Section 141.01

The Municipality of Woerden deducted virtually all of the VAT incurred by it in constructing two buildings, which it sold at 10% of its cost to a newly formed foundation (with board members appointed by it and educational institutions). The Foundation provided part of the buildings free of charge to the institutions, and rented the balance, with all of the rents VAT-exempt except for those used by a sports enterprise. The Regional Court of Appeal, Amsterdam held that the sale price invoiced to the Foundation related solely to the parts of the buildings that were leased on a taxable basis, so that the Municipality was acting as an entrepreneur only in respect of 10% of the buildings, and was entitled to deduct only 10% of the VAT charged to it.

The Supreme Court of the Netherlands referred the case for a preliminary ruling on the question, which was summarized (at para. 29) as being “in essence:”

[I]n circumstances…in which a taxable person has had a building constructed and has sold that building for a price less than the cost of constructing it, [is] that taxable person...entitled to deduct all of the VAT paid in respect of the construction of that building, or only a part of that tax in proportion to the parts of the building which its purchaser uses for economic activities.

In finding (at para. 39) that the Municipality was entitled to deduct full input tax regardless of the use made by the purchaser of the property, President Biltgen stated (at paras 36, 41-42):

[T]he VAT Directive does not subject the right to deduct to a condition related to the use of the goods and services at issue by the person who receives those goods and services from the taxable person, since that would imply that every transaction of a taxable person with a purchaser...who does not carry out an economic activity, such as private individuals, would limit the taxable person’s right to deduct input tax. …

[I]t follows from the case-law...that if the supply price is lower than the cost price, the deduction cannot be limited in proportion to the difference between the supply price and the cost price, even if the supply price is considerably lower than the cost price, unless it is purely symbolic… .

The fact that that purchaser allows parts of the building…to be used without charge is of no importance… .

After having incurred substantial GST in acquiring a transit system for exempt use, the appellant commenced to lease the system to another municipal transit entity for rent of $1 per year, but with the lessee being obligated to pay municipal taxes imposed on the leased premises (which amounted to around $2 million per year). In finding that this lease represented a supply of the system for consideration other than nominal consideration (so that there was a change of use under ss. 209(2) and 199(3) entitling the appellant to recover the basic tax content of this asset), C Miller J noted that if he accepted the appellant's position that "nominal is trifling or such an amount that it is immaterial whether or not it is paid, the answer is self-evident – several million dollars are not nominal [and] there is no evidence that [the lessee] ever intended not to pay the property taxes" (para. 55), and went on to state (at para. 56) that even "interpreting ‘nominal' on a relative basis, that payment of the property taxes…is not nominal."

Ryanair launched a takeover bid for all the shares of another airline and thereby incurred expenses for consultancy and other services. It was not possible to acquire all the shares for competition law reasons. Ryanair requested the deduction of input VAT paid on those expenditures on the basis that its intention, after gaining control of the target company, had been to provide management services subject to VAT. Article 4 of the Sixth Directive defined a taxable person as “any person who independently carries out in any place any economic activity,” and Article 17(2)(a) provided a deduction for VAT due or paid respecting goods and services used for the purposes of the taxable person’s taxable transactions.

The Court concluded (at para. 32):

Articles 4 and 17 of the Sixth Directive must be interpreted as conferring on a company, such as that at issue in the main proceedings, which intends to acquire all the shares of another company in order to pursue an economic activity consisting in the provision of management services subject to VAT to that other company, the right to deduct, in full, input VAT paid on expenditure relating to consultancy services provided in the context of a takeover bid, even if ultimately that economic activity was not carried out, provided that the exclusive reason for that expenditure is to be found in the intended economic activity.

Before so concluding, the Court stated (at para. 30) that “In the event that the expenditure is attributed in part also to an exempt or non-economic activity, VAT paid on that expenditure may only be deducted in part.”), and (at para. 25):

[T]he right to deduct, once it has arisen, is retained even if the intended economic activity was not carried out and, therefore, did not give rise to taxed transactions … . Any other interpretation would be contrary to the principle that VAT should be neutral as regards the tax burden on a business. It would be liable to create, as regards the tax treatment of the same investment activities, unjustified differences between businesses already carrying out taxable transactions and other businesses seeking by investment to commence activities which will in future be a source of taxable transactions.

Stewardship Ontario (“SO”) was a not-for-profit corporation that operated, as part of a regime governed by the Waste Diversion Act, 2002 (Ontario), an Ontario program for recycling various types of waste such as paints, solvents, batteries, empty propane tanks and antifreeze. It collected the waste and paid for its processing or disposal. “Stewards,” being persons who had a commercial connection with such waste, were statutorily responsible for paying fees to SO to reflect their reasonable share of the associated costs.

Before making more detailed findings that SO was making taxable supplies for consideration to the stewards, D’Arcy J found that SO was entitled to full input tax credits for the HST on its costs (including “administrative” charges from an oversight body), stating (at paras 75, 76, 77, 81 and 82):

As discussed in my reasons in the University of Calgary ... the purpose of section 141.01 is to clarify the application of subsection 169(1) to GST paid on property or services that are not used directly in the making of a specific supply in a situation where the person is making both taxable and exempt supplies. …

I would not expect section 141.01 to deny the input tax credits otherwise determined under subsection 169(1) in the situation where a person is only engaged in commercial activities.

…[P]aragraph 141.01(2)(a) deems property and services to have been acquired for consumption or use in the course of a commercial activity of the person, if the property and services were acquired by the person for the purpose of making taxable supplies for consideration. Paragraph 141.01(3)(a) contains identical rules, except that it applies to the actual consumption or use of the property or service.

In my view, these sections apply to the fact situation before me, since all of the property and services acquired by the Appellant from the Third Party Service Providers either were acquired for the purpose of making taxable supplies for consideration or were consumed or used in the making of taxable supplies for consideration.

He also noted (at para 121) that the interpretation advanced by the Crown:

would defeat two of the primary objectives of the GST Act, which are to “prevent the cascading of GST, and to allow the obligation to pay GST to flow through to the ultimate consumer.”

A developer (Iberdrola) contracted with a Bulgarian municipality to reconstruct, for free, a waste-water pumping station serving a holiday village at which it was building apartment buildings. At issue was whether Iberdrola was entitled to deduct the VAT borne by it on the pumping-station reconstruction work in accordance with a European VAT provision, which provided such a deduction for inputs to “goods and services [that] are used for the purposes of the taxed transactions of a taxable person.” In the context of answering a referral respecting this question, the First Chamber of the European Court of Justice stated:

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the [apartment] buildings …to that pump station, with the result that that reconstruction was essential for completing that [apartment] project… .

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality … and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .

The registrant was the sole proprietor, owner and operator of a swimming school which offered private swimming lessons. In 2013, the registrant was criminally charged with misconduct respecting a 15-year old female instructor, was acquitted of all charges in 2015, and incurred legal fees totalling $176,000. However, the laying of the charges (which were publicized, resulted in termination as a “training partner” of the Canadian Red Cross and substantially reduced enrolments) resulted in operations at the school being suspended in the autumn of 2013.

In finding that the registrant was not entitled to input tax credits for HST incurred in 2014 on legal fees, Favreau J stated (at paras 28, 30):

… I do not see …the link between the legal fees incurred to defend the Appellant’s reputation and the earning ability of his swimming school and the commercial activities per se carried out in 2014 by the swimming school.

Although the Appellant did not close his business and still had the intention to restart it as a sole proprietorship, he has not established a connection, direct or indirect, between the legal services sought and any ongoing supply of taxable services.

After citing Haggart and Doiron, he then concluded (at para 33):

… The Appellant did not meet his burden to demonstrate that a direct and clear connection existed between the charges that were laid against the Appellant and the activities he engaged in for the purpose of earning income.

A UK newspaper (ANL) paid VAT on its purchase of vouchers from Marks & Spencer and an intermediary ("Hut"), which it then provided free to those readers subscribing to its Sunday editions for the promotional period. HMRC argued that ANL was not entitled to recover any input tax on the vouchers because it had acquired the vouchers for on-supply at no consideration. Patten LJ found that the vouchers were part of the cost of promoting the taxable supply of ANL newspapers, so that any input tax was recoverable. He stated (at para. 48):

[I]n economic terms, the cost of purchasing the vouchers was…part of ANL's overall expenditure in the production and sale of its newspapers which the vouchers were intended to promote. The fact that the vouchers were provided free to buyers of the newspapers merely serves to confirm that they were cost components of the business rather than the onward supply of the vouchers.

Norseman was a UK holding company which had subsidiaries operating mines in Australia, with the day-to-day management taking place in Australia. It registered for VAT as a “management consultancy” on the basis of a representation that it would recover all its costs through charges to the subsidiaries. However, it did not make any charges to the subsidiaries until after the periods in question because the subsidiaries were incurring losses, so that no output tax was declared.

Before finding that Norseman was not entitled to credits for the input tax on its costs (e.g., professional fees and web design), and after having noted at (para. 52) that credits would have been available if there instead were only an undertaking for the future making of taxable supplies, Warren J stated (at para. 124):

Noreseman needs to establish that, when it incurred input tax in the relevant period, it had either already made supplies for a consideration (the first question) or that it had the intention of making at some time in the future supplies for a consideration (the second question).

Respecting the first question, the supplies were made gratuitously (at para. 121). Respecting the second question, there was an insufficient link to future supplies (paras. 123 & 124):

[A]n intention merely to make supplies is not a sufficient basis on which to recover input tax…

… What needs to be established is a direct and immediate link between the services supplied and the charges levied or to be levied.

He added (at para. 126) that “if the intention had been to charge a nominal amount of, say £100 per annum, that would be unlikely to satisfy the EU law necessary to establish consideration.”

The appellant (U of C), which was a public service body, made a s. 211 election in 2006. The methodology which it used in calculating the input tax credits to which it was entitled for the GST payable on this self-supply was to determine the relative proportions of the space in its buildings used directly in making taxable supplies (e.g., third-party rentals) and exempt supplies (e.g., classroom use) and to apply these same relative proportions to common areas inside buildings (e.g., stairwells) as well as to those outside the buildings (such as lawns and walkways). The Minister arrived at a higher percentage of exempt use (and, therefore, lower ITCs) by treating the “External Common Areas” as being acquired only for exempt use and by weighting different building areas by factors reflecting their relative replacement cost (whereas the appellant had simply used relative square footages of floor space).

After finding (at para. 93) that “the Appellant carried on a single business, namely, the operation of a university, and that it carried on all of its activities in the course of this business,” D’Arcy J stated (at para. 106):

[I]f a corporation incurs an expense in the course of its business (endeavour), then the expense will always be incurred for the purpose of making one or more supplies. The purpose of the business is to earn revenue, i.e., to make supplies. Therefore, the result of subsection 141.01 (2) is that all costs incurred by a person in the course of the person’s business must be traced to a specific supply or multiple supplies in respect of which the costs were incurred.

In accepting the appellant’s methodology, he stated (at para. 148) that “the Appellant’s purpose when acquiring the External Common Areas on February 1, 2006 was no different than its purpose when acquiring, at the same time, the remaining portions of the U of C Properties: to use them for the purpose of making both taxable and exempt supplies” and, respecting the Minister’s indexing factor approach, “the CRA cannot simply substitute its method for that of the GST registrant” (para. 183), this method ignored that the appellant constructed several of the buildings prior to the introduction of the GST (para. 186) and such approach would require retaining valuators whereas “a GST registrant should be entitled to determine its input tax credits on the basis of information in its possession."

As the parties accepted that there was no subsequent significant change in use, the same percentages applied to determining ITCs for subsequent improvements (paras. 197-198).

The appeal was allowed.

The holding of vacant office space held by a GST-exempt business ("Sun Life") for potential future taxable rentals to independent contractors (being financial advisors engaged in the sale of its financial products) qualified for ITC purposes as commercial activity. Owen J also stated (at para. 54) that "the amount of vacant space that is required for rental to Advisers is a business judgment that is best left to Sun Life absent a sham or window dressing or similar vitiating circumstances." See summary under s. 141.01(5).

A subsidiary (“PFL”) of the appellant went into receivership in 1991, and in 1996 PFL and its shareholders launched an action against various parties claiming damages of $60 million on behalf of themselves and the bankrupt PFL. The appellant claimed $23,700 of input tax credits for GST on related legal fees incurred by it.

Webb J found that the appellant was entitled to such ITCs under s. 186(1) given his findings (at para 36) that “[t]he professional fees incurred in 1998 were in relation to the Legal Action, which, if successful, would result in PFL resuming its dairy product business and result in a significant increase in the value of the shares of PFL and the value of the indebtedness of PFL to the Appellant” and (at paras. 37-8) that in 1998 PFL continued to hold “some office furniture, pictures, and other miscellaneous assets… that had been acquired by PFL when it was carrying on the dairy products business.”

The trustee in bankruptcy ("Richter") for Castor Holdings Ltd. (whose audited financial statements had disclosed $1.8 billion in assets and who essentially only invested in high-yield loans) was only able to recover $25 million when the liquidation of the Castor estate was largely completed in 1994. In addition to suing - in its capacity of trustee in bankruptcy for the Castor estate (the "Estate") - the former Castor auditors ("C&L") for $40 million in damages sounding in contract, Richter began a "litigation support business" of providing assistance to the creditors (including hiring professionals and experts) in connection with their action sounding in negligence against C&L for $800 million in damages. The creditors lent money to Richter on a non-interest-bearing basis to fund the related costs of Richter (mostly fees of professionals and experts). It was understood that to the extent that, on settlement of the litigation, Richter was not able to recover its costs out of the proceeds of an award made to it on its own claim, Richter at such time would invoice the creditors for its remaining unrecovered costs, to be paid by set-off against the loans. Most of the Richter costs were incurred respecting a test case brought by one of the creditors ("Widdington"), which at the time of this GST case was still on-going.

In finding that it was reasonable for Richer to treat the bulk of its related GST costs as being creditable, Archambault J stated (at para. 38):

Given that Castor's main activities involved making exempt supplies, the activities of the Trustee would be deemed [by s. 141.1(3)(b)] not to be carried on in the course of commercial activities. Therefore, the costs of the litigation support services that the Estate enjoyed in prosecuting its own claim against C&L would not qualify for ITCs. … However, the portion of the services and properties in question that was acquired for the purpose of prosecuting the claims of the Participating Creditors would be considered to have been acquired in the course of commercial activities. … The allocation by the Estate of the use of its inputs between its taxable supplies and its other activities (exempt supplies) appears to me to be a fair and reasonable one and it complies with subsection 141.01(5)... .

See summary under s. 123(1) - business.

A Canadian public company ("Nowsco") that was engaged in the provision of oil field services incurred significant fees for services rendered by financial advisors and a law firm in connection with seeking a "white knight" following the commencement of a takeover bid for its shares, as a result of which it was able to secure a higher price for its shares from the original bidder.

After quoting (at para. 55) a Finance Press Release stating that s. 141.01 was "designed to clarify the requirement to apportion GST paid on indirect inputs for registrants, such as financial institutions, who make both taxable and exempt supplies of goods or services," C Miller T.C.J. found that as s. 141.01 was intended as an apportionment provision to allocate inputs between taxable supplies and non-taxable supplies, it did not apply to Nowsco, which was engaged exclusively in making taxable supplies. Consequently, "the stringent purpose test contained in s. 141.01 is not applicable to Nowsco's case and, therefore, does not alter a finding that the fees were incurred in the course of commercial activity" (para. 62).

After having incurred substantial GST in acquiring a transit system for exempt use, the appellant commenced to lease the system to another municipal transit entity for rent of $1 per year, but with the lessee being obligated to pay municipal taxes imposed on the leased premises. Before going on to find that this lease represented a supply of the system for non-nominal consideration (so that there was a change of use under ss. 209(2) and 199(3) entitling the appellant to recover the basic tax content of this asset), C Miller J accepted that s. 141.01 required the appellant to establish that its use of the system was for the purpose of making taxable supplies for consideration, stating "if a registrant is in the unique position of only making taxable supplies without consideration, then section 141.01 should apply to deny the ITCs."

See summary under s. 141.01(1.1).

The Municipality of Tsarevo (Bulgaria), acting as a developer, obtained a building permit in order to reconstruct a waste-water pumping station serving a holiday village. Iberdrola was a private investor that purchased land in that village in order to construct apartments for seasonal use. Iberdrola entered into a contract with the municipality for the reconstruction of the pumping station and subcontracted with a third party to perform that work. The Solfia Administrative Court found that Iberdrola was entitled to deduct input tax respecting the supply from the subcontractor on the basis that the related expenditure formed part of Iberdrola’s general costs of its services irrespective that the work carried out related to a property belonging to the municipality. After an appeal, the Administrative Supreme Court, Bulgaria referred to the Court of Justice the question which the latter (at para. 24) summarized as being in essence:

[W]hether Article 168(a) of Directive 2006/112 must be interpreted as meaning that a taxable person has the right to deduct input VAT in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity.

Article 168(a) provided:

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay: … the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

The Court stated (at paras 33-35):

It is clear … that, without the reconstruction of that pump station, it would have been impossible to connect the buildings …to that pump station, with the result that that reconstruction was essential for completing that project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity.

Those circumstances are likely to demonstrate the existence of a direct and immediate link between the reconstruction service in respect of the pump station belonging to the municipality of Tsarevo and a taxed output transaction by Iberdrola since it appears that the service was supplied in order to allow the latter to carry out the construction project… .

The fact that the municipality of Tsarevo also benefits from that service cannot justify the right to deduct corresponding to that service being denied to Iberdrola if the existence of such a direct and immediate link is established … .

The Court concluded (at para 41):

… Article 168(a) … must be interpreted as meaning that a taxable person has the right to deduct input value added tax in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity, in so far as those services do not exceed that which is necessary to allow that taxable person to carry out the taxable output transactions and where their cost is included in the price of those transactions.

Before finding that it was fair and reasonable for the University of Calgary to allocate (for input tax credit purposes) its GST costs for its grounds using the same split between taxable and exempt use as was applicable to the floor space of its buildings which was directly used for one (third-party rentals) or the other (e.g., classroom) use, D’Arcy J stated (at paras. 132, 183):

[A] methodology based on the actual use of space that involves a detailed review of the use of thousands of rooms comprising approximately 898,000 square meters of space, is a fair and reasonable method to determine the extent to which the Appellant acquired the U of C Properties for use in its commercial activities.

As…noted in Sun Life [2015 TCC 37], the CRA cannot simply substitute its method for that of the GST registrant. A GST registrant is entitled to use any method that is fair and reasonable provided it complies with the provisions of the Act.

The appellant ("Sun Life"), whose principal business was the sale of financial products, subleased space in its various office buildings to independent contractors who also sold Sun Life financial products, at rents that also were intended to capture costs of the building common areas. The floor space of a building set aside for use of such "advisers" (including unoccupied space that was allocated for future recruits) was grossed up for a pro rata share of common areas (principally, jointly used spaces such as meeting rooms, internal corridors and hallways, and building common areas attributed to Sun Life by the building owner), and the total so allocated to the advisers was divided by the total area under lease to determine the proportion of the rents paid by Sun Life on which it claimed ITCs.

Owen J allowed Sun Life's ITC claims in full, finding its allocation method to be fair and reasonable (noting, at para. 40, that "there may be more than one method that is fair and reasonable.") The Minister argued that, even to the extent that the common spaces (such as meeting rooms) were being used by the advisers, they were being used in furtherance of the appellant's provision of financial services. Owen J stated (at para. 48) that "this argument fails to recognize that the Advisers are independent contractors and that their use of the subleased space is in furtherance of their own business objectives," noted (at para. 49) "that the Advisers cannot use the subleased space without also using the common-use space," and (at para. 50) that "the direct purpose of the available space was to rent the space to Advisers" was relevant rather than "the indirect (or ultimate) purpose of having space available …to facilitate the sale of Financial Products."

Likewise, Owen J found (at para. 54) that, absent a sham, "the amount of vacant space that is required for rental to Advisers is a business judgment best left to Sun Life... ."

The registrant, who had a quarterly GST reporting period, had acquired a property for personal use, but converted it to commercial use (for short-term rentals) in the second quarter of 2005. VA Miller J agreed with the Minister's position that the four-year limitations period in s. 225(4)(b) had commenced on 1 July 2005 (i.e. the day after the end of the second quarter), and had thus expired before the registrant claimed an input tax credit at the end of 2009 in respect of the conversion.

The registrant had taken the position that s. 141.01(5) supported the contention that the conversion of the property from personal to commercial use had to be considered at the end of the "fiscal year" based on its use of "throughout the year." VA Miller J disagreed. She stated (at para. 11):

Rather subsection 141.01(5) allows a taxpayer to adopt a general allocation method to determine the amount of ITCs that can be claimed when that taxpayer has both taxable and exempt supplies: CIBC World Markets Inc. v. R., 2011 FCA 270.

The allocation of substantially all the litigation-related costs of a trustee in bankruptcy to its "litigation support business" of supporting of a negligence suit for $800 million brought by the bankrupt company's creditors against the company's former auditors rather than to its action on behalf of the estate for $40 million for breach of contract, was found to be "fair and reasonable" in compliance with s. 141.01(5).

See summary under s. 141.01 (2).

A hall included in the registrant's premises was used partly for making taxable supplies (rentals) and partly for making exempt supplies (bingo sessions and meetings of the members or its executives). The registrant's method of claiming input tax credits and overhead costs effectively assumed that the premises were used in commercial activity except when they are actually used for the exempt activities. Beaubier TCJ. found that this method of allocation was unreasonable, and accepted the Minister's method of allocation which was based on the registrant's history of purchases of supplies for exempt and non-exempt purposes.