Bell Telephone Company of Canada v. The King

Bell Telephone Company of Canada v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-04-12
Neutral citation
2023 TCC 45
File numbers
2018-3444(GST)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2018-3444(GST)G
BETWEEN:
THE BELL TELEPHONE COMPANY OF CANADA
or BELL CANADA,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on June 20–22, 2022, at Toronto, Ontario
Before: The Honourable Justice Steven K. D’Arcy
Appearances:
Counsel for the Appellant:
Alan Kenigsberg Al-Nawaz Nanji
Counsel for the Respondent:
Jack Warren
Dominik Longchamps
JUDGMENT
In accordance with my Reasons for Judgment:
The appeal from assessments made under the Excise Tax Act by Notices of Assessment dated July 30, 2015 and May 30, 2016 is dismissed, with costs to the Respondent.
Signed at Vancouver, British Columbia, this 12th day of April 2023.
“S. D’Arcy”
D’Arcy J.
Citation: 2023TCC45
Date: 20230412
Docket: 2018-3444(GST)G
BETWEEN:
THE BELL TELEPHONE COMPANY OF CANADA
or BELL CANADA,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
Introduction
[1] The primary issue in this appeal is whether the Appellant, Bell Canada, when purchasing electricity in Ontario, received a single supply of electricity or, as argued by the Appellant, multiple supplies of electricity, delivery services and regulatory services.
[2] During the relevant years, subsection 236.01(2) of Part IX of the Excise Tax Act (the “GST Act”) required a large business, such as the Appellant, to recapture a portion of the input tax credits that it claimed in respect of certain specified property and services, including electricity.
[3] The issue of whether the Appellant received a single supply of electricity as opposed to multiple supplies is key when determining the amount of input tax credits that the Appellant was required to recapture under subsection 236.01(2) for its reporting periods ending between July 1, 2010 and December 31, 2012. The amount at issue is approximately $2,550,000.
[4] The Appellant is a GST registrant that is engaged exclusively in GST commercial activities, being the selling of telecommunications services, telecommunications equipment and services related to telecommunications services and equipment.
Preliminary Issues
[5] The parties filed a short partial agreed statement of facts (the “PASF”). The PASF provides a brief description of the Appellant, notes the various Ontario electricity distribution companies (the “Local Distributors”) that made supplies to it, references the 106 invoices issued by various Local Distributors that are included in the Joint Book of Documents, and describes the audit of the Appellant and the assessments issued by the Minister. The PASF contains few relevant facts with respect to the issue before the Court.
[6] I heard from three witnesses: Mr. William Ferris, the Director of Real Estate Operations for the Appellant, Mr. John Todd, the President of Elenchus Research Associates, Inc., and Mr. Travis Lusney, the Director of Power Systems at Power Advisory LLC.
[7] Since the primary issue in this appeal is whether each supplier (i.e. a Local Distributor) made a single supply or multiple supplies, I expected to hear testimony from employees of one or more of the Local Distributors. This did not occur. As a result, the Court received only general details of how the Local Distributors operate when making supplies. For example, while the parties provided the Court with numerous invoices issued to the Appellant by various Local Distributors, the parties did not file any contracts that the Appellant entered into with Local Distributors. Nor did the parties provide the Court with any contracts or details of any contracts that Local Distributors entered into with their suppliers.
[8] Mr. Ferris’s testimony related mainly to how the Appellant powered its networks and to the 106 sample invoices included in Exhibit A-1, focusing on the four categories of items set out on the invoices. I did not find his testimony with respect to the invoices particularly helpful since the invoices speak for themselves and, as I will discuss, the Local Distributors were required, pursuant to subsection 79.17(1) of the Ontario Energy Board Act, 1998[1] (the “OEB Act”) and the relevant regulations, to itemize their invoices to show the four categories of items.
[9] In addition, Mr. Ferris’s evidence was limited since he did not work for the Appellant during the years at issue in this appeal.
[10] Mr. Todd, as the President of Elenchus Research Associates, Inc., provides advice to numerous Canadian distributors of electricity, including the majority of the Local Distributors as well as integrated electric utilities such as Hydro-Québec and New Brunswick Power. His advice relates primarily to operating in the various Canadian regulated electricity markets, including applying for rate increases.
[11] He holds a bachelor of science in electrical engineering and a master of business administration in economics and management science, both from the University of Toronto. He is not a professional engineer. He stated that he has redefined himself as an economist.
[12] Mr. Todd has never worked as an employee of a Local Distributor, a transmission company, a company that generates electricity or one of the entities that regulates the Ontario electricity market.
[13] The Appellant first put Mr. Todd to the Court as an expert witness. After holding a voir dire, I ruled that his expert report was not admissible. The oral reasons for my ruling are attached as Appendix A. I did not find Mr. Todd’s expert report necessary.
[14] As can be seen from Appendix A, I found that Mr. Todd’s answers to the questions put to him by the Appellant did not contain facts that were of such a technical nature that I required help to appreciate those facts. If a lay witness had provided the various facts set out in Mr. Todd’s report, I could have formed my own conclusion without the help of an expert.
[15] In addition, as stated in my oral reasons, the primary purpose of Mr. Todd’s report is to give fact evidence; it is not to give an opinion, an inference from the facts. I do not require an expert to tell me the facts. I need a lay witness whose fact evidence can be tested under cross-examination.
[16] After my ruling, the Appellant decided to present Mr. Todd to the Court as a fact witness. Mr. Todd’s evidence was helpful with respect to the structure of the Ontario electricity market. However, he was not able to provide evidence with respect to the actual individual supplies made by Local Distributors to their various customers. Only an employee of a Local Distributor could provide such evidence. Mr. Todd could only tell me how the various regulators and the relevant provincial legislation regulated the business of the Local Distributors.
[17] Mr. Lusney, as Director of Power Systems at Power Advisory, oversees most of the firm’s analysis with respect to electricity sectors across Canada and throughout North America. Power Advisory is a management consulting firm in the electricity sector. Mr. Lusney noted that Power Advisory provides traditional management consulting services involving asset valuation, price forecasting, market assessments, strategic guidance and investment analysis.
[18] Mr. Lusney holds a bachelor of science in electrical engineering and a master of science in electrical engineering, both from Queen’s University. He is a professional engineer.
[19] Unlike Mr. Todd, Mr. Lusney has worked for parties involved in the Ontario electricity market. Prior to joining Power Advisory, he worked for the Ontario Power Authority and, between 2006 and 2008, for a Local Distributor, Hydro Ottawa Limited. When working at Hydro Ottawa, he was responsible for supporting the planning process, in particular, the development, allocation, and justification of capital planning budgets.
[20] The Respondent first put Mr. Lusney to the Court as an expert witness. After holding a voir dire, I ruled that his expert report was not admissible. My reasons were the same as my reasons for excluding Mr. Todd’s expert report: Mr. Lusney’s report was not necessary, because there was nothing in his report of such a technical nature that an expert was required. In addition, it was an attempt to adduce fact evidence through an expert as opposed to a lay witness.
[21] The Respondent then called Mr. Lusney as a fact witness. Mr. Lusney’s evidence was also helpful with respect to the structure of the Ontario electricity market. Furthermore, he was able to provide some evidence with respect to the operation of Hydro Ottawa; however, the evidence was limited since he did not work for Hydro Ottawa during the relevant period and he did not appear to have been directly involved in the making of supplies by Hydro Ottawa to its various customers.
Summary of the Facts
[22] The Ontario electricity market is heavily regulated.
[23] Only registered entities can participate in the Ontario electricity market. The businesses that such entities may carry on are limited by legislation. Electricity can only be purchased for resale in the government-operated market, fees charged for transmitting electricity are set by government regulators, the total price at which entities may sell electricity to the ultimate consumers is set by government regulators, and the government dictates what can appear and how it is to appear on invoices issued to the ultimate consumers.
[24] During the relevant period, the key players in the Ontario electricity market were the entities that generate the electricity (the “Generators”), the Independent Electricity System Operator (the “IESO”), the entities that transmit the electricity (the “Transmitters”), and the Local Distributors which sell the electricity to most consumers.
[25] The witnesses also referred to retailers. Mr. Todd noted that there are 70 licensed retailers in Ontario but that only a few are active.
[26] Mr. Todd and Mr. Lusney provided similar descriptions of how each of the key players participates in the Ontario electricity market.
[27] The Generators are the companies that create the electricity. The primary Generators located in Ontario are Ontario Power Generation and Bruce Power (which produce power using nuclear reactors). In addition, there are a number of smaller Generators in Ontario, which generate electricity through gas-fired generation plants, solar farms and wind generators. The witnesses noted that Generators located outside of Ontario, such as Hydro-Québec, also sell into the Ontario electricity market. Further, electricity produced outside of Ontario may also be sold into the Ontario market by wholesalers (the “Wholesalers”), which purchase electricity from Generators for resale.
[28] The IESO is a government agency that manages the Ontario electricity system in real time to ensure that there is an adequate supply of electricity in Ontario on both a moment-by-moment basis and an annual basis. The Generators and Wholesalers sell their electricity through a market operated by the IESO. The market operates in real time, matching the Generators and Wholesalers that are willing to sell a specific quantity of electricity at a specified price into the Ontario market with Local Distributors, large industrial customers and Wholesalers that are willing to buy the specific quantity at the specified price. The price is referred to as the market clearing price, or the MCP.
[29] The Transmitters carry the electricity from the Generators to the Local Distributors and to a few large commercial customers that are connected to the transmission systems (for example, steel mills in Hamilton). Hydro One and its subsidiaries own 95% of the capacity of the transmission system. Certain Indigenous organizations and a private U.S. company own the remaining 5% of the capacity.
[30] Because of the high voltage of the transmission system, only large commercial users of electricity are able to connect to it. All other users can only access the electricity by connecting to the system of a Local Distributor. Local Distributors transform the power from high voltage to low voltage and then sell it, at a usable voltage level, to residential, commercial and small industrial users. As a result, most consumers in Ontario purchase electricity from Local Distributors. During the relevant period, the Appellant only purchased electricity from Local Distributors.
[31] There are 61 licensed Local Distributors in Ontario. Municipalities own most of them. These Local Distributors serve their local communities. In fact, each of the Local Distributors is only entitled to sell in a designated area. The designated area is usually the area of the local municipality.
[32] In addition to being a Transmitter, Hydro One is also a Local Distributor. It services the parts of the province of Ontario that are not serviced by the other Local Distributors.
[33] Consumers can also purchase electricity from so-called retailers. As mentioned previously, Mr. Todd stated that few retailers were active in Ontario during the relevant period. He noted that the use of retailers was, in effect, a failed experiment. Consumers who purchase electricity from retailers must purchase transmission services from the Local Distributor for the area in which they live or operate. The Appellant did not purchase any electricity from retailers during the relevant period.
[34] When purchasing electricity, the Appellant received supplies from various Local Distributors. The PASF states that it had no separate suppliers of, nor contracts for, electricity, transmission services and distribution services apart from the Local Distributors.[2]
[35] As mentioned previously, the electricity market in Ontario is heavily regulated. This is done mainly through the provisions of the Electricity Act, 1998, S.O. 1998, c. 15, Sched. A (the “Electricity Act”) and the provisions of the OEB Act.
[36] Section 57 of the OEB Act provides that an entity must be registered before it can, among other things:
-own or operate a distribution system;
-own or operate a transmission system;
-generate electricity;
-retail electricity; and
- sell or purchase electricity through the IESO-administered markets.
[37] Subsection 71(1) of the OEB Act provides that a Transmitter or Local Distributor shall not carry on any business activities other than transmitting or distributing electricity.[3]
[38] The effect of section 57 is that a Local Distributor can only carry on a business of owning or operating a transmission system if it is registered to do so. There is no evidence before me that any Local Distributor other than Hydro One carried on the business of owning or operating a transmission system. I infer from this lack of evidence that none of the Local Distributors other than Hydro One was registered to carry on the business of owning or operating a transmission system.
[39] As a result, the Local Distributors were restricted by the OEB Act to the business of selling electricity to consumers in their defined area.
[40] Subsection 70(11) of the OEB Act provides, in effect, that a Local Distributor can only distribute electricity in the area specified in its licence. Section 28 and subsection 29(1) of the Electricity Act require a Local Distributor to sell electricity to every person who requests to be connected to its distribution network.
[41] These provisions are consistent with the testimony of Mr. Todd and Mr. Lusney who testified that Local Distributors must be registered, can only carry on business in their designated area, and cannot own a Generator.[4] They also testified that the Generators cannot own Local Distributors or Transmitters. Their testimony is consistent with section 81 of the OEB Act and subsection 29.1(2) of the Electricity Act.
[42] Section 78 of the OEB Act provides that the only amount that a Transmitter can charge for the transmission of electricity and the only amount that a Local Distributor can charge for the distribution and sale of electricity is the amount set by the Ontario Energy Board. As Mr. Todd and Mr. Lusney explained, the rates that the Transmitters and Local Distributors may charge are set on a continuous basis by the Ontario Energy Board.
[43] Mr. Todd and Mr. Lusney testified that the Ontario Energy Board uses a cost-recovery model to set the rate that a Local Distributor may charge its customers. The rate allows the Local Distributors to recover the amounts that they pay the Generators and Wholesalers when acquiring electricity on the IESO market, the amounts that they pay the Transmitters to transmit the electricity from the Generators to their distribution network, the fees that are charged by regulators such as the IESO and the costs that they incur in operating their distribution and sales network (in the OEB Act, the distribution and sales network is referred to as the retailing of electricity).[5]
[44] The rate also includes a profit element. The profit element is calculated on the costs that a Local Distributor incurs in operating its distribution and sales network. The Local Distributors are not allowed to earn a profit on the costs that they incur to purchase the electricity, on the costs that they incur to transmit it to their distribution network or on the regulatory fees.
[45] All the witnesses were taken to invoices issued to the Appellant by various Local Distributors. The witnesses focused on the various itemized items on the invoices that together comprise the total amount charged on the invoices to the Appellant. The individual items shown on the invoices vary from Local Distributor to Local Distributor and, for one Local Distributor, from invoice to invoice.
[46] The OEB Act requires each Local Distributor to itemize its invoices. Section 79.17 provides that the invoices are to be in a form prescribed by regulation or approved by the Minister. The actual information required on a Local Distributor’s invoice is set out in Regulation 275/04 to the OEB Act, Information on Invoices to Low-volume Consumers of Electricity (the “Invoice Regulations”). Pursuant to the Invoice Regulations, the invoices issued by Local Distributors to so-called low-volume consumers, which include most residential customers and commercial customers (including the Appellant), must include the following information:
- the heading Your Electricity Charges;
- the following sub-headings are to be included below the Your Electricity Charges heading:
oElectricity,
oDelivery,
oRegulatory charges, and
oDebt retirement charge;
-under the sub-heading Electricity, the amount of electricity consumed, the commodity price of the electricity and any other information required by other regulations made under the OEB Act must be shown clearly and separately;
-under the sub-heading Delivery, the invoice must clearly indicate the total cost of the delivery charges;
-under the sub-heading Regulatory charges, the invoice must clearly indicate the total cost of the regulatory charges;
-under the sub-heading Debt retirement charge, the invoice must clearly indicate the total amount of the debt retirement charge payable;
-the invoice must include information on the historical consumption of electricity;
-the invoice must clearly indicate the consumer’s consumption of electricity as indicated on the consumer’s meter;
-the Local Distributor must include, on or with the invoice, the glossary of terms set out in subsection 10(1) of the Invoice Regulations [the glossary of terms provides a description of each of the four sub-headings];
-the invoice must include the Local Distributor’s website and telephone number in a note following the glossary of terms that reads as follows: “NOTE: For a detailed explanation of electricity terms, please visit (website of distributor, where available) or www.oeb.gov.on.ca”; and
-the invoice must include any messages with respect to conservation, alternative energy sources or renewable sources issued by the Minister.[6]
[47] Section 9 of the Invoice Regulations provides that the only information that a Local Distributor can provide on the invoices with respect to the Your Electricity Charges heading and the four sub-headings is information specified in the Invoice Regulations, another regulation made under the OEB Act or in a provision or regulation made under the Electricity Act or the Ontario Clean Energy Benefit Act, 2010.
[48] Subsections 3(2) and 4(2) of the Invoice Regulations specify how the Local Distributor is to calculate the amounts shown under the Delivery and Regulatory charges sub-headings.
[49] Most of the invoices at Tabs 1 to 106 of Exhibit A‑1 contain the required heading and sub-headings. However, some invoices provide more detail than other invoices. Further, not all the invoices contain the glossary of terms and the required wording with respect to the Local Distributor’s website.
[50] For example, the invoice at page 133 of Exhibit A-1, issued by Toronto Hydro-Electric System (“Toronto Hydro”), contains the heading Your Electricity Charges; four sub-headings, namely Electricity, Delivery, Regulatory and Debt Retirement Charges; and a single amount for each sub-heading, all of which are required by regulation. The four amounts shown for each sub-heading are then added together, with the total identified as Your Total Electricity Charges. HST is then added to the total, resulting in an amount identified as Total Due.
[51] The only information provided on the invoice in respect of each sub-heading is the single amount. No other information is provided, with one exception. Under the sub-heading Electricity, the number of kilowatt-hours (“KWH”) of electricity consumed and the price per KWH for the electricity are indicated. This is required by section 2 of the Invoice Regulations.
[52] There are no calculations shown for the single amounts included under the other three sub-headings.
[53] The invoice also contains the meter reading for the relevant month.[7]
[54] I will refer to the Local Distributor invoices that only show a single amount for each of the four required sub-headings (including how the amount that appears under the Electricity sub-heading is calculated) as the “Basic Information Invoices”.
[55] Other invoices issued by Toronto Hydro contain significantly more information under each sub-heading. For example, the invoice at pages 174 and 175 of Exhibit A-1 is for a period similar to the period covered by the invoice at page 133, but it is for a different Bell Canada location. This invoice also contains the heading Your Electricity Charges and the four sub-headings, namely Electricity, Delivery, Regulatory and Debt Retirement Charge. However, instead of a single amount under each sub-heading, various amounts are shown, as follows:
-Under the sub-heading Electricity, three separate line items appear with an amount for each item. Each of the three line items shows the KWH and price per KWH that were used to calculate the amount on the particular line.
-Under the sub-heading Delivery, there are seven separate line items, with an amount for each item. The calculation of six of the amounts based on KWH is shown. The seventh item is referred to as a Customer Charge.
-Under the sub-heading Regulatory Charges, three separate line items are shown, with an amount for each item. The calculation of two amounts based on KWH is indicated. The third item is referred as a Standard Supply Service Admin Charge.
-A single line item and amount appear under the sub-heading Debt Retirement Charge. The amount is calculated based on KWH.
[56] All the amounts on the invoice under the sub-headings (the 13 amounts) are added together, with the total amount shown next to the heading Your Total Electricity Charges. HST is then added to the total electricity charge, resulting in the Total Due.
[57] I will refer to the Local Distributor invoices that include more than single amounts for the four required sub-headings as the “Detailed Invoices”.
[58] Nearly all the Basic Information Invoices and the Detailed Invoices contain a total of all the items on the invoice that is identified as Your Electricity Charges, Total Electric Charges, Your Total Electricity Charges, Your Electricity Charges, Total Current Electric Charges, Total Electricity Charges, Total of your electricity charges, or Electricity Charges.
[59] Mr. Todd and Mr. Lusney explained that the separate amounts shown on Toronto Hydro’s Detailed Invoice are the amounts used to calculate the relevant amount for each sub-heading in accordance with the Invoice Regulations. For example, the seven items under the sub-heading Delivery are the amounts that Toronto Hydro is required by subsection 3(2) of the Invoice Regulations to include when calculating the cost of delivery charges. The disclosure of the specific seven items under the Delivery sub-heading was not required by subsection 3(1) of the Invoice Regulations. Subsection 3(1) only requires a Local Distributor to disclose the total cost of the delivery charges.
[60] On the basis of the sample invoices provided at Tabs 1 to 106, it appears that the majority of the Local Distributors used Basic Information Invoices, which only provided limited information similar to the Toronto Hydro Basic Information Invoice.[8] However, in addition to Toronto Hydro, a number of other Local Distributors provided more detailed information similar to the information found on Toronto Hydro’s Detailed Invoice.[9] It appears that Toronto Hydro and Hydro One[10] are the only Local Distributors that issued both Basic Information Invoices and Detailed Invoices.
[61] Some of the Local Distributors issued Detailed Invoices that did not contain the sub-headings required by the Invoice Regulations. For example, Waterloo North Hydro’s invoice at Tab 43 of Exhibit A-1 provides the Electricity sub‑heading but then groups all other charges under the sub-heading Your Other Charges. Welland Hydro-Electric System Corp.’s invoices at Tab 45 of Exhibit A‑1 do not contain any sub-headings; all items are shown under the heading Charges & Credits. Kitchener-Wilmot Hydro lists all items under one heading: Your Electricity Charges.[11]
[62] The Cornwell Electric invoice at Tab 68 of Exhibit A-1 only provides limited information. However, there are only two items on the invoice: one is a charge for the electricity consumed and the second is titled Debt Retirement Charge. The amount shown for the debt retirement charge is 0. No amounts are included for delivery or regulatory charges.
[63] One other inconsistency in the Detailed Invoices included in Exhibit A‑1 relates to the itemization of the electricity consumed. The Invoice Regulations require the Local Distributors to show, under the sub-heading Electricity, the amount of electricity consumed and the commodity price for the electricity. Most invoices have two types of charges for the electricity consumed. One is based on the amount of KWH consumed in the month multiplied by the amount that the Local Distributor paid for each KWH, and the second item is what is called the Provincial Benefit (also known as the Global Adjustment).
[64] Mr. Todd explained that some of the Generators are paid two amounts for their electricity: the real-time market price determined when electricity is sold on the IESO market and the Provincial Benefit. The Provincial Benefit is the difference, if any, between the market price and a guaranteed minimum price offered by the Government of Ontario to certain Generators. The Local Distributors pay the Provincial Benefit to the Generators. It is then included in the price that the Local Distributors are allowed to charge their customers.
[65] Certain of the Local Distributors that issued a Detailed Invoice, such as Toronto Hydro,[12] show the Provincial Benefit under the Electricity sub-heading, while others, such as Festival Hydro (located in Stratford, Ontario) and Waterloo North Hydro, do not include the Provincial Benefit/Global Adjustment under the Electricity sub-heading, but rather under a sub-heading called Your Other Charges.[13] This means that Local Distributors such as Festival Hydro and Waterloo North Hydro not indicate their total cost to acquire electricity under the Electricity sub-heading. A portion appears under another sub-heading.
[66] Since I did not hear testimony from any of the Local Distributors, it is not clear why the majority of Local Distributors provide only the basic information required by the Invoice Regulations while other Local Distributors provide more information with respect to how the charge for each sub-heading is calculated. It is also not clear why some Local Distributors do not provide the disclosure required by the Invoice Regulations or why, in at least one situation, there is no itemized charge for delivery or regulatory charges.
[67] Each of the witnesses described items that appeared on certain of the Detailed Invoices. I did not find this testimony particularly helpful because the Local Distributors that issued Detailed Invoices were not consistent with respect to what items they itemized on invoices and because the majority of Local Distributors issued Basic Information Invoices. In addition, there is no evidence before me with respect to how the Local Distributors that issued Basic Information Invoices calculated the amounts shown under each of the four sub-headings.
[68] The evidence that is before me is that the Ontario Energy Board, applying the Invoice Regulations, dictated the items to be disclosed on the Local Distributors’ invoices, including the sub-headings to be used and the amounts that were to appear under each sub-heading. This, and the absence of evidence to the contrary, leads me to infer that the itemization is not based on what the Local Distributors believed that they supplied, but rather on what they were required to itemize under the Invoice Regulations. I would require contradictory evidence from a Local Distributor to reach a different conclusion.
Summary of the Law
[69] When calculating its net tax under subsection 225(1) of the GST Act, a person, such as the Appellant, may claim input tax credits. Subsection 169(1) of the GST Act contains the general rules for the claiming of input tax credits. The applicable portions of subsection 169(1) read as follows:
Subject to this Part, where a person acquires or imports property or a service or brings it into a participating province and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply, importation or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period:
A x B
where
A is the tax in respect of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and
B is
. . .
(c) . . . the extent (expressed as a percentage) to which the person acquired or imported the property or service or brought it into the participating province, as the case may be, for consumption, use or supply in the course of commercial activities of the person.
[70] As a result of subsection 169(1), a person’s ability to claim input tax credits is dependent on the person’s intended or actual use of the property or service in the person’s commercial activities.
[71] It is not in dispute that any property or service that the Appellant acquired from a Local Distributor was acquired for consumption or use in its commercial activities. It was entitled to, and did in fact, claim on its GST tax return input tax credits equal to 100% of the GST that it paid to the Local Distributors.
[72] However, at the time that Ontario and British Columbia agreed to be participating provinces for purposes of the GST Act, the GST Act was amended to add section 236.01, which may require a person to recapture a portion of the input tax credits that the person claimed under subsection 169(1). Specifically, section 236.01 requires certain persons to recapture the input tax credits that they claimed in respect of the tax that they paid under subsection 165(2), sections 212.1 and 218.1 and Division IV.1 on the acquisition, importing or bringing into a particular province of certain specified property or services. Section 236.01 applied to supplies made in Ontario between July 1, 2010 and June 30, 2018. This period includes the years at issue in this appeal.
[73] In order to understand how the recapture works, one must first understand how the GST is levied under the GST Act.
[74] The GST is levied under four separate and distinct divisions, each of which imposes the tax. The four divisions are as follows:
-Division II, which levies the tax on taxable supplies that are made in Canada. This is the tax levied on supplies that occur in Canada;
-Division III, which levies the tax on all goods imported into Canada, regardless of whether or not the goods are subject to Canadian customs duties;
-Division IV, which levies the tax on imported services and intangible personal property; and
-Division IV.1, which levies the tax on property and services brought into a participating province.
[75] Each of the divisions levies the federal GST at multiple rates.
[76] Subsection 165(1) levies Division II tax at a 5% rate on all taxable supplies made in Canada. Subsection 165(2) levies an additional tax on taxable supplies made in a so-called participating province at the relevant rate for that province. A participating province is a province that has agreed with the federal government to share the revenue realized from the GST. As of July 1, 2010, Ontario became a participating province. As a result, an additional tax at an 8% rate is levied under subsection 165(2) of the GST Act on all taxable supplies that are deemed under the GST Act to have been made in Ontario. This results in a total tax rate of 13%, which is referred to as the HST rate.
[77] Divisions III, IV and IV.1 operate in a similar manner. Tax at the 5% rate is levied under sections 212 and 218[14] of Division III and Division IV respectively. The additional tax on supplies consumed in participating provinces (e.g. the 8% rate for Ontario) is levied under sections 212.1 and 218.1 of Division III and Division IV respectively. Division IV.1 tax is only levied at the relevant participating province’s tax rate (e.g. the 8% rate for Ontario).
[78] During the periods at issue in this appeal, subsection 236.01(2) required that input tax credits in respect of the tax payable at the additional 8% Ontario rate be recaptured for certain specified supplies made in Ontario regardless of whether the tax was levied under division II, III, IV or IV.1.
[79] The issue in the current appeal is the amount of input tax credits that the Appellant must recapture in respect of the 8% tax that it paid under subsection 165(2) of Division II, section 212.1 of Division III, section 218.1 of Division IV or Division IV.1 on supplies made to it by the Local Distributors. It appears from the evidence before me that the Local Distributors only levied the 8% tax under subsection 165(2) of Division II.
[80] Subsection 236.01(2) reads as follows:
If a sales tax harmonization agreement with the government of a participating province relating to the new harmonized value-added tax system allows for the recapture of input tax credits, in determining the net tax for the reporting period of a large business that includes a prescribed time, the large business shall add all or part, as determined in prescribed manner, of a specified provincial input tax credit of the large business.
[81] The sales tax harmonization agreement between the federal government and Ontario allows for the recapture of input tax credits. Therefore, the recapture applied to a large business that operated in Ontario during a prescribed period.
[82] Large business is defined in subsection 236.01(1) to mean a prescribed person or a person of a prescribed class. The relevant regulations for purposes of section 236.01 are those included in Part 6 of the New Harmonized Value-added Tax System Regulations, No. 2 (the “Recapture Regulations”). Both parties accept that the Appellant is a prescribed person for purposes of section 27 of the Recapture Regulations and thus is a large business for purposes of subsection 236.01(2).
[83] As mentioned previously, the recapture applied during the periods at issue in this appeal. The periods at issue occurred during a prescribed time as defined in section 30 of the Recapture Regulations.
[84] Since the Appellant was a large business and the reporting periods at issue occurred during a prescribed time, the Appellant was required, when determining its net tax for the reporting periods to add all or part of a specified provincial input tax credit.
[85] Specified provincial input tax credit is defined in subsection 236.01(1) of the GST Act to mean:
(a)the portion of an input tax credit of a large business in respect of a specified property or service that is attributable to tax under subsection 165(2), section 212.1 or 218.1 or Division IV.1 in respect of the acquisition, importation or bringing into a participating province of the specified property or service; and
(b)a prescribed amount in respect of an input tax credit of a large business that is attributable to tax under subsection 165(2), section 212.1 or 218.1 or Division IV.1 or in respect of an amount that would be such an input tax credit if prescribed conditions were satisfied in prescribed circumstances.
[86] Paragraph (a) is the relevant portion of the definition for purposes of this appeal. As a result, the specified provincial input tax credits of the Appellant were all of the input tax credits that the Appellant claimed in respect of tax paid at the additional 8% Ontario rate on specified property or services in respect of the acquisition, importation, or bringing into Ontario of the specified property or service.
[87] Specified property or service is defined in subsection 236.01 to mean a prescribed property or service, or property or service of a prescribed class.
[88] Division 3 of the Recapture Regulations contains the prescribed property and services for purposes of the definition of specified property or service. Paragraph 28(1)(e) of the Recapture Regulations prescribes specified energy that is acquired in, or brought into, Ontario.
[89] Specified energy is defined is section 26 of the Recapture Regulations to mean:
(a) electricity, gas and steam; and
(b) anything (other than fuel for use in a propulsion engine) that can be used to generate energy
(i) by way of combustion or oxidization, or
(ii) by undergoing a nuclear reaction in a reactor for the generation of energy.
[90] As a result of section 236.01 and the Recapture Regulations, the Appellant was required to recapture the portion of the input tax credits that it claimed in respect of the tax that it paid under subsection 165(2) on the consideration for the supply by the Local Distributors of electricity.
[91] Further, pursuant to subsection 31(3) and section 26 of the Recapture Regulations, it was required to recapture 100% of such tax during the periods at issue.
[92] The Appellant has raised the issue of whether the tax it paid under subsection 165(2) to Local Distributors was in respect of a single supply of electricity or multiple supplies of electricity, delivery services and regulatory services.
[93] A taxable supply is defined in subsection 123(1) as a supply made in the course of a commercial activity. A supply is defined as the provision of property or a service in any manner, including sale, transfer, barter, exchang