Telus Communications (Edmonton) Inc. v. Canada, 2009 FCA 49

Date: 20090218

Docket: A-117-08

Citation: 2009 FCA 49

 

CORAM:       NOËL J.A.

                        NADON J.A.

                        PELLETIER J.A.

 

BETWEEN:

TELUS COMMUNICATIONS (EDMONTON) INC.

Appellant

and

HER MAJESTY THE QUEEN

Respondent

 

 

 

Heard at Edmonton, Alberta, on February 12, 2009.

Judgment delivered at Ottawa, Ontario, on February 18, 2009.

 

REASONS FOR JUDGMENT BY:                                                                                   NOËL J.A.

CONCURRED IN BY:                                                                                                  NADON J.A.

PELLETIER J.A.

 

Date: 20090218

Docket: A-117-08

Citation: 2009 FCA 49

 

CORAM:       NOËL J.A.

                        NADON J.A.

                        PELLETIER J.A.

 

BETWEEN:

TELUS COMMUNICATIONS (EDMONTON) INC.

Appellant

and

HER MAJESTY THE QUEEN

Respondent

 

 

REASONS FOR JUDGMENT

NOËL J.A.

 

[1]               This is an appeal by Telus Communications (Edmonton) Inc. (the appellant or Telus) from a decision of Hershfield J. of the Tax Court of Canada (the Tax Court Judge), dismissing for the most part Telus’ appeal from a reassessment made by the Minister of National Revenue (the Minister) under the Excise Tax Act, R.S.C. 1985, c. E-15 (the Act) for the period from March 1, 1995 to December 31, 1995. More specifically, the appellant takes issue with the Tax Court Judge’s conclusion that the appellant is not entitled to a rebate and/or refund of its net tax in the amount of $1,849,230.75 pursuant to subsection 261(1) of the Act.

RELEVANT FACTS

 

[2]               The appellant entered into an agreement to purchase certain telecommunications assets of Edmonton Telephones Corporation (Ed Tel). Effective March 10, 1995, the appellant acquired all of the undertaking, property, assets and rights of Ed Tel, including the goodwill of the local telephone exchange business formerly carried on by Ed Tel by way of an arrangement under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the Arrangement).

 

[3]               Joint elections were filed pursuant to subsection 167(1) of the Act resulting in no tax being payable with respect to the supply of the Ed Tel assets to the appellant.

 

[4]               Prior to the acquisition, Ed Tel had contracted for supplies in the normal course of business. All the supplies relevant to this appeal (the Supplies) were contracted by Ed Tel and made by suppliers before March 10, 1995, the effective date of the acquisition. None of the Supplies had been paid for at the time of the acquisition.

 

[5]               The purchase price for the business was payable on the effective date by the appellant by the issuance of shares and debt instruments of the appellant and by the assumption of liabilities of
Ed Tel, including the liability of Ed Tel to pay for the Supplies.

 

[6]               Ed Tel was not released of its contractual obligation vis-à-vis its suppliers and no contractual relationship was created between the suppliers and the appellant.

[7]               Pursuant to its undertaking, the appellant paid for the Supplies after March 10, 1995 in the ordinary course of operating the business acquired from Ed Tel including GST invoiced in respect of the Supplies.

 

[8]               The appellant claimed input tax credits (ITCs) in respect of such GST payments on the basis that it was the “recipient” of the Supplies and that it was not otherwise entitled to a rebate and/or refund of that amount. Ed Tel, on the other hand, did not claim ITCs in respect of the Supplies.

 

[9]               The Minister denied the ITCs claimed by the appellant on the basis that the appellant was not the recipient of the Supplies and therefore was not entitled to the ITCs. The Minister further refused to recognize any entitlement of the appellant to a rebate and/or refund under the Act.

 

[10]           The reassessment was later confirmed and the appellant brought the matter before the Tax Court of Canada.

 

RELEVANT STATUTORY PROVISIONS

 

[11]           Section 165 of the Act provides that the “recipient” of a taxable supply must pay tax (GST). The general rule governing the entitlement to ITCs and their computation is set out in subsection 169(1):

 

 

[12]           Section 123 of the Act defines the word “recipient” as follows:

 

 

[13]           A rebate and/or refund to net tax is provided for in subsection 261(1):

 

 

[14]           Where the Minister determines that the person is entitled to a rebate under subsection 261(1), but did not claim it, subsection 296(4.1), as it read at the relevant time (now subsection 296(2.1)), allows the Minister to apply the unclaimed rebate against any outstanding liabilities under Part IX of the Act:

 

 

[15]           Subsection 296(2.1) which replaced subsection 296(4.1) as of July 1, 1996 is essentially to the same effect:

 

 

[16]           It is also useful to set out paragraph 263(b) which provides that the payment of a rebate pursuant to subsection 261(1) of the Act is subject to the following restriction:

 

 

THE TAX COURT DECISION

 

[17]           With respect to the initial ground of refusal, the Tax Court Judge held that only the “recipient” of the Supplies can claim an ITC. Even though subsection 169(1) makes no express reference to a “recipient”, the effect of the provision is to allow an ITC where “property or a service is supplied to or imported by a person”. The word “recipient” as defined includes “any reference to a person to whom a supply is made”. The Supplies in the case at bar were made to Ed Tel so the reference in subsection 169(1) to a person must be read as a reference to Ed Tel as the “recipient” (Reasons, paras. 7 to 24).

 

[18]           After holding that the appellant was entitled to certain adjustments which are no longer in issue in this appeal (Reasons, paras. 25 to 37), the Tax Court Judge turned to the question whether the appellant was otherwise entitled to the claimed amount pursuant to subsection 261(1). He first acknowledged that the wording of this provision when read on its own could entitle the appellant to a rebate and/or refund. However, such a reading would lead to absurd results. More specifically, he noted that to permit a rebate where the liability of a “recipient” under the Act has been paid by a non-recipient of the supply, would require the Minister to scrutinize the source of every remittance to ensure that the amount remitted in respect of a supply would not have to be returned as a rebate before the “recipient” was assessed (Reasons, para. 43).

 

 

[19]           The payment made by the appellant was intended to extinguish Ed Tel’s liability under the Act. The ITC mechanism provided for under the Act (i.e. ss 169(1)) is the only route which permits such payments to be reconciled (Reasons, para. 44). The Tax Court Judge concluded that, all that happened was that Ed Tel did not cooperate with the appellant to give it the relief it should have secured under the Arrangement had it been properly structured (ibidem).

 

[20]           The Tax Court Judge went on to hold that the person referred to in subsection 261(1) of the Act as the person who made the payment is not the person who makes the payment, but rather is the person on whose behalf the payment is made. In the case at bar, the payment was made on behalf of Ed Tel and as such, the appellant was not entitled to the rebate (Reasons, para. 45).

 

ALLEGED ERRORS

 

[21]           The appellant no longer takes issue with that aspect of the Tax Court Judge’s decision which holds that only Ed Tel, as the “recipient” of the Supplies, was entitled to claim the ITCs pursuant to subsection 169(1). The appeal is directed solely at the Tax Court Judge’s conclusion that the appellant was not entitled to a rebate and/or refund of the amount claimed pursuant to subsection 261(1).

 

[22]           The appellant submits that the relevant determination which the Tax court Judge was required to make pursuant to subsection 261(1) and former subsection 296(4.1) was whether the appellant paid an amount on account of GST that was not an amount payable by it under the Act. The circumstances under which the payment was made are not relevant as subsection 261(1) of the Act provides that such amount may be paid “by mistake or otherwise”.

 

[23]           The clear focus of the examination for entitlement to a rebate under subsection 261(1) is on the “person who paid an amount” which in the case at bar is the appellant. Once this is established, the only remaining issue is whether the payment was: 1) as or on account of tax; and 2) not payable or remittable by the person. The appellant contends that no further inquiry needs to be made. This approach is said to be consistent with the recent decisions of this Court in West Windsor Urgent Care Centre Inc. v. Canada, 2008 FCA 11 (West Windsor), and Canada v. United Parcel Service Canada Ltd., 2008 FCA 48 (UPS).

 

[24]           The appellant challenges the Tax Court Judge’s conclusion that the ITC mechanism is the only one available to prevent the “windfall” which will accrue to the Minister if no rebate should be granted. This conclusion does not take into account the fact that the purpose of the rebate provisions is remedial in nature. The approach taken by the Tax Court Judge effectively narrows subsection 261(1) such that it can only apply to limited situations (i.e. where a person obligated to pay GST paid too much).

 

 

 

[25]           The Tax Court Judge’s conclusion that the person referred to in subsection 261(1) of the Act is not “the person who writes the cheque or transfers the funds to the Minister”, but rather is “the person on whose behalf the payment is made”, is not supported by a textual, contextual and purposive interpretation of subsection 261(1) of the Act.

 

ANALYSIS AND DECISION

 

[26]           In appellate review, questions of law are reviewable on a standard of correctness, while findings of fact or mixed law and fact will be set aside only if it is determined that the trial judge has committed a palpable and overriding error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235). In my view, the question whether ITCs recoverable by the “recipient” of the Supplies pursuant to subsection 169(1) can also be recovered by the person who paid the tax on behalf of the “recipient” pursuant to subsection 261(1), is one of pure statutory construction which stands to be reviewed on a standard of correctness.

 

[27]           As noted by the Tax Court Judge, the context in which subsection 261(1) is to be applied includes subsection 169(1) and paragraph 263(b). Subsection 169(1) when read with the definition of the word “recipient” provides in effect that only the person to whom a supply is made can claim the related ITC. Paragraph 263(b) provides, that a rebate of an amount under subsection 261(1) shall not be paid to a person to the extent that it can reasonably be regarded that the person has claimed or is entitled to claim ITCs in respect of the amount. If the Minister determines that the person was entitled to a rebate pursuant to subsection 261(1) of the Act, but the person did not claim it, then subsection 296(4.1) of the Act permits the Minister to apply the unclaimed rebate against any outstanding liabilities under Part IX of the Act.

 

[28]           In the case at bar, the purchase price paid by the appellant pursuant to the Arrangement included the assumption of liabilities by the appellant for Supplies that had been contracted for by Ed Tel. As found by the Tax Court Judge, the payments were made on behalf of Ed Tel and the intent of the Arrangement was that Ed Tel would be released of its liability under the Act upon the appellant making the payments.

 

[29]           The Tax Court Judge concluded that Ed Tel was the recipient of the Supplies, a finding that is not challenged on appeal. It follows that Ed Tel was the only person entitled to claim the ITCs for the GST paid to its suppliers under subsection 169(1) of the Act. The position advanced by the appellant is that subsection 261(1) should be construed so as to also allow it to claim relief for the same amount.

 

[30]           According to this reasoning, two persons could claim relief for the same tax, the recipient by means of ITCs and a third party who made the payment on behalf of the recipient by way of a rebate and/or refund. In my view, the Tax Court Judge was on solid ground when he held that different persons cannot be entitled to make claims for the same amount under the scheme implemented by Parliament. The need for a streamlined approach is self-evident. As was stated by the Tax Court Judge (Reasons, para. 43):

 

… to permit rebates where the liability of recipients under the Act has been paid by a non-recipient of the supply who undertook to pay it, would require the Minister to scrutinize the source of every remittance to ensure that the amount remitted in respect of a supply would not have to be returned as a rebate before the recipient was assessed. Failing the exercise of such impossible scrutiny, GST could be avoided by all recipients of taxable supplies whether or not ITCs were claimable. …

 

 

[31]           Subsection 261(1) applies to a person who makes a payment “as or on account of, … tax, net tax, penalty or other obligation under this Part …”. It is common ground that the appellant had no obligation to pay tax under the Act when it paid the suppliers. Subsection 261(1) does not apply to a payment made on account of someone else’s tax.

 

[32]           I do not give much weight to the appellant’s contention that subsection 261(1) should be construed to avoid the windfall to the fisc which results from this interpretation. Where a transaction, such as the one here in issue takes place, all that needs to be done in order to avoid the difficulty confronting the appellant, is to ensure that the person authorized to make the claim, does so. In the present case, the evidence indicates that the outstanding ITCs were not sufficiently material in the overall context of the transaction to attract attention so that the matter of the outstanding ITCs was left unattended (Transcript of examination of Mr. McGillicuddy, Appeal Book, Vol. 1, p. 189). This is not a reason to construe subsection 261(1) in a manner that was not intended.

 

[33]           The decision of this Court in UPS and West Windsor both dealt with a very different set of facts. A more appropriate analogy is to the decision of this Court in 2955-4201 Québec Inc. v. Canada., [1997] F.C.J. No. 1536 (QL), [1997] G.S.T.C. 100 (2955-4201 Québec). The applicant in 2955-4201 Québec purchased the assets of an automobile sales and distribution business, including the inventory of new vehicles. The parties made an election under section 167, so that no GST was payable with respect to the sale. The total amount paid included the inventory value of the new vehicles, which mistakenly included the GST paid for the vehicles by the vendor. Upon discovering this, the applicant claimed to be entitled to either ITCs or a rebate under subsection 261(1). The trial judge held that neither section 169 nor subsection 261(1) was applicable. Décary J.A. writing for the Court agreed with the trial judge, stating (at page 100-4):

 

[5]      Judge Lamarre-Proulx of the Tax Court of Canada held that neither section 169 nor section 261 is applicable since both these sections presuppose that tax was paid or payable by the applicant, whereas no tax was paid or payable by the applicant in the case at bar. The Tax Court Judge stated that in her opinion the real issue in the case is not a payment of tax made by the applicant to the Minister but the actual value of the sale price the applicant should have paid the vendor; she concluded that this issue does not concern the Minister.

 

[My emphasis]

 

 

[34]           In this case, as in 2955-4201 Québec, the payment for the Supplies (and the related GST) formed part of the purchase price. The only difference is that in 2955-4201 Québec, the Supplies

were paid for by the recipient directly whereas in this case, they were paid for by the purchaser on behalf of the recipient. This is not a distinction which warrants a different treatment.

 

[35]           I would dismiss the appeal, with costs.

 

“Marc Noël”

 

“I agree.

       M. Nadon J.A.”

 

“I agree.

       J.D. Denis Pelletier J.A.”

 

 

 

FEDERAL COURT OF APPEAL

 

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

 

 

DOCKET:                                                                              A-117-08

 

(APPEAL FROM A JUDGMENT OF THE HONOURABLE HERSHFIELD J. DATED MARCH 10, 2008, NO 2003-1066(GST)G.)

 

STYLE OF CAUSE:                                                              Telus Communications (Edmonton) Inc. and Her Majesty the Queen

 

PLACE OF HEARING:                                                        Edmonton, Alberta

 

DATE OF HEARING:                                                          February 12, 2009

 

REASONS FOR JUDGMENT BY:                                     Noël J.A.

 

CONCURRED IN BY:                                                         Nadon J.A.

                                                                                                Pelletier J.A.

 

DATED:                                                                                 February 18, 2009

 

 

APPEARANCES:

 

Curtis Stewart	FOR THE APPELLANT
Margaret Irving Connie Mah	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

Bennett Jones LLP Calgary, Alberta	FOR THE APPELLANT
John H. Sims, Q.C. Deputy Attorney General of Canada	FOR THE RESPONDENT