Meadow Lake Swimming Pool Committee Inc. v. The Queen, docket 98-2588-GST-I (Informal Procedure)

Date: 19991028

Docket: 98-2588-GST-I

BETWEEN:

MEADOW LAKE SWIMMING POOL COMMITTEE INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rowe, D.J.T.C.C.

[1] The appellant appealed from an assessment of Goods and Services Tax (GST), including penalty and interest, dated November 6, 1997, issued by the Minister of National Revenue (the "Minister") on the basis the appellant - a non-profit corporation - during the period August 1, 1994 to December 31, 1996 had received consideration from the Town of Meadow Lake (Town) in return for operating an indoor swimming pool owned by the municipality and in so doing had made a taxable supply without remitting GST in relation to the revenue received. The Meadow Lake Swimming Pool Committee Inc. (Pool Committee Inc.) objected to the assessment and on June 29, 1998 a Notice of Decision was issued confirming the previous assessment and the complete document is reproduced below:

" REGISTERED

Meadow Lake Swimming Pool Committee Inc.

Box 310

Meadow Lake, SK S0M 1V0

Saskatoon Tax Services

Appeals Division

340 – 3rd Avenue North

Saskatoon, SK S7K 0A8

NOTICE OF DECISION

This notice refers to the Goods and Services Tax assessment no. 2727 dated November 6, 1997.

The Minister of National Revenue has carefully reconsidered the assessment with reference to the information and reasons set forth in your Notice of Objection and renders the following decision.

Your objection is disallowed and the assessment is confirmed.

The substance of your representation is that the "operating grants" provided by the Town of Meadow Lake are subsidies made in the public interest and are not consideration for a supply. You further submit that the "operating grants" received from the Town of Meadow Lake are a subsidy to defray the operating deficit of the Meadow Lake Aquatic Center and not compensation or consideration for the supply of any service. You indicate that the Town of Meadow Bylaw No. 12/94 was passed pursuant to section 150(d) of the Urban Municipalities Act and not for the service of building and operating the Meadow Lake Aquatic Center.

Based on the evidence reviewed, there is a direct link between the payments you receive from the Town of Meadow Lake and a supply or supplies you provide to the Town of Meadow Lake. In the Town of Meadow Lake Bylaw no 12/94 the service to be provided is clearly outlined in Part 5 points 8 through 12. As a result, the operating grants you receive from the Town of Meadow Lake are consideration for a supply. Section 150(d) of the Urban Municipalities Act allows council to establish, maintain, operate ... or regulate the use of recreational facilities ... or lease land or buildings ... to any association organized for the purpose of fostering an interest in athletics, culture or recreation. Section 150(d) allows the Town of Meadow Lake to enact Bylaw no 12/94.

Schedule V to the Excise Tax Act does not contain a provision to describe the supply as an exempt supply, therefore, tax will apply to the transaction. Consideration was made of section 6 of Part VI of Schedule V to the Excise Tax Act and the financial statements provided with your April 28, 1998 letter and found not applicable in this circumstance. After apportionment of the eligible expenses to the various revenues earned, the direct costs of the service provided to the Town of Meadow Lake are materially less than the grants received.

Accordingly, a reassessment will not be issued."

[2] Counsel for the appellant made an opening statement in order to assist in clarifying issues before the Court as the Notice of Appeal had been drafted by other solicitors and certain matters set forth therein were no longer considered to be viable issues in the within appeal. Counsel advised the following assumptions of fact made by the Minister as set out in paragraph 5(b) to (h), inclusive, of the Reply to the Notice of Appeal were admitted:

"(b) the appellant is a non-profit organization;

(c) the appellant is not a charity for the purposes of the Act;

(d) the appellant registered for the purposes of the Act effective September 2, 1994, and was assigned GST registration number 139147953;

(e) the appellant filed returns on a monthly basis reporting tax collectible, input tax credits and net tax as set out in Schedule A ... ;

(f) the Town owned the parcel of land that the Facility was constructed on;

(g) the Town owned the Facility upon completion of the construction;

(h) the Town reimbursed the Appellant for all of the costs incurred in constructing the Facility;"

[3] Counsel for the appellant advised that in his view the issue in the within appeal was whether the appellant had supplied a service of operating, maintaining and regulating the indoor swimming pool, referred to as the facility, and whether the monies received by the Pool Committee Inc. from the Town - in the form of an annual operating grant to eliminate a deficit - could be regarded as consideration in connection with a supply of services which would attract tax. Another issue was whether the Town and the Pool Committee Inc. had a lease - explicit or implicit - on the facility at all times material. Counsel advised the appellant would not be taking the position that it was a para-municipal corporation as set forth in the Notice of Appeal.

[4] Counsel for the respondent stated the issue was whether or not certain amounts paid annually by the Town to the appellant were consideration for a taxable supply within the meaning of the relevant provisions of the Excise Tax Act (the "Act").

[5] Leonard Francis testified he resides in Meadow Lake, Saskatchewan, and is a Barrister and Solicitor carrying on practice there since his admission to the Law Society of Saskatchewan in 1980. The Meadow Lake Swimming Pool Committee Inc. was incorporated by him as a non-profit society pursuant to the Non-profit Corporations Act of Saskatchewan. The Certificate of Incorporation was filed as Exhibit A-1. Francis has served as a Director ever since incorporation and prior to that was a member of a committee of interested citizens who were active in promoting the concept of an indoor swimming pool facility. Francis explained that references to the committee before and after incorporation generally referred to the same mechanism and function of the citizen-based group involved with the creation, construction and later operation of the swimming pool even though it became formalized by incorporation on January 19, 1990. At a point in the mid-1980's, there was a community discussion about recreational enhancements in Meadow Lake. A consulting firm undertook a survey of recreational needs and the results demonstrated a desire on the part of residents to have an indoor swimming pool. Later, a public meeting was held and a committee of volunteers was formed with a mandate from the public meeting to pursue the matter under the name Meadow Lake Swimming Pool Committee. A representative of the Town was at the meeting as an observer and it was apparent the Town - as a municipal corporation - would not be involved in building the facility. As a result, there was a need to create a separate entity to promote the concept of the pool. Following incorporation of the committee, by-law No. 1 - Exhibit A-2 - set out the purpose and object of the corporation which was to "provide a swimming pool facility for the benefit of the residents and visitors of Meadow Lake, Saskatchewan and Districts as a whole". At paragraph 6 of the by-law it stated there was to be one class of membership defined as follows: all persons 18 years of age and older who are permanent residents of the Town of Meadow Lake, Saskatchewan or the area within a radius of 50 miles of the Town of Meadow Lake shall be deemed to have applied for and shall be entitled to membership in the corporation. Pool Committee Inc. undertook additional research and both indoor and outdoor facilities were considered together with other matters of concern such as capital expenditures, operating expenses and ancillary matters pertaining to the project. Pool Committee Inc. concluded an indoor facility was the only one feasible and began inquiring into the matter of the type of amenities to be located within the facility and further surveys were carried out with regard to potential use. An architect was retained and preliminary cost estimates were calculated in the sum of $2.7 million. The Town was in constant contact with the Pool Committee Inc. and provided funds, as required, from time to time. A framework for project financing was developed which was based on the sum of $900,000 being raised from the community, another equal sum to be provided by the Town and the final $900,000 to be provided by a combination of grants from the provincial and federal governments. A problem arose in that all levels of government were involved in a process of cutbacks for this type of funding. Francis explained that, as a result, the committee "went back to the drawing board" and a more modest design was prepared with a reduced cost of $2 million. The Town council stated the municipality would assist the project on a dollar-for-dollar basis to a maximum of $700,000 but would not be involved in operating the facility. Pool Committee Inc. began fund-raising in Meadow Lake - population 5,000. Donations - earmarked for the pool project - were solicited from the public through the mechanism of designating the Town as the recipient so receipts - qualifying for income tax deductions - could be issued to donors. Between 1991 and 1994, the usual fund-raising projects were employed including pie-eating contests and bake sales. Some people made donations to the Town by way of pledge to be paid over a five-year period. As a result of the community activity to fund the project, the sum of $800,000 had been donated and/or pledged to the Town for the pool. The Town had constantly been kept up to date with the efforts of Pool Committee Inc. and it advised the municipality that more money was needed for the project. Town council agreed to allot additional funds and Pool Committee Inc. put out an invitation for design and construction proposals with a fixed cost based on specifications. The site upon which the facility was to be constructed was owned by the Town and it was clear that any building constructed thereon would become the property of the municipal corporation of Meadow Lake. Pool Committee Inc. went to the Town and requested the sum of $1 million in order to make up a significant portion of the extra $1.8 million required to complete the construction. On July 1, 1994 Dominion Construction Ltd. began construction and a special account was opened at a financial institution in Meadow Lake with signing authority thereon structured to include a representative from the Town as well as named directors of Pool Committee Inc. The Council of the Town of Meadow Lake, on September 12, 1994, enacted a by-law - Exhibit A-3 - in which at part 4, it authorized the Committee - meaning Pool Committee Inc. - to construct the indoor swimming pool on the town-owned site. Francis was also the solicitor for the Town and drafted the by-law in order to properly authorize Pool Committee Inc. to fulfil the mandate of operating the pool and Part 5 of the by-law set forth the details, including the commitment by the Town to grant to Pool Committee Inc. the sum of $80,000 for the operation, maintenance and regulation of the swimming pool for 1995. From the beginning, it had been obvious to all parties involved in the project that no swimming pool facility would ever pay its own way and that there would always be an annual operating deficit. The perennial shortfall could be one kept within manageable limits or it could get out of hand and there was a consensus that Pool Committee Inc. could operate the facility at less cost than if the Town were to include the pool as part of overall municipal operations. Basically, it had been an appreciation of this economic fact of life which had led to the Town agreeing to put up the sum of $1 million for initial construction of the facility on the basis it would be involved thereafter only in the sense of paying annual operating grants to Pool Committee Inc. Francis stated there was never any written lease or operating agreement drafted or signed although that documentation had been contemplated in the by-law - Exhibit A-3 - at paragraph 8. The common intention of Pool Committee Inc. and the Town was for the non-profit corporation to become a tenant of the facility in return for receiving support from the Town in the form of annual operating grants. Pool Committee Inc. was always in sole possession of the facility and it was never contemplated it would pay any rent to the Town as that payment would only serve to increase the operating deficit which would then require more money from the Town to cover the shortfall. Francis stated it was never the intention of the Town to operate the pool. Handwritten notes - Exhibit A-4 - dated October 25, 1995 made in the course of preparing the President's Report for Pool Committee Inc. dealt with a variety of matters including setting out the ongoing need for the Town to pay grants to cover operating deficits as well as attaching a schedule of the structure of Pool Committee Inc. and the various committees involved in the operation of the facility which had been ready for use in April, 1995 and named the Meadow Lake Aquatic Centre. The number of directors serving on the board of Pool Committee Inc. varied between 10 and 20 and in 1994 or 1995 the Town insisted one of the councillors be appointed a director. The fiscal year of the Town was based on a calendar year and Pool Committee Inc. chose the same year-end. Each year, Pool Committee Inc. completed financial statements for the fiscal period and would prepare a budget for the forthcoming year upon which a request for an operating grant would be based. The month of April was when the Town budget was prepared and Pool Committee Inc. would not always receive the full amount it had requested. It had other sources of revenue including fees paid for use of the pool by members of the public, amounts received from offering swimming lessons, monies raised through fund-raising activities and grants from other organizations and community-service groups. The financial statements and related documents for the year ending December 31, 1995 - Exhibit A-5 - included - at Schedule F - a statement of income and expense. Total income - including a grant from the Town in the sum of $74,000 - amounted to $226,827 while expenses were $226,981. Financial statements for the year ending December 31, 1996 and December 31, 1997 were filed as Exhibits A-6 and A-7, respectively. Francis explained that because many pledges of money for the pool project had been made over a five-year period, it was necessary for Pool Committee Inc. to obtain a bank loan in the interim on the basis the pledges were considered as a form of collateral. As payments on the pledges were received, the amounts were paid directly to the bank to reduce the amount of the loan. In the fall of 1997, the facility had run up an overdraft of more than $20,000 and the directors of Pool Committee Inc. went to the Town Council requesting funding to pay it off. Concurrently, a plan was presented to Council in an effort to convince the councillors the situation would not arise in the forthcoming fiscal year and the Town acceded to the request but reduced - proportionately - the operating grant to a maximum of $105,000. An extract from the minutes of the meeting of Council was filed as Exhibit A-8. The financial statement of Pool Committee Inc. for 1998 was filed as Exhibit A-9. Capital expenditures were part of the overall budget of the corporation and fund-raising efforts continued with a view to adding a water slide in accordance with initial design which had taken this amenity into account. Francis stated the use of the facility by Pool Committee Inc. was always at "the pleasure of Council". The Town owned the land and the building and provided grants to the non-profit corporation to cover operating deficits. He identified the Notice of Objection, included in Exhibit A-10, as having been prepared by him on behalf of the appellant. Pool Committee Inc. hired Shelley MacNeill as Aquatic Director, and she was responsible for general management of the facility including all aspects of administration of revenue and expenses and compliance with GST. The only objection to the assessment issued by the Minister was in relation to monies received from the Town in the form of operating grants in that all other GST collected on admission fees or from sale of products or services within the facility had been remitted.

[6] In cross-examination, Leonard Francis stated the original swimming pool committee was formed to meet the need of the community to investigate the possibility of building a swimming pool facility and, once constructed, to operate it. The Town would offer support only if the project were to be driven by the committee and - later - its successor corporation. According to Francis, the Town was never prepared "to issue a blank cheque" for operating the pool and did not want to include the facility as part of ordinary municipal works. The non-profit corporation was a distinct legal entity and the operating grants issued by the Town were on a year-to-year basis and any new Council could have refused funding. Referring to Exhibit A-3 - the by-law pertaining to the construction, operation, maintenance and operation of the pool - at paragraph 8 - Francis reiterated no lease or operating agreement ever existed. Further, Francis identified a letter – Exhibit R-1 - dated April 28, 1998 he had written to an officer of Revenue Canada wherein he stated the Town and Pool Committee Inc. had never entered into a Lease and Operating Agreement. Francis agreed paragraph 9 of said by-law read as follows:

"The Town shall grant to the Committee, the maximum sum of EIGHTY THOUSAND ($80,000.00) DOLLARS for the operation, maintenance, and regulation of the swimming pool for 1995 which sum shall be pro-rated for the period of time the swimming pool is operational in that year."

[7] Pursuant to paragraph 11, budget surpluses were to be retained by Pool Committee Inc. for capital expenditures. Francis was referred to a letter dated May 14, 1997 - part of Exhibit A-10 - sent by Ron Litzenberger, Technical Interpretation Services Unit - Revenue Canada - to Ms. MacNeill, Aquatic Director to the effect Revenue Canada considered the operating grants from the Town to have a direct link to the supply of the service of operating, maintaining and regulating the swimming pool owned by the Town and that those payments were a taxable supply pursuant to the provisions of the Excise Tax Act and were not otherwise exempt. The assessment which is the subject of the within appeal was dated November 6, 1997. Francis stated that Ms. MacNeill, in her capacity as Aquatic Director, commenced overseeing the pool operation on February 1, 1995 in preparation for the actual opening of the facility on April 1, 1995. She did not have any responsibility for any aspects of the construction phase of the project. Francis stated the directors of Pool Committee Inc. met once a month unless otherwise required. Since the non-profit corporation had revenues in excess of $100,000 per year it had to prepare appropriate financial statements and undergo an audit which, in any event, was a condition of continued funding from the Town. Pool Committee Inc. filed annual reports in accordance with provincial law. In the financial statements - Exhibits A-5, A7 and A-9 - the swimming pool facility was shown as an asset of Pool Committee Inc. although the building was situate on property owned by the Town and was, therefore, owned by the municipal corporation. Francis stated this particular accounting method may have been employed because it was Pool Committee Inc. that had entered into the construction contract with the builder and had operated the bank account for purposes of paying the contractor on a draw basis in accordance with progress on the facility. In any event, if the non-profit corporation were to be wound up, the few assets it did have would be paid over to the Town, in accordance with provincial law.

[8] In re-examination, Francis stated that he handled a variety of commercial transactions in the course of his law practice and prepares many documents including those entitled Lease and Operating Agreements which - in his opinion - is intended to relate to a specific document or type of document and it was in the same context that he stated in his letter to Revenue Canada that the document - as such - did not exist between Pool Committee Inc. and the Town. The letter had been sent in response to a letter from Revenue Canada - Exhibit A-12 - dated April 1, 1998 requesting, inter alia, a copy of any Lease and Operating Agreement as referred to in the Town by-law.

[9] Frank Fechter testified he is an automobile dealer living in Meadow Lake and has been a councillor of the Town for 14 years. He recalled certain citizens began asking for support from the Town to investigate the feasibility of building a swimming pool. Council was aware the volunteer group had no funds and the Town provided some money to undertake preliminary surveys and investigation. The group of interested volunteers approached Council with a proposal which the councillors found to be "too rich". Pool Committee Inc. came back with a more modest proposal and Council advised the Town was willing to contribute approximately $750,000 toward construction of the facility. This amount was later increased to $1 million. The Town had a small staff, part-time councillors and relied heavily on volunteers and community support groups. The Town always owned the facility but did not ever take possession of it other than in an indirect sense. Pool Committee Inc. operated the pool and the Town funded the operation by contributing an amount to cover the deficit each year. The annual ritual was that Council would examine the financial statements of Pool Committee Inc. together with the proposed budget covering operations for the next year. On occasion, Council cut back the amount of Town funding in recognition that it received requests from many recreational groups and there was only a certain amount of money available. As far as the swimming pool was concerned, throughout the years a majority of councillors supported the payment of operating grants to Pool Committee Inc. The Town never considered having any other person or entity operate the pool although it did reject a request from Pool Committee Inc. to operate an exercise facility within the pool complex on the grounds it would compete with an existing business in Meadow Lake owned by a ratepayer.

[10] Rhonda Burfitt testified that she is an auditor with Revenue Canada and was the GST Appeals Officer when the Notice of Objection was filed in relation to the assessment which is the subject matter of the within appeal. She had worked in the GST section since 1991 and was transferred into the Appeals Division until June 1, 1998. She also worked as a technical writer in Ottawa. Burfitt testified she examined the Notice of Objection and was of the view no additional information had been provided that was not available to her from the audit file. She researched the issue, provided some material to the appellant's solicitor which she believed to be relevant and came to a decision to confirm the assessment. She referred to a Technical Information Bulletin B-046 dated February 22, 1991 – Exhibit R-3 - which outlined an expanded definition of municipality giving rise to the ability for an entity to be recognized as a para-municipal corporation and therefore exempt for GST purposes on monies received from a town. She also reviewed Technical Information Bulletin B-067 dated August 24, 1992 - Exhibit R-4 - in order to assist her in determining whether in her opinion, a supply had taken place in return for a transfer payment and, as such, was to be regarded as consideration. In her opinion there was a direct link between the supply of the service of managing, maintaining and operating the swimming pool facility and the receipt of operating grants from the Town. She examined a schedule of payments made by the Town to Pool Committee Inc. - Exhibit R-5 - and noted many payments were in the sum of $10,000 per month but ranged in amounts from zero some months to a high of $40,000.

[11] In cross-examination, Ms. Burfitt stated she did not meet with any representative of the appellant nor did she consider any aspect of the matter on the basis there was a lessor-lessee relationship between the Town and the appellant.

[12] Counsel for the appellant submitted that if the evidence established Pool Committee Inc. was a lessee of the facility then the appeal must be determined in favour of the appellant because in such case the provision of any services with respect to the operation of the swimming pool would be on the appellant's own account and not a service provided to the Town. That relationship, Counsel submitted, can be created by contract, express or implied, by which one person possessed of an interest in real estate - the landlord/lessor - confers on another person - the tenant/lessee - the right to exclusive possession of the real property or some part thereof for a specific term, usually in consideration of a payment of rent, either in money or equivalent. In Counsel's view of the evidence, the Town leased the facility to the appellant on a year-to-year basis and a by-law of the Town specifically referred to terms of a lease and operating agreement. In such case, even though no written agreement to that effect was ever signed, an implicit lease agreement can be established through the evidence whereby the appellant could have possession of the swimming pool complex for no consideration and could carry on all operational activities on its own account. In the alternative, Counsel submitted even if I could not find that a lease existed between the Town and the appellant the issue was whether the amount paid by way of operating grants to Pool Committee Inc. were in fact "consideration for a supply". If so, then the amounts paid are clearly subject to GST but the payment of a grant by a municipality to a non-profit organization may or may not be regarded as consideration for a supply depending on the circumstances surrounding the payments. The payments by the Town to the appellant were for a public purpose which was of benefit to the general public and the ongoing support by the Town to fund the facility was indicative the payments were not consideration for a supply. Finally, Counsel submitted the penalties imposed by the Minister, pursuant to section 280 of the Act, should be deleted because the appellant had exercised due diligence and had otherwise complied with the Act in relation to all other sources of revenue except for the funds received from the Town.

[13] Counsel for the respondent replied first to the issue of penalties and submitted the appellant was a sophisticated, well-organized entity with access to legal and accounting expertise and if in doubt could have undertaken appropriate research into the matter or obtained a ruling from Revenue Canada. As for whether or not the services provided by the appellant constituted a taxable supply, it was obvious the swimming pool facility was one a municipality ordinarily would be expected to own and operate. The appellant did not fall within the provisions of the Act relating to exempt supplies (Part VI of Schedule V) nor was it a para-municipal corporation. Counsel's view of the evidence was that it clearly established the specific purpose of the appellant had been to build and then to operate a swimming pool subject to financial control by the Town in terms of depending on the municipality for grants to cover the inevitable annual deficit. Further, in Counsel's submission, there was no lease - in fact or in law - as there was no term, no privity of estate and the appellant had no right to take action to remain in possession of the property or to take action against other persons in connection therewith. An overview of the evidence revealed a careful, methodical approach taken throughout by both the Town and the appellant in the course of dealings with each other and it is simply not reasonable to find they intended to have a lessor/lessee relationship. Counsel concluded by pointing to the evidence which showed there was an exchange of money in return for a supply, by the appellant, which benefited the town in a specific manner.

[14] The first issue to be addressed is whether it has been established on the evidence that the appellant and the Town had a lessor/lessee relationship as a consequence of having entered into a lease with respect to the swimming pool facility. The answer is: no, they did not, for the following reasons. First, there is nothing concrete to point to any intent by the appellant or the Town to enter into a lease with respect to the facility. Although the term "Lease and Operating Agreement" is referred to in the by-law dated September 12, 1994, at paragraph 8 thereof, one must look at that paragraph and the subsequent one in order to ascertain the intent of the Town. Paragraphs 8 and 9 of said by-law read as follows:

"8. The Committee is engaged to operate, maintain and regulate the swimming pool on a year to year basis under the terms of a Lease and Operating Agreement.

9. The Town shall grant to the Committee, the maximum sum of EIGHTY THOUSAND ($80,000.00) DOLLARS for the operation, maintenance, and regulation of the swimming pool for 1995 which sum shall be pro-rated for the period of time the swimming pool is operational in that year."

[15] It is apparent the Town was engaging the appellant - a non-profit corporation - to operate the pool which was owned by the Town. The Town was not receiving any rent for the exclusive use or possession of the facility by the appellant. Instead, it was clear the Town would be paying an amount on an annual basis to the appellant on the basis the Town would approve the request for funding contained in an operating budget which had to be submitted to Council for approval. Leonard Francis served as a founding member of the original group of Meadow Lake residents interested in constructing a swimming pool and later served throughout as a director of the corporation which carried out fund-raising, monitored actual construction and then undertook the operation of the facility. In addition, he was the solicitor for the Town and drafted the by-laws relating to the operation of the pool. At each step in the process - beginning at the first public meeting when a representative of the Town was in attendance - the Town chose to remain separate from the construction process and, later, to distance itself from the daily operation of the pool even though it owned the facility which was situate on municipal land. However, the Town was in constant contact with Pool Committee Inc. and it was always completely obvious the Town would have to cover annual operating deficits in the form of payments which were labelled as grants and would be paid on a year-to-year basis. It is inconceivable that during the careful, deliberate - yet highly innovative and often brilliant - methodical campaign from conception, onwards to design, then construction and operation of the facility (all the while employing a variety of fund-raising techniques), the parties somehow forgot to draw up and sign a lease agreement in order to formalize their intent with respect to the facility. The Town would not - and perhaps could not - enter into an oral lease of the facility and the conjunctive use - in the by-law - of the term "Lease and Operating Agreement" obviously is in reference to carrying out the stated intent of the by-law which was to "provide for the construction, operation, maintenance and regulation" of an indoor swimming pool. It was not to lease the facility to the appellant in the ordinary sense that term is used within the business community. Second, the appellant did not act as though it were a tenant in exclusive possession of the facility for a definite term when it requested permission from the Town to locate an exercise facility within the pool complex as a means of generating revenue. The Town refused on the basis it did not want to be seen as entering into competition with a local business offering the same service. Francis referred to the tenure of the appellant in its capacity as operator, manager of the facility as being "at the pleasure of Council". The appellant had no right of possession to the facility other than for the purpose as stated in paragraph 8 of the by-law which was to pursue its engagement to operate, maintain and regulate the swimming pool. For the appellant to be engaged by the Town for that specific purpose is no different than for some other person to have been retained, hired or employed to carry out the same function. The moment the Town stopped providing operating grants the appellant would have no right to continue in possession of the facility.

[16] The next issue is whether the management of the pool by the appellant under the circumstances disclosed by the evidence was tantamount to Pool Committee Inc. having made a taxable supply. The relevant provisions of the Act include the following:

"section 123(1) - "supply" means ... the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition;

section 123(1) - "consideration" includes any amount that is payable for a supply by operation of law;

section 123(1) – "commercial activity" of a person means

(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the persons, ...

section 165(1) - Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply."

[17] In the case of Hidden Valley Golf Resort Assn. v. Canada [1998] G.S.T.C. 95, Judge Margeson, Tax Court of Canada, considered whether or not certain payments made to the appellant were for rent or for services. At issue, therefore, was the true nature or real character of those payments. At p. 12 continuing on p. 13, Judge Margeson stated:

"The Court will at first make some general findings with respect to the GST provisions of the ETA.

Under subsec. 165(1) of the Act, every transaction is subject to the GST, unless somehow exempt. Every recipient of a taxable supply made in Canada is required to pay GST. A "taxable supply" is defined in s. 123, as, "a supply that is made in the course of a commercial activity", but does not include an exempt supply.

A "commercial Activity" is also defined in s. 123 and it includes virtually every type of activity, whether or not the activities are engaged in with an expectation of profit. (See Parkland Crane Service Ltd. v. Canada, supra.) Further, the term "supply" is defined in s. 123 as including "the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition".

The Court is satisfied that if the transaction in question attracts the GST under these provisions, then one cannot contract out of the attraction of the tax on the transaction, immaterial of the nature of the contract or agreement that is entered into, and immaterial of what provisions are contained in the agreement.

The question is always asked as to what is the true nature or real character of the payment. It matters not what the parties call it, be it rent or some other term. (See Entré Computer Centers Inc. v. Canada, supra.)

The true characterization of the payment in question is not necessarily determined by the manner in which it is paid, the period of time over which it is paid, the method of its calculation or whether it is paid in advance, periodically or in a lump sum. However, all of these factors may have some bearing in assisting the Court in determining the true nature of the payment, although none of them is necessarily conclusive."

[18] The case of Westcan Malting Ltd. v. Canada [1998] G.S.T.C. 34 dealt with the appeal of the taxpayer that had wanted to build a malting plant to provide malt to the brewing industry. In order to do so, it required a large water supply and effluent system and the corporation entered into an agreement with the Village of Alix to construct the system pursuant to an agreement whereby the municipality would obtain federal and provincial grant moneys and pay them to Westcan for the construction. The Village would own the system but would transfer it to Westcan for the sum of $1 if it ceased to operate it and Westcan would be entitled to receive the water and effluent disposal service at cost. Revenue Canada assessed Westcan for failure to collect GST on the sale of the system to the Village. One of the grounds upon which Westcan appealed was that there had been no supply of the system by it and/or the consideration was nil because the moneys paid were grant moneys from the provincial and federal governments. At p. 15 and following of his judgment, Judge Teskey, Tax Court of Canada, stated:

"The crux of the question is the ownership of the infrastructure. When The Agreement is considered as a whole, there can be no other conclusion other than Alix is the owner of the infrastructure. The obligations contained in para. 7.4 of The Agreement to maintain insurance is an indicator of ownership. It cannot be said that Alix holds titles in trust for the appellant or that it acted as agent for the appellant. The grant money was paid by both governments pursuant to written agreements with Alix, the main purpose being the building of a municipal infrastructure that would accommodate the requirements of the appellant.

The appellant needed the infrastructure. If it had built at its costs the infrastructure, the end result would have been that it had invested $3,200,000 and had the use of it at its costs. Under the Agreement, it gets the use of the infrastructure at cost and the appellant's capital cost was lowered from $3,200,000 to only $100,000 (all figures being rounded). The obvious benefit to the appellant was that it did not have to invest $3,100,000 to arrive at the position of use at cost. Originally, the appellant wanted Alix to be responsible for all costs of upgrading its infrastructure. This was not acceptable to Alix. The actual final agreement was the next best position for the appellant.

Supply is defined in the Act as:

"supply" means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition

This definition is an inclusive definition that is far reaching in what it encompasses. One such inclusion in its definition is that of a disposition which is not defined in the Act.

My colleague, Bonner, T.C.J., in Plant National Ltd. v. M.N.R. (1988), [1989] 2 C.T.C. 2145, 89 D.T.C. 401 (T.C.C.), said at pages 402 and 403:

The definitions of the word "disposition" in Black's Law Dictionary fifth Edition include "the parting with, alienation of, or giving up property". In the same dictionary "dispose of" is defined in part as follows: "to alienate, relinquish, part with, or get rid of; to put out of the way; to finish with; to bargain away".

The next consideration is whether this supply may be regarded as a taxable supply. Under the Act, a taxable supply is a supply made in the course of a commercial activity. Under the Act, the making of a supply by the person, of real property of the person, constitutes a commercial activity. On the basis of the evidence, there can be no conclusion other than that a supply has occurred. That supply consisted of the infrastructure project; real property for the purposes of the Act. I find that in the case at hand there was a supply of real property of the appellant, by the appellant to Alix, constituting a taxable supply.

The next issue to address for the purposes of s. 165 of the Act, is what the value of the consideration for this supply is. For the purposes of this appeal, I have found it useful to consult Technical Information Bulletin ("TIB") B-067, of August 24, 1992, titled Goods and Services Tax Treatment of Grants and Subsidies, to determine if the grants may be regarded as consideration. This TIB instructs that generally a grant, made in the public interest, will not be considered as consideration for a supply. However, if there exists a direct link between a grant being received by a person, and a supply being provided by that person to either the grantor of the funds, or one or more third parties, that grant will be regarded as consideration for the supply. To determine if there exists this direct link, the TIB sets out some questions to be addressed. Those are:

1) Does a supply take place in respect of the payment?

2) Is there a direct link between the payment and the supply?

3) What was the purpose of the payment?

4) Was the purpose of the supply to allow the grantor to maintain accountability in respect of the use of the payment?

On the basis of the evidence before me, I have determined that the supply of infrastructure does take place in respect of the grants provided to the appellant. Irrespective of whether those grants are from the various governments, funnelled through Alix, or are regarded from Alix, it is inescapable that ownership of the infrastructure passed to Alix on the final payment of the grant money to the appellant. There is a direct link between the appellant receiving the grant money, and Alix receiving ownership of the infrastructure. As such, the grant money received by the appellant from Alix constitutes the consideration received for the supply of the infrastructure.

Although it is apparent from the evidence that ownership of infrastructure was not a major consideration between the parties, the substance and form of the overall agreements between the various governments, Alix, and the appellant, indicate that Alix was to own the final infrastructure. The direct purpose of the grants were to allow Alix to enlarge its water and sewer capacity in order to have the appellant establish its plant.

There was a supply by the appellant to Alix and consideration paid by Alix to the appellant."

[19] The Technical Information Bulletin referred to in Westcan, supra, at page 3, poses this question: When is a transfer payment consideration for a supply? It reads as follows:

"To determine if a transfer payment is consideration for a supply, first establish whether the recipient has, or will, make a supply as a result of having received the payment. If this is the case, determine whether there is a direct link between the transfer payment and the supply.

A direct link may not always be apparent and therefore it will be necessary to consider the circumstances surrounding each case. For example, it is necessary to examine the agreement between the parties, the conduct of the parties and the objectives or policy statements of the grantor. In addition, the legislation, by-laws and any applicable regulation under which the payment is made should be examined, along with payment documents, reports and any applicable documentation."

The Bulletin goes on to say (p. 4):

"There is a direct link between a transfer payment and a supply if the payment is directly related to the provision of a supply to the grantor, or to a third party, by the recipient of the transfer payment. If a direct link exists, the payment is consideration, and if the supply is taxable, the payment must be used to calculate the tax."

[20] In the within appeal, the evidence establishes the appellant did exactly what it was supposed to do in accordance with a plan established between it and the Town at an early stage in the process of planning to construct a swimming pool facility. The appellant was to raise funds, co-ordinate construction and thereafter operate, maintain and regulate the completed pool on the basis it would receive revenue from admissions, sale of certain services and products and would be paid an amount each year in the form of an operating grant in order to cover the inevitable annual deficit. Pool Committee Inc. - albeit a non-profit corporation specially created for that very purpose - was functioning in the same manner as any other manager or operator of the facility in return for payment of money. The payment each year to the appellant by the Town as an operating budget was subject to scrutiny and approval in whole or in part by the councillors and was directly tied to the operation of the pool. When an overdraft situation arose in 1997 and the appellant had to appear before Town Council - hat in hand - for an extra $20,000 to clear off the debt, the money was forthcoming only on the basis the problem would not arise again and on condition the amount advanced would be deducted from the grant for the following year. The grant each year had a limit imposed and the money was paid for the reasons stated in the by-law. The Town did not pay $100,000 per year to the appellant to promote aquatics as a lifestyle or to advance general knowledge of the sport of swimming or water polo in Meadow Lake. Pool Committee Inc. received money each year in accordance with a well-tuned mechanism and was required to utilize the funds solely in connection with the stated purpose of operating, maintaining and regulating the swimming pool. An Aquatic Director had been hired by the appellant to oversee all aspects of the operation of the facility and, in most respects, the day-to-day operation of the facility would have been indistinguishable to an outside observer from that of an entity engaged in providing such management services within the context of an ordinary commercial activity. The Town was the owner of the facility and it required a manager to supervise the facility because the decision had been made - from the beginning - not to have the pool complex operated as part of municipal operations. While the financial support by the Town was ongoing, the overarching consideration is that it was directly linked to the provision of the specific management service provided by the appellant and the relationship was dependent - each year - on the provision of money by the Town. The Town owned the facility and had a duty to ensure the residents of Meadow Lake had the right to use the swimming pool complex. In order to do so, it could operate the pool as part of ordinary Town operations or it could enter into an arrangement with another person or entity to manage the facility in return for payment of certain amounts of money under specific conditions. It chose to pay Pool Committee Inc. to run the pool on a day-to-day basis and it received the exact service which was the subject matter of the payment. For the foregoing reasons, the Minister was correct in assessing the appellant on the basis the payments received from the Town were in consideration for a supply which was taxable within the provisions of the Excise Tax Act.

[21] The issue arose whether - in the event I found the assessment to have been correct - the imposition of the penalty by the Minister pursuant to section 280 of the Act was justified. In the case of Pillar Oilfield Projects Ltd. v. Canada [1993] G.S.T.C. 49, Judge Bowman of the Tax Court of Canada considered the matter of the penalty under section 280 and found it to be one of strict liability rather than absolute liability and, as such, one susceptible to a defence of due diligence on the basis a person should have the possibility of exculpating himself from the imposition of administrative penalties imposed by a public servant. However, that defence had to be based on certain grounds and, at p. 9 of his judgment, Judge Bowman stated:

"Innocent good faith does not, however, amount to due diligence. In light of the decisions of the Supreme Court to which I have referred, I do not regard the Time Data Recorder case or the decisions referred to in it as authority for the proposition that due diligence, if established, is not a defence to a penalty under subsec. 280(1) of the Excise Tax Act or for treating a penalty imposed under that subsection as absolute as opposed to strict."

Judge Bowman continued:

"Mr. Allen, on behalf of the appellant, argued that the appellant had demonstrated that it had performed its responsibilities with due diligence. I do not think that on the evidence this defence has been established. As stated above innocent good faith in the making of unintentional errors is not tantamount to due diligence. That defence requires affirmative proof that all reasonable care was exercised to ensure that errors not be made."

[22] In the within appeal, the appellant had the benefit of accounting and legal advice and had hired a full-time Aquatic Director in April, 1995 to administer all aspects of the operations of the appellant pertaining to day-to-day management of the pool including all matters pertaining to collection of revenues. By letter dated May 14, 1997 from Revenue Canada to Ms. MacNeill in her capacity as Aquatic Director, it was clear the position of the Minister was that the payments from the Town were subject to GST. Prior to that, the appellant had registered for GST and had collected and remitted GST in relation to paid admissions to the complex and the sale of supplies and services and had filed the appropriate returns in which allowable input tax credits were claimed. Although it seems somewhat strange that the appellant, as a non-profit corporation dependent on funds from the Town in order to continue operating the facility for the Town, would have to charge GST and therefore add to its annual operating deficit by the amount of the GST - requiring a proportionate increase in the operating grant - that is my view of the application of the Act. I fail to see how the appellant through its officers, directors and employee could have ignored the potential impact of the annual payment from the Town which amounted to a substantial sum. The arrangement should have given rise to further enquiry to ensure there was compliance with the Act and relying on some sort of oral lease arrangement with respect to a multi-million dollar facility is completely unreasonable. It is not uncommon for there to be seemingly absurd tax consequences between various levels of government when participating in projects or creative financing through corporations or agencies and the appellant should have taken time to determine its liability under the Act. On the facts before me, I find the defence of due diligence not to have been made out. The entire process by which the swimming pool in Meadow Lake came into being was fascinating and a tribute to the ingenuity of civic-minded persons like Leonard Francis and all the others who pursued the dream to fruition. The GST provisions were never meant to apply in this sort of situation but any relief that is available will have to emanate from the federal government on the basis of a policy decision. My jurisdiction is to determine whether or not the assessment is valid. It is. The appeal is dismissed.

Signed at Toronto, Ontario, this 28th day of October 1999.

"D.W. Rowe"

D.J.T.C.C.