Date: 19990305
Docket: A-502-95
CORAM: THE CHIEF JUSTICE
LINDEN J.A.
SEXTON J.A.
IN re The Excise Tax Act
BETWEEN:
| HER MAJESTY THE QUEEN |
Appellant
- and -
GLENGARRY BINGO ASSOCIATION
Respondent
Heard at Edmonton, Alberta, on Friday, January 29, 1999.
Judgment delivered at Ottawa, Ontario, on Friday, March 5, 1999.
REASONS FOR JUDGMENT BY: SEXTON J.A.
CONCURRED IN BY: THE CHIEF JUSTICE
LINDEN J.A.
Date: 19990305
Docket: A-502-95
CORAM: THE CHIEF JUSTICE
LINDEN J.A.
SEXTON J.A.
IN re The Excise Tax Act
BETWEEN:
| HER MAJESTY THE QUEEN |
Appellant
- and-
| GLENGARRY BINGO ASSOCIATION |
Respondent
REASONS FOR JUDGMENT
SEXTON J.A.
Introduction
[1] The issue to be decided in this case is whether, pursuant to section 178 of the Excise Tax Act ("ETA"), Glengarry Bingo Association ("GBA" or the respondent) is exempt from collecting and remitting GST for services and equipment supplied to its Members.
[2] In the present case, the Tax Court Judge made certain findings of fact with which I take no objection. With respect, it is his conclusion in law that these facts support a finding of agency that I cannot support. In my view, the evidence is simply insufficient to conclude that GBA was acting as an agent of its Members when it supplied equipment and the services of its staff to them. Thus section 178 of the ETA does not apply to exempt GBA from charging GST in the provision of those supplies.
Facts
[3] In order to hold a bingo event in Alberta, the Alberta Gaming Control Branch requires charitable organizations to incorporate an association or become Members of an association incorporated under the Alberta Societies Act1. The purpose of the association is to conduct the commercial transactions related to the operation of the bingo. The conduct of bingos is governed by the Terms and Conditions of Bingo License, which is a document issued by the Gaming Control Branch.
[4] The respondent, is a bingo association that was incorporated under the Societies Act for this purpose. GBA conducts bingo games for its Members which are registered and non-registered charities. GBA has in excess of 20 member organizations. To fulfil its mandate, GBA leased a bingo hall and purchased bingo equipment. It hired bingo callers, cash advisors and a hall manager (the "Paid Staff"). It also purchased the other supplies necessary to run the bingo, including bingo cards.
[5] Each member's bingo nights were determined by draw. For each bingo night, a member had to acquire a bingo license and supply volunteer staff. The licensed member also had to provide a bingo chairperson who was responsible for the bingo. Each night, the financing of the bingo occurred as follows: GBA advanced a float of $1500 to the member conducting the bingo. At the end of the night the member returned the float and gave GBA a rent cheque for use of the hall and a supplies cheque which included an amount for the provision of bingo cards, equipment and staff.
[6] GBA collected and remitted GST on the rent and bingo cards but not on the supply of equipment or staff. By notice of Assessment dated May 2, 1993, the Minister of National Revenue taxed the respondent 7% on the supply of equipment and staff to its Members. GBA appealed to the Tax Court of Canada.
[7] The learned Tax Court Judge found that GBA supplied both bingo equipment and Paid Staff to its Members. This supply was a "taxable supply" as it occurred in the course of a "commercial activity" within the meaning set out in subsection 123(1) of the ETA. Next, he found that GBA, as an entity incorporated under the Societies Act, had a distinct legal status from its Members and therefore rejected the argument that since the GBA and its members constituted a single "person" there was no supply from GBA to its Members. However, he concluded that the Terms and Conditions of Bingo License established that GBA was acting as an agent to its Members and therefore pursuant to section 178 of the Act, GBA did not have to pay the GST.
Analysis
[8] Subsection 165(1) of the ETA mandates that GST must be charged on the provision of a taxable supply. It states:
| Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada a tax in respect of the supply equal to 7% of the value of the consideration for the supply. |
[9] The question raised in this appeal is whether the GBA can escape liability for GST by demonstrating that it falls within section 178 of the ETA, which states:
| For the purposes of this Part, where in making a supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient. |
[10] Initially, it should be noted that the onus is on the respondent to establish an agency relationship. This was the view taken in Parkland Crane Service Ltd. v. The Queen2, which was the first decision to consider the issue of agency under section 178. Kempo J.T.C.C. found:
| The onus is on the appellant to establish an agency relationship on the balance of probabilities in order to be removed from the deeming provision of s. 178 of the Act which says the reimbursements of an expense by a recipient of a supply is deemed to be part of the supply of service to the recipient unless that expense was incurred by the appellant as an agent of the recipient.3 |
[11] In the case at bar, I have concluded that GBA has not discharged its onus of establishing that it was acting as an agent when it supplied equipment and the services of its staff to its Members. I will address each of these in turn.
I. Supply of Paid Staff
[12] In my view, the evidence is clear that GBA was not acting as an agent to its Members in its dealing with its Paid Staff. First, GBA and not its Members was the employer of the Paid Staff. Second, GBA did not hold itself out to the Paid Staff that it was acting as an agent for its Members. Third, the Members were not at risk for the obligations owed by GBA to its Paid Staff. These three facts demonstrate that GBA was contracting as principal and not on behalf of its Members.
[13] The Tax Court Judge's conclusion that GBA was the employer of the Paid Staff is a finding of fact that is well supported by the evidence. The Paid Staff entered employment contracts with GBA, which is prima facie evidence that GBA was in fact their employer. The employment contract between GBA and Mary Sidor, GBA's hall manager since January 1, 1992, is typical of the contracts signed by the Paid Staff. It does not purport to bind the Members and in fact does not mention them at all. Mary Sidor's contract provides that her duties are to be determined by the President of the GBA and that her remuneration can be increased at the GBA's discretion.
[14] GBA has argued that despite the fact that the Members were not party to the employment contracts, the Paid Staff were actually the employees of the Members on the basis that it was actually the Members who controlled the employees. However, on the basis of the facts as found by the Tax Court Judge, no conclusion can be reached other than that the GBA controlled its employees. He found:
| The employees were hired by the Appellant, directed as to hours of work by the Appellant and paid their cheques by the Appellant. The testimony was clear that even a bingo chairperson could not fire a caller, cash advisor or hall manager employed by the association. The chairperson would merely report the complaint to the hall manager or the association executive. Nor could a member refuse to accept a caller or cash advisor. The member could only express a preference not to have that person; such an expression might, or might not, be honoured by the association. The callers and cash advisors had no say in the members they worked with. They were simply hired and allocated days of work by the association hall manager. They...were paid every two weeks by the Appellant at per diem rates agreed to with the appellant at the time of hiring. The appellant withheld and remitted the withholdings for them as employees. They were totally integrated into the Appellant's bingo hall operation. GBA controlled its employees, owned or leased their tools and integrated them into the bingos. |
| ... |
| In the court's view the payments made by the members to the Appellant for the services of the hall manager, caller and cash advisor were payments for services performed by employees of the Appellant. The Appellant was the employer.4 |
The evidence demonstrates that with regard to the staff, GBA prepared their work schedules, paid their remuneration, identified their duties and trained and hired them. The respondent did this as their employer.
[15] On the second point, it is equally clear that GBA did not purport to act in a representative capacity for the Members when dealing with the Paid Staff. The Members were not involved in any capacity in the hiring of the Paid Staff. Further, employees testified that they believed GBA was their employer and had received no indication that the Members were liable for their contracts. Simply put, there is no evidence which suggests GBA held itself out as an agent when contracting with its employees.
[16] Finally, the Member's lack of exposure to the GBA's obligations is another indication that there was no agency relationship. It is well established that risk is a significant factor in determining whether an agency relationship exists. Here, a review of the evidence indicates that the Members were insulated from the activities of the GBA. Indeed a motivating purpose in having the commercial transactions of the bingos being provided by an independent association was to insulate Members from risk. The testimony of Ian Taylor, Executive Director of the Gaming Control Branch, is quite compelling on this point:
| Q: Is the issue of liability of the Members with regard to the bingo part of the play at all? |
| A: ... I guess one of the first principles, in terms of protecting them from the commercial interest, is by having a not for profit entity incorporated under the Societies Act it provides a corporate entity which can enter into commercial agreements with agencies as landlords, in terms of a lease agreement. If then the Bingo is unsuccessful the individual charities are protected because they are -- they're not held liable for the debts of the Bingo Association. That's limited to the assets of the association, to the incorporated entity. And so the groups are protected financially in the case of a failure of a bingo association.5 [emphasis added] |
[17] The evidence is clear that the Members were not responsible for the obligations of the association. Most telling is the fact that when GBA was in financial difficulty and was in arrears of vacation pay to its staff, the Staff did not seek reimbursement from the Members. If GBA was merely an agent in the supply of staff, it follows that the Members would be liable for any default in GBA's obligations. The Paid Staff had no legal right to collect from the Members and the Members did not respond to cover GBA's obligations to its employees. This is evident from the following testimony of Mary Sidor:
| Q: Okay, and would you go to the members and say, you know, pay us the money, we're not getting it from Graham [the former treasurer of GBA]? |
| A: Well, we didn't really go to them, but...some of the callers like would phone him and whatever club would be in that night, when it was payday, the staff came in for their pay cheques. So the club that was on at that time knew that we weren't getting paid the way we were supposed to. And they would say something to him, I guess, or to Jim [president of GBA], one of them. But it still didn't help any.6 |
Mary Sidor's testimony confirms that the Members knew that GBA's obligations to its staff were not being fulfilled and yet they did not act to rectify the situation. The reason is simple: they were under no duty to honour GBA's obligations and consequently they were not at risk for its activities. Thus, the risk analysis demonstrates that Members were insulated from GBA. In my view, this is strong evidence that GBA was not acting as an agent in its dealings with the Paid Staff.
[18] The Tax Court Judge shared the view that the Members were exposed to very little risk vis-a-vis GBA. He found:
| There is no evidence that when GBA had its financial problems any of its members allowed GBA to act as its agent. The various minutes of GBA which refer to this at the time make no reference to an "agency" or to member's liability.7 |
[19] GBA contends that the terms of the bingo license obligate the member conducting the bingo to reimburse GBA for salaries paid to the staff even in the rare event that the bingo loses money. However, considering that this would virtually never occur, and put in the context of the relationship as a whole, it is not sufficient to base a finding of agency.
[20] As has been mentioned, the onus is on the respondent to establish agency. On a proper analysis of the facts I am of the opinion that the respondent has failed. Indeed, the evidence before the Tax Court Judge cannot support an agency relationship. I turn now to the issue of the supply of equipment.
II. Supply of Equipment
[21] The appellant has argued that in view of the Tax Court Judge's finding that GBA purchased the bingo equipment from Alberta Bingo Supplies ("ABS") and was therefore the owner of the equipment, he could not make a finding that GBA acted as an agent.
[22] The Tax Court Judge correctly identified the owner of the equipment as GBA. He found:
| Any equipment purchased is owned by the association. If the purchase is financed, the association undertakes the financing and obtains the title. The Appellant insures the equipment.8 |
GBA rented its equipment to its Members in the course of providing all the services necessary to run the bingo.
[23] There is no evidence that GBA held itself out to ABS as an agent for individual Members or that the Members were in any way at risk concerning any of GBA's obligations for the equipment. Furthermore, during the period GBA was in financial trouble with its equipment supplier (ABS) there was no evidence that any creditor alleged that the Members were liable.
[24] Indeed as Ian Taylor testified, by the terms of the Bingo license, none of the Members could guarantee or "in any way commit itself respecting an association's premises lease". Interestingly, GBA charged Members GST for the provision of the hall. In my view, the provision of the hall is analogous to the supply of equipment. I fail to find a distinction between the two. Susan Morgan, who became treasurer of GBA on September 30, 1992, testified that the reason GST was not charged on the provision of the equipment was based on the former treasurer's belief that it was not required. This is not helpful in understanding the reason for the difference in treatment. In my view, it is difficult to reconcile the fact GST was charged on the supply of the hall but not on the supply of the equipment.
[25] In sum, it is clear that GBA was not acting as an agent when leasing its equipment to its Members. Although the conclusion reached is determinative of the appeal, I will now address the Tax Court Judge's analysis that led to his conclusion that there was an agency relationship.
Findings of the Tax Court Judge
[26] The Tax Court Judge based his finding of agency on two points. First, he found the general scheme set out in the Terms and Conditions of Bingo License establish a principal/agent relationship between the Members and GBA. Second, he relied more precisely on Paragraph IV, A, 3 of the Terms and Conditions of Bingo License, which specified that the funds received by GBA from its Members remained the property of the Members. With respect, I do not find that this is sufficient to support a finding of agency.
[27] With regard to the Terms and Conditions of the Bingo Licence, there is no express provision establishing that GBA would act as agent. Furthermore, there is nothing implicit which supports a finding of agency. It was open for the Gaming Control Branch to specify that the association would act as an agent for its Members. That it chose not to do so is a telling indication that no agency relationship exists.
[28] On the second point, it is clear that the GBA holds funds for its Members. This is stated in paragraph IV, A, 3 of the Terms and Conditions of Bingo License which states:
| Expenses, excluding rental of premises, shall not exceed 10 percent of gross revenue. If paid to the association, these funds are considered pre-paid expenses, and remain gaming revenues liable to specific accounting, and any surplus remaining after payment of allowable expenses shall be reimbursed to association Members on an equitable basis, on a frequency determined by association membership. |
| [emphasis added] |
However, the fact that GBA holds the funds and reimburses its Members is not determinative of the issue of agency.
[29] The evidence demonstrates that GBA did not keep the funds received from members for expenses in a separate account. Instead, at the end of each bingo, the supplies cheque received from the Member was deposited directly into GBA's general chequing account. The portions of the cheque for the equipment and staff were never separately identified. Moreover, GBA's financial statements treat the funds as the property of GBA. This is additional support for the view that GBA treated the money as an asset and was not simply holding it as agent. A more appropriate characterization of what was transpiring was that GBA was simply holding the money in trust for its Members.
[30] Furthermore, the reimbursement of an expense alone will not lead inexorably to a finding of agency. In Parkland, where other factors pointed away from a finding of agency, Kempo J.T.C.C. commented on the significance of the reimbursement of the expense:
| ...the simple reimbursement of the fees may remain a neutral factor in the determination as to whether a purported agency relationship existed.9 |
[31] The significance of the expense reimbursement in the case at bar was recently addressed by David Sherman.10 After commenting that the conclusion of agency rested primarily on the fact that the Terms and Conditions of Bingo License established a limit on expenses and required any excess to be returned to the Members, he stated:
| The conclusion is surprising because it appears to fly in the face of the traditional tests for agency. There has been much discussion as to what constitutes an agent for the purposes of s. 178 and for purposes of Schedule VI, part V, s. 5. Revenue Canada has produced draft policy statement P-182, 'Determining the Meaning of 'Agent' and 'Agency', which outlines a range of tests to be applied in determining whether one person is the agent of another. It is not at all clear that the mere fact an excess disbursement is repayable should cause the association to become an 'agent' when none of the other criteria for agency has been satisfied. |
I agree that an obligation to repay an excess disbursement is not determinative of the agency issue, particularly where other factors point away from the agency relationship. Although not determinative of the meaning of "agency" in section 178, the draft policy statement P-182 referred to, although not binding, is a useful tool in determining whether an agency relationship exists.
[32] P-182 identifies three essential qualities of agency. 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. Since I find that GBA did not have the capacity to affect the legal position of its Members, I find it unnecessary to address the other factors which Revenue Canada has indicated are required for a finding of agency.
[33] The most common example of how an agent might affect the legal position of its principal is by entering a contract on the principal's behalf. It is clear here that GBA was not authorized to enter contracts with third parties on behalf of the members. For instance, GBA could not have entered into a contract for purchase of bingo equipment on behalf of its Members. It was only empowered to bind itself. In the contract of purchase, GBA bound itself; it did not purport to act for its Members nor did it expose them to risk. The fact that the Members were insulated from risk is demonstrated by the reaction of ABS when GBA was in arrears on its equipment payments: ABS made no attempt to seek compensation from the Members and the Members did not entertain the idea that they might be liable. These events illustrate that GBA could not effect the legal position of its Members, which demonstrates that an essential element of agency was not present.
Conclusion
[34] For the reasons described above, I am of the view that there was no agency relationship in this case. GBA was not expressly authorized to act as an agent for its Members. In light of the Tax Court Judge's finding that GBA was both the employer of the Paid Staff and the owner of the equipment supplied to the Members, and his other findings, I find it impossible to infer an agency relationship on the facts of this case. Therefore I conclude that section 178 does not apply and pursuant to section 165, the respondent is liable for GST on the taxable supplies it has provided. I would allow the appeal with costs to the appellant.
"J. Edgar Sexton"
J.A.
"I agree
Julius A. Isaac C.J"
"I agree
A.M. Linden J.A."
__________________2 [1994] G.S.T.C. 58 (T.C.C.).
5 At 340 of the trial transcript.
6 At 242 of the trial transcript.
10 See the commentary following s. 178 in the Carswell GST Partner .