University of Alberta v. The Queen

University of Alberta v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2015-12-21
Neutral citation
2015 TCC 336
File numbers
2013-3740(GST)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2013-3740(GST)G
BETWEEN:
UNIVERSITY OF ALBERTA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on October 29 and 30, 2014, at Calgary, Alberta.
Submissions received from the Respondent on April 2, 2015 and from the Appellant on April 6, 2015.
Before: The Honourable Justice Steven K. D'Arcy
Appearances:
Counsel for the Appellant:
Justin Kutyan
Carla Hanneman
Counsel for the Respondent:
Ronald MacPhee
Jack Warren
JUDGMENT
The appeals from the reassessments made under the Excise Tax Act and dated July 25, 2011 and November 8, 2011 are allowed with costs. The reassessments are referred back to the Minister for reconsideration and reassessment on the basis that, during the relevant periods, the Appellant used the property identified as Plan 221 ET Block 1 and Block 2 to the extent of 25.36% in its commercial activities.
The parties have thirty days from the date of this judgment to make representations with respect to the amount of costs that the Court should award to the Appellant. If no submissions are received, costs shall be awarded to the Appellant as set out in the Tariff.
Signed at Ontario, Canada, this 21st day of December 2015.
“S. D’Arcy”
D'Arcy J.
Citation:2015 TCC 336
Date: 2015 12 21
Docket: 2013-3740(GST)G
BETWEEN:
UNIVERSITY OF ALBERTA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
I. Issue [1] The issue in these appeals is the extent to which the Appellant acquired and subsequently used certain of its land in its GST commercial activities.[1] This issue requires the Court to address the application of the general input tax credit rule in subsection 169(1), the “fair and reasonable” rule in subsection 141.01(5), and the input tax credit apportionment rules in subsections 141.01(2) and (3) of the GST Act.
II. Interrelationship with the University of Calgary Appeals [2] These appeals and appeals by the University of Calgary[2] were scheduled to be heard over the same three-day period. The appeals of both Appellants raise the same issue.
[3] Counsel for the Appellant suggested, at the commencement of the hearing of the appeals, that the Court hear the appeals of the University of Calgary on common evidence with the appeals of the University of Alberta. However, he asked that the Court issue two separate judgments.
[4] Counsel for the Respondent was willing, for efficiency purposes, to proceed in such a manner but had some concerns since each Appellant would be presenting different facts to support its claim for input tax credits.
[5] I was not willing to follow counsel for the Appellant’s suggestion for the simple reason that the evidence was not common to both parties. Although the Appellants carried on very similar, if not identical businesses, they engaged in different activities in the course of their respective businesses. These activities determine their entitlement to input tax credits.
[6] However, I did recognize that the two Appellants used very similar methodologies to determine their entitlement to input tax credits. In addition, counsel for the Appellant informed the Court that while there was no evidence that was common to both appellants, there was “quite a bit of parallel in the evidence”.
[7] As a result, the appeals of the two Appellants proceeded as follows:
- The Court called the University of Calgary appeals and both parties presented their evidence.
- The Court adjourned those appeals.
- The Court called the University of Alberta appeals and both parties presented their evidence.
- The Court called the appeals of both Appellants, allowing the parties to present a single argument for the appeals of both Appellants.
III. Summary of Facts [8] I heard from two witnesses. Mr. Martin Ronald Coutts testified on behalf of the Appellant and Mr. Robert Degagne testified on behalf of the Respondent.
[9] Mr. Coutts, a chartered accountant, is the Associate Vice-President, Finance and Supply Management of the Appellant. Mr. Degagne graduated from the Appellant with a Bachelor of Commerce degree. He has been a CRA auditor for a little over 20 years.
[10] I found both witnesses to be credible. However, as I will discuss, I do not accept Mr. Degagne’s application of subsections 141.01(2) and (3).
[11] The University of Alberta is a public research university located in Edmonton, Alberta, with approximately 38,000 students and 7,000 faculty and staff. Founded in 1908, the university has 18 faculties and offers approximately 200 undergraduate and 170 graduate programs.[3]
[12] The Appellant owns several parcels of real property in Edmonton, which collectively constitute its land and premises.[4]
[13] Notwithstanding that the Appellant uses its lands and premises predominantly for educational purposes, it also provides various commercial and non-educational services to students, staff, and the public.[5]
[14] The parties note the following in the PASF I at paragraph 2: “At all relevant times, the University of Alberta was a “registrant”, a “public service body” and a “public institution”, as defined in subsection 123(1) of the Excise Tax Act (the “Act”). For the purposes of the Act, the University of Alberta makes both taxable and exempt supplies in the course of conducting its activities.”
[15] The fact that the Appellant is a public service body means that it is also a public sector body,[6] which is relevant for the purposes of the section 206 change-in-use rules.
[16] These appeals involve one of the parcels of land owned by the Appellant. The legal description of this parcel of land is Plan 221 ET Block 1 and Block 2. I will refer to this parcel of land and the buildings located on the land as the “Campus”.
[17] The Appellant made an election, effective February 1, 2006, under section 211 of the Act in respect of the Campus.[7] I will discuss the effect of the election shortly. The main consequence of the election, for the purposes of these appeals, is that the Appellant was deemed to have received on February 1, 2006 a taxable supply of the Campus by way of sale and to have paid on that day tax in respect of the deemed supply.[8]
[18] Subsequent to February 1, 2006, the Appellant made improvements to the Campus. The tax in respect of the improvements to the Campus appears to have been paid or to have become payable between February 1, 2006 and the end of June 2011.[9]
[19] As a result of the deemed acquisition of the Campus and the subsequent improvements to the Campus, the Appellant is required to determine, for input tax credit purposes, the extent to which it acquired the Campus, additions to the Campus or improvements to the Campus for use in its GST commercial activities.
[20] The Appellant developed a methodology to determine the extent to which it used the Campus in its commercial activities (the “Appellant’s Original Methodology”). The parties provided the following general description of the Appellant’s Original Methodology in the PASF I (paragraphs 8 and 10):
The University of Alberta took into account all of the structures on the U of A Property [the Campus]. It identified within a particular structure the space (measured by square meters) that was directly used in making taxable supplies for consideration, exempt supplies, and a mix of the two activities.
. . .
The University of Alberta then aggregated all of the activities from all the structures on the property to determine a ratio (expressed as a percentage) to be applied to the remaining space on the property (i.e., the common areas).
[21] The Appellant, using this methodology, filed numerous GST returns in which it claimed input tax credits in respect of the Campus on the basis that, during the relevant periods, 28.67% represented the extent to which it acquired the Campus for use, or used the Campus, in the course of its commercial activities.
[22] The Minister reassessed on the basis that four adjustments are required to the Appellant’s Original Methodology in order for the methodology to comply with the provisions of the GST Act, particularly section 141.01.
[23] First, the Minister disagrees with the Appellant’s determination of the amount of space in specific buildings that the Appellant used directly in the making of taxable supplies for consideration, directly in the making of exempt supplies, and indirectly to make both taxable and exempt supplies. Second, she believes that the determination of the extent to which the common areas within buildings (the “Internal Common Areas”) were used in commercial activities should be made on a building-by-building basis. Third, she disagrees with the Appellant’s treatment of the external common areas on the Campus (the “External Common Areas”). Fourth, she believes that the Appellant’s Original Methodology should be amended to add a weighting or index factor.
[24] The Appellant accepts the changes proposed by the Minister with respect to the allocation of space within specific buildings and the determination of the use of the Internal Common Areas. The PASF I states the following:
Subsequent to issuance of the Reassessments under appeal, the Appellant agreed to some of the adjustments proposed by the Minister (in applying the Appellant’s methodology). As a result the Appellant now claims the extent to which the U of A Property [the Campus] was being used in commercial activities is 25.36%.[10]
[25] I will refer to the 25.36% as the “Appellant’s Final Percentage” and to the methodology used by the Appellant to determine the percentage as the “Appellant’s Final Methodology”.
[26] The Appellant does not accept the Minister’s treatment of the External Common Areas or the addition of an indexing factor.
[27] The parties provided in the PASF I the following general description of the methodology developed by the Respondent (the “Respondent’s Methodology”):
The Minister takes the position that the entirety of the U of A Property must be considered in calculating the extent of use in commercial activity. The Minister takes the position that the outdoors areas (other than parking areas) such as green space, roadways, walkways, forest reserve and landscaped areas were not for use in making taxable supplies for consideration. Based on this view, the Minister takes the position that the U of A Method must be applied in a manner that includes these outdoor areas when calculating the extent of use in commercial activity of the appellant.
The Minister takes the position that a weighting or index system is required to take into account the different types of space on the U of A Property. The Minister has identified the relative replacement costs of the various structures on the U of A Property and uses that information to apply an indexing factor to the U of A Property.[11]
[28] The Minister, using the Respondent’s Methodology and after making adjustments to the Appellant’s initial calculation of the direct use of space within specific buildings and the Appellant’s initial determination of the use of the Internal Common Areas, determined that the Campus was used to the extent of 14.12% in commercial activities (the “Respondent’s Percentage”).
[29] This resulted in the Minister assessing the Appellant to increase its net tax by approximately $1.7 million for the relevant periods.[12]
[30] Although they disagree on the treatment of the External Common Areas and the addition of a weighting or index factor to the Appellant’s Final Methodology, the parties do agree on the actual use of the space within each building situated on the Campus. Specifically, the Appellant and the Respondent used the same calculation of the extent (measured in square meters) to which each building was used directly in the making of taxable supplies for consideration, directly in the making of exempt supplies and indirectly in making both taxable and exempt supplies to determine their percentages (25.36% and 14.12%, respectively).[13]
IV. The Appellant’s Methodology [31] Mr. Coutts explained the Appellant’s Original Methodology to the Court. He and Mr. Degagne explained the adjustments that the parties made to the Appellant’s Original Methodology to arrive at the Appellant’s Final Methodology.
[32] As noted in the PASF I, the Appellant identified within a particular structure situated on the Campus all of the space (measured in square meters) that was used directly in the making of taxable supplies for consideration, directly in the making of exempt supplies and indirectly in making both taxable and exempt supplies (i.e., the Internal Common Areas).[14]
[33] Mr. Coutts explained the process used by the Appellant, under the Appellant’s Original Methodology, to determine the extent to which the Campus was used in commercial activities.[15] He testified that the Appellant maintained an internal space inventory that it used for various internal and external purposes, such as reports to the Alberta Government.
[34] The Appellant used this internal space inventory to determine the activities that took place in each square meter in each of the sixty-seven structures on the Campus. Using this information, the Appellant determined, for each structure, which square meters it used directly in the making of taxable supplies for consideration, directly in the making of exempt supplies and indirectly in the making of both taxable and exempt supplies.
[35] The Appellant then calculated the total square meters in all of the structures that it used directly in the making of taxable supplies, the total square meters in all of the structures that it used directly in the making of exempt supplies, and the total square meters that comprised the Internal Common Areas.[16] Using only the square meters used directly in the making of supplies, it calculated a percentage by dividing the space used directly to make taxable supplies by the sum of the space used directly to make taxable supplies and the space used directly to make exempt supplies.[17] This is the 28.67% percentage that the Appellant originally claimed was the extent to which it used the Campus in commercial activities.
[36] At some point in time, the Appellant reviewed these calculations with the CRA and made two adjustments.
[37] First, the Appellant accepted certain adjustments that the CRA determined were required to the Appellant’s calculation of the use of the space within the structures.[18]
[38] Second, the Appellant accepted the CRA’s apportionment method for the Internal Common Areas. The CRA apportioned the Internal Common Area for each structure between the making of taxable supplies and the making of exempt supplies according to the identified use of the space within the specific structure. Specifically, it apportioned the common area for a specific structure according to the identified direct use of the space within the specific structure for the purpose of making taxable supplies for consideration and the identified direct use of the space within the specific structure for the purpose of making exempt supplies.[19] Under the Appellant’s Original Methodology, a similar calculation is performed. However, the Appellant apportioned all of the Internal Common Areas according to the identified cumulative direct use of the space within all of the structures on the Campus. It did not perform a structure-by-structure calculation.
[39] Exhibit B to the PASF I contains the parties’ agreed allocation of space in each of the structures on the Campus.[20] It is based upon the Appellant’s original calculations and the two CRA adjustments.
[40] The exhibit identifies sixty-seven structures on the Campus. Exhibit B to the PASF I shows the total of the room-by-room calculations for each structure on the Campus broken down by the square meters used in the making of taxable supplies for consideration and the square meters used in the making of exempt supplies.
[41] The square meters for the sixty-seven structures are then totalled with the following result:
- The Appellant used 167,221.83 square meters in the making of taxable supplies for consideration.
- The Appellant used 492,049.63 square meters in the making of exempt supplies.
[42] It is the Appellant’s position that the extent to which it used the Campus in commercial activities is determined by taking the total square meters of all of the structures on the Campus that were used in the making of taxable supplies for consideration and dividing it by the total of the square meters used in the making of taxable supplies for consideration and the square meters used in the making of exempt supplies. Using the numbers in Exhibit B to the PASF I, one arrives at the Appellant’s Final Percentage, 25.36%,[21] which, the Appellant argues, represents the extent to which the Campus was used in commercial activities.
[43] It is the Appellant’s position that it is entitled to the input tax credits resulting from the application of the 25.36% to the GST paid or deemed to have been paid in the relevant periods, as set out in Exhibit A to the PASF I.
[44] For example, Exhibit A shows that the parties have agreed that the GST in respect of which the Appellant was entitled to claim input tax credits as of April 30, 2006 is $4,459,253.02. It is the Appellant’s position that it was entitled to claim an input tax credit equal to 25.36% of this amount.
[45] The Appellant’s Final Methodology assumes that the Appellant acquired all areas of the land on the Campus for the purpose of making either taxable or exempt supplies.
V. The Respondent’s Methodology [46] The Respondent does not accept the Appellant’s methodology. She does not believe it complies with section 141.01 of the Act. She proposes a methodology developed by the CRA that starts with the use of the space within the structures determined under the Appellant’s Final Methodology and makes two substantial adjustments. First, it treats the External Common Areas as space that was “not for use in making taxable supplies for consideration”.[22] Second, it applies a weighting or index factor based upon the replacement cost of the various structures on the Campus.
[47] Mr. Degagne explained the Respondent’s Methodology.
[48] The CRA started with the numbers contained in Exhibit B of the PASF I for each structure on the Campus. These are the numbers used in the Appellant’s Final Methodology to determine the extent to which it used the Campus in commercial activities. The numbers represent the square meters in each structure used in the making of taxable supplies for consideration and the square meters used in the making of exempt supplies.[23]
[49] The CRA then adjusted the numbers in Exhibit B of the PASF I on the assumption that the Appellant did not use the External Common Areas indirectly to make taxable and exempt supplies.[24] As noted in Exhibit B of the PASF I, the External Common Areas comprised 338,945 square meters.[25]
[50] Mr. Degagne testified that the Appellant used the External Common Areas in “exempt” activities.[26]
[51] Mr. Degagne took me to Exhibit R1, which shows the adjustments the CRA made to the Appellant’s Final Methodology. Exhibit R1 shows that the CRA did not change the Appellant’s calculation of the square meters of space within the structures that the Appellant used in the making of taxable supplies for consideration.[27] However, the CRA did increase the number of square meters the Appellant used in the making of exempt supplies by the 338,945 square meters of External Common Areas, resulting in an increase from 492,049.63 square meters to 830,994.74 square meters.[28]
[52] After making the adjustment for the External Common Areas, the CRA then applied what it refers to as a “weighting index” to its square meter calculations.
[53] A CRA valuator, Rick Sliwkanich, estimated the replacement costs for the buildings, parking lots, and landscaped areas located on the Campus (referred to as the improvements).[29] Mr. Sliwkanich calculated the replacement cost of each of the improvements as of January 21, 2009 and then calculated a relative replacement cost per square foot.[30]
[54] The CRA auditor used the relative replacement cost per square foot as a weighting index and applied it to the square meter breakdown agreed to by the parties for the Campus. Pages 529 to 670 of Exhibit R1 show the application of the CRA’s indexing factor to the Campus.
[55] For example, for the Engineering Teaching and Learning Complex (“ETLC”), the parties agreed that the Appellant used 1,828.16 square meters of the complex in the making of taxable supplies for consideration and 12,834.74 square meters in the making of exempt supplies.[31] Mr. Sliwkanich determined the relative cost per square foot for the ETLC to be 230.43.[32] The CRA applied its weighting factor as follows:
- It first calculated a weighted commercial area for the ETLC equal to the space used in the making of taxable supplies for consideration times the weighted index (the relative cost per square foot for the ETLC), i.e., 1,828.16 x 230.43 = 421,262.[33]
- It then calculated a weighted exempt area for the ETLC equal to the space used directly in the making of exempt supplies times the weighted index (the relative cost per square foot for the ETLC), i.e.,12,834.74 x 230.43 = 2,957,510.[34]
- The CRA then totalled these amounts to arrive at a weighted total area for the ETLC of 3,378,772 (421,262+ 2,957,510).[35]
[56] The CRA completed the same calculation for each of the other sixty six structures on the Campus.
[57] A calculation was also done for the External Common Areas. Specifically, the CRA auditor began by splitting the agreed size of the External Common Area between a 77,900 square-meter forest reserve and the remaining 261,045.07 square meters. Since Mr. Degagne assumed all of this area was “exempt”, he calculated a weighted exempt area for each of the two spaces equal to the size of the area times the relevant indexing factor. For the forest reserve, this equalled 77,900 x 1.00 = 77,900 and for the remaining External Common Areas it equalled 261,045 x 2.55 = 665,665. [36]
[58] The CRA then totalled the calculated weighted commercial area, the weighted exempt area, and the weighted total area for the Campus, with the following result:
- Weighted square meters used in commercial activities - 18,265,124.16
- Weighted square meters used in exempt activities – 110,432,751.91[37]
- Weighted total area – 128,697,876.07.[38]
[59] The CRA then determined the extent to which the Appellant used the Campus in commercial activities by taking the amount it calculated as the total weighted square meters used in making taxable supplies for consideration and dividing it by the weighted total area for the Campus. This resulted in the Respondent’s Percentage, 14.19%.
[60] It is the Respondent’s position that the Appellant is entitled to input tax credits resulting from the application of the Respondent’s Percentage to the GST paid or deemed to have been paid with respect to the Campus, as set out in Exhibit A of the PASF I. For example, Exhibit A of the PASF I shows that the eligible amount of GST for the Appellant’s reporting period ending April 30, 2006 for the Campus was $4,459,253.[39] It is the Respondent’s position that the Appellant was entitled to claim an input tax credit equal to 14.19% of this amount.
The Law
[61] Subsection 169(1) of the 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 × 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
. . .
(b) where the property or service is acquired, imported or brought into the province, as the case may be, by the person for use in improving capital property of the person, the extent (expressed as a percentage) to which the person was using the capital property in the course of commercial activities of the person immediately after the capital property or a portion thereof was last acquired or imported by the person, and
(c) in any other case, 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.
[62] These appeals relate to the Appellant’s ability to claim input tax credits with respect to the acquisition of capital real property and subsequent improvements to the real property. Under paragraph (c) of the definition of B in subsection 169(1), a GST registrant is entitled to claim an input tax credit for GST paid on the acquisition of capital real property according to the extent to which the property is acquired for consumption, use or supply in the course of the registrant’s commercial activities. With respect to improvements to the capital real property, paragraph (b) of the definition of B in subsection 169(1) allows a person who is a registrant to claim an input tax credit based upon the extent to which the person was using the capital real property in the course of the person’s commercial activities immediately after the capital real property was last acquired by the person.
[63] Subsection 209(1) provides that subsections 199(2) to (4) and 200(2) and (3) apply, with any modifications the circumstances require, to certain real property acquired by a registrant that is a public service body as if the real property were personal property. Those subsections apply to real property acquired by the public service body for use as capital property or, in the case of subsection 199(4), to improvements to capital real property of the public service body.
[64] The Appellant is a public service body. Therefore, in the first instance, subsection 209(1) would apply to any acquisition of the Campus and to improvements to the Campus.
[65] Subsections 199(2) to (4) contain rules that are generally referred to as the primary use test. The combined effect of those provisions and subsection 209(1) is that tax payable by a registered public service body in respect of the acquisition of capital real property is not included in determining the input tax credit of the public service body unless the real property was acquired for use primarily in commercial activities of that body.[40] A similar rule applies for improvements to such real property. Any tax payable in respect of improvements is not included in determining the input tax credit of the public service body unless, at the time that such tax is paid or becomes payable, the capital real property is used primarily in commercial activities of the public service body.[41]
[66] It is my understanding that the Appellant, prior to making the section 211 election on February 1, 2006, was not entitled to claim input tax credits in respect of the Campus since it was not using the property primarily in commercial activities.
[67] Section 211 provides a mechanism whereby certain public service bodies may claim input tax credits in respect of real property that they do not use primarily in commercial activities. In addition, the election results in certain exempt supplies of the real property becoming taxable supplies.
[68] Subsection 211(1) provides in part that, where a public service body files an election with respect to real property that is capital property of the body, section 209 does not apply to the property. As a result, the public service body is entitled to claim input tax credits in respect of such real property even if the real property is used primarily in non-commercial activities.
[69] In addition, supplies of the real property that would otherwise be exempt because of the application of section 1 of Part V.1 of Schedule V[42] or the application of paragraph 25 of Part VI of Schedule V[43] are excluded from exemption under these sections.
[70] The evidence before me is that, prior to February 1, 2006, the Appellant made significant exempt supplies of real property by way of lease. As a result of the election under section 211, these supplies became taxable supplies.
[71] Once a public service body makes an election under subsection 211(1), it is deemed under paragraph 211(2)(a) to have made, immediately before the effective date of the election, a supply of the real property by way of sale and to have collected, on the particular day, tax in respect of the supply equal to the basic tax content of the property on the particular day.[44]
[72] Paragraph 211(2)(b) deems the public service body to have received, on the effective date of the election, a taxable supply of the real property by way of sale and to have paid, on the particular day, tax in respect of the supply equal to the basic tax content of the property on the particular day.
[73] Effective February 1, 2006, the Appellant made an election under section 211 in respect of the Campus. As a result, it was deemed to have made a supply of the Campus immediately before February 1, 2006 and to have acquired that property on February 1, 2006.
[74] There is no dispute before the Court with respect to either the deemed supply of the property under paragraph 211(1)(a) or the Appellant’s ability to claim an offsetting input tax credit for the tax it was deemed to have collected.[45]
[75] The issue before the Court is the Appellant’s ability to claim input tax credits for the tax it was deemed to have paid on the exercise of the election and for the GST it subsequently paid in respect of improvements to the Campus.
[76] A significant amount of the input tax credits at issue relates to the GST the Appellant was deemed under paragraph 211(2)(b) to have paid on the deemed acquisition of the Campus. Under subsection 169(1), the Appellant is entitled to claim a credit for such tax based on the extent (expressed as a percentage) to which it acquired the real property for use in the course of its commercial activities.
[77] The parties also disagree on the amount of input tax credits the Appellant is entitled to claim in respect of tax paid or payable, after the deemed acquisition, on improvements to the property. Since the Campus is capital real property of the Appellant and the Appellant has made an election under subsection 211(1), paragraph 169(1)(b) and the change-in-use rules in section 206 apply when determining the Appellant’s entitlement to input tax credits for tax paid in respect of improvements to the property. These provisions look at the Appellant’s actual use of the property.
[78] Regardless of which provisions apply, the Appellant’s ability to claim input tax credits is dependent on its intended or actual use of the property in commercial activities. Commercial activity is defined in subsection 123(1). The relevant portions of the definition for the purposes of these appeals are as follows:
“commercial activity” of a person means
(a) a business carried on by the person . . . except to the extent to which the business involves the making of exempt supplies by the person,
. . . and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
Business is defined in subsection 123(1) as follows:
“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.
[79] Under the GST Act, a person’s business is broader than the person’s commercial activity. A business includes all of the activities of a person regardless of whether the activities involve the making of taxable supplies or of exempt supplies. This is an important distinction for the purposes of various provisions of the Act, including the input tax credit apportionment rules contained in section 141.01.
[80] On the evidence before me, I have concluded that the Appellant carried on a single business, namely, the operation of a university, and that it carried on all of its activities in the course of this business. All of the business constituted a commercial activity of the Appellant, except to the extent to which the business involved the making of exempt supplies.
[81] The application of subsection 169(1) to tax paid on property or services acquired by a registrant in the course of its business for consumption or use directly in the making of a specific supply is relatively straightforward. For example, if the registrant acquires the property or service only for consumption or use directly in the making of a taxable supply, then the property is consumed or used in the course of the registrant’s commercial activity and the registrant is entitled to claim a full input tax credit for the tax paid on the acquisition of the property or service. Alternatively, no input tax credit is available if the registrant acquires the property or service solely for consumption or use directly in the making of exempt supplies.
[82] The application of subsection 169(1) to “indirect costs”, that is, those for property and services that are not used directly in the making of a taxable or an exempt supply, is not as straightforward. When making a determination in this regard, one must consider the section 141.01 input tax credit apportionment rules.
[83] Indirect costs include such things as administrative costs, overhead costs, and costs incurred in respect of common areas in or around a building. For example, in most instances, the payroll department of a corporation that makes both taxable and exempt supplies will not be involved directly in the making of any supplies by the corporation.
[84] The expenses of the payroll department are incurred in the course of the registrant’s business. All of the registrant’s business constitutes its commercial activity, except to the extent to which the business involves the making of exempt supplies. It can be argued that, since the payroll department is not involved directly in the making of exempt supplies, it is not involved in the portion of the registrant’s business that makes the exempt supplies. If this argument were accepted, then all of the payroll department’s activities would be considered to have occurred in the course of the registrant’s commercial activity. Such an interpretation would allow a registrant who makes both taxable and exempt supplies to claim full input tax credits for indirect costs such as costs incurred by its payroll department.
[85] Parliament addressed this issue when it added section 141.01 in 1994, retroactive to the introduction of the GST. Subsections 141.01(2) and 141.01(3) clarify that, when determining input tax credits for a registrant involved in making both taxable and exempt supplies, one must attribute all costs of the registrant to the making of supplies.
[86] Subsection 141.01(2) sets out a deeming rule that applies on the acquisition of property or a service.[46] The subsection reads as follows:
Where a person acquires or imports property or a service or brings it into a participating province for consumption or use in the course of an endeavour of the person, the person shall, for the purposes of this Part, be deemed to have acquired or imported the property or service or brought it into the province, as the case may be,
(a) for consumption or use in the course of commercial activities of the person, to the extent that the property or service is acquired, imported or brought into the province by the person for the purpose of making taxable supplies for consideration in the course of that endeavour; and
(b) for consumption or use otherwise than in the course of commercial activities of the person, to the extent that the property or service is acquired, imported or brought into the province by the person
(i) for the purpose of making supplies in the course of that endeavour that are not taxable supplies made for consideration, or
(ii) for a purpose other than the making of supplies in the course of that endeavour.
[87] Endeavour of a person is defined in subsection 141.01(1) as meaning a business of the person, an adventure or concern in the nature of trade of the person, or the making of a supply of real property of the person.
[88] For example, the endeavour of a person carrying on a single business is all of the activities of the business, including the making of taxable supplies and the making of exempt supplies.
[89] Subsection 141.01(2) applies to property or a service acquired[47] by the person for consumption or use in the course of the business. Pursuant to paragraph 141.01(2)(a), the person is deemed, for the purposes of the Act, to have acquired the property or service for consumption or use in the course of commercial activities of the person to the extent that the property or service is acquired by the person for the purpose of making taxable supplies for consideration in the course of the business.
[90] Alternatively, under subparagraph 141.01(2)(b)(i), the person is deemed to have acquired the property or service for consumption or use otherwise than in the course of commercial activities of the person to the extent that the property or service is acquired by the person for the purpose of making supplies in the course of the business that are not taxable supplies made for consideration. Normally, this would be exempt supplies and taxable supplies made for no consideration or nominal consideration.[48]
[91] In addition, under subparagraph 141.01(2)(b)(ii), the person is deemed to have acquired the property or service for consumption or use otherwise than in the course of commercial activities of the person to the extent that the property or service is acquired by the person for a purpose other than the making of supplies in the course of the business. This provision applies where a person incurs expenses that do not relate to the person’s business. Normally, such expenses are personal expenses of the owner of the business or a person related to the owner.
[92] Subsection 141.01(2) looks at the person’s purpose when acquiring the property or service, in other words, the person’s intended use of the property or service. In particular, it looks to see if the intention was to consume or use the property or service in the making of taxable supplies for consideration, the making of exempt supplies or the making of a combination of these supplies.[49] The person is only entitled to claim an input tax credit for tax paid on the property or service to the extent that the person’s intention was to consume or use the property or service in the making of taxable supplies for consideration.
[93] In my view, if a corporation incurs an expense in the course of its business (endeavour), then the expense will always be incurred for the purpose of making one or more supplies. The purpose of the business is to earn revenue, i.e. to make supplies. Therefore, the result of subsection 141.01(2) is that