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Docket: 2002-4404(GST)G |
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BETWEEN: |
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SUTTER SALMON CLUB LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on May 20, 2004 at Saint John, New Brunswick.
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Before: The Honourable Justice T. E. Margeson |
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Appearances: |
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Counsel for the Appellant: |
Nicole L. Gallant |
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Counsel for the Respondent: |
Marcel Prevost |
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JUDGMENT
The appeal from the Notice of Assessment Number 01EE0102530, made under Part IX of the Excise Tax Act dated February 27, 2002, for the period January 1, 1998 to December 31, 2000 is allowed, with costs, and the matter is referred to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at New Glasgow, Nova Scotia, this 8th day of July, 2004.
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"T. E. Margeson" |
Margeson, J.
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Citation: 2004TCC443 |
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Date: 20040708 |
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Docket: 2002-4404(GST)G |
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BETWEEN: |
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SUTTER SALMON CLUB LTD., |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Margeson, J.
[1] The Minister of National Revenue ("Minister") assessed the Appellant by Notice of Assessment Number 01EE0102530, dated February 27, 2002, in the amounts of $33,676.19 tax, $4,682.68 interest, and $5,724.91 penalty in respect of goods and services tax ("GST") for the period January 1, 1998 to December 31, 2000. The basis of the assessment was subsection 123(1) of the Excise Tax Act, Revised Statutes of Canada 1985, chapter 15 ("Act").
[2] The Minister contended that the capital contributions of the shareholders were deemed to be consideration for the supply of a membership pursuant to section 140 of the Act. The supply of a membership is subject to tax pursuant to section 165 of the Act. He submitted that the right of the shareholders to the use of the fishing lodge was a "membership" as that term is defined in subsection 123(1) of the Act.
[3] The parties agreed to the following statement of facts:
b) the Appellant is a GST registrant with GST Account No. 139863260;
c) the Appellant is registered as an extra-provincial corporation carrying on business in the province of New Brunswick;
d) at all times relevant to this appeal the Appellant owned and operated a fishing lodge in New Brunswick;
e) for the period relevant to this appeal the Appellant had nine shareholders, each of which held 10% of the shares except one that held 20%;
f) all shareholders during the period in question were American residents;
g) the shareholders paid $50,000 per share as an initial investment in the Appellant;
h) a Unanimous Shareholder Agreement ("the Agreement") was entered into on January 1, 1997;
i) the Agreement provided, among other things, for the following:
i) the Board of Directors was to consist of all the shareholders with votes proportionate to their shareholder interest in the Appellant;
ii) the transfer of shares in the Appellant was restricted; and
iii) the shareholders were required to make operating or capital fund contributions;
j) ... the Agreement required each shareholder to contribute, proportionate to their shareholdings, funds to the Appellant to cover any shortfalls in operating or capital funds by the Appellant (the "capital contribution");
k) the Agreement provided that failure by a shareholder to make the capital contribution as required would result in a dilution of his or her shareholder interest in favour of the other shareholders who have met the requirement;
l) in 1997 three shares were sent to each shareholder (six to the shareholder holding a 20% interest) - one for the initial purchase contribution of $50,000 and one each for the capital contribution made in 1996 and 1997;
m) shares were not issued for capital contributions in years subsequent to 1997;
n) each shareholder was entitled to use the fishing lodge for a fee of US$6,800 per person;
o) the fee included for seven days:
- the use of the lodge, which contains 3 bedrooms, a living and dining room and a kitchen,
- the use of 2 [sic] cabins each containing one to two bedrooms and a bathroom,
- meals, cooking, cleaning, the services of a guide, and the use of 3 vehicles - a 1991 Blazer, a 1989 Suburban and a 1999 Suburban
p) when not being used by the shareholders the lodge was rented to third parties at market rates;
q) the Appellant did not collect HST on the fees from shareholders or the capital contributions from shareholders;
r) the reason for the Appellant's existence was to provide recreational benefits to its shareholders through their access to and use of the fishing lodge;
s) in 1998, 1999 and 2000 capital contributions were made by the shareholders and the Appellant failed to collect and to remit tax as follows:
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Capital Contribution |
HST @ 15% |
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1998 |
$37,702.36 |
$4,905.35 |
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1999 |
24,961.44 |
3,744.22 |
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2000 |
25,616.25 |
3,842.44 |
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$12,492.01 |
Issues to be Decided
[4] The issues to be decided are:
1. Whether the capital contributions were membership fees subject to tax as defined in subsection 123(1) of the Act;
2. Were the capital contributions deemed to be consideration for the supply of the membership pursuant to section 140 of the Act?
3. Was the supply of the membership subject to tax pursuant to section 165 of the Act?
Argument on Behalf of the Appellant
[5] The Appellant submitted written argument as follows:
15. The Appellant submits that the Capital Contributions are not subject to HST.
16. In its Reply, the Respondent has stated that it is relying, in part, on section 140 of the Excise Tax Act, R.S.C. 1985, c-15. Section 140 states as follows:
For the purposes of this Part, where
(a) a person makes a supply of a share, bond, debenture or other security (other than a share in a credit union or in a cooperative corporation the main purpose of which is not to provide dining, recreational or sporting facilities) that represents capital stock or debt of a particular organization, and
(b) ownership of the security by the recipient of the supply is a condition of the recipient's, or another person's, obtaining a membership, or a right to acquire a membership, in the particular organization or in another organization that is related to the particular organization,
the supply of the security shall be deemed to be a supply of a membership and not a supply of a financial service.
17. The Respondent has also indicted [sic] that is relying on the definition of "membership" in subsection 123(1) of the Act. The definition is as follows:
"membership" includes a right granted by a particular person that entitles another person to services that are provided by, or to the use of facilities that are operated by, the particular person and that are not available, or are not available to the same extent or for the same fee or charge, to persons to whom such a right has not been granted, and also includes such a right that is conditional on the acquisition or ownership of a share, bond, debenture or other security;
18. The Appellant submits that, in order for section 140 to apply, there must have been the supply of a share, bond, debenture or other security. As agreed by the Respondent, no shares were issued by the Appellant for Capital Contributions made by the Shareholders in the years in question. Therefore, subsection 140(a) does not apply.
19. It is noted that subsections 140(1) and (b) are conjunctive, therefore if (a) does not apply, there is no need to go further. However, in any event, the Appellant submits that subsection 140(b) also does not apply, as payment by the Shareholders of the Capital Contribution was not a condition of the Shareholder's obtaining a membership in the Appellant.
20. The Appellant is a share capital corporation. It submits that it does not have "members"; it has shareholders. Further, if the Shareholders are to be considered "members", which the Appellant submits they are not, it is clear that they were members prior to the years in question. Therefore, making the Capital Contributions in the years 1998, 1999 and 2000 was not a condition of obtaining membership, or the right to acquire membership, as required by subsection 140(b).
21. The Appellant submits that, in determining whether the Shareholders were "members" of the Appellant, as defined in subsection 123(1), it must be determined whether they had the "right" to services provided by the Appellant, or to the use [sic] the Facilities, which right was not available, or not available to the same extent or for the same fee, to persons to whom such a right had not been granted.
22. A "right" is defined in Black's Law Dictionary, 6th ed. as follows:
An interest or title in an object or property; a just and legal claim to hold, use, or enjoy it, or to convey or donate it, as he may please.
A legally enforceable claim of one person against another, that the other shall do a given act, or shall not do a given act.
23. In determining whether such a "right" existed, one must look to the relevant documentary evidence. The fact that the Appellant had a practice whereby the Shareholders would each use the Facilities for one week per year does not mean the Shareholders had a legally enforceable right to do so. The Appellant submits that a practice is clearly different from a legally enforceable right.
24. The relevant documents, the Appellant submits, in determining the Shareholders' rights, are the incorporation documents of the Appellant, its Bylaws, and the Unanimous Shareholder Agreement. In none of these documents is it stated that the Shareholders have a right to services provided by the Appellant or to use of the Facilities. Further, nowhere is it stated that Shareholders are entitled to pay less for the Appellant's services or for use of the Facilities than are non-shareholders.
25. In Riverside Country Club v. Canada, [2002] T.C.J. No. 424, the Court considered section 140 and the definition of "membership" in subsection 123(1) of the Act in the context of some members of a golf club providing a loan to the club, in order for the Club to make capital improvement. The loan was in addition to the member's payment of membership fees. Rowe D.T.C.J. stated as follows at paragraph 11:
It is apparent that the loan - as the term was used by the appellant - or the lump sum payment, as preferred by counsel for the respondent, was not a share, bond, debenture or other security and even if it were, the evidence is clear that participation in the loan option program was not a condition of obtaining a membership or the right to acquire a membership in the Club.
26. The Appellant submits that this is similar to the case at bar. The Shareholders were not issued shares in exchange for their Capital Contributions, and payment of same was not a condition of their obtaining membership in the Appellant.
27. Further, the Appellant states that the Respondent has plead nothing in relation to what qualifies as a "taxable supply", or how it concludes that supply of a membership is taxable. If understood correctly, the Respondent's position is that:
· the Capital Contributions are deemed to be consideration for the supply of a membership pursuant to section 140 of the Act;
· the Shareholders shall pay tax, as recipients of a "taxable supply", as per subsection 165(1) of the Act; and
· the Appellant, having made a "taxable supply", shall collect the tax payable thereon, as per subsection 221(1) of the Act.
28. There is nothing plead by the Respondent to link the assumptions made by the Minister to "taxable supply". As such, the Appellant submits that their appeal should be allowed.
[6] In addition to the written argument counsel said that even if it was a membership, there is still a question as to whether it is taxable. The question should be "was it a taxable supply?"
Argument on Behalf of the Respondent
[7] Counsel for the Respondent submitted that the right of the shareholders to the use of the fishing lodge was a "membership" as that term is defined in subsection 123(1) of the Act. He further submitted that making the capital contributions was a requirement of a shareholder and that being a shareholder was a condition of having the right to use the fishing lodge. Consequently, the capital contributions are deemed to be consideration for the supply of the membership pursuant to section 140 of the Act. He further submitted that the supply of the membership is subject to tax pursuant to section 165 of the Act.
[8] In oral submission counsel said that Sutter Salmon Club Ltd. members had the right to the use of the lodge at the best time in the year as they selected it. Others who were not members did not have that right. The periods of time left over after members selected their choice periods of time went to others.
[9] He said that the shareholders have this right under the Articles. They were paying the capital in order to have the right of choice. If that were not the case, why would they pay the capital?
[10] For what other reason would they make capital contributions? Counsel had to admit that this was not set out in the Articles or by way of agreement but it was the practice of the corporation. He referred to presumptions contained in paragraph 5 p) of the Reply which said:
when not being used by the shareholders the lodge was rented to third parties at market rates;
and r) which said:
the reason for the Appellant's existence is to provide recreational benefits to its shareholders through their access to and use of the fishing lodge;
He said that these presumptions have not been rebutted. He referred to paragraph 5 of the Unanimous Shareholder Agreement, which provided for additional funding. This section said as follows:
5.1 The Shareholders agree with one another that any additional operating or capital funds or other financial support required by the Corporation shall be provided by them proportionately with their then current equity interest in the Corporation.
5.2 If any Shareholder fails to provide the funding or financial support required by the Corporation, the defaulting Shareholder shall be liable to a proportionate dilution of his or her Common Share interest in the Corporation in favor [sic] of the other Shareholder who has met the funding requirement, such dilution to be based on a comparison of the total amount of support in the form of guarantees and loans provided to the Corporation by each Shareholder.
[11] This was an incentive for the shareholders to maintain their capital funds, otherwise their holdings would be diluted.
[12] Therefore there was an impetus to pay their capital funds and thereby preserve their preferential use of the lodge.
[13] If the shareholders did not keep up their capital, they could reach the point where they would no longer be a member and could not use the facility for the annual fee.
[14] The payments to the capital in question here were disguised membership fees. They would not have paid that money just to have rights at a meeting. He also referred to paragraph 1.1 of the Unanimous Shareholder Agreement, entitled "General and Administrative", which gave each shareholder the right to be a director or to nominate a director.
[15] In reply, counsel for the Appellant said that if the shareholders did not keep up the capital contribution, they would lose authority but not all of their authority because they would always be a shareholder.
[16] She also suggested that there may be different reasons why one would invest in the corporation other than the purpose that counsel for the Respondent suggested. Such reasons might be the obtaining of dividends or the right to share in the profits if the property was sold.
[17] She also indicated that it was significant that no shares were issued in the years under consideration here. Nothing was issued for the contributions. Therefore, there should be no tax. She referred to subsection 140(a) of the Act in that regard.
Analysis and Decision
[18] The following provisions of the Act are applicable.
The definition of "membership" is found in subsection 123.(1) of the Act as follows:
includes a right granted by a particular person that entitles another person to services that are provided by, or to the use of facilities that are operated by, the particular person and that are not available, or are not available to the same extent or for the same fee or charge, to persons to whom such a right has not been granted, and also includes such a right that is conditional on the acquisition or ownership of a share, bond, debenture or other security;
Section 140.:
For the purposes of this Part, where
(a) a person makes a supply of a share, bond, debenture or other security (other than a share in a credit union or in a cooperative corporation the main purpose of which is not to provide dining, recreational or sporting facilities) that represents capital stock or debt of a particular organization, and
(b) ownership of the security by the recipient of the supply is a condition of the recipient's, or another person's, obtaining a membership, or a right to acquire a membership, in the particular organization or in another organization that is related to the particular organization,
the supply of the security shall be deemed to be a supply of a membership and not a supply of a financial service.
Subsection 165.(1):
Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.
Subsection 221.(1):
Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
[19] In order for the Appellant to be subject to taxation for the years it question, it must have provided a "taxable supply". In the Respondent's submission the taxable supply was the membership and the cost of that membership was the capital contributions that were made in the years in question. These capital contributions, according to the Respondent, should be deemed to be consideration for the supply of the membership under the provisions of section 140 of the Act. The basis for this argument is that the members were paying the capital contribution in order to obtain a right. It was not available, or available to the same extent or for the same fee or charge, to persons other than the members. This right was one of preference to be able to use the facilities when the members wanted to use them regardless of the time of the year and this brought the contributors under the definition of "membership" under subsection 123(1) of the Act.
[20] In other words to describe the payments as capital payments was just a disguise for the payment and they were, in reality, membership fees. In the event that the contributors did not keep up their contributions (capital payments or membership fees) they might no longer be members and could lose the right to use the facility for the annual fee at the choice time of the year. This was the impetus to keep up the payments as there could be no other reason for it.
[21] The making of the capital contributions was a requirement of being a shareholder and being a shareholder was a condition of having the right to use the fishing lodge. Consequently the capital contributions are deemed to be consideration for supply of a membership pursuant to section 140.
[22] However, in order for tax to be payable there must have been a taxable supply. Counsel for the Respondent has assumed that the supply of a membership is a taxable supply and counsel for the Appellant takes issue with this on the basis that the Respondent has not plead any facts nor made any presumptions in the Reply to allow the Court to conclude that this was a taxable supply.
[23] The Court is satisfied that if the taxpayer received a membership in return for the consideration of paying the capital contributions, then it is a taxable supply unless it is otherwise shown not to be a taxable supply, it is exempt or zero-rated. The Court would conclude that there was a taxable supply if it were satisfied that what the taxpayers received for the payment of their capital contributions in the years in question amounted to a membership under section 140 or subsection 123(1).
[24] There is some difficulty for the Respondent in satisfying the Court in that respect because in order for section 140 to apply there must have been the "supply of a share, bond, debenture or other security". It would seem reasonable to conclude that there must have been consideration paid for the supply of that share and the consideration, which is alleged to be the subject matter of the tax, must have been the amount of the capital contributions.
[25] It is common ground that no shares were issued by the Appellant for the capital contributions made by the shareholders in the years in question and consequently the Court cannot see how subsection 140(a) has been fulfilled in this case.
[26] Further, the Court agrees with counsel for the Appellant that subparagraphs (a) and (b) of section 140 are conjunctive and therefore this argument on behalf of the Respondent would fail if either subparagraph (a) or (b) was not fulfilled.
[27] In any event, the Court is satisfied, that subsection 140(b) does not apply because there is no evidence whatsoever that the payment of the capital contributions by the shareholders was a condition of the shareholders obtaining a membership in the Appellant.
[28] Further, there is nothing in any of the evidence submitted to the Court that would suggest that any of these contributors were considered to be members. They were always considered to be shareholders. If they were members, then they were members prior to the years in question. Therefore, making the capital contributions in the years 1998, 1999 and 2000 was not a condition of obtaining a membership, or the right to acquire a membership, as required by subsection 140(b).
[29] The Respondent's position is further complicated by the definition of "membership" under subsection 123(1) of the Act. As counsel for the Appellant argued, there was nothing in the evidence that would establish that the contributors had the "right" to services provided by the Appellant, or to the use of the facilities, which right was not available, or not available to the same extent, or for the same fee, to persons to whom such a right had not been granted, which is one of the requirements of this subsection. The most that can be said is that there was a practice whereby the shareholders would each use the facilities for one week per year (obviously in preference to non-shareholder use). But there was nothing in the Articles of the Corporation nor in the Shareholders' Agreement to satisfy the Court that such practice amounted to a "legally enforceable right".
[30] In Riverside Country Club v. Canada, [2001] T.C.J. No. 424, section 140 was considered by Rowe, D.T.C.J. and he concluded that a lump sum payment, or loan, was not a share, bond, debenture or other security under subsection 123(1) of the Act and, even if it were, participation in the loan option program was not a condition of obtaining a membership or the right to acquire membership in the club.
[31] This case is similar to the case at bar because the Court is satisfied that the shareholders were not issued shares in exchange for their capital contributions and although the payment or non-payment of same had some financial consequences for the shareholders, the Court is satisfied that the payment of the capital was not a condition of obtaining membership in the Appellant, even if this Court were to conclude that they had acquired a membership. That membership had already existed before the years in question.
[32] In the end result, the appeal will be allowed, with costs, the answers to the three questions posed as the issues in this case are answered in the negative and the matter is referred back to the Minister for reassessment and reconsideration on the basis that the capital contributions are not subject to Harmonized Sales Tax ("HST").
Signed at New Glasgow, Nova Scotia, this 8th day of July, 2004.
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"T. E. Margeson" |
Margeson, J.
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CITATION: |
2004TCC443 |
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COURT FILE NO.: |
2002-4404(GST)G |
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STYLE OF CAUSE: |
Sutter Salmon Club Ltd. v. The Queen |
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PLACE OF HEARING: |
Saint John, New Brunswick |
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DATE OF HEARING: |
May 20, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice T. E. Margeson |
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DATE OF JUDGMENT: |
July 8, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
Nicole L. Gallant |
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Counsel for the Respondent: |
Marcel Prevost |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Nicole L. Gallant |
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Firm: |
Patterson Palmer |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |