Metropolitan Toronto Coach Terminal v. Ontario (Minister of Revenue), [1998] 3 CTC 139

Ferrier J.:

This motion is to determine a question of law by way of special case regarding an assessment issued to the Metropolitan Coach Terminal Inc. (the “Terminal”) dated February 28, 1991, under the Retail Sales Tax Act, R.S.O. 1980, c. 454 as amended (the “Act”). On the basis of agreed facts, the court has been asked to determine whether the Terminal can claim that a tax exemption applies to certain repair services provided to it by the Toronto Transit Commission (the “TTC”), of which it was a wholly owned subsidiary at the relevant times. The Ministry of Finance claims that there is no such applicable exemption.

The Facts

During the period covered by the assessment, the Terminal was known as Gray Coach Lines, Limited (“Gray Coach”). Gray Coach was a wholly- owned subsidiary of the TTC.

The TTC operated its own garages for the repair of its buses, street cars, etc. The TTC purchased repair parts from arm’s length suppliers and paid the Retail Sales Tax on those parts. All repair parts purchased by TTC were purchased with the intention that they would be used for the TTC’s own consumption or use.

Gray Coach’s buses also required repairs and Gray Coach maintained its own garage facility for this purpose.

From time to time, repair parts required for the use of Gray Coach were purchased by Gray Coach from the TTC’s tax-paid general inventory. Tax would again be payable under the Act on the sale of these repair parts by TTC to Gray Coach unless a specific exemption was available. Subsection 18(3) of Regulation 904 under the Act, provides an exemption for tax-paid goods between related parties in certain circumstances, and accordingly the parts were purchased by Gray Coach from TTC free from tax.

From time to time, Gray Coach’s buses were repaired at TTC garages. In such cases, TTC charged Gray Coach for the required labour and sold the parts required for the repair to Gray Coach out of its general tax-paid inventory. These parts were also sold free from tax by TTC to Gray Coach pursuant to s-s. 18(3) of Regulation 904.

$612,029.49 of the assessment relates to tax assessed on TTC’s labour charges (the “Repair labour”) to repair Gray Coach buses where the Repair Parts used in the repairs were purchased by Gray Coach exempt from tax pursuant to s-s. 18(3) of Regulation 904. The period covered by the assessment is January 1, 1988 to October 31, 1990. The tax on the labour charges is the subject of the dispute.

The Issue

The sole question of law to be determined in this special case is as follows:

Does section 5(1)2(c) of the Retail Sales Tax Act, R.S.O. 1980, as amended, exempt the Appellant from taxation on labour repair services provided by employees of the TTC to the Appellant, assessed by the Minister, in an amount of $612,029.49 plus related interest?

The Statutory Framework

Tax On Services

Section 2 of the Act imposes an 8% tax on, among other things, the purchase of certain taxable services:

2(3) Every purchaser of a taxable service described in clause (a), (c) or (d) of paragraph 21 of section 1 shall pay to her Majesty in right of Ontario a tax in respect thereof computed at a rate of 8 percent of the fair value thereof.

“Taxable service” is defined to include:

1.21 (c) labour provided to install, assemble, dismantle, adjust, repair or maintain personal property.

These provisions oblige Gray Coach to pay 8% tax on the amount charged by the TTC for the Repair Labour unless the labour falls within an exemption.

Exemptions from tax are set out in s. 5 of the Act, the relevant subsections of which are as follows:

5(1) The purchaser of the following classes of tangible personal property and taxable services is exempt from the tax imposed by section 2:

2. taxable services that are described in clause (c) or (d) of paragraph 21 of section 1 and that are,

(c) provided to maintain, restore or repair tangible personal property where the repairs or repair parts used in the maintenance, restoration or repair may be purchased exempt from tax.

[Emphasis added.]

5(3) No taxable service is exempt from the tax imposed by this Act by reason that the tangible personal property used in providing the taxable service is tangible personal property in respect of which tax imposed by this Act had been paid.

[Emphasis added.]

Tax on Tangible Personal Property

Section 2 imposes tax on the purchase of tangible personal property as follows:

2(1) Every purchaser of tangible personal property ... shall pay to Her Majesty in right of Ontario a tax in respect of the consumption or use thereof, computed at the rate of 8% of the fair value thereof.

The Regulations prescribe an exemption from tax under the Act where tangible personal property is purchased from a person who wholly owns the purchasing corporation. The purpose of the Regulation is to avoid double taxation between a wholly-owned buyer and seller, in some circumstances. Regulation 904 to the Act reads in part, as follows:

Transfer of Merchandise Between Related Persons

18(1) In this section, “wholly owns” means the beneficial ownership of not less than 95% of the total issued and outstanding share capital of a corporation, exclusive of directors’ qualifying shares, by a person, or by a person and persons who are members of his family within the meaning of subsection 6(2) of the Act, and “wholly-owned” has a corresponding meaning.

(2) This section shall not apply to a transfer of tangible personal property if,

(a) the tangible personal property has been transferred at any previous time on a tax exempt basis under the provisions of this section or any predecessor thereof; or,

(b) any tax imposed by this Act on any purchaser who acquired the tangible personal property in any prior transfer or purchase has not been paid.

(3) No tax is payable by a corporation on its purchase of tangible personal property from a person who wholly owns, either directly or through another wholly- owned corporation, the purchasing corporation.

With respect to the interpretation of these enactments, both parties cited the recent Supreme Court of Canada decision in Friesen v. R. (1995), 127 D.L.R. (4th) 193 (S.C.C.), at 197, citing Dreidgers Construction of Statutes, 2d ed. (Toronto: Butterworths, 1983):

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

Friesen expresses the law clearly that the words of a statute should be given their plain meaning in the context of the statute.

The Appellant’s Position

While the parties agree that s-s. 18(3) of Regulation 904 permitted Gray Coach to purchase the Repair Parts without payment of tax, the parties disagree as to whether this means that the Repair Parts were purchased “exempt from tax” for purposes of clause 5(1), 2(c) of the Act.

The appellant’s main submission is that, since the parts are purchased by Gray Coach on a tax-free basis under the Regulation, then clause 5(l)2(c) applies. Accordingly, it provides an exemption for otherwise taxable services where they are provided to repair property using repair parts that were purchased “exempt from tax”. The appellant submits that the exemption from tax specified in 5(1 )2(c) may be pursuant to any provision of the Act or regulations, and therefore the assessment was in error in holding the Terminal liable for tax on the repair services in question.

Several points were raised to support this submission.

First, the appellant argues that s. 18 of Regulation 904 provides an exemption from tax within the meaning of clause 5 of the Act, according to an ordinary meaning interpretation of the phrase “no tax is payable” in s. 18(3).

Second, the appellant argues that clause 5(l)2(c) does not restrict the exemption for repair labour to circumstances where the parts would be exempt under the Act (as distinct from the Regulations). Rather, the section contemplates a variety of exemptions. In essence, it was submitted, the respondent was asking the court to read-in a restriction on the scope of the exemption by adding words to the effect of “under this Act”, thereby limiting a more general provision. Such a reading would be inconsistent with basic principles of statutory interpretation and with other parts of clause 5 where the legislature restricted the scope of exemptions by express wording.

Third, the appellant submits that exempting from tax the Repair Labour provided by the TTC is consistent with the scheme of the Act with respect to related parties. It pointed to s. 5(l)2(e)’s exemption for labour performed by a corporation’s employees to repair its own tangible personal property and the general intention of s. 18 of Regulation 904. The appellant submitted that the exemption of Repair Labour provided to it by the TTC is analogous to the exemption of the “own-use” labour employed by the TTC.

Finally, the appellant suggested that this is a case where the traditional interpretive principle in tax statutes, that which grants a presumption in favour of the taxpayer, should be applied. Québec (Communauté urbaine) c. Notre-Dame de Bonsecours (Corp.) (1994), [1995] 1 C.T.C. 241 (S.C.C.) at 5023 was cited as authority for the continuing vitality of that presumption.

Analysis

The presumption in favour of the taxpayer in the interpretation of tax legislation, though it is not to be applied automatically, often assists the court in interpreting ambiguous provisions. However, such a presumption only applies where there is actual ambiguity. This dispute is not such a case. Section 5, correctly construed, does not allow the tax exemption sought by the appellant.

Section 5(3) of the of the Retail Sales Tax Act provides that taxable service is not exempt where tangible personal property used in providing a taxable service has had tax paid on it. I concur with the submission of the respondent: the appellant is specifically relying on the fact that tax has been paid on the repair parts by the TTC, in order to obtain an “exemption” from tax for the taxable service associated with the (tax-paid) repair part - but s. 5(3) specifically denies the exemption in such circumstances.

The repair parts in question were free from tax to Gray Coach only because they were purchased from the tax-paid inventory of the TTC. The parts are not exempt from sales tax; tax originally was paid on those parts by the TTC. The exemption in s. 18(3) of Regulation 904 permits a related- party transaction involving the sale of repair parts to occur without taxation for the purchaser because the tax was already paid by the seller. Section 18(3) does not operate to make the repair parts “tax-exempt” for purposes of s. 5; quite to the contrary, the fact that tax was already paid brings the transaction directly into the scope of s. 5(3).

The appellant constructed a detailed argument based on legislative history that showed s. 5(3) was introduced before repair labour was included as a “taxable service” and before any corresponding exemptions to the taxation of repair labour existed in the Act. It submitted that its purpose, when introduced, was to clarify what was then a new development in the law, that “taxable services” were subject to a new category of tax and that suppliers of taxable services were to be taxed on any inputs used in the production of those services. From this history, it was argued that s-ss. 5(2) and 5(3) of the Act were not intended to restrict the scope of any exemptions in the Act in respect of taxable services, and therefore cannot support the interpretation of the section put forward by the respondent.

I note, however, that s. 18 of Regulation 904, as it is today, was only enacted in 1983 (see O.Reg. 334/83). The amendments to the Rebate section of the Regulation to include specified related-party transactions took place after (1) the establishment in the Act of the general principle that both services and inputs in the production of services were taxable, and (2) the inclusion of repair services as taxable services under the Act, subject to defined exemptions. The Regulation nevertheless exempts from taxation only a specific class of transactions between related parties, those involving tan- gible personal property. It remains silent with respect to transactions involving services. If the Lieutenant Governor in Council wishes to extend government policy to prevent taxation of services between related entities, it has the same means available to it as it had when it enacted a regulation preventing double taxation on tangible personal property.

Further, I accede to the submission of the respondent that it would be an unreasonable interpretation of clause 5(1 )2(c) to provide an exemption for taxable repair services, if a TTC repair part was involved in the repair service, but not if the part were purchased elsewhere or no parts were required. It cannot be intended under the Act that services would be taxed differently depending upon whether the services involve parts purchased from the TTC as distinct from parts acquired from third parties, or services which do not involve any parts at all.

Other Issues

The respondent contends both that the phrase in clause 5(1 )2(c) refers only to exemptions that are found in the Retail Sales Tax Act and that the rebate provision in Regulation 904 is not an exemption. As noted above, the appellant takes the opposite position on each issue. There was argument about distinctions between an “exemption”, a “rebate”, and other forms of words representing exceptions from the general obligation to pay tax. Submissions were made in relation to whether (or not) the government could create an exemption from tax by regulation, whether such a regulation was authorized under the Retail Sales Tax Act in 1989, and whether this regulation in fact purported to create an exemption from tax. In view of my findings concerning the interpretation of s. 5(3) it is not necessary to determine these issues.

Accordingly the answer to the question of law is “no”.

The appeal is dismissed with costs.

Order accordingly.