Citation: 2008 TCC 400
Date: 20080630
Docket: 2007-2555(GST)I
BETWEEN:
STANTEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1]
Stantec Inc.
(“Stantec”) is a Canadian public company, a holding corporation with a network
of subsidiary companies in Canada and the United States. It is a registrant for GST purposes. As part of
a merger in 2005 of one of its wholly‑owned subsidiaries, Stantec
Consulting California Inc., with a California company, Keith
Companies Inc., it incurred significant costs in Canada
for professional services required to obtain a listing of its shares on the New
York Stock Exchange. It was a condition of the transaction with Keith Companies
that Stantec be listed on a United States Exchange. Stantec paid GST on the
professional listing services and sought to claim input tax credits in connection
therewith. The Minister of National Revenue denied the input tax credits
and argued:
(i) Input tax credits
cannot be claimed pursuant to section 169 of the Excise Tax Act (the “Act”)
as Stantec had no commercial activity and made no taxable supplies on which it
would charge GST.
(ii) Subsections 186(1)
and (2) of the Act do not apply to the merger transaction to deem
Stantec to have acquired the listing services in the course of its commercial
activities.
[2]
Stantec’s position is
that:
(i) It did acquire the
listing services for use in its commercial activity of holding operating
companies to obtain dividend and interest income, and, even if the listing
services were used in relation to the supply of Stantec’s own shares, that
supply was a zero-rated taxable supply, not an exempt supply, and consequently
the services were for use in commercial activity, as defined in the Act.
(ii) It falls squarely
within the deeming provisions of subsection 186(1) or subsection 186(2) of the Act,
which relate specifically to holding companies.
Facts
[3]
I heard evidence from
Stantec’s Vice-President of Practice and Risk Management, Mr. Alpern, and
Stantec’s Manager of Investor Relations, Mr. Stelfox. Stantec is a holding
corporation with several subsidiaries engaged in the business of consulting
engineering, architecture and interior design. The network of Stantec
companies employs approximately 9,000 people throughout Canada and the United States, although Stantec itself only has two or three
employees. For the past 10 years, Stantec’s corporate objective has been
to grow principally by way of acquisition of subsidiary companies. Its three
main subsidiaries are Stantec Consulting (in Canada),
Stantec Consulting Services Inc. (in eastern United States) and Stantec
Consulting Inc. (in western United
States).
[4]
Stantec became
interested in Keith Companies and started discussions with them in 2003, but it
was not until early 2005 that they took concrete steps towards a deal. Stantec
perceived there was a good fit with Keith Companies given the latter’s focus on
urban land projects and water and waste water remediation. Keith Companies has
a large western U.S. presence. Keith Companies was not the
first United States acquisition: from 1997 to 2001, Stantec
had made 14 United States’ acquisitions, though Keith Companies
would have been the largest to that point.
[5]
Stantec set up a
wholly-owned California subsidiary company, Stantec Consulting
California Inc., with the plan to merge that company with Keith Companies.
The total merger consideration was over $90 million. Stantec and Keith
Companies entered into an Agreement and Plan of Merger and Reorganization dated
as of April 14, 2005. It is helpful to produce certain parts of that Agreement:
SECTION 7.03. Conditions to the Obligations of the Company.
The obligations of the Company to consummate the Merger are subject to the
satisfaction or waiver (where permissible) of the following additional
conditions:
…
(f) U.S. Exchange Listing. The shares of Parent
Common Stock to be issued in the Merger shall have been authorized for listing
or quotation, as the case may be, on the U.S. Exchange, subject to official
notice of issuance.
[6]
In a Proxy Statement/Prospectus
of August 17, 2005, the merger was summarized as follows:
The Merger
We are proposing a merger of
Keith and Stantec Consulting, a wholly-owned subsidiary of Stantec. Following
completion of the merger, Stantec Consulting will continue as the
surviving corporation of the merger and as a wholly-owned subsidiary of Stantec.
After the merger, Keith’s existing shareholders will own approximately 17% of
the outstanding Stantec common shares (based on 18,937,019 Stantec common shares
outstanding as of April 13, 2005).
Pursuant to the merger agreement attached as Appendix A
to this proxy statement/prospectus, each share of Keith common stock will be
exchanged for merger consideration equal to: (1) US$11.00 in cash, (2) 0.23
common shares of Stantec and (3) that number of Stantec common shares equal to
US$5.50, based on the 20-day average trading price of Stantec common shares
prior to the merger. Based on the closing sale price of Stantec common shares
and the U.S. dollar‑Canadian
dollar exchange rate as of August 15, 2005, 0.23 Stantec common shares had a
value of approximately US$7.38 and US$5.50 equaled approximately 0.17 Stantec
common shares.
Holders of Keith common stock will have the right to
elect to receive their merger consideration in the form of (A) a mixture of
cash and Stantec common shares, as described above, (B) all Stantec common
shares or (C) all cash, subject in the case of (B) and (C) to pro rata
adjustment if the amount of Stantec common shares or cash is oversubscribed.
Based on the closing sale price of Stantec common shares and the U.S. dollar-Canadian
dollar exchange rate as of August 15, 2005, for each share of Keith common
stock a holder who elects to receive (A) a mix of cash and Stantec common
shares will receive US$11.00 and approximately 0.40 Stantec common shares, (B)
all Stantec common shares will receive approximately 0.74 Stantec common shares
and (C) all cash will receive approximately US$23.88, subject to pro rata
adjustment in the case of (B) and (C).
If the merger will not qualify as a tax-free
reorganization under the provisions of Section 368(a) of the Code, Stantec has
the option, at its sole discretion, to complete the merger by paying cash
merger consideration of US$22.00 per share of Keith common stock rather than
the merger consideration described above. In such circumstances, you would
receive US$22.00 in cash for each and every share of Keith common stock you
own. In the event that Stantec exercises this option, Keith and Stantec will
recirculate a revised proxy statement/prospectus and resolicit the vote of
Keith shareholders to approve the merger. If the merger does not qualify as a
tax-free reorganization and Stantec does not exercise its option to pay all
cash, Keith will not be obligated to consummate the merger. Furthermore, in
such situation, Stantec and Keith will not consummate the merger without
recirculating a revised proxy statement/prospectus and resoliciting the vote of
Keith shareholders to approve the merger.
[7]
Mr. Alpern was clear
that had Stantec not taken steps to list with the New York Stock Exhange,
the merger transaction would not have proceeded. Mr. Stelfox indicated
that Keith Companies’ shareholders wanted access to a U.S. exchange.
Until Keith Companies’ deal came along, Stantec had no plans to list in the United States as, according to Mr. Alpern, it did not make any
economic sense to do so. Investors continued to rely most heavily on the
Toronto Stock Exchange, rather than the New York Stock Exchange. Stantec did
take steps to list on the New York Stock Exchange which it achieved on August
5, 2005. It incurred costs for the professional services in Canada to obtain that listing and the SEC registration.
It paid GST of $58,735.83 in connection with such professional listing
services.
Issue
[8]
Is Stantec entitled to
input tax credits of $58,735.83?
Analysis
[9]
Subsections 186(1) and
(2) are provisions which recognize the unique situation of a holding company
and deem, in certain circumstances, that a holding company is engaged in
commercial activities.
[10]
Subsection 186(1) reads
as follows:
186(1) Where
(a) a registrant (in
this subsection referred to as the “parent”) that is a corporation resident in
Canada at any time acquires, imports or brings into a participating province
particular property or a service that can reasonably be regarded as having been
so acquired, imported or brought into the province for consumption or use in
relation to shares of the capital stock, or indebtedness, of another
corporation that is at that time related to the parent, and
(b) at the time that
tax in respect of the acquisition, importation or bringing in becomes payable,
or is paid without having become payable, by the parent, all or substantially
all of the property of the other corporation is property that was last acquired
or imported by the other corporation for consumption, use or supply by the
other corporation exclusively in the course of its commercial activities,
except where subsection (2) applies, for the purpose
of determining an input tax credit of the parent, the parent is deemed to have
acquired or imported the particular property or service or brought it into the
participating province, as the case may be, for use in the course of commercial
activities of the parent to the extent that the parent can reasonably be
regarded as having so acquired or imported the particular property or service,
or as having so brought it into the province, for consumption or use in
relation to the shares or indebtedness.
[11]
To qualify for input
tax credits pursuant to this section, Stantec must prove the following:
(i) It was a registrant, resident in Canada.
(ii)
Keith Companies or
Stantec California were involved wholly in commercial
activity.
(iii)
Stantec and Keith
Companies or Stantec and Stantec California were related at the time of obtaining the
professional listing services.
(iv)
The professional
listing services to obtain the New York Stock Exchange listing were “in
relation to” Keith Companies shares or Stantec California shares.
[12]
There is no dispute
that Stantec meets the first two conditions. Also, the Respondent did not
argue that Stantec and Keith Companies were not related nor that Stantec and
Stantec California were not related at the time the services
were acquired. Clearly, Stantec and Stantec California were related. I also accept the Appellant’s argument that on and after
the April 14, 2005 agreement, Stantec and Keith Companies were also related by
virtue of the application of subsection 126(2) of the Act and
paragraph 251(5)(b) of the Income Tax Act.
[13]
That leaves then for
consideration the fourth prerequisite for the application of subsection 186(1) –
can the listing services reasonably be regarded as having been acquired for use
“in relation to” Keith Companies shares or Stantec California shares?
[14]
“Reasonably regarded in
relation to” is an expression of the widest possible import. The Supreme Court
of Canada addressed the phrase “in relation to” in Slattery (Trustee of) v. Slattery suggesting
it implies a wide, rather than narrow, view in connecting two matters. When
this expansive approach has a lead-in with the words “reasonably regarded”, I
reach the inevitable conclusion that it should not take very much to draw a
nexus between acquiring the listing services and the shares of either Keith
Companies or Stantec California.
[15]
There is no question
there is a strong nexus between the listing services and the Stantec shares –
they were the very shares listed, but the connection need not be one of a
primary nor substantial nor directly related nature. The concept of “in relation
to” is not one of prominence let alone exclusivity.
[16]
The facts are quite
clear – the listing services were acquired so that Stantec could complete its
deal to own all the shares of the company resulting from the merger of Keith
Companies and Stantec California. Those services, I find, can readily and
reasonably be regarded as being in relation to the shares of either Keith Companies
or Stantec California or the shares of the merged company; that is, the
investment by Stantec in its new acquisition.
[17]
The Respondent relies
on Policy Statement P-196R, which describes the example of a parent company owning
51% of a subsidiary, raising money by the issuance of its own shares so that it
can finance the acquisition of additional subsidiary company shares. The
Government would not apply subsection 186(1) to allow the input tax credits
relating to the professional services in issuing the shares, as the parent
company cannot reasonably be regarded as acquiring the services for use in
relation to the operating company shares. The Government contends raising funds
by issuing shares is one step removed from obtaining more operating company
shares. I see no support for this one step removed doctrine. Policy P‑196R
allows the application of subsection 186(1) if the holding company incurs costs
to simply buy an operating company shares, without raising money by issuing its
own shares. I fail to see how one acquisition is in relation to the subsidiary
company shares and the other is not. I am not persuaded by Policy P‑196R.
I find that subsection 186(1) does apply to the situation before me.
[18]
While this is
sufficient to allow Stantec’s appeal, I also find subsection 186(2)
applies. It reads:
186(2) For the purposes of this Part, if
(a) a registrant that
is a corporation resident in Canada (in this subsection referred to as the
“purchaser”) acquires, imports or brings into a participating province a
particular property or service relating to the acquisition or proposed
acquisition by it of all or substantially all of the issued and outstanding
shares, having full voting rights under all circumstances, of the capital stock
of another corporation, and
(b) throughout the
period beginning when the performance of the particular service began or when
the purchaser acquired, imported or brought into the participating province, as
the case may be, the particular property and ending at the later of the times
referred to in paragraph (c), all or substantially all of the property
of the other corporation was property that was acquired or imported for
consumption, use or supply exclusively in the course of commercial activities,
the particular property or service is deemed to have
been acquired, imported or brought into the participating province for use
exclusively in the course of commercial activities of the purchaser and, for
the purpose of claiming an input tax credit, any tax in respect of the supply
of the particular property or service to the purchaser, or the importation or
bringing in of the particular property by the purchaser, is deemed to have
become payable and been paid by the purchaser on the later of
(c) the later of the
day the purchaser acquired all or substantially all of the shares and the day
the intention to acquire the shares was abandoned, and
(d) the day the tax
became payable or was paid by the purchaser.
[19]
The Government’s December
1999 Technical notes describe the purpose of this provision as follows:
Subsection 186(2) applies in situations where a corporation acquires
or proposes to acquire all or substantially all of the voting shares of the
capital stock of another corporation that engaged exclusively in commercial
activities. In this case, the purchasing corporation is allowed to claim input
tax credits for property and services it acquires in relation to the takeover
or proposed takeover.
[20]
To qualify for input
tax credits pursuant to this section, Stantec must show that:
(i) Stantec is a registrant
corporation resident in Canada.
(ii)
Stantec must propose to
acquire or acquire substantially all of the voting shares of the target company,
Keith Companies.
(iii)
Substantially all of Keith
Companies’ property must be used exclusively in commercial activities.
(iv)
The listing services
must relate to the acquisition of substantially all of Keith Companies shares.
There is no dispute with respect to the first and
third conditions.
[21]
The first argument the
Respondent raises, in denying the application of subsection 186(2), is that the
merger transaction did not constitute an “acquisition” of Keith Companies
shares for the purposes of subsection 186(2), as there was no actual
acquisition of those shares. The Respondent is giving a far too restricted
meaning to “acquisition” of shares.
[22]
In the Government
Memoranda Series, Chapter 8.1, the term “acquire” is defined as follows:
The word “acquire” is not defined in the Act. The ordinary
dictionary definition of the term “acquire” is to get, obtain, have control
over or possess. With respect to property, relevant case law indicates that
property is acquired by obtaining ownership or such normal aspects of ownership
as possession, use or risk.
[23]
Did Stantec acquire Keith
Companies? Certainly that is what the representatives of Stantec believed they
were doing, as was clear from Mr. Alpern’s and Mr. Stelfox’s testimony and
the merger agreement itself. Stantec paid consideration of over $90 million
in cash and shares to end up with 100% control of the merged company that
resulted from the merger of Keith Companies and Stantec California, already owned 100% by Stantec. As part of the merger
transaction, all Keith Companies shares were cancelled. It appears that under
the California Corporations Code, only one of the predecessor
corporations continues as the surviving corporation, but that surviving
corporation has all the assets and liabilities of both predecessors. Stantec
has acquired Keith Companies, on any interpretation of the word “acquired”.
[24]
The Respondent argues
that this is not the acquisition of Keith Companies shares, yet pursuant
to the Merger Agreement, those Keith Companies shares evolve into a right
to receive Stantec’s shares or shares and cash. Stantec is paying to get
something, and that something is the cancellation of Keith Companies shares and
ownership of all the shares of the merged company. Effectively, it gets full
ownership of Keith Companies. It does so by contractually having control of the
disposition of those shares in the form of their cancellation. As Stantec
already owned all of the shares of one predecessor company, it is obtaining, by
this transaction, 100% of the right to control the other predecessor, now
continued as the newly merged company.
[25]
Subsection 186(2) is
aimed at takeovers. This was a takeover. The denial of the application of this
section due to some peculiarities in California corporate
law and an overly rigid approach to the concept of acquisition of shares,
defeats the essence of subsection 186(2). I find that Stantec, in contracting
for the cancellation of Keith Companies shares and in owning all of the shares
of the merged company, has for the purposes of subsection 186(2) effectively
acquired all of Keith Companies shares.
[26]
The Respondent then
goes on to argue that the listing services do not relate to the acquisition. I
rely on the same reasons I gave in connection with subsection 186(1) to
find there is sufficient connection between the listing services and the
acquisition of Keith Companies to constitute the one “relating to” the other.
I conclude the circumstances of Stantec’s takeover of Keith Companies
falls squarely within subsection 186(2).
[27]
The application of subsections
186(1) and (2) is sufficient to find in favour of Stantec and allow the input
tax credits. Stantec, however, relied on the general application of section 169
and the definition of “commercial activity” as its main argument for getting
the input tax credits, without having to resort to subsections 186(1) and
(2). For that reason, I will briefly address their argument.
[28]
The difficulty in
applying section 169 to a holding corporation is that the corporation does not
carry on a business of making supplies. The Respondent suggests that this alone
may be sufficient to deny Stantec the input tax credits. The Respondent
then goes on to argue that the only supply Stantec made was the supply of its
own shares, which the Respondent mistakenly suggests was an exempt supply, and
thus does not constitute commercial activity. While the Respondent did not
raise section 141.01 of the Act in argument, it was raised in the Reply
to the Notice of Appeal: I presume the Respondent’s argument is based on
the application of section 141.01.
[29]
To claim input tax
credits pursuant to section 169, Stantec must have acquired the listing
services for use in the course of commercial activities. Commercial activities
is defined broadly as:
“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;
“Business” is defined as:
"business" includes a profession, calling,
trade, manufacture or undertaking of any kind whatever, whether the activity or
undertaking is engaged in for profit, and any activity engaged in on a regular
or continuous basis that involves the supply of property by way of lease,
licence or similar arrangement, but does not include an office or employment;
[30]
As was clear from the approach
of the Federal Court of Appeal in London Life Insurance Co. v. Canada,
a company whose business was making exempt supplies, could still be found to
engage in commercial activity with respect to a particular transaction (in that
case by making leasehold improvements). As I indicated in the case of BJ Services
Co. Canada v. R.,
the definition of commercial activity is wide. The only activities that
would take a corporation’s activities outside the realm of commercial activity
would be activities of a personal nature or the making of exempt supplies.
Stantec, in acquiring Keith Companies by way of merger, was neither engaged in
activity of a personal nature, nor engaged in making exempt supplies. The
supply of its own shares to the American shareholders of Keith Companies, as
part of the transaction, was a zero-rated taxable supply. See section 10.1 of
Schedule VI, Part V of the Act which reads as follows:
10.1 A supply of intangible personal property
made to a non-resident person who is not registered under Subdivision d of
Division V of Part IX of the Act at the time the supply is made, but not
including
(a) a supply
made to an individual unless the individual is outside Canada at that time;
(b) a supply of intangible
personal property that relates to
(i)
real property situated in Canada,
(ii)
tangible personal property ordinarily situated
in Canada, or
(iii)
a service the supply of which is made in Canada and is not a zero‑rated supply
described by any section of this Part or Part VII or IX;
(c) a supply
that is the making available of a telecommunications facility that is
intangible personal property for use in providing a service described in
paragraph (a) of the definition “telecommunication service” in subsection
123(1) of the Act;
(d)
a supply of intangible personal property
that may only be used in Canada; or
(e)
a prescribed supply.
Section 141.01 of the Act would therefore not
come into play to restrict any input tax credits.
[31]
Were the listing
services acquired to be used in the acquisition by merger? As is clear from my
comments in connection with subsections 186(1) and (2), I am satisfied the
listing services were clearly for the purpose of cementing the takeover of Keith Companies.
I conclude, with respect to the merger transaction, that the listing services
were acquired for use in commercial activity as the transaction involved
no exempt supply and was not of a personal nature.
[32]
A more interesting
question arises if I had determined that the listing services were not in
relation to the takeover but were for a greater, longer term benefit to Stantec
and its shareholders of obtaining a New York Stock Exchange listing,
I would then have to address similar issues raised in BJ Services –
for whose benefit (the company’s or the shareholders’) were the costs incurred?
Does this alter the nature of the activity from a commercial one to a more
personal one? While it is unnecessary to answer these issues given my
conclusion in the preceding paragraph, the Appellant’s counsel did allude to
them, suggesting the listing was central for Stantec to maintain and grow its
value, notwithstanding the perceived, if not real, benefit to shareholders
present and future. The Appellant concluded that, given the policy of
maximizing shareholder value by acquiring operating subsidiaries, it cannot be
said the purpose, benefit or context of the listing services could give rise to
a personal benefit. This, however, is unlike the situation in BJ Services
where that company’s business was the making of taxable supplies. How section
141.01 applies to a holding company not in the business of making supplies is a
different question – one I need not grapple with for this decision.
[33]
The appeals are allowed
and the matters are referred back to the Minister for reconsideration and
reassessment on the basis that Stantec qualifies for the input tax credits
pursuant to section 169, as the listing services were acquired for use in the
course of Stantec’s commercial activities pursuant to the deeming provisions of
subsections 186(1) or (2) of the Act, or in accordance with the general
definition of commercial activities applied to the specific merger transaction.
Signed at Ottawa, Canada, this 30th
day of June 2008.
"Campbell J. Miller "
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