Date:
20021115
Docket:
2001-1753-GST-G
BETWEEN:
BJ SERVICES
COMPANY CANADA,
the
successor to NOWSCO WELL SERVICE LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Miller
J.
[1]
On June 13, 1996, BJ Services Canada Inc. (BJ Canada) acquired
the shares of Nowsco Well Service Ltd. (Nowsco), the Appellant,
in a hostile takeover. In the weeks leading up to that
transaction, the directors of Nowsco received advice from RBC
Dominion Securities Inc. (RBC), Simmons & Company
International (Simmons) of Houston, Texas and the law firm of
Blake Cassels & Graydon (Blake), their financial and legal
advisors, in dealing with the hostile takeover bid. For such
services, Nowsco paid RBC $13,070,777 plus goods and services tax
(GST) of $914,765, Simmons $5,171,164 with no payment of GST, and
Blake $225,000 plus GST of $15,750. The Minister of National
Revenue (the Minister) assessed Nowsco denying it any input tax
credits (ITCs), assessing GST on the Simmons' fee and
assessing interest and penalties. This is the appeal of that
assessment.
Issues
[2](i) Is
Nowsco entitled to claim ITCs because, pursuant to section 169 of
the Excise Tax Act, the fees were incurred in the course
of Nowsco's commercial activities? and
(ii)
Was the Simmons' fee acquired for consumption exclusively in
the course of Nowsco's commercial activities and, therefore,
not an imported taxable supply in accordance with section 217 of
the Excise Tax Act, and consequently not subject to GST
pursuant to section 218?
The common
thread of course is whether the fees were incurred in the course
of Nowsco's commercial activities.
[3]
Although the parties addressed alternative arguments and also dealt with the
issue of interest and penalties, because I find that Nowsco did
incur the fees in the course of its commercial activities, it is
unnecessary to deal with those issues.
Facts
Background
[4]
Nowsco has been in business since the early 1960s. Mr. Stanley
Shouldice, the CEO, went through the history of the company with
some considerable pride. It was clear that he was devoted to this
business for well over 30 years. The business originally was
limited to pumping liquid nitrogen into oil wells, but over the
years evolved into a full-service company to make wells more
productive. The company grew from a handful of staff working
locally to over 2,000 staff working worldwide by the
mid-1990s.
[5]
Nowsco became a public company in 1971 at a time when the
revenues were approximately $3,000,000 annually. By the
mid-1990s, its revenues were in the hundreds of millions. The
number of shareholders decreased over the years as major Canadian
institutional investors became more interested in the company and
acquired large holdings. Mr. Shouldice indicated that by 1995
Nowsco was the largest company in Canada in its business in terms
of revenue, employees and research and development.
[6]
It is significant to note Nowsco's mission statement adopted
in the early 1990s. It reads as follows:
Nowsco will
ensure superior growth in shareholder value by providing
quality services and engineering to the international energy
market. Nowsco will accomplish this by providing the best value
to the client through quality management and industry leading
solutions delivered with integrity and safety by the best people
in the service industry.
Mr.
Shouldice testified that the reference to shareholder value was
intentionally stated first, as this was what the business was all
about. He confirmed that he spent some considerable time with
shareholder relations, by handling daily calls, by going on
shareholder road shows and by obtaining advice on shareholder
protection. Mr. Shouldice stated that shareholder confidence was
the driving force of the entire business. He believed the value
of the shares dictated how much Nowsco could raise in the capital
markets, with the least amount of dilution of the
stock.
[7]
Nowsco did not make any exempt supplies for the purposes of the
Excise Tax Act, other than earning insignificant amounts
of interest income, royalties, technical assistance fees and
financial fees and, any inputs relating to the earning of such
interest income, royalties, technical assistance fees and
financial fees are deemed by subsection 185(1) of the Excise
Tax Act to have been acquired or imported in the course of
Nowsco's commercial activities.
Takeover
of Nowsco
[8]
On April 1, 1996, representatives of BJ Services Company (BJ)
approached Nowsco, through Mr. Shouldice, to negotiate a friendly
merger, and proposed the purchase of all the common shares in
Nowsco for $27 per share (Initial Proposal). The shares were
trading in the $16 range.
[9]
On April 2, 1996, Nowsco's Board of Directors (the Board) met
to discuss the Initial Proposal and formed a special committee,
comprised of three independent Board members, to advise on all
matters relating to this proposal. At this meeting, Bennett Jones
Vercheres advised the Board that (i) the Board had a general duty
to act honestly, in good faith and in the best interest of the
corporation in determining whether or not to support the Initial
Proposal; (ii) that the directors had a fiduciary obligation to
obtain the highest price for Nowsco's shares; and (iii) that
the requirement to obtain the highest price for Nowsco's
shares had generally been interpreted to require the Board to
engage in an auction of Nowsco's shares and to retain
financial advisors to advise them of the value of Nowsco's
shares.
[10] Nowsco
immediately engaged the services of RBC as financial advisors
with respect to the Initial Proposal and any subsequent proposals
that might arise. Under the RBC agreement, RBC was exclusively
engaged as the Canadian financial advisor to Nowsco effective as
of April 4, 1996 with respect to the Initial Proposal and with
respect to any possible responses thereto, including the review
of alternatives to maximize shareholder value, including the
solicitation of additional takeover bid offers, a
recapitalization, asset sales or the sale of all or part of
Nowsco by way of merger, share exchange, amalgamation,
arrangement, reorganization or otherwise. The RBC agreement
further provided that the financial advisory services included,
without limitation, advice and assistance in evaluating the
Initial Proposal or subsequent offers and opinions as to the
fairness of the Initial Proposal or subsequent offers from a
financial perspective.
[11] On April 4,
1996, Nowsco engaged the services of Simmons, an investment bank
specializing in the oil service and equipment industry, as
special financial advisor to assist Nowsco and RBC in determining
a course of action with respect to the Initial Proposal and any
subsequent proposals that might arise. Mr. Shouldice indicated
the Board wanted an American advisor intimately familiar with the
oilfield service industry. That is all Simmons dealt with. The
Appellant's expert, Mr. Ian D. Bruce, confirmed that it was
common industry practice to have two financial advisors in this
type of situation. According to the Simmons' agreement,
Simmons was also engaged to:
(a)
assist with an understanding and presentation of the status and
potential impact of Nowsco's technology to potential
acquirers of Nowsco;
(b)
assist with efforts to approach other companies as alternatives
to takeover by BJ;
(c)
share industry data and information to assist Nowsco and RBC in
determining a fair value for the common shares of Nowsco;
and
(d)
respond to any of the requests from the Board and senior
management of Nowsco in their efforts to maximize shareholder
value.
As it was a
company operating in the United States, Simmons was not a
registrant for the purposes of the Excise Tax
Act.
[12] On April 9,
1996, the Initial Proposal was formally presented to Nowsco's
Board by representatives of BJ with the request that the Board
commit to negotiating exclusively with BJ until April 19, 1996,
the period given to the Board to consider and negotiate the final
terms of the Initial Proposal. The Board refused this
request.
[13] Mr.
Shouldice explained his attitude toward BJ at that time was less
than favourable for a number of reasons. He believed they were
poorly managed, had weak staff, inconsistent pricing and were not
well regarded. He had had a bad experience in the early 1990s
with them in a previous takeover attempt through a suggested
share swap; he believed they had misused confidential
information. He was also aware that they had pulled out of a
country in the middle of the night. All to say, he did not trust
them. Reaction from his employees and major customers was
similar. The employees did not want to work for BJ. The Board
therefore put a stay bonus in place, so that if employees were
terminated, they would receive attractive bonuses. Major
customers indicated they would not contract with BJ. Mr.
Shouldice saw all that he had worked for dissipating before his
eyes. He sought advice from the advisors on how to thwart this
particular takeover, primarily by seeking a white
knight.
[14] On April
12, 1996, BJ Canada formally offered the Initial Proposal to
shareholders of Nowsco.
[15] On April
16, 1996, the Special Committee engaged Blake to provide it with
legal advice regarding the independence of the Committee and a
number of other legal issues that arose from April 2, 1996, to
June 13, 1996.
[16] On April
19, 1996, RBC advised the Board that, in RBC's opinion, the
consideration under the Initial Proposal was inadequate. RBC
provided a formal opinion to this effect to the Board on April
22, 1996. The Board also received the report of the Special
Committee on the same day, recommending that the Board advise
shareholders to reject the Initial Proposal. The Board
consequently unanimously recommended to the shareholders of
Nowsco that they reject the Initial Proposal.
[17] From April
2, 1996, Nowsco and its advisors were in contact with other
parties interested in acquiring the assets of Nowsco, the common
shares in Nowsco, or a combination thereof. It was clear from the
advisors that the Board had a duty to get the maximum price for
the shares. The Board could be liable if it could not prove they
maximized the price. The options considered by the Board were: to
just say no, though the advice received was that this was not a
viable option given the duty on the Board; to attempt an internal
rearrangement, though this appeared unfeasible as being
unaffordable; or to proceed to a broad auction, in effect seek
the white knight.
[18] Out of the
blue, Nowsco received an expression of interest from Great Lakes
Chemical Corporation (GLCC), and between April 29 and May 2,
1996, Nowsco and its advisors met with GLCC to negotiate terms of
an offer to acquire the common shares of Nowsco.
[19] On May 4,
1996, Nowsco and GLCC entered into a pre-acquisition agreement
whereby GLCC agreed to make a takeover bid to acquire the common
shares in Nowsco at a price equal to $30.90 per share on terms
described in the agreement.
[20] On May 6,
1996, RBC provided Nowsco with an opinion that the GLCC offer was
fair from a financial point of view. On the same day, GLCC made
the offer to shareholders of Nowsco. Coincidentally, the Board
issued a directors' circular of the shareholders from Nowsco
recommending the GLCC offer. Mr. Shouldice described his reaction as
follows:
Well, it
was an answer to my prayers from the standpoint that Great Lakes
did not know anything about the oilfield service business so they
would need us, they would need our staff, they had no intentions
of changing our name and as a matter of fact one of their first
requirements was to have myself and all of our key management
people sign employment contracts that we would stay, so it
appeared to me that this white knight was utopia, it was going to
give us a new shareholder that was going to pay more than $27.00.
It was going to give us a company that would let us operate
Nowsco as an entity and they brought with them a large chemical R
& D component which I felt would complement our business,
because a lot of what we do is pumping chemicals, so the whole
marriage was
utopia.
[Transcript pages 56-57]
[21] On June 3,
1996, BJ Canada amended their Initial Proposal by increasing the
consideration to $35 per share and extending the offer period to
June 13, 1996.
[22] On June 6,
1996, RBC provided Nowsco with an opinion that the second BJ
offer was fair from a financial point of view. That same day, the
Board issued a directors' circular to the shareholders of
Nowsco recommending the second BJ offer. As Mr. Shouldice said,
he felt that they had won the battle but lost the war. Out of a
sense of vindictiveness, he was pleased to see BJ having to pay
so much for the shares, but he was concerned as to the future of
his company.
[23] On June 13,
1996, BJ Canada acquired greater than 90 percent of the common
shares in Nowsco, which allowed BJ Canada to acquire all of the
issued and outstanding common shares in Nowsco by virtue of the
compulsory acquisition provisions of the Business Corporation
Act of Alberta.
Fees paid
to RBC, Simmons and Blake
[24] The fees
outlined in the RBC agreement for the financial advisory services
provided by RBC depended on whether a transaction resulted from
the Initial Proposal or any subsequent proposals within one year
of the RBC agreement. If no transaction occurred, RBC would have
been entitled to a fee equal to $2,000,000. If a transaction
occurred which resulted in a change of control of Nowsco, then
RBC was entitled to an incentive-based fee in addition to the
$2,000,000 fee.
[25] Under the
RBC agreement, Nowsco was required to pay an initial engagement
fee of $500,000 immediately and a further $150,000 upon the
provision of an opinion on the fairness of the Initial Proposal.
These fees were deposits to be applied against the fees described
above. The $500,000 engagement fee was paid on April 22, 1996,
and the $150,000 fee payable on the provision of a fairness
opinion was paid on April 24, 1996. As the takeover resulted in a
change of control of Nowsco, RBC was entitled to the
non-contingent fee of $2,000,000 plus the incentive fee.
The aggregate fees paid to RBC including the engagement fee, was
$13,070,777 (the RBC fees), the balance of which was paid on June
7, 1996. Nowsco also paid GST with respect to the RBC fees. The
aggregate amount of GST paid by Nowsco with respect to the RBC
fees was equal to $914,765.98.
[26] In
consideration for their financial advisory services, the Simmons
agreement provided that Simmons was entitled to a non-contingent
fee equal to US$250,000 plus an incentive fee based on the value
of a closed transaction in excess of the Initial Proposal,
subject to a minimum of US$250,000. Under the Simmons'
agreement, Nowsco was required to pay the non-contingent fee
equal to US$250,000 immediately and the incentive fee on the
closing date of the transaction. The non-contingent fee was paid
by wire transfer on June 12, 1996. On the closing of the
takeover, Simmons was entitled to the incentive fee. The
aggregate fees paid to Simmons including the non-contingent fee,
was US$3,759,425 or C$5,171,164.
[27] The
aggregate fees paid to Blake for legal services was $225,000 (the
Blake fees). Nowsco also paid GST with respect to the Blake fees
in the amount of $15,750. These fees were paid on June 11,
1996.
[28] The RBC
fees, the Simmons fees and the Blake fees were reasonable in the
circumstances.
Expert
evidence
[29] Mr. Bruce
was presented and accepted as an expert in mergers and
acquisitions, the expectations of public capital markets and
response of directors in hostile takeover bids. He advised that
the merger and acquisition activity throughout the 1980s and
1990s simply became part of the day-to-day activities of the
capital markets. This led to reports such as the Dey Committee
dealing with corporate governance and specifically the obligation
of boards to shareholders. The conclusion by the Dey Committee
and the response of the public company community was that the
directors' obligations in mergers and acquisitions were for
the protection of shareholders. This further resulted in public
company boards seeking and obtaining advice for preparing the
company for potential takeover bids, including putting in place
shareholder rights protection plans. Indeed, Nowsco had
instituted such a plan prior to the takeover bid by
BJ.
[30] Mr. Bruce
described Canada as moving toward a U.S. type approach, which
puts an onus on directors to shop until they drop in seeking a
maximum price for shareholders. Typically, a board in a hostile
bid is faced with four options:
(i)
if not a bona fide offer just say no;
(ii)
negotiate - according to Mr. Bruce this is seldom viable as
normally one gets the best price by talking to others;
(iii)
recapitalize or other internal rearrangement; and
(iv)
broad auction - this is the option Mr. Bruce indicated is the
norm in the industry.
[31] He
confirmed that directors would always obtain financial and legal
advice in facing a hostile takeover. He further confirmed that
the expectation of a board in a hostile takeover is to discharge
its duty of good faith, to look after the best interests of the
company and the shareholders, to obtain the maximum value for
shares and, ultimately, to let the shareholders
decide.
[32] With
respect to Nowsco's actions, Mr. Bruce summarized his view of
those actions as being a classic textbook reaction. They did
everything right. Their reaction was consistent with both
regulators' and shareholders' expectations.
The
assessment
[33] Nowsco
claimed ITCs for the GST paid with respect to the RBC fees and
the Blake fees in the amount of $914,965.98 and $15,750,
respectively, in accordance with subsection 169(1) of the
Excise Tax Act. On February 15, 2000, Canada Customs and
Revenue Agency (CCRA) sent Nowsco a letter proposing to deny the
ITCs claimed with respect to the RBC fees, other than $150,000
paid on the provision of the first fairness opinion, and the
Blake fees and to assess GST with respect to the Simmons fees. On
March 29, 2000, the Minister assessed the Appellant in accordance
with this letter. Interest and penalties were also assessed
pursuant to subsection 280(1) of the Excise Tax Act in the
amount of $241,000 and $338,900.04, respectively.
Analysis
[34] The simple
issue is whether the fees were incurred by Nowsco in the course
of its commercial activities. The issue is framed thus due to the
wording of section 169 of the Excise Tax Act, the relevant
parts of which read as follows:
169(1) Subject to this Part, where a
person acquires or imports property or a service or brings it
into a participating province and, during a reporting period of
the person during which the person is a registrant, tax in
respect of the supply, importation or bringing in becomes payable
by the person or is paid by the person without having become
payable, the amount determined by the following formula is an
input tax credit of the person in respect of the property or
service for the period:
A x B
where
A is the
tax in respect of the supply, importation or bringing in, as the
case may be, that becomes payable by the person during the
reporting period or that is paid by the person during the period
without having become payable; and
B
is
...
(c)
in any other case, the extent (expressed as a percentage) to
which the person acquired or imported the property or service or
brought it into the participating province, as the case may be,
for consumption, use or supply in the course of commercial
activity of the
person.
[my emphasis]
[35]
"Commercial activity" is defined in section 123
as:
a business carried on by the person (...) except to the extent to
which the business involves the making of exempt supplies by the
person ...
It appears
from this definition that two elements of Nowsco's activities
will not qualify as commercial activities; first, activity
relating to the making of exempt supplies by Nowsco, and second,
non-business activity, which I take to mean activity of a
personal nature. Given that Nowsco did not make any exempt
supplies, it is only if the fees are considered as having a
non-business or personal element that would remove them from
commercial activity for purposes of section 169. This is subject,
however, to whether "commercial activity" is further
clarified by any other provisions of the Act, specifically
whether section 141.01, as the Respondent contends, applies to
remove the fees from having been made in the course of a
commercial activity, because they are not directly related to the
making of taxable supplies.
[36] I approach
this analysis by first determining whether, based solely on an
interpretation of section 169, the fees were incurred in the
course of Nowsco's commercial activities. If I find they were
not, that is the end of the analysis, as Nowsco would not be
entitled to the ITCs claimed. If I find, as I do, that the fees
were used in the course of Nowsco's commercial activities, it
is then necessary to consider whether section 141.01 applies to
deem what prima facie is considered to be in the course of
commercial activity, to not be in the course of commercial
activity. This will involve the interpretation of section 141.01
applying the well-established approach of Professor
Driedger to statutory interpretation. There is then an
alternative analysis I will briefly explore which focuses on the
supply from Nowsco's directors to its shareholders. Finally,
I will conclude with a discussion as to whether the result I
reach is sustainable from the perspective of the policy of the
GST legislation.
[37] Returning
then to the starting point, were the fees incurred in the course
of a business carried on by Nowsco or were they incurred in the
course of a non-business or personal venture? The Appellant
argues that it offends common sense to suggest Nowsco's
directors' response to the takeover bid, as required by law,
falls outside commercial activity. The advice received by the
Nowsco directors was that they were obliged to maximize
shareholder value - that was the duty of the directors of a
public company and as such cannot be divorced from the business
of the company. The Appellant stresses that maintaining
shareholder confidence with respect to the share value of the
company is a driving force of any public company business, and
specifically so in this case, as illustrated by the very wording
of the company's mission statement. Finally, the Appellant
contends that when Nowsco went public to access public capital
markets, it committed to doing whatever was legally required or
commercially expected of one who accesses those markets. This is
what Nowsco did and this must, therefore, be in the course of
carrying on its business.
[38] The
Respondent contends that the fees constituted a shareholder
benefit. They were not incurred for the benefit of the company,
had no impact on the company's capacity to make taxable
supplies and, therefore, cannot be said to be in the course of
the company's commercial activity. Even if section 141.01
does not directly come into play, the Respondent maintains that
it provides a useful gloss on what is intended under subsection
169(1), and that is, that consideration must be given to the
purpose of an input, in determining whether it falls within the
course of a commercial activity. The Respondent argues that that
purpose must be in connection with the making of taxable
supplies. Finally, the Respondent maintains the fees relate to
the market in corporate securities and not to the production
chain: it is only inputs in connection with that production chain
of goods and services that are within the course of a
company's commercial activity.
[39] There are
several factors to consider in determining the business versus
non-business nature of the inputs in issue. I agree with
the Respondent that the purpose for the input is a factor, though
not the overriding factor (as it would be if section 141.01
applied - an issue I will deal with later). Other factors,
however, to consider are: for whose benefit was the input
incurred; the context within which the input was incurred
including what is the business of a public company; and case law
dealing with what constitutes commercial activity.
Purpose
of input
[40] What was
Nowsco's purpose in seeking advice on how to deal with the
hostile takeover? Mr. Shouldice acknowledged that ultimately it
was to assist in obtaining the maximum shareholder value for the
company's shareholders. However, he expressed some tension
between that objective and that of ensuring the long-term best
interest of the company. It was clear he was overjoyed at the
GLCC offer as it promised a rosier future for the company. He
wanted his advisors to find that white knight. He was somewhat
bitter that the goal of maximizing shareholder value resulted in
the acceptance of the BJ offer. There was an element, therefore,
in seeking the advice that went beyond the sole purpose of
maximizing shareholder value; that is, there was an element that
pertained to the ongoing viability and economic health of the
company to provide its oilfield service. I accept, however, that
that objective was secondary to the main purpose of maximizing
shareholder value, although having such a secondary objective
does indicate a connection to the goods and service marketplace,
to the provision of taxable supplies and, therefore, not
exclusively to the corporate marketplace.
[41] In
considering the primary purpose to maximize shareholder value, I
am not convinced that even that purpose is devoid of any
relationship to the making of taxable supplies. While the purpose
is most directly connected to the corporate marketplace, rather
than the goods and services marketplace, the two necessarily
overlap in a public company context. The public company is in
that corporate marketplace to access funds. It is critical that
that marketplace have confidence in the company's ability to
maintain and grow its value. This is done in a number of ways. As
Mr. Shouldice indicated in answer to the question as to what
drives up shareholder value:
Honesty,
integrity, delivering the profits or the increased returns that
we forecast. ... we would make a commitment that we thought that
we could do something next year and delivering on that commitment
is an important part of your shareholder value. In other words,
there is short-term shareholders and there is long-term
shareholders. The short-term ones, they are just looking at
dollars and the long-term ones are looking at growth, so if you
can present a picture and deliver on a long-term growth pattern
that is increasing the shareholder value, it has some substance
to it.
[Transcript page 79]
So,
responding as forecast is an important factor in Mr.
Shouldice's mind. I agree. A company that does not behave as
commercially expected will lose that corporate marketplace
confidence, and suffer the financial consequences. Those
consequences will go directly to the company's ability to
sustain a profitable business. Had Nowsco's directors not
responded in the textbook fashion, as Mr. Bruce described,
what would the consequences have been to the ongoing
commerciality of the goods and service business? Chaos perhaps,
uncertainty definitely - each of which would have negatively
impacted on the ability of Nowsco to make its taxable
supplies.
[42] While the
purpose of maximizing shareholder value in these circumstances is
not directly linked to the making of taxable supplies, it is not
totally disconnected either. Combined with a secondary purpose
that I am satisfied was in the company's best interest, I
conclude that the purpose factor in this case does not take the
inputs outside the realm of commercial activity for purposes of
section 169.
Benefit
from input
[43] Turning
next to the factor of who benefitted from the company's
payment of the fees, there is no question the shareholders were
the main beneficiaries. But is this the same sort of benefit a
shareholder would derive for example from having his company pay
all the utilities for his personal residence, which also serves
as the company's office? I do not believe it is. This is not
a case of one shareholder reaping a specific personal benefit
completely unrelated to the fortunes of the company. This is the
group of shareholders collectively benefitting from the
reputation, track record and future prospects of the business of
the company, which garnered such confidence in the marketplace to
yield a top dollar. The benefit is ultimately tied in to the
overall operation of the public company. And with Nowsco in
particular, given its approach as exemplified in its mission
statement, every effort of the business went towards maximizing
shareholder value. As Mr. Shouldice pointed out, that was
the essence of the business. As such, I have some difficulty in
identifying the benefit resulting from the financial consulting
services as a sort of "personal" benefit that would
take the fees outside the realm of commercial
activity.
Context
of input
[44] Turning to
the context within which the fees were incurred as another factor
in determining whether they were incurred in the course of
commercial activity, I accept the Appellant's assertion that
it offends common sense to consider otherwise. The directors of
Nowsco, in hiring consultants, were doing exactly what the
lawyers told them they were bound to do - get help in handling
the takeover bid, including, according to the agreement with
RBC:
with
respect to any possible responses thereto, including, without
limitation, the review of alternatives to maximize shareholder
value including the solicitation of additional takeover bid
offers, a recapitalization, assets sale, or the sale of all or
part of [Nowsco] by way of merger, share exchange, amalgamation,
arrangement, reorganization or otherwise.
[Statement
of Agreed Facts]
Clearly,
every avenue was to be explored and other potential purchasers
sought. The duty of the directors had shifted from one of
primarily acting in the best interests of the company to acting
to maximize shareholder value. The Respondent would suggest this
moved the actions of the directors out of the goods and service
marketplace and into the corporate marketplace; in other words,
out of the "business" of Nowsco. I believe that in the
public company context, that puts too narrow a definition on
business. The business of Nowsco was operated in both
marketplaces, for without efforts expended in the corporate
marketplace, the company's ability to access the capital
integral to its day-to-day operation would be limited. How can
this not be part of its business? Mr. Shouldice spent part
of every day dealing with shareholder issues. He went on road
shows to market his company. This was expected. This was
business. Further, I do not view the hiring of financial
consultants and the subsequent provision of information to the
shareholders as being a separate financial service business of
Nowsco. That stretches the concept of business in a more elastic
fashion than is sensible.
Case law
re: input
[45] Before
leaving this issue of what does and does not fall within the
purview of commercial activity, I wish to address some of the
cases raised by the Respondent. The Respondent relies on the
cases of 398722 Alberta Ltd. v. R.
and London Life Insurance Co. v. R.
for the proposition that one must identify the specific supply
that is most closely connected to the input. In this case, the
Respondent suggests it is the exempt supply of the shares.
However, in neither 398722 Alberta Ltd. nor London
Life was the supply at issue a supply of a third party. In
both cases, the supply was a supply of the taxpayer. That is a
significant difference in the case before me. There is no doubt
the inputs here are most closely connected to a supply of shares
but it is not a supply of Nowsco. This fact can
only be ignored by somehow piercing the corporate veil or
establishing some type of agency relationship between the
shareholder and Nowsco: this was not argued.
[46] If there is
a principle that the inputs must be most closely identified with
a supply to determine their eligibility for the ITC, the supply
must be a supply of the taxpayer. The taxpayer, Nowsco, only made
taxable supplies, unless one considers the proffering of
information by the directors to the shareholders as a supply
other than a taxable supply. I will deal with this issue in my
alternative analysis.
[47] The
Respondent then relied on the Tax Court of Canada case of
Boulangerie St-Augustin. v. The Queen
approved by the Federal Court of Appeal. This was an income tax
case dealing with the deductibility of expenses relating to the
preparation of information circulars in the course of three
takeover bids. The analysis by Archambault J. involved a two-step
review of the expenses: first, whether they qualified pursuant to
the general provision of subsection 9(1) of the Income Tax
Act which brings profit into income. This necessitates the
application of accepted principles of commercial trading.
Archambault J. found that business people consider these expenses
as necessary business expenses. He then took the second step to
determine if the limiting provisions of section 18 applied to
deny deduction unless incurred for the purpose of gaining or
producing income. This specific restricting purpose-based
provision has no counterpart in the Excise Tax Act
provisions with which the case before me is concerned. I am only
dealing with whether the inputs (the fees) were incurred in the
course of carrying on a business. I would suggest that the
equivalent test, if I am going to receive any help at all from an
income tax case, is Judge Archambault's first step - what are
the accepted principles of commercial trading. I was provided
with no evidence, expert or otherwise, as to the common
commercial treatment of these inputs vis-à-vis the
availability of ITCs. The lack of any precedent on this issue and
the fact the Appellant presumed the ITCs were available, leaves
me to conclude the commercial practice is to seek and expect the
ITCs. This is by no means determinative. However, I do not find
the Boulangerie case assists the Respondent's case,
but if anything assists Nowsco's.
[48] The
Respondent went on to refer to a Canada Customs and Revenue
Agency Communiqué dated February 8, 2000, dealing with the
Boulangerie decision. In expounding its policy, the
Department stated at page 3:
Costs
incurred to fight a take-over bid and maintain the status
quo, in particular by hiring expert advisors to assist the
company in putting a defence mechanism in place, are not
deductible by virtue of paragraph 18(1)(a) of the
Act.
Implicit in
this statement is the acceptance that left to a determination of
profit, in accordance with accepted principles of commercial
trading, these expenses would be deductible: it is only the
second step, the application of paragraph 18(1)(a) that is
not met. Again, in GST terms there is only the question of
"commercial activity", without the restriction of an
equivalent paragraph 18(1)(a) requiring a certain purpose.
As I have already indicated, "purpose" is a factor to
consider in determining "commercial activity", but I am
not of the view that one needs an exclusive purpose of making
taxable supplies to qualify for the ITCs. (Bear in mind I am
still reviewing this issue without yet having explored the
applicability of section 141.01)
[49]
Respondent's counsel also referred me to a couple of United
Kingdom cases for guidance: BLP Group plc v. Customs and
Excise Commissioners and the
Commissioners of Customs and Excise v. Redrow Group plc. The legislation
considered in the latter case was similar to section 169, in that
a taxpayer was entitled to an ITC on "goods and services
used or to be used for the purpose of any business carried on or
to be carried on by him". The House of Lords concluded that
a taxpayer who makes only taxable supplies is entitled to credits
for all of its input tax. The Court distinguished the earlier
BLP case as follows:
But the BLP
case was concerned with a point which seems to me to be entirely
different from that which arises here. In that case services had
been supplied to BLP in connection with the sale of shares, which
was an exempt supply. The argument that had been used for the
purposes of BLP's taxable transactions had to look beyond the
direct and immediate link with the exempt supply to the ultimate
aim of the sale, which was to raise funds to pay off debts. In
the present case there is no problem of allocation of that kind.
It is agreed that all the supplies which Redrow makes in the
course or furtherance of its business are taxable supplies. So it
is not necessary to examine each of the transactions on which it
claims to be entitled to deduct input tax in order to determine
whether there is a direct and immediate link with a supply which
is taxable. That exercise only becomes necessary where the
evidence shows that the taxable person makes supplies some of
which are exempt supplies or is carrying on an activity other
than the making of taxable supplies: ... The question then is
whether there is a direct and immediate link with an exempt
supply or with a supply which is not taxable. Where, as in this
case, all the supplies which the taxable person makes in the
course or furtherance of its business are taxable supplies, the
only question which has to be addressed is whether the supplies
on which it seeks to deduct input tax have been used or are to be
used for the purposes of the business ...
...
Questions such as who benefits from the service or who is the
consumer of it are not helpful. The answers are likely to differ
according to the interest which various people may have in the
transaction. The matter has to be looked at from the standpoint
of the person who is claiming the deduction by way of input tax.
Was something being done for him for which, in the course or
furtherance of a business carried on by him, he has had to pay a
consideration which has attracted Value Added Tax? The fact that
someone else - in this case, the prospective purchaser - also
received a service as part of the same transaction does not
deprive the person who instructed the service and who has had to
pay for it of the benefit of the deduction.
[50] I find
these comments useful in cementing my view that I should only
look at the supplies of the taxpayer (Nowsco) in determining the
eligibility for ITCs. I should not deny the ITC on the basis of
an exempt supply of the third-party shareholder. I then come full
circle to the issue of whether the inputs relate to a business of
Nowsco's, other than the making of taxable supplies. I find
there is no other business. I also find these expenses are not of
a non-commercial or personal nature. They were incurred in the
course of Nowsco's commercial activity.
Section
141.01
[51] Is section
141.01 to subsection 169(1) of the Excise Tax Act as
paragraph 18(1)(a) is to section 9 of the Income
Tax Act? Having found that the fees are inputs eligible for
the ITC pursuant to section 169, does section 141.01 now
come into play to deem it otherwise?
[52] The
Respondent argues that section 141.01 and section 169 must be
read together and, in doing so, there is a clear requirement of a
connective test for an activity to qualify for the ITCs; that is,
ITCs are only available if the inputs, the fees in this case, are
acquired for the purpose of making taxable supplies for
consideration. To support the argument that section 141.01
requires this connective link, the Respondent referred me again
to the 398722 Alberta Ltd. and the London Life
cases. In the 398722 Alberta Ltd. case, Justice Sharlow
was dealing with a company engaged in both taxable and exempt
supplies, but did not go so far as to suggest that section 141.01
clarifies section 169 for companies only engaged in making
taxable supplies. Justice Rothstein's comments in London
Life may, however, be more supportive of the Respondent's
position. In London Life, it was clear the basic business
of London Life was the provision of exempt supplies, but
Justice Rothstein identified the leasehold allowance
received by London Life as more closely connected to the
supply of leasehold improvements by London Life back to
the landlord. Justice Rothstein found in effect that the
acquisition of construction property and services by London
Life to make its leasehold improvements constituted a
separate business, a commercial activity involved in the making
of taxable supplies.
[53] Both these
cases, however, dealt with situations of supplies (taxable or
exempt) made by the taxpayers themselves. Neither addressed the
situation before me where the exempt supply is a supply of a
third party. Also, I do not see the provision by Nowsco's
directors of information to its shareholders as constituting the
type of separate business that Justice Rothstein found existed in
the London Life case, by the provision of leasehold
improvements from London Life to the landlord.
[54] The
Appellant argues that section 141.01 is not meant to be a definer
of section 169 - it is an apportionment provision only. It cannot
have any application to a company such as Nowsco that only makes
taxable supplies. The Appellant indicates there is no case
support for an interpretation that section 141.01 requires
any connective link between the purpose of the input and its
eligibility for the ITCs, other than in an apportionment sense to
a company engaged in making both taxable and exempt supplies. It
was not intended to push any indirect inputs out of the ITC
system.
[55] The
Appellant relies on the press release from the Department of
Finance dated April 30, 1993,
announcing the introduction of this legislation:
The
Government of Canada today tabled in the House of Commons a
Notice of Ways and Means proposing amendments to the Excise
Tax Act that are designed to clarify the requirement to
apportion GST paid on indirect inputs for registrants, such as
financial institutions, who make both taxable and exempt supplies
of goods or services.
Under the
GST, like value-added tax systems in other countries, suppliers
of exempt goods or services are not relieved of tax on their
inputs to the extent that the inputs relate to the making of
exempt supplies. When a Registrant's business involves making
both taxable and exempt supplies, the Registrant is required to
apportion tax on inputs in determining the amount of input tax
credits that the Registrant may claim. ...
[56] The
Appellant also refers to the explanatory notes to the draft
legislation:
New section
141.01 is designed to clarify and reinforce the requirement to
apportion the use of inputs, based on the extent to which the
inputs are used or consumed, or acquired or imported for
consumption or use, for the purpose of making taxable and
non-taxable supplies. ...
... As
noted above, a business is not a commercial activity to the
extent that it involves the making of exempt supplies. This means
that, for example, the internal audit department of a financial
institution that makes both taxable and exempt supplies is, in
part, within the scope of a commercial activity, and, in part,
outside that scope since it is part of what is involved in the
making of both types of supplies in the course of the
business.
New section
141.01 is added only to reinforce this concept that the ultimate
purpose of making supplies of some kind involves all aspect of
the business. The new section removes any confusion that in this
regard by, in effect, requiring an attribution of all costs to
the making of supplies.
[57] In
following the principles of statutory interpretation set down by
Professor Driedger and accepted at all levels of Canadian
courts, it is necessary to read the words of section 141.01 in
their entire context and grammatical and ordinary sense
harmoniously with the scheme of the Act, the object of the
Act, and the intention of Parliament.
[58] The context
of the provision is that it appears in Division I, the
Interpretation Division of Part IX, under a subheading
"Supplies and commercial activities". The heading of
subsection 141.01(2) is simply "acquisition for purpose of
making supplies". Certainly, the provision has something to
do with the interpretation of commercial activity. Although the
heading does not refer to the apportionment nature of the
section, the ordinary meaning of the wording and structure of the
section does suggest it is meant to allocate inputs between the
purpose of making taxable supplies and the purpose of making
supplies that are not taxable or a purpose other than making
supplies. It is not set up as an either/or section; there is an
"and" between subsections (a) and (b),
not an "or". That leads to the interpretation that the
input is not meant to fall totally on one side or another, but is
indeed to be allocated. Neither the Appellant nor the Respondent
argued that this was a case suitable for an
apportionment.
[59] On an
ordinary, plain meaning approach, I find the provision more aptly
reflects the apportionment nature suggested by the Appellant, and
does not inject a general purpose test into the definition of
"in the course of commercial activity" for the purpose
of including or excluding entire inputs.
[60] This
meaning is supported by the press release referred to earlier and
the explanatory notes likewise already cited.
[61] Section
141.01 does not explicitly state that it is, nor that it is
intended to serve as, a general rider on the definition of
commercial activity. I do not interpret it as requiring a purpose
test before any input can be found to have been incurred in the
course of commercial activity. It is simply meant to apportion
inputs of a taxpayer who makes a combination of taxable supplies
and exempt supplies or a taxpayer who incurs inputs for the
purpose of making taxable supplies and for a purpose other than
making supplies. In those circumstances, a specific input must be
apportioned.
[62] Frankly, I
have concluded that the legislators did not contemplate this
specific type of input in drafting section 141.01. Nothing in the
releases or explanatory notes gives any clue that they did. These
clarifying materials confirm Parliament's intent was to
apportion an input, not to determine whether the whole input is
or is not eligible for the ITC. I find that the stringent purpose
test contained in section 141.01 is not applicable to
Nowsco's case and, therefore, does not alter a finding that
the fees were incurred in the course of commercial activity. To
deny ITCs to a company such as Nowsco, that only made taxable
supplies, for inputs such as financial advisory fees incurred in
a hostile takeover scenario, the legislation should be explicit
and not left to cross-referencing and implication.
Alternative Analysis
[63] I feel
reinforced in my conclusion by an analysis that does not focus on
the supply of shares by Nowsco's shareholders as the supply
to which the inputs most directly relate, but to the supply of
advice by Nowsco to its shareholders as the relevant supply for
purposes of making a connective link between the input and
output. The definition of supply is certainly
broadly enough written to encompass the provision of information
and advice from Nowsco's shareholders for no consideration.
The question to then ask is whether the supply of advice is a
taxable or exempt supply. Advice such as this is specifically
excluded from the definition of financial service which
reads:
123(1) financial service"
means
(a) the
exchange, payment, issue, receipt or transfer of money, whether
effected by the exchange of currency, by crediting or debiting
accounts or otherwise,
(b) the
operation or maintenance of a savings, chequing, deposit, loan,
charge or other account,
(c)
the lending or borrowing of a financial instrument,
(d) the
issue, granting, allotment, acceptance, endorsement, renewal,
processing, variation, transfer of ownership or repayment of a
financial instrument,
(e)
the provision, variation, release or receipt of a guarantee, an
acceptance or an indemnity in respect of a financial
instrument,
(f)
the payment or receipt of money as dividends (other than
patronage dividends), interest, principal, benefits or any
similar payment or receipt of money in respect of a financial
instrument,
(f.1) the
payment or receipt of an amount in full or partial satisfaction
of a claim arising under an insurance policy,
(g) the
making of any advance, the granting of any credit or the lending
of money,
(h) the
underwriting of a financial instrument,
(i)
any service provided pursuant to the terms and conditions of any
agreement relating to payments of amounts for which a credit card
voucher or charge card voucher has been issued,
(j)
the service of investigating and recommending the compensation in
satisfaction of a claim where
(i)
the claim is made under a marine insurance policy, or
(ii)
the claim is made under an insurance policy that is not in the
nature of accident and sickness or life insurance and
(A)
the service is supplied by an insurer or by a person who is
licensed under the laws of a province to provide such a service,
or
(B)
the service is supplied to an insurer or a group of insurers by a
person who would be required to be so licensed but for the fact
that the person is relieved from that requirement under the laws
of a province,
(j.1) the
service of providing an insurer or a person who supply a service
referred to in paragraph (j) with an appraisal of the
damage caused to property, or in the case of a loss of property,
the value of the property, where the supplier of the appraisal
inspects the property, or in the case of a loss of the property,
the last-known place where the property was situated before the
loss,
(k) any
supply deemed by subsection 150(1) or section 158 to be a supply
of a financial service,
(l)
the agreeing to provide, or the arranging for, a service referred
to in any of paragraphs (a) to (i), or
(m) a
prescribed service,
but does
not include
...
(p)
the service of providing advice, other than a service
included in this definition because of paragraph (j) or
(j.1),
[emphasis added]
(q)
...
Notwithstanding the Appellant's section 185 argument, in
which he maintains the supply of information from the directors
to shareholders does constitute a financial service, I conclude
these services are more in the nature of advice and, therefore
specifically excluded from the definition of financial service.
The supply is therefore, not an exempt supply on that basis, nor
does it fall within any other category of Schedule V.
[64] Before
continuing with a review of whether the advice to shareholders
constitutes a taxable supply, I want to raise an analysis not
raised at trial, which would take me down the long and winding
road of exploring the very definition of a share. Is the
obligation of directors of a company to advise shareholders with
respect to a hostile takeover offer one of the rights contained
in the bundle of rights which constitute the share? Given that an
issuance of shares is an exempt supply, does the directors'
advice, albeit given years after the issuance of shares, still
form an integral part of the share, and therefore to be
considered part of an exempt supply? I am inclined to think not,
but do not intend to embark on the long and winding road. It is
unnecessary for the purposes of this judgment. I will leave
further investigation into this intriguing issue to the
academics.
[65] If not an
exempt supply, is the advice by default a "taxable
supply", that is a supply made in the course of a commercial
activity? Although the analysis starts to become somewhat
circuitous, the determination of what falls within the definition
of commercial activity shifts from the perspective of the input
(the fees) to the output (the supply of advice to the
shareholder). Paraphrasing some of the definitions in section
123, was Nowsco's advice to its shareholders a supply made in
the course of an undertaking carried on by Nowsco? Yes. But, was
the advice part of a business or undertaking separate from the
oilfield service business? No, it was not. Nowsco was not in the
"business" of proffering financial advice.
[66] As I have
previously indicated, it is too much of a commercial stretch to
find a separate business existed. Nowsco only had one business -
the oilfield service business. The supply of information or
advice to shareholders can only therefore be part of that
business. Consequently, the output (supply of advice from Nowsco
to the shareholders) is part and parcel of those taxable supplies
and therefore the input is most closely linked to a taxable
supply. This is not inconsistent with the conclusion I reached
earlier, in that any activity engaged in by the company which is
related to the shareholders, provided that it is commercial and
not personal in nature, is a commercial activity for the purposes
of the Excise Tax Act.
[67] Had I found
that the supply of advice from Nowsco to its shareholders was
neither an exempt supply nor a taxable supply, but simply a
supply, I would not have found that fatal to the Appellant's
position. It would be fatal if there was a principle that
"commercial activity" was defined as making taxable
supplies, but it is not so defined. A company that makes a supply
that is neither an exempt supply nor taxable supply can still be
seen as doing so in the course of a commercial activity, provided
that supply is not purely of a non-commercial or personal nature.
I believe that is the unusual situation in which the Appellant
would have found itself.
Policy
[68] Having
found the fees were incurred in the course of Nowsco's
commercial activity pursuant to section 169, and that neither
case law nor section 141.01 have altered that initial
finding, I want to briefly consider whether this position is
justifiable from a policy perspective.
[69] The
Appellant claimed there is no policy reason for distinguishing
costs incurred in responding to a takeover bid, from any other
indirect input such as shareholder costs generally, audit
functions and the like. A large public company has many more
obligations, and thus incurs many more expenses, than a small
privately held company. Similarly, an international company has
many more complexities than a domestic company. The Appellant
contends there is nothing in any underlying GST policy to suggest
a resource company which has to operate its commercial activities
at a level of increased complexity will be transformed into an
ultimate consumer for GST purposes. The GST legislation provides
a transaction based value added tax and focuses on the inputs and
outputs of a particular person. It was the shareholder, not
Nowsco, who made an exempt supply, though Nowsco incurred the
fees - fees incurred in the course of Nowsco's commercial
activity, which included accessing public capital markets, and
complying with associated legal obligations and market
expectations. Once involved in these markets it was committed to
these obligations for one purpose - to operate the business of
oilfield services. It follows that all these activities are
commercial activities within the scope and policy of the GST
legislation.
[70] The
Respondent maintains, from a policy perspective, that providing
ITCs in this case does not avoid the cascading of tax in the
value added production cycle. The inputs relate to the corporate
securities market, not the production of goods and services. If
the shareholders had acquired the inputs directly, there would be
no question the ITCs would not be available. The inputs, to
qualify for credit, must have been incurred by Nowsco for the
purpose of making taxable supplies, otherwise, there is an
improper double dip if Nowsco gets the ITCs,
[71] I do not
intend to wade deeply into the murky waters of GST policy, and
drown in a sea of complexities. I prefer to approach the policy
aspect in as direct a manner as possible. While I agree with the
Respondent that there is no question the shareholders would be
denied the ITCs, had they incurred the fees directly, this does
not lead me to an inevitable conclusion that, from a policy
perspective, Nowsco should not be entitled to claim the ITCs. I
am more swayed by the Appellant's approach that a public
company, engaged in the international commercial arena has to
deal with far more complex corporate and securities law issues
than the corner mom and pop shop. Are the costs of complying with
these increased complexities the types of costs the consumer
would expect to have a company pass on? I believe they are. Where
corporate and securities laws impose fiduciary, regulatory and
other forms of obligations on a public company, is a consumer of
the company's product offended that such costs are passed
along? I suspect not. This is not akin to passing on to the
customer a purely personal shareholder benefit (the all expense
paid cruise to the spouses of the executives of the pension plan
which holds a significant portion of shares in the company, for
example). The commercial expectation is that Nowsco's fees
are legitimate costs of the business, costs like any other
indirect inputs, which do get passed on to the customer. Given
that, it is then not a quantum leap to find a reasonable
commercial expectation that the GST attached to those costs are
not to be borne by Nowsco as an ultimate consumer.
[72]
Nowsco's fees are not directly part of the production chain,
but I am satisfied there is no policy which requires that they
must be; otherwise, there is a risk no indirect inputs would be
entitled to the ITCs. GST policy clearly recognizes the
entitlement of indirect inputs to ITC. So, how do the fees paid
by Nowsco differ? The Respondent might say because they have no
link at all to the production chain, whereas other indirect
inputs have some link. It is up to each company to determine how
resources, financial and otherwise, are allocated between direct
inputs and accepted ancillary inputs. In the circumstances of
this case, the Appellant maintains there is indeed some link to
the making of taxable supplies. The policy debate, I would
suggest, should be less concerned with the technical debate of
whether or not there is a requirement for a connective link
between the input and the making of taxable supplies, and more
concerned with the connection between the input and what is
acceptable in the commercial forum of a public company engaged in
international work, as part of the company's business. If
that latter link exists, then it must fall within the scheme of
the Excise Tax Act to treat such an input as entitled to
the ITC. Some might argue this would lead to the conclusion that
every corporate expense, no matter how ancillary to the
production chain, is incurred in the course of commercial
activity. In these days of intense scrutiny of public companies
and their executives, I find this is not an inevitable
conclusion. Some expenses simply will not be commercially
acceptable.
[73] Who then
ultimately pays the GST on these services if the shareholders do
not, and if Nowsco gets the ITCs? The same people who pay the GST
on any other input of Nowsco - the ultimate consumer of
Nowsco's product. Nowsco incurred an approximate fee of $18
million. Some of that is passed on to its customers in the price
charged for its oilfield services; the customers, all being
registrants in business, will in turn pass it on until it reaches
the ultimate consumer. The GST is "lost" only if Nowsco
makes no attempt to recoup any of this expense in the ongoing
supply of its product, potentially selling its services at a
loss. This would be an unrealistic supposition. Certainly, there
are many factors playing into the determination of price. Cost
recovery is just one of them, but it is an important factor in
any evaluation of the fairness of the GST system.
[74] The
Minister of Finance, the Honourable Michael H. Wilson, explained
the rationale behind the GST in an information booklet
introducing the legislation as follows:
... sales
tax reform will improve the overall fairness of the Canadian tax
system. As a result of reform, the distribution of the tax burden
will be more progressive and lower income Canadians will be
better off.
The
Respondent suggests there is some inherent unfairness in allowing
Nowsco the ITCs. Unfair to whom? Certainly not to Nowsco, not to
Nowsco's shareholders, not to Nowsco's customers. The
unfairness, if any, must reach down to that ultimate customer -
the unregistrant driver filling her car with gas. Is she paying
more or less tax because Nowsco got its ITCs? If one presumes
Nowsco passed the costs of the fees straight across to its
customers, then whether or not Nowsco got the ITCs had no impact
on the ultimate consumer. That consumer will still be picking up
the tab for the GST on the $18 million fees. The beneficiary will
be the Government of Canada, as it will have received the GST on
the $18 million twice, should the ITCs be denied.
[75] Yet, what
happens if Nowsco, concerned about the additional $1 million GST
bill no longer eligible for ITCs, decides to take the logical
business step of upcharging the $18 million to $19 million so as
to recover the $1 million in lost ITCs? Now, the ultimate
consumer is indeed going to have to pay more - and an unfairness
results. But not because of allowing ITCs, but quite the
opposite, by denying the ITCs.
[76] The
Respondent might suggest the flaw is that the $18 million
fee is not theoretically passed on by Nowsco to its customers.
This seems to fly in the face of commercial realities (I have
already discussed my view of commercial expectations in the
international marketplace). It is not what the government
theorizes as to what a public company does; it is what the public
company, acting in a reasonable commercial manner, actually does,
that must be reviewed in order to assess the "fairness"
of this system. The government determines that fees, such as
Nowsco's, are not part of its commercial activity. This leads
the government to an expectation that neither the fees, nor the
GST attached to them, should or would be passed on in the
production chain by Nowsco. This is an unrealistic expectation.
For the government not to recognize that some or all of the costs
such as Nowsco's fees are passed on to the ultimate consumer
of the Company's product, is to allow the government to
collect GST twice. This is not the form of fairness ever
contemplated by introductory statements of the Minister of
Finance referred to earlier. I am not convinced there is a strong
policy reason in theses circumstances to lead me away from my
conclusion that the fees were incurred in the course of
Nowsco's commercial activity.
Conclusion
[77] The
legislation, case law and GST policies do not support the
Respondent's position that a taxpayer only gets ITCs if it
can show that the purpose of inputs is in connection with making
taxable supplies. Notwithstanding counsel for both sides'
advice that this issue was easy, I have not found it so. There
are strong arguments on both sides. Indeed, my initial reaction
was that the Respondent's position was correct. I find
myself, however, on balance not finding sufficient support to
accept it. Admittedly, the fees did not have that direct link to
the making of taxable supplies, but they had no direct link to
the making of any other supplies of Nowsco, as Nowsco did not
make any other supplies. (Unless of course one accepts the
alternative analysis that the provision of advice from the
directors to the shareholders was a taxable supply.) The fees
also cannot be said to be connected to any other business. And
they do not constitute a non-commercial personal benefit
simply because they resulted in the shareholders getting more for
their shares. No, I find they were used in the course of
Nowsco's commercial activity, and do therefore qualify for
the ITCs. No policy argument has convinced me otherwise. This is
a situation which I suspect was not contemplated by the
legislation. Given the corporate world is rife with mergers and
acquisitions, oft-times of a hostile nature, fees of the type
incurred by Nowsco are commonplace. The numbers must be huge. I
am not prepared to find the Nowscos of the country are ultimate
consumers of such fees, and consequently must pay the GST bill,
without much clearer evidence of Parliament's intent to treat
them in this manner. I therefore allow the appeal, answering yes
to each of the questions posed in paragraph 2. I refer this
matter back to the Minister for reconsideration in accordance
with these reasons. Costs to the Appellant.
Signed at
Ottawa, Canada, this 15th day of November, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-1753(GST)G
STYLE OF
CAUSE:
BJ Services Company Canada,
the
successor to Nowsco Well Service Ltd. and Her Majesty the
Queen
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
August 19 and 20, 2002
REASONS FOR
JUDGMENT BY: The Honourable Campbell J.
Miller
DATE OF
JUDGMENT:
November 15, 2002
APPEARANCES:
Counsel
for the Appellant: W. Clarke Hunter
Counsel
for the
Respondent:
J.E. (Ted) Fulcher
COUNSEL OF
RECORD:
For the
Appellant:
Name:
W. Clarke Hunter
Firm:
Macleod Dixon LLP
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-1753(GST)G
BETWEEN:
BJ SERVICES
COMPANY CANADA,
the
successor to NOWSCO WELL SERVICE LTD.,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on August 19 and 20, 2002, at Calgary, Alberta, by
the
Honourable Judge Campbell J. Miller
Appearances
Counsel
for the Appellant: W. Clarke Hunter
Counsel
for the
Respondent:
J.E. (Ted) Fulcher
JUDGMENT
The appeal
from the assessment of goods and services tax made under the
Excise Tax Act, notice of which is dated March 29, 2000,
and bears number 10CT0000698, for the period of January 1,
1996 to July 31, 1996, is allowed, with costs, and the
assessment is vacated.
Signed at
Ottawa, Canada, this 15th day of November, 2002.
J.T.C.C.
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