[OFFICIAL ENGLISH TRANSLATION]
98-9207(GST)G
BETWEEN:
CORÉLO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 4, 2000, at Baie Comeau, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Jean Nadeau
Counsel for the Respondent: Michel Morel
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated March 24, 1995, and bears number 0211805, for the period from January 1, 1991, to March 31, 1993, is allowed with regard to the penalties and dismissed with regard to the assessment and the interest associated therewith, in accordance with the attached Reasons for Judgment, the whole without costs.
Signed at Ottawa, Canada, this 16th day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 23rd day of January 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20010816
Docket: 98-9207(GST)G
BETWEEN:
CORÉLO 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 dated March 24, 1995, concerning the goods and services tax ("GST") for the period from January 1st, 1991, to March 31, 1993.
[2] The Notice of Appeal and the Reply to the Notice of Appeal clearly explain the facts and the nature of the case. It is therefore appropriate to begin by reproducing the main part of the Notice of Appeal:
[TRANSLATION]
1. This appeal concerns the following assessment:
- Date of notice of assessment: March 24, 1995
- Taxation years: January 1, 1991, to
March 31, 1993
- Tax owed under the assessment: $76,039.54
2. The appellant is a non-profit organization (NPO) incorporated under Part III of the Quebec Companies Act for the sole purpose of providing premises to institutions in the health and social services network of the North Shore administrative region.
3. On or about March 24, 1995, the appellant received a notice of assessment numbered 0211805 from the Ministère du Revenu of Quebec stating that taxes were being claimed from it as goods and services tax (GST) for the period from January 1, 1991, to March 31, 1993.
4. According to the notice of assessment, the Ministère du Revenu of Quebec was claiming $76,039.54 in GST, which the appellant paid without prejudice to its rights on July 19, 1995.
5. On or about June 13, 1995, the appellant sent the Ministère du Revenu of Quebec a notice of objection to the notice of assessment asking the Ministère du Revenu to vacate the assessment for the reasons set out below.
6. On or about June 12, 1997, the Ministère du Revenu of Quebec sent the appellant a letter enclosing a decision on the objection, which was the Ministère's reply to the appellant's notice of objection. The decision read as follows:
[TRANSLATION]
The assessment was made in accordance with the provisions of the Act, in particular-but without limiting the generality of the foregoing-since the rebates claimed as a non-profit organization cannot be granted because "Corélo Inc." is not a qualifying non-profit organization within the meaning of sections 259 et seq. of the Excise Tax Act.
A person is a qualifying non-profit organization if it is a non-profit organization whose percentage of government funding for the year is at least 40 percent.
The Ministère's position is that the amounts of money paid by the health care and social services institutions in consideration of supplies of immovable property made to them by Corélo Inc. by way of lease cannot be considered to be government funding.
[3] The respondent replied by stating that she had assumed the following facts in support of the assessment:
[TRANSLATION]
(a) the appellant is a GST registrant;
(b) the appellant was incorporated under Part III of the Companies Act (R.S.Q., c. C-38) for the purpose, inter alia, of building, purchasing and leasing immovable property to be used as residential premises for institutions in the health and social affairs network;
(c) according to its letters patent, the appellant is authorized to own $100,000,000 in immovable property;
(d) in accordance with its corporate powers, the appellant makes supplies of immovable property by way of lease mainly to health network institutions ("the institutions") located in the North Shore region;
(e) the immovable property is supplied by way of lease to government employees to whom the government must provide living accommodations pursuant to collective agreements or letters of understanding between the parties;
(f) the appellant owns about 89 immovable properties that it supplies by way of lease for those purposes;
(g) the appellant collects rental income on its properties;
(h) the rent paid to the appellant is the consideration for the supplies of immovable property that it makes by way of lease;
(i) the appellant's annual financial statement for the fiscal period that ended on March 31, 1993, indicates the following on page 2:
INCOME 1993 1992
Property leasing $1,590,919 $1,507,862
Interest 6,732 6,442
Sale of capital property 56,000 -------
Rent supplement 19,898 22,107
Other (note 3) 59,368 324,740
$1,732,917 $1,861,151
(j) according to its annual financial statements, the appellant does not receive any grants or other government funding from the institutions that lease its immovable property;
(k) at the time of payment, none of the institutions that lease the appellant's immovable property provides it with government funding certificates in a form prescribed by the Minister;
(l) for the period from January 1, 1991, to March 31, 1993, the appellant claimed GST rebates totalling $61,274.36 as a non-profit organization;
(m) the appellant could not receive those rebates because it was not a qualifying non-profit organization for that period;
[4] The issue is whether the appellant was a non-profit organization that qualified for GST rebates for the period from January 1, 1991, to March 31, 1993. To decide that issue, the Court must determine whether the money paid to the appellant during the periods at issue constituted government funding.
[5] The evidence showed that the administrators of the health and social services network of the North Shore region had to deal with very specific problems: the network's jurisdiction extends over a very wide area, the distances to be covered are considerable and the road network is difficult and not very efficient.
[6] Because of the size of the area served, centralizing services would be unrealistic; the network must serve a great number of very small communities that rightly claim minimum basic services. To deliver certain services that are often essential, it is imperative that the network be able to count on appropriate premises for delivering those services but also for housing the health professionals responsible for providing the available types of care.
[7] To meet the many needs in a satisfactory manner and to fully accomplish its fundamental mission, those in charge of the network decided-since they could not take certain initiatives because of the limited powers of their legal entity-to create a parallel, autonomous legal structure whose purpose was to facilitate the delivery of social and health services. They therefore created and incorporated the non-profit company "Corélo Inc."
[8] Corélo Inc. was thus incorporated to solve the problems that the North Shore regional health and social services board ("R.H.S.S.B.") could not solve because of its limited powers. The two entities worked in very close co-operation to accomplish their respective missions, since they had the same objective of delivering maximum care with maximum efficiency.
[9] Corélo's head office was at the same address as the R.H.S.S.B. All of Corélo's management, administration, planning and accounting activities were handled by R.H.S.S.B. employees and managers. Corélo's current operations were under the control and responsibility of a chief executive officer who was also a member of the management of the R.H.S.S.B. The R.H.S.S.B. freed up the necessary people, whose salaries were paid by Corélo Inc. Financial management, planning and various projects were also handled and organized by R.H.S.S.B. employees.
[10] Corélo's fundamental mission was therefore to carry out certain real estate projects needed to deliver various services in the region.
[11] Corélo, a non-profit organization, was incorporated on April 14, 1980, under Part III of the Companies Act (R.S.Q., c. C-38). It was therefore incorporated to solve problems and make it possible to attain fundamental objectives.
[12] The corporation's objects were established as follows:
[TRANSLATION]
1. For charitable and social purposes, to build, purchase, lease, own, improve, maintain, administer and dispose of immovable property and movable property that might subsequently become immovable in order to provide:
(a) residential premises, on a priority basis, to persons working in the social affairs network and then to those working in the public and parapublic sectors;
(b) premises for public institutions in the social affairs network that would like to introduce specific resources, including clinics, group homes and others of a similar nature;
(c) residential premises adapted for persons with disabilities.
2. To organize, install, maintain and improve all services associated with the said immovable and movable property in order to ensure the general well-being of its occupants.
3. To collect all sums of money, whether by way of donation, subscription, will, gift or otherwise, to accomplish the corporation's purposes.
4. Generally, to do all things and take all actions necessary to achieve the above goals.
[13] Supplementary letters patent completed the initial objects.
[TRANSLATION]
6.2 The corporation may have only seven (7) members. Any person who agrees to be a member, who is designated by the North Shore health and social services board and who is accepted by the board of directors shall be a member.
However, three (3) of those persons shall be appointed after consultation with, and on the recommendation of, the region's health care and social services institutions that benefit from the corporation's services, in accordance with the procedure set out in the corporation's by-laws for that purpose.
A member shall cease to be a member when the North Shore health and social services board appoints another person who agrees to become a member of the corporation in his or her place.
. . .
5. All of the corporation's by-laws shall be ratified by the North Shore health and social services board, and those by-laws shall take effect only as of the date of such ratification.
6. If the corporation is dissolved or wound up, whether voluntarily or by court order, its property, once the debts have been paid, shall pass to an organization carrying on an analogous activity or, if there is no such organization, shall pass to the North Shore health and social services board, which shall manage it. If the board cannot do so, the property shall be distributed to the region's health care and social services institutions based on need.
[14] Corélo Inc. was therefore incorporated to support, supplement and facilitate the operations of the R.H.S.S.B., whose role was to serve the entire middle and lower North Shore and also all the communities of New Quebec.
[15] The scope and limits of the powers of the R.H.S.S.B., an organization created by the Act respecting health services and social services [R.S.Q., c. S-4.2], are set out in section 340 of that statute, which reads as follows:
The main object of a regional board is to plan, organize, implement and evaluate, in the region, the health and social services programs prepared by the Minister.
The other objects of a regional board are
1. ensuring public participation in the management of the public network of health services and social services and ensuring that users' rights are protected;
2. formulating priorities in matters of health and welfare according to the needs of the population of the region and within the scope of the objectives fixed by the Minister, ...
3. establishing service organization plans in its territory and evaluating the effectiveness of services....
4. allocating the budgets intended for the institutions and granting subsidies to community organizations and accredited private resources;
5. ensuring the coordination of the special medical activities of physicians who are under agreement pursuant to section 360 and the activities of the institutions, community organizations, intermediate resources and nursing homes accredited for the purposes of subsidies under section 454 and promoting their cooperation with the other agents of community development;
6. implementing measures for the protection of public health and for the social protection of individuals, families and groups;
7. ensuring economical and efficient management of the human, material and financial resources at its disposal.
[16] The appellant Corélo Inc. therefore gave itself the powers and means it needed to occupy the areas of activity not accessible to the R.H.S.S.B. For that purpose, and so that it could provide all residents of those remote areas with access to health care, the appellant purchased or had built immovable property needed by the R.H.S.S.B. to fully carry out its fundamental mission.
[17] That property was used as living accommodations and clinics. This was often a necessity, since institutions that must serve the public in remote areas are responsible for providing living accommodations to those who must deliver the available services. Over the years, the appellant purchased immovable property.
IMMOVABLE PROPERTY AND HOW IT WAS USED
|
|
1990-91 |
1991-92 |
1992-93 |
|
Living accommodations |
53 |
56 |
58 |
|
Clinics, intermediate resources and community organizations |
20 |
25 |
28
|
|
TOTAL |
73 |
81 |
86 |
[18] The occupied property was purchased or built mainly as living accommodations or as clinics and community resources either by means of a grant from the R.H.S.S.B. or by means of mortgage financing. In some cases, both methods were used.
[19] Once built or purchased, the property was leased; the rent was based essentially on the financing method used, to which occupancy-related expenses- such as taxes, insurance and repairs-were added. The leases were always signed with the institution responsible for the local assignment; thus, in the case of residential rent, the leases were never signed with the occupants but rather with their employer.
[20] The rent level was based essentially on the financing costs and the occupancy and administrative expenses. Although the appellant argued that there was no question of making profits, the financial statements showed profits of $133,181 in 1992 and losses of $201,418 in 1991 and $97,562 in 1993. Even though the property acquired by means of a grant was leased for a minimal amount that basically covered expenses, in reality there were very significant variables that created both profits and losses.
[21] The issue is whether, for the period from January 1, 1991, to March 31, 1993, the amounts paid to the appellant were government funding entitling it to a GST rebate for the said period.
[22] The appellant argued that the amounts were government funding because the rental income came from public sector institutions subsidized directly or indirectly by the government; in other words, the appellant claimed that it was a non-profit organization that qualified for GST rebates given that the rental income was based solely on the cost, given its financing arrangements and the operating expenses, given that the goal being pursued was of public order and non-profit and, finally, given that those concerned depended directly and totally on the government.
[23] To reinforce its arguments, the appellant stated:
[TRANSLATION]
The rent that Corélo receives from the institutions is tax-exempt. However, to achieve its objects, Corélo purchases taxable property and services in respect of which it claims to be entitled to a rebate for half of the taxes as a non-profit organization under section 259 ETA.
[24] Not only do the parties agree on the wording of the issue in this case, but they are also relying on the same legislative provisions to support their respective arguments. Those provisions are as follows:
The concept of "government funding" is defined in the Regulations prescribing matters necessary for determining rebates payable to public service bodies under section 259 of the Excise Tax Act, which read as follows:
"government funding" of a particular person means
(a) an amount of money, including a forgivable loan but not including a refund or rebate of, or credit in respect of, tax duties or fees imposed under any statute, that is readily measurable and is paid or payable to the particular person by a grantor
(i) for the purpose of financially assisting the particular person in carrying out the purposes of the particular person and not as consideration for supplies made by the particular person, or
(ii) as consideration for making property or services available for consumption or use by other persons (other than the grantor, individuals who are officers, employees, shareholders or members of the grantor, or persons related to the grantor or to such individuals), where supplies of the property or services made by the particular person to such other persons are exempt supplies, and
b) an amount of money paid or payable to the particular person by an organization (in this paragraph referred to as the "intermediary") that received the amount from a grantor or by another organization that received the amount from an intermediary, where
(i) in the case of an amount that, after 1990, becomes payable or is paid to the particular person, the intermediary or the other organization, as the case may be, provides to the particular person, at the time the amount is paid to the particular person, a certificate in a form prescribed by the Minister certifying that the amount is government funding, and
(ii) the amount would be government funding of the particular person by reason of paragraph (a) if the amount were paid by the grantor directly to the particular person; (montant de financement public)
According to that definition, government funding is:
[TRANSLATION]
· an amount of money . . . that is readily measurable and is paid or payable to the particular person by a grantor . . . as consideration for making property or services available for consumption or use by other persons (other than the grantor, individuals who are officers, employees . . . or members of the grantor, or persons related to the grantor or to such individuals), where supplies of the property or services made by the particular person to such other persons are exempt supplies; or
· an amount of money paid or payable to the particular person by an organization (in this paragraph referred to as the "intermediary") that received the amount from a grantor or by another organization that received the amount from an intermediary, where
· the intermediary or the other organization, as the case may be, provides to the particular person, at the time the amount is paid to the particular person, a certificate in a form prescribed by the Minister certifying that the amount is government funding, and
· the amount would be government funding of the particular person by reason of "the first definition" if the amount were paid by the grantor directly to the particular person.
The same regulations define the term "grantor" as including a government, a trust, a board, a commission and a corporation that is controlled by a government and one of the main purposes of which is to fund non-profit endeavours:
"grantor" means
(a) a government or municipality, other than a corporation all or substantially all of whose activities are commercial activities or the supply of financial services or any combination thereof,
(b) a corporation that is controlled by a government or by a municipality and one of the main purposes of which is to fund charitable or non-profit endeavours,
(c) a trust, board, commission or other body that is established by a government, municipality or corporation described in paragraph (b) and one of the main purposes of which is to fund charitable or non-profit endeavours, and
(d) a band of Indians within the meaning of any Act of Parliament; (subventionnaire)
[25] One of the appellant's main arguments is that importance must be attached not to what the money was spent for (rent) but basically to the origin of the funds. Its argument is worded as follows:
[TRANSLATION]
When an institution pays an amount of money to Corélo in consideration of immovable property and Corélo makes the property available for use by the institution through exempt supplies, the institution is merely giving Corélo an amount of money that the North Shore R.H.S.S.B. has entrusted to it for that purpose. That amount of money (rent paid by the institution) would therefore be government funding of the particular person (Corélo) by reason of paragraph (a) if the amount were paid by the grantor (the North Shore R.H.S.S.B. or the Ministère de la Santé et des Services sociaux) directly to the particular person.
[26] In answer to the respondent's arguments, the appellant went even further:
[TRANSLATION]
The consideration received by Corélo for the supply of its immovable property is not rent in the usual sense of that word, since that rent is based on the amortization of the mortgage loan used to finance the purchase or construction of the property. That is why the lease filed as Exhibit A-10 between the appellant and the Centre de santé de la Basse Côte-Nord for the Old Fort clinic, construction of which was fully funded by the North Shore regional health and social services board, provides for only a nominal annual rent of $1.
[27] The appellant first referred to the constraints faced by the R.H.S.S.B. to justify the creation of the appellant, whose fundamental mission is to provide premises using various methods or approaches (purchase or construction) (full or partial financing).
[28] Once the premises are fitted out, a lease is signed and the rent is set based on the financing but also on all the occupancy-related expenses (taxes, maintenance, heating, etc.).
[29] How can it be understood and argued that the consideration paid is not rent in the usual sense without having to completely disregard the actual facts? I do not think that the nature of administrative realities can be changed solely to derive a benefit therefrom.
[30] As for the requirements relating to the certificate, once again, the appellant argued that this was a secondary, non-fatal technicality that could not be raised against it because the forms were not available and its external auditors were not even aware of their existence.
[31] The respondent admitted that the rent paid by the institutions came from funds provided by the R.H.S.S.B., which in turn received grants from the Ministère de la Santé et des Services sociaux of Quebec ("M.S.S.S.").
[32] However, the respondent said, and rightly so, that the rent was not paid directly to Corélo Inc. by the M.S.S.S.; it was paid directly by the institutions that used the space made available to them under leases granted by the appellant. There is no doubt that the rent was paid by the institutions for and in consideration of the occupation of the premises described in a lease; this reality cannot be overshadowed or even downplayed on account of the fact that the institutions that owed the rent received grants that enabled them to pay it.
[33] At the relevant time, Corélo Inc. was a separate, autonomous corporation, even though the evidence showed that the R.H.S.S.B. had considerable influence over all its activities and policies and over its general management.
[34] Even if corporate entities have the same objectives and may ultimately depend on the same funder, this has no effect on their legal autonomy and independence.
[35] When a separate entity is required to attain certain objectives and solve certain problems, that reality cannot suddenly disappear to avoid the obligations associated with its existence.
[36] To carry out its mandate, the R.H.S.S.B. set up a legal structure separate from its own; that entity cannot, for the purposes of certain obligations, disappear or simply be considered non-existent on account of the fact that it shares the same concerns.
[37] Corélo Inc. was incorporated; it became a separate, autonomous intermediary that was fully subject to all legal obligations in terms of its activities and operations.
[38] For an amount to be considered government funding, a number of conditions and requirements must be met; it is not enough to meet just one or even two of the conditions. I believe that four conditions are essential:
(1) The payments were initially received by the intermediary from a grantor;
(2) The funds paid by the intermediary to the particular person must be intended to assist the particular person in carrying out that person's purposes or to pay for an exempt supply made to "other persons", except, inter alia, persons related to the grantor;
(3) The funds do not go through more than two intermediaries before reaching the final recipient (for example, from a grantor to a national organization, to a provincial organization and then to a local organization);
(4) The intermediary provides a government funding certificate in a form prescribed by the Minister (form GST-322) certifying to the particular person that the amount is government funding.
[39] First of all, the appellant admitted that it did not provide the government funding certificates in a form prescribed by the Minister of National Revenue ("the Minister") (form GST No. 322). It seems that that requirement was not known to either the appellant or its external auditors.
[40] To explain the failure to comply with that condition and to avoid the consequences, the appellant argued first that it was not responsible because its own external auditors did not know of the existence of the condition and the forms, it seems, were not available.
[41] The appellant also argued that the formality was a secondary one and that the failure to complete it was not fatal. Accepting such an interpretation would amount to saying that Parliament spoke for nothing. This argument that the form requirement was an optional formality is not valid and must be rejected.
[42] When an enactment explicitly states that information should be provided or sent by means of a certificate using prescribed wording, I do not think that such an obligation can be evaded without repercussions. For these reasons, I do not think that the amounts of money paid or payable were government funding, which is why the appeal must be dismissed on this point.
[43] I have no jurisdiction to intervene with regard to the interest, since this is a matter that Parliament has left to the Minister's sole discretion.
[44] As for the penalties, the respondent argued that good faith is not equivalent to the due diligence needed for the penalties to be cancelled. Indeed, good faith is not synonymous with due diligence. However, the assessment of a penalty, unless it involves strict liability, which is not the case here, presupposes a certain negligence or even carelessness.
[45] In my opinion, there is no doubt about the appellant's good faith in this case, and the evidence also showed that it behaved, in the circumstances revealed by the evidence, in a manner that cannot be called wrongful or grossly negligent, which is why the penalties should not be maintained. Accordingly, the appeal is well founded with regard to the penalties and must be dismissed with regard to the assessment.
[46] The appeal is allowed with regard to the penalties and dismissed with regard to the assessment. The case will therefore have to be referred back for a reassessment that must be made without adding penalties, the whole without costs.
Signed at Ottawa, Canada, this 16th day of August 2001.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 23rd day of January 2003.
Sophie Debbané, Revisor