore region;
(e) the immovable
property is supplied by way of lease to government employees to
whom the government must provide living accommodations pursuant
to collective agreements or letters of understanding between the
parties;
(f) the
appellant owns about 89 immovable properties that it supplies by
way of lease for those purposes;
(g) the appellant
collects rental income on its properties;
(h) the rent paid to
the appellant is the consideration for the supplies of immovable
property that it makes by way of lease;
(i) the
appellant's annual financial statement for the fiscal period
that ended on March 31, 1993, indicates the following on page
2:
INCOME
1993
1992
Property
leasing
$1,590,919
$1,507,862
Interest
6,732
6,442
Sale of capital property
56,000
-------
Rent
supplement
19,898
22,107
Other (note
3)
59,368
324,740
$1,732,917
$1,861,151
(j) according
to its annual financial statements, the appellant does not
receive any grants or other government funding from the
institutions that lease its immovable property;
(k) at the time of
payment, none of the institutions that lease the appellant's
immovable property provides it with government funding
certificates in a form prescribed by the Minister;
(l) for the
period from January 1, 1991, to March 31, 1993, the appellant
claimed GST rebates totalling $61,274.36 as a non-profit
organization;
(m) the appellant could
not receive those rebates because it was not a qualifying
non-profit organization for that period;
[4] The issue is whether the appellant
was a non-profit organization that qualified for GST
rebates for the period from January 1, 1991, to
March 31, 1993. To decide that issue, the Court must
determine whether the money paid to the appellant during the
periods at issue constituted government funding.
[5] The evidence showed that the
administrators of the health and social services network of the
North Shore region had to deal with very specific problems: the
network's jurisdiction extends over a very wide area, the
distances to be covered are considerable and the road network is
difficult and not very efficient.
[6] Because of the size of the area
served, centralizing services would be unrealistic; the network
must serve a great number of very small communities that rightly
claim minimum basic services. To deliver certain services that
are often essential, it is imperative that the network be able to
count on appropriate premises for delivering those services but
also for housing the health professionals responsible for
providing the available types of care.
[7] To meet the many needs in a
satisfactory manner and to fully accomplish its fundamental
mission, those in charge of the network decided-since they could
not take certain initiatives because of the limited powers of
their legal entity-to create a parallel, autonomous legal
structure whose purpose was to facilitate the delivery of social
and health services. They therefore created and incorporated the
non-profit company "Corélo Inc."
[8] Corélo Inc. was thus
incorporated to solve the problems that the North Shore regional
health and social services board ("R.H.S.S.B.") could
not solve because of its limited powers. The two entities worked
in very close co-operation to accomplish their respective
missions, since they had the same objective of delivering maximum
care with maximum efficiency.
[9] Corélo's head office
was at the same address as the R.H.S.S.B. All of
Corélo's management, administration, planning and
accounting activities were handled by R.H.S.S.B. employees and
managers. Corélo's current operations were under the
control and responsibility of a chief executive officer who was
also a member of the management of the R.H.S.S.B. The R.H.S.S.B.
freed up the necessary people, whose salaries were paid by
Corélo Inc. Financial management, planning and various
projects were also handled and organized by R.H.S.S.B.
employees.
[10] Corélo's fundamental mission
was therefore to carry out certain real estate projects needed to
deliver various services in the region.
[11] Corélo, a non-profit
organization, was incorporated on April 14, 1980, under Part III
of the Companies Act (R.S.Q., c. C-38). It was
therefore incorporated to solve problems and make it possible to
attain fundamental objectives.
[12] The corporation's objects were
established as follows:
[TRANSLATION]
1. For
charitable and social purposes, to build, purchase, lease, own,
improve, maintain, administer and dispose of immovable property
and movable property that might subsequently become immovable in
order to provide:
(a) residential
premises, on a priority basis, to persons working in the social
affairs network and then to those working in the public and
parapublic sectors;
(b) premises for
public institutions in the social affairs network that would like
to introduce specific resources, including clinics, group homes
and others of a similar nature;
(c) residential
premises adapted for persons with disabilities.
2. To
organize, install, maintain and improve all services associated
with the said immovable and movable property in order to ensure
the general well-being of its occupants.
3. To collect
all sums of money, whether by way of donation, subscription,
will, gift or otherwise, to accomplish the corporation's
purposes.
4. Generally,
to do all things and take all actions necessary to achieve the
above goals.
[13] Supplementary letters patent completed
the initial objects.
[TRANSLATION]
6.2 The corporation may
have only seven (7) members. Any person who agrees to be a
member, who is designated by the North Shore health and social
services board and who is accepted by the board of directors
shall be a member.
However, three (3) of those persons shall be appointed after
consultation with, and on the recommendation of, the region's
health care and social services institutions that benefit from
the corporation's services, in accordance with the procedure
set out in the corporation's by-laws for that
purpose.
A member shall cease to be a member when the North Shore health
and social services board appoints another person who agrees to
become a member of the corporation in his or her place.
. . .
5. All of the
corporation's by-laws shall be ratified by the North
Shore health and social services board, and those by-laws
shall take effect only as of the date of such ratification.
6. If the
corporation is dissolved or wound up, whether voluntarily or by
court order, its property, once the debts have been paid, shall
pass to an organization carrying on an analogous activity or, if
there is no such organization, shall pass to the North Shore
health and social services board, which shall manage it. If the
board cannot do so, the property shall be distributed to the
region's health care and social services institutions based
on need.
[14] Corélo Inc. was therefore
incorporated to support, supplement and facilitate the operations
of the R.H.S.S.B., whose role was to serve the entire middle and
lower North Shore and also all the communities of New Quebec.
[15] The scope and limits of the powers of
the R.H.S.S.B., an organization created by the Act respecting
health services and social services
[R.S.Q., c. S-4.2], are set out in section 340 of
that statute, which reads as follows:
The main object of a regional board is to plan, organize,
implement and evaluate, in the region, the health and social
services programs prepared by the Minister.
The other objects of a regional board are
1. ensuring
public participation in the management of the public network of
health services and social services and ensuring that users'
rights are protected;
2. formulating
priorities in matters of health and welfare according to the
needs of the population of the region and within the scope of the
objectives fixed by the Minister, ...
3.
establishing service organization plans in its territory and
evaluating the effectiveness of services....
4. allocating
the budgets intended for the institutions and granting subsidies
to community organizations and accredited private resources;
5. ensuring
the coordination of the special medical activities of physicians
who are under agreement pursuant to section 360 and the
activities of the institutions, community organizations,
intermediate resources and nursing homes accredited for the
purposes of subsidies under section 454 and promoting their
cooperation with the other agents of community development;
6.
implementing measures for the protection of public health and for
the social protection of individuals, families and groups;
7. ensuring
economical and efficient management of the human, material and
financial resources at its disposal.
[16] The appellant Corélo Inc.
therefore gave itself the powers and means it needed to occupy
the areas of activity not accessible to the R.H.S.S.B. For that
purpose, and so that it could provide all residents of those
remote areas with access to health care, the appellant purchased
or had built immovable property needed by the R.H.S.S.B. to
fully carry out its fundamental mission.
[17] That property was used as living
accommodations and clinics. This was often a necessity, since
institutions that must serve the public in remote areas are
responsible for providing living accommodations to those who must
deliver the available services. Over the years, the appellant
purchased immovable property.
IMMOVABLE PROPERTY AND HOW IT WAS USED
|
|
1990-91
|
1991-92
|
1992-93
|
|
Living accommodations
|
53
|
56
|
58
|
|
Clinics, intermediate resources and community
organizations
|
20
|
25
|
28
|
|
TOTAL
|
73
|
81
|
86
|
[18] The occupied property was purchased or
built mainly as living accommodations or as clinics and community
resources either by means of a grant from the R.H.S.S.B. or by
means of mortgage financing. In some cases, both methods were
used.
[19] Once built or purchased, the property
was leased; the rent was based essentially on the financing
method used, to which occupancy-related expenses- such as
taxes, insurance and repairs-were added. The leases were always
signed with the institution responsible for the local assignment;
thus, in the case of residential rent, the leases were never
signed with the occupants but rather with their employer.
[20] The rent level was based essentially on
the financing costs and the occupancy and administrative
expenses. Although the appellant argued that there was no
question of making profits, the financial statements showed
profits of $133,181 in 1992 and losses of $201,418 in 1991 and
$97,562 in 1993. Even though the property acquired by means of a
grant was leased for a minimal amount that basically covered
expenses, in reality there were very significant variables that
created both profits and losses.
[21] The issue is whether, for the period
from January 1, 1991, to March 31, 1993, the amounts
paid to the appellant were government funding entitling it to a
GST rebate for the said period.
[22] The appellant argued that the amounts
were government funding because the rental income came from
public sector institutions subsidized directly or indirectly by
the government; in other words, the appellant claimed that it was
a non-profit organization that qualified for GST rebates given
that the rental income was based solely on the cost, given its
financing arrangements and the operating expenses, given that the
goal being pursued was of public order and non-profit and,
finally, given that those concerned depended directly and totally
on the government.
[23] To reinforce its arguments, the
appellant stated:
[TRANSLATION]
The rent that Corélo receives from the institutions is
tax-exempt. However, to achieve its objects, Corélo
purchases taxable property and services in respect of which it
claims to be entitled to a rebate for half of the taxes as a
non-profit organization under section 259 ETA.
[24] Not only do the parties agree on the
wording of the issue in this case, but they are also relying on
the same legislative provisions to support their respective
arguments. Those provisions are as follows:
The
concept of "government funding" is defined in the
Regulations prescribing matters necessary for determining
rebates payable to public service bodies under section 259 of the
Excise Tax Act, which read as follows:
"government funding" of a particular person
means
(a) an
amount of money, including a forgivable loan but not including a
refund or rebate of, or credit in respect of, tax duties or fees
imposed under any statute, that is readily measurable and is paid
or payable to the particular person by a grantor
(i) for the purpose of financially assisting the particular
person in carrying out the purposes of the particular person and
not as consideration for supplies made by the particular person,
or
(ii) as consideration for making property or services
available for consumption or use by other persons (other than the
grantor, individuals who are officers, employees, shareholders or
members of the grantor, or persons related to the grantor or to
such individuals), where supplies of the property or services
made by the particular person to such other persons are exempt
supplies, and
b) an amount of money paid or payable to
the particular person by an organization (in this paragraph
referred to as the "intermediary") that received the
amount from a grantor or by another organization that received
the amount from an intermediary, where
(i) in the case of an amount that, after 1990, becomes payable
or is paid to the particular person, the intermediary or the
other organization, as the case may be, provides to the
particular person, at the time the amount is paid to the
particular person, a certificate in a form prescribed by the
Minister certifying that the amount is government funding,
and
(ii) the amount would be government funding of the particular
person by reason of paragraph (a) if the amount were paid
by the grantor directly to the particular person; (montant de
financement public)
According to that definition, government funding is:
[TRANSLATION]
· an amount
of money . . . that is readily measurable and is paid or payable
to the particular person by a grantor . . . as consideration for
making property or services available for consumption or use by
other persons (other than the grantor, individuals who are
officers, employees . . . or members of the grantor, or persons
related to the grantor or to such individuals), where supplies of
the property or services made by the particular person to such
other persons are exempt supplies; or
· an amount
of money paid or payable to the particular person by an
organization (in this paragraph referred to as the
"intermediary") that received the amount from a grantor
or by another organization that received the amount from an
intermediary, where
·
the intermediary or the other organization, as the case may be,
provides to the particular person, at the time the amount is paid
to the particular person, a certificate in a form prescribed by
the Minister certifying that the amount is government funding,
and
·
the amount would be government funding of the particular person
by reason of "the first definition" if the amount were
paid by the grantor directly to the particular person.
The same regulations define the term "grantor" as
including a government, a trust, a board, a commission and a
corporation that is controlled by a government and one of the
main purposes of which is to fund non-profit
endeavours:
"grantor" means
(a) a government or municipality, other than
a corporation all or substantially all of whose activities are
commercial activities or the supply of financial services or any
combination thereof,
(b) a corporation that is controlled by a
government or by a municipality and one of the main purposes of
which is to fund charitable or non-profit endeavours,
(c) a trust, board, commission or other body
that is established by a government, municipality or corporation
described in paragraph (b) and one of the main purposes of
which is to fund charitable or non-profit endeavours, and
(d) a band of Indians within the meaning of any
Act of Parliament; (subventionnaire)
[25] One of the appellant's main
arguments is that importance must be attached not to what the
money was spent for (rent) but basically to the origin of the
funds. Its argument is worded as follows:
[TRANSLATION]
When an institution pays an amount of money to Corélo
in consideration of immovable property and Corélo makes
the property available for use by the institution through exempt
supplies, the institution is merely giving Corélo an
amount of money that the North Shore R.H.S.S.B. has
entrusted to it for that purpose. That amount of money (rent paid
by the institution) would therefore be government funding of the
particular person (Corélo) by reason of
paragraph (a) if the amount were paid by the grantor
(the North Shore R.H.S.S.B. or the Ministère de la
Santé et des Services sociaux) directly to the particular
person.
[26] In answer to the respondent's
arguments, the appellant went even further:
[TRANSLATION]
The consideration received by Corélo for the supply of
its immovable property is not rent in the usual sense of
that word, since that rent is based on the amortization of the
mortgage loan used to finance the purchase or construction of the
property. That is why the lease filed as Exhibit A-10
between the appellant and the Centre de santé de la Basse
Côte-Nord for the Old Fort clinic, construction of
which was fully funded by the North Shore regional health and
social services board, provides for only a nominal annual rent of
$1.
[27] The appellant first referred to the
constraints faced by the R.H.S.S.B. to justify the creation of
the appellant, whose fundamental mission is to provide premises
using various methods or approaches (purchase or construction)
(full or partial financing).
[28] Once the premises are fitted out, a
lease is signed and the rent is set based on the financing but
also on all the occupancy-related expenses (taxes,
maintenance, heating, etc.).
[29] How can it be understood and argued
that the consideration paid is not rent in the usual sense
without having to completely disregard the actual facts? I do not
think that the nature of administrative realities can be changed
solely to derive a benefit therefrom.
[30] As for the requirements relating to the
certificate, once again, the appellant argued that this was a
secondary, non-fatal technicality that could not be raised
against it because the forms were not available and its external
auditors were not even aware of their existence.
[31] The respondent admitted that the rent
paid by the institutions came from funds provided by the
R.H.S.S.B., which in turn received grants from the
Ministère de la Santé et des Services sociaux of
Quebec ("M.S.S.S.").
[32] However, the respondent said, and
rightly so, that the rent was not paid directly to Corélo
Inc. by the M.S.S.S.; it was paid directly by the institutions
that used the space made available to them under leases granted
by the appellant. There is no doubt that the rent was paid by the
institutions for and in consideration of the occupation of the
premises described in a lease; this reality cannot be
overshadowed or even downplayed on account of the fact that the
institutions that owed the rent received grants that enabled them
to pay it.
[33] At the relevant time, Corélo
Inc. was a separate, autonomous corporation, even though the
evidence showed that the R.H.S.S.B. had considerable influence
over all its activities and policies and over its general
management.
[34] Even if corporate entities have the
same objectives and may ultimately depend on the same funder,
this has no effect on their legal autonomy and independence.
[35] When a separate entity is required to
attain certain objectives and solve certain problems, that
reality cannot suddenly disappear to avoid the obligations
associated with its existence.
[36] To carry out its mandate, the
R.H.S.S.B. set up a legal structure separate from its own; that
entity cannot, for the purposes of certain obligations, disappear
or simply be considered non-existent on account of the fact
that it shares the same concerns.
[37] Corélo Inc. was incorporated; it
became a separate, autonomous intermediary that was fully subject
to all legal obligations in terms of its activities and
operations.
[38] For an amount to be considered
government funding, a number of conditions and requirements must
be met; it is not enough to meet just one or even two of the
conditions. I believe that four conditions are essential:
(1) The payments
were initially received by the intermediary from a grantor;
(2) The funds paid
by the intermediary to the particular person must be intended to
assist the particular person in carrying out that person's
purposes or to pay for an exempt supply made to "other
persons", except, inter alia, persons related to the
grantor;
(3) The funds do not
go through more than two intermediaries before reaching the final
recipient (for example, from a grantor to a national
organization, to a provincial organization and then to a local
organization);
(4) The intermediary
provides a government funding certificate in a form prescribed by
the Minister (form GST-322) certifying to the particular person
that the amount is government funding.
[39] First of all, the appellant admitted
that it did not provide the government funding certificates in a
form prescribed by the Minister of National Revenue ("the
Minister") (form GST No. 322). It seems that that
requirement was not known to either the appellant or its external
auditors.
[40] To explain the failure to comply with
that condition and to avoid the consequences, the appellant
argued first that it was not responsible because its own external
auditors did not know of the existence of the condition and the
forms, it seems, were not available.
[41] The appellant also argued that the
formality was a secondary one and that the failure to complete it
was not fatal. Accepting such an interpretation would amount to
saying that Parliament spoke for nothing. This argument that the
form requirement was an optional formality is not valid and must
be rejected.
[42] When an enactment explicitly states
that information should be provided or sent by means of a
certificate using prescribed wording, I do not think that such an
obligation can be evaded without repercussions. For these
reasons, I do not think that the amounts of money paid or payable
were government funding, which is why the appeal must be
dismissed on this point.
[43] I have no jurisdiction to intervene
with regard to the interest, since this is a matter that
Parliament has left to the Minister's sole discretion.
[44] As for the penalties, the respondent
argued that good faith is not equivalent to the due diligence
needed for the penalties to be cancelled. Indeed, good faith is
not synonymous with due diligence. However, the assessment of a
penalty, unless it involves strict liability, which is not the
case here, presupposes a certain negligence or even
carelessness.
[45] In my opinion, there is no doubt about
the appellant's good faith in this case, and the evidence
also showed that it behaved, in the circumstances revealed by the
evidence, in a manner that cannot be called wrongful or grossly
negligent, which is why the penalties should not be maintained.
Accordingly, the appeal is well founded with regard to the
penalties and must be dismissed with regard to the
assessment.
[46] The appeal is allowed with regard to
the penalties and dismissed with regard to the assessment. The
case will therefore have to be referred back for a reassessment
that must be made without adding penalties, the whole without
costs.
Signed at Ottawa, Canada, this 16th day of August 2001.
J.T.C.C.
Translation certified true
on this 23rd day of January 2003.
Sophie Debbané, Revisor
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