In Canada, most financial services are exempt from tax under the Excise Tax Act. This means that financial institutions cannot charge GST/HST and cannot claim input tax credits to recover the GST/HST that they have paid to provide these exempt financial services.
The inability to claim input tax credits could incentivize financial institutions to purchase goods and services in non-harmonized provinces (where only the five per cent GST would normally apply) to the detriment of harmonized provinces. To prevent this from happening, the ETA and the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, also known as the SAM rules, outline special attribution method rules under which selected listed financial institutions must determine their provincial HST component based on where they supply the exempt financial services rather than where they purchase their inputs. In this context, net tax is calculated using “attribution percentages” that are based on the type of financial institution.
The Federal Court of Appeal recently dealt with these complex SAM Rules in Farm Credit Canada v Canada, 2017 FCA 244. In this case, the appellant was a federal Crown corporation that provided specialized financial services to the farming industry. Unlike most of its private financial institution competitors, the appellant did not accept or fund its loans from public deposits.
After the appellant filed its GST/HST returns as a general corporation under the SLFI Regulations it was reassessed by the Canada Revenue Agency on the basis that it was a loan corporation and was thus subject to a higher attribution percentage than a general corporation.
The appellant appealed to the Tax Court of Canada where it argued that while the term loan corporation was not explicitly defined in the ETA or the SLFI Regulations, it should be interpreted the same way as it is in the federal and provincial legislation that govern trust and loan corporations. These Acts explicitly define a loan corporation to mean a regulated entity that makes loans funded by deposits from the public.
To interpret the meaning of the term “loan corporation,” the tax court applied a TCP analysis – a textual, contextual, and purposive approach to statutory interpretation outlined by the Supreme Court of Canada in Canada Trustco Mortgage Co. v Canada, 2005 SCC 54. On this basis, the tax court held that the term loan corporation in the SLFI Regulations meant any corporation whose principal business was making loans.
On appeal, the Federal Court of Appeal conducted its own TCP analysis as follows:
Text: The fact that a term is defined a certain way in other Acts does not mean that the term has an accepted legal meaning, particularly where the purpose of the other Acts is fundamentally different. The purpose of the Acts cited by the appellant is to make trust and loan corporations register in the jurisdictions in which they operate which is very different from the purpose of the SLFI Regulations which is to tax corporations in the same way regardless of where their business is located in Canada. Nothing in the text suggests that loan corporation means anything other than a corporation providing loans.
Context: Had Parliament intended to limit the scope of the term loan corporation to regulated deposit-taking entities it could have explicitly done so. There is no indication that Parliament intended for financial institutions to be taxed according to their regulatory status. On the contrary, Parliament’s descriptions of the types of listed financial institutions suggest classification based on the nature of a financial institution’s business.
Purpose: Interpreting the term loan corporation to mean a corporation whose principal business is making loans is consistent with the purpose of the SAM Rules which is to discourage financial institutions from acquiring all of their inputs in non-HST participating provinces.
The appeal court therefore dismissed the appeal and confirmed that a loan corporation for the purposes of the SLFI Regulations meant any corporation whose principal business was making loans.
The SAM Rules and SLFI Regulations are already complex enough without having to read in definitions from other Acts of Parliament or from the provincial legislatures which were enacted for fundamentally different purposes. In the absence of an express definition in the ETA or its Regulations, the decisions of both the tax court and Federal Court of Appeal demonstrate the analytical rigour of the TCP doctrine, and appear to have reached a reasonable conclusion on the issues before them.
Robert G. Kreklewetz and Steven Raphael are lawyers with Millar Kreklewetz LLP in Toronto