Date: 20010427
Docket: 98-2151-GST-G
BETWEEN:
LIBRA TRANSPORT (B.C.) LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1]
This appeal is brought from an assessment under Part IX of the
Excise Tax Act, which imposes a tax (GST) on the
commercial supply of goods and services. The assessment covers
the period from August 1, 1993 to April 30, 1997. The only matter
in dispute is whether, as the Respondent asserts, the Appellant
made taxable supplies of insurance and of motor vehicle licences
to certain subcontractors with which it did business. The
Appellant says that it did not, but rather it was the agent of
the subcontractors for the purpose of obtaining insurance and
vehicle licences.
[2]
The Appellant and an associated company, Libra Transport Ltd.,
(Libra) are owned and operated by Mr. John Kohlman and his wife.
The Appellant owns one tractor trailer rig and Libra owns three.
They have been very successful in attracting business, and as a
result have far more work to do than their four rigs can handle.
They farm out the excess to about 20 subcontractors who own their
own rigs and operate them under the umbrella of the Appellant,
hauling freight on the highways of British Columbia, Alberta,
Saskatchewan and Manitoba. The customers (shippers) inform the
Kohlmans of the hauling that is to be done, and they assign each
job to one of their own rigs, or to one of the
subcontractors.
[3]
The Kohlmans refer to their subcontractors as leased operators,
and they are so described in the form of contract which they all
must sign in order to operate under the aegis of the Appellant
and Libra. However there are no lease agreements, and the trucks
and trailers are owned, operated, and remain in the possession of
the subcontractors. The contracts are of a somewhat informal
nature. They were drawn up by Mr. Kohlman without any help from a
lawyer, and many of the issues which one might expect to find
provided for are simply not addressed. For the most part, they
deal with such matters as safety and policies relating to the use
of the trucks on the highway. They specify the amount that the
subcontractors are to pay to the Appellant, but little else about
the day-to-day operating procedures and financial arrangements.
During the first three years of their association the
subcontractors paid to the Appellant 13% of the gross receipts
for the trips they made; after that, the rate dropped to 10%. The
contracts do not spell out the services that Libra will provide
to the subcontractors in relation to such matters as operating
authorities, highway transport licenses and insurance, or as to
the filing of fuel tax reports with the various provincial
governments. Mr. Kohlman testified as to all these matters, and I
accept his evidence as giving an accurate account of the terms
under which the Appellant and the subcontractors operate.
[4]
To haul freight on the highway, it is necessary to have an
operating authority from the government of each province through
which the freight will be hauled. Before 1988 it was both
difficult and expensive to obtain this operating authority. With
the advent of deregulation in 1988 that is no longer so, although
the operating authority is still required. It is now only
necessary to apply for it and to pay the fee, which varies
between $50.00 and $200.00. It is no longer necessary to
demonstrate public necessity and convenience as before. It is,
however, necessary to have an address in each province for which
an operating authority is acquired. The Appellant each year
obtains the necessary operating authorities in its own name, and
the subcontractors operate under it. They each carry a copy of
the document in the truck with them, as they may be required to
produce it to a provincial inspector. The names of the Appellant
and the owner both appear on the trucks of the
subcontractors.
[5]
Any truck that is driven on the highway must also be licenced in
the province from which it operates. That province shares the
licencing fee with the other provinces in which the truck
operates, based on the mileage driven in each province. This
requires that a comprehensive report be filed for each truck,
showing the miles driven in each province. For each truck there
must also be a report filed showing the fuel purchases and the
mileage driven in each province, so that the provincial
governments can share appropriately among them the fuel tax paid.
Each truck owner keeps records of mileage driven and fuel
purchased, and turns them over to the Appellant, who uses a
computer program to make the necessary computations and file the
reports for itself and for the subcontractors, both for the fuel
tax and for the vehicle licences.
[6]
It is not surprising that the subcontractors can obtain their
insurance at more favourable rates by combining with the
Appellant, Libra, and the other subcontractors to purchase it.
The Appellant has had a good claims record over the years, and
this, together with the strength of numbers, ensures better rates
than any single operator would otherwise be able to obtain. The
Appellant has for many years, including the period of this
assessment, arranged for insurance to be issued through its
insurance brokerage firm, CMB Insurance Brokers (CMB). One policy
is written to cover all the vehicles, both tractors and trailers,
and the premium is broken down vehicle by vehicle. The broker
deals only with the Appellant; the Appellant pays the annual
premium to the broker for all the vehicles; the terms of payment
are 25% down, and the balance payable by nine monthly
instalments.
[7] A
great many insurance documents were entered into evidence by the
Appellant, from which the following appears. On some occasions
the policies were written showing Libra and the Appellant as
being the insured. Sometimes they showed Libra, the Appellant,
and the subcontractors as being insured. The contractors were
sometimes described simply as the leased operators of Libra. The
policies did, however, specify all the vehicles in the combined
fleet, and the premiums were itemized for each vehicle. During
the GST audit it became apparent that the policies were not
always issued showing all the subcontractors as being insured
under the policies, and as a result certain change endorsements
were issued to correct that. Counsel for the Respondent made much
of these changes in argument, but I am satisfied by the
documents, and by the evidence of Mr. Kohlman, that the public
liability, property damage, cargo and collision insurance placed
by the Appellant through CMB was for the benefit of the
subcontractors as insured persons, as well as for Libra and the
Appellant. The premiums attributable to the subcontractors were
recovered from them by the Appellant on the same basis of 25%
down and nine monthly instalments for the balance, as will be
described.
[8]
At the end of each month the Appellant sends a statement to each
of its subcontractors. These statements show each trip that the
subcontractor has made, by date and job number, the starting
point and destination, and the gross amount charged by the
Appellant to the customer. From the total of these amounts, the
Appellant deducts 10% for its fee under the contract, GST of 7%
on that amount, and whatever amounts are owing to it by the
subcontractor for vehicle licence, vehicle insurance, or any cash
advances received during the month. The balance is then paid to
the subcontractor by a cheque which accompanies the
statement.
[9]
The position taken by the Minister which forms the basis of the
assessment under appeal is described by Revenue Canada in a
letter dated July 18, 1997 to the Appellant which accompanied the
assessment bearing the same date. The two items in dispute are
dealt with in paragraphs 3 and 4 of that letter as follows:
3.
Libra Transport (B.C.) Ltd. purchased fleet insurance and then
supplied them [sic] to independent lease operators. As
Libra Transport (B.C.) Ltd. is not considered as
"insurer" for GST purposes, or acting as an agent for
the insurance company, the supply is deemed taxable at 7%.
4.
Schedule V of the Excise Tax Act exempts a supply of a
vehicle licence if made by a government. Therefore, the vehicle
licence would not be subject to GST when supplied to Libra
Transport (B.C.) Ltd. However, as Libra Transport (B.C.) Ltd. is
not acting as agent for the government, the supply of licence to
the lease operator is deemed taxable at 7%.
[10] The
theory of the assessment is further elaborated by the following
assumptions pleaded in paragraph 10 of the Respondent's
Reply:
10.
In so assessing the Appellant, the Minister relied on, inter
alia, the following assumptions:
(a)
the facts stated and admitted above;
(b)
the Appellant is a GST registrant with GST Registration
No. 103325031;
(c)
at all times relevant to this appeal the Appellant was a
corporation involved in the business of supplying freight
transportation services under contracts it entered into with its
customers;
(d)
for the purpose of fulfilling its obligations to its customers
under the aforesaid contracts for freight transportation
services, the Appellant retained the services of subcontractors
in addition to using its own vehicles;
(e)
in respect of each transportation of goods, the Appellant
undertook the responsibility of a common carrier, whether the
goods were transported by one of its own vehicles or by the
vehicles of a subcontrator;
(f)
the Appellant acquired at least 4 types of insurance in respect
of the freight transportation services it provided, which
included the following:
i)
automobile insurance;
ii)
general comprehensive insurance;
iii)
cargo insurance; and
iv)
physical damage insurance for the tractors and trailers;
(g)
the total insurance premiums paid by the Appellant in the
relevant periods with respect to the insurance referred to in the
previous subparagraph were as follows:
Year
Cargo
Auto & General Physical Premium
1995
34,500
30,952
104,573 170,025
1996
18,700
53,246
106,379 178,325
53,200
84,198
210,952 348,350
(h)
the Appellant was the policy holder under each of the insurance
policies at all material times;
(i)
the auto insurance policies cover September 12 to September
12;
(j)
the cargo insurance policy covers July 17 to July 17;
(k)
the Appellant acquired an Operating Authority/Safety Fitness
Certificate from the province of Alberta, as Conditions of
Licence for an extra-provincial motor carrier from the province
of British Columbia; an Operating Authority Certificate from the
province of Saskatchewan; and a Licence to operate
extra-provincial trucks from Manitoba (the "Operating
Authorities");
(l)
the documents referred to in the previous sub-paragraph entitled
the Appellant to transport freight in each of those provinces
under the conditions specified in the document;
(m) the
licence year runs from April 1 to March 31;
(n)
the total amount paid by the Appellant as licence fees under the
Operating Authorities was;
Licence Fees
1993
45,120.16
1994
55,905,61
1995
54,670.31
1996
74,769.83
230,465.91
(o)
the Appellant supplied each of the subcontractors with all four
types of insurance referred to in subparagraph 10(f) herein
before;
(p)
the Appellant supplied each of the subcontractors with some of
the rights it had acquired from the provinces to transport
freight in that province;
(q)
the Appellant collected the consideration payable with respect to
the supplies of insurance and licences made to the subcontractors
by deducting the amount owing on such supplies from the amount
the Appellant owed to the subcontractor with respect to the
freight transportation services the subcontractor supplied to the
Appellant's customers;
(r)
the insurance premiums charged to owner/operators were as
follows:
Year
cargo
auto
physical premium GST
95/10/31
28,500
30,952
91,020
150,472 10,533,04
96/10/31
15,400
40,912
92,904
149,216 10,445.12
43,900
71,864
183,924 299,688 20,978.16
(s)
the licence fees charged to the owner/operators were as
follows:
Licence
Fee
GST
94/04/30
42,253.03
2,950.71
95/04/30
44,317.31
3,102.21
96/04/30
59,676.78
4,177.37
97/04/30
65,691.26
4,598.39
211,838.38
14,828.68
(t)
the Appellant failed to collect tax in the amount of $35,806.84
in respect of the consideration it received for the supplies of
insurance and licences;
(u)
during the Relevant Period the Appellant did not act as the agent
of any of the aforesaid subcontractors;
(v)
during the Relevant Period the Appellant was not a government,
municipality, a board, or a commission authorized by law to issue
licences in respect of transportation;
(w) during
the Relevant Period the Appellant was not a person who was
licensed or otherwise authorized under the laws of Canada or a
province to carry on in Canada an insurance business or under the
laws of another jurisdiction to carry on in that other
jurisdiction an insurance business;
(x)
the Appellant is required by the Excise Tax Act, R.S.C.
1985, c. E-15, as amended (the "Act") to
file its GST returns on a monthly basis;
[11] A number
of things should be said at this point about these assumptions.
For the most part the facts are not in dispute; the dispute
arises from the conclusions that the Minister of National Revenue
has drawn from those facts. I refer in particular to
subparagraphs 10(h), (o), (p), (t) and (u). I have already found
that the Appellant and its subcontractors were insured under the
policies of insurance, and that the premiums paid by the
Appellant in the first instance, as set out in subparagraph (g),
were paid in part on its own behalf, and in part on behalf of the
subcontractors. The amounts set out in subparagraph (n) were paid
to the provincial governments for vehicle licences, not for the
operating authorities.
[12] The
essence of the dispute between the parties is to be found in the
assertions made in subparagraphs 10(o), (p), (t) and (u). The
Minister contends that the Appellant did not act as agent for the
subcontractors when it purchased insurance and vehicle licences
for their benefit, but that it made supplies of insurance and
vehicle licences to them. For the reasons that follow, I do not
agree.
[13] In
considering the incidence of a value added tax on the supply of
goods and services it is always relevant to ask the question
"what did the Appellant supply?"[1] The assessor answered that question
by saying that the Appellant supplied insurance and motor vehicle
licences to its subcontractors, for which it charged them the
amounts that it had paid to the insurer's agent and to the
provincial governments. That appears from the letter which
accompanied the assessment, and from the assumptions found in
subparagraphs 10(n), (o), (p), (q) and (r) of the Reply. The
difficulty with this theory is that it ignores the obvious fact
that only an insurance company licensed to do so may sell
insurance, and only a provincial government may sell motor
vehicle licences.[2] The Respondent, of course, does not contend that
insurance supplied by an insurer or motor vehicle licences
supplied by a provincial government would attract tax.
[14] Counsel
for the Respondent maintained throughout the position pleaded in
subparagraph 10(u), that the Appellant did not act as the agent
of the subcontractors in connection with the acquisition of
either insurance or vehicle licences. However, when invited to
answer Lord Denning's question, he could only respond that
the services supplied by the Appellant to its subcontractors were
those of obtaining insurance for them at a favourable rate, and
of obtaining the operating authority (and presumably also the
motor vehicle licences) from the province. These positions are,
of course, inconsistent. Counsel attempted to support the
contention that the Appellant did not act as an agent for its
subcontractors on the basis that it received no separate
consideration for doing so. I know of no reason that would
prevent the Appellant from supplying its services as an agent to
obtain licences and insurance along with other services for a
single consideration. In my view that is exactly what has
happened in this case.
[15] Mr.
Kohlman testified that at the time he first entered into
agreements with subcontractors to haul for him, they asked him to
arrange insurance and vehicle licences for them. He agreed to do
so, and has done so ever since, receiving no remuneration for it
other than the 10% of gross receipts that the Appellant charges
its subcontractors. This evidence was not contradicted, and I
accept it as accurate. In those circumstances, the Appellant is
certainly acting as the agent of the subcontractors when it
arranges insurance for them, and obtains their vehicle licences.
The only remuneration received by the Appellant for supplying
these services is contained within the 10% of gross revenues
which the Appellant charges the subcontractor; it is not in
dispute that this amount is subject to GST, which the Appellant
collects and remits. The amounts of $299,688.00 and $211,838.38,
on which the Minister now seeks to tax the Appellant $35,806.84,
are clearly expenses incurred by the Appellant as the agent of
the subcontractors, and reimbursed to it by those subcontractors.
As such, they are not part of the consideration paid for the
Appellant's services, and so they do not form part of the
base upon which GST is calculated. Section 178 of the Act,
prior to its repeal,[3] specifically excluded such amounts from the
consideration for services. That section was repealed because it
was redundant; the same result is arrived at as a matter of legal
principle.[4]
[16] The
decisions of this Court in Fedderly Transportation Ltd. v. The
Queen[5] and
Vanex Truck Services Ltd. v. The Queen[6]are both superficially similar to
the present case. In both cases a company in the trucking
business subcontracted work to independent owner-operators for a
fee. In both cases the Appellant purchased the insurance and the
licences for the owner-operators' vehicles, and received
reimbursement from them for the costs. In Fedderly, the
owner-operators assigned a tractor unit, and in some cases a
trailer as well, exclusively for use in the business of the
Appellant. Two separate fees were paid by the owner-operators.
One was an administration fee which is not relevant to the issue
before me. The other was a brokerage fee of 18% of the gross
receipts, or 33% if a trailer unit was assigned as well as the
tractor. In addition, the owner-operators reimbursed Fedderly for
the cost of obtaining the licences and insurance. Mogan J. held
that the reimbursement of these costs was part of the brokerage
fee, and so deemed to be part of the consideration for the
brokerage service by the operation of section 178 of the
Act.[7] In
reaching this conclusion, however, he made it clear that it was
only the exclusive assignment of a specific tractor by the
subcontractor to the Appellant that permitted the Appellant to
obtain for that tractor the licence under the Motor Carrier
Act[8] and
insurance under an umbrella policy held by Fedderly for its own
benefit. Under this arrangement, these costs were properly
considered expenses incurred by the Appellant in making the
brokerage service, and so the reimbursement of them came within
the purview of section 178. There was not, as there is in the
case before me, an agency relationship between the main
contractor and the subcontractor in relation to the obtaining of
the insurance and the licences.
[17] The same
is true of the Vanex case. The subcontractors transferred
the legal title to their vehicles, although not beneficial
ownership, to Vanex, which then obtained the vehicle licences in
its own name. Vanex also obtained insurance coverage for its own
benefit under a fleet policy issued to it by the Insurance
Corporation of British Columbia which covered all vehicles
registered in its name. Margeson J. found that only Vanex was
insured under the policy. He went on to hold that what Vanex
supplied to the drivers was the right to drive their vehicles
with the benefit of licences and insurance for which it had paid.
The cost of the licences and the insurance was recovered from the
drivers, and so was deemed to be part of the consideration for
the service. Again, there was no agency relationship established;
indeed the Appellant does not appear to have advanced an argument
based on agency in that case.
[18] The
Respondent also relied on Parkland Crane Service Ltd. v. The
Queen[9]. That
case involved the fee charged for a travel permit required to
transport a mobile crane on the roads of Alberta. The Appellant
supplied its cranes for an hourly fee. In addition, it billed the
customer for the cost of the permit which was required in order
to transport the crane to the job site. Kempo J. held that the
permit fee was included in the consideration for the
Appellant's services by reason of section 178. She said at
page 11:
The onus is on the appellant to establish an agency
relationship on the balance of probabilities in order to be
removed from the deeming provision of s. 178 of the Act
which says the reimbursement of an expense by a recipient of a
supply is deemed to be part of the supply of service to the
recipient unless that expense was incurred by the appellant as an
agent of the recipient. This has not been accomplished in this
case.
In the present case the Appellant has satisfied that onus, as
I have already found.
[19] The
appeal is allowed and the assessment is referred back to the
Minister for reconsideration and reassessment on the basis that
the amounts paid to the Appellant by the subcontractors for
licences and insurance are not part of the consideration for its
services, and so are not subject to tax. The Appellant is
entitled to its costs.
Signed at Ottawa, Canada, this 27th day of April, 2001
"E.A. Bowie"
J.T.C.C.
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