Date: 19980707
Docket: 96-2209-GST-G
BETWEEN:
FEDDERLY TRANSPORTATION LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] The Appellant is a British Columbia corporation which carries on a trucking business in Fort St. John, B.C. The issue in this appeal is whether the Appellant made a “taxable supply” to certain third party truckers with a resulting liability for goods and services tax (“GST”). In its Notice of Appeal, the Appellant made the following allegations of fact:
Paragraph 2: The Appellant’s business consists of, among other things:
(a) entering into contracts to haul loads on its own trucks for a fee payable by the other contracting party and,
(b) brokering contracts for independent truckers (the “Owner-operators”) to haul loads on the Owner-operator’s trucks for a brokerage fee payable by the Owner-operators.
Paragraph 5: ... the Appellant pays the cost of insuring and licensing the vehicles owned by the Owner-operators. The Appellant invoices the Owner-operators for those premiums and fees.
Paragraph 6: The Appellant’s invoices are paid by deducting, from the amounts payable to the Owner-operators by the Appellant, the Appellant’s brokerage fee together with the amount of the insurance premiums and license fees paid by the Appellant in respect of the Owner-operator’s vehicles.
The above allegations were admitted in the Reply which the Respondent filed in response to the Notice of Appeal. At the commencement of the hearing, counsel for the Appellant sought to amend the Notice of Appeal by adding the following proposed statements:
Paragraph 9: In the alternative, the Appellant says that it was responsible for paying for license fees, insurance, diesel fuel and other expenses associated with the vehicles operated by the Owner-operators. Furthermore, the Appellant says that it did not supply the licenses, insurance, fuel and other items to the Owner-operators nor did it receive any payment or other form of consideration in respect of those items.
Paragraph 16: In the further alternative, the Appellant says that it was responsible for paying the license fees, insurance, diesel fuel and other expenses and that it did not supply any of these items to the Owner-operators, nor did it receive any consideration for those items.
[2] Counsel for the Respondent objected to the proposed amendment to the Notice of Appeal on the basis that (i) the Appellant had already alleged that it paid the cost of insuring and licensing the vehicles of the Owner-operators, and that it invoiced the Owner-operators for the respective premiums and fees; (ii) those allegations about amounts paid and subsequent invoices had been admitted; (iii) the Appellant had already alleged that its invoices to the Owner-operators were paid by making deductions from amounts payable by the Appellant to the Owner-operators; (iv) those allegations about how the Appellant’s invoices were paid had been admitted; and (v) the proposed amendments in paragraphs 9 and 16 about not receiving “any payment or other form of consideration” were an explicit contradiction of facts which had already been alleged and admitted.
[3] I upheld the Respondent’s objection and did not permit the Appellant to make the proposed amendments to its Notice of Appeal. There were many reasons for refusing permission to the Appellant. The original Notice of Appeal was dated June 18, 1996 and filed with the Court on June 19, 1996. The Respondent’s Reply was filed with the Court on August 26, 1996. The lawyer who signed the original Notice of Appeal was the same counsel who appeared for the Appellant at the hearing of this appeal on June 18, 1998. There was a two-year period from June 18, 1996 to June 18, 1998 in which the Appellant could reflect upon its pleading; could decide whether some facts already alleged and admitted should be withdrawn or qualified with a contradictory allegation; could give notice to the Respondent of its intention to make a significant amendment to the Notice of Appeal; and could give the Respondent adequate time to make any corresponding amendment to its Reply or conduct an examination for discovery.
[4] There was a status hearing on November 25, 1997 when this appeal was set down for hearing on Monday, June 15, 1998. The status hearing Order provided for examinations for discovery to be completed by April 15, 1998 but, apparently, both sides waived oral discoveries. In the week preceding June 15, 1998, the hearing date was moved back three days to June 18 for the convenience of the Court. According to statements made by counsel at the commencement of the hearing, the Appellant did not inform the Respondent of the Appellant’s intention to amend its pleading until late in the week preceding June 15, 1998. In other words, it was a last minute move by the Appellant. If I had permitted the Appellant’s proposed amendment, it would have been difficult to resist an application by the Respondent to adjourn the trial in order to amend its pleading or to conduct an examination for discovery or to do both. In all of the above circumstances, there was no merit in the Appellant’s brink-of-trial motion to amend its pleading.
[5] After my ruling that the Appellant could not amend its pleading, counsel for the Appellant elected to call no witnesses. With the consent of counsel for the Respondent, the Appellant entered the following four exhibits:
A-1 Notice of Reassessment dated March 21, 1996 for GST having no. 11DU-114013683;
A-2 Letter dated March 21, 1996 from Revenue Canada to Appellant being “Notice of Decision”;
A-3 Letter dated October 30, 1995 from Revenue Canada to Appellant being GST Application Ruling;
A-4 Letter dated April 2, 1991 from Revenue Canada to an accountant in Fort St. John, B.C. commenting on application of GST to common carrier;
[6] The Respondent called as its only witness Keith Roskab-Smith, a GST auditor employed by Revenue Canada. Mr. Roskab-Smith performed the GST audit of the Appellant’s business. He went to Fort St. John and did most of the audit at the Appellant’s place of business. He described the Appellant’s operation as that of a common carrier using its own vehicles and sometimes hiring the vehicles of independent truckers referred to as “Owner-operators”. The Appellant had its own shipping customers with whom it contracted directly. When the Appellant used the vehicles of Owner-operators, it would submit a monthly statement to each Owner-operator showing the gross revenue for the preceding month and the various deductions which were held back by the Appellant leaving a net amount payable to the Owner-operator.
[7] According to the auditor, the Appellant charged an amount called “brokerage” which was 18% of the gross revenue if the Owner-operator provided both the tractor and trailer. If, however, the Owner-operator provided only the tractor and the Appellant provided the trailer, then the Appellant charged an additional amount called “trailer rent” which was 15% of the gross revenue. The auditor produced three monthly statements which he had obtained from an employee of the Appellant which confirmed the brokerage and trailer rent arrangement. Exhibit R-1 is entitled “Leased Operators Statement for the month of March 1994” and was issued by the Appellant to “Country Roads Trucking - Unit #F6”. The amounts listed in Exhibit R-1 are as follows:
|
GROSS EARNINGS |
$29,747.06 |
|
DEDUCTIONS |
|
|
Brokerage 18% |
5,354.47 |
|
Trailer Rent |
4,462.06 |
|
Insurance - March |
838.70 |
|
Shell Canada |
3,252.15 |
|
Highway Car & Truck Wash |
45.75 |
|
Handling charges |
329.79 |
|
$14,282.92 |
|
|
NET EARNINGS |
$15,464.14 |
[8] It can be seen from Exhibit R-1 that the brokerage amount of $5,354.47 is precisely 18% of the gross earnings. Similarly, the trailer rent amount of $4,462.06 is precisely 15%. The insurance deduction of $838.70 appears to be only the portion allocated to “Country Roads Trucking - Unit #F6” of a larger monthly insurance premium. The charge to Shell Canada is supported by an attached invoice from “Shell Commercial Access” showing 8,142.6 litres at 39.94 ¢ per litre. The detail of the Shell invoice, however, indicates that the price actually paid to Shell for 12 different purchases ranged from a high of 38.54 ¢ per litre to a low of 35.32 ¢ . The auditor did not have any explanation for the discrepancy. The car wash amount of $45.75 is supported by an invoice for that amount signed by Gerald Schaus who appears to be the owner of “Country Roads Trucking”. And lastly, the handling charge of $329.97 is precisely 10% of the aggregate of the two deductions for Shell Canada and Truck Wash.
[9] Exhibit R-3 is another monthly statement to “Country Roads Trucking - Unit #F6” for the month of August 1994. It is similar to Exhibit R-1 except that there are deductions for license fees paid to Alberta and B.C. and the handling charge is a nominal $10. Exhibit R-2 is a monthly statement to “Mid-North Ventures - Unit #F19” for September 1994, similar to Exhibit R-3 except for special deductions for repairs to a tire and an engine oil leak plus charges for cellular phones.
[10] In the absence of any testimony from a responsible officer or employee of the Appellant, I am satisfied that Exhibits R-1, R-2 and R-3 are representative of the monthly accounting which occurred between the Appellant and its various Owner-operators. Also, the auditor produced as Exhibit R-4 certain pages from what appears to be a service agreement between the Appellant and Gerry Schaus, doing business as Country Roads Trucking. Specifically, paragraph B) of Exhibit R-4 describes the amounts to be “charged back” by the Appellant to the Owner-operator in the monthly statements; paragraph E) provides for a rental amount if the Owner-operator uses the Appellant’s trailer; and paragraph G) provides for an administration fee of 10% on the Appellant’s purchases charged back against the Owner-operator.
[11] At the end of the Respondent’s evidence, the Appellant did not call any evidence in reply. Therefore, the best evidence with respect to the Appellant’s business operation came from the GST auditor for Revenue Canada and the four exhibits which he produced as Exhibits R-1 to R-4 inclusive. In cross-examination, the Appellant’s counsel required the GST auditor to produce his working papers and audit report (marked as Exhibit A-5) but I do not find them helpful in the determination of this appeal.
[12] Exhibit A-2 is a letter (Notice of Decision) sent by Revenue Canada to the Appellant on the same day when Revenue Canada issued the Notice of Reassessment which is under appeal. Exhibit A-2 states in part:
Your objection is partly allowed as indicated on the attached Notice of Reassessment.
Your first representation is that you should not have been assessed goods and services tax (GST) on the supply of brokerage service to the sub-contractor carriers. You contend that the service is zero rated according to the April 2, 1991 and October 30, 1995 ruling letters issued by the Department.
The ruling given by the Department’s letter dated October 30, 1995 reads in part as follows:
“...we rule that:
brokerage fees deducted by Fedderly from their sub-contractor carriers’ gross earnings prior to this date will be zero-rated, by virtue of the ruling letter of April 2, 1991, ... issued by the Department’s Burnaby Office ...”
The evidence is that you have been assessed GST on brokerage fees for the period from February 1, 1992 to April 30, 1995. As stated in the ruling letter dated October 30, 1995, brokerage fees which were deducted from the sub-contractor carriers’ gross earnings prior to October 31, 1995 were zero rated. Therefore, your objection on this issue is allowed and you have been reassessed.
Your second representation is that you should not have been assessed GST on license and insurance fees which were deducted from the sub-contractor carriers’ gross earnings. You contend that license and insurance were zero rated supplies when you purchased them from the insurance company. Therefore, the license and insurance fees should be zero-rated when they were reimbursed by the sub-contractor carriers.
Section 178 of the Excise Tax Act reads in part as follows:
“... where in making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration of the supply of the service ...”
The evidence is that you had made a supply of a service to the sub-contractor carriers. The expenses incurred by you, which included license and insurance, had been reimbursed by the sub-contractor carriers. The reimbursements had become part of the consideration of the supply of the service and are taxable. Accordingly, your objection on this issue is disallowed.
Although the substance of section 178 is quoted in Exhibit A-2, the entire section reads as follows:
178 For the purposes of this Part, where in making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient.
It is clear from Exhibits A-2 (quoted above) and A-3 (the Revenue Canada ruling letter of October 30, 1995 referred to in Exhibit A-2) that Revenue Canada regarded the brokerage service as zero rated. Accordingly, any consideration for the brokerage service would attract zero GST. Counsel for the Appellant argued that the theory of the reassessment is expressed in paragraphs 13 and 14 of the Respondent’s pleading which state:
Paragraph 13: ... the Appellant provided a service to the Carriers that included administration, payroll, accounting, and paying for expenses such as insurance, license, and plates, fuel, phone, and association fees on their behalf.
Paragraph 14: ... pursuant to section 178 of the Act, the expenses paid by the Appellant become part of the consideration for service and are taxable at 7%.
[13] The Appellant argued that the brokerage service was the only supply of service by the Appellant to the Owner-operators and was zero-rated in accordance with the ruling by Revenue Canada. Therefore, any expenses incurred by the Appellant for which the Appellant was reimbursed by an Owner-operator are deemed by section 178 to be part of the consideration for the supply of that service; and all such reimbursements should be zero-rated. I do not accept the proposition that the so-called brokerage service is the only supply of service by the Appellant to the Owner-operators. Nor do I regard all of the reimbursements shown in Exhibits R-1, R-2 and R-3 as reimbursements for expenses incurred by the Appellant “in making a supply” of a brokerage service to an Owner-operator within the meaning of section 178.
[14] It appears that all contracts for the carriage of goods are made with the Appellant which subcontracts with Owner-operators for the carriage of those goods that cannot be transported on the Appellant’s own vehicles. I infer from the admitted facts and the evidence that the Appellant is not a broker in the sense of a “middleman” like a stockbroker or real estate broker who brings together a vendor and purchaser. Exhibit R-4 describes two different services provided by the Appellant to an Owner-operator, with two different levels of compensation payable by the Owner-operator. Paragraph 1 E) of Exhibit R-4 refers to Schedule A which is an indirect way of defining the so-called brokerage fee earned by the Appellant: 18% when the Owner-operator provides both the tractor and the trailer; and 33% when the Owner-operator provides only the tractor. The additional 15% is sometimes called “trailer rent”. (Note: the actual percentages of 67% and 82% in Schedule A appear to be reversed from what they should be according to Exhibits R-1, R-2 and R-3 and the evidence of the auditor). The so-called brokerage fee is like a commission or finders fee earned by the Appellant for bringing certain business to the Owner-operator. Paragraph 1 G) describes a “10% administration fee” which is payable on any purchase (i.e. disbursement) made by the Appellant and charged back to the Owner-operator for reimbursement.
[15] In my view, the so-called brokerage fee and the administration fee are for two very different services. I accept the facts alleged and admitted in paragraph 5 of the Notice of Appeal (quoted above). Section 3 of the Motor Carrier Act (R.S.B.C.) states that no person may operate a “public freight vehicle” on a highway unless that person holds a license. (The paraphrasing is my own). In Exhibit R-4 (paragraph 1 A)), the Owner-operator agrees to furnish to the Appellant “exclusively during the term of this agreement” certain defined equipment which, I assume, will always include at least one tractor because the brokerage fee can never be less than 18% on the basis that the Owner-operator has provided a tractor. I note that a specific tractor is furnished or assigned in Exhibit R-4 and that an 18% brokerage fee is charged in each of Exhibits R-1, R-2 and R-3.
[16] I conclude that it is the exclusive assignment of a tractor by the Owner-operator to the Appellant for a defined term which permits the Appellant to obtain for that tractor the necessary license under the Motor Carrier Act, and the necessary insurance under some umbrella policy held by the Appellant. Relying on that conclusion, I find that the two specific expenses incurred by the Appellant for the license under the Motor Carrier Act and the insurance are expenses incurred “in making a supply” of a brokerage service within the meaning of section 178. Accordingly, the reimbursement for those two specific expenses is deemed (by section 178) to be part of the consideration for the supply of the brokerage service. If the brokerage service was zero-rated for the period of time under appeal, then the reimbursement for the license fee and the insurance was also zero-rated under the deeming provision of section 178.
[17] In the so-called brokerage relationship between the Appellant and the Owner-operator, it is necessary for the Appellant to hold both the license and the insurance; and the reimbursement of the Appellant for the license and insurance becomes part of the consideration for the brokerage service. The same cannot be said for other expenses incurred by the Appellant for items like fuel, truck wash, tire repair and cellular phones. These other expenses are incurred by the Appellant and later charged back to the Owner-operator only as an administrative convenience in the subcontracting of work by the Appellant to the Owner-operator. These other expenses are contemplated by paragraph 1 G) of Exhibit R-4 and are the basis for the “10% administration fee”.
[18] I have already stated that I do not accept the Appellant’s argument that the so-called brokerage service is the only supply of service by the Appellant to the Owner-operators. Consistent with the terms of Exhibit R-4, there is a type of service called brokerage and a different service called administration. The consideration for the brokerage service is found in paragraph 1 E) and Schedule A of Exhibit R-4 and depends upon the kind of equipment (18% or 33%) assigned by the Owner-operator to the Appellant. For the reasons stated above, the costs of license and insurance are part of the consideration for the brokerage service. The consideration for the administration service is the reimbursement of all of the Appellant’s expenses (except license and insurance) plus any administration fee actually charged by the Appellant. The consideration for the administration service is all subject to the 7% GST.
[19] If the Appellant had called a responsible officer or employee as a witness, I would have relied less on assumptions and inferences for the facts necessary to decide this case. In conclusion, the appeal is allowed only for the purpose of excluding from the imposition of the GST any reimbursement which the Appellant received from an Owner-operator with respect to the cost of a licence or insurance. Each party shall bear its own costs.
Signed at Ottawa, Canada, this 7th day of July, 1998.
"M.A. Mogan"
J.T.C.C.