Apr 15, 2018

Regulatory Charge or User Fee? The Tax Court allows input tax credits for a quasi-public recycling corporation

Stewardship Ontario v. The Queen, 2018 TCC 59 (CanLII)

A decision of the Tax Court of Canada dealt with a significant question regarding the imposition of value added tax on a quasi-public agency, in this case an organization called Stewardship Ontario. This ruling is likely to be relevant to other similar provincial and municipal agencies across Canada.

Ontario's Waste Diversion Act, 2002, imposes responsibility on industries that sell products to consumers to bear the cost of disposing of those products when they become waste. The Act authorizes the creation of a corporation to carry out recycling and disposal activities. This led to the creation of Stewardship Ontario, a non-profit corporation operated by interested industry groups.

Significant amounts of money were involved. During the period from 2010 to 2013, Stewardship Ontario collected fees of $40 to $50 million per year for the disposal of various hazardous waste products such as paint containers and gas canisters. It charged GST on those fees.

Stewardship Ontario hired third party service providers to do the work of recycling and disposal, and paid GST of about $18 million on those services during the relevant period. It sought input tax credits for the GST it had paid.

HMQ in Right of Canada argued that Stewardship Ontario was not making a taxable supply and should not have charged GST to its members. In that case, it would also not be entitled to receive input tax credits.

D'Arcy J. noted that the argument that GST should not have been charged on the fees did not represent altruism on the part of the federal Crown. The industry groups paying GST on the recycling fees charged by Stewardship Ontario would receive input tax credits, and therefore that GST would not be net revenue to the federal Crown. By contrast, if Stewardship Ontario, having paid GST, did not receive input tax credits for them, "the Minister's position actually results in a windfall for the Crown" (at para. 66).

The Minister made a number of arguments, all rejected by the judge. The simplest of these was that Stewardship Ontario was only carrying out its statutory duty to recycle and therefore not providing a service. The judge noted the very broad definition of supplying a service in the Excise Tax Act:

[86] … The definition of service is extremely broad. If something is not property, money or what one could call an "employee service", then it will be deemed to be a service.

[87] As a result of the broad definitions of supply, property and service, the provision of anything in any manner will constitute a supply.

[88] When the Appellant collects the MHS Waste through its vast collection network and then manages the waste to ensure that it is either recycled or safely disposed of by the Third Party Service Providers, it is providing something. That something is the service of collecting, recycling and/or safely disposing of the MHS Waste (the "Recycling Services").

Once it is recognized that Stewardship Ontario was providing a service, the fact that it had a statutory duty to provide this service made no difference:

[91] … the only question that is relevant when determining whether a person made a supply is whether the person provided something. The reason why a person provided the something is irrelevant when one is attempting to determine whether a person has, as a question of fact, made a supply.

Finally, the Minister argued that the amounts charged by Stewardship Ontario should be considered not a user fee, but a regulatory charge, and therefore not taxable:

[106] I agree with the Appellant; the MHSW Steward Fees were consideration for the taxable supply by the Appellant of the Recycling Services.

[107] Consideration is defined in subsection 123(1) of the GST Act to include any amount that is payable for a supply by operation of law.

[114] The Appellant followed the provisions of the WD Act by basing the fee paid by an individual MHSW Steward on the quantity of product generating the waste that the steward sold or otherwise distributed into the Ontario market and on an estimate of the amount of MHS Waste generated from the product that was collected by the Appellant….

[115] In short, the fee is an estimate of the costs the Appellant incurred in collecting and recycling the MHS Waste with which the steward has a commercial connection under the WD Act.

The judge's statutory interpretation confirms that the Excise Tax Act is designed to make the GST follow the characteristics of a proper value added tax. If Stewardship Ontario had not been entitled to receive input tax credits, it would have been forced to pass on the cost of the GST it paid to its members in the form of higher fees. One of the undesirable and inefficient features of an old-fashioned sales tax is that it embeds the tax paid on inputs as a cost that is passed on to users. It can lead to a snowball effect of excessive taxation. That is exactly the type of inefficiency that a value added tax is supposed to overcome.