http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/127251/index.do
University of Alberta v. The Queen (December 21, 2015 – 2015 TCC 336, D’Arcy J.).
Précis: For GST purposes the University of Alberta was required to compute the percent of its campus which was used for commercial purposes; that computation in turn determined the amount of its input tax credits. The University, after accepting some of the Minister’s adjustments, contended for a figure of 25.36%; the Minister argued for a lower allocation of 14.12%.
The Tax Court rejected the position advanced by the Minister and allowed the University’s appeal with costs.
Decision: This decision, as well as a companion decision for the University of Calgary, delves into the esoteric realm of allocation of commercial and non-commercial space by public service institutions. The reasons run to 184 paragraphs with 71 footnotes. While the decision is exhaustively thorough it will likely be of little interest other than to GST/HST specialists. The University argued for an allocation of 25.36% while the Minister argued for 14.12% (which, of course, would have reduced the University’s input tax credits). The University was successful and the appeal was allowed with costs.
One point of possibly more general application is the Court’s rejection of the Minister’s attempt to impose an “indexing” methodology to account for the fact that the campus was assembled over a long period of time, most of it pre-GST and at a lower cost than that of more recent additions or improvements; in other words that it should not use historic cost for older portions of the campus.
[163] The Respondent’s argument for the use of the indexing factor is set out in her written submissions as follows:
The respondent’s submission is that it is not fair and reasonable to compare a unit of space with a lower value of improvements to a unit of space with a higher value of improvements. Lower cost space contributes comparatively less GST input cost and BTC [basic tax content] to a title than does higher cost space. A correcting factor must be utilized to match spaces of the title upon which GST was paid or payable, to areas from which ITCs [input tax credits] are sought to be recovered.
The Court rejected the concept of imposing a system on the taxpayer where the method it had used was fair and reasonable and also rejected the concept of requiring taxpayers in similar situations to pay for costly valuations to determine their input tax credits:
[168] In my view, the Respondent is simply arguing that her method is better than the Appellant’s method on the basis that it results in a more accurate correlation between the Appellant’s use of the Campus and the tax the Appellant is deemed to have paid in respect of certain buildings and land.
[169] As my colleague, Justice Owen, noted in Sun Life, the CRA cannot simply substitute its method for that of the GST registrant. A GST registrant is entitled to use any method that is fair and reasonable provided it complies with the provisions of the Act.
[170] Regardless, I am not convinced that the use of the indexing factor proposed by the Respondent results in a more accurate calculation.
[171] The Appellant was created in 1908. As a result, a significant portion of the Campus was constructed prior to the introduction of the GST. The Appellant did not pay GST on property or services acquired to construct buildings at that time or to make pre-GST improvements to the buildings. The use of the indexing factor ignores this fact.
[172] The GST at issue is equal to the basic tax content on the date of the deemed acquisition of the Campus. It is the tax paid since the introduction of the GST. The application of the CRA’s indexing factor to buildings constructed prior to the introduction of the GST seriously decreases the reliability of the resulting ratios.
[173] My second concern relates to the timing of the valuation of the Campus. It was done in January 2009, nearly three years after the deemed acquisition. I would expect that costs would have changed over the three years, in absolute and in relative terms.
[174] The third concern I have with respect to the use of the indexing factor is that it requires the Appellant to hire a valuator in order to determine its entitlement to input tax credits. This would place an unreasonable financial burden on the Appellant and other GST registrants who would be required to perform similar calculations. Further, if the Court accepted this method, the Appellant would be required to retain a valuator each time the section 206 change-in-use rules apply to its capital real property.
[175] In my view, a GST registrant should be entitled to determine its input tax credits on the basis of information in its possession, without having to resort to hiring expensive third parties, such as valuators.
[176] In summary, I do not accept the Respondent’s argument that the Appellant’s Final Methodology requires an indexing factor in order to satisfy the subsection 141.01(5) fair and reasonable test.
[Footnote omitted]
This decision, along with the Sun Life decision blogged previously on this site, appears to have clipped the Minister’s proverbial wings in terms of imposing valuation methodologies on taxpayers that are not specifically mandated by statute or a regulation.