Tax Court of Canada Judgments

Date: 20000915

Docket: 1999-203-GST-I

BETWEEN:

IMMEUBLES SANSFAÇON INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Tardif, J.T.C.C.

[1] This is an appeal from a notice of assessment bearing number 7213209, dated October 24, 1997, in the amount of $79,716.91, that was confirmed, following an objection dated August 31, 1998, by a decision that reads as follows:

[TRANSLATION]

The Minister of Revenue has reviewed the facts and reasons set out in your notice of objection and has decided that:

The assessment was made in compliance with the Act, inter alia, but without limiting the generality of the foregoing, in that the supply by the municipality, the Town of Saint-Émile, of the service of installing sanitary and storm sewer infrastructure for the Développement Plein-Sud – Phase VI housing development and doing various curb construction and street paving work is exempt under section 22 of Schedule V, Part VI of the Excise Tax Act and the input tax rebates claimed cannot be allowed given the provisions of section 169 of the said Act.

[2] The notice of assessment ensued from a refusal to allow certain input tax credits ("ITC").

[3] During the years in issue, the appellant was a real estate developer; it developed residential sectors within the Town of Saint-Émile (the "Town").

[4] After identifying a certain sector, the appellant would make a proposal to the Town regarding a project for the construction of a number of homes.

[5] If it was interested in having the project carried out, the Town would then have experts make a detailed evaluation of the cost of infrastructure, including sewage and water systems and asphalting.

[6] To obtain the municipality's approval, the appellant had to promise to pay most of the infrastructure construction costs identified by the municipality's experts.

[7] During the initial phases of residential developments, the municipality took charge of carrying out all the infrastructure work and later claimed the amounts it had spent plus the applicable taxes.

[8] The municipality would first evaluate the costs of the project submitted by the appellant who then had to decide whether it would go ahead with the project. If it decided to go ahead, the municipality would initiate the building process through calls for tenders, all in accordance with the applicable statutes and regulations.

[9] The Town was the principal contractor and took care of obtaining tenders for the work. Interested businesses would obtain the book of specifications and all relevant information from the professionals employed by the Town.

[10] The entire tendering process and the subsequent acceptance of the lowest complying bid took place without the appellant's involvement.

[11] At the same time, the municipality had agreed with the appellant that the appellant would take care of all the disbursements. Following various inspections by town agents checking on progress on worksites, the Town would authorize full or partial payment depending on circumstances. The contractor concerned would then prepare an invoice and send it to the municipality which would in turn send it immediately to the appellant for payment. The appellant would then pay the amount owed, plus the applicable taxes. After the payments had been made, the appellant would claim the input tax credits.

[12] These are the main facts revealed by the evidence. In support of her arguments, the respondent produced documentary evidence.

[13] Once the appellant's project had been accepted, the municipality initiated the tendering process. After reviewing the tenders submitted in response to the invitation to tender, the Town of Saint-Émile generally passed a resolution accepting the lowest complying bid and the whole constituted a real contract. To illustrate the process, I consider it helpful to reproduce the contents of Resolution number 96-082-03 (Exhibit I-2) :

[TRANSLATION]

EXCERPT FROM THE MINUTES OF THE

TOWN COUNCIL

OF THE TOWN OF SAINT-ÉMILE

COPY OF RESOLUTION

SESSION OF MONDAY, MARCH 4, 1996

RESOLUTION NUMBER 96-082-03

OUTCOME OF THE TENDER OPENING

PROJECT 11601, RUE DE MONTRACHET

AND SIGNING AUTHORITY FOR THE CONTRACT

It is moved by Councillor Pierre Verret, seconded by Councillor Miville Cloutier, and unanimously resolved that this Council, following the opening of tenders on February 26, 1996, in respect of Project 11601, rue de Montrachet, which resulted in the following tenders:

1 - Les Excavations Lafontaine inc. $258,741.94

2 - Construction B.M.L. Division de Sintra $263,445.72

3 - Les Excavations Nadeau et fils inc. $263,452.56

4 - Henri Labbé et fils inc. $268,746.91

5 - Métro Excavation inc. $269,702.43

6 - Les Entreprises P.E.B. ltée $269,773.08

7 - Vallier Ouellet $279,929.32

8 - Giroux et Lessard ltée $301,651.64

9 - G. Chouinard et fils inc. $400,836.71

accept, on the recommendation of the Génivar engineering firm, the lowest complying bid, namely, that of Les Excavations Lafontaine inc., at $258,741.94, and authorize the Mayor and the Chief Executive Officer and Clerk, or their substitutes, to sign the contract. Since phase 1A is immediate, phase B will have to be part of an agreement with the developer. The signing of the contract is conditional on the developer's providing a bank guarantee.

A D O P T E D.

. . .

[14] The respondent also produced a letter from the Town of Saint-Émile. The contents of this letter included the following (Exhibit I-1):

[TRANSLATION]

Subject: Confirmation of agreement with the developers

File no.:    1-11-2/27

Dear Sir,

I hereby confirm the agreement with the developers on the method of paying the contractors for the road infrastructure.

Under this agreement, invoices are to be sent directly to the developers by the contractors (including the engineers, laboratories . . .). The Municipality shall act in a supervisory capacity only.

Note should be taken of the fact that the contract is signed by the contractor and the municipality but payments are to be made by the developers. The latter are to submit in this regard a bank guarantee letter covering the estimated cost of the work.

I trust that this information will be of use to you and I wish you a happy holiday season.

Jean Savard, Chief Executive Officer and

Secretary-Treasurer

[15] When the appellant wanted to introduce additional documentary evidence, it was met by the respondent's vigorous objection that such evidence had the effect of contradicting valid written instruments.

[16] The respondent's objection was very important in that it had a direct effect on the admissibility of a major portion of the appellant's evidence.

[17] As for the appositeness of the respondent's objection, I think it would be appropriate to recall the words of Judge Pierre Dussault of this Court in Brigitte Tanguay v. Her Majesty the Queen, [1997] T.C.J. No. 16; Judge Dussault wrote as follows:

...

The documents filed in evidence support the testimony heard respecting the circumstances of the transfer of the property and the nature of the total consideration agreed upon between the parties.

Having regard to the evidence adduced, I do not believe that the notarized contract constituted a simulation designed to deceive third parties or that the agreement between the appellant and her spouse respecting the repayment for his share of the property constituted a counter-letter. I find that the Minister cannot assess by disregarding this agreement the existence of which, in my view, the appellant proved on the balance of evidence as she was at liberty to do so in the absence of any restriction on giving testimony on this point. This evidence moreover was completed by the filing of documents supporting the probability of such an agreement. I will simply take the liberty of adding that the prohibition enacted by article 1234 of the Civil Code of Lower Canada against testimony for the purpose of contradicting the terms of a valid written instrument does not apply in tax matters. . . .

(Emphasis added.)

[18] The respondent would like this Court to take into account primarily the agreement signed after the tender was accepted, the tender itself constituting a genuine contract. However, the contract that the respondent believes should be the decisive document for the Court to consider contains a condition that opens the door to introducing documents essentially related to it, and the respondent's objection should accordingly be overruled.

[19] Moreover, the resolution contains a condition that may readily be defined as an essential consideration. I refer to the following excerpt from the said resolution:

[TRANSLATION]

...

accept, on the recommendation of the Solivar engineering firm, the lowest complying bid, namely, that of Métro Excavation Inc., and authorize the Mayor and the Chief Executive Officer and Clerk, or their substitutes, to sign the contract with Métro Excavation Inc., conditional on the developer's depositing a bank guarantee letter and on the signing of the memorandum of understanding with the developer.

A D O P T E D

(Emphasis added.)

[20] The respondent cannot argue that the documents relied on by the appellant are inadmissible or contradict the alleged contract; the documents that the appellant wishes to introduce in evidence basically relate to, explain and complete the evidence while shedding light on the entire contractual relationship between the parties.

[21] These various documents in no way contradict the agreement entitled [TRANSLATION] "Memorandum of Understanding" between the Town and the appellant. Rather, I believe that they complete and clarify the nature and purpose of the rights and obligations of the parties. Moreover, the words: "to sign the contract with Métro Excavation Inc., conditional on the developer's depositing a bank guarantee letter and on the signing of the memorandum of understanding with the developer", are most certainly a commencement of written proof that opens the door to the introduction of evidence disclosing all of the facts that generated rights and obligations.

[22] On the one hand, the documentary evidence established that the Town had an important role to play in carrying out the infrastructure work. The Town was also a key factor in that, without its intervention, none of the work would have been possible. It initiated the process and supervised the performance of the work.

[23] On the other hand, it is equally clear that the financial responsibility arising from the performance of the work did not lie with the Town. There is no doubt that this responsibility was in no way debatable, uncertain or vague; formal and contractual guarantees were provided for and these were enhanced by the bonds usually posted in such cases.

[24] This is also quite apparent from the documentary evidence as a whole.

[25] It would perhaps have been preferable if all the documents relative to the supplies covered by this appeal had been prepared in such a way as to specify the involvement of all the interested parties, in particular, the Town of Saint-Émile, the appellant and the contractors.

[26] If this had been done, there would undoubtedly have been no dispute.

[27] Was the appellant required, under an agreement regarding a supply or otherwise, as the case may be, to pay the consideration for the supply, thus becoming, under section 123 of the Excise Tax Act (the "Act"), a recipient who could claim the ITC?

[28] It is appropriate at this point to reproduce the memorandum of understanding between the appellant and the Town of Saint-Émile (Exhibit I-3) :

[TRANSLATION]

CANADA

PROVINCE OF QUEBEC

TOWN OF SAINT-ÉMILE

MEMORANDUM OF UNDERSTANDING

BETWEEN:

The Town of Saint-Émile, a legally constituted body politic governed by the provisions of the Cities and Towns Act of Quebec, having its place of business at 6180 des Érables, Saint-Émile, G3E 1K6, duly represented for the purposes hereof by Mayor Renaud Auclair and Chief Executive Officer and Clerk Jean Savard, by virtue of Resolution number 96-081-03 adopted at the session of Monday, March 4, 1996, a certified true copy of which is annexed hereto and is an integral part of this agreement;

Hereinafter: The Town

AND:

Immeubles Sansfaçon Inc., a legally incorporated company, having its place of business at 1121 Chemin Sainte-Foy, Suite 101, Québec, G1S 2M2, duly represented by Yvan Asselin and Bruno Sansfaçon, sole owners of the company;

Hereinafter: The Developer

WHEREAS the Developer has submitted a project for a residential development entitled: "Développement Plein sud, phase VI";

WHEREAS the Developer is the owner of the streets concerned, namely, part of de Montrachet and part of Cabernet-Sauvignon;

WHEREAS lighting, water, sanitary and storm sewer, road, asphalt and curb work is required on the lots referred to above;

WHEREAS the engineering firm Génivar has prepared drawings and specifications numbered 11601, and whereas that firm is responsible for supervision of the work;

WHEREAS it is appropriate to set out the obligations of each party in a memorandum of understanding;

NOW THEREFORE, THE TOWN AND THE DEVELOPER AGREE AS FOLLOWS:

CLAUSE 1:

The above preamble is an integral part of this Memorandum.

CLAUSE 2:

The Developer undertakes to pay the Town the entire cost of infrastructure work performed by the tenderer or tenderers selected, including contingent costs for the services of engineers, a notary, lawyers, surveyors and testing laboratories and for lighting and all other costs associated with the project.

CLAUSE 3:

The Developer shall remit, when this Memorandum is signed, a bank guarantee letter covering the cost of the project estimated at $434,000. The letter of guarantee amount may be decreased following any payment of an invoice by the Developer and contribution by the Town.

The Developer shall pay in full any invoices presented by the City, in accordance with the recommendations of the Génivar engineering firm, within 25 days from the date the invoice is sent. Interest on late payments shall be 15% annually prorated over the number of days late after the 25-day period.

CLAUSE 4:

Before the work begins, the Developer shall transfer to the Town full ownership of the streets on which the work is to be performed for a nominal amount of $1.00.

All necessary deeds of easement and rights of way shall be registered in favour of the Town at the same time.

The Mayor and the Chief Executive Officer and Clerk, or their substitutes, are authorized to sign on behalf of the Town of Saint-Émile any document relating to the transfer of the streets, rights of way or easements.

CLAUSE 5:

The Town undertakes to perform the work set out in this Memorandum diligently, in accordance with the contract signed with the tenderer or tenderers selected.

CLAUSE 6 :

Conditional on approval of the borrowing by-law by the Quebec Department of Municipal Affairs, the Town undertakes to pay the Developer an amount representing the Town's contribution to the work, estimated by the Génivar firm at $53,223.43, which corresponds to half the total costs per linear foot depending on the length of the parcel of land earmarked for the school and purchased by the Town. This amount shall be adjusted to reflect actual costs after the outcome of the call for tenders is known.

The Town's contribution shall be paid to the Developer proportionately, as the work is approved by the Génivar engineers.

If the asphalting and curb work are done in two stages over a period of more than 10 months, the Town's contribution shall be paid in an amount proportionate to the work performed and in accordance with the method set out above.

The Town's contribution shall be payable on condition that all invoices presented by the Town be paid by the Developer.

CLAUSE 7:

The engineering firm, the testing laboratory and the tenderer or tenderers performing the work are hired by the Town.

CLAUSE 8:

The infrastructure, water supply, lighting, sanitary and storm sewer, road, asphalt and curb works shall in toto remain the property of the Town.

IN WITNESS WHEREOF THE PARTIES HAVE SIGNED IN TRIPLICATE, AT SAINT-ÉMILE, THIS 10th DAY OF APRIL 1996.

THE TOWN THE DEVELOPER

(signature)        (signature)      

Renaud Auclair, Mayor Yves Asselin

(signature)        (signature)      

Jean Savard, Chief Executive Bruno Sansfaçon

Officer and Clerk

Analysis

[29] What must be decided then is the extent to which the appellant, which did not contract directly with the service providers, but which was unequivocally required, under an agreement between it and the co-contracting municipality, to pay the consideration for the performance of the various work involved, may be defined as a recipient within the meaning of section 123 of the Act.

[30] In the normal course of things, the answer should be found in the Act's definition of "recipient".

The relevant provisions

[31] Sections 23 and 123 of the Act read as follows:

...

23.(1) [definition as added by S.C. 1990, c. 45, subs. 12(1)]

"recipient", in respect of a supply, means the person who pays or agrees to pay consideration for the supply or, if no consideration is or is to be paid for the supply, the person to whom the supply is made;

123.(1) [definition as amended by S.C. 1993, c. 27, subs. 10(1), deemed to be in force on December 17, 1990]

"recipient" of a supply of property or a service means

(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,

(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration [italics added] . . .

and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply.

[French version] “ acquéreur ”

a) personne qui est tenue, aux termes d'une convention portant sur une fourniture, de payer la contrepartie de la fourniture;

b) personne qui est tenue, autrement qu'aux termes d'une convention portant sur une fourniture, de payer la contrepartie de la fourniture;

[italics added] . . .

Par ailleurs, la mention d'une personne au profit de laquelle une fourniture est effectuée vaut mention de l'acquéreur de la fourniture.

[32] If reference is made to the English version of the definition of "recipient",[1] paragraph (b) can apply only in a case where there is no agreement for a supply. Yet, the French version[2] does not exclude the possibility that paragraph (b) can apply despite the existence of an agreement for a supply. Which interpretation is to be preferred? To better understand and appreciate the scope of paragraph (b), one must refer to the explanatory notes of the Minister of Finance relating to Bill C-112, amending the definition of "recipient" in 1993, so as to better understand the intent of Parliament[3] regarding the proper interpretation of the notion of "recipient":

Some questions have arisen in cases where a person pays consideration for a supply for which another person contracted. Often it is the case that an agent pays consideration on behalf of a purchaser who is liable to pay. Where an agent makes a payment on behalf of a purchaser, the purchaser is considered to have paid that consideration and is therefore the only "recipient" of the supply. However, to avoid any ambiguity in this regard, the definition "recipient" is amended by setting out each case under a separate paragraph so as to clarify that each is mutually exclusive.[4] [italics added]

[33] It appears that Parliament wanted to further clarify the notion of recipient in relation to the former definition to avoid any ambiguity and not to change the meaning and the original scope of the definition. That former version could lead to some confusion because it was silent on the parties' legal obligations. As a result of the amendment, in a case where consideration has to be paid, the recipient is the one who, ultimately, under an agreement for a supply [according to paragraph (a)] or otherwise [according to paragraph (b)], is liable to pay that consideration.

[34] The situations provided for by paragraphs (a) and (b) are mutually exclusive in the sense that there cannot be two separate recipients, one under paragraph (a), the other under paragraph (b). This does not mean, however, that if there is an agreement for a supply, paragraph (a) cannot apply. Paragraph (b) could apply despite the existence of an agreement for a supply in a case where the person liable to pay under that agreement is not required to pay anything at all.[5] In the instant case, according to the bank guarantee letter provided by the appellant and the agreement whereby the contractors directly invoice the appellant (Exhibits A-2, A-3, A-7, A-8, A-9 and A-11), the Town is under no obligation to pay anything at all in respect of the consideration for the supply.

[35] It seems obvious to me that the mandator is the recipient within the meaning of the definition in section 123 of the Act, provided, however, that the mandate has been disclosed to the co-contracting supplier.[6] In the instant case, the situation is very close to the tacit mandate provided for in article 2132 of the Civil Code of Québec.[7] Such a finding is all the more logical since the mandate was disclosed to the contractors and, at the request of the Town, the contractors agreed from that time on to invoice the appellant directly. The documentary evidence has amply established that the appellant was legally obligated to pay the consideration for the supplies. Even if I were to find that this obligation arose neither from an agreement for supplies nor from a mandate, it would still have to be concluded that the appellant was legally obligated to pay the consideration, in a case where paragraph (a) did not apply.

[36] The Honourable Judge Pierre Dussault of this Court in 163410 Canada Inc. v. Canada,[8] held that an agreement between the ultimate payer for the supply and the intermediary, who was dealing with the supplier, was an agreement for a supply within the meaning of paragraph (a) of the definition of "recipient" in subsection 123(1) of the Act.

[37] In that case, the appellant company was also a real estate developer. For the purposes of a particular project, amounts belonging to it were held in escrow by an intermediary. As a result of difficulties in carrying out the project, the amounts held by the intermediary were used to pay the fees of a law firm, with which the intermediary had contracted, for resolving the difficulties encountered by the appellant. An agreement between the appellant and the intermediary who had contracted with the supplier of services clearly indicated that the services were to be paid for from the amounts belonging to the appellant that were held by the intermediary. The intermediary was then required to account to the appellant for the amounts thus spent by itemizing the fees incurred. Judge Dussault reached the conclusion that, even though the supplier of services had contracted with an intermediary, "it was the appellant which was actually required to pay the fees invoiced . . .".[9] According to Judge Dussault, "the agreement [between the intermediary and the appellant], to which [the supplier of services] was also implicitly a party . . . concerns the supply of legal services and alters the initial agreement between [the intermediary and the supplier of services] in this regard."[10]

[38] In the light of that decision, the upshot is that the memorandum of understanding between the Town and the appellant concerns the supply of services and alters the agreements between the Town and the various contractors in this regard. The contractors (the suppliers within the meaning of the Act) were implicitly parties to the memorandum of understanding between the appellant and the Town. Although the memorandum of understanding does not specify any obligation on the part of the contractors towards the appellant, the later agreement according to which the contractors undertook to send the invoices directly to the developer removes any ambiguity in that regard. In point of fact, the appellant had to pay the consideration for each of the supplies, as the Town was ultimately released from doing so by the bank guarantee letter provided by the appellant.

[39] I therefore find that the appellant was in fact the recipient.

[40] For these reasons, the appeal is allowed.

Signed at Ottawa, Canada, this 15th day of September 2000.

"Alain Tardif"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 8th day of January 2001.

Erich Klein, Revisor

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