GST/HST On Timeshare Club Annual Fee: Tax Court Ruling Reversed On Appeal

On July 11, 2017, in its much-anticipated decision in Club Intrawest v. The Queen1, the Federal Court of Appeal ("FCA") set aside a judgment of the Tax Court of Canada and ruled that GST/HST is exigible only on that portion of annual resort fees paid to the appellant, Club Intrawest ("Intrawest"), for services it provided in relation to "timeshare" vacation homes located within Canada. The ruling also establishes that the portion of the annual resort fees attributable to services related to Intrawest vacation homes located outside Canada is not subject to tax.

In the Tax Court decision2, Justice Steven K. D'Arcy rejected a favourable Canada Revenue Agency ("CRA") administrative policy and determined that GST/HST was applicable on the entirety of the annual resort fees invoiced by Intrawest, even though some of the underlying timeshare properties were situated in the U.S. and Mexico.

The FCA decision, authored by Justice Eleanor R. Dawson, now represents the state of the law regarding the application of the so-called "made-in-Canada" rules in section 142 of the Excise Tax Act ("ETA").

Facts

The background to the litigation can be summarized as follows:

Intrawest is a Canadian resident non-profit, non-stock Delaware corporation established to facilitate the administration and operation of vacation homes in connection with a timeshare ownership program ("Intrawest Program"). Members of the Intrawest Program hold timeshare points ("Points") that entitle them to stay at vacation homes owned by Intrawest. The vacation homes are located in Canada, the U.S. and Mexico. Members of the Intrawest Program pay annual resort fees ("Annual Resort Fees") to cover such costs as property taxes, insurance coverage and salaries and benefits of Intrawest's employees. The amount of the Annual Resort Fees depends on the number of Points that a member holds. Intrawest never collected GST/HST on the Annual Resort Fees on the ground that it was merely acting as agent on behalf of its members when it acquired the various goods and services in connection with the Intrawest Program. As such, Intrawest viewed the Annual Resort Fees as simply being a reimbursement of the expenses incurred by Intrawest and, therefore, not as a consideration for a taxable supply. The dispute arose when the CRA took a different view and reassessed Intrawest for uncollected GST/HST in connection with the Annual Resort Fees for its monthly periods between 2002 and 2007. Intrawest appealed this reassessment principally on the basis of the agency analysis. Intrawest also argued in the alternative that, to the extent that it might be found to have made a supply to the members, the Annual Resort Fees should then be allocated between taxable supplies made within Canada (subject to GST/HST) and taxable supplies made outside of Canada (not subject to GST/HST) based on the Points issued with respect to Canadian vs. non-Canadian Intrawest vacation homes.

Tax Court decision

The agency issue

In reply to Intrawest's "agency" analysis, the CRA argued that the Annual Resort Fees were in fact consideration for a taxable supply of intangible personal property on the part of Intrawest. In deciding this issue, the Tax Court considered the three generally accepted components of an agency relationship:

The consent of both principal and agent; A grant of authority to the agent by the principal, allowing the former to affect the latter's legal position; and Control by the principal of the agent's actions. The Tax Court concluded that Intrawest was not acting as an agent on behalf of its members. It followed that the Annual Resort Fees paid by the members were not a reimbursement of expenses incurred by Intrawest and were instead consideration paid for a supply that could be subject to GST/HST under the ETA.

The GST/HST issue

Intrawest accepted the proposition that to the extent it made a supply, it was a taxable supply. However, it disagreed...