Citation: 2011 TCC 336
Date: 20110707
Docket: 2009-2793(GST)G
BETWEEN:
reluxicorp Inc.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
an assessment made by the Quebec Minister of Revenue (Minister)
dated February 9, 2009, under
Part IX of the Excise Tax Act (ETA), for 24 periods
(i.e., quarterly periods and monthly periods) from October 1, 2003, to
August 31, 2007. Specifically, the appellant disputes the assessment of $30,720.51
that the Minister made in determining the goods and services tax (GST)
on supplies of tangible personal property and services acquired outside Canada
by the appellant from a non-resident person who is not registered, under sections 217 and 218 of the ETA. After hearing the
evidence, counsel for the respondent advised the Court that the respondent was agreeing
to reduce the amount of GST assessed in this regard by $3,430.28, which
corresponds to the tax calculated on the portion of the commissions paid by the
appellant outside Canada as shown in the assessment filed as
Exhibit I-2. The statutory provisions that are the basis for this part of
the assessment are reproduced below:
DIVISION I — interpretation
123. (1) Definitions — In section 121, this Part and Schedules V to X,
. . .
"commercial activity" of
a person means
(a) a business carried on by the person (other than a business carried on without a
reasonable expectation of profit by an individual, a personal trust or a partnership,
all of the members of which are individuals), except to the extent to which
the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the
nature of trade (other than an adventure or concern engaged in without a
reasonable expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except to the extent
to which the adventure or concern involves the making of exempt supplies by the
person, and
(c) the making of a supply (other than an exempt
supply) by the person of real property of the person, including anything done
by the person in the course of or in connection with the making of the supply;
. . .
"exclusive" means
(a) in
respect of the consumption, use or supply of property or a service by a person
that is not a financial institution, all or substantially all of the
consumption, use or supply of the property or service, and
(b) in
respect of the consumption, use or supply of property or a service by a
financial institution, all of the consumption, use or supply of the property or
service;
. . .
“exempt supply” means a supply included in Schedule V;
. . .
DIVISION IV — Tax ON IMPORTED TAXABLE SUPPLIES
217. Definitions — The following
definitions apply in this Division.
. . .
"imported taxable supply" means
(a) a taxable supply (other than a
zero-rated or prescribed supply) of a service made outside Canada to a
person who is resident in Canada, other than a supply of a service that is
(i) acquired for consumption, use or supply exclusively in the course of
commercial activities of the person or activities
that are engaged in exclusively outside Canada by the person and that are not
part of a business or an adventure or concern in the nature of trade engaged in
by the person in Canada,
. . .
(c) a taxable supply (other than a
zero-rated or prescribed supply) of intangible personal property made
outside Canada to a person who is resident in Canada, other than a supply of
property that
(i) is acquired for consumption, use or supply exclusively in the course
of commercial activities of the person or activities
that are engaged in exclusively outside Canada by the person and that are not
part of a business or an adventure or concern in the nature of trade engaged in
by the person in Canada,
. . .
[In force from 2003-07-02 to 2006-06-21]
218. Imposition of goods and services tax — Subject to this Part, every recipient of an imported taxable
supply shall pay to Her Majesty in right of Canada tax calculated at the rate of 7% on the value of the consideration
for the imported taxable supply.
[In force from 2006-06-22 to 2007-12-13]
218. Imposition of goods and services tax — Subject to this Part, every recipient of an imported taxable
supply shall pay to Her Majesty in right of Canada tax calculated at the rate of 6% on the value of the consideration
for the imported taxable supply.
. . .
SCHEDULE V — EXEMPT SUPPLIES
subsection 123(1)
Part I — Real Property
. . .
6. [Rental of a residential complex or a
residential unit in a residential complex] — A supply
(a) of a residential complex or a residential unit in a residential
complex by way of lease, licence or similar arrangement for the purpose of its occupancy as a place of residence or lodging
by an individual, where the period throughout which continuous occupancy
of the complex or unit is given to the same individual under the arrangement is
at least one month;
[Emphasis
added.]
[2]
The appellant also challenges
the assessment of $7,032.34 that the Minister added as GST and that the
appellant collected with respect to various taxable supplies and did not
include in determining its net tax for the periods from October 2003 to
December 2003 ($5,939.72) and from October 2004 to December 2004 ($1,092.62). The
appellant contends that these periods were statute-barred at the time of the
assessment and that it is incumbent on the respondent to prove that the
appellant made a misrepresentation that is attributable to neglect,
carelessness or wilful default in determining its net tax during the two
periods at issue, which the appellant denies. At the commencement of the
hearing, counsel for the respondent informed the Court that his client was conceding
the amount of $1,092.62 and that it agreed with the appellant on this amount.
The statutory provisions that are the basis of this second part of the
assessment are reproduced below:
Subdivision b — Input Tax Credits
169. (1) General rule for credits — Subject to
this Part, where a person acquires or imports property or a service or brings
it into a participating province and, during a reporting period of the person
during which the person is a registrant, tax in respect of the supply,
importation or bringing in becomes payable by the person or is paid by the
person without having become payable, the amount determined by the following
formula is an input tax credit of the person in respect of the property or
service for the period:
A × B
where
A is the tax in respect
of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or
that is paid by the person during the period without having become payable; and
B is
(a)
where the tax is deemed under subsection 202(4) to have
been paid in respect of the property on the last day of a taxation year of the
person, the extent (expressed as a percentage of the total use of the property
in the course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,
(b) where the property or service is acquired, imported or brought into
the province, as the case may be, by the person for use in improving capital
property of the person, the extent (expressed as a percentage) to which the
person was using the capital property in the course of commercial activities of
the person immediately after the capital property or a portion thereof was last
acquired or imported by the person, and
(c) in any other case, the extent (expressed as a percentage) to
which the person acquired or imported the property or service or brought it
into the participating province, as the case may be, for consumption, use or
supply in the course of commercial activities of the person.
. . .
169. (4) Required documentation — A
registrant may not claim an input tax credit for a reporting period unless,
before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form
containing such information as will enable the amount of the input tax credit
to be determined, including any such information as may be prescribed; and
(b) where the credit is in respect of property or a service supplied to
the registrant in circumstances in which the registrant is required to report
the tax payable in respect of the supply in a return filed with the Minister
under this Part, the registrant has so reported the tax in a return filed under
this Part.
. . .
DIVISION V — COLLECTION
AND REMITTANCE OF DIVISION II TAX
Subdivision a —Collection
221. (1) Collection of tax — Every person who makes a
taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax
under Division II payable by the recipient in respect of the supply.
. . .
Subdivision b — Remittance of Tax
225. (1) Net tax — Subject to
this Subdivision, the net tax for a particular reporting period of a person is
the positive or negative amount determined by the formula
A - B
Where
A is the total of
(a) all amounts that became collectible and all other amounts collected
by the person in the particular reporting period as or on account of tax under Division II, and
(b) all amounts that are required under this Part to be added in
determining the net tax of the person for the particular reporting period; and
B is the total of
(a) all amounts
each of which is an input tax credit for the particular reporting period or
a preceding reporting period of the person claimed by the person in the
return under this Division filed by the person for the particular reporting
period, and
(b) all amounts each of which is an amount that may be deducted by the
person under this Part in determining the net tax of the person for the
particular reporting period and that is claimed by the person in the return
under this Division filed by the person for the particular reporting period.
. . .
228. (1) Calculation of net tax — Every person
who is required to file a return under this Division shall, in the return,
calculate the net tax of the person for the reporting period for which the
return is required to be filed, except where subsection (2.1) or (2.3) applies
in respect of the reporting period.
228. (2) Remittance — Where the
net tax for a reporting period of a person is a positive amount, the person
shall, except where subsection (2.1) or (2.3)
applies in respect of the reporting period, remit that amount to the
Receiver General,
(a) where the person is an individual to whom
subparagraph 238(1)(a)(ii)
applies in respect of the reporting period, on or before April 30 of the year
following the end of the reporting period;
(b) in any other case, on or before the day on or
before which the return for that period is required to be filed.
. . .
298. . . .
(4) Idem — An
assessment in respect of any matter may be made at any time where the person to
be assessed has, in respect of that matter,
(a) made a misrepresentation that is attributable to
the person’s neglect, carelessness or wilful default;
INPUT TAX CREDIT
INFORMATION (GST/HST) REGULATIONS
3. Prescribed
information — For the purposes of paragraph 169(4)(a) of the Act, the following
information is prescribed information:
(a) where the total amount paid or payable shown on
the supporting documentation in respect of the supply or, if the supporting
documentation is in respect of more than one supply, the supplies, is less than
$30,
(i) the name of the supplier or the intermediary in
respect of the supply, or the name under which the supplier or the intermediary
does business,
(ii) where an invoice is issued in respect of the
supply or the supplies, the date of the invoice,
(iii) where an invoice is not issued in respect of the
supply or the supplies, the date on which there is tax paid or payable in
respect thereof, and
(iv) the total amount
paid or payable for all of the supplies;
(b) where the total amount paid or payable shown on
the supporting documentation in respect of the supply or, if the supporting
documentation is in respect of more than one supply, the supplies, is $30 or
more and less than $150,
(i) the name of the supplier or the intermediary in
respect of the supply, or the name under which the supplier or the intermediary
does business, and the registration number assigned under subsection 241(1) of
the Act to the supplier or the intermediary, as the case may be,
(ii) the information set out in subparagraphs (a)(ii) to (iv),
(iii) where the amount paid or payable for the supply
or the supplies does not include the amount of tax paid or payable in respect
thereof,
(A) the amount of tax paid or payable in respect of
each supply or in respect of all of the supplies, or
(B) where provincial sales tax is payable in respect
of each taxable supply that is not a zero-rated supply and is not payable in
respect of any exempt supply or zero-rated supply,
(I) the total of the tax paid or payable under
Division II of Part IX of the Act and the provincial sales tax paid or payable
in respect of each taxable supply, and a statement to the effect that the total
in respect of each taxable supply includes the tax paid or payable under that
Division, or
(II) the total of the tax paid or payable under
Division II of Part IX of the Act and the provincial sales tax paid or payable
in respect of all taxable supplies, and a statement to the effect that the
total includes the tax paid or payable under that Division,
(iv) where the amount paid or payable for the supply
or the supplies includes the amount of tax paid or payable in respect thereof
and one or more supplies are taxable supplies that are not zero-rated supplies,
(A) a statement to the effect that tax is included
in the amount paid or payable for each taxable supply,
(B) the total (referred to in this paragraph as the
“total tax rate”) of the rates at which tax was paid or payable in respect of
each of the taxable supplies that is not a zero-rated supply, and
(C) the amount paid or payable for each such supply
or the total amount paid or payable for all such supplies to which the same
total tax rate applies, and
(v) where the status of two or more supplies is
different, an indication of the status of each taxable supply that is not a
zero-rated supply; and
(c) where the total amount paid or payable shown on
the supporting documentation in respect of the supply or, if the supporting
documentation is in respect of more than one supply, the supplies, is $150 or
more,
(i) the information set out in paragraphs (a) and (b),
(ii) the recipient’s name, the name under which the
recipient does business or the name of the recipient’s duly authorized agent or
representative,
(iii) the terms of
payment, and
(iv) a description of
each supply sufficient to identify it.
[Emphasis added.]
Facts
[3]
It is common ground
that the appellant is the owner as nominee of the hotel operated under the
banner "Residence Inn by Marriott" and located in downtown Montréal. It
signed a franchise agreement with Marriott Worldwide Corporation (Marriott),
a non‑resident corporation, on or about January 23, 2003 (Exhibit A‑1,
tab 4). Under this franchise agreement, the appellant is required to remit
the following amounts to Marriott, as stated in paragraph 15 of the Amended Notice
of Appeal:
[translation]
(a) A 5 % royalty on its annual gross room revenues for
the right to use the "Residence Inn by Marriott" banner in the course
of its business;
(b) A contribution of 2.5 % on its annual gross room revenues for marketing contributions; and
(c) Additional fixed and mandatory costs related to various
services, i.e., (1) costs associated with a customer loyalty program available
to all clients of the Hotel (Marriott Reward Expenses), (2) costs associated
with the use of Marriott’s reservation system and invoicing system (Software
Support, Hardware Expenses, Security Service), and (3) commissions with respect
to Short Term Rentals.
[4]
In making the assessment
at issue, the Minister was of the view that 30% of the above‑noted
royalties paid by the appellant to Marriott were subject to the GST because those
royalties, according to the Minister, were related to exempt supplies, i.e.,
the long‑term rental of units for a period of at least one month (this constitutes
an exempt supply under paragraph 6(a) of Part I of
Schedule V to the ETA). Accordingly, the Minister determined that the
appellant was required to pay the GST on the imported taxable supplies in
accordance with sections 217 and 218 of the ETA with respect to the
following amounts, as reproduced below and set out in paragraph 18 of the Amended
Notice of Appeal:
[translation]
18. Accordingly, the Minister assessed the Appellant
with respect to the following amounts:
|
|
Total expense
|
Portion subject
to the GST according to the MRQ
|
GST
|
|
Marriott Rewards Expenses
|
$117,015.35
|
$35,104.61
|
$2,332.57
|
|
Software Support
|
8,995.37
|
2,968.61
|
186.56
|
|
Commissions
|
172,253.71
|
51,676.11
|
3,430.28
|
|
Hardware Expenses
|
12,518.07
|
3,755.42
|
232.75
|
|
Security Service
|
5,534.42
|
1,660.33
|
107.56
|
|
Marketing Expenses
|
441,653.76
|
132,496.13
|
8,777.57
|
|
Franchise Fees
|
785,873.57
|
235,762.07
|
15,653.21
|
|
TOTAL
|
1,543,844.25
|
463,153.28
|
30,720.50
|
[5]
For the appellant, I
heard testimony from its president, Javier Planas, as well as from Gilles Larivière,
President of Horwath Hotels, a consultant specializing in the hotel industry,
and Marc Cerri, who has been the appellant’s financial controller since 2007.
The respondent called Natasha Jean‑Baptiste, tax auditor with Revenu Québec,
who conducted the audit that resulted in the assessment at issue.
[6]
Mr. Planas explained
that the "Residence Inn by Marriott" banner was directed to a
clientele interested in renting units for a period varying from 5 to 29 days
(the average being 5 to 9 days). Other banners specifically serve stays of
short duration (1 to 4 days) or long duration (30 days or more). For long‑term
stays, he mentioned the names of three banners that Marriott used: "Marriott Execustay",
"Marriott Executive Apartments" and "Grand Residences by
Marriott". The services offered for long‑term rentals are not the
same. There is no daily room cleaning service, and breakfast is not included.
Sometimes, long‑term rental units offer the use of a washing machine and
dryer. With respect to the “Residence Inn by Marriott” banner, the units are
generally larger than short‑term rental units and include a kitchenette
with a dishwasher, stove, microwave and small refrigerator. Cleaning service is
provided daily, and breakfast is included.
[7]
According to Mr. Planas,
the franchise agreement that the appellant signed with Marriott did not permit
him to use the Marriott banners for long‑term rentals. However, nothing
prevented the appellant from offering long‑term stays that it itself sold
through its commercial division in Montréal. In addition, Marriott may, through
its centralized reservation service, rent units in the appellant’s hotel on a
long‑term basis. Mr. Planas provided a chart showing the percentage
of nights for stays of more than 30 days and less than 30 days at his
establishment (Exhibit A‑1, tab 7). It appears from this chart
that stays of less than 30 days increased from 54.78% in 2004 to 74.91% in
2007. At the same time, stays of 30 days or more fell from 45.2% in 2004 to
25.1% in 2007. This indicated to Mr. Planas that the franchise agreement
signed by the appellant with Marriott in 2003 had the positive effect of
increasing the target clientele looking for stays from 5 to 29 days and
decreasing long‑term rentals of 30 days or more. As Mr. Planas
explained, stays of 30 days or more are a good basis for hotel operations but
do not bring in as much money for the appellant as shorter stays. This is
because clients who stay for a longer period negotiate lower rental rates, but
the appellant is responsible for the same fixed costs. In fact, by using the "Residence
Inn by Marriott" banner, the appellant is required under the franchise
agreement to provide daily room cleaning service and breakfast.
[8]
Moreover, Mr. Planas
and Mr. Cerri traced the source of the reservations for stays of 30 days
or more (Exhibit A-1, tab 8). It was determined that in 2007 74.83% of
these reservations were made by the hotel’s internal management in Montréal without
going through Marriott’s central reservation service. It was not possible to
determine the source of the other reservations. Accordingly, Mr. Cerri applied
the figure of 74.83% to the total number of reservations of unknown origin on
the assumption that those reservations must have been made in the same
proportion by the hotel’s internal management without going through Marriott’s
central reservation service. He therefore concluded that 94.28% of the
reservations for stays of 30 days or more were made directly by the hotel’s
internal management in Montréal without going through Marriott. According to
Mr. Planas, this percentage is very plausible since it is very rare that
reservations for stays of 30 days or more are made through Marriott given that
the franchise agreement signed by the appellant was aimed at stays of less than
30 days. He even said that, after deciding to operate his hotel under the "Residence
Inn by Marriott" banner, he had
to work hard to retain the existing clientele for long‑term stays. From
what I understand, until 2003, the year the franchise agreement was signed, the
hotel, then in an inferior category, had many more clients for prolonged stays
at lower rates. With the new Marriott banner, those clients were no longer as
interested, which indicated to Mr. Planas that the arrival of Marriott was
a disincentive to long‑term rentals rather than an incentive. He said
that this also explains the reduction in rentals of 30 days or more, which the
chart above demonstrates (Exhibit A‑1, tab 7).
[9]
This calculation
suggested to him that almost all the reservations for stays of 30 days or more,
which constitute an exempt supply, had no connection with the franchise
agreement with Marriott, and that, as a result, the appellant was not required
to pay the GST on the amounts remitted to Marriott.
[10]
Mr. Planas explained
the advantages of operating under the Marriott banner. It provides access to
the central reservation network, the customer loyalty program, software and
business programs, the data processing system and to suppliers at better prices.
[11]
Moreover, the royalties
paid to Marriott under the franchise agreement are calculated on the appellant’s
annual gross room revenues, including the revenues from short- and long‑term
rentals. According to Mr. Planas, this is standard practice in the hotel
industry. Separate contracts are not entered into. Nonetheless, he said that
the net result is advantageous to the appellant because the Marriott banner brings
in a lot. In addition, he stated that Marriott uses the 2.5% royalties on annual
gross room revenues for [translation]
"marketing contributions" solely to advertise "Residence Inn by
Marriott."
[12]
With respect to the
royalties paid to Marriott that are related to a customer loyalty program
(Marriott Reward Expenses) and to the costs of using Marriott’s reservation and
invoicing system (Software Support, Hardware Expenses, Security Service), Mr. Planas
stated that this was aimed at everything involving the short- and long‑term
clientele, without distinction. Finally, the amount the appellant paid to
Marriott for commissions is used only to reimburse the commissions Marriott pays
to travel agencies for short‑term rentals. Mr. Cerri confirmed this.
[13]
Mr. Larivière did
not testify as an expert but simply on his general knowledge of the hotel
industry. He said that Marriott has a range of banners serving various markets.
The banners respond to the needs of the clientele in terms of both the category
of hotel (economy, average or superior quality) and the length of stay. Thus,
the "Residence Inn by Marriott" banner is aimed at a target clientele
of superior quality for stays varying from 5 to 29 days and, on the basis of certain
statistics from the United States, the average stay is from 4 to 6 days.
However, he also said that this banner (like all the others) could accept
clients looking for shorter or longer stays. In other words, each banner seeks
a primary market but accepts any clientele, depending on demand. He explained
that the Marriott chain guarantees clients a high standard for maintenance and
cleanliness of the premises and that clients expect to pay a higher price. According
to him, the "Residence Inn by Marriott" banner has little impact on the
rental of units for 30 days or more. As I understand it, he explained this by the
reduced services in long‑term rentals whereas the "Residence Inn by
Marriott" banner offers a standard number of services with the result that
rates are higher.
[14]
For his part, Mr. Cerri
explained why the amount of $5,939.72 had not been reported in determining the
net tax for the period from October 2003 to December 2003. During that time,
the hotel was undergoing major renovations, and one of Marriott’s regular
clients, the Shriners Hospital, was transferred to the Clarion Hotel. The appellant invoiced
the hospital, including the GST, and sent the full amount collected to the
Clarion Hotel. Mr. Cerri confirmed that the Clarion Hotel had remitted the
entire amount of the tax collected to the government, but he had no evidence
with him to substantiate this. He explained that he was not the appellant’s
controller at that time but that he probably would have done the same thing. He
explained that the net result would have been the same had the tax collected
from the Shriners Hospital been reported and reduced by an equivalent amount for
the input tax credits (ITCs) on the tax paid to the Clarion Hotel. In his view,
the appellant was not required to include that amount in its net tax return for
this period. Moreover, he confirmed that the appellant was collecting GST on every
short‑term rental (less than 30 days) and was not collecting it for long‑term
rentals (30 days or more) because the latter were exempt supplies. He also
confirmed that the appellant’s books showed that 30% of the appellant’s total
revenues were derived from long‑term rentals and 70% from short‑term
rentals. In this context, the appellant generally claimed ITCs in a ratio of
70%.
[15]
Ms. Jean‑Baptiste
determined the GST payable by the appellant on 30% of the royalties paid to Marriott
since that was the percentage of the appellant’s gross room rentals that were
derived from long‑term rentals, which are exempt supplies. The appellant was
required to pay tax on the royalties remitted to Marriott under section 218
of the ETA because it was the recipient of an imported taxable supply that was
not acquired in the course of commercial activities. Commercial activity is
defined in section 123 of the ETA and excludes the making of exempt
supplies.
[16]
With respect to the
amount determined for the prescribed period of 2003, she was of the view that, without
a mandator‑mandatary (principal-agent) contract between the appellant and
the Clarion Hotel or re-invoicing the latter, the appellant could not transfer
the amount of tax collected from the Shriners Hospital to the Clarion Hotel but
was required to remit that amount to the government. As soon as the appellant
itself invoiced the hospital, its fiscal duty was to collect (which it did) and
to remit the tax to the government (which it failed to do). In this context,
she determined that the appellant had made a misrepresentation that was attributable to neglect, carelessness or wilful default and
that the Minister was justified in assessing the appellant on that amount
beyond the statute-barred period.
Analysis
I. Assessment under section 218 of the ETA
[17]
As stated above, the
assessment of $30,720.51 made in this connection is now reduced to $27,290.23 to
reflect the respondent’s concession of $3,430.28 with respect to the royalties
paid by the appellant to Marriott for commissions paid to travel agents on
short‑term rentals.
[18]
Under section 218
of the ETA, the recipient of an imported taxable supply is required to pay tax
on the value of the consideration for the supply. An imported taxable supply is
defined in section 217 of the ETA. In the case at bar, subparagraphs (a)(i)
and (c)(i) apply. Thus, an imported taxable supply is the taxable supply
of a service or intangible personal property made outside Canada to a person
who is resident in Canada, other than a supply of a service or
property that is acquired for consumption, use or supply exclusively in the
course of commercial activities of the person residing in Canada. If we transpose these terms here, the royalties paid
by the appellant to Marriott for the use of the "Residence Inn by
Marriott" banner and the services associated with it are the consideration
for the imported taxable supplies unless it is determined that the appellant
acquired the right to use the banner and the services for consumption, use or
supply exclusively in the course of its commercial activities. A commercial activity
is defined in section 123 of the ETA as, inter alia, a business
carried on [by a person] . . . except to the extent to which the
business involves the making of exempt supplies. A supply of a residential
complex or a residential unit in a residential complex by way of lease for the
purpose of its occupancy as a place of residence or lodging by the same
individual for a period of at least one month is an exempt supply under
paragraph 6(a) of Part I of Schedule V to the ETA. The term
"exclusive" is defined in section 123 of the ETA as meaning all
or substantially all of the consumption, use or supply of a property or a
service.
[19]
In the appellant’s
view, it acquired the franchise rights from Marriott for consumption, use or
supply exclusively in the course of its commercial activities. It claims that
it acquired these rights with the sole intention of increasing the hotel’s short‑term
rentals, for which it collects the GST from its clients, which is a “commercial
activity” under the ETA. It submits that all or substantially all of the long‑term
rentals, which are exempt supplies and therefore not commercial activities
under the ETA, are made by its internal sales team, not by Marriott’s central
reservation service. Consequently, the applicant says, long‑term rentals
have no impact and are separate from the franchise agreement signed with
Marriott. For these reasons, it submits that it was not required to pay tax on
the royalties paid to Marriott because the supplies acquired from Marriott fall
under the exception in subparagraphs (a)(i) and (c)(i) of the
definition of "imported taxable supply" in section 217 of the ETA.
[20]
For its part, the
respondent is of the view that the appellant has not demonstrated that the long‑term
rentals were not connected to the franchise agreement with Marriott. In support
of its arguments, the respondent submits that the royalties paid to Marriott for
the use of its banner were calculated based on a percentage of the appellant’s
gross room revenues, including long‑term rentals. Since the appellant
believed that 30% of its gross room revenues were derived from long‑term
rentals, the Minister assessed the tax on 30% of the royalties paid to Marriott
during the period at issue.
[21]
In my view, the
respondent is correct. I find that the evidence is not sufficiently cogent to determine
that the royalties paid to Marriott under the franchise agreement for the use
of the "Residence Inn by Marriott" banner did not constitute imported
taxable supplies in a 30% ratio, under section 217 of the ETA.
[22]
The appellant attempted
to demonstrate that by acquiring the "Residence Inn by Marriott"
banner, it undertook to pay royalties to Marriott for the use of Marriott’s
services related to the rental of units for stays of less than 30 days quasi‑exclusively.
At least, that is what emerges from the testimony of Messrs. Planas and
Larivière. As I have already stated, Mr. Larivière did not testify as an
expert but simply shared his general knowledge of the hotel business.
[23]
A careful reading of
the franchise agreement shows that the concept of the "Residence Inn by
Marriott" banner is defined as follows in the preamble (Exhibit A‑1,
tab 4, page 1):
WHEREAS, Franchisor [Marriott] and its affiliates and predecessors
have developed and own a concept and system (“System”) for the establishment
and operation of hotels under the names “Residence Inn by Marriott” and
“Residence Inn,” which typically feature suites with living rooms, fireplaces,
fully-equipped kitchens and breakfast bars, patios or balconies, sleeping
quarters and baths, recreational facilities and swimming pools; all references
herein to the “System” shall be to the Residence Inn by Marriott System in the
United States and Canada;
WHEREAS, the distinguishing characteristics of the System, all of
which may be changed, improved or further developed by Franchisor, include,
without limitation:
1. The trade names, trademarks and service marks “The
Residence Inn,” “Residence Inn by Marriott [sic], “Gatehouse,” and
“Residence Inn-Sider,” and such other trade names, trademarks and service marks
as are now or as may hereafter be designated by Franchisor in writing as part
of the System (“Proprietary Marks”);
2. design & construction criteria documents for
Residence Inn by Marriott hotels;
3. high standards of cleanliness, quality and service as
prescribed in the Residence Inn by Marriott System Standards Manual (the
“Manual”);
4. management training;
5. advertising, marketing and promotional programs;
6. the Residence Inn by Marriott Reservation System; and
7. the Residence Inn by Marriott Property Management System.
[24]
The entire contract subsequently
refers to "System" to designate the "Residence Inn by Marriott"
or "Residence Inn" banners.
[25]
Although I realize
after reading the preamble and other provisions in the agreement that this
banner may be directed to a superior category hotel (as Mr. Larivière
suggested), there is no indication or reference anywhere regarding the targeted
clientele’s length of stay. Royalties must be paid in accordance with "gross
room revenues", which is defined as follows in paragraph III. I of
the agreement at page 6:
I. "Gross room revenues" as used herein shall
include all gross revenues attributable to or payable for rental of guest
suites at the Hotel including, without limitation, all credit transactions,
whether or not collected, but excluding (i) any sales taxes, room taxes, or
goods or services taxes collected by Franchisee [appellant] for transmittal to
and sent to the appropriate taxing authority, and (ii) any revenues from sales
or rentals of ancillary goods, such as VCR rentals, telephone income and
fireplace log sales. Gross room revenues shall also include the proceeds from
any business interruption insurance applicable to loss of revenues due to the
non-availability of guest rooms and for guaranteed no-show revenue that is
collected. Gross room revenues shall be accounted for in accordance with the
Uniform System of Accounts for Hotels Ninth Revised Edition 1996 as published
by the Hotel Association of New York City, Inc. or any later edition or
revision that Franchisor approves or designates.
[26]
No distinction is made
between short‑term and long‑term rentals. At various places in the
agreement, reference is made to the superior quality of establishments managed
under the "Residence Inn by Marriott" banner (or the "System",
which is the name used to refer to this banner in the agreement), but there is
no reference or association made between the “Residence Inn by Marriott” banner
or the “System” and the clientele’s length of stay.
[27]
The appellant tried
using another method to show that long-term rentals were not related to the use
of the "Residence Inn by Marriott" banner. It wanted to demonstrate
that all or substantially all of the reservations for stays of 30 days or more
were made by the hotel’s internal management in Montréal. According to Exhibit A-1,
tab 8, the source of the reservations made directly from Montréal in 2007
was traced, and that resulted in a percentage of 74.83. The extrapolation of the
appellant’s calculations to attribute the same percentage to the reservations
of unknown origin (and thus to arrive at the figure of 94.28% of reservations
made by the hotel’s commercial management in Montréal without going through the
Marriott banner) appears unfounded to me. On the one hand, applying the same
percentage seems completely arbitrary and unverified to me. On the other hand,
if it was possible to trace the reservations made by the hotel’s internal management,
it is difficult to imagine that the reservations of unknown origin could have
also been made by the hotel management. If that had been the case, it seems to
me that they would have been traced in the same way as the others. In my view,
the appellant’s approach is rather incongruous and is not based in any way on
any probative evidence.
[28]
Moreover, the appellant
argued that, even if the 94.28% were not accepted, the 74.83% could be regarded
as sufficient to say that all or substantially all of the reservations for long‑term
stays were made by the hotel’s internal management in Montréal. Its counsel
referred to certain cases that hold that the percentage to be applied to
satisfy the condition set by Parliament when it used the expression "all
or substantially all" may be less than 90% (which is the administrative standard
required by the Minister). In McDonald v. Canada, [1998] T.C.J. No. 621
(QL), Judge Rip stated that the so‑called "90% rule" is a rule
of thumb but that the expression is elastic and does not convey "the
concept of an ascertainable proportion of the whole". That case involved determining
the percentage of the distance driven by a taxpayer in connection with his
employment under subsection 6(2) of the Income Tax Act (ITA), and he
decided that 85% could be considered "all or substantially all". In Keefe
v. The Queen, 2003 TCC 791, Justice Sheridan found that 81% of the
distance driven in the course of employment could be considered "all or
substantially all" of the distance travelled in the course of employment
for the purposes of the ITA. In McKay v. Canada, [2000] T.C.J. No. 712
(QL), Judge Rip held that an 80% use of a vehicle in the taxpayer’s business
was sufficient to say that the vehicle was used "exclusively" in
commercial activities under the ETA. In Watts v. The Queen, 2004 TCC
535, Justice Bowman decided that an amount varying from 76% to 81% of the
taxpayer’s income that was taxable in Canada over a three‑year period
could qualify as "all or substantially all". He held that the
difference between 81, 77 and 76 (or 81, 81 and 76), depending on the
calculation, was not large enough to warrant a different treatment in the three
years.
[29]
I conclude from these cases
that the meaning to be given to the expression “all or substantially all” must
be left to the discretion of the trier of fact, to decide as best he or she can
according to the circumstances of each case. In this case, internal management
in Montréal made 74.83% of the reservations for long‑term stays for 2007 (Exhibit A-1,
tab 8). We do not have the figures for the preceding years, which would
certainly have helped. In Watts, above, Justice Bowman knew the
percentages for each of the three years and took care to say that the
difference between 81% and 76% was not large enough to warrant a different
treatment. Would his decision have been the same if the cap of 80% had not been
reached in any of the years? In my opinion, there is a limit to be observed. Parliament
used the expression "all or substantially all", which means, in my
view, that the figure must be closer to the totality than half‑way
between the majority and the totality.
[30]
In the particular
circumstances of this case, it would have been more than desirable to have the
data for each year. Although I understand that this would have required
substantial effort, the fact is that the onus is on the appellant, and it is
incumbent on it to demonstrate that all or substantially all of the royalties
paid to Marriott were used for short‑term rentals. In my view, it has
failed to do so. The appellant did not provide data on the reservations made by
the Marriott reservation centre. In addition, Mr. Planas acknowledged that
one of the advantages of the franchise agreement was, in fact, being able to
benefit from the Marriott reservation centre. The franchise agreement does not stipulate
anywhere that Marriott undertook to make reservations for rentals that are
exclusively or all or substantially all short- term rentals, and to make a
minimum percentage of long‑term reservations. The evidence revealed that
the "Residence Inn by Marriott" banner focused on stays of 5 to 29
days, but Mr. Planas himself acknowledged that Marriott could make
reservations for long‑term stays. Rentals for 30 days or more decreased
over the years, but based on the appellant's data they currently stand at 25% according
to the chart in Exhibit A-1, tab 7, and 30% according to the books.
This is still significant.
[31]
I therefore find that
the royalties paid to Marriott to have the right to use its banner and the
other services (which royalties are calculated on the gross room rentals that
the appellant generates) also include revenues from long‑term rentals.
Since, according to the appellant’s books, 30% of its rental revenues are
derived from the rental of units for 30 days or more, which
constitutes an exempt supply under the ETA, the respondent was justified in
requiring the GST on 30% of the royalties paid to Marriott during the period at
issue, under sections 217 and 218 of the ETA. However, the respondent
conceded the portion attributable to the commissions paid to travel agents on
the basis that these commissions were paid only for short‑term rentals.
The appeal will therefore be allowed on this point to reduce the amount of the
assessment by the amount conceded ($3,430.28).
II Assessment for the statute-barred period in
2003
[32]
Subsection 298(4) of
the ETA allows the Minister to make an assessment at any time where the person
to be assessed has made a misrepresentation that is attributable to the
person’s neglect, carelessness or wilful default. The appellant acknowledges
that it collected the GST on the rental expenses for which it itself invoiced
the Shriners Hospital but that it did not remit the GST to the
government because it transferred the amounts collected to the Clarion Hotel,
which had actually provided accommodation to the client. The respondent must
first prove that the appellant made a misrepresentation. Mr. Cerri contends
there was none since the net result would have been the same had the tax been
reported because it would have been cancelled out by the equivalent ITCs. The
respondent submits that, in order to be entitled to ITCs, the appellant was
required to send an invoice, which it did not do.
[33]
The appellant does not
dispute that it invoiced the Shriners
Hospital, collected the GST and did not remit it to
the government. Nor does it dispute that it did not invoice the Clarion Hotel.
In this context, it appears that the appellant did not comply with the ETA. Under
sections 221, 225 and 228 of the ETA, a registrant that collects the GST when
it makes a taxable supply must remit to the Receiver General the positive
amount of its net tax for a reporting period. In this case, the appellant had
to claim an equivalent amount of ITCs to reduce the positive amount of the net
tax to zero by providing the documentation required under section 169 of
the ETA and under the applicable regulations on the necessary information for an
ITC claim. This was not done. Therefore, a misrepresentation was made.
[34]
The next question is
whether the misrepresentation was attributable to neglect, carelessness or
wilful default. There will be negligence where the respondent establishes that the
appellant did not exercise reasonable care (Venne v. Canada, [1984] F.C.J.
No. 314 (QL)). If the taxpayer demonstrates that even with the exercise of
due diligence the mistake was unavoidable, there will be no negligence.
Moreover, good faith does not amount to due diligence (see Pillar Oilfield
Projects Ltd. v. The Queen, Tax Court of Canada, 93-614 (GST)I, November 19,
2003, pages 5, 6 and 10, [1993] G.S.T.C. 49, pages 49‑4 and 49‑7). In
addition, there will be carelessness if the person failed to make reasonable
efforts to comply with the Act (Misiak v. The Queen, 2011 TCC 1, which
refers to Bérubé v. Canada, [2002] T.C.J. No. 107 (QL)). In this
case, we do not know what really happened. We did not have the version of the
then‑controller. We note that the provisions of the Act were not followed
correctly. In addition, although the onus was not on the appellant, Mr. Cerri
took the trouble to say before the Court that he had taken the necessary steps
to ensure that the GST collected by the appellant from the Shriners Hospital in
the 2003 reporting period at issue had been remitted by the Clarion Hotel. If
that were the case, I find it a little strange that he did not bring the
documentary evidence on this point or, at the very least, some kind of evidence
of the checks he conducted.
[35]
The appellant knew the
rules about collecting and remitting tax because it collected taxes regularly
on all short‑term rentals. In my opinion, it cannot be said that the
mistake was unavoidable. In addition, the appellant gave no indication that it
had obtained a professional opinion prompting it, after a thoughtful,
deliberate and careful analysis, to not report the tax it had collected, with
the assurance that the net tax would be reduced to zero through the ITC claim (see
Regina Shoppers Mall Limited v. The Queen, 90 DTC 6427, 1990 CarswellNat
344 (F.C.T.D.), affirmed by the Federal Court of Appeal, [1991] F.C.J. No. 52
(QL), 91 DTC 5101, 1991 CarswellNat 382; Reilly Estate v. The Queen, 84
DTC 6001, 1983 CarswellNat 357 (F.C.T.D.)). Furthermore, the fact that the amount
collected was not included in the net tax return meant that the Minister could
not necessarily detect the error during the normal assessment period (see General
Park Motors Ltd. v. The Queen, 2009 TCC 409).
[36]
Therefore, in my view, the
appellant failed to exercise reasonable care in the circumstances.
Consequently, I find that the respondent has demonstrated that the appellant made
a misrepresentation attributable to its neglect, carelessness or wilful default
by not reporting the tax collected in the amount of $5,939.72 for the reporting
period from October 2003 to December 2003.
[37]
As stated at the outset,
the respondent concedes the amount of $1,092.62 for the reporting period from
October 2004 to December 2004.
Decision
[38]
For these reasons, the
appeal is allowed only to reflect the concessions made by the respondent, and
the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the
amount of $30,720.51 assessed
under section 218 of the ETA should be reduced to $27,290.23 and that the
tax of $1,092.62 assessed for the period from October to December 2004 should
be cancelled. Interest and penalties are to be readjusted accordingly.
Costs
[39]
Since the respondent waived
its costs, each party shall bear their own costs.
Signed at Ottawa, Canada, this
7th day of July 2011.
"Lucie Lamarre"
Translation certified true
On this 22th day of September 2011
François Brunet, Revisor
Email this Content