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Citation: 2009 TCC 25
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Date: 20090212
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Dockets: 2007-728(GST)G
2007-731(GST)G
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BETWEEN:
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EXXONMOBIL CANADA LTD. AND
EXXONMOBIL CANADA RESOURCES COMPANY
O/A EXXONMOBIL CANADA PROPERTIES PARTNERSHIP (“CPP”),
and
EXXONMOBIL CANADA LTD. AND
EXXONMOBIL CANADA RESOURCES COMPANY
O/A EXXONMOBIL CANADA ENERGY PARTNERSHIP (“CEP”),
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A.
FACTS
[1] The appeals were heard together on common
evidence.
[2] The Appellants, ExxonMobil Canada Properties Partnership
(“ExxonMobil CPP”) and ExxonMobil Canada Energy Partnership (“ExxonMobil CEP”) are
partners of a general partnership formed under the laws of the Province of Alberta between ExxonMobil
Canada Ltd. and ExxonMobil Canada Resources Company (formerly ExxonMobil
Resources Limited). The Appellants carried on business at all relevant times in
the oil and gas industry.
[3] The Appellants were registered for Goods and Services Tax
(“GST”) during the relevant times.
[4] The Appellant, ExxonMobil CPP, appeals from the Notice of
Reassessment (the “Reassessment”) dated November 9, 2005 (No. 10CT0600728)
issued by the Minister of National Revenue (the “Minister”) pursuant to the Excise
Tax Act (Canada) (the “ETA”). The Appellant objected to the
Reassessment in a Notice of Objection dated February 7, 2006. The Minister
confirmed the Reassessment in Notices of Decision dated November 14, 2006. The
Reassessment related to the period January 1, 2002 to December 31, 2002.
[5] The Appellant, ExxonMobil CEP, appeals from the Notice of
Reassessment (the “Reassessment”) dated December 7, 2005 (No. 10CT0600882)
issued by the Minister pursuant to the ETA. The Appellant objected to
the Reassessment in a Notice of Objection filed on March 7, 2006. The Minister
confirmed the Reassessment in a Notice of Decision dated November 14, 2006. The
Reassessment related to a period from February 1, 2002 to December 31, 2002.
[6] At the commencement of the hearing the parties filed an Agreed
Statement of Facts which reads as follows (Exhibit A-1):
A. Appellants’ Policy And Practice
1. From time to time, the
Appellants relocate their employees from one work location to another in Canada.
Joint Book of
Documents, Tabs 2 to 6
2. Under their domestic relocation
policy, the Appellants reimburse certain moving expenses incurred by the
relocated employee, such as interim housing costs (“Reimbursement Expenses”).
These items are reimbursed only upon proof that the expense has been incurred
and these Reimbursement Expenses are subject to audit. The Appellants claimed
and received input tax credits (“ITCs”) for these Reimbursement Expenses and
they are not under dispute in these appeals.
3. In addition to the
Reimbursement Expenses, the Appellants paid additional amounts to the relocated
employees under their domestic relocation policy. The parties agree that these
additional amounts qualify as allowances under the Excise Tax Act. For
the purposes of this agreed statement of facts, these amounts will be called
“additional amounts.” The Appellants claimed ITCs with respect to these
additional amounts, which were disallowed and which are the subject of these
appeals.
4. For these additional amounts,
the portion above $650.00 is included on the relocated employee’s T-4 income
statement as a taxable benefit under the Income Tax Act.
5. The relocated employee is not
required to submit receipts for any portion of the additional amount, but is
required to retain receipts for the first $650.00 in the event that the Canada
Revenue Agency requires that the employee verify that amount of moving
expenditures.
6. The use of the additional
amount is at the discretion of the relocated employee.
7. All of the employees at issue
in both appeals were employed by the Appellant ExxonMobil Canada Energy
Partnership (CEP) under a Services Agreement dated January 1, 1998. However,
there is no dispute that the additional amounts under appeal were paid and that
the ITCs claimed by the Appellants are properly the subject of appeal. The
Respondent will not be relying upon this “different employer issue” as a basis
for resisting these appeals, although it reserves its rights on this issue for
other audit years.
Joint Book of
Documents, Tab 1
B. ExxonMobil CPP Appeal
8. The Appellant ExxonMobil Canada Properties Partnership (“ExxonMobil CPP”) is a
general partnership formed under the laws of the Province of Alberta between ExxonMobil Canada Ltd. and ExxonMobil Canada
Resources Company (formerly ExxonMobil Resources Limited). ExxonMobil CPP
carried on business at all relevant times in the oil and gas business.
ExxonMobil CPP’s address is:
237 Fourth Avenue S.W.
P.O. Box 2480, Station M
Calgary, Alberta
T2P 3M9
9. ExxonMobil CPP appeals from the
Notice of Reassessment (No. 10CT0605‑4105‑2567) (the “CPP
Reassessment”) dated November 14, 2005 issued by the Minister of National
Revenue (the “Minister”) pursuant to the Excise Tax Act (Canada) (the
“Act”).
Joint Book of
Documents, Tabs 13 and 14
10. For the periods January 1, 2002
to December 31, 2002, this Appellant filed amended Goods and Services
Tax/Harmonized Sales Tax (“GST/HST”) returns. This Appellant reported tax
collected or collectible of $129,018,002.29, claiming ITCs of $91,117,433.62
and net tax of $37,900,568.67. For the reporting period ending November 30,
2002, the Appellant sought to deduct ITCs totalling $34,124.16 with respect to
the additional amounts.
11. On November 9, 2005, the
Minister issued a Notice of Assessment (No. 10CT0600728) (the “CPP Assessment”).
Pursuant to the CPP Assessment, this Appellant was assessed net tax of
$38,020,204.98, interest of $23,065.71, and penalties of $60,640.06 for the
periods from January 1, 2002 to December 31, 2002. The net tax was
calculated as follows:
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Net tax reported
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37,900,568.67
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Adjustments to tax
collected/collectible
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133,427.68
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Adjustments to input
tax credits (at issue)
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29,212.68
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Adjustments to input
tax credits claimed
(not at issue)
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(43,004.05)
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Net tax assessed
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38,020,204.98
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Joint Book of
Documents, Tabs 7 to 9
12. A Notice of Objection was filed
on February 7, 2006. By way of the Notice of Objection, this Appellant sought
ITCs in the amount of $29,212.68, pursuant to section 174 of the Act, among
other things.
Joint Book of
Documents, Tab 10
13. On November 14, 2006, the
Minister varied the CPP Assessment in the CPP Reassessment. The CPP
Reassessment allowed the Appellant’s objection in part (with respect to issues
not under appeal), and reassessed the Appellant with respect to issues under
appeal. Specifically, the Minister denied the Appellant ITCs in the amount of
$29,212.68, pursuant to sections 169 and 174 of the Act. The net tax reassessed
was calculated as follows:
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Net tax reported on returns
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37,900,568.67
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Adjustments to tax
collected/collectible (not at issue)
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122,504.03
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Adjustments to input tax credits
(at issue)
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29,212.68
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Adjustments to input tax credits
(not at issue)
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(43,004.05)
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Net tax assessed
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38,009,281.33
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Joint Book of
Documents, Tabs 13 and 14
14. The Notice of Appeal was filed
on February 9, 2007 and transmitted to the Deputy Attorney General of Canada on February 22, 2007.
15. ITCs in the amount of $29,212.68
were at issue when the Notice of Appeal was filed on February 9, 2007. These
ITCs involved additional amounts paid for both domestic and expatriate
relocation. Subsequent to the filing of the Notice of Appeal, the parties
agreed that the portion of the appeal relating to expatriate employees be
abandoned. Only additional amounts paid for domestic relocation are at issue in
this hearing.
16. Accordingly, by letter dated
March 26, 2008, this Appellant indicated that it had claimed ITCs in the amount
of $10,496.50 in respect of expatriate relocations and that the amount of ITCs
remaining under appeal was $18,716.18 ($29,212.68 - $10,496.50).
17. At all relevant times, this
Appellant was a partnership involved in the oil, gas and petroleum products
industry, and the shipping and storage of petroleum products.
18. At all relevant times,
ExxonMobil Canada Resources Company owned 40% of this Appellant.
19. At all relevant times,
ExxonMobil Canada Ltd. owned 60% of this Appellant.
20. ExxonMobil CPP was registered
for GST purposes during all relevant times with GST Registration Number 12343‑4052‑RT0001.
C. ExxonMobil CEP Appeal
21. The Appellant ExxonMobil Canada
Energy Partnership (“ExxonMobil CEP”) is a general partnership formed under the
laws of the Province of Alberta
between ExxonMobil Canada Ltd. and ExxonMobil Canada Resources Company
(formerly ExxonMobil Resources Limited). ExxonMobil CEP carried on business at
all relevant times in the oil and gas business. ExxonMobil CEP’s address is:
237 Fourth Avenue S.W.
P.O. Box 2480, Station M
Calgary, Alberta
T2P 3M9
22. ExxonMobil CEP appeals from the
Notice of Reassessment (No. 10CT0608‑8103‑2178) (the “CEP
Reassessment”) dated November 14, 2006 issued by the Minister pursuant to the
Act.
Joint Book of
Documents, Tabs 22 and 23
23. For the periods February 1, 2002
to December 31, 2002, this Appellant filed amended GST/HST returns. This
Appellant reported tax collected or collectible of $162,262,243.56, claiming
ITCs of $298,871,471.79 and net tax of ($136,609,228.23). For the reporting
period ending November 30, 2002, the Appellant sought to deduct ITCs
totalling $166,188.15 with respect to the additional amounts.
24. On December 7, 2005, the
Minister issued a Notice of Assessment (10CT0600882) (the “CEP Assessment”).
Pursuant to the CEP Assessment, this Appellant was assessed net tax of
$136,447,012.47, interest of $22,277.56, and penalties of $54,863.02 for the
periods from February 1, 2002 to December 31, 2002. The net tax was
calculated as follows:
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Net tax reported
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(136,609,228.23)
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Prior audit
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3,859.85
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Adjustments to tax
collected/collectible
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25,569.74
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Adjustments to input tax credits
(at issue)
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145,199.47
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Adjustments to input tax credits
claimed (not at issue)
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19,878.53
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Net tax assessed
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(136,414,720.64)
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Joint Book of
Documents, Tabs 17 to 19
25. A Notice of Objection was filed
on March 7, 2006. By way of the Notice of Objection, this Appellant sought ITCs
in the amount of $145,199.47, pursuant to section 174 of the Act, among other
things.
Joint Book of
Documents, Tab 20
26. On November 14, 2006, the
Minister varied the CEP Assessment in the CEP Reassessment. The CEP
Reassessment allowed the Appellant’s objection in part (with respect to issues
not under appeal), and reassessed the Appellant with respect to issues under
appeal. Specifically, the Minister denied the Appellant ITCs in the amount of
$145,199.47, pursuant to sections 169 and 174 of the Act. The net tax
reassessed was calculated as follows:
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Net tax reported
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(136,609,228.23)
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Prior audit (not at issue)
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3,859.85
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Adjustments to tax
collected/collectible
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25,569.74
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Adjustments to input tax credits
(at issue)
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145,199.47
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Adjustments to input tax credits
claimed (not at issue)
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15,120.55
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Net tax assessed
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(136,419,478.62)
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Joint Book of
Documents, Tab 22 and 23
27. The Notice of Appeal was filed
on February 9, 2007 and transmitted to the Deputy Attorney General of Canada on February 22, 2007.
28. ITCs in the amount of
$145,199.47 were at issue when the Notice of Appeal was filed on February 9,
2007. These ITCs involved additional amounts paid for both domestic and
expatriate relocation. Subsequent to the filing of the Notice of Appeal, the
parties agreed that the portion of the appeal relating to expatriate employees
be abandoned. Only additional amounts paid for domestic relocation are at issue
in this hearing.
29. Accordingly, by letter dated
March 26, 2008, this Appellant indicated that it had claimed ITCs in the amount
of $41,472.52 in respect of expatriate relocations and that the amount of ITCs
remaining under appeal was $103,726.95 ($145,199.47 - $41,472.52).
30. At all relevant times, this
Appellant was a partnership involved in the oil, gas and petroleum products
industry.
31. At all relevant times,
ExxonMobil Canada Resources Company owned 59% of this Appellant.
32. At all relevant times,
ExxonMobil Canada Ltd. owned 41% of this Appellant.
33. ExxonMobil CEP was registered
for GST purposes during all relevant times with GST Registration Number
12416-4146-RT0001.
B. ISSUES
[7] The issue is whether the Appellants were
entitled to claim notional Input Tax Credits (“ITCs”) for amounts over $650
paid to employees in respect of the moving allowances pursuant to sections 169,
170 and 174 of the ETA.
C. STATUTORY FRAMEWORK
[8] Section 169 of the ETA reads as follows:
General rule for credits
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
(a)
where the tax is deemed under subsection 202(4) to have been paid in
respect of the property on the last day of a taxation year of the person, the
extent (expressed as a percentage of the total use of the property in the
course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,
(b)
where the property or service is acquired, imported or brought into the
province, as the case may be, by the person for use in improving capital
property of the person, the extent (expressed as a percentage) to which the
person was using the capital property in the course of commercial activities of
the person immediately after the capital property or a portion thereof was last
acquired or imported by the person, and
(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 activities of the person.
Determining credit for improvement
(1.1) Where a person acquires or imports property or a
service or brings it into a participating province partly for use in improving
capital property of the person and partly for another purpose, for the purpose
of determining an input tax credit of the person in respect of the property or
service,
(a)
notwithstanding section 138, that part of the property or service that is
for use in improving the capital property and the remaining part of the
property or service are each deemed to be a separate property or service that does
not form part of the other;
(b)
the tax payable in respect of the supply, importation or bringing in, as
the case may be, of that part of the property or service that is for use in
improving the capital property is deemed to be equal to the amount determined
by the formula
A x B
where
A is the tax payable (in this section referred
to as the "total tax payable") by the person in respect of the
supply, importation or bringing in, as the case may be, of the property or
service, determined without reference to this section, and
B is the extent (expressed as a percentage)
to which the total consideration paid or payable by the person for the supply
in Canada of the property or service or the value of the imported goods or the
property brought in is or would be, if the person were a taxpayer under the
Income Tax Act, included in determining the adjusted cost base to the person of
the capital property for the purposes of that Act; and
(c)
the tax payable in respect of that part of the property or service that is
not for use in improving the capital property is deemed to be equal to the
difference between the total tax payable and the amount determined under
paragraph (b).
(1.2) REPEALED: S.C. 1997, c. 10, s. 161(2), effective
April 1, 1997 (Act, s.161(5)).
(1.3) REPEALED: S.C. 1997, c. 10, s. 161(2), effective
April 1, 1997 (Act, s.161(5)).
Credit for goods imported to provide commercial service
(2) Subject to this Part, where a registrant imports goods
of a non-resident person who is not registered under Subdivision d of Division
V for the purpose of making a taxable supply to the non-resident person of a
commercial service in respect of the goods and, during a reporting period of
the registrant, tax in respect of the importation becomes payable by the
registrant or is paid by the registrant without having become payable, the input
tax credit of the registrant in respect of the goods for the reporting period
is an amount equal to that tax.
Restricted credit for selected listed financial
institutions
(3) No amount shall be included in determining an input tax
credit of a person in respect of tax that becomes payable by the person under
subsection 165(2) or section 212.1 while the person is a selected listed
financial institution unless
(a)
the input tax credit is in respect of
(i)
tax that the person is deemed to have paid under subsection 171(1),
171.1(2), 206(2) or (3) or 208(2) or (3), or
(ii)
an amount of tax that is prescribed for the purposes of paragraph (a) of
the description of F in subsection 225.2(2); or
(b)
the person is permitted to claim the input tax credit under subsection
193(1) or (2).
Required documentation
(4) A registrant may not claim an input tax
credit for a reporting period unless, before filing the return in which the
credit is claimed,
(a)
the registrant has obtained sufficient evidence in such form containing
such information as will enable the amount of the input tax credit to be
determined, including any such information as may be prescribed; and
(b)
where the credit is in respect of property or a service supplied to the
registrant in circumstances in which the registrant is required to report the
tax payable in respect of the supply in a return filed with the Minister under
this Part, the registrant has so reported the tax in a return filed under this
Part.
Exemption
(5) Where the Minister is satisfied that there
are or will be sufficient records available to establish the particulars of any
supply or importation or of any supply or importation of a specified class and
the tax in respect of the supply or importation paid or payable under this
Part, the Minister may
(a)
exempt a specified registrant, a specified class of registrants or
registrants generally from any of the requirements of subsection (4) in respect
of that supply or importation or a supply or importation of that class; and
(b)
specify terms and conditions of the exemption.
[9] Section 170 of the ETA reads, in part,
as follows:
Restriction
170. (1) In determining an
input tax credit of a registrant, no amount shall be included in respect of the
tax payable by the registrant in respect of
…
(b) a supply, importation or bringing into a participating
province of property or a service that is acquired, imported or brought in by
the registrant at any time in or before a reporting period of the registrant
exclusively for the personal consumption, use or enjoyment (in this paragraph
referred to as the "benefit") in that period of a particular
individual who was, is or agrees to become an officer or employee of the
registrant, or of another individual related to the particular individual,
except where
(i) the registrant makes a taxable supply of the property
or service to the particular individual or the other individual for
consideration that becomes due in that period and that is equal to the fair
market value of the property or service at the time the consideration becomes
due, or
(ii) if no amount were payable by the particular individual
for the benefit, no amount would be included under section 6 of the Income Tax
Act in respect of the benefit in computing the income of the particular
individual for the purposes of that Act; and
…
Further restriction
(2) In determining an input tax credit of a registrant, no
amount shall be included in respect of the tax payable by the registrant in
respect of property or a service acquired, imported or brought into a participating
province by the registrant, except to the extent that
(a) the consumption or use of property or services of such
quality, nature or cost is reasonable in the circumstances, having regard to
the nature of the commercial activities of the registrant; and
(b) the amount is calculated on consideration for the
property or service or on a value of the property that is reasonable in the
circumstances.
[10] Section 174 of the ETA reads as follows:
Travel and other
allowances
174.
For the purposes of this Part, where
(a)
a
person pays an allowance
(i)
to
an employee of the person,
(ii)
where
the person is a partnership, to a member of the partnership, or
(iii)
where
the person is a charity or a public institution, to a volunteer who gives
services to the charity or institution
for
(iv)
supplies
all or substantially all of which are taxable supplies (other than zero-rated
supplies) of property or services acquired in Canada by the employee, member or
volunteer in relation to activities engaged in by the person, or
(v)
the
use in Canada, in relation to
activities engaged in by the person, of a motor vehicle,
(b) an amount in respect of
the allowance is deductible in computing the income of the person for a
taxation year of the person for the purposes of the Income Tax Act, or would have
been so deductible if the person were a taxpayer under that Act and the
activity were a business, and
(c)
in
the case of an allowance to which subparagraph 6(1)(b)(v), (vi), (vii) or
(vii.1) of that Act would apply
(i)
if
the allowance were a reasonable allowance for the purposes of that
subparagraph, and
(ii)
where
the person is a partnership and the allowance is paid to a member of the
partnership, if the member were an employee of the partnership, or, where the
person is a charity or a public institution and the allowance is paid to a
volunteer, if the volunteer were an employee of the charity or institution,
the
person considered, at the time the allowance was paid, that the allowance would
be a reasonable allowance for those purposes and it is reasonable for the
person to have considered, at that time, that the allowance would be a
reasonable allowance for those purposes,
the
following rules apply:
(d) the person is deemed to
have received a supply of the property or service,
(e)
any
consumption or use of the property or service by the employee, member or
volunteer is deemed to be consumption or use by the person and not by the
employee, member or volunteer, and
(f)
the
person is deemed to have paid, at the time the allowance is paid, tax in
respect of the supply equal to the amount determined by the formula
A X (B/C)
where
A is the amount of the allowance,
B is
(i) the total of the rate set out in subsection 165(1) and the tax
rate
for a participating province if
(A) all or substantially all of the supplies for which the
allowance
is paid were made in participating provinces, or
(B) the allowance is paid for the use of the motor vehicle in
participating provinces, and
(ii) in any other case, the rate set out in subsection 165(1), and
C is the total of 100% and the percentage determined for B.
D. ARGUMENTS OF COUNSEL
Appellants’ Arguments
[11] The Appellants maintain that they must relocate
some of their employees in order to maximize efficiencies within their business
activities and to allow their employees to benefit from opportunities arising
from their work.
[12] To assist their employees in relocating, ExxonMobil
CPP and ExxonMobil CEP offered them moving allowances. The moving
allowance was equal to 15% of the employees’ annual salary. (Note: the
moving allowances in question were in addition to reimbursements made by the
Appellants of the employees’ direct moving expenses. In order to be reimbursed
for the direct moving expense, the employees were required to file receipts
with the Appellants.)
[13] Paragraph 5 of the Appellants’ Factum describes,
in some detail, what the moving allowances were intended to cover. Paragraph 5
reads as follows:
Examples of expenses
that the moving allowance is intended to compensate includes, amongst other
things: draperies; blinds and carpeting for new premises; removal and
installation of lighting fixtures; disconnection and reconnection of utilities
(e.g., hydro, water and gas); reprogramming of cellular phones and pagers; penalties
for early cancellation of service contracts; initial house cleaning;
redirection of mail; the cost of registering vehicles or obtaining licences in
a new province; children’s school uniform and books; disassembly and reassembly
of items for shipment; the shipment of items excluded from coverage and the replacement
of items that cannot be shipped (e.g., dangerous goods, foreign foods and
plants) and additional insurance on valuable items shipped.
[14] The Agreed Statement of Facts states that for
the moving allowances (referred to as “additional amounts”) the portion above
$650 is included on the relocated employee’s T-4 income statement as a taxable
benefit under the Income Tax Act (see paragraph 4 of the Agreed
Statement of Facts).
[15] ExxonMobil CPP claimed ITCs in the amount of $34,124.16
during the period from January 1, 2002 to December 31, 2002.
[16] ExxonMobil CEP claimed ITCs in the amount of
$166,188.15 during the period from February 1, 2002 to December 31, 2002.
[17] The parties agreed to abandon any ITCs claimed
in respect of expatriate relocations. As a result of this concession, the
amounts of ITCs now at issue are:
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CPP -
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$ 18,716.18
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CEP -
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$103,726.95
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[18] In his Factum, Counsel for the Appellants said:
9. In these
Reassessments, the Minister disallowed the ITCs claimed by the Appellants for
the period under appeal in respect of the amount of the moving allowances that
was required to be included in the employees’ income as a taxable benefit on
the basis that this allowance was an expense of a “personal nature” that did
not satisfy the conditions of section 174 of the Act.
[19] The argument of Counsel for the
Appellants may be summarized as follows:
1.
Supplies acquired by
relocated employees were “in relation to” the activities engaged in by the
Appellants;
2.
All or substantially
all of the supplies are taxable supplies;
3.
The deeming
provisions of section 174 entitle the Appellants to claim ITCs;
4.
There is no “exclusive
personal consumption” under paragraph 170(1)(b);
5.
The “reasonable”
limitation in subsection 174(c) does not apply; and
6.
In any event, the
moving allowances are reasonable and not arbitrary.
Respondent’s
Argument
[20] The argument of Counsel for the
Respondent may be summarized as follows:
1.
The use of the moving
allowance is at the complete discretion of the employee and no receipts are
provided to the Appellants.
2.
The moving allowances
are taxable benefits in the nature of income and are paid in addition to the
reimbursement by the Appellants of the actual or direct moving expenses
incurred by the employees.
3.
The scope of the
deeming provisions contained in section 174 of the ETA is to be
determined in the context of other provisions of the ETA and section 6
of the Income Tax Act (“ITA”).
4.
Paragraph 170(1)(b)
of the ETA precludes any entitlement to ITCs in respect of the
allowances because the allowances are for supplies of property or services
acquired exclusively for the personal consumption, use or enjoyment of the
employees.
5.
Paragraph 174(a)(iv)
denies any entitlement to ITCs if the allowances are not for supplies of
property or services acquired by the employees in relation to activities
engaged in by the Appellants.
6.
Paragraph 174(a)(iv)
also denies any entitlement to ITCs if the allowance is not for supplies that
are all or substantially all taxable supplies other than zero-rated supplies.
7.
Counsel for the
Respondent also said that to permit ITCs claimed by an employer solely on the
basis that an allowance had been paid to employees would be contrary to the
most basic principles of the ETA.
8.
Subsection 169(1) of
the ETA sets out the general rule for ITCs. A registrant may claim an
ITC in respect of GST paid on the acquisition of a property or service to the
extent that the registrant acquired the property or service for consumption,
use or supply in the course of commercial activities of the registrant.
Subsection 169(4) requires that before claiming an ITC the registrant must have
sufficient evidence to enable the amount of the ITC to be determined. However,
allowance payments do not require receipts.
9.
Section 170 of the ETA
places specific restrictions on ITCs that may be claimed in respect of
purchases by a registrant that have a significant personal element.
10.
Subsection 170(1) of
the ETA provides that no ITC may be claimed for GST paid in respect of:
property or a
service for the personal use or enjoyment (“benefit”) of an employee except
when:
“i. the property or service has been
provided for fair market value consideration to the employee; and,
ii. no amount would be included in
the income of the employee for the benefit pursuant to s. 6 of the Income
Tax Act.”
(Emphasis added)
11.
In the cases under
appeal, the amounts claimed as ITCs by the Appellant would be denied under subsection
170(1) of the ETA. The employees do not pay the Appellants the fair
market value consideration of the benefit and the employees are required
to include the amount of the allowances under section 6 of the ITA in
computing their income for the purposes of that Act, i.e.:
Amounts to be included as income from office or employment
6.(1) There shall be included in computing the income of a
taxpayer for a taxation year as income from an office or employment such of the
following amounts as are applicable:
…
Personal or living expenses
6.(1)(b) all amounts received by the taxpayer in the year as an allowance
for personal or living expenses or as an allowance for any other purpose,
except …
12.
Subsection 170(2) of
the ETA adds the additional restriction that no amount shall be included
in respect of GST paid except to the extent that the use and consideration was
reasonable in the circumstances.
13.
The significance of
these restrictions is the clear instruction of Parliament that GST paid by an
employer for goods or services that are for the personal benefit of an employee
are not, as a general rule, to be included in the calculation of ITCs by
employers. As stated by Campbell, T.C.J. in 3859681 Canada Inc. v. The
Queen, 2003 TCC 501 at paragraph 29:
… it was Parliament’s
intent to deny ITC’s for any item that is exclusively for the employee’s
personal use, consumption or employment (sic – enjoyment) within the context of
that section.
14.
Again the expressed
intent of the legislation is that payments to employees for their personal
benefit do not result in ITCs.
Role of ss. 174 and 175 – Allowances and
Reimbursements
15.
It should be noted
that section 174 of the ETA is generally intended to apply where an
allowance is only for supplies that are taxable at 7% (now 5%) which were
acquired by an employee.
16.
A further condition
is that if the allowance is deductible to an employer and taxable to an
employee under the ITA, it must have been a reasonable allowance
(subsection 174(c)).
17.
If these conditions
are met the following rules apply, pursuant to section 174 of the ETA:
(a)
the employer is
deemed to have received a supply of the property or service;
(b)
any use of the
property or service by the employee, (member or volunteer) is deemed to be used
by the employer and not by the employee; and
(c)
the employer is
deemed to have paid, at the time the allowance is paid, tax in respect of the
supply equal to the amount determined by the formula A x (B/C).
18.
The scope of these
deeming provisions is not intended to completely displace the general and
specific restrictions that preclude personal expenses and amounts in the nature
of salary expenditures from being eligible for ITCs.
E. ANALYSIS
AND DECISION
[21] Before dealing with the application
of the sections of the ETA, I wish to note that in this situation we are
dealing with an “allowance” and not a “reimbursement”. An allowance is
different from a reimbursement and is explained in CRA’s Policy P-075R. Policy
P-075R reads as follows:
An allowance is any periodic or
other similar payment that a person receives from another person, without
having to account for its use. An amount constitutes an allowance for the
purposes of section 174 … where the amount meets all of the following criteria:
·
The amount paid must be a predetermined amount;
·
The amount must be paid for a certain purpose;
·
The amount paid must be at the complete disposition of the person
receiving the payment; and
·
There is no requirement for the person receiving the payment to repay or
account for its use.
[22] The jurisprudence is of the same opinion
as the CRA Policy P-075R and many cases have cited the precedent in R. v.
Pascoe, [1975] C.T.C. 656, paragraph 7, in this regard. Further clarifying
the position on allowances, Justice Linden from the Federal Court of
Appeal stated the following in Verdun v. The
Queen, 98 DTC 6175:
An
allowance is usually a monetary payment to cover personal expenses, whereas a
benefit is normally, but not exclusively, a non-monetary benefit. In this case,
the money received by the applicant was meant to cover the cost of his having
meals when he worked at his Elmira office, some 20 miles away from his home in
Wellesley, four evenings per week. While the applicant argues that the amounts
paid were reasonable, the Income Tax Act, as it now stands, does not
permit him to remain untaxed on these receipts, no matter how reasonable they
may seem to him.
Following the principles set out by this Court in Attorney
General of Canada v. MacDonald [1994] F.C.J. No. 378: (1)
these amounts were an arbitrary or fixed amount, that was determined in advance
(even though based on an estimate of the potential cost); (2) they were paid to
cover personal expenses in lieu of reimbursement; and (3) there was no obligation
to account for them. …
[23] I find that the moving allowances
described in the present appeal fit the criteria of CRA’s Policy P-075R and
should be treated as allowances and not reimbursements.
[24] Counsel for the Appellants relies on
the deeming provisions contained in section 174 of the ETA. Counsel for
the Appellants says that the deeming provisions contained in section 174 are a
complete answer to all of the issues in the appeal.
[25] Section 169 of the ETA provides
the general rule for claiming ITCs. Section 170 provides the general
restrictions that apply to registrants who seek to claim ITCs under section 169.
Sections 171 to 193 provide additional rules and restrictions applicable to the
claiming of ITCs in particular situations. Section 174 is one of
these provisions. Therefore, even if the deeming provisions contained in section
174 can apply in this case, it simply places the Appellants in the shoes of the
employees. This section does not automatically entitle the Appellants to claim
the ITCs at issue. In order for the Appellants to claim the ITCs for the moving
allowances paid to employees, sections 169 and 170 must still be applied. The
application of section 174 does not preclude the application of sections
169 and 170.
[26] As is noted above, subsection 174(d)
deems the employer (i.e. the Appellants) to have been the recipients of the
supply of property or services acquired by the employee. Subsection 174(e)
deems the employer to have consumed or used the property or service that is
consumed or used by the employee. Subsection 174(f) deems the employer to have
paid the GST in respect of the supply of property or services.
[27] Section 174 provides
that the employer (i.e. the Appellants) paid the GST. However, in my opinion,
section 174 does not override or supersede the application of the modifiers
contained in sections 169 and 170.
[28] Section 169 determines who is eligible to claim ITCs.
However, it is stated in section 169 that it is expressly subject to other
provisions of Part IX of the ETA. One of these provisions is found in
paragraph 170(1)(b) of the ETA. Paragraph 170(1)(b) provides that no
ITCs may be claimed in respect of any supply acquired for the exclusive
personal use or consumption of an employee unless there would have been no
taxable benefit and that the employee had paid nothing for the benefit. In
this situation the portion of the moving allowance over $650 was a taxable
benefit. It therefore follows that paragraph 170(1)(b) applies to deny the ITCs
that were claimed by the Appellants.
[29] In addition, there was no evidence produced at the
hearing which indicated that the employees paid the Appellants the fair market
value of the benefit.
[30] It should also be noted that subsection 170(2) of
the ETA provides that no amount shall be included in respect of GST paid
except to the extent that the use and considerations are reasonable in
the circumstances.
[31] As is indicated above, the moving
allowances under these appeals were equal to 15% of the annual salary of the
employees who received the allowances. The Minister, in reassessing the
Appellants, made an assumption that the allowances were unreasonable. The
Appellants did not provide any evidence to prove that the allowances were, in
fact, reasonable. For example, the Appellants did not produce any evidence to
prove that the allowances were based on the distance of the move, the number of
family members involved in the move, how the moving allowance was actually
spent or any other relevant fact. I find that the arbitrary provision of the
allowances, based on the employees’ annual salary, to be unreasonable under
subsection 170(2) for the purposes of claiming ITCs under the ETA.
[32] I agree that the deeming provisions
contained in section 174 of the ETA must be considered. However, in my
opinion the deeming provisions in section 174 do not displace the general
and specific restrictions contained in sections 169 and 170 of the ETA.
[33] Counsel for the Appellants noted that
in the decision 3859681 Canada Inc. v. The Queen, 2003 TCC 501 (“Zellers”),
Justice Campbell held that the items purchased by employees of Zellers
were incurred in the course of the commercial activities of Zellers and she
allowed Zellers to claim the ITCs.
[34] In my opinion, the decision of Justice
Campbell in Zellers can be distinguished on the following basis:
1. In Zellers
the parties agreed that the 10% amounts that were paid to the employer were
allowances and that the allowances were reasonable. In the present appeal, the
Minister made an assumption that the allowances were unreasonable.
2. In Zellers
the parties agreed that the allowance was for “all or substantially all”
taxable supplies. In the present appeal, Counsel for the Minister argued that
the Appellants were not entitled to claim ITCs as the allowance is not for
supplies that are all or substantially all taxable supplies.
3. Finally,
the Zellers appeal was an appeal under the informal procedure. These
appeals are under the General Procedure Rules of the Tax Court of Canada Rules.
[35] Before closing I wish to make
reference to the following:
1.
The treatment for
moving allowances is included in CRA’s policy P‑075R. The policy states:
… A moving allowance of
up to $650 is treated as a non-taxable reimbursement to the employee, as long
as the employee certifies that the amount was spent on moving expenses. […] The
amount of a moving allowance, which is required to be included in an
individual’s income as a taxable benefit, is not considered to be an allowance
pursuant to section 174 of the ETA.
I
have concluded that this policy statement is a proper interpretation of the
law.
2.
This sentiment is
further echoed by David Sherman in his analysis of section 174. He says at page
114-128 of Canada GST Service, C3:
For GST/HST purposes […]
a moving allowance of up to $650 is treated as a non-taxable reimbursement to
the employee. [T]his amount is considered a reimbursement for GST/HST purposes.
The person paying the amount (the employer) would then be able to claim an
input tax credit, or rebate, on the reimbursed amount, subject to any other
restrictions in the Excise Tax Act.
The amount of moving
allowance which is required to be included in an individual’s income as a
taxable benefit (i.e., any amount over $650) is considered to be remuneration,
or income from employment, of that individual. As employment income, this
amount would not be subject to GST/HST, and not eligible for purposes of
determining an input tax credit entitlement.
[36] For the reasons noted above, I have
concluded that the appeals should be dismissed, with costs.
Signed at Vancouver, British Columbia,
this 12th day of February 2009.
Little
J.
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