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Statutory Interpretation - 'In the Course of Commercial Activity'. President's Choice Bank v. Canada (the King)
In President's Choice Bank v. Canada (the King) (Fed CA, 2024) the Federal Court of Appeal allowed an excise tax appeal, here on the issue of 'notional input tax credits (NITCs)'.
Here the court considers the statutory interpretation of the phrase, "in the course of a commercial activity" in the Excise Tax Act:[24] In my opinion, the Tax Court committed two extricable errors of law. First, it considered that the phrase "“in the course of a commercial activity”" entails an either/or test. ....
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A. There Is No Either/Or Test
[25] The Tax Court based its analysis on the premise that it needed to determine whether PC Bank makes the Redemption Payment in the course of a financial services activity or in the course of a commercial activity. The Tax Court adopted this premise in saying that it needed to examine the evidence to determine whether the "“Redemption Payment [is] linked to the making of exempt or taxable supplies”": TCC Reasons at para. 66 [emphasis added]. Yet analyzing the text, context, and purpose of subsection 181(5) reveals that it is not an either/or test: it allows a person to pay an amount in the course of a commercial activity and in the course of an activity that is not commercial.
(1) Text
[26] Subsection 181(5) provides that a particular person may claim an ITC when it "“pays, in the course of a commercial activity of the particular person, an amount to the supplier for the redemption of the coupon.”" The text of subsection 181(5) does not require that the amount be paid "“exclusively”" in the course of a commercial activity, nor does it require that the amount be paid "“primarily”" in the course of such an activity. Unlike the words exclusively and primarily, the phrase "“in the course of”" has a broad meaning; it means "“incidental to”" or "“connected to”" directly or indirectly: Attorney General of Canada v. Metropolitan Toronto Hockey League, [1995] F.C.J. No. 944 at para. 14, n 1; The Queen v. Blanchard, 1995 CanLII 18940 (FCA); M.N.R. v. Yonge Eglinton Building Ltd., 1974 CanLII 2476 (FCA), [1974] 1 F.C. 637 at 644–645.
[27] Reading subsection 181(5) as stating that a person can only pay an amount in the course of one activity would add words to the Act. Similarly, it would add words to the Act to read subsection 181(5) as requiring that an amount have a primary connection with a commercial activity.
(2) Context
[28] The context of subsection 181(5) supports the above textual interpretation.
(a) A payment can be made in the course of more than one activity
[29] Subsections 169(1), 141(2) and (4), 202(2), as well as paragraphs 199(2)(a), 217.1(6)(c), and 217.1(7)(c) show that the Act contemplates that a payment can be made in the course of doing one thing and in the course of doing another. More specifically, the Act contemplates that a payment can be made in the course of a commercial activity and in the course of an activity that is not commercial.
(i) Subsection 169(1)
[30] Subsection 169(1) provides the general rule for ITCs. It contains a formula, which grants an ITC for tax paid in respect of a property or service to the extent that the registrant acquires the property or service for use in the course of its commercial activities. This formula results in the registrant being entitled to an ITC according to the percentage of use of the property or service in the course of commercial activities. The inclusion of the formula presupposes that a property or service can be acquired for use in the course of more than one activity. This was the case in Midland Hutterian Brethren v. Canada, 2000 CanLII 16725 (FCA) [Midland] where a colony purchased cloth for its members. The members could use the cloth to make two types of clothing: working clothes for the colony’s commercial activity (farming) and clothes for their personal activities. Our Court rejected the Minister’s argument that any personal use of clothing disqualified the work cloth from any ITC, and concluded that the colony was entitled to an ITC pursuant to the formula in subsection 169(1).
[31] Midland does not address whether the colony paid for the cloth in the course its commercial activity or in the course of its non-commercial activity of providing cloth to its members for personal use. Nevertheless, from the moment that the cloth was acquired for use in the course of more than one activity, it stands to reason that the colony paid for the cloth in the course of two activities.
(ii) Subsections 141(2) and (4)
[32] Subsection 141(2) provides that, where "“substantially all”" the consumption or use for which a person acquires a property or service is in the course of the person’s commercial activities, all of the use or consumption is deemed to be in the course of those commercial activities. Similarly, subsection 141(4) provides that, where substantially all the consumption or use for which a person acquires a property or service is in the course of activities that are not commercial, all of the use or consumption is deemed to be in the course of those non-commercial activities. This wording demonstrates that Parliament considers that an acquisition can be made substantially—but not totally—in the course of one activity and, to a smaller extent, in the course of another activity. Again, this entails that the payment for the property or service is made in the course of more than one activity.
(iii) Subsection 202(2)
[33] Subsection 202(2) provides that a registrant is not entitled to an ITC in respect of a vehicle or aircraft unless the vehicle or aircraft "“was acquired […] for use exclusively in commercial activities of the registrant”" [emphasis added]. The fact that Parliament requires that the vehicle or aircraft be acquired for exclusive use in commercial activities presupposes that a vehicle or aircraft can be acquired—and hence the payment made for that vehicle or aircraft—in the course of both commercial and non-commercial activities.
(iv) Paragraph 199(2)(a)
[34] Similarly, paragraph 199(2)(a) provides that a registrant is not entitled to an ITC in respect of capital property "“unless the property was acquired (…) for use primarily in commercial activities of the registrant”" [emphasis added]. Again, the requirement that the capital property be acquired for use primarily in commercial activities presupposes that the property can be acquired, and its payment made, in the course of more than one activity.
(v) Paragraphs 217.1(6)(c) and 217.1(7)(c)
[35] Paragraphs 217.1(6)(c) and 217.1(7)(c) provide rules for computing ITCs and rebates that financial institutions can claim in the context of the Division IV Tax on Imported Taxable Supplies. These paragraphs call for a determination of the extent to which an outlay or expense was made or incurred "“in the course of commercial activities”" of the financial institutions. If one talks about the "“extent to which”" an expense is incurred in the course of a commercial activity, then there must be an extent to which the expense was incurred in the course of a non-commercial activity. Therefore, Parliament presupposes that the payment of a single expense can be simultaneously in the course of a commercial activity and in the course of a non-commercial activity. This reinforces the interpretation that Parliament, in drafting subsection 181(5), presupposed that the payment redeeming a coupon could be simultaneously in the course of a commercial activity and in the course of a non-commercial activity.
[36] In drafting subsection 181(5), Parliament did not include explicit language that the credit be allocated only "“to the extent”" that the person made the payment in the course of a commercial activity. The absence of this allocative language indicates that Parliament intended to grant an NITC on the entire amount of a coupon redemption payment from the moment the payment was made in the course of a commercial activity.
(vi) The specific context of subsection 181(5)
[37] Many of the provisions discussed above refer to tax paid in the context of an acquisition of property or service. This makes sense because an acquisition of property or service, or an equivalent transaction (e.g. importation), is ordinarily the triggering event for GST to become payable. In the case of a coupon, the particular person who pays for the coupon or makes the redemption payment does not acquire a property or service—the customer does. In the example discussed above, the customer acquires the shampoo, and the particular person pays for the coupon. Accordingly, subsection 181(5) could not use the same language as that used in ss. 169(1), 141(2) and (4), 202(2), 199(2)(a), 217.1(6)(c), and 217.1(7)(c). That said, from the moment that the Act contemplates that a payment for property or service can be made in the course of more than one activity, there is no reason why a redemption payment cannot be made in the course of more than one activity.
(b) There is no requirement for a special connection between the payment for the redemption of the coupon and the commercial activity
[38] Subsections 169(1), 202(2) as well paragraphs 199(2)(a), 217.1(6)(c), and 217.1(7)(c) also show that when Parliament wants a property or service acquired to have a special connection with a commercial activity, its states so expressly.
[39] For example, ss. 169(1), 217.1(6)(c), and 217.1(7)(c) provide that an ITC will only be allowed to "“the extent”" that the property or service is acquired or the outlay or expense is made or incurred for use in the course of commercial activities. Subsection 202(2) requires that a vehicle or aircraft be acquired for "“use exclusively in the course of commercial activities of the registrant”". As for paragraph 199(2)(a), it requires that a capital property be acquired for "“use primarily in the commercial activities of the registrant”". The absence of a similar constraint in subsection 181(5) indicates that Parliament did not intend to require a higher degree of connection between the amount paid for the redemption of the coupon and the registrant’s commercial activity.
(c) The Act’s structure indicates that one cannot extrapolate subsection 169(1)’s apportionment methodology to subsection 181(5)
[40] It may be tempting to interpret subsection 181(5) in light of the general rule for ITCs in subsection 169(1), which provides a formula that only awards ITCs to the extent that a good or service was used in the course of a commercial activity. More specifically, one may be tempted to infer from subsection 169(1)’s apportionment methodology that Parliament did not contemplate that the whole redemption payment in subsection 181(5) could be made in the course of a commercial activity and in the course of a financial services activity. Yet the structure of the Act suggests that one cannot extrapolate subsection 169(1)’s apportionment methodology to subsection 181(5).
[41] Subsection 169(1) is in Subdivision B of Division II of Part IX. Subdivision B is entitled "“Income Tax Credits”" and contains general rules about ITCs. Subdivision C, which contains section 181, is entitled "“Special Cases”". Subdivision C comprises a plethora of rules to address "“special”" cases where applying the general rules in Subdivision B would lead to incongruous results undesirable to Parliament: CWAY Logistics Ltd. v. The Queen, 2017 TCC 225 at para. 24. This structural distinction suggests that Parliament intended to give separate or "“special”" treatment to input tax credits for the redemption of coupons. Consequently, one should be wary of extrapolating subsection 169(1)’s apportionment methodology to subsection 181(5) and concluding that a redemption payment can only be made in the course of either a commercial activity or in the course of a non-commercial activity.
(3) Purpose
[42] The purpose of subsection 181(5) is to ensure that the "“correct overall net amount of [tax] is remitted to the government in respect of the supply to the vendor”": 1992 Explanatory Notes at 106 [emphasis added].
[43] In the example of the bottle of shampoo discussed above, the retailer is deemed to have collected, and must report and remit GST/HST of $1.50—that is, 15% of $10.00 (price of the shampoo before applying the coupon). Yet the customer did not pay the full price of the shampoo; it only paid $9.00. If the person redeeming the coupon paid the other portion of the price of the shampoo—the remaining $1.00—in the course of a commercial activity, then that person is entitled to claim an NITC equal to the tax fraction of the portion it paid. Without the NITC, the government would over-collect tax.
[44] There is an overpayment, and the purpose of subsection 181(5) is to relieve that overpayment. This purpose concords with Parliament’s choice of a broad phrase like "“in the course of”", which merely requires a payment to be "“connected to”" or "“incidental to”" a commercial activity. Insofar as imposing an either/or test would restrict NITCs for payments connected to commercial activities, such an imposition would contravene Parliament’s purpose.
[45] Additionally, the fact that the person redeeming the coupon is a financial institution is of no consequence if its redemption payment is in the course of a commercial activity. When Parliament intends to exclude financial institution from claiming an ITC, it does so expressly: see ss. 141, 199(1), 200(1). Subsection 181(5) contains no such exclusion.
(4) Conclusion: First extricable error of law
[46] The above textual, contextual, and purposive analysis reveals that subsection 181(5) is not an either/or test: a payment can be made in the course of a commercial activity and in the course of a non-commercial activity. Subsection 181(5) does not require a court to determine in the course of which of two activities an amount for the redemption of a coupon is paid. Moreover, subsection 181(5) does not require that the amount paid have a "“primary”" or "“exclusive”" connection with a commercial activity. Accordingly, the Tax Court erred in law by basing its analysis on the premise that it needed to determine whether the Redemption Payment is made in the course of a financial services activity or in the course of a commercial activity.
[47] In fairness to the Tax Court, the case was seemingly presented to it as an either/or test: "“Appellant’s written submissions to the Tax Court in respect of the NITC Issue”", Supplemental Appeal Book, Vol. 8, Tab 16, at 2529 at para. 90; see also "“Transcript of Opening Statements, dated January 31, 2022”", Supplemental Appeal Book, Vol. 8, Tab 14 at 2480–81. However, given that 1) this new argument relates to an issue of statutory interpretation, 2) the appellant’s new argument does not prejudice the respondent who had the opportunity to adduce evidence that could defeat this argument, and 3) the respondent does not take issue with this new argument being raised, I am of the view that the interests of justice require that this new argument be considered: Koch v. Borgatti Estate, 2022 FCA 201 at para. 67; Quan v. Cusson, 2009 SCC 62 at paras. 36–37; Eli Lilly Canada Inc. v. Teva Canada Limited, 2018 FCA 53 at para. 45, leave to appeal to SCC refused, 38077 (8 November 2018). This is why I proceeded with a statutory analysis of subsection 181(5).
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