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Docket: 2000-386(GST)G |
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BETWEEN: |
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CORPORATION DE L'ÉCOLE POLYTECHNIQUE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on April 10, 2003 at Montréal, Quebec.
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Before: |
The Honourable Judge Louise Lamarre Proulx |
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Appearances: |
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Counsel and agent for the Appellant: |
Diane Bouchard Étienne Gadouas (Student-at-Law) |
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Counsel for the Respondent: |
Martine Bergeron |
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JUDGMENT
The appeal of the assessment made under the Excise Tax Act, the notice of which bears the number 03405821 and is dated October 27, 1998, is dismissed with costs to the Respondent, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 2nd day of September 2003.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
Translation certified true
on this 19th day of March 2004.
Shulamit Day-Savage, Translator
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Citation: 2003TCC601 |
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Date: 20030902 |
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Docket: 2000-386(GST)G |
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BETWEEN: |
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CORPORATION DE L'ÉCOLE POLYTECHNIQUE, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Louise Lamarre Proulx, J.
[1] This is an appeal of an assessment under the Excise Tax Act (the "Act"). This assessment, dated October 27, 1998, the notice of which bears the number 03405821, and covers the period from May 1, 1994 to May 31, 1997.
[2] The issue is whether supply of a licence to use intellectual property is a taxable supply included in the exceptions to the general rule that a supply made by a public institution of any personal property or a service is an exempt supply, according to Section 2, Part VI, Schedule V of the Act.
[3] Section 2 reads as follows:
Section 2. [Supply made by a public institution of any personal property or a service] - A supply made by a public institution of any personal property or a service, but not including a supply of
(a) property or a service included in Schedule VI;
(b) property or a service where the supply is deemed under Part IX of the Act to have been made by the institution (other than a supply that is deemed only under section 136.1 of the Act to have been made);
(c) property (other than capital property of the institution or property that was acquired, manufactured or produced by the institution for the purpose of making a supply of the property) where, immediately before the time tax would be payable in respect of the supply if it were a taxable supply, the property was used (otherwise than in making the supply) in commercial activities of the institution;
(d) capital property of the institution where, immediately before the time tax would be payable in respect of the supply if it were a taxable supply, the property was used (otherwise than in making the supply) primarily in commercial activities of the institution;
(e) tangible property that was acquired, manufactured or produced by the institution for the purpose of making a supply of the property and was neither donated to the institution nor used by another person before its acquisition by the institution, or any service supplied by the institution in respect of such property, other than such property or such a service supplied by the institution under a contract for catering;
(f) property made by way of lease, licence or similar arrangement in conjunction with a supply of real property included in paragraph 25(f);
(g) property or a service made by the institution under a contract for catering for an event or occasion sponsored or arranged by another person who contracts with the institution for catering;
(h) a membership where the membership
(i) entitles the member to supplies of admissions in respect of a place of amusement that would be taxable supplies if they were made separately from the supply of the membership, or to discounts on the value of consideration for such supplies, or
(ii) includes a right to participate in a recreational or athletic activity, or use facilities, at a place of amusement,
except where the value of the supplies, discounts or right described in subparagraph (i) or (ii) is insignificant in relation to the consideration for the membership;
(i) services of performing artists in a performance where the supply is made to a person who makes taxable supplies of admissions in respect of the performance;
(j) a service involving, or a membership or other right entitling a person to, supervision or instruction in any recreational or athletic activity;
(k) a right to play or participate in a game of chance;
(l) a service of instructing individuals in, or administering examinations in respect of, any course where the supply is made by a vocational school, as defined in section 1 of Part III, or a school authority, public college or university; or
(m) an admission in respect of
(i) a place of amusement,
(ii) a seminar, conference or similar event where the supply is made by a university or public college, or
(iii) any fund-raising event held after April 1991.
[4] It is accepted by both parties that the Appellant is a public institution. It is also accepted by both parties that the only paragraph in the section above that may apply to a supply of a licence to use intellectual property is paragraph (c).
[5] According to the Appellant, the supply by the appellant of such a licence constitutes a taxable supply of an incorporeal moveable property, because, prior to this supply, the good, in other words the intellectual property, was used in the Appellant's commercial activities. The Respondent claims that, immediately before the moment at which the tax related to this supply would be payable had it been a taxable supply, the good that had been supplied was not used in the commercial activities of the Appellant. Therefore it is an exempt supply.
[6] The nature of the Appellant's activities with respect to this intellectual property must be established. It must be determined whether they were commercial activities.
[7] The facts described by the Appellant in paragraphs 7 to 12 of the Reply to the notice of appeal are as follows:
7. The Appellant is a teaching institution affiliated with the Université de Montréal.
8. In order to encourage scientific research and experimental development, the Quebec government has implemented various tax deductions to attract investors, specifically SPEQ-R & D and university research contracts.
9. In order to maximize the tax deductions offered to investors, SPEQ-R & D was created. These organizations were structured so that research was granted by contract to a university entity. Under the research contract, the university entity agreed to buy, from the SPEQ-R & D, the intellectual property arising from the research and to then grant the rights to use this property through a licence.
10. During the period that is the subject of the assessment at issue, the Appellant carried out research contracts on behalf of four SPEQ-R & D: Enviro R & D Inc., IBS R & D Inc., Les Capteurs Capco R & D Inc. and Les Biosystèmes Biosys R & D Inc.
11. As required by the Excise Tax Act (the "ETA"), the Appellant paid GST at the time the intellectual property rights held by the four SPEQ mentioned above were purchased. By virtue of its status as a public sector organization, the Appellant therefore only receive partial reimbursement of 67% of the GST paid.
12. The Appellant subsequently realized that it had the right to the full input tax credits (ITC) and obtained the difference between the GST paid and the partial reimbursement received, when it produced its tax return for the period of July 1994.
In the assessment at issue, the Respondent is asking for payment of the difference between the GST paid and the partial reimbursement initially obtained by the Appellant, in addition to the applicable interest and penalties.
[8] Paragraphs 7 to 11 of the Notice of appeal were admitted. Counsel for the Appellant explained that in 1991, there were four Sociétés de Placements dans l'Entreprise Québécoise ("SPEQ") that were set up to obtain funding for research to be carried out by private research corporations in cooperation with the Appellant.
[9] The first witness for the Appellant was Mr. Augustin Brais. He is an engineer and research administrator at L'École Polytechnique. During the SPEQ era he was manager of the major research projects section.
[10] The witness explained that l'École Polytechnique is a university institution with a teaching and research mission.
[11] Mr. Brais recounted that at the beginning of the 90s, the university institutions wanted to market some of their research results in order to provide financial assistance to the university. SPEQ activities took place within this context.
[12] The witness explained that he was involved after the SPEQ were founded. L'École Polytechnique conducted research whereas set-up issues were the responsibility of the proponent. The four projects mentioned in the notice of appeal were produced as Exhibits A-1 to A-4.
[13] For the purposes of the hearing, the parties restricted themselves to the SPEQ called SPEQ R & D BioCapital IBS Ltd. (Exhibit A-1). The private research company set up for this purpose was called IBS Société d'applications de faisceaux d'ion R & D Inc. ("IBS R & D"). A Belgian corporation, Ion Beam Applications, S.A. (IBA), a cyclotron manufacturer, was involved in the creation of the private research company (Tab 1 of Exhibit A-1).
[14] The research contract between IBS and the Appellant, dated October 16, 1991, can be found in Tab 2 of Exhibit A-1. This agreement was intended to provide the Appellant with a mandate to conduct research. Section 8.2 of the research agreement indicates that the intellectual property rights belong entirely to IBS. Section 8.3 provides that, with the prior written approval of IBS, the university entity can use the intellectual property for research and teaching.
[15] These sections read as follows:
[translation]
8.2 All and any property rights with respect to any aspect of the intellectual property, the research project or the research project results or rights arising therefrom, are the property of IBS.
8.3 With the prior written approval of IBS, the university entity could use the intellectual property for research and education.
[16] In Tab 3 of Exhibit A-1 the purchasing and licence contract can be found, dated October 16, 1991. The whereas clauses provide that a research agreement was concluded on October 16, 1991 between IBS R & D and the university entity, that at the end of the research project the university entity wishes to acquire the intellectual property in the research project, and that IBS R & D agrees to sell the intellectual property to the university entity inasmuch as it grants it exclusive and world rights to operate and market the intellectual property.
[17] These whereas clauses read as follows:
[translation]
WHEREAS a research agreement has been concluded on October 16, 1991 between IBS R & D and the university entity (the "research agreement") and execution of this contract is an essential condition for IBS R & D and the university entity and to carry out the research agreement;
WHEREAS at the end of the research project as defined in the research agreement, the university entity wishes to acquire the intellectual property in the research as defined below;
WHEREAS IBS R & D agrees to sell the intellectual property inasmuch as the university entity grants it an exclusive and world licence to operate and market the intellectual property;
[18] Section 2 of this contract is entitled: "Purchase of intellectual property" and Section 3: "Exclusive and world licence". These clauses in the purchase and licensing contract only enter into effect on December 13, 1993, in other words, after the end of the research project. During the entire research program, the intellectual property belongs to the business. The maximum amount of royalties was the same as the purchase price of the intellectual property, or $756,502.
[19] It is relevant to reproduce paragraphs 2.1, 2.3 and 3.1 of the purchase and licensing contract:
[translation]
2.1 IBS R & D hereby agrees irrevocably and unconditionally to sell, and the university entity hereby irrevocably agrees to buy from IBS R & D, on December 13, 1993, for the lowest fair market value the intellectual property of $756,502 (the "acquisition price"), with the exception that the university entity will not be responsible for payment of the acquisition price on December 13, 1993 if, at that date, the amount paid under the contract of substitution as a collateral guarantee of reimbursement of a portion of the loans contracted by SPEQ shareholders has not been discharged or recovered from the borrowers, in whole or in part. However, as each part of this amount becomes discharged or recovered, the university entity will then become irrevocably and unconditionally bound to assign the amount received in total or partial payment of the acquisition price of the intellectual property.
. . .
2.3 The university entity may deduct from the acquisition price only those amounts that cannot be claimed as reimbursement of any federal or provincial taxes on the products or services, or of any other sales tax it may be required to pay on the acquisition price.
. . .
3.1 The university entity hereby grants to IBS R & D, from December 13, 1993, following acquisition of the intellectual property, an exclusive and irrevocable licence for the territory with the right to sub-licence to any person the right to operate and market the intellectual property subject to payment, for a minimum of ten and a maximum of twenty years (the exact period to be determined as a function of the number of years required, within the framework of an assessment of the fair market value, for the amounts below to reach a maximum of $756,502), as of December 13, 1993, of the following amounts to the university entity by IBS R & D:
3.1.1 1% of net income; or
3.1.2 10% of all royalties;
taking into consideration the fact that the payment of each amount will discounted in accordance with the ratio described in appendix A, as a function of the payment date, and that the amounts reach the lesser of i) fair market value or ii) a maximum of $756,502.
[20] The invoices for the purchase of the intellectual property relating to the four SPEQ were submitted as Exhibit A-9. With respect to the SPEQ used as the example, in the invoice it can be seen that the acquisition cost is that mentioned in section 2 of the purchasing and licence contract. Taxes are paid on these acquisition amounts and these are the taxes for which input credit is being claimed.
[21] Mr. Brais stated that the purpose of the purchasing and licence contract was to enable the Appellant to use the intellectual property in order to market it, and also to continue with the research and eventually, later on, to use the research results.
[22] This intellectual property is still the property of the Appellant, since at a certain point IBS withdrew from the research project. The same phenomenon occurred for the other three projects. No royalty income was received from the private business by the four SPEQ at issue.
[23] The final research reports were submitted as Exhibit A-5, in order to demonstrate that actual research was conducted at l'École Polytechnique.
[24] According to the witness, the budget of l'École Polytechnique is currently in the order of $90 million. The research budget, if limited strictly to research activities and excluding research investments, is approximately $30 million per year.
[25] In cross-examination the witness recognized that section 4 of the purchase and licensing contract (Tab 3 of Exhibit A-1) provides that the university agrees that it will not operate or market the intellectual property.
[26] Paragraph 4.1 reads as follows:
4.1 The University entity commits and agrees not to operate or market the intellectual property and that it will not give to any other party whatsoever the right to operate or market the intellectual property in any form whatsoever.
[27] The witness for the Respondent was Ms. Louise Belliveau, auditor for Revenu Québec. She audited this file in 1997. She explained that input tax credits are granted on 100% of the supply when the supply is taxable. Here, 67% of the tax was reimbursed as provided for public institutions under section 259 of the Act. The rate is given in paragraph 5 of the Public Service Body Rebate Regulations.
[28] The witness related that she had obtained an opinion from the direction générale de la législation that said that the supply by the university, to SPEQ, of a licence for intellectual property operating and marketing rights constitutes an exempt supply under the general exemption outlined in Section 2 of Part VI of Schedule V. This opinion was submitted during the cross-examination as Exhibit A-10.
Arguments
[29] Counsel for the Appellant accepted that as a public institution, L'École Polytechnique usually provided an exempt supply, but she emphasized that within the SPEQ agreements, the research program became a specific commercial activity and that it is separate from the other research activities of the L'École Polytechnique. The good was therefore used in the institution's commercial activities before it was re-sold.
[30] In the opinion of the Counsel for the Respondent, that which had been acquired was an intellectual property right and that which had been provided was a licence. These were not the same good. But she did not linger on this argument because Counsel for the Appellant emphasized, quite rightly, that the licence was a subdivision of property. Counsel for the Respondent emphasized that the good, the intellectual property, could not be used since it was the property of the private business and since, once acquired, it was immediately and simultaneously provided to this business through a license. In addition, there was a specific clause excluding the rights to all commercial use by the Appellant.
[31] But the main point made by Counsel for the Respondent is that the good, immediately before being supplied, had not been used in a commercial activity. If it had been used by the Appellant, it had been as part of the exempt supply by l'École Polytechnique, or, in other words, as part of teaching and research and not in commercial activities. For this purpose, she is refers to the Appellant's act of incorporation.
[32] Section 3 of the Loi sur la Corporation de l'École Polytechnique de Montréal reads as follows:
[translation]
3. The purpose of the corporation is to provide higher education and promote research in all domains of science in which the profession of engineering is exercised.
Conclusion
[33] I am of the opinion that the meaning of "commercial activities" in paragraph 2(c) of Part VI of Schedule V will be the determining factor. If this expression is given the meaning as defined in paragraph 123(1) of the Act, the issue cannot be resolved. According to this definition, all the Appellant's activities are commercial activities, except those which are exempt. According to section 2 of Part VI of Schedule V, supply of personal property is an exempt supply except for the supply of personal property used in commercial activities. This is a circular argument (as suggested by author [David] Sherman, in volume C6 of the Canada GST Service collection, published by Carswell, with respect the meaning to be given "commercial activities" in this paragraph 2(c)).
[34] Upon reading the [list of] exemptions in section 2, a connotation of commercial activities can be perceived that is similar to those which are normally found in a business in which profit is the primary goal. The meaning of commercial activities in subsection 123(1) of the Act is a wider one which includes more than the usual meaning of the expression "commercial activities." In order for the text of the regulation to have meaning here, the term "commercial activities" must be interpreted as having its usual meaning.
[35] The explanatory notes regarding the text of this regulation agree with this interpretation. I cite the first paragraph of the explanatory note regarding Bill C-62 (S.C.) 1990, c. 45):
General exemption for charities [Bill C-62 (S.C. 1990, c. 45)] - Under this section, all supplies of goods and services by charities are exempt from GST, except for the list of supplies set out in paragraphs (a) to (m). The supplies included in this list are of a type generally made by commercial businesses.
[36] This explanatory note can be found on pages 476 and 477 of Notes explicatives fédérales en taxes à la consommation, Archives de 1990 à 1996, published by CCH Canadian as part of their TaxWorks collection.
[37] With respect to the use of explanatory notes in judgments, I cite author Pierre-André Côté in Interprétation des lois, 3rd edition, Les Éditions Thémis, on page 546:
[translation]
In my opinion, the courts should accept reference to explanatory notes accompanying a bill in the same way and for the same reasons that they take into consideration the views of legal scholars. An explanatory note is a valid opinion about the statute being interpreted. The judge retains discretion to accord the weight justified by the circumstances (Hébert v. Marx, [1988] R.J.Q. 2185 (S.C.)). If the enactment's meaning is plain, the notes will have little weight. But if it is ambiguous, the notes may either suggest a possible interpretation or confirm the conclusions that the judge has inferred from other sources. Pragmatic objections to parliamentary history do not apply, because explanatory notes are usually brief, easily accessible, and often quite relevant. There are also fewer questions about their reliability than with forms of parliamentary history.
[38] Counsel for the Appellant emphasized that the research conducted within the SPEQ framework should be considered separately from the Appellant's usual research program. However even this does not necessarily make it a commercial activity of the Appellant. This specific activity must have commercial characteristics.
[39] I am of the opinion that the evidence did not reveal any indication of commercial activities for the purpose of profit. Indications could include separate accounting, marketing or other commercial characteristics. I do not find these characteristics either in the clauses of the agreements or in the facts described by the Appellant's witness.
[40] I am of the opinion that the evidence showed that the intended purpose of the agreements is teaching and research, in keeping with the Appellant's mission, not profit. Whether [the research was] funded by specific investors or by subsidies or tuition fees, that fact does not change the nature of the research-related activities.
[41] The appeal is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 2nd day of September 2003.
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"Louise Lamarre Proulx" |
Lamarre Proulx, J.
Translation certified true
on this 19th day of March 2004.
Shulamit Day-Savage, Translator