Introduction
In Club Intrawest (2017 FCA 151), the Federal Court of Appeal dealt with a complicated scenario that the Court thought had been overlooked by the architects of the Excise Tax Act. When faced with this predicament the FCA did what common law courts have been doing for hundreds of years: it came up with a novel solution that it considered to be fair and legally justifiable. In particular, the FCA found that a single general payment of consideration can be broken down into multiple supplies where the facts – and common sense – suggest that multiple supplies are actually being made.
Facts
Club Intrawest was the administrator/operator of a resort-condo timeshare program offering vacation accommodations at nine resorts located in Canada, the United States, and Mexico that could be rented using points purchased by members. Intrawest charged its members an annual resort fee that covered operational expenses such as maintenance/repairs, insurance, domestic services, and maintaining a reserve fund. To calculate a member’s annual resort fee, Intrawest would divide the budgeted membership costs for a particular year by the total number of issued resort points in order to establish the per point rate for a calendar year. The annual resort fee payable by a given member was equal to the per point rate multiplied by the number of resort points that the member had for the calendar year.
Intrawest did not charge its members GST/HST on the resort fee, and it was accordingly assessed by the CRA for GST not collected for the years 2002 to 2007. The CRA assessed Intrawest on the basis that it ought to have collected GST based on the ratio of total resort points issued for properties located in Canada to the total resort points issued in respect of all of the vacation properties in a given year. Intrawest disagreed with the CRA’s assessment and launched an appeal to the Tax Court of Canada.
Decision of the Tax Court of Canada
At the TCC, Intrawest argued that no GST/HST was payable because the resort fee was actually just reimbursement for expenses that it incurred as the members’ agent. In the alternative, Intrawest argued that because it supplied services separately to each resort, any GST/HST payable should be allocated based on the ratio of the resort fee associated with the operation of resorts located in Canada to the total cost for the operation of all nine resorts.
On the facts before it, the TCC concluded that an agency agreement was not supported by the evidence that was presented by Intrawest. In particular, the TCC held that it was Intrawest and the resorts’ developers, not the members, who held beneficial interests in the resorts. The members had only contractual rights to occupy the resorts pursuant to their agreements. Since the members had no legal rights that Intrawest could effect on their behalf with respect to the maintenance of the resorts, the TCC held that no agency could exist with respect to their operating expenses.
The TCC determined that the resort fee was in effect consideration for the supply of services in relation to real property. However, when looking to the legislation the TCC found that the place of supply rules for services in relation to real property situated both in Canada and abroad in paragraphs 142(1)(d) and 142(2)(d) of the ETA were contradictory and constituted a “legislative inconsistency.” To resolve this contradiction, the TCC reasoned that because the resort fee was also in respect of services related to things other than real property (e.g., administrative services), the general place of supply rules for services in the ETA applied. Under the circumstances, the TCC found that the place of supply was in Canada and the resort fee should be fully taxed.
Decision of the Federal Court of Appeal
On appeal, the FCA spent significant time considering Intrawest’s agency argument, but ultimately concluded that the TCC had not erred on this point.
In dealing with the issue of GST/HST on the resort fee, the FCA summarized the TCC’s finding that Intrawest had made a single supply and that the resort fee was consideration therefor. However, the FCA disagreed with the TCC’s decision to effectively break down this single supply into components, including administrative services, as a justification for applying the general place of supply rules for services. Instead, the FCA found that the fact that some portion of the resort fee was used for administrative purposes did not change the fact that the predominant element of the supply was services in relation to real property situated both in and out of Canada. Accordingly the conflict between paragraphs 142(1)(d) and 142(2)(d) had to be considered.
The FCA agreed that the TCC had been correct not to adopt the parties’ suggestion to interpret subsection 165(1) so that tax was levied on only a portion of the consideration for the single taxable supply because “the Act contemplates that a single supply will either be subject to tax on the whole of the consideration paid for the supply or be not subject to tax at all.”
The FCA instead determined that it should split the supply “so that the supply is treated as two supplies in order to recognize that ultimately the services are inherently distinct in one important respect: the services relating to the operation of the vacation homes located in Canada are services in relation to real property situated in Canada and hence are a taxable supply – the services relating to the operation of the Intrawest vacation homes situated outside of Canada are services related to real property situated outside of Canada and hence are a non-taxable supply.”
In terms of allocating the resort fee to these two supplies, the FCA rejected the CRA’s allocation method in favour of the allocation method proposed by Intrawest which the FCA felt “more fairly and reasonably reflect[ed] the nature of the taxable supply.”
Commentary
While the ETA does not explicitly contemplate the allocation of a single consideration between two separate supplies along geographical lines, the FCA used common law principles of “single-versus-multiple supplies” to arrive at a novel solution which seems to advance the general intent of the ETA and provides a result which was more in line with what both parties had been advocating.
As a practical matter, when drafting agreements pertaining to compound supplies parties should consider whether they ought to try and separate the supplies and allocate consideration to each supply. However, even in the absence of such express allocation, Intrawest opens the door for a party to argue that a single amount of consideration should be treated as being paid on account of multiple supplies in appropriate cases.
That said, the decision in Intrawest may not be applicable where the place of supply rules are not contradictory. For example, a supply of intangible personal property is deemed to be made in Canada if the property “may be used in whole or in part in Canada” and made outside Canada if the property “may not be used in Canada.” As a result, if intangible personal property for use worldwide is purchased, it is deemed to be a supply to be made in Canada pursuant to subsection 142(1). It is for this reason that the FCA in Dawn’s Place Ltd. (2006 FCA 349) had no problem concluding that the single supply was deemed made in Canada pursuant to subparagraph 142(1)(c)(i).
To date neither party in Intrawest has applied to appeal to the Supreme Court of Canada.
Rob Kreklewetz is a partner and John Bassindale is an associate with Millar Kreklewetz LLP