Date: 20010622
Docket: 1999-2664-GST-I
BETWEEN:
RIVERSIDE COUNTRY CLUB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rowe, D.J.T.C.C.
[1]
The Minister of National Revenue (the "Minister")
issued a Notice of Decision, dated February 23, 1999 confirming
an earlier assessment - no. 00000002749 -
issued on February 4, 1998 for the period May 1, 1997 to October
31, 1997. In disallowing the objection of the appellant,
Riverside Country Club (Riverside or Club), the Minister found
that section 140 of the Excise Tax Act (the
"Act") was applicable on the basis the payments
in issue - by members of Riverside - were made in
consideration for a taxable supply and, as a result, pursuant to
subsection 165(1) of the Act, the members were required to
pay tax in respect of the taxable supply at the rate of 7% on the
value of the consideration. The Minister did not consider the
payment of money by a member under the relevant circumstances to
have been in respect of the supply of a financial service and,
therefore, the payment was not exempt pursuant to section 1
of Part VII of Schedule V to the Act. At page 2 -
and following - of the Notice of Decision, R.L. Panghorn,
Assistant Director, Appeals stated:
"Based on the evidence reviewed, we find that Section 140
of the Excise Tax Act is applicable. It is our position that the
payment made by the members to the Club is consideration for a
taxable supply of a membership. As a result, pursuant to
subsection 165(1) of the ETA, the member must pay tax in respect
of this taxable supply calculated at the rate of 7% on the value
of consideration for the supply. Where a member exercises the
option of paying the total consideration for the taxable supply
(i.e., pays the principal amount of the "total full play
equivalent"), then this total amount is subject to the GST.
Alternatively, where the member exercises the option of paying
the annual special levy (the estimated $500), then the annual
levy is subject to the GST at 7%.
Subsection 123(1) of the ETA defines membership to include
certain rights acquired in connection with a share, bond,
debenture or other security. The definition describes the right
as being provided under the terms and conditions of the security,
however, in practice the condition of holding a security of the
club is contained in the bylaws of the organization or in a
separate agreement under which the membership right is conveyed.
Bill C-112 amendment, subclause 10(1), provides that
the right must be conditional on the acquisition or ownership of
the security, regardless of where that condition is set out.
Subsection 123(1) of the ETA defines a debt security as a
right to be paid money and includes a deposit of money. Debt
securities include debentures, unsecured notes, convertible
notes, mortgages, book debts, accounts receivable, treasury
bills, bonds, etc.
We do not consider the payment made by the member to be in
respect of a supply of a financial service (i.e., the lending of
money) and, therefore, the payment is not an exempt supply of a
financial service pursuant to section 1 of part VII of Schedule V
to the ETA.
Subparagraph 140(b) states that ownership of the security is a
condition of the recipient's obtaining a membership in the
particular organization. In a July 14, 1997 letter issued by
Riverside Country Club to its members it states that
"members who join the Club in future years will be required
to make the identical contribution to the Club. Regardless of the
joining date future members must either pay the special capital
assessment for 25 years or provide an interest free loan of
$6,300.00."
We feel that the members are simply paying an amount (whether
all at once or annually) in respect of a supply of a membership
made by the Club. The persons paying the amount are members of
the Club at the time the payment is made, it is a condition of
the membership to pay a certain amount towards the Club's
capital improvements, the total principal payment is an option
available to the member in meeting the member's membership
obligations, by paying the amount the member continues to receive
the benefits of membership in the Club and by choosing this
option of payment the total cash outlay by the member is less
than if they chose to pay the annual levy of approximately $500.
If the payment of the amount was not a condition of membership, a
third option of requiring no payment of any amount would have
been offered to the member.
The payment made to the Club by the member in respect of the
principal amount of the member's total full play equivalent
is consideration for a taxable supply and, therefore, the total
payment is taxable at 7% for GST purposes. As a result, the Club
must charge and collect tax from the member on the total amount
of this payment.
Accordingly, a reassessment will not be issued."
[2]
The position of the appellant - as set forth in the
objection and the subsequent appeal - will become clearer
as the evidence unfolds but it is based on the representation
that loans to the Club were provided by the members which merely
created a debt security as defined by the Act and
constituted a legally enforceable right of said members to be
repaid the principal amount of the loan. As a result, the
appellant considered the right of a member to use the facilities
of the Club stemmed from the annual payment of standard dues and
fees and was not dependent on any requirement to provide a loan
to the Club. Therefore, the appellant maintains there is no
amount of Goods and Services Tax (GST) applicable to that
definable portion of any member's payment that is
attributable to the loan as opposed to regular annual dues and
fees.
[3]
Douglas Hodson testified he is a resident of Saskatoon,
Saskatchewan. He graduated from the University of Saskatchewan in
1981 with a Bachelor of Commerce degree and then went on to law
school. He was admitted to the Law Society of Saskatchewan in
1985 and currently practices in partnership with a Saskatoon law
firm. Hodson stated he is a member of Riverside, a golf club
located along the bank of the South Saskatchewan River, 8
kilometers from the City of Saskatoon. Riverside was established
in 1912 and is a private club. It registered for purposes of the
Act, effective January 1, 1991 and was assigned a
registration number. Hodson stated that over the years, the
clubhouse had fallen into a state of disrepair and was no longer
adequate to meet the needs of members. Hodson, who had been a
member at Riverside since 1989, was elected to the Board of
Directors (Board) and - in 1996 - became President of
the Club. Hodson explained that in the late 1980's a
long-range planning committee had been given the task of building
a new clubhouse. Various matters were considered over the
subsequent years, including the stability of the riverbank,
layout changes to the course and several related concerns.
Progress was extremely slow but - in 1994 - a Finance
Committee began to examine methods of financing any new
construction if the proposals were to receive approval from the
full membership. A consensus was required in order for the
project to be successful and many of the senior members were
concerned about burdening their estate with some long-term debt
after their death. Members of the Club were placed into different
categories with the Full Play members having full privileges
which were tantamount to almost unrestricted access to the course
and related facilities. Membership in this category was
restricted to 400. Others, known as Select Play members were
required to abide by certain restrictions concerning play on
Wednesday afternoons and tee-off times on weekends. In addition,
Riverside offered a package with one Full Play and one Select
Play/Spousal membership which was appropriate for certain couples
who would then decide which one would assume the Full Play
membership with the attendant privileges. There was also a
category described as a Social member and this designation
permitted a member to not participate in golfing or other Club
activities for a year but still retain the right to be a member.
There was also a type of absentee membership available to those
who had moved away from Saskatoon but wished to retain a
connection to Riverside. Through a variety of classifications,
there was also a system in place to encourage participation by
young golfers and all persons within these categories were
excluded from any obligation to contribute to the capital
requirements of the Club. For the rest of the members, the total
annual fee included a charge for storage of clubs, access to the
driving range and membership in either the Royal Canadian Golf
Association or the Canadian Ladies Golf Association. In addition,
there was a Minimum House Charge (MHC) in order to encourage
members to utilize the clubhouse facilities in terms of
purchasing food and beverages. There had been a special capital
charge - in the sum of $200.00 per year - and this amount would
be used for past, current and future capital projects such as the
installation of a new sprinkler system. Hodson referred to a
spreadsheet - Exhibit A-1 - setting forth the
different types of membership for the 1993-1994 golfing season -
as an example of the composition of the Club and the method for
levying fees and other assessments. Hodson stated that the Board
of Directors of Riverside - on November 18, 1996 -
resolved to proceed with the construction of a new clubhouse. A
Notice of Meeting - Exhibit A-2 - was sent to all
members advising that an Annual General Meeting would be held on
December 11, 1996 and that the special business to be transacted
at that time would concern a resolution to proceed with the
construction of the new facility. An information circular was
attached to the notice and it set forth the resolution of the
Board as well as details concerning implementation of the plan
and the relevant financial considerations. During the years
preceding the decision of the Board to proceed, there had been
discussions concerning the site of the new building as well as
six or seven changes in the location of certain holes. The
projected cost of the construction - including a 5%
contingency allowance - was in the sum of $3,962,000. The project
was intended to commence during the summer of 1997 with the main
construction of the clubhouse to occupy the period from the end
of September to April, 1998 so as to avoid serious interference
with the use of the course and facilities by the members during
the regular golfing season. As a result, two separate contracts
were tendered in the spring of 1997, one pertaining to the course
renovations and the other relating to the new clubhouse. In order
to provide financing in the sum of $3.2 million, the Board of
Riverside made arrangements to borrow that amount from the Royal
Bank (Royal) and to repay the loan over a period of 25 years
based on market interest rates. Hodson stated the Board had
calculated the sum of $500.00 per year - based on certain
membership levels over a 25-year period - as representing
the capital contribution required to fund the construction
project as approved by the general membership following the
meeting on December 11, 1996. To that point, the members had been
paying the sum of $200.00 per year as a capital charge and the
cost of the new facilities would increase the cost - to a
Full Play member - by $300.00 so that the ongoing capital
cost assessment would be in the amount of $500.00 per year. The
required capital contributions by Select Play and other types of
adult members were 50% or 40%, respectively, of the amount paid
by those in the Full Play category. In paragraph 3 of the Notice
of Meeting - Exhibit A-2 - there had been reference
to the increased capital assessment of $300.00 (plus GST) for
Full Play members and $150.00 for other members in the event
construction was to proceed. Hodson referred to a booklet -
Exhibit A-3 - entitled 1997 Members'
Handbook - issued by Riverside and - on page 6 - details
concerning payment of fees were set forth. The annual fee was due
by the end of February in each year and any assessments relating
to capital or other special charges were due by the end of March.
Since the old clubhouse - at some point during the
1960's - had sustained damage from a tornado, there had
been ongoing assessments required to repair certain portions of
the facility. Hodson referred to an invoice - Exhibit A-4
- as the one used by Riverside to inform members of the
amount due for the 1996 season. The invoice for the 1997 year
- Exhibit A-5 - as issued to a Full Play member - contained
a special capital surcharge in the sum of $535.00 which was based
on the amount of $500.00 together with GST at 7%. As a result of
the construction project, this assessment had increased from the
previous amount of $214.00 which was comprised of a $200.00
contribution for capital purposes together with GST in the sum of
$14.00. Details of the financing program undertaken with Royal
were set forth in the document dated April 1, 1997, filed as
Exhibit A-6. Although the said document bore the date thereon,
the financing arrangements had been in place earlier in order to
permit tenders to be called for the necessary construction. The
Board of Riverside elected to fix a 10-year term at a reasonable
interest rate and the total loan - including $200,000 as a
revolving line of credit - was in the sum of $3.3 million.
By letter dated July 14, 1997, with attachments - Exhibit
A-7 - Hodson, in his capacity as President of Riverside,
communicated with members of the Club and explained therein the
details of the annual assessment together with an explanation of
a Member Loan Option which would enable a participant to provide
an interest free loan to the Club in the amount of $6,300.00.
Members, who had already paid the 1997 annual capital assessment
and who provided the Club with a loan by August 15, 1997, would
have the sum of $300.00 applied to the loan amount, reducing the
loan required under this option to $6,000.00. In 1998 and
subsequent years, the loan amount would be in the sum of
$6,300.00 and the loan balance would be retired by the Club at
the rate of $200.00 per year, without interest. Upon resignation
as a member, the loan balance would be repaid but without
interest. In the interim, the annual repayment by the Club
- in the sum of $200.00 - would be applied to the
capital assessment due to be paid each year by the member. The
loan requirement for Select Play/ Spousal - members was in
the amount of $3,150.00 with a credit of $150.00 if the loan was
provided by August 15, 1997 and the loan balance was to be
reduced at the rate of $100.00 per year. Social members were
given the option to provide the loan of $6,300.00 or to continue
paying an annual assessment of 40% of the regular assessment. In
the last full paragraph on page 2 of Hodson's letter, he
stated the opinion of the Finance Committee was that GST was not
payable on the initial loan amount but was payable annually on
the $200.00 assessment (which was to be paid from the loan
repayment) and members were to be billed - annually - the
GST on the sum of $200.00. The members were also warned that
"if Revenue Canada requires the Club to collect GST on the
loan amount members will be subsequently billed for the
GST". Hodson stated that a critical component of the loan
option was that a mechanism had to be put in place to repay the
outstanding balance to a retiring member. By means of the
financing arrangement presented to the members of Riverside, the
Club could reduce the outstanding amount of the loan to Royal.
Full details of the terms and conditions of the Special Capital
Assessment Plan were sent to members by way of attachment to
Hodson's letter. Although work had begun on the new
clubhouse by the first part of September, 1997, each
Full Play member had already paid the $500.00 capital
assessment for the current year and this money - together with
the funds later being provided by way of loans - permitted the
Club to borrow only the sum of $1.4 million from Royal. Because
it had been able to raise $1.8 million within the membership, the
Club was able to delay drawing down the loan from Royal until
required towards the end stages of the construction project.
Hodson stated that - at all times - members had the option
to participate - or not - in the loan program and
over 50% of them decided to participate. The joining fee required
to be paid in the case of a Full Play member was in the sum of
$3,000.00 and it was non-refundable. In 1998, Hodson was Past
President of the Club as well as Chair of the Implementation
Committee, responsible for Finance and he utilized a spreadsheet
- Exhibit A-8 - prepared by Riverside office staff
- in order to provide information to Royal in order to
complete the borrowing arrangements. On that document -
which Hodson believed to be accurate - all members were
listed including those who chose not to participate in the Member
Loan Option. Royal had agreed to lend the sum of $6,000 to
Riverside members who wished to participate in the loan program
and this borrowing was secured by a Promissory Note. The
financing method permitted Royal to advance the proceeds to the
borrower but the funds would be sent to Riverside, pursuant to a
Direction to Pay. In return, Riverside agreed with Royal that it
would not refund a departing member the outstanding balance of
the loan unless that person's loan to Royal had been fully
repaid. This loan procedure had been instituted prior to the Club
drawing down on the main loan but the $200,000 revolving line or
credit had already been in place. Of the total Full Play
membership of 400, almost 200 ignored the invitation contained in
Hodson's letter and declined to advance any funds to the
Club by way of loan. The members who did participate loaned
Riverside a total of $1,779,650. At that time, there was no limit
on the number of Select Play members but currently it is set at
200. Hodson reiterated that it was important for those members
choosing to provide a loan to receive assurance that - in
the event they decided to give up their membership - they
would be repaid the balance of the loan, calculated at the time
of their departure. Riverside did not provide any security to the
members who chose to loan money to the Club other than a covenant
to re-pay as provided for in the by-laws of Riverside, a
non-profit organization incorporated under The Non-Profit
Corporations Act of Saskatchewan. The financial statements of
Riverside for the 1996-2000, inclusive, years were filed
collectively as Exhibit A-9. Hodson was a member of the Board for
each year until the end of 1998, following which he was Chair of
the Committee concerned with finance and was familiar with most
of the monetary matters which were the subject matter of the
audited financial statements prepared by the accounting firm of
KPMG. In the 1996 financial statement, there was no record of any
liabilities to members. However, in the 1997 statement - at
note 4 - the outstanding debt to Royal in the sum of
$1,198,527 was stated as well as the amount - mentioned
earlier - due to members. This note pertaining to the liability
of Riverside to the members was carried through in subsequent
years. Hodson stated he and his wife had loaned the sums of
$6,300.00 and $3,150.00, respectively, to Riverside and he is
currently owed the sum of $5,300.00. Since the departing
member's Club membership must be acquired by a new member,
there may be a delay - depending on the timing of the departure
of a member in relation to the golf season - of up to one
year before the retiring member would be repaid the outstanding
amount of the loan. Hodson referred to the pamphlet
- Exhibit A-10 - as the current
information package provided by Riverside to prospective
members.
[4]
In cross-examination, Douglas Hodson stated he had been involved
with the Riverside expansion undertaking solely as a volunteer
and Club member. The accounting and financial statements were
prepared by KPMG but he was directly involved with financial
matters pertaining to the construction project and with the
borrowing - by Riverside - from Royal as well as the system
by which members could borrow from Royal in order to advance a
loan to the Club. The document - Exhibit A-1 -
pertained to the 1994 golfing season and was prepared for the
Board. Hodson was a member of the Board and it met at least once
per month and a package of reports would accompany the agenda.
One member of the Board was a Chartered Accountant and he
prepared documents relating to the budget for the forthcoming
season. Hodson prepared the Notice of Meeting
- Exhibit A-2 - and related documents. The 1997
Members' Handbook - Exhibit A-3 - at
page 6 - referred to the requirement that annual dues had
to be paid by March 31st of each year. Hodson stated there was
somewhat of a grace period but by the end of April the payment
due from a member had to be made if that person wished to play
the course. The capital surcharge also had to be paid and -
in 1997 - that assessment was in the sum of $500.00. In the
event a member chose to loan the Club the sum of $6,300.00, then
Riverside agreed to repay the member at the rate of $200.00 per
year to be applied against the capital surcharge each year that
the lender remained a member. Hodson disagreed with the
suggestion of counsel for the respondent that the loan was a
pre-payment of the capital surcharge for the next 25 years as
most of the current members would not remain within the Club for
that period. Counsel referred Hodson to the Information Circular
- attached to Exhibit A-2 - dated November 18, 1996,
specifically to paragraph 2, where it stated, "Once contract
prices have been finalized, members will be presented with final
numbers on the pre-payment option (likely in June or July,
1997)". Hodson replied that at this point in time the
pre-payment method had been considered as an option as well as
other methods such as raising funds by means of issuing a
debenture. However, the members of the Club had not yet approved
any expansion plans - as recommended by the Board - and that
endorsement did not occur until the annual general meeting held
on December 11, 1996 during which 96% of the members voted to
approve the construction project. In order to provide some
mechanism to repay an advance to a retiring member, the loan
provided for a reimbursement of the remaining balance calculated
as a portion of the overall 25-year term. Prior to participating
in the Loan Option Program, all members received a document
- Exhibit A-7 - explaining the plan. Included in the
documents was a form where a member could choose either to
continue to pay the annual special capital assessment or to
provide an interest-free loan to the Club in the amount of $6,300
($6,000 if provided by August 15, 1997) on the terms and
conditions of the Special Capital Assessment Plan. The form could
be returned - to Riverside - together with a cheque in the
required amount. There was also provision for the Spouse Member
Election in which the amounts were exactly 50% of the ones
applicable to Full Play members. Hodson stated his understanding
was that the terms and conditions pertaining to the loans by
members to Riverside were later incorporated into the by-laws of
the Club and that obviated the need to issue approximately 200
promissory notes, one to each participating member. The
subsequent indebtedness by Riverside to the members was disclosed
in each subsequent financial statement. In Hodson's view,
during his tenure on the Board, it was intended that the Board
enshrine a legal obligation pursuant to which Riverside would be
required to repay a retiring member the appropriate remaining
amount of the loan. Hodson stated he and his wife each made a
loan to the Club and were satisfied they would be repaid the
relevant amount in accordance with the terms and conditions under
which the monies had been advanced. Hodson agreed the special
capital surcharge in the sum of $200 per year was subject to GST
and the amount of $200 per year - although credited to that
assessment by way of loan repayment - required the member
to pay GST in the sum of $14.00. In 1997, as reflected in the
invoice - Exhibit A-5 - the capital surcharge was in
the sum of $500. Thereafter, a Full Play member - for
example - could either pay the surcharge - as assessed
- during the term of membership or could participate in the
member loan plan and have the assessment fixed at the rate of
$200 per year. This sum would be paid by way of applying the
annual repayment on the $6,000 loan. No further payments would be
required from the participating member, other than GST in the sum
of $14.00 which was included in the annual invoice for total fees
and dues. The comparison found towards the back pages of the
document - filed as Exhibit A-7 - had been prepared by a
Riverside member who was a Chartered Accountant and it contained
numbers relevant to the choice of paying the capital assessment
annually or choosing to participate in the loan option. Hodson
agreed there was reference therein to the loan being equivalent
to "a 7% after tax return on his or her funds". The
timing of repayment to a retiring member was dependent on a new
member joining the club and, although other golf courses had been
constructed in the Saskatoon area, the Riverside membership list
had increased and the Full Play levels were consistent so that
- at this point - there had never been any problem in
reimbursing the appropriate amount to a departing member. Hodson
stated that the invoices - Exhibits A-4 and A-5 -
were prepared for periods prior to the implementation of the loan
program. The commitment letter - dated April 1, 1997
- issued by Royal was signed by Hodson - on May 14,
1997 - on behalf of Riverside. His recollection is that the Board
had approved him as a signatory to the document on the basis he
was a Board member and also the Chair of the Finance Committee.
Hodson stated that tenders had been put out in March and certain
experts had been retained by Riverside at that time because
Riverside was confident the required financing arrangements were
in place with Royal despite the fact the formalization of those
terms occurred later. A variety of documents and resolutions had
been required by Royal as part of the borrowing process and the
loan was drawn down, as required, much later in the year. Hodson
stated he thought there were probably further changes made to the
borrowing agreement prior to funds actually being advanced by
Royal. At page 4 of the Royal commitment letter - Exhibit
A-6 - there was reference to a first charge mortgage in the
sum of $3,100,000. However, at some point, the Club elected to
lock into a 10-year term at 6.25% on an amount of approximately
$1.2 million with no pre-payment privilege while agreeing to
pay interest on another sum of $400,000 - at a floating interest
rate - and this portion of the financing could be prepaid
at the option of Riverside. The agreement - by Royal - to make
loans to members for the purpose of loaning the sum of $6,300
- or other amount required by the category of membership
- was limited to the 1997 year but any member could
participate in the Loan Option program in subsequent years by
dealing directly with Riverside in the event some financing over
a short term was required. Hodson indicated that to the best of
his recollection, the list of members - Exhibit A-8 -
was created during October, 1997 and agreed that some stragglers
may have decided to make a loan up to the end of December. In any
event, Hodson's estimate was that only 55% of Riverside
members - in 1997 - agreed to participate in the
loan program. In referring to Exhibit A-8, Hodson explained that
the lines containing a member's name and type of
membership, without any other information appearing thereafter in
the spaces to the right thereof, indicate that a particular
member had chosen not to participate in making a loan to the
Club. He agreed some of those members may have chosen to make a
loan to the Club in 1998 or subsequent years. Hodson stated he
was not part of any committee dealing with officials at Revenue
Canada and the reference - Exhibit A-7, page 2 - about a
request for an interpretation to confirm that GST was not payable
on the initial loan amount was in the context of certain
discussions between Brian Taylor - a Riverside member acting on
behalf of the Board - and Revenue Canada. Riverside had an
accounting firm prepare the necessary financial statements and
income tax returns and the Club also had office staff comprised
of a General Manager, in-house accountant, secretaries, food and
beverage personnel and workers directly related to the operation
of the golf course. Hodson assumed the office staff had prepared
the document - Exhibit A-8 - and has seen other
similar documents during his time on the Board or while serving
on the special committee dealing with expansion and/or finance.
While serving on the Board and as an ordinary member, he relied
on the accuracy of the financial statements as prepared by KPMG.
A member of the Club - Dave Hobberman, C.A. - was the
head of an operating finance committee and the method followed
was for the office staff to generate information which Hobberman
reviewed and the ultimate audit was undertaken by KPMG. Counsel
referred Hodson to the material contained in Exhibit A-10
pertaining to membership in Riverside. Hodson stated his
recollection was that a Select Play member had to be a spouse of
a Full Play member but some long-term members in that category
were entitled to remain therein even though they were no longer
part of a defined spousal unit. As a Board member between 1992
and 1997, Hodson stated the Club was probably always near the
maximum of 400 Full Play members and, while other golf courses
had been built, the attraction of Riverside was that it was a
full-fledged private club. In order to join Riverside, there was
a $500 non-refundable fee required at time of application which
- if approved - then took into account that sum and
the Club applied it to the $3,000 non-refundable joining fee
which could be financed over a three-year term but the applicable
GST on the entire amount had to be paid during the first year.
Hodson stated there were many members who still choose to pay the
special capital surcharge in the sum of $500 per year. Within the
information package - Exhibit A-10 - there was a
sheet setting out the different forms of membership together with
the fee schedules and included on the form there is an
explanation entitled: Special Capital Surcharge vs. Loan to Club.
Counsel referred Hodson to the statement that as a member of
Riverside, "you will be provided the option to pay the
Surcharge amount annually or in a lump sum payment to the
Club". Hodson responded that he did not agree with that
usage of the term " lump sum" in the context of a
payment of the relevant sum of money. No loans were made to
Riverside by any individuals who were not members of the
Club.
[5]
Counsel for the appellant submitted the evidence disclosed the
following:
1.
Riverside required financing to construct a new club house and to
pay for the costs of other course improvements.
2.
In early 1997, the Club imposed an annual $500 levy against Full
Play members to cover the anticipated financing costs of the
loan.
3.
The loan program instituted by Riverside allowed members to
provide a loan in the sum of $6,300 which would reduce the amount
of funds required through the loan from Royal. The loans were
without interest and were repayable to the member at the rate of
$200 per year. Upon termination of membership, the outstanding
balance on a member's loan would be repaid upon that member
being replaced with a new member and upon repayment of financing
to Royal, if applicable, obtained by that member in relation to
borrowed funds to enable the member to provide the loan to
Riverside.
4.
Full Play members who elected to provide the Club with a loan
would also pay a $200 annual levy (plus GST). In 1997 only, if
the member electing to provide a loan to Riverside had already
paid the $500 levy for that year, then the member was provided
with a credit of $300 so that they had to provide only the sum of
$6,000 but would be credited with a loan in the amount of
$6,300.
5.
Many of the members continued to pay the annual levy of $500
while those members who had elected to provide a loan to the Club
paid an annual levy of $200.
[6]
Counsel for the appellant submitted that the advance of money
- by way of loan to the Club - was not consideration
for a taxable supply pursuant to subsection 165 of the
Act because the amount paid by the member to Riverside
represented the principal amount of the loan and was not
consideration for any supply provided to the Club by the member.
Counsel submitted further that the Club had not provided anything
to the member other than its obligation to repay the loan as no
membership rights were conveyed as a result of a member choosing
to participate in the member loan option and members who chose to
pay the ongoing annual levy rather than provide a loan received
the same membership rights. Counsel submitted the loans - by
members - to Riverside were included in the category of a
financial service - as defined in subsection 123(1) of the Act
- and constituted an exempt supply as a result of being
excluded from the definition of commercial activity within the
Act. Counsel pointed out that the loans - by members - to
Riverside met the indicia of any standard loan transaction and
the only thing the member received from the Club was the
obligation to repay the loan as no other membership rights or
services were obtained as a consequence of making the loan. In
counsel's view, any difference in the levy paid by those
who chose to continue to pay the higher annual levy and those who
elected to make a loan to Riverside did not amount to a taxable
supply of property or services to a member and the incidental
benefit of having the capital surcharge fixed at the rate of $200
per year for 25 years does not detract from the true nature of
the loan. In conclusion, counsel submitted that a reading of
section 140 of the Act would lead one to conclude that it
had no application to the issue in the within appeal.
[7]
Counsel for the respondent submitted that during the period in
issue - May 1, 1997 to October 31, 1997 - the
special annual surcharge was set at $500 per full play equivalent
and each member was required to pay this levy in addition to
other fees paid in connection with membership in the Club. In
counsel's view of the loan transaction, members were
provided with the opportunity to pay his or her share of the cost
of the new construction either by paying a lump sum amount or by
paying the special annual levy for as long as required by the
term of the financing undertaken by Riverside. A member who
elected to pay the lump sum of $6,000 - in 1997
- was not required to pay the special annual levy and would
be assessed only a fixed sum of $200 per year in respect of the
improvements to the course and clubhouse and this amount would be
paid by way of deduction from the lump sum. Counsel submitted the
evidence made it clear that regardless of the date of joining,
any new member was required to make the same capital contribution
to the Club as current members and all members had to pay either
the special annual levy or the lump sum amount to keep or to
acquire membership in Riverside. Further, counsel submitted, the
cash outlay by the member who chose to pay the lump sum was less
than the anticipated cash outlay by the member who chose to pay
for the improvements by way of the special annual levy. In
counsel's view of the matter, there was GST payable on the
so-called loan amount when it was paid by the members in the same
manner as applicable to other members who had chosen not to make
the loan but to pay the full annual special levy which was
subject to GST - at 7% - on the sum of $500. Counsel
disagreed with the position of the appellant that the loan
constituted a financial service within the context of subsection
123(1) of the Act because obtaining or maintaining a
membership in the Club was contingent upon paying either the
special annual levy or upon payment of the lump sum/loan and a
member who did not choose one or the other methods lost the
privileges of membership, as defined by that provision of the
Act. As for the ability to receive some reimbursement of
money upon ceasing to be a member of Riverside, counsel submitted
that it would be a refund of prepaid fees which were required as
a condition of membership in the Club, in the same sense as one
might choose to prepay a membership for a year - or longer
period - in a health club or gymnasium facility in order to
obtain a reduction in overall fees based on the right of the
proprietor to have the use of the money during that time. Counsel
raised the point that there was no promissory note or other
document in writing upon which to base an action in debt by a
member against Riverside should the Club default in repayment of
the appropriate balance owing on the amount advanced. Counsel
conceded that section 140 of the Act pertaining to supply
of membership with security was not applicable to the within
appeal, although it had been relied upon by the Minister in the
Notice of Decision dated February 23, 1999 and was an alternative
position set forth in the respondent's written submissions.
Counsel concluded by submitting the evidence - overall -
would support the Minister's characterization of the
transaction as constituting a taxable supply within the meaning
of the Act because the entire structure of the so-called
loan was inextricably bound up with the rights and privileges of
membership.
[8]
In the reasons provided by the Minister in the Notice of
Decision, it is clear the Minister considered section 140 of the
Act to be applicable. Counsel for the respondent has since
conceded it does not apply to the issue in the within appeal.
However, it is worthwhile examining that section as well as the
definition of "membership" contained in subsection
123(1) because these provisions were relied on by the Minister in
arriving at the conclusion that the payment made to the Club by a
member in respect of the principal amount of the member's
total full play equivalent was consideration for a taxable supply
and, therefore, the total payment was taxable at 7% for GST
purposes and, as a result, the Club must charge and collect tax
from the member on the total amount of this payment.
[9]
Section 140 of the Act reads as follows:
"Supply of membership with security - For
the purposes of this Part, where
(a) a person makes a supply of a share, bond, debenture
or other security (other than a share in a credit union or in a
cooperative corporation the main purpose of which is not to
provide dining, recreational or sporting facilities) that
represents capital stock or debt of a particular organization,
and
(b) ownership of the security by the recipient of the
supply is a condition of the recipient's, or another
person's, obtaining a membership, or a right to acquire a
membership, in the particular organization or in another
organization that is related to the particular organization,
the supply of the security shall be deemed to be a supply of a
membership and not a supply of a financial service."
[10] The definition of
membership is found in subsection 123(1) of the Act, as
follows:
"membership" includes a right granted by a
particular person that entitles another person to services that
are provided by, or to the use of facilities that are operated
by, the particular person and that are not available, or are not
available to the same extent or for the same fee or charge, to
persons to whom such a right has not been granted, and also
includes such a right that is conditional on the acquisition or
ownership of a share, bond, debenture or other
security;"
[11] It is
apparent that the loan - as the term was used by the
appellant - or the lump sum payment, as preferred by
counsel for the respondent, was not a share, bond, debenture or
other security and even if it were, the evidence is clear that
participation in the loan option was not a condition of obtaining
a membership or the right to acquire a membership in the Club.
There is no definition of "security" contained within
the Act but it is defined in The Canadian Oxford paperback
Dictionary - Oxford University Press Canada 2000 - as
follows:
"6a:A certificate attesting the ownership of, or interest
in, the capital, assets, property, profits, earnings or royalties
of any person or company.
6b: a document, such as a bond, debenture, or note,
acknowledging a debt."
[12] Counsel
for the respondent submitted the so-called loan by a member to
Riverside was not enforceable because it had not been evidenced
by any document in writing to specifically acknowledge the debt.
I am not aware of any legislation that would require the loan to
be evidenced by any particular form of written document, nor was
any suggested in the course of argument. I put forward this
scenario for consideration. Time passes and a member decides to
leave the Club but Riverside refuses to pay the balance of the
loan even though the conditions subsequent have been met by a new
member having been accepted to take the place of the departing
member and there is no outstanding balance on the loan - if
relevant - to Royal. The departing member argues there is
no reason for Riverside to withhold the appropriate payment as
calculated in accordance with the terms and conditions attached
to the advance of the loan in conformity with the documentation
contained in Exhibit A-7. The departing member presents to the
presiding judge the details surrounding the proposed expansion of
the Club facilities, the matters discussed at the annual general
meeting on December 11, 1996 where the general membership
ratified the recommendations of the Board and the offer presented
by Riverside, as contained in the exhibit referred to above. The
plaintiff then demonstrates that he or she had paid the money to
Riverside in pursuance of the offer to participate in the member
loan plan and that the terms and conditions were an integral part
of the bylaws of the organization, as approved by appropriate
resolutions of the Board of Directors. My prediction is there
would be a finding in favour of the erstwhile member and judgment
would issue against Riverside within the timeframe usually
associated with the quick-as-lightning pronouncements dispensed
by the formidable - albeit mercurial - Judge Judy in the course
of her popular daytime television show.
[13] The
appellant's position is that the method adopted by the Club
and the members constituted a financial service as defined by
subsection 123(1) which includes - for our purposes, the
following:
"(a) the exchange, payment, issue, receipt or
transfer of money, whether effected by the exchange of currency,
by crediting or debiting accounts or otherwise,
...
(c) the lending or borrowing of a financial
instrument,
...
(d) the issue, granting, allotment, acceptance,
endorsement, renewal, processing, variation, transfer of
ownership or repayment of a financial instrument,
...
(g) the making of any advance, the granting of any
credit or the lending of money,"
[14] There is
a definition of financial instrument in subsection 123(1) and it
includes a debt security which is also defined within the same
subsection in this manner:
""debt security" means a right to be paid money
and includes a deposit of money, but does not include a lease,
licence or similar arrangement for the use of, or the right to
use, property other than a financial instrument;"
[15] The relevant part of
the definition of "money" in subsection 123(1)
includes:
"any currency, cheque, promissory note, letter of credit,
draft, traveller's cheque, bill of exchange, postal note,
money order, postal remittance and other similar instrument,
..."
[16] Pursuant
to Section 1 of Part VII of Schedule V to the Act, a
financial service is an exempt supply and the position of the
appellant is that when a member provides the loan to the Club, it
falls within paragraph 123(1)(g) of the definition of
financial service as provided above and the obligation of
Riverside to repay the loan falls, inter alia, with
subparagraph 123(1)(a) of said provision.
[17] There is
no doubt that the transaction is a bona fide transaction
giving rise to enforceable legal obligations. The Minister was
convinced that the granting of a loan pursuant to the member
option was inextricably bound up with the right to obtain -
or maintain - membership in the Club and that it made no
difference whether someone chose to participate in the loan
option plan or decided to pay an annual levy of $500 as a special
capital surcharge in order to assist in paying off the Riverside
debt to Royal, except that by choosing the loan method, the total
cash outlay by a member was less than if he or she had chosen to
pay the regular annual levy. However, if one examines the
spreadsheet - Exhibit A-1 - in which various
categories of membership and different types of fees and
assessments are set forth, it is apparent that membership -
while it certainly has its privileges - requires a
considerable cash outlay. Before a person is even considered for
membership, a non-refundable payment of $500 must accompany an
application. If approved, the new member will have that amount
applied to the joining fee of $3,000. Once a member, there are
annual fees based on the relevant category together with fees for
storage of clubs, use of the driving range, mandatory memberships
in national golf organizations, minimum house charge for the
clubhouse food and beverage component and special capital
charges. Failure to discharge any of these various obligations
could result in loss of membership. The evidence is clear that
the senior members of Riverside did not want to participate in
any form of pre-payment of fees, especially not for 25 years. In
addition, it had been a concern of older members that any advance
of funds to Riverside should not be capable of burdening their
estate after death by having those amounts tied up for that
period of time. A vital component of approval of the financing
scheme was for the Board to provide members with a mechanism of
repayment of the loan upon certain conditions having been met.
The subscribing members were aware of the terms and conditions
and accepted the offer to lend money on that basis. In return,
they gave up the right to collect interest - in the
ordinary sense - but were able to lock into a fixed annual
assessment of $200 for the next 25 years as a mechanism by which
to satisfy the requirement - as a member - to
continue to pay the ongoing special capital surcharge in order to
retire the debt made necessary by the construction of new
facilities. However, the necessary ingredient to make the member
loan program attractive to members was the ability to have the
appropriate amount capable of being repaid upon the happening of
certain events.
[18] It is
obvious the Minister considers that GST should be payable on the
full amount of the monies advanced by members of the Club during
the period - in 1997 - covered by the assessment. I
cannot find support for that proposition in the relevant
legislation as applied to the facts in the within appeal. I am
not a partisan of the philosophy devoted to meandering in
metaphysical meadows using the rod and staff of a case-specific
- and often ill-defined - comprehension of the object and
spirit test to provide comfort and support in an effort to divine
what Parliament must have really, really intended in a global
sense when drafting the legislation at issue, especially absent
any ambiguity. One must also take into account that - despite a
veritable jungle of incredibly complex detail - Parliament was
capable of approving the placement of a cookie bouquet - with at
least 8 cookies - into the zero-rated category while - in a
remarkable display of sang-froid - simultaneously choosing
to disappoint the manufacturers of ice lollies whose produce was
excluded from similar treatment by virtue of the provisions
of subsection 1(j) of Part III of Schedule VI of the Act (
GST Portions). I am not concerned with whether or not any public
purpose would be served by allowing the financing methodology
followed by the appellant to be seen as falling within the
definition of a financial service pursuant to the Act and,
therefore, constituting an exempt supply not subject to GST.
Whether or not Riverside is a good not-for-profit- corporate
citizen in planning and executing a controlled slice around this
particular GST hazard, is totally irrelevant. Taking into account
the evidence and the applicable provisions of the Act (
and regretting the absence of any decisions relevant to this
point) I find the loans provided by the members - to Riverside -
qualify as a financial service within the meaning of the Act and
do not represent consideration for a taxable supply. The
Minister's decision was incorrect in relying on
section 140 of the Act and the appellant has
demonstrated that the assessment should not - otherwise -
be confirmed.
[19] The
appeal is allowed and assessment 00000002749 - dated February 4,
1998 - is hereby vacated. Because the amount in dispute for
the purposes of section 18.3009 of the Tax Court of Canada
Act is more than $7,000, there can be no costs awarded to the
appellant.
Signed at Sidney, British Columbia, this 22nd day of June
2001.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE
NO.:
1999-2664(GST)I
STYLE OF
CAUSE:
Riverside Country Club and H.M.Q.
PLACE OF
HEARING:
Saskatoon, Saskatchewan
DATE OF
HEARING:
April 25, 2001
REASONS FOR JUDGMENT BY: the
Honourable Deputy Judge D.W. Rowe
DATE OF
JUDGMENT:
June 22, 2001
APPEARANCES:
Counsel for the Appellant: John R. Beckman
Counsel for the
Respondent:
Elaine Lee
COUNSEL OF RECORD:
For the
Appellant:
Name:
John R. Beckman
Firm:
McKercher, McKercher & Whitmore
Saskatoon, Saskatchewan
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2664(GST)I
BETWEEN:
RIVERSIDE COUNTRY CLUB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 25, 2001 at Saskatoon,
Saskatchewan, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Counsel for the
Appellant:
John R. Beckman
Counsel for the
Respondent:
Elaine Lee
JUDGMENT
The
appeal from the assessment made under the Excise Tax Act,
notice of which is dated February 4, 1998 and bears number
00000002749 is allowed and the assessment is vacated in
accordance with the attached Reasons for Judgment.
Signed at Sidney, British Columbia, this 22nd day of June
2001.
D.J.T.C.C.
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