In the Federal Court of Appeal decision, CIBC World Markets Inc. v Canada, 2019 FCA 147, the Canadian investment banking subsidiary (investment dealer) of a large Canadian bank won its appeal of an adverse 2018 Tax Court of Canada ruling with respect to its claim for input tax credits (ITCs). The ITCs in question related to GST/HST paid on expenses attributable to certain exported supplies made by the investment dealer in connection with the bank’s activities outside Canada.
Background
Among its other activities, the investment dealer provides administrative services to the bank in connection with the bank’s permanent establishments located outside Canada. In reporting periods from 2008 to 2013, the investment dealer claimed ITCs with respect to expenses allocable to those services.
As members of a closely related group, the bank and the investment dealer had elected under subsection 150(1) of the Excise Tax Act (a “150 Election”). As a result, supplies made between the two entities were deemed “financial services” and were thus exempt under section 2 of Part VII of Schedule V. Registrants that make exempt supplies cannot claim ITCs on inputs related to such supplies.
However, Part IX of Schedule VI of the ETA (the Zero-Rated Schedule) establishes the general principle that exported supplies are zero-rated (taxed at 0%). Registrants may claim ITCs on inputs related to zero-rated supplies.
The Tax Court of Canada determined that a taxable supply originating in Canada and also deemed to be a financial service by virtue of a 150 Election remains an exempt supply, even where “exported” to a foreign branch.
On this appeal to the FCA, the investment dealer argued:
• that the bank was in fact deemed to be a non-resident person with respect to its activities conducted through its foreign permanent establishments and thus cannot be party to or be bound by a 150 Election with respect to the supplies made in the course of these activities; and
• that the fiction created by subsection 132(3) ETA should have been given effect and that subsequently the supplies in issue should have been taken as being made to a separate non-resident person.
It follows from this conclusion that a conflict of purpose exists. Supplies exchanged between the investment dealer and the bank are deemed, by virtue of the 150 Election, to be financial services and are also considered exempt supplies as per section 2 of Part VII of the Exempt Schedule. However, since the services were “exported” and not consumed in Canada, they can also be properly characterized as zero-rated supplies under Part IX of the Zero-Rated Schedule and be excluded from the Exempt Schedule as per section 1 of Part VII of the Exempt Schedule. The problem, therefore, is finding a way to reconcile the substantive effect of the 150 Election, which imposes GST/HST on financial services, with the overarching principle that exported supplies are not subject to GST/HST.
Based on the purposive analysis described in National Bank Life Insurance v. Canada, 2006 FCA 161, the Tax Court concluded that section 2 of Part VII of the Exempt Schedule overrides section 1 of the same Schedule, which states that a supply of a financial service that is not included in Part IX of the Zero-Rated Schedule is exempt, and, as a result, the Investment dealer was not entitled to the claimed ITCs.
The FCA Ruling
Positions of the parties
The Investment dealer’s only contention on appeal was that the supplies made to the bank’s foreign permanent establishments fell outside the scope of subsection 150(1) as the 150 Election thereunder could only be made by Canadian resident persons. According to the investment dealer, the bank should have been considered as a non-resident person regarding its activities carried on through its foreign permanent establishments under subsection 132(3) ETA and thus the supplies made to the bank’s foreign permanent establishments should fall outside the scope of subsection 150(1). (paragraph 18)
In response, the Crown argued that pursuant to subsection 132(3) ETA, the bank’s foreign establishments were not deemed to be separate non-resident persons and that the FCA could not ignore the clear wording of both subsections 150(1) and 132(3) to achieve the correct tax policy objective. (paragraphs. 21 and 24)
The issue
The issue was whether the 150 Election extended to all supplies made by the investment dealer to the bank, including those made in connection with the activities carried on by the bank through its foreign permanent establishments. (paragraph 26)
The decision
Conflict between subsections 150(1) and 132(3) ETA
In a decision rendered by Chief Justice Noel, the FCA rejected the Crown’s contention that, since Parliament clearly expressed its intent in the provisions, a purposive and contextual interpretation could not alter the outcome. Justice Noel confirmed, as stated in Hillier v. Canada (Attorney General), 2019 FCA 44 at paragraph 24, that even when a legislative provision seems to be precise and unequivocal, it is still necessary to examine the legislative purpose and context. (paragraph 27)
Key Takeaways
Statutory interpretation
The FCA confirmed that even when a legislative provision seems to be precise and unequivocal, it is still necessary to examine the legislative purpose and context. When an ambiguity arises from this broader examination of two conflicting provisions, one has to determine whether they can be made to work coherently in a manner which gives effect to the statutory scheme. (paragraphs 27-28)
Activities of foreign permanent establishments
The FCA also determined that, in the context of a 150 Election, when a person is deemed to be a separate non-resident person with respect to its activities conducted through its foreign permanent establishments, the services provided to those establishments fall outside the scope of subsection 150(1) and must be treated as zero-rated exported supplies.
The ruling’s effect on section 2 of Part VII of the Exempt Schedule
It is noteworthy that the FCA did not look at the application of section 2 of Part VII of the Exempt Schedule. In the Tax Court decision, Justice Bocock asked whether that section overrides section 1 of the same shedule, which states that a supply of a financial service that is not included in Part IX of the Zero-Rated Schedule is, in fact, exempt. His finding was that it does. Prior to the enactment of section 2, deemed financial services under a 150 Election would fall either into the Exempt Schedule, if they were consumed domestically, or the Zero-Rated Schedule, if they were exported. However, with the enactment of Section 2 - which explicitly mentions deemed financial services captured by 150 Elections without making any differentiation between domestically consumed and exported services - such supplies are exclusively redirected to the Exempt Schedule as exempt supplies. In this respect, the FCA ruling appears to defeat the exact purpose for which Section 2 of Part VII of the Exempt Schedule was enacted. It is likely that Parliament specifically targeted services rendered to foreign permanent establishments by enacting such provision.
Jean-Guillaume Shooner is a Partner at Stikeman Elliott LLP.