Commission Scolaire Des Chênes v. The Queen, docket 97-3347-GST-G

Date: 20000210

Docket: 97-3347-GST-G

BETWEEN:

COMMISSION SCOLAIRE DES CHÊNES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Lamarre Proulx, J.T.C.C.

[1]            The parties have agreed that the judgment in this appeal will be entered in 28 other similar appeals, that is those of:

COMMISSION SCOLAIRE CHOMEDEY DE LAVAL, 97-3330(GST)G

COMMISSION SCOLAIRE D'AVIGNON, 97-3331(GST)G

COMMISSION SCOLAIRE SEIGNEURIE, 97-3332(GST)G

COMMISSION SCOLAIRE PRINCE-DAVELUY, 97-3333(GST)G

COMMISSION SCOLAIRE DE LE GARDEUR, 97-3334(GST)G

COMMISSION SCOLAIRE DE CHÂTEAUGUAY, 97-3335(GST)G

COMMISSION SCOLAIRE DES CANTONS, 97-3336(GST)G

COMMISSION SCOLAIRE DU HAUT ST-MAURICE, 97-3337(GST)G

COMMISSION SCOLAIRE THETFORD-MINES, 97-3338(GST)G

COMMISSION SCOLAIRE DES MILLES-ÎLES, 97-3339(GST)G

COMMISSION SCOLAIRE DE LA HAUTE-GATINEAU, 97-3340(GST)G

COMMISSION SCOLAIRE PIERRE-NEVEU, 97-3341(GST)G

COMMISSION SCOLAIRE DE L'ASBESTERIE, 97-3342(GST)G

COMMISSION SCOLAIRE DE L'EAU-VIVE, 97-3343(GST)G

COMMISSION SCOLAIRE DE MEMPHREMAGOG, 97-3344(GST)G

COMMISSION SCOLAIRE DE ST-HYACINTHE-VAL-MONTS, 97-3346(GST)G

COMMISSION SCOLAIRE DE COATICOOK, 97-3349(GST)G

COMMISSION SCOLAIRE ST-JEAN-SUR-RICHELIEU, 97-3351(GST)G

COMMISSION SCOLAIRE LES ÉCORES, 97-3353(GST)G

COMMISSION SCOLAIRE CHAVIGNY, 97-3354(GST)G

COMMISSION SCOLAIRE ST-JÉRÔME, 97-3356(GST)G

COMMISSION SCOLAIRE DU GOÉLAND, 97-3357(GST)G

COMMISSION SCOLAIRE DU LAC ST-JEAN, 97-3358(GST)G

COMMISSION SCOLAIRE MORILAC, 97-3359(GST)G

COMMISSION SCOLAIRE DE VAL D'OR, 97-3361(GST)G

COMMISSION SCOLAIRE DE SOREL, 97-3362(GST)G

COMMISSION SCOLAIRE LAURENTIAN, 97-3375(GST)G

COMMISSION SCOLAIRE ROUYN-NORANDA, 97-3376(GST)G

[2]            At the start of the hearing, the parties filed an agreed statement of facts:

[TRANSLATION]

1.              The appellant is a school board governed inter alia by the Education Act (R.S.Q., c. I-13.3);

2.              It is registered for the purposes of the GST (registration number 122509979);

3.              It organizes school bus transportation of all or part of its students and holds an authorization from the Minister of Transport for that purpose;

4.              The supply by the appellant to its students of transportation service before the beginning of classes and after the end of classes each day is made free of charge;

5.              The supply of lunchtime transportation service and adult transportation service made by the appellant must be paid for by the parents or the students who choose to use that service;

6.              In accordance with the Education Act, the Minister of Transport pays the appellant a subsidy for the supply of student transportation service before the beginning and after the end of classes each day;

EXHIBIT I-1            Filed together, letters from the Department of Transport respecting the preliminary determination of budgetary allocations paid to the appellant for the 1992-1993, 1993-1994, 1994-1995 and 1995-1996 school years;

EXHIBIT A-1           Filed together, TE-104 forms (Student transportation operation reports) completed by the appellant for the 1992-1993, 1993-1994, 1994-1995 and 1995-1996 school years;

7.              Having neither the staff nor adequate equipment to transport the students, the appellant contracts with independent carriers for this purpose;

EXHIBIT A-2           Filed together, copies of contracts entered into by the appellant with Autobus Robert Blanchard Inc. for the periods from 1992 to 1995 and from 1995 to 1998;

8.              The appellant and the respondent agree to file only copies of contracts entered into with Autobus Robert Blanchard Inc. since the contracts are standard contracts and the other contracts entered into with other independent carriers for the periods in issue differ only with respect to amounts;

9.              The appellant paid the consideration provided for in the transportation contracts for the periods in issue as well as the GST payable under the Excise Tax Act, R.S.C., 1985, c. E-15 (hereinafter the "ETA");

10.            Since July 1, 1992, the appellant has always claimed from the Minister, under section 259 of the ETA, a partial rebate of the GST paid to the independent carriers;

11.            Since July 1, 1992, the appellant has always received the partial rebate claimed under section 259 of the ETA;

12.            In its GST return for the period from May 1 to 31, 1996, the appellant claimed ITCs of $505,273.42 representing, according to the appellant, the difference between total GST paid to the independent carriers since July 1, 1992 and the amounts refunded by the Minister since that date as partial rebates under section 259 of the ETA;

EXHIBIT A-3           Filed together, copies of forms FPZ 500 (Goods and Services Tax Return) and GST 66E (Goods and Services Tax Rebate Application for Registrant Public Service Bodies) for the period from May 1 to 31, 1996;

                                  Notice of Assessment 22239 dated September 24, 1996 issued for the period from May 1 to 31, 1996;

                                  Notice of assessment dated December 6, 1996;

13.            On September 24, 1996, the Minister issued notice of assessment 22239 in respect of the appellant for the period from May 1 to 31, 1996;

14.            By that notice of assessment, the Minister refused to pay the appellant the ITCs of $505,273.42;

15.            On December 6, 1996, the appellant filed a notice of objection against assessment 22239;

16.            The appellant filed a notice of appeal with the Registry of this Court on November 14, 1997 before a decision had been rendered by the Minister in response to the notice of objection, that is, more than 180 days after the said notice of objection was filed;

17.            The parties agree that the judgment in this case will be entered in the 28 other related cases, a list of which is appended hereto;

18.            The parties also agree that the amount of the ITC rebate claimed by the appellant or the other 28 school boards is not the subject of any admission, the parties moreover having agreed that, before complying with any final judgment eventually rendered in the appellants' favour, the Minister will have the opportunity to audit each and every application for input tax credits in order to validate diligently and within a reasonable time the accuracy of the amounts claimed;

19.            Exhibits I-1, A-1, A-2 and A-3 referred to in paragraphs 6, 7, 12, 13 and 15 hereof are accordingly filed by consent.

[3]            The agreed statement of facts almost completely reproduces the facts set out in paragraph 17 of the Reply to the Notice of Appeal (the "Reply"), describing the assumptions of fact on which the Minister of National Revenue (the "Minister") relied in assessing the appellant. The facts set out in the Notice of Appeal do not differ greatly from those stated in the agreed statement of facts.

[4]            The point at issue is whether the budgetary allocations paid to the appellant for student transportation are consideration for the student transportation service. If the answer is yes, would that have the effect of setting aside section 5 of Part III, Schedule V of the Excise Tax Act (the "Act"), which provides that student transportation is an exempt supply. The appellant argues that the answer is yes to both questions and claims input tax credits ("ITCs") under section 169 of the Act. The amount it claims is the difference between the total goods and services tax paid to the independent carriers from July 1, 1992 to May 31, 1996 and the amounts refunded by the respondent since July 1, 1992 in respect of a partial rebate under section 259 of the Act.

[5]            Carmen Lemire, the appellant's director of financial resources, and Lucie Leduc, a tax law research officer with Revenu Québec, testified at the request of counsel for the appellant. Serge Charest, an economist with the Department of Education, testified at the request of counsel for the respondent.

[6]            Ms. Lemire explained to the Court how the Department of Transport's subsidies are granted to a school board for student transportation purposes. The Department issues budgetary rules, which were filed as Exhibit A-4. At the start of the school year, the Department sends a letter providing preliminary confirmation of the resource envelope. The school board signs contracts with the student carriers for three-year periods under the budgetary rules. A copy of the contract is sent to the Department of Transport. At the end of the year, the appellant sends a report, the TE-104, providing details on the organization and cost of the transportation. The Department produces its final certification on that basis. This confirms that the transportation has been organized in compliance with the budgetary rules.

[7]            It is up to the school board to organize student transportation. The Department of Transport covers neither the GST nor the QST in the resource envelope. Neither the lunchtime transportation nor the adult transportation is included in the subsidy. Parents wanting lunchtime transportation must pay the determined annual amount. This information is given to the Department of Transport through the TE-104 report. The number of children is not a factor considered in establishing the resource envelope. If the school board manages to organize its transportation so as to cut costs covered by the subsidy, that board may retain a portion of the surplus. If it exceeds its budget, it absorbs the difference.

[8]            Ms. Lemire referred to paragraph 2.0 (page 10 of tab 1, Exhibit A-4) entitled Calcul de l'enveloppe budgétaire (Calculation of Resource Envelope). There are three classes of allocation: the basic allocation, the supplementary allocation and the specific allocation. The basic allocation is the main allocation. Its calculation is always based on the basic allocation of the previous year. The supplementary allocation is for activities related to the transportation of students registered in the "home kindergarten" or "parent cooperative kindergarten" programs. The specific allocation is for the transportation of students with disabilities or with adjustment or learning difficulties.

[9]            Again according to Ms. Lemire, school transportation, excluding GST and QST, costs on average $5,700,000 per year. To this must be added $330,000 for GST and QST, which is not returned to them. The partial rebate is 68 percent for the GST and 47 percent for the QST.

[10]          Serge Charest, an economist with the Department of Education, testified for the respondent. Mr. Charest is responsible for that Department's Student Transportation Assistance Program, which used to come under the jurisdiction of the Department of Transport. The funding component of the program was transferred, while much of the safety component remained with the Department of Transport. The witnesses mainly used the expression "Department of Transport", which is employed in these reasons as well.

[11]          According to Serge Charest, the Department of Transport establishes three-year fiscal frameworks. This began around 1982-83. Through the fiscal framework, the school boards are informed of the major orientations the government wants to take over three years. Annual budgetary rules are then issued stating more precisely how each of the school board envelopes will be calculated. Even the three-year fiscal framework is usually based on historical envelopes, that is to say the allocations from previous years, with certain adjustments. According to the witness, this policy no doubt supposes that it has been observed that the clientele's needs have been adequately served. This is a matter of taking into consideration both local management and central administration.

[12]          Prior to 1994, a portion of the budget surpluses was recovered without the subsequent year's basic allocation being affected. Starting in 1994, surpluses were no longer recovered. Until 1994, the Department recovered 50 percent of the surplus based on a formula described by the witness as follows: 50 percent of the standardized surplus was recovered where the surplus was greater than one percent or $20,000. If a school board had a standardized surplus of $25,000, the surplus to which the Department was entitled was $5,000. If a school board had a surplus of $150,000, the Department may have been unable to recover anything if $150,000 was less than one percent of its overall budget. The surplus had to be at least equal to one percent of its budget.

[13]          With respect to the transferability of subsidies, Mr. Charest stated that the school boards have a great deal of latitude. He referred to paragraph 1.6 (Exhibit A-4, Règles budgétaires (Budgetary Rules), tab 1, page 9) entitled "Transférabilité" ("Transferability"), concerning the transferability of the basic, supplementary and specific allocations. The basic and supplementary allocations [TRANSLATION] are transferable from one to the other and to other budgetary items than student transportation. The specific allocation is not transferable to other budgetary items. Where allocations paid for the purposes of defraying the cost of transportation operations are transferred to other budgetary items, they are subject to the general operating rules for school boards laid down under the Education Act [. . .] and the budgetary rules for school boards [. . .] established by the Minister of Education.

[14]          Using the neutral tax burden theory, Mr. Charest explained why the subsidies were not increased to reflect the newly imposed GST and QST. Before these taxes came into effect, school boards paid the federal sales tax included in the price of goods. Thus if the school board was already paying an amount of hidden tax and the Act granted it a rebate of 68 percent of the tax applicable to the goods or services, its tax burden should remain neutral despite the fact that it was subject to the Act.

[15]          The witness stated that the first letter is called the notification of the envelope and is sent in May. These are the documents appearing in Exhibit I-1. In June, another document, called the Minister's certification, certifies the basic envelope. The Department of Transport is not involved in negotiating the contract into which the school board enters with the carriers.

[16]          In cross-examination, the witness was led to comment on the [TRANSLATION] Interruption of Service Attributable to the School Board [. . .] covered in article 5.2.3 of the Budgetary Rules (page 27, tab 1, Exhibit A-4), which states: [TRANSLATION] Where school busing service is interrupted in whole or in part for reasons attributable to an authorized school board or a subsidized institution, the Minister of Transport shall make an adjustment. In Mr. Charest's opinion, this provision means what it says, but is rarely applied; the last time it was applied was in 1985-86.

[17]          Lucie Leduc is a tax law research officer with Revenu Québec and works in the Department's objections unit. She relied on paragraphs 10 and 11 of Memorandum 300-4-3, Technical Information Bulletin B-067 and interpretation letters from the interpretation directorate in Québec (Exhibit I-2). She did not have to issue her decision in this case since the Notice of Appeal was filed prior to confirmation.

[18]          Paragraphs 10 and 11 of Memorandum 300-4-3 respecting educational services read as follows:

School Bus Services

10.            A supply made by a school authority to elementary or secondary school students of a service of transporting the students to or from a school that is operated by a school authority is exempt

11.            However, where a school authority contracts with a private business to provide school bus services for its students, the supply of such services by the private business to the school authority is taxable. Any tax paid by the school authority under such a contract will be partly rebated under section 259 of the Act, if the school authority is established and operated otherwise than for profit.

[19]          In Ms. Leduc's view, based on a careful reading of Technical Information Bulletin B-067 respecting subsidies, the subsidy in this case is not a consideration for a supply. According to Bulletin B-067, some subsidies may be a consideration, others not. A subsidy will be regarded as a consideration if there is a direct link between the subsidy and the supply, which, in the witness's view, is not the case in this instance.

Argument

[20]          Relying on the notion of recipient, counsel for the appellant contends that student transportation does not constitute an exempt supply for the appellant, notwithstanding section 5, Part III, Schedule V of the Act, which provides that a supply made by a school authority to elementary or secondary school students of a service of transporting the students to or from a school that is operated by a school authority constitutes an exempt supply.

[21]          The appellant claims that section 5 of Part III of Schedule V of the Act does not apply because the subsidy paid to it by the Quebec Department of Transport is directly linked to the price of the student transportation service and is thus the consideration for the supply of that service. In the circumstances, it is not the student who is the recipient, but the person required to pay the amount or the consideration for the supply of the transportation, that is, the Department of Transport. Thus, since the supply of transportation is not an exempt supply, it was made by the appellant in the course of its commercial activities within the meaning of the Act. The appellant was thus entitled to claim the total amount of GST paid to the independent carriers. This is what the appellant did in claiming an input tax credit in the amount requested, that is, the difference between the total tax paid to the carriers for the periods in issue and the partial rebate previously granted.

[22]          Counsel for the respondent argued that, according to the definition of commercial activity in section 123 of the Act, the making of exempt supplies does not constitute such a commercial activity, so that the exempt supply of a student transportation service provided by the appellant for its students is not made in the course of its commercial activities. Under section 169 of the Act, the appellant may not claim ITCs in respect of GST paid to the independent carriers for the transportation services received from them because they were not received for consumption, use or supply in the course of its commercial activities. In accordance with section 259 of the Act and its regulations, the appellant, as a selected public service body, may therefore receive only the partial rebate of the GST paid to the independent carriers.

[23]          In the respondent's view, the student is the recipient: the subsidies paid to the appellant by the Department of Transport do not constitute a consideration for a supply because there is no direct link between the payment of the subsidies and the supply of the transportation service. The students are the recipients because they are the persons to whom a service is rendered, and no consideration is payable. In addition, Parliament's intent is clear because section 5 of Part III of Schedule V contains no ambiguity: student transportation is exempt.

Conclusion

[24]          First, it must be determined who is the recipient of the appellant's transportation service within the meaning of the Act. Does the Department of Transport's subsidy constitute a consideration within the meaning of the Act? Second, if the answer is yes, can that change section 5 of Part III of Schedule V of the Act?

[25]          According to subsection 123(1) of the Act, "taxable supply" means a supply that is made in the course of a commercial activity. A "commercial activity" is a business carried on, except to the extent to which the business involves the making of exempt supplies. An "exempt supply" is a Schedule V supply.

[26]          Schedule V is entitled: "Exempt Supplies". Part III concerns Educational Services. Section 5 reads as follows:

5               A supply made by a school authority to elementary or secondary school students of a service of transporting the students to or from a school that is operated by a school authority.

[27]          A "recipient" is defined in section 123 as follows:

"recipient" of a supply of property or a service means

(a)            where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,

(b)            where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration, and

(c)            where no consideration is payable for the supply,

(i)             in the case of a supply of property by way of sale, the person to whom the property is delivered or made available,

(ii)            in the case of a supply of property otherwise than by way of sale, the person to whom possession or use of the property is given or made available, and

(iii)           in the case of a supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply.

[28]          The last clause of the definition is somewhat ambiguous. Does it amend the definition of "recipient" to mean a person to whom a supply is made, when these words appear in the Act, or does it merely refer to the definition of "recipient"? It should be noted that the description of a service of transporting students in section 5, Part III, ScheduleV of the Act uses precisely this same expression: A supply made by a school authority to [. . .] students. According to the explanatory notes to Bill C-112 of February 1993, this expression, where used elsewhere in Part IX of the Act or in Schedules V, VI or VII, refers solely to the recipient of the supply as that term is defined in subsection 123(1) of the Act. I believe this is how this clause must be interpreted because, in order for it to be considered as being broad enough in scope to amend, as it were, the definition of "recipient", it would have to be contained in a paragraph dealing specifically with the definition of "recipient", not in the paragraph concerning cases in which no consideration is payable in respect of the supply. It therefore remains to be determined whether a consideration was paid to the appellant for the transportation service.

[29]          Sections 291 and 292 of the Education Act empower school boards to organize transportation for part of its students and to enter into contracts with private carriers for that purpose. Section 292 provides that student transportation before the beginning of classes and after the end of classes each day is free of charge. It is therefore within the school boards' power to organize student transportation. Where such transportation is organized, it must be free of charge before the beginning and after the end of classes. Section 300 of the same Act provides that the Department of Transport shall establish the budgetary rules for determining the amount of subsidies granted to the school boards.

[30]          Does the subsidy in respect of transportation service have a direct link with that service? Counsel for the respondent included in his authorities an article which I find quite interesting because it shows that, in the administration of value-added taxation (VAT), the same question arises regarding the circumstances in which a subsidy constitutes a consideration. This article, taken from the Vat Monitor, Vol. 7, No. 1, January/February 1996, p. 3, and entitled: "When Is a Link Direct?", discusses the notion of direct link. (This periodical is published by the International Bureau of Fiscal Documentation for the some 100 countries which have some form of VAT.) On page 9, paragraph D, which discusses subsidies, states that such subsidies are viewed as a consideration when they are directly linked to the price of the supply. The analysis of subsidies as consideration contained in Bulletin B-067 entitled "Goods and Services Tax Treatment of Grants and Subsidies" also refers to the notion of a direct link between the subsidy and the supply of the service. I quote at page 2:

In general, transfer payments made in the public interest or for charitable purposes will not be regarded as consideration for a supply.

However, if there is a direct link between a transfer payment received by a person and a supply provided by that person, either to the grantor of the transfer payment or to third parties, the transfer payment will be regarded as consideration for the supply. If a transfer payment is consideration for a supply, then it must be determined whether or not the supply is taxable.

[31]          "Consideration" is defined as follows in subsection 123(1) of the Act: "Consideration" includes any amount that is payable for a supply by operation of law. The definition thus refers to an amount payable by operation of law for a supply. It is therefore interesting in the circumstances to refer to article 2098 of the Civil Code of Quebec:

A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to carry out physical or intellectual work for another person, the client or to provide a service, for a price which the client binds himself to pay.

[32]          The consideration for the supply of services is the price the customer is required to pay. (In this respect, we come back to what is stated in the Vat Monitor article cited above.) The evidence did not show that the subsidy provided by the Department of Education was linked to the price of the transportation service. On the contrary, the evidence revealed that the Department had no obligation with respect to the actual cost of the student transportation service, that the school boards had broad latitude with respect to the use of the funds allocated for such transportation and that there was no link between the payment of the subsidy and the actual cost of the service. The subsidy is in the nature of financial assistance made available to the school board to enable it to perform one of its tasks, that is, to provide a student transportation service. It is not in the nature of a payment of the price of a service. Therefore no consideration is paid for this service. The recipient of the supply of the service is thus the elementary or secondary school student for whom the service is rendered as described in section 5, Part III, Schedule V of the Act.

[33]          I have come to the conclusion that there was no consideration for the student transportation service provided by the appellant, but even if there had been a consideration, would it have been a consideration for a non-taxable supply? It is not easy to answer this question. For the reasons stated in paragraph 28 of these reasons, I believe that, if there was a consideration for the transportation service, it would not be the service described in section 5 of Part III of Schedule V, which, read together with the definition of recipient in subsection 123(1) of the Act, contemplates solely, in my view, the case of a transportation service provided for no consideration.

[34]          In any case, I do not have to decide this last point in view of my conclusion that the subsidies granted to the appellant by the Department of Transport, and subsequently by the Department of Education, for student transportation are not in the nature of a consideration.

[35]          The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 10th day of February 2000.

"Louise Lamarre Proulx"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

[OFFICIAL ENGLISH TRANSLATION]

97-3347(GST)G

BETWEEN:

COMMISSION SCOLAIRE DES CHÊNES,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on October 6 and 7, 1999, at Montréal, Quebec, by

the Honourable Judge Louise Lamarre Proulx

Appearances

Counsel for the Appellant:                             Yves St-Cyr

                                                                   Philip Nolan

Counsel for the Respondent:                         André Forget

                                                                   Maryse Lord

JUDGMENT

          The appeal from the goods and services tax assessment made under the Excise Tax Act, the notice of which is dated September 24, 1996 and bears number 22239, is dismissed with costs in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 10th day of February 2000.

"Louise Lamarre Proulx"

J.T.C.C.