Robin Aero-Space – “in respect of TPP”

(As originally published in GST & Commodity Tax Journal, March 2005)

The Tax Court’s recent decision in Robin Aerospace Products Ltd. v. R, (2005 TCC 128) is the first to examine the issue of just how far one can zero-rate advisory services provided by non-residents, when the object of the services is tangible personal property situated in Canada.

Legislative Overview

The technical zero-rating provisions are usually found in either sections 7 or 23 of Part V of Schedule VI of the Excise Tax Act (the “ETA”), which are provided for in Figure 1 below.  

Figure 1:    Part V of Schedule VI of the ETA – Zero-rated Services

____________________________________________________________________________________

While the general rule is that services (including advisory, professional or consulting services) are zero-rated when made to non-residents, the exclusions set out in the specific paragraphs in Figure 1 serve to carve out exceptions to zero-rating. 

Both section 7 and section 23 provide exceptions for services “in respect of tangible personal property” that is situated in Canada at the time the service is performed.

While much has been written on the implications of the broad language in these exclusion, there was, until recently, no jurisprudence.

The recent decision of the Tax Court in Robin Aerospace changes that, and serves to put service providers on notice as to some of the basic requirements that the Tax Court will be looking at.

Robin Aerospace Case

Facts

Robin Aerospace Products Ltd. was a Canadian company providing technical services in aerospace, engineering and marketing (“Robin Aerospace”).  It was also the sole Canadian sales representative of Leach International of California (“Leach”), a U.S. corporation that manufactured electrical power distribution systems and components. 

In 1994, Leach and Bombardier entered into a parts contract for the supply of an electrical power distribution system Bombardier’s new “Global Express” Aircraft – then in development  To facilitate Leach’s involvement in the project, Robin Aerospace hired two technicians, Messrs. Whittome and Lorencz, who were to act as technical experts onsite, during the design phase in Montreal.  (Rather than hire these subcontractors directly, Leach had to subcontract the two employees from Robin Aerospace, under the terms of its contract with Robin Aerospace.)

Later on (and due to financial difficulties), Leach was replaced in this arrangement by another non-resident company, the Sundstrand Corporation (“Sundstrand”).  Sundstrand continued to deliver the same electrical system to Bombardier, and with Robin Aerospace’s consent, kept the subcontractor relationships with Whittome and Lorencz in place.  Sundstrand also continued to maintain ownership of the electrical system while it was in Canada , and until that equipment was installed, tested correctly, and signed off on by Bombardier. 

As part of their work in Canada, Whittome and Lorencz would submit reports to Sundstrand monitoring the technical compliance of the systems under the detailed test procedures;  they were not authorized to perform any physical work on the systems, however, seemingly due to the high costs of insurance costs for technicians who actually worked on the Global Express during its development stage.

During this time, Robin Aerospace also invoiced Sundstrand for the services of two other employees, again on a time and expenses basis:  Thickson, an engineer, who was employed in the marketing department assisting the party responsible for producing the “flight controls” for the Global Express Project; and Manojlovic, who was employed but spent the majority of his time in California when the prototype electrical system was being constructed.

Robin Aerospace ultimately invoiced Leach and/or Sundstrand for the services of Messrs. Whittome, Lorencz, Thickson, and Manojlovic, but without charging GST.

The CRA assessed, taking the position that the services were not zero-rated, being “in respect of” tangible personal property situated in Canada.

Court’s Conclusions

The issue in the case boiled down to whether or not the services provided by Robin Aerospace were zero-rated services, or taxable based on the exclusion in paragraph (c) of section 23.[1]  More specifically, the Court had to determine whether the services provided were “in respect of tangible personal property situated in Canada at the relevant time”.

In the Court’s view, the services were so provided.

In reaching its decision, the Court found to “appropriate to consider the contractual relationship which existed between the parties”, and emphasized in detail the various aspects of the Offer to Perform Services, and the Statement of Work which detailed the services that were to be performed in relation to the various equipment and systems in place in Canada.  The Court rejected the view that the services were merely

Limited to “observation and reporting”, concluding that the relevant documents suggested “a much wider role”.

In terms of the interpretation to be afforded the words “in respect of tangible personal property”, the Court had the following to say:

[20] The Appellant's position is that the services provided to [the non-residents] are zero-rated supplies as defined in the relevant provisions of the Act.  More specifically, it was argued that no such service was performed in respect of tangible personal property situated in Canada as a result of which the services provided are zero-rated and therefore not subject to GST.  Acceptance of this submission would require the Court to give the words "services in respect of" a markedly restricted meaning. As was noted by counsel for the Respondent, the Supreme Court of Canada in Nowegijick v. The Queen stated:   " The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."

        I have concluded that there was substantially more than an indirect or incidental nexus between the service provided by Robin to Sundstrand and the tangible personal property.

In doing so, the Court effectively confirmed the CRA’s longstanding position that the words “in respect of” are not to be easily limited.[2]

On the other hand, the Court did appear to suggest that if the relationship between the services and the tangible personal property is merely “indirect” or representing an “incidental nexus”, they “in respect of” test may not be met.

In the result, the Court upheld the assessment, but allowed (without much discussion) a pre-rating of the charges by Robin Aerospace, allowing the appeal for the portion of the charges for services that it viewed as taking place outside of Canada:

[21] One further issue remains, that being whether the totality of the service provided by the subcontractors was in Canada . Cossar initially testified that the subcontractors, Whittome and Lorencz, spent approximately two-thirds of their time out of Canada , either in the United States at the Sundstrand … plants or in England . … Accordingly, I propose to allocate one-third of the services as not subject to the provisions of the relevant sections of the Excise Tax Act.  Thickson had the same responsibilities as Whittome and Lorencz and the same allocation is appropriate. With respect to the fourth subcontractor, Manojlovic, … there is simply insufficient evidence to warrant any adjustment of the Minister's assessment.

Commentary

While much of the Court’s decision can be seen to be a factual one (i.e., taking its view of the situation from the evidence and documentation specific to the case), the Court’s analysis of the meaning of “in respect of” does serve to confirm the generally expected view that the words would be given the same interpretation as set out in the Nowegijick case. 

Given the Court’s suggestion that “in respect of” requires more than “an indirect or incidental nexus between the service provided … and the tangible personal property”, it seems that the more interesting cases will focus on where to draw that line.

Finally, the Court’s willingness to “allocate” for services performed while “outside Canada ” is probably not based on a completely technical approach to the ETA.  Subsection 142(1) makes it clear that where a service is performed “in whole or in part in Canada”, it is deemed to be a taxable supply made in Canada – and therefore entirely subject to GST, unless otherwise zero-rated.[3] 

On the other hand, and while not completely articulated by the Court, it could well be that the Court considered the situation to involve a series of separate services, each capable of being viewed as supplied in or outside of Canada in its own right, and therefore allowing for the allocation that was made.  While a bit of a stretch – at least based on the stated reasoning in the case – that sort of argument might well end up being the more interesting part of the case, particular to the extent service providers caught in the same assessment position attempt to argue for the same allocation.[4]

Authors:

Robert G. Kreklewetz & Vern Vipul

Millar Kreklewetz LLP

Hard Name.  Simple Solution.    ^TM

Copyright © Millar Kreklewetz LLP