http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/127251/index.do
University of Calgary v. The Queen (December 11, 2015 – 2015 TCC 321, D’Arcy J.).
Précis: For GST purposes the University of Calgary 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 allocations as follows:
[24] The Appellant accepts the changes proposed by the Minister with respect to the allocation of space within specific buildings. The PASF I states the following:
Subsequent to issuance of the Reassessments under appeal, the Appellant agreed to some of the adjustments proposed by the Minister (in applying the Appellant’s methodology). As a result, the Appellant now claims the extent to which each U of C Property was being used in commercial activities is as follows:
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Child Development Centre
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81.20%
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Main Campus
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41.33%
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[Footnote omitted]
The Minister contended to the following allocations:
[28] The Minister, using the Respondent’s Methodology and after making adjustments to the Appellant’s original calculation of the use of space within specific buildings, determined the extent to which each of the U of C Properties was used during the relevant period in commercial activities, as follows (the “Respondent’s Percentages”):
- CDC – 69.91%
- Main Campus – 18.06%
- South Campus – 11.93%
[Footnote omitted]
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 Alberta, delves into the esoteric realm of allocation of commercial and non-commercial space by public service institutions. The reasons run to 200 paragraphs with 85 footnotes. While the decision is exhaustively thorough it will likely be of little interest other than to GST/HST specialists. The University advanced one set of allocations. The Minister argued for substantially lower allocations (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.
[177] The Respondent’s argument for the use of the indexing factor is set out in her written submissions as follows (at paragraph 55):
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:
[182] 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 use of the property by the Appellant, and the tax paid by the Appellant.
[183] 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.
[184] Regardless, the Respondent’s use of the indexing factor has serious shortcomings.
[185] First, the Respondent used the 2011 replacement cost to determine the Appellant’s entitlement to input tax credits in 2006, five years earlier. I would expect that costs would have changed over the five years, both in absolute and in relative terms.
[186] Second, the use of the indexing factor ignores the fact that the Appellant constructed several of the buildings prior to the introduction of the GST. The Appellant did not pay GST on property or services acquired to construct these buildings or to make pre-GST improvements to the buildings.
[187] The GST at issue is equal to the basic tax content on the date of the deemed acquisition of the U of C Properties. It is the tax paid since the introduction of the GST. The application of the indexing factor to buildings constructed prior to the introduction of the GST seriously decreases the reliability of the resulting ratios.
[188] For example the CRA calculated that the basic tax content of the Main Campus on December 31, 2007 was $4,787,125 on the basis of expenditures of approximately $224,500,000. The $224,500,000 represents the expenditures the Appellant made with respect to the Main Campus between the introduction of the GST and December 31, 2007.
[189] The CRA determined that the replacement cost for the Main Campus was $1.282 billion. The expenditures incurred between the introduction of the GST and the date of the deemed acquisition represent only 17.5% of the total replacement costs. This evidences the fact that the Appellant constructed a substantial portion of the buildings prior to the introduction of the GST. This is consistent with the fact that the university was founded in 1966.
[190] Another 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.
[191] 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.
[192] 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.