ROYAL BANK OF
HER MAJESTY THE QUEEN
THE CANADIAN BANKERS ASSOCIATION
REASONS FOR JUDGMENT OF THE
from the Bench at Toronto, Ontario, on February 14, 2007)
is an appeal against a decision of Bowie TCCJ (Judge) of the Tax Court of
Canada rendered on April 21, 2005. The learned Judge dismissed the Appellant’s
appeal of its reassessment under the Excise Tax Act, R.S. 1985, CH. E-15
(Act). The Appellant was denied input tax credits (ITCs) that it had claimed
on the ground that it provided branch services that were taxable supplies under
part IX of the Act.
hearing the evidence and submissions of the parties, the Judge concluded that
the branch services offered by the appellant to its wholly owned subsidiary
Royal Mutual Funds Inc. (RMFI) “were financial services exempt from tax, and
that the inputs to them therefore did not give rise to an entitlement to ITCs”:
see paragraph 19 of the reasons for judgment.
coming to this conclusion, the Judge made a number of findings that, in our
view, were findings of mixed fact and law. These findings can only be reviewed
by this Court if they reveal a palpable and overriding error: see Riverfront
Medical Evaluations Ltd. v. R., 2002 F.C.A. 341.
Judge found that the Appellant’s personnel were employees of the appellant and
not employees of RMFI: see paragraphs 14 and 15 of his reasons for judgment.
They were acting on a dual capacity, that is to say that they were providing
services to the Appellant and, whenever necessary, to RMFI. The Judge reviewed
the organizational structure as well as the operations of the Appellant and of
RMFI. There was, in our view, ample evidence to support his conclusion.
for the Appellant submits that determining who was the employer of the
personnel provided by the appellant was an irrelevant issue. He contends that
the Judge made that issue a determinative one that influenced and permeated all
do not agree with counsel that that issue was irrelevant. It was a factor that
the Judge could properly take into account and weigh, as he did, with the other
facts and circumstances surrounding the supply of the branch services to RMFI,
including the fact that the personnel was selling the securities on behalf of
Judge was also of the view, as previously mentioned, that the branch services
offered by the appellant to RMFI were financial services. The relevant parts of
the definition of “financial services” found in section 123 of the Act read:
(d) the issue,
endorsement, renewal, processing, variation, transfer of ownership or
repayment of a financial instrument,
agreeing to provide, or
the arranging for, a
service to in any of paragraphs (a) to (i), or
But does not include
l’octroi, l’octroi, l’attribution, l’acceptation, l’endossement, le
renouvellement, le traitement, la modification, le transfert de propriété ou
le reboursement d’un effet financier ;
fait de consentir à effectuer un
service visé à l’un
des alinéas a) à i) ou de prendre les mesures en vue de l’effectuer ;
m) un service
visé par règlement.
La présente définition
t) les services visé
4(2) of the Financial Services (GST/HST) Regulations, SOR/91-26 (as
amended) defines for the purposes of section 123 of the Act the services that
are prescribed services :
4(2) Subject to subsection
(3), the following services, other than a service described in section 3, are
prescribed for the purposes of paragraph (t) of the definition
"financial service" in subsection 123(1) of the Act:
(a) the transfer, collection or processing of
(b) any administrative service, including
an administrative service in relation to the payment or receipt of dividends,
interest, principal, claims, benefits or other amounts, other than solely the
making of the payment or the taking of the receipt.
Sous réserve du paragraphe (3), pour l'application de l'alinéa t) de la
définition de «service financier», au paragraphe 123(1) de la Loi, sont visés
les services suivants, sauf ceux mentionnés à l'article 3 :
la communication, la collecte ou le traitement de renseignements;
b) les services administratifs, y compris ceux
reliés au paiement ou au recouvrement de dividendes, d'intérêts, de capital,
de créances, d'avantages ou d'autres montants, à l'exclusion des services ne
portant que sur le paiement ou le recouvrement.
essence, the Judge concluded that the services provided by the Appellant
consisted in the distribution or arranging for the distribution of Units of the
mutual funds. “The major element of the branch services that the Appellant
supplied to RMFI”, he wrote, “is the very service that RMFI had contracted to
supply to the Funds under clause (c) of Article 3.01 of the Master Management
Agreement”: see paragraph 16 of his reasons for Judgment.
paragraphs 14 to 17 of his reasons, he provided the justifications for his
finding. Again, we are satisfied, that the evidence on the record supported
his finding and we see no error that, in this regard, would justify our
intervention. In relation to the distribution of units of the Funds, the
evidence reveals that RMFI possessed no infrastructure that enabled it to
distribute or arrange for the distribution of units of the Funds. These were
the financial services that were provided by the Appellant.
for the Appellant submitted as an alternative argument that the branch services
were administrative services, excluded from the definition of financial
services. We did not find it necessary to hear from the Respondent as we were
satisfied that the Judge made no error in dismissing that claim of the
services provided by the Appellant were much more than clerical in nature and
advice. It was agreed by the parties that the services should be treated as a
single supply of services and not be broken down. It is obvious that the
dominant and, we would say essential, characteristic of this supply of services
by personnel duly licensed in conformity with the regulatory scheme was the
selling of securities on behalf of RMFI, i.e. the distribution of the units of
the Appellant challenges the Judge’s finding that the defence of due diligence
had not been established so as to relieve the Appellant of the penalties
assessed and imposed by the Minister pursuant to section 280 of the Act. The
Judge was not satisfied that the Appellant had taken all reasonable steps to
determine the correct interpretation of the law.
record reveals a paucity of actions and measures taken by the Appellant to
inquire about the meaning of the relevant provisions of the Act and ensure
compliance with them. On the facts that were before the Judge, we cannot say
that his conclusion is erroneous.
for the Appellant submitted that the Judge erred in requiring that the
Appellant seeks either a ruling from Revenue Canada or an
independent opinion. That, he says, puts to high a standard and alters the
nature and test of the due diligence defence.
addition, he contends that this, in subsequent litigation, would evacuate
altogether the possibility of raising the defence and bring automatically the
imposition of the penalties if the Appellant were to disregard the ruling or
the independent opinion and lose its case.
say that the Judge required the seeking of a ruling or an independent opinion
appears to us to be a mischaracterization of what he said. He simply stated
that there was no evidence that steps of the kind were taken that could have
assisted in establishing the defence of due diligence.
for the fact that the defence of due diligence would be pre-empted in
subsequent unsuccessful proceedings where the ruling or the independent opinion
was not followed, we are satisfied that this would not necessarily be the
case. The defence would have to be assessed against all the facts, including
the merit of the ruling or the independent opinion, the extent of the ambiguity
of the impugned legislation and the reasonableness of the Appellant’s behaviour
in these circumstances.
these reasons, the appeal will be dismissed with costs.