SCC: Constitutional immunity from tax superseded by intergovernmental agreement

On December 12, 2019 the Supreme Court of Canada issued a rare GST/HST decision in Canada (Attorney General) v. British Columbia Investment Management Corp., 2019 SCC 63.

The main issue was whether a provincial Crown corporation responsible for managing public sector pension funds was subject to the obligations under the Excise Tax Act (the Act) to collect and remit GST in this case in respect of investment management services provided in respect of investments held in pooled investment portfolios (the portfolios). The court held that the Crown corporation was constitutionally immune from taxation, but that any applicable GST was required to be charged and collected because the provincial government had agreed to do so.

The decision is important for its comments on the test for a trust in tax legislation, for its interpretation of the Constitution Act and intergovernmental agreements, and for its holding on jurisdiction in tax litigation.

Factual overview

British Columbia Investment Management Corporation (BCI) is a Crown corporation formed by the government of British Columbia in 1999. BCI owns and manages the investment assets held in the portfolios that the BC government had previously held and managed.

BCI holds investments in the portfolios and also in segregated funds. For investment management services relating to the segregated funds, BCI charged fees directly to its client and collected and remitted GST on these amounts. However, in respect of the portfolios, BCI did not charge fees but recovered its costs of managing the portfolios from the income realized on the portfolio assets. BCI did not charge, collect or remit GST on these amounts.

The governments of BC and Canada agreed to certain tax payment obligations under a long-standing Reciprocal Taxation Agreement (RTC), and under a Comprehensive Integrated Tax Coordination Agreement (CITCA) relating to the planned harmonization of BC provincial sales tax with the GST.

Procedural history

The Canada Revenue Agency audited BCI and formed the view that BCI had failed to collect and remit GST in respect of the portfolios. While the audit was ongoing, BCI sought a declaration from the BC Supreme Court that it was immune from GST in respect of the portfolios under the Constitution Act, 1867, which supersedes the Act.

The BC Supreme Court held that section 125 of the Constitution Act, 1867 immunized BCI from taxation by Canada under the Act in respect of assets held in the portfolios and tax charges against those assets, but that BCI was bound by the provisions of the RTA and CITCA respecting federal taxation of those assets. The court did not determine the validity or correctness of the GST assessments that the CRA issued upon completing its audit. BCI objected to those assessments and they may ultimately be appealed to the Tax Court of Canada.

The BC Court of Appeal and Supreme Court of Canada each upheld the lower court’s decision.

Overview of the SCC’s majority decision

The GST and trusts

The majority of the Supreme Court began its analysis by providing an overview of the application of GST to trusts. The majority acknowledged that the lower courts did not consider the technical operation of the GST legislation in detail. While it was not strictly necessary to examine how the GST legislation operates to determine the constitutional immunity issue, the majority commented on certain technical aspects to assist in addressing and understanding the parties’ arguments.

The majority commented that there was no dispute that the investment management services provided by BCI outside of the context of the portfolios are taxable supplies for GST purposes. In the context of the portfolios, however, the court identified that the threshold issue involves whether the portfolios are the “recipient” of taxable supplies. This issue depends on whether the portfolios are a “person” which is defined in the Act to include a “trust”.

The “trust” issue

The majority observed that if the portfolios were not trusts for purposes of the Act, then BCI was simply managing its own assets and GST was inapplicable. The court was not required to decide whether the portfolios were trusts for GST purposes, however, because the parties did not raise that issue. The majority nonetheless commented that an arrangement does not necessarily constitute a private law trust simply because the word “trust” is used in a statute or legal document. Since the Act does not define the term “trust” and the concept of a trust forms part of the law of property and civil rights, reference must be made to applicable provincial law. The common law test in BC for the existence of a trust is whether there has been an express or implied declaration of trust, with an alienation of property to a trustee to be held for a specified beneficiary.

The constitutional issue

The majority concluded that the intergovernmental immunity from taxation provided under section 125 of the Constitution Act, 1867 applied to the portfolios. In essence, this section prevents one government from taxing another government. The majority held that “when the trustee is a provincial Crown agent, the [Act] runs afoul of section 125 because it imposes tax on property legally owned by the Crown”. The court also rejected Canada’s argument that section 125 of the Constitution Act, 1867 only applied if BC (or BCI) was the beneficial owner of the portfolio assets.

The intergovernmental agreements issue

Despite constitutional immunity, the court held that BC had voluntarily agreed to pay GST to Canada. As the majority explained, BC and Canada effectively agreed to pay one another’s applicable sales taxes. Under the RTA, BC agreed to pay the federal taxes imposed under the Act. The CITCA similarly set out a “pay and rebate” scheme with respect to the HST regime that BC intended to implement in 2009, but later abandoned. The court held that BCI was subject to the obligations set out in the agreements to the same extent as BC.

The jurisdiction issue

The court also concluded that BCI’s petition did not fall within the exclusive jurisdiction of the Tax Court. The chambers judge had properly exercised jurisdiction, because the essential nature of the issues was the rights, obligations, and duties of a Crown agent under the Constitution Act, 1867 and at common law, which goes beyond assessing tax under the Act. The fact that tax reassessments were issued to BCI while the litigation was in progress was immaterial.

The Dissent

Chief Justice Wagner dissented in part regarding BCI’s constitutional immunity.

The dissent expressed the view that the trust property was not property “belonging to” BC. Rather, the beneficial interest in it rests with the unit holders. The dissent held that both the unit holders and the pension boards were private parties. To extend the constitutional immunity to BCI would allow private parties to benefit from a taxation immunity and would give BCI an improper commercial advantage.

The dissent also held that the potential for the portfolios to be a “recipient” under the Act was not sufficient to invoke constitutional protection because the connection to the tax was its own choice. The dissent observed that BCI and the pension boards (mostly private entities) elected not to pay BCI directly for its investment management services. Had they done so, the pension boards would have been liable to pay GST and the portfolios would not have been a “recipient”.