Tax Court of Canada Judgments

Docket: 2002-1777(GST)I

BETWEEN:

S.K. MANAGEMENT INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on February 28, 2003 at Saskatoon, Saskatchewan

Before: The Honourable Judge Diane Campbell
Appearances:
Agent for the Appellant:	Sherry Peters
Counsel for the Respondent:	Lyle Bouvier

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Excise Tax Act, notice of which is dated April 27, 2001, and bears number 00000000235, is dismissed in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 7th day of March 2003.

"Diane Campbell"

J.T.C.C.

Citation: 2003TCC103

Date: 20030307

Docket: 2002-1777(GST)I

BETWEEN:

S.K. MANAGEMENT INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Campbell, J.

[1]      The Appellant was audited for the reporting periods ending between August 1, 1999 and January 31, 2001 (the relevant period). By notice of assessment dated April 27, 2001 the Minister assessed the Appellant net tax of $8,456.08 together with a penalty and interest for the reporting periods ending during the relevant period. The penalty and interest assessed were later cancelled. The Respondent argues that all of the supplies made by the Appellant were taxable and that the Appellant was required to collect and account for the tax of 7% on those supplies. The Appellant agreed that there was no dispute respecting the amount of net tax calculated but argued that it should not be liable for this tax as the Appellant was acting as an agent of a the Downtown Bingo Association ("the Association").

[2]      Kevin Sandy, President of the Appellant and Sherry Peters, an officer of the Appellant, gave evidence.

[3]      The assumptions upon which the Respondent relies are as follows:

12.        In so assessing the Appellant, the Minister made the following assumptions of fact, with respect to the relevant period:

(a)         622047 Saskatchewan Limited changed its name to S K Management Inc.;

(b)         the Appellant was engaged in commercial activities;

(c)         the Appellant made supplies of property and services that were taxable at 7%;

(d)         the Appellant has been a registrant for the purposes of the Act since August 1, 1999;

(e)         the Appellant filed returns reporting tax collectible, input tax credits and net tax as follows:

Period End Date	Due Date	Date Filed	Tax Collected	Input Tax Credits	Net Tax
1999-12-31	2000-03-31	2000-04-17	0.00	6,068.82	(6,068.82)
2000-01-31	2000-02-29	2000-04-17	0.00	89.20	(89.20)
2000-04-30	2000-05-31	2000-06-09	0.00	1,687.20	(1,687.20)
2000-07-31	2000-08-31	2000-09-27	0.00	6,506.78	(6,506.78)
2000-10-31	2000-11-30	2001-03-16	0.00	0.00	0.00
2001-01-31	2001-02-28	2001-03-16	0.00	0.00	0.00
			0.00	14,352.00	(14,352.00)

(f)          the Appellant carried on a business as a management company;

(g)         the Association had a licence from the Authority to run bingos;

(h)         each of the Association's members obtained a licence from the Authority when that member was operating, sponsoring or conducting a bingo;

(i)          the Appellant has a Gaming Supplier licence from the Authority to provide paper and services to the Association and its members;

(j)          the Appellant entered into an agreement with the Association as of July 10, 1999;

(k)         the Appellant entered into a subsequent agreement which modified the July 10, 1999 agreement on or about December 1, 2000;

(l)          pursuant to the terms of the 1999 Agreement and the 2000 Agreement, the Appellant provided property and services to the Association to enable the Association to conduct bingo events on the Association's behalf and on behalf of its members;

(m)        the property and services provided by the Appellant to the Association included, but was not limited to:

(i)          promoting and supervising the development of bingo programs and operations;

(ii)         ensuring that the bingos were operated in accordance with all laws and regulations;

(iii)        leasing the bingo hall premises from Voyageur Club of Saskatoon Inc.;

(iv)        resupplying the bingo hall premises to the Association;

(v)         providing all furniture, fixtures, bingo equipment and other equipment and accessories required to conduct bingos;

(vi)        providing all the paper and supplies that are required to conduct bingos;

(vii)       maintaining all of the bingo equipment in good repair;

(viii)       employing sufficient personnel to operate the bingos;

(ix)        training representatives of the Association's members;

(x)         maintaining and supervising adequate floats and petty cash;

(xi)        assisting the Association to correctly calculate the payout of prizes; and

(xii)       assisting the Association in the preparation of financial statements;

(n)         the Appellant was the employer of the personnel it provided to operate the bingos (the "Employees");

(o)         the Appellant hired the Employees after receiving the Association's approval;

(p)         the Appellant paid the remuneration and the benefits, if any, of the Employees;

(q)         the Appellant is registered as an employer, with its own business number, with the Canada Customs and Revenue Agency for remitting source deductions;

(r)         the source deductions for the Employees were paid by the Appellant;

(s)         the Appellant prepared the T4 slips and other employment documentation for the Employees;

(t)          the Appellant trained the Employees;

(u)         the Association could only remove one of the Employees from the bingo hall if it had reasonable grounds for believing that the Employee was fraudulent, dishonest or deceitful;

(v)         the Appellant also made supplies through a concession stand, which included but was not limited to supplies of food and beverages from a limited menu, supplies of cigarettes and supplies of dabbers;

(w)        the Appellant was not acting as an agent for the Association or its members;

(x)         the Appellant received consideration of at least $378,833.84 for the supplies it made during the relevant period;

(y)         the Appellant did not account for tax on the consideration it received from the Association;

(z)         the Appellant failed to report tax of at least $26,518.37 in respect of the supplies it made during the relevant period;

(aa)       the Appellant claimed input tax credits on its returns with respect to the supplies of property and services that it acquired in order to make the supplies to the Association and its members;

(bb)       the Appellant was entitled to and had documentation to support input tax credits of no more than $18,062.29; and

(cc)       the Appellant's net tax remittable for the reporting periods ending during the relevant period was at least $8,456.08.

[4]      During the relevant period the Appellant conducted bingo games for the Association. The members of this association were various charitable organizations. According to Sherry Peters, she was working for the Association when it began experiencing problems in operating these bingos. As a result, on June 10, 1999, the Appellant submitted a proposal, Exhibit A-1, to manage the Bingo Hall on behalf of the Association. The proposal was accepted and on July 10, 1999, the parties entered into their first management agreement (Exhibit R-1). Pursuant to this agreement, the Appellant, at its own expense, was to provide the following services to the Association and I quote from paragraph 1.02:

1.02      The Contractor's Responsibilities

Without limiting the generality of section 1.01 the types of services which the Contractor shall perform, in accordance with any directions and policies of the Association, and at the Contractor's own expense include the following:

(a)         promotion and supervision of the development of bingo programs and operations for bingo events and advise the Association before the implementation of major promotions or programs;

(b)         provide all furniture, fixtures, bingo equipment and other equipment and accessories (hereinafter collectively called "Bingo Equipment"), paper and other supplies which are required to conduct Bingo Events in the Bingo Hall in a proper and efficient manner;

(c)         maintenance of all Bingo Equipment in good repair and working order;

(d)         ensure that all bingo events conducted in the Bingo Hall are conducted in a lawful manner and in full compliance with all governmental laws and regulations and in accordance with the rules, terms, conditions, specifications and directives of any authority having jurisdiction including, without limitation, the Liquor and Gaming Authority;

(e)         promote and assist in the training and instruction of the representatives of the members of the Association;

(f)          provide and maintain sufficient personnel registered pursuant to The Alcohol and Gaming Regulation Act for the purpose of operating bingo events in the Bingo Hall in an efficient and proper manner;

(g)         maintain and supervise adequate floats for the proper and efficient operation of bingo events in the Bingo Hall;

(h)         assist the Association in the preparation of such operating or other financial statements as may be required:

(i)          to enable the Association to properly calculate the payout of prizes and other payments to be made by the Association;

(ii)         to enable the Association to provide the Liquor and Gaming Authority with all such financial statements and reports as it requests from time to time;

(i)          deposit daily into specified accounts of the Association, all revenue earned in the conduct of that day's bingo events;

(j)          comply with lawful and reasonable instructions as may be given by the Association;

(k)         to obtain a 5 year lease with an option to renew for a further 1 to 5 years of the bingo hall premises with Voyageur Club of Saskatoon Inc.;

(l)          to enter into a lease with the Association of the bingo hall on the terms and conditions more specifically set out in the Lease document attached hereto as Schedule "A";

(m)        in the event the Association contracts with Western Canada Lottery Association to conduct bingo events at the bingo hall, provide and accommodate all requirements of the Western Canada Lottery Association with respect to the operation of such bingo events.

The parties later entered into another agreement which contained the same wording at paragraph 1.02 of this second agreement with the following exceptions:

(1)      The opening paragraph of 1.02 of the second agreement reads as follows:

Without limiting the generality of section 1.01 the types of services which the Contractor shall perform, in accordance with any directions and policies of the Association include the following:

...

and

          (2)      Paragraph 1.02(g) now reads as follows:

(g)         maintain and supervise adequate floats and petty cash in the amount of $1,300.00 (1,000.00 petty cash) (the 300.00 club floats and petty cash have been provided by the Association), for the proper and efficient operation of bingo events in the Bingo Hall;

[5]      At paragraph 1.05 of the first agreement, the hiring of personnel was further dealt with as follows:

1.05      Personnel

The Contractor agrees that all persons employed by it in the Bingo Hall to provide the services to be provided by the Contractor under this agreement must be first approved by the Association. The Contractor further agrees that:

(a)      the Association shall have the right to remove any such person employed by the Contractor from the Bingo Hall if the Association reasonably believes that such person was fraudulent, dishonest or deceitful in working or providing any services at bingo events conducted by the Association, and upon receiving notice of the same from the Association, the Contractor shall provide, subject to the approval of the Association as aforesaid, a person to replace the person so removed; and

(b)     it shall replace any of its employees at the Bingo Hall in whom the Association has reasonably lost confidence within three (3) days after receiving notice thereof from the Associaiton.

This same wording was also included in the second agreement at paragraph 1.05.

[6]      Pursuant to the first agreement, the Appellant was paid compensation for the services rendered to the Association in the monthly sum of $53,000.00 (which, however, could not exceed 16% of the gross revenues generated by each bingo event). This was referred to as a management fee and was to be "... inclusive of all taxes, of whatsoever nature and kind, including without limitation, the Goods and Services Tax pursuant to the Excise Tax Act (Canada), which may be payable in connection with such fee by the Association". From this fee the Appellants paid all the expenses incurred in providing these services to the Association.

[7]      The second management agreement (Exhibit R-2) was really an amendment to the first agreement and was backdated to December 2000. The Appellant had again contacted their GST office in an attempt to get clarification on tax liability and based on what they were told, the Appellant and the Association agreed to amend the agreement so it would reflect their actual relationship. One of the major changes in this second agreement was that the Association was now to pay all expenses incurred by the Appellant, including paying the employees. The Association paid the Appellants each month 10% of the "net dollars to split", inclusive again of taxes including the Goods and Services Tax. Although the Association now paid the employees, the Appellant was still responsible, according to paragraph 1.02(f), to:

(f)       provide and maintain sufficient personnel registered pursuant to The Alcohol and Gaming Regulation Act for the purpose of operating bingo events in the Bingo Hall in an efficient and proper manner;

[8]      In addressing GST returns, at paragraph 2.02(e) it states:

The parties acknowledge and agree that all expenses incurred in operating the Bingo Hall are incurred in the name of the Contractor and that the Contractor is therefore entitled to file GST Returns on such expenses and entitled to the refund (if any) of GST on such expenses.

[9]      Both the first and second agreements contained the same provisions concerning indemnification and insurance. The Appellant was to maintain insurance in respect to and be responsible for the acts of its officers and employees. The Appellant was to indemnify the Association under both agreements for damages and injuries resulting from any breach of the agreements.

[10]     Both agreements also contained the following provision which referred to the party's relationship as one of principal and independent contractor. It states at paragraph 7.02 (Exhibit R-2):

7.02      Independent Contractor

The parties hereto intend that the relationship between them created by this agreement is that of principal and independent contractor. No agent, employee or servant of the Contractor shall be or shall be deemed to be the employee, agent or servant of the Association. The Association is interested only in the result obtained under this agreement. The Association shall not have the right to direct the contractor to devote any fixed or minimum hours in respect of the performance of the services to be provided by the Contractor hereunder. The Contractor shall be solely and entirely responsible for its acts and for the acts of its directors, officers, agents, employees, servants and subcontractors during the performance of this agreement.

[11]     The issue to be decided here is whether the Appellant is an agent of the Association in supplying the various services to the Association. If the Appellant is an agent it will be exempt from collecting and remitting GST for the services and equipment supplied to the Association.

[12]     Respondent counsel referred me to the case of Glengarry Bingo Assn. v. Canada, [1999] F.C.J. No. 316. Glengarry is similar to the present case except, that in this case, the Appellant is supplying services to the Association that represents its members. In Glengarry, the Bingo Association was itself supplying the services to its members. The Federal Court in Glengarry found that the Appellant was not acting as an agent in dealing with its various members.

[13]     The Appellant agreed at the hearing that the contract provisions clearly state that the Appellant is not an agent but that these contracts were "in error". They contended that they received the incorrect information from CCRA officials, were unable to obtain a ruling on their position with respect to tax liability and that if the Appellant had received the correct information, the contracts would never have been signed.

[14]     While I appreciate the frustration which the Appellant experienced because it felt the correct information had not been supplied, I am still left with two legally binding contracts which purport to establish the proper legal relationship between the parties and the admission of the representative of the Appellant that the contracts do not reflect the relationship as one of agency.

[15]     Both agreements refer to the relationship as that of Principal and Independent Contractor. There is no mention of an agency relationship. Although the Association has the right to first approve employees before they are hired and the right to remove employees for fraudulent, dishonest or deceitful behaviour, in all other respects, the relationship between the Appellant and those hired to staff bingo events is an employer/employee relationship. The contracts go on to call for removal of those employees "in whom the Association has reasonably lost confidence". However this provision must be referenced back to the prior provision in the same paragraph in which the Association may interfere for fraudulent, dishonest or deceitful behaviour. It does not further extend the rights of the Association, as argued by the Appellant. There is no other specific indication of control by the Association over the employees, except in these limited circumstances. In all other respects the staff were the employees of the Appellant. Under the first contract, the Appellant paid the staff but in the second contract all monies were paid to the Association and the Association paid the staff. This however is not sufficient to change the basic essence of this relationship. Certainly one of the telling aspects of the contract is the indemnity provision that clearly establishes that the Association was not to be liable for the acts of the Appellant's employees. There was no evidence before me that would suggest that the Appellant was acting as or holding itself out as an agent when hiring and dealing with its employees. It was the Appellant who issued the T4's. The Appellant was the legal employer of the staff and responsible for their acts. Paragraph 7.02 of both agreements clearly support this conclusion where it states that no employee of the Appellant was to be deemed an employee of the Association.

[16]     According to the Glengarry case, risk is a significant factor in determining whether an agency relationship exists. In this regard, both agreements contain the same provision on indemnification. It is clear that the intention of both parties was to completely indemnify the Association and its member charities from all damages and injuries. In fact this provision actually went one step further with the requirement that the Appellant maintain insurance on its directors, officers, employees and servants. These provisions are clearly intended to insulate the Association and its members from any risk related to operating the bingo events. This is another indication that there is no agency relationship.

[17]     The manner in which expenses were paid was changed in the second agreement. Although all money is deposited to an account belonging to the Association, from which it now pays all expenses, it is paying directly those expenses which have been incurred by the Appellant. This alone is not determinative of the agency issue. This did not change the basic agreement that the Appellant was liable for expenses. The second agreement merely changed the payment source. As stated in the Glengarry case, at paragraph 30, "... the reimbursement of an expense alone will not lead inexorably to a finding of agency".

[18]     In the Glengarry case, the Court referred to three essential qualities of agency. Although these were contained in CCRA draft policy Statement P-182 and are not determinative of "agency", I agree with that Court's finding that they are a useful tool. These three qualities are referred to at paragraph 32 of the decision:

... These are the consent of both the Principal and Agent, the authority of the Agent to Affect the Principal's Legal Position and the Principal's Control of the Agent's Action ...

[19]     There is no evidence in this case nor anything express or implied in the agreements that could lead one to conclude that the Appellant had consent or authority to legally bind the Association. There is nothing in the relationship that hints that the Association is in any way responsible for the acts of the Appellant. The Appellant did not purport to act as an agent of the Association nor was there exposure of the Association to any potential risk. It is clear from the contracts that the Appellant could not affect the liability of the Association. In fact the agreements contained broad indemnity clauses which maintained the Association safe and harmless from all liability. All risk involved with supplying the services to the Association are incurred by the Appellant alone.

[20]     With the provisions of the agreements and the facts before me, I am unable to infer any type of agency relationship between the parties. The Association maintained some control over the Appellant's employees but it was not sufficient to change the essential nature of the overall relationship between the Appellant and the employees. There were general rights of supervision reserved to the Association but again these are insufficient to infer an agency relationship. The onus is on the Appellant to establish that an agency relationship exists and that onus has not been met.

[21]     The appeal is therefore dismissed.

Signed at Ottawa, Canada, this 7th day of March 2003.

"Diane Campbell"

J.T.C.C.

CITATION:

2003TCC103

COURT FILE NO.:

2002-1777(GST)I

STYLE OF CAUSE:

S.K. Management Inc. and Her Majesty the Queen

PLACE OF HEARING

Saskatoon, Saskatchewan

DATE OF HEARING

February 28, 2003

REASONS FOR JUDGMENT BY:

The Honourable Judge Diane Campbell

DATE OF JUDGMENT

March 7, 2003

APPEARANCES:

Agent for the Appellant:

Sherry Peters

Counsel for the Respondent:

Lyle Bouvier

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada