[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
This is an appeal of an assessment issued against
Université Laval on November 3, 2011. The assessment concerned the taxability
of the subsidy paid by the City of Québec to the Appellant for reporting
periods between January 1, 2008 and June 30, 2011.
The appeal was heard September 14, 2015, in Québec.
The Appellant, Université Laval, is a public
institution of higher education located in Québec.
The Appellant operates some sports and leisure
facilities as part of its academic mission.
The University’s Physical Education and Sports
Pavilion (PEPS) is undergoing expansion to meet growing demand and extend its
The city supported the project by providing a
subsidy; however, it required that city residents have access to the new
facilities under certain conditions.
Following meetings and discussions between the
City and the University, two agreements were signed on September 23, 2010, one
regarding the subsidy, the other concerning public access.
The first was a Memorandum of Understanding stipulating that the City of
Québec would grant the University a $10-million subsidy for the PEPS expansion
The second agreement regarding access and use of
infrastructure and equipment
(hereinafter “Access agreement”) outlined the parties’ obligations and terms
and conditions of engagement.
Both agreements gave rise to the assessment at
issue in this appeal; the parties interpret the content and surrounding
circumstances in a completely different manner.
Université Laval’s position
The Appellant submits that the $10-million
amount obtained from the City of Québec was a direct subsidy without any
consideration, and that, consequently, the University did not make a taxable
supply to the City.
The Appellant maintained that the subsidy was
granted essentially and exclusively to implement the PEPS expansion project in
the public interest, since its facilities were located on city land.
It also submits that the agreement on access and
use of infrastructure and equipment was completely independent of the subsidy
paid, and, as a result, could not constitute consideration for the subsidy. In
this regard, the Appellant submits that the subsidy did not allow the City of
Québec to use future PEPS facilities free of charge or at lower cost.
The Appellant submits that the City of Québec
would have to assume the operating and occupancy costs of future PEPS
facilities by its residents, adding that this is evidence of the absence of a
relationship or interrelationship between the two agreements.
Subsidiarily, it argues that if the Court were
to conclude that the subsidy was for consideration, the consideration in no way
reflected the total $10-million amount.
Furthermore, the Appellant also argues that if
the Court were to conclude that the subsidy was for consideration, it then amounts
to the supply of intangible personal property exempt under Section 2 of Part VI
of Schedule V of the Excise Tax Act (ETA).
The Respondent submits that the $10-million
subsidy granted by the City of Québec was issued as consideration for a supply
to the City.
The Respondent submits that the subsidy paid
constituted consideration for a supply; the supply was the right to utilize
real property. This right consisted in obtaining some access to PEPS facilities
under an agreement.
The Respondent also submits that the City of
Québec had an obligation to supply and provide access to sports facilities for
its residents. To this end, the City could grant subsidies to any person or
organization involved in these activities to enable the City to meet the needs
of its residents in accordance with the Charter of the Ville de Québec.
The Respondent submits that the two agreements
entered into by the Appellant and the City of Québec established a direct connection
between the subsidy and the University’s obligations to the City.
In this regard, the Respondent submits that this
supply is deemed to be a supply of real property under subsection 136(1) of the
In the alternative, the respondent adds that,
under Section 25 of Part VI of Schedule V of the ETA, if the Court were to
conclude that the subsidy was granted for consideration, that supply was not
exempt because it was primarily used in the course of the Appellant’s
The first issue is whether the amount paid by
the City of Québec to Université Laval constitutes consideration for a supply.
In the alternative, if the Court were to
conclude that the subsidy was provided for consideration, the issue is then to
determine whether the entire subsidy was provided for consideration.
Also, in the alternative, if the Court were to
conclude that the subsidy was provided for consideration, it will have to
answer the following question: is this an exempt supply?
Consideration for a supply
First, the Court must determine whether the
subsidy paid by the City of Québec to Laval University constitutes
consideration for a supply.
According to the ETA’s definition of
consideration, a subsidy can constitute consideration if it is directly related
to the supply provided. In this regard, the definition of supply leads us to ask
whether Laval University must supply goods and/or services in exchange for the
amount received as a subsidy from the City of Québec. If so, the subsidy will
then be deemed the consideration for a supply.
The answer to this fundamental question is found
in the content of the two agreements between the parties: the Memorandum of
Understanding regarding the subsidy and the Access agreement regarding access
to PEPS infrastructure and equipment.
It is important to examine these two agreements
to understand exactly what the parties intended.
First, we note that the two agreements were
signed on the same day, September 23, 2010, by the same parties, Université
Laval and the City of Québec.
Also, the two agreements refer to one another.
The Memorandum of Understanding refers to a second agreement to be signed, the
Access agreement, which also refers to the Memorandum of Understanding.
First, we will address the Memorandum of
Understanding and then we will move on to the Access agreement.
Memorandum of Understanding
Page 2 of the Memorandum of Understanding stipulates that the City of
Québec supports the University so as to benefit from the facilities to be
built, which will resolve the lack of sports equipment on city land and enable
the City to meet its obligations owed to the population.
Section 1 of the Memorandum of
stipulates that the purpose of the memorandum is to define the parties’
obligations and terms and conditions regarding the payment of a subsidy to the
University, including provincial and federal taxes.
The obligations and responsibilities of the
parties outlined in Sections 3 and 4 of the Memorandum specify that the University
will provide the City with access to the PEPS sports facilities under certain
terms and conditions.
With respect to the obligations of the parties,
Section 4.3 of the Memorandum of Understanding is particularly interesting,
but also relevant:
The University’s obligations
4.3 Provide the City with access to the sports facilities to be
built as part of the PEPS expansion project as a proportion of the periods to
be reserved for the City as a priority, i.e. 70% of its hours of operation, in
accordance with the parameters set out in an agreement to be signed on the
access and use of sports infrastructure and equipment as part of the PEPS
Under this section, it seems obvious to me that
the parties reached an agreement stipulating and clearly establishing a link,
i.e. that the subsidy was granted in consideration for the right to benefit
from the sports facilities built with the subsidy granted by the City.
In other words, the City agrees to pay a $10million
subsidy provided that the subsidy not be used exclusively for the construction
and renovation of PEPS facilities, but also to provide City of Québec residents
with privileged access to the sports facilities.
I can only emphasize the fact that the purpose
of this memorandum is, first, to set out the parties’ obligations with respect
to the subsidy, and second, the University’s obligation to provide city
residents with privileged access.
The terms and conditions of payment of the
subsidy are set out in Section 5 of the Memorandum:
5. Terms and conditions of the subsidy
consideration of the University’s obligations and engagements stipulated under
this Memorandum of Understanding, the City agrees to pay the University a
subsidy for the total amount of $9 million,
including provincial and federal taxes as well as the still unpaid balance
stipulated in the first Memorandum of Understanding identified under WHEREAS
number 5 of this Memorandum of Understanding […].
[Underlining added for emphasis.]
Upon reading this section, it is very clear that
in consideration for the City’s grant, the University will provide City of
Québec residents with privileged access to its sports facilities.
The second agreement signed the same day,
September 23, 2010, is also decisive with respect to the issues.
Agreement on access to the facilities
First, the purpose of the Agreement on access is found in Section 1:
1. Purpose of the agreement
The purpose of
the Agreement between the City and the University is to set out the main
obligations and terms and conditions of engagement regarding City residents’
access to the University’s sports facilities, with regard to funding of the
operating costs of facilities built as part of the
PEPS expansion project (the “facilities”), as well as funding of the costs
relating to the City’s use of the sports facilities. The facilities are
described in greater detail in Appendix C attached to the Memorandum to
make it part of the document.
[Underlining added for emphasis.]
The funding in question in this Section is the
The University’s obligations are set out in
Section 3.2 of the agreement.
Furthermore, it seems quite obvious that this Section is based on
Section 4.3 of the Memorandum because it also refers to City residents
having access to the facilities for 70% of their hours of operation:
the City with access to its sports facilities for 70% of their hours of
operation. Hours of use will have to be set for normal peak hours for
sports equipment, days, evenings and weekends.
[Underlining added for emphasis.]
It seems clear that the purpose of this agreement
is to set out and define the parties’ obligations and responsibilities with
respect to the subsidy. Under these stipulations, there is no doubt as to the
Appellant’s obligations to provide access to City of Québec residents.
The link between the two agreements is also
clearly defined in Section 4.4 of the Agreement; it states that any
commitments by the City are subject to the entry into force of a lending bylaw
relating to the Memorandum of Understanding.
In addition, an extract of the minutes of a City council session
indicates that the City agrees to give the remaining $9-million amount and that
for its part, the University must, inter alia, provide City residents with
priority privileged access.
Gilles D’Amboise, director of the sports
activities service from 1997 to 2012, was the only witness. His testimony
provides a good understanding of the letter, and the spirit and intent clearly
expressed by both parties in the agreements entered into by the City of Québec
and Université Laval. Some extracts of his testimony are provided below:
TARDIF: But am I to understand that these are two separate files completely
independent from one another?
D’AMBOISE: According to us, those are two completely different files.
These two files have nothing to do with one another.
D’AMBOISE: […] We always told the City that we are initiating a PEPS
expansion operation. The University needs to expand. We are going to – we are
asking you to associate yourself with the City because we are going to provide
services for your residents. So we are asking you for 10 million.
are going to, in terms of operating costs, we are going to make room for you.
We are going to make you – we will guarantee you 70 percent of priority time
slots. In return, you will have to pay 70 percent of operating costs and
occupancy costs. That’s how it worked.
when we submitted the project to the City of Québec, asking for a $10million
contribution, we were submitting a construction project to the City.
– and they – if you read all the submission documents, you will see in the
submission documents that we are asking the City to contribute to the
construction at –
TARDIF: Without any conditions?
D’AMBOISE: Well that’s not the way we put it. We told the City that we
are asking you for 10 million and we will open the doors to provide you
with a – with access for residents up to 70 percent of the hours of operation,
but in return you will have to pay for the occupancy costs and the operating
[Underlining added for emphasis.]
Based on Mr. D’Amboise’s entire testimony, there
is no doubt about the direct link between the two agreements; indeed, that
interpretation fully validates the clear, and even obvious contents of both
agreements. Based on the contents of these two agreements, the intent of the
parties is so clearly expressed that it leaves no room for interpretation; the
parties are mutually required to fulfill obligations and provide a service.
They are mutually bound so that each party’s
obligation is correlated to the other party’s obligation. Each party derives an
advantage in exchange for the obligation.
Any interpretation to the contrary is
essentially based on assumptions and speculation. When one or more written
agreements clearly express the will of the parties, the Court must stand by the
language agreed to by the parties. In this case, both agreements were reached
through meetings, discussions and negotiations. The final written version,
prepared by qualified skilled professionals, correctly expressed the clear will
of the parties. Contradicting or distorting the contents of valid written
instruments requires very specific evidence based on a solid foundation.
However, in this case, the situation is completely different and there is no
doubt as to the meaning and scope of the two agreements.
In addition, the contents of these agreements
are precise and consistent. As such, I do not believe it is possible to counter
what they so clearly express. The amounts involved are considerable. Those who
prepared the agreement clearly defined the rights and obligations of the
parties. The precision, clarity and consistency of the contents of the two
agreements completely rule out any other interpretation.
In this regard, the criterion of the direct link
was reviewed and examined in Regina (City) v. The Queen,  T.C.J.
No. 315 (QL):
 The author
of Part I of T.I. Bulletin B067 explains that “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”. The
Bulletin emphasizes that “[a] direct link may not always be apparent and
therefore it will be necessary to consider the circumstances surrounding each
case”. Relevant circumstances may include: the agreement between the parties;
the conduct of the parties; the objectives or policy statements of the grantor;
and the legislation, bylaws and any applicable regulation under which the
payment is made.
 Part II of T.I. Bulletin B067 states policy guidelines to
clarify whether a direct link exists between a transfer payment and a supply
and, therefore, whether the transfer payment is consideration. According to
these guidelines, where a supply takes place in respect of a transfer payment,
there will be a direct link between the supply and the transfer payment if the
supply is provided to the grantor for a “purchase purpose” as opposed to a
“public purpose”. The Bulletin refers to a “purchase purpose” as “one which
benefits the grantor or a specific third party and may be of a commercial
nature” and to a “public purpose” as “one which benefits the general public or
a particular segment of the general public”.
In the same case, the Court closely examined the
case of a subsidy for consideration of supply under a contract:
 The concept
of direct link permits one to recognize if consideration was paid for a supply.
Normally, when a supplier contracts to provide a supply, the cost or
consideration for that supply appears in the contract. An unconditional subsidy
does not identify a specific purpose or cause for funding. If a person can
reasonably determine that there is a specific object for the grant, as it is
usually described in a contract, then linkage between the grant and the supply
exists and the amount of the grant is consideration for the supply for purposes
of the Act. Linkage, therefore, serves as a valuable tool to determine if there
is consideration. […]
Similarly, the City argued, an agreement existed between it and the Government
of Saskatchewan that the City would build connector routes, even though the
grants to fund the connector routes were unconditional. There was an accepted
practice or an implied agreement between the City and Province that varying
portions of unconditional grants were to be used, and were used, for
construction of connector routes, as well for other things.
In Meadow Lake Swimming Pool Committee Inc.
v. Canada,  T.C.J. No. 723 (QL), the Court ruled that a grant
constitutes consideration when a municipality provides funds to a nonprofit
organization to operate a pool owned by the municipality. The judge reviewed
the pool construction plans of both parties and concluded that there was a
direct link between the grant and the supply provided by the organization.
In Commission scolaire Des Chênes v. Canada,
 T.C.J. No. 71 (QL), the Court ruled that a subsidy is deemed
consideration if it is directly linked to the price of the supply provided. The
Court also examined this link in Sydney Mines Firemen’s Club v. The Queen,
2011 TCC 403:
 In an earlier decision, the Federal Court of Appeal in Commission
scolaire Des Chênes v. The Queen, 2001 FCA 264, found that a subsidy for
transportation purposes was consideration although it did not fully cover the
cost of the goods or services for which the subsidy is given. Justice Noël
determined that there was a sufficient link between the subsidy paid by the
Province of Quebec and the services provided by the school board for students.
A subsequent decision by the Federal Court of Appeal in Calgary (City) v The
Queen, 2010 FCA 127, appears to narrow Des Chênes to the terms of
the written agreements that exist between the province and a public sector
body. However, neither Des Chênes nor Calgary (City) considered
Thus, I cannot accept the Appellant’s submission
that no supply was provided as consideration for the subsidy, that the subsidy
agreement is simply a subsidy agreement, that the Agreement on access is
independent from the subsidy and, as such, there cannot be any consideration
for the subsidy.
In my opinion, the Appellant is on the wrong
track when it submits that these two agreements are completely independent. In
fact and in law, there is a clear and direct link between the two agreements. I
must therefore conclude that a subsidy was paid as consideration for a supply.
Given that the subsidy is consideration for a
supply, I must now qualify the supply by determining whether or not it is a
Before conducting a review to determine whether
the supply is exempt within the meaning of the ETA, I will respond to the subquestion
raised by the Appellant. Is the subsidy equal to the value of the supply? In
other words, is there a difference in the value of each party’s obligations?
The Appellant argues that if the Court were to conclude
that the supply was taxable, the matter should then be returned to the Canada
Revenue Agency to establish the fair market value before applying it to the
cost of the facilities.
The value of the supply versus the consideration
is an issue that involves the parties in a transaction. In a normal situation
where the parties are completely responsible, and even more clearly, when they
are supported by experts, the value of the supply cannot be questioned.
In this case, not only did the very well-advised
parties agree throughout the agreements, they also specifically and expressly
indicated the value of the supply to be made for consideration.
As a result, there is no reason for this Court
to investigate the value of the supply that was to be taxed.
Qualification of the supply
To qualify the supply, the Court must first look
at the following definitions of subsection 123(1) of the ETA:
commercial activity of a person
(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 person,
(b) an adventure or concern of the
person in the nature of trade (other than an adventure or concern engaged in
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 adventure or concern involves the making of exempt supplies
by the person, and
(c) the making of a supply (other than
an exempt supply) by the person of real property of the person, including
anything done by the person in the course of or in connection with the making
of the supply.
supply means a supply included in Schedule V.
supply means a supply that is made in the
course of a commercial activity.
In this case, we are dealing with a public
sector body, as defined in subsection 123(1) of the ETA:
service body means a nonprofit organization, a
charity, a municipality, a school authority, a hospital authority, a public
college or a university.
sector body means a government or a public
It is therefore necessary to refer to
Part VI of Schedule V of the ETA and in particular to Sections 2
and 25 to determine which supplies are exempt with respect to public sector
In addition, to qualify the supply, it is also
necessary to look at the following definitions of subsection 123(1) of the ETA:
property means property that is not real
real property includes
(a) in respect of property in the
Province of Quebec, immovable property and every lease thereof,
(b) in respect of property in any other
place in Canada, messuages, lands and tenements of every nature and description
and every estate or interest in real property, whether legal or equitable, and
(c) a mobile home, a floating home and
any leasehold or proprietary interest therein.
Subsection 136(1) of the ETA defines the right
to use real property as a supply of real property, and the same principle
applies to the right to use tangible personal property:
136 (1) For the purposes of this Part, a
supply, by way of lease, licence or similar arrangement, of the use or right to
use real property or tangible personal property shall be deemed to be a supply
of real property or tangible personal property, as the case may be.
Section 2 of Part VI of Schedule V of the ETA provides
that a supply made by a public institution of any personal property or a
service is an exempt supply, notwithstanding the exceptions listed in this
Thus, the issue is whether the University’s
supply is a supply of personal property, services or real property.
In this case, the agreements clearly refer to a
right of access to PEPS facilities and real property. This right to use real
property could be considered intangible personal property.
However, subsection 136(1) of the ETA clearly provides
that when there is an agreement on the use or right to use real property, the
supply is then deemed to be a supply of this asset, the supply of real
property. In this case, the service is the right to utilize the real property
to be constructed. Finally, the service in question is deemed to be a taxable
supply. The City was required to pay the tax; it paid the tax and even made
that provision in the Memorandum in Sections 1 to 3 and 5.
Given that the supply in question is the supply
of real property, the next step is to verify whether or not this supply is
We should therefore look at Section 25 of Part
VI of Schedule V of the ETA, which deals with exempt supplies and more
specifically the supply of real property by a public service body.
Section 25 provides that this type of
supply can be exempt, unless the property is used primarily in the Appellant’s
The Respondent argues that the real property was
used for commercial purposes 66% of the time, and the Appellant itself
determined that the rate of commercial use was 69%.
Mr. D’Amboise, as director of PEPS sports
activities, testified for the Appellant regarding this issue; he confirmed that
since September 2010 the PEPS was used for commercial purposes over 50% of the
On the balance of probabilities, it is
permissible, if not necessary, to conclude that the real property is used
primarily in the course of the Appellant’s commercial activities; consequently,
it is not an exempt supply.
For all these reasons, the appeal is dismissed
because the assessment that gave rise to the appeal is well founded. The whole
with costs to the Respondent.
Signed at Ottawa,
Canada, this 20th day of January 2016.
Translation certified true
on this 16th day of June 2016.
François Brunet, Revisor