Tax Court of Canada Judgments

Date: 20010516

Docket: 1999-4570-GST-G

BETWEEN:

CITY OF REGINA,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Rip, J.T.C.C.

[1]            The City of Regina ("City" or "appellant") appeals from an assessment issued pursuant to Part IX of the Excise Tax Act ("Act") which denied the City's claim for input tax credits ("ITC's") in the amount of $246,435.63 pursuant to subsection 169(1) of the Act in respect of costs incurred for capital construction of improvements to several highways within the limit of the City during 1996, 1997 and 1998 that the appellant refers to as "highway connector routes".

[2]            The Minister of National Revenue ("Minister") allowed only a modest portion of the aggregate amount claimed for ITC's, disallowing the balance. In the Minister's view the construction of improvements to the highway connector routes was not a taxable supply made by the City since the City did not carry on a commercial activity when making these improvements. The City was under a statutory obligation to maintain and repair the highway connector routes. In any event, the Minister maintains the repairs constitute exempt supplies in accordance with sections 10, 21 and, after 1996, section 21.1 of Schedule V, Part VI of the Act. The Minister also appears to take the position that the construction in issue were mere improvements, or repairs and maintenance, of the roads and not capital improvements.

[3]            The principal issue before me is whether the appellant carried on a commercial activity when constructing the highway connector routes. Pursuant to subsection 169(1) of the Act a registrant under the Act is entitled to ITC's to the extent it used supplies with respect to which it claims ITC's in the course of a commercial activity. The City is a registrant. In effect, the City claims it provides a service of selling goods and services to the Government of Saskatchewan (sometimes hereinafter referred to as "Province" or "Saskatchewan") for consideration in the form of operating grants it receives from the Province.

[4]            A "highway connector route", sometimes referred to as a "connector route" is a road in the City that connects two or more provincial highways passing through or near the City or that leads to a provincial highway. These routes are used by residents of the City as well as non-residents travelling along and between provincial highways. The following are the relevant highways and their connector routes in the City:

Highways #6 and #11 join with Albert Street North and continue to Albert Street South which joins Ring Road and Highway #1 going East-West and Highway #6 South;

Highway #33 joins with Arcola Avenue which crosses Ring Road and then meets up with Victoria Avenue;

                3)              Highway #1 joins with Victoria Avenue which meets up with Albert Street;

                4)              Highway #46 joins with McDonald Street which meets up with Ring Road;

5)              Highway #1 meets with Lewvan Drive which continues north to Pasqua Street and meets with Highway #11;

6)              Highway #1 joins with Ring Road which continues east, north and then west to Pasqua Street providing access to Highways #33, #46, #6, and #11, and;

7)              The north and south service roads along Victoria Avenue and the east and west service roads along Albert Street join the same highways as Victoria Avenue and Albert Street.

[5]            The main portion of the claim for ITC's, approximately 80 per cent of the claim, relates to one project, Lewvan Drive to Pasqua Street meeting Highway #11 (numbered 5 above and referred to as the "Pasqua Project"). Pasqua Street crossed over a Canadian National Railway ("CNR") crossing. The City dug out a roadway and built a bridge for the railway tracks over Pasqua Street; Pasqua Street was also widened. The City billed CNR for the cost of relocating the railway tracks during construction and charged Goods and Services Tax ("GST"). (From time to time private citizens of the City of Regina request certain services from the City. The City bills for these services and collects GST). The City can ascertain the costs of each element of construction of the Pasqua and other projects, such as the road and bridge.

[6]            Roads are built and improved in order to relieve traffic congestion. Roads may be widened from two lanes to four lanes or more and speed limits may be increased. This was the purpose of the Pasqua Project.

[7]            Mr. Kenneth Kosolofski, former Manager of Accounting Services for the City, testified that when the City uses its own employees for repairs and maintenance of city roads GST is not collected. To construct roads, the City obtains the services of subcontractors and GST is charged. The Government of Saskatchewan owns title to all streets and lanes in the Province, including those in the City.[1] These include the highway connector routes. The Government of Saskatchewan delegates uses to the municipality. Under The Urban Municipality Act, 1984[2] the City is required to keep every street in a reasonable state of repair. Subject to the approval of the Minister of Highways and Transportation of the Province, City Council of Regina may exercise its powers to regulate traffic on a highway connector route for a temporary period for the carrying out of the construction, repair or improvement of the route.[3]

[8]            Each year the City Council prepares a capital works development plan for not less than a five-year period including the current year, showing the estimated cost and proposed sources of financing for each capital work for each year; a copy of the plan is sent to the provincial government.[4]

[9]            The City budget identifies funds to be received from the Province for a capital work.[5] A separate account is maintained for each source of funding. The City receives provincial funding for road construction and repairs pursuant to The Municipal Revenue Sharing Act[6] and The Urban Municipalities Revenue Sharing Regulations.[7] During the years in appeal the City also received funds under the National Infrastructure Program of the federal government. Other sources of municipal revenue used to repair, maintain and construct roads are from municipal taxes and levies.

[10]          An operating grant from the Province, Mr. Kosolofski explained, may be used for maintenance as well as for capital, that is, to construct roads or for any other purpose the City deems proper which, I understand, may include library and health services, for example, as well as roads. The grant is unconditional. No particular project need be undertaken. Mr. Robert Linner, City Manager for Regina, produced a letter from the Deputy Minister of Saskatchewan Highways and Transportation which acknowledged, among other things, that compensation is paid to the City to maintain, operate and construct sections of public highways within the City limits. In recognition of the mutual interest the Province and City have in highway connectors, the Province provides unconditional funding to the City in the form of general operating grants for use, in part, to maintain and construct highway connectors, including other things of municipal responsibility.

[11]          The Director of Municipal Engineering for Regina, Mr. David Colm, explained that City and provincial government engineers are in continuous touch with each other to plan road improvements in and around Regina. The Province may identify the City's needs for road construction and make suggestions to the City. Both the City and the Province may undertake separate studies of highways and roads within Regina. Wherever a work is done on a connector, there is a close working liaison between the City and the Province since both municipal and provincial roads are affected.

[12]          Mr. Linner explained that the Province has also given conditional grants to assist municipalities for specific projects. A municipality must apply for a conditional grant whereas there is never an application for an unconditional grant. In the latter case, which is very typical, the City carries on its public works without provincial consent: no paper trail is necessary.

[13]          Projects funded in part by the federal government under the National Infrastructure Program; applications are made to a Joint Federal-Provincial Committee for a specific project. The City of Regina made about two or three such applications totalling $12.9 million. As between the City and the Province, the City relies on its ongoing relationship to construct projects like Pasqua. The Pasqua Project was advanced by the City as a connector requiring upgrade. The Pasqua Project was funded by the Province as to 18 per cent, the City as to 49 per cent and the National Infrastructure Program as to 33 per cent.

[14]          There has been some question as to whether the construction of the connector routes are capital or repair and maintenance of roads. Respondent's counsel raised the argument, for example, that the maintenance and repair of roads within the City's boundaries are generally considered to be part of standard municipal services. I do not question this. However, the evidence before me is that the Pasqua Project, for example, was more than merely repairs and maintenance of a road; it was the construction of a wholly new road and was a capital project. The other projects also appear to be capital works.

Argument

[15]          For the purposes of this appeal,

"commercial activity" of a person means

(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person,[8]

[16]          The Act defines "business" to include

...a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment;

. . .

[17]          An "exempt supply" is defined by subsection 123(1) to mean a supply included in Schedule V. Part VI of Schedule V sets out exemptions for supplies made by public sector bodies. A "public sector body" means a government or a public service body and refers to a municipality, including City of Regina.[9]

[18]          Section 10 of Part VI of Schedule V[10] states that:

A supply made by a public sector body of any property or service where all or substantially all of the supplies of the property or service by the body are made for no consideration.

[19]          ITC's may be claimed by a person only to the extent that the supplies in question are consumed or used in the course of a commercial activity.[11] As Bowman J., as he then was, concluded in Centre provincial de ressources pédagogiques c. R., "... if all the supplies produced by a public sector body are exempt, no input tax credit can be claimed."[12]

[20]          The respondent's position is that the City pursues a statutory obligation when it constructs the connector routes. However, the construction of these roads by the City does not comprise a commercial activity since the making of the construction project was an exempt supply pursuant to section 10 of Part VI of Schedule V. The respondent's view is that since the provincial grants received by the City were unconditional and not tied to a specific case, no consideration within the meaning of the Act was paid to the City for the making of the project; there was no link between the Province and the City to build the project. The Crown appears to have relied on the fact that the City determined that less than one-half of the amount of funding came from the Province, and thus the provincial grants were not made specifically for the projects, in particular the Pasqua Project.

[21]          In my view the construction of the connector routes was a commercial activity within the meaning of the Act. The connector routes are used by the residents of Saskatchewan and others in carrying out their commercial activities and benefits the Province. The new road and additions to older roads by way of guard rails, for example, improves the Province's property. The appellant was involved in "an undertaking of any kind whatever", within the definition of "commercial activity". In Hleck, Kanuka, Thuringer v. Canada,[13]my colleague Bell, J. explained that:

The test set out under the Act is more liberal than the test for deductibility of a business expense under the Income Tax Act. Expenditures made for the purpose of gaining or producing income from a business are, by definition, made in the course of commercial activity. However, those made in the course of commercial activity are not, necessarily, made for the purpose of gaining or producing income from a business. [emphasis added]

. . .

[22]          In Timmins v. Canada,[14] the Federal Court of Appeal held that the Province of New Brunswick carried on a business within the meaning of "business" under the Income Tax Act, which meaning includes the words "undertaking of any kind whatever".[15] The New Brunswick Government provided services outside Canada for the purpose of establishing and administering several dairy farms in Malawi, in return for a fee and the reimbursement of certain expenses. The province of New Brunswick was carrying on a business even though the work was undertaken for humanitarian reasons as well as to increase employment opportunities in New Brunswick and for economic stimulation in that province.

[23]          In its Technical Notes of July 1997 the Department of Finance states that section 10 of Part VI of Schedule V exempts supplies by a public sector body of property or services where all or substantially all of the body's supplies of the property or service are made free of charge. And, because they are made free of charge, that department concludes that the supplies are not considered to be made in the course of a commercial activity.

[24]          The fact that the work is undertaken pursuant to a statutory obligation does not disqualify the work from the character of a commercial activity, so long as the person who undertook the work did not make exempt supplies in carrying on the undertaking. To the extent any part of a business consists of making exempt supplies, that part must be notionally severed from the other parts of the business.[16]

[25]          The issue now is whether the City made an exempt supply. Did the City receive consideration from the Province for making the projects? The City states that it received consideration in the form of operating grants and such grants should be considered to be consideration within the meaning of the Act.

[26]          Subsection 123(1) defines consideration to include:

...any amount that is payable for a supply by operation of law;

[27]          The provincial grants, appellant's counsel submitted, are paid to it by operation of law, notwithstanding the grants are unconditional. Counsel relied on Technical Information Bulletin B-067, dated August 24, 1992 ("T.I. Bulletin B-067") in which the Department of National Revenue, Customs and Excise, at the time, stated that "if it is established that a supply takes place in return for a transfer payment, the payment may be regarded... as ‘consideration' for a supply". A "grant" is a form of "transfer payment".

[28]          The author of Part I of T.I. Bulletin B-067 explains that "if there is a direct link between a transfer payment received by a person and a supply provided by that person, either to the grantor of the transfer payment or to third parties, the transfer payment will be regarded as consideration for the supply". The Bulletin emphasizes that "[a] direct link may not always be apparent and therefore it will be necessary to consider the circumstances surrounding each case". Relevant circumstances may include: the agreement between the parties; the conduct of the parties; the objectives or policy statements of the grantor; and the legislation, by-laws and any applicable regulation under which the payment is made.

[29]          Part II of T.I. Bulletin B-067 states policy guidelines to clarify whether a direct link exists between a transfer payment and a supply and, therefore, whether the transfer payment is consideration. According to these guidelines, where a supply takes place in respect of a transfer payment, there will be a direct link between the supply and the transfer payment if the supply is provided to the grantor for a "purchase purpose" as opposed to a "public purpose". The Bulletin refers to a "purchase purpose" as "one which benefits the grantor or a specific third party and may be of a commercial nature" and to a "public purpose" as "one which benefits the general public or a particular segment of the general public".

[30]          The appellant contends that there was a supply in respect of the grant and that the province of Saskatchewan is the recipient of this supply since it received a direct benefit since its assets were enhanced. As to the purchase purpose, the appellant emphasizes that T.I. Bulletin B-067 states that "[a] purchase purpose may apply even if the grantor is a public sector body and some public benefit results".

[31]          The concept of linkage between the grant or subsidy and the supply is not found in the Act itself. In an earlier appeal, Des Chênes (Commission Scolaire) c. R., 2000 CarswellNat 791, before Lamarre Proulx, J. counsel for the respondent submitted among their authorities an article published in the Vat Monitor[17] entitled "When Is a Link Direct?" Lamarre Proulx, J. writes that according to this article, at page 9, paragraph 30, subsidies are viewed as a consideration when they are directly linked to the price of the supply. T.I. Bulletin B-067 adopts this notion of direct link between the subsidy and the supply of the service.[18] The concept of linkage is simply a means to determine if a transfer payment was made to fund a particular supply of, in other words, if a supply was made for consideration.

[32]          The concept of direct link permits one to recognize if consideration was paid for a supply. Normally, when a supplier contracts to provide a supply, the cost or consideration for that supply appears in the contract. An unconditional grant or subsidy does not identify a specific purpose or cause for funding. If a person can reasonably determine that there is a specific object for the grant, as it is usually described in a contract, then linkage between the grant and the supply exists and the amount of the grant is consideration for the supply for purposes of the Act. Linkage, therefore, serves as a valuable tool to determine if there is consideration. An example of linkage is found in the facts leading to a ruling by the Canada Customs and Revenue Agency (CCRA), apparently dated November 18, 1999. The city of Winnipeg entered into a contract with the Government of Manitoba to construct two additional lanes of road on a major highway and the Government of Manitoba agreed to pay a portion of the costs of construction. The CCRA agreed that the payment by the province of Manitoba to the city of Winnipeg was consideration for taxable supplies of construction services made to the province of Manitoba. The CCRA ruled correctly since one can readily identify the cost of the supply, which was described in the contract between the two governments. This is not the situation before me.

[33]          The appellant also relied on the reasons for judgment in Meadow Lake Swimming Pool Committee Inc. v. The Queen[19] in which the Court, referring to T.I. Bulletin B-067, found that grants were consideration when a municipality gave funds to a non-profit organization to operate a swimming pool owned by the municipality. The trial judge, in finding a direct link between the supply made by the non-profit organization and the grant, considered the plans between the municipality and the non-profit organization early in the planning stages of the pool's construction. Similarly, the City argued, an agreement existed between it and the Government of Saskatchewan that the City would build connector routes, even though the grants to fund the connector routes were unconditional. There was an accepted practice or an implied agreement between the City and Province that varying portions of unconditional grants were to be used, and were used, for construction of connector routes, as well for other things.

[34]          The facts in Meadow Lake, supra, are not at all similar to those at bar. The swimming pool was the only asset owned by the appellant in that appeal. Any grant given by the municipality to the corporation operating the swimming pool could be for only one purpose, the operation of the swimming pool, whether or not the municipality specified the intended use of the funds. This is not what is before me.

[35]          Appellant also relied on paragraph 141.01(3)(a) of the Act:

Where a person consumes or uses property or a service in the course of an endeavour of the person, that consumption or use shall, for the purposes of this Part, be deemed to be

in the course of commercial activities of the person, to the extent that the consumption or use is for the purpose of making taxable supplies in the course of that endeavour; and

                . . .

[36]          The word "endeavour" means, among other things, "a business of the person,..."[20]

[37]          All the supplies used in the course of making the project, appellant submitted, were used for the purpose of making taxing supplies in the course of an endeavour, namely providing a service or selling a good or service to the Government of Saskatchewan.

[38]          Counsel for the appellant argued in the alternative that if the grant received from the Province is not consideration for the projects then, in accordance with paragraph 141.01(1.2)(a) of the Act, the amount of the grant may be deemed consideration for the project. Paragraph 141.01(1.2)(a) deems a grant by a government for the purpose of funding an activity involving the making of taxable supplies to be deemed consideration for those supplies but only for the purpose of section 141.01. This provision and paragraph 141.01(3)(c) do not aid the appellant. Section 141.01 generally sets out the rules where, when a registrant's business involves making both taxable and exempt supplies, the registrant is required to apportion tax on inputs in determining the amount of ITCs that the registrant may claim. The effect of subsection 141.01(2), for example, is that unless an input is acquired for the purpose of making supplies "for consideration", no input tax credits will be available. The provision does not determine whether a supply is made for consideration on the facts at bar.

[39]          Lamarre Proulx, J. adopted the rational set forth in T.I. Bulletin B-067 and searched for a direct link between subsidies paid by the Quebec Department of Transport to school commissions in the Province for the purpose of transporting students between their homes and schools at no cost. The school commissions contract with independent carriers for this purpose and pay the independent carriers for their services, including the GST. In the past, the school commissions claimed and received a partial rebate of GST in accordance with section 259 of the Act on the amount paid to the independent carriers. Subsequently the school commissions claimed ITCs representing the difference between the total GST paid to independent carriers and the amounts refunded as partial rebates. The Department of Transport subsidy did not consider the number of children requiring transportation and if a school commission managed to organize its transportation so as to reduce costs covered by the subsidy, it may retain a portion of the supplies.

[40]          Lamarre Proulx, J. held that the evidence did not show that the subsidy provided by the Department of Transport was linked to the price of the transportation service. Not only did the Department of Transport have no obligation with respect to the cost of the students' transportation service, but the school commissions had broad latitude with respect to the use of the funds allocated for transportation. Thus, there was no link between the payment of the subsidy (or grant) and the cost of the service. The grant was not in the nature of a payment of the price of the service and no consideration is paid for the service.

[41]          I do not question that officials of the City and officials of the Government of Saskatchewan were in regular, if not constant, touch to improve the highway system of the Province in and around Regina. I accept that each level of government let the other know of its intentions and that efforts were made to coordinate their construction activities. It may well be that in determining the amounts of unconditional grants to the City, the Government of Saskatchewan included monies for construction of, or additions to, highway connectors. However, on the evidence before me I cannot find that the amount of any unconditional grant, in whole or in part, was related to a particular project before me that the Province agreed to subsidize. Hence, no consideration was paid to the City by the Government of Saskatchewan.

[42]          The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 16^th day of May 2001.

"Gerald J. Rip"

J.T.C.C.

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