Date: 20010427
Docket: 98-2151-GST-G
BETWEEN:
LIBRA TRANSPORT (B.C.) LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.T.C.C.
[1] This appeal is brought from an assessment under Part IX of the Excise Tax Act, which imposes a tax (GST) on the commercial supply of goods and services. The assessment covers the period from August 1, 1993 to April 30, 1997. The only matter in dispute is whether, as the Respondent asserts, the Appellant made taxable supplies of insurance and of motor vehicle licences to certain subcontractors with which it did business. The Appellant says that it did not, but rather it was the agent of the subcontractors for the purpose of obtaining insurance and vehicle licences.
[2] The Appellant and an associated company, Libra Transport Ltd., (Libra) are owned and operated by Mr. John Kohlman and his wife. The Appellant owns one tractor trailer rig and Libra owns three. They have been very successful in attracting business, and as a result have far more work to do than their four rigs can handle. They farm out the excess to about 20 subcontractors who own their own rigs and operate them under the umbrella of the Appellant, hauling freight on the highways of British Columbia, Alberta, Saskatchewan and Manitoba. The customers (shippers) inform the Kohlmans of the hauling that is to be done, and they assign each job to one of their own rigs, or to one of the subcontractors.
[3] The Kohlmans refer to their subcontractors as leased operators, and they are so described in the form of contract which they all must sign in order to operate under the aegis of the Appellant and Libra. However there are no lease agreements, and the trucks and trailers are owned, operated, and remain in the possession of the subcontractors. The contracts are of a somewhat informal nature. They were drawn up by Mr. Kohlman without any help from a lawyer, and many of the issues which one might expect to find provided for are simply not addressed. For the most part, they deal with such matters as safety and policies relating to the use of the trucks on the highway. They specify the amount that the subcontractors are to pay to the Appellant, but little else about the day-to-day operating procedures and financial arrangements. During the first three years of their association the subcontractors paid to the Appellant 13% of the gross receipts for the trips they made; after that, the rate dropped to 10%. The contracts do not spell out the services that Libra will provide to the subcontractors in relation to such matters as operating authorities, highway transport licenses and insurance, or as to the filing of fuel tax reports with the various provincial governments. Mr. Kohlman testified as to all these matters, and I accept his evidence as giving an accurate account of the terms under which the Appellant and the subcontractors operate.
[4] To haul freight on the highway, it is necessary to have an operating authority from the government of each province through which the freight will be hauled. Before 1988 it was both difficult and expensive to obtain this operating authority. With the advent of deregulation in 1988 that is no longer so, although the operating authority is still required. It is now only necessary to apply for it and to pay the fee, which varies between $50.00 and $200.00. It is no longer necessary to demonstrate public necessity and convenience as before. It is, however, necessary to have an address in each province for which an operating authority is acquired. The Appellant each year obtains the necessary operating authorities in its own name, and the subcontractors operate under it. They each carry a copy of the document in the truck with them, as they may be required to produce it to a provincial inspector. The names of the Appellant and the owner both appear on the trucks of the subcontractors.
[5] Any truck that is driven on the highway must also be licenced in the province from which it operates. That province shares the licencing fee with the other provinces in which the truck operates, based on the mileage driven in each province. This requires that a comprehensive report be filed for each truck, showing the miles driven in each province. For each truck there must also be a report filed showing the fuel purchases and the mileage driven in each province, so that the provincial governments can share appropriately among them the fuel tax paid. Each truck owner keeps records of mileage driven and fuel purchased, and turns them over to the Appellant, who uses a computer program to make the necessary computations and file the reports for itself and for the subcontractors, both for the fuel tax and for the vehicle licences.
[6] It is not surprising that the subcontractors can obtain their insurance at more favourable rates by combining with the Appellant, Libra, and the other subcontractors to purchase it. The Appellant has had a good claims record over the years, and this, together with the strength of numbers, ensures better rates than any single operator would otherwise be able to obtain. The Appellant has for many years, including the period of this assessment, arranged for insurance to be issued through its insurance brokerage firm, CMB Insurance Brokers (CMB). One policy is written to cover all the vehicles, both tractors and trailers, and the premium is broken down vehicle by vehicle. The broker deals only with the Appellant; the Appellant pays the annual premium to the broker for all the vehicles; the terms of payment are 25% down, and the balance payable by nine monthly instalments.
[7] A great many insurance documents were entered into evidence by the Appellant, from which the following appears. On some occasions the policies were written showing Libra and the Appellant as being the insured. Sometimes they showed Libra, the Appellant, and the subcontractors as being insured. The contractors were sometimes described simply as the leased operators of Libra. The policies did, however, specify all the vehicles in the combined fleet, and the premiums were itemized for each vehicle. During the GST audit it became apparent that the policies were not always issued showing all the subcontractors as being insured under the policies, and as a result certain change endorsements were issued to correct that. Counsel for the Respondent made much of these changes in argument, but I am satisfied by the documents, and by the evidence of Mr. Kohlman, that the public liability, property damage, cargo and collision insurance placed by the Appellant through CMB was for the benefit of the subcontractors as insured persons, as well as for Libra and the Appellant. The premiums attributable to the subcontractors were recovered from them by the Appellant on the same basis of 25% down and nine monthly instalments for the balance, as will be described.
[8] At the end of each month the Appellant sends a statement to each of its subcontractors. These statements show each trip that the subcontractor has made, by date and job number, the starting point and destination, and the gross amount charged by the Appellant to the customer. From the total of these amounts, the Appellant deducts 10% for its fee under the contract, GST of 7% on that amount, and whatever amounts are owing to it by the subcontractor for vehicle licence, vehicle insurance, or any cash advances received during the month. The balance is then paid to the subcontractor by a cheque which accompanies the statement.
[9] The position taken by the Minister which forms the basis of the assessment under appeal is described by Revenue Canada in a letter dated July 18, 1997 to the Appellant which accompanied the assessment bearing the same date. The two items in dispute are dealt with in paragraphs 3 and 4 of that letter as follows:
3. Libra Transport (B.C.) Ltd. purchased fleet insurance and then supplied them [sic] to independent lease operators. As Libra Transport (B.C.) Ltd. is not considered as "insurer" for GST purposes, or acting as an agent for the insurance company, the supply is deemed taxable at 7%.
4. Schedule V of the Excise Tax Act exempts a supply of a vehicle licence if made by a government. Therefore, the vehicle licence would not be subject to GST when supplied to Libra Transport (B.C.) Ltd. However, as Libra Transport (B.C.) Ltd. is not acting as agent for the government, the supply of licence to the lease operator is deemed taxable at 7%.
[10] The theory of the assessment is further elaborated by the following assumptions pleaded in paragraph 10 of the Respondent's Reply:
10. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:
(a) the facts stated and admitted above;
(b) the Appellant is a GST registrant with GST Registration
No. 103325031;
(c) at all times relevant to this appeal the Appellant was a corporation involved in the business of supplying freight transportation services under contracts it entered into with its customers;
(d) for the purpose of fulfilling its obligations to its customers under the aforesaid contracts for freight transportation services, the Appellant retained the services of subcontractors in addition to using its own vehicles;
(e) in respect of each transportation of goods, the Appellant undertook the responsibility of a common carrier, whether the goods were transported by one of its own vehicles or by the vehicles of a subcontrator;
(f) the Appellant acquired at least 4 types of insurance in respect of the freight transportation services it provided, which included the following:
i) automobile insurance;
ii) general comprehensive insurance;
iii) cargo insurance; and
iv) physical damage insurance for the tractors and trailers;
(g) the total insurance premiums paid by the Appellant in the relevant periods with respect to the insurance referred to in the previous subparagraph were as follows:
Year Cargo Auto & General Physical Premium
1995 34,500 30,952 104,573 170,025
1996 18,700 53,246 106,379 178,325
53,200 84,198 210,952 348,350
(h) the Appellant was the policy holder under each of the insurance policies at all material times;
(i) the auto insurance policies cover September 12 to September 12;
(j) the cargo insurance policy covers July 17 to July 17;
(k) the Appellant acquired an Operating Authority/Safety Fitness Certificate from the province of Alberta, as Conditions of Licence for an extra-provincial motor carrier from the province of British Columbia; an Operating Authority Certificate from the province of Saskatchewan; and a Licence to operate extra-provincial trucks from Manitoba (the "Operating Authorities");
(l) the documents referred to in the previous sub-paragraph entitled the Appellant to transport freight in each of those provinces under the conditions specified in the document;
(m) the licence year runs from April 1 to March 31;
(n) the total amount paid by the Appellant as licence fees under the Operating Authorities was;
Licence Fees
1993 45,120.16
1994 55,905,61
1995 54,670.31
1996 74,769.83
230,465.91
(o) the Appellant supplied each of the subcontractors with all four types of insurance referred to in subparagraph 10(f) herein before;
(p) the Appellant supplied each of the subcontractors with some of the rights it had acquired from the provinces to transport freight in that province;
(q) the Appellant collected the consideration payable with respect to the supplies of insurance and licences made to the subcontractors by deducting the amount owing on such supplies from the amount the Appellant owed to the subcontractor with respect to the freight transportation services the subcontractor supplied to the Appellant's customers;
(r) the insurance premiums charged to owner/operators were as follows:
Year cargo auto physical premium GST
95/10/31 28,500 30,952 91,020 150,472 10,533,04
96/10/31 15,400 40,912 92,904 149,216 10,445.12
43,900 71,864 183,924 299,688 20,978.16
(s) the licence fees charged to the owner/operators were as follows:
Licence Fee GST
94/04/30 42,253.03 2,950.71
95/04/30 44,317.31 3,102.21
96/04/30 59,676.78 4,177.37
97/04/30 65,691.26 4,598.39
211,838.38 14,828.68
(t) the Appellant failed to collect tax in the amount of $35,806.84 in respect of the consideration it received for the supplies of insurance and licences;
(u) during the Relevant Period the Appellant did not act as the agent of any of the aforesaid subcontractors;
(v) during the Relevant Period the Appellant was not a government, municipality, a board, or a commission authorized by law to issue licences in respect of transportation;
(w) during the Relevant Period the Appellant was not a person who was licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business;
(x) the Appellant is required by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act") to file its GST returns on a monthly basis;
[11] A number of things should be said at this point about these assumptions. For the most part the facts are not in dispute; the dispute arises from the conclusions that the Minister of National Revenue has drawn from those facts. I refer in particular to subparagraphs 10(h), (o), (p), (t) and (u). I have already found that the Appellant and its subcontractors were insured under the policies of insurance, and that the premiums paid by the Appellant in the first instance, as set out in subparagraph (g), were paid in part on its own behalf, and in part on behalf of the subcontractors. The amounts set out in subparagraph (n) were paid to the provincial governments for vehicle licences, not for the operating authorities.
[12] The essence of the dispute between the parties is to be found in the assertions made in subparagraphs 10(o), (p), (t) and (u). The Minister contends that the Appellant did not act as agent for the subcontractors when it purchased insurance and vehicle licences for their benefit, but that it made supplies of insurance and vehicle licences to them. For the reasons that follow, I do not agree.
[13] In considering the incidence of a value added tax on the supply of goods and services it is always relevant to ask the question "what did the Appellant supply?"[1] The assessor answered that question by saying that the Appellant supplied insurance and motor vehicle licences to its subcontractors, for which it charged them the amounts that it had paid to the insurer's agent and to the provincial governments. That appears from the letter which accompanied the assessment, and from the assumptions found in subparagraphs 10(n), (o), (p), (q) and (r) of the Reply. The difficulty with this theory is that it ignores the obvious fact that only an insurance company licensed to do so may sell insurance, and only a provincial government may sell motor vehicle licences.[2] The Respondent, of course, does not contend that insurance supplied by an insurer or motor vehicle licences supplied by a provincial government would attract tax.
[14] Counsel for the Respondent maintained throughout the position pleaded in subparagraph 10(u), that the Appellant did not act as the agent of the subcontractors in connection with the acquisition of either insurance or vehicle licences. However, when invited to answer Lord Denning's question, he could only respond that the services supplied by the Appellant to its subcontractors were those of obtaining insurance for them at a favourable rate, and of obtaining the operating authority (and presumably also the motor vehicle licences) from the province. These positions are, of course, inconsistent. Counsel attempted to support the contention that the Appellant did not act as an agent for its subcontractors on the basis that it received no separate consideration for doing so. I know of no reason that would prevent the Appellant from supplying its services as an agent to obtain licences and insurance along with other services for a single consideration. In my view that is exactly what has happened in this case.
[15] Mr. Kohlman testified that at the time he first entered into agreements with subcontractors to haul for him, they asked him to arrange insurance and vehicle licences for them. He agreed to do so, and has done so ever since, receiving no remuneration for it other than the 10% of gross receipts that the Appellant charges its subcontractors. This evidence was not contradicted, and I accept it as accurate. In those circumstances, the Appellant is certainly acting as the agent of the subcontractors when it arranges insurance for them, and obtains their vehicle licences. The only remuneration received by the Appellant for supplying these services is contained within the 10% of gross revenues which the Appellant charges the subcontractor; it is not in dispute that this amount is subject to GST, which the Appellant collects and remits. The amounts of $299,688.00 and $211,838.38, on which the Minister now seeks to tax the Appellant $35,806.84, are clearly expenses incurred by the Appellant as the agent of the subcontractors, and reimbursed to it by those subcontractors. As such, they are not part of the consideration paid for the Appellant's services, and so they do not form part of the base upon which GST is calculated. Section 178 of the Act, prior to its repeal,[3] specifically excluded such amounts from the consideration for services. That section was repealed because it was redundant; the same result is arrived at as a matter of legal principle.[4]
[16] The decisions of this Court in Fedderly Transportation Ltd. v. The Queen[5] and Vanex Truck Services Ltd. v. The Queen[6]are both superficially similar to the present case. In both cases a company in the trucking business subcontracted work to independent owner-operators for a fee. In both cases the Appellant purchased the insurance and the licences for the owner-operators' vehicles, and received reimbursement from them for the costs. In Fedderly, the owner-operators assigned a tractor unit, and in some cases a trailer as well, exclusively for use in the business of the Appellant. Two separate fees were paid by the owner-operators. One was an administration fee which is not relevant to the issue before me. The other was a brokerage fee of 18% of the gross receipts, or 33% if a trailer unit was assigned as well as the tractor. In addition, the owner-operators reimbursed Fedderly for the cost of obtaining the licences and insurance. Mogan J. held that the reimbursement of these costs was part of the brokerage fee, and so deemed to be part of the consideration for the brokerage service by the operation of section 178 of the Act.[7] In reaching this conclusion, however, he made it clear that it was only the exclusive assignment of a specific tractor by the subcontractor to the Appellant that permitted the Appellant to obtain for that tractor the licence under the Motor Carrier Act[8] and insurance under an umbrella policy held by Fedderly for its own benefit. Under this arrangement, these costs were properly considered expenses incurred by the Appellant in making the brokerage service, and so the reimbursement of them came within the purview of section 178. There was not, as there is in the case before me, an agency relationship between the main contractor and the subcontractor in relation to the obtaining of the insurance and the licences.
[17] The same is true of the Vanex case. The subcontractors transferred the legal title to their vehicles, although not beneficial ownership, to Vanex, which then obtained the vehicle licences in its own name. Vanex also obtained insurance coverage for its own benefit under a fleet policy issued to it by the Insurance Corporation of British Columbia which covered all vehicles registered in its name. Margeson J. found that only Vanex was insured under the policy. He went on to hold that what Vanex supplied to the drivers was the right to drive their vehicles with the benefit of licences and insurance for which it had paid. The cost of the licences and the insurance was recovered from the drivers, and so was deemed to be part of the consideration for the service. Again, there was no agency relationship established; indeed the Appellant does not appear to have advanced an argument based on agency in that case.
[18] The Respondent also relied on Parkland Crane Service Ltd. v. The Queen[9]. That case involved the fee charged for a travel permit required to transport a mobile crane on the roads of Alberta. The Appellant supplied its cranes for an hourly fee. In addition, it billed the customer for the cost of the permit which was required in order to transport the crane to the job site. Kempo J. held that the permit fee was included in the consideration for the Appellant's services by reason of section 178. She said at page 11:
The onus is on the appellant to establish an agency relationship on the balance of probabilities in order to be removed from the deeming provision of s. 178 of the Act which says the reimbursement of an expense by a recipient of a supply is deemed to be part of the supply of service to the recipient unless that expense was incurred by the appellant as an agent of the recipient. This has not been accomplished in this case.
In the present case the Appellant has satisfied that onus, as I have already found.
[19] The appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amounts paid to the Appellant by the subcontractors for licences and insurance are not part of the consideration for its services, and so are not subject to tax. The Appellant is entitled to its costs.
Signed at Ottawa, Canada, this 27th day of April, 2001
"E.A. Bowie"
J.T.C.C.
[1] See British Railways Board v. Customs and Excise Commissioners, [1977] 2 All E. R. 873, per Lord Denning at p. 876g.
[2] See Insurance Act, R.S.A. 1980, c. I-5, and Motor Vehicle Administration Act, R.S.A. 1980, c. M-22. All the provinces have similar legislation.
[3] S.C. 1997 c. 10, s. 27, deemed to have come into force on April 24, 1996.
[4] Technical Note – July 1997.
[5] [1998] G.S.T.C. 77; aff'd [2000] G.S.T.C. 83.
[6] [1999] G.S.T.C. 101.
[7] 178 For the purpose 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.
[8] R.S.B.C. 1996 c. 315 s.3
[9] [1994] G.S.T.C. 58