Canada: Québec Retail Sales Tax Act Repealed 25 Years Ago Is Still Relevant For Determining ITC Recapture

Central Issues

At issue before the Tax Court of Canada (the "TCC") in Triple M Metal LP v. The Queen ("Triple M")¹ was whether, as a "large business", Triple M Metal LP ("Triple M") recaptured sufficient specified provincial input tax credits ("SPITCs") relating to the Ontario portion of HST ("PVAT") paid on the acquisition of "specified energy"² by Triple M pursuant to subsection 236.01(2) of the Excise Tax Act (the "ETA").³ In particular, Triple M excluded from its recaptured SPITCs, the PVAT relating to the acquisition of "specified production energy" (i.e., energy consumed or used to produce or manufacture goods for sale).

Canada Revenue Agency ("CRA") challenged this exclusion in computing the recaptured SPITCs (the "SPITC Reduction"). The taxpayer, Triple M, argued that under the formula for calculating the SPITCs eligible for recapture and added back to net tax, the SPITC Reduction was specifically allowed.⁴

Key Definitions

The application of the SPITC Reduction depended on whether or not Triple M is "a scrap dealer" within the meaning of paragraph (d) in the definition of "selected person" in ss. 31(1) of the New Harmonized Value- added Tax System Regulations, No. 2 (the "PVAT Regulations").⁵ In the formula for calculating the SPITCs for "specified energy", the SPITC Reduction can be made for "specified production energy".

This "specified production energy", also defined in ss. 31(1), includes "the part of specified energy acquired in, or brought into, a specified province by a selected person for consumption or use by the selected person in the production of tangible personal property for sale", subject to exclusion for any "part of the specified energy" for consumption or use in equipment "not integral to that production". [Emphasis added.] Only "a selected person" can, therefore, qualify for the SPITC Reduction. By definition, "a selected person" cannot, however, be "a scrap dealer".

The definition of "production" is a critical component of the term "specified production energy". Under section 26 of the PVAT Regulations:

The TCC distilled from this maze of definitions the central issue at the core of this dispute between the taxpayer, Triple M, and CRA:⁶

Triple M's Business

Broadly viewed, "Triple M's undertaking primarily relates to the collection, sorting, compacting and rendering of scrap metal for use in the production of steel". This overall process can be broken down into different sets of activities. Firstly, there is the "sorting, shearing and compacting" (the "Aggregating Activities"). Then comes the "various baling and shredding processes which very effectively further separate, re-form, pulverize and collate ferrous and non-ferrous components of scrap metal" (the "Processing Activities").

Triple M sells the ferrous components "to steel mills who use the compacted, pulverized and sorted iron in production". The non-ferrous (non-iron) residue is sold to "non-steel producing customers for various purposes".⁷

Triple M's SPITC Allocation

Triple M took the position that it was not required to recapture SPITCs relating to the energy costs consumed and used solely for its Processing Activities, which make Triple M a scrap recycler or processor, rather than a scrap dealer. With respect to the Aggregating Activities, Triple M recaptured SPITCs. There was no dispute as to the quantum of the amounts allocated between the two different sets of activities by Triple M. The dispute related to "whether the ITCs related solely to the processing activities are or are not subject to recapture as SPITCs".⁸

Is Triple M a "Scrap Metal Dealer"?

The term "scrap metal dealer" is explicitly excluded from the definition of a "selected person", who would be eligible for the SPITC Reduction. That is, a scrap metal dealer is not a selected person and is, therefore, ineligible to qualify for the SPITC Reduction.

The TCC noted that:⁹

The Modern Rule of Statutory Interpretation

To resolve the ambiguity inherent in this term, the TCC looked to the modern rule of statutory interpretation stated at paragraph 10 of Canada Trustco Mortgage v. R¹⁰ ("Canada Trustco").¹¹

(i)Textual Analysis

As to the textual analysis, the TCC considered both the dictionary definitions of a "scrap metal dealer". With respect to the jurisprudence, the Court concluded that the cited cases "dealt with different industries and activities than those of scrap metal dealers or recyclers".¹² For this reason, the TCC found these cases of limited use.

The common theme of the dictionary definitions of "dealer" was:¹³

Triple M submitted that "there is a general consensus or understanding within the scrap metal industry that a scrap metal dealer is different from a scrap metal recycler". For the following reasons, the TCC found the "evidence in this regard is not convincing".¹⁴

First, Triple M's Vice-President of Engineering testified as to the industry understanding of this term, but the evidence was unclear as to actually what was the demarcation between a scrap metal dealer and scrap metal recycler. Second, Triple M indicated in its tax return that its North American Industry Classification code (NAICS) code corresponded to "primary metal manufacturing". There was no evidence, however, as to how this classification was determined, if other more specific classifications were available, or why Triple M selected this classification. Third, Triple M called itself a scrap metal "recycler". Since Triple M engaged in both Aggregation and Processing Activities, this "self-described" name could not be viewed as "a definitive and official demarcation".¹⁵

(ii)Contextual Analysis

In the contextual analysis, the TCC grappled with whether tautological elements are incorporated into the definition of "specified production energy", which has two main characteristics: (i) there must be a "selected person" who uses the energy; and (ii) the energy must be used in the "production of tangible personal property for sale".¹⁶

As to this first characteristic, the term "selected person" is defined in the negative so as to exclude inter alia "a scrap metal dealer". Among the exclusions from a "selected person", only a "financial institution" is defined in the ETA or its Regulations.¹⁷ As to the second characteristic, "production" is defined under section 26 of the PVAT Regulations to mean the "assembling, processing or manufacturing" of tangible personal property (inputs) to create other property (outputs) that "is different in nature or character" from the original property (inputs).¹⁸

The exclusion of a "scrap metal dealer" (as not "a selected person") would have little meaning or significance on its own, if this definition were simply to exclude a purchaser and re-seller of scrap metal products, to the extent the person were not engaged in the production of goods (outputs) that were "different in nature or character" than the original inputs (because a "scrap dealer", or buyer and seller of scrap metal, would not generally be engaged in the production of new goods). The TCC put "the presumption against tautology" this way:¹⁹

The TCC went on to explain why the presumption against tautology was rebutted in this case, given the contextual framework and, as discussed below in the next section, the purposive analysis. As explained below, various repealed Quebec sales tax laws were considered in examining the contextual framework, and the legislative purpose or policy rationale, of the SPITC recapture and the SPITC Reduction.

Ss. 236.01(2) of the ETA allows for recapture of SPITCs of a "large business" if this recapture is provided for in a "sales tax harmonization agreement with the government of a participating province", as defined in ss. 123(1) of the ETA. An example of such an agreement is the Comprehensive Integrated Tax Coordination Agreement (the "CITCA") entered into between the Government of Ontario and the Federal Government. Pursuant to Part XVII of the CITCA, the SPITC recapture is part of the transitional measures set out in Annex "C" of the CITCA.

In Annex "C", section 17 restricts the scope of ITC recapture so that it "does not exceed the scope of the persons, property and services that are denied input tax refunds in respect of the Québec Sales Tax, pursuant to An Act Respecting the Québec Sales Tax, R.S.Q. c. T-01, as it read on March 10, 2009." The TCC then considered the scope of the input tax refund ("ITR") restrictions as of March 10, 2009.

Under section 206.1 of An Act Respecting the Québec Sales Tax (the "QST Act"), a "large business" is restricted from claiming ITRs relating to the acquisition of "electricity, gas, combustibles or steam" (the "Energy Sources").²⁰ Under section 206.3 of the QST Act, carved-out from these ITR restrictions are acquisitions of Energy Sources "used for a purpose such that the exemption provided for in paragraph aa of section 17 of the Retail Sales Tax Act (RSQ, chapter I-1) would apply in respect thereof but for section 49 of that Act". For this purpose, the expressions "sales of electricity, gas or fuel" in paragraph (aa) of section 17 shall read as "sales of electricity, gas, combustibles or steam" to mirror the Energy Sources mentioned in section 206.1 of the QST Act.

The TCC then delved into the exemption in paragraph 17 (aa) of the Retail Sales Tax Act, c I-1 (the "QRST Act"), "which has long been repealed and replaced by the" QST Act (in 1992). This provision exempted the acquisition of Energy Sources used by a person in the production of goods intended for sale (the "RST Production Exemption").

This RST Production Exemption excluded certain categories of persons "determined by the Minister under section 20" of the QRST Act. Under paragraph 20(b) of the QRST Act, the Minister could designate for exclusion from the RST Production Exemption those persons "whose activities consist mainly of ... selling movable property they have not produced but to which they may have made certain changes before delivery to the consumer". This determination "shall be effected by publication of a notice in the Gazette officielle du Québec and shall have effect from the day of such publication".

A notice published in the Gazette officielle du Québec in 1983 (the "1983 Notice")²¹ designated entities excluded from the RST Production Exemption in paragraph 20(b) of the QRST Act. The 1983 Notice, entitled "Categories of persons whose principal activity is furnishing services or selling movable property", designates, among others, for exclusion from the RST Production Exemption under paragraph 20(b) of the QRST Act: restaurants and hotels, garage operators and scrap metal dealers. In addition, the Minister designates to exclude, among others, "financial institutions" from the RST Production Exemption under paragraph 20(a) of the QRST Act (as "persons whose activities consist principally of supplying personal or professional services").

Applying the ordinary meaning of a "scrap metal dealer" under paragraph 20(b) of the QRST Act, and by extension under ss. 31(1) of the PVAT Regulations, would run afoul of the presumption against tautology, because a scrap metal dealer would normally be understood to be a person who does not generally engage in the "production" of goods under section 26 of the PVAT Regulations (i.e., does not produce goods different in nature or character).

The TCC, however, found that the presumption against tautology is rebutted "as it appears that Parliament intended to both clarify and emphasize that certain excluded entities cannot avail themselves of the "specified production energy" exemption even when they undertake processing activities". [Emphasis added by the author.] To support this view, the TCC gave another example of tautology with respect to other exclusions from "selected person" and the SPITC Reduction. The term "selected person" covers hotels, bars, coffee shops and restaurants, which are specifically excluded from a "selected person" and the SPITC Reduction. Yet, they are already excluded from the SPITC Reduction because they are not considered to engage in the "production" of goods. The definition of "production" under section 26 of the PVAT Regulations excludes "assembling, processing or manufacturing of tangible personal property in a retail establishment". [Emphasis added by the TCC.]

The TCC, however, expressed reservation about whether the CITCA, QST Act and QRST Act do "form part of the statutory context of the provision at issue under the Regulations", specifically the meaning of "a scrap metal dealer", which is excluded from the definition of "selected person" in ss. 31(1) of the PVAT Regulations. Numerous terms, other than "scrap metal dealer", that impact on the scope of recaptured ITCs are defined in sections 26 and 31 of the PVAT Regulations. Moreover, where other legislation was incorporated by reference into the PVAT Regulations, Parliament did so explicitly.²²

(iii) Purposive Analysis

Even if the TCC expressed doubt about whether the CITCA, QST Act and QRST Act form part of the statutory context for considering the definition of "scrap metal dealer", the TCC concluded that "they do certainly provide extrinsic aids in interpreting the purpose or the policy rationale for excepting a "scrap metal dealer" in relation to the "specified production energy" exemption". By viewing the term "scrap metal dealer" through the lens of the Quebec sales tax regime, particularly the 1983 Notice, the TCC resolved the ambiguity.

The 1983 Notice clarifies that the RST Production Exemption is not available to a "scrap metal dealer", whose activities consist principally of buying and selling goods that they have not produced. The inconsequential changes they make to scrap before re-selling the scrap means, in effect, that they are not manufacturers or producers entitled to the RST Production Exemption. Factually, Triple M can be distinguished from a scrap metal dealer because of its significant Processing Activities, through which unusable scrap is converted into new iron or other products to be sold to either steel manufacturers or other manufacturers.

The exclusions from the definition of "selected person", including "a scrap metal dealer", are virtually or substantively identical to the exclusions from the RST Production Exemption listed in the 1983 Notice. This replication should not be considered "a mere coincidence", but rather "should be viewed as a deliberate attempt by Parliament and Ontario to exclude these entities from qualifying for the SPITC Reduction in relation to "specified production energy" based on the same purpose and rationale as established by the 1983 Notice and section of the QRSTA."²³

By virtue of the presumptions of knowledge of, and consistent expression with, the 1983 Notice, by the Federal Parliament and Ontario Legislature, the presumption against tautology could be rebutted. In entering into the CITCA, which limited ITC recapture to the scope of the ITR restrictions, and in enacting the term "selected person" in the PVAT Regulations, the Federal Parliament and Ontario Legislature were presumed to have knowledge of the 1983 Notice. It is presumed that the replication of terms from the 1983 Notice was intentional and intended to convey that the terms in the PVAT Regulations should take their meaning from the corresponding terms in the 1983 Notice (adopted for any variances because of differences in regimes, notably that the RST Production Exemption applied in the context of a retail sales tax rather than a multi-stage, value-added tax).

So with the above in mind, the TCC adopted the definition of "a scrap metal dealer" from the 1983 Notice. A scrap metal dealer is a person whose activities consist principally of buying and selling scrap metal that they have not produced. It is not broad enough to apply to a scrap metal recycler, whose Processing Activities take the recycler outside the scope of this definition, despite some Aggregating Activities consistent with what a scrap metal dealer does.

Presumption in Favour of Taxpayer

To the extent that there was any residual doubt where the ordinary principles of statutory interpretation fail to resolve the interpretation of "a scrap metal dealer" in the PVAT Regulations, then, as stated in Placer Dome, the residual presumption should apply in favour of the taxpayer, Triple M.²⁴

Our View

By excluding from the SPITC Reduction the energy that Triple M consumed in the Aggregating Activities, which would be identified with those of a scrap metal dealer (i.e., non-production), Triple M took a reasonable position. By restricting "a scrap metal dealer" to a person who principally engages in the buying and re-selling of scrap metals without fundamentally changing their condition, the TCC reached a sensible result. That way, a business engaged substantially in scrap metal recycling or production could avail itself of the SPITC Reduction, but a true scrap metal dealer would not be allowed any SPITC Reduction, even if the dealer engages in some incidental, ancillary or relatively minor "production" and sale of goods. In this way, the tautology is incomplete and the definition of "a scrap metal dealer" maintains residual meaning beyond emphasizing, through repetition, the exclusion of true scrap metal dealer activities or Aggregating Activities from the SPITC Reduction (excluded in any event because of their carve-out from "production").

Footnotes

1 2016 TCC 293.

2 Section 26 of the PVAT Regulations defines "specified energy" to mean, in general terms, (a) "electricity, gas and steam" and (b) anything else (other than fuel for use in a propulsion engine) that can be used to generate energy (i) by way of combustion or oxidization, or (ii) by a nuclear reaction. "Specified energy" that is acquired in a "specified province", i.e., Ontario, is, in turn, a "prescribed" property or service within the definition of "specified property or service" pursuant to paragraph 28(1)(e) of the PVAT Regulations and, therefore, subject to recapture under ss. 236.01(2) of the ETA, to the extent not excluded under the formula for calculating SPITCs under ss. 31(3) of the PVAT Regulations.

3 R.S.C. 1985, c. E-15, as amended.

4 The "prescribed manner" for calculating the recaptured SPITCs added back to net tax is set out in ss. 31(3) of the PVAT Regulations.

5 SOR/2010-151 [P.C. 2010-790, June 17, 2010], as amended.

6 Supra, footnote 1, at paragraph [32].

7 Ibid, at paragraph [7].

8 Ibid, at paragraph [8].

9 Ibid, at paragraph [41].

10 2005 SCC 54, [2005] 2 S.C.R. 601.

11 At paragraph [42] of Triple M, supra footnote 1, the TCC stated: "For taxing statutes, Canada Trustco was adopted by virtue of Placer Dome Canada Ltd. v. Ontario (Minister of Finance)", 2006 SCC 20.

12

13

14 Supra, footnote 1, at paragraph [46]. Ibid, at paragraph [44]. Ibid, at paragraph [50].

15 Ibid, at paragraph [53].

16 Ibid, at paragraph [56].

17 ETA, ss. 123(1) and section 149 define a "financial institution".

18 Supra, footnote 1, at paragraphs [57] and [58].

19 Ibid, at paragraph [59].

20 Sections 206.1 and 206.3 of the QST Act were initially repealed by SQ 1995, c. 63, s. 350 effective August 1, 1995. The repeal is, however, only effective in respect of registrants that are small- and medium-sized enterprises. The repeal of sections 206.1 and 206.3 was postponed indefinitely for large businesses pursuant to SQ 1997, c. 85, s. 729. As of March 10, 2009, which is the operative date for determining the scope of the ITR restrictions that the SPITC recapture cannot exceed, sections 206.1 and 206.3 were still in force and effect for large businesses.

21 Gazette officielle du Québec, June 29, 1983, Vol 115, No. 28, at 2272.

22 Supra, footnote 1, at paragraph [64]. As an example, the TCC referred to section 8 of the PVAT Regulations that prescribes for the purposes of paragraph (d) of the definition of "specified provincial tax" in section 220.01 of the ETA, "in the case of a vehicle registered in the province of Ontario, a prescribed tax is the tax imposed under the Retail Sales Tax Act, R.S.O. 1990, c. R. 31, as amended from time to time."

23 Supra, footnote 1, at paragraph [70].

24 Supra, footnote 11, at paragraph [24].

First published by the Sales, Tax, Customs & Trade Journal, Volume XIII, No.4 in 2017

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2017