City of Airdrie v. The Queen

City of Airdrie v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2005-01-14 Neutral citation 2005 TCC 4 File numbers 2004-2139(GST)I Judges and Taxing Officers Gordon Teskey Subjects Part IX of the Excise Tax Act (GST) Decision Content Docket: 2004-2139(GST)I BETWEEN: CITY OF AIRDRIE, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on December 13, 2004 at Calgary, Alberta Before: The Honourable Justice Gordon Teskey Appearances: Agent for the Appellant: Ralph MacKelvie Counsel for the Respondent: Dawn M. Taylor ____________________________________________________________________ JUDGMENT The appeal from the assessment of goods and services tax made pursuant to the Excise Tax Act, notice of which is dated February 11, 2004 and bears number 10CT-0318-1140-0131 is dismissed, in accordance with the attached Reasons for Judgment. Signed at Vancouver, British Columbia, this 14th day of January, 2005. "Gordon Teskey" Teskey, J. Citation: 2005TCC4 Date: 20050114 Docket: 2004-2139(GST)I BETWEEN: CITY OF AIRDRIE, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Teskey, J. [1] The Appellant appeals an assessment of tax, Notice of which bears number 10CT-0318-1140-0131 and is dated February 11, 2004, made pursuant to the Goods and Services (GST) provisions of the Excise Tax Act (the "Act"). Issues [2] The issues are: (a) Whether the Appellant made a supply by installing water and sewer lines to service lands to be purchased by The Board of Trustees of the Calgary Separate School District No. 1 (the "Board")?; (b) If a supply was made, was it an exempt supply or a taxable supply?; and (c) If the supply was an exempt supply, has the Minister of National Revenue (the "Minister") properly disallowed claimed input tax credits (ITC) and allowed a rebate of 57.14%? Facts [3] The Minister, when making the assessment, assumed 18 separate facts that were reproduced as paragraph 6, subparagraphs a) to r) in the Reply to the Notice of Appeal, all of which were admitted by the Appellant and read as follows: a) at all material times the Appellant was a municipal corporation located in the province of Alberta; b) the Appellant registered under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act") effective January 1, 1991, and was assigned Registration number 10692 9961 RT0001; c) the Appellant was required to file GST returns on a monthly basis; d) at all material times, the Appellant provided taxable and exempt supplies; e) as a municipality, the Appellant supplies various services including the provision of water and the disposal of sewage; f) at all material times, the Appellant claimed the municipal rebate of 57.14% on the GST paid; g) the Board acquired a four acre portion (the "School Lands") of a larger subdivision area, from Pensionfund Realty Limited, for the purposes of constructing and operating a junior/senior separate high school on these School Lands; h) as a condition of the subdivision which created the School Lands, the Appellant's subdivision approving authority required that the Underground Utility Lines be constructed and installed to service the School Lands and that would as well, service the adjacent and as yet undeveloped lands; i) in the Agreement, the Board agreed to fund and pay for the cost of construction and installation of the Underground Utility Lines (excepting only the costs of constructing oversize Underground Utility Lines, which costs would be paid by the Appellant) on the understanding that the Appellant would provide assistance to the Board in the recovery of such costs from the balance of the subdivision lands benefiting from the Underground Utility Lines as and when the development of such lands occurred; j) Pursuant to the Agreement, the Appellant put the contract out to public tender and was responsible for the costs of a survey, inspection, field supervision and the coordination of construction services relating to the installation of the Underground Utility Lines; k) pursuant to the Agreement, the Appellant was solely responsible for administering all payments due to the contractor including provisions for all builders' liens or other holdbacks as were required by law or were permitted under the contract; l) the Appellant awarded and entered into a contract with Perth Construction Ltd. respecting the construction and installation of the Underground Utility Lines; m) the Appellant paid $359,803.79 including GST of $23,538.57 to Perth Construction Ltd. respecting the Underground Utility Lines (the "Costs"); n) on or about the last monthly filing periods in 1998, the Appellant claimed municipal rebates totaling $13,450.60 respecting the Costs; o) pursuant to the Agreement and in order to be reimbursed for its payment of the Costs, on November 5, 1998, the Appellant invoiced the Board for $365,001.85 respecting the construction and installation of the Underground Utility Lines; p) in filing its GST return for the month ending February 29, 2000, the Appellant reported a credit adjustment to ITCs of $23,538.57 and a debit adjustment to rebates of $13,450.60 respecting the Costs; q) the Appellant filed monthly GST returns and reported taxable supplies totalling $3,587,025 for the Assessment Period, as detailed in Schedule "A"; r) in filing its GST returns, the Appellant reported GST of $199,150.02, claimed ITCs totalling $305,042.25 and claimed Rebates totalling $601,878.08, for the Assessment Period, as detailed in Schedule "A"; [4] Paragraph 6 had two further subparagraphs labelled s) and t), which ought not to have been there, as they were the issues that I have to decide. They read as follows: s) the Appellant overstated ITCs by $23,538.57 for the Assessment Period, as detailed in Schedule "B"; and t) the Appellant understated Rebates by $13,449.94 for the Assessment Period, as detailed in Schedule "B"; [5] The Appellant entered into a formal written agreement with the Board on the 15th of July, 1998, which was entered as Exhibit A-1. [6] This agreement says that, in essence, in order for the Board to acquire a parcel of land, the Appellant required the land to be serviced with sewer and water. The Board agreed to fund the servicing but not any oversizing. The Appellant proceeded to service the school lands with oversized services. The town agreed to charge the other benefited lands when developed with the costs of the services and to reimburse the Board if and when the costs are collected. [7] Attached hereto is a copy of the above-mentioned agreement, marked as Schedule "A". [8] The Appellant proceeded, pursuant to the agreement, to have the lands serviced with sewer and water lines. [9] On May 29, the Appellant's employees prepared a request to have an invoice sent to the Board for progress payments as approved by its engineers. [10] As a result of the invoice requisition, the Appellant sent to the Board an invoice that simply stated "Ridgegate Trunk Mains" for $341,123.22 plus GST of $23,878.63, for a total of $365,001.90, which the Board promptly paid in full. (The invoice date is obviously wrong as it predates the agreement and was paid on November 18, 1998). Analysis [11] The Respondent argues that the installation of the water and sewer services pursuant to the written agreement was en exempt supply and therefore the Appellant should not have charged the Board GST in the amount of $23,538.57, thus the Appellant cannot claim the $23,538.57 as ITCs. It is up to the Board to apply for a rebate of GST paid in error. The Appellant is entitled to a rebate of 57.14% of the costs, which has been allowed and therefore the assessment stands. [12] The Appellant argues that, pursuant to the agreement, there was no supply to the Board of sewer and water mains, only an accommodation as ownership of the services did not pass to the Board. In essence, the agreement was a temporary financing arrangement and the $341,123.27 was for processing the terms of the agreement. [13] I reject the Appellant's position. [14] The agreement speaks for itself. The Appellant hired a contractor, the services were installed, the Board paid for the services (less oversizing). This allowed the Board to obtain title to the property, build a school thereon and have the use of the water and sewer services. The Board may or may not get reimbursed for the cost of the sewer and water main installation and if it does get reimbursed, when? [15] Part VI of Schedule V of the Act, under the heading "Public Sector Bodies", is the section of that act that gives a general exemption for supplies by public institutions. Section 22 thereof reads as follows: 22. [Water and sewage systems] - A supply of a service, made by a municipality or by an organization that operates a water distribution, sewerage or drainage system and that is designated by the Minister to be a municipality for the purposes of this section, of installing, repairing, maintaining or interrupting the operation of a water distribution, sewerage or drainage system. [16] Thus, the agreement was for a supply and the supply was exempt. [17] The Act, in section 123, defines "taxable supply" "commercial activity" and "exempt supply". There is no need to go through these provisions. [18] My colleague, Justice Lamarre Proulx, in Montréal (City) v. Canada, [2003] T.C.J. No. 432 (Q.L.), 2003 TCC 534, held that a taxpayer cannot claim ITCs on an exempt supply. I agree. [19] The Appellant argued that the assessment is contrary to Policy Statement P-168R. This statement deals with a municipality that is selling serviced lots to the public. Herein, there are no lots owned by the municipality and thus, the policy has no bearing on this appeal whatsoever. [20] It was common ground that, if I found the agreement constituted an exempt supply, then the 57.14% rebate, as provided by the Act, was correct. [21] For the above reasons, the appeal is dismissed. Signed at Vancouver, British Columbia, this 14th day of January, 2005. "Gordon Teskey" Teskey, J. CITATION: 2005TCC4 COURT FILE NO.: 2004-2139(GST)I STYLE OF CAUSE: City of Airdrie and Her Majesty the Queen PLACE OF HEARING: Calgary, Alberta DATE OF HEARING: December 13, 2004 REASONS FOR JUDGMENT BY: The Hon. Justice Gordon Teskey DATE OF JUDGMENT: January 14, 2005 APPEARANCES: Agent for the Appellant: Ralph MacKelvie Counsel for the Respondent: Dawn M. Taylor COUNSEL OF RECORD: For the Appellant: Name: Firm: For the Respondent: John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada SCHEDULE "A" This Agreement Made this 15 day of July, 1998, BETWEEN: THE CITY OF AIRDRIE, A Municipal Corporation in the Province of Alberta (the "Municipality") OF THEFIRST PART -and- THE BOARD OF TRUSTIES OF THE CALGARYSEPARATESCHOOL DISTRICT NO 1. A School District with offices in the City of Calgary, in the Province of Alberta (the "School District") OF THE SECOND PART ENDEAVOR TO ASSIST AGREEMENT WHEREAS the School District is the registered owner or entitled to become the registered owner of the School Lands (as hereinafter defined); AND WHEREAS it is the intention of the School District to construct a junior separate high school on the School Lands; AND WHEREAS as a condition of the subdivision which created the School Lands, the Municipality's subdivision approvingauthority requires that a sanitary sewer line anda water trunk line be constructed and installed to service the School Lands and that will as well, service the adjacent and as yet undeveloped lands; AND WHEREAS the School District has agreed to fund and pay for the cost of construction and installation of the sanitary sewer line and the water trunk line (excepting only the costs of constructing oversize sanitary sewer and water trunk lines, which costs shall be paid by the Municipality) on the understanding thatthe Municipality will provide assistance to the School District in the recovery of such costs from the "Benefited Lands" as and when development of such lands occurs; NOW THEREFORE in consideration of the mutual covenants and undertakings herein provided, the Municipality and the School District agree as follows: 1. Definitions 1.1 In this Agreement, the following words and phrases shall have the following meaning: (a) "Act" means theMunicipal Government Act, 1994, S.A. Chapter M-26.1 and amendments thereto; (b) "Approving Authority" means the Municipality's subdivision approving authority as that term is defined in the Act; (c) "Benefited Lands" means those lands other than the Subdivision Area comprising the balance of the southwest quarter of 1-27-IW5M as outlined in red on Schedule "A" hereto and which lands may in future benefit from the construction and installation of the Underground Utility Lines; (d) "Construction Completion Certificate" or "C.C.C." means the Construction, Completion Certificate signed by the Municipality certifying that the construction and installation of the Underground Utility Lines have been completed to required standards and specifications under the Contract; (e) "Contract" means the contract awarded by and entered into between the Municipality and the Contractor for the construction and installation of the Underground Utility Lines; (f) "Contractor" means Perth Construction Ltd., which has or will be entering into a contract with the Municipality for the construction and installation of the Underground Utility Lines; (g) "Construction Costs" mean the total costs paid or incurred by the Municipality relating to the Contract for the construction and installation of the Underground Utility Lines which costs have been budgeted as: Construction $469,435.00 Geotechnical/Quality control $16,430.00 Engineering Survey & Inspection (5%) $24,293.00 Administration (1%) $4,858.00 Contingency (+/- 10%) $50,000.00 Construction Total: $565,016.00 G.S.T. (3%) $16,950,48 Project Total: $581,966.48 (h) "Developer" means Morguard Investments Limited as property manager and agent of PensionFund Realty Limited; (i) "Minister" means the Minister of Education for the Government of the province of Alberta, whose department has agreed to provide the funding for the Construction Costs less Oversize Costs required in order to enable the construction of the school to proceed on the School Lands; (j) "Municipality" means the municipal corporation defined on page 1 of this Agreement and its successors and assigns or designated representatives thereon; (k) "Oversize Costs" means that portion of the Construction Costs which can be attributed to or which result from the Underground Utility Lines being constructed on an oversize basis or with excess capacity in order that such Underground Utility Lines can be used to service future development of lands outside of the Benefited Lands and which Oversize Costs (based on the estimated Construction Costs) estimated to be the sum of $146,446.85; (l) "School District" means the School District defined on page 1 of this Agreement and its successors and assigns or designated representative thereof; (m) "School Lands" means the approximately four acre parcel contained within the Subdivision Area, which is marked as the "School Lands" on the attached Schedule "A" hereto. (n) "Subdivision Area" means the lands described and identified in blue on acopy of the plan attached as Schedule "A" hereto; (o) "Underground Utility Lines" means the sanitary sewer line and the water trunk line required, as a condition of subdivision approval, to be constructed and installed underground in the corner marked in green on the attached Schedule "A" hereto, in order to service both the Subdivision Area and The Benefited Lands. 2. School District Lands 2.1 The School District acknowledges and agrees that: (a) it is acquiring from the Developer a portion (4 acres) of the Subdivision Area for the purposes of constructing and operating a Junior/Senior High Separate School on such lands (to be known as St. Martin de Porres School), with the balance of the Subdivision Area to be designated as school and/or municipal reserve; (b) as a condition of subdivision for the Subdivision Area, the Approving Authority has required the construction and installation of the Underground Utility Lines to service the Subdivision Areasand the Benefited Lands; and (c) the School District has agreed to fund and/or reimburse the Municipality for Construction Costs less Oversize Costs associated with the construction and installation of the Underground Utility Lines on the understanding that the Municipality will endeavor to assist the recovery of such costs on behalf of the School District from the future development of the Benefited Lands. 3. Construction of Underground Utility Lines 3.1 Obligations of Municipality The Municipality acknowledges and agrees that: (a) it has put out to public tender, the Contract for the construction and installation of the Underground Utility Lines in accordance with the plans and specifications approved by the Municipality; (b) it shall, prior to entering into the Contract with the Contractor, provide to the School District and the Minister the following: (i) a copy of the tender or Invitation to Bid published or sent out by the Municipality; (ii) a copy of all bids received from contractors relating to the construction and insulation of the Underground Utility Lines; (iii) a copy of the proposed Contract which the Municipality proposes to enter into with the Contractor who has submitted a bid which is acceptable and has been approved by the Municipality; and (iv) the Municipality's calculation and breakdown as to the amount of Construction Costs less Oversize Costs associated with the construction and installation of the Underground Utility Lines for which the School District and the Minister will be providing a funding commitment; and (c) it shall be responsible for costs of a survey, inspection, field supervision, and the coordination of construction services relating to the construction and installation of the Underground Utility Lines in accordance with the Contract. 3.2 School DistrictApproval Unless the School District and/or the Minister has reasonable or justifiable cause for rejecting the bid and the resulting Contract recommended by the Municipality,the School District shall, within twenty one (21) days of its receipt of the information referred to in Article 3.1(b) above, provide its written approval of the Contract as well as the written commitment of the School District and/or the Minister (which 'written commitment shall be satisfactory to the Municipality) to fund and pay far the full amount of the Construction Costs less Oversize Costs. 3.3 Payment of Construction Costs Once construction and installation of the Underground Utility Lines has commenced, reimbursement from the School District to the Municipality shall occur as follows: (a) as progress billings are received from the Contractor, the Municipality shall, following review and approval of such progress billings, invoice the School District for its pro rata share of such progress billing (which shall be the amount of the Construction Costs less Oversize Costs associated with each such progress draw); and (b) the School District shall remit the amount of such invoice to the Municipality within fifteen (15) days of receipt of the Municipality's invoice. The Municipality shall be solely responsible for administering all payments due to the Contractor under the Contract including provision for all builders' liens or other holdbacks as may be required by law or permitted under the terms of the Contract. 4- Agreement to Assist 4.1 Benefited Lands The Municipality acknowledges that the Underground Utility Lines provided for the Subdivision Area will also in future service the Benefited Lands when such lands are developed, and therefore the Municipality has agreed (by way of a levy of a local improvement tax or otherwise) to assist in the recovery, for and on behalf of the School District, of the Construction Costs less Oversize Costs, paid by the School District, as and when development of the Benefited Lands occurs. 4.2 Amount of Reimbursement The amount of reimbursement to which the School District shall be entitled and the amount for which the Municipality will endeavor to assist recovery, for and on behalf of the School District, shall be the amount of the Construction Costs less Oversize Costs actually paid by the School District to the Municipality relating to the construction and installation of the Underground Utility Lines. 4.3 Prerequisites to Recovery The School District shall not be entitled to be reimbursed for any portion of the Construction Costs unless and until: (a) a C.C.C. has issued in respect of the construction and installation of the Underground Utility Lines; and (b) the School District has paid all sums due to the Municipality pursuant to Article 4.1. 4.4 Method of Recovery The Municipality agrees that it shall assist in the recovery of costs paid out by the School District on the following basis: (a) the maximum amount to be reimbursed to the School District shall be the actual amount of the Construction Costs less Oversize Costs paid by the School District to the Municipality for the construction and installation of the Underground Utility Lines; (b) the Municipality shall endeavor to recover the full reimbursable amount on a pro rata basis from the first 71.52 acres of the Benefited Lands as such Benefited Lands are developed; (c) the amount of reimbursement to be requested and recovered from each area of the Benefited Lands, as and when such lands are developed, shall be determined by representatives of the Municipality acting reasonably; (d) as the owners or developers of the Benefited Lands or any portion thereof apply for development or subdivision of all or a portion of the Benefited Lands, the Municipality shall enter into an agreement with the applicant for such development or subdivision approval requiring the applicant or owner or Developer to pay to the Municipality at the time of the granting of approval and as a condition of such approval for such development or subdivision, an amount in respect of the Underground Utility Lines which will be used to service all or the affected portion of the Benefited Lands; and (e) as reimbursement or recovery is received by the Municipality from the applicants or developer or owners of the Benefited Lands, such amounts shall be reimbursed and paid to the School District. 4.5 Caveat The Municipality shall (with the consent of the Developer who is the current owner of the Benefited Lands) register a caveat against the Benefited Lands pursuant to the terms of this Agreement in order to provide notice to subsequent owners or developers of the Benefited Lands as to the recovery of costs associated with the Underground Utility Lines as and when future development of the Benefited Lands occurs. 5. General 5.1 Notices If there are notices required under the terms of this Agreement they should be given by registered mail, or by personal delivery, or by facsimile transmission: School District: Calgary Separate School District No, 1 1000 - 5th Ave. S.W. Calgary, AB T2P 4T9 Attention: Mr. Richard Mysliwy Fax No.: (403)298-1339 Municipality: City of Airdrie P.O. Bag #5 Airdrie, AB T4B 2C9 Attention: City Manager Fax No.: 948-6567 5.2 Waiver A waiver by either party hereto of the strict performance by the other of any covenant or provision of this Agreement shall not of itself constitute a waiver of any subsequent breach of such covenant or provision or of any other covenant, provision or term of this Agreement. 5.3 Further Documents Both parties shall execute and deliver all further documents and assurances reasonably necessary to give effects to this Agreement and to discharge the respective obligations of each party. 5.4 Force Majeure Neither of the parties shall be deemed to be in default in respect of the non-performance of its obligations under this Agreement if and so long as the non-performance is due to strikes, lockouts, fire, tempest, or acts of God, beyond its control, and all time periods shall be extended by one day for each day of delay; the delay for lack of finances shall in no event be deemed to be a cause beyond a party's control. 5.5 Successors and Assigns This Agreement shall be binding and shall enure to the benefit of the respective parties hereto and their successors, successors in title, and assigns. IN WITNESS WHEREOF the parties hereto have executed this Agreement under the hands of their duly authorized officers on the day and date first above written. THE BOARD OF TRUSTEES OF THE CALGARY SEPARATE SCHOOL DISTRICTNO. 1.