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Citation: 2009 TCC 474
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Date: 20090918
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Docket: 2007-2762(GST)G
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BETWEEN:
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MARITIME-ONTARIO FREIGHT LINES LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This
appeal concerns an assessment issued to Maritime-Ontario Freight Lines Limited
(“Maritime-Ontario”) pursuant to the Excise Tax Act for the period from
June 29, 2003 to June 24, 2006.
[2] The
circumstances that led to the assessment involve the failure of
Maritime-Ontario to collect goods and services tax (GST) from independent
contractors who performed services for it in relation to the transportation of
goods. There are two amounts at issue: $1,792,157 as net tax and $71,739 as a
four percent penalty.
Background
[3] Maritime-Ontario
is a licensed carrier that is engaged in the transportation of general freight
and mail. It is based in Brampton,
Ontario.
[4] Maritime-Ontario
contracts with third-party customers to move goods for consideration, plus
GST.
[5] The
services of independent contractors (“Contractors”) are often used by
Maritime-Ontario to haul goods. The fee that is paid to the Contractors is
exempt from GST.
[6] This
appeal concerns an option that Contractors were given to use a credit card for
fuel supplied by Maritime-Ontario through an arrangement with a fuel supplier.
[7] If a
Contractor uses the credit card to purchase fuel, Maritime-Ontario pays the
invoice from the fuel supplier and this outlay is effectively reimbursed by the
Contractor.
[8] The GST
in respect of these fuel purchases is collected by the fuel supplier from
Maritime-Ontario, and Maritime-Ontario claims an input tax credit in respect of
the expense.
[9] Maritime-Ontario
takes the position that it does not need to collect GST from the Contractors in
respect of the credit card arrangement because the fuel was being acquired for
Maritime-Ontario’s own use.
[10] Although
it is not directly relevant to the appeal, I would mention that if Maritime-Ontario
had collected GST from the Contractors, the Contractors would be entitled to
claim input tax credits to fully recoup the GST expense.
[11] The
Minister of National Revenue (the “Minister”) submits that GST should have been
collected from the Contractors on the basis that Maritime-Ontario acquired fuel
from the fuel suppliers and resupplied it to the Contractors.
[12] In the
assessment at issue, the Minister has included the amount of such GST in the
computation of Maritime-Ontario’s “net tax.”
[13] Although Maritime-Ontario submits that it did not resupply fuel to Contractors,
it submits in the alternative that certain provisions of the Act deem
there not to be a taxable supply to the Contractors in these circumstances. The
provisions that are relied on are s. 133 (single supply), s. 136.1 (ongoing
services), and Part VII of Schedule VI to the Act (interline settlement
rules).
[14] In the
further alternative, Maritime-Ontario submits that the penalty should be
vacated on the basis that due diligence was exercised.
Analysis
[15] The
assessment at issue adjusts the “net tax” of Maritime-Ontario by the amount of
GST that the Minister submits should have been collected from the Contractors
in respect of fuel purchased with the credit cards.
[16] There
is no dispute that the assessment is correct if Maritime-Ontario should have
collected GST from the Contractors.
[17] It is useful to refer to the definition of “net tax” in s. 225(1) of the Act.
The emphasized phrase below makes it clear that “net tax” includes tax that is
collectible even if it is not collected. Subsection 225(1) provides:
225. (1) Net tax — Subject to this Subdivision, the net tax
for a particular reporting period of a person is the positive or negative
amount determined by the formula
A – B
where
A is the total of
(a) all amounts that became collectible
and all other amounts collected by the person in the particular reporting
period as or on account of tax under Division II, and
(b) all amounts that are required under
this Part to be added in determining the net tax of the person for the
particular reporting period; and
B is the total of
(a) all amounts each of which is an input
tax credit for the particular reporting period or a preceding reporting period
of the person claimed by the person in the return under this Division filed by
the person for the particular reporting period, and
(b) all amounts each of which is an amount
that may be deducted by the person under this Part in determining the net tax
of the person for the particular reporting period and that is claimed by the
person in the return under this Division filed by the person for the particular
reporting period. [Emphasis
added.]
[18] The relevant issue, then, is whether the GST was collectible from the Contractors.
[19] In
general, GST is required to be collected on the value of consideration for a
taxable supply (s. 221(1), s. 165(1)).
[20] The
term “supply” is defined in s. 123(1) of the Act. It provides:
“supply” means, subject to sections 133 and 134, the provision
of property or a service in any manner, including sale, transfer, barter,
exchange, licence, rental, lease, gift or disposition
[21] This definition is
broad, and it has been held
that a transfer of title is not necessary: Vanex Truck Service Ltd. v. The
Queen, [2001] GSTC 70 (FCA), para. 12.
[22] The issue
is whether Maritime-Ontario resupplied fuel to Contractors when the credit
cards were used. For this purpose, it is necessary to consider the nature of
the relationship between Maritime-Ontario and the Contractors.
[23] I
would mention at the outset that neither party argued that Maritime-Ontario
purchased fuel as agent for the Contractors. I will therefore assume that the
relationship was not one of agency.
[24] I
would also mention that this is not the first time that an issue of this type has
come before the courts. Counsel referred me to the following other decisions
involving transportation companies and independent contractors: Vanex,
above; Libra Transport (B.C.) Ltd. v. The Queen, [2002] GSTC 112 (FCA); Fedderly
Transportation Ltd. v. The Queen, [2000] GSTC 83 (FCA).
[25] The decisions in each of these cases turned on their
facts, and in particular on the nature of the relationship between the transportation company and the
contractor.
[26] The
facts in Vanex are probably closest to those in this appeal.
Maritime-Ontario suggests that there are important differences, however. Not
only are the contractual terms different, but in Vanex the Contractors actually
paid the GST to Vanex and Vanex failed to remit it ([1999] GSTC 101 (TCC),
para. 209).
[27] I now
turn to the facts of this case. I will begin by describing the background that
led to the arrangement that Maritime-Ontario had with the Contractors.
[28] When
the GST initially came into force in the early 1990s, Maritime-Ontario sought
advice from Ernst & Young as to how it should handle its obligations under
the Act.
[29] Based
on this advice, Maritime-Ontario decided to alter the agreements that it had
with Contractors so that it, and not the Contractors, would pay the GST on fuel
purchased with these credit cards.
[30] Unfortunately, the standard form agreement that was used to effect
this result appears to have been rather badly drafted. There are a number of internal
inconsistencies in the document and the nature of the relationship between
Maritime-Ontario and the Contractors is not clearly set out.
[31] Nevertheless,
it appears that it was intended that the fuel purchased with credit cards be
purchased by Maritime-Ontario on its own behalf and not on behalf of the
Contractors. The plan was that the Contractors would not have to pay GST
because they were not acquiring the fuel.
[32] The
reason for adopting such an arrangement, according to Doug Munro, the president
of Maritime-Ontario, was to minimize GST cash flow difficulties for
Maritime-Ontario and its small business Contractors. It was a matter of timing
differences in reference to a large expenditure. The arrangement did not affect
the amount of tax that would ultimately be collected after input tax credits
were taken into account.
[33] The essential
question in this appeal is whether the plan as conceived by Maritime-Ontario
was legally effective.
[34] This
turns on whether the plan was properly effected by the standard form agreement
that governed the relationship.
[35] It is
useful to set out some of the relevant terms from one of the agreements that
was entered into evidence[1]
(Ex. A-1, Tab 1):
WHEREAS Independent
Contractor is the owner of the vehicle more particularly described in Schedule
"A" annexed hereto, and forming part hereof, and the Independent
Contractor desires to contract with M-O for use of such vehicle on terms and
conditions as hereinafter set forth;
…
AND WHEREAS M-O desires to use
and operate the motor vehicle equipment with the Independent Contractor, […]
…
1. Use and Description
The Independent Contractor hereby contracts
for service the vehicle, for operation in M-O’s motor carrier pool. Particulars
of said vehicle are set forth in Schedule "A" hereto attached, and by
this reference made a part hereof, as the same may be from time to time,
supplemented by way of deletions or additions thereto.
…
3. Payment
3.1 As payment for the
contract for services to be rendered hereunder, M-O agrees to pay the
Independent Contractor, the amounts agreed upon and set forth in Schedule
"B" hereto attached and by this reference made part hereof, or as may
from time to time be supplemented by the parties hereto via supplement to
Schedule "B".
…
5. Independent
Contractor Equipment
Independent
Contractor shall furnish to M-O the equipment described in Schedule
"A" and all necessary labour to perform this contract for service,
including loading and unloading. […]
…
16. Other Expenses
16.1 Independent
Contractor agrees to bear all expenses not otherwise provided for in this
Agreement, including, but not limited to cost of maintenance, fuel, tires,
repairs, wages of third parties, fuel taxes, empty mileage, permits of all
types, tolls, base plates and licenses and any unused portions of such items.
Independent Contractor also agrees to pay those deductions set forth in
Schedule "B".
[36] It is
clear that this agreement was drafted with the intention of implementing the
GST planning proposed by Ernst & Young.
[37] The
recitals to the agreement state an intention that Maritime-Ontario will operate
the Contractor’s vehicle with the Contractor. Section 5 is consistent with this
because it provides that the Contractor will furnish equipment, meaning the
vehicle, to Maritime-Ontario.
[38] The intended nature of the relationship is not set out
in the agreement nearly as clearly as it should have been. Nevertheless, it
appears that Maritime-Ontario
intended either to assume responsibility for the use of the vehicle, with
driving services being provided by the Contractors, or it was intended that there
be a joint venture. The latter characterization seems to more closely reflect
reality.
[39] As for
expenses, the agreement seems to contemplate that expenses could be incurred by
either party, and that they would be incurred on that party’s own behalf unless
the agreement provided otherwise for a particular expense.
[40] Further, the agreement provides that many expenses incurred by Maritime-Ontario would
effectively be reimbursed by the Contractors. This included the cost of fuel
purchased with the credit cards.
[41] In general, the mechanism that was employed to achieve this “reimbursement” was a
reduction in the fees that were payable to the Contractors for their services.
The fee is provided for in section 3.1 and the adjustment for expenses is
detailed in a formula set out in Schedule B to the agreement.
[42] Counsel
for the Minister points to section 16.1 as being inconsistent with the
appellant’s position. It provides that Contractors “bear” the expense of fuel
and also that the Contractors will “pay” the deductions set out in Schedule B.
[43] The
wording of section 16.1 muddies the waters, but I do not think that the section
is inconsistent with the fee scheme contemplated by section 3.1. The term
“bear” is broad enough to encompass an effective reimbursement through a
reduction in a fee. The use of the phrase “pay the deductions” appears to be
bad drafting but the intent is clear. The mechanism employed with respect to
fuel paid for by Maritime-Ontario is a deduction in the fee.
[44] I
would conclude that the agreement as a whole is consistent with the intent that
fuel paid for by Maritime-Ontario is acquired on its own behalf.
[45] Notwithstanding
obvious drafting deficiencies with the agreement, I am of the view that its
terms are clear enough to achieve Maritime-Ontario’s intent.
[46] I suspect that an expert in commercial law could come
up with arguments to support the view that the fuel in this case was acquired
by the Contractors. In my view, however, an overly-technical approach would not
be appropriate in these circumstances.
[47] The objective of the arrangement was a modest one – to
avoid the mismatching of payments and credits under the Act. It was believed
that the arrangement would be for the benefit of both Maritime-Ontario and the
Contractors.
[48] Before
concluding, I would mention that a concern was raised at the hearing about tax
leakage. Apparently one of the Contractors had been audited by the Minister and
it was determined that he had claimed input tax credits with respect to the GST
paid by Maritime-Ontario.
[49] I can
appreciate the Minister’s concern in this regard, especially since the
agreement is not well drafted. I would also note that Maritime-Ontario in a
sense facilitated the claim by the Contractor by providing to him information
as to the amount of GST that Maritime-Ontario had paid.
[50] Nevertheless,
I do not think that this is a sufficient basis to find that GST was collectible
from the Contractors. Notwithstanding that the Minister determined that at least
one Contractor claimed input tax credits, the Contractors had no reasonable
basis to do so. The intent of the agreement is relatively clear, and the pay
summaries provided to the Contractors by Maritime-Ontario clearly showed that the
Contractors were not paying GST.
Conclusion
[51] In
light of this conclusion, it is not necessary for me to consider any of the other
arguments raised by counsel for the appellant.
[52] The
appeal will be allowed, and the assessment will be referred back to the
Minister of National Revenue for reconsideration and reassessment on the basis
that net tax should be reduced by $1,792,157.50, and the penalty of $71,739
should be vacated.
[53] Maritime-Ontario
is entitled to costs.
Signed at Toronto, Ontario this 18th day of September
2009.
Woods
J.
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