Federal Court of Appeal Decisions

     A-201-96

CORAM:      STRAYER J.A.

     LINDEN J.A.

     ROBERTSON J.A.

B E T W E E N :

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     SENTINEL SELF-STORAGE CORPORATION

     Respondent

    

         A-202-96

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     ON-GUARD SELF-STORAGE LIMITED

     Respondent

Heard at Edmonton on Monday, November 18, 1996.

Judgment rendered at Ottawa on Thursday, November 28, 1996.

REASONS FOR JUDGMENT BY:      LINDEN J.A.

CONCURRED IN BY:      STRAYER J.A.

     ROBERTSON J.A.

     A-201-96

    

CORAM:      STRAYER J.A.

     LINDEN J.A.

     ROBERTSON J.A.

B E T W E E N :

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     SENTINEL SELF-STORAGE CORPORATION

     Respondent

     A-202-96

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     ON-GUARD SELF-STORAGE LIMITED

     Respondent.

     REASONS FOR JUDGMENT

LINDEN J.A.

     The primary issue in these applications is whether the respondents, Sentinel and On-Guard, should have collected and remitted the goods and services tax ("GST") in respect of a $10.00 forfeited discount in rental fees paid by defaulting tenants of self-storage facilities. A subsidiary issue is whether the Tax Court Judge erred in awarding costs to the respondents where the amount in dispute was more than $7,000.00.

     These applications were heard on common evidence and a single set of Reasons for Judgment was issued by McArthur J.T.C.C.. The only difference between the two applications is the amount in issue for each of the corporations. Sentinel Self-Storage Corp. ("Sentinel") collected $354,601.00 in forfeited discount between 1991 and 1993, while On-Guard Self-Storage Corp. ("On-Guard") collected $279,305.00.

     Beginning with the primary issue, subsection 165(5) of the Excise Tax Act¹ requires that "....every recipient of a taxable supply" pay a 7% GST. A "supply" is defined in subsection 123(1) of the Act as "...the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition". A "taxable supply" is defined in the same section as a supply "...made in the course of commercial activity". It was the position of the Department of National Revenue upon reassessment of the respondents with respect to the 1991, 1992 and 1993 taxation years that the payment of an additional amount by a defaulting tenant is a taxable supply according to the Act.

     The respondents are corporations who operate self-storage facilities. They rent storage lockers to customers on the basis of a monthly charge according to the terms of a Leasing Agreement, the interpretation of which is central to the resolution of this appeal. The Agreement used by the respondents is the same in both cases. The payment provisions of the Agreement are as follows:

DEFINITIONS:

1.1 In this Agreement each of the following terms shall have the meaning set out below:

....

(c) "Monthly Charge" means the charge due from Renter to [Sentinel or On-Guard] in respect of each Monthly Term, being the sum of ____ or such other amount as may be stipulated in a written notice delivered by [Sentinel or On-Guard] to Renter at least seven (7) days prior to the Due Date in respect of any Monthly Term.

...

(e) "Prompt Payment Discount" means the sum of $10.00 or such other amount as may be stipulated in a written notice delivered by Sentinel to Renter at least seven (7) days prior to the Due Date of any monthly period.

PAYMENT:

3.1 Renter shall pay the Monthly Charge (less the Prompt Payment Discount) due in respect of each Monthly Term on or before that Monthly Term's Due Date.

3.2 If [Sentinel or On-Guard] does not receive payment of the Monthly Charge (less the Prompt Payment Discount) for any Monthly Term on or before the Due Date Renter shall immediately and without demand pay [Sentinel or On-Guard] the full Monthly Charge without any deduction whatsoever.

Essentially, a customer who pays rent for a storage facility on or before the due date, according to the Agreement, pays the amount equal to the Monthly Charge less the Prompt Payment Discount, while the renter who does not pay on or before the due date pays the full Monthly Charge. This full charge is $10.00 higher than the monthly base rate, which is governed by the size of the storage unit. When a fee is overdue, the manager of the storage facility will place an overlock on the renter's unit to prevent the renter from accessing it. The manager will then contact the renter by telephone to attempt to obtain payment. Two weeks after the due date, a letter is sent to the renter. A similar letter is sent periodically until 61 days past the due date, at which point the respondents seize the goods contained in the locker to offset the outstanding fees.

     The Tax Court Judge found that the $10.00 increase in fees paid by defaulting tenants was not part of the monthly rental charge, but rather a fee paid by them to compensate the respondents for action taken to try to collect the late payment. The fee was, according to the Tax Court Judge, consideration for a financial service which, under Schedule V, Part VII, section 1 of the Act, was exempt from GST. Paragraph 123(1)(b) of the Act defines a "financial service" as including "the operation or maintenance of a savings, checking, deposit, loan, charge or other account". The Tax Court Judge also relied on GST Memorandum c.17.1, paragraph 7, which states that a "...late payment is a financial service as it relates to the operation of an overdue account". Accordingly, the fee represented "....the costs to the [respondent] of operating the account of a tenant following the breach of the Agreement by that tenant", and was thus exempt from taxation.

     With respect, I cannot agree with this finding. First, and most importantly, the terms of the Agreement used by On-Guard and Sentinel create a two-tiered pricing arrangement on the basis of the time of payment, not a credit arrangement for the overdue payment of the Monthly Charge. The renter either pays the Monthly Charge less the Prompt Payment Discount, pursuant to paragraph 3.1 of the Agreement, or the renter pays the full Monthly Charge pursuant to paragraph 3.2 of the Agreement if payment is late. The respondents' position is that the extra amount paid by overdue renters is used to cover the costs of collecting payment. They did not, however, present any evidence of the actual expenditures in this regard. In the absence of such evidence, there is clearly no support for the respondents' position, the Agreement being worded as it is.

    

     Furthermore, paragraph 4.8 of the Agreement provides the respondents with an independent right to recover costs from overdue renters. It reads:

4. RENTER'S ADDITIONAL OBLIGATIONS

...

4.8      Renter agrees to indemnify and hold harmless [On-Guard or Sentinel] and its directors, officers, agents, and employees from and against any and all claims, losses, costs (including legal costs on a Solicitor and his client basis), liabilities, damages or expenses which [On-Guard or Sentinel] or its directors, officers, agents or employees may suffer or incur as a direct or indirect result of the failure to the Renter to perform or observe any of the Renter's obligations under this Agreement or arising from or in connection with the use of the Unit or anything done in the Unit or the Premises by Renter or its agents, employees or invitees.

Any expense incurred by the respondents in the collection of an overdue Monthly Charge, therefore, could be recouped pursuant to this paragraph. The forfeited Prompt Payment discount need not be relied upon by the respondents to achieve this purpose. Instead, the Monthly Charge paid by overdue renters is exactly what the Agreement states that it is, the amount owing in respect of each Monthly Term if payment of the Monthly Charge (less the prompt Payment Discount) is not received before the specified due date.

    

     Second, while Parliament saw fit to exempt both late payment penalties and prompt payment discounts in relation to "tangible personal property or services", as specified in section 161 of the Act², this exemption does not apply to the leasing of self-storage facilities which, pursuant to subsection 136(1) of the Act, are deemed to be a supply of real property.³ If Parliament had intended to exclude late payment penalties and prompt payment discounts in relation to the supply of real property, it would have so specified. In a similar manner, section 158 of the Act⁴ specifically characterizes a portion of the taxable supply received by tax discounters, who prepare income tax refunds for customers in exchange for an assignment of their rights to the refund, to be a financial service and thus exempt. Again, Parliament chose to bestow favourable treatment upon this specific supply. The absence of an exemption for the supply of real property leads to the reasonable inference that it is to be included as a "taxable supply" for the purposes of the GST. That inference has not been rebutted in this case.

     Third, the Tax Court Judge characterized the extra amount paid by overdue renters as a "late payment charge" which, according to GST Memorandum c.17.1, paragraph 7, "...is a financial service as it relates to the operation of an overdue account". I cannot agree, however, that payment of the full Monthly Charge, as required by paragraph 3.1 of the Agreement, is a financial service which relates to the "operation of an overdue account". The Tax Court Judge decided that the term "other account", which is included in the definition of "financial services", was wide enough to include the amount at issue. This characterization fails to account for the fact that the higher amount paid by overdue renters appears to be an arbitrarily set figure which does not correspond with the provision of any particular services by the respondents and which bears no relationship to the provision of credit for the overdue period. The Monthly Charge without the Prompt Payment Discount is qualitatively no different from the Monthly Charge less the Prompt Payment Discount; it is simply a higher monthly fee charged to overdue renters in an effort to encourage timely payment.

    

     Finally, the respondents rely on Acme Video Inc. v. The Queen⁵. In that case, additional charges to a renter for an overdue videotape were characterized by Rowe, J.T.C.C. as a taxable supply. The respondents attempted to distinguish that case from the ones before me on the ground that the amount charged for late return was the amount that could have been earned for rental of the tape during the overdue period. I am not persuaded that this distinction is of relevance to these applications, particularly in light of the difference between the goods at issue in these two situations. While the amount charged to overdue renters under the terms of the On-Guard and Sentinel Agreements is not equal to the cost of renting the storage space during the overdue period, it has not been established that it bears any relation to the cost of collecting the overdue payment or to the provision of a financial service. The cases, therefore, are more alike than they are different.

     Turning to the second issue, the award of costs in favour of the respondents made by the Tax Court Judge, counsel for the respondent concedes that costs should not have been awarded below. Subsection 18.3009(1) of the Tax Court of Canada Act⁶ limits the award of costs to cases where the taxpayer's appeal results in a reduction of tax by more than one-half and the amount in dispute is less than $7,000.00. The amounts in issue in these applications, as listed on the Notices of Assessment, were $21,178.50 for On-Guard, and $37,367.50 for Sentinel. Further, the appeal should not have succeeded. Consequently no costs ought to have been awarded in respect of the appeal to the Tax Court.

     The applications on the merits should be allowed and the Notices of Assessments should be affirmed. The applications as to costs should also be allowed, no costs being awardable before the Tax Court of Canada in these circumstances. However, the reasonable and proper costs of the taxpayers in respect of these applications should be paid by Her Majesty in right of Canada pursuant to section 18.25 of the Tax Court of Canada Act.

     "A.M. Linden"

"I agree                      J.A.

B.L. Strayer J.A."

"I agree

J.T. Robertson J.A."     

     IN THE FEDERAL COURT OF CANADA

     A-20l-96

B E T W E E N :

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     SENTINEL SELF-STORAGE CORPORATION

     Respondent

     A-202-96

     HER MAJESTY THE QUEEN

     Applicant

     - and -

     ON-GUARD SELF-STORAGE LIMITED

     Respondent

     REASONS FOR JUDGMENT

__________________

¹ R.S., c. E-13, s.1.

² 161. Early or late payments - For the purposes of this Part, where tangible personal property or services are supplied and the amount of consideration for the supply shown in the invoice in respect of the supply may be reduced if the amount thereof is paid within a time specified in the invoice or an additional amount is charged to the recipient by the supplier if the amount of the consideration is not paid within a reasonable period specified in the invoice, the consideration due shall be deemed to be the amount of consideration shown in the invoice.

³ Subsection 136(1) states that "[f]or the purposes of this Part, a supply, by way of lease, licence or similar arrangement, of the use or right to use real property or tangible personal property shall be deemed to be a supply of real property, as the case may be".

⁴ 158. Tax refund discounts - For the purposes of this Part, where a discounter (within the meaning of the Tax Rebate Discounting Act) pays an amount to a person to acquire from the person a right to a refund of tax (within the meaning of that Act[)], notwithstanding section 139, the discounter shall be deemed to have made (a) a taxable supply of a service for consideration equal to the lesser of (i) 2/3 of the amount, if any, by which the amount of the refund exceeds the amount paid by the discounter to the person to acquire the right, and (ii) $30; and (b) a separate supply of a financial service for consideration equal to the amount by which the amount of the refund exceeds the total of the amount paid by the discounter to the person to acquire the right and the amount determined under paragraph (a).

⁵      [1995] G.S.T.C. 49.

⁶ R.S.C. 1985, c. T-2.