Date: 1980804
Docket: 96-2237-GST-I
BETWEEN:
L.J. MEIER CO. LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
MOGAN J.T.C.C.
[1] This is an appeal under Part IX of the Excise Tax Act which is the legislation creating the goods and services tax (“GST”). The Appellant is a sales agent on behalf of certain manufacturers. It also operates a retail store in Belleville, Ontario under the name “Meier’s Leather”. The Appellant was assessed for GST on commission revenue it received from January 1, 1991 to March 31, 1994.
[2] Mr. Leo Meier, the president of the Appellant, described the Appellant’s function as a manufacturer’s agent. He would travel from Ontario to British Columbia visiting retail stores, gift shops and trading posts which cater to tourists taking orders mainly for leather products. He described himself as an “order taker”. He would transmit the order to a particular manufacturer who would then ship the product directly to the store or shop which had given the order to Mr. Meier. The Appellant earned a commission on each order so obtained.
[3] The GST legislation took effect on January 1, 1991. From then until mid-1994, the Appellant would send an invoice to each manufacturer for the commissions earned but it made no attempt to collect GST on the commissions. Mr. Meier had not even thought about whether the Appellant’s commissions were subject to GST. In the fall of 1994, Revenue Canada conducted a GST audit of the Appellant and, on December 1, 1994, issued a Notice of Assessment which, inter alia, levied additional GST of $33,159.64 on aggregate commissions of $473,709.16 earned in the period January 1, 1991 to March 31, 1994.
[4] After receiving the assessment, the Appellant issued invoices to many of the manufacturers who had paid the aggregate commissions of approximately $473,000 asking them to pay the relevant GST. Exhibit A-1 is a list of those manufacturers who were asked to pay aggregate GST of $16,488 on gross commissions of $235,555. The manufacturers listed in Exhibit A-1 were those whom the Appellant assumed were registrants under the GST legislation.
[5] The Appellant did not send invoices for the GST amounts to Indian (i.e. native Canadian) manufacturers for whom it acted as agent (order taker) because the Appellant assumed or understood that they were not registered for GST purposes. One of the Indian manufacturers is Michelle Sioui operating under the name “Linette & Michelle” and located on a Huron Indian Reserve at Loretteville just outside Quebec City. Linette & Michelle is a manufacturer of leather products (purses, vests and smaller goods) and the Appellant has done business with Michelle Sioui for about 15 years.
[6] Another Indian manufacturer whom the Appellant did not invoice for GST was Marcel Sioui operating under the name “Kabir Kouba”. The Appellant or Mr. Leo Meier has been doing business with Marcel Sioui since 1957. Kabir Kouba manufactures leather and sheep slippers and moccasins; and is also located on the Huron Indian Reserve at Loretteville. The products for which the Appellant earned commissions from Linette & Michelle and Kabir Kouba were manufactured on the Reserve at Loretteville. After receiving the assessment for GST, the Appellant did not invoice Linette & Michelle or Kabir Kouba for any GST on commissions because, according to Leo Meier, “I knew in advance that they were not GST registered”.
[7] To the best of Mr. Meier’s knowledge, neither Linette & Michelle nor Kabir Kouba was incorporated. It was also his understanding from his many visits to the Reserve at Loretteville that all of the manufacturing of Linette & Michelle and Kabir Kouba was done on the Reserve by native Canadians who lived on the Reserve.
[8] Almost all of the orders for manufactured products are taken by Leo Meier himself who either visits the stores and shops with actual samples of the products or rents a stall at a gift show or displays his samples in a hotel room. He uses the same method to obtain orders from the Appellant’s clients without regard to the type of product which is being ordered.
[9] Counsel for the Appellant argued that the Minister of National Revenue had assessed the Appellant for GST on the commissions when the Appellant was not liable to pay GST on the commissions. The main charging provision of the GST legislation is subsection 165(1) which states:
165(1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.
The Appellant argues that under subsection 165(1) the liability is on the recipient of a taxable supply. The Appellant renders a service to a manufacturer by obtaining an order and, in return, is paid a commission. In the circumstances of this case, it is the manufacturer which is the recipient of the taxable supply. Looking at subsection 165(1) in isolation, it is the recipient of the taxable supply (a defined term) who is liable to pay the 7% GST. There are, however, other provisions of the GST legislation which can make the Appellant liable.
[10] A “supply” is defined to include the provision of a service; and a “taxable supply” is a supply made in the course of a commercial activity. Having regard to those terms, subsection 221(1) states:
221(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
Under subsection 221(1), the Appellant had an obligation to collect the GST when it sent out its invoices for the commissions. And under subsection 223(1), it had an obligation to disclose the tax in the invoice. The Appellant also had an obligation to remit the net tax as determined in subsection 225(1) for each reporting period. And finally, paragraph 296(1)(a) of the GST legislation authorized the Minister to assess the Appellant for the net tax for a reporting period. There is no merit in the Appellant’s argument that the Minister could not assess the Appellant for the net tax just because the Appellant was not primarily liable for the tax under subsection 165(1).
[11] Counsel for the Appellant also argued that the Appellant could not be liable for tax with respect to commissions received from a manufacturer who was an Indian doing his or her manufacturing on a “reserve” as that word is defined in the Indian Act, R.S.C. ch. I-5. The Appellant relies on the decision of the Supreme Court of Canada in A.G. of Quebec v. Sioui et al.[1990] 1 S.C.R. 1025 in which the Court confirmed that the treaty of 1760 between Hurons and the British was a treaty within the meaning of section 88 of the Indian Act. Section 224 of the GST legislation states that if a supplier has satisfied certain conditions including accounting for or remitting the tax but “has not collected the tax from the recipient”, the supplier may bring an action in court to recover the tax from the recipient. The Appellant claims that even if it had invoiced and remitted the GST with respect to commissions received from Indian manufacturers on reserves, those manufacturers would not have paid the tax because of section 87 of the Indian Act, and the Appellant could not have brought an action in court to recover such tax because of section 89 of the Indian Act which states:
89(1) Subject to this Act, the real and personal property of an Indian or a band situated on a reserve is not subject to charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour or at the instance of any person other than an Indian or a band.
[12] This argument concerning the Appellant’s ability to collect an amount by an action in court from an Indian manufacturer raises the question as to whether the service provided by the Appellant to an Indian manufacturer on a reserve is taxable under the GST legislation. Section 87 of the Indian Act has been the subject of much litigation in recent years. The relevant words are:
87(1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83, the following property is exempt from taxation, namely,
(a) the interest of an Indian or a band in reserve lands or surrendered lands; and
(b) the personal property of an Indian or a band situated on a reserve.
(2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property.
In Williams v. The Queen, 92 DTC 6320, the issue was the situs of unemployment insurance benefits received by an Indian who claimed exemption from income tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. The Supreme Court of Canada decided in favour of the taxpayer by developing a test of “connecting factors”. Gonthier J. stated at page 6326:
... A connecting factor is only relevant in so much as it identifies the location of the property in question for the purposes of the Indian Act. In particular categories of cases, therefore, one connecting factor may have much more weight than another. It would be easy in balancing connecting factors on a case by case basis to lose sight of this.
...
... The first step is to identify the various connecting factors which are potentially relevant. These factors should then be analyzed to determine what weight they should be given in identifying the location of the property, in light of three considerations: (1) the purpose of the exemption under the Indian Act; (2) the type of property in question; and (3) the nature of the taxation of that property. The question with regard to each connecting factor is therefore what weight should be given that factor in answering the question whether to tax that form of property in that manner would amount to the erosion of the entitlement of the Indian qua Indian on a reserve.
To determine “the purpose of the exemption under the Indian Act”, Gonthier J. relied on the comments of La Forest J. in Mitchell v. Peguis Indian Band, [1990] 2 S.C.R. 85 in which the following statements were made at page 131:
In summary, the historical record makes it clear that ss. 87 and 89 of the Indian Act, the sections to which the deeming provision of s. 90 applies, constitute part of a legislative "package" which bears the impress of an obligation to native peoples which the Crown has recognized at least since the signing of the Royal Proclamation of 1763. From that time on, the Crown has always acknowledged that it is honour-bound to shield Indians from any efforts by non-natives to dispossess Indians of the property which they hold qua Indians, i.e., their land base and the chattels on that land base.
It is also important to underscore the corollary to the conclusion I have just drawn. The fact that the modern-day legislation, like its historical counterparts, is so careful to underline that exemptions from taxation and distraint apply only in respect of personal property situated on reserves demonstrates that the purpose of the legislation is not to remedy the economically disadvantaged position of Indians by ensuring that Indians may acquire, hold, and deal with property in the commercial mainstream on different terms than their fellow citizens. An examination of the decisions bearing on these sections confirms that Indians who acquire and deal in property outside lands reserved for their use, deal with it on the same basis as all other Canadians.
In Mitchell, the issue was whether certain money which the Government of Manitoba agreed to pay to 54 Indian bands could be garnished by creditors of those bands.
[13] In Folster v. The Queen, 97 DTC 5315, the issue was whether the income of a status Indian employed in the Norway House Indian Hospital located not on the Norway House Indian Reserve but on land near that Reserve is exempt from income tax pursuant to section 87 of the Indian Act. The Federal Court of Appeal allowed the taxpayer’s appeal by adopting the “connecting factors” test as developed by the Supreme Court of Canada in Williams. In particular, Linden J.A. referred to the following factors (i) the proximity of the hospital to the Norway House Reserve; (ii) due to the remote nature of the Norway House community, the difference between reserve land and non-reserve land was not obviously apparent; (iii) 80% of the clients at the hospital are status Indians; and (iv) the funds which paid the taxpayer’s salary were advanced by the federal Crown as part of its responsibility for the health care of Indians and, in particular, Indians of the Norway House Reserve.
[14] In Southwind v. the Queen, 98 DTC 6084, the taxpayer was an Indian residing on a reserve who operated a logging business as a sale proprietor. The business provided logging services to a non-Indian corporation not located on a reserve. In 1990, the taxpayer was paid $42,000 by the corporation for logging work performed at three off-reserves cutting locations. The taxpayer claimed to be exempt from income tax under section 87 of the Indian Act. In dismissing the taxpayer’s appeal, the Federal Court of Appeal considered about eight connecting factors and concluded that the taxpayer was engaged not in a business that was integral to the life of his reserve, but in a business that was in the commercial mainstream.
[15] In Recalma et al. v. The Queen, 98 DTC 6238, the issue was whether certain investment income derived from mutual funds and other securities purchase by status Indians at a branch of the Bank of Montreal located on a reserve was exempt from tax under section 87 of the Indian Act. In dismissing the taxpayers’ appeals, Linden J.A. delivered the reason for the Federal Court of Appeal and stated at page 6240:
... Investment income, being passive income, is not generated by the individual work of the taxpayer. In a way, the work is done by the money which is invested across the land. The Tax Court judge rightly placed great weight on factors such as the residence of the issuer of the security, the location of the issuer's income generating operations, and the location of the security issuer's property. While the dealer in these securities, the local branch of the Bank of Montreal, was on a Reserve, the issuers of the securities were not; the corporations which offered the Bankers' Acceptances and the managers of the Mutual Funds in question were not connected in any way to a Reserve. They were in the head offices of the corporations in cities far removed from any reserve. Similarly, the main income generating activity of the issuers was situated in towns and cities across Canada and around the world, not on Reserves. In addition, the assets of the issuers of the securities in question were predominantly off Reserves, which in case of default would be most significant.
[16] And finally, in a recent decision, The Minister of Finance for New Brunswick v. The Union of New Brunswick Indians et al. (June 18, 1998), a majority of the Supreme Court of Canada affirmed the purpose of section 87 of the Indian Act as described by La Forest J. in Mitchell (see above).
[17] I will now consider the basic facts of this case. The Appellant is an agent for manufacturers, an order-taker. Mr. Meier as an employee of the Appellant visits retail stores and shops across Canada taking orders and relaying those orders to his manufacturing principals who ship directly to the stores and shops. The Appellant sends an invoice to each manufacturer for the commissions it has earned on the orders obtained. In a nutshell, the Appellant provides a service to its manufacturing principals for which it is compensated by commissions. That service is not performed on any Indian reserve. It is performed in the cities and towns of Canada where there are stores and shops which want to purchase products from the manufacturers represented by the Appellant. The order-taking service which the Appellant performs for its non-Indian manufacturing principals is identical to the service it performs for certain Indians who reside on and do their manufacturing on an Indian reserve.
[18] All of the Appellant’s clients are off the reserve. All of the contracts are completed off the reserve when the Appellant accepts the orders from the retail stores and shops. It is the Appellant as agent who transmits the orders back to the principals, Indians and non-Indians. In my opinion, the Indian manufacturers represented by the Appellant are not exempt under section 87 of the Indian Act from paying GST on the commissions earned by the Appellant as an order-taker. In Southwind (see above), Linden J.A. stated at page 6087:
In concluding, it should be noted that section 87 does not exempt all Natives resident on a Reserve from income taxation. The process of determining the tax status of income earned by Natives on Reserves has become quite complex, depending on a sophisticated analysis of a series of factors. It may appear to some that inconsistencies exist in the treatment of the various cases, but each of them depends on its unique facts. All we can do is evaluate the factors and draw the lines, as best we can, between business income and employment income that is situated on the Reserve and integral to community life, and income that is primarily derived in the commercial mainstream, working for and dealing with off-reserve people.
[19] I find that the Indian manufacturers represented by the Appellant are not engaged in a business that is integral to the life of the Reserve. They are engaged in a business which is in the commercial mainstream. Accordingly, they must do so on the same basis as all other Canadians with whom they compete.
[20] Whatever Mr. Leo Meier may have concluded about the attitude of the Indian manufacturers on the Huron Reserve at Loretteville with respect to GST on the Appellant’s commissions, those commissions are subject to GST and the Appellant has an obligation under section 221 to collect the tax. Whether the Appellant can bring an action in court to collect an amount owing by one or more of its manufacturing principals is not relevant in determining the Appellant’s liability in the assessment under appeal.
[21] There is another issue in this appeal concerning GST paid by Meier Leather Limited, a separate corporation affiliated with the Appellant. Meier Leather Limited (“MLL”) was carrying on business in January 1991 and it registered for GST purposes. MLL went out of business in November 1991 but in December 1991 and January 1992 it was still paying certain suppliers for goods which had been delivered before December 1, 1991. MLL also paid GST in December 1991 and January 1992 with respect to the amounts it paid to suppliers. MLL did not claim any input tax credits with respect to the GST it paid in December 1991 and January 1992 because it was out of business and not filing GST returns. In this appeal, the Appellant claims input tax credits with respect to the GST paid by MLL in December 1991 and January 1992. Unfortunately, I am not able to identify any section of the GST legislation which would permit one corporation to deduct the unclaimed input tax credits of an affiliated corporation.
[22] The appeal from the GST assessment is dismissed. I understand that the Appellant has been given credit for all of the GST which it has collected (and remitted) from its manufacturing principals with respect to commissions received by the Appellant from January 1, 1991 to March 31, 1994.
Signed at Ottawa, Canada, this 4th day of August, 1998.
"M.A. Mogan"
J.T.C.C.