REASONS
FOR JUDGMENT
Campbell J.
Introduction
[1]
The sole issue in these appeals boils down to
this: a determination of the value of the consideration paid by various mutual
fund trusts (the “Funds”) to the Appellant (also referred to as the “Manager”)
for the supply of management services which it provided to each of the Funds.
To determine the value, I must look at what the actual consideration consisted
of in these circumstances. Ultimately, this will determine whether the
Appellant properly collected and remitted the appropriate amount of GST on the
fees that were charged to each Fund.
[2]
Although several of the Respondent’s assumptions
of fact, contained in the Reply to the Notice of Appeal as well as the
submissions, address the legal arrangements and cash payments, with respect to
both mutual fund corporations and mutual fund trusts as seemingly one and the
same, they are, in fact, very different creatures. The appeals before me are
restricted to the management fees that were paid by the Funds to the Appellant
with respect to the mutual fund trusts. The Appellant did not appeal the assessments
respecting the mutual fund corporations.
[3]
These appeals are from reassessments made under
Part IX of the Excise Tax Act (the “ETA”). The Appellant is
appealing three sets of Notices of Reassessment:
(a) those dated February 23, 2011, issued in the name of Invesco
Canada Ltd. (“Invesco”) for the period from April
1, 1999 to October 31, 1999 in respect of Trimark Investment Management
Inc. (“TIMI”);
(b) those dated June 10, 2011, involving Aim Funds Management
Inc. (“AIM”) for the same period, April 1, 1999 to October 31, 1999; and
(c) those dated February 24, 2012, involving AIM and TIMI
immediately prior to and following the amalgamation of AIM and TIMI (now
referred to as Invesco) on August 1, 2000 for the periods between November 1,
1999 and December 31, 2006.
[4]
During the hearing, the Appellant advised the
Court that it did not intend to continue its appeal of the reassessments as they
related to AIM, for the periods prior to the amalgamation, that is, for the
periods from April 1, 1999 to July 31, 2000.
[5]
The Appellant provides management services to
the Funds within the mutual fund industry (the “Industry”). For the provision
of these services, which are taxable supplies, the Appellant charges management
fees to the Funds. Goods and Services Tax (“GST”) is charged, collected and
remitted on these fees, pursuant to the ETA. The Industry operates
within a highly‑regulated environment, according to national and
provincial securities laws. This ensures transparency for investors, who place
custody of their money with an investor to purchase either shares in a mutual
fund corporation or, as in these appeals, units in a trust fund. Such an
arrangement permits individual investors access to a wide‑ranging
portfolio and professional advice and management in respect to their
investments that a smaller investor could not otherwise access.
[6]
In exchange for agreeing to manage the
day-to-day business activities of the Funds, the Appellant/Manager earns income
by charging management fees, which are generally charged against all assets of
the fund. In some instances, to remain economically viable players in the
market, the Manager must attract and retain the larger, sophisticated investor
groups, such as pension funds (the “Large Investors”). As an inducement, the Manager
has discretion to reduce the normal management fees that are charged to
ordinary investors in the funds. This practice, of management fee reductions,
gives rise to special distributions made by the Funds to the Large Investors.
These special distributions, equal to the amount of the management fee
reduction and paid on a monthly or quarterly basis, are known as the “Management Fee Distributions”.
[7]
These appeals concern the GST treatment of those
Management Fee Distributions. No GST was collected or remitted on the
distributions. The Minister of National Revenue (the “Minister”) reassessed the
Appellant/Manager on the basis that these Management Fee Distributions were
part of the consideration, in addition to the amount of the Manager’s reduced
fee, paid or payable by the Funds for the supply of management services by the
Appellant/Manager.
Facts and Background
[8]
The only witness was David Warren, Executive
Vice-President and Chief Financial Officer of the Appellant. Seven “Joint
Document Brief” books were filed by the parties. While the testimony and
argument focussed on one set of mutual trust fund documents, these were
representative of all the documentation at issue in these appeals.
[9]
To determine what the Funds actually paid to the
Appellant/Manager for the management services, the Appellant focussed on the
legal rights that existed among the Manager, the Funds and the Large Investors,
as set out in the relevant documentation. To establish the “factual matrix”
underpinning the documentation, the Appellant emphasized that I must analyze
the evidence before me, with a view to establishing:
(a) the commercial purpose of the transactions;
(b) the context; and
(c) the market in which the parties operated.
[10]
The Appellant is in the business of sponsoring,
managing and distributing mutual funds. The Appellant wears two hats with
respect to the Funds: it is a trustee of the Funds and it also provides
investment management services and stock advice to the Funds. On August 1,
2000, AIM, the mutual fund manager for the AIM group of funds, and TIMI, the
mutual fund manager for the Trimark group of funds, amalgamated to form Aim
Funds Management Inc. (“AFMI”), the predecessor to Invesco. During the relevant
periods, Invesco offered mutual funds to public investors under the AIM and
TIMI brand names, pursuant to an annual Prospectus and an Annual Information
Form (the “AIF”), together referred to as the “Offering Documents”.
[11]
The management fee that the Funds paid the
Appellant/Manager is fixed by contract in a document called the “Management Agreement”.
The fee is charged to each Fund for which the Appellant provided services. They
accrue daily and are generally charged against the assets.
[12]
The Appellant markets the Funds toward two
groups of investors, retail investors and the Large Investors, the latter group
being generally comprised of the institutional investors. It is the investors
who pay the management fees, although indirectly. These fees, together with
other Fund expenses, reduce the profit within the mutual trust funds, thereby
reducing the income that will be available to be distributed to investors. The
logic is that, if the Manager of a trust fund is able to induce Large Investors
to purchase units by offering a reduced fee, then that reduced fee should
produce higher distributions to the investors because of the increased monetary
base.
[13]
Unlike the Large Investors, the retail investors
have no ability to negotiate reduced management fees but the Funds do provide
them with investment expertise and diversification that would otherwise be
unavailable to them in the marketplace. According to Mr. Warren’s evidence, the
Large Investors generally do not have a financial advisor but, instead, work
through consultants in negotiating a management fee reduction. These investors
would receive the benefit of a negotiated fee reduction through a management
fee distribution, calculated and equal to the difference between the potential
management fee amount that the Appellant could have charged and the amount of
the negotiated management fee reduction or discount applied to the “gross” fee.
This was referred to as the net management fee (Cross-examination of Mr. Warren,
Transcript, Volume 2, pages 230 to 231).
[14]
The Appellant was prepared to charge the Funds a
reduced management fee for its supply of management services because, overall,
the gross amount of fees earned by the Manager against the Funds’ net assets
would significantly increase as a consequence of a large investment in the
Funds. This was so even though the fees to a Large Investor may have been
offered at a lower percentage rate. A fund would also benefit because the size
of its investment portfolio increased when Large Investors became unitholders
in a fund. If retail investors are also unitholders in a fund where Large Investors
are attracted by a reduced fee to become unitholders, the entire fund and all
investors are impacted by the increased fund assets available for investment.
[15]
Since the trustee has a fiduciary duty to the
entire Fund, structuring an arrangement that allows for a management fee
reduction to effectively benefit the Large Investors, without negatively
impacting other investors in the Fund, has remained an issue that the Industry
has grappled with for many years.
[16]
Prior to 1995, the management fee reduction was
achieved through a rebate from the Appellant to the Large Investors. Under this
approach, the Appellant charged the Funds the full management fee as set out in
the Management Agreement. The Appellant then paid the Large Investors a
“management fee rebate”. In 1995, the Ontario Securities Commission (the
“OSC”), along with other regulators within the industry, became concerned that
this method of paying rebates to unitholders could trigger subsection 12(2.1)
of the Income Tax Act (the “ITA”) and subject the Funds to a
detrimental and unanticipated income tax inclusion. In a 1994 Technical Interpretation,
the Canada Revenue Agency (the “CRA”) advised of the adverse income tax
consequences and concluded that a double tax - one to the investors in receipt
of management fee rebates and another to the trust funds ‑ would be
the result.
[17]
By correspondence dated June 29, 1995, the OSC
wrote to Appellant Counsel with the following request:
4. Please disclose the fact that the repayment of management
fees to an investor may trigger negative tax consequences to the investor
and/or the Funds and provide an opinion from tax counsel or provide for an
indemnification to the Fund from Trimark for any tax liabilities of the Funds
with respect to the repayment of management fee.
(Joint Document Brief, Volume 1, Tab 1, page 2)
It became
critical for this arrangement, that had been in place until 1995, to be
revamped in order to avoid any risk of double taxation through the application
of subsection 12(2.1) of the ITA. This provision provides that
inducement payments or reimbursements made to beneficiaries of trusts are to be
included in the income of the trusts. Since the management fee rebates to the
Large Investors could be considered inducement payments meant to reimburse expenses
of the trusts, pursuant to subsection 12(2.1), paragraph 12(1)(x) would cause
those rebate amounts to also be included in the income of the Funds, resulting in
double taxation of the rebate amounts. As a result, changes were introduced in
1995 in order to avoid the potential application of subsection 12(2.1). The
Appellant had to alter the manner in which the management fee rebate amounts
were made but, in doing so, the trusts were also constrained by subsection
104(7.1) of the ITA. As explained by Appellant Counsel in his opening
submissions at paragraph 64:
… You will know that
this provision would deny a trust the ability to deduct its distributions of
income and net realized gains. The Funds would not want to lose those
flow-through deductions for the whole fund in order to solve the large investor
subsection 12(2.1) issue.
[18]
To avoid these potential income tax
consequences, the Appellant changed the method of making management fee rebate
payments to unitholders in the Funds and instead, the Appellant/Manager was
given discretion to negotiate with the Large Investors for a reduction in the
management fee it charged to the Funds. This was in return for the Funds
agreeing to make a distribution of the amount of this reduction to the Large
Investors. Consequently, the Funds would then have additional resources to make
special trust distributions to the Large Investors because the Appellant had
reduced its fee for the services it was providing.
[19]
The Appellant described the new method of paying
management fee rebates as follows:
1. The Appellant/Manager calculated the net management fee it
charged the Funds by taking “Factor A” (the maximum stated management fee) and
subtracting “Factor B” (the fee reduction offered by the Appellant to the Funds
calculated with respect to specific Large Investors).
2. The Appellant collected GST on the net management fee
calculated according to Step 1.
3. The Funds then made special Management Fee Distributions to
the Large Investors out of trust income or trust capital.
[20]
The Appellant sought and received an advance
income tax ruling to ensure that this proposed new arrangement would not result
in double taxation under the ITA (the “Ruling”). The Ruling confirmed
the CRA’s view that these special Management Fee Distributions from the Funds
to the Large Investors should be treated as trust distributions out of the
mutual trust funds. Pursuant to subsection 104(6) of the ITA, the Funds
would be entitled to deduct those payments.
[21]
For income tax purposes, Management Fee
Distributions were to be treated as trust distributions by the Funds and the
Large Investors. Although this Ruling dealt only with subsection 104(7.1) of
the ITA and the Appellant did not obtain a ruling with respect to
potential GST implications, the fee arrangements at issue in these appeals are
those that are the subject matter of the Ruling.
[22]
The new arrangements were implemented through
the following documentary changes:
1. The Declaration of Trust for a Fund was amended to (a)
define “Management Fee Distributions” as a special subset of distributions
available only to Large Investors and (b) require the Trustee of the Fund to
make such distributions to Large Investors. (Joint Document Brief, Volume 1,
Tab 5, Second Amendment to Declaration of Trust, paragraphs 2.1, 2.2 and 2.4).
2. The Management Agreement, between the Manager and the Fund,
was amended to provide that the Manager may reduce the management fees at an
annual rate, which is less than that rate otherwise paid by the Funds under a
Management Agreement in respect of a particular unitholder, on condition that
the amount of the reduction is distributed to that unitholder by the Fund
(Joint Document Brief, Volume 1, Tab 6, Amendment to Management Agreement).
The Appellant’s Position
[23]
The management fee paid by the Funds to the
Appellant/Manager was the net management fee of “Factor A” (the maximum stated
management fee that could be charged according to the Offering Documents) minus
“Factor B” (the fee reduction amount offered to eligible Large Investors). This
reduced amount was the sole consideration for the Appellant’s single supply of
management services. The Management Fee Distributions were a separate
transaction occurring between the Funds and the Large Investors and were
distributions of trust income or realized capital gains of the Funds to the
Large Investors. The Appellant’s fee was reduced at the point of sale and there
were no subsequent adjustments or rebates that were paid. Consequently, the
distributions were a separate supply and did not form part of the consideration
provided to the Appellant for the supply of management services. All of the
documentation, together with the amendments, the conduct of the parties, the
surrounding commercial realities and circumstances support the objective
intention of the parties that the management fee was reduced at the point of
sale to Large Investors at a rate that matched the rate a Large Investor could
have obtained by hiring an investment manager directly. At the same time, the
objective intention of the parties was to avoid a payment of funds from a Manager
to an investor, either directly or indirectly, so as to prevent potential
double taxation caused by the application of subsection 12(2.1) of the ITA.
[24]
Appellant Counsel also relied on internal
accounting documents and tax returns respecting the payment of fees and
interpretation of the contracts.
[25]
In the alternative, the Appellant argued that,
if this Court concluded that the Management Agreement contained a guarantee or
condition that was partial consideration for the supply of management services,
the Minister did not plead an assumption relating to the value of that
condition or guarantee, which then places the onus on the Minister and not the
Appellant. However, the Appellant contends that the Respondent adduced no
evidence at the hearing respecting this issue.
The Respondent’s Position
[26]
The Respondent argued that the Management Fee
Distributions to the Large Investors did not represent a price adjustment for
the management services that the Appellant offered and, therefore, did not
reduce the value of the consideration payable by the Funds for the supply of
the management services. There was no reduction in the total amount payable by
the trust funds under the Management Agreement. The Funds paid the full management
fee but to two different parties.
61. … The only
change was that instead of being required to pay the total amount payable (i.e.
the gross management fee) directly to the appellant (i.e. the supplier), the
Trust was now required (or at least permitted) to instead pay one component of
the gross management fee to particular investors (identified by the appellant)
in the form of management fee distributions.
(Respondent’s Written Submissions, paragraph 61)
The second
portion of the fee that was paid to the Large Investors at the Appellant’s
direction was therefore part of the value of the consideration for the
management services and upon which GST should have been remitted.
[27]
The Respondent submitted that, as long as there
is a direct link or connection between the amount payable and the supply that
is made, then the amount will be consideration for that supply.
[28]
In determining the value of the consideration,
both the legal and the “economic reality” of the transactions should be
considered. The economic reality of the transactions is that the Funds were in
no better position as a result of the management fee reductions. From the
perspective of the Funds, there was no difference between the periods before
and after 1995 when changes were made. Instead of paying the full fee to the
Appellant/Manager for the supply of management services, the Funds now make two
payments, one to the Appellant and the remainder to the Large Investors. The
economic reality is that the Funds have no additional money in their coffers.
According to the Respondent, the legal reality is that the Appellant negotiated
agreements with the Large Investors and agreed to cause the Funds to make these
payments of Management Fee Distributions in exchange for the investors agreeing
to invest in the Funds. It was the Appellant that owed an obligation to the
Large Investors equal to the amount of these distributions. Had the Funds not
paid the distributions, the Large Investors would have a legal right against
the Appellant/Manager for recovery of any unpaid amounts. The Appellant would
then have legal rights against the Funds in respect to their obligation to pay
the distributions.
[29]
As a result, there is both a legal and an
economic link or connection between the unreduced gross management fee and the
supply of management services to the Funds. The Funds were liable to pay gross
fees pursuant to the Management Agreement, provided the Appellant fulfilled its
managerial responsibilities. However, the Appellant and the Funds agreed that,
instead of the Funds paying the gross management fees, the Appellant would
receive part of those fees in cash and the Funds would accept an obligation or
condition imposed upon them to pay the negotiated reduced amounts to the Large
Investors. This obligation had a value equal to the amounts negotiated between
the Appellant and the Large Investors.
[30]
In response to the adequacy of the pleadings
issue raised by the Appellant, the Respondent contended that the Reply to the
Notice of Appeal sets out that the benefit of the negotiated reduction went,
not to the Funds, but to the Large Investors with whom the managers negotiated
a special deal. The Reply assumed that the Funds did not receive those
negotiated amounts nor any benefit from that arrangement and that the management
fee was never reduced.
Analysis
A. The Legislative Framework
and Jurisprudence
[31]
Subsection 165(1) of the ETA is the
charging provision. It provides that tax shall be paid on the value of the
consideration for a taxable supply. In these appeals, the taxable supply is the
management services provided by the Appellant to the Funds and the Appellant
agreed those services are taxable supplies for GST purposes. The recipient of
the supply is the Funds. The issue arises in respect to a valuation of the
consideration for those services. According to the wording of subsection
165(1), the consideration must be “for the supply”. This means there must be a
link or connection between the consideration and the supply itself. Subsection
123(1) of the ETA provides the following definition of “consideration”:
“consideration”
includes any amount that is payable for a supply by operation of law;
The Technical
Notes that accompanied the introduction of this definition explained the
purpose behind the inclusion of the phrase “by operation of law” in the
definition:
… [In] some
circumstances, amounts can become payable for a supply by operation of law in
the absence of a contract. … This would address, for example, situations where
services are rendered to a person without having been contracted for and the
person is required, by law, to pay fair value for the services received.
… [Emphasis added]
(Explanatory Notes to Legislation Relating to the Goods and Services
Tax, Department of Finance: February 1993)
[32]
The inclusion of the phrase “by operation of
law” is intended to encompass those relationships which may not be contractual
in nature but that are nonetheless governed by common law doctrine or statute.
The explanation, contained in the Technical Notes, mirrors the definition provided
by the Federal Court of Appeal in Commission Scolaire des Chênes v Canada
(2001 FCA 264, [2001] FCJ No. 1559, at paragraphs 18 and 19).
[33]
The Federal Court of Appeal, in its reasons in Commission
Scolaire des Chênes, concluded that two factors will be required in order
for consideration to have been paid for a supply:
18. Consideration
under the Act is easily discernable when the obligation to pay arises under a
contract. …
19. Under the
Act, in order for a payment to constitute consideration, it must have been made
pursuant to a legal obligation (contractual or otherwise) and must be closely
enough linked to a supply that it may be regarded as having been made
"for" that supply (see the definition of the term
"consideration" in section 123). That is why a direct link is
required.
The Federal Court
of Appeal noted that a payment made pursuant to the terms of a contract will
always meet the definition of consideration. However, where a payment is made
outside the contract, an analysis will be required to determine whether a
direct link exists between the payment and the supply. At paragraph 20 of Commission
Scolaire des Chênes, the Court concluded:
20. … [W]hen
the payment is made otherwise than under a contract, the purpose of the payment
and the circumstances in which it is made must be carefully analyzed to
determine whether there is a direct link with the supply; a payment will
constitute consideration only where it is made “for” or in return for that
supply.
[34]
In County of Lethbridge v The Queen, 2005
TCC 809, [2006] TCJ No. 56, Justice Bell confirmed that the definition of
consideration for the purposes of the ETA includes any amount that would
be consideration under common law:
95. … In Dunlop
Pneumatic Tyre Co. Ltd. v Selfridge & Co. Ltd.[1915] AC 847 at 855,
HL, Lord Dunedin wrote:
I am
content to adopt from a work of Sir Frederick Pollock … the following words as
to consideration:
An act or
forbearance of one party, or the promise thereof, is the price for which the
promise of the other is bought, and the promise thus given for value is
enforceable.
At paragraph 100,
Justice Bell went on to state:
100. … The test
to be applied is not whether there is a “direct link”. This rhapsodic venture
into a mire of possibilities is foreign to the common law concept of
contractual consideration. The test in this case is whether there was
“consideration” as that term, both under the definition in the Act, and
under common law, exists.
[35]
As a result of the foregoing comments, much of the
Respondent’s submissions on “direct link” between the payments and the related
caselaw were unnecessary. Pursuant to Commission Scolaire des Chênes and
the common law definition of consideration, all that would be required for the Management
Fee Distributions to constitute consideration for the taxable supply of
management services would be a contractual obligation.
[36]
The ETA also provides a definition, in
subsection 153(1), for the value of the consideration for a supply as follows:
153. (1) Value of
consideration – Subject to this Division, the value
of the consideration, or any part thereof, for a supply shall, for the purposes
of this Part, be deemed to be equal to
(a)
where the consideration or that part is expressed in money, the amount of the
money; and
(b)
where the consideration or that part is other than money, the fair market value
of the consideration or that part at the time the supply was made.
[37]
The Appellant contended that, pursuant to
subsection 153(1), the only supply was for a dollar amount under the Management
Agreement. In respect to the Respondent’s argument that there was additional
consideration that was not cash and was in the form of a legal obligation to
pay Management Fee Distributions to Large Investors, the Appellant argued that
the Respondent must address what the fair market value of that non-cash
consideration would be. Appellant Counsel submitted that the Respondent did not
adduce evidence respecting fair market value. The Appellant’s position was that
the legal obligation to pay Management Fee Distributions to Large Investors is
found in the Declaration of Trust. The Management Agreement, according to the
Appellant, contains a guarantee that the Funds will comply with their
obligation under the Declaration of Trust. However, when viewed within the
context of the factual matrix umbrella, this guarantee is not consideration for
the management services that the Appellant provided and, even if the Court
determines that it was, the Respondent has not established the value of the
guarantee.
[38]
The Respondent argued that it is the Management
Agreement that creates a legal obligation to pay the Management Fee
Distributions to the Large Investors on the Appellant’s behalf but that it is
the Appellant that has the obligation to pay the distributions to the Large
Investors. Under the Management Agreement, when the Funds agreed to accept this
obligation, something of value is being provided to the Appellant (Respondent’s
Written Submissions, paragraph 62). The value of the obligation, being
consideration for the management services, is equal to the Management Fee
Distributions, according to the Respondent’s position.
[39]
The first step in these appeals is to interpret
the contracts and relevant documentation in order to determine the true nature
of the legal obligations that were created. If I determine that the only
consideration for the management services was the cash amount of the Appellant’s
reduced fee, that ends the matter. If, however, I conclude that the Funds had a
legal obligation to pay amounts in addition to the reduced fee for the
Appellant’s services, then the next step will be a determination of the fair
market value of that legal obligation or condition to the Appellant.
B. The Factual Matrix/Contractual
Interpretation and the Recent SCC Decision in Sattva Capital Corp. v Creston
Moly Corp., 2014 SCC 53, (“Sattva”)
[40]
The importance of and the role that the relevant
factual matrix has in the interpretation of contracts is well established in
Canadian jurisprudence and, in particular, tax matters. Subsequent to the hearing
of these appeals, the Supreme Court of Canada, on August 1, 2014, released a
decision in Sattva dealing with the principles of contractual
interpretation. Since this has a direct bearing on the issue before me, that
is, the determination of the value of the consideration that the Appellant
received from the Funds for the supply of management services, I requested that
the parties provide further written submissions in respect to the impact of the
Sattva decision.
[41]
Overall, the reasons rendered by Mr. Justice
Marshall Rothstein and the principles enunciated respecting contractual
interpretation are consistent with prior jurisprudence. While Sattva
clarifies the basic existing principles of contractual interpretation, it does
not change the relevant law, nor my view of the issue before me, based on the
already existing jurisprudence. In Sattva, Justice Rothstein endorsed a
practical, common-sense approach to the interpretation of contracts not
dominated by technical rules of construction. A determination of the intent of
the parties and the scope of their understanding should be the Court’s
overriding concern and the present-day approach that should be applied. To this
end, a contract should be read as a whole, giving the words it employs their
ordinary and grammatical meaning, consistent with the surrounding circumstances
known to the parties at the time the contract was formed – often referred to as
the “factual matrix”. At paragraph 47, Justice Rothstein describes this
approach as follows:
[47] Regarding
the first development, the interpretation of contracts has evolved towards a
practical, common-sense approach not dominated by technical rules of
construction. The overriding concern is to determine “the intent of the parties
and the scope of their understanding” (Jesuit Fathers of Upper Canada v.
Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at
para. 27 per LeBel J.; see also Tercon Contractors Ltd. v. British
Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at
paras. 64‑65 per Cromwell J.). To do so, a decision-maker must
read the contract as a whole, giving the words used their ordinary and
grammatical meaning, consistent with the surrounding circumstances known to the
parties at the time of formation of the contract. Consideration of the
surrounding circumstances recognizes that ascertaining contractual intention
can be difficult when looking at words on their own, because words alone do not
have an immutable or absolute meaning:
No contracts are made in a vacuum: there
is always a setting in which they have to be placed. . . . In a commercial
contract it is certainly right that the court should know the commercial
purpose of the contract and this in turn presupposes knowledge of the genesis
of the transaction, the background, the context, the market in which the
parties are operating.
(Reardon Smith Line, at p. 574, per
Lord Wilberforce)
[42]
Consequently, the Court must consider the
commercial purpose, background and context of the transaction as well as the
market in which the parties to a contract are operating. This goes back to the
very basics of contract interpretation principles: contracts are never made in
a vacuum.
[43]
Words alone do not have an immutable or absolute
meaning. Rather, their meaning should be considered against the backdrop of
relevant contextual factors, including the purpose of the agreement and the
nature of the relationship between the parties that is created by the contract.
At paragraph 48 of Sattva, Justice Rothstein reproduced the following passage
by Lord Hoffman in Investors Compensation Scheme Ltd. v West Bromwich
Building Society, [1998] 1 All ER 98 (H.L.) as follows:
[48] …
The meaning which a document (or any
other utterance) would convey to a reasonable man is not the same thing as the
meaning of its words. The meaning of words is a matter of dictionaries and
grammars; the meaning of the document is what the parties using those words
against the relevant background would reasonably have been understood to mean.
[p. 115]
[44]
However, as Justice Rothstein concludes in Sattva,
although surrounding circumstances will be a relevant consideration to
contractual interpretation, they cannot be allowed to overwhelm the words
contained in a contract. This principle would logically follow from the principle
of giving words their ordinary and grammatical meaning, consistent with
surrounding circumstances at the time of the contract formation. Otherwise,
words in a contract would not be given their ordinary and grammatical meaning.
In other words, courts cannot use surrounding circumstances to deviate from the
text such that a new agreement is created. Specifically, Justice Rothstein had
the following to say in respect to what a court can consider when interpreting
a contract:
[57] While the
surrounding circumstances will be considered in interpreting the terms of a
contract, they must never be allowed to overwhelm the words of that agreement (Hayes
Forest Services, at para. 14; and Hall, at p. 30). The goal of
examining such evidence is to deepen a decision-maker’s understanding of the
mutual and objective intentions of the parties as expressed in the words of the
contract. The interpretation of a written contractual provision must always be
grounded in the text and read in light of the entire contract (Hall, at
pp. 15 and 30-32). While the surrounding circumstances are relied upon in the
interpretive process, courts cannot use them to deviate from the text such that
the court effectively creates a new agreement (Glaswegian Enterprises Inc.
v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62).
[45]
As emphasized by Justice Rothstein at paragraph
58 of his reasons, evidence respecting surrounding circumstances will
necessarily vary from case to case and will be limited to the objective
evidence of the background facts at the time of formation and execution of the
contract. This requires a court to look at the knowledge that the parties
possessed or ought to have possessed, again, prior to and at the time of the
contract formation. As noted in Sattva, considering surrounding
circumstances, as an interpretative aid, does not offend the parol evidence
rule, which excludes evidence of the parties’ subjective intentions and
precludes considering evidence outside the words of the contract that would
result in varying the contract in some manner. Absent ambiguity, the Court
cannot consider the subjective intention of the parties to a contract nor their
actions subsequent to contract formation. Although the Appellant relied on
subsequent accounting documents and tax returns to support its position, since
there is no ambiguity present in the documentation, I have placed no reliance
on this portion of the Appellant’s submissions.
The Appellant’s
Position after Sattva
[46]
The Appellant’s position is that its proposed
interpretation of the agreements between the parties is further supported by
the reasons in Sattva. The objective intention of the parties was to
implement the transaction described in the ATR-65 and the Ruling in order to
avoid the impact of double income taxation. It could not therefore be the
objective intent of the parties to increase GST payable, in respect to the
management services, by implementing the Respondent’s complicated, multi-step
arrangements (Appellant’s Written Submissions on Sattva, at paragraph
18). The language, contained in the Management Agreements, that refers to the
conditionality of the management fee discount, should not be interpreted to
mean that the Funds had to “earn” the discount by making a separate supply each
time that a discount would be applied (Appellant’s Written Submissions on Sattva,
paragraph 19). Essentially, this would thwart the parties’ commercial goals and
lead to inconsistencies with the Fund’s treatment of the payment of the Management
Fee Distributions as trust distributions (Appellant’s Written Submissions on Sattva,
paragraph 19(a) and (b)). Instead, the conditionality of the discount addressed
concerns of differential entitlement to income or capital between beneficiaries
of a trust, contrary to subsection 104(7.1) of the ITA. It also ensured
the integrity of the new arrangement by preventing other investors from
challenging these arrangements because the fee reductions were not being used
to pay distributions to all of the investors in the Fund (Appellant’s Written
Submissions on Sattva, paragraph 20(a) and (b)). The language, contained
in the confirmation letters from the Funds to the Large Investors, merely
confirms that the Large Investors would receive Management Fee Distributions
from the Funds. It was not an agreement by the Appellant to make the
distribution itself to the Large Investors (Appellant’s Written Submissions on Sattva,
paragraph 21).
The
Respondent’s Position after Sattva
[47]
The Funds were distinct from the Large
Investors, to whom the Appellant directed the Funds to pay the distributions
(Respondent’s Written Submissions on Sattva, paragraph 9). The Funds
were liable under the Management Agreements to pay consideration for the supply
of management services by the Appellant, as they were the recipients of the
Appellant’s taxable supply (Respondent’s Written Submissions on Sattva,
paragraph 10).
[48]
The Funds did not realize any savings from the
management fee reduction that was negotiated between the Appellant and the
Large Investors. The fee distributions were amounts payable by the Funds under
the amended Management Agreements, in addition to the cash amounts paid by the
Funds to the Appellant/Manager (Respondent’s Written Submissions on Sattva,
paragraphs 11 and 12). Consideration is much broader in scope in these
circumstances and is not limited to cash paid by the recipient to the supplier
(Respondent’s Written Submissions on Sattva, paragraphs 13, 27 and 29).
Consequently, this Court should interpret the word “consideration” to include
the Management Fee Distributions payable by the Funds to the Large Investors.
[49]
The Appellant did not want the Funds to realize
any savings which would, in turn, benefit all unitholders and did not want to
reduce its management fees for all investors. For accounting and financial
statement purposes, the Funds recorded the distributions payable to the Large
Investors as a liability and recorded distributions paid to these investors as
an expense (Respondent’s Written Submissions on Sattva, paragraph 14).
These surrounding circumstances support the Respondent’s position that the
amounts payable by the Funds for the supply of management services were not
reduced.
[50]
If a supplier, in its discretion, reduces the
amount payable by the recipient solely on the condition that the recipient
should pay the difference to another party, the supplier has not reduced the
amount that the recipient is paying for the supply (Respondent’s Written
Submissions on Sattva, paragraph 16). The Appellant’s subjectively held
belief that the consideration paid by the Funds for GST/HST purposes was less
than the “gross” management fee is irrelevant (Respondent’s Written Submissions
on Sattva, paragraph 20). The Supreme Court of Canada has held that
nothing in the ETA requires that a supply have only one recipient (Calgary (City) v The Queen, 2012 SCC 20, [2012] 1 SCR and United Parcel
Service Canada Ltd. v The Queen, [2009] 1 S.C.R. 657). The Appellant’s
interpretation of the word “consideration” would import limitations into the
definition where none were intended by Parliament (Respondent’s Written
Submissions on Sattva, paragraphs 23 to 29).
[51]
The purpose of these fee arrangements was to
accord preferential treatment to a select group of investors. The Funds always
remained liable to pay the total “gross” management fees to the Appellant,
partly through cash payments directly to the Appellant and partly through
payments of special distributions to the Large Investors. This interpretation
is in accordance with the practical, common-sense approach adopted in Sattva
(Respondent’s Written Submissions on Sattva, paragraphs 30 and 31).
[52]
One point arising out of the parties’ further
submissions on the Sattva decision requires comment: The Respondent’s
argument that, from a practical, common-sense approach, the consideration paid
by the Funds has not been reduced simply because the Appellant (the supplier)
has reduced the amount payable by the Funds (the recipient) based solely on the
condition that the Funds pay the difference to another party (Respondent’s
Written Submissions on Sattva, paragraphs 12 to 16).
[53]
Put simply, the Respondent is saying that the
Funds must pay the Management Fee Distributions to either the Large Investors
or to the Appellant/Manager. Either way, the Funds will be paying the full
amount and, therefore, the consideration that is payable by the Funds has not
been reduced. It remains the “gross” management fees prior to the fee reduction.
This is predicated upon the view that it is the Manager that owes the special distributions
to the Large Investors. The Appellant referred to this as the “… directed
payment theory [which] really raises the question of conduit or trust or
something …” (Appellant’s Reply Submissions, Transcript, Volume 3, page 450).
This reference to “or something” that Appellant Counsel referenced I infer to
be an agency relationship when he uses the term “conduit” in the same sentence.
Agency was never argued except for this passing reference. Because I have
concluded that, according to my interpretation of the contracts, it was the Funds,
and not the Appellant, that had the legal obligation to pay the Large Investors
under the terms of the Declaration of Trust, I do not have to address the
agency/conduit reference.
[54]
The Funds enjoyed a benefit arising from their
access to the fee reduction during the time lapse between the payment of the
net management fee to the Appellant and Management Fee Distributions to the
Large Investors. The Funds paid a net management fee to the Appellant weekly
and at the end of the month, while the amount of the reduction of the
management fee was paid to the Large Investors as special distributions monthly
or quarterly. Contrary to the Respondent’s assumption that the trusts did not
receive the negotiated amounts, nor the benefit of the negotiated amounts (Reply
to the Notice of Appeal, assumption (t)), the Funds did receive a benefit
because they had access to those amounts for investment purposes for varying
periods of time. Although the evidence did not address exactly how long the
Funds had access to each Large Investor’s fee reduction, there clearly was a
time lapse between the time of the negotiated fee reduction and the eventual
distributions to those investors. In those time periods, the Funds enjoyed the
benefit of additional assets, alleviating the potential application of
subsection 104(7.1) so that there could be no argument that the distributions
created different entitlements to Fund assets as between beneficiaries of the
trust funds.
[55]
Even if I accepted the Respondent’s argument
that the special distributions constitute consideration to the Appellant, these
amounts must be reduced by some value assigned to the benefit. On this basis
alone, the Minister’s assumption, that “the funds paid the full amount of the
management fees originally agreed upon and did not receive a rebate of, or
reduction in, those fees” is demolished. The benefit would be the amount of the
return in respect to that fee reduction during whatever time period the Funds
had access to the negotiated amount of the fee reduction.
[56]
The Appellant’s approach to contractual
interpretation, which is at the heart of the issue in these appeals, is
supported by an abundance of jurisprudence, including the most recent Supreme
Court of Canada decision in Sattva. Where contracts are in written form,
as in these appeals, there is a presumption that the parties chose the words
that would reflect their intention and the resulting bargain they struck. The
objective for the Court is to examine the factual matrix or surrounding
circumstances in order to determine what the parties intended by the words they
chose to use in the contract. So the actual text of the agreement, together
with the context of the circumstances in which the parties bargained, will be
integral to the proper approach to contractual interpretation. The surrounding
circumstances will include an examination of the purpose of the contract, the
knowledge that the parties had at the time or which should have been available
to them when they were bargaining and at the date of the contract formation,
together with an examination of the industry standards, the market and the
commercial reality within which the parties were operating.
[57]
I am being asked to determine the value of the
consideration in respect to the Appellant’s supply of management services to
the Funds. The parties are in disagreement over which payments constitute
consideration as set out in a number of agreements, including several
amendments to some of those agreements. In these circumstances, it is
imperative that I take all of those surrounding circumstances into
consideration in determining the existing legal rights among the Manager, the Funds
and the unitholders in arriving at a determination of the value of the
consideration and a proper characterization of the Management Fee Distributions.
In fact, that is exactly what Sattva instructs me to do.
[58]
The Respondent’s proposed interpretation of
clauses in several key documents is at odds with the approach adopted in Sattva
and in prior jurisprudence.
[59]
The three documents, that are central to a
determination of the issue, are:
(a) the confirmation correspondence, dated October 2, 1995,
forwarded by the Appellant/Manager to the Large Investors;
(b) the Amendment to the Declaration of Trust; and
(c) the Amendment to the Management Agreement.
Although there
were a number of different amendments and contracts relating to the various
funds and time periods, the parties focussed on one set of documents as
representative of the entire group.
The
Correspondence to the Large Investors (the Confirmation Letter)
[60]
Much of this document involves the marketing and
intellectual property rights which are not relevant to the issues before me.
The relevant portion relating to Management Fee Distributions states:
[…] For greater
certainty, we acknowledge that, as a holder of units of the Mutual Funds,
subject to regulatory approval, commencing October 1, 1995, you will be
entitled to Management Fee Distributions (as described and on the terms set out
in the Prospectus), in respect of the units of each Mutual Fund held by you to
which such distributions are available, required to achieve the effective
annual management fee, per fund, set out below:
|
Net Asset Value (per fund)
|
Fee
|
|
up
to $1 million
|
0.95%
|
|
from
greater than $1 million to $3 million
|
0.85%
|
|
from
greater than $3 million to $5 million
|
0.75%
|
|
from
greater than $5 million to $10 million
|
0.70%
|
|
greater
than $10 million
|
0.65%
|
provided that, you
agree not to sell contracts of insurance which derive their performance from
the Mutual Funds to individuals or groups comprised of less than ten members.
As is
set out in the Prospectus, although there are currently no plans to terminate
the Management Fee Distributions, we reserve the right to discontinue or change
the Management Fee Distributions at any time.
[…]
(Joint Document Brief, Volume 1, Tab 7, pages 1 to 2)
[61]
The Respondent’s position is that an agreement
existed between the Appellant/Manager and the Large Investors pursuant to which
the Appellant had a legal obligation to cause the Funds to pay the Management
Fee Distributions to the Large Investors. Respondent Counsel, at page 383 of
the Transcript (the oral submissions) submitted that where the Funds made
distributions, there was a separate or “side agreement” or arrangement between
the Appellant and the Large Investors which would confirm the amount of the
distributions that the Large Investors would receive and how it would be
calculated. Respondent Counsel argued that it was the Appellant/Manager that
had the sole discretion to determine when an investor would receive a
distribution and what that amount would be. The Appellant also reserved the
right to discontinue or change the distributions at any time.
[62]
These so-called “side agreements” referred to by
the Respondent do not create legal obligations for the Appellant to pay any
amount to the Large Investors. The Appellant’s discretion was the ability to
negotiate directly with the Large Investors for a reduced management fee as a
means of attracting them to invest in the Funds. The legal obligation to pay
distributions to the Large Investors is created pursuant to the Declaration of
Trust instruments which are meant to govern the legal relationship between the
Funds and the investors. The contents of this correspondence do not create any
legal obligation for the Appellant to pay any amounts, either Management Fee
Distributions or any other type of payment, to the Large Investors. The correspondence
establishes two things: first, the Large Investors will be entitled to Management
Fee Distributions by virtue of being unitholders in the Funds; and second, the
entitlement to those distributions originates and flows from the terms
contained in the Offering Documents.
The Amendment
to the Declaration of Trust
[63]
The Declaration of Trust amended section 4.03 to
include the following provision:
2.3 […]
Section 4.03 is
amended by adding the following subsection (f) to that section:
(f) In the event that the Manager has decided to reduce the
management fee it charges to the Trust in respect of a Unitholder with
substantial holdings in the Trust and who satisfies any other criteria
established by the Manager from time to time, the amount of the reduction shall
be credited daily to such Unitholder, and shall be distributed to such
Unitholder and automatically reinvested in Units on such day or days in a
taxation year determined by the Trustee from time to time (a “Management Fee
Distribution”), except as set forth below. …
(Joint Document Brief,
Volume 1, Tab 5, pages 2 to 3)
[64]
It is apparent from this wording that the
obligation, for the Funds to pay Management Fee Distributions to Large
Investors, is created by the Declaration of Trust. The legal obligation or
liability to pay these special distributions arises through the wording
employed by the Declaration of Trust and not the Management Agreement. The
Large Investors were entitled to receive distributions as unitholders in the
Funds. The Declarations of Trust establish these special Management Fee
Distributions as a subset of the ordinary trust distributions which the Funds
are required to make. It is the trustee that holds the assets of a trust
pursuant to the terms contained in the Declaration of Trust. The special
distributions are not consideration for the Appellant’s supply of management
services to the Funds because they are being paid from the Funds, which are
separate legal entities, to trust beneficiaries as trust distributions.
[65]
The Respondent’s position is clearly evident in
the assumptions of fact set out at (t), (u), (v) and (w) of the Reply to the
Notice of Appeal:
(t) the mutual fund corporations and trusts did not receive
the negotiated amounts, nor the benefit of the negotiated amounts;
(u) the negotiated amounts did not relate to the original
supply of investment management services to the mutual fund trusts or
corporations by the manager;
(v) the manager charged the mutual fund trusts and
corporations the full amount of the management fees originally agreed upon;
(w) the funds paid the full amount of the management fees
originally agreed upon and did not receive a rebate of, or reduction in, those
fees;
[66]
The Respondent has assumed that the special
distributions were paid to the Large Investor from the Appellant’s fees, that
the Appellant charged full fees to the Funds and that the Appellant then made payments
of the reduced amounts to the Large Investors. However, Mr. Warren’s evidence,
which was not challenged on cross‑examination, was that the
Appellant/Manager did not make payments to the investors. There is no evidence,
oral or documentary, that could support the Respondent’s assumption that the
Appellant received the full fee and returned a portion to the investor. The
documents support the conclusion that the money never left the trust vehicle
except pursuant to the terms of the applicable agreements.
[67]
Paragraph 4.03(f) of the Second Amendment to the
Trust Declaration further clarifies that it was the Trustee of the Funds who
determined the day or days in a taxation year when the amounts of the reduction,
which were generally reinvested in units of the Funds, were to be distributed
to the unitholders. It also specifies other key points concerning distribution
including:
(a) how the amount of the Management Fee Distributions was to be
determined;
(b) when they were to be paid; and
(c) that they were to be paid first out of net income and then
out of net realized capital gains.
[68]
Article VI, “Determination and Distribution of
Net Income and Net Capital Gains”, of the Master Declaration of Trust confirms
that there were limitations associated with the discretion to pay distributions
and that it was the Trustee, not the Appellant, that possessed that
discretionary power. In particular, section 6.3, at paragraph (a) states:
SECTION 6.3 Unitholder
Entitlement for Tax Purposes
(a) Subject as hereinafter provided and subject to Article
XI, the Trustee shall have the sole discretion to determine if any distribution
or distributions of the property or assets of a Fund are to be made, the time
or times of such distributions and the record date or dates for the purposes of
determining Unitholders entitled to receive distributions. …
(Joint Document Brief, Volume 7, Tab 164,
page 19)
The Amendment to the Management
Agreement
[69]
The Management Agreement was amended as a consequence of the
Ruling obtained in 1995 to include the following provision:
11. The Manager may from time
to time reduce the management fee otherwise payable to the Manager hereunder by
an amount equal to the aggregate of the amounts agreed to with certain
unitholders on the condition that the Fund distribute to each particular
unitholder that portion of the amount of such reduction agreed to with such
unitholder. (Emphasis added)
(Example provided of the Americas
RRSP Fund, Joint Document Brief, Volume 1, Tab 19, page 000675)
[70]
The Respondent’s argument was that the phrase “on the condition
that” is the source of the legal obligation for the Funds to pay the Management
Fee Distributions to the Large Investors. The Respondent contended that,
pursuant to this agreement, the Funds are assuming the Appellant’s legal
obligation to pay the reduced amounts to the Large Investors as consideration
for the management services. The value of that consideration, Respondent Counsel
argued, is equal to the Appellant’s obligation to the Large Investors. In
support of this position, the Respondent relied on the reasons in Roberge
Transport Inc. v The Queen, 2010 TCC 155, [2010] TCJ No. 100, where it was
held that an agreement to incur an expense is the consideration or part of the
consideration for the purposes of the ITA.
[71]
The Appellant argued that Roberge has no application to
the issues before me because the Appellant was under no contractual obligation
to pay any amounts to the Large Investors. The Funds were not reimbursing an
expense or incurring an expense on the Appellant’s behalf and this is evident
in the documentation. Appellant Counsel also argued that the Manager was
permitted to reduce the management fees that it charged the Funds as a result
of the 1995 amendments that were implemented. As a result of this point of sale
reduction to the management fees, the Funds had the benefit of, and earned
income on, the remaining portion for the period between the payment of the cash
fees and the quarterly management distributions. This enabled the Funds to make
distributions to all of the trust beneficiaries in the Funds. Finally, the
Appellant noted that the guarantee cannot be equated to a direction or
diversion of the management fees payable from the Appellant to the Large
Investors because its presence in the documents is to ensure compliance with
the terms of the advance tax Ruling and to ensure that the retail investor
beneficiaries, as unitholders within the Funds, could not challenge those
special Management Fee Distributions.
[72]
With respect to the Management Agreement, I conclude that there
is sufficient evidence to infer that the objective intent of the parties was to
avoid the application of subsection 12(2.1) by eliminating any payment of an
inducement, directly or indirectly, between the Appellant and the Large Investors,
while at the same time avoiding the application of subsection 104(7.1) which
could attract double taxation. The numerous documents that are before me must
be interpreted from the perspective of this goal that the parties were
attempting to achieve, amid concerns as well that had been communicated to them
from the OSC. To prevent these rules from being triggered, it was the objective
intention of the parties to ensure that the Management Fee Distributions would
be separate from the fees that the Appellant charged the Funds for its
management services. Consequently, to achieve these goals, there could be no
payment from the Appellant to the Large Investors. In doing so, the
transactions adhered to the terms of the advance tax Ruling. From this, one
should not conclude that the income tax treatment of the payments will have any
direct bearing on my conclusions respecting the GST consequences in respect to
these payments. However, the Ruling and the ATR-65 (which described the income
tax rulings that CRA had provided to others in the industry) form part of the
factual matrix which must be reviewed in the contractual interpretation of the
documents before me. They are instructive of the commercial environment in
which the parties were operating at the time and of their objective intent, as
revealed through their efforts to achieve a particular income tax result. The
Ruling and the ATR-65 described transactions in which the income tax consequences
would be consistent with a Manager charging the Funds reduced fees provided the
Funds used the savings to pay special distributions to certain investors.
[73]
The Appellant’s primary concern in requesting the income tax
Ruling was to structure transactions so that subsection 104(7.1) would not be
engaged where entitlements from the Funds could be different as between the
Large Investors and the general retail investors. The new arrangements that
were implemented, subsequent to the Ruling, were meant to address the potential
application of subsection 12(2.1) of the ITA and the resulting double‑taxation
scenario concerning both the Funds and the investors.
[74]
The evidence adduced by the Appellant established that the
Appellant did, in fact, reduce its rate in respect to the management services
it was providing to the Funds and that this reduction occurred at the point of
sale. The fee charged by the Appellant to the Funds and, in turn, the amount
that the Funds were obligated to pay the Appellant for the management services
was equal to the reduced or net fee and, therefore, GST would be applicable on
this amount.
[75]
The Appellant’s proposed interpretation of the documentary
evidence accords with the approach in Sattva. The Respondent’s
propositions simply do not. Sattva instructs us to interpret the
documents generally, as well as the contentious provisions within them, from a
global perspective. That includes moving beyond the words and phrases
themselves to a review of the contracts as a whole. At the same time, I must give
the words used within the documents their ordinary and grammatical meaning but consistent
with and against the backdrop of the surrounding circumstances applicable to
the facts and the knowledge that the parties had, or ought to have had, during
the period when the contracts were being formulated.
[76]
The objective intent of the parties is connected to market events
that were occurring prior to 1995 and the requirement to ensure that the Large
Investors benefited from the negotiated lower rate that the Appellant had the
discretion to offer. As a result, and in accordance with the transactions
described in the income tax Ruling as well as the ATR-65, the Offering
Documents, including the Declaration of Trust, the Prospectus and the AIF, were
amended specifically to ensure that the Large Investors would receive the special
Management Fee Distributions as trust distributions from the Funds and that
those distributions would not be challenged.
[77]
According to the reasons in Sattva, the factual matrix
includes objective evidence of background facts that were known to, or within the
knowledge of, both parties when the contract was formed. Of course, this does
not extend to a consideration of the subjective intent of the parties, which is
viewed as inadmissible. The parties in the present case intended to implement
transactions described in the ATR-65 and the Ruling so that any prospect of
double taxation could be avoided, as it would have applied to the pre-1995
arrangements under which the parties originally operated. Although a
subjectively held belief, on its own, that certain actions should be taken in
order to avoid the possibility of double taxation, will never influence a court
on the tax treatment that ought to result, actual content, expressed in the
wording of the relevant documents, can be assessed in order to assist in ascertaining
the objective intent of the parties at the time of formation of the agreement,
in light of all of the existing surrounding circumstances.
[78]
At the end of the day, the totality of the surrounding
circumstances will be relevant where they are used by a court to assist in the
interpretation of the contract viewed as a whole while giving the words
contained therein their ordinary and grammatical meaning consistent with the
surrounding circumstances as presented in the evidence. Since the court’s findings
will often be fact specific, it is essential that the court have knowledge of
the relevant circumstances as they existed in the commercial market and,
generally, the external factors that came to bear on the parties taking
specific actions – all of which merely assist the court in drawing the proper
conclusions respecting the objective intent of the parties, as they chose to
express them, in the body of a contract.
[79]
I consider that the Ruling and the ATR-65 may be considered in
these appeals as they are a necessary piece of the overall puzzle as to why the
parties embarked on a course of action and why amendments were implemented in
1995. Although Sattva does not provide guidelines as to how subjective
intent is to be distinguished from objective intent and although the line
between what is subjective intention and what is not is not a particularly well‑delineated
line, applying a generous dose of common sense to the facts before me, I
conclude that I must consider them in looking at the contracts as they are
framed within the factual matrix. In doing so, I am cognizant that neither the
Ruling nor the ATR‑65 may be incorrectly used to create a new contract
between the parties. My consideration of these two documents is confined to
assigning them their respective roles within the surrounding circumstances in
order that they may assist me in reaching the proper interpretation of the
contracts before this Court.
[80]
When I look at the ‘big picture’ here, that is, the evidence of
David Warren and all of the documents before me in light of the surrounding
circumstances at the time, including: the commercial realities in which the
parties contracted, the business challenges concerning the application of
various provisions of the ITA that could have produced unwanted and
inequitable tax treatment, the duties owed to the investors and the necessity
of dealing with the concerns of the OSC, the correct conclusions, from both a
legal and commercial perspective, are that:
(a) the
Appellant’s management fees were discounted at the point of sale;
(b) the
net management fee is, in fact, only that reduced amount;
(c) the
Large Investors received the special distributions from the Funds as
unitholders in the trusts; and
(d) the
Appellant/Manager had no obligation, legal or otherwise, to pay distributions
to the Large Investors.
The
Assumptions of Fact Contained in the Reply to the Notice of Appeal
[81]
Although the Respondent’s argument, that the guarantee or
condition for the Funds to pay the Large Investors was a form of consideration,
may have had some merit if framed differently in the pleadings, the Respondent
did not adduce any evidence respecting the value of this liability. It was
evident that the value of this liability may not necessarily be equal to the
amount of the Management Fee Distributions. The Respondent, therefore, cannot
place reliance on the reasoning in Roberge, given the absence of any
legal obligation for the Appellant to pay any amounts to the Large Investors, in
order to argue that the value of the guarantee is equivalent to the exact
amount of the Management Fee Distributions.
[82]
The ITA provides that the value of non-monetary
consideration will be its fair market value. Ordinarily, the Appellant would
bear the onus to rebut an assumption respecting fair market value of the
guarantee or condition respecting the special distributions. However, in these
appeals, the Reply contains no assumptions whatsoever respecting the Minister’s
position on this theory. At assumptions (v) and (w), the Minister assumed that
the Appellant charged the Funds “the full amount” of the management fees, without
reduction or benefit or rebate. (Assumption (v) also referenced mutual fund
corporations – an indication the Minister has failed to distinguish the basic
differences between the legal arrangements applicable to mutual fund
corporations and trusts.)
[83]
The Minister also assumed that it was the Appellant that paid the
special distributions to the Large Investors (assumptions (r) and (s)). The
Appellant has demolished these assumptions as there is no basis at all in the
evidence before me that could give any credence to these assumed facts.
[84]
Paragraph 9 of the Reply to the Notice of Appeal, although not an
assumption of fact, states the Minister’s assessing position as follows:
9. The
Minister determined that the appellant was required to collect GST from the
mutual fund trusts (the “fund trusts”) calculated on the total management fees
payable by the fund trusts to the appellant. The distribution of fund units or
other amounts to certain investors (which the appellant has termed “Management
Fee Rebates” or “Management Fee Distributions”) did not reduce the management
fees payable by the fund trusts to the appellant. In computing net tax for the
reporting periods under appeal, the appellant was required to include the full
amount of GST collectible from the fund trusts.
This is consistent with the other
referenced assumptions that the guarantee or obligation for the Funds to pay
the Management Fee Distributions to the Large Investors had no value. It is not
surprising, then, that there was no assumption pleaded that addresses the value
of the obligation assumed by the Funds. Assumptions must be clearly worded and
precise so that an appellant can know the case it will have to meet. Where none
of the over two dozen assumptions address this matter even indirectly, the onus
is with the Respondent to bring forward evidence of the value of the guarantee
or obligation. The Respondent’s position, based on Roberge, is that the
value of the guarantee is the full amount of the Management Fee Distributions
paid to the Large Investors based on the purported existence of a legal
obligation on the Appellant’s part to pay special distributions to the Large
Investors. That purported legal obligation never existed between those parties.
Consequently, the Respondent has failed to establish the value of the
guarantee.
Conclusion
[85]
Management Fee Distributions paid by the Funds to the Large
Investors were not consideration for the Appellant’s supply of management
services to the Funds. They were a separate payment made pursuant to the trust
declarations governing the relationship between the Funds and the Large
Investors. The Appellant, as Manager of the Funds, negotiated a reduced fee
with the Large Investors and the Funds paid the money to the Appellant weekly
and at the end of each month. That reduced fee was the amount that was charged
by the Manager to the Funds and it is the only transaction which is subject to
GST. The “cash fees” were the only consideration for the supply of management services
that the Appellant was providing to the Funds. No other consideration was paid
or payable. The proper interpretation of the legal documents relating to the
relevant transactions, when taking into consideration the surrounding circumstances
that existed when the contracts were formed, together with the conduct of the
parties, is that the Appellant has properly charged, collected and remitted
applicable GST based on the correct value of the consideration, which was the
reduced amount of management fees charged to the Funds. This is consistent with
my interpretation of the Management Agreement between the Funds and the
Appellant as well as the Offering Documents.
[86]
The appeals are allowed, with costs to the Appellant.
Signed at Ottawa, Canada, this 23rd day of December 2014.
“Diane
Campbell”
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