Québec Retail Sales Tax Act Repealed 25 Years Ago Is Still Relevant For Determining ITC Recapture

Central Issues

At issue before the Tax Court of Canada (the "TCC") in Triple M Metal LP v. The Queen ("Triple M")1 was whether, as a "large business", Triple M Metal LP ("Triple M") recaptured sufficient specified provincial input tax credits ("SPITCs") relating to the Ontario portion of HST ("PVAT") paid on the acquisition of "specified energy"2 by Triple M pursuant to subsection 236.01(2) of the Excise Tax Act (the "ETA").3 In particular, Triple M excluded from its recaptured SPITCs, the PVAT relating to the acquisition of "specified production energy" (i.e., energy consumed or used to produce or manufacture goods for sale).

Canada Revenue Agency ("CRA") challenged this exclusion in computing the recaptured SPITCs (the "SPITC Reduction"). The taxpayer, Triple M, argued that under the formula for calculating the SPITCs eligible for recapture and added back to net tax, the SPITC Reduction was specifically allowed.4

Key Definitions

The application of the SPITC Reduction depended on whether or not Triple M is "a scrap dealer" within the meaning of paragraph (d) in the definition of "selected person" in ss. 31(1) of the New Harmonized Value- added Tax System Regulations, No. 2 (the "PVAT Regulations").5 In the formula for calculating the SPITCs for "specified energy", the SPITC Reduction can be made for "specified production energy".

This "specified production energy", also defined in ss. 31(1), includes "the part of specified energy acquired in, or brought into, a specified province by a selected person for consumption or use by the selected person in the production of tangible personal property for sale", subject to exclusion for any "part of the specified energy" for consumption or use in equipment "not integral to that production". [Emphasis added.] Only "a selected person" can, therefore, qualify for the SPITC Reduction. By definition, "a selected person" cannot, however, be "a scrap dealer".

The definition of "production" is a critical component of the term "specified production energy". Under section 26 of the PVAT Regulations:

"production" means an activity (other than the assembling, processing or manufacturing of tangible personal property in a retail establishment or the storage of finished products) that is

1. the assembling, processing or manufacturing of particular tangible personal property to create other tangible personal property that is different in nature or character from the particular tangible personal property;

...

The TCC distilled from this maze of definitions the central issue at the core of this dispute between the taxpayer, Triple M, and CRA:6

The central issue in dispute is the Minister's factual characterization of Triple M as a "scrap metal dealer" to the extent of its processing activities and, consequently, not a "selected person" under subsection 31(1) of the Regulations who can avail itself of the SPITC Reduction in respect of the cost of "specified production energy".

Triple M's Business

Broadly viewed, "Triple M's undertaking primarily relates to the collection, sorting, compacting and rendering of scrap metal for use in the production of steel". This overall process can be broken down into different sets of activities. Firstly, there is the "sorting, shearing and compacting" (the "Aggregating Activities"). Then comes the "various baling and shredding processes which very effectively further separate, re-form, pulverize and collate ferrous and non-ferrous components of scrap metal" (the "Processing Activities").

Triple M sells the ferrous components "to steel mills who use the compacted, pulverized and sorted iron in production". The non-ferrous (non-iron) residue is sold to "non-steel producing customers for various purposes".7

Triple M's SPITC Allocation

Triple M took the position that it was not required to recapture SPITCs relating to the energy costs consumed and used solely for its Processing Activities, which make Triple M a scrap recycler or processor, rather than a scrap dealer. With respect to the Aggregating Activities, Triple M recaptured SPITCs. There was no dispute as to the quantum of the amounts allocated between the two different sets of activities by Triple M. The dispute related to "whether the ITCs related solely to the processing activities are or are not subject to recapture as SPITCs".8

Is Triple M a "Scrap Metal Dealer"?

The term "scrap metal dealer" is explicitly excluded from the definition of a "selected person", who would be eligible for the SPITC Reduction. That is, a scrap metal dealer is not a selected person and is, therefore, ineligible to qualify for the SPITC Reduction.

The TCC noted that:9

The words scrap metal dealer are embedded with ambiguity from the outset; neither the ETA nor the Regulations define the term "scrap metal dealer".

The Modern Rule of Statutory Interpretation

To resolve the ambiguity inherent in this term, the TCC looked to the modern rule of statutory interpretation stated at paragraph 10 of Canada Trustco Mortgage v. R10 ("Canada Trustco").11

It has been...