In the recent case of Club Intrawest v. Her Majesty the Queen (2017 FCA 151), the Federal Court of Appeal (the "FCA") was faced with a unique fact pattern not contemplated by the legislation. In dealing with this unusual situation, the FCA did what common law courts do best, and improvised a solution which it considered both fair and legally justifiable. In the process, the FCA has introduced a new gloss on the common law "single versus multiple supply analysis" and held that even where a recipient is only charged a single amount of consideration, a court may nevertheless find that there were two separate supplies, each with different tax treatment.
Background on Single versus Multiple Supplies
By way of background, one of the frequent issues in GST analysis is whether the supplier is making a single supply to a recipient, or is making multiple supplies to the recipient. This is relevant where the underlying components would have different tax treatment if supplied separately.
Consider the purchase of a gift basket that contains both fresh fruit and salted nuts. If you bought fresh fruit and nuts separately in a grocery store the fresh fruit would be zero-rated, while the salted nuts would be taxable at 5% GST. When the two are packaged and supplied together in a gift basket, however, the consideration paid for the basket must be taxed in a single way, because it is a single supply – it cannot be broken out into taxable and non-taxable portions.
The Facts of Club Intrawest
Club Intrawest was the administrator and operator of a resort-condo timeshare program which offered vacation accommodations at nine different resorts across North America. As part of its operations Club Intrawest charged its members an annual fee (the "Resort Fee") which was calculated at a certain dollar amount per "point" that the member owned. The Resort Fee was therefore an amount charged to each member in respect of all of the resorts, including those inside and outside of Canada.
Club Intrawest never charged GST/HST on the Resort Fee, and the CRA assessed them for the GST/HST they had failed to collect from 2002 to 2007. Although the Resort Fee related to both resorts inside Canada and outside Canada, the CRA decided to only impose tax on the portion of the Resort Fee related to resorts inside Canada. Accordingly the CRA apportioned the total Resort Fee using a ratio of the points issued in respect of Canadian locations compared to all points issued. Club Intrawest appealed the assessment to the Tax Court of Canada (the "TCC").
Decision of the Tax Court of Canada
At the TCC, Club Intrawest took the position that its Resort Fee was not actually a charge for services, but merely reimbursement for expenses that it paid for as agent of the members. In the alternative Club Intrawest suggested that the Resort Fee should be allocated between Canadian and non-Canadian properties – but on a different basis than the CRA had used.
The TCC first considered the agency argument, and found that there was insufficient evidence that an agency agreement existed between the parties. Significantly, the TCC held that the members had no beneficial interest in the resorts, and accordingly that Club Intrawest could not be acting as the agent of the members in maintaining the properties. There was also no evidence that the members had consented to Club Intrawest acting as their agent. As there was no agency agreement, the Resort Fee was held to be consideration for a supply of services in respect of the resorts made by Club Intrawest to the members.
In considering whether or not the supply was made in Canada the TCC determined that the ETA's place of supply rules for services in relation to real property were contradictory, and that this appeared to be a legislative oversight. Specifically, while paragraph 142(1)(d) provides that a service in relation to real property will be deemed to be made in Canada if the real property is situated in Canada, paragraph 142(2)(d) provides such services will be deemed to be made outside Canada if the real property is located outside Canada. On the facts of this case the single supply of services was in relation to real property located both inside and outside Canada, and both deeming rules would technically apply.
The TCC overcame this issue by holding that the Resort Fee was not solely for services in relation to real property, but also included a number of services (e.g. administrative services) that did not specifically relate to real property. On this basis the TCC applied the more general place of supply rules for services which deemed the supply to be made in Canada, and therefore fully taxable.
Decision of the Federal Court of Appeal
On Appeal, the Federal Court of Apepal carefully considered Club Intrawest's agency argument but ultimately held that the TCC had properly "considered in detail" the appellant's arguments, and accordingly the FCA could find no error in the TCC's finding on this point.
The FCA next considered the TCC's analysis of the taxability of the Resort Fee and the place of supply of the associated services, and held that the TCC had erred in deciding that the presence of some administrative services was sufficient to justify applying the general place of supply rules. The proper focus should have been the predominant element of the supply – in this case services in respect of real property. Accordingly it was necessary to consider the contradictory deeming rules in paragraphs 142(1)(d) and 142(2)(d) directly.
The FCA held that the TCC had properly rejected the suggestion advanced by the parties that section 165(1) be interpreted so that tax is only levied on a portion of the consideration of the single taxable supply. This solution was not permissible because "a single supply will either be subject to tax on the whole of the consideration paid for the supply or be not subject to tax at all."
The FCA came up with a rather surprising solution of its own: "[split] up supply so that the supply is treated as two supplies". As there were now two supplies – one in respect of the resorts located in Canada, and one in respect of the resorts located outside of Canada, there was no longer any conflict between 142(1)(d) and 142(2)(d) as each one applied to a separate supply.
In allocating the Resort Fee to these two supplies, the FCA preferred the allocation method of Club Intrawest to that of CRA, holding that it was more fair and reasonable to allocate the Resort Fee based on the ratio of membership costs associated with the operation of the resorts in Canada to the total membership costs for all resorts.
This decision represents a creative solution by the FCA to a problem which the parties themselves struggled with before the TCC – how to justify that only part of the Resort Fee should be taxable. By leveraging the common law principles of "single versus multiple supplies" the FCA was able to come up with an elegant solution that represents an interesting legal development in this area of law.
This case also demonstrates the importance of considering how GST/HST applies to supplies before the invoices are issued and the supply is made. Had the parties obtained advice from a tax lawyer regarding the GST/HST consequences of the Resort Fee, they may have decided to break the Resort Fee into two separately identified and calculated fees in respect of the Canadian and non-Canadian properties. This would have avoided the need for costly litigation at the Tax Court.
As the old saying goes, an ounce of prevention is worth a pound of cure!
A version of this article appeared in the August 2017 issue of Canadian Tax Highlights.