In Intrawest v. The Queen1, the Tax Court of Canada, under the pen of Justice Steven K. D'Arcy, ruled against a favourable Canada Revenue Agency ("CRA") administrative policy and determined that Goods and Services Tax/Harmonized Sales Tax ("GST/HST") is applicable to 100% of the annual resort fee invoiced by a timeshare club for services rendered to its members even if those services relate, in part, to vacation resorts located outside of Canada.
The 72-page decision examines at length the so-called "made-in-Canada" rules contained in section 142 of the Excise Tax Act ("ETA").
Club Intrawest ("Intrawest") is a Canadian resident non-profit, non-stock corporation created to facilitate the administration and operation of vacation homes in connection with a timeshare ownership program ("Intrawest Program"). Members of the Intrawest Program hold timeshare points that entitle them to stay at vacation homes owned by Intrawest ("Points"). The vacation homes are located in Canada, the United States and Mexico. Members of the Intrawest Program pay an annual resort fee ("Annual Resort Fee") to cover such costs as property taxes, insurance coverage and salaries and benefits of Intrawest's employees. The amount of the Annual Resort Fee depends on the number of Points that a member holds.
Intrawest never collected GST/HST on the Annual Resort Fee on the ground that it was merely acting as agent on behalf of its members when it acquired the various goods and services in connection with the Intrawest Program. On this analysis, the Annual Resort Fee was simply a reimbursement of the expenses incurred by Intrawest and, as such, could not be construed as consideration for a taxable supply.
The CRA disagreed. It assessed Intrawest for uncollected GST/HST for its monthly periods between 2002 and 2007. Intrawest appealed this assessment, principally on the basis of the agency analysis. Intrawest also argued (in the alternative) that, to the extent that it might be found to have made a supply, the Annual Resort Fee should then be allocated between taxable supplies made within Canada (subject to GST/HST) and taxable supplies made outside of Canada (not subject to GST/HST) based on the Points issued with respect to Canadian vs. non-Canadian vacation homes.
- Was Intrawest acting as an agent?
As noted above, the CRA's response to Intrawest's agency argument was that the Annual Resort Fee was in fact consideration for a taxable supply of intangible personal property on the part of Intrawest. In deciding this issue, the Tax Court considered the three generally accepted components of an agency relationship2: (i) the consent of both principal and agent, (ii) a grant of authority to the agent by the principal, allowing the former to affect the latter's legal position, and (iii) control by the principal of the agent's actions. The Court's conclusions were as follows:
Intrawest did not provide the Tax Court with supporting evidence to the effect that its members consented to the agency relationship. Moreover, the Court found it difficult to conclude that the members would have appointed Intrawest as their agent without entering into an agency agreement.
One of the key issues related to the ultimate ownership of the vacation homes. If the members did not have any obligation to pay the expenses required to maintain the resorts, Intrawest could not have been in a position to affect the members' legal position in respect of such expenses and an agency relationship could not have existed.
Intrawest argued that the beneficial interests in the vacation resorts were held in a trust for the benefit of its members. However, Intrawest failed to provide evidence that this was the case. Furthermore, it did not provide any documents showing that the risks associated with the ownership of the vacation resort properties rested with the members.
In similar fashion to corporations that issue shares, Intrawest is controlled by a board of directors that is elected by its members. However, Justice D'Arcy noted that: "the question that must be asked is not whether the Members of the Appellant controlled the Appellant for corporate law purposes, but whether they exercised control over the Appellant pursuant to an agency agreement."3 Intrawest did not produce such evidence.
For the above-mentioned reasons, the Court reached the conclusion that Intrawest was not acting as an agent on behalf of its members. It followed from this that the Annual Resort Fee paid by the members was not a reimbursement of expenses incurred by Intrawest. Instead, it was consideration paid for a supply that could be subject to GST/HST under the ETA.
- Was the supply made in Canada?
Although Intrawest agreed that to the extent it made a supply, it was a taxable supply; it disagreed with the CRA on the application of the "made-in-Canada" rules under section 142 of the ETA.
Before considering the place-of-supply rules, the Court first had to determine whether the Annual Resort Fee was paid as consideration for a service rendered by Intrawest to each of its members or as an ongoing consideration for the Club Intrawest membership (i.e. a supply of intangible personal property) as the CRA claimed. In this regard, the Court ruled that the Annual Resort Fee was paid by the members in consideration for the supply of a service by Intrawest.
Intrawest also argued that it made separate single supplies of services in respect of each vacation home. The Court however considered that by using the Annual Resort Fee to fund its operations, Intrawest had made a single supply of services because it could only continue to operate the Intrawest Program if it incurred all of the costs associated with the timeshare program.
The Court then analyzed the so-called "made-in-Canada" rules, particularly paras. 142(1)(g) and 142(2)(g) of the ETA, commonly referred to as the general place-of-supply rules for services, and paras. 142(1)(d) and 142(2)(d), which create an exception to the general place-of-supply rules in the case of a service related to real property. In his analysis, Justice D'Arcy noted that section 142 of the ETA contains an internal inconsistency inasmuch as a plain reading of its provisions can, in certain circumstances, deem two mutually exclusive events to occur. Thus, in the circumstances of this case,
- A plain reading of para. 142(1)(d) deems the single supply of the services by Intrawest to be made in Canada since the services relate to real property situated in Canada, and
- A plain reading of para. 142(2)(d) deems the single supply of the services to be made outside Canada since the services also relate to real property situated outside Canada.
In the circumstances, this ambiguity obviously needed to be resolved. Rather unusually, the parties agreed about the resolution: both the CRA and Intrawest asked the Court to interpret the inconsistency in such a manner that the GST/HST would be applicable to only a portion of the Annual Resort Fee. However (even more interestingly!), the Court did not accept the parties' agreed position. Instead, after considering the ETA as a whole in light of the intentions of Parliament, Justice D'Arcy concluded that "the GST Act, when read as a whole, does not contemplate splitting a single supply that is made in Canada into a taxable portion and a non-taxable portion."4 For the Court, subsection 165(1) of the ETA - the provision that imposes the tax on taxable supplies that are made in Canada - contains no ambiguity and clearly imposes the tax on the full consideration for the taxable supply. Furthermore, dividing a single supply that is made in Canada would create other inconsistencies, for example: the claiming of input tax credits would not produce the intended results if only a portion of the consideration for a single supply was subject to tax. Therefore, the Court concluded, if Parliament had intended subsections 165(1) and (2) of the ETA to levy tax on only a portion of the consideration for a single supply of a service or property, then it would have included a provision allocating the tax paid to the taxable portion of the supply, as it did for some other sections in the ETA.
The Court found that Parliament's intentions were (i) to impose the tax, at the applicable rate, on all of the consideration for a single taxable supply that is deemed to have been made in Canada, (ii) to deem, under section 142, supply of services that are performed inside and outside of Canada to be made in Canada, and (iii) to impose the tax on supply of services to residents of Canada where the services are consumed at least partly in Canada. Furthermore, Justice D'Arcy stated: "they [the CRA and Intrawest] appear to be arguing that I should interpret the GST Act in a manner that offers special relief from taxation for a supply of services in relation to real property, relief that is not offered with respect to any other supplies of services, since the GST applies to all of the consideration for a supply of a service that does not relate to real property and is performed (consumed) partly in Canada."5 He also noted that the parties' interpretation would allow residents of Canada to escape a portion of the tax on a single supply of services that the resident consumes partly in Canada and would offer special relief that is not offered with respect to any other supply of services.
Finally, the Court concluded that paras. 142(1)(d) and 142(2)(d) of the ETA did not apply in the case at hand because "the words 'a service in relation to real property' in paragraphs 142(1)(d) and 142(2)(d) should be interpreted to mean that these paragraphs only apply if the single supply of a service relates solely to real property."6However, a number of services performed by Intrawest in the administration of the Intrawest Program did not relate directly to real property. Therefore, the exception provided for in paras. 142(1)(d) and 142(2)(d) was not applicable. Finally, Justice D'Arcy stated that as the services were, in part, performed in Canada, para. 142(1)(g) was applicable and that as a result, the supply was deemed to have been made in Canada.
Therefore, even though the CRA was willing to concede that, in such circumstances, GST/HST apply only on a portion of the consideration for the taxable supply, the Court took a harder line, deciding that GST/HST applied to 100% of the Annual Resort Fee paid by Intrawest's members.
The Court concluded that if a service is performed partially or wholly inside Canada, the supply is deemed to be made in Canada and is therefore fully subject to GST/HST. Only when the service is performed wholly outside Canada is the supply deemed to be made outside Canada. However, as pointed out by the Court, certain services that are provided partially or wholly inside Canada to non-residents could be zero-rated under the general export rules. Unfortunately, this specific question was not before the Court and it is unclear whether GST/HST was in fact applicable to Annual Resort Fees collected from Intrawest's non-resident members. In practice, we believe that an annual resort fee charged to non-resident members of timeshare programs with respect to resorts located outside Canada could in fact be zero-rated under the export rules in certain situations.
Intrawest has appealed the decision to the Federal Court of Appeal.