LÉTOURNEAU J.A.
BETWEEN:
Appellant
and
HER MAJESTY THE QUEEN
Respondent
and
THE CANADIAN BANKERS ASSOCIATION
Intervenor
Heard at Toronto, Ontario, on February 14, 2007.
Judgment delivered from the Bench at Toronto, Ontario, on February 14, 2007.
REASONS FOR JUDGMENT OF THE COURT BY: LÉTOURNEAU J.A.
Docket: A-27-06
Citation: 2007 FCA 72
CORAM: DÉCARY J.A.
LÉTOURNEAU J.A.
EVANS J.A.
BETWEEN:
ROYAL BANK OF CANADA
Appellant
and
HER MAJESTY THE QUEEN
Respondent
and
THE CANADIAN BANKERS ASSOCIATION
Intervenor
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Toronto, Ontario, on February 14, 2007)
[1] This is an appeal against a decision of Bowie TCCJ (Judge) of the Tax Court of Canada rendered on April 21, 2005. The learned Judge dismissed the Appellant’s appeal of its reassessment under the Excise Tax Act, R.S. 1985, CH. E-15 (Act). The Appellant was denied input tax credits (ITCs) that it had claimed on the ground that it provided branch services that were taxable supplies under part IX of the Act.
[2] After hearing the evidence and submissions of the parties, the Judge concluded that the branch services offered by the appellant to its wholly owned subsidiary Royal Mutual Funds Inc. (RMFI) “were financial services exempt from tax, and that the inputs to them therefore did not give rise to an entitlement to ITCs”: see paragraph 19 of the reasons for judgment.
[3] In coming to this conclusion, the Judge made a number of findings that, in our view, were findings of mixed fact and law. These findings can only be reviewed by this Court if they reveal a palpable and overriding error: see Riverfront Medical Evaluations Ltd. v. R., 2002 F.C.A. 341.
[4] The Judge found that the Appellant’s personnel were employees of the appellant and not employees of RMFI: see paragraphs 14 and 15 of his reasons for judgment. They were acting on a dual capacity, that is to say that they were providing services to the Appellant and, whenever necessary, to RMFI. The Judge reviewed the organizational structure as well as the operations of the Appellant and of RMFI. There was, in our view, ample evidence to support his conclusion.
[5] Counsel for the Appellant submits that determining who was the employer of the personnel provided by the appellant was an irrelevant issue. He contends that the Judge made that issue a determinative one that influenced and permeated all his reasoning.
[6] We do not agree with counsel that that issue was irrelevant. It was a factor that the Judge could properly take into account and weigh, as he did, with the other facts and circumstances surrounding the supply of the branch services to RMFI, including the fact that the personnel was selling the securities on behalf of RMFI.
[7] The Judge was also of the view, as previously mentioned, that the branch services offered by the appellant to RMFI were financial services. The relevant parts of the definition of “financial services” found in section 123 of the Act read:
|
Financial service” means … (d) the issue, granting allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,
(l) the agreeing to provide, or the arranging for, a service to in any of paragraphs (a) to (i), or
(m) a prescribed service,
But does not include
(t) a prescribed service;
(emphasis added) |
«service financier» d) l’émission, l’octroi, l’octroi, l’attribution, l’acceptation, l’endossement, le renouvellement, le traitement, la modification, le transfert de propriété ou le reboursement d’un effet financier ; a. l) le fait de consentir à effectuer un service visé à l’un des alinéas a) à i) ou de prendre les mesures en vue de l’effectuer ;
m) un service visé par règlement.
La présente définition exclut :
t) les services visé par règlement. |
[8] Subsection 4(2) of the Financial Services (GST/HST) Regulations, SOR/91-26 (as amended) defines for the purposes of section 123 of the Act the services that are prescribed services :
|
4(2) Subject to subsection (3), the following services, other than a service described in section 3, are prescribed for the purposes of paragraph (t) of the definition "financial service" in subsection 123(1) of the Act: (a) the transfer, collection or processing of information, and (b) any administrative service, including an administrative service in relation to the payment or receipt of dividends, interest, principal, claims, benefits or other amounts, other than solely the making of the payment or the taking of the receipt. (emphasis added) |
4(2) Sous réserve du paragraphe (3), pour l'application de l'alinéa t) de la définition de «service financier», au paragraphe 123(1) de la Loi, sont visés les services suivants, sauf ceux mentionnés à l'article 3 : a) la communication, la collecte ou le traitement de renseignements; b) les services administratifs, y compris ceux reliés au paiement ou au recouvrement de dividendes, d'intérêts, de capital, de créances, d'avantages ou d'autres montants, à l'exclusion des services ne portant que sur le paiement ou le recouvrement.
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[9] In essence, the Judge concluded that the services provided by the Appellant consisted in the distribution or arranging for the distribution of Units of the mutual funds. “The major element of the branch services that the Appellant supplied to RMFI”, he wrote, “is the very service that RMFI had contracted to supply to the Funds under clause (c) of Article 3.01 of the Master Management Agreement”: see paragraph 16 of his reasons for Judgment.
[10] In paragraphs 14 to 17 of his reasons, he provided the justifications for his finding. Again, we are satisfied, that the evidence on the record supported his finding and we see no error that, in this regard, would justify our intervention. In relation to the distribution of units of the Funds, the evidence reveals that RMFI possessed no infrastructure that enabled it to distribute or arrange for the distribution of units of the Funds. These were the financial services that were provided by the Appellant.
[11] Counsel for the Appellant submitted as an alternative argument that the branch services were administrative services, excluded from the definition of financial services. We did not find it necessary to hear from the Respondent as we were satisfied that the Judge made no error in dismissing that claim of the Appellant.
[12] The services provided by the Appellant were much more than clerical in nature and advice. It was agreed by the parties that the services should be treated as a single supply of services and not be broken down. It is obvious that the dominant and, we would say essential, characteristic of this supply of services by personnel duly licensed in conformity with the regulatory scheme was the selling of securities on behalf of RMFI, i.e. the distribution of the units of the Funds.
[13] Finally, the Appellant challenges the Judge’s finding that the defence of due diligence had not been established so as to relieve the Appellant of the penalties assessed and imposed by the Minister pursuant to section 280 of the Act. The Judge was not satisfied that the Appellant had taken all reasonable steps to determine the correct interpretation of the law.
[14] The record reveals a paucity of actions and measures taken by the Appellant to inquire about the meaning of the relevant provisions of the Act and ensure compliance with them. On the facts that were before the Judge, we cannot say that his conclusion is erroneous.
[15] Counsel for the Appellant submitted that the Judge erred in requiring that the Appellant seeks either a ruling from Revenue Canada or an independent opinion. That, he says, puts to high a standard and alters the nature and test of the due diligence defence.
[16] In addition, he contends that this, in subsequent litigation, would evacuate altogether the possibility of raising the defence and bring automatically the imposition of the penalties if the Appellant were to disregard the ruling or the independent opinion and lose its case.
[17] To say that the Judge required the seeking of a ruling or an independent opinion appears to us to be a mischaracterization of what he said. He simply stated that there was no evidence that steps of the kind were taken that could have assisted in establishing the defence of due diligence.
[18] As for the fact that the defence of due diligence would be pre-empted in subsequent unsuccessful proceedings where the ruling or the independent opinion was not followed, we are satisfied that this would not necessarily be the case. The defence would have to be assessed against all the facts, including the merit of the ruling or the independent opinion, the extent of the ambiguity of the impugned legislation and the reasonableness of the Appellant’s behaviour in these circumstances.
[19] For these reasons, the appeal will be dismissed with costs.
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-27-06
(APPEAL FROM AN ORDER OF THE HONOURABLE JUSTICE BOWIE, TAX COURT OF CANADA, DATED DECEMBER 20, 2005, 2002-2478(GST)G)
STYLE OF CAUSE: ROYAL BANK OF CANADA
Appellant
and
HER MAJESTY THE QUEEN
Respondent
and
THE CANADIAN BANKERS
ASSOCIATION
Intervenor
DATE OF HEARING: FEBRUARY 14, 2007
PLACE OF HEARING: TORONTO, ONTARIO
REASONS FOR JUDGMENT
OF THE COURT BY: (DÉCARY, LÉTOURNEAU & EVANS JJ.A.)
BENCH BY: LÉTOURNEAU J.A.
APPEARANCES:
|
Al Meghji
|
For the Appellant |
|
John McLaughlin
John B. Laskin Gillian Dingle |
For the Respondent
For the Intervenor |