Note:
Elements of this Order were appealed to the Appeal Division of the P.E.I. Supreme Court.
The Court's findings on the appeal can be located here (PDF File).

Docket UT97101
Order UT00-01

IN THE MATTER of an appeal by Island Tel against a decision of the Provincial Tax Commissioner, dated March 27, 1997.

BEFORE THE COMMISSION

on Thursday, the 18th day of May, 2000.

Ginger Breedon, Vice-Chair
Elizabeth MacDonald, Commissioner
Weston Rose, Commissioner

Order

Contents

Appearances & Witnesses

Reasons for Order

1.     Introduction & Background
2.     Issues
2.1   Introduction
2.2   Tax on Services
2.3   General Findings - Accounting, Consulting & Engineering Services
2.4   Specific Findings - Accounting, Consulting & Engineering Services
2.5   Findings - Software
2.6   Place of Consumption
2.7   Adjustment or Refund of Taxes Paid
3.     Disposition

Order

Appearances & Witnesses

1. For Island Tel

Counsel:
Ronald J. Keefe

Witnesses:
Rick Bleasdale
Tax Advisor,
MT&T

George LeBoutillier
Engineering Technologist
MT&T 

Glen LeBlanc
Manager, Corporate Accounts & Budgets
MT&T

Barry Hubley
Retired Vice-President, Finance & Comptroller, Island Tel
& Comptroller, MT&T 

Stan H. MacPherson
Consultant

2. For the Provincial Tax Commissioner

Counsel:
Ruth M. DeMone

Witnesses:
Miro Forest
Consultant

Mary Hennessey
Manager, Audit, Collection & Inspection Services
P.E.I. Department of the Provincial Treasury 

Terry Keefe
Audit Supervisor
P.E.I. Department of the Provincial Treasury

Rodney Darren Chase
Audit Manager
New Brunswick Department of Finance 

Mary Best
Consultant

3. For the Island Regulatory and Appeals Commission

Counsel:
Thomas A. Matheson, Q.C.

Staff:
Donald G. Sutherland
Director, Technical Services

Heather R. Walker
Recording Secretary

Reasons for Order

1. Introduction & Background

This is an appeal by the Island Telephone Company Limited (now Island Telecom Inc.)("Appellant", "Company" or "Island Tel") against a decision of the Provincial Tax Commissioner ("Tax Commissioner" or "Respondent"), dated March 27, 1997. The appeal centres on the question of whether certain services provided to the Appellant by Maritime Tel and Tel ("MT&T") of Halifax, Nova Scotia, are goods within the meaning of the Revenue Tax Act, R.S.P.E.I. 1988, Cap. R-14, and, if they are, whether the goods were consumed in Prince Edward Island.

The events leading to the filing of the within appeal began on November 28, 1996, when the Province issued Notice of Assessment No. 1593 to Island Tel. The assessment covered the audit period August 1, 1993 to December 31, 1995 and included, among other things, tax on purchases relating to accounting, consulting and engineering services provided by MT&T pursuant to a service agreement between the two firms. On January 24, 1997, Island Tel filed a Notice of Objection with the Tax Commissioner pursuant to Section 9 of the Revenue Administration Act, R.S.P.E.I. 1988, Cap. R-13-2, which reads as follows:

9. (1) Where a person considers that he is not liable to taxation under a revenue Act or disputes liability for the amount assessed against him, he may, within sixty days of the date of service or mailing of the notice of assessment serve on the [Provincial Tax] Commissioner a notice of objection setting out the reasons for the objection and all relevant facts.

 (2) A notice of objection is sufficiently served if delivered to the office of the Commissioner or sent by registered mail addressed to the Commissioner. 

(3) The Commissioner shall, within sixty days of receipt of the notice of objection, reconsider the assessment or estimate and vacate, confirm or vary it, and he shall thereupon notify the objector of his decision by registered mail. 

The Tax Commissioner issued his decision on the objection on March 27, 1997.  In his decision, the Tax Commissioner confirmed or upheld the taxes assessed. 

On April 25, 1997, Island Tel appealed the above decision to this Commission pursuant to Section 10 of the Revenue Administration Act, which reads as follows:

10. (1) If the taxpayer or collector is dissatisfied with the decision of the Commissioner under subsection 9(3), he may, within thirty days from the date of mailing of the decision, appeal to the Island Regulatory and Appeals Commission hereafter referred to as the 'Commission'.

 (2) Any appeal shall be commenced by serving upon the Commission a notice of appeal in writing setting out the grounds of the appeal and stating briefly the facts relative thereto.

 (3) A notice of appeal is sufficiently served if delivered to the office of the Commission or sent by registered mail addressed to the Commission.

  (4) On the hearing of the appeal both the appellant and the Commissioner are entitled to be heard and to submit further evidence.

  (5) The Commission may, in writing, designate a person on its behalf to hear an appeal under this section and any reference in this section to the Commission includes a person so designated.

  (6) Upon any appeal, the Commission may affirm, vary or reverse the decision of the Commissioner and shall give the appellant written notice of its decision by registered mail.

A hearing on three preliminary issues in the appeal was held on November 10, 1998. The Commission's findings on the three preliminary issues: document disclosure, onus of proof and validity of regulations—were released on December 21, 1998. The Appellant subsequently appealed those elements of the Commission's findings dealing with the issue of onus to the PEI Supreme Court, Appeal Division. On July 12, 1999, the Court dismissed the appeal. (http://www.gov.pe.ca/courts/supreme/reasons/ad0819.pdf)

The hearing of the substantive issues was held on December 13, 14, 15, 16, and 17, 1999. Final briefs were filed in early February 2000 and reply briefs were filed in mid-February. 

2. Issues

2.1  Introduction

As noted above, this appeal deals with tax on accounting, consulting and engineering services provided by MT&T to Island Tel and the issue of whether such services, if determined by the Commission to be goods within the meaning of the Revenue Tax Act, were consumed in Prince Edward Island. The appeal also deals with the issue of whether Island Tel is entitled to a refund for tax paid on software—the subject of an earlier appeal to the Commission in Northern Telecom v. Provincial Tax Commissioner (1998), IRAC Docket UT94102, Order UT98-1, dated April 21, 1998. (https://irac.pe.ca/Orders/salestax/1998/ut98-1.html)

2.2 Tax on Services

Section 4 of the Revenue Tax Act reads as follows:

4. Every consumer of goods consumed in the province shall, at the time of taking delivery, pay to the Minister for the raising of revenue for provincial purposes, a tax at the rate of ten percent of the fair value of the goods.

Subclause 1.(e)(iv) of the Act defines goods as follows:

1(e) "goods" includes     
    … 
(iv) legal services, accounting services and consulting services, engineering services and architectural services, each as defined in the regulations; 

Subsection 1(3) of the Revenue Tax Act Regulations provides as follows:

(3) For the purpose of subclause 1(e)(iv) of the Act, the following expressions are defined: 

(a) "accounting services" means those services that are in the nature of the investigation or audit of accounting records, or the preparation of or reporting on balance sheets, profit and loss amounts, and other similar services including bookkeeping (including payroll preparation and billing)1, cost accounting, and tax return preparation, but does not include services provided by a person to that person's employer in the course of employment;
…
(c) "consulting services" means those services that are in the nature of advice or opinions provided for fee, gain or reward, other than in the areas of

(i) agriculture,
(ii) day care,
(iii) education,
(iv) financial services (other than accounting services),
(v) fisheries,
(vi) health care,
(vii) human and veterinary medicine,
(viii) insurance,
(ix) pharmaceutical dispensing,
(x) real estate,
(xi) tourism,

but does not include services incidental to the conduct of a trade designated under the Apprenticeship and Trades Qualification Act R.S.P.E.I. 1988, Cap. A-15;

 (d) "engineering services" means those services provided by a person conducting "professional engineering", or the "practice of engineering", as defined in clause 1(s) of the Engineering Profession Act R.S.P.E.I. 1988, Cap. E-8.1, but does not include services provided by a person to that person's employer in the course of employment; 

Subsection 1(s) of the Engineering Profession Act provides as follows:

1(s) "professional engineering" or the "practice of engineering" means the provision of services for another as an employee or by contract and such services shall include consultation, investigation, instruction, evaluation, planning, design, inspection, management, research, development and implementation of engineering works and systems; 

In its appeal to the Commission, Island Tel makes a number of submissions, including:

1.  The intention of the Legislature was to impose a tax on services provided by professionals—professional accountants or engineers authorized to carry on practice in Prince Edward Island;

2.  The services provided were not accounting, consulting or engineering services within the meaning of the legislation and regulations. In the case of accounting services, the Appellant submits that accounting services of the type provided by MT&T were not accounting services provided by professional accountants and were therefore not intended to be caught by the legislation. In addition, the Appellant submits that the Tax Commissioner erroneously determined that a number of administrative services were accounting services;

In the case of consulting services, the Appellant submits that such services as training programs are not consulting services and, in any event, are not taxable as there is no fee, gain or reward obtained by MT&T. In the case of engineering services, Island Tel submits that the Legislature intended only to tax engineering services provided by professional engineers engaged in professional engineering or the practice of engineering. According to the Appellant, the services provided and characterized as engineering services were not engineering services within the meaning of the Revenue Tax Act, as the individuals providing the services were not qualified to practice as engineers;

3.  The Legislature did not intend to tax services delivered by a parent corporation to a subsidiary;

4.  MT&T only charged Island Tel the actual cost of the services provided and not the charges that a professional firm providing those services would charge;

5. The Province of Prince Edward Island has constitutional authority only to raise revenue on goods consumed in the Province; and,

6. The goods were consumed in Nova Scotia where the services were provided.

The Respondent, on the other hand, submits that:

1.  Although professionals usually provide the taxable services at issue, the legislation does not require that they be provided by professionals practicing under a statute to be taxable;

2.  The service agreement between Island Tel and MT&T describes the various types of services as accounting, engineering or consulting services;

3.  The work characterized as engineering by the provincial tax auditor was engineering as defined in the Revenue Tax Act and Engineering Professions Act regardless of whether it was provided by a professional engineer;

4.  The descriptions provided by MT&T to the auditor place the services within the taxable definitions;

5.  The amount charged for the services does not, in and of itself, have any impact on whether the provided service is taxable;

6.  Island Tel is incorporated in and provides services in the Province of Prince Edward Island and is not wholly owned by MT&T as defined in Section 20.(1) of the Revenue Tax Act Regulations; and,

7.  Island Tel consumes goods, including those contained in the service agreement with MT&T, in providing its services in Prince Edward Island.

The Commission heard evidence on accounting and consulting services from a number of witnesses. Glen LeBlanc, MT&T's Assistant Corporate Accountant during the audit period, provided evidence on the particulars of each of the accounts dealt with under the service agreement. Mr. LeBlanc characterized substantially all of the services provided as administrative in nature with only a secondary purpose of providing accounting data. Mr. LeBlanc also testified that the bookkeeping and accounting functions were recorded in Nova Scotia and then were passed through to the general ledger at month's end.

Barry Hubley, a former Vice-President of Finance with the Appellant, gave evidence corroborating Mr. LeBlanc's testimony.  Although he did not present a detailed breakdown of the accounts, he characterized the work provided to Island Tel as operational in nature with one of the by-products of the operational services being accounting records.

Mr. Hubley also indicated that, although he was Vice-President of Finance for Island Tel, he was resident in Nova Scotia and primarily provided management services to Island Tel. Mr. Hubley indicated that, in the course of providing management services, he used financial information.

Stan MacPherson, a chartered accountant in public practice in P.E.I., gave opinion evidence on behalf of the Appellant as to the meaning of the definition of accounting services in the Revenue Tax Act.  Mr. MacPherson testified that, in his opinion, the intention of the Legislature was to place a tax on accounting services as provided by professional accountants or professional accounting firms. Mr. MacPherson agreed with the witnesses for MT&T that, although the production of data for accounting purposes might be an outgrowth of MT&T's services under the service agreement, the creation and recording of this data was not the provision of an accounting service by MT&T and, accordingly, was not taxable.

Terry Keefe, the Respondent's lead auditor in this matter, gave detailed evidence as to how he performed the audit and the various requests for information he had made in the course of attempting to determine whether the services provided were taxable.  Mr. Keefe explained his interpretation of the MT&T—Island Tel service agreement.  Mr. Keefe's evidence indicates that, from conversations he had with Rick Bleasdale of MT&T and his personal observations of the accounting section of MT&T, he determined which of the functions performed by MT&T were accounting. 

The Commission also heard from Mary Best, a chartered accountant in public practice in P.E.I. engaged by the Respondent to present opinion evidence on whether the functions determined by the Tax Commissioner to be accounting services were accounting services as set out in the Revenue Tax Act.  Ms. Best testified that certain bookkeeping functions are the basis of accounting, or the starting point of the accounting process. Thus, she believes them to be taxable accounting services. Unlike Mr. MacPherson, she characterizes some of the recording processes as part of accounting.

In the case of engineering services, the Commission heard from two witnesses, George LeBoutillier, a certified engineering technologist with MT&T, and Miro Forest, a professional engineer engaged by the Respondent to comment on the engineering-related questions at issue in this appeal.

Mr. LeBoutillier testified that, while he provided network planning for Island Tel, he is not a licensed professional engineer.  Mr. LeBoutillier also testified that he was directly involved in providing the services categorized as engineering by the Respondent. He described the various accounts and sub-accounts that had been categorized as engineering and categorized these accounts primarily as the ordering or provisioning of equipment for the Island Tel network.

Finally, Mr. LeBoutillier testified that, while he spent substantial time in Prince Edward Island, he delivered his network planning services from Nova Scotia and that equipment was delivered to PEI and installed by Island Tel representatives.

Miro Forest testified as to the complex and technical nature of the telecommunications network.  He is of the view that a person who is not a professional engineer may provide engineering services.  In his evidence, he reviewed the decision of the Provincial Tax Commissioner on appeal and, with two exceptions, is of the opinion that the engineering-related services provided by MT&T are engineering services within the meaning of the Revenue Tax Act Regulations.

The Appellant argues that, in the case of accounting and engineering services, only professional services provided by professionals are subject to tax.  In addition, services provided within an organizational structure of an operational or administrative nature are not, in its view, taxable. The Appellant further submits that, if the Commission decides that the legislation should be interpreted in a wide context—that a professional need not provide the taxable service—then each specific service must be reviewed by the Commission with consideration to the definition of the service as set out in the regulations. Finally, the Appellant submits that, if the Commission determines that some of the services fall within the legislative definition, the Commission must determine if consumption occurred in Prince Edward Island. The Appellant contends that, in most cases, consumption did not occur in Prince Edward Island.

In the case of consulting services, the Appellant argues that a service such as training is not a consulting service in that the activity does not involve advice or opinions. In addition, other services categorized by the Respondent as consulting did not, in the Appellant's view, involve advice or opinions and, in all cases, there was no fee, gain or reward.

The Respondent argues the legislation does not require that the services at issue be provided by professionals to be taxable. According to the Respondent, the services are taxable accounting, consulting and engineering services based on function rather than who provided them.

The Respondent submits that, in the case of consulting services, the service agreement specifically states that MT&T would provide the Appellant with consultation services. Moreover, the Respondent submits that such services were provided for fee, gain or reward.

The Respondent further submits that, under the legislation, each corporation is a separate person. As a result, inter-corporate services such as those at issue here attract tax. According to the Respondent, only services provided by an employee to an employer are exempt from tax and that, in the case of the MT&T – Island Tel relationship, MT&T employees provided the services to Island Tel. Finally, the Respondent submits that the services at issue were consumed in Prince Edward Island as part of Island Tel's business operations.

2.3 General Findings - Accounting, Consulting & Engineering Services

In interpreting legislation, the Commission must determine what the Legislature intended in enacting the section or sections of the Act (or Regulations) in question.

[W]ords in an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, and the intention of [the Legislature].
(See, e.g. Columbia House v. Prince Edward Island (Minister of Finance)(1991), 96 Nfld. & P.E.I.R. at 348.  

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. (Stubart Investments Ltd. v. The Queen(1984), 10 D.L.R. (4th) 1 (S.C.C.), p.32.

In this case, the Commission must first determine whether the services at issue here are accounting, consulting or engineering services as defined in the legislation and regulations. If the answer is, in any manner, yes, then the Commission is asked by the Appellant to determine, on an account-by-account basis, whether each account falls within the definitions. Finally, if the Commission determines that some or all of the accounts at issue fall within the definitions set out in the regulations, then the issue of whether the services were consumed in Prince Edward Island must be addressed.

As noted above, the Appellant argues that the services contemplated in the legislation and regulations were to be professional services. In the case of accounting services, the Appellant cites two 1993 versions of Revenue Tax Guides RTG 133 and RTG 137 wherein the word professional was used. The Respondent, on the other hand, argues that the Revenue Tax Guides are subordinate to the legislation and regulations wherein the word professional is not used.

The Revenue Tax Guides are a product of the Department of the Provincial Treasury, not the Legislature. While the use of the word professional in the 1993 tax guides may have shown some belief on the part of the Department that only professional services were to be taxed, the fact that the word professional is absent from the legislation and regulations cannot, in our view, be ignored.

The Appellant argues that services provided by a parent to a subsidiary are not goods subject to tax. In this respect, it appears to the Commission that the service agreement between Island Tel and MT&T represents a standard business relationship where one party contracts with the other to purchase certain goods or services for a fee. In our view, the mere existence of the agreement confirms that something other than an intra-corporate relationship exists between the parties. It is noted, as well, that, at the time of the audit, MT&T did not own not less than 95 per cent of the total issued and outstanding share capital of Island Tel—the amount required for exemption pursuant to Section 20.(1) of the Revenue Tax Act Regulations.

Having fully considered the evidence and the submissions of counsel, and bearing in mind the scheme, object and context of the Revenue Tax Act and Regulations, the Commission is of the opinion that the defined terms accounting services, consulting services and engineering services, when read in their grammatical and ordinary sense, have the following application to the matters at issue in this appeal.

In the case of accounting services, the Commission is of the view that the Legislature intended to make taxable those accounting services that are normally provided by professional accountants or accounting firms and also similar services such as bookkeeping, which has traditionally included payroll preparation and billing. We take the latter category to include those bookkeeping services that may not always be provided by professional accountants, but may be provided by bookkeepers and other individuals not having the formal degree of training required of chartered accountants or others with professional accounting designations.

In the case of consulting services, the Commission finds that those services that constituted advice or opinions provided by MT&T to Island Tel under the service agreement were services provided for a fee, gain or reward and are therefore consulting services within the meaning of Subclause 1(3)(c) of the Revenue Tax Act Regulations. 

In the case of engineering services, the Commission finds that the Legislature intended to tax those services described in Section 1(s) of the Engineering Profession Act that were provided by a person conducting professional engineering or the practice of engineering pursuant to that Act. Unlike the definition of accounting services set out in Subclause 1(3)(a) of the Revenue Tax Act Regulations, the definition of engineering services contained in subclause 1(3)(d) makes specific reference to a person conducting professional engineering or the practice of engineering. The Commission concludes from this that, in order to be considered a good, the services must be provided by a person who meets the requirements of the Engineering Profession Act either through license, certificate or exemption.

We turn our attention, then, to the specific account items in issue.

2.4 Specific Findings - Accounting, Consulting & Engineering Services

2.4.1    Introduction

At the outset, it will be noted that the Appellant has the onus of disproving the validity of the items assessed both as to imposition and amount. In Island Tel v. Provincial Tax Commissioner (1999),  (http://www.gov.pe.ca/courts/supreme/reasons/ad0819.pdf) P.E.I.S.C.A.D., McQuaid, J., had this say (at p. 3):

The issue is whether, on an appeal to the Commission pursuant to s.10 of the Revenue Administration Act, the person to whom a notice of assessment has been issued by the Provincial Tax Commissioner has the onus of disproving the notice of assessment.

DISPOSITION 

I would dismiss the appeal. The Commission was correct in ordering that the person to whom the notice of assessment has been issued has the onus of disproving the validity of the notice of assessment both as to imposition and amount. 

The Commission heard several days of testimony on the specifics of the account items. Witnesses for the Appellant described many of the functions as administrative or operational in nature and, in the case of engineering, as ordering or provisioning. Witnesses for the Respondent describe them, for the most part, as taxable services provided to Island Tel pursuant to the service agreement.

In the case of accounting and consulting services, the process or methodology used by lead auditor Terry Keefe in determining which elements of the service agreement fell within the definitions contained in the legislation and regulations is described in his written evidence (Ex. R.8, Tab 1). After the issuance of the original assessment, a determination was made by Mr. Keefe that the taxable percentage of Professional Services described in the agreement and used in the calculation by the Respondent was in error. The percentage was reduced from 52.138% to 45.600%. The taxable percentage of salary load was also accordingly reduced from 14% to 12%.

The specific accounts at issue were described in the evidence of witness LeBlanc. For ease of reference, these accounts, together with the account title or description and the position of the parties, are set out below:

Accounting
(as defined in Corporate Accounting Monthly Booking)

Corporate Development
(as defined in Corporate Accounting Monthly Booking)

Internal Audit & Security
(as defined in Corporate Accounting Monthly Booking)

Market Development
(as defined in Corporate Accounting Monthly Booking)

Treasury
(as defined in Corporate Accounting Monthly Booking)

Human Resources
(as defined in Corporate Accounting Monthly Booking)

In the case of engineering services, the process or methodology used by lead auditor Terry Keefe in determining which elements of the service agreement fell within the definition contained in the legislation and regulations is also described in his written evidence. The engineering accounts themselves were described by the Appellant's witness, George LeBoutillier. These accounts, together with the positions of the parties, are briefly described below:

A final account relating to the taxability of software is described below:

The Commission has spent a considerable amount of time reviewing the individual accounts described above as well as the evidence of the witnesses and the submissions of counsel. In the case of accounting services, the Commission is of the view that, with the exception of those accounts discussed later in these reasons, all of the accounts constitute either accounting or consulting services. This would include general overheads associated with the services and would incorporate administrative support costs and other general office expenditures. In our view, the accounts fall within the broad definitions set out in subclause 1(3)(a)2 and (c) of the Revenue Tax Act Regulations:

1(3)…

(a) "accounting services" means those services that are in the nature of the investigation or audit of accounting records, or the preparation of or reporting on balance sheets, profit and loss amounts, and other similar services including bookkeeping , cost accounting, and tax return preparation, but does not include services provided by a person to that person's employer in the course of employment;
…
(c) "consulting services" means those services that are in the nature of advice or opinions provided for fee, gain or reward, other than in the areas of…
…

In our view, the fact that these services may be provided by professional, supervisory or operational employees has no bearing on whether they are accounting or consulting services within the above definitions. The functions themselves determine whether they qualify for inclusion in the definitions.

As previously noted, in the case of engineering services, the Commission is of the view that the services must be provided by a person who meets the requirements of the Engineering Profession Act either through license, certificate or exemption.

Revenue Tax Act Regulations

1(3)…  

(d) "engineering services" means those services provided by a person conducting "professional engineering", or the "practice of engineering", as defined in clause 1(s) of the Engineering Profession Act R.S.P.E.I. 1988, Cap. E-8.1, but does not include services provided by a person to that person's employer in the course of employment;

Engineering Profession Act 

1(s) "professional engineering" or the "practice of engineering" means the provision of services for another as an employee or by contract and such services shall include consultation, investigation, instruction, evaluation, planning, design, inspection, management, research, development and implementation of engineering works and systems; 

A difficulty the Commission has had throughout these proceedings has been the determination of the exact nature of the individual accounts at issue. The evidence of the witnesses on these accounts was often indistinct and the professional witnesses who gave opinion evidence often wandered into areas, such as legal interpretation, that were of little assistance to the Commission. As a result, the task of determining whether an individual account falls within the legislative definitions has proven a difficult and time-consuming one.

For the purposes of these reasons, it is not the intention of the Commission to discuss each of these accounts. Given that the onus is on the Appellant to disprove the validity of the assessment both as to imposition and amount, it is our intention to focus only on those accounts, or elements of those accounts, that we believe the Appellant has been successful in disproving. 

2.4.2 Accounting & Consulting Accounts 

Bearing in mind the scheme, object and context of the Revenue Tax Act and Regulations, the Commission finds that, except for the following three identified accounts, the words accounting services and consulting services, when read in their grammatical and ordinary sense, include all of the accounts at issue as set out in the Notice of Assessment. The Commission notes that, in some cases, certain functions described as accounting would, in our view, be more properly described as consulting. For assessment purposes, however, the description or assignment of the accounts into one or the other of these categories does not matter. 

2.4.3 Engineering Accounts

Based on a thorough review of the evidence and submissions of counsel and our interpretation of the applicable law, the Commission is satisfied that many of the services identified as engineering or engineering-related services provided by MT&T to Island Tel within the service agreement, are not engineering services within the meaning of the Revenue Tax Act and Regulations.  

Subclause 1.3(d) of the Revenue Tax Act Regulations defines engineering services as those services provided by a person conducting ‘professional engineering' or the ‘practice of engineering' as defined in clause 1(s) of the Engineering Profession Act. Unlike accounting services or consulting services, the definition provides that the services must be provided by a person conducting professional engineering or the practice of engineering.  In our view, this definition could easily have been drafted to say ‘engineering services' means those services that are in the nature of professional engineering or the practice of engineering as defined in clause 1(s) of the Engineering Profession Act if Government's intent was to simply tax based on the function performed. However, the definition in the regulation includes a reference to a person conducting professional engineering or the practice of engineering as defined in Engineering Profession Act.  The Commission concludes from this that the Government intended to tax those services provided by persons who would normally be governed by the Engineering Profession Act.   

As a result, the Commission believes that the determination of the attributes of the person providing the service is an integral part of the determination of whether a particular service is an engineering service within the meaning of the definition.  For all of these reasons, we believe that taxable engineering services must be provided by a person who would be subject to the control of the Engineering Profession Act.  Therefore, subject to the comments set out below, we find that the services at issue were not provided by a person conducting professional engineer or the practice of engineering. 

Of the previously listed engineering accounts in the assessment, the Commission finds that the following account contains no engineering or consulting services within the meaning of the Revenue Tax Act and Regulations. 

This is described as translation work performed by operational staff at MT&T and categorized as engineering by the Respondent. In our view, translation work appears to be operational in nature and does not fall within the definitions set out in the legislation and regulations. This also applies to any translation work that may be contained in other account categories as well.

The other account descriptions, which were given by Mr. LeBoutillier and by other witnesses, make it clear to the Commission that, although most of the services provided were not engineering within the meaning of the Revenue Tax Act Regulations, there were other services provided that fall within the definition of either consulting services or engineering services.  Although there was no value-based division of the specific services provided in each of the accounts categorized as engineering, based upon the descriptions and the evidence before it, the Commission also finds that:

 2.5 Findings - Software

The account relating to the taxability of software is outlined below.

This account involves the Appellant's use of MT&T's Computerized Automatic Loop Reporting  System (CALRS) to isolate, test and repair troubles associated with telephone lines. 

The account was taxed by the Respondent as computer software as defined in clause 1(1)(g.1) of the Revenue Tax Act Regulations. The Respondent submits that Island Tel had the use of—or the right to use—a computerized reporting system. The Appellant submits that it does not have the right to use the program as the term is defined in the Revenue Tax Act Regulations. 

The Commission finds that this item is not computer software within the definition of clause 1(1)(g.) of the Regulations. In our view, the Appellant is merely purchasing a service that happens to involve the use of software. The right to use the program as defined in the regulations is, in our opinion, a license or right granted by the software developer or manufacturer to a person. Based on the information before us, that right or license is not conferred upon Island Tel. 

2.6 Place of Consumption

Section 4 of the Revenue Tax Act reads as follows:

4. Every consumer of goods consumed in the province shall, at the time of taking delivery, pay to the Minister for the raising of revenue for provincial purposes a tax at the rate of ten percent of the fair value of the goods.

The Appellant maintains that the Province only has the constitutional authority to raise revenue taxes on goods consumed in P.E.I. In this instance, the Appellant argues that the goods at issue were consumed in Nova Scotia. 

The Respondent, on the other hand, argues that the goods were consumed in P.E.I. notwithstanding that the services were performed in Nova Scotia.

The position of the Appellant from the date of the filing of its Notice of Objection on January 24, 1997 (Exhibit R-7 – Tab 1) is that the Province has authority under Section 92(2) of the British North America Act to make laws in relation to direct taxation within the Province for the raising of revenue for provincial purposes.  The Appellant is of the view that it is then ultra vires the Province to assess tax on goods used or consumed outside the Province.

Section 4 of the Revenue Tax Act creates a tax obligation on every consumer of goods consumed in the Province. The Appellant argues the consumption of the services provided through the service agreement does not occur in the Province of Prince Edward Island. For example, in the case of accounting services, it submits that the vast majority of these accounting services were directed to the Vice-President of Finance and the Comptroller of Island Tel, both of whom reside in the Province of Nova Scotia.  Thus, consumption of the goods took place in the Province of Nova Scotia, rather than the Province of PEI. In addition it argues that services such as tax return preparation completed in Nova Scotia and sent to Newfoundland cannot be consumed in PEI.

The Respondent states that, as the principal, if not the exclusive, operations of the Appellant were carried on in the Province of Prince Edward Island, and that as the services were provided to maintain and support the business operations of the Appellant in the Province of Prince Edward Island, consumption took place in the Province of Prince Edward Island.

The Commission is faced with two problems in determining the place of consumption.  The first of these is that the Appellant is a corporation and not a natural person.  As a result, substantial argument revolved around the place of delivery of the services and whether the company officers who made use of the services were resident in the Province of Prince Edward Island or the Province of Nova Scotia.  In addition, argument touched upon the issue of whether the directors of the corporation met and acted in the Province of PEI or in the Province of Nova Scotia and whether the majority of the shareholders of the corporation who would also rely upon some of this financial data were resident in the Province of PEI or otherwise.  The second issue arises in regard to the nature of the good. The Respondent's witness, Mr. Keefe, stated this succinctly at page 9 of his pre-filed evidence where he puts the issue as follows:

As the services provided by MT&T to Island Tel were not in the nature of tangible goods, such as a television or computer, the manner of consumption of these services is more difficult to envision.

In this passage, Mr. Keefe is attempting to point out the difficulties that arise by the expansion of the definition of the taxable item good to include certain services that had previously been non-taxable.  Section 1(e) of the Act defines goods to include chattels, personal, other than things in action, and then, in the succeeding three subsections of this definition, includes various types of services such as telecommunication services, repair and installation labour, computer software and finally legal, accounting, consulting, engineering and architectural services.  As stated by Mr. Keefe, the actual consumption of these goods is much more difficult to identify than the consumption of physical goods.  This, coupled with the fact that the body consuming has no corporeal presence, makes the determination of use or consumption even more difficult.

In determining the issue of consumption, the Commission makes the following findings of fact:

1.     The Island Telephone Company Limited was incorporated under the laws of the Province of Prince Edward Island, and has its head office in the Province of Prince Edward Island. 

2.    The Island Telephone Company Limited is in the business of providing telecommunication services within the Province of Prince Edward Island, although, for the necessity and convenience of its customers, it is connected to telephone networks located outside the Province of Prince Edward Island.

3.    The majority of shareholders of Island Tel were non-residents of Prince Edward Island. 

4.    Certain key financial officers of The Island Telephone Company Limited resided in Nova Scotia, not in Prince Edward Island.

5.    The Board of Directors of the company met primarily within the Province of Prince Edward Island, but also met outside the Province of PEI,

The Commission has concluded that the residency of the officers and directors and shareholders of the company is not relevant to a determination of where the company consumed goods.  The officers and directors of the company guided its operations and were responsible for managing the business and affairs of the corporation.  However, it is the company that consumed the goods and not these individuals who, although they may have been responsible for guiding the corporation, were not the corporation itself.  Therefore, we have concluded that, although certain key officers of the corporation resided outside the Province and may have used information outside the Province, the information was used to further or enhance the operations of the corporation. As a result, the information or services must have been consumed by the Company that paid for the services and used by it in the course of its operations.  

As the principal operations of the company are carried on exclusively within the Province of Prince Edward Island, we have concluded and hereby find that consumption by the company took place within the Province of Prince Edward Island notwithstanding that the services were delivered outside the Province of Prince Edward Island and, in some cases, were delivered to company officers outside the Province of Prince Edward Island.  We believe that to reach any other conclusion would defy common sense. 

2.7  Adjustment or Refund of Taxes Paid

Section 19(1) of the Revenue Administration Act reads as follows:

19(1)     Where a person:
            (a)   has paid an amount of tax that is not payable as tax; or
            (b)  has paid an amount as tax that is in excess of the amount payable
                 as tax,

 the Minister shall repay to that person the amount wrongly paid or the amount of the excess if application for refund has been made within four years of the date the overpayment was made.

The Appellant seeks the refund of taxes self-assessed or paid in relation to computer software. Software of the type at issue here was determined by the Commission, in Order UT98-1 (Re Northern Telecom), not to be taxable. While the Respondent agrees that the refund would have been made had the Appellant properly applied for it pursuant to Section 19(1) of the Revenue Administration Act, the Respondent believes that, since an application for refund was not made within the prescribed period, the Tax Commissioner is prevented from making the refund. The Respondent submits, as well, that the Commission has no jurisdiction in this matter, as the payments in question were not part of an assessment subject to appeal.

The Appellant believes that the Commission retains jurisdiction in the Northern Tel case by virtue of the within appeal and that the amount should be repaid under Section 19(1) of the Revenue Administration Act.

The Commission heard evidence on this issue from Rick Bleasdale for the Appellant and from Mary Hennessey for the Respondent.

Mr. Bleasdale's evidence reviews the process followed in attempting to obtain a refund on the taxes paid through self-assessment. The witness expressed the view that a refund can be made by the Respondent pursuant to Section 12 of the Revenue Administration Act:

12. Neither the giving of a notice of objection or a notice of appeal by any person nor any delay in the hearing of an appeal shall in any way affect the due date, the interest or penalties, or any liability for payment provided under this Act or a revenue Act, in respect of any moneys due and payable to the Government that are the subject matter of the objection or appeal, but in the event of the estimate of the Commissioner being set aside or reduced on appeal, the Minister shall refund the amount or excess amount which has been paid to the Government and any additional interest or penalty paid thereon. 1990,c.54,s.12. 

Ms. Hennessey testified that she had obtained a legal opinion to the effect that purchases that were not assessed by the Provincial Tax Commissioner because the applicable tax had been paid or self-assessed did not form part of the Tax Commissioner's assessment and would therefore be subject to the limitation period set out in Section 19(1) of the Revenue Administration Act. Ms. Hennessey's evidence is that she views the legal opinion as preventing the Tax Commissioner from making the requested refund. 

In summary, the Appellant argues that the tax paid is within the scope of Commission Order UT89-1 or is part of the items contained in the assessment in this docket. It submits that refund application was made within the four-year time limitation, was denied by the Tax Commissioner, and is therefore a decision that the Commission has jurisdiction to overturn. Finally, the Appellant submits that the Tax Commissioner wishes to right the wrong, but believes he does not have the authority under section 19(1). According to the Appellant, the Commission should confirm that the Tax Commissioner does have authority under that section.

The Respondent argues that the Commission is without jurisdiction to address the issue as the amounts at issue were paid outside of any assessment. The Notice of Objection, which Island Tel alleges placed the Commissioner on notice, was a Notice of Objection in regard to the Northern Tel case. Finally, the Respondent submits that the Commission has no further jurisdiction to deal with Order UT98-1.

Inasmuch as the amount in question was based on a self-assessment as opposed to an assessment issued by the Respondent subject to appeal, the Commission is of the view that the jurisdictional questions raised by the Respondent have merit. Having fully considered this issue, it is clear that the Commission only obtains jurisdiction on assessments that have been issued, objected to and appealed. We find, therefore, that we lack jurisdiction in this matter.

However, in our view, the decision to retain the amount under the shield of Section 19(1) is questionable. The section merely permits a repayment; it does not prohibit it. The section uses the words …the Minster shall repay… as opposed to words such as …the Minister shall only repay… In our view, the Tax Commissioner's interpretation of the section is far too narrow and does not reflect the plain and ordinary meaning of these words. 

Although we have concluded that we do not have jurisdiction to dispose of this issue, we believe the Tax Commissioner might wish to reconsider his decision not to issue a refund. The Commission believes that the taxing regime in the province must be seen to be fair and fairly applied. It cannot, in our view, be said that the Tax Commissioner was anything other than fully aware of this issue well within the four-year time frame.

3. Disposition

An Order varying the decision of the Tax Commissioner in accordance with these reasons will therefore be issued.

[1] The words "including payroll preparation and billing" were not contained in the Regulation during the audit period.

 [2] This is how the subclause read at the time of the audit.

Order

UPON the appeal of the Island Telephone Company Limited (now Island Telecom Inc.) against a decision of the Provincial Tax Commissioner, dated March 27, 1997;

AND UPON hearing the evidence adduced by the Appellant as well as what was alleged by counsel at hearings conducted in Charlottetown on December 13, 14, 15, 16 and 17, 1999;

NOW THEREFORE, for the reasons given in the annexed Reasons for Order;

IT IS ORDERED THAT

1. The  decision of the Provincial Tax Commissioner dated March 27, 1997 is varied as follows:

  • Account 662-41316 Revenue Forecasting (Settlements) Salaries
    90% of the activities in this account are not accounting, consulting or engineering services as defined in the legislation and regulations.

  • Account 662-70018 Profit Centre Reporting Salaries
    The activities in this account are not accounting, consulting or engineering services as defined in the legislation and regulations.

  • Account 665-38919 Methods/Assignments Control Centre
    The activities in this account are not accounting, consulting or engineering services as defined in the legislation and regulations.

  • Account Category 0082 Acct 2216-5799
    Translation work performed under this or other accounts is not      accounting, consulting or engineering services as defined in the legislation and regulations.

  • Other Engineering Services Accounts
    25% of the residual assessed engineering services costs—those calculated following the deduction of the costs associated with translation services—are consulting services as defined in the legislation and regulations;

10% of the residual assessed engineering services costs—those calculated following the deduction of the costs associated with translation services—are engineering services as defined in the legislation and regulations; and,

the  balance of the other engineering services accounts or costs associated with those accounts are neither engineering services nor consulting services as defined in the legislation and regulations.

  • 675-00603 Computerized Automatic Loop Reporting System (CALRS) Contribution  
         Activities in this account are not software as defined in the legislation and regulations.

2. The services at issue in this appeal were consumed in the Province of Prince Edward Island;  and,

3. The issue of adjustment or refund of taxes is ultra vires the Commission.

DATED at Charlottetown, Prince Edward Island, this 18th day of May, 2000.

BY THE COMMISSION:

Ginger Breedon, Vice-Chair
Elizabeth MacDonald, Commissioner
Weston Rose, Commissioner

NOTICE

Section 12 of the Island Regulatory and Appeals Commission Act reads as follows:

12. The Commission may, in its absolute discretion, review, rescind or vary any order or decision made by it or rehear any application before deciding it.

Parties to this proceeding seeking a review of the Commission's decision or order in this matter may do so by filing with the Commission, at the earliest date, a written Request for Review, which clearly states the reasons for the review and the nature of the relief sought.

Sections 13.(1) and 13(2) of the Act provide as follows:

13.(1) An appeal lies from a decision or order of the Commission to the Appeal Division of the Supreme Court upon a question of law or jurisdiction.

(2) The appeal shall be made by filing a notice of appeal in the Supreme Court within twenty days after the decision or order appealed from and the Civil Procedure Rules respecting appeals apply with the necessary changes.