Date: 19980218
Docket: 97-710-GST-I
BETWEEN:
AUBRETT HOLDINGS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur, J.T.C.C.
[1] The Appellant's company, Aubrett Holdings Ltd, is
appealing a decision made by the Minister of National Revenue
(“the Minister”) under the Excise Tax Act (the
“Act”) which disallowed the Appellant’s
request for a rebate of GST pursuant to section 261 in the amount
of $14,000.
[2] The parties agreed to the following facts and no further
evidence was submitted.
[3] The Appellant is a corporation formed under the
Business Corporations Act of Alberta engaged in the
business of an insurance agent in the City of Calgary.
In 1991, the Appellant purchased the assets of two insurance
agencies, Amcan Insurance Services Inc. ("Amcan") and
Davidson-Elves Agencies (1982) Ltd. ("Davidson")
(collectively the "Vendors"). Both financial
institutions were in receivership and they were purchased from
Dunwoody Limited (the "Receiver") which was acting as
interim manager and receiver.
[4] Prior to the supplies in question, the Vendors'
business was that of a broker or salesperson of insurance
policies. The purchase price was $200,000 allocated,
a) $185,000 for insurance books[1] and $15,000 for furniture, equipment
and miscellaneous items. In addition the Appellant paid $14,000
for GST. For the most part, I have accepted the position of the
Appellant and have therefore set out counsel's submissions in
considerable detail.
The Appellant's Submission
[5] Every recipient of a taxable supply made in Canada
is required to pay the 7% GST based on the amount of
consideration for the supply[2]. A taxable supply is a supply that
is made in the course of a commercial activity, but does
not include an exempt supply[3]. A commercial activity generally was
defined, at the relevant time, to be any business, adventure in
the nature of trade, except to the extent the activity involved
the making of an exempt supply.
[6] A financial institution generally includes a person
whose primary business is as a broker or salesperson of financial
instruments[4]. A
financial instrument includes an insurance policy[5]. As a result, an
insurance broker or agent is, by definition, a financial
institution for purposes of the Act.
Mechanics of GST
[7] The GST is a value added tax. It ultimately is designed to
be borne only by the final consumer of the goods or services
supplied. This is accomplished by means of the input tax credit
mechanism.
[8] In commercial activity, entities throughout the supply
chain charge GST on the goods and services supplied by them
(outputs) but they are able to recover this GST paid through the
input tax credit mechanism.
[9] A significant exception is that no GST is charged on
exempt supplies. To keep the system whole, a supplier of exempt
supplies generally is not entitled to recover, through the input
tax credit mechanism, any GST incurred by it on its purchases
(inputs) to the extent those inputs relate to exempt activities.
Financial institutions are prime examples of suppliers of exempt
supplies.
[10] Generally, a supply of a financial service (including the
underwriting of an insurance policy, or the arranging for the
underwriting of an insurance policy) is an exempt supply pursuant
to Part VII of Schedule V to the Act. Insurance
corporations and insurance brokers generally are not required to
collect GST. They generally are not entitled to recover GST on
purchases (inputs) through the input tax credit mechanism. This
is the situation of the Appellant and the Vendors.
Receivers
[11] Pursuant to section 266, the suppliers of the sale of
assets in question, for purposes of the Act, are the
Vendors and not the receiver-manager (Dunwoody).
Cascading of Tax
[12] One of the benefits of the GST is that it is generally
designed to avoid the cascading of tax that sometimes occurs in
the context of provincial sales taxes, and the federal sales tax
which the GST replaced[6]. Cascading of tax can be described as the imposition
of tax at several stages of production which tax cannot be
recovered by either the supplier or recipient of the supplied
goods or services.
[13] The Respondent's interpretation leads to cascading
GST. Because the Appellant is a financial institution, the
$14,000 GST on the purchase could not be recovered through the
input tax credit mechanism. If the Appellant's business was
sold to another insurance broker, those same assets would again
be subject to GST (pursuant to the legislation in force as at the
time of the original transaction) and no GST could be recovered
by it through the input tax credit mechanism. The Appellant
submits that his interpretation does not lead to the cascading of
tax. The Respondent argues that there are examples of cascading
tax in the Act and minimizes the importance of eliminating
this effect.
Prerequisite for GST -- Supply Made "in the Course of
" a Commercial Activity
[14] The Appellant's primary argument is that the sale of
the insurance agency businesses by the Vendors to the Appellant
is not subject to GST because it is not a taxable supply. It is
not a taxable supply because it is not made in the course of a
commercial activity.
[15] In Frankel Corporation [1959] CTC 244 the
Supreme Court of Canada held that a supply was not a supply made
in the business, but was a supply of the business.
Martland, J. stated the following for the Court, at p. 258:
In my opinion the evidence establishes . . . that the sale of
the inventory of non-ferrous metals as part of the assets
sold by the agreement of December 19, 1951, by the appellant to
Federated was not a sale in the business of the appellant, but
was made as a part of a sale of a business of the appellant, and
consequently the proceeds of that sale were not income from a
business within the meaning of Section 4 of the Income Tax
Act.
[16] The Appellant therefore submits that the sale by the
Vendors was not a supply made in the course of their business but
was a supply of the business itself. That supply, in and of
itself, cannot comprise a supply made in the course of a
business or in the course of an adventure in the nature of trade.
This is what directly follows from the Supreme Court's
decision in Frankel Corporation.
[17] This conclusion is also consistent with the decision of
Bell, J.T.C.C. in Hleck, Kanaka, Thuringer v. The Queen
[1994] GSTC 46 decided under the Tax Court of Canada Rules
Informal Procedure. Judge Bell stated that the phrase
"in the course of commercial activity of a person" is
not defined and has not been judicially considered, but that
"this phrase does not differ greatly from the phrase 'in
the ordinary course of business'" (at p. 46-6). He
continues at p. 46-6 to give meaning to the phrase by referring
to the comments of Rich, J. in Downs Distributing Co. Pty.
Ltd. v. Associated Blue Star Stores Pty. Ltd. (1948), 76 CLR
463, a decision of the High Court of Australia, to the effect
that a transaction in the ordinary course of business
supposes,
... that according to the ordinary and common flow of
transactions in affairs in business there is a course, an
ordinary course. It means that the transactions must fall into
place as part of the undistinguished common flow of business
done, that it should form part of the ordinary business carried
on, calling for no remark and arising out of no special or
peculiar situation.
[18] The Appellant submits that, based on the interpretation
of "in the course of commercial activity" given by
Judge Bell, the sale of assets by the Vendors cannot be one that
is regarded as being made in the course of a business or
adventure in the nature of trade of the Vendors. These sales were
not part of the ordinary business carried on by the Vendors. As
such, the supplies cannot be taxable supplies that are subject to
GST.
[19] The suggestion that the sale of the assets of the
business is a business in itself means that the Vendors must have
been carrying on two businesses, the first was providing exempt
supplies of financial instruments and the second was a business
or adventure or concern in the nature of trade involving the
supply of the assets of that business.
[20] The Respondent argues that there is no specific provision
that exempted the sale of these assets and so they must be
subject to tax. The Appellant maintains that there is in fact no
provision in the Act which directly results in GST being
applicable to the sale of the assets in the first place. There is
no applicable charging provision for a sale occurring under these
circumstances.
[21] The Respondent argues that there would be no need for
section 167 if the Appellant’s position is correct, however
this submission ignores subsection 141(5) which states that
anything done in the termination or disposition of a business is
deemed to be in the course of a commercial activity. It is
because of subsection 141(5) that subsection 167(1) is required.
If it were not for subsection 141(5) there would not be tax on
the sale of a business and section 167 would be unnecessary.
[22] This leads to the Respondent’s position that
subsection 141(5) is only applicable with respect to apportioning
input tax credits. This position can not be correct because
subsection 141(5) begins with “For the purposes of this
part....” referring to Part IX of the Act which
encompasses the whole of the provisions applicable to the Goods
and Services Tax. Further, subsection 141(5) was replaced by
section 141.1 which is clearly not only applicable to input tax
credits.
Purposive Analysis
[23] The second branch of the Appellant's argument is that
the object and spirit of the Act is that supplies by a
financial institution of goodwill, or of a business including an
element of goodwill, should not be subject to GST.
[24] The authority for this proposition can be found in both
paragraph 141.1(1)(b) and section 167.1 of theAct, both of
which were introduced into the Act subsequent to the
supplies in question. However, it is the Appellant's position
that these amendments did not change the law, they merely
clarified the applicable law.
[25] In Department of Finance Release 92-064, dated
September 14, 1992, the following statement is made
with respect to section 141.1, at p.9:
Changes will be proposed to clarify the GST treatment
of certain dispositions of personal property --
typically involving extraordinary transactions that do not
necessarily occur in the ordinary course of a business or an
adventure in the nature of trade. [Emphasis added.]
[26] The Respondent seized on the word “expands”
in the following part of the Technical notes:
New subsection 141.1(1) clarifies and expands upon that
rule.
[27] The Appellant contends that the portion relevant to the
transaction in question was merely a clarification and the
expansion referred to had to do with the extention of the rule to
property of a person that was manufactured or produced by the
person. The relevant portion in this case is paragraph
141.1(1)(b) which is merely a clarification. The Appellant
suggests that the words “effectively ensure” as used
with regard to the relevant amendment do not imply a change.
[28] The above pronouncements also are consistent with
subsection 45(2) of the Interpretation Act, which
generally provides that an amendment of an enactment shall not be
deemed to be or to involve a declaration that in law under such
enactment was or was considered by Parliament or other body or
person by whom the enactment was enacted to have been different
from the law as it is under the enactment as amended.
[29] In the French Shoes Ltd. v. The Queen [1986] 2 CTC
132 the taxpayer argued that the amendment of the Income Tax
Act to include paragraph 12(1)(x) thereof, which
expressly includes in income any inducement payments made to a
taxpayer, meant that such inducement payments were not subject to
income prior to the effective date of the amendment. Teitelbaum,
J. of the Federal Court, Trial Division, held that the amendment
did not imply a change in the law, and that it merely clarified
the law. This is the essence of the Appellant's position in
respect of the amendments to the Act to include sections
141.1 and 167.1.
[30] The Respondent also referred to the HSC Research[7] case as
support for the submission that amendments should not be used to
infer that the law has not changed. This case states that
external evidence must be looked at in order to infer that an
amendment changes the law rather than merely clarifies it. The
Appellant has provided external evidence that the amendments in
question clarify rather than change the law. The Appellant
submits that this Court should consider the object and spirit of
the Act in a respect of a sale of a business by a
financial institution (Supreme Court of Canada, viz.
- Corporation Notre-Dame de Bon-Secours v.
Communaute urbaine de Quebec [1995] 1 CTC 241).
[31] When dealing with supplies of goodwill the legislation
was a maze back in the early days of the GST and the Appellant
submits that the purposive approach is appropriate in order to
resolve uncertainty. There is still a residual presumption in
favour of the taxpayer and where there is remaining uncertainty,
as in this case, the Appellant should have the benefit of that
uncertainty.
Respondent's Submission
The Appellant's Activity is a business or an adventure
or concern in the nature of trade
[32] The GST is a transaction based tax and it is submitted
that it is incorrect to catagorize the status of the transaction
based on who the supplier is or what the supplier generally does.
Whether a transaction attracts tax depends on the transaction
itself.
[33] The relevant provisions of the Act begin with the
definition of commercial activity as “any business carried
on by a person” or “any adventure or concern of a
person in the nature of trade...”. The making of exempt
supplies are specifically excluded from the definition and an
exempt supply includes financial instruments. Insurance policies
are financial instruments. Exempt supplies are specific supplies
as listed in Schedule V.
[34] The definition of “business” as it is defined
in the Act and used in the definition of commercial
activity is particularly important. “Business” is
very broad and the activities that were undertaken by the Vendor
in these circumstances, the sale of assets fits into the
definition of business as an “undertaking of any kind
whatever”.
[35] Commercial activity also includes an adventure or concern
in the nature of trade and if the Appellant’s activity is
not a business then it is an adventure or concern in the nature
of trade. The Frankel case is not appropriate because it
dealt with income and “income” is narrower than a
“supply”.
[36] The Appellant also relied on the Hleck case which
dealt with whether input tax credits could be claimed by the wife
of a law firm partner. The circumstances of that case are
different and the case dealt with the term “commercial
activity” as it relates to eligibility for input tax
credits. The case widened the scope of what would be included in
commercial activity rather than narrowed it.
[37] It is the Minister’s position that there is no
specific provision which relieves the application of tax for the
time period in question to this particular transaction. A supply
made by a business or by a person in an adventure or concern in
the nature of trade is necessarily taxable unless a particular
relieving provision is found in the Act.
Intent and Purpose of the Act was to include
activities such as the one at issue in this case
(Respondent's Position continued)
[38] Subsection 167(a) of the Act deems that
where a supplier makes a supply of a business or part of a
business the supplier is deemed to have made a separate supply of
each property that is supplied under the agreement. The
Act deems the supply of a business to be taxable and there
would be no need to include a specific section dealing with the
supply of a business if the intention was not to tax it.
Paragraph (b) deals with an election that a supplier and
recipient can make in respect of such a transaction to deem it to
be made for no consideration and such a provision is only
required if parliaments intention is to tax those supplies in the
normal course.
[39] Subsection 200(3) is another provision that refutes the
Appellant’s argument that the supply in question was not
intended to attract tax. That section states that capital
personal property used otherwise than in commercial activity does
not attract tax. Although this provision does not apply to
financial institutions, according to paragraph 200(1)(a),
it shows that capital supplies were contemplated to be
taxable.
[40] In this case, the Appellant is a financial institution
normally involved in making exempt supplies but the assets of the
business were sold and this is not an exempt supply because it is
not included in Schedule V. The respondent submits that the
Act as a whole indicates that it was parliaments intention
to tax such supplies.
[41] Subsection 141(3) does not apply in this situation. In
addition subsection 141(5) deals with the apportionment of
input tax credit and, as such, has no application to this
particular provision. Support for this interpretation is found in
the May 1990 “Technical Notes” which dealt with
section 141. The Respondent submits that subsection 141(5) deal
with the ability to claim input tax credits when it is not clear
that it’s a commercial activity because there may not be
supplies.
[42] The Respondent further submits that even if subsection
141(5) does apply it is helpful to their position because it
deems activities undertaken in connection with a commercial
activity, such as to start-up and wind-down the commercial
activity, to be part of the commercial activity but it does not
refer to exempt supplies which are excluded from the definition
of a commercial activity. The words chosen are precise and admit
no ambiguity and it is submitted that the plain meaning of the
Act must prevail. The “object and purpose” can
play only a limited role in the interpretation of precise
legislation like the Excise Tax Act. The specific sections
that relieve the application of tax are clear in their meaning
and no further inference is needed in the face of such specific
language. The authority for this approach is The Queen v.
Province of Alberta Treasury Branches, 133 DLR (4th) 609
(SCC).
[43] While the legal effect of the transaction may not be
clear the words of subsection 141(5) are clear and the Court need
look no further than those words.
[44] While cascading tax is distasteful and there are attempts
to minimize it in the Act it is not non-existent. In the
current situation there is no evidence of a cascading tax because
their is unlikely to have been any GST component in the selling
price of the customer lists and furniture and section 141.1 was
added to the Act so that a resupply of the goods in this
case are unlikely to attract tax as long as it took place
subsequent to September 1992.
[45] The Appellant argued that section 141.1 which is
applicable to supplies made after September 30, 1992, should be
used as an aid to interpreting the legislation in effect at the
time the transaction took place and in particular as an aid to
interpreting subsection 141(5) of the Act. Subsections
45(2) and 45(3) of the Interpretation Act are relevant.
These subsections state that an amendment is deemed neither to
imply a change in the law nor is it deemed to involve a
declaration of the previous state of the law.
[46] Where there is no evidence of the context in which the
amendment was adopted and where there is no indication of any
declaratory intention, an amendment should not be used to
conclude that amendment was meant to clarify, not change, an
existing provision[8]. Where there is external evidence to that effect, an
amendment can be considered to reflect a change in the
legislation, HSC Research (supra). The internal evidence
that the amendment was intended as a change is the effective date
of the amendment. They could have made it retroactive as they did
with many other amendments.
[47] The external evidence is found in the Department of
Finance Technical Notes that state that subsection 141.1(1)
clarifies and expands upon paragraph 141(5)(b). In
addition that Note said:
...New paragraph 141.1(1)(b) is the corollary to new paragraph
141.1(1)(a). Paragraph 141.1(1)(b) provides that supplies of
personal property will not be considered to be made in the course
of a commercial activity if the property was consumed, used,
manufactured or produced exclusively in non-commercial activities
and the property was acquired imported, manufactured or produced
exclusively for use or consumption in non-commercial
activities.
The addition of this corollary rule will obviously
effect only those persons who are at least partly engaged in
non-commercial activities.... (emphasis added by Respondent)
[48] The internal and external evidence of the
legislators' intention suggests a change in the legislation
rather than a mere clarification.
[49] The Appellant referred to section 167.1 of the
Act, which applies specifically to goodwill, as support
for their position. There is somewhat of a maze in trying to
determine the treatment of “goodwill” through the
first three years of GST. Originally (and at the time relevant to
this appeal) goodwill was not mentioned at all and then an
amendment excluded tax from supplies of goodwill but specifically
excluded financial institutions from the application of the
section. A subsequent amendment included financial institutions
but at the relevant time it is not accurate to infer that
goodwill supplied by a financial institution was intended to be
excluded from the application of tax when this amendment
specifically excluded financial institutions.
[50] I now attempt to analyze the arguments submitted. It is
not disputed that the Receiver is the agent of the Vendors and
therefore the analysis of the transaction is based upon the
Vendors making a supply to the Appellant[9]. This interpretation is supported by
Revenue Canada’s policy statement[10].
In the Course of a Commercial Activity
[51] As stated by the Appellant, in order for this transaction
to attract GST the Appellant must be the recipient of a taxable
supply. In order for this supply to be a taxable supply it must
be made “in the course of a commercial activity”. A
commercial activity means (among other things) any business or
adventure or concern in the nature of trade. In Hleck,
Judge Bell interpreted the term “in the course of a
commercial activity” as defined in subsection 123(1) of the
Act and compared the term to the similar term “the
ordinary course of business”. Hleck dealt with the
availability of input tax credits for expenses incurred by a law
firm to enable a partner’s wife to attend a conference with
the partner. Bell, J.T.C.C. stated at 46-6:
The question becomes whether or not the attendance at a
conference of one’s spouse is in the undistinguished common
flow of business done.
[52] While this decision is not binding it is persuasive and
agrees with the distinction between “in the business”
and “of the business” made by Martland J. of the
Supreme Court of Canada in Frankel.
[53] Hleck dealt with the same statutory definitions
which apply in this case. The supply at issue in this case was
clearly not made “in the undistinguished common flow of
business done” and was a supply “of the
business” rather than “in the business”.
Therefore the appeal should succeed because the supply of the
business in this case is not a taxable supply and so no relieving
provision is required as the Respondent urged.
[54] I do not accept the Respondent’s submission that
the Vendors were in one business involving an activity which was
an exempt supply and another, separate commercial activity which
involved the sale of the assets used in the first activity but
which was not exempt. The result of following the
Respondent’s argument would be startling: when a person
sold an investment asset which it had held as an investment to
earn income from business or property, the sale of that
investment asset would be itself a business or an adventure in
the nature of trade. Indeed, counsel for the Respondent attempted
to draw an analogy to capital personal property in her arguments,
perhaps suggesting exactly this result. If a business or
adventure or concern in the nature of trade could be interpreted
in this way there would be no need for a tax on capital gains
because such gains would be taxable as income.
[55] While subsection 141(5) achieves a result similar to that
suggested by the Respondent, by deeming activities undertaken in
starting up and winding down a commercial activity to be part of
the commercial activity and therefore subject to GST, that
subsection does not state that such activities are deemed to be
either businesses or adventures or concerns in the nature of
trade independently from the underlying commercial activity.
[56] The Department of Finance has indicated that the
elimination of tax cascading is one of two important economic
benefits of a value-added tax. The fact that some examples of tax
cascading exist does not diminish the importance of the
elimination of such effects as a goal. The Respondent’s
interpretation of the Act could lead to tax cascading and
an interpretation which avoids this result is preferable. The
fact that no tax cascading actually occurred in this case does
not aid in interpreting the legislation.
[57] The Excise Tax Act has been amended so that
there is no longer any doubt that the present transaction would
not be taxable if carried out today. Paragraph 141.1(1)(b)
deems supplies of personal property to be made otherwise than in
the course of commercial activities if the property was acquired
or produced in the course of activities which are not commercial
activities. In addition, section 167.1 states that goodwill is
not included in calculating the tax payable when a business is
sold. The bulk of the value of the supply at issue, the customer
lists, are considered to be goodwill.
[58] As the Respondent stated, the Act was a maze
during the first three years as it related to the treatment of
goodwill -- in one twelve month period three different versions
of section 167.1 existed. If anything can be drawn from this
situation it seems reasonable to conclude that Parliament was
“attempting to get it right” and this would support
the Appellant’s argument that Parliament was attempting to
clarify the existing law[11].
[59] The goal of avoiding tax cascading as well as subsequent
amendments to the Act support this conclusion.
[60] The appeal is allowed.
Signed at Ottawa, Canada, this day of February 1998.
"C.H. McArthur"
J.T.C.C.
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