Docket: A-249-16
Citation:
2017 FCA 151
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CORAM:
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NADON J.A.
DAWSON J.A.
GAUTHIER J.A.
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BETWEEN:
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CLUB INTRAWEST
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Appellant
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and
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HER MAJESTY THE
QUEEN
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Respondent
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REASONS
FOR JUDGMENT
DAWSON J.A.
[1]
Subsection 165(1) of the Excise Tax Act,
R.S.C. 1985, c. E-15 (Act) imposes the Goods and Services Tax in respect of
taxable supplies “made in Canada”. Subsection
142(1) of the Act deems certain supplies to be made in Canada; subsection
142(2) deems certain other supplies to be made outside of Canada. Together,
these provisions are referred to as the place-of-supply rules.
[2]
The appellant, Club Intrawest, “was created to facilitate the administration and operation
of resort accommodations in connection with a vacation accommodation ownership
plan (the Intrawest program)” (Amended Partial Agreed Statement of Facts
and Issues (Agreed Statement) paragraph 4). The Intrawest program is marketed
and sold in Canada and the United States. Vacation homes are located in as many
as nine resorts situated in Canada, the United States and Mexico.
[3]
The appellant was assessed under the Act in
respect of annual resort fees paid by members of the Intrawest program to the
appellant for the reporting periods ending October 31 for the 2002 to 2007
taxation years. The appellant objected to the assessment and ultimately
appealed from it to the Tax Court of Canada. The appellant argued that the
resort fees were paid to it as reimbursement for expenses it incurred as agent
for the members of the Intrawest program. It followed, the appellant argued,
that GST was not exigible on the resort fees. In the alternative, if GST
applied to the resort fees, the appellant argued that because the resort
accommodations administered and operated under the Intrawest program were
located both inside and outside of Canada, GST should be allocated on the basis
it proposed and not on the basis applied by the Minister of National Revenue in
her assessment. More will be said later about the alternative approaches
proposed by the parties.
[4]
The Tax Court rejected the appellant’s argument
that it had incurred the resort fees as agent of the members of the Intrawest
program. The Court went on to apply the place-of-supply rules and concluded
that the entire supply was made in Canada (2016 TCC 149). This is an appeal
from the judgment of the Tax Court.
I.
The Issues
[5]
Two issues are raised on this appeal:
i.
Did the Tax Court err in failing to find that
the resort fees paid to the appellant by the members represented reimbursement
of expenses incurred by the appellant as agent for the members of the Intrawest
program?
ii.
Did the Tax Court err in its interpretation and
application of the place-of-supply rules?
[6]
Before I turn to consideration of these issues,
it is helpful to review the facts needed to situate these issues and then to
review the relevant findings of the Tax Court.
II.
The Facts
[7]
The facts are set out in detail in the lengthy
reasons of the Tax Court. The following facts are sufficient to situate the
issues raised on appeal.
[8]
The Intrawest program is a timeshare program offering
vacation homes in resorts located in Canada, the United States and Mexico.
Members of the Intrawest program purchase points to be used to rent vacation
homes based on an assigned point value. The vacation homes were originally either
built or purchased by a Canadian developer and an American developer. The
developers transferred the vacation homes to the appellant in exchange for the
number of resort points required to acquire the right to occupy and use the
vacation homes for an entire year in perpetuity. Legal title to the vacation
homes was transferred to a trust company as trustee for the appellant.
[9]
Under this scheme, the developer and the vacation
home timeshare purchaser enter into a Purchase and Membership Agreement. In the
Purchase and Membership Agreement, the developer sells resort points acquired
from the appellant to the purchaser who then uses the resort points to reserve
occupancy of a vacation home for a specified period of time each year. The Tax
Court found that the legal substance of resort points is the right to occupy
vacation homes. As a practical matter, resort points provide a means of keeping
track of the proportionate interests of the point holders in the timeshare
vacation homes. The Purchase and Membership Agreement also provides that the
purchaser becomes a member of the appellant, and thus a member of the Intrawest
program.
[10]
The members of the appellant are the Canadian
and American resort point purchasers and the Canadian and American developers.
Members are required to pay an annual assessment to the appellant to meet “Membership Costs”.
[11]
“Membership Costs” are defined to include all costs incurred by the appellant for and
on behalf of the members, as more specifically provided in the Master
Declaration entered into by the Canadian developer and the appellant. Article
10.3 of the Master Declaration states that membership costs “shall include, but shall not be limited to”:
(a) The maintenance, repair, modification, alteration, redecoration
or replacement of any Resort Accommodation;
(b) The maintenance, repair, modification, alteration,
redecoration, replacement, and rental of the Equipment;
(c) Insurance coverage;
(d) A capital contribution for reserves;
(e) Domestic services, including cleaning and maid service, the
frequency of which shall be determined from time to time by the Board,
furnished to or on behalf of Members;
(f) Assessments levied against Resort Accommodations by a Project
or association for a Project; and
(g) Any other costs incurred by the Club in connection with the
maintenance, repair, replacement, restoration, redecoration, improvement,
operation, and administration of the Resort Accommodations, or in connection
with the operation or administration of the Club, which are directly
attributable to the commitment of one (1) or more Resort Accommodations in
accordance with the provisions [of the Master Declaration].
[12]
To calculate the annual resort fee, the
appellant divides the budgeted membership costs for a particular year by the
total number of issued resort points in order to establish the per point rate
for a calendar year. The annual resort fee payable by a member to the appellant
for a calendar year is the per point rate for that year, multiplied by the
number of resort points owned by the member.
[13]
The appellant did not collect GST on the resort
fees charged annually to members of the Intrawest program.
III.
The Decision of the Tax Court
[14]
The Tax Court considered three issues, only two
of which are relevant to this appeal. The first was described to be whether the
appellant “acquired numerous goods and services as
agent” for the members of the Intrawest program. The second issue was described
to be whether the taxable supply of services was made in Canada.
[15]
With respect to the agency issue, the Tax Court
began its analysis by noting that when an agent acts for a principal and
acquires property or a service from a third party supplier, the agent does not
make a supply of the property or service to the principal. Rather, the agent
acts as a conduit for the supply (reasons, paragraph 71). This means that the
principal acquires the underlying supply and the reimbursement from the
principal to the agent represents the principal’s payment to the supplier for
the underlying supply.
[16]
With respect to agency relationships generally,
citing Royal Securities Corporation Ltd. v. Montréal Trust Co. et al.,
[1967] 1 O.R. 137 at page 155, [1996] O.J. No. 1078 at paragraph 55; aff’d
[1967] 2 O.R. 200, [1967] O.J. No. 997 (Ont. C.A.), the Tax Court correctly
noted that the three generally accepted components of an agency relationship
are:
i.
Both the principal and the agent consent to the
agency relationship.
ii.
The principal grants authority to the agent
allowing the agent to affect the principal’s legal position.
iii.
The principal controls the agent’s actions
(reasons, paragraph 78).
[17]
The Tax Court then turned to consider each
element of this test. The Tax Court dealt first with the authority of the
appellant to affect the legal position of the members of the Intrawest program.
[18]
In its notice of appeal the appellant asserted
that it held the vacation homes in trust for the members of the Intrawest
program. During oral argument in the Tax Court, counsel for the appellant
argued that before one could properly characterize the resort fees, a
determination had to be made about the ownership of the vacation homes. The
appellant argued that it held the beneficial interests in the vacation homes in
trust for the members of the Intrawest program.
[19]
The Tax Court thus turned to address this issue,
noting that if members of the Intrawest program were not obligated to pay the
expenses required to maintain, repair, improve and operate the vacation homes,
or to incur other expenses with respect to the vacation homes, there would be
no legal rights that the appellant could affect on behalf of its members in
respect of such expenses. It would follow that an agency relationship could not
“as a question of fact” exist (reasons,
paragraph 80).
[20]
After reviewing the evidence before it, and
applying the test to determine who held the beneficial ownership in the
vacation homes, the Tax Court concluded that the appellant itself held the
beneficial interest in the vacation homes, subject to the occupancy rights held
by the Canadian and American developers. Moreover, the beneficial interest held
by the appellant included the risk of damage to the vacation homes and the
obligation to incur operating costs (reasons, paragraph 140). Members of the Intrawest
program simply acquired a contractual right to occupy the vacation homes
pursuant to the rules set out in the governing documents (reasons, paragraph
115).
[21]
It followed that the members were not
responsible for the operation, repair and maintenance of the vacation homes and
were not liable to incur any expenses with respect to the vacation homes
(reasons, paragraph 141). It further followed that because there were no legal
rights that the appellant could affect on behalf of its members with respect to
the operating expenses, an agency relationship did not exist between the
appellant and the members of the Intrawest program (reasons, paragraph 142).
[22]
While this was dispositive of the appellant’s
agency argument, the Tax Court went on to consider the remaining two components
of the agency relationship.
[23]
With respect to the issue of consent, the Tax
Court drew a negative inference from the appellant’s failure to adduce a
written agreement whereby the members of the Intrawest program appointed it as
their agent with respect to the vacation home operating costs. The Court had
difficulty accepting that the members would have appointed the appellant as
their agent without entering into an agreement that specified the expenses the
appellant could incur as agent, the standard of care required of the appellant
and the terms of any indemnification (reasons, paragraphs 148 and 149). The Tax
Court went on to find that the only direct evidence before it with respect to
the conduct of the members supported the Minister’s assumption that members of
the Intrawest program did not consent to the appellant acting as their agent
(reasons, paragraph 172). The Court then went on to review other evidence that
supported a finding that the conduct of the parties did not support a finding
of agency.
[24]
With respect to the issue of control, while the
Tax Court accepted that the members of the Intrawest program control the
appellant through their ability to elect the board of directors, such corporate
control did not mean that the appellant acted as the members’ agent. At the end
of the day, the Tax Court concluded that the evidence fell short of
establishing that the members exercised control over the appellant pursuant to
an agency agreement (reasons, paragraphs 190 and 191).
[25]
Having concluded that the resort fees did not
represent an amount paid by the members to the appellant as reimbursement of
costs incurred by the appellant as agent for the members, it followed that the
resort fees constituted consideration paid for a supply. The Tax Court then
turned to consider whether that supply was subject to GST, and more
particularly whether the supply was made in Canada (reasons, paragraph 194).
[26]
The Tax Court began its analysis by noting that
the parties accepted that if the appellant did make a supply, the supply was a
taxable supply. However, the parties disagreed on the application of the
place-of-supply rules contained in the Act (reasons, paragraph 196).
[27]
The Minister, when assessing the appellant,
assumed that the members of the Intrawest program paid the resort fees as
consideration for the supply of intangible personal property that related to
real property situated both inside and outside of Canada. The Minister
submitted that the Court ought to allocate the resort fees between taxable
supplies made inside Canada and taxable supplies made outside of Canada by
basing the allocation on the ratio of total resort points issued in respect of
properties located in Canada to the total resort points issued in respect of
all of the vacation properties (reasons, paragraph 197).
[28]
The appellant disagreed, arguing that any supply
made by it was a supply of a service in relation to real property, with the
resort fees being the consideration for the supply. The appellant further
argued that the appellant made separate single supplies of services in respect
of each vacation home. Thus, the appellant submitted that the Court ought to
allocate the resort fees basing the allocation on the ratio of membership costs
associated with the operation of vacation homes situated in Canada to the total
cost for the operation of all vacation homes (reasons, paragraphs 199-200).
[29]
The Tax Court then discussed what it viewed to
be a legislative inconsistency in the place-of-supply rules: as described in
detail later in these reasons, subsections 142(1) and (2) deem two mutually
exclusive events to occur (reasons, paragraphs 201-212). However, before
addressing the legislative inconsistency the Tax Court moved to consider
whether members paid the resort fees to the appellant as consideration for the
supply of a service or as consideration for the supply of intangible personal
property (reasons, paragraph 224).
[30]
The Tax Court rejected the Minister’s argument
that the resort fees were paid as consideration for the supply of membership in
the Intrawest program, which constituted the supply of intangible personal
property. The Tax Court found that the appellant did not provide any rights in
consideration for the resort fees. It followed that it did not supply any
property. What the appellant supplied was its agreement to use the resort fees
to fund its operations. Specifically, the appellant agreed to use the funds to
pay the vacation home operating costs, to pay costs incurred to operate the
Intrawest program, to pay its own internal expenses and to hold a portion of
the funds in a reserve fund for future unexpected expenses (reasons, paragraphs
226-238).
[31]
Having characterized the resort fees as being
consideration for the supply of a service, it was necessary for the Court to
consider whether the appellant made a single supply or multiple supplies in
consideration of the resort fees. Applying the test articulated in O.A.
Brown Ltd. v. Canada, [1995] G.S.T.C. 40 at page 40, 3 G.T.C. 2092 (T.C.C.),
at page 2095, the Tax Court found as a fact that the appellant made a single
supply by agreeing to use the resort fees to fund its operations. In the
Court’s view, the Master Declaration treated “the
supply as a single supply, with the consideration being based upon the
[a]ppellant’s total estimated costs.” The appellant “could only continue to operate the Intrawest Program if it
incurred all of the costs” (reasons, paragraph 259).
[32]
It followed that the Tax Court rejected the
notion that the resort fees, which were used to fund four separate activities
(the maintenance, operation and improvement of each vacation home; the
operation of the Intrawest program; the operation of the appellant itself; and
the maintenance of a reserve fund), constituted four separate groups of
supplies. The Tax Court further rejected the notion that the appellant made
separate supplies in respect of the Canadian vacation homes on the one hand and
the American and Mexican vacation homes on the other (reasons, paragraph 258).
[33]
Having found that the appellant made a single
supply of a service, the Tax Court considered whether section 142 of the Act
deemed the supply to have been made in Canada. The Tax Court began its analysis
by setting out the relevant portions of the place-of supply rules in section
142 of the Act:
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142 (1) For the purposes of this Part, subject to sections 143,
144 and 179, a supply shall be deemed to be made in Canada if
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142 (1) Pour l’application de la présente partie et sous réserve
des articles 143, 144 et 179, un bien ou un service est réputé fourni au
Canada si :
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…
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…
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(d) in the case of a supply of real property or of a
service in relation to real property, the real property is situated in Canada;
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d) s’agissant
d’un immeuble ou d’un service y afférent, l’immeuble est situé au Canada;
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…
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…
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(f) the supply is a supply of a prescribed service; or
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f) il
s’agit d’un service visé par règlement;
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(g) in the case of a supply of any other service, the
service is, or is to be, performed in whole or in part in Canada.
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g) s’agissant
de tout autre service, il est, ou sera, rendu en tout ou en partie au
Canada.
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142 (2) For the purposes of this Part, a supply shall be deemed
to be made outside Canada if
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142 (2) Pour l’application de la présente partie, un bien ou un
service est réputé fourni à l’étranger si :
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…
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…
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(d) in the case of a supply of real property or a
service in relation to real property, the real property is situated outside
Canada;
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d) s’agissant
d’un immeuble ou d’un service y afférent, l’immeuble est situé à
l’étranger;
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…
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…
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(f) the supply is a supply of a prescribed service; or
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f) il
s’agit d’un service visé par règlement;
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(g) in the case of a supply of any other service, the
service is, or is to be, performed wholly outside Canada.
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g)
s’agissant de tout autre service, il est, ou sera, rendu entièrement à
l’étranger.
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(emphasis added)
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(soulignement ajouté)
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[34]
Noting that there were currently no prescribed services,
the Tax Court observed that the internal inconsistency it had previously
referred to exists as a result of the wording of paragraphs 142(1)(d)
and 142(2)(d) of the Act, which apply when the supplied service is “in relation to real property”. Where a single supply
of a service is made in relation to real property both inside and outside of
Canada, the supply will be deemed to be made both inside and outside of Canada,
depending upon which paragraph of section 142 is applied (reasons, paragraph
263).
[35]
In order to resolve this inconsistency, the Tax
Court concluded that, while the phrase “in relation to”
should be given a wide scope, “within the context of
section 142, the words require a direct relationship between the service and
the real property. The service must be performed directly on the real property
or relate directly to the real property” (reasons, paragraph 265).
[36]
This interpretation was found to be “consistent with the immediate context in which the relevant
words are used in section 142.” More particularly, at paragraph 320 the Tax
Court reasoned that:
… Both paragraph 142(1)(d) and paragraph
142(2)(d) deal first with the supply of real property and then with the supply
of a service in relation to real property. In fact, paragraphs 142(1)(d) and
142(2)(d) contain the only reference in the place-of-supply rules to the supply
of real property. This supports an interpretation that Parliament intended
paragraphs 142(1)(d) and 142(2)(d) to apply to supplies that relate solely to
real property, including services that relate only to such real property.
[37]
It followed that notwithstanding the Tax Court’s
conclusion that all of the services performed by the appellant “relate directly or indirectly to real property”,
paragraphs 142(1)(d) and 142(2)(d) of the Act were inapplicable –
they applied only to services performed by the appellant that related directly and
solely to real property (reasons, paragraphs 266 and 318). While certain
services supplied by the appellant clearly related directly to the vacation
homes, others were found not to relate directly to the vacation homes. For
example, the general and administrative services provided at the appellant’s
Vancouver office did not relate directly to the vacation homes. Rather, these
services were in relation to the operation of the appellant as a corporation
(reasons, paragraph 268).
[38]
As a result of this analysis, because the single
supply related, at least in part, to things other than real property, the place-of-supply
of the service was determined under paragraphs 142(1)(g) and 142(2)(g)
of the Act. On this analysis, paragraph 142(1)(g) deemed the supply to
be made in Canada because the appellant performed the service partially in
Canada. It further followed that the GST applied to the totality of the resort
fees paid by the members of the Intrawest program (reasons, paragraphs 321 and
322).
[39]
The Tax Court completed its analysis by noting that
its analysis resulted in more tax being payable than would be exigible under
the applicable Canada Revenue Agency administrative policy. However, the Tax
Court found that the administrative policy did not comply with the relevant
provisions of the Act. Finally, because the Minister could not appeal its own
assessment, notwithstanding the conclusion that GST applied to the totality of
the resort fees, the judgment could not increase the tax assessed by the
Minister (reasons, paragraph 323).
IV.
Consideration of the Issues
1.
The Agency Issue
[40]
The appellant acknowledges that the Tax Court
correctly articulated the components of an agency relationship. The appellant
argues, however, that the Tax Court erred in law in the application of the test
for agency by failing to give effect to the provisions of the Master
Declaration, the Purchase and Membership Agreement and notes to the appellant’s
financial statements.
[41]
I begin consideration of the agency issue by
rejecting the submission that the asserted errors are errors of law. The
appellant challenges the Tax Court’s conclusion that the appellant did not
receive the resort fees as agent of its members and the weight the Court gave
to the evidence before it. Absent an extricable error of law, the appellant
must demonstrate a palpable and overriding error of fact or mixed fact and law
(Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paragraphs
36 and 46).
[42]
I turn now to the substance of the asserted
errors.
[43]
The appellant relies upon the Fourteenth Amended
and Restated Master Declaration executed by the Canadian developer and the
appellant effective October 27, 2006. The appellant points to and relies upon Articles
9.1 and 9.3, as well as the definitions of “membership
costs” and “resort fees”.
[44]
In Article 9.1, under the heading “Management, Maintenance, and Repairs”, responsibility
for the repair, replacement, restoration, improvement, operation and
administration of the vacation homes is vested in the appellant. Thereafter, “[t]he [appellant] shall act as the agent of all of the
Members in collecting Assessments and in paying taxes, utility costs, and
other Membership Costs” (emphasis added).
[45]
Article 9.3, subject to certain limited
exceptions, provides that “exclusive control and
responsibility over the maintenance, repair, modification, and alteration of
all Resort Accommodations and the Equipment therein is vested in the
[appellant], as agent for the Members” (emphasis added).
[46]
Article 1 contains the defined terms. Article
1.37 defines “Membership Costs” to mean and
include “all costs incurred by the [appellant] for and
on behalf of the Members”. Article 1.50 defines “Resort
Fees” to mean “the annual assessment levied by
the Board upon all Members for their proportionate share of the annual Membership
Costs”.
[47]
Next, the appellant points to Articles 5 and 7
of the Purchase and Membership Agreement. This is the only purchase and
membership agreement placed in evidence and it is an agreement between the
Canadian developer and the Canadian resort point purchasers.
[48]
In Article 5, the purchaser acknowledges
receiving copies of the agreement together with copies of a number of other
specified documents. The purchaser states that he or she has been given the
opportunity to read the documentation and that he or she understands their
provisions. The purchaser also “agrees to be bound by,
to be subject to and to abide by the provisions of all Club Instruments as they
may be amended from time to time.”
[49]
In Article 7, the purchaser signifies his or her
understanding and agreement that the appellant will incur membership expenses “as the agent for all Members in accordance with their
proportionate share of the Resort Points” (emphasis added). The
purchaser agrees to reimburse the appellant “on a
cost-sharing basis for the Purchaser’s share of the Membership expenses as
determined annually by the [appellant] and referred to as the Resort Fee”.
[50]
Finally, in the notes to appellant’s financial
statements as at December 31, 2003, the appellant is said to incur expenses and
to recover costs as “agent of the members”. The
members’ assets are described to include real estate and equipment at vacation
home resorts.
[51]
In addition to arguing that the Tax Court failed
to give effect to this evidence, the appellant argues that the Tax Court erred
by requiring an express, standalone written agency agreement.
[52]
Illustrative of this error is said to be the
summary manner in which the Tax Court dismissed the significance of the
reference to agency in Article 7 of the Purchase and Membership Agreement. At
paragraph 156 of its reasons, the Tax Court wrote that it could not see how
this could constitute an agency agreement between the resort point purchasers
and the appellant because the appellant was not a party to the agreement. The
appellant argues that this statement ignores that in the Master Declaration the
appellant expressly accepted its role as agent for the members, and ignores
that the members agreed in the Purchase and Membership Agreement to be bound by
the Club Instruments, including the Master Declaration.
[53]
I begin by rejecting the argument that the Tax
Court erred by requiring an express, standalone written agency agreement.
[54]
It is correct that the Tax Court drew a negative
inference from the failure of the appellant to provide the Court with a written
agreement whereby the Canadian and American developers and the Canadian and
American resort point purchasers appointed the appellant to act as their agent
with respect to the operating costs of the vacation homes (reasons, paragraph
148). The Court found it to be implausible that the resort point purchasers
would appoint the appellant as their agent without entering into an agreement
specifying such things as the actual expenses that the appellant could incur as
agent (reasons, paragraph 149). This was particularly so in light of the terms
of the Management Agreement entered into between the appellant and the Canadian
developer in which the appellant appointed the Canadian developer as its agent
for specific functions. This agreement contained numerous clauses “that one would expect in an agency agreement” such as
an indemnification clause and a standard of care clause (reasons, paragraphs
146-147). The appellant has not shown that the negative inference drawn by the
Tax Court was palpably and overridingly wrong.
[55]
This said, in any event I am not persuaded that
the negative inference drawn as a result of the appellant’s failure to produce
a written agency agreement was material to the Court’s conclusion that the
appellant had failed to demonstrate the existence of an agency relationship.
[56]
The negative inference was not material because
the Tax Court recognized, citing G.H.L. Fridman, Canadian Agency Law,
2nd ed. (Markham, Ont: LexisNexis, 2012) at paragraphs 3 through 7, that where
no express, written agency agreement exists it remains necessary to “look at the conduct of the parties to determine whether an
agency relationship has come into existence” (reasons, paragraph 166). The
Court’s reliance on this passage and subsequent examination of parties’ conduct
show that the Court did not consider it was necessary for the appellant to produce
an express, standalone written agency agreement.
[57]
The Tax Court also considered in detail the
appellant’s argument, which it re-argues in this Court, that the Purchase and
Membership Agreement and the Master Declaration constitute agency agreements
(reasons, paragraph 152). The Court rejected this argument for the following
reasons:
i.
With respect to the reference to the appellant
incurring membership expenses “as the agent for all
Members” in Article 7 of the Purchase and Membership Agreement, this
reference to agency did not exist in the first iteration of the agreement; this
reference was only added three years after the creation of the Intrawest
program. The only explanation given for this addition was that the reference to
agency was added on the advice of an accountant. Because the Canadian developer
added these words three years after the program was created, some Canadian
resort point purchasers acquired their resort points and memberships pursuant
to an agreement that did not refer to the appellant acting as their agent
(reasons, paragraphs 153-155).
ii.
With respect to Articles 9.1 and 9.3 of the
Master Declaration and their references to agency, again such references were
not contained in the original Master Declaration. Rather, the words were added
three years after the Master Declaration was first executed, also at the
direction of an accountant (reasons, paragraph 161).
iii.
The late addition of the reference to agency in
these agreements might explain internal inconsistencies in Article 9 of the
Master Declaration. To illustrate, the first sentence in Article 9.1 states
that the responsibility for the maintenance, repair, replacement, restoration,
improvement, operation and administration of the vacation homes is vested in
the appellant. Further, the first sentence of the second paragraph of Article
9.3 prohibits any member from making or doing any repairs, modifications or the
like. These two clauses state that it is the appellant, not the members, who is
responsible for the operation and upkeep of the vacation homes (reasons,
paragraph 162).
iv.
This conclusion is consistent with the Court’s
finding of fact that the beneficial interest in the vacation homes held by the
appellant included the risk of damage or loss attached to the homes, including
the obligation to pay the expenses incurred in respect of the operation, repair
and maintenance of the homes (reasons, paragraph 163).
v.
This conclusion that it is the appellant that is
responsible for the operation and upkeep of the vacation homes is inconsistent
with the references in Articles 9.1 and 9.3 to the appellant incurring
operating costs as agent for its members. Notwithstanding the addition of the agency
language, the Court was not of the view that this addition reflected the actual
relationship between the appellant and its members (reasons, paragraph 164).
vi.
Further, these agreements cannot constitute an
agency agreement between the American resort point purchasers and the
appellant, or between the American developer and the appellant because they
were not parties to the agreements. No written agreements or viva voce
evidence was provided with respect to any agreements entered into by the
American resort point purchasers or the American developer in respect of the
Intrawest program (reasons, paragraph 165).
The
Court noted the failure of the appellant to call any resort point purchaser or
any officer or director or employee of the appellant to testify about the
agency relationship and drew an adverse inference from this failure (reasons,
paragraph 167).
[58]
The Court then turned to other evidence that in
its view negated the existence of an agency relationship (reasons, paragraph
173):
i.
The first matter considered was that the
appellant calculated the annual resort fee in part on the basis of expenses
other than vacation home operating costs. The appellant included its own internal
costs, such as the cost of its annual general meeting, the cost of its auditor,
its income tax obligations and legal costs. The Court found that these were
costs of the appellant, not its members. They were not costs incurred by the
appellant as agent for the appellant’s members. Similarly, a portion of the
annual resort fee related to a reserve fund maintained by the appellant as a
contingency fund for future unexpected costs. This too did not represent an
expense incurred by the appellant as agent of its members (reasons, paragraphs
174-175).
ii.
The Court then turned to the content of the
appellant’s bylaws and the Master Declaration. Section 7.2 of the bylaws
provides that the appellant’s members are required to pay the annual resort fee
to the appellant in accordance with the terms of the Master Declaration. The
bylaws did not oblige the members to personally incur the vacation home
operating costs or any other expenses related to the vacation homes. Article
10.1 of the Master Declaration obligates a member to pay the annual resort fee.
This is a distinct obligation from one where the member is personally liable
for the vacation home operating costs. Further, Article 10.4 of the Master
Declaration provides that while the annual resort fee is to be based on
estimated costs, the actual amount of the resort fee is in the sole discretion
of the appellant’s board and may be adjusted “based on
the additional expenses incurred by [the appellant].” The Court found
that these clauses were based on the assumption that the costs incurred by the
appellant were costs incurred on its own account and not as agent for its
members (reasons, paragraphs 176-181).
iii.
Finally, the Court considered the evidence that
the Canadian developer had an option not to pay the annual resort fee if it
elected to subsidize the financial operations of the appellant. This is
provided for in Articles 10.7 and 1.8 of the Master Declaration which allow the
Canadian developer to subsidize the appellant’s financial operations in the
event that the assessments, including the annual resort fee, and “every other revenue source (income) received by” the appellant
fails to equal or exceed the actual expenses incurred during the fiscal year.
Thus, Article 10.7 does not contemplate the situation where the appellant
incurs costs as the Canadian developer’s agent. Rather, the article is based
upon the assumption that the appellant incurs costs on its own account. The
Canadian developer agrees to provide financial assistance if such costs exceed
the appellant’s annual revenue (reasons, paragraphs 182-183).
[59]
Read fairly, the Tax Court did not require
evidence of an express, standalone written agency agreement. Rather, the Court
carefully examined the relevant agreements and concluded that they did not
support the existence of an agency relationship. The Court then looked at the
conduct of the parties for the purpose of determining whether the conduct
evidenced an agency relationship and found it did not. I can detect no palpable
and overriding error of fact or mixed fact and law in the reasoning of the Tax
Court. Nor can I detect any extricable legal error. It follows that the
appellant has failed to demonstrate that the Tax Court erred in finding that
the resort fees paid to the appellant by its members did not represent the
reimbursement of expenses incurred by the appellant as agent for its members.
[60]
Before leaving this issue, two final points
should be addressed.
[61]
First, the listing in paragraph 57 above of the findings
the Tax Court relied on to conclude that the Canadian Purchase and Membership
Agreement and the Master Declaration do not evidence an agency relationship,
did not enumerate the Tax Court’s reference to the evidence of a Canadian
resort point purchaser, Mr. Abraham. Mr. Abraham testified that he did not know
that the appellant was holding itself out as his agent (reasons, paragraph
171). The appellant argues that such evidence was inadmissible and contrary to
the parol evidence rule. I agree that the parol evidence rule precludes, among
other things, evidence about the subjective intentions of the parties to a
contract (Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at
paragraphs 54-59; Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC
53, [2014] 2 S.C.R. 633, at paragraph 59). However, in light of the extensive
reasons given by the Tax Court for its conclusion on the agency issue, I am
satisfied that the brief reference to Mr. Abraham’s testimony was not in any
way material to the ultimate conclusion reached by the Tax Court.
[62]
Second, while the Tax Court did not expressly
deal with the notes to the appellant’s financial statements, given the Tax
Court’s detailed reasons for its conclusion on the agency issue, I am not
persuaded that an auditor’s characterization of the appellant’s relationship to
its members is of such import that it required comment.
2.
An Agency Sub-Issue: The Inquiry into Beneficial
Ownership
[63]
Before the Tax Court, the appellant argued that
the beneficial interest in the vacation homes is held by the appellant’s
members – the members of the Intrawest program. As explained above at
paragraphs 19 and 20, the Tax Court rejected this argument. Instead, the Tax
Court found that the appellant held a beneficial interest in the vacation
homes, subject to the occupancy rights held by the Canadian and American
developers.
[64]
In its written argument, the appellant
characterizes the Tax Court’s analysis to be misguided; it asserts that the
Court erroneously concluded that the appellant bore the onus of proving that
its members held beneficial ownership of the vacation homes.
[65]
During oral argument, counsel for the appellant
resiled to a degree from this argument. Counsel stated that he was no longer
certain that the bundle of rights members acquired when purchasing their
interest in the vacation homes rose to the level of beneficial ownership.
Counsel did not, however, withdraw the argument.
[66]
I will therefore deal briefly with this issue.
[67]
I begin by rejecting the notions that the Tax
Court’s analysis was misguided and that it imported a requirement that the
appellant prove that its members were the beneficial owners of the vacation
homes. Rather, the appellant asserted in its notice of appeal such ownership to
be one of the material facts it relied upon. In argument before the Tax Court,
the appellant characterized this to be one of the “key
issues” (reasons, paragraph 79). The Tax Court therefore did not engage
in a legal detour as the appellant now asserts. The Court dealt with the issue
placed before it by the appellant. The point the appellant sought to make was
that if the members were the beneficial owners of the vacation homes it would
follow that when the appellant acquired goods and services in the course of
maintaining the vacation homes, it did so as agent of the beneficial owners.
[68]
I also reject the appellant’s argument that the
Tax Court erred by ignoring key documents such as the Trust Indenture and the
Master Declaration.
[69]
The Tax Court began its analysis with the Agreed
Statement and the Trust Indenture, finding that initially the legal and
beneficial interests in the Canadian vacation homes were held by the Canadian
developer. The Canadian developer then transferred the legal and beneficial
ownership of the Canadian vacation homes to the appellant. Simultaneously with
its acquisition of the Canadian vacation homes, the appellant transferred legal
title to the homes to the Canadian bare trustee to hold such title “in trust for and on behalf of the [appellant]”
(Article 2.1 of the Trust Indenture). Finally, as consideration for the
Canadian vacation homes, the appellant transferred the occupancy rights in the
homes in perpetuity to the Canadian developer (reasons, paragraphs 86-89).
[70]
The Tax Court then moved to apply the legal
criteria of possession, use, risk and control in order to follow and determine
the beneficial ownership of the vacation homes. The Tax Court found that:
i.
The Canadian developer held the right to use the
Canadian vacation homes (reasons, paragraph 92).
ii.
The absence of evidence made it impossible to
make a definitive finding about possession – the Canadian developer probably
held possession rights in the Canadian vacation homes, subject to any residual
interest the appellant may hold (reasons, paragraph 95).
iii.
Risk referred to the risk of damage to the
property. There was no evidence that the appellant transferred any risk with
respect to the Canadian vacation homes to the Canadian developer. The Court
drew an adverse inference from the appellant’s failure to adduce the Canadian
Vacation Home Transfer Agreement or to call a witness to speak to the terms of
the transfer (reasons, paragraphs 98, 99 and 102).
iv.
The conclusion that the appellant retained the
risk was consistent with the testimony that the appellant, not the developer,
paid the repair, maintenance and operating costs of the Canadian vacation homes
(reasons, paragraph 101).
v.
In the absence of the relevant transfer
agreement or viva voce evidence, the best evidence was that the
appellant and the Canadian developer shared control of the Canadian vacation
homes (reasons, paragraph 105).
vi.
Both the appellant and the Canadian developer
held beneficial interests in the Canadian vacation homes. The risk of damage to
the property rested with the appellant (reasons, paragraph 108).
vii.
For the same reasons, the Court found that the
appellant and the American developer held beneficial interests in the American
and Mexican vacation homes. The appellant also bore the risk of damage to these
properties (reasons, paragraph 110).
viii.
The sale by the Canadian developer of resort
points and memberships in the appellant amounted to the granting of a
contractual right to occupy a vacation home pursuant to the rules set out in
the Master Declaration and the Membership Guidelines. This is a contractual
right. A Canadian resort point purchaser did not receive a beneficial interest
in a specific vacation home (reasons, paragraphs 115-116).
ix.
Further, because the Canadian developer was not
at risk with respect to the Canadian vacation homes, the developer could not
transfer the obligation to repair and maintain the Canadian vacation homes to
the Canadian resort point purchasers (reasons, paragraph 118).
x.
There was no evidence that either the appellant
or the American developer transferred any beneficial interests in the American
and Mexican vacation homes to the Canadian developer. It followed that the
Canadian developer could not transfer beneficial interest in the American and
Mexican vacation homes to the Canadian resort point purchasers (reasons,
paragraph 119).
xi.
There was no evidence of any transaction between
the American developer and Canadian resort point purchasers. It followed that
there was no evidence that either the Canadian or American developer
transferred beneficial ownership in any vacation home to the Canadian resort
point purchasers (reasons, paragraphs 120-121).
xii.
There was no evidence that an American resort
point purchaser acquired a beneficial interest in any vacation home (reasons,
paragraph 124).
xiii.
There was no evidence that the appellant
transferred beneficial interests in the vacation homes directly to resort point
purchasers (reasons, paragraph 128).
xiv.
Similarly, there was no evidence that the appellant
transferred beneficial interests in the vacation homes to a trust for the
benefit of the members. While a witness on behalf of the appellant testified to
the existence of a trust, the witness did not provide the Court with any trust
agreement or provide any oral evidence with respect to the terms of such a
trust. While Article 4.4 of the Master Declaration referred to a trust for the
benefit of the members, the clause did not create a trust. It simply evidenced
that the American and Canadian developers agreed that the appellant would
create a trust. There was no evidence that the appellant created such a trust
(reasons, paragraphs 129-135).
xv.
Further, Article 4.4 of the Master Declaration
was ambiguous because it stated that “the value of each
Member’s beneficial interest in the Resort Accommodation shall be paid out and
distributed to each Member of the [appellant] in accordance with Article X of
the Bylaws of the Club.” However, Article 10.2 of the bylaws stated that
the assets, including the vacation homes, are assets of the appellant and so
are only distributed to the appellant’s members on a winding up and dissolution
of the appellant. The appellant’s bylaws contain no reference to the appellant
holding any of its assets in trust for its members. Rather, Article X
contemplates the situation where the appellant holds its assets for its own
account, not in trust for its members (reasons, paragraph 136).
[71]
To conclude on this issue, the Tax Court did not
ignore key documents. Rather, the Court carefully examined the relevant documents
and concluded that they did not support the appellant’s assertion that its
members held the beneficial interest in the vacation homes. I can detect no
palpable and overriding error of fact or mixed fact and law in the reasoning of
the Tax Court. Nor can I detect any extricable legal error. It follows that the
appellant has failed to demonstrate that the Tax Court erred in finding that
the appellant, not its members, held a beneficial interest in the vacation
homes.
3.
The GST Issue
[72]
As noted at the beginning of these reasons,
subsection 165(1) of the Act imposes GST in respect of taxable supplies made in
Canada. To determine whether GST is exigible, it is necessary to both correctly
characterize the supply in issue and to correctly determine whether the supply
was “made in Canada”.
[73]
With respect to the characterization of the
supply, the appellant argues that the Tax Court correctly concluded that, if
the appellant did not incur the costs of operating the vacation homes as agent,
it supplied a service to the members of the Intrawest program. The appellant
asserts, however, that the Tax Court erred in failing to characterize the
predominant element of the service. Had it done so, the appellant submits that
the Tax Court would have found there to be a single supply: the operation of
each resort property.
[74]
This conclusion is said to flow from the decision
of the Tax Court in O.A. Brown (cited above at paragraph 31) and the
decision of this Court in Global Cash Access (Canada) Inc. v. Her Majesty The
Queen, 2013 FCA 269, 451 N.R. 358. The appellant provides one single supply
because no component of the supply has any commercial efficacy on its own.
While the services in respect of each individual resort property are
interdependent and inextricably intertwined, the same is not true of the
overall operation of all of the resort properties. The operation and costs
incurred with respect to each property are independent from the other
properties. Thus, resort properties have been added to, and removed from, the
Intrawest program over time.
[75]
I begin by reviewing the reasons of the Tax
Court which address the appellant’s submissions on this point. At paragraph 257
of the reasons, the Court noted that members of the appellant pay the annual
resort fee in order to fund membership costs as defined in Article 1.37 of the
Master Declaration. Such costs include, but are not limited to, the items set
out in paragraph 11 above.
[76]
The service provided by the appellant is its
agreement to use the annual resort fees to fund its operations. Specifically,
the appellant agrees to use the funds to pay the vacation home operating costs,
to pay the costs incurred to operate the Intrawest program, to pay its own
internal expenses and to hold a portion of the funds in a reserve fund for
future unexpected expenses (reasons, paragraph 237).
[77]
The Tax Court found as a fact that the appellant
made a single supply by agreeing to use the annual resort fee to fund its
operations. In so concluding, the Tax Court relied upon the Master Declaration’s
treatment of the supply as a single supply “with the
consideration being based upon the Appellant’s total estimated costs”
and the fact that the appellant could only continue to operate the Intrawest
program if it incurred all of the membership costs (reasons, paragraph 259).
[78]
The next question is to determine whether the
Tax Court erred in ascertaining the place of the supply. More particularly, was
the supply “a service in relation to real property”
or a service falling within the general place-of-supply rule?
[79]
As explained above in paragraphs 37 and 38, the
Tax Court characterized the single supply to be the use of the annual resort
fees to fund the appellant’s operations, but found that some of the services
included therein did not relate directly and solely to real property. Therefore
the Court determined the place-of-supply under paragraphs 142(1)(g) and
142(2)(g) of the Act.
[80]
In order to determine whether an overall supply
consists of more than one supply, that is whether a supply consists of a
compound supply or multiple supplies, one must determine whether an “alleged separate supply is an integral part, integrant or
component of the overall supply. … One factor to be considered is whether or
not the alleged separate supply can be realistically omitted from the overall
supply.” (O.A. Brown, paragraphs 22-23).
[81]
More recently, in Global Cash Access, this
Court looked to the commercial efficacy of an arrangement in order to determine
the predominant element of a single supply. As that predominant element fell
within the statutory definition of “financial service”
in subsection 123(1) of the Act, and did not fall within any statutory
exception, the consideration received by the taxpayer in exchange for the
supply was not subject to GST.
[82]
What I take from Global Cash Access is
that when applying the Act regard must be had to the predominant element of a
single supply. It is an error of law to apply the Act having regard to services
that do not form the predominant element of a single supply (see also: Great-West
Life Assurance Company v. Her Majesty The Queen, 2016 FCA 316, [2016]
F.C.J. No. 1408, at paragraph 43).
[83]
It follows, in my respectful view, that the Tax
Court erred in its application of subsections 142(1) and 142(2) of the Act when
it broke down the single supply into its constituent elements for the purpose
of determining whether each constituent element related directly and solely to
real property (reasons, paragraphs 264-271 and 318).
[84]
While the Tax Court’s approach avoided to a
degree the conflict between paragraphs 142(1)(d) and 142(2)(d) of
the Act which it identified earlier, the approach is contrary to both O.A. Brown
and the jurisprudence of this Court. The administrative services the Tax Court
relied upon to apply the general place-of-supply rule were an integral part of
the operation of the Intrawest program – they could not be realistically
omitted from the supply. Nor were the administrative services the predominant
element of the supply.
[85]
This conclusion squarely engages the inconsistency
between paragraphs 142(1)(d) and 142(2)(d). In the present case,
the predominant element of the supply is the use of the annual resort fee to
fund the operation of the Intrawest program. Because the Intrawest program
operates vacation homes in Canada, the United States and Mexico, the
predominant element of the supply is in relation to real property situated both
inside and outside of Canada.
[86]
The legislative inconsistency arises because
Parliament, when drafting the place-of-supply rules, appears not to have
contemplated that a single supply could be made in respect of multiple real
properties, some inside Canada and others outside Canada.
[87]
In the Tax Court, the parties submitted a
practical solution: interpret subsection 165(1) so that tax is levied on only a
portion of the consideration of the single taxable supply.
[88]
In my view, the Tax Court correctly rejected
this interpretation for the reasons set out at paragraphs 275 through 288 of
its decision. I agree that the Act contemplates that a single supply will
either be subject to tax on the whole of the consideration paid for the supply
or be not subject to tax at all.
[89]
To resolve the legislative inconsistency the Tax
Court reasoned at paragraphs 310 and 316:
In my view, section 142 must be interpreted
in a manner that respects Parliament’s intention to impose the tax, at the
applicable rate, on all of the consideration for a single taxable supply that
is deemed to be made in Canada, its general intention to deem, under section
142, supplies of services that are performed inside and outside of Canada to be
made in Canada, and its intention to impose the tax on supplies of services to
residents of Canada where the services are consumed at least partly in Canada.
…
Paragraphs 142(1)(g) and 142(2)(g) apply to
the supply of all services that do not relate to real property. There is no
inconsistency in the application of these paragraphs and they address all
situations that may arise: namely, a service performed completely in Canada, a
service performed completely outside of Canada and a service performed both
inside and outside of Canada. In my view, these paragraphs reflect Parliament’s
intention with respect to the application of the deeming rules to supplies of
services. If the service is performed partially or wholly inside of Canada, the
supply is deemed to be made in Canada; it is only when the service is performed
wholly outside of Canada that the supply is deemed to be made outside Canada.
[90]
There are, in my view, two principal
difficulties with the Tax Court’s resolution of the legislative inconsistency.
[91]
First, paragraphs 142(1)(d) and 142(2)(d)
apply to both a supply of real property and a service “in
relation to real property”. While the Tax Court, citing Nowegijick v.
Her Majesty The Queen, [1983] 1 S.C.R. 29, agreed that the phrase “in relation to” used in the two paragraphs “should be given a wide scope” (reasons, paragraph
265), it read words into the provisions to conclude that:
i.
the relevant paragraphs “only
apply to services performed by the Appellant that relate directly to
real property” (emphasis added) (reasons, paragraph 266); and,
ii.
the relevant paragraphs only apply if the single
supply of a service relates solely to real property (emphasis in
original) (reasons, paragraph 318).
[92]
Second, the Court’s interpretation rendered
paragraph 142(1)(d) redundant. A supply of a service in relation to real
property located in Canada is subsumed into the general place-of-supply rule
unless the supply relates to real property located exclusively outside of
Canada. Put another way, the Tax Court’s interpretation elevates paragraph
142(1)(g) to a default provision, applying to all services performed
inside and outside of Canada. Had this been Parliament’s intent, it would have
been a simple matter to so legislate, and then enumerate express exceptions to
this default provision.
[93]
The resolution I propose builds on the
jurisprudence relied upon by the Tax Court in the present case at paragraph 256
of its reasons: the question of whether two elements constitute a single supply
or two or more supplies is a question of fact to be determined with a generous
application of common sense. It also recognizes that the single supply
principle is a common law approach adopted by the Tax Court, based upon
jurisprudence from the United Kingdom decided in the context of its value-added
tax legislation (Great Canadian Trophy Hunts Inc. v. The Queen, 2005 TCC
612, [2005] G.S.T.C. 162, at paragraph 39).
[94]
Generally, as explained above, a single supply
of services is a supply of services that are inextricably intertwined. If such
services are partially consumed in Canada they will be deemed to be supplied
wholly in Canada under the general place-of-supply rule.
[95]
In this circumstance, I see no reason in
principle that precludes splitting up the supply so that the supply is treated
as two supplies in order to recognize that ultimately the services are
inherently distinct in one important respect: the services relating to the
operation of the vacation homes located in Canada are services in relation to
real property situated in Canada and hence are a taxable supply – the services
relating to the operation of the Intrawest vacation homes situated outside of
Canada are services related to real property situated outside of Canada and
hence are a non-taxable supply.
[96]
The Tax Court rejected this approach because in
its view to accept the approach would require the Court “to accept that the Appellant made separate supplies in
respect of the other three groups of activities” (reasons, paragraph
258).
[97]
I disagree. This approach simply recognizes the
distinction between the intertwined bundle of services that constitute the
Intrawest program and the reality that the bundle of services are operated on a
property-by-property basis. Thus, as the appellant argues, resort properties
are added to and removed from the Intrawest program without affecting the
nature and character of the program.
[98]
It follows from this approach that it will be
necessary to quantify the consideration paid for the taxable supply, i.e. the
consideration paid for the services provided in relation to real property
situated in Canada. The balance of the consideration paid to the appellant by
way of the annual resort fees will be in respect of the non-taxable supply. The
method of quantification must be fair and reasonable.
[99]
The assessments under appeal were based on the
Minister’s conclusion that a portion of the resort fees was paid for the supply
of intangible personal property related to real property situated in Canada. To
allocate a portion of the resort fees to the supply of intangible personal
property related to real property situated in Canada, the Minister used the
ratio of resort points issued by the appellant in respect of vacation homes in
resorts situated in Canada to the total resort points issued in respect of all
vacation homes held by the appellant.
[100] The appellant proposed an alternative approach. The appellant
proposed that the resort fees should be allocated based on the ratio of
membership costs associated with the operation of the vacation homes in resorts
situated in Canada to the total membership costs for all resorts.
[101] In my view, the allocation proposed by the appellant more fairly and
reasonably reflects the nature of the taxable supply: the resort fees paid to
operate the vacation homes in resorts situated in Canada. The consideration
paid for the taxable supply should be calculated on this basis.
V.
Conclusion
[102] The judgment of the Tax Court dismissed the appellant’s appeals from
the assessments issued with respect to the reporting periods ending October 31
for each year from 2002 to 2007, and awarded costs to the respondent.
[103] For the reasons set out above, I would allow the appeal from the
judgment of the Tax Court and set aside the judgment of the Tax Court, with
costs both here and in the Tax Court. Pronouncing the judgment that the Tax
Court should have pronounced, I would refer the GST assessments back to the
Minister for reconsideration and reassessment on the basis that GST is exigible
only on that portion of the resort fees paid to the appellant on account of the
services it provided in relation to the vacation homes situated in Canada.
“Eleanor R. Dawson”
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“I agree.
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M. Nadon J.A.”
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“I agree.
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Johanne
Gauthier J.A.”
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