Farm Credit Canada v. R. – FCA: Tax Court decision affirmed – taxpayer a “loan corporation” for GST/HST purposes

Farm Credit Canada v. R. – FCA:  Tax Court decision affirmed – taxpayer a “loan corporation” for GST/HST purposes

https://decisia.lexum.com/fca-caf/decisions/en/item/303698/index.do

Farm Credit Canada v. Canada (December 12, 2017 – 2017 FCA 244, Gauthier, Near (Author), De Montigny JJ. A.).

Précis:   The taxpayer took the position that it was not a “loan corporation” for GST/HST purposes because it did not accept deposits from the public.  CRA rejected that interpretation and the Tax Court agreed.  The taxpayer appealed unsuccessfully to the Federal Court of Appeal.  Costs of $2,200, all inclusive, were awarded to the Crown.

Decision:  The law in this area is quite arcane but ultimately it  boils down to allocation of financial services between provinces for GST/HST purposes:

[2]               The appellant is a federal Crown corporation that is wholly owned by the Government of Canada and governed by the Farm Credit Canada Act, S.C. 1993, c. 14. Its purpose is to enhance rural Canada by providing specialized and personalized financial services to farming operations and to enterprises that are closely related to or dependent on farming. These services include making loans to primary producers to purchase business inputs such as land and equipment, making loans to suppliers or processors who do business with primary producers, and entering into agreements with partners that act as intermediaries. The appellant competes with private financial institutions.

[3]               The appellant agreed in the Statement of Agreed Facts that its principal business is the making of loans. It does not accept deposits from the public.

[4]               The appellant filed its GST/HST returns for the 2008–2009, 2009–2010, and 2010–2011 annual reporting periods as a general corporation under the Attribution Regulations. The Canada Revenue Agency (CRA) reassessed the returns on the basis that the appellant was a loan corporation in 2012. The appellant appealed the reassessments to the Tax Court of Canada.

[5]               The Attribution Regulations are part of what is generally referred to as the “special attribution method” (SAM Rules). The SAM Rules allocate a financial institution’s activities to the province where its financial services are consumed. The SAM Rules have four components: (1) they apply to “selected listed financial institutions”(SLFIs), (2) they require statutory adjustments to tax payable under Divisions IV and IV.1 of the Excise Tax Act, (3) they prohibit SLFIs from claiming input tax credits in respect of the provincial portion of the HST paid, and (4) they require SLFIs to adjust net tax for reporting periods. Ultimately, the net tax is calculated according to “attribution percentages” determined under Part 2 of the Attribution Regulations. The attribution percentages are based on the “type” of organization and differ for general corporations and loan corporations.

The Court of Appeal accepted the Tax Court decision:

[40]           As the trial judge noted, the main purpose of the SAM Rules is to discourage financial institutions from acquiring all of their inputs in non-participating provinces as this would discourage investment in participating provinces. In its reasons, the Tax Court cited the Regulatory Impact Analysis Statement, C. Gaz. 2013.II.1167 that accompanies the Attribution Regulations:

… These amendments generally provide that … the methods for determining an SLFI’s provincial attribution percentages, which the SLFI uses to determine its liability for the provincial component of the HST for each of the HST participating provinces, reflect the consumption of the SLFI’s financial services by residents of the province.

[emphasis in Tax Court decision]

Ultimately, without the SAM Rules, the structure would allow organizations to minimize the non-recoverable tax that they would pay. The SAM Rules address this by attributing liability for the provincial portion of the HST to the province where the financial service was consumed.

[41]           Interpreting the term loan corporation as requiring deposits from the public would create a situation where some lenders, including the appellant, would have an advantage over those that do take deposits. The respondent notes, and I agree, that the appellant competes with private financial institutions that are subject to the attribution percentage for loan corporations. In my view, Parliament did not intend to give the appellant this benefit.

[42]           Finally, the appellant argues that the Tax Court’s interpretation of loan corporation creates an opportunity for tax avoidance. I disagree. An organization is entitled to plan its affairs in response to the law as it stands (Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1; 19 TC 490). If an organization accurately reports what business it has undertaken during the year, it will be taxed accordingly. If that regime allows for organizations to plan their affairs in a way that avoids paying taxes, that is a problem for Parliament to address.

[43]           Thus in my view, the Tax Court did not err in finding that the appellant is a loan corporation for the purpose of the Attribution Regulations. It considered the text, context, and purpose of the Attribution Regulations and correctly found that the term loan corporation is not limited to regulated institutions that take deposits from the public.

Accordingly the appeal was dismissed.  Costs of $2,200, all inclusive, were awarded to the Crown.