Citation: 2017 TCC 225
Date: 20171110
Docket: 2016-4465(GST)I
BETWEEN:
CWAY
LOGISTICS LTD.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Bocock J.
I. Introduction
[1]
Registrants under the Excise Tax Act, RSC
1985, c. E-15, as amended (the “ETA”) are entitled to claim input tax
credits (“ITCs”) for goods and services tax (“GST”) paid on taxable supplies
and goods acquired in relation to business activities. Employers engaged in
business may reimburse employees a reasonable vehicle allowance where such
employees provide their own motor vehicles in the course of their employment
duties. Where such a vehicle allowance is paid, the ETA specifically
permits the employer to claim a prescribed or deemed input tax credit on the
employee acquired supplies. This allows the employer to recover the ITCs concordant
with the GST which it would have otherwise expended on the taxable supplies consumed
in commercial activities had the employer directly purchased the goods and
services rather than the employee.
II. Facts
[2]
The present appeal involves the denial by the
Minister of National Revenue (the “Minister”) of $4,935.00, being the amount of
an otherwise statutorily permitted ITC calculated on certain paid vehicle
allowances.
[3]
Most factual aspects of the appeal were agreed to
by the parties within a partial agreed statement of facts presented at the
outset of the hearing. Any further facts were quickly established and settled by
concurrence after the commencement of the hearing.
[4]
The Appellant (“CWAY”) is a corporation which
provides interline transport services to its only customer, Dynamex Canada (“Dynamex”).
[5]
CWAY has two employees, Ashley and Christopher. They
drive the vehicles used to provide the transport services to Dynamex. Ashley and
Christopher own the vehicles, not CWAY. Ashley and Christopher are also CWAY’s
equal and only shareholders. In providing their transport services as
employees, Ashley and Christopher accurately log the business versus personal
use of their vehicles.
[6]
For their efforts as employees, Ashley and Christopher
receive wages and a motor vehicle allowance from CWAY. The vehicle allowance is
calculated using the rates prescribed by the Minister under the ETA and
applicable regulations. The allowance is paid only on the business mileage
driven. As shareholders, all transactions of the employees/shareholders are
balanced and reconciled to ensure that among shareholder loan accounts, paid
dividends and the personal use of vehicles there is no unaccounted for personal
benefit accuring to the employees/shareholders.
[7]
The peculiarity of the arrangement arises from
Dynamex’s provision of fuel cards. A fuel card is provided to each of Ashley and
Christopher to pay for fuel on the personal vehicles which are, in turn,
deployed for CWAY’s business. When Dynamex pays the invoices of CWAY for the
transport services, it deducts the charges incurred by Ashley and Christopher on
the fuel cards. In turn, the full invoices (including the set-off or withheld
reimbursement for the fuel cards) is recorded as revenue by CWAY. In short,
CWAY records the revenue on the invoices. However, CWAY receives the lesser
amount as payment from Dynamex. This creates a deficiency between the lesser cash
receipts and the greater recorded revenue of CWAY. This cash deficiency is
exactly represented by the withheld fuel pre-payment on the fuel cards (the
“fuel cost deduction”).
[8]
As noted above, CWAY claims the prescribed ITCs
relating to the vehicle allowance paid to Ashley and Christopher. The Minister
has disallowed those ITCs and hence, the appeal before the Court.
III. Legislative
Regime
[9]
The ETA specifically prescribes deemed ITCs
on the travel and other allowances paid to employees incurring expense for the
employer’s commercial activities.
[10]
Section 174 of the ETA, provides as
follows [excerpted for
relevance]:
174 For the
purposes of this Part, where
(a)
a person pays an allowance
(i)
to an employee of the person,
… 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
The following
rules apply:
…
(d) the person
is deemed to have received a supply of the property or service,
…
[11]
Relevant to a vehicle allowance, section 174 of
the ETA, as seen above, refers to subsection 6(1)(b)(vii.1) of the Income
Tax Act, RSC 1985, c.1, as amended (the “Act”) which exempts a taxpayer
from including certain reasonable motor vehicle allowances from income by
providing as follows [emphasis
added]:
Amounts to be included as income from office or employment
6 (1) There shall be included in … income of a
taxpayer …
…
Personal or living expenses
…
(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
…
(vii.1) reasonable allowances for the use of a motor vehicle
received by an employee (other than an employee employed in connection with the
selling of property or the negotiating of contracts for the employer) from
the employer for travelling in the performance of the duties of the office or
employment,
IV. The
Minister’s Arguments for Disallowance
[12]
Counsel for the Respondent submitted the
following as the Minister’s rationale for denying the deemed ITCs.
[13]
Firstly, section 174 allows registrants to claim
ITCs on employee allowances. Even though the allowances are paid to a
registrant’s own employees, the provision deems certain prescribed pro rata
ITCs to have arisen on the allowances, provided that the allowance is
reasonable. The vehicle allowance that CWAY pays Ashley and Christopher is
unreasonable because it is based on the inclusion of the cost of fuel when it
should not be. CWAY receives its revenue from Dynamex net of the fuel cost
deduction. However, Ashely and Christopher did not incur fuel costs because such
expenses were prefunded by Dynamex to the extent of the fuel cost deduction. Definitionally,
it is unreasonable for CWAY to pay a vehicle allowance which reimburses expenses,
the bulk of which are already prepaid and not owed to and/or incurred by the
employee.
[14]
Secondly, CWAY asks that the Minister (and now
the Court) to conflate CWAY with its employees by improperly lifting the
corporate veil in order to regard the Appellant as both CWAY (who received
lesser revenue and reconcilies the shareholder loan and dividend accounts) and its
employees (who qua employees do not incur the fuel costs) for the purposes
of section 174.
[15]
In Meredith v. R., 2002 FCA 258 (CanLII),
[2002] F.C.J. No. 1007 (QL), the Federal Court of Appeal stated at paragraph 12
that:
Lifting the
corporate veil is contrary to long-established principles of corporate law.
Absent an allegation that the corporation constitutes a “sham” or a vehicle for
wrongdoing on the part of putative shareholders, or statutory authorisation to
do so, a court must respect the legal relationships created by a taxpayer (see
Salomon v. Salomon & Co. (1896), [1897] A.C. 22 (U.K. H.L.); Kosmopoulos
v. Constitution Insurance Co., 1987 CanLII 75 (SCC), [1987] 1 S.C.R. 2
(S.C.C.)). A court cannot recharacterize the bona fide relationships on the
basis of what it deems to be economic realities underlying those relationships
(see Continental Bank of Canada v. R., 1998 CanLII 794 (SCC),
[1998] 2 S.C.R. 298 (S.C.C.); Shell Canada Ltd. v. R., 1999
CanLII 647 (SCC), [1999] 3 S.C.R. 622 (S.C.C.); Ludmer c. Ministre du
Revenu National, 2001 SCC 62 (CanLII), 2001 SCC 62 (S.C.C.) at para. 51).
[16]
Without the inclusion of the fuel cost deduction
as a component in the vehicle allowance, the rate of the allowance is too high
and therefore, unreasonable. The fuel deduction cost contains a personal use
component. Section 174 must take into account subparagraph 6(1)(b)(vii.1) of the
ITA, which deals with the non-inclusion of motor vehicle allowances in
employee income, to determine what is reasonable allowance: I-D Foods
Corporation v. The Queen, 2013 TCC 15.
[17]
Lastly, subparagraph 6(1)(b) was applied in the
Federal Court of Appeal case Ville de Beauport v. Minister of
National Revenue, 2001 FCA 198 (CanLII), [2002] 2 C.T.C. 161. That case
also, at paragraph 26, refers to section 7306 of the Income Tax Regulations
as establishing a useful reference point for measure of a reasonable vehicle
allowance. In this appeal, the allowance should not include fuel costs because
the employees possessed and used pre-paid fuel cards for such expense to the
extent of the fuel cost deduction. Implicit in this argument is that whatever
accurate and elaborate mathematical calculations are used to ensure that no
benefit or unreasonable vehicle allowance is ultimately paid, initially, the
employee had not borne the costs.
[18]
In response, the Appellants simply argue that at
the end of the reconciliation exercise, there is no slippage or leakage of an
undeclared or unwarranted benefit. Although Ashley and Christopher used the
fuel cards, all such value relating to those cards was ultimately posted to
their personal tax-paid benefit through dividends and recognized by reduced
cash receipts to CWAY reflected by the fuel cost deductions set-off by Dynamex.
In short, the pro rata portion of the fuel cost reduction is both accurately
allocated to the employees personally and reported as revenue corporately.
There are no ITCs claimed beyond those relating to the rightfully and
accurately allocated imputed taxable supplies consumed in commercial activities
and acquired by Ashley and Christopher in the course of their employment.
V. Decision
and Analysis
[19]
The broad issue before the Court is whether the
requirements of section 174 have been met. Are the amounts for the vehicle
allowances paid reasonable given the facts of the case such that imputed ITCs
may be claimed? To answer that question the court must pursue the somewhat
unique facts and circumstances of this case as they match up against section
174.
[20]
The sub-issues for doing so are:
a)
is there an
unreasonable component of the allowance based upon the methodology used?
(i) the
process followed
[21]
Respondent’s counsel does not dispute that the
process followed by CWAY was meticulous or ultimately accurately reflective of
the allowance paid. In due course, the process reconciled all otherwise
necessary components for the payment of a reasonable vehicle allowance. Mileage
was carefully tracked; mileage logs were used. CWAY received lesser revenue
equal to the fuel card charges including GST; the fuel cost deduction was
inclusive of GST. No shareholder received a non-taxable benefit from the fuel
cards and the ITCs claimed were not inflated or inaccurate, save for the sole
issue of the use at the outset by the employees of the fuel cards. One might
logically ask, what did Ashley and Christopher ultimately receive? By year end
an offsetting entry, accurately reflective of the personal component of the
fuel cost deduction, was made to their respective shareholder loan accounts. Dividends
were then declared to offset the reflected advances to shareholders. This
removed any issue concerning an unaccounted shareholder benefit. This amount
was relatively simple to calculate since it represented the difference between
the “invoiced” services and the revenue received by CWAY. By definition, this
is precisely and arithematically the fuel cost deduction. The paid vehicle
allowance otherwise reimbursed a portion of this allocation, but solely to the
mileage related to commercial activities.
(ii) are
the rates beyond those prescribed?
[22]
There was no dispute by the Respondent that the
vehicle allowance amounts were anything other than reasonable amounts paid
pursuant to the prescribed CRA rates under Regulation 7306. The essence
of the disagreement is that the employees had not incurred the cost of the fuel
at the time of procurement which, as asserted by the Respondent, is a component
of the prescribed allowances under Regulation 7306.
b) does the methodology followed otherwise
offend or fall outside prescribed ITC in section 174?
(i) the
section itself
[23]
Section 174 is clear. In order for an employer
to claim the deemed ITC on vehicle allowances, the section imposes certain
conditions. The recipient must be an employee. The amount must relate to
taxable supplies acquired by the employee in the course of the registrant’s
commercial activities or the use of a motor vehicle for similar purposes. The
amount must also be a reasonable allowance as if it were paid and non-taxable under
sub-paragraph 6(1)(b)(vii.1) of the ITA.
(ii) its
context
[24]
Within section 174 of the ETA, reference
is specifically made to sub-paragraph 6(1)(b)(vii.1) of the ITA. Beyond
that, the section itself falls within Subdivision C, Special Cases, which
creates input tax credits for registrants in circumstances where same would
otherwise be unavailable.
(iii) its purpose
[25]
The purpose of the section is not critically
different from its stated textual object. The subsection creates a deemed ITC
in respect of vehicle allowances falling within the statutory definition to
ensure that where employees supply their own vehicles, maintenance, fuel and insurance
in pursuit of their employer’s business, such commercial activity of the third party
employer is not denied the ITCs in respect of such goods and services so
consumed. Logically, were such services and goods acquired directly by CWAY
under the ETA, ITCs would be available.
[26]
Specifically referable to the overall purpose of
the statute and its incorporation by reference of the ITA, is the conclusion
of Justice Archambault in I-D Foods Corporation at paragraphs 24 and 25:
[24] In the Goods and Services Tax Reporter, in section
65-800 under the heading “Employee Allowances”, it is stated.
Subparagraph
6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA applies. These
subparagraphs apply to travelling allowances, including automobile allowances
paid to salespersons . . . Therefore an allowance which is not reasonable
under the per kilometre test in subparagraph 6(1)(b)(x) of the ITA
and the duplicating reimbursement test in subparagraph 6(1)(b)(xi) would
not be a reasonable allowance for purposes of section 174 of the Excise
Tax Act (ETA). However, the individual may be able to pursue a rebate
under section 253.
[only those relevant emphasized sections are
reproduced]
[25]I also believe that this interpretation of section 174 is the
most reasonable one given that the question to be answered under section 174 is
whether the allowance would be a “reasonable allowance for those purposes,”
i.e., for the purposes of subparagraph 6(1)(b)(v) of the ITA. The
implicit reference to subparagraph 6(1)(b)(x) of the ITA is required
because of the close relationship between sections 174 and 253 of the ETA and
subparagraph 6(1)(b)(v) of the ITA. It is obvious that Parliament
intended that the three provisions be closely connected. This is evident not
only from the wording of paragraph 174(c) and subsection 253(1) of the
ETA, but also from the explanatory notes which where issued by the Department
of Finance when paragraph 174(c) was amended in 1993. To understand the context
of these notes and the amendments, it is useful to reproduce here sections 174
and 253 as they read before the 1993 amendments:
174.
Travel and other allowances — For the purposes of
this Part, where
…
(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,
the person shall be deemed to have
received a taxable supply and …
[27]
While Justice Archambault was dealing with the
override of subparagraph 6(1)(b)(x) (concerning the need for a per kilometre
allowance) to subparagraph 6(1)(b)(v) of the ITA (the related general
travel allowance provision), the statement nonetheless shows the need to
harmoniously reconcile all the related components necessary to a successful
claim of the deemed ITCs under section 174.
VI.
Further Analysis and Conclusion
[28]
The re-stated issue is whether the vehicle
allowance, as measured within the context and purpose of section 174 of the
ETA and subsection 6(1) of the ITA (the “operative sections”), is
reasonable. The Court rejects the argument of the Respondent concerning the
corporate veil. How the ultimate amount of the vehicle allowance is reconciled
is not considered within the operative sections. The question is one of
reasonableness, overall methodology and compliance. If incurred by the
employee, could such an “allowance” be transformed, mutatis mutandis,
into a subparagraph 6(1)(b)(vii.1) (in I-D Foods it was 6(1)(b)(v)) non-taxable
allowance. The mileage calculation was in compliance, the actual allowance was
lifted from the regulations and there was no double counting or unwarranted or
unreported payment as a result of the meticulous year-end reconciliation.
[29]
Further, the fact that full reconciliation did
not occur until the end of the year is also consistent with the analogous “duplicating
reimbursement” test referred to by Justice Archambault in I-D Foods. The
end of the year would be the very time when such an exclusion would be assessed
and determined by the taxpayer. Suggesting that the calculation at any given point
would be unreasonable because of the advance payment represented by the
ultimately reconciled fuel cards is not accurate. By the year end, all was
right. The fuel card personal benefit was fully in the hands of the employees
as a taxable benefit, the vehicle allowance was reasonable and the imputed ITCs
were claimed only on the commercial activities. The same could be said for any
related year end determination related to a subparagraph 6(1)(b)(v) or 6(1)(b)(vii.1)
exclusion.
[30]
With further reference to I-D Foods,
Justice Archambault, although he disallowed the appeal because the company
did not comply with sub-paragraph 6(1)(b)(x) (the per kilometre allowance
override), stated the following:
[29] In order for
the determination made by IDF (that the allowance was a reasonable allowance at
the time it was paid) to be reasonable, it had to be made in conformity with
subparagraph 6(1)(b)(v), taking into account the deeming rule of subparagraph
6(1)(b)(x) of the ITA. The purpose of enabling an employer, under paragraph
174(c) of the ETA, to determine what is reasonable at the time of the payment
is not to give the employer the power to define the legal concept of
“reasonable allowance” but to give it the flexibility to conclude at that time
(here, every two weeks), after taking into account all the adjustments made in
the course of the year, including those at the end of the year, that the
allowance will meet the legal definition of “reasonable allowance”.
[31]
The vehicle allowance was painstakingly accurate
and compliant with those available guideposts. By year-end, it was fully
reconciled, reasonable and accurate. While the ultimate methodology may have
been a bit convoluted, circuitous and unorthodox, it ultimately complied with
the legislation and regulations within the relevant measured period: annually.
CWAY paid its employees a reasonable allowance for the use of their motor
vehicles in CWAY’s commercial activities, which would otherwise have qualified
for exclusion from the employees’ income under subparagraph 6(1)(b)(vii.1) at
the conclusion of the year. As such, CWAY is entitled to the deemed ITCs for
the calculable taxable supplies related to the vehicle expenses.
[32]
Costs shall be fixed at $150.00.
Signed at Ottawa,
Canada, this 10th day of November 2017.
“R.S. Bocock”
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