PDM Royalties Ltd Pship v. R. – TCC: Administrator of Fund Cannot Claim ITC’s Since It Acted as Fund’s Agent

Bill Innes on Current Tax Cases

http://decision.tcc-cci.gc.ca/en/2013/2013tcc270/2013tcc270.html New Window

PDM Royalties Limited Partnership v. The Queen[1] (August 29, 2013) involved a somewhat complex reorganization of the Pizza Delight chain.  To put matters quite simply, at the end of the day the appellant, PDM Royalties Limited Partnership, acted as administrator of an income fund, the PDM Royalties Income Fund (the “Fund”), and the appellant claimed ITCs in respect of GST paid on certain expenses arising out of that relationship:

[1]            This appeal relates to assessments under the Excise Tax Act (“ETA”) for the periods June 1, 2004 to November 30, 2004, July 1, 2004 to July 31, 2004 and January 1, 2005 to March 31, 2006 which disallowed the Appellant’s claim for input tax credits (“ITCs”) in the amounts of $65,719.88, $98,219.15 and $107,621.44 respectively. The majority of the ITCs were with respect to expenses incurred in structuring and selling units of an income fund.

While the case involves discussion of some other issues (were the expenses in respect of exempt financial activity of the Fund, were the expenses properly documented, etc.) the most interesting aspect is the question whether the appellant incurred the expenses as principal or as an agent for the Fund.

The appellant had an uphill battle on this point since the language of the documentation (i.e., the Administration Agreement between the appellant and the Fund) was not helpful:

3.1 Payment of Expenses

As agent of the Fund, the Administrator shall pay for all outlays and expenses to third parties incurred by the Administrator in the administration of the affairs of the Fund and the performance by the Administrator of its duties hereunder (including costs and expenses incurred in calling and convening meetings of Unitholders, in reporting to Unitholders and in making distributions to Unitholders). For greater certainty, the Administrator shall pay the remuneration and expenses of the Trustees as provided in Section 8.9 of the Declaration of Trust. (emphasis added)

This forced the appellant to make the very daunting argument that the Administration Agreement did not properly reflect the relationship between the parties:

[29]        In response to my request, counsel for the Appellant submitted that the agreement is an Administration Agreement and its primary purpose is to make the Appellant the administrator of the Fund and not the agent of the Fund. He wrote that the conduct of the parties evidenced an unwritten agreement between them which superseded the written agreement. The unwritten agreement was that the Appellant would incur the expenses on its own behalf. I do not find the Appellant’s argument persuasive. The Fund and the Appellant executed the Administration Agreement; the Appellant presented it as one of its exhibits at the hearing; and, there was no evidence that it was no longer valid or enforceable between the parties. Moreover, section 6.2 of the Administration Agreement reads: “This Agreement shall not be amended or varied in its terms by oral agreement or by representations or otherwise except by instrument in writing executed by the duly authorized representatives of the parties hereto or their respective successors or assigns.”

Such arguments rarely meet with much success in the courts.  This case was no exception:

[30]        I have concluded that the Appellant was not only the Administrator of the Fund but also the agent for the Fund and that the Law of Agency applies to this appeal. Pursuant to the Law of Agency, the Fund and not the Appellant was liable to pay for the contracts entered into by the Appellant on the Fund’s behalf. See Adams v R, [1998] 2 CTC 333 (FCA) at paragraph 13 where Robertson J.A. observed:

I take it to be axiomatic that where an agent makes a contract with a third party on behalf of a disclosed principal and that principal has authorized the making of such contract the principal can sue and be sued by the third party on the contract. In other words, a direct contractual relationship is thereby created between principal and third party by the acts of the agent, who does not become a party to the relationship. This is the very purpose and rationale of agency law: see G.H.L. Fridman, Law of Agency, 7d, 1996 at 216.

[31]        It is my view that when the Appellant paid for or contracted for services which were provided to the Fund, it did so as agent for the Fund and it disclosed that it was acting as agent for the Fund. Paragraph 2.6 of the Administration Agreement required the Appellant to disclose that it was entering into contracts “solely on behalf” of the Fund. The acts of the Appellant created direct contractual relationships between the Fund and the service providers whose invoices are at issue. It was the Fund, as principal, who was contractually liable to pay under the agreements with the suppliers and it is the Fund who was the recipient of the services provided and who acquired the services.

[32]        Some of the services provided to the Fund were legal, accounting, assurance services, listing on the TSX, valuation of trademarks and other intellectual properties, printing and publishing. Based on the evidence before me, it is not clear if the Financing Agreement was intended to make a re-supply of these services to the Appellant from the Fund. However, any re-supply of the services was impossible because the services were consumed by the Fund, the original recipient of the services. It is my opinion that the Appellant did not acquire the services which were provided to the Fund even though it paid the expenses for the services. It paid those expenses as agent for the Fund.

This case illustrates the importance of ensuring that the documentation of any reorganization carefully dovetail with the anticipated tax results.

[1] 2013 TCC 270.