Bank of Montreal v. Canada (Attorney General)

Bank of Montreal v. Canada (Attorney General)
Court (s) Database
Federal Court Decisions
Date
2020-11-26
Neutral citation
2020 FC 1014
File numbers
T-901-19
Decision Content
Date: 20201126
Docket: T-901-19
Citation: 2020 FC 1014
Ottawa, Ontario, November 26, 2020
PRESENT: Madam Justice Walker
BETWEEN:
BANK OF MONTREAL
Applicant
and
ATTORNEY GENERAL OF CANADA
Respondent
AMENDED PUBLIC JUDGMENT AND REASONS
(Confidential Judgment and Reasons issued on October 29, 2020)
[1] This application centres on the method of computation of input tax credits (ITCs) to be used by the Bank of Montreal (the Bank or BMO) in the calculation of its net Goods and Services Tax (GST)/Harmonized Sales Tax (HST) owing for its November 1, 2017 - October 31, 2018 fiscal year (FY 2018). The Bank applied to the Minister of National Revenue (Minister) to use a particular allocation method to compute its ITCs for FY 2018 pursuant to subsection 141.02(18) of the Excise Tax Act, RSC 1985, c E-15 (ETA). The Minister denied the Bank’s application in a letter dated April 30, 2019 (Decision) and the Bank requests the Court’s review of the Decision.
[2] The Bank argues that the Minister exceeded the scope of her authority in denying its FY 2018 application (2018 Application). BMO also argues that the Decision was either incorrect or unreasonable principally because the Minister erred in (1) departing from her authorization of the same or a similar ITC computation method for the Bank’s prior fiscal years; and (2) her substantive rationale for the denial. The Respondent submits that the Decision was within the Minister’s authority to approve the Bank’s proposed computation method under section 141.02 of the ETA and that the Decision was reasonable. The Respondent states that the Minister’s conclusions regarding the distortion of BMO’s ITC claim resulting from the proposed method were fully explained in the Decision and supported by the evidence in the record.
[3] For the reasons that follow, the Bank’s application for judicial review of the Decision is dismissed. Very briefly, I have found that:
(1) The standard for the Court’s review of the Decision is reasonableness;
(2) The Minister’s denial of the Bank’s 2018 Application falls within the scope of her authority pursuant to subsection 141.02(20) of the ETA; and
(3) The Decision was reasonable. The Minister provided reasons for her denial in accordance with subsection 141.02(22) and those reasons were justified in light of the evidence in the record, the statutory scheme governing her approval authority in the ETA, and the parties’ submissions.
[4] By way of preliminary matter and with the consent of the parties, the style of cause in this matter is amended to reflect the proper respondent, the Attorney General of Canada, in accordance with Rule 303(3) of the Federal Courts Rules, SOR/98-106 (Rules).
[5] Certain commercially sensitive evidence filed in this Application is subject to a Confidentiality Order dated November 14, 2019. A confidential Judgment was sent to the parties on October 29, 2020 to allow them to propose any redactions required for the public issuance of the Judgment. The Bank proposed redactions on November 18, 2020. I have reviewed the redactions proposed. I am satisfied that they appropriately balance the interest of protecting confidential information and the public interest in open and accessible court proceedings.
I. Introduction
[6] ITCs are a fundamental principle of the Canadian GST/HST regime. In lay terms, they are a deduction from the amount of GST/HST (“GST” for purposes of this judgment) a business is required to pay to the government in each reporting period. An enterprise’s ITC claim can be straightforward where it conducts one business in Canada engaged solely in selling GST taxable goods and services to Canadian residents but the Bank’s ITC claim is not straightforward. The Bank’s business has a number of facets and is not confined to Canada. In addition, the provision of ‘financial services’ by the Bank, its primary business, is subject to complex GST and ITC computation rules. Those rules, when coupled with the difficulty inherent in identifying the Bank’s income (based on interest rate spreads) and the fact that money is fungible, lead to the issues in this application.
[7] A fulsome discussion of the ITC scheme, the relevant definitions contained in the ETA, the Bank’s business, and its 2018 Application follows in this judgment. However, central to the Bank’s proposed computation method is the concept of an allocation of its ITCs among its operating groups as one step of the calculation of its net GST payable. The Minister described the purpose of an allocation in the Decision:
An allocation is a means of attributing an input to a particular supply or supplies. Attribution methods must accurately reflect […] the actual extent to which a particular input was acquired, imported or brought into a participating province for consumption or use, or was consumed or used (“acquired or used”) for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.
[8] The Bank’s 2018 Application is based on a tiered allocation and computation of its ITC entitlement. Significant tiers or elements of the Bank’s 2018 computation method were accepted by the Minister and are not in dispute. The Minister denied the 2018 Application because, in her view, the structure of BMO’s proposed method to determine its ITC claim for its residual pool of GST costs did not provide a reasonable approximation of the goods and services (inputs) the Bank used for the purpose of making taxable supplies. Although the issue before me can be stated simply, its resolution is far from simple due to the nature of the GST regime and the calculation of ITCs by a financial institution, the structure of sections 141.01 and 141.02 of the ETA, the complexity of the Bank’s proposed method, and the parties’ multi-layered arguments.
II. Overview of the GST and ITC regime
[9] I will begin with an overview of the relevant concepts and provisions of the GST and ITC regime to provide context for the factual background to the Bank’s 2018 Application and the issues raised by the Bank in this application for judicial review.
[10] The GST is a value-added sales tax (VAT) applied to a taxable supply of property or services for consideration (subs. 165(1) of the ETA). As a VAT, the GST is intended to be paid by the final consumer of the goods or services purchased. A business in the supply chain bears only the GST it collects on the value it adds to a property or service. The mechanism for ensuring the GST is a VAT is the ITC. Each business in the supply chain is entitled to claim ITCs to recover the GST paid to its suppliers (GST Cost) on purchases related to its taxable commercial activities. Using an example from the Bank’s submissions, if a bookshop buys a book from a supplier for $80.00, the bookshop pays $4.00 in GST to the supplier. The bookshop then sells the book for $100.00 to a final consumer in Canada, adding $20.00 in value and charging $5.00 in GST to the consumer. The bookshop is entitled to an ITC of $4.00 (its recoverable GST Cost) and is required to remit to the government $1.00.
[11] Under the ETA, a “supply” is the sale, lease or other provision of a property or service and is either a taxable supply or an exempt supply. Taxable supplies are taxed at differing rates and a supply that is subject to a zero rate of GST (zero-rated supply) is nonetheless a taxable supply. These terms are defined in section 123 of the ETA. The term “financial service” is also defined in section 123 and includes deposit taking and lending services. The supply of financial services to a resident of Canada is an exempt supply (Schedule V to the ETA), while certain financial services provided to non-residents are zero-rated (taxable) supplies (Schedule VI to the ETA).
[12] The distinction between taxable supplies and exempt supplies is critical in the ITC regime and in this application. A business is entitled to claim ITCs in respect of the goods and services, or inputs, it uses in making taxable supplies to its customers and clients. If a business engages solely in the provision of taxable supplies to its customers, its ITC claim is typically straightforward (e.g. the for-profit bookshop that only sells books to Canadians).
[13] In the present context, if the Bank provided financial services to Canadian clients only (exempt supplies), those clients would not pay GST to the Bank for those services and the Bank would not be permitted to claim ITCs for the GST it paid to acquire all the inputs (desks, purchased or leased premises, etc.) required to carry on its business. In reality, BMO provides financial services to both Canadian clients and non-resident clients. In GST language, it makes exempt and taxable supplies. Even though the Bank collects no GST from its non-resident clients in respect of its financial services because those supplies are zero-rated, it is entitled to collect ITCs in respect of the inputs used to make those supplies.
[14] The ETA does not require a specific allocation method or the use of specific accounting systems that would separate each property or service that a business uses in its provision of taxable and exempt supplies (Magog (City of) v Canada, 2001 FCA 210 at para 17 (Ville de Magog)). Rather, most businesses are permitted to select an ITC computation method, subject to the requirement in subsection 141.01(5) of the ETA that the business’s method be fair and reasonable and be used by the business throughout the fiscal year.
[15] Generally, a business required to pay GST is subject to a self-reporting and self-assessment regime. The business calculates the net amount of GST it is required to submit to the Canada Revenue Agency (CRA) for each reporting period based on its selected ITC computation method. The business’s GST return and remittance is subject to audit. As part of the audit, the Minister has the right to determine whether the computation method chosen by the business is fair and reasonable. If not, the Minister reassesses the return and denies some or all of the ITCs claimed by the business, and issues an assessment. The business then has the right to object to the assessment and appeal the assessment to the Tax Court of Canada (TCC).
III. The Pre-approval regime: Section 141.02 of the ETA
[16] Parliament amended the ITC regime for Canadian financial institutions in 2008 by enacting what is now section 141.02 of the ETA. The section creates two categories of financial institutions. Qualifying institutions (QIs) consist of large Canadian banks, insurers and securities dealers, including the Bank. Non-qualifying institutions are smaller financial institutions and are not subject to the pre-approval regime set out in section 141.02.
[17] An additional set of subsection 141.02(1) definitions is necessary to understanding the dispute between the parties. The subsection requires financial institutions to categorize the inputs used in their businesses as: (1) “excluded inputs”, which are typically capital expenditures; (2) “exclusive inputs”, which can be traced exclusively to use in the provision of either taxable or exempt supplies; and (3) “residual inputs”, which are all remaining inputs. In an allocation of residual inputs, the “operative extent” and “procurative extent” of a property or service must be determined. The operative or procurative extent of a property or service is the extent to which the particular property or service is consumed or used (operative extent), or acquired or purchased (procurative extent), for the purpose of making taxable supplies for consideration or for a purpose other than making taxable supplies for consideration. The question posed is what are the various assets and services purchased by the Bank being used for: the making of taxable supplies (the provision of financial services to non-residents of Canada) or the making of exempt supplies (the provision of financial services to Canadian residents)?
[18] Under the section 141.02 regime, QIs are subject to a distinct scheme for the computation of their eligible ITCs. Pursuant to subsection 141.02(18), a QI may apply to the Minister in advance of each fiscal year for approval of their proposed ITC computation method for the year. The Minister may approve or deny the use of the method (subs. 141.02(20)). The Minister’s decision is separate from the audit process and is not subject to appeal to the TCC. If the Minister authorizes the method, that method must be used by the QI to prepare its GST return for the particular fiscal year (subs. 141.02(21)). Any audit of that return is limited to determining whether the approved method was used consistently through the year and applied correctly.
[19] If the Minister denies the application, she must provide reasons for the denial (subs. 141.02(22)) and her decision is subject to review by this Court. The QI cannot use its proposed allocation method and is deemed to have used residual inputs for the purpose of making taxable supplies at a prescribed rate of 12% (subs. 141.02(8)). In its submissions, the Bank highlights the impact to it of the application of the prescribed rate of recovery for residual inputs, stating that it normally recovers a materially higher percentage of its residual GST Costs through ITCs.
IV. Factual background
[20] The Bank is one of Canada’s largest financial services institutions, providing a broad range of personal and commercial banking, wealth management and investment banking products to more than 12 million customers globally. BMO carries on business in Canada and through foreign branches, and owns an array of subsidiaries and other entities. As noted above, the Bank is a QI for purposes of section 141.02 of the ETA.
[21] The Bank engages in the provision of financial services, primarily deposit taking, borrowing and lending. The financial services BMO provides to its Canadian clients are exempt supplies. As a result, the Bank is not entitled to claim ITCs for the GST it pays to obtain inputs used to provide those services. Conversely, the financial services BMO provides to non-residents of Canada are generally taxable, zero-rated supplies and the Bank is entitled to claim ITCs for the GST it incurs on inputs used to provide those financial services.
[22] The Bank operates through five operating groups, three of which are customer-facing: Personal and Commercial Banking (P&C), Wealth Management and Capital Markets. The primary activity of the largest customer-facing operating group, P&C, is the provision of banking services (deposit taking and lending) to Canadians, mainly through BMO’s many Canadian branches.
[23] The remaining two groups are Corporate, which includes the Bank’s Treasury group, and Technology & Operations (T&O). Corporate and T&O centralize certain management functions of the Bank for the customer-facing operating groups. As its name suggests, T&O is responsible for BMO’s physical and technological infrastructure. The Corporate group centralizes the Bank’s legal, tax, accounting and regulatory operations. The Treasury group within Corporate is responsible for the Bank’s liquidity requirements. It raises funding for the Bank, including funding required by the three customer-facing operating groups, to ensure the Bank has available sufficient liquid assets to satisfy its financial commitments at all times. A material part of the Treasury group’s liquidity operations involves the borrowing of funds in foreign markets (the supply of financial services, via the issuance of a debt security, to a non-resident of Canada).
[24] Following the introduction of section 141.02 of the ETA, the Bank applied to the Minister for authorization to use a particular ITC allocation method (Initial Method) in respect of each of its 2009-2016 fiscal years. The Minister authorized BMO to use the Initial Method for each such fiscal year.
[25] The Bank revised the Initial Method (Revised Method) for its FY 2017. BMO submitted its application to use the Revised Method to the Minister on August 3 and 4, 2016. After a long period of discussion and consultation, the Minister authorized the Bank’s use of the Revised Method with modifications (2017 Approved Method) on January 29, 2018. In the authorization letter, the Minister stated that the remaining outstanding issues under discussion would be addressed during a future audit of the fiscal year.
[26] On February 28, 2018, the Bank submitted the 2018 Application requesting the Minister’s approval to use the 2017 Approved Method for FY 2018. There was no significant change in the Bank’s business operations between FY 2017 and FY 2018. Again, a lengthy period of discussions, meetings, consultation and negotiation between the parties ensued.
[27] Despite many attempts by the parties to explain their respective positions and to resolve their disagreements, the Minister denied the Bank’s 2018 Application on April 30, 2019.
V. The Bank’s proposed ITC computation method
[28] The Bank’s proposed method for computing its ITC entitlement for FY 2018 (2018 Method) relies on its financial reporting system and has two main phases. The Bank first calculates the total amount of GST paid by the Bank during the year and allocates that total GST Cost to each of the five operating groups. Second, a three-tiered allocation of the GST Costs incurred by the Bank is undertaken:
(1) Cost Allocation Formula (Technical Services Agreements (TSAs)).|||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| This step of the 2018 Method is not in dispute.
(2) Specific use formula.|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||| Again, this step of the 2018 Method is not in dispute.
(3) Output method formula (OMF). The Bank’s 2018 ITC Claim in respect of its residual pool of GST Costs is calculated using a revenue-based OMF, which itself involves three steps. The focus of the OMF calculation is the Bank’s interest revenues (or ‘Outputs’ using the Respondent’s terminology): interest amounts that are the consideration for the supply of financial services (the borrowing and lending of money) for GST purposes. The Minister did not accept the Bank’s OMF methodology and denied the 2018 Application. It is certain aspects of this step of the 2018 Method that remain in dispute.
[29] Before describing the three steps of the OMF, it is first necessary to understand the two components of the Bank’s interest revenues derived from the supply of financial services to its customers. For GST purposes, BMO makes a supply of a financial service both when it borrows money (because it supplies a debt security and pays interest) and when it lends money (because it supplies funds and receives interest). Therefore, interest paid and interest received by the Bank are included in the OMF calculation.
[30] The OMF, as proposed, functions as follows: (A) the Bank calculates its aggregate interest revenues by adding |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| (collectively, Interest Amounts); (B) the OMF allocates the Interest Amounts from Corporate, including the Treasury group, among the three customer-facing operating groups |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| (Treasury Allocations); and (C) a ratio (OMF ratio) is applied to the aggregated Interest Amounts in each customer-facing operating group to arrive at the proportion or percentage of the aggregated Interest Amounts derived from transactions in which the counterparty to the Bank was a non-resident of Canada (i.e. zero-rated transactions). The resulting percentage (Recovery Rate) is applied to each operating group’s co-mingled residual GST Cost pool to determine ITC eligibility.
VI. Decision under review
[31] The Decision consists of a Decision letter and detailed attachment. It is supported by a lengthy Decision Report. The Minister identified a number of concerns with the 2018 Method in the Decision but the parties agree that the Minister’s denial of the Application was in fact based on (1) the allocation through the OMF of the Interest Amounts of the Treasury group to the three customer-facing operating groups (OMF/Allocation Issue); and (2) the components of the formula itself and the use of the aggregated Interest Amounts to arrive at the Recovery Rate for determining ITC eligibility in each operating group (OMF/Recovery Rate Issues).
[32] The Minister used the Decision letter to set out the framework for her analysis of the OMF. She identified two guiding GST principles:
The Minister acknowledged that the Treasury Allocations to the customer-facing operating groups may align with the Bank’s general allocation policies designed to meet its regulatory requirements but distinguished the GST regime. She stated that an allocation model for GST purposes must connect the purchase or lease of an input on which GST was paid with the use of that input by the business in its operations:
Treasury allocations to the customer facing operating groups may be in accordance with the bank’s allocation policies in order to meet the regulatory requirements; however, the concept of an underlying allocation method or methods used must link a particular property or service on which tax was paid or payable to its use for the purpose of making taxable supplies for consideration and for purposes other than making taxable supplies for consideration.
The Minister then addressed the use of an OMF and emphasized that the Bank’s output-based method must result in a “reasonable approximation” of the assets and properties actually used by it for the purpose of making taxable supplies:
OMF is the least preferred method to determine the operative and procurative extent of business inputs. If an output method allocation is used, the calculation must give reasonable approximation of the inputs used for the purpose of making taxable supplies - in this case the zero-rated financial services provided by Treasury.
[33] The Minister concluded that the Bank’s OMF did not result in a reasonable approximation of the inputs it used to provide zero-rated financial services to non-residents of Canada:
The distortions noted in “Attachment A” to this letter, ha[ve] resulted in the method not providing a reasonable approximation of the inputs. This has resulted in an excessive amount of ITCs that you have proposed to claim through OMF for the zero-rated financial services provided by the treasury department of the corporate support services group. As explained in all our letters/submissions and meetings, the ITCs for the zero-rated financial services in question should be limited to the direct and allocable inputs for these services at the corporate level.
[34] In Attachment A to the Decision letter, the Minister reiterated the general principles governing the use of an ITC allocation method to determine the operative and procurative extent of a property or service. The Minister referred to the Bank’s 2016 Annual Report and its description of the Treasury group and the operating groups as responsible for the ongoing management of liquidity and funding risk across the enterprise. The Minister noted that one of the main functions of a bank’s treasury department is to manage capital and liquidity to ensure that all parts of the bank can readily access the cash they need to conduct business activities.
[35] Although Attachment A is lengthy and somewhat repetitive in structure, the Minister framed her denial of the 2018 Application around her concerns with the OMF and the two general principles cited in the Decision letter. The repetition in Attachment A occurs because the Minister addressed separately, but in largely parallel terms, the non-domestic lending and borrowing functions (interest income and interest expenses) of the Corporate and Treasury groups and the counterparties to those various transactions (foreign branches, foreign subsidiaries and third parties).
[36] OMF/Allocation Issue: The Minister stated that any ITC recovery for administrative and funding supplies provided by the Corporate group, including Treasury, should come from the GST Costs incurred or allocated to the Treasury function. The Minister concluded that the OMF did not respect this principle because it permits the Bank to dip into the GST Costs of the customer-facing operating groups.
[37] The Minister found that the Bank had claimed its eligible ITCs for the services provided by Corporate and Treasury to foreign branches, subsidiaries and third parties through its TSAs and cost recovery, each a prior pass or step in the 2018 Method. It followed that the OMF permits additional and ineligible ITC recovery by allocating Treasury revenues (Interest Amounts) to the customer-facing groups:
Including the treasury revenues […] from the branches into the OMF formulae at par with the revenues from the supplies made by the customer facing groups of the bank to claim additional ITC is not acceptable by CRA since the treasury functions are provided by the corporate supporting group which is distinct from the three customer facing groups of the bank. Further, allocation of treasury revenue to the customer facing operating groups has no relevance to the ITC entitlement for the financial services provided by Treasury at the corporate level. ITC entitlement should be limited to the direct and allocable costs to treasury including any back office support for the financial services in question.
[38] OMF/Recovery Rate Issues: The Minister identified two issues in the OMF that, in her view, would distort the Bank’s rate of GST Cost recovery such that the use of the OMF would not provide a reasonable approximation of the Bank’s use of inputs for the purpose of making taxable (zero-rated) supplies for consideration. The first distortion resulted from the components of the OMF ratio used to establish the Recovery Rate, namely the Bank’s exclusion of its Canadian intra-bank Interest Amounts from the denominator of the ratio.
[39] The second distortion identified by the Minister in the 2018 Method was the assumption that the cost of carrying on business in the Treasury group and the customer-facing groups was comparable. The Minister stated that this assumption skewed or distorted the Recovery Rate because it did not take into account the actual inputs required to undertake two very different businesses:
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
[40] The Minister concluded that the 2018 Method would result in an excess ITC claim based on the Treasury group’s funding operations. In her view, the Bank should not ignore the fact that the non-resident financial services in question are provided by Treasury and not the three large customer-facing groups. The OMF does not maintain this distinction, permitting ITC recovery based in part on the Bank’s provision of domestic financial services.
VII. Issues
[41] I have organized my analysis of the Bank’s arguments into two broad sections:
The standard for the Court’s review of the Decision; and
My review of whether the Decision was reasonable.
VIII. Standard of review
The Parties’ submissions
[42] The Bank acknowledges that the presumptive standard of review of administrative decisions is reasonableness (Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65 at para 23 (Vavilov)) but submits that the presumptive standard is rebutted in the present case. BMO relies on constitutional principles, the emphasis in Vavilov on the importance of legislative intent, and tax administration principles to argue that this is one of the rare cases in which an administrative decision must be reviewed for correctness (Vavilov at paras 33, 69-70, 82, 108). The premise of the Bank’s submissions is that, in denying its proposed ITC computation method pursuant to subsection 141.02(20) of the ETA, the Minister is imposing a significant financial burden by essentially determining a material component of its net GST payable for FY 2018. BMO argues that Parliament does not recognize a reasonable range of outcomes in determining a taxpayer’s tax payable for the year. A review of the Decision for reasonableness “would inappropriately allow the Minister leeway to conclusively determine a qualifying institution’s tax payable, without sufficient recourse to the courts”.
[43] In the alternative, if the standard for the Court’s review of the Decision is reasonableness, the Bank submits that the review must be rigorous. The Decision must be internally coherent and justified in relation to both the facts and laws that constrain the Minister (Vavilov at paras 85, 105, 120) and must bear the hallmarks of reasonableness: justification, transparency and intelligibility (Vavilov at para 99). The Bank also submits that the Minister’s departure from her prior decisions must be explained in the reasons for the Decision (Vavilov at para 131).
[44] The Respondent submits that there is no basis to depart from the Vavilov presumption of reasonableness. In enacting section 141.02 of the ETA, Parliament delegated to the Minister the authority to approve a QI’s proposed ITC computation method and Parliament’s legislative intent must be respected. The Respondent argues that the very enactment of section 141.02 supports the presumption of reasonableness (Vavilov at paras 24, 30). The Respondent also argues that the Bank’s characterization of the Minister’s decision as a tax assessment is misguided and derives from its dissatisfaction with subsection 141.02(8) and the imposition of the deemed 12% ITC recovery rate for residual inputs.
[45] Further, the Respondent submits that the Bank has failed to identify specific text in section 141.02, or in the ETA generally, that demonstrates Parliament’s intent to accord the Minister’s subsection 141.02(20) decisions less deference. A detailed review of the scheme of section 141.02 and the fact that it specifically carves the approval process for a QI’s ITC computation method from the general provisions for non-QIs indicates a conscious decision by Parliament to position the Minister as the gatekeeper of the QI approval process.
[46] As the hearing of this application drew to a close, the Federal Court of Appeal (FCA) issued its judgment in Hunt v Canada, 2020 FCA 118 (Hunt). The question before the FCA in Hunt was whether section 207.05 of the Income Tax Act, RSC 1985 (5th Supp), c 1 (ITA), offends section 53 of the Constitution Act, 1867 and is unconstitutional as an improper delegation of a taxation power. At my request, the Bank and the Respondent provided written submissions regarding the impact of the FCA’s analysis in Hunt on the present case. The Bank submits that the FCA’s analysis is relevant to the Court’s interpretation of section 141.02 of the ETA and the scope of the Minister’s approval authority under subsection 141.02(20). The Respondent contends that Hunt has limited application to this application because section 141.02 creates a regime that governs the accurate calculation of inputs and ITCs. It does not concern the imposition of tax or the delegation of a taxation power.
Analysis
[47] I have considered the Bank’s submissions carefully but conclude that there is no basis for departing from the presumptive standard of reasonableness for my review of the Decision. I find that Parliament’s intention to reserve the approval of a QI’s proposed ITC computation method to the Minister is evident in section 141.02 of the ETA and must be respected (Vavilov at para 33).
[48] The SCC identified five situations in which a departure from the presumption of reasonable review is warranted: legislative intent (legislated standards of review and statutory appeal mechanisms) and the rule of law (constitutional questions, general questions of law of central importance to the legal system as a whole, and jurisdictional boundaries between administrative bodies) (Vavilov at para 69). The Court did not foreclose other situations that would call for correctness review but cautioned that such categories would be exceptional (Vavilov at para 70):
[70] […] That being said, the recognition of any new basis for correctness review would be exceptional and would need to be consistent with the framework and the overarching principles set out in these reasons. In other words, any new category warranting a derogation from the presumption of reasonableness review on the basis of legislative intent would require a signal of legislative intent as strong and compelling as those identified in these reasons (i.e., a legislated standard of review or a statutory appeal mechanism). Similarly, the recognition of a new category of questions requiring correctness review that is based on the rule of law would be justified only where failure to apply correctness review would undermine the rule of law and jeopardize the proper functioning of the justice system in a manner analogous to the three situations described in these reasons.
[49] I find that none of the five situations identified by the SCC support a departure from the reasonableness standard. Parliament has not legislated a standard of review for, nor a statutory appeal from, a subsection 141.02(20) approval or denial. There is no constitutional question, general question of law of central importance or jurisdictional boundary at issue in this application.
[50] The Bank submits that the Decision falls within the SCC’s category of the exceptional case but I do not agree. BMO focusses its submissions on constitutional arguments (and not constitutional invalidity), legislative intent and established principles of tax administration, and emphasizes the significant financial implications of the Minister’s denial.
[51] The Bank’s reliance on constitutional principles in support of correctness review stems from its characterization of the Minister’s Decision as a determination of its net GST owing for FY 2018. The Bank submits that the fiscal consequences of the Decision extend beyond the approval of an ITC computation method, the narrow purpose of section 141.02. The Bank argues that the Minister’s denial of the 2018 Application effectively determines the quantum of its ITC claim because subsection 141.02(8) automatically applies a 12% prescribed recovery percentage for residual inputs.
[52] BMO states that the power of taxation is a democratic power that must be exercised by the House of Commons (sections 53 and 54 of the Constitution Act, 1867). A taxation power may be delegated but only with clear and unambiguous language (Ontario English Catholic Teachers’ Assn v Ontario (Attorney General), 2001 SCC 15 at para 77 (OECTA)). As the exercise by the Minister of her approval authority under subsection 141.02(20) is the exercise of a taxation power, BMO argues that such authority must be narrowly constrained and subject to very careful and exacting review (OECTA at para 77).
[53] I do not agree with the Bank’s characterization of the Minister’s Decision and find that the Minister does not exercise a taxation power in exercising her approval authority pursuant to subsection 142.02(20) of the ETA. Whether the Minister approves or denies a QI’s application, her authority extends only to a review of the computation method proposed. She does not determine the net GST payable by the QI, nor does she impose the 12% deemed recovery rate. The consequences of her denial are mandated by other subsections of section 141.02, including subsection 141.02(8), duly enacted by Parliament in accordance with sections 53 and 54 of the Constitution Act, 1867. The Bank’s actual net GST payable will only be determined against its actual results, including the identification of its taxable and exempt supplies for the fiscal year, its gross GST paid and the application of the various provisions of section 141.02. The Bank’s reliance on constitutional principles and the cautionary language in the OECTA case to argue for a departure from the presumptive standard of reasonableness review is not persuasive.
[54] As stated above, the specific question before the FCA in Hunt was whether section 207.5 of the ITA offends section 53 of the Constitution Act, 1867 and is unconstitutional as an improper delegation of a taxation power. The FCA answered the question in the negative. The TCC had also considered whether sections 207.05 and 207.06, separately or combined, constitute an invalid delegation of taxation power to the Minister. The FCA declined to address this second question because the answer depended on a number of subsidiary questions which the parties had not dealt with in their memoranda of fact and law. The FCA stated that, in order to answer those questions, the legislative provisions in question were to be interpreted using the accepted method of examining the text, context and purpose of the provisions (Hunt at para 11, with reference to leading cases including Re Rizzo & Rizzo Shoes Ltd., [1998] 1 S.C.R. 27, 154 D.L.R. (4th) 193; Entertainment Software Assoc. v Society Composers, 2020 FCA 100 at para. 39 (Entertainment Software); TELUS Communications Inc. v Wellman, 2019 SCC 19). The FCA stated (Hunt at paras 13-14):
[13] In some cases, after a full examination of the text in light of its context and purpose, the Court might conclude that Parliament’s provision, in its authentic meaning, satisfactorily constrains the Minister’s discretion and defines what she can do and how she should do it. The Minister would not be creating and imposing a tax or coming up with the tax rate on her own. She would not be a law unto herself.
[14] But in other cases, the Court might conclude that Parliament’s provision, in its authentic meaning, gives the Minister an unconstrained, undefined discretion without criteria. The Minister, not Parliament, would be creating and imposing the tax or coming up with the tax rate on her own. She