Date: 20010516
Docket: 1999-4570-GST-G
BETWEEN:
CITY OF REGINA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1]
The City of Regina ("City" or
"appellant") appeals from an assessment issued
pursuant to Part IX of the Excise Tax Act
("Act") which denied the City's claim
for input tax credits ("ITC's") in the amount
of $246,435.63 pursuant to subsection 169(1) of the Act in
respect of costs incurred for capital construction of
improvements to several highways within the limit of the City
during 1996, 1997 and 1998 that the appellant refers to as
"highway connector routes".
[2]
The Minister of National Revenue ("Minister") allowed
only a modest portion of the aggregate amount claimed for
ITC's, disallowing the balance. In the Minister's
view the construction of improvements to the highway connector
routes was not a taxable supply made by the City since the City
did not carry on a commercial activity when making these
improvements. The City was under a statutory obligation to
maintain and repair the highway connector routes. In any event,
the Minister maintains the repairs constitute exempt supplies in
accordance with sections 10, 21 and, after 1996, section 21.1 of
Schedule V, Part VI of the Act. The Minister also appears
to take the position that the construction in issue were mere
improvements, or repairs and maintenance, of the roads and not
capital improvements.
[3]
The principal issue before me is whether the appellant carried on
a commercial activity when constructing the highway connector
routes. Pursuant to subsection 169(1) of the Act a
registrant under the Act is entitled to ITC's to the
extent it used supplies with respect to which it claims
ITC's in the course of a commercial activity. The City is a
registrant. In effect, the City claims it provides a service of
selling goods and services to the Government of Saskatchewan
(sometimes hereinafter referred to as "Province" or
"Saskatchewan") for consideration in the form of
operating grants it receives from the Province.
[4] A
"highway connector route", sometimes referred to as a
"connector route" is a road in the City that connects
two or more provincial highways passing through or near the City
or that leads to a provincial highway. These routes are used by
residents of the City as well as non-residents travelling
along and between provincial highways. The following are the
relevant highways and their connector routes in the City:
Highways #6 and #11 join with Albert Street North and continue
to Albert Street South which joins Ring Road and Highway #1 going
East-West and Highway #6 South;
Highway #33 joins with Arcola Avenue which crosses Ring Road
and then meets up with Victoria Avenue;
3)
Highway #1 joins with Victoria Avenue which meets up with Albert
Street;
4)
Highway #46 joins with McDonald Street which meets up with Ring
Road;
5)
Highway #1 meets with Lewvan Drive which continues north to
Pasqua Street and meets with Highway #11;
6)
Highway #1 joins with Ring Road which continues east, north and
then west to Pasqua Street providing access to Highways #33,
#46, #6, and #11, and;
7)
The north and south service roads along Victoria Avenue and the
east and west service roads along Albert Street join the same
highways as Victoria Avenue and Albert Street.
[5]
The main portion of the claim for ITC's, approximately 80
per cent of the claim, relates to one project, Lewvan Drive
to Pasqua Street meeting Highway #11 (numbered 5 above and
referred to as the "Pasqua Project"). Pasqua Street
crossed over a Canadian National Railway ("CNR")
crossing. The City dug out a roadway and built a bridge for the
railway tracks over Pasqua Street; Pasqua Street was also
widened. The City billed CNR for the cost of relocating the
railway tracks during construction and charged Goods and Services
Tax ("GST"). (From time to time private citizens of
the City of Regina request certain services from the City. The
City bills for these services and collects GST). The City can
ascertain the costs of each element of construction of the Pasqua
and other projects, such as the road and bridge.
[6]
Roads are built and improved in order to relieve traffic
congestion. Roads may be widened from two lanes to four lanes or
more and speed limits may be increased. This was the purpose of
the Pasqua Project.
[7]
Mr. Kenneth Kosolofski, former Manager of Accounting
Services for the City, testified that when the City uses its own
employees for repairs and maintenance of city roads GST is not
collected. To construct roads, the City obtains the services of
subcontractors and GST is charged. The Government of Saskatchewan
owns title to all streets and lanes in the Province, including
those in the City.[1] These include the highway connector routes. The
Government of Saskatchewan delegates uses to the municipality.
Under The Urban Municipality Act, 1984[2] the City is required to
keep every street in a reasonable state of repair. Subject to the
approval of the Minister of Highways and Transportation of the
Province, City Council of Regina may exercise its powers to
regulate traffic on a highway connector route for a temporary
period for the carrying out of the construction, repair or
improvement of the route.[3]
[8]
Each year the City Council prepares a capital works development
plan for not less than a five-year period including the current
year, showing the estimated cost and proposed sources of
financing for each capital work for each year; a copy of the plan
is sent to the provincial government.[4]
[9]
The City budget identifies funds to be received from the Province
for a capital work.[5] A separate account is maintained for each source of
funding. The City receives provincial funding for road
construction and repairs pursuant to The Municipal Revenue
Sharing Act[6]
and The Urban Municipalities Revenue Sharing
Regulations.[7]
During the years in appeal the City also received funds under the
National Infrastructure Program of the federal government. Other
sources of municipal revenue used to repair, maintain and
construct roads are from municipal taxes and levies.
[10] An
operating grant from the Province, Mr. Kosolofski explained,
may be used for maintenance as well as for capital, that is, to
construct roads or for any other purpose the City deems proper
which, I understand, may include library and health services, for
example, as well as roads. The grant is unconditional. No
particular project need be undertaken. Mr. Robert Linner, City
Manager for Regina, produced a letter from the Deputy Minister of
Saskatchewan Highways and Transportation which acknowledged,
among other things, that compensation is paid to the City to
maintain, operate and construct sections of public highways
within the City limits. In recognition of the mutual interest the
Province and City have in highway connectors, the Province
provides unconditional funding to the City in the form of general
operating grants for use, in part, to maintain and construct
highway connectors, including other things of municipal
responsibility.
[11] The
Director of Municipal Engineering for Regina,
Mr. David Colm, explained that City and provincial
government engineers are in continuous touch with each other to
plan road improvements in and around Regina. The Province may
identify the City's needs for road construction and make
suggestions to the City. Both the City and the Province may
undertake separate studies of highways and roads within Regina.
Wherever a work is done on a connector, there is a close working
liaison between the City and the Province since both municipal
and provincial roads are affected.
[12] Mr.
Linner explained that the Province has also given conditional
grants to assist municipalities for specific projects. A
municipality must apply for a conditional grant whereas there is
never an application for an unconditional grant. In the latter
case, which is very typical, the City carries on its public works
without provincial consent: no paper trail is necessary.
[13] Projects
funded in part by the federal government under the National
Infrastructure Program; applications are made to a Joint
Federal-Provincial Committee for a specific project. The
City of Regina made about two or three such applications
totalling $12.9 million. As between the City and the Province,
the City relies on its ongoing relationship to construct projects
like Pasqua. The Pasqua Project was advanced by the City as a
connector requiring upgrade. The Pasqua Project was funded by the
Province as to 18 per cent, the City as to 49 per cent and the
National Infrastructure Program as to 33 per cent.
[14] There has
been some question as to whether the construction of the
connector routes are capital or repair and maintenance of roads.
Respondent's counsel raised the argument, for example, that
the maintenance and repair of roads within the City's
boundaries are generally considered to be part of standard
municipal services. I do not question this. However, the evidence
before me is that the Pasqua Project, for example, was more than
merely repairs and maintenance of a road; it was the construction
of a wholly new road and was a capital project. The other
projects also appear to be capital works.
Argument
[15] For the
purposes of this appeal,
"commercial activity" of a person means
(a) a business carried on by the person (other than a business
carried on without a reasonable expectation of profit by an
individual, a personal trust or a partnership, all of the members
of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person,[8]
[16] The
Act defines "business" to include
...a profession, calling, trade, manufacture or
undertaking of any kind whatever, whether the activity or
undertaking is engaged in for profit, and any activity engaged in
on a regular or continuous basis that involves the supply of
property by way of lease, licence or similar arrangement, but
does not include an office or employment;
. . .
[17] An
"exempt supply" is defined by subsection 123(1) to
mean a supply included in Schedule V. Part VI of Schedule V sets
out exemptions for supplies made by public sector bodies. A
"public sector body" means a government or a public
service body and refers to a municipality, including City of
Regina.[9]
[18] Section
10 of Part VI of Schedule V[10] states that:
A supply made by a public sector body of any property or
service where all or substantially all of the supplies of the
property or service by the body are made for no
consideration.
[19]
ITC's may be claimed by a person only to the extent that
the supplies in question are consumed or used in the course of a
commercial activity.[11] As Bowman J., as he then was, concluded in
Centre provincial de ressources pédagogiques c. R.,
"... if all the supplies produced by a public sector
body are exempt, no input tax credit can be claimed."[12]
[20] The
respondent's position is that the City pursues a statutory
obligation when it constructs the connector routes. However, the
construction of these roads by the City does not comprise a
commercial activity since the making of the construction project
was an exempt supply pursuant to section 10 of Part VI of
Schedule V. The respondent's view is that since the
provincial grants received by the City were unconditional and not
tied to a specific case, no consideration within the meaning of
the Act was paid to the City for the making of the
project; there was no link between the Province and the City to
build the project. The Crown appears to have relied on the fact
that the City determined that less than one-half of the amount of
funding came from the Province, and thus the provincial grants
were not made specifically for the projects, in particular the
Pasqua Project.
[21] In my
view the construction of the connector routes was a commercial
activity within the meaning of the Act. The connector
routes are used by the residents of Saskatchewan and others in
carrying out their commercial activities and benefits the
Province. The new road and additions to older roads by way of
guard rails, for example, improves the Province's property.
The appellant was involved in "an undertaking of any kind
whatever", within the definition of "commercial
activity". In Hleck, Kanuka, Thuringer v. Canada,[13]my
colleague Bell, J. explained that:
The test set out under the Act is more liberal than the
test for deductibility of a business expense under the Income Tax
Act. Expenditures made for the purpose of gaining or
producing income from a business are, by definition, made in the
course of commercial activity. However, those made in the course
of commercial activity are not, necessarily, made for the purpose
of gaining or producing income from a business. [emphasis
added]
. . .
[22] In
Timmins v. Canada,[14] the Federal Court of Appeal held that the
Province of New Brunswick carried on a business within the
meaning of "business" under the Income Tax
Act, which meaning includes the words "undertaking of
any kind whatever".[15] The New Brunswick Government provided services
outside Canada for the purpose of establishing and administering
several dairy farms in Malawi, in return for a fee and the
reimbursement of certain expenses. The province of New Brunswick
was carrying on a business even though the work was undertaken
for humanitarian reasons as well as to increase employment
opportunities in New Brunswick and for economic stimulation
in that province.
[23] In its
Technical Notes of July 1997 the Department of Finance states
that section 10 of Part VI of Schedule V exempts supplies by
a public sector body of property or services where all or
substantially all of the body's supplies of the property or
service are made free of charge. And, because they are made free
of charge, that department concludes that the supplies are not
considered to be made in the course of a commercial activity.
[24] The fact
that the work is undertaken pursuant to a statutory obligation
does not disqualify the work from the character of a commercial
activity, so long as the person who undertook the work did not
make exempt supplies in carrying on the undertaking. To the
extent any part of a business consists of making exempt supplies,
that part must be notionally severed from the other parts of the
business.[16]
[25] The issue
now is whether the City made an exempt supply. Did the City
receive consideration from the Province for making the projects?
The City states that it received consideration in the form of
operating grants and such grants should be considered to be
consideration within the meaning of the Act.
[26]
Subsection 123(1) defines consideration to include:
...any amount that is payable for a supply by operation
of law;
[27] The
provincial grants, appellant's counsel submitted, are paid
to it by operation of law, notwithstanding the grants are
unconditional. Counsel relied on Technical Information Bulletin
B-067, dated August 24, 1992
("T.I. Bulletin B-067") in which the
Department of National Revenue, Customs and Excise, at the time,
stated that "if it is established that a supply takes place
in return for a transfer payment, the payment may be
regarded... as ‘consideration' for a
supply". A "grant" is a form of "transfer
payment".
[28] The
author of Part I of T.I. Bulletin B-067 explains that "if
there is a direct link between a transfer payment received by a
person and a supply provided by that person, either to the
grantor of the transfer payment or to third parties, the transfer
payment will be regarded as consideration for the supply".
The Bulletin emphasizes that "[a] direct link may not
always be apparent and therefore it will be necessary to consider
the circumstances surrounding each case". Relevant
circumstances may include: the agreement between the parties; the
conduct of the parties; the objectives or policy statements of
the grantor; and the legislation, by-laws and any
applicable regulation under which the payment is made.
[29] Part II
of T.I. Bulletin B-067 states policy guidelines to clarify
whether a direct link exists between a transfer payment and a
supply and, therefore, whether the transfer payment is
consideration. According to these guidelines, where a supply
takes place in respect of a transfer payment, there will be a
direct link between the supply and the transfer payment if the
supply is provided to the grantor for a "purchase
purpose" as opposed to a "public purpose". The
Bulletin refers to a "purchase purpose" as "one
which benefits the grantor or a specific third party and may be
of a commercial nature" and to a "public
purpose" as "one which benefits the general public or
a particular segment of the general public".
[30] The
appellant contends that there was a supply in respect of the
grant and that the province of Saskatchewan is the recipient of
this supply since it received a direct benefit since its assets
were enhanced. As to the purchase purpose, the appellant
emphasizes that T.I. Bulletin B-067 states that "[a]
purchase purpose may apply even if the grantor is a public sector
body and some public benefit results".
[31] The
concept of linkage between the grant or subsidy and the supply is
not found in the Act itself. In an earlier appeal, Des
Chênes (Commission Scolaire) c. R., 2000
CarswellNat 791, before Lamarre Proulx, J. counsel for the
respondent submitted among their authorities an article published
in the Vat Monitor[17] entitled "When Is a Link Direct?"
Lamarre Proulx, J. writes that according to this article, at page
9, paragraph 30, subsidies are viewed as a consideration when
they are directly linked to the price of the supply.
T.I. Bulletin B-067 adopts this notion of direct link
between the subsidy and the supply of the service.[18] The concept of
linkage is simply a means to determine if a transfer payment was
made to fund a particular supply of, in other words, if a supply
was made for consideration.
[32] The
concept of direct link permits one to recognize if consideration
was paid for a supply. Normally, when a supplier contracts to
provide a supply, the cost or consideration for that supply
appears in the contract. An unconditional grant or subsidy does
not identify a specific purpose or cause for funding. If a person
can reasonably determine that there is a specific object for the
grant, as it is usually described in a contract, then linkage
between the grant and the supply exists and the amount of the
grant is consideration for the supply for purposes of the
Act. Linkage, therefore, serves as a valuable tool to
determine if there is consideration. An example of linkage is
found in the facts leading to a ruling by the Canada Customs and
Revenue Agency (CCRA), apparently dated November 18, 1999.
The city of Winnipeg entered into a contract with the Government
of Manitoba to construct two additional lanes of road on a major
highway and the Government of Manitoba agreed to pay a portion of
the costs of construction. The CCRA agreed that the payment by
the province of Manitoba to the city of Winnipeg was
consideration for taxable supplies of construction services made
to the province of Manitoba. The CCRA ruled correctly since one
can readily identify the cost of the supply, which was described
in the contract between the two governments. This is not the
situation before me.
[33] The
appellant also relied on the reasons for judgment in Meadow
Lake Swimming Pool Committee Inc. v. The Queen[19] in which the Court,
referring to T.I. Bulletin B-067, found that grants were
consideration when a municipality gave funds to a non-profit
organization to operate a swimming pool owned by the
municipality. The trial judge, in finding a direct link between
the supply made by the non-profit organization and the grant,
considered the plans between the municipality and the non-profit
organization early in the planning stages of the pool's
construction. Similarly, the City argued, an agreement existed
between it and the Government of Saskatchewan that the City would
build connector routes, even though the grants to fund the
connector routes were unconditional. There was an accepted
practice or an implied agreement between the City and Province
that varying portions of unconditional grants were to be used,
and were used, for construction of connector routes, as well for
other things.
[34] The facts
in Meadow Lake, supra, are not at all similar to those at
bar. The swimming pool was the only asset owned by the appellant
in that appeal. Any grant given by the municipality to the
corporation operating the swimming pool could be for only one
purpose, the operation of the swimming pool, whether or not the
municipality specified the intended use of the funds. This is not
what is before me.
[35] Appellant
also relied on paragraph 141.01(3)(a) of the
Act:
Where a person consumes or uses property or a service in the
course of an endeavour of the person, that consumption or use
shall, for the purposes of this Part, be deemed to be
in the course of commercial activities of the person, to the
extent that the consumption or use is for the purpose of making
taxable supplies in the course of that endeavour; and
. . .
[36] The word
"endeavour" means, among other things, "a
business of the person,..."[20]
[37] All the
supplies used in the course of making the project, appellant
submitted, were used for the purpose of making taxing supplies in
the course of an endeavour, namely providing a service or selling
a good or service to the Government of Saskatchewan.
[38] Counsel
for the appellant argued in the alternative that if the grant
received from the Province is not consideration for the projects
then, in accordance with paragraph 141.01(1.2)(a) of the
Act, the amount of the grant may be deemed consideration
for the project. Paragraph 141.01(1.2)(a) deems a grant by
a government for the purpose of funding an activity involving the
making of taxable supplies to be deemed consideration for those
supplies but only for the purpose of section 141.01. This
provision and paragraph 141.01(3)(c) do not aid the
appellant. Section 141.01 generally sets out the rules where,
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 ITCs that the registrant
may claim. The effect of subsection 141.01(2), for example, is
that unless an input is acquired for the purpose of making
supplies "for consideration", no input tax credits
will be available. The provision does not determine whether a
supply is made for consideration on the facts at bar.
[39] Lamarre
Proulx, J. adopted the rational set forth in T.I. Bulletin B-067
and searched for a direct link between subsidies paid by the
Quebec Department of Transport to school commissions in the
Province for the purpose of transporting students between their
homes and schools at no cost. The school commissions contract
with independent carriers for this purpose and pay the
independent carriers for their services, including the GST. In
the past, the school commissions claimed and received a partial
rebate of GST in accordance with section 259 of the Act on
the amount paid to the independent carriers. Subsequently the
school commissions claimed ITCs representing the difference
between the total GST paid to independent carriers and the
amounts refunded as partial rebates. The Department of Transport
subsidy did not consider the number of children requiring
transportation and if a school commission managed to organize its
transportation so as to reduce costs covered by the subsidy, it
may retain a portion of the supplies.
[40] Lamarre
Proulx, J. held that the evidence did not show that the subsidy
provided by the Department of Transport was linked to the price
of the transportation service. Not only did the Department of
Transport have no obligation with respect to the cost of the
students' transportation service, but the school
commissions had broad latitude with respect to the use of the
funds allocated for transportation. Thus, there was no link
between the payment of the subsidy (or grant) and the cost of the
service. The grant was not in the nature of a payment of the
price of the service and no consideration is paid for the
service.
[41] I do not
question that officials of the City and officials of the
Government of Saskatchewan were in regular, if not constant,
touch to improve the highway system of the Province in and around
Regina. I accept that each level of government let the other know
of its intentions and that efforts were made to coordinate their
construction activities. It may well be that in determining the
amounts of unconditional grants to the City, the Government of
Saskatchewan included monies for construction of, or additions
to, highway connectors. However, on the evidence before me I
cannot find that the amount of any unconditional grant, in whole
or in part, was related to a particular project before me that
the Province agreed to subsidize. Hence, no consideration was
paid to the City by the Government of Saskatchewan.
[42] The
appeal is dismissed with costs.
Signed at Ottawa, Canada, this 16th day of May
2001.
"Gerald J. Rip"
J.T.C.C.
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