Date: 20021219
Docket: 1999-3572-GST-G
BETWEEN:
SASKATCHEWAN WHEAT POOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowie J.
[1] This appeal is brought from an assessment for goods and services tax (GST) under Part IX of the Excise Tax Act (the Act). The assessment covers the period from January 1, 1991 to December 31, 1993. In general terms, the issue is whether certain payments made to the Hartford Fire Insurance Company for insurance coverage attract GST (I shall refer to that company and the other members of the Hartford group of companies simply as "Hartford"). The Minister of National Revenue has assessed the Appellant on the basis that section 178 of the Act applied to render these amounts subject to tax. Section 178 was in force during the entire period covered by the assessment under appeal. It was, however, repealed effective April 24, 1996. It read:
178 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.
The reason given by the government for its repeal was that it simply expressed the position at common law, and so it was redundant.
[2] The Appellant's position is that the amounts were collected by it from the persons actually insured in the capacity of agent of Hartford, and that the payments were made by the insureds as consideration for the supply by Hartford of a financial service to the insureds.[1] Counsel for the Appellant quite rightly conceded during the trial that it is liable to collect and remit GST on a percentage of the premiums that it retained under its agreement with Hartford as consideration for collecting those premiums, and perhaps also as consideration for other services performed by the Appellant in relation to the settlement of claims.
facts
[3] The Appellant operates numerous stockyards in the Province of Saskatchewan where cattle and other animals are sold at auction. The cattle in question are transported to the yards from the producers' farms by truck. Upon arrival there they are unloaded into pens; from there the animals go to the auction ring, where they are sold at auction to the highest bidder. Once sold, they leave the ring, and they may be held for a short time in pens again before being loaded on trucks to be transported to their destination. That may be a farm, a feedlot, or a slaughter house. It may be within the Province of Saskatchewan, elsewhere in Canada or in the United States of America. The outbound transit may be by truck, or in the case of those cattle going a longer distance, by rail. Obviously, the movement of cattle in trucks and their juxtaposition in pens raises considerable potential for injury and death of the animals due to trauma of many kinds. Prior to 1972, individual truckers and farmers bought insurance against the risk of injury and death to their cattle in transit. Hartford has always been a leader in this type of insurance in Western Canada, and it offered policies covering producers and buyers against potential loss on an individual basis. In 1972, Hartford developed what was described in the evidence as a blanket policy of insurance, under which losses due to injury or death of livestock were covered, both during transit to the yard and at the yard prior to sale. Hartford also underwrote losses occurring after sale, either in the yard or during transit to the ultimate destination of the animals. I shall return in more detail to the terms of these policies. These policies, although changed in their coverage somewhat from time to time by a number of endorsements issued over the years, remained in force in essentially their original form until April 1, 1993 when they were replaced by policy no. 87 LST 620002.
[4] I heard evidence from Clarence Kuse, who was the senior manager of Hartford in Saskatchewan between 1963 and 1995, when he retired and was replaced by James Blahum. They both gave evidence as to the formation, the history and the administration of the relationship existing among Hartford, Saskatchewan Wheat Pool and the producers, truckers and buyers during the period between 1963 and the present. Their evidence was consistent, and they are disinterested witnesses. I accept their evidence completely. I also heard evidence from Morton Allewell who retired in 1992 after 26 years working at the Appellant's livestock division. For the latter part of that time he held the title of operations manager. The other witness for the Appellant was Stewart Stone; he is presently general manager of Heartland Livestock Services, successor company to the livestock division of Saskatchewan Wheat Pool. In 1993 he became manager of marketing and finance. All these witnesses are knowledgeable as to the affairs of the Appellant during the relevant period of time. Their evidence was consistent and it was not shaken in cross-examination. I accept their evidence as being an accurate description of the longstanding and very important business relationship which evolved among the Appellant, the producers and the buyers of livestock, and Hartford in the period between 1960 and 1993.
the business of the Appellant
[5] The Appellant provides a number of services to its customers. These include selling animals in the ring at auction; buying animals for others at the auctions as an order buyer; arranging outward transportation of animals purchased for the buyers; branding, inoculating and ear tagging animals; and negotiating direct sales of animals to packing houses for producers. The Appellant also acts as a financier of cattle for producers under what is called the feed finance program, and it purchases cattle on its own account for market support reasons. It also owns and raises horses which are ultimately sold directly by it into the Japanese market.
the policies
[6] Hartford has been in the insurance business for many years and it has been the dominant insurer of livestock in Western Canada for half a century or more. Before 1972, producers had to insure their animals directly with Hartford, each producer acting independently to obtain a policy covering their own shipments. Animals were covered in transit in the truck, and up to the point of sale. Mr. Kuse testified that in 1972, he developed what he described as the "special single", or blanket insurance policy to cover animals during transit and in the yard prior to sale under one policy. That policy was issued to Saskatchewan Wheat Pool Livestock Division, and bore Hartford number 9236. Under this policy, premiums were paid by shippers on the basis of the number of cattle shipped and the distance that they travelled to the yard. Premiums were invoiced to the producers by the Appellant as one of several deductions made by it from the selling price of the producer's cattle. A typical settlement advice following a sale of cattle showed the proceeds of the sale for the cattle shipped, less the Appellant's selling commission, charges for any other services such as inoculation that might have been provided, and less the applicable charges for insurance. Hartford also issued policy number 9237, a blanket policy designed to cover animals after sale, from the point at which title passed to the buyer for the remaining period that the animals were in the Appellant's yard, and in transit from there to the buyer's premises. Again, the premium was determined by the number of animals insured and the distance they travelled. The risks covered by these policies were death or injury to the animals from any cause other than a pre-existing condition. Under this policy, too, the insurance premium was collected by the Appellant, which invoiced each buyer as part of the invoice for the purchase price of the animal bought. The Appellant then remitted the premiums to Hartford, retaining the agreed percentage for itself as consideration for collecting the premium.
the issue
[7] The Respondent's position is that the real insured under the Hartford policies of insurance is the Appellant, not the producers and buyers of cattle, and that the amounts that the Appellant invoiced to those producers and buyers for insurance were in fact additional charges for its auction services, by which it passed on to the producers and the buyers its own cost of insurance coverage. If the charges were in fact consideration for auction services, that would be a taxable supply. For the reasons that follow, I have concluded that the persons insured under the policies were the producers and buyers of cattle and that the amounts invoiced to them were in fact premiums paid by them to Hartford and collected for Hartford by the Appellant as its agent for that purpose.
who is the insured?
[8] The witnesses were unanimous that it was considered desirable for as many producers and buyers as possible to be covered by the Hartford insurance. No action was required on the part of producers or buyers to trigger coverage; all animals were considered to be covered, and the premiums were invoiced to the producers and to the buyers, unless they took positive steps to opt out of the coverage. Buyers sometimes did opt out, because they already had other coverage under their own individual policies covering all the cattle purchased by them at the Appellant's and at other livestock auctions. In that case they were not charged premiums. Producers could also opt out of the coverage, but few ever did so. Those who took positive steps to opt out were not invoiced for the premiums. There is no question that both the Appellant and Hartford have a strong preference to see both buyers and shippers covered for the risk of injury or death to their animals. For Hartford, it was simply a matter of volume of business, and therefore profit. For the Appellant, there was some direct financial advantage, as it earned a portion of the insurance premiums for collecting them. I have no doubt that there was also some incidental benefit to the Appellant, in that its relations with the producers and with the buyers would inevitably suffer if they incurred uninsured losses through injury or death while the animals were in transit to the stockyards, or held there pending sale and shipment out.
[9] Counsel for the Respondent attempted to establish in cross-examination of the witnesses that the real insured under these policies was the Appellant, and that the Appellant was simply passing on to its producers and its purchasers the cost of providing itself with insurance. Neither the oral evidence nor the documents support this theory. The Appellant's risk was minimal, because the terms upon which animals were accepted for sale, and upon which they were sold, protected the Appellant from liability unless it arose from the specific negligence of its employees. The benefit to the Appellant was certainly increased when an endorsement protecting it from subrogated claims that might otherwise be made against it by Hartford was issued. However, the evidence satisfies me that this was no more than an incidental benefit of minimum and unspecified value to the Appellant.
settlement of claims
[10] If an injury to an animal was detected upon unloading an arriving shipment, or in the yard after unloading but prior to sale, a report was obtained by the Appellant's employees from the driver who delivered the shipment. The Appellant generally would send this claim to the local Hartford office, indicating the nature of the injury and the circumstances, and establishing the amount of the loss. A badly injured animal would be sold to a slaughter house for salvage. If Hartford paid the full value of the animal then it was entitled to the salvage, and it would be paid either by the slaughter house, or by the Appellant if the Appellant had received it from the slaughter house. If the animal were saleable then it would be sold, and the shipper would be paid the proceeds of sale by the Appellant, and Hartford would pay to the shipper the difference between the market value of a healthy animal and the actual selling price of the injured animal.
[11] Claims after sale were looked after in different ways. Although policy no. 9237 covered both losses in the yard after sale but prior to shipment, and losses during outward transit, Hartford assigned a separate policy number administratively to those losses which occurred in the Appellant's yard prior to shipment. The evidence is that no policy ever existed under this separate number, but it was created by Hartford to keep track of the losses incurred between the sale and the shipment of animals for its own underwriting purposes. The grouping of these claims for underwriting purposes has no bearing on the issues in this appeal.
[12] Losses arising after sale were reported to Hartford in much the same way as those arising before sale. If the buyer of an animal which was injured or died after sale had already been invoiced for that animal, then Hartford would pay the claim directly to the buyer. If the buyer had not been invoiced prior to the injury then the Appellant, instead of invoicing the purchaser, invoiced Hartford for the value of the animal. In that case, the buyer would never be invoiced and would never pay for the animal. Hartford would pay the value of the animal to the Appellant and the Appellant in turn would pay that amount to the producer in the usual way. Under this scenario, any salvage obtained for the animal would go to Hartford. If an animal after sale was found to be slightly injured but still saleable, it would be sent through the auction ring again. As an injured animal, it would sell the second time for a lower price. Hartford would then pay the difference between the initial sale price and the second sale price to the producer. Both Mr. Kuse and Mr. Blahum were quite definite in their evidence that Hartford, as the insurer, had a strong preference for paying claims directly to the owner of the dead or injured animal rather than paying them indirectly through the Appellant. Nevertheless, the Appellant did on occasion receive the insurance money in trust for a producer.
the policies
[13] The original policies of insurance were written by Hartford on February 14, 1972 showing the insured on the face of the policy to be:
Saskatchewan Wheat Pool
Livestock Division
Regina, Saskatchewan
hereinafter called "the trucker" for the account of the owners, hereinafter called 'owner' or 'owners' of the livestock transported as herein provided, ...
Policy no. 9236 contained an endorsement providing that:
The policy to which this endorsement is attached is hereby altered and limited to cover all livestock in which the Saskatchewan Wheat Pool, Livestock Division, have an interest while in transit from point of loading transported by truck suitably equipped for the hauling of livestock to any Saskatchewan Wheat Pool, Livestock Division, stockyard or sales agency listed below: ...
It is important that Saskatchewan Wheat Pool is described as the insured "for the account of the owners of the livestock transported ...". The reference to livestock in which Saskatchewan Wheat Pool have an interest must be taken to refer to the producers and buyers, as only they have an interest in the livestock before, during or after sale, except in the unusual case where the Appellant is a buyer on its own account. Below that are listed the ten facilities of the Appellant. The policy then goes on to provide that:
This policy insures against loss by reason of death or actual crippling caused by the hazards of transportation ... on shipments of livestock while in transit in automobile trucks, trailers or semi-trailers until unloaded at any Saskatchewan Wheat Pool, Livestock Division, Stockyard or Sales Agency listed above.
The other relevant provisions of the endorsement read as follows:
It is agreed that after unloading that the policy will continue to insure against loss by reason of accidental crippling or death while such livestock is passing through the alleys, pens, sheds, and barns on the premises owned or leased by the insured or until the animals are sold, or for a period of 48 hours, whichever occurs first, except that there will be no liability under the policy for any losses caused by fire, lightning, windstorm, tornado or cyclone after the livestock insured hereunder is unloaded from the trucks at destination named herein.
2. Wherever the words, "the trucker" or "owner", or "owners" appear in the printed conditions of the policy to which this endorsement is attached, they shall be substituted by "the assured"; and any conditions in the printed portion of the policy in conflict with the conditions of this endorsement shall be inoperative.
3. ...
4. The paragraph in the printed condition of the policy, starting with the words, "This policy also insures against loss caused by theft, etc." is hereby changed to read as follows:
"This policy also insures against loss caused by so-called hi-jacking of entire truckloads of livestock where such livestock is stolen by the unlawful taking possession of the conveyance in which the animals are being transported together with the animals themselves, but this policy shall not cover against loss caused by the theft or hi-jacking of any livestock by any person or persons in the employ of the assured or in the employ of the trucker engaged by the assured for transporting livestock or representing such trucker or assured in any capacity; neither does this policy insure, nor is it to be construed to insure, against the theft of part of the livestock or against loss caused by missing animals, except where all livestock in the shipment is stolen or hi-jacked as above provided. Missing animals are not to be interpreted to mean dead animals of record at the scene of any wreck, collision, upset or accident."
5. It is specially understood and agreed that the assured will furnish monthly to this Company at its office at the Saskatoon Public Stock Yards, Saskatoon, Saskatchewan, properly verified statement in writing showing the total number of head of livestock handled and pay premium thereon at the rates set forth hereunder: ...
[14] Policy no. 9237 was also written on February 14, 1972. It covered livestock after sale. It described the insured in exactly the same way as did policy no. 9236. It provided that the coverage began upon weighing of the livestock to the assured at the stockyard, and continued until unloading at the destination. It provided a premium varying from $.03 per head for weanlings to $1.00 per head for boars over 350 pounds for coverage while being held at the Appellant's stockyard, and for a premium based on the mileage to the destination for livestock trucked from the stockyard. Otherwise, the terms of the two policies were essentially the same.
[15] There is no doubt that there are inconsistencies in the language within the original 1972 policies. However, giving a fair reading to the policies as a whole, it seems inescapable that the intention was that Hartford would insure the owners of the cattle from time to time against losses through death, injury and hijacking, among other things. Some endorsements issued at a later time provide some benefits to the Appellant. These include the endorsement protecting it from subrogated actions, and an endorsement to protect against theft of cattle while in the care and custody of the Appellant. With the latter, as with the former, the Appellant's potential liability is minimized by the terms of its contracts with sellers and buyers, so that it had little risk to insure against. However, the evidence does not reveal any intention to insure the Appellant, as opposed to the producers and the buyers.
[16] The problems with the policy language were not eliminated, but in fact were exacerbated, by the language of the 1993 reissued policy. However, both parties, and all the witnesses, took the position that the policies issued in 1992 to replace those written in 1972 were intended to provide the same coverage as those that they replaced. Both parties agreed that the same results should prevail for the period between January 1991 and April 1, 1993, when the replacement policy no. 87 LST 620002 was issued, as for the period from April 1, 1993 to December 31, 1993. In other words, they accept that no fundamental change in the relationship was brought about by the reissued policy. The following factors indicate that the insured under these policies are the shippers and the purchasers of the animals, not the Appellant:
(i) The insurance was written initially in 1972 to replace individual policies under which the truckers were the insured;
(ii) The insurance in question is property insurance, not negligence insurance. Therefore, the insured must be the owner of the property from time to time, or a person who would be liable for its loss;
(iii) If the Appellant were insuring against the consequences of its negligence, then the policies would be written in language appropriate to negligence insurance.
(iv) If the Appellant were the insured, and simply passing the cost of the insurance along to its customers as the Crown contends, then the cost of insurance would simply be included in the price of the services or, alternatively, it would be billed separately, but without the opportunity for shippers and purchasers to opt out of the coverage;
(v) The witnesses were unanimous in considering the owners of the animals to be the insureds;
(vi) The Appellant at no time has an ownership interest in the animals shipped to it for sale. At most it is a baillee from time to time, but its liability as a baillee is limited by the terms of its contracts with the shippers and the buyers to specific acts of negligence; and
(vii) A letter dated February 26, 1976 written by Mr. Kuse on the letterhead of Hartford to Mr. R.L. Harland, Chief Accountant of the Appellant's livestock division, enclosed a two-page summary of the coverage under the policies which makes it quite clear that the incoming truck transit policy was to cover the animals from loading at the point of origin until the time of sale, and that the outgoing truck transit policy covered them from the time of loading at the stockyard to their final destination.
[17] It is well settled that where goods or services are purchased through the interposition of an agent between the seller and the buyer, there is only one transaction. In the present case, the Appellant is an agent in the transactions by which Hartford sells insurance to the producers and to the purchasers of animals sold through its facilities. The transactions are not subject to GST because they consist only of the provision of insurance by Hartford to those producers and buyers. One of several red herrings pursued in this case was whether the Appellant, if an agent, was agent of the insured or of the insurer. The answer to that question is quite immaterial to the issue before me. What is material is that it was not a principal. Also material is that it did provide to Hartford a service in connection with the collection of premiums and the settlement of claims. This service was altogether separate from the sale of the insurance. The Appellant, as I have said, conceded during the trial that it was liable to collect and remit tax on the portion of the premiums retained by it as payment from Hartford for these services. None of this is affected by the fact that the Appellant negotiated the terms of the policies with Hartford for the benefit of its customers. In that capacity it was an unpaid agent for the insured shippers and buyers.
[18] The appeal is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was liable to collect and remit GST only in respect of that portion of the premiums collected by it for Hartford that it retained as payment for its services to Hartford. The Appellant has achieved substantial success and so is entitled to its costs.
Signed at Ottawa, Canada, this 19th day of December, 2002.
|
"E.A. Bowie" |
J.T.C.C.
COURT FILE NO.: 1999-3572(GST)G
STYLE OF CAUSE: Saskatchewan Wheat Pool and
Her Majesty the Queen
PLACE OF HEARING: Regina, Saskatchewan
DATE OF HEARING: January 8, 9 and 10, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: December 19, 2002
APPEARANCES:
Counsel for the Appellant: Brian Scherman
Counsel for the Respondent: Elaine Lee and
Crystal McLeod (Student-at-law)
COUNSEL OF RECORD:
For the Appellant:
Name: Brian Scherman
Firm: Balfour Moss
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-3572(GST)G
BETWEEN:
SASKATCHEWAN WHEAT POOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 8, 9 and 10, 2002, at Regina, Saskatchewan, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the Appellant: Brian Scherman
Counsel for the Respondent: Elaine Lee and
Crystal McLeod (Student-at-law)
JUDGMENT
The appeal from the reassessment of tax made under the Excise Tax Act, notice of which is dated May 7, 1999 and bears number 09ES114483308, for the period January 1, 1991 to December 31, 1993, is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was liable to collect and remit GST only in respect of that portion of the premiums collected by it for Hartford Fire Insurance Company that it retained as payment for its services to Hartford.
Signed at Ottawa, Canada, this 19th day of December, 2002.
|
"E.A. Bowie" |
J.T.C.C.
[1] The supply of an insurance policy is the supply of a "financial service", which is an "exempt supply", and therefore excluded from the definition of "commercial activity", and so excluded from the definition of "taxable supply". Section 165 imposes tax on "every recipient of a taxable supply ... ".