Date: 20010622
Docket: 1999-2664-GST-I
BETWEEN:
RIVERSIDE COUNTRY CLUB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rowe, D.J.T.C.C.
[1] The Minister of National Revenue (the "Minister") issued a Notice of Decision, dated February 23, 1999 confirming an earlier assessment - no. 00000002749 - issued on February 4, 1998 for the period May 1, 1997 to October 31, 1997. In disallowing the objection of the appellant, Riverside Country Club (Riverside or Club), the Minister found that section 140 of the Excise Tax Act (the "Act") was applicable on the basis the payments in issue - by members of Riverside - were made in consideration for a taxable supply and, as a result, pursuant to subsection 165(1) of the Act, the members were required to pay tax in respect of the taxable supply at the rate of 7% on the value of the consideration. The Minister did not consider the payment of money by a member under the relevant circumstances to have been in respect of the supply of a financial service and, therefore, the payment was not exempt pursuant to section 1 of Part VII of Schedule V to the Act. At page 2 - and following - of the Notice of Decision, R.L. Panghorn, Assistant Director, Appeals stated:
"Based on the evidence reviewed, we find that Section 140 of the Excise Tax Act is applicable. It is our position that the payment made by the members to the Club is consideration for a taxable supply of a membership. As a result, pursuant to subsection 165(1) of the ETA, the member must pay tax in respect of this taxable supply calculated at the rate of 7% on the value of consideration for the supply. Where a member exercises the option of paying the total consideration for the taxable supply (i.e., pays the principal amount of the "total full play equivalent"), then this total amount is subject to the GST. Alternatively, where the member exercises the option of paying the annual special levy (the estimated $500), then the annual levy is subject to the GST at 7%.
Subsection 123(1) of the ETA defines membership to include certain rights acquired in connection with a share, bond, debenture or other security. The definition describes the right as being provided under the terms and conditions of the security, however, in practice the condition of holding a security of the club is contained in the bylaws of the organization or in a separate agreement under which the membership right is conveyed. Bill C-112 amendment, subclause 10(1), provides that the right must be conditional on the acquisition or ownership of the security, regardless of where that condition is set out.
Subsection 123(1) of the ETA defines a debt security as a right to be paid money and includes a deposit of money. Debt securities include debentures, unsecured notes, convertible notes, mortgages, book debts, accounts receivable, treasury bills, bonds, etc.
We do not consider the payment made by the member to be in respect of a supply of a financial service (i.e., the lending of money) and, therefore, the payment is not an exempt supply of a financial service pursuant to section 1 of part VII of Schedule V to the ETA.
Subparagraph 140(b) states that ownership of the security is a condition of the recipient's obtaining a membership in the particular organization. In a July 14, 1997 letter issued by Riverside Country Club to its members it states that "members who join the Club in future years will be required to make the identical contribution to the Club. Regardless of the joining date future members must either pay the special capital assessment for 25 years or provide an interest free loan of $6,300.00."
We feel that the members are simply paying an amount (whether all at once or annually) in respect of a supply of a membership made by the Club. The persons paying the amount are members of the Club at the time the payment is made, it is a condition of the membership to pay a certain amount towards the Club's capital improvements, the total principal payment is an option available to the member in meeting the member's membership obligations, by paying the amount the member continues to receive the benefits of membership in the Club and by choosing this option of payment the total cash outlay by the member is less than if they chose to pay the annual levy of approximately $500. If the payment of the amount was not a condition of membership, a third option of requiring no payment of any amount would have been offered to the member.
The payment made to the Club by the member in respect of the principal amount of the member's total full play equivalent is consideration for a taxable supply and, therefore, the total payment is taxable at 7% for GST purposes. As a result, the Club must charge and collect tax from the member on the total amount of this payment.
Accordingly, a reassessment will not be issued."
[2] The position of the appellant - as set forth in the objection and the subsequent appeal - will become clearer as the evidence unfolds but it is based on the representation that loans to the Club were provided by the members which merely created a debt security as defined by the Act and constituted a legally enforceable right of said members to be repaid the principal amount of the loan. As a result, the appellant considered the right of a member to use the facilities of the Club stemmed from the annual payment of standard dues and fees and was not dependent on any requirement to provide a loan to the Club. Therefore, the appellant maintains there is no amount of Goods and Services Tax (GST) applicable to that definable portion of any member's payment that is attributable to the loan as opposed to regular annual dues and fees.
[3] Douglas Hodson testified he is a resident of Saskatoon, Saskatchewan. He graduated from the University of Saskatchewan in 1981 with a Bachelor of Commerce degree and then went on to law school. He was admitted to the Law Society of Saskatchewan in 1985 and currently practices in partnership with a Saskatoon law firm. Hodson stated he is a member of Riverside, a golf club located along the bank of the South Saskatchewan River, 8 kilometers from the City of Saskatoon. Riverside was established in 1912 and is a private club. It registered for purposes of the Act, effective January 1, 1991 and was assigned a registration number. Hodson stated that over the years, the clubhouse had fallen into a state of disrepair and was no longer adequate to meet the needs of members. Hodson, who had been a member at Riverside since 1989, was elected to the Board of Directors (Board) and - in 1996 - became President of the Club. Hodson explained that in the late 1980's a long-range planning committee had been given the task of building a new clubhouse. Various matters were considered over the subsequent years, including the stability of the riverbank, layout changes to the course and several related concerns. Progress was extremely slow but - in 1994 - a Finance Committee began to examine methods of financing any new construction if the proposals were to receive approval from the full membership. A consensus was required in order for the project to be successful and many of the senior members were concerned about burdening their estate with some long-term debt after their death. Members of the Club were placed into different categories with the Full Play members having full privileges which were tantamount to almost unrestricted access to the course and related facilities. Membership in this category was restricted to 400. Others, known as Select Play members were required to abide by certain restrictions concerning play on Wednesday afternoons and tee-off times on weekends. In addition, Riverside offered a package with one Full Play and one Select Play/Spousal membership which was appropriate for certain couples who would then decide which one would assume the Full Play membership with the attendant privileges. There was also a category described as a Social member and this designation permitted a member to not participate in golfing or other Club activities for a year but still retain the right to be a member. There was also a type of absentee membership available to those who had moved away from Saskatoon but wished to retain a connection to Riverside. Through a variety of classifications, there was also a system in place to encourage participation by young golfers and all persons within these categories were excluded from any obligation to contribute to the capital requirements of the Club. For the rest of the members, the total annual fee included a charge for storage of clubs, access to the driving range and membership in either the Royal Canadian Golf Association or the Canadian Ladies Golf Association. In addition, there was a Minimum House Charge (MHC) in order to encourage members to utilize the clubhouse facilities in terms of purchasing food and beverages. There had been a special capital charge - in the sum of $200.00 per year - and this amount would be used for past, current and future capital projects such as the installation of a new sprinkler system. Hodson referred to a spreadsheet - Exhibit A-1 - setting forth the different types of membership for the 1993-1994 golfing season - as an example of the composition of the Club and the method for levying fees and other assessments. Hodson stated that the Board of Directors of Riverside - on November 18, 1996 - resolved to proceed with the construction of a new clubhouse. A Notice of Meeting - Exhibit A-2 - was sent to all members advising that an Annual General Meeting would be held on December 11, 1996 and that the special business to be transacted at that time would concern a resolution to proceed with the construction of the new facility. An information circular was attached to the notice and it set forth the resolution of the Board as well as details concerning implementation of the plan and the relevant financial considerations. During the years preceding the decision of the Board to proceed, there had been discussions concerning the site of the new building as well as six or seven changes in the location of certain holes. The projected cost of the construction - including a 5% contingency allowance - was in the sum of $3,962,000. The project was intended to commence during the summer of 1997 with the main construction of the clubhouse to occupy the period from the end of September to April, 1998 so as to avoid serious interference with the use of the course and facilities by the members during the regular golfing season. As a result, two separate contracts were tendered in the spring of 1997, one pertaining to the course renovations and the other relating to the new clubhouse. In order to provide financing in the sum of $3.2 million, the Board of Riverside made arrangements to borrow that amount from the Royal Bank (Royal) and to repay the loan over a period of 25 years based on market interest rates. Hodson stated the Board had calculated the sum of $500.00 per year - based on certain membership levels over a 25-year period - as representing the capital contribution required to fund the construction project as approved by the general membership following the meeting on December 11, 1996. To that point, the members had been paying the sum of $200.00 per year as a capital charge and the cost of the new facilities would increase the cost - to a Full Play member - by $300.00 so that the ongoing capital cost assessment would be in the amount of $500.00 per year. The required capital contributions by Select Play and other types of adult members were 50% or 40%, respectively, of the amount paid by those in the Full Play category. In paragraph 3 of the Notice of Meeting - Exhibit A-2 - there had been reference to the increased capital assessment of $300.00 (plus GST) for Full Play members and $150.00 for other members in the event construction was to proceed. Hodson referred to a booklet - Exhibit A-3 - entitled 1997 Members' Handbook - issued by Riverside and - on page 6 - details concerning payment of fees were set forth. The annual fee was due by the end of February in each year and any assessments relating to capital or other special charges were due by the end of March. Since the old clubhouse - at some point during the 1960's - had sustained damage from a tornado, there had been ongoing assessments required to repair certain portions of the facility. Hodson referred to an invoice - Exhibit A-4 - as the one used by Riverside to inform members of the amount due for the 1996 season. The invoice for the 1997 year - Exhibit A-5 - as issued to a Full Play member - contained a special capital surcharge in the sum of $535.00 which was based on the amount of $500.00 together with GST at 7%. As a result of the construction project, this assessment had increased from the previous amount of $214.00 which was comprised of a $200.00 contribution for capital purposes together with GST in the sum of $14.00. Details of the financing program undertaken with Royal were set forth in the document dated April 1, 1997, filed as Exhibit A-6. Although the said document bore the date thereon, the financing arrangements had been in place earlier in order to permit tenders to be called for the necessary construction. The Board of Riverside elected to fix a 10-year term at a reasonable interest rate and the total loan - including $200,000 as a revolving line of credit - was in the sum of $3.3 million. By letter dated July 14, 1997, with attachments - Exhibit A-7 - Hodson, in his capacity as President of Riverside, communicated with members of the Club and explained therein the details of the annual assessment together with an explanation of a Member Loan Option which would enable a participant to provide an interest free loan to the Club in the amount of $6,300.00. Members, who had already paid the 1997 annual capital assessment and who provided the Club with a loan by August 15, 1997, would have the sum of $300.00 applied to the loan amount, reducing the loan required under this option to $6,000.00. In 1998 and subsequent years, the loan amount would be in the sum of $6,300.00 and the loan balance would be retired by the Club at the rate of $200.00 per year, without interest. Upon resignation as a member, the loan balance would be repaid but without interest. In the interim, the annual repayment by the Club - in the sum of $200.00 - would be applied to the capital assessment due to be paid each year by the member. The loan requirement for Select Play/ Spousal - members was in the amount of $3,150.00 with a credit of $150.00 if the loan was provided by August 15, 1997 and the loan balance was to be reduced at the rate of $100.00 per year. Social members were given the option to provide the loan of $6,300.00 or to continue paying an annual assessment of 40% of the regular assessment. In the last full paragraph on page 2 of Hodson's letter, he stated the opinion of the Finance Committee was that GST was not payable on the initial loan amount but was payable annually on the $200.00 assessment (which was to be paid from the loan repayment) and members were to be billed - annually - the GST on the sum of $200.00. The members were also warned that "if Revenue Canada requires the Club to collect GST on the loan amount members will be subsequently billed for the GST". Hodson stated that a critical component of the loan option was that a mechanism had to be put in place to repay the outstanding balance to a retiring member. By means of the financing arrangement presented to the members of Riverside, the Club could reduce the outstanding amount of the loan to Royal. Full details of the terms and conditions of the Special Capital Assessment Plan were sent to members by way of attachment to Hodson's letter. Although work had begun on the new clubhouse by the first part of September, 1997, each Full Play member had already paid the $500.00 capital assessment for the current year and this money - together with the funds later being provided by way of loans - permitted the Club to borrow only the sum of $1.4 million from Royal. Because it had been able to raise $1.8 million within the membership, the Club was able to delay drawing down the loan from Royal until required towards the end stages of the construction project. Hodson stated that - at all times - members had the option to participate - or not - in the loan program and over 50% of them decided to participate. The joining fee required to be paid in the case of a Full Play member was in the sum of $3,000.00 and it was non-refundable. In 1998, Hodson was Past President of the Club as well as Chair of the Implementation Committee, responsible for Finance and he utilized a spreadsheet - Exhibit A-8 - prepared by Riverside office staff - in order to provide information to Royal in order to complete the borrowing arrangements. On that document - which Hodson believed to be accurate - all members were listed including those who chose not to participate in the Member Loan Option. Royal had agreed to lend the sum of $6,000 to Riverside members who wished to participate in the loan program and this borrowing was secured by a Promissory Note. The financing method permitted Royal to advance the proceeds to the borrower but the funds would be sent to Riverside, pursuant to a Direction to Pay. In return, Riverside agreed with Royal that it would not refund a departing member the outstanding balance of the loan unless that person's loan to Royal had been fully repaid. This loan procedure had been instituted prior to the Club drawing down on the main loan but the $200,000 revolving line or credit had already been in place. Of the total Full Play membership of 400, almost 200 ignored the invitation contained in Hodson's letter and declined to advance any funds to the Club by way of loan. The members who did participate loaned Riverside a total of $1,779,650. At that time, there was no limit on the number of Select Play members but currently it is set at 200. Hodson reiterated that it was important for those members choosing to provide a loan to receive assurance that - in the event they decided to give up their membership - they would be repaid the balance of the loan, calculated at the time of their departure. Riverside did not provide any security to the members who chose to loan money to the Club other than a covenant to re-pay as provided for in the by-laws of Riverside, a non-profit organization incorporated under The Non-Profit Corporations Act of Saskatchewan. The financial statements of Riverside for the 1996-2000, inclusive, years were filed collectively as Exhibit A-9. Hodson was a member of the Board for each year until the end of 1998, following which he was Chair of the Committee concerned with finance and was familiar with most of the monetary matters which were the subject matter of the audited financial statements prepared by the accounting firm of KPMG. In the 1996 financial statement, there was no record of any liabilities to members. However, in the 1997 statement - at note 4 - the outstanding debt to Royal in the sum of $1,198,527 was stated as well as the amount - mentioned earlier - due to members. This note pertaining to the liability of Riverside to the members was carried through in subsequent years. Hodson stated he and his wife had loaned the sums of $6,300.00 and $3,150.00, respectively, to Riverside and he is currently owed the sum of $5,300.00. Since the departing member's Club membership must be acquired by a new member, there may be a delay - depending on the timing of the departure of a member in relation to the golf season - of up to one year before the retiring member would be repaid the outstanding amount of the loan. Hodson referred to the pamphlet - Exhibit A-10 - as the current information package provided by Riverside to prospective members.
[4] In cross-examination, Douglas Hodson stated he had been involved with the Riverside expansion undertaking solely as a volunteer and Club member. The accounting and financial statements were prepared by KPMG but he was directly involved with financial matters pertaining to the construction project and with the borrowing - by Riverside - from Royal as well as the system by which members could borrow from Royal in order to advance a loan to the Club. The document - Exhibit A-1 - pertained to the 1994 golfing season and was prepared for the Board. Hodson was a member of the Board and it met at least once per month and a package of reports would accompany the agenda. One member of the Board was a Chartered Accountant and he prepared documents relating to the budget for the forthcoming season. Hodson prepared the Notice of Meeting - Exhibit A-2 - and related documents. The 1997 Members' Handbook - Exhibit A-3 - at page 6 - referred to the requirement that annual dues had to be paid by March 31st of each year. Hodson stated there was somewhat of a grace period but by the end of April the payment due from a member had to be made if that person wished to play the course. The capital surcharge also had to be paid and - in 1997 - that assessment was in the sum of $500.00. In the event a member chose to loan the Club the sum of $6,300.00, then Riverside agreed to repay the member at the rate of $200.00 per year to be applied against the capital surcharge each year that the lender remained a member. Hodson disagreed with the suggestion of counsel for the respondent that the loan was a pre-payment of the capital surcharge for the next 25 years as most of the current members would not remain within the Club for that period. Counsel referred Hodson to the Information Circular - attached to Exhibit A-2 - dated November 18, 1996, specifically to paragraph 2, where it stated, "Once contract prices have been finalized, members will be presented with final numbers on the pre-payment option (likely in June or July, 1997)". Hodson replied that at this point in time the pre-payment method had been considered as an option as well as other methods such as raising funds by means of issuing a debenture. However, the members of the Club had not yet approved any expansion plans - as recommended by the Board - and that endorsement did not occur until the annual general meeting held on December 11, 1996 during which 96% of the members voted to approve the construction project. In order to provide some mechanism to repay an advance to a retiring member, the loan provided for a reimbursement of the remaining balance calculated as a portion of the overall 25-year term. Prior to participating in the Loan Option Program, all members received a document - Exhibit A-7 - explaining the plan. Included in the documents was a form where a member could choose either to continue to pay the annual special capital assessment or to provide an interest-free loan to the Club in the amount of $6,300 ($6,000 if provided by August 15, 1997) on the terms and conditions of the Special Capital Assessment Plan. The form could be returned - to Riverside - together with a cheque in the required amount. There was also provision for the Spouse Member Election in which the amounts were exactly 50% of the ones applicable to Full Play members. Hodson stated his understanding was that the terms and conditions pertaining to the loans by members to Riverside were later incorporated into the by-laws of the Club and that obviated the need to issue approximately 200 promissory notes, one to each participating member. The subsequent indebtedness by Riverside to the members was disclosed in each subsequent financial statement. In Hodson's view, during his tenure on the Board, it was intended that the Board enshrine a legal obligation pursuant to which Riverside would be required to repay a retiring member the appropriate remaining amount of the loan. Hodson stated he and his wife each made a loan to the Club and were satisfied they would be repaid the relevant amount in accordance with the terms and conditions under which the monies had been advanced. Hodson agreed the special capital surcharge in the sum of $200 per year was subject to GST and the amount of $200 per year - although credited to that assessment by way of loan repayment - required the member to pay GST in the sum of $14.00. In 1997, as reflected in the invoice - Exhibit A-5 - the capital surcharge was in the sum of $500. Thereafter, a Full Play member - for example - could either pay the surcharge - as assessed - during the term of membership or could participate in the member loan plan and have the assessment fixed at the rate of $200 per year. This sum would be paid by way of applying the annual repayment on the $6,000 loan. No further payments would be required from the participating member, other than GST in the sum of $14.00 which was included in the annual invoice for total fees and dues. The comparison found towards the back pages of the document - filed as Exhibit A-7 - had been prepared by a Riverside member who was a Chartered Accountant and it contained numbers relevant to the choice of paying the capital assessment annually or choosing to participate in the loan option. Hodson agreed there was reference therein to the loan being equivalent to "a 7% after tax return on his or her funds". The timing of repayment to a retiring member was dependent on a new member joining the club and, although other golf courses had been constructed in the Saskatoon area, the Riverside membership list had increased and the Full Play levels were consistent so that - at this point - there had never been any problem in reimbursing the appropriate amount to a departing member. Hodson stated that the invoices - Exhibits A-4 and A-5 - were prepared for periods prior to the implementation of the loan program. The commitment letter - dated April 1, 1997 - issued by Royal was signed by Hodson - on May 14, 1997 - on behalf of Riverside. His recollection is that the Board had approved him as a signatory to the document on the basis he was a Board member and also the Chair of the Finance Committee. Hodson stated that tenders had been put out in March and certain experts had been retained by Riverside at that time because Riverside was confident the required financing arrangements were in place with Royal despite the fact the formalization of those terms occurred later. A variety of documents and resolutions had been required by Royal as part of the borrowing process and the loan was drawn down, as required, much later in the year. Hodson stated he thought there were probably further changes made to the borrowing agreement prior to funds actually being advanced by Royal. At page 4 of the Royal commitment letter - Exhibit A-6 - there was reference to a first charge mortgage in the sum of $3,100,000. However, at some point, the Club elected to lock into a 10-year term at 6.25% on an amount of approximately $1.2 million with no pre-payment privilege while agreeing to pay interest on another sum of $400,000 - at a floating interest rate - and this portion of the financing could be prepaid at the option of Riverside. The agreement - by Royal - to make loans to members for the purpose of loaning the sum of $6,300 - or other amount required by the category of membership - was limited to the 1997 year but any member could participate in the Loan Option program in subsequent years by dealing directly with Riverside in the event some financing over a short term was required. Hodson indicated that to the best of his recollection, the list of members - Exhibit A-8 - was created during October, 1997 and agreed that some stragglers may have decided to make a loan up to the end of December. In any event, Hodson's estimate was that only 55% of Riverside members - in 1997 - agreed to participate in the loan program. In referring to Exhibit A-8, Hodson explained that the lines containing a member's name and type of membership, without any other information appearing thereafter in the spaces to the right thereof, indicate that a particular member had chosen not to participate in making a loan to the Club. He agreed some of those members may have chosen to make a loan to the Club in 1998 or subsequent years. Hodson stated he was not part of any committee dealing with officials at Revenue Canada and the reference - Exhibit A-7, page 2 - about a request for an interpretation to confirm that GST was not payable on the initial loan amount was in the context of certain discussions between Brian Taylor - a Riverside member acting on behalf of the Board - and Revenue Canada. Riverside had an accounting firm prepare the necessary financial statements and income tax returns and the Club also had office staff comprised of a General Manager, in-house accountant, secretaries, food and beverage personnel and workers directly related to the operation of the golf course. Hodson assumed the office staff had prepared the document - Exhibit A-8 - and has seen other similar documents during his time on the Board or while serving on the special committee dealing with expansion and/or finance. While serving on the Board and as an ordinary member, he relied on the accuracy of the financial statements as prepared by KPMG. A member of the Club - Dave Hobberman, C.A. - was the head of an operating finance committee and the method followed was for the office staff to generate information which Hobberman reviewed and the ultimate audit was undertaken by KPMG. Counsel referred Hodson to the material contained in Exhibit A-10 pertaining to membership in Riverside. Hodson stated his recollection was that a Select Play member had to be a spouse of a Full Play member but some long-term members in that category were entitled to remain therein even though they were no longer part of a defined spousal unit. As a Board member between 1992 and 1997, Hodson stated the Club was probably always near the maximum of 400 Full Play members and, while other golf courses had been built, the attraction of Riverside was that it was a full-fledged private club. In order to join Riverside, there was a $500 non-refundable fee required at time of application which - if approved - then took into account that sum and the Club applied it to the $3,000 non-refundable joining fee which could be financed over a three-year term but the applicable GST on the entire amount had to be paid during the first year. Hodson stated there were many members who still choose to pay the special capital surcharge in the sum of $500 per year. Within the information package - Exhibit A-10 - there was a sheet setting out the different forms of membership together with the fee schedules and included on the form there is an explanation entitled: Special Capital Surcharge vs. Loan to Club. Counsel referred Hodson to the statement that as a member of Riverside, "you will be provided the option to pay the Surcharge amount annually or in a lump sum payment to the Club". Hodson responded that he did not agree with that usage of the term " lump sum" in the context of a payment of the relevant sum of money. No loans were made to Riverside by any individuals who were not members of the Club.
[5] Counsel for the appellant submitted the evidence disclosed the following:
1. Riverside required financing to construct a new club house and to pay for the costs of other course improvements.
2. In early 1997, the Club imposed an annual $500 levy against Full Play members to cover the anticipated financing costs of the loan.
3. The loan program instituted by Riverside allowed members to provide a loan in the sum of $6,300 which would reduce the amount of funds required through the loan from Royal. The loans were without interest and were repayable to the member at the rate of $200 per year. Upon termination of membership, the outstanding balance on a member's loan would be repaid upon that member being replaced with a new member and upon repayment of financing to Royal, if applicable, obtained by that member in relation to borrowed funds to enable the member to provide the loan to Riverside.
4. Full Play members who elected to provide the Club with a loan would also pay a $200 annual levy (plus GST). In 1997 only, if the member electing to provide a loan to Riverside had already paid the $500 levy for that year, then the member was provided with a credit of $300 so that they had to provide only the sum of $6,000 but would be credited with a loan in the amount of $6,300.
5. Many of the members continued to pay the annual levy of $500 while those members who had elected to provide a loan to the Club paid an annual levy of $200.
[6] Counsel for the appellant submitted that the advance of money - by way of loan to the Club - was not consideration for a taxable supply pursuant to subsection 165 of the Act because the amount paid by the member to Riverside represented the principal amount of the loan and was not consideration for any supply provided to the Club by the member. Counsel submitted further that the Club had not provided anything to the member other than its obligation to repay the loan as no membership rights were conveyed as a result of a member choosing to participate in the member loan option and members who chose to pay the ongoing annual levy rather than provide a loan received the same membership rights. Counsel submitted the loans - by members - to Riverside were included in the category of a financial service - as defined in subsection 123(1) of the Act - and constituted an exempt supply as a result of being excluded from the definition of commercial activity within the Act. Counsel pointed out that the loans - by members - to Riverside met the indicia of any standard loan transaction and the only thing the member received from the Club was the obligation to repay the loan as no other membership rights or services were obtained as a consequence of making the loan. In counsel's view, any difference in the levy paid by those who chose to continue to pay the higher annual levy and those who elected to make a loan to Riverside did not amount to a taxable supply of property or services to a member and the incidental benefit of having the capital surcharge fixed at the rate of $200 per year for 25 years does not detract from the true nature of the loan. In conclusion, counsel submitted that a reading of section 140 of the Act would lead one to conclude that it had no application to the issue in the within appeal.
[7] Counsel for the respondent submitted that during the period in issue - May 1, 1997 to October 31, 1997 - the special annual surcharge was set at $500 per full play equivalent and each member was required to pay this levy in addition to other fees paid in connection with membership in the Club. In counsel's view of the loan transaction, members were provided with the opportunity to pay his or her share of the cost of the new construction either by paying a lump sum amount or by paying the special annual levy for as long as required by the term of the financing undertaken by Riverside. A member who elected to pay the lump sum of $6,000 - in 1997 - was not required to pay the special annual levy and would be assessed only a fixed sum of $200 per year in respect of the improvements to the course and clubhouse and this amount would be paid by way of deduction from the lump sum. Counsel submitted the evidence made it clear that regardless of the date of joining, any new member was required to make the same capital contribution to the Club as current members and all members had to pay either the special annual levy or the lump sum amount to keep or to acquire membership in Riverside. Further, counsel submitted, the cash outlay by the member who chose to pay the lump sum was less than the anticipated cash outlay by the member who chose to pay for the improvements by way of the special annual levy. In counsel's view of the matter, there was GST payable on the so-called loan amount when it was paid by the members in the same manner as applicable to other members who had chosen not to make the loan but to pay the full annual special levy which was subject to GST - at 7% - on the sum of $500. Counsel disagreed with the position of the appellant that the loan constituted a financial service within the context of subsection 123(1) of the Act because obtaining or maintaining a membership in the Club was contingent upon paying either the special annual levy or upon payment of the lump sum/loan and a member who did not choose one or the other methods lost the privileges of membership, as defined by that provision of the Act. As for the ability to receive some reimbursement of money upon ceasing to be a member of Riverside, counsel submitted that it would be a refund of prepaid fees which were required as a condition of membership in the Club, in the same sense as one might choose to prepay a membership for a year - or longer period - in a health club or gymnasium facility in order to obtain a reduction in overall fees based on the right of the proprietor to have the use of the money during that time. Counsel raised the point that there was no promissory note or other document in writing upon which to base an action in debt by a member against Riverside should the Club default in repayment of the appropriate balance owing on the amount advanced. Counsel conceded that section 140 of the Act pertaining to supply of membership with security was not applicable to the within appeal, although it had been relied upon by the Minister in the Notice of Decision dated February 23, 1999 and was an alternative position set forth in the respondent's written submissions. Counsel concluded by submitting the evidence - overall - would support the Minister's characterization of the transaction as constituting a taxable supply within the meaning of the Act because the entire structure of the so-called loan was inextricably bound up with the rights and privileges of membership.
[8] In the reasons provided by the Minister in the Notice of Decision, it is clear the Minister considered section 140 of the Act to be applicable. Counsel for the respondent has since conceded it does not apply to the issue in the within appeal. However, it is worthwhile examining that section as well as the definition of "membership" contained in subsection 123(1) because these provisions were relied on by the Minister in arriving at the conclusion that the payment made to the Club by a member in respect of the principal amount of the member's total full play equivalent was consideration for a taxable supply and, therefore, the total payment was taxable at 7% for GST purposes and, as a result, the Club must charge and collect tax from the member on the total amount of this payment.
[9] Section 140 of the Act reads as follows:
"Supply of membership with security - For the purposes of this Part, where
(a) a person makes a supply of a share, bond, debenture or other security (other than a share in a credit union or in a cooperative corporation the main purpose of which is not to provide dining, recreational or sporting facilities) that represents capital stock or debt of a particular organization, and
(b) ownership of the security by the recipient of the supply is a condition of the recipient's, or another person's, obtaining a membership, or a right to acquire a membership, in the particular organization or in another organization that is related to the particular organization,
the supply of the security shall be deemed to be a supply of a membership and not a supply of a financial service."
[10] The definition of membership is found in subsection 123(1) of the Act, as follows:
"membership" includes a right granted by a particular person that entitles another person to services that are provided by, or to the use of facilities that are operated by, the particular person and that are not available, or are not available to the same extent or for the same fee or charge, to persons to whom such a right has not been granted, and also includes such a right that is conditional on the acquisition or ownership of a share, bond, debenture or other security;"
[11] It is apparent that the loan - as the term was used by the appellant - or the lump sum payment, as preferred by counsel for the respondent, was not a share, bond, debenture or other security and even if it were, the evidence is clear that participation in the loan option was not a condition of obtaining a membership or the right to acquire a membership in the Club. There is no definition of "security" contained within the Act but it is defined in The Canadian Oxford paperback Dictionary - Oxford University Press Canada 2000 - as follows:
"6a:A certificate attesting the ownership of, or interest in, the capital, assets, property, profits, earnings or royalties of any person or company.
6b: a document, such as a bond, debenture, or note, acknowledging a debt."
[12] Counsel for the respondent submitted the so-called loan by a member to Riverside was not enforceable because it had not been evidenced by any document in writing to specifically acknowledge the debt. I am not aware of any legislation that would require the loan to be evidenced by any particular form of written document, nor was any suggested in the course of argument. I put forward this scenario for consideration. Time passes and a member decides to leave the Club but Riverside refuses to pay the balance of the loan even though the conditions subsequent have been met by a new member having been accepted to take the place of the departing member and there is no outstanding balance on the loan - if relevant - to Royal. The departing member argues there is no reason for Riverside to withhold the appropriate payment as calculated in accordance with the terms and conditions attached to the advance of the loan in conformity with the documentation contained in Exhibit A-7. The departing member presents to the presiding judge the details surrounding the proposed expansion of the Club facilities, the matters discussed at the annual general meeting on December 11, 1996 where the general membership ratified the recommendations of the Board and the offer presented by Riverside, as contained in the exhibit referred to above. The plaintiff then demonstrates that he or she had paid the money to Riverside in pursuance of the offer to participate in the member loan plan and that the terms and conditions were an integral part of the bylaws of the organization, as approved by appropriate resolutions of the Board of Directors. My prediction is there would be a finding in favour of the erstwhile member and judgment would issue against Riverside within the timeframe usually associated with the quick-as-lightning pronouncements dispensed by the formidable - albeit mercurial - Judge Judy in the course of her popular daytime television show.
[13] The appellant's position is that the method adopted by the Club and the members constituted a financial service as defined by subsection 123(1) which includes - for our purposes, the following:
"(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the exchange of currency, by crediting or debiting accounts or otherwise,
...
(c) the lending or borrowing of a financial instrument,
...
(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,
...
(g) the making of any advance, the granting of any credit or the lending of money,"
[14] There is a definition of financial instrument in subsection 123(1) and it includes a debt security which is also defined within the same subsection in this manner:
""debt security" means a right to be paid money and includes a deposit of money, but does not include a lease, licence or similar arrangement for the use of, or the right to use, property other than a financial instrument;"
[15] The relevant part of the definition of "money" in subsection 123(1) includes:
"any currency, cheque, promissory note, letter of credit, draft, traveller's cheque, bill of exchange, postal note, money order, postal remittance and other similar instrument, ..."
[16] Pursuant to Section 1 of Part VII of Schedule V to the Act, a financial service is an exempt supply and the position of the appellant is that when a member provides the loan to the Club, it falls within paragraph 123(1)(g) of the definition of financial service as provided above and the obligation of Riverside to repay the loan falls, inter alia, with subparagraph 123(1)(a) of said provision.
[17] There is no doubt that the transaction is a bona fide transaction giving rise to enforceable legal obligations. The Minister was convinced that the granting of a loan pursuant to the member option was inextricably bound up with the right to obtain - or maintain - membership in the Club and that it made no difference whether someone chose to participate in the loan option plan or decided to pay an annual levy of $500 as a special capital surcharge in order to assist in paying off the Riverside debt to Royal, except that by choosing the loan method, the total cash outlay by a member was less than if he or she had chosen to pay the regular annual levy. However, if one examines the spreadsheet - Exhibit A-1 - in which various categories of membership and different types of fees and assessments are set forth, it is apparent that membership - while it certainly has its privileges - requires a considerable cash outlay. Before a person is even considered for membership, a non-refundable payment of $500 must accompany an application. If approved, the new member will have that amount applied to the joining fee of $3,000. Once a member, there are annual fees based on the relevant category together with fees for storage of clubs, use of the driving range, mandatory memberships in national golf organizations, minimum house charge for the clubhouse food and beverage component and special capital charges. Failure to discharge any of these various obligations could result in loss of membership. The evidence is clear that the senior members of Riverside did not want to participate in any form of pre-payment of fees, especially not for 25 years. In addition, it had been a concern of older members that any advance of funds to Riverside should not be capable of burdening their estate after death by having those amounts tied up for that period of time. A vital component of approval of the financing scheme was for the Board to provide members with a mechanism of repayment of the loan upon certain conditions having been met. The subscribing members were aware of the terms and conditions and accepted the offer to lend money on that basis. In return, they gave up the right to collect interest - in the ordinary sense - but were able to lock into a fixed annual assessment of $200 for the next 25 years as a mechanism by which to satisfy the requirement - as a member - to continue to pay the ongoing special capital surcharge in order to retire the debt made necessary by the construction of new facilities. However, the necessary ingredient to make the member loan program attractive to members was the ability to have the appropriate amount capable of being repaid upon the happening of certain events.
[18] It is obvious the Minister considers that GST should be payable on the full amount of the monies advanced by members of the Club during the period - in 1997 - covered by the assessment. I cannot find support for that proposition in the relevant legislation as applied to the facts in the within appeal. I am not a partisan of the philosophy devoted to meandering in metaphysical meadows using the rod and staff of a case-specific - and often ill-defined - comprehension of the object and spirit test to provide comfort and support in an effort to divine what Parliament must have really, really intended in a global sense when drafting the legislation at issue, especially absent any ambiguity. One must also take into account that - despite a veritable jungle of incredibly complex detail - Parliament was capable of approving the placement of a cookie bouquet - with at least 8 cookies - into the zero-rated category while - in a remarkable display of sang-froid - simultaneously choosing to disappoint the manufacturers of ice lollies whose produce was excluded from similar treatment by virtue of the provisions of subsection 1(j) of Part III of Schedule VI of the Act ( GST Portions). I am not concerned with whether or not any public purpose would be served by allowing the financing methodology followed by the appellant to be seen as falling within the definition of a financial service pursuant to the Act and, therefore, constituting an exempt supply not subject to GST. Whether or not Riverside is a good not-for-profit- corporate citizen in planning and executing a controlled slice around this particular GST hazard, is totally irrelevant. Taking into account the evidence and the applicable provisions of the Act ( and regretting the absence of any decisions relevant to this point) I find the loans provided by the members - to Riverside - qualify as a financial service within the meaning of the Act and do not represent consideration for a taxable supply. The Minister's decision was incorrect in relying on section 140 of the Act and the appellant has demonstrated that the assessment should not - otherwise - be confirmed.
[19] The appeal is allowed and assessment 00000002749 - dated February 4, 1998 - is hereby vacated. Because the amount in dispute for the purposes of section 18.3009 of the Tax Court of Canada Act is more than $7,000, there can be no costs awarded to the appellant.
Signed at Sidney, British Columbia, this 22nd day of June 2001.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE NO.: 1999-2664(GST)I
STYLE OF CAUSE: Riverside Country Club and H.M.Q.
PLACE OF HEARING: Saskatoon, Saskatchewan
DATE OF HEARING: April 25, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Judge D.W. Rowe
DATE OF JUDGMENT: June 22, 2001
APPEARANCES:
Counsel for the Appellant: John R. Beckman
Counsel for the Respondent: Elaine Lee
COUNSEL OF RECORD:
For the Appellant:
Name: John R. Beckman
Firm: McKercher, McKercher & Whitmore
Saskatoon, Saskatchewan
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2664(GST)I
BETWEEN:
RIVERSIDE COUNTRY CLUB,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 25, 2001 at Saskatoon, Saskatchewan, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Counsel for the Appellant: John R. Beckman
Counsel for the Respondent: Elaine Lee
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated February 4, 1998 and bears number 00000002749 is allowed and the assessment is vacated in accordance with the attached Reasons for Judgment.
Signed at Sidney, British Columbia, this 22nd day of June 2001.
|
"D.W. Rowe" |
D.J.T.C.C.