Date: 20001221
Docket: A-183-99
CORAM: LINDEN J.A.
EVANS J.A.
MALONE J.A.
BETWEEN:
MIDLAND HUTTERIAN BRETHREN,
Applicant
- and -
HER MAJESTY THE QUEEN,
Respondent
Heard at Calgary, Alberta, on Friday, October 13, 2000.
Judgment delivered at Ottawa, Ontario, on Thursday, December 21, 2000.
REASONS FOR JUDGMENT BY: MALONE J.A.
CONCURRED IN BY: LINDEN J.A.
DISSENTING REASONS FOR JUDGMENT BY: EVANS J.A.
Date: 20001221
Docket: A-183-99
CORAM: LINDEN J.A.
EVANS J.A.
MALONE J.A.
BETWEEN:
MIDLAND HUTTERIAN BRETHREN,
Applicant
- and -
HER MAJESTY THE QUEEN,
Respondent
REASONS FOR JUDGMENT
MALONE J.A.
The Minister of National Revenue ("the Minister") denied the Applicant an input tax credit ("ITC") in respect of the cost of certain cloth purchased to make into work clothing for use by its members in its farming operation. This is an application for judicial review of a judgment of the Tax Court of Canada, dated February 26, 1999, dismissing the applicant's appeal, which challenged that assessment made by the Minister under Part IX of the Excise Tax Act, ("the Act").1
Under the scheme of the Act, a registrant, such as the applicant, engaged in a commercial activity which does not produce exempt supplies, is entitled to recover, using the ITC regime, the goods and services tax ("GST") paid on any goods or services acquired "for consumption, use or supply in the course of commercial activities of the person".2 There is no dispute that the applicant carries on a commercial activity, that is farming, and produces non-exempt supplies. The disagreement is about whether the cloth was used in the course of commercial activities. The issue is one of remoteness. How closely tied to an output does an expense have to be before it qualifies for an ITC?
Facts
Midland Hutterian Brethren ("the Colony"or "the registrant") is a communal colony of the Hutterian Brethren Church and was organized as an Alberta corporation under Part 9 of the Companies Act (Alberta)3 on January 6, 1978. The Colony's members work without monetary compensation. In exchange, members of the Colony and their families receive shelter, education, food and clothing supplied by the Colony.4
The Colony operates an active farming business. In accordance with its constitution, members are allotted cloth to be made into two types of clothing, one type for church purposes and the other for work purposes. Seventy-five percent of the cloth is said to be used by the registrant's members in their farm work.5 This work cloth is heavy material acquired specifically to be made into work garments.
Members of the Colony have only church clothes and work clothes. Church clothes are never used for farm work and work clothes are never worn to church. No clothes are made for external sale.6
In computing its GST returns for the period in question, the Colony claimed ITCs for 50% of the GST incurred on the work cloth.
A Crown witness acknowledged that certain items such as work boots and work gloves acquired by farm registrants for use by their employees in commercial activities qualify for ITCs.7 However, because the primary purpose for acquiring the work cloth was to clothe the Colony's members, the witness reasoned that its purpose was personal use, regardless of whether or not it was used for farming.8 Accordingly, an ITC for the work cloth was denied by the Minister.
Statutory Framework
The GST regime was enacted as Bill C-62 with effect from January 1, 1991.9 Section 169 was the provision that provided for the ITC mechanism. As originally enacted, subsection 169(1) allowed a full ITC for the GST incurred on purchases (inputs) that were acquired for exclusive use in commercial activities. Subsection 169(2) provided a proportionate ITC for the GST incurred on purchases (inputs) that were acquired for partial use in commercial activities.
Bill C-112 amended section 169 and received Royal Assent on June 10, 1993.10 The relevant portions of that bill merged subsections 169(1) and 169(2), as originally enacted, into a single provision, namely subsection 169(1). This amendment was made retroactive to the date of the coming into force of the GST legislation, so that the original version of the statute was deemed never to have existed or to have had any legal effect. The amendment and the deletion of the word "exclusive" in the preamble to the original subsection 169(1) did not result in any substantive change to the entitlement to ITCs.
The variable "B" in the mathematical formula set out in amended subsection 169(1) is the component that deals with the extent to which ITCs can be recovered for purchases (inputs) acquired for use in commercial activities in most circumstances. If the purchase (input) was acquired for use exclusively in commercial activities, the variable "B" in the formula set out in subsection 169(1) is 100%. If the purchase (input) was intended only partly for use in commercial activities, that percentage is used in the mathematical calculation of the ITC entitlement.
For the purpose of facilitating the calculation in paragraph 169(1)(B)(c), subsection 141(2) provides that if "substantially all" of the intended use is in commercial activities, the extent of use is deemed to be 100%. This Court was advised that "substantially all" is administratively interpreted by the Canada Customs and Revenue Agency to mean 90% or more. Similarly, if "substantially all" (90% or more) of the intended use is for non-commercial activities, the extent is deemed by subsection 141(4) to be 0% and no ITC will be afforded the registrant. If the extent of the intended use in commercial activities is between 10% and 90%, then that intended use percentage becomes B for the purposes of the calculation in paragraph 169(1)(B)(c).
Based on the foregoing analysis, the fact that some of the work cloth in this case may be used for a purpose other than commercial activities need not completely disqualify that cloth from qualifying for ITC. Pursuant to paragraph 169(1)(B)(c), however, one must determine the extent to which the property was acquired for use in a commercial activity, as a percentage.
In the registrant's appeal to the Tax Court of Canada as well as here, the issue was whether the cloth could be said to have been acquired by the Colony for use, at least in part, in the course of its farming business, when that cloth was acquired, inter alia, to make work clothes for the persons providing the physical labour in its commercial enterprise.
The registrant's position is that, having held that the cloth was used to make work clothing actually worn for farm duties, the Tax Court Judge erroneously concluded that the work cloth could not be considered to have been acquired for use in the course of its commercial activities under subsection 169(1).11 It is argued that the Tax Court Judge's finding in respect of "use" of the cloth confirms that the work cloth acquired was intended for use in the course of the Colony's farming business, and hence was qualified for an ITC, at least to the extent that it was to be used at work.
Analysis
There was little evidence at trial relating to incidental non-commercial use since this was not the basis upon which the Minister denied the registrant an ITC on the work cloth. The basis of the disallowance was that the work cloth was acquired not for use in commercial activity but principally for personal use.12 On the evidence, however, this basis for denying an ITC by the Minister was implicitly rejected by the Tax Court Judge, who found as a fact that the work cloth was used, in part at least, to make work clothes for use in the farming operation.
The Minister has argued that any personal use of clothing disqualifies the work cloth from any ITC eligibility following the Supreme Court of Canada reasoning in Symes v. The Queen.13 In income tax law, personal use is largely an issue of whether a self-employed person (not a corporation) may deduct an expense under s. 18 or whether an employee has received a taxable benefit under s. 6. Neither of these questions is relevant to this case. Nor is it useful to analogize with principles of vicarious liability in tort law or human rights concepts which employ very different language in very different contexts.
In any event, the Tax Court Judge made no reference to any personal use for the work cloth. The fact that the Colony, an Alberta corporation, seeks only a 50% ITC (which calculation has not been challenged) leads me to conclude that any issue that arises as to personal use is accounted for by the unclaimed portion of the ITC. Accordingly, I need not address the issue of the extent to which it could be said that the work cloth was used for non-commercial activities.
In his reasons for judgment, the Tax Court Judge found that the cloth was used to make work clothes for Colony members used in the farming operation. However, he held that this was not used by the registrant's members in the production of taxable supplies because its commercial activities were its farming operations, not making clothes.14 In reaching that decision, he relied on the following analysis by Chief Justice Lamer of the Supreme Court of Canada:15
| The GST is designed to be a tax on consumption. To this end, the GST Act contemplated three classes of goods and services. Taxable supplies attract the tax of 7% each time they are sold. To the extent that the purchaser of a taxable supply uses that good or service in the production of other taxable supplies, it is entitled to an "input tax credit" and can recover the tax it has paid from the government." [emphasis added]. |
This quotation, however should not be taken as deciding the issue in this case. In my opinion the quoted passage does not impart a restrictive meaning as to the type of goods used in the production of taxable supplies that are eligible for an ITC.16 Rather the passage quoted simply articulates the distinction between producers of non-exempt goods, who may claim an ITC for goods acquired, and producers of exempt goods, who may not.
Consequently, the phrase "in the production," which was determinative in the Court below, merely conveys the idea in subsection 169(1) that goods acquired in the course of commercial activities are eligible for an ITC. Thus, no distinction between goods acquired and used directly in production and goods acquired and used to facilitate production, or as part of the production process, is indicated by those words.
Certainly, if the cloth purchased was used to make clothes for sale, as suggested by the Tax Court Judge, an ITC would be allowed. Similarly, if the work clothes were bought ready-made for use in farming, an ITC would be equally available, at least to the extent used in the commercial activity (similar to a uniform in other commercial endeavours). But the ITC is not limited to cloth or other raw material incorporated into goods to be manufactured and sold in the retail trade. Nor is an ITC limited to equipment used in producing goods for sale.
In my opinion, there is no ambiguity in the wording of subsection 169(1) of the Act. I take comfort from the fact that on two earlier occasions, other panels of this Court have been called upon to deal with this subsection and none have suggested there is an ambiguity or a need to resort to a searching inquiry as to purpose of the ITC scheme.17
Applying the unambiguous words of subsection 169(1), the Colony is entitled to an ITC for the work cloth in issue. This Court has already interpreted these words to mean that, when a registrant incurs a GST expense in connection with its commercial activities, it is entitled to an ITC. As Stone J.A. explained in Metropolitan Toronto Hockey League decision:18
| The scheme of the Act allows a business to claim refund or credit of any tax paid on the purchase or services connected to its sale of taxable supplies. In this way the tax is ultimately paid only by the final non commercial purchaser of a taxable supply [Emphasis added]. |
When the phrase "connected to" was used by Justice Stone to explain the words in the statute, the meaning it conveyed was that the supplies must contribute to the production of articles or the provision of services that are taxable. It would not be enough to qualify as being connected to the business activity if something, like a cigarette, were merely consumed while engaged in the business activity, for that would not contribute to the commercial activity that will ultimately produce taxable supplies.
There is no language in subsection 169(1) that requires the use in question to be exclusively commercial or that distinguishes between property acquired and used directly and property acquired and altered before its use in commercial activities. Once an item is found to be acquired and used in connection with the commercial activities of a GST registrant and that item directly or indirectly contributes to the production of articles or the provision of services that are taxable, then an ITC is available using the formula in that subsection. Any possible abuse is to be combatted by requiring evidence of intended use and an adjustment in the percentage of ITC allowed by the Minister.
Here the evidence is clear. The work cloth was supplied by the Colony to its members because of its durability and longevity. The long-wearing nature of the work cloth saved the Colony money over the long term when compared to other materials. In this way, it contributed both to the Colony's commercial activities and bottom line.19 Given that a Crown witness admitted that the Minister allows ITCs for certain items such as work gloves and boots acquired by other farm registrants for use by their employees, I am of the opinion that the connection for the work cloth in issue here is not to remote.20
I am of the respectful view that the learned Tax Court Judge committed an error of law in his interpretation of the words "consumption, use or supply in the course of commercial activity". I would allow the appeal and refer the matter back to the Tax Court of Canada for redetermination on the basis that the Colony is entitled to input tax credits on the purchase of work cloth used to make work clothes pursuant to subsection 169(1) of the Act. The applicant should have its costs throughout.
(B. Malone)
J.A.
I agree
A.M. Linden
J.A.
__________________
1. R.S.C. 1985, c. E-15, as amended.
2. The pertinent portions of subsection 169(1) Les passages pertinents de l'alinéa 169(1) se read as follows: lisent comme suit:
| ... where property ... is supplied to ... a person and ... tax in respect of the supply ... becomes payable ... the input tax credit ... is the amount determined by the formula | ... le crédit de taxe sur les intrants d'une personne, ... relativement à un bien ... qui lui est fourni, correspond au résultat du calcul suivant si, ... la taxe relative ... à la fourniture devient payable |
| A x B | A x B |
| where A is the ... tax in respect of the supply and B is ... the extent (expressed as a percentage) to which the person acquired ... the property ... for consumption, use or supply in the course of commercial activities of the person. | où A représente la taxe relative ... à la fourniture ...; B représente: ... le pourcentage qui représente la mesure dans laquelle la personne a acquis ... le bien ... pour consommation, utilisation ou fourniture dans le cadre de ses activités commerciales. |
| [emphasis added] | [Non souligné dans l'original] |
| The term "commercial activity" is defined in subsection 123(1) to mean: | L'expression "activité commerciale" est définie au sous-alinéa 123(1) comme suit: |
| ... a business carried on ... except to the extent to which the business involves the making of exempt supplies... | ... l'exploitation d'une entreprise ... sauf dans la mesure où l'entreprise comporte la réalisation par la personne de fournitures exonérées ... |
3. R.S.A. 1980, c. C-20.
4. Applicant's Record, pages 59-91.
5. Respondent's Record pages 23, 24, 27 and 28.
6. Respondent's Record pages 23, 24, 27 and 28.
7. Applicant's Record p. 120 and 121.
8. Respondent's Application Record p. 67.
9. S.C. 1990, c. 45.
10. S.C. 1993, c. 27.
11. Applicant's Submissions re subsection 169(1) at p. 3.
12. Supra at endnote 8.
13. [1993] 4 S.C.R. 695 at p. 737.
14. Respondent's Record p. 144.
15. Attorney General of Canada v. Attorney General for Alberta, [1992] G.S.T.C. 2 (S.C.C.) at p. 2.
16. Upon further examination, one finds that immediately following the above passage, this sentence: "The MUSH sector is entitled to claim input tax credits to the extent that its purchases are used in making taxable supplies". The MUSH sector refers to municipalities, universities, schools and hospitals.
17. 2955-4201 Quebec Inc. v. Canada, [1997] F.C.J. No. 1536; 398722 Alberta Ltd. v. Canada, [2000] F.C.J. No. 644.
18. Metropolitan Toronto Hockey League v. Canada, [1995] F.C.J. No. 944 at endnote 1.
19. Transcript of Proceedings in the Tax Court of Canada, at p. 23 to 26.
20.. Supra at endnote 7.
Date: 20001221
Docket: A-183-99
CORAM: LINDEN J.A.Enter Coram Names just after [Comment] code.Separated by a hard return. Maximum 3. EVANS J.A. MALONE J.A.
BETWEEN:
MIDLAND HUTTERIAN BRETHREN
Applicant
- and -
Enter Style of Cause just after [Comment] code HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
EVANS J.A.
A. INTRODUCTION
This application for judicial review turns on an apparently simple question of statutory interpretation. Is the cloth purchased by the appellant Hutterite colony for the purpose of making clothes to be worn by its members when working on the colony's farm "acquired ... for ... use ... in the course of commercial activities"? If it is, the appellant is entitled to a GST input tax credit (ITC) for the amount of the GST that it paid when it purchased the cloth.
My colleagues are of the view that, to the extent that the cloth was purchased for use "in connection with" or "to contribute to" its commercial activities, the colony is entitled to an ITC. They find that, because the cloth was durable and hard-wearing, it was suitable for making clothes to be worn while the members were working on the colony's farm. Accordingly, since the profitability of the colony's commercial activities was thereby enhanced, because the members' work clothes would not have to be replaced as often as they would if a less heavy material had been purchased, the cloth was properly regarded as purchased for use "in the course of commercial activities".
Moreover, my colleagues also state that the meaning of the statutory phrase "in the course of commercial activities" is unambiguous. Hence, they conclude, it is inappropriate for the Court to consider tax policy considerations when determining how close must be the connection between the goods in respect of which the ITC is claimed and a registrant's commercial activities when, for example, the goods in question also satisfy personal needs.
I agree that, for the goods to be acquired for use "in the course of commercial activities", there must be a functional connection between the needs of the business and the goods. It is not sufficient that the members of the colony wore the clothes made from the cloth while they were engaged in the commercial activity.
I also agree that the Tax Court Judge erred in law when he held that, since the colony's commercial activity was not the manufacture of clothing, the cloth was ineligible for an ITC. This view assumes that the goods must make a direct contribution to the production of the registrant's taxable supply. I see nothing in the statutory language, nor in its rationales, that so limits the scope of paragraph 169(1)(c).
However, with all respect, I cannot agree with my colleagues that the words "in the course of commercial activities" are clear and unambiguous. In my view, the disputed phrase is sufficiently open-textured that, as a linguistic matter, it is not determinative of the degree of connection with the commercial activity necessary to justify an ITC. Hence, in deciding whether the goods in question here are used "in the course of commercial activities" the Court must have regard to the purposes underlying the statutory scheme, particularly when the interpretation of the disputed words is likely to have ramifications that go well beyond the facts of the particular case.
Having considered all relevant factors, I have concluded that my colleagues' understanding of the term permits an ITC to be claimed for an expenditure that has too tangential a connection with the production of taxable supplies, and is insufficiently attentive to important considerations of fiscal fairness. In my opinion, the colony cannot claim an ITC in respect of the cloth because it was acquired for a use that satisfied the personal need of the members for warmth and decency, and to discharge its obligation to provide the members, and their families, with the necessities of life, including clothing. Thus, when made into work clothes, the cloth was not sufficiently functionally related to the colony's commercial activities to justify permitting the appellant to pass on to the general body of taxpayers the GST that it paid in respect of its members' non-church clothing.
B. FACTUAL BACKGROUND
The relevant facts of this case are accurately set out by Malone J.A. and I need not rehearse them here. However, I would emphasise the following points.
First, apart from the fact that the cloth was of a heavier weight, and therefore more hard-wearing, than that used for the members' church clothes, there was no evidence that the clothes made from the cloth had any properties that made them especially suitable for farm work. For example, they did not protect the wearers from occupational hazards of farm work, or enable them to perform tasks in the course of the commercial activities that would have been impossible, or more difficult, if they had been wearing any outdoor clothing. Nor was there any evidence that the cloth was more expensive because it was to be made into clothes to be worn while the members were performing farm work.
Second, to the extent that the design of the clothes served also to identify the wearers as Hutterites, the identification was with the colony as a religious community, and not with its commercial activities. Hence, there is no analogy between the members' clothes and the uniforms worn by some employees in order to promote their employer's business, or the robes and other special clothing that members of the Bar are required to wear when appearing in court.
Third, while the record is not altogether clear, I have inferred from the fact that the ITC claimed is only 50% of the GST paid in respect of the cloth that the members wore their work clothes on occasions when they were neither engaged in farm work, nor attending church, such as when eating meals or pursuing domestic activities. The claim is not reduced because, while wearing the clothes when working on the farm, the members also obtained a personal benefit from them.
Fourth, the colony is not incorporated solely for farming or other commercial objects. Indeed, its memorandum of association provides as the first of its objects that the company is established to promote, engage in carry on and/or conduct the Christian Religion and its religious teachings, and all that are part of or connected with such Religion or its teachings. As Malone J.A. has made clear, the Midland Hutterian Brethren constitute a religious community in which members surrender their ownership of property, and the colony undertakes to provide them and their families with the necessities of life, including food, shelter, education and clothing.
C. ANALYSIS(a) Is the phrase "in the course of" clear and unambiguous?
I accept, of course, that, if a word or phrase in a taxing statute can be said to have a "clear and unambiguous" meaning when read in the statutory context as a whole, the judicial task of interpretation is at an end. In these circumstances, it is unnecessary and inappropriate for the Court to embark on a search for a purpose underlying the statutory scheme that will shed further light on the meaning of the provision in question. If this is as reasonably accurate a summary of the extensive jurisprudence of the Supreme Court of Canada as is possible in two sentences, I would offer two observations.
First, a reading of words or phrases "in their context" surely cannot be limited to merely textual considerations, to the exclusion of the legislative policy underlying the statutory scheme. Second, the subtlety and imprecision of language is such that, in my view, the existence of a "plain or unambiguous meaning" of legislation is likely to be the exception, rather than the rule, at least when its interpretation is sufficiently contentious to reach this Court.
Before examining the specific statutory context of the phrase "in the course of commercial activities" relevant to this case, I consider how this phrase is used in ordinary speech and in other legal contexts, in order to determine if it has a sufficiently clear meaning as to preclude a full consideration of the statutory context in which it is used in paragraph 169(1)(c) of the Excise Tax Act. (i) the `ordinary' meaning of "in the course of"
Dictionaries provide evidence of the range of meanings that a word or phrase has in ordinary linguistic usage. For example, The New Shorter Oxford English Dictionary appears to provide a purely temporal meaning of the phrase:in the course of while doing; during the progress or length of However, the parent work, the Oxford English Dictionary (Second Edition) provides a somewhat broader range of meaning:in the course of: in the process of, during the progress of
The French version of the statutory text uses the phrase "dans le cadre de ses activités commerciales", which would seem clearly not confined to a framework or context that was strictly temporal; the word "pendant" would better have conveyed the meaning "while". Thus, Le Grand Robert de la Langue Française explains the phrase "dans le cadre" to mean "les limites prévues, imposés par", and cross-references to "compétence".
I conclude from this brief examination that, in their ordinary usage in the English and French languages, "in the course of" and "dans le cadre de" are not so precise that the meaning of the words "in the course of commercial activities" is sufficiently clear and unambiguous as to preclude an interpretation that draws on the particular statutory context in which they appear.
(ii) other `legal' meanings of "in the course of"
A phrase that bears a range of meaning in ordinary speech may nonetheless have a single meaning when used in the law. Accordingly, if it were clear from other legal contexts that the phrase "in the course of" has some uniform or technical meaning, then I might have to concede that its meaning in paragraph 169(1)(c) is, as my colleagues assert, clear and unambiguous, and hence not in need of elucidation through the policy of the statutory scheme for the imposition of GST. For this purpose, I have considered two examples of the use of the phrase in other legal rules.
First, at common law a "master" is liable for the torts of "servants" committed "in the course of their employment". It is clear that an employer will not be held vicariously liable simply because the tort was committed by the employee "while on the job for payroll purposes": John G. Fleming, The Law of Torts, 9th edition (North Ryde, N.S.W.: LBC Information Services, 1998), page 421. The author goes on to say that the term "has failed to acquire a high degree of precision," although an important consideration is that, if not actually authorised, the wrongful act must be capable of being regarded as an unauthorised mode of performing an authorised task.
Indeed, the multiplicity of the factors considered by the courts, and the importance of the facts of the particular case in determining the result, give a significant factual component to the question of whether an employee was acting "in the course of" employment when the wrong was committed: see Lewis N. Klar, Tort Law (Toronto: Thomson Professional Publishing of Canada, 1991), pages 418-19.
Second, the phrase occurs in the Canadian Human Rights Act, R.S.C. 1985, c. H-6, where paragraph 7(b) makes it a discriminatory practice "in the course of employment to differentiate adversely in relation to an employee on a statutorily prohibited ground of discrimination." It was accepted in Cluff v. Canada (Department of Agriculture), [1994] 2 F.C. 176 at 187 (F.C.T.D.) that it was relevant to a determination of whether an employee was "in the course of" his or her employment for the purpose of this provision to consider whether the person was engaged in activities that were related to his or her employment, as opposed to those that were personal in nature.
Again, it would seem evident from these two examples alone that there is no precise legal meaning of the phrase "in the course of employment". Hence, when used in paragraph 169(1)(c) of the Excise Tax Act, the phrase does not have the clear and unambiguous meaning of a legal term of art. (iii) conclusion
The point that I wish to make is not that dictionaries or other legal contexts provide the meaning to be assigned to the words "in the course of commercial activities" in paragraph 169(1)(c) of the Excise Tax Act. Rather, given the lack of a precise meaning of the phrase in ordinary speech, and its use in such different legal rules as those governing vicarious liability and the scope of protection of the right to freedom from discrimination in employment, it is simply not plausible for my colleagues to assert that its meaning in paragraph 169(1)(c) is so clear that it can be determined without considering its surrounding statutory context.
(b) "Personal" needs and the needs of the commercial activity (i) introduction
In my opinion, goods that are used by a person while engaged in commercial activities will generally not qualify for an ITC if the registrant was likely to have bought them, or goods like them, as an item required for everyday living. That this is true of the goods in question in this case is demonstrated by the fact that the cloth was made up into "work clothes" that were worn by members and their families (including children and the elderly), even when they were not engaged in the commercial activity of farming. As I have already noted, another function of the clothes was to identify their wearers as members of the broader religious community of Hutterites.
In addition, the cloth was supplied by the colony as part of the obligation of the collectivity to provide clothing to individual members and their families. Since the objects of the colony are not limited to its commercial activities, it cannot be said that the purchase of the cloth was necessarily made in the course of its commercial activities, in the sense that it must have contributed to or was in connection with those activities.
In these circumstances, there must be a closer functional connection between the purchase of the cloth and the commercial activity than is provided on the facts of this case, namely that the clothes were worn while the members worked on the farm, and that the heavy nature of the cloth made it economical for making up into work clothes.
(ii) personal needs and the Income Tax Act
As is well known, income tax law on the deduction of expenses from profits distinguishes between allowable expenses incurred to further the making of profit and those of a "personal" nature that are not. In Symes v. Canada, [1993] 4 S.C.R. 695 at 738, Iacobucci J. observed: in a tax system which is at least partly geared toward the preservation of vertical and horizontal equities ... one seeks to prevent deductions which represent personal consumption. To the extent that a taxpayer can make a lifestyle choice while maintaining the same capacity to gain or produce income, such choices tend to be seen as personal consumption decisions, and the resultant expenses as personal expenses.
While the Income Tax Act, paragraph 18(1)(h) specifically prohibits the deduction of "personal or living expenses of the taxpayer" from the taxpayer's profit from a business, it has also been said that this provision was inserted out of an abundance of caution, because general accounting principles, applied to determine "profit" for tax purposes, disregard personal expenditures in the calculation of net profit: see Peter W. Hogg, Joanne E. Magee and Ted Cook, Principles of Canadian Income Tax Law, 3rd edition (Toronto: Carswell, 1999), pages 239-41.
Despite this and other differences between section 18 of the Income Tax Act and subsection 169(1) of the Excise Tax Act, there are also similarities in the underlying policy concerns that make the Income Tax Act jurisprudence relevant to the interpretation and application of the GST legislation.
The policy of the Income Tax Act is to avoid the unfairness of permitting a taxpayer to deduct an expense incurred as part of the necessities of daily life, or for other purposes personal to the taxpayer, when others who are not engaged in the pursuit of profit from a business cannot write off against their income tax liability similar expenditures. The same concern would be equally applicable if GST registrants conducting commercial activities were able to benefit from an ITC in respect of the GST paid for goods that satisfy their personal needs or living expenses, rather than the needs of the commercial activity.
The purpose of the ITC is to prevent businesses from having to shoulder the burden of double taxation and to support the principle that the GST is a tax on consumption to be borne by the end consumer, and not by the person supplying the goods or services ultimately consumed. It is not the purpose of the ITC to enable those engaged in commercial activities to call upon taxpayers as a whole to subsidise their personal or living expenses or, in this case, to help the colony to defray the cost of meeting its obligations to clothe members of the community and their families, whether or not they are engaged in the commercial activities of the colony.
I note by way of parenthesis that, in computing their income for any taxation year, communal organizations that carry on businesses, in part to support their members, are not entitled to deduct the cost of providing benefits of any kind to their members (Income Tax Act, subparagraph 143(1)(k)(i)), including, presumably, the cost of the cloth purchased by the appellant to make into clothing for its members to wear while working in the colony's farming business.
This suggests to me that, in considering other fiscal advantages claimed by the colony, such as an ITC on the cloth supplied to the members for their work clothing, the Court should be mindful of the obligations of the colony to its members that derive from its religious, communal and essentially non-commercial nature.
Accordingly, while I do not necessarily disagree with the result reached on the facts, I cannot agree with the statement in Hleck, Kanuka, Thuringer v. The Queen (1994), 94 DTC 1698 at 1702 (T.C.C.) that, unlike the position in the law of income tax, the fact that an item confers a personal benefit is irrelevant to whether it was acquired for use in the course of commercial activities for the purpose of its eligibility for an ITC. In my opinion, it will be difficult to establish that a good purchased by a GST registrant has a sufficiently close functional connection with the production of the taxable supply to qualify it for an ITC if it, or something like it and of similar cost, was likely to have been purchased in any event by the registrant in order to satisfy a personal need.
(iii) implications of the majority decision
If my colleagues were correct in their interpretation of the words "in the course of commercial activities", so large a gap would have been opened in the GST legislation that corrective legislation would seem inevitable. Of course, it is not fatal to a particular interpretation of a statute that it leads to consequences that were neither foreseen, nor intended at the time of its enactment, or is apt to give rise to anomalies and injustices. However, it is appropriate for the courts to take practical consequences into account as part of the interpretative exercise and, if not precluded by other considerations, to prefer an interpretation that is not likely to require remedial legislative surgery.
Thus, I do not read the majority reasons as limited to registrants, whether incorporated or not, who provide goods to others who are engaged in furthering the registrant's commercial activities. This issue is dealt with in the Excise Tax Act, paragraph 170(1)(b), a provision that may be inapplicable to the facts of this case because it is not clear that, when engaged in farming activities, members are employees or officers of the colony.
Hence, as counsel for the taxpayer conceded, if the colony were entitled to an ITC in respect of the cloth that is made up into clothes for the members to wear when working on the farm, it would follow that an individual registrant should be able to claim an ITC in respect of any good purchased for use while she or he is engaged in commercial activity, provided only that it is suitable for the purpose and can be said in some sense to contribute to the profitability of the commercial activity.
Thus, as go the Hutterites' work clothes, so go the ordinary business suits worn by GST registrants while meeting with clients or otherwise engaged in the practice of their profession or the pursuit of their business. According to the majority, it would be sufficient for taxpayers claiming an ITC on the GST paid on their suits to show that, for example, since clients are likely to have more confidence in them if they wear business suits, and the profitability of their practice or business is thereby enhanced, their clothes are acquired for use in the course of their commercial activities.
It may not be totally fanciful to think that the wearing of an ordinary business suit may contribute to a registrant's "bottom line". However, since the registrant would need clothing in any event, and suits are commonly worn for other purposes, the connection between the goods and the commercial activity will generally be too remote to qualify the registrant for an ITC, and thus to provide a fiscal advantage not enjoyed by most other taxpayers.
D. CONCLUSIONS
No doubt it will not always be easy to draw the line between an ITC-eligible good consumed in the process of the commercial activity on the one hand and, on the other, one that is not because it satisfies a personal need of the registrant and has only a tenuous connection with the registrant's commercial activities.
Whether a good was acquired for use "in the course of commercial activities" may often require an assessment of the whole factual context, and a weighing of the various factors indicative of the good's functional integration into the commercial activity. To the extent that this exercise involves findings of fact, the Court should be reluctant to intervene, in the absence of "palpable and overriding" error by the Tax Court Judge.
While the Tax Court Judge in this case did not explore this issue because he confined ITCs to items used directly in the production of the colony's taxable supply, there is, nonetheless, sufficient evidence in the record for me to conclude that the Judge did not err in dismissing the appeal.
For these reasons, I would have dismissed the application for judicial review.
"John M. Evans" J.A.
Docket: A-183-99Enter City, Province and Date just after [Comment] code. DATED AT OTTAWA, ONTARIO, ON WEDNESDAY, DECEMBER 21, 2000
PRESENT: LINDEN J.A. EVANS J.A. MALONE J.A.
BETWEEN:Enter Style of Cause just after [Comment] code.- MIDLAND HUTTERIAN BRETHREN,
Applicant
- and -
HER MAJESTY THE QUEEN,
Respondent
JUDGMENT
The appeal is allowed and the matter is referred back to the Tax Court of Canada for redetermination on the basis that the Midland Hutterian Brethren is entitled to input tax credits on the purchase of work cloth used to make work clothes pursuant to subsection 169(1) of the Excise Tax Act. The applicant shall have its costs throughout.
(A. Linden) J.A.