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Docket: UT01101
Order UT02-01

IN THE MATTER OF an appeal by MR&S Management Inc. against a decision of the Provincial Tax Commissioner, dated December 21, 2000.

BEFORE THE COMMISSION

on Wednesday, the 16th day of January, 2002.

Ginger Breedon, Chair
Maurice Rodgerson, Vice-Chair
James Carragher, Commissioner

Order

Contents

Appearances & Witnesses

Reasons for Order

1.    Background

2.    Discussion & Findings

    2.1    Introduction

    2.2    Matters Not Raised in the Notice of Appeal

    2.3    Asset Transfer

    2.4    Tax on Services

            2.4.1    Introduction

            2.4.2    Client "A"

            2.4.3    Client "B"

            2.4.4    Client "C"

            2.4.5    Client "D"

            2.4.6    Client "E"

            2.4.7    Client "F"

            2.4.8    Client "G"

            2.4.9    Client "H"

            2.4.10    Client "I"

3.    Other Matters

4.    Disposition

Order

Appearances & Witnesses

1.    For the Appellant, MR&S Management Inc.

Counsel:
Ronald J. Keefe

Witness:
Darren Noonan, Partner
MacPherson Roche Smith & Noonan

2.      For the Respondent, Provincial Tax Commissioner

Counsel:
Ruth M. DeMone

Witnesses:
Shelly Rector, Tax Auditor

        Lorne Bay, Audit Supervisor

 3.      For the Island Regulatory and Appeals Commission

Counsel:
Thomas A. Matheson, Q.C.

Staff:
Donald G. Sutherland
Director, Technical & Regulatory Services

Donna Chandler
Recording Secretary

Reasons for Order

1.  Background

(1)      This is an appeal by MR&S Management Inc. ("MR&S" or "Appellant") against a decision of the Provincial Tax Commissioner ("Tax Commissioner" or "Respondent"), dated December 21, 2000. The appeal relates to tax assessed on purchases associated with the transfer of assets from a partnership to the Appellant as well as tax on services provided by the Appellant to a number of clients.

(2)      The taxes at issue in this appeal were assessed pursuant to Notice of Assessment No. 1186, which was issued on August 31, 2000 by the Province of P.E.I. following an audit of the Appellant. On October 30, 2000, MR&S filed a Notice of Objection with the Provincial Tax Commissioner pursuant to Section 9 of the Revenue Administration Act, 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.

(3)      The Tax Commissioner issued his decision on the objection on December 21, 2000.  In his decision, the Commissioner confirmed the taxes assessed.

(4)      On January 19, 2001, MR&S appealed the above decision 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.

 (5)      Following receipt of the written evidence and suitable scheduling for the involved parties, the appeal was heard by the Commission on September the 19th and 20th, 2001. Final briefs were filed on October 19, 2001 and reply briefs were filed on November 2, 2001.

 (6)      In order to protect the identity of the Appellant's clients, the Commission agreed to maintain the hearing record in this appeal as well as third party client names in confidence. For the purpose of these reasons, reference to specific client invoices will be referred to as client invoice "A", "B" et cetera.

2.    Discussion & Findings

2.1    Introduction

(7)    The appeal deals with:

  •  tax on certain services provided by the Appellant to eight specific clients;

  •  tax on services provided to a ninth client; and

  •  tax on the transfer of office equipment and furniture from a partnership to the Appellant and tax on plant care services.

(8)     The last issue—office equipment and furniture transfer as well plant care services—resulted in an objection on the part of the Respondent to the effect that MR&S was raising issues not set out in the Notice of Appeal—something the Respondent argues is not permitted. The parties submitted written briefs dealing with the objection in their final argument.

(9)     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)

(10)    The Commission has carefully considered the evidence of the witnesses as well as the submissions of counsel on each of the issues in this appeal. Bearing in mind the scheme, object and context of the relevant legislation and regulations, the Commission hereby renders its decision.

(11)    The Commission acknowledges the contributions of counsel and the witnesses in this proceeding.

2.2    Matters Not Raised in the Notice of Appeal

 2.2.1    May an Appellant raise issues in its appeal that were not specifically set out in its Notice of Appeal to the Commission?

(12)    This issue arose as a result of the evidence filed by Mr. Noonan on behalf of MR&S and relates to the acquisition of office furniture and equipment from an accounting partnership in Charlottetown as well as the purchase of plant care services. These two items were not set out in the Notice of Appeal filed with the Commission.

(13)    The Tax Commissioner submits that an appellant is precluded from raising issues in an appeal to the Commission that were not set out in the Notice of Appeal. The Respondent contends that Section 10 of the Revenue Administration Act specifically requires that a Notice of Appeal be in writing and that it contain grounds for the appeal. According to the Tax Commissioner, the Commission has, in other cases, clearly stated that it has no ability to waive the provisions of the Act. The Respondent cited the Commission's decision in  Island Construction, (Commission Order UT99-1, dated March 25, 1999), wherein the Commission stated, in part, as follows (at p.2):

 As a creature of statute, the Commission only has the authority expressly conferred upon it by the legislature. In this case, the legislature, through the Revenue Administration Act, has clearly stipulated a time limitation for the filing of an appeal. The Commission has no ability to waive the provisions of the Act.

(14)    The Tax Commissioner further submits that, in the course of the audit process, a taxpayer is provided with a significant amount of information prior to an assessment being issued and is aware of the issues involved in the audit.  According to the Respondent, the rules of fairness and natural justice are therefore not compromised. In any event, the Respondent contends that the common law principles of fairness and natural justice can be ousted by statute.

(15)    Finally, the Tax Commissioner referred the Commission to the following comments of McQuaid, J. in Prince Edward Island (Tax Commissioner) v. Maritime Dredging Ltd (1997), 157 Nfld. & P.E.I.R. 80 (P.E.I.S.C.A.D.);

The appeal to the Commission is clearly one by way of hearing de novo, and there is no reason why an appellant should be restricted to only those issues raised before the Provincial Tax Commissioner, nor should the Commission be precluded from adjudicating upon those issues provided any new issues are raised by the appellant in the Notice of Appeal from the Commissioner's decision.

(16)    According to the Respondent, the comments of McQuaid, J., are relevant to the matters at issue here. To allow new issues to be raised would, in the Respondent's view, effectively render the time limitation period for appeals meaningless.

(17)    The Appellant argues that Section 10 of the Revenue Administration Act is procedural rather than substantive in nature in that it does not go to the jurisdiction of the Commission. The Appellant further submits that, if a taxpayer is limited to those issues raised in the Notice of Appeal, the principles of fairness and natural justice could be circumvented. Finally, the Appellant submits that the comments of  McQuaid, J, in Maritime Dredging were obiter dictum and not binding upon the Commission.

(18)    In the matter at issue here, it is acknowledged by the parties that an appeal hearing before the Commission is a hearing de novo and that an appellant may raise issues before the Commission that were not raised before the Provincial Tax Commissioner. However, the Respondent contends that an appellant may only do so if the issues are set out in the Notice of Appeal. The Appellant, MR&S, contends otherwise.

(19)    A significant amount of argument and reply argument were devoted to this issue. However, the issue seems to hinge, in large part, on the court's interpretation of the appeal provisions of the Revenue Administration Act as set out in Maritime Dredging. For ease of reference, the comments of the court at issue here are repeated below:

The appeal to the Commission is clearly one by way of hearing de novo, and there is no reason why an appellant should be restricted to only those issues raised before the Provincial Tax Commissioner, nor should the Commission be precluded from adjudicating upon those issues provided any new issues are raised by the appellant in the Notice of Appeal from the Commissioner's decision. (emphasis added)

(20)    Having fully considered the submissions of counsel on this issue and the applicable law,  the Commission is of the view that the comments of the court in Maritime Dredging were merely intended to indicate that new issues not raised before the Tax Commissioner must be set out in the Notice of Appeal to the Commission. We do not view the comments of the court as intending to restrict an appellant's access to the appeal process where the matters at issue are known to the Respondent. In this case, the principal matter at issue— the acquisition of office furniture and equipment—was raised in the initial objection to the Tax Commissioner and dealt with in his decision. The issue was thus known to the Tax Commissioner. In our view, the matter at issue here is not new within the context in which the Court is speaking. The interpretation the Respondent has placed on these comments is, in our view, too restrictive.

(21)    The Commission therefore finds and concludes that an appellant may raise issues in its appeal that were not specifically set out in its Notice of Appeal to the Commission provided the issues were raised in the appellant's initial objection to the Tax Commissioner.

(22)    Since the issue of tax on plant care services does not appear to have been raised in the Notice of Objection to the Tax Commissioner—and was not raised in the Notice of Appeal to the Commission—it will not be considered here.

2.3    Asset Transfer

2.3.1    Is the transfer of assets from Deloitte & Touche to MR&S exempt from tax pursuant to Section 20 of the Revenue Tax Act Regulations?

2.3.2    Even if the transfer of assets is not exempt, did the transfer fall within the four-year limitation period set out in Section 38 of the Revenue Tax Act Regulations?

(23)    This issue involves tax on the transfer of assets from Deloitte and Touche to MR&S. A secondary issue relates to whether the audit period involving the transfer was within the four-year limitation period set out in Section 38 of the Revenue Tax Act Regulations.

(24)    Sections 20 and 38 of the Revenue Tax Act Regulations read as follows:

20.(1)    In this section "wholly owns" in relation to a corporation, means having the beneficial ownership of not less than 95 per cent of the total issued and outstanding, share capital of the corporation, exclusive of directors' qualifying shares in the hands of a person or of a person and members of his family.

Application of section

(2)    This section does not apply to a transfer of goods if any tax imposed by the Act on any purchaser who acquired the goods in any prior transfer or purchase has not been paid.

Purchase by corporation from owner of corporation

(3)    No tax is payable by a corporation on its purchase of goods from a person who wholly owns, either directly or through another wholly-owned corporation, the purchasing corporation.

. . .

38.    In making an assessment pursuant to the Act, the Commissioner shall not consider a period prior to the four fiscal years immediately preceding the date of assessment unless there is a reasonable appearance to him of willful default or fraud.

(25)    The Appellant takes the position that the transfer is exempt from tax pursuant to Section 20 of the Revenue Tax Act Regulations. In the alternative, the Appellant submits that the transfer occurred beyond the time limitation set out in Section 38 of the Revenue Tax Act Regulations. 

(26)    The Respondent submits that the transfer does not fall within the exemption provisions of Section 20 of the Revenue Tax Act Regulations and that the transfer occurred within the time limitation set out in Section 38 of the Revenue Tax Act Regulations.

(27)    The record in this proceeding discloses that the Tax Commissioner assessed revenue tax on the value of the office furniture and equipment transferred from Deloitte & Touche on the sale of its accounting practice in Charlottetown P.E.I. to MR&S.

(28)    The record also discloses that:

1.     MR&S was incorporated August 31, 1995 by Stanley H. MacPherson, a partner in Deloitte and Touche, who had made arrangements with Deloitte and Touche to have MR&S buy the firm's accounting practice in P.E.I.;

2.    the transfer took place on August 31, 1995, although there is some evidence the transfer was not recorded in the accounts of MR&S until September of 1995;

3.    although there were suggestions at the hearing that Deloitte and Touche transferred the assets to Mr. MacPherson—who in turn transferred them to MR&S—the written agreement [part of Exhibit R-1] clearly indicates that the transfer was to go  directly from Deloitte and Touche to MR&S;

4.    at the time of the transfer, Stanley MacPherson was the sole shareholder of MR&S; and

5.    there were a substantial number of partners in Deloitte and Touche at the time of the transfer. Mr. Noonan, appearing for the Appellant, placed the number at approximately 1,000.

(29)    As noted above, the Appellant argues that the transfer to MR&S was not a taxable transaction.  The Appellant states that:

a partnership is not a legal entity separate from its partners as is, for example, a Corporation separate from its shareholders.  Each partner has a limited liability for the debts and obligations of the partnership.  Each partner has a joint and undivided ownership interest in the property of the partnership.

(Appellant's Closing Argument, pp. 17-18)

(30)    The Appellant therefore concludes that Mr. MacPherson was the owner of the goods because of his partnership interest in Deloitte and Touche.

(31)    The Appellant submits that Subsection 20(3), of the Revenue Tax Act Regulations applies to the transaction.  That subsection reads as follows:

No tax is payable by a Corporation on its purchase of goods from a person who wholly owns, either directly or through another wholly owned Corporation, the purchasing Corporation.

(32)    Mr. Noonan's evidence established that, on August 31, 1995, Mr. MacPherson wholly owned MR&S, the purchasing corporation.  The Appellant concludes that, as Mr. MacPherson was the owner of the goods, Subsection 20(3) creates an exemption from tax.

(33)    The Tax Commissioner submits that the definition of person in Subsection 1(k) of the Revenue Tax Act includes the meanings assigned to person in the Interpretation Act—a natural person and corporation—and also the extended meanings included in the Revenue Tax Act—municipal corporations, regional school boards, and other boards, commissions, and committees.  The Tax Commissioner therefore concludes that, as the word partnership is not included within the definition of a person in the Interpretation Act or contained as a definition in the Revenue Tax Act, the intent of Section 20 of the Revenue Tax Act Regulations is to exclude, from the exemption provision, transfers between partnerships and corporations. 

(34)    The essence of the Tax Commissioner's argument in this respect is set out below:

 In a partnership, particularly one with upward of 1,000 partners, the Commissioner submits that no one partner owns all of the partnership property or has individually paid the tax on the acquisition of that partnership property to enable a transfer to take place on a tax-exempt basis to a Corporation which is wholly-owned by that partner.  Each partner would have ‘paid' a proportionate share of the tax based on their (sic) share of the partnership.

(Respondent's Brief in Response, p.11)

(35)    Counsel for both parties appear to be in agreement that partnership property is owned equally among the partners to the firm.  No evidence was introduced at the hearing that would indicate that Deloitte and Touche did not pay tax at the time of its original acquisition of the assets.  If Deloitte and Touche had paid tax on the acquisition of the assets at the time of original purchase, then each partner was responsible for a share of the tax.

(36)    The Commission accepts the analysis by counsel for the Tax Commissioner that the transfer to MR&S was a transfer from all of the partners of Deloitte and Touche.  Mr. MacPherson, as a partner in Deloitte and Touche, had an undivided interest in the partnership property.  However, he was not the only person transferring the assets to MR&S.

(37)    It would appear to the Commission that the purpose of Section 20 of the Revenue Tax Act Regulations is to prevent double taxation:

1.    where a person is transferring goods—upon which tax has been paid—to a corporation owned or controlled by him; or,

2.    where a transfer of goods—upon which tax has been paid—is taking place among or between corporations owned or controlled by the same person.

(38)    The Commission recognizes that Section 20 does not specifically identify partnership arrangements. However, the Commission does believe that the fundamental principle underlying this section—the prevention of double taxation—does extend to this type of common business arrangement to the extent of the individual partner's ownership of goods.

(39)    In this situation, the parties who originally paid tax on the acquisition were all of the 1,000 or so partners of Deloitte and Touche.  In our view, the goods are now being transferred to MR&S from a firm in which Mr. MacPherson, as a partner, has paid 1/1000th of the tax on those goods. 

(40)    The Commission is of the view that Section 20 of the Revenue Tax Act Regulations is intended to apply to partnerships to the extent that the individual partner or partners had actually paid tax. In this respect, reference is made to Subsection 20(6) of the Regulations, which reads as follows:

No tax is payable by a person who purchases goods from a corporation he does not wholly own on that portion of the actual value of the goods equal to the proportion of the shares owned by the purchaser of the total issued and outstanding share capital of the Corporation.

(41)    This Subsection indicates that the regulation is intended to eliminate double taxation only on the portion of the company's goods attributable to the person to whom the transfer is being made. While this Subsection is not directly applicable to the transfer involved here, it does provide a guide as to the extent of the intended exemption. In this case, the intended exemption would only be Mr. MacPherson's proportionate share of the tax paid on the value of the goods transferred to MR&S.

(42)    For all of these reasons, the Commission finds that the overall transfer of assets from Deloitte & Touche to MR&S is not exempt from tax pursuant to Section 20 of the Revenue Tax Act Regulations. The exemption would, however, apply to Mr. MacPherson's proportionate share of the tax paid on the value of the goods transferred to MR&S.

(43)    We turn our attention, then, to the issue of whether the transfer falls within the four-year limitation period set out in Section 38 of the Revenue Tax Act Regulations. For ease of reference, Section 38 is repeated below:

38.  In making an assessment pursuant to the Act, the Commissioner shall not consider a period prior to the four fiscal years immediately preceding the date of assessment unless there is a reasonable appearance to him of willful default or fraud.

(44)    There is no suggestion here of willful default or fraud. The issue therefore centers on the question of what constitutes four fiscal years immediately preceding the date of assessment.

(45)    The date of assessment is August 31, 2000. The Tax Commissioner contends that the transfer was recorded on September 1, 1995. MR&S contends that the transfer occurred on August 31, 1995 pursuant to the terms of a purchase agreement. It is acknowledged by both parties that the fiscal year-end of the Appellant is August 31.

(46)    Based on the evidence before us, the relevant fiscal years of the Appellant would appear to be as follows: 

Fiscal Year

Number of Fiscal Years
Sep 1, 1999 – Aug 31, 2000

-

Sep 1, 1998 – Aug 31, 1999

 1

Sep 1, 1997 – Aug 31, 1998

 2

Sep 1, 1996 – Aug 31, 1997

 3

Sep 1, 1995 – Aug 31, 1996

 4

(47)    Section 38 of the Revenue Tax Act Regulations allows for an assessment to be made for the four fiscal years immediately preceding the assessment date. The words fiscal years are, in our view, to be read as the fiscal years of the firm being assessed. Provided, then, that the assessment date is sometime within the fiscal period September 1, 1999 to August 31, 2000,  the allowable assessment period would, in our view, begin on September 1, 1995.

(48)    As noted above, the assessment date at issue in this case is August 31, 2000. Since the date falls within the fiscal year of MR&S ending August 31, 2000, the Tax Commissioner cannot, in our view, consider any period prior to September 1, 1995.

(49)    The Commissions finds that the transfer of assets occurred on August 31, 1995 and that the transfer was subsequently recorded in the accounts of the Appellant on September 1, 1995. In order to be taxable, the provisions of Section 4 of the Revenue Tax Act must also be satisfied:

4.    Subject to section 4.2, 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 per cent of the fair value of the goods.

(50)    Based on the evidence and submissions before us, it would appear that delivery occurred on August 31, 1995 notwithstanding the date in which the transfer was recorded in the accounts of the Appellant. In our view, delivery  must occur within the four-year period described above in order for the goods to be taxable. The fact that delivery may be recorded in the accounts of a taxpayer during some other accounting period is not, given the language of Revenue Tax Act and Regulations, relevant.

(51)    For the reasons stated above,  the Commission finds that the transfer of assets did not fall within the four-year limitation period set out in Section 38 of the Revenue Tax Act Regulations. The tax associated with the transfer of assets from Deloitte and Touche to MR&S Management Inc. is therefore reversed.

2.4    Tax on Services

2.4.1    Introduction

(52)    This issue involves tax on professional services provided by MR&S to a number of clients under separate invoices. The relevant sections of the Revenue Tax Act read 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.

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), 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;

2.4.2    Client "A"

Fees on which tax assessed: $1,284.00

(53)    This issue involves cost accounting and tax-related services provided to the client. The Appellant's position on this issue is that the majority of the services provided were tax planning. According to the Appellant, tax preparation is an accounting service while tax planning or consulting is a financial service that is exempt.

(54)    The Respondent's position is that the services provided were cost accounting and tax planning and that both of these services fall under the definition of accounting and are therefore taxable.

(55)    During the hearing, Mr. Noonan testified that the services were provided prior to August 31, 1995. The invoice to this client is dated November 8, 1995 and states that it is for Professional services rendered relating to the period ending August 31, 1995. There is no evidence before us to suggest that the services were not provided during the time period indicated on the invoice.

(56)    Given our findings in 2.3 above, the Commission finds that delivery occurred beyond the time limitation set out in Section 38 of the Revenue Tax Act Regulations. A finding on whether the item at issue is a taxable professional service is therefore unnecessary.

(57)    The Tax Commissioner's decision in this respect is reversed.

2.4.3    Client "B"

Fees on which tax assessed: $936.25

(58)    This item relates to taxation services. The Appellant submits that the services are not taxable accounting services. The Respondent contends that the services are taxable accounting services.

(59)    Mr. Noonan testified that  MR&S provided financial services relating to taxation matters but that the services were not in the nature of, nor did they include, tax return preparation. According to Mr. Noonan, MR&S provided advice concerning discussions with Revenue Canada as well as the refinancing of business operations. Mr. Noonan noted that these latter services were not found by the Respondent to be taxable.

(60)    Ms. Rector testified that the amount billed and the description of services were broken into two parts on the invoice. The first part dealt with Revenue Canada matters, including meetings, correspondence and discussions concerning the settlement of tax arrears, capital asset tax balances, and the reviewing of a Notice of Assessment. The second part was for refinancing and building insurance, mortgages, real estate appraisals, and property shortfall and re-financing. According to the witness, the amount relating to the Revenue Canada Taxation matters was taxable under either accounting services or consulting services in the area of accounting services.

(61)    Mr. Bay testified that the services relating to Revenue Canada fall within the income tax area. In his view, such services are considered taxable as either  accounting services or a consulting services in the area of accounting services.

(62)    The Commission notes that the definition of accounting services under Subsection1(3)(a) of the Revenue Tax Act Regulations includes the words and other similar services… In our view, these words are intended to capture a broad range of services beyond tax return preparation. Moreover, the services are not, in our view, exempt financial services as set out in subclause 1(3)(c)(iv) of the Regulations. Such services would likely include services provided by financial institutions, such as lending institutions and brokerage houses, but not services such as those provided here.

(63)    The Commission therefore finds that services are either taxable accounting or non-exempt consulting services within the meaning of Revenue Tax Act Regulations.

(64)    The Tax Commissioner's decision in this respect is affirmed.

2.4.4    Client "C"

Fees on which tax assessed: $1,542.00

(65)    This issue involves human-resource related services provided to a firm in Charlottetown.

(66)    The Appellant submits the services were consulting financial services. The Respondent submits that the services were consulting services in the area of human resources and not consulting in the area of financial services.

(67)    Mr. Noonan testified that MR&S assisted the client in finding a financial controller. The witness is of the view that the provision of this advice is a  financial service and not an accounting service as defined in the Regulations.

(68)    Ms. Rector testified that the amount on the invoice was for professional services relating to a Financial Controller Executive Search and included discussions regarding needs, position responsibilities and candidate criteria. The invoice also was for preparation and placement of an ad; receipt and perusal of resumes; preparation of a summary of resumes including recommendations for interview; the contacting of individuals to arrange for  interviews; discussions on making an offer; and preparation of response letters. According to the witness, it was determined that the invoice was for consulting services in the area of human resources.

(69)    Mr. Bay testified that the services were consulting services in the area of human resources. According to the witness, such services are not exempt from tax.

(70)    The Commission accepts the evidence and the submissions of the Respondent on this issue and finds that services are non-exempt consulting services within the meaning of Revenue Tax Act Regulations.

(71)    The Tax Commissioner's decision in this respect is affirmed.

2.4.5    Client "D"

Fees on which tax assessed: $4,500.00

(72)    This issue involves services provided to a provincial crown corporation in the area of business development.

(73)    The Appellant submits that the services at issue were financial in nature and dealt with business development in the area of tourism. The Respondent submits that the services are consulting in the area of economic development.

(74)    Mr. Noonan testified that MR&S provided advice on the development of a program to assist in the upgrading of golf courses. According to the witness, the activity is not an accounting service but rather a financial service or a consulting service in the area of tourism. The witness noted that MR&S provided advice on the establishment of a program to provide financial assistance in a tourism-related activity.

(75)    Ms. Rector testified that the invoice was for Preparation of Report on a Potential Golf Course Upgrading Assistance Program. According to the witness, she was advised by Mr. Bay that this service was either an accounting service or a consulting service in a taxable area.

(76)    Mr. Bay testified that the invoice contained minimal detail and that it was assumed that the report associated with the service likely involved the preparation of financial projections. As such, the witness concluded that the service was a taxable accounting service. According to the witness, to the extent that the invoice may be for consulting services, it would be in the area of sports and recreation and therefore taxable.

(77)    Having considered the evidence and submissions of counsel on this issue, the Commission finds that services are either taxable accounting or non-exempt consulting services within the meaning of Revenue Tax Act Regulations. For the reasons set out in 2.4.3 above, the services are not exempt financial services. In our view, the services are also not exempt tourism services as set out in subclause 1(3)(c)(xi) of the Regulations as the services were not provided directly to the tourism sector.

(78)    The Tax Commissioner's decision in this respect is affirmed.

2.4.6    Client "E"

Fees on which tax assessed: $1,250.00

(79)    This issue involves tax on services provided to a firm involved in agricultural soil assessment.

(80)    The Appellant takes the position that the services at issue involved assistance to the client in the area of financing. In the Appellant's view, the services are  exempt financial services.

(81)    The Respondent's position is that, even though this client was not an accounting client of MR&S, the financial projections were taxable accounting services.

(82)    Mr. Noonan testified that the client provides services to farmers. MR&S was retained to assist in obtaining financing. According to the witness, MR&S provided a financial service directly related to agriculture, both of which are exempt services.

(83)    Ms. Rector testified that the invoice describes the services as professional services including the compilation of financial projections for inclusion in a business plan. According to the witness, the work-in-progress ledger indicated that time was spent on cash flows and projections. In Ms. Rector's view, financial projections and cash flow statements are future-oriented financial statements and fall under the definition of accounting services.

(84)    Mr. Bay testified that the invoice was for Professional services rendered, including: Compilation of financial projections for [Client "E"] for the years to end December 31, 1996, 1997, 1998 and 1999. According to Mr. Bay, the definition of accounting services includes the preparation of …balance sheets, profit and loss amounts, and other similar services ...  and, on this, basis, the invoice was considered to be accounting services and taxable. 

(85)    Having considered the evidence and submissions of counsel on this issue, the Commission finds that services are taxable accounting services within the meaning of Revenue Tax Act Regulations. In our view, the services are not exempt financial services as set out in subclause 1(3)(c)(iv) of the Regulations. As noted above, such services would likely include services provided by financial institutions, such as lending institutions and brokerage houses, but not services such as those provided here.

(86)    The Commission finds, as well, that the services are not consulting services in the area of agriculture as the services were not provided directly to the agricultural sector. The client herein provides services to the agricultural sector but is not directly involved in agriculture.

(87)    The Tax Commissioner's decision in this respect is affirmed.

2.4.7    Client "F"

Fees on which tax assessed:
Invoice 0409 - $792.00
Invoice 0410 - $6,607.00
Invoice 2856 - $1,926.00

(88)  This issue involves a variety of services provided to a developer.  The appellant submits that the services were primarily financial in nature in the area of income tax and financial consulting.  In the alternative, the Appellant submits that they are consulting in the area of tourism.

(89)  The Respondent submits that the invoices are not exempt consulting services in the area of tourism but rather consulting services in the areas of gambling or entertainment.

(90)    In the case of invoices 0409 and 0410, Mr. Noonan testified that the client engaged MR&S to assist in the establishment of a tourism-related activity in the province and provided advice in the area of financial services and tourism. According to the witness, MR&S met with a number of government officials and researched and advised the client on the income tax implications of a proposed business structure. MR&S views income tax advice as an exempt financial service. According to the witness, the accounting service definition clearly indicates that only services in the nature of tax return preparation should be considered taxable.

(91)    In the case of invoice 2856, Mr. Noonan testified that the client acquired a partially completed development and engaged MR&S to obtain financial and other support for the project. This included research on the tax implications of business ownership. The Appellant views these services as financial in the area of tourism.

(92)    In the case of invoice 0410, Ms. Rector testified that the invoice was based on professional services for meetings, telephone conferences and discussions on casino and resort issues. Issues included background information, file research as well as regulatory and political issues, employment potential, licensing requirements, the mapping out of a strategy, support for the project, outlining history and current status, post-meeting analysis, tour of the region and consultations with various parties. According to the witness, the invoice covered a variety of services, some of which are accounting and some of which are consulting. Ms. Rector noted that other consulting services were services in the area of gambling or entertainment—which are not exempt—and not in the area of financial services or tourism.

(93)    In the case of invoices 0409 and 2856, the witness testified that the invoices specified professional services provided with respect to a proposed resort complex, including consulting on property management, income tax and the acquisition of a casino license. A second invoice—0409—relates to income tax services to an individual. In her view, the variety of services falls in the areas of accounting services and gambling or entertainment and are thus taxable.

(94)    Mr. Bay testified that, in the case of invoice 0410, the invoice was for services in the development of a casino and resort. According to the witness, the services were a combination of accounting services and taxable consulting services in the area of gambling and entertainment.

(95)    In the case of invoices 0409 and 2856 relating to the resort, Mr. Bay noted that the invoices involved income tax consulting, the selection of a property manager and consulting in the area of a casino license. According to the witness, tax advisory services are either accounting services or consulting in the area of accounting services. The services relating to a casino license would, in Mr. Bay's view, be consulting in the area of gambling and entertainment.

(96)    In the case of invoice 0409 issued to an individual, Mr. Bay testified that the invoice was for income tax advice and income tax preparation. According to the witness, tax advisory services are considered either accounting services or consulting in the area of accounting services, and are taxable. (97)    The Commission is of the view that the activities covered by all of the invoices discussed above constitute consulting services in the area of tourism and are thus exempt from tax pursuant to subclause 1(3)(c)(xi) of the Regulations, which reads as follows:

(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

. . .

(xi) tourism,

(98)    In the Commission's view, each of the services at issue relates to tourism to the extent it is defined in the Regulations. Given the vague language in the above regulation, the Commission is of the opinion that tourism must be read to include advice or opinions provided to the whole of the tourism industry. Absent a definition that would assist us in this respect, we find that the services at issue here are precisely those that were intended to be exempt from tax.

(99)    The Tax Commissioner's decision in this respect is reversed.

2.4.8    Client "G"

Fees on which tax assessed: $1,059.00

(100)    This issue involves tax-related advice provided to a firm headquartered in Charlottetown. The Appellant submits that the tax advisory services provided to this client are exempt financial services. The Respondent submits that tax advisory services are taxable accounting services.

(101)    As noted in Section 2.4.3 of these reasons, the definition of accounting services under Section1(3)(a) of the Revenue Tax Act Regulations includes the words and other similar services… We have concluded that these words are intended to capture a broad range of services beyond tax return preparation. Similarly, we have concluded that the services at issue here are not exempt financial services as set out in subclause 1(3)(c)(iv) of the Regulations.

(102)    The Commission finds that services are either taxable accounting or non-exempt consulting services within the meaning of Revenue Tax Act Regulations.

(103)    The Tax Commissioner's decision on this issue is affirmed.

2.4.9    Client "H"

Fees on which tax assessed: $428.00

(104)    This issue involves services in the area of advice on the potential acquisition of certain franchise rights. The Appellant submits that the services were exempt financial services. According to the Appellant, the services required financial analysis but that such analysis was a secondary function.

(105)    The Respondent submits that the calculation of a break-even point is cost accounting and is taxable.

(106)    Mr. Noonan testified that the services involved financial analysis on the acquisition of the rights. However, MR&S considers such services to be exempt financial services and not taxable accounting services.

(107)    Ms. Rector testified that the invoice was for the recalculation of the break-even point in terms of units sold and sales revenue. According to the witness, the analysis involved calculations to determine the number of units that must be sold to break even or cover expenses. In her view, this is cost accounting and a taxable accounting service.

(108)    Mr. Bay gave evidence to the effect that the invoice was for the calculation of the break-even point for the business. In his view, this an accounting service as it  is in the nature of cost accounting.

(109)    Based on the evidence and submissions on this issue, the Commission accepts the submission of the Respondent and finds that the services are either taxable accounting or non-exempt consulting services within the meaning of Revenue Tax Act Regulations.

(110)    The Tax Commissioner's decision on this issue is affirmed.

2.4.10    Client "I"

Invoices:
MRS-001
MRS-001A
MRS-002
MRS-0078

(111)    This issue involves services provided over a period of time to a group of  associated companies. It is contended that the services were provided under a pre-existing written contract entered into before the introduction of tax on professional services and that the existence of such a contract effectively exempts the services from tax. It is also contended that the services were provided outside of the time limitation period set forth in Section 38 of the Regulations.

(112)    The Appellant's takes the position that a client letter of July 23, 2001 (Exhibit A-3) confirms the existence of a written contract between the client and Deloitte & Touche. The Appellant further submits that the work provided under invoices 001, 001A, and 002 were for services performed prior to September 1, 1995. Finally, the Appellant submits that Invoice 0078 is an invoice dealing with relieving work in progress and is therefore not taxable.

(113)    The Tax Commissioner takes the position that, although the initial invoices were issued in August 1995 and are therefore beyond the time-limitation period, the invoices were listed in MR&S' September 1995 billing summary and are  therefore within the audit period. The Tax Commissioner notes that the revenue associated with the invoices was included in the fiscal year-end financial statements dated August 31, 1996.

(114)    The Tax Commissioner submits that Revenue Tax Guide ("RTG 137") 137 has no application to this matter.   RTG 137 states that fixed price, lump sum contracts signed prior to September 1, 1993 will be honored as written and will be exempt of sales tax …  According to the Respondent, there is no evidence of the existence of such a contract.  The Tax Commissioner also submits that the evidence introduced at the hearing does not support the Appellant's contention that the bill MRS-0078 was merely one to relieve work in progress.

(115)    Mr. Noonan testified that the invoices in question were issued on behalf of Deloitte & Touche but were recorded with the prefix MRS for administrative convenience. The witness stated that, if tax is payable, it should be in the name of Deloitte & Touche.

(116)    Mr. Noonan also testified that all bills associated with these services were negotiated with the client prior to the implementation of tax on professional services. The witness stated that the November 30, 1995 invoice (MRS-0078) was a dummy bill generated to relieve work in progress.

(117)    Ms. Rector testified that the Appellant did not provide any information to the effect that revenue tax should not be charged or that tax had been remitted. The witness also testified that the total sales associated with these invoices were recorded on MR&S' return for September 1995 and that the invoice totals correspond with the amounts recorded on the return.

(118)    According to the Ms. Rector, under articles 2 and 3 of the purchase agreement between MR&S and Deloitte and Touche, MR&S purchased the assets including the accounts receivable and unbilled receivables. Finally, Ms. Rector testified that a signed contract with the client was never provided to the Respondent, despite attempts to obtain the contract.

(119)    Mr. Bay testified that, when MR&S purchased the assets of Deloitte & Touche, MR&S also purchased the work in progress, including work in progress respecting this client's accounts. According to the witness, a signed contract relating to the client's accounts was never provided,

(120)    The Commission has considered the evidence and the submissions of counsel on this issue. In our view, with the exception of invoice 0078 discussed below, we find that the transfer of assets does not fall within the four-year limitation period set out in Section 38 of the Revenue Tax Act Regulations.

(121)    As noted in section 2.3 of these reasons, delivery must occur within the four-year limitation period in order for the goods to be taxable. The fact that delivery may be recorded or booked in the accounts of a taxpayer during some other accounting period is not, given the language of in Section 38 of the Revenue Tax Act Regulations, relevant. In this case, the invoices clearly show that the work was performed prior to September 1, 1995.

(122)    The tax on invoices MRS-001, MRS-001A and MRS-002 is therefore reversed.

(123)    In the case of invoice MRS-078, the Commission heard extensive evidence on MR&S' use of dummy invoices to relieve work in progress. As we understand it, the process is an internal one that involves the issuance of a simulated invoice that has the effect of recording—for accounting purposes—work that has been carried out but not actually billed. MR&S claims that MRS-0078 is such an invoice.

(124)    While the evidence presented by the Appellant on this issue was credible, the Commission believes that considerable confusion existed at the time of the business transfer to MR&S. MRS-0078 bears the date of November 30, 1995 and states that it is to relieve all September WIP from the client. While the Appellant suggests that the amount of the of the invoice shows a direct association with invoice MRS-001—issued to the same client—we believe the services carried out under MRS-0078 constitute separate taxable accounting or non-exempt consulting services. In making this finding, the Commission notes that the work periods set forth in the two invoices are different.

(125)    The tax on Invoice MRS-0078 is affirmed.

3.  Other Matters

(126)    Testimony at the hearing reflected very different interpretations of the Regulations as they relate to some of the matters appealed.  Witnesses for the Respondent freely admitted that some parts of the Regulations were open to a reasonable, yet different interpretation than the one advanced and used by the auditors and the Tax Commissioner.

(127)    In preparing this decision and reviewing the Regulations relating to some aspects of the case, the Commission also found that the opportunity exists to reach widely varying interpretations because of the lack of clarity in the wording of the Regulations.

(128)    The Commission believes that the taxpayer, tax collector, auditor and Tax Commissioner would all benefit from greater clarity in the Regulations and a more proactive approach in providing interpretations before tax is collected, rather than at the time of audit.

4.  Disposition

(129)    An order incorporating the above findings will therefore be issued.

Order

UPON  the appeal of MR&S Management Inc. against a decision of the Provincial Tax Commissioner, dated December 21, 2000;

AND UPON hearing the evidence adduced and the submissions of counsel at hearings conducted in Charlottetown on September the 19th and 20th, 2001;

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

IT IS ORDERED THAT

1.    the tax associated with the transfer of assets from Deloitte and Touche to MR&S Management Inc. is reversed;

2.     the tax on services provided to client "A" is reversed;

3.     the tax on all services provided to client "F" is reversed;

4.     the tax on services provided to client "I" under invoices MRS-001, MRS-001A and MRS-002 is reversed; and

5.     the tax on all other services determined in the annexed reasons for order to be taxable is affirmed.

DATED at Charlottetown, Prince Edward Island, this 16th day of January, 2002.

BY THE COMMISSION:

Ginger Breedon, Chair

Maurice Rodgerson, Vice-Chair

James Carragher, 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.