Marine Atlantic Inc. v. The King

Marine Atlantic Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-07-10
Neutral citation
2023 TCC 95
File numbers
2012-1765(GST)G, 2015-2123(GST)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Dockets: 2012-1765(GST)G
2015-2123(GST)G
BETWEEN:
MARINE ATLANTIC INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeals heard on September 27-29, 2021 at Vancouver, British Columbia, before the Honourable Justice Johanne D’Auray; on October 26, 2021, December 16, 2021, January 11-12, 2022 and January 21, 2022 via Zoom, before the Honourable Justice Johanne D’Auray; and on February 27, 2023 at Vancouver British Columbia, before the Honourable Justice Steven D’Arcy
Appearances:
Counsel for the Appellant:
Kimberley Cook
Florence Sauve
Chris Canning
Counsel for the Respondent:
Lynn Burch
Spencer Landsiedel
Selena Sit
JUDGMENT
In accordance with my Reasons for Judgment:
The appeals from reassessments made under Part IX of the Excise Tax Act (“GST Act”) for the Appellant’s reporting periods ending between January 1, 2006 and January 31, 2012 are allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that, for each reporting period of the Appellant ending between January 1, 2006 and March 31, 2011, the Appellant’s input tax credits are to be determined by applying the Appellant’s Final Percentage of 24.52% to the total amount of HST that was paid or payable by the Appellant in the specific period, and for each reporting period of the Appellant ending between April 1, 2011 and January 31, 2012, the Appellant’s input tax credits are to be determined by applying the Appellant’s Final Percentage of 18.11% to the total amount of HST that was paid or payable by the Appellant in the specific period. Such input tax credits shall be used to calculate the Appellant’s net tax for each of the relevant periods and its entitlement to the public service body rebate under section 259 of the GST Act.
The parties have 60 days from the date of this judgment to make written representations with respect to the amount of costs that the Court should award the Appellant. The written submissions shall not exceed 15 pages. If no submissions are received, costs shall be awarded to the Appellant as set out in the Tariff.
Signed at Antigonish, Nova Scotia, this 10th day of July 2023.
“S. D’Arcy”
D’Arcy J.
Citation: 2023TCC95
Date: 20230710
Dockets: 2012-1765(GST)G
2015-2123(GST)G
BETWEEN:
MARINE ATLANTIC INC.,
Appellant,
and
HIS M AJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
[1] The issue in the two appeals before the Court is the Appellant’s entitlement to input tax credits with respect to the GST/HST that it paid on goods and services that it acquired in the course of its business of providing a ferry service between Newfoundland and Nova Scotia. The amount at issue in the two appeals is substantial, in excess of $7 million.
[2] In the first appeal (the “First Appeal”), the Appellant appeals assessments in respect of its GST/HST reporting periods ending between January 1, 2006 and March 31, 2010. In the second appeal (the “Second Appeal”), the Appellant appeals assessments in respect of its GST/HST reporting periods ending between April 1, 2010 and January 31, 2012. The Court heard the two appeals together on common evidence.
[3] My former colleague Justice D’Auray was the presiding judge during the hearing of the evidence and the closing argument. However, she retired from the Court in early 2022, shortly after the conclusion of the hearing.
[4] During a conference call on March 30, 2022, the Chief Justice informed the parties that he would have to assign a new judge to render the judgment in these appeals. He provided the parties with the following two options:
-a new trial with a new judge; or
-a new judge who would render a judgment based upon the trial record.
[5] On the same day, the parties wrote to the Court requesting that it assign a new judge to decide the appeals based on the existing record before the Court.
[6] I was then appointed the presiding judge for these appeals. After a thorough review of the record, including the transcripts of all proceedings, the various written submissions filed by the parties both with respect to argument and procedural issues, and the substantial documentary evidence, I informed the parties that I would require them to appear before the Court to summarize their argument and answer numerous questions. The parties appeared before me on February 27, 2023 (the “February 2023 Proceedings”).
[7] During the evidentiary portion of the hearing, the Appellant called two witnesses: Mr. Murray Hupman and Mr. Shawn Leamon.
[8] Mr. Hupman, a professional engineer, has been with the Appellant for 22 years. Since April 2019, he has served as the president and CEO of the Appellant. Prior to assuming his current position, he held various other positions with the Appellant, including vice-president of operations and chief information officer.
[9] Mr. Leamon, a CGA/CPA, has served as the vice-president, finance of the Appellant for the last 15 years, including the years at issue in these appeals. He first worked for the Appellant in 1989 as a summer student.
[10] Counsel for the Respondent noted at the commencement of the hearing that she did not intend to call any witnesses. However, she intended to file an affidavit. I will discuss the filing of the affidavit shortly.
[11] Because of issues with respect to the filing of the Respondent’s affidavit, the Respondent called Mr. Bryan Roach. Mr. Roach is currently retired but worked for the Canada Revenue Agency (the “CRA”) between March 1992 and October 2012. He did not participate in the GST audit of the Appellant that resulted in the assessments that are before the Court. However, he did conduct a GST audit of the Appellant in the early 2000s that included an audit of excise tax refunds claimed by the Appellant in respect of fuel for the period ending December 31, 2001. As I will discuss, his testimony related solely to these excise tax refunds, Mr. Roach provided no evidence with respect to the periods at issue.
[12] At the commencement of Mr. Roach’s testimony, counsel for the Respondent asked Mr. Roach the following question: “Other than your general recollection of attending at MAI’s [the Appellant’s] offices and having an interview on the topic of the excise tax refund claims made by MAI for hoteling, do you have any independent recollection of who you talked to, what they told you, or anything of that sort?” Mr. Roach answered, “No, I don’t.”[1]
[13] Counsel for the Respondent then argued that Mr. Roach’s working paper dated November 27, 2002 (which had previously been marked as Exhibit A‑3 and which I will refer to as the 2002 excise tax audit working paper) should be accepted by the Court under what she referred to as the “past recollection accorded” concept. The working paper is a document that is barely over a page in length.
[14] Counsel for the Appellant stated that she had no objection to the Court accepting the 2002 excise tax audit working paper.
[15] The Respondent was clearly invoking the past recollection recorded doctrine. This doctrine permits witnesses who demonstrate an inability to recall “certain events”, to use documents, such as the 2002 excise tax audit working paper, in Court in order to assist them while giving testimony, provided that the following conditions are satisfied:
-The past recollection must have been recorded in some reliable way.
-At the time that the witness made or reviewed the record, his or her memory must have been sufficiently fresh and vivid to be probably accurate.
-The witness must be able now to assert that the record accurately represented his or her knowledge and recollection at the time that he or she reviewed it.
-The original record itself must be used, if it is procurable.[2]
[16] Counsel for the Respondent then put the 2002 excise tax audit working paper in front of Mr. Roach and asked him a number of leading questions with respect to the working paper. On the basis of Mr. Roach’s answers to counsel for the Respondent’s leading questions (his answers were mainly “Yes, that’s correct”, “Yes, that’s right”, “I don’t directly recall” and “[Y]es, I think in this case that’s what I would have been told”,) it is clear that the working paper was not being used to refresh Mr. Roach’s memory; he had no recollection of the events referred to in his working paper.
[17] As a result, I have treated the 2002 excise tax audit working paper as a record admitted by the Court under the past recollection recorded doctrine.
[18] Since the working papers did not refresh Mr. Roach’s memory, it is the 2002 excise tax audit working paper, not Mr. Roach’s testimony, that is the source of the information before the Court.
[19] The Respondent appears to be relying on the 2002 excise tax audit working paper as evidence of purported discussions between Mr. Roach and a Mr. David Penney, who in 2002 was a staff accountant for the Appellant. This evidence is hearsay evidence. I have given no weight to the references in the 2002 excise tax audit working paper to such discussions, especially since a number of factual conclusions made by Mr. Roach in the working paper were shown by the Appellant’s witnesses to be incorrect. If the Respondent wanted evidence before the Court with respect to Mr. Penney’s purported comments, he should have called Mr. Penney.
[20] In addition, the 2002 excise tax audit working paper arose with respect to an audit that occurred years before the period at issue and related to excise tax on fuel, not to GST. Such evidence has little or no value in the appeals before the Court.
[21] To the extent that the Appellant’s claiming of excise tax refunds with respect to fuel during the periods at issue is relevant, I have relied on the testimony of Mr. Leamon as opposed to a one-page document. Mr. Leamon informed himself of why the Appellant claimed the excise tax refunds during the periods at issue in these appeals and how it calculated the refunds during such periods.
[22] The parties also filed a Partially Agreed Statement of Facts (the “PASF”) as well as a Joint Book of Documents composed of seven volumes of documents. Although this was not indicated at the time that the books were filed with the Court, the parties stated during the February 2023 Proceedings that they agreed on the admissibility and authenticity of the documents included in the Joint Book of Documents. However, they did not agree on the truthfulness of their contents.
Affidavit Filed by the Respondent
[23] On September 29, 2021, immediately after the Appellant had closed the evidentiary portion of its case, the Respondent attempted to enter an affidavit sworn on September 20, 2021 by Mr. Jonathan Shimizu, a CRA tax appeals case specialist. The affidavit relates to the Appellant’s claim for excise tax refunds between January 1, 2006 and January 31, 2012. In the affidavit, Mr. Shimizu provides his opinion of when the Excise Tax Act allows for a refund for excise tax paid on fuel and he also discusses how the CRA records information with respect to refund claims. In addition, he refers to the 90 pages of documents attached to the affidavit. These 90 pages include a 10-page Excel spreadsheet that purportedly shows the CRA’s recording of refund claims for diesel fuel during the January 1, 2006 to January 31, 2009 period and an 80-page document that purportedly shows the CRA’s recording of refund claims for diesel fuel during the February 1, 2009 to January 31, 2012 period.
[24] Counsel for the Respondent stated that she was entering the affidavit pursuant to subsection 335(5) of the GST Act. She stated that if the Crown satisfies the conditions of subsection 335(5) then the Crown may tender the evidence without the necessity of producing a live witness to put that evidence before the Court.[3] In other words, counsel believed that if the conditions of subsection 335(5) are satisfied, the Court must admit the affidavit.
[25] She also stated that with this type of affidavit, no cross-examination of Mr. Shimizu “is required and no opportunity for cross-examination is required”.[4] Moreover, she argued that the Respondent’s actions did not offend rule 89 of the Tax Court of Canada Rules (General Procedure) (the “General Procedure Rules”).
[26] Rule 89 is relevant because the 90 pages of documents attached to the affidavit were not on the Appellant’s list of documents or the Respondent’s list of documents, were not provided in answers to undertakings during discovery, and were not even informally given to the Appellant before the Appellant closed the evidentiary portion of its case.
[27] Further, the documents attached to the affidavit were not mentioned in the pleadings, and the Appellant had not waived discovery of the documents.
[28] Counsel for the Appellant strenuously objected to the admission of the affidavit and the 90 pages of documents attached to it. Counsel for the Appellant clearly explained the issue with the Respondent’s conduct as follows:
Justice, we’re put in a very difficult position here because fundamentally my friend stands up and says, “this is non-controversial evidence” and it couldn’t be anything further from the truth. It goes to the basis upon which a significant portion of the appellant’s claim rests … And what’s particularly galling to me is that the respondent would choose not to provide this evidence to us before now. They swear the affidavit on the 20th, they don’t even give it to us on Monday morning, when our clients are here. They carefully wait until we’ve closed our case and then voila here’s an affidavit. Won’t even speak to what it goes to or what they’re relying on it for. And of course that’s the whole purpose of the discovery process is for the parties have a chance to consider these things.[5]
…
We can’t proceed, Justice, and that’s the problem. And why that doesn’t work is because we can’t rest our case and argue a case when we’re not able to ascertain the relevance and significance of the evidence that the Crown at 4:30 on a Wednesday afternoon with argument on Friday suddenly springs on the Court without any justification for why they’re springing it now instead of, for example, even if they had provided us with the affidavit when it was commissioned, then we would have had a chance to explore that. But to do it at this time is outrageous candidly.[6]
[29] I agree completely with counsel for the Appellant; this was a blatant attempt at trial by ambush in respect of a key issue in the appeals.
[30] The Respondent’s actions defeated the purpose of discovery. As the Supreme Court of Canada noted in Juman v. Doucette, “… a proper pre-trial discovery is essential to prevent surprise or ‘litigation by ambush’, to encourage settlement once the facts are known, and to narrow issues even where settlement proves unachievable.”[7]
[31] The main purpose of rule 89 of the Court’s General Procedure Rules is to avoid trial by ambush. The rule provides that no document shall be used in evidence by a party unless:
-a reference to the document appears in the pleadings, or in a party’s list of documents or in the affidavit filed with the list of documents;
-it was produced at the examination for discovery; or
- it was produced by a witness who was not under the control of the party.
[32] In the current appeals, none of these conditions were satisfied. As a result, the document was not admissible unless the Respondent obtained the consent of the Appellant or unless the Court directed that the affidavit be admitted.
[33] As I will discuss, eventually the Appellant withdrew its objection to the affidavit and the Court allowed it to be admitted. But this was done at a cost.
[34] Further, the fact that the affidavit was eventually admitted does not change the fact that the Respondent attempted a trial by ambush.
[35] I also have a serious concern with respect to the Respondent’s attempt to use an affidavit in appeals such as the ones before the Court, especially when the Respondent, at that point in time, did not intend to call any fact witnesses.
[36] As noted in Sopinka on the Trial of an Action,[8] “[T]he general rule is that witnesses are to attend in court to give their evidence orally. Affidavit evidence may be admitted as an exception to prove facts which are not contentious, but will generally not be allowed where the evidence is contentious, or the credibility of the witness is in issue.”[9]
[37] In my view, an affidavit has no place in a trial where the facts are in issue, such as the trial before the Court. The Court is a trial court; evidence must come in through witnesses so that this evidence can be tested on cross-examination.
[38] Only in exceptional circumstances will the Court allow affidavit evidence, and even then, this evidence can be admitted only when the facts are not contentious. In my view, affidavit evidence should never be allowed when it is an attempt to circumvent the Court’s General Procedure Rules and would lead to a trial by ambush.
[39] As counsel for the Appellant noted, and as can be seen from my reasons for judgment, the Appellant’s ability to claim input tax credits for GST paid on fuel is a key issue in the appeals before the Court. Further, the Respondent is relying on the Appellant’s claims for excise tax refunds to support his argument.
[40] The Respondent’s actions in these appeals are consistent with a troubling trend of the Respondent not bringing witnesses to the hearings of taxpayers’ appeals and then attempting to enter evidence through affidavits. Recently, the Court has seen this happen frequently in informal proceedings. The Respondent now appears to be attempting to use the same ill-advised approach in general proceedings.
[41] In my view, this conduct must stop. The Court issues judgments based on the evidence before it. If the Respondent wishes to rely on facts that he cannot obtain through cross-examination of the Appellant’s witnesses, then he needs to bring witnesses. Considering the vast resources of the CRA, this should not be an issue.
[42] My third concern with the affidavit relates to the Respondent’s argument with respect to the application of subsection 335(5) of the GST Act.
[43] Subsection 335(5) provides that an affidavit properly sworn by an officer of the CRA setting out that the officer has charge of the appropriate records and that a document attached to the affidavit is a document or a true copy of a document or a print-out of an electronic document made by or on behalf of the Minister is evidence of the nature and contents of the document. For purposes of appeals and applications before this Court, the reference to a document made by or on behalf of the Minister is normally a reference to a document made by the CRA.
[44] The Respondent does not appear to appreciate that subsection 335(5) does not address the truthfulness of the contents of the document. This subsection states that the affidavit is evidence of the nature and contents of the CRA document. In my view, the words “evidence of the nature and contents” refer to the authenticity of the CRA document and the fact that the affidavit evidences what is stated in the CRA document.
[45] For example, the affidavit of Mr. Shimizu is evidence that the attached documents are copies of authentic CRA documents and the documents evidence what is stated in the documents. The documents attached to Mr. Shimzu’s affidavit evidence how the CRA recorded the Appellant’s refund claims; they are not evidence of the truth (“correctness”) of what the documents say.
[46] The Respondent argued that subsection 335(5) allows a document to be presented without cross-examination and that it allows the Minister to file documents without calling a witness.
[47] There is nothing in the wording of subsection 335(5) to support such a position. The subsection simply states that the affidavit is evidence of the nature and contents of the attached CRA document. It does not state that the document is admissible in a hearing or that it can be presented without cross-examination.
[48] These are decisions that are only made by the Court under its jurisdiction to control the processes of the Court.
[49] The Court’s decision in Carcone v. The Queen[10], (“Carcone”), a decision relied on by the Respondent, illustrates the danger of the Respondent’s position. The Court’s decision in that case was in respect of the applicant’s application for an order extending the time within which notices of objection to reassessments may be filed. During the hearing, the Respondent filed an affidavit under subsection 244(9) of the Income Tax Act, which is very similar to subsection 335(5) of the GST Act. Subsection 244(9) of the Income Tax Act also contains the wording that the affidavit is evidence of the nature and contents of the CRA documents.
[50] Similar to Mr. Shimizu’s affidavit, the affidavit in Carcone provided evidence with respect to information in the CRA’s records. However, in Carcone, the CRA person who swore the subsection 244(9) affidavit was called as a witness at the hearing and was cross-examined by counsel for the applicant. This cross‑examination showed that the information taken from the CRA’s records was incorrect; the information did not, as claimed in the affidavit, reflect information provided by the taxpayer.[11] In short, once the evidence was tested under cross‑examination, it was proven to be incorrect. Carcone is an example of why, in appeals such as the ones before the Court, untested evidence provided by an affidavit should only be placed before the Court in exceptional circumstances.
[51] My fourth concern with Mr. Shimizu’s affidavit is that it contains more than what is permitted under subsection 335(5). Paragraph 4 of the affidavit contains opinion evidence on excise tax law, and paragraphs 5 to 8 contain evidence with respect to the CRA’s internal systems.
[52] In the current appeals, once counsel for the Appellant raised her concerns, Justice D’Auray adjourned the hearing to allow counsel for the Appellant to consult with her client. The Appellant then filed written submissions on October 6, 2021, and the Respondent filed written submissions on October 18, 2021. On October 26, 2021, just before Justice D’Auray was scheduled to issue her decision on the admissibility of the affidavit, the Appellant wrote to the Court stating that the Appellant had agreed to withdraw its objection to the admission of the affidavit and that the Respondent had agreed that the Appellant should be entitled to recall one or both of its witnesses to provide direct examination evidence regarding the matters in the affidavit. The Appellant also agreed to allow cross-examination of its witness.
[53] The affidavit was then accepted by the Court.
[54] Mr. Leamon and Mr. Roach then provided testimony on December 16, 2021 via Zoom. Mr. Leamon was able to provide detailed evidence with respect to the Appellant’s claim for excise tax refunds during the periods at issue. As I noted previously, I will rely on Mr. Leamon’s evidence to the extent that I need to consider the Appellant’s excise tax refunds.
[55] Closing argument was then held on January 11, 12 and 21, 2022 by Zoom.
[56] The Respondent’s actions resulted in trial days being thrown away, additional written submissions having to be prepared and filed, and an additional day of testimony by two witnesses. Further, argument was delayed from October 1, 2021 to January 2022. I will deal with the Respondent’s actions in my cost award.
Summary of Facts
[57] The Appellant is a federal Crown corporation that provides a constitutionally mandated passenger and commercial marine transportation system between Newfoundland and Nova Scotia.
[58] The constitutionally mandated ferry service is provided between Port aux Basques, Newfoundland and North Sydney, Nova Scotia. The sail takes approximately six to eight hours. The Appellant also operates a seasonal route between Argentia, Newfoundland and North Sydney, Nova Scotia. The seasonal sail takes approximately 16 hours, is not constitutionally mandated and runs between mid-June and late-September.
[59] The Appellant operates terminals in Port aux Basques, Argentia, and North Sydney (the “Terminals”). Its head office is located in St. John’s, Newfoundland, and it has corporate offices in Port aux Basques, Newfoundland.
[60] During the relevant periods, the Appellant provided its services using a fleet of four vessels (the “Vessels”). The Vessels were substantial in size. They were capable of transporting 600 to 700 hundred people and their vehicles. In addition to containing areas for the transportation of vehicles, the ships (other than one ship called the Atlantic Freighter[12]), contained areas that were used for such things as passenger cabins, individual passenger seating, restaurants, retail stores, and bars.
[61] At the beginning of 2006, the fleet was composed of vessels named the Ericson, the Caribou, the Smallwood and the Atlantic Freighter. By April 2011, the Caribou, the Smallwood and the Atlantic Freighter had been replaced by vessels named the Atlantic Vision, the Blue Puttees and the Highlanders (the “New Vessels”).[13]
[62] The Appellant imported each of the New Vessels into Canada before placing it in service.
[63] During the relevant periods, the Appellant made both taxable and exempt GST supplies. The various taxable supplies identified by the Appellant are set out at paragraph 11 of the PASF and in Exhibit A-1, Tab 14. The specific taxable supplies identified by the Appellant are as follows:
-the provision of passenger cabins;
-the provision of sleeper dorms;
-the provision of reserved seating (also referred to as day/nighters);
-the sale of items in retail stores (including gift shops and speciality shops);
-the sale of food and beverages in à la carte dining halls;
-the sale of food and beverages in cafeterias;
-the sale of food and beverages in bars;
-the provision of kennels;
-the sale of items through vending machines; and
- the provision of amusement machines.
[64] As I will discuss, on the basis of the evidence before the Court, in particular the lack of evidence, it is difficult for the Court to know how the Minister, when assessing the Appellant, calculated the Appellant’s input tax credits. However it appears that at the time of the issuance of the assessments for the Appellant’s reporting periods ending between January 1, 2006 and March 31, 2010 (the reporting periods covered by the First Appeal), the Minister accepted that the Appellant had made each of the noted taxable supplies. Yet, before confirming the notices of assessment with respect to the reporting periods ending between January 1, 2006 and March 31, 2010, the CRA changed its view and concluded that the supplies of the passenger cabins, sleeper dorms, and reserved seating were exempt supplies.[14] It also took this position when assessing the Appellant’s reporting periods that are the subject of the Second Appeal.
[65] On September 17, 2021, shortly before the start of the oral hearing, counsel for the Respondent filed a letter with the Court (the “Concession Letter”) in which she stated that the Minister had conceded that the supplies of the passenger cabins, sleeper dorms and reserved seating were “areas of taxable activity”.
[66] Both parties agree that the Appellant made one exempt supply, the supply of a ferry service. Specifically, the Appellant made the following supply, which section 1 of Part VIII of Schedule V of the GST Act deems to be an exempt supply:
A supply, other than a zero-related supply, of a service of ferrying by watercraft passengers or property where the principal purpose of the ferrying is to transport motor vehicles and passengers between parts of a road or highway system that are separated by a stretch of water.
[67] The only issue before the Court is the Appellant’s entitlement to input tax credits in respect of property and services acquired or imported for consumption, use, or supply in the course of its commercial activities.
[68] Mr. Hupman testified that the operation of each vessel involves an integrated environment. In his words, “everything depends on everything.”[15] The interior of each of the Appellant’s ships was designed based upon the features that the Appellant required in order to provide its services. For example, the number of passenger cabins, crew cabins, restaurants, snack bars, passenger seating areas and vehicle parking areas required by the Appellant, affected the design of a specific vessel.
[69] He noted that one of the most important factors that was taken into account when designing the Vessels was seaworthiness, particularly damage stability and intact stability. The Vessels had to be stable in the water.
[70] Mr. Hupman described each of the taxable supplies made by the Appellant focusing on the nature of the supply and on how a Vessel’s physical space and subsystems were used in making the supply.
[71] The most significant generator of revenue from taxable supplies was the passenger cabins. The cabins generated annual revenue of between $4.5 and $4.6 million; however, once the New Vessels entered service, this revenue rose to between $6.1 and $7.3 million.[16]
[72] Mr. Hupman described the cabins as hotel rooms. Each cabin had its own washroom (including a shower), electrical system (to recharge devices), and television. In addition, each cabin has its own HVAC system, meaning that a guest can control the heating and air conditioning for the cabin.
[73] He noted that the cabins took up a great deal of space on the Vessels. For example, the two or three people who occupy a cabin take up as much space as 40 to 50 people sitting in the general seating area.
[74] The cabins also added significant weight to the Vessels. Mr. Hupman noted that this was an important issue from a design perspective. He stated that the more weight you have on a vessel, the bigger the internal systems and engines must be to manage the vessel and propel it.
[75] Since the 100 cabins have 100 showers, sinks and toilets, they also have a significant impact on the ship’s water system and sewage treatment facility.
[76] Many staff members are required to service and clean the cabins. Since all of the crewmembers live on the ship for two-week periods, this affects various parts of the ship, particularly the crew cabins.
[77] Catering services were another significant generator of taxable supplies. The Vessels’ galley, cafeterias, dining rooms, bars, and snack bars were used to provide the catering services. In most years, these supplies generated revenue of approximately $3 million.
[78] Mr. Hupman noted that the catering services had a significant impact on the design of the Vessels. The catering services required a significant amount of space on the Vessels and relied on numerous subsystems of the Vessels. He provided the following examples:
-The galley used to prepare the food for the various food service outlets took up a significant amount of space. It required marine equipment of a special quality and grade.
-A separate space was required to process and clean the dishes and cutlery to avoid cross-contamination.
-The restaurants, which seat approximately 100 people, took up a great deal of space. In addition, a vessel must provide space to allow for the turnover of customers using the restaurants. Mr. Hupman explained that, while a restaurant had the ability to seat around 100 passengers, there were somewhere between 600 and 700 people on each vessel. A vessel had to provide space to allow, over the six- to eight-hour journey, as many people as possible to use the restaurant. He referred to this as the turnover of customers.
-Significant storage space was required to operate the catering services. Each vessel had cold storage, bulk stores and freezer/cooler storage. These stored the food required to feed thousands of passengers and the crew.
-The area used to provide the catering services utilized a number of what were referred to as technical systems, including:
§the HVAC systems;
§the potable water system, which provided drinkable water that was used for both drinking and washing the dishes and cutlery;
§the sewage treatment facility; and
§a composting area that was required for the physical food waste generated by the catering services.
[79] As a result, the catering services affected the size of the various tanks on the Vessels that were used to store the potable water (the Appellant did not produce water–it was loaded prior to a crossing) and to operate the sewage system. For example, the sewage generated from the catering had a notable impact on the size of the tanks.
[80] Each vessel had to be crewed to support the catering services. As with other crewmembers, these crewmembers were on board the Vessels for two-week periods. As a result, the Vessels required crew cabins for those who provided the catering services.
[81] The day/night seating was another source of taxable supplies. These seats were larger than the normal seating and were contained in a separate space. The Appellant charged a fee for the use of these seats. Annual revenue from these taxable supplies was between $60,000 and $89,000 in the earlier years but climbed to $254,000 once the New Vessels were added to the fleet. Mr. Hupman noted that these seats required more floor space than the general seating. This space consumed heating and air conditioning.
[82] The retail stores were another source of taxable supplies. The stores sold day-to-day amenities, souvenirs and other confection items. Space was required for the stores and for storage of the stores goods. In most of the years under appeal, the retail stores generated between $500,000 and $600,000 of revenue.
[83] Other sources of taxable supplies were the kennels, vending machines and amusement machines. All required space and consumed electricity for lights, heating and air conditioning. The amusement machines, in particular, consumed a significant amount of electricity.
[84] Mr. Hupman testified that 50% of the crew on board a vessel worked directly in the areas that made taxable supplies. Crew cabins were required for each of the crewmembers.
[85] He noted that crew cabins were similar to the passenger cabins and thus had the same impact on the operating systems of the vessel. However, since the crew cabins were the person’s “home away from home”, the cabins contained a few extra features. These included mini-fridges and a higher electrical outage to allow for the use of various other appliances and devices. As a result, the electrical load in the crew cabins was higher than the load in the passenger cabins.
[86] Mr. Hupman noted that there were two areas of the ships that the Appellant treated as being used exclusively in the making of the exempt supply of the ferry service. One was the area where passengers parked their cars and trucks. The Appellant referred to this area as the passenger vehicle decks. Passengers were not permitted on the vehicle decks while the vessel was sailing.
[87] Mr. Hupman acknowledged that an argument could be made that the passenger vehicle decks had a strong nexus to the making of taxable supplies. For example, passengers who had booked cabins had to park their cars on the passenger vehicle decks before walking to their cabins. The Appellant believed that treating the passenger vehicle area as an exclusively exempt area supported a fair and reasonable allocation of the Appellant’s costs to taxable and exempt supplies. This was a prudent decision.
[88] The second area of the ships that the Appellant treated as being used exclusively in the making of the exempt supply of the ferry service was the general seating area. Any passenger who received the exempt supply of the ferry service was entitled to use the general seating area.
[89] In addition to the areas of the Vessels used exclusively to make exempt supplies and the areas used exclusively to make taxable supplies, the Appellant identified numerous areas that, in Mr. Hupman’s words, had a connection to both the making of the taxable supplies and the making of the exempt transportation service. These included all areas of the ships that were not used solely in the making of either taxable supplies or exempt supplies. The Appellant refers to these areas as the common areas.
[90] The common areas, which are summarized in Exhibit A-1 at Tabs 3 to 9, varied from ship to ship depending on the design of the ship. They included corridors, walkways, stairways, public washrooms, the exterior deck (also referred to as the outside seating or open deck space or the exterior walking deck), the galley, galley stores, the hospital room, the bridge, crew cabins, the officers’ and crew’s mess area, crew laundry, the wheelhouse, the engine room, the auxiliary engine room, the air conditioning room, the pump room, maintenance shops, the sewage plant, the boiler room, fuel and ballast water tanks, void spaces,[17] the generator compartment, the control room, mooring stations, hydraulic machinery compartments,[18] the stabilizer room, and the fire control room.
The Law
[91] The GST is levied under four separate and distinct divisions of the GST Act, Division II, Division III, Division IV and Division IV.1 of the GST Act. Each of these divisions imposes the tax. For example, a single transaction may be taxed under both Division II and Division III.
[92] Under Division II, the tax is levied on taxable supplies that are made in Canada. This is the tax levied on supplies that occur in Canada. Division II tax is levied either at the 5% GST rate or at the higher 13%/15% HST rates. The 5% GST rate applies to goods and services consumed in so-called non‑participating provinces (Quebec and all provinces west of Ontario). The 13% HST rate is applied to goods and services consumed in Ontario and the 15% HST rate is applied to goods and services consumed in one of the Atlantic provinces. Ontario and the Atlantic provinces are referred to as the participating provinces.
[93] The Division II tax is collected by the supplier of the good or service.
[94] Under Division III, the tax is levied on all goods imported into Canada, regardless of whether or not the goods are subject to Canadian customs duties. The tax is levied and collected by the Canada Border Services Agency at the time of importation. All commercial importations are taxed at 5%. Non‑commercial importations are taxed at either the 5% GST rate or the 13%/15% HST rates, depending on whether the importer is a resident of a non-participating or a participating province.
[95] Under Division IV, the tax is levied on imported services and intangible personal property. The recipient of the imported service or intangible personal property pays the tax on a self-assessing basis directly to the CRA. Generally speaking, a recipient only self-assesses Division IV tax if it imports the service or intangible personal property for use in activities that do not constitute GST commercial activities.[19]
[96] Division IV.1 is intended to ensure that consumers in a participating province do not avoid the higher HST rate by acquiring goods and services in non-participating provinces. Division IV.1 tax is imposed on goods and services imported into a participating province. Similar to Division IV, Division IV.1 tax is imposed on a self-assessing basis and does not apply if the person is entitled to claim full input tax credits in respect of the imported property or service.
[97] As noted previously, the Appellant made a number of taxable supplies on the ships. Each of these taxable supplies was subject to Division II tax. The Appellant was required to add such tax when calculating, under su