City of Montreal v. The Queen

City of Montreal v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2003-07-30 Neutral citation 2003 TCC 534 File numbers 2001-3234(GST)G Judges and Taxing Officers Louise Lamarre Proulx Subjects Part IX of the Excise Tax Act (GST) Decision Content Docket: 2001-3234(GST)G BETWEEN: CITY OF MONTRÉAL, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] Appeal heard on November 19, 2002, at Montréal, Quebec Before: The Honourable Judge Louise Lamarre Proulx Appearances: Counsel for the Appellant: Louis-Frédérick Côté Josée Massicotte Counsel for the Respondent: Richard Gobeil Benoît Denis ____________________________________________________________________ AMENDED JUDGMENT The appeal of the assessment made under the Excise Tax Act, the notice of assessment of which bears the number 853398 and is dated February 19, 1999, is dismissed with costs to the Respondent, in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 31st day of July 2003. "Louise Lamarre Proulx" J.T.C.C. Translation certified true on this 5th day of March 2004. Shulamit Day-Savage, Translator Citation: 2003TCC534 Date: 20030730 Docket: 2001-3234(GST)G BETWEEN: CITY OF MONTRÉAL, Appellant, And HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Lamarre Proulx, J. [1] This is an appeal of the assessment, the notice of which bears number 853398 and is dated February 19, 1999, and relates to the period from October 3 to 30, 1998. [2] The issue concerns the input tax credit ("ITC") under subsection 169(1) of the Excise Tax Act (the "Act"), with respect to the collection of recyclable materials. [3] Under paragraph 20(h) of Part VI of Schedule V, an exempt supply includes "a supply of a service of collecting garbage, including recyclable materials" carried out by a municipality. [4] The Appellant seeks to obtain all of the ITCs paid on recyclable material collection services on the grounds that this collection is essential to the business enterprise, which is the sorting centre for recyclable materials. Alternatively, the Appellant argues that it is engaged in activity that includes a component of commercial activity and a component of exempt activities and that, under section 141.01 of the Act, it has a right to claim the ITCs in accordance with a formula of fair and reasonable distribution. [5] The first witness for the Appellant was Mr. Pierre Bolduc, financial management consultant for the City of Montréal from 1996 to 1999. He is the resource person with respect to GST and QST. On July 28, 1997, he requested a ruling by Revenu Québec with respect to the operation of a recycling depot at the Complexe Environnemental Saint-Michel. The Revenu Québec decision, dated March 5, 1998, stated that the recyclable-material processing service is a commercial activity. These letters can be found at Tab 11 of Exhibit I-1. No mention was made of ITCs arising from the collection of recyclable materials. [6] On page three, the aforementioned decision reads: [TRANSLATION] "In accordance with the facts presented, we are of the opinion that the supply, by the processing firm, of recyclable materials from the separate collection conducted by the city or on its behalf in its geographic area, or from other sources, constitutes a taxable supply." [7] At Tab 9 of Exhibit I-1, the witness filed an agreement between the City of Montréal, Entreprise conjointe Groupe Construction Pamico Inc. and Rebuts Solides Canadiens Inc. with respect to the recovery of recyclable materials. This agreement is dated July 9, 1990. [8] At Tab 10 of Exhibit I-1, the witness filed the document related to the request for proposals for the operation of the recycling depot at the Complexe Environnemental de Saint-Michel ("CESM") for the period from 1997 to 2006. [9] In the same document, the witness referred to Section 8 of the project specifications (special section), in a section entitled [TRANSLATION] "Ownership and sale of recyclable materials". Section 8.1 reads as follows: [TRANSLATION] "Recyclable materials become the property of the contractor as soon as they are unloaded inside the recycling depot or on the land occupied for the purposes of this contract." The witness explained that there was a transfer of property from the city to the contractor. [10] Tabs 5, 6, 7 and 8 of Exhibit I-1 are the project specifications, for various years, for the removal of containers of recyclable materials. The first two tabs are for the removal of large bell containers and the two other tabs concern curbside collection. [11] The witness explained that the truck that collects recyclable products has two compartments: one section for paper or fibre and the other for glass, plastic and metal. The contents of the truck are dumped at the factory in the same manner. The paper is dumped in one section of the factory and the glass, plastic and metal in another. [12] With respect to curbside collection, the worker takes the bin, places it near the truck, sorts the recyclable materials and places them in one of the two appropriate containers on the truck. [13] The witness explained that, in his opinion, the inputs related to the collection of recyclable products are inputs that are used directly for commercial activity. If recyclable materials are not collected, they cannot undergo initial processing and be sold. Commercial activity cannot take place. The requested ITCs are related to the collection and the cost of the bins and containers. The ITCs related to the collection services amount to $311,000 and the credits related to the bins are $34,000. [14] Exhibit A-2 is called [TRANSLATION] "Method of distribution." This is a working document, prepared by the witness, which shows a distribution method that he feels is fair and reasonable. He based this on the fact that 2 % of all recyclable materials collected are rejected as inappropriate. Therefore, according to the witness, recyclable materials comprise 98% of the commercial activity (which is the sale of recyclable materials); hence, 98% of the ITCs related to the collection is being claimed. [15] The night before the hearing, the witness prepared another distribution method based on the collection and processing costs. He arrives at a proportion of approximately 50%. Given my conclusions and the vagueness of his reasoning, I will not address this issue any further. [16] During cross-examination, the Appellant confirmed that the business responsible for the operation of the recyclable material sorting centre should pay a rent of $25,000 per month to the City of Montréal and that there are other cities that dump their recyclable materials at this plant. [17] The second witness for the Appellant was Ms. Diane André. She is a design consultant and team leader at environment services. She explained that, at the sorting centre, there are two collecting pits, separated according to the type of material. The materials are pressed and bundled. Then they are sent to various recycling plants. [18] She explained that the materials places in the collection bins were the property of the city from the moment they are placed on the road. When they arrive at the sorting centre, they belong to the contractor. [19] She gave her explanation of the meaning of the "Fees" clause. The formula provides that the city guarantees the contractor a certain tonnage to be processed during the year. This was 40,000 tonnes in 1998 and 50,000 tonnes for subsequent years until the end of the contract. [20] Counsel for the Appellant referred Ms. André to the documents at Tabs 5 to 8 in Exhibit I-1. These are the project specifications for the separate collection to be carried out by the transporters. In the large bins, there are different bins for paper and other recyclable products. With respect to the small bins (for residential homes), the individual indiscriminately places paper and other recyclable materials in the bins. It is the responsibility of the garbage collector to sort the paper and other materials. The employee returns the non-recyclables, such as a porcelain mug, to the bin. As a courtesy, he also leaves a note explaining why the article was not collected. [21] The document included at Tab 8 of Exhibit I-1 is entitled [TRANSLATION] "Project Specifications for separate curbside collection." On page 17, "separate collection" is defined as [TRANSLATION] "Separate collection means the act of taking recycled materials placed at the side of the road, sorting them quickly, placing them in the truck bin and transporting them to the sorting and recovery centre designated by the director." On page 26 of the same document, the second paragraph of Section 8.8 reads as follows: [TRANSLATION] "However, citizens are not required to separate the various recyclable materials in the recycling bin. This should be done by the contractor upon collection." Ms. André explained that it is preferable for citizens to put papers and cardboard on one side and containers on the other. It is not mandatory and this is no reason for the contractor to leave the bin in the street. [22] With respect to bins with wheels, in apartment buildings, the contractor must verify that each bin contains the correct material. [23] In cross-examination, the witness confirmed that sorting centre employees are not employees of the City of Montréal and that the contractors who carry out the collections had to pay admission fees to the Saint-Michel sorting centre. The city reimbursed the transporter. At Tab 7, on page 27 of the project specifications for separate curbside collection for 1993 to 1996, Section 13.1 reads as follows: [TRANSLATION] "The sorting and recovery centre will charge the contractor a per-tonne admission fee for the recyclable materials, according to the agreement between the city and the business operating the sorting and recovery centre." [24] Mr. Clément Gauthier, an auditor at Revenu Québec, testified at the request of the Appellant's Counsel. He explained that he had refused the ITCs because it was household waste that was being collected. Collection of household waste, including recyclables, is an exempt supply. Appellant's arguments [25] First and foremost, Counsel submitted the key argument that the Appellant had a right to all of its ITCs for expenses incurred as part of its commercial activities, under subsection 169(1) of the Act. He pointed out that the Respondent had admitted that the operation of the recyclable-material recovery centre constitutes a commercial activity. He therefore holds that all goods and services related to the collection of recyclable materials were part of the Appellant's commercial activity, the operation of a recyclable-material recovery centre. [26] In addition, Counsel argued that the said goods and services were involved in a service to collect recyclable material, which is an exempt activity under paragraph 20(h) of Part VI of Schedule V of the Act and in a commercial activity, the operation of a recovery centre. [27] The following facts confirm the duality of the goals: the city sorts, transports and sells the recyclable material it owns. It transfers ownership of the recyclable material to the contractor as soon as it is delivered to the sorting centre. [28] Counsel stated that the Act does not specify the methods to be used to distribute goods and services that have been acquired for use in commercial and other activities. Subsection 141.01(5) of the Act provides that the method used must be fair and reasonable. This principle was confirmed in City of Magog v. Canada, GSTC 98 (F.C.A.), [2001] F.C.J. No. 1259 (Q.L.). [29] The Appellant suggested a method based on the fact that 98% of the recyclable material is used in commercial activity and only 2% is rejected. This is a fair and reasonable distribution method within the meaning of subsection 141.01(5) of the Act. [30] In addition, subsection 141(1) of the Act provides that, when a good or service used by a person is almost completely used within the course of their commercial activity, the good or service is deemed to be fully used within this activity. Respondent's arguments [31] Counsel for the Respondent pointed out that paragraph 20(h) of Part VI of Schedule V of the Act provides that a service of collecting garbage, including recyclable materials, is an exempt supply. He also pointed out that, according to the definition of commercial activity in subsection 123(1) of the Act, exempt supplies are specifically excluded from commercial activity. Yet according to subsection 169(1) of the Act, a person has the right to the input tax credit for a good or service acquired for use in the course of the commercial activities of the person. The Appellant would therefore not have a right to the input tax credit for the service of collecting recyclable material. [32] Collecting recyclable material is an activity separate from their disposal. The lawyer referred to the Federal Court of Appeal decision in 398722 Alberta Ltd. v. Canada, [2000] F.C.J. No. 644 (Q.L.), and specifically the following passage: . . . Thus the question is whether the respondent's business involves, to any extent, the making of exempt supplies. 22 Any business may consist of a number of components, each of which is integral to the business as a whole. The definition of "commercial activity" recognizes that possibility but requires, for GST purposes, that any part of the business that consists of making exempt supplies be notionally severed. . . . Conclusion [33] Paragraph 20(h) of Part VI of Schedule V of the Act reads as follows: 20. The following supplies made by a government or municipality or by a board, commission or other body established by a government or a municipality: . . . (h) a supply of a service of collecting garbage, including recyclable materials . . . [34] The relevant part of the definition of commercial activity in subsection 123(1) of the Act reads as follows: "commercial activity" of a person means: (a) a business carried on by the person . . . except to the extent to which the business involves the making of exempt supplies by the person; (b) an adventure or concern of the person in the nature of trade . . . except to the extent to which the adventure or concern involves the making of exempt supplies by the person; (c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply. [35] The relevant part of subsection 141.01(5) of the Act reads as follows: (5) The methods used by a person in a fiscal year to determine (a) . . . (b) the extent to which the consumption or use of properties or services is for the purpose of making taxable supplies for consideration or for other purposes, shall be fair and reasonable and shall be used consistently by the person throughout the year. [36] Since Counsel for the Appellant referred to subsection 141.01(5) of the Act, I think it is worth referring to the explanatory note of February 1994 regarding the interpretation of section 141.01 of the Act, since I am of the opinion that it explains the gist of this section well in light of subsection 169(1) of the Act. This explanatory note can be found in the Historical Explanatory Notes of the Goods and Services Tax Reporter, published by CCH Canadian Ltd. as part of its TaxWorks collection. [37] The passages are as follows: Apportionment of Inputs [Bill C-13 (L.C. 1994, ch. 9)] - New section 141.01 is designed to clarify and reinforce the requirement to apportion the use of inputs, based on the extent to which the inputs are used or consumed, or acquired or imported for consumption or use, for the purpose of making taxable and non-taxable supplies. This apportionment is relevant to the determination of input tax credits. Importantly, as the new section is added for greater certainty, it does not represent a change in policy or in the manner in which the tax is to be administered. By virtue of section 169 of the Excise Tax Act, tax paid on business inputs can be recovered by way of input tax credits only to the extent that the inputs are acquired or imported for consumption, use or supply in the course of a "commercial activity". The necessity, in certain circumstances, to prorate tax on business inputs in determining input tax credits derives from the definition of "commercial activity", which is found in subsection 123(1) of the Act. Under the definition of "commercial activity", a business is not a commercial activity to the extent that it involves the making of exempt supplies. . . . Clearly, one of the implications of this definition is that anything used exclusively and directly in the making of "exempt" supplies is not used or consumed in the course of a commercial activity and, therefore, cannot give rise to an input tax credit. . . . Many types of properties and services used in the operation of a business are not directly used in the making of supplies. These may be referred to as "indirect inputs". Examples include items of overhead and inputs used in the operation of "support" functions of a business such as a personnel department or an internal audit department. The personnel, management, administrative and other support functions of a business are part of what is involved in the making of supplies since these functions are undertaken in order for the business to achieve the ultimate end or purpose of making supplies. As noted above, a business is not a commercial activity to the extent that it involves the making of exempt supplies. This means that, for example, the internal audit department of a financial institution that makes both taxable and exempt supplies is, in part, within the scope of a commercial activity and, in part, outside that scope since it is part of what is involved in the making of both types of supplies in the course of the business. New section 141.01 is added only to reinforce this concept that the ultimate purpose of making supplies of some kind involves all aspects of the business. The section, in effect, requires an attribution of all costs to the making of supplies. Only if, and to the extent that, those costs are incurred for the purpose of making taxable supplies are they eligible for input tax credits. . . . [38] This explanatory note tells us that the direct inputs of an exempt activity are not subject to distribution. When a good or a service is used in part for a commercial activity and in part for an exempt activity, distribution must take place. The Federal Court of Appeal rendered a decision with respect to these mixed purpose activities, in City of Magog v. Canada, supra. These are not the types of activities for which the Appellant is claiming the inputs. [39] The inputs claimed by the Appellant are related to the direct costs of collecting recyclable material. The inputs claimed are those paid for transportation, and on bins and containers. [40] The Federal Court of Appeal decided as follows in 398722 Alberta Inc. (supra): that any part of the business that consists of making exempt supplies be notionally severed. Collecting garbage, including recyclable material, is an exempt activity and must be notionally severed. [41] This is clearly what is said in subsection 169(1) of the Act. A registrant's input tax credit that relates to an acquired good or service is calculated according to the extent to which this good or service has been used within the course of the registrant's commercial activities. [42] Inputs paid with respect to the direct costs of the exempt activity cannot be claimed under subsection 169(1) of the Act, nor can they be distributed under subsection 141.01(5) of the Act. [43] Accordingly, the appeal is dismissed. Signed at Ottawa, Canada, this 30th day of July 2003. "Louise Lamarre Proulx" J.T.C.C. Translation certified true on this 5th day of March 2004. Shulamit Day-Savage, Translator