Farm Credit Canada v. The Queen

Farm Credit Canada v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-02-24
Neutral citation
2017 TCC 29
File numbers
2013-4196(GST)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2013-4196(GST)G
BETWEEN:
FARM CREDIT CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 3, 2016 at Calgary, Alberta
Before: The Honourable Justice Steven K. D'Arcy
Appearances:
Counsel for the Appellant:
Dan Misutka
Nandini Somayaji
Counsel for the Respondent:
Marilyn Vardy
Darren Prevost
JUDGMENT
In accordance with the attached Reasons for Judgment:
1. The appeals from reassessments made under the Excise Tax Act, notices of which are dated September 10, 2012, for the reporting periods ending on March 31, 2009 and March 31, 2010 are quashed;
2. The appeal from a reassessment made under the Excise Tax Act, notice of which is dated September 17, 2012, for the reporting period ending March 31, 2011 is dismissed; and
3. Costs are awarded to the Respondent.
Signed at Vancouver, British Columbia, this 24th day of February 2017.
“S. D’Arcy”
D'Arcy J.
Citation: 2017 TCC 29
Date: 20170224
Docket: 2013-4196(GST)G
BETWEEN:
FARM CREDIT CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1] The issue before the Court is whether, during the relevant reporting periods, the Appellant was a “loan corporation” for the purposes of the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (the “Attribution Regulations”) adopted pursuant to Part IX of the Excise Tax Act (the “GST Act”).
[2] Neither party called witnesses during the hearing. The parties filed a statement of agreed facts (“SAF”) and a joint book of documents (Exhibit AR1). The parties agreed that the documents could be taken as proof of the truth of their contents. The Respondent provided additional evidence by way of read-ins.
I. Summary of Facts [3] The Appellant’s annual report for the fiscal period ending March 31, 2011 states that the Appellant “is a financially self-sustaining federal Crown corporation reporting to Parliament through the Minister of Agriculture and Minister for the Canadian Wheat Board.”[1]
[4] The SAF, attached as Appendix A to these Reasons for Judgment, provides information on the purpose and operations of the Appellant. The following paragraphs summarize this information.
[5] The Appellant’s purpose is to enhance rural Canada by providing specialized and personalized financial services to farming operations and enterprises that are closely related to, or dependent on, farming.
[6] The principal business of the Appellant is the lending of money.
[7] The Appellant is a corporation continued under the Farm Credit Canada Act[2] (the “FCCA”). It is not incorporated or continued under the federal Trust and Loan Companies Act[3] or under the relevant trust and loan corporation legislation of any province. In addition, it is not registered or licensed to carry on business as a loan corporation under the relevant provincial trust and loan corporation legislation.
[8] The statement of agreed facts notes that the Appellant is subject to federal oversight and federal statutory requirements, as set out below:
- The Appellant may be subject to a special examination by the Superintendent of Financial Institutions from time to time. The last special examination was conducted in respect of the period between December 11, 2012 and March 31, 2013.
- The FCCA imposes a maximum leverage requirement. The aggregate direct and contingent liabilities of the Appellant cannot, at any time, exceed twelve times the capital of the Appellant, except by order of the Governor in Council.
- The Appellant provides its annual corporate plan and financial results to the Minister of Finance and the Minister of Agriculture and Agri-Food.
[9] The Appellant offers the following three product lines in its lending business:
1. primary production financing;
2. agribusiness and agri-food financing; and
3. FCC Alliances point-of-sale financing.
[10] Primary production financing is the making of loans to primary producers, such as grain farmers or dairy farmers, to purchase inputs such as land, equipment or supplies.
[11] Agribusiness and agri-food financing is the making of loans to suppliers or processors who do business with primary producers. Examples of the Appellant’s customers in this category are equipment manufacturers and dealers, food processors (such as meatpackers) and input providers (such as seed wholesalers).
[12] FCC Alliances point-of-sale financing involves the Appellant entering into agreements with so-called alliance partners such as crop input suppliers, agricultural equipment dealers, and cattle dealers. In this form of financing, a primary producer seeks to make a purchase (or to lease) from an alliance partner. The primary producer seeks financing for the purchase from the Appellant, with the alliance partner operating as an intermediary.
[13] In addition to its lending activities, the Appellant has the following revenue-generating activities:
a. direct and indirect investment in commercialization-to-growth-stage businesses operating in various agricultural sectors;
b. the offering of loan, credit life, and accident insurance products administered by Sun Life Assurance Company of Canada; and
c. the sale of farm management software.
[14] The Appellant’s annual reports for its fiscal years ending March 31, 2009, 2010 and 2011 evidence that the Appellant’s net interest income after provision for credit losses comprises approximately 98% of its net income before administration expenses.[4]
[15] The statement of agreed facts does not state where in Canada the Appellant carries on its business. However, the Appellant’s annual reports note that the Appellant operates from 100 offices located in each of Canada’s ten provinces.[5]
II. Reporting Periods Before the Court [16] The Respondent, in her written submissions, argues that I should quash the appeals in respect of the Appellant’s GST reporting periods ending on March 1, 2009 and March 31, 2010. I agree, for the following reasons.
[17] The Appellant is an annual filer for the purposes of the GST Act. It is appealing reassessments in respect of its annual GST reporting periods ending on March 31, 2009, 2010 and 2011.
[18] The Minister assessed each of these reporting periods as follows:
- Annual reporting period ending on March 31, 2009, net tax of $224,131.74.
- Annual reporting period ending on March 31, 2010, net tax of $397,095.08.
- Annual reporting period ending on March 31, 2011, net tax of $2,537,716.99.
[19] The parties agree that, if the Court finds that the Appellant is a “loan corporation” under the Attribution Regulations, the Minister has assessed the correct amount of net tax for each of these reporting periods.[6]
[20] In addition, the parties agree[7] that, if the Court finds that the Appellant was a “general corporation” under the Attribution Regulations, the net tax of the Appellant for each of the reporting periods would be as follows:
- Annual reporting period ending on March 31, 2009, net tax of $267,611.74.
- Annual reporting period ending on March 31, 2010, net tax of $454,968.08.
- Annual reporting period ending on March 31, 2011, net tax of $2,022,265.99.
[21] The difficulty I have with the agreement reached by the parties is that the Appellant is not asking me to reduce the net tax assessed for its GST reporting periods ending on March 31, 2009 and on March 31, 2010. The Appellant and the Respondent are telling me that, if I find that the Appellant is a “loan corporation”, the assessments for those two reporting periods are correct and if I find that the Appellant is a “general corporation”, I should increase the assessments for those two reporting periods.
[22] While the Court can issue a judgment confirming the Minister’s assessment of net tax for a reporting period (by dismissing the appeal), it cannot issue a judgment increasing the amount of net tax the Minister has assessed for a reporting period. The Respondent cannot appeal her own assessment, which would be the result if I increased the amount of the net tax assessed.
[23] As a result, the Appellant’s appeals with respect to its reporting periods ending on March 31, 2009 and March 31, 2010 are quashed. The only reporting period properly before the Court is the Appellant’s reporting period ending on March 31, 2011.
III. The Law [24] The Attribution Regulations are part of what is generally referred to as the special attribution method (the “SAM Rules”) that applies to certain financial institutions. As the Appellant noted in its written submissions, the SAM Rules are very complex. This complexity is exacerbated by the fact that the SAM Rules were amended during the reporting period at issue, with very unusual effective dates for the amendments.
[25] However, one must understand the various statutory provisions that comprise the SAM Rules in order to determine the meaning of the words “loan corporation” as those words are used in the Attribution Regulations.
[26] I will begin my discussion of the law by summarizing the general operation of the GST Act. This discussion is required in order to provide context for the SAM Rules. I will then discuss, in detail, the operation of the SAM Rules.
A. Imposition of Tax Under the GST Act [27] The GST is levied under four separate and distinct divisions of the GST Act: Division II, Division III, Division IV, and Division IV.1.
[28] Division II tax is levied under subsections 165(1) and (2) of the GST Act. Those subsections read as follows:
(1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% of the value of the consideration for the supply.
(2) Subject to this Part, every recipient of a taxable supply made in a participating province shall pay to Her Majesty in right of Canada, in addition to the tax imposed by subsection (1), tax in respect of the supply calculated at the tax rate for that province on the value of the consideration for the supply.
[29] The effect of subsections 165(1) and (2) is to levy a single federal value added tax (the “GST”) at multiple rates on the recipient of taxable supplies made in Canada: the 5% rate for supplies made in so-called non-participating provinces[8] (the “GST rate”) and the various higher rates imposed on supplies made in so-called participating provinces that are subject to tax under both subsections 165(1) and (2) (the “HST rate(s)”).
[30] Schedule VIII to the GST Act contains the actual rates at which the tax is imposed under subsection 165(2) (the “Sch. VIII provincial tax rate(s)”).
[31] Between April 1, 2009 and March 31, 2011 (the relevant period), the Division II tax was levied at the following rates:
- During all of the relevant period, the Division II tax was levied at the 5% GST rate on supplies that were determined to be made in Alberta, Saskatchewan, Manitoba, Quebec, and Prince Edward Island.
- During all of the relevant period, the Division II tax was levied at a 13% HST rate on supplies that were determined to be made in either New Brunswick or Newfoundland. The 13% HST rate was comprised of the 5% rate levied under subsection 165(1) and an 8% Sch. VIII provincial tax rate levied under subsection 165(2) on supplies made in New Brunswick and Newfoundland.
- Prior to July 2010, the Division II tax was levied at a 13% HST rate on supplies that were determined to be made in Nova Scotia; the rate increased to a 15% HST rate for supplies made after June 2010. The increase in the HST rate was a result of the Sch. VIII provincial tax rate for supplies made in Nova Scotia increasing from 8% to 10% effective July 1, 2010.
- Prior to July 2010, the Division II tax was levied at the 5% GST rate on supplies that were determined to be made in British Colombia; the rate increased to a 12% HST rate for such supplies made after June 2010. The increase was a result of the addition of British Columbia as a participating province under the GST Act on July 1, 2010, the Sch. VIII provincial tax rate for that province being 7%.
- Prior to July 2010, the Division II tax was levied at the 5% GST rate on supplies that were determined to be made in Ontario; the rate increased to a 13% HST rate for such supplies made after June 2010. The increase was a result of the addition of Ontario as a participating province under the GST Act on July 1, 2010, the Sch. VIII provincial tax rate for that province being 8%.
[32] The recipient of a taxable supply pays the Division II tax to the GST registrant who supplied the property or service. The supplier then remits the Division II tax to the government.
[33] Division III tax is levied under section 212 at the 5% GST rate on all goods imported into Canada. In addition, under section 212.1, a resident of a participating province will pay additional Division III tax at the relevant Sch. VIII provincial tax rate on non-commercial goods imported into Canada. The Canada Border Services Agency collects the Division III tax at the time the goods are imported into Canada.
[34] Division IV tax at the 5% GST rate is levied under section 218 on certain services and intangible personal property imported into Canada. Subsection 218.1(1) levies Division IV tax at the relevant Sch. VIII provincial tax rate on such supplies that a person imports for consumption or use or supply in one or more of the participating provinces.
[35] Division IV tax is also levied under section 218.01 at the 5% GST rate on certain financial institutions in respect of internal charges.[9] Subsection 218.1(1.2) levies the Division IV tax at the relevant Sch. VIII provincial rate on such financial institutions that are resident in a participating province. The rules with respect to the imposition of Division IV tax under sections 218.01 and 218.1(1.2) are extremely complex. The provisions apply in certain situations to financial institutions that carry on their activities inside and outside of Canada, normally through branches.
[36] Generally speaking, Division IV tax is only levied if the services or intangible personal property are not subject to tax under Division II and are imported for use wholly or partly in GST non-commercial activities. The recipient of the supply of the imported service or intangible personal property pays the Division IV tax on a self-assessing basis.
[37] Division IV.1 tax is levied on property and services brought into a participating province. The tax is levied at the relevant Sch. VIII provincial tax rate. Similar to Division IV tax, Division IV.1 tax, generally speaking, only applies to property and services brought into a participating province for use wholly or partly in GST non-commercial activities. The tax is paid on a self‑assessing basis.
B. Input Tax Credits [38] Subsection 169(1), contains the general rules for the claiming of input tax credits in respect of GST paid on the acquisition or importation of property or services, or on the bringing of the property or services into a participating province. The subsection applies to all tax imposed under any of the four Divisions of the GST Act.[10]
[39] Generally speaking, subsection 169(1) allows a GST registrant to claim an input tax credit for GST paid to the extent that the registrant acquired or imported the property or service, or brought it into a participating province, for consumption, use, or supply in the course of the person’s GST commercial activities.
[40] For example, a GST registrant is entitled to claim a full input tax credit for the GST paid on the acquisition of property or a service if it acquired the property or service for use only in its GST commercial activities. However, if a registrant, such as a financial institution, acquired the property or service for use in the proportion of 30% in GST commercial activities and 70% in the course of making exempt supplies (a GST non-commercial activity), then it is only entitled to claim an input tax credit for 30% of the GST paid on the acquisition of the property or service.
C. Remittance of Tax by a GST Registrant [41] A GST registrant is required to calculate and remit its net tax for each of its GST reporting periods. The net tax of a person for a specific reporting period is determined under subsection 225(1). Generally speaking, the net tax of a person for a specific reporting period is all amounts that became collectible and all other amounts collected by the person in the particular reporting period as or on account of Division II tax minus input tax credits claimed in the GST return filed by the person.
[42] The GST registrant is also required to remit any tax it is required to self-assess under Divisions IV and IV.1. The registrant remits the Division IV and IV.1 tax with its net tax for the GST reporting period in which the Division IV and IV.1 tax became payable.[11]
[43] As discussed previously, the Canada Border Services Agency collects the Division III tax at the time the goods are imported into Canada.
D. The SAM Rules [44] A significant portion of a financial institution’s business is comprised of exempt activities. As a result, it is not entitled to recover, by way of input tax credits, all of the GST it pays on the acquisition or importation of property or services. The imposition of the GST at multiple rates raises issues for financial institutions that carry on business in both participating and non-participating provinces. Absent special rules, such financial institutions would be able to minimize the amount of non-recoverable GST they pay at the higher HST rate by purchasing and consuming goods and services in non-harmonized provinces at the lower 5% GST rate. This would potentially reduce investment in the participating provinces.
[45] The government recognized this issue at the time the first provinces elected to become participating provinces. As a result, it developed the SAM Rules for financial institutions that carry on business in both participating and non-participating provinces. The SAM Rules are intended to result in the location of a financial institution’s purchases or importations of goods and services not affecting the amount of non-recoverable GST payable by the financial institution at the HST rate. The Department of Finance referred to this objective as being “to avoid the HST creating a bias in terms of where an SLFI [selected listed financial institution] sources its inputs”.[12]
[46] There are four components of the SAM Rules. First, certain financial institutions are defined to be selected listed financial institutions (“SLFI”). Second, statutory adjustments are made to the tax payable by an SLFI under Divisions IV and IV.1 at the Sch. VIII provincial tax rate. Third, an SLFI is not entitled to claim input tax credits in respect of the portion of the GST paid at the Sch. VIII provincial tax rate. Fourth, adjustments are made to the SLFI’s net tax for a specific reporting period.
(1) First Component: What is an SLFI? [47] The SAM Rules only apply to SLFIs. The term SLFI is defined in subsection 225.2(1). The definition was amended in respect of any reporting period of a person that ends on or after July 1, 2010 (the “July 1, 2010 Amendment”). The July 1, 2010 Amendment coincided with Ontario and British Columbia becoming participating provinces. I will refer to subsection 225.2(1) as it read prior to the July 1, 2010 Amendment as “old subsection 225.2(1)”. I will refer to the subsection as it read after the July 1, 2010 Amendment as “new subsection 225.2(1)”.
[48] As I will discuss, certain sections of the Attribution Regulations apply when determining whether a person is an SLFI. In addition to subsection 225.2(1) being amended upon Ontario and British Columbia becoming participating provinces, substantial changes were made to the Attribution Regulations. In fact new regulations were introduced (the “New Attribution Regulations”) replacing the previous regulations (the “Old Attribution Regulations”). Any reference in these reasons for judgment to the Attribution Regulations is a reference to both the New Attribution Regulations and the Old Attribution Regulations.
[49] Old subsection 225.2(1) read as follows, as it applied to financial institutions that were corporations:
(1) For the purposes of this Part, a financial institution is a selected listed financial institution throughout a reporting period in a fiscal year that ends in a particular taxation year of the financial institution if the financial institution is a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) during the particular year and the preceding taxation year and
(a) the financial institution is a corporation that, under the rules prescribed in any of sections 402 to 405 of the Income Tax Regulations, has or would, if it had taxable income for the particular year and the preceding taxation year, have taxable income earned in the particular year and the preceding taxation year in any of the participating provinces and taxable income earned in the particular year and the preceding taxation year in any of the non-participating provinces;
. . .
(d) the financial institution is a prescribed financial institution.
[50] As a result, under old subsection 225.2(1) a financial institution that was a corporation had to satisfy the following two conditions before it was deemed to be an SLFI:
• It had to be a financial institution that was a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x), and
• It must either have been required, under the Income Tax Regulations, to allocate taxable income to both a participating and a non-participating province or be a prescribed institution. Section 2 of the Old Attribution Regulations provides that certain financial institutions are prescribed financial institutions for the purposes of old subsection 225.2(1).
[51] New subsection 225.2(1) reads as follows, as it applies to financial institutions that are corporations:
For the purposes of this Part, a financial institution is a selected listed financial institution throughout a reporting period in a fiscal year that ends in a taxation year of the financial institution if the financial institution is
(a) a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) during the taxation year; and
(b) a prescribed financial institution throughout the reporting period.
[52] New subsection 225.2(1) retains the first condition in old subsection 225.2(1), namely, that the financial institution be a listed financial institution under subparagraphs 149(1)(a)(i) to (x ), but replaces the second condition in old subsection 225.2(1) - i.e., that the financial institution either be required to allocate income under the Income Tax Regulations or be a prescribed institution under section 2 of the Old Attribution Regulations - with the requirement that the financial institution be a prescribed financial institution. Section 9 of the new Attribution Regulations provides that certain financial institutions are prescribed financial institutions for the purposes of new subsection 225.2(1).
[53] With respect to the first condition, listed financial institution is defined in subsection 123(1) to mean a person referred to in paragraph 149(1)(a), which defines financial institution. Paragraph 149(1)(a) contains subparagraphs (i) to (xi). An SLFI is defined to only include the listed financial institutions mentioned in subparagraphs (i) to (x) of paragraph 149(1)(a), which are the following:
(i) a bank,
(ii) a corporation that is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee,
(iii) a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money,
(iv) a credit union,
(v) an insurer or any other person whose principal business is providing insurance under insurance policies,
(vi) a segregated fund of an insurer,
(vii) the Canada Deposit Insurance Corporation,
(viii) a person whose principal business is the lending of money or the purchasing of debt securities or a combination thereof,
(ix) an investment plan, [and]
(x) a person providing services referred to in section 158.
[54] Paragraph 4 of the SAF states that the “principal business of the Appellant is the making of loans”. As a result, the Appellant satisfies the first requirement of old subsection 225.2(1) and new subsection 225.2(1) since it is a financial institution that is a listed financial institution described in subparagraph 149(1)(a)(viii), being a person whose principal business is the lending of money.
[55] With respect to the second condition in subsection 225.2(1), I will first consider that condition as stated in old subsection 225.2(1).
[56] Under old subsection 225.2(1), a financial institution satisfied the second condition if it was required under sections 402 to 405 of the Income Tax Regulations to allocate taxable income to both a participating and a non-participating province or was a prescribed financial institution.
[57] Under section 402 of the Income Tax Regulations, the financial institution will only be required to allocate income to a particular province if it has a permanent establishment in the province. Subsection 400(2) of the Income Tax Regulations defines permanent establishment as, generally speaking, a fixed place of business.
[58] It is my understanding that the Appellant, as a Crown corporation, does not pay provincial income tax and therefore does not fall within sections 402 to 405 of the Income Tax Regulations. As a result, it did not satisfy the second condition contained in paragraph (a) of old subsection 225.2(1).
[59] However, the second condition would also be satisfied if the Appellant was a prescribed financial institution under the Attribution Regulations.
[60] Under section 2 of the Old Attribution Regulations, a financial institution is a prescribed financial institution for the purposes of paragraph (d) of old subsection 225.2(1), if the financial institution is named in Schedule III of the Financial Administration Act and, if it were required to pay tax under the Income Tax Act, it would be required to allocate income to a participating province and a non-participating province under the allocation rules in sections 402 to 405 of the Income Tax Regulations.[13]
[61] The Appellant is named in Schedule III of the Financial Administration Act and the Appellant conceded in its written argument that it was a prescribed person under section 2 of the Old Attribution Regulations.
[62] In summary, the Appellant satisfied the first and second conditions under old subsection 225.2(1) and was a selected listed financial institution under old subsection 225.2(1).
[63] I will now consider the second condition under the new subsection 225.2(1). The second condition is satisfied if the financial institution is a prescribed financial institution under section 9 of the New Attribution Regulations. Under section 9 of the New Attribution Regulations, a financial institution, such as the Appellant, is a prescribed financial institution for the purposes of the definition of SLFI if it has a permanent establishment in a participating province and a permanent establishment in any other province. That section reads as follows,
Subject to sections 10 to 15 and for the purpose of paragraph 225.2(1)(b) of the Act, a financial institution is a prescribed financial institution throughout a reporting period in a particular fiscal year that ends in a taxation year of the financial institution if the financial institution
(a) has, at any time in the taxation year, a permanent establishment in a participating province and has, at any time in the taxation year, a permanent establishment in any other province; or
(b) is a qualifying partnership during the taxation year.
[64] Subsection 1(1) of the New Attribution Regulations defines permanent establishment of a person for the purposes of the New Attribution Regulations. That subsection defines permanent establishment of a corporation to mean any permanent establishment determined under subsection 400(2) of the Income Tax Regulations and any permanent establishment that entity is deemed to have under section 3 of the New Attribution Regulations. As a result, a selected listed financial institution that is a corporation will be deemed to have a permanent establishment in a province if it has a fixed place of business in the province (i.e., a permanent establishment under subsection 400(2) of the Income Tax Regulations) or is deemed to have a permanent establishment under section 3 of the New Attribution Regulations.
[65] Section 3 of the New Attribution Regulations contains rules that deem certain financial institutions to have a permanent establishment in a specific province. Paragraph 3(a) sets out a rule that deems a bank to have permanent establishments in certain provinces on the basis of where deposits held by the bank, property securing loans issued by the bank, or borrowers in respect of unsecured loans issued by the bank are located. Paragraph 3(b) deems an insurer to have permanent establishments in certain provinces by virtue of the location of property and persons insured by the insurer. Paragraph 3(c) contains a deeming rule for trust and loan corporations, trust corporations or loan corporations. The paragraph deems such entities to have a permanent establishment in certain provinces on the basis of where property securing loans issued by the entity, borrowers in respect of unsecured loans issued by the entity, or non-loan business carried on by the entity are located. Paragraphs 3(d), (e), and (f) extend the meaning of permanent establishment for a segregated fund of an insurer, a distributed investment plan and a private investment plan.
[66] Section 3 of the New Attribution Regulations extends the meaning of permanent establishment by looking past the physical fixed place of business of an entity to see if the entity is earning income in provinces where it does not have a physical fixed place of business. For example, under paragraph 3(c) of the New Attribution Regulations a financial institution that is a trust and loan corporation, a trust corporation or a loan corporation will be deemed to have a permanent establishment in a province if a loan that was made by the financial institution is outstanding and is secured by land situated in the province, or, if not secured by land, is owing by a person resident in the province, or if the financial institution conducts business (other than business in respect of loans) in the province. The financial institution is deemed to have a permanent establishment in the province even if it does not have a fixed place of business in that province. As a result of these new provisions, financial institutions that only have a single fixed place of business may still be deemed to be SLFIs.
[67] The backgrounder issued by the Department of Finance with respect to the New Attribution Regulations explains that section 3 is being added to ensure that a financial institution that carries on business across Canada, including in one or more participating provinces, is an SLFI even if it only has one fixed place of business.
[68] The New Attribution Regulations have unusual effective dates. Section 9 applies in respect of a reporting period that ends on or after July 1, 2010. The definition of permanent establishment in subsection 1(1) applies in respect of reporting periods that end on or after July 1, 2010, except that references to investment plans in paragraphs (a) and (b) are to be ignored as is paragraph (c), for reporting periods in a fiscal year that ends in a taxation year of the financial institution that begins before May 3, 2013.
[69] Section 3 of the New Attribution Regulations has two effective dates. The deeming provisions with respect to banks, segregated funds of an insurer, distributed investment plans and private investment plans apply in respect of a reporting period of a person that ends on or after July 1, 2010. However, the deeming provisions with respect to insurers, trust and loan corporations, trust corporations and loan corporations only apply in respect of a reporting period in a fiscal year of a person that begins on or after July 1, 2010.
[70] The reporting period of the Appellant that is before the Court began on April 1, 2010 and ended on March 31, 2011. Since this reporting period ended after June, 2010, new subsection 225.2(1) applies when determining whether the Appellant was an SLFI during the reporting period. As I have already discussed, the Appellant satisfied the first condition of new subsection 225.2(1) since it is a listed financial institution described in paragraph 149(1)(a)(viii).
[71] The second condition of new subsection 225.2(1) is satisfied if the Appellant is a prescribed financial institution under section 9 of the New Attribution Regulations. The Appellant was a prescribed financial institution during the reporting period at issue if it had a permanent establishment in a participating province and a permanent establishment in a non-participating province.
[72] The determination of where the Appellant had a permanent establishment will be made under subsection 1(1) of the New Attribution Regulations, since paragraph (b) of the definition of permanent establishment applies to reporting periods that end after June, 2010. However, paragraph 3(c) of the New Attribution Regulations, which extends the meaning of permanent establishment for “loan corporations”, will not apply to the Appellant even if I do determine that the Appellant was a “loan corporation” during the relevant period. This is the result since paragraph 3(c) of the New Attribution Regulations only applies to reporting periods of the Appellant that begin on or after July 1, 2010. The reporting period at issue began on April 1, 2010.
[73] Thus, the Appellant will satisfy the second condition as it had a fixed place of business in participating and non-participating provinces. The evidence before me is that the Appellant had fixed places of business in participating and non-participating provinces since it conducted its business through offices located in each of the 10 provinces.
[74] In summary, the Appellant was an SLFI during the reporting period before the Court.
(2) Second and Third Components: Adjustments to tax payable and input tax credits [75] The second component of the SAM Rules, namely, adjustments to the tax payable by an SLFI, is set out in subsection 218.1(2) for Division IV tax and section 220.04 for Division IV.1 tax.
[76] Subsection 218.1(2) provides that SLFIs do not self-assess the Division IV tax imposed under subsections 218.1(1) and (1.2) at the Sch. VIII provincial tax rate.[14]
[77] Section 220.04 provides that SLFIs do not self-assess the tax imposed under Division IV.1 at the relevant Sch. VIII provincial tax rate.[15]
[78] The result of these two sections is that SLFIs pay GST under the various divisions of the GST Act as follows:
- SLFIs pay Division II tax under subsections 165(1) and 165(2) at either the 5% GST rate, or the relevant HST rate, depending on whether the supply is made in a participating province or a non-participating province;
- SLFIs pay Division III tax under section 212 at the 5% GST rate on goods imported in the commercial stream and, under sections 212 and 212.1, at the relevant HST rate on goods that are not imported in the commercial stream; and
- SLFIs self-assess Division IV tax under sections 218 and 218.01 at the 5% GST rate.
[79] As a result, an SLFI only pays tax at the HST rate under Division II and Division III. It is not required, under Division IV and Division IV.1, to self-assess tax at the Sch. VIII provincial tax rate.
[80] The third component of the SAM Rules is set out in subsection 169(3). The subsection provides that an SLFI is not entitled to claim input tax credits for the portion of the HST imposed at the Sch. VIII provincial tax rate under Division II (subsection 165(2)) and under Division III (section 212.1).[16] As a result, an SLFI can only claim input tax credits at the 5% GST rate for any tax it has paid under Divisions II, III and IV.[17]
[81] In summary, when calculating its net tax under the general rules in subsection 225(1), the SLFI includes tax collected at both the GST rate and the HST rate,[18] however it only claims input tax credits for tax paid at the GST rate. This is the result even if it paid Division II and/or Division III tax at the higher HST rate. In addition, the SLFI is only required to self-assess Division IV tax at the GST rate, even if it imports intangible personal property or services for consumption in a participating province. Finally, the SLFI is not required to self-assess Division IV.1 tax on property and/or services it brings into a participating province for use in non-commercial activities.
(3) Fourth Component: The SAM calculation [82] The fourth component of the SAM Rules, subsection 225.2(2), compensates for the departures from the “standard” GST rules with respect to Division IV and IV.1 tax payable and the claiming of input tax credits. It operates by adjusting the SLFI’s net tax determined under the general rules in 225(1).
[83] Specifically, the SLFI, when determining its net tax for a specific reporting period, adds to or deducts from the amount determined under subsection 225 (1) the amount determined by the formula [(A-B) x C x (D/E)] - F + G.[19]
[84] The SLFI performs a separate subsection 225.2(2) calculation for each participating province. The following describes the calculation for a specific participating province.
[85] The first calculation is (A-B).
[86] A is defined as the total of all tax payable by the SLFI under subsection 165(1) and sections 212, 218 and 218.01 in the reporting period.[20] This is all the Division II, III and IV tax the SLFI paid at the 5% GST rate.
[87] B is defined as all of the input tax credits claimed by the SLFI in its GST return for the specific reporting period.[21] As discussed previously, the SLFI is only entitled to claim input tax credits for tax paid at the 5% GST rate.
[88] As a result, A-B represents the tax the SLFI paid at the 5% GST rate that is not recoverable by the claiming of an input tax credit (the Non-recoverable 5% Tax).
[89] C is a percentage determined in accordance with the relevant provisions of the Attribution Regulations. The percentage is determined for the specific participating province and represents the allocation of a portion of the SLFI’s Non-recoverable 5% Tax to the specific participating province. I will refer to the percentage as the “Attribution Percentage”.
[90] The next calculation is (D/E). D is the Sch. VIII provincial tax rate for the specific participating province and E is the rate set out in subsection 165(1). The effect of multiplying the portion of the Non-recoverable 5% Tax allocated to the specific participating province by D/E is to grossup the allocated Non-recoverable 5% Tax to the Sch. VIII provincial tax rate for the specific participating province. The result is the amount of non-recoverable tax the SLFI should pay at the Sch. VIII provincial tax rate for the specific province.
[91] F represents the amount of tax that became payable, or was paid by the SLFI without having become payable, under either subsection 165(2) (Division II tax) or under section 212.1 (Division III tax) at the Sch. VIII provincial tax rate for the specific participating province. F is intended to give the SLFI credit for the tax it became liable to pay, or that it did pay, dur