EU VAT Cases and GST "Supply"

GST applies to a taxable supply, and the amount of GST is based on the amount of consideration for the supply (ETA subsection 165(1)). However, Canadian case law on the meaning of "supply" has been sparse, although the FCA in Canada v. Costco Wholesale Canada Ltd. (2012 FCA 160) recently indicated that the term "supply" is broad. Since the GST and the value-added tax (VAT) under the European Union Common Systems Directive (2006/112/EC, November 28, 2006) share common core principles--including the concept of supply--can the jurisprudence on those topics help fill in the gaps?

In the ETA, "supply" is defined to mean the provision of property or service in any manner; "service" means anything other than goods (with other exclusions); and "consideration" includes any amount payable for a supply (including non-monetary consideration). Given the breadth of these definitions, one might be tempted to follow the money--that is, to infer from a transfer of money that there must also be a "supply" for which the transfer is the "consideration." Clearly, however, not all transfers of money involve supplies subject to GST--for example, the return of a deposit. What are the limits to the meaning of "supply"?

A number of European Court of Justice (ECJ) VAT decisions shed light on some potential limits to the meaning of "supply" for GST purposes, at least at a conceptual level (and recognizing that there are statutory differences). For example, the ECJ held in Mohr ([1996] EUECJ C-215/94) and Landboden ([1997] EUECJ C-384/95) that government payments to farmers who undertook to reduce commodity production were not payments for supplies, notwithstanding that "supply of service" is defined in the directive to mean "any transaction which does not constitute a supply of goods" and includes "the obligation to refrain from an act, or to tolerate an act or situation." The ECJ reasoned that the undertakings were not within the scope of the VAT because they did not give rise to any consumption; the farmers did not provide services to an identifiable consumer or any benefit capable of being regarded as a cost component of the activity of another person in the commercial chain. (Compare this reasoning with the CRA's approach in Technical Information Bulletin B-067, "Goods and Services Tax Treatment of Grants and Subsidies," August 24, 1992.)

In Kretztechnik ([2005] EUECJ C-465/03), the ECJ held that the issuance of shares by a company was not a supply to the shareholders. Rather, the activity was properly characterized as the company acquiring capital and acknowledging the new shareholders' rights from their investment (the situation may be different with respect to the transfer of existing shares; see BLP Group plc ([1995] EUECJ C-4/94). Interestingly, the CRA reached the opposite conclusion in GST Policy Statement P-108, "Raising of Capital" (January 26, 1994). One explanation may be that the ETA defines "financial service" to include the "issuance" of a "financial instrument," which in turn is defined to include equity securities (shares). However, if the issuance of shares is not a supply to begin with (on the basis of Kretztechnik), then it is not clear that the definition is relevant (at least in respect of the issuance of shares as opposed to insurance policies, for example).

In any event, these decisions illustrate the importance of carefully considering the nature of the activity in order to ascertain the proper characterization. The ECJ's conclusion that the activities at issue, both of which involved transfers of money, did not constitute supplies was not obvious on the basis of the broad wording of the directive provisions. The ECJ based the limits on the scope of "supply" on the nature of the VAT as a tax on consumption and on the character of the particular activity.

B.S. (Simon) Thang
London, England
b.s.thang@lse.ac.uk

Canadian Tax Focus
Volume 3, Number 2, May 2013
©2013, Canadian Tax Foundation