Section 165 of the ETA imposes GST in respect of supplies “made in Canada”.  The so-called “place of supply rules” in section 142 of the ETA serve to deem particular supplies to be made either inside or outside of Canada.  As a result of a legislative inconsistency these rules can conceivably deem a particular supply to be made both inside and outside of Canada.  This inconsistency was analyzed by the TCC in the recent decision of Club Intrawest (2016 TCC 149).  In doing so, the TCC arguably expanded the place of supply rules such that GST now applies to more supplies than even CRA had previously contemplated.

Club Intrawest (CI) operated a resort condo time-share scheme under which its members purchased points to be used to rent vacation homes.  The members also paid CI an Annual Resort Fee, which was used to fund CI’s operations (maintenance, operation and improvement of each vacation home; operation of the program; operation of CI; and maintaining a reserve fund).  The vacation homes were beneficially owned by CI and were located in Canada, the United States, and Mexico.  CI did not charge GST on the Annual Resort Fee, taking the position that its expenses relating to the vacation homes were incurred on the members’ behalf (as agent), and that the Annual Resort Fee was merely a reimbursement in respect of same and thus not taxable. However, the CRA assessed the Annual Resort Fee as consideration for a taxable supply. 

The TCC agreed with the CRA that the fee was taxable, but it disagreed as to the nature of the supply and the methodology for taxing it. The TCC concluded that CI made a single supply of services relating to real property situated in Canada, real property situated outside of Canada, and things other than real property (e.g. CI’s operating costs). Thus, the supply was of “any other service” – not specifically enumerated in paragraphs 142(1)(a)-(f) and 142(2)(a)-(f) – and paragraph 142(1)(g) applied to deem the supply to be made in Canada because the service was “performed in whole or in part in Canada”.

However, perhaps most interestingly, the TCC conducted a thorough analysis of the potential application of paragraphs 142(1)(c) and (d) and 142(2)(c) and (d). Paragraphs 142(1)(c) and (d) deem the supply of intangible personal property (IPP) or a service in relation to real property, to be made inside Canada if the real property is located in Canada. Paragraphs 142(2)(c) and (d) deem the supply of IPP or a service in relation to real property, to be made outside Canada if the real property is located outside Canada. The supply of IPP or a service in relation to real property that was situated both inside and outside Canada is thus deemed by these subparagraphs to be made inside and outside Canada.  The TCC addressed this apparent legislative inconsistency in its decision.

The parties took the position that the supply of IPP or a service that was in relation to real property situated both inside and outside Canada, should be taxed on an allocated basis between taxable supplies made in Canada and taxable supplies made outside Canada. This approach appears to be the same approach taken by CRA in respect of resort point sales, as outlined in a CRA ruling (RITS 52554, October 15, 2004).  

Nevertheless, the TCC concluded that the ETA imposed full GST on such supplies: there is no legislative basis to charge GST only to the extent that the supply related to real property in Canada.  The TCC noted that subsection 165(1) imposes tax on the full consideration for a taxable supply made in Canada; the ETA read as a whole does not contemplate splitting a single supply into taxable and non-taxable portions under the place of supply rules. The TCC said that Parliament explicitly splits single supplies in the manner proposed by the parties in other ETA sections – for example, a supply of real property containing a non-taxable residential unit and taxable commercial unit is deemed to be two separate supplies in subsection 136(2) - and Parliament also decided that most supplies are deemed to be made in Canada even if the supply is consumed both inside and outside of Canada. According to the TCC, other rules have the effect of removing tax from taxable supplies pursuant to zero-rating provisions, which serves as further support for the full taxation of the supplies in issue. 

The underlying problem in the legislative drafting of the place of supply rules apparently exists in our view because Parliament did not contemplate a single supply being made in relation to either (1) multiple real properties or (2) a single real property located both inside and outside of Canada.  Interestingly, the CRA took a different approach with respect to the latter scenario from the one that it took in Club Intrawest: in GST Memoranda Series, chapter 19.1, paragraph 37, the CRA concluded that a supply of an irrigation system to a farm located both inside and outside Canada was fully taxable.   

In any event, the TCC analysis appears to be accurate on this point based on the overall wording of the place of supply rules and the basic imposition of tax provision in section 165. Under that provision, full GST attaches to a supply made in Canada, and not only to the extent that it is made in Canada.

The zero-rating rules intend to result in fairness if it is expected that a supply made in Canada is predominantly for consumption outside Canada. For example, sections 7 and 23 of Part V of Schedule VI provide exemption for certain services acquired by non-residents.

Perhaps Finance needs to consider whether zero-rating should apply to a non-resident paying such a fee. For now, the legislation results in full taxation of these transactions. In our view, the CRA’s administrative apportionment – while having no legislative basis  seems a very fair attempt to resolve the matter.

* A version of this article appears in the September 2016 edition of Canadian Tax Highlights.