REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
The Appellant, High-Crest Enterprises, owns and
operates a nursing home in Springhill, Nova Scotia. The facility provides long‑term
care for its residents, including nursing care, food services, housekeeping and
occupational therapy.
[2]
Prior to the construction of the addition in
issue in this appeal, the Appellant operated a 56‑bed facility. Of those
beds, 45 were operated for the Nova Scotia Department of Health and 10 for the
Department of Veterans Affairs. There was also one respite bed.
[3]
In 2007, the Nova Scotia Department of Health
sought proposals regarding the provision of long-term nursing care. In response
to this request, the Appellant made a proposal for providing 20 additional beds
and this proposal was accepted by the Department of Health in early 2008.
[4]
As a result, the Appellant constructed a 20‑bed
addition to its Springhill facility. Occupancy of the addition began in the
first quarter of 2010.
[5]
Pursuant to the Excise Tax Act, the Appellant
is considered to have made a self-supply of the addition to the Springhill
facility. As a result it is required to include in its Harmonized Sales Tax return
(output) tax on the self‑supply.
[6]
The Appellant says that the Harmonized Sales Tax
on the self-supply should be equal to the applicable rate of tax multiplied by
the fair market value of the property.
The Appellant filed its return for the period from January 1, 2010 to
March 31, 2010 on that basis. The Appellant obtained a valuation of the
property. The quantum of the valuation is not in issue.
[7]
At that time, the rate of the Harmonized Sales
Tax was 13% of which 5% was for the federal government and 8% was for the government
of Nova Scotia.
[8]
In that period and in prior reporting periods,
the Appellant claimed input tax credits with respect to the construction of the
addition to the Springhill facility. Cumulatively, the input tax credits
claimed are greater than the amount of the output tax reported by the Appellant
on the self‑supply.
[9]
If the Appellant is correct, the practical
result is that with respect to the construction of the 20‑bed addition,
cumulatively, in the period in issue and preceding periods, the Appellant
receives a net tax refund to the extent that the input tax credits exceed the output
tax on the self-supply of the addition.
[10]
The Respondent says the Appellant cannot receive
an overall net tax refund of the Harmonized Sales Tax with respect to the
addition because, in the circumstances, section 191.1 of the Excise Tax Act
applies. In certain circumstances, the section requires the output tax on the
self‑supply to be no less than the total amount of input tax paid in
relation to the addition. Put differently, when it applies the section prevents
an overall net tax refund on the self‑supply by increasing the value of
the addition for the purpose of computing the tax on the self‑supply.
[11]
There is no quantum issue. The parties agree on
the numerical outcome if section 191.1 applies and if it does not apply. The
difference between the two positions amounts to slightly less than $300,000.
[12]
Thus the issue in this appeal is whether
subsection 191.1(1) of the Excise Tax Act applies and thereby increases
the output tax on the self‑supply.
[13]
This issue turns on the contractual arrangements
between the Appellant and the Department of Health and whether, as a result of
those arrangements, the Appellant received, or could expect to receive,
“government funding” as defined by subsection 191.1(1) of the Excise Tax Act.
The Statutory Scheme
[14]
Section 191.1 of the Excise Tax Act read
as follows at the relevant time:
Definitions
191.1(1) The
definitions in this subsection apply in this section.
government
funding, in respect of a residential complex, means
an amount of money (including a forgivable loan but not including any other
loan or a refund or rebate of, or credit in respect of, taxes, duties or fees
imposed under any statute) paid or payable by
(a) a grantor, or
(b) an organization that received
the amount from a grantor or another organization that received the amount from
a grantor,
to a builder of
the complex or of an addition thereto for the purpose of making residential
units in the complex available to individuals referred to in paragraph (2)(b).
(subvention)
grantor means
(a) a government or municipality,
other than a corporation all or substantially all of whose activities are
commercial activities or the supply of financial services or any combination
thereof;
(b) a band (within the meaning
assigned by section 2 of the Indian Act);
(c) a corporation that is controlled
by a government, a municipality or a band referred to in paragraph (b)
and one of the main purposes of which is to fund charitable or non-profit
endeavours; and
(d) a trust, board, commission or
other body that is established by a government, municipality, band referred to
in paragraph (b) or corporation described in paragraph (c) and
one of the main purposes of which is to fund charitable or non-profit
endeavours. (subventionneur)
Subsidized
residential complexes
(2) For the
purposes of subsections 191(1) to (4), where
(a) a builder of a residential
complex or an addition thereto is deemed under any of subsections 191(1) to (4)
to have, at any time, made and received a supply of the complex or addition,
(b) possession or use of at least
10% of the residential units in the complex is intended to be given for the
purpose of their occupancy as a place of residence or lodging by
(i) seniors,
(ii) youths,
(iii) students,
(iv) individuals with a disability,
(v) individuals in distress or individuals
in need of assistance,
(vi) individuals whose eligibility for
occupancy of the units as a place of residence or lodging, or for reduced
payments in respect of their occupancy as a place of residence or lodging, is
dependent on a means or income test,
(vii) individuals for whose benefit no
other persons (other than public sector bodies) pay consideration for supplies
that include giving possession or use of the units for occupancy by the
individuals as a place of residence or lodging and who either pay no
consideration for the supplies or pay consideration that is significantly less
than the consideration that could reasonably be expected to be paid for
comparable supplies made by a person in the business of making such supplies for
the purpose of earning a profit, or
(viii) any combination of individuals
described in any of subparagraphs (i) to (vii), and
(c) except where the builder is a
government or a municipality, the builder, at or before that time, has received
or can reasonably expect to receive government funding in respect of the
complex,
the amount of
tax in respect of the supply calculated on the fair market value of the complex
or addition, as the case may be, is deemed to be equal to the greater of
(d) the amount that would, but for
this subsection, be the tax calculated on that fair market value, and
(e) the total of all amounts each of
which is tax that was payable by the builder in respect of
(i) real property that forms part of the
complex or addition, as the case may be, or
(ii) an improvement to that real property.
[15]
There are a number of conditions in section
191.1 but most of them are either not in dispute or are very clearly met on the
evidence. Section 191.1 applies where the three conditions in paragraphs
191.1(2)(a), (b) and (c) are met.
[16]
There is no dispute that there was a self‑supply
of a residential complex as required by paragraph 191.1(2)(a). There is
also no question that the intended use of at least 10% of the residential units
in the complex fell within the requirements of paragraph 191.1(2)(b).
[17]
Paragraph 191.1(2)(c) requires that the
builder, the Appellant, receive or reasonably expect to receive government
funding in respect of the complex at the time of the self‑supply.
Government funding is defined in subsection 191.1(1).
[18]
There is no question that High-Crest is the
builder of the addition to a residential complex and that High-Crest received
payments from the government of Nova Scotia. The government is a “grantor”
under paragraph (a) of the definition of “grantor” contained in
subsection 191.1(1).
[19]
The legal question in this matter thus turns on
limited portions of section 191.1. For convenience, I reproduced those portions
below after removing text that is inapplicable in these circumstances:
Definitions
191.1(1) The
definitions in this subsection apply in this section.
government
funding, in respect of a residential complex, means
an amount of money . . . paid or payable by
(a) a grantor, or
. . .
to a builder of
the complex or of an addition thereto for the purpose of making residential
units in the complex available to individuals referred to in paragraph (2)(b). . . .
. . .
Subsidized
residential complexes
(2) For the
purposes of subsections 191(1) to (4), where
. . .
(c) . . . the builder, at
or before that time, has received or can reasonably expect to receive
government funding in respect of the complex,
. . .
[20]
Thus, the crucial question is:
•
Whether the builder (High-Crest),
•
at or before that time (the time of the
self-supply referred to in paragraph 191.1(2)(a)),
•
has received or can reasonably expect to receive
government funding, “an amount of money . . .
paid or payable by a grantor [Nova Scotia] . . . to a builder
[High-Crest] of the complex or of an addition thereto for the purpose of making
residential units in the complex available to individuals”, in respect
of the complex.
[21]
We can simplify and reorder this to make the
question clearer:
•
At or before the time of the self-supply of the
20‑bed addition,
•
had High-Crest received, or could it reasonably
expect to receive,
•
an amount of money paid or payable by the
government of Nova Scotia for the purpose of making residential units in the 20‑bed
addition available to individuals?
[22]
The critical question to be decided can be
stated as:
Whether, at the time of
the self‑supply, High‑Crest could expect to receive an amount of
money from the government of Nova Scotia “for the
purpose of making residential units in the [20‑bed addition]
available to individuals” (emphasis added).
The Facts
[23]
The only witness was Mr. Shannon
Stephenson. Mr. Stephenson is a lawyer and the Chief Executive Officer of
High-Crest. There are no credibility issues. A substantial amount of
documentation was filed as exhibits.
[24]
In March 2007 the Department of Health issued
the first part of a request for proposals to build new nursing home facilities.
[25]
The request sets out right in the first
paragraph of the introduction that the proposal seeks level II nursing home
beds such as those provided by the addition constructed by the Appellant. Clauses 1.2.1 and 1.2.2 of the
request for proposals set out the background and objectives. It explains that
the province seeks to have new long‑term care homes built with 804 new
beds in various parts of the province. It also seeks to achieve certain goals
not only in terms of the facilities but also in terms of cost and quality of
the services and programs that the new homes will offer. These requirements for
facilities and for program services are elaborated on at length in Appendices B
and C of the request for proposals.
[26]
Clause 2.2.3.2 of the request sets out that:
The facilities
and services required under this contract include the design and development of
the required buildings and infrastructure, the project management for the
development/implementation phase, the operations and maintenance of the
facilities, the development and delivery of resident care programs and resident
services.
[27]
It is clear from this that bidders are to
design, develop and then operate the facility. The document together with its appendices
also sets out numerous requirements imposed on the project.
[28]
Clause 2.3.4 of the request sets out that a
successful proposal will lead to:
•
A Development Agreement covering the period of
design and construction of the required facilities, and
•
An annually renewable Service Agreement with a
25‑year term covering the ongoing operations of the facility.
The Service Agreement will be renewed
subject to renewal of the facility’s license and the provision of services that
meet or exceed the requirements in this RFP and proposed by the successful
service provider(s).
The contracts
will provide for payment for services which will commence at the date of
occupancy. Any requirement for bridge financing during the development phase
will be the responsibility of the Successful Proponent(s).
[29]
This sets out clearly that the successful bidder
must obtain financing to cover the development of the facility because payments
for services will only start at the time occupancy begins. It is also clear
that the successful bidder will have to enter into separate development and service
agreements, the terms of which will not be negotiable.
[30]
The Appellant made a proposal and, by letter
dated January 7, 2008, the Department of Health advised the Appellant that
it was successful and that the per diem rate per bed would be $264.47. By
letter dated January 15, 2008, the Appellant confirmed that it would
accept the per diem rate of $264.47 per bed;
this is equivalent to about $96,500 per year per bed.
[31]
Subsequently, the Appellant signed the
development agreement for the construction of the 20‑bed addition. The Appellant was unable to
find a signed copy but Mr. Stephenson testified that the copy filed was
substantially the same as the signed agreement. It would appear that it was
signed in February 2009 given that the copy filed is a draft dated
February 4, 2009.
[32]
The agreement together with its schedules and appendices
imposes numerous requirements on the Appellant. It also requires the Appellant
to enter into the service agreement with the government of Nova Scotia and
requires the service provider to acknowledge and agree that the service
agreement and every subsequent service agreement shall contain an express
continuing obligation on the Appellant to operate the 20‑bed addition and
provide services to the residents.
[33]
Article 4.2 provides that the Minister of Health
will confirm the approved budget subject to an executed service agreement and
the issuance of a licence to the Appellant. Once this happens, the Appellant will
start receiving annual funding from the government of Nova Scotia.
[34]
Somewhat earlier, by letter dated
January 28, 2009, the Department of Health approved a capital budget for
the development and construction of the addition in an amount of $5,533,250 including
interest.
The letter also says:
Please note:
•
The Department will provide annual funding
sufficient to amortize the mortgage for the capital cost over 25 years.
[35]
Subsequently in February 2009, the Appellant
signed the service agreement. The agreement together with its schedules and
appendices imposes a wide variety of requirements. Broadly speaking, the
Appellant agreed to provide the residents of the new facility with a range of
services including accommodation, meals, nursing services, housekeeping,
physical and occupational therapy and recreational services.
[36]
The province does not make any payments to the
Appellant pursuant to the development agreement. The only payments are made
pursuant to the service agreement.
[37]
The provincial funding to the Appellant is the
sum of three constituent parts.
[38]
First, there is the protected envelope which
covers health care costs (nursing, dietitians, physiotherapy, social work,
recreation, etc.) and raw food costs. Any unused funds in this budget are
returned to the province.
[39]
Second, there is the unprotected envelope that
covers capital costs (notably, in this case, the addition) and accommodation
costs such as administration, management, cooking, housekeeping and
maintenance). To the extent that the Appellant provides all the required
accommodation services for less than the budget, the Appellant may be able to
earn a profit.
[40]
These two envelopes make up the budget for the
20 beds added by the addition and the total of the two envelopes divided
by 20 beds and by 365 days equals the per diem per bed. For the addition, this
amounts to a total budget of about $2,074,000 per year.
[41]
Third, the Appellant receives a small annual
capital renewal reserve payment of about $65,000 or $68,000 per year. Unspent funds from the capital
renewal reserve remain with the Appellant.
[42]
The Appellant may not charge more for the
services than the per diem and, while there is the possibility of profit if the
Appellant underspends the unprotected envelope, there is also the risk of loss
if it goes over budget.
[43]
The amount of $264.47 per diem that the province
proposed and the Appellant accepted in January 2008 consisted of $113.03 in the
unprotected envelope and $151.31 in the protected envelope. Of the unprotected
amount of $113.03, an amount of $54.64 was for capital costs.
[44]
This amount of $54.64 per day per bed covered
the amortization, including interest, over 25 years of the approved
capital costs of $5,533,250, consisting of:
|
Capital cost
|
$4,671,514
|
|
Land
|
$65,385
|
|
HST
|
$641,250
|
|
Interest during
construction
|
$155,101
|
|
Total
|
$5,553,250
|
[45]
The $54.64 per day per bed produces an annual
amount of $395,938.
[46]
Thus, if all goes according to plan and the
agreement is renewed for 25 years, the Appellant will recover the full
cost of the new facility including all the HST paid on the construction of the
addition.
[47]
Under the service agreement, the Minister of
Health pays for the protected envelope. The unprotected envelope is paid for by
the residents and by the Minister of Health in varying degrees.
[48]
Residents are each potentially liable to pay the
standard accommodation charge, $86.50 per day,
if they have sufficient income. If the resident has insufficient income, the
Minister will pay part or all of the standard accommodation charge.
[49]
If 85% of a resident’s income is greater than
the annualized accommodation charge, about $31,500, the resident pays the full
accommodation charge. Thus, an individual whose income exceeds about $37,100
per year will pay the full accommodation charge.
[50]
Where a resident’s income is lower, the
accommodation charge is lowered so that on an annual basis it does not exceed
85% of the resident’s income. In addition, the accommodation charge is lowered
further, if necessary, to ensure that the resident keeps at least $2,700 of his
or her income. Indeed, the Minister may actually pay an amount to supplement
the income of someone whose income is less than $2,700.
[51]
The Appellant is responsible for collecting the
accommodation charge from each resident. The Minister of Health pays not only
the difference between $86.50 per day and the actual accommodation charge paid
by the resident but also the difference between the $113.03 per diem for the
unprotected envelope and the $86.50.
As well, as we have already seen the entire protected envelope is paid for by
the Minister of Health.
[52]
Mr. Stephenson testified that if the
Appellant is unable to collect the accommodation charge from the resident, it
is unable to collect that amount from the Department of Health.
[53]
The evidence does not disclose what specific portion
of the accommodation cost or of the unprotected envelope is paid for by the
residents of the addition and what portion by the Minister of Health.
[54]
I am, however, satisfied that the Minister of
Health’s contribution to the accommodation charge is significant.
Analysis
[55]
While there are a great many pages of documents
forming the contractual arrangements underlying this appeal, for the purposes
of the question to be decided the essential points of the arrangements are the
following.
[56]
While we have a request for proposals leading to
a proposal by the Appellant, acceptance of the proposal by the government of
Nova Scotia coupled with an offer by the province of a specific per diem per
bed, and acceptance by the Appellant of the proposed per diem, all of which led
to the signature of the development agreement and then the service agreement,
the development agreement and the service agreement, including all the attached
documents, form a single set of contractual arrangements. It is clear that from
the very beginning there could be no service agreement without a development
agreement and vice versa.
[57]
As we have seen, the purpose of the government
of Nova Scotia was to have new facilities constructed in order to provide new
nursing home beds in Springfield and in other parts of the province and, as
well, to arrange for the continuing provision of residential accommodation as
well as various care and nursing services in those new facilities.
[58]
These related objectives are reflected in the
contractual arrangements which require not only that High‑Crest construct
and operate the new facility with 20 nursing home beds but also that it
provide services including “accommodation, programs,
dietary goods, social work services, physical, and occupational therapy, and
personal and skilled nursing care”.
[59]
While residents contribute to accommodation
costs depending on their income, the funding by the province is such that the
province is making a significant contribution to the cost of residential
accommodation in the new facility.
[60]
At the time of the self‑supply, could High‑Crest
expect to receive an amount of money from the government of Nova Scotia “for the purpose of making residential units in the
[addition] available to individuals”?
[61]
There is no question that at the time of the
self‑supply High‑Crest could expect to receive amounts of money from the government of Nova
Scotia. High-Crest would not have made such a large and risky investment in the
construction of the addition, a construction with a fair market value upon
completion that was substantially less than its cost, if it did not expect the
service contract to come into operation and be renewed for many years.
[62]
The question is one of interpretation: What does
“to receive amounts for the purpose of making residential units available”
mean?
[63]
As often happens in disputed tax matters, we are
in a situation where straightforward words in the abstract turn out to be less
clear when applied in a particular factual context.
[64]
The Appellant submits that section 191.1 cannot
apply. First, the Appellant takes the position that the use of the words “for the purpose” suggests that an all or nothing
approach applies with respect to the payments and, consequently, section 191.1
cannot apply unless the payments are solely for the purpose of making available
residential units.
[65]
Second, the Appellant suggests that the section
was never meant to apply where the amounts are paid as consideration for
supply; the section is meant to apply where the grantor is somehow providing a
benefit to the builder. The Appellant further argues that there is no benefit
conferred upon it.
[66]
With respect to the second argument, I simply do
not see anything in the section which would suggest that there is a requirement
that the relevant payments confer a benefit on the recipient. The language is
simply that there must be a payment for the stated purpose, nothing more.
[67]
In support of its first argument, the Appellant
refers to the jurisprudence related to the question of single or multiple
supplies and the case of O.A. Brown Ltd. v. Canada, [1995] G.S.T.C. 40.
I am not sure I understand how that case is of assistance.
[68]
In that case the Court needed to decide whether
there was a single supply or a multiple supply. For the purpose of applying the
GST, it has been established that if there is a single supply the dominant
characteristic of that supply will determine whether it is a taxable supply, an
exempt supply or a zero rated supply. Where there is a multiple supply then one
will look to the character of each separate supply to determine how its sale is
to be treated and it may be that the different supplies will be treated
differently for GST purposes.
[69]
The situation here is different; we are not
faced with determining the character of a supply in order to know whether it is
taxable, zero rated or exempt.
[70]
Under the agreement the Appellant supplies to
residents residential accommodation and other services. There is nothing in
section 191.1 which suggests we have to analyze this case in terms of the kind
of supply or kinds of supplies the Appellant was making to the government of
Nova Scotia.
[71]
It is useful to consider section 191.1. It does
not require that the government funding for the required purpose cover any
particular portion of the cost of achieving that purpose; the contribution to
the purpose need not represent a large portion of those costs.
[72]
On its face, by bumping up the amount of output
tax so it is never less than the input tax paid on the construction, the
objective of the section is to prevent any net tax refund in respect of the
self‑supplied construction where there is a government subsidy in the
form of an amount, or amounts, of money paid for the specified purpose.
[73]
Section 191.1 was added to the Excise Tax Act
in 1997. The Department of Finance technical notes of July 1997 stated the
following with respect to the section:
New section
191.1 provides for special self‑supply rules for government‑funded
residential buildings designed to be occupied by individuals having special
needs or limited financial resources, in recognition of the fact that it is
often difficult to ascertain the “fair market value” of such buildings. This
new provision ensures that the builder must account for an amount of tax that
is at least equal to the total of all tax that was payable by the builder in
respect of real property forming part of the complex or addition or in respect
of improvements thereto. Where the builder is registered for the tax, the
builder will have been entitled to claim input tax credits for these amounts so
the net effect of section 191.1 will be to at least recapture the amount of
those credits.
[74]
The modern rule of interpretation is now well established in
tax. As the Supreme Court of Canada stated in Canada Trustco Mortgage Co. v.
Canada:
10 It has been
long established as a matter of statutory interpretation that “the words of an
Act are to be read in their entire context and in their grammatical and
ordinary sense harmoniously with the scheme of the Act, the object of the Act,
and the intention of Parliament” . . . .
[75]
Given this, when is an expected amount (or when
are expected amounts) received for the purpose of making residential units
available to individuals? There are at least three possibilities:
1. When
the payments that High-Crest expected to receive are exclusively for the
purpose of making residential units available to individuals.
2. When
the payments that High-Crest expected to receive are primarily for the purpose
of making residential units available to individuals.
3. When
part of the payments are for the purpose of making residential units available
to individuals.
[76]
There is no case law on point but the scheme of
the section indicates a clear purpose. On its face the section seeks to deny a
net tax refund on the self‑supply by bumping up the output tax where
there is government support for the provision of residential accommodation to
the groups of individuals described in the section. It does so without regard
to the extent of the support; in relation to the costs of the accommodation,
the support can be modest or it can be the entire cost or anything in between.
[77]
It would not make sense to read this as not
applying to government support simply because, there were, as is the case here,
combined payments providing government support both for the provision of
residential accommodation together with government support for additional
services such as nursing services. Government support for residential
accommodation is not diminished by the payment of additional amounts in support
of other purposes.
[78]
The requirements of section 191.1 are met so
long as part of the amounts received are for the purpose of making residential
units available.
[79]
Accordingly, at the time of the self‑supply
the Appellant could reasonably expect amounts of money for the purpose of
making residential units in the addition available to individuals referred to
in the section.
Conclusion
[80]
Thus, section 191.1 applies and it follows that
the appeal is dismissed. Costs are awarded to the Respondent.
Signed at Ottawa, Ontario, this 20th day of October 2017.
“Gaston
Jorré”
Email this Content