Reference re Quebec Sales Tax, [1994] 2 S.C.R. 715

IN THE MATTER OF Section 53 of the Supreme Court Act;

AND IN THE MATTER OF the questions referred by the Governor in Council concerning the authority of the Legislature of Quebec or of the Legislature of a Province to enact legislation imposing a tax similar to the goods and services tax imposed by Part IX of the Excise Tax Act, by Order in Council P.C. 1993‑1740 dated the 26th day of August 1993;

and

The Attorney General of Canada and

the Attorney General of Quebec Interveners

and

Wilfrid Lefebvre, Q.C. Amicus curiae

Indexed as: Reference re Quebec Sales Tax

File No.: 23690.

1993: December 9; 1994: June 23.

Present: Lamer C.J. and La Forest, L'Heureux‑Dubé, Gonthier, McLachlin, Iacobucci and Major JJ.

reference by the governor in council

Constitutional law ‑‑ Distribution of legislative powers ‑‑ Taxation ‑‑ Provincial sales tax ‑‑ Proposed amendments to Quebec sales tax designed to transform it into tax similar to federal goods and services tax ‑‑ Whether proposed amendments within legislative authority of province ‑‑ Constitution Act, 1867, s. 92(2).

The Governor General in Council referred to this Court two questions concerning the constitutional validity of proposed amendments to Quebec's sales tax ("QST") designed to transform the QST into a tax similar in all essential respects to the federal goods and services tax ("GST"). Under the proposed amendments, every purchaser of a taxable supply must pay a tax equal to 8 percent of the value of the consideration given for the supply. As with the GST, a purchaser who uses the good or service in the production of other taxable supplies will be entitled to a refund from the government equal to the amount of tax initially paid on its inputs. Zero‑rated supplies will be subject to the tax in the same way as any other taxable supply as they move through the production chain to the ultimate consumer, but the consumer will pay a tax set at 0 percent, and suppliers will be entitled to the input tax refund. In contrast to zero‑rated supplies, the vendor of an exempt supply will not be entitled to the input tax refund. The collection of the tax will be assured by every person engaged in commercial activities who makes a taxable supply. The persons collecting the tax are agents of the Minister of Revenue and are required to be registered with the Minister. Small suppliers ‑‑ those whose annual revenues are less than $30,000 ‑‑ will be exempted from the obligation to register and thus collect the tax.

The questions referred to this Court read as follows:

1. Is it within the legislative authority of the Legislature of Quebec to impose, by way of provisions similar to those in the schedule attached hereto, a tax in respect of the supply of property or a service to a recipient who receives it for the sole purpose of making a new supply of it, or in respect of the supply of a property or a service to a recipient who receives it for the sole purpose of its becoming a component part of another property or service to be supplied by the recipient, particularly in view of the input tax refund provisions? If not, in what particular or particulars and to what extent?

2. Is it within the legislative authority of the Legislature of a Province to impose a tax within the province similar to the goods and services tax imposed pursuant to the Excise Tax Act, R.S.C., 1985, c. E‑15, Part IX, as amended by S.C. 1990, c. 45? If not, in what particular or particulars and to what extent?

Held: Both questions should be answered in the affirmative.

The proposed tax could be validly adopted by the Quebec legislature pursuant to s. 92(2) of the Constitution Act, 1867. The fact that the tax is recouped through a series of indemnifications before the good reaches the final consumer does not make it an indirect tax for constitutional purposes. Imposing the tax at each level in the consumption chain is simply a method of tax collection by instalments. The reimbursement of the tax initially "paid" through the mechanism of the input tax refund means that there is no tax to be passed on. Since the person who ultimately pays the tax is the one intended to bear the burden, the tax is direct. While registrants are likely to pass on to consumers the administrative burdens they bear as tax collectors, these burdens are not taxes. Nor will the proposed tax result in taxation of persons outside the province by indirect means. Since a supply shipped outside Quebec is identified as a zero‑rated supply, no tax is collected from the recipient and the registrant making the supply is eligible for an input tax refund corresponding to the tax initially paid. The fact that someone might not bother claiming the exemption and would thereby pass on the tax to consumers in other provinces would not alter the general tendency of the tax.

The exemption in the draft legislation for zero‑rated supplies does not give rise to an indirect tax since it is simply an application of the general regime with a tax rate of zero. The ultimate consumer of zero‑rated supplies pays no tax, while the person supplying the good or service is entitled to the input tax refund for any tax paid prior to making the zero‑rated supply. Exempt supplies are similar in that the person receiving such supplies does not pay any tax, but the suppliers of exempt supplies are generally not entitled to the input tax refund, raising the possibility that they might seek to recover the amount paid from the ultimate consumer. Since nearly all the exempt supplies enumerated are services, however, virtually all of their inputs must be "transformed" before they are resold. It will therefore be impossible for the tax to be passed on with the good or service. While there will clearly be exceptions to this general characterization of services as necessarily involving transformation or consumption, the general tendency of this exemption is to create a direct tax consistent with the constitutional imperatives recognized in earlier decisions.

The exemption of small suppliers from the obligation to register with the Minister of Revenue and collect the tax on the Minister's behalf would, standing alone, unquestionably have the effect of creating indirect taxation. Small suppliers are required to pay the tax on the goods they purchase and unless they choose to register and incur the accompanying administrative costs, they will not be eligible for the input tax refund and will inevitably seek to recoup any money they pay from the consumers of their products. This fact does not, however, alter the general tendency of the tax. The exemption recognizes non‑compliance with the tax scheme by certain small suppliers who face prohibitive costs of administration. The statistics relating to the importance of small suppliers in the total value of taxable supplies demonstrate that their position is exceptional in the overall scheme. The exemption is thus simply an incidental element of the efficient administration of the proposed tax.

Cases Cited

Referred to: Reference Re Goods and Services Tax, [1992] 2 S.C.R. 445; Bank of Toronto v. Lambe (1887), 12 App. Cas. 575; Allard Contractors Ltd. v. Coquitlam (District), [1993] 4 S.C.R. 371; Brewers and Maltsters' Association v. Attorney‑General for Ontario, [1897] A.C. 231; Atlantic Smoke Shops, Ltd. v. Conlon, [1943] A.C. 550; Attorney‑General for Quebec v. Reed (1884), 10 App. Cas. 141; Canadian Pacific Railway Co. v. Attorney General for Saskatchewan, [1952] 2 S.C.R. 231; Cairns Construction Ltd. v. Government of Saskatchewan, [1960] S.C.R. 619; Attorney‑General for British Columbia v. Kingcome Navigation Co., [1934] A.C. 45.

Statutes and Regulations Cited

Act respecting the Québec sales tax and amending various fiscal legislation, S.Q. 1991, c. 67, ss. 93 to 172.

Constitution Act, 1867, ss. 91, 92(2).

Education and Hospitalization Tax Act, R.S.S. 1953, c. 61, s. 5(3).

Excise Tax Act, R.S.C., 1985, c. E‑15 [am. 1990, c. 45], Part IX, Schedule V, Parts I to VI.

School Cafeteria Food and Beverages (GST) Regulations, SOR/91‑29.

Supreme Court Act, R.S.C., 1985, c. S‑26, s. 53.

Authors Cited

Canada. Department of Finance. Budget 89: The Goods and Services Tax. Ottawa: Department of Finance, April 27, 1989.

Canada. Department of Finance. Goods and Services Tax: An Overview. Ottawa: Department of Finance, August 1989.

Canada. Department of Finance. Goods and Services Tax: A Summary. Ottawa: Department of Finance, 1990.

Canada. Department of Finance. The White Paper: Tax Reform 1987. Ottawa: Department of Finance, 1987.

La Forest, G. V. The Allocation of Taxing Power Under the Canadian Constitution, 2nd ed. Canadian Tax Paper No. 65. Toronto: Canadian Tax Foundation, 1981.

Mill, John Stuart. Principles of Political Economy, with Some of Their Applications to Social Philosophy, vol. II. Boston: Little & Brown, 1848.

Whalley, John, and Deborah Fretz. The Economics of the Goods and Services Tax. Canadian Tax Paper No. 88. Toronto: Canadian Tax Foundation, 1990.

REFERENCE by the Governor General in Council, pursuant to s. 53 of the Supreme Court Act, concerning the constitutional validity of proposed amendments to Quebec's sales tax. Both questions answered in the affirmative.

Jean‑Marc Aubry, Q.C., James M. Mabbutt, Q.C., and Marie‑Claude P. Larin, for the intervener the Attorney General of Canada.

Jean‑François Jobin and Monique Rousseau, for the intervener the Attorney General of Quebec.

Wilfrid Lefebvre, Q.C., and Patrice Marceau, for the amicus curiae.

The judgment of the Court was delivered by

Gonthier J. --

I - Introduction

In this reference, we are asked to consider the constitutional validity of proposed amendments to the Province of Quebec's sales tax ("QST"). These amendments are designed to transform the QST into a tax similar in all essential respects to the federal goods and services tax ("GST"). Pursuant to an agreement between the Province of Quebec and the Government of Canada on August 30, 1990, the tax bases of the federal and provincial consumption taxes were substantially harmonized and the Province of Quebec accepted responsibility for administering the GST in Quebec. The proposed amendments which form the subject of this reference would represent the final steps in harmonizing the QST and GST. The GST was the subject of an earlier reference to this Court and was held to be intra vires Parliament (Reference Re Goods and Services Tax, [1992] 2 S.C.R. 445 ("GST Reference")). The validity of the federal tax, however, is in no way determinative of the issues raised in this reference. Although the desire to harmonize federal and provincial consumption taxes is administratively and politically attractive, it remains to be determined whether the proposal is compatible with the Constitution.

II - The Facts

The principal difference between the existing QST and the GST derives from the concept of "non-taxable supplies" present in the provincial regime. This concept ensures that the QST is a retail sales tax, that is, one which is collected at the retail level. The GST, in contrast, is a value-added tax which is collected and reimbursed at every stage along the production and marketing chain with the final consumer ultimately being the one to pay the tax. The net result of the two taxes is identical: the ultimate consumer pays the tax; however, the mechanism for achieving this end differs. Pursuant to s. 53 of the Supreme Court Act, R.S.C., 1985, c. S‑26, the Governor General in Council seeks to determine whether the mechanism through which the GST is collected as well as certain other aspects of the GST would be intra vires the provincial legislatures. A draft set of provisions which would transform the QST into a tax similar to the GST was annexed to the Order-in-Council containing the questions referred to this Court by the Governor General in Council. These provisions (the "draft Act") are found in the annex to this judgment.

As was noted by this Court in the GST Reference, the GST contemplates three classes of goods and services: taxable supplies, exempt supplies and zero-rated supplies. In addition to the three classes, there is also a special exemption for small business: the small supplier exemption. It is this structure which has been reproduced in the draft provisions and which was the focus of oral argument before the Court. A brief review of these elements will set the factual background for the constitutional questions submitted by the Governor General in Council.

The general operation of the proposed tax is clear from an examination of the concept of taxable supply. A taxable supply is defined in s. 1 of the draft Act as the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, lease, gift or alienation in the course of a commercial activity. Every purchaser of a taxable supply must pay a tax equal to 8 percent of the value of the consideration given for the supply (in certain cases reduced to 4 or 0 percent (zero-rated supplies); draft Act, s. 2). As with the GST, the purchaser of a taxable supply who uses that good or service in the production of other taxable supplies will be entitled to a refund from the government equal to the amount of tax initially paid on its inputs (the input tax refund or the input tax credit under the GST; draft Act, s. 13). To the extent that taxable supplies are not used by the purchaser to produce other taxable supplies, by definition they will be consumed by the purchaser for non-commercial purposes. In such a case, the purchaser will not be eligible for an input tax refund. The tax will thus be collected and refunded at each stage of the production and marketing process until the ultimate consumer is reached. The input tax refund mechanism, in the case of taxable supplies, thus ensures that the tax is paid by the ultimate consumer.

Zero-rated and exempt supplies, in contrast, will not attract any tax from the ultimate consumer. Zero-rated supplies will be subject to the tax in the same way as any other taxable supply as they move through the production chain to the ultimate consumer. The consumer, however, will pay a tax set at "0 percent", and suppliers will be entitled to the input tax refund. The result is that no net revenue will be raised for the government at any stage in the production and marketing chain. In contrast to zero-rated supplies, the vendor of an exempt supply will not be entitled to the input tax refund. In the case of exempt supplies, therefore, the tax will be paid to the government at the penultimate stage in the supply chain rather than by the ultimate consumer.

The collection of the tax will be assured by every person engaged in commercial activities who makes a taxable supply. The persons collecting the tax are agents of the Minister of Revenue and are required to be registered with the Minister (draft Act, ss. 25 and 28). Registration must occur before a taxable supply is made and is a condition precedent of eligibility for the input tax refund. Registrants are required to file returns in which they calculate their net tax for a reporting period (draft Act, s. 30). The net tax is essentially the difference between the amount of tax collected and the input tax refund for which the person is eligible in a given reporting period (draft Act, s. 29). On the basis of these calculations, the registrant will either be entitled to a refund from the government or be obliged to pay over the excess tax collected. Registrants will face significant administrative costs in complying with the proposed scheme. As is the case with the GST, certain persons, however, will be exempted from the obligation to register and thus collect the tax. Anyone whose annual revenues are less than $30,000 will have the option of registering (draft Act, ss. 18, 19 and 25). These persons are identified as small suppliers.

In order to test the constitutionality of the proposal to harmonize the QST and GST, the Governor General in Council, by Order-in-Council dated August 26, 1993, referred the following two questions to this Court:

1. Is it within the legislative authority of the Legislature of Quebec to impose, by way of provisions similar to those in the schedule attached hereto, a tax in respect of the supply of property or a service to a recipient who receives it for the sole purpose of making a new supply of it, or in respect of the supply of a property or a service to a recipient who receives it for the sole purpose of its becoming a component part of another property or service to be supplied by the recipient, particularly in view of the input tax refund provisions? If not, in what particular or particulars and to what extent?

2. Is it within the legislative authority of the Legislature of a Province to impose a tax within the province similar to the goods and services tax imposed pursuant to the Excise Tax Act, R.S.C., 1985, c. E-15, Part IX, as amended by S.C. 1990, c. 45? If not, in what particular or particulars and to what extent?

These same two questions were stated by Chief Justice Lamer as constitutional questions on September 7, 1993.

III - Analysis

The first constitutional question deals with the basic operation of the proposed tax and the elimination of the concept of non-taxable supplies from the current QST. The second and more general constitutional question requires that I address not only the basic operation of the tax, but the various exemptions which form part of the existing federal regime and which were highlighted above. The central issue in this reference is whether the proposed tax, in its general operation as well as its specific details, is a tax within the provincial taxing power contained in s. 92(2) of the Constitution Act, 1867. Section 92(2) stipulates:

92. In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subjects next herein-after enumerated; that is to say, --

93. Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.

The amicus curiae and the Attorneys General of Quebec and Canada have agreed that the tax will be collected within the province only and that it will be used to generate revenue for provincial purposes. My analysis of the proposed tax will therefore focus on determining if it is direct.

I begin with an examination of the legal principles applicable to determining whether a tax is direct within the meaning of s. 92(2). I then analyze the proposed QST in light of these principles beginning with the general scheme. Finally, I consider the constitutional validity of the three categories of exemptions: "zero-rated supplies", "exempt supplies" and the "small supplier exemption".

1. The Applicable Principles of Law

It is well established that whether a given tax is direct or indirect in terms of the Constitution Act, 1867 is a question of law and not of economic incidence. The test predominately relied on in the jurisprudence to distinguish between the two types of taxes is the formulation employed by John Stuart Mill in his 1848 treatise, Principles of Political Economy, Book V, c. III, at p. 371:

A direct tax is one which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another; such as the excise or customs.

Though this formulation is no longer used by economists, it has served and continues to serve the legal purpose of providing a relatively clear bench mark for applying the division of taxation powers contained in ss. 91 and 92 of the Constitution Act, 1867. Definitively adopted for that purpose in Bank of Toronto v. Lambe (1887), 12 App. Cas. 575 (P.C.), the distinction has subsequently been applied in a number of cases including Allard Contractors Ltd. v. Coquitlam (District), [1993] 4 S.C.R. 371.

The application of Mill's distinction during the last century allows us to predict the constitutional fate of some taxes with a measure of confidence. In analyzing a given tax, it should be remembered that the courts examine the general tendency of the tax, rejecting exceptional factual circumstances as legally irrelevant (Lambe, supra; Brewers and Maltsters' Association of Ontario v. Attorney-General for Ontario, [1897] A.C. 231). Customs duties and excise taxes, as Mill noted, are indirect taxes. The tax in these two cases is paid by the importer or manufacturer with, it has been said, "the expectation and intention" that it will generally be passed on to the purchaser as an element of the price. There is no intention in either case to place the burden of the tax on the manufacturer or importer, who simply act as conduits through which to pass on the burden to others. The tax is therefore not paid by the person who is intended to bear the burden. Property, income and consumption taxes, in contrast, have been historically held to be direct taxes since their general tendency is that the person intended to bear the burden of the tax is the one who pays it. The intention apparent in the case of customs duties and excise taxes that the tax be passed on with the good is absent from property, income and consumption taxes.

The case law interpreting s. 92(2) contains various indicia or propositions which serve to guide the courts. Five of these are of particular relevance in determining the constitutionality of the proposed provincial value-added tax.

As noted above, one indicium is whether the intention of the legislator as to who should bear the tax is clear. In the case of direct taxes, Viscount Simon recognized that "the taxing authority is not indifferent as to which of the parties to the transaction ultimately bears the burden, but intends it as a `peculiar contribution' on the particular party selected to pay the tax" (Atlantic Smoke Shops, Ltd. v. Conlon, [1943] A.C. 550, at p. 564). A related indicium of direct taxation is whether everyone knows how much tax they really pay (Mill, Book V, c. VI, cited with approval by Viscount Simon in Atlantic Smoke Shops; see also Attorney-General for Quebec v. Reed (1884), 10 App. Cas. 141 (P.C.)). At Confederation, the decision to limit the provincial legislatures to direct taxation was aimed at transparency and thought to enhance political accountability. Though the criterion of accountability may not be the central focus of the more recent jurisprudence pertaining to s. 92(2), transparency still serves to identify a tax as direct.

A third indicium, one of indirectness, was recognized by Rand J. in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan, [1952] 2 S.C.R. 231. He pointed to the attachment of a tax to a good as a strong indication that the tax is indirect (at pp. 251-52):

If the tax is related or relateable, directly or indirectly, to a unit of the commodity or its price, imposed when the commodity is in course of being manufactured or marketed, then the tax tends to cling as a burden to the unit or the transaction presented to the market.

Thus, where the tax "clings" to the product in the sense that its amount attaches to the good and moves together with the good through the chain of supply, an element of indirectness may be present. The validity of Rand J.'s indicator is demonstrated most vividly by customs duties and excise taxes. This test was recently applied in Allard Contractors, supra, at pp. 394-98, to identify a volumetric fee on soil removal as an indirect tax.

At first glance, provincial consumption taxes would appear to be taxes which attach to a good; however, the case law has unequivocally and correctly recognized such taxes as direct (see Atlantic Smoke Shops, supra, and Cairns Construction Ltd. v. Government of Saskatchewan, [1960] S.C.R. 619). In particular, a number of cases have held that consumption taxes will be direct even though they may be passed on when the good or service initially taxed is incorporated or transformed into a new good or service (see Attorney-General for British Columbia v. Kingcome Navigation Co., [1934] A.C. 45; Cairns, supra). Thus where a tax is imposed on the consumption of fuel oil, the fact that the oil may be used in the manufacture of another good and thereby passed on as part of the cost of that good does not render the tax unconstitutional. The good is consumed and the tax therefore cannot be passed on with the good as is the case with an import duty.

The final proposition of relevance in determining the constitutional validity of the proposed value-added tax is that the nature of a tax is not affected by the system of collection (see Kingcome, supra; Atlantic Smoke Shops, supra, and Cairns, supra). The fact that a retailer collects the tax from a consumer on behalf of the government and then physically pays the money over to the government does not alter the characterization of such a tax as direct. The person intended to bear the burden of the tax, the consumer, is still the one who in reality pays it even though the retailer as agent for the government collects it. It is true that the retailer bears a burden in relation to the collection of the tax; however, this burden is part of the general cost of doing business and cannot be related to or passed on in a recognizable form with any particular good.

In approaching new taxes, the constitutional fate of which is unknown, it is not without interest to refer to an important effect of the s. 92(2) limitation to direct taxation. In addition to the historical desire to promote transparency and accountability, one finds a concern in the case law and literature regarding taxation of persons outside the province by indirect means or taxation which interferes with interprovincial or international trade. The prohibition against excise taxes and customs duties clearly achieves this latter purpose. As my colleague La Forest J. noted in his study of the taxation power under the Canadian Constitution, "the person who ultimately pays an excise tax may have no other connection with the province benefiting from the tax than that the product was originally produced or manufactured there" (G. V. La Forest, The Allocation of Taxing Power Under the Canadian Constitution (2nd ed. 1981), at p. 202).

My review of the jurisprudence interpreting s. 92(2) has revealed that apart from excise taxes, import duties, or taxes of a similar nature and the two more general limitations highlighted in the preceding paragraph, the provinces have come to enjoy considerable freedom in constructing their tax systems. Having examined the basic principles informing the interpretation and application of s. 92(2), I now turn to a detailed examination of the tax proposed in the draft Act.

2. The General Scheme of the Proposed Tax

A perusal of the economics literature reveals that value-added taxes are often seen as refined versions of consumption taxes (see, for example, Whalley and Fretz, The Economics of the Goods and Services Tax (1990)). Collection earlier in the production and marketing chain is thought to increase compliance by collecting the bulk of tax revenues from larger organizations believed to have more dependable accounting systems. Furthermore, until someone resells a good they have purchased, they can be assumed to be the consumer and therefore liable to pay the tax. To avoid the ultimate burden of paying the tax, they must prove that the good or service was used in the provision of another taxable supply. This "onus" is easily discharged by collecting the tax on behalf of the government when taxable supplies are made to other persons and by filing returns which detail the amount of tax collected and the amount "paid" in respect of inputs. Enforcement is thereby enhanced by the documentary record created.

As was noted above, consumption taxes have historically been held to be direct taxes. In Cairns, supra, this Court held that a tax on consumers of tangible personal property purchased at the retail level was direct. A similar conclusion was reached in Atlantic Smoke Shops, supra, where the tax was on tobacco purchased for consumption from a retail vendor. To the extent that the proposed value-added tax is in fact a consumption tax on the ultimate consumer, these cases provide some support for its validity. The real question in determining if the tax is direct, however, is not whether it is a consumption tax, but whether the person intended to bear the burden of the tax is the person paying the tax.

The unique feature of a value-added tax, its collection along the production and marketing chain, may be the chief attraction for governments. However, the collection mechanism, which provides for the tax as the good moves through the consumption chain, may at first sight appear to raise the spectre of an indirect tax.

It was maintained before us that value-added taxes are similar to excise taxes or customs duties in that the tax is in some sense passed on with the good and indemnification occurs when the good is sold. It will be remembered that Rand J. in Canadian Pacific Railway Co. v. Attorney General for Saskatchewan, supra, identified the fact that the tax tended to cling to a good as an indication of indirectness. The fact that the tax is recouped through a series of indemnifications before the good reaches the final consumer does not, however, make the value-added tax an indirect tax for constitutional purposes. Close examination of the proposed tax reveals that the person who ultimately pays the tax is the one intended to bear the burden, and, therefore, the tax is direct.

As noted above, the proposed tax will be paid and then reimbursed at each stage until final consumption. Imposing the tax at each level in the consumption chain is simply a method of tax collection by instalments. The persons who collect the tax along the chain and who are reimbursed are really tax collectors. The draft Act, it will be remembered, explicitly identifies these persons as agents of the Minister of Revenue in their capacity as tax collectors (draft Act, s. 28). Rather than putting forward a new and different type of tax, the essence of the proposed amendments is simply to substitute a new mechanism of collection.

The availability of the input tax refunds is the key to understanding what is truly going on prior to the stage of ultimate consumption. Eligibility for an input tax refund relieves the consumer turned supplier from the burden of the tax which is then charged to the person who purchases the good. The reimbursement of the tax initially "paid" through the mechanism of the input tax refund means that there is no tax to be passed on. The input tax refund thus guarantees that the person who ultimately pays the tax is the one who was intended should bear the burden and that therefore the proposed tax is a form of direct taxation. Though the input tax refund mechanism operates behind the scenes to produce this result and though the GST, for example, can be included in the price and appear only on the final invoice, consumers are fully aware, often to their dismay, that they are paying the tax. Indeed the federal government made it very clear in the background papers to the GST, that in replacing the hidden federal sales tax it was "committed to ensuring that Canadians [be] informed in a clear and visible manner that the GST is being applied" (Goods and Services Tax: An Overview, Department of Finance, August 1989, at p. 20; see also Budget 89: The Goods and Services Tax, Department of Finance, April 27, 1989, at pp. 19 and 25). As noted above, such transparency is one of the hallmarks of direct taxation.

The amicus curiae, however, attacked the proposed tax by focusing on the input tax refund. The amicus curiae argued that the person who initially "pays" the tax is not the person whom the legislature has chosen to bear the burden. These persons, it was argued, pass the tax and the burden back to the government by the mechanism of the input tax refund. I cannot accept this argument. The registrants are not in any constitutionally significant sense the persons paying the tax when they resell the good or another good or service which the taxed good was used to produce. The input tax refund in such a case operates to ensure that any tax initially paid is fully reimbursed. Registrants therefore do not pay the tax or bear the burden, as stated above, they merely function as tax collectors transferring the revenues to the government as was the case in Cairns, supra, and Kingcome, supra.

This view of the tax is supported by the presence of provisions in earlier versions of retail sales taxes which required a vendor to collect the tax even though the person alleged the good was being purchased for the purpose of resale. Section 5(3) of The Education and Hospitalization Tax Act, R.S.S. 1953, c. 61, the Act considered in Cairns, required persons in such a situation to deposit with the vendor an amount equal to the tax otherwise payable under the Act. The "deposit" was then refunded on receipt of evidence satisfactory to the Minister that the property was purchased for the purpose of resale. In other words, the "deposit" was refunded only when the Minister received sufficient evidence that the tax would be paid further down the chain. Under the draft Act and the GST, eligibility for a refund results from simply filing a return; however, as with s. 5(3) in the Saskatchewan Act, compliance with the statutory regime is thereby enhanced.

It is true that as tax collectors registrants bear hidden burdens in relation to the role assigned them under the scheme. These burdens consist of the administrative cost of keeping records and filing returns as well as the cost of transferring funds to the government prior to reimbursement. In the GST Reference, these costs were identified as administrative burdens and it was held that the obligation on a province to collect and remit the GST was not taxation of a province's property (supra, at pp. 483 and 481). It is likely that these burdens will be passed on to consumers; however, this fact does not alter the general tendency of the tax for the purposes of s. 92(2). These burdens are not taxes. These costs will not attach to any particular good, but rather will be part of the general cost of doing business. As a general cost of doing business, the burdens would often be transferred in one form or another, but they are not related to any particular good. It is not "the tax" that is passed on. The requirement that the tax be direct is satisfied. It is paid by the very person intended to bear its burden.

As to the concern that a value‑added tax might result in taxation of persons outside the province by indirect means, it must be recognized that the collection of the bulk of tax revenues prior to the retail level creates the possibility that a good shipped to another province will carry with it the provincial tax as part of its price. This situation does not arise with the existing sales taxes because they are imposed exclusively at the retail level and not at the wholesale or manufacturing level. Absent provision for a refund in cases where the good is shipped outside the province, the manufacturer or wholesaler would clearly attempt to recoup the tax paid on the particular good from the consumers in the destination province.

The drafters of the proposed Act, however, have avoided this problem. Section 12 identifies "a supply shipped outside Québec" as a zero-rated supply. As a zero-rated supply, no tax is collected from the recipient and the registrant making the supply is eligible for an input tax refund corresponding to the tax initially paid. The refund thus ensures that the proposed tax has no extra-territorial effects. The fact that someone might not bother claiming the exemption and would thereby pass on the tax to consumers in other provinces would not alter the general tendency of the tax.

The preceding review of the general scheme of the proposed tax and my conclusion that the tax, through the mechanism of the input tax refund, operates as a direct tax leads to an affirmative answer in respect of the first constitutional question.

3. The Various Exemptions

Having found the general operation of the proposed tax to be constitutional, it is necessary to consider the three categories of exceptions contained in the draft Act. As noted by the amicus curiae, the fact that the general tendency of the basic tax is direct cannot justify the creation of an exemption which would in effect be an indirect tax. The general tendency doctrine justifies ignoring, for constitutional purposes, particular factual exceptions; it does not allow the provincial legislatures to create indirect taxes by calling them exceptions to a tax the general tendency of which is direct.

(a) The Zero-Rated Supplies

Section 12 of the draft Act identifies the supply of a number of goods and services as zero-rated supplies. This exemption poses no concerns from the point of view of s. 92(2). As noted above in respect of a supply outside Quebec, this exemption is simply an application of the general regime with a tax rate of zero. The ultimate consumer of zero-rated supplies therefore pays no tax. The person supplying the good or service, on the other hand, is entitled to the input tax refund for any tax paid prior to making the zero-rated supply. The net result is that no tax revenues are generated in the case of zero-rated supplies. My finding that the mechanism of the general regime is valid can thus be extended to this category of exceptions.

(b) The Exempt Supplies

The category of exempt supplies, created by s. 11 of the draft Act, is similar to the zero-rated supplies in that the person receiving such supplies does not pay any tax. The difference between exempt supplies and zero-rated supplies, as noted above, however, is that the suppliers of exempt supplies are generally not entitled to the input tax refund. Provision has been made for a partial rebate for certain identified organizations (see draft Act, ss. 20 to 23). In the case of exempt supplies, therefore, the tax is paid at the penultimate stage in the consumption chain by the supplier. This scenario raises the possibility that the proposed tax will operate as an excise tax with the supplier seeking to recover the amount paid from the ultimate consumer. In such a case, the tax would be indirect and would be ultra vires the provinces.

The Attorney General of Canada and the Attorney General of Quebec argued that the category of exempt supplies does not create an indirect tax in practice. The essence of their argument was that because of the nature of the exempt supplies the vast majority of taxed inputs will be consumed or transformed in the production of the exempt supplies and, therefore, it will be impossible for the tax to be passed on with the good or service. The consumption or transformation of the inputs means that any tax paid becomes part of the general cost of producing the good or service rather than being passed on to the consumer with the particular good. This argument is supported by the decisions of the Privy Council and this Court which recognized that a tax will be direct even though the good which is subject to the tax is incorporated or transformed into a new good or service (see Kingcome, supra; Cairns, supra).

The amicus curiae conceded that the exemption is valid as far as taxed inputs are in fact consumed in the production of exempt supplies, but argued that the exemption is invalid to the extent it allows goods to be supplied without transformation or consumption. Although the amicus curiae did not convincingly point to specific examples to justify his position, it is necessary to test the validity of the argument advanced by the Attorneys General by examining the specific supplies covered by s. 11.

The supply of a residential complex, health care service, educational service, child and personal care service, legal aid service, and a supply made by a public sector body are the exempt supplies enumerated in s. 11. The full content of these various supplies is ascertained by examining the corresponding provisions of the GST (Schedule V, Parts I to VI of the Excise Tax Act, R.S.C., 1985, c. E-15, as amended by S.C. 1990, c. 45) and the supplies described in ss. 93 to 172 of the Act respecting the Québec sales tax and amending various fiscal legislation (S.Q. 1991, c. 67, "QST amending Act").

For the purposes of this reference, it is not necessary to undertake a detailed examination of each of these provisions. Since nearly all the categories enumerated in s. 11 of the draft Act are services, the section itself suggests that virtually all of the inputs of the exempt supplies must be "transformed" before they are resold. None of these categories are analogous to retail sales where the retailer merely takes an existing good and resells it. For example, paper, pens, computers and charts are all transformed by the educator in order to produce an educational service such as a course. Similarly, child care and legal aid workers do not buy child care and legal aid services and then resell them. In each case, they take various inputs and transform them into a product which is entirely different from the inputs.

There will clearly be exceptions to this general characterization of services as necessarily involving transformation or consumption. One might argue, for example, that the toilet used in the construction of an apartment is not "transformed" in the creation of a residential complex. However, in Cairns it was held that a tax on such inputs is valid because there is a transformation in putting the components together to make a house. A similar analysis applies to the other categories of services enumerated in s. 11. Taking medical services as an example, the more detailed provisions of the federal and Quebec legislation exempt the supply of drugs and medical or surgical equipment when they are administered in conjunction with the supply of laboratory, radiological or other diagnostic services in a "health care establishment" (see QST amending Act, ss. 108 to 110; Excise Tax Act, Schedule V, Part II, ss. 1 to 3). I therefore agree with the Attorneys General that the general tendency of this exemption is to create a direct tax consistent with the constitutional imperatives recognized in earlier decisions.

In addition to the above reasons, my conclusion is based on the fact that the specific provisions related to exempt supplies contained in both the federal and Quebec legislation cited above are extremely detailed and therefore narrowly limit the scope of the exemption. It is conceivable, however, that there will be instances where the wording of the statute could authorize simple resale and therefore the classic passing on of the tax characteristic of indirect taxes. While recognizing the theoretical potential of this possibility, my examination of both the federal and Quebec legislation revealed that the legislators have taken some care to limit such results. In the case of educational services, for example, while cafeteria meals are exempted, the supply of carbonated beverages and pre-packaged goods for sale to consumers are not, nor are supplies from vending machines (see QST amending Act, s. 131; Excise Tax Act, Schedule V, Part III, s. 12; and School Cafeteria Food and Beverages (GST) Regulations, SOR/91-29, December 18, 1990). Similarly, the provisions applicable to public sector bodies exhaustively list the municipal and provincial government services which are exempt (see QST amending Act, ss. 161 to 168; Excise Tax Act, Schedule V, Part VI, ss. 19 to 22). In the case of charities, which are included in the definition of public sector bodies, supplies of corporeal property acquired for the purposes of resale are, as a general rule, subject to the tax (see QST amending Act, s. 141(5); Excise Tax Act, Schedule V, Part VI, s. 2(e)). Three exceptions to this general rule exist for cases where a supply of corporeal moveable property is made in the context of fund-raising campaigns, in the course of a business activity carried on exclusively by volunteers or where the supply is made at cost (for the volunteer and direct cost exemptions respectively, see QST amending Act, ss. 142 and 148; and Excise Tax Act, Schedule V, Part VI, ss. 3 and 6). The fund-raising exemption is limited by a number of conditions which include that the body does not carry on the business of selling such property, that all sales persons are volunteers and that the consideration for each item sold does not exceed $5 (see QST amending Act, s. 144; Excise Tax Act, Schedule V, Part VI, s. 4). The overwhelming impression one gets from these provisions is that the exceptions are limited in scope and, as such, particular cases of any recoupment of the tax would not affect the general tendency of the tax.

(c) The Small Supplier Exemption

The final element of the proposed tax challenged before us was the small supplier exemption. As noted above, every person engaged in a commercial activity would be obligated under the draft Act to register with the Minister of Revenue and collect the tax on the Minister's behalf. This mandatory registration imposes unavoidable administrative costs, the relative significance of which will vary with the size of the business involved. As I concluded above, though these costs will form part of the costs of doing business and will in all likelihood be passed on to the purchasers of taxable supplies, they do not make the tax indirect. The provisions pertaining to small suppliers which exempt certain businesses from these costs would, standing alone, unquestionably have the effect of creating indirect taxation. Small suppliers are required to pay the tax on the goods they purchase and unless they choose to register and incur the accompanying administrative costs, they will not be eligible for the input tax refund. There can be no doubt, however, that unregistered small suppliers will inevitably seek to recoup any money they pay from the consumers of their products. As will be seen though, this reality does not lead to the conclusion that the exemption is ultra vires the provincial legislature.

It would seem that a likely cause of non-compliance with the tax scheme by small suppliers, assuming rational economic behaviour, would be that the costs of administration are prohibitive as a result of resource constraints and the competitive circumstances of the market. The proposed regime and the GST could be seen as explicitly acknowledging this possibility by creating an exception for the smallest suppliers. The amicus curiae, however, questioned the legitimacy of this exception because it was recognized explicitly by the legislator. With respect, I am unable to agree with the position taken by the amicus curiae. The choice of the legislator to recognize and legalize particular factual realities by providing an option to small suppliers not to participate in the collection system cannot alter the general tendency of the tax.

The statistics relating to the importance of small suppliers in the total value of taxable supplies demonstrate that the position of small suppliers is exceptional in the overall scheme. Though there are an estimated 400,000 small suppliers in Quebec, they account for a very small portion of total economic activity. The statistics provided to us indicate that small suppliers were responsible for approximately 0.61 percent of the taxable supplies made by Canadian firms and individuals and a slightly higher percentage when Quebec is viewed in isolation. It should be recognized that these figures include small suppliers who transform their taxed inputs. In those cases, the tax is direct under the principles recognized in Cairns, supra, and other cases. Furthermore, the Attorney General of Quebec noted that a large number of small suppliers choose to register in any event as they are entitled to do (or are obliged to because their customers insist). Finally, the exceptional nature of the circumstances contemplated by the exemption as reflected in these statistics and facts seems particularly persuasive when one considers that the persons envisaged by this exemption under the GST are typically students who run their own summer business, small non-profit and charitable groups selling goods or services to raise funds and people who work part-time such as retired accountants or persons selling goods from their home (Goods and Services Tax: A Summary, October 1990, Department of Finance, at p. 58).

To hold that the exemption is ultra vires the provincial legislatures would be an absurd result given that the exemption, as it was conceived in the case of the GST, was originally created because of the significantly higher compliance costs for small firms relative to large firms (see, for example, The White Paper: Tax Reform 1987, Department of Finance, June 18, 1987, at p. 23). The exemption in the proposed legislation is therefore an express policy decision based on, we can presume, the unjustifiable nature of imposing these administrative costs on firms below a certain level of revenues. The Attorney General of Quebec suggested that incurring these costs would be untenable both for the Minister of Revenue, presumably in terms of revenues generated, as well as for the small suppliers given the particular competitive circumstances and resource constraints they face.

The small supplier exemption is thus simply an incidental element of the efficient administration of the proposed consumption tax. It is, however, a crucial element of the efficient collection of the tax. The acceptance by this Court and the Privy Council that provincial consumption taxes could be collected by suppliers necessarily laid the foundation for the particular case raised by this exemption as well as its validity. Implicit in the decision to accept that suppliers could collect consumption taxes without transforming the tax into an indirect tax through the imposition of the associated costs was the recognition that the administration of such taxes will necessarily cause certain costs to be attached to the scheme which will not affect the scheme's constitutional validity. No doubt the small supplier (exempted from these costs) would attempt to collect the tax from the consumer, but that in my mind is precisely the person who the legislature intended would pay it. That is what the Act as a whole is aimed at. Small suppliers, like all other suppliers, may register for reimbursement, but they may if they find it convenient choose not to do so. They are simply exempted in this way, then, for administrative convenience and not to change the general incidence of the tax. By the effect of the general scheme, of which their operations form a minimal part, they are effectively agents of the government for collection of the tax like other suppliers. What we have here is a mere administrative device to complete the contours of the scheme by avoiding expensive collection machinery in this residuary part of the scheme as well as inconvenience to these small suppliers. Because of the minimal role small suppliers play in the total scheme envisaged by the tax, they would be effectively in the same position as all other retailers who fall within the scheme.

IV - Conclusion

Careful scrutiny of the proposal to transform the QST into a value‑added tax similar in all essential respects to the GST reveals that the proposed tax could be validly adopted by the Legislature of Quebec pursuant to s. 92(2) of the Constitution Act, 1867. Both the general regime of the tax, through the mechanism of the input tax refund, and the various exemptions create a tax the general tendency of which is direct. The constitutional questions are therefore answered as follows:

1. Is it within the legislative authority of the Legislature of Quebec to impose, by way of provisions similar to those in the schedule attached hereto, a tax in respect of the supply of property or a service to a recipient who receives it for the sole purpose of making a new supply of it, or in respect of the supply of a property or a service to a recipient who receives it for the sole purpose of its becoming a component part of another property or service to be supplied by the recipient, particularly in view of the input tax refund provisions? If not, in what particular or particulars and to what extent?

Answer: Yes.

2. Is it within the legislative authority of the Legislature of a Province to impose a tax within the province similar to the goods and services tax imposed pursuant to the Excise Tax Act, R.S.C., 1985, c. E-15, Part IX, as amended by S.C. 1990, c. 45? If not, in what particular or particulars and to what extent?

Answer: Yes.

SCHEDULE

DRAFT HARMONIZATION

QUÉBEC SALES TAX -- GOODS AND SERVICES TAX

Definitions

1. For the purposes of this document, unless the context indicates otherwise,

"commercial activity" means

(1) any business carried on by a person,

(2) any adventure or concern of a person in the nature of trade, and

(3) any activity engaged in by a person that involves the supply of an immovable or of a right or interest in respect of an immovable by that person;

however, "commercial activity" does not include

(4) an activity engaged in by a person to the extent that it involves the making of an exempt supply by the person,

(5) an activity engaged in by an individual without a reasonable expectation of profit, or

(6) the performance of any activity or duty in relation to an office or employment;

"person" means a corporation, trust, individual, partnership or succession or a body that is an association, club, commission, union or other organization of any kind;

"prescribed" means prescribed by regulation or determined in accordance with rules prescribed by regulation;

"recipient", in respect of a supply, means the person who pays or agrees to pay consideration for the supply or, if no consideration is or is to be paid for the supply, the person to whom the supply is made;

"registrant" means a person who is registered, or who is required to apply to be registered, under this document;

"service" means anything other than property, money and anything that is supplied to an employer by a person who is or agrees to become an officer or employee of the employer in the course of or in relation to his office or employment;

"small supplier", at any time, means a person who, at that time, is a small supplier under sections 18 and 19, unless the person is not, at that time, a small supplier under section 148 of the Excise Tax Act (Statutes of Canada);

"supplier", in respect of a supply, means the person making the supply;

"supply" means the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, lease, gift or alienation;

"taxable supply" means a supply that is made in the course of a commercial activity, but does not include an exempt supply.

TAXATION

Imposition of tax

Taxable supply made in Québec

2. Every recipient of a taxable supply made in Québec shall, on the earlier of the day the consideration for the supply is paid and the day the consideration for the supply becomes due, pay to the Minister of Revenue a tax in respect of the supply equal to 8 % of the value of the consideration for the supply.

Notwithstanding the first paragraph, the rate of the tax is 4% in respect of the supply of incorporeal movable property or an immovable or service, other than

(1) the supply of a telephone service;

(2) the supply of a telecommunication or a telecommunication service in respect of which the tax prescribed by the Telecommunications Tax Act (R.S.Q., chapter T-4) would apply but for section 14 of the said Act.

However, the rate of the tax in respect of a taxable supply that is a zero-rated supply is 0 %.

Corporeal property brought into Québec

3. Every person who brings into Québec corporeal property for consumption or use in Québec by the person or at his expense by another person shall, immediately after arrival of the property in Québec, pay to the Minister a tax equal to 8 % of the value of the property, except in the case of an immovable, in which case the tax shall be equal to 4 % of its value.

For the purposes of the first paragraph, the value of the property means

(1) in the case of property produced by the person outside Québec but in Canada and brought into Québec within 12 months after it is produced, the cost price of the property, including the tax paid or payable by the person under Part IX of the Excise Tax Act (Statutes of Canada) in respect of the elements of the cost price;

(2) in the case of property supplied to the person outside Québec by way of sale and consumed or used in Québec within 12 months after it is supplied, the value of the consideration for the supply;

(3) in the case of property supplied to the person by way of lease, licence or similar arrangement outside Québec, the value of the consideration for the supply that can reasonably be attributed to the right of enjoyment of the property in Québec;

(4) in any other case, the fair market value of the property.

Notwithstanding the second paragraph, the value of property brought into Québec in prescribed circumstances shall be determined in the prescribed manner.

The first paragraph does not apply in respect of

(1) corporeal property, where tax under section 2 is payable in respect of the supply of the property;

(2) prescribed goods;

(3) corporeal property brought into Québec by a registrant for exclusive consumption or use in the course of the commercial activities of the registrant and in respect of which the registrant would, if he had paid tax under the first paragraph in respect of the property, be entitled to apply for an input tax refund.

A person who brings corporeal property into Québec includes any person who causes such property to be brought into Québec.

Taxable supply made outside Québec

4. Every recipient of a taxable supply of incorporeal movable property or a service that is made outside Québec shall pay to the Minister a tax in respect of the supply, calculated at the rate provided for in the second paragraph on the basis of the value of the consideration for the supply, if the recipient is resident in Québec and may reasonably be regarded as having received the property or service for use in Québec otherwise than exclusively in the course of a commercial activity.

The rate of tax to which the first paragraph refers is the rate that would be applicable in respect of the supply under section 2 if the supply were made in Québec.

Taxable supply of a road vehicle

5. A supply, made otherwise than in the course of a commercial activity, of a road vehicle that must be registered under the Highway Safety Code (R.S.Q., chapter C-24.2) following an application by the recipient of the supply is deemed to be a taxable supply.

Presumptions respecting place of supply

Supply deemed to be made in Québec

6. A supply is deemed to be made in Québec if

(1) in the case of a supply by way of sale of corporeal movable property, the property is, or is to be, delivered in Québec to the recipient of the supply;

(2) in the case of a supply of corporeal movable property otherwise than by way of sale, possession or use of the property is given or made available in Québec to the recipient of the supply;

(3) in the case of a supply of incorporeal movable property,

(a) the property may be used in whole or in part in Québec and the recipient is resident in Québec or registered under this document, or

(b) the property relates to an immovable situated in Québec, to corporeal movable property ordinarily situated in Québec or to a service to be performed in Québec;

(4) in the case of a supply of an immovable or of a service in relation to an immovable, the immovable is situated in Québec;

(5) in the case of a supply of a telecommunication service, the instrument or facility for the emission, transmission or reception of the service in respect of which the invoice for the supply is, or is to be, issued is ordinarily situated in Québec;

(6) the supply is a supply of a prescribed service; or

(7) in the case of a supply of any other service,

(a) the service is or is to be performed wholly in Québec; or

(b) the service is or is to be performed in part in Québec.

Consideration

Value of consideration - general rule

7. The value of the consideration, or any part thereof, for a supply is deemed to be equal,

(1) where the consideration or that part is expressed in money, to the amount of the money; and

(2) where the consideration or that part is expressed otherwise than in money, to the fair market value of the consideration or that part at the time the supply was made.

Duties, fees and taxes

8. The consideration for a supply includes any duty, fee or tax imposed under an Act of the legislature of Québec, another province, the Northwest Territories, the Yukon Territory or of the Parliament of Canada on the recipient or the supplier of the supply in respect of the supply, production, importation into Canada, consumption or use of the property or service supplied that is payable by the recipient or the supplier.

Notwithstanding the first paragraph, the consideration for a supply does not include the tax payable under this document or a prescribed duty, fee or tax.

Expense incurred in supply of a service

9. Where, in making a supply of a service, a person incurs an expense for which the person is reimbursed by the recipient of the supply, the amount of the reimbursement is deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as a mandatary of the recipient.

Specific rules respecting taxation

Supply by a small supplier

10. Where a person makes a taxable supply and the consideration, or a part thereof, for the supply becomes due, or is paid before it becomes due, at a time when the person is a small supplier who is not a registrant, that consideration or part thereof, as the case may be, shall not be included in calculating the tax payable in respect of the supply.

This section does not apply to a supply of an immovable by way of sale.

EXEMPT SUPPLY

Exempt supply[^1]

11. The following supplies are exempt:

(1) a supply of a residential complex;

(2) a supply of a health care service;

(3) a supply of an educational service;

(4) a supply of a child and personal care service;

(5) a supply of a legal aid service;

(6) a supply made by a public sector body.

ZERO-RATED SUPPLY

Zero-rated supply[^2]

12. The following supplies are zero-rated:

(1) a supply of medication;

(2) a supply of a medical device;

(3) a supply of basic groceries;

(4) a supply of agriculture and fishing products;

(5) a supply shipped outside Québec;

(6) a supply of a travel service;

(7) a supply of a transportation service.

INPUT TAX REFUND

Exclusively commercial activities

13. Where property or a service is acquired or brought into Québec by a registrant for consumption, use or supply exclusively in the course of commercial activities of the registrant, the input tax refund of the registrant in respect of the property or service for a reporting period of the registrant is the amount of any tax that became payable or, if it had not become payable, was paid by the registrant in that period in respect of the acquisition or bringing into Québec by the registrant of the property or service.

For the purposes of this section, where an invoice for an amount is issued to a registrant in respect of a taxable supply made in Québec to the registrant, tax under section 2 calculated on that amount is deemed to have become payable on the date of the invoice.

Application

14. Where property or a service is acquired or brought into Québec by a registrant for non-exclusive consumption, use or supply (in this section referred to as the "intended use") in the course of commercial activities of the registrant, the input tax refund of the registrant in respect of the property or service for a reporting period of the registrant is the amount determined by the formula

A X B.

For the purposes of this formula,

(1) A is the amount that would be determined under the first paragraph of section 13 in respect of the property or service if that section were read without reference to the word "exclusively"; and

(2) B is the percentage that the intended use of the property or service in those commercial activities of the registrant is of the total intended use of the property or service.

Restriction

15. In determining an input tax refund of a registrant, no amount shall be included in respect of the tax payable by the registrant in respect of the following supplies made to, or brought into Québec by, the registrant:

(1) a supply of a membership in a club the main purpose of which is to provide recreational, sporting or dining facilities;

(2) a supply or the bringing into Québec of property or a service that is acquired or brought in by the registrant at any time in or before a reporting period of the registrant exclusively for the personal consumption, use or enjoyment (in this section and in section 16 referred to as the "benefit") in that period of a particular individual who was, is or agrees to become an officer or employee of the registrant, or of another individual related to the particular individual;

(3) a supply made in or before a reporting period of the registrant of property, by way of lease, licence or similar arrangement, primarily for the personal consumption, use or enjoyment in that period of

(a) where the registrant is an individual, the registrant or another individual related to the registrant;

(b) where the registrant is a partnership, an individual who is a member of the partnership or another individual who is an employee, officer or shareholder of, or related to, a member of the partnership;

(c) where the registrant is a corporation, an individual who is a shareholder of the corporation or another individual related to the shareholder; and

(d) where the registrant is a trust, an individual who is a beneficiary of the trust or another individual related to the beneficiary.

Exceptions

16. Paragraph 2 of section 15 does not apply in the following cases:

(1) the registrant makes a taxable supply of the property or service to the particular individual or the other individual for consideration that becomes due in that period and that is equal to the fair market value of the property or service at the time the consideration becomes due; or

(2) if no amount were payable for the benefit by the particular individual who was, is or agrees to become an officer or employee of the registrant, no amount would be included under sections 34 to 47.17 of the Taxation Act (R.S.Q., chapter I‑3) in respect of the benefit in computing the income of the particular individual.

Similarly, paragraph 3 of section 15 does not apply where the registrant makes a taxable supply of the property in that period to such an individual for consideration that becomes due in that period and that is equal to the fair market value of the supply at the time the consideration becomes due.

Restriction

17. In determining an input tax refund of a registrant, no amount shall be included in respect of the tax payable by the registrant in respect of the supply or bringing into Québec of a book for which he is entitled to compensation under section 24.

SMALL SUPPLIER

Small supplier

18. A person is a small supplier throughout a particular calendar quarter and the first month immediately following the particular calendar quarter if the total referred to in paragraph (1) does not exceed the sum of the total referred to in paragraph (2) and $30 000:

(1) the total of all amounts each of which is the value of consideration that became due in the four calendar quarters immediately preceding the particular calendar quarter, or that was paid in those four calendar quarters without having become due, to the person or an associate of the person at the beginning of the particular calendar quarter for taxable supplies, other than supplies by way of sale of capital property of the person or of the associate, made by the person or the associate in the course of commercial activities;

(2) where, in the four calendar quarters immediately preceding the particular calendar quarter, the person or an associate of the person at the beginning of the particular calendar quarter made a taxable supply of a right to participate in a game of chance, the total of all amounts each of which is

(a) an amount of money paid or payable by the person or associate as a prize or winnings in the game or in satisfaction of the bet; or

(b) consideration paid or payable by the person or the associate for property or a service that is given as a prize or winnings in the game or in satisfaction of the bet.

Exception

19. Notwithstanding section 18, where at any time in a calendar quarter, the total referred to in paragraph (1) exceeds the sum of the total referred to in paragraph (2) and $30 000:

(1) the total of all amounts each of which is the value of the consideration that became due in the calendar quarter or was paid in that calendar quarter without having become due, to a person or to an associate of the person at the beginning of the calendar quarter for taxable supplies, other than supplies by way of sale of capital property of the person or of the associate, made by the person or the associate in the course of commercial activities;

(2) where, in the calendar quarter, the person or an associate of the person at the beginning of the calendar quarter made a taxable supply of a right to participate in a game of chance, the total of all amounts each of which is

(a) an amount of money paid or payable by the person or associate as a prize or winnings in the game or in satisfaction of the bet; or

(b) consideration paid or payable by the person or the associate for property or a service that is given as a prize or winnings in the game or in satisfaction of the bet;

the person is not a small supplier throughout the period beginning immediately before that time and ending on the last day of the calendar quarter.

REBATE AND COMPENSATION

Rebate to certain organizations

Definitions

20. For the purposes of this section and sections 21 to 23,

"charity" includes a non-profit organization that operates an institution, or part thereof, for the purpose of providing nursing home intermediate care service or residential care service, within the meaning of those expressions in the Canada Health Act (Statutes of Canada);

"claim period" of a person at any time means the reporting period of the person that includes that time;

"municipality" includes an organization designated by the Minister to be a municipality, but only in respect of supplies (other than taxable supplies) made by the organization of municipal services specified in the designation;

"percentage of government funding" of a person for a fiscal year of the person means the percentage determined in prescribed manner;

"selected public service body" means

(1) a hospital authority;

(2) a school authority or university that is established and operated otherwise than for profit;

(3) a public college; or

(4) a municipality.

Tax payable

21. For the purposes of sections 22 and 23, the tax payable by a person in respect of property or a service does not include an amount that the person has claimed or is entitled to claim as an input tax refund in respect of the property or service.

Qualifying non-profit organization

22. For the purposes of this subdivision, a person is a qualifying non-profit organization at any time in a fiscal year of the person if, at that time, the person is a non-profit organization and the percentage of government funding of the person for the year is at least 40%.

Rebate

23. A person who, on the last day of the claim period or the fiscal year of the person, is a selected public service body, a charity or a qualifying non-profit organization, is entitled to a rebate equal to one of the following percentages, as the case may be, of the amount of the tax that became payable during that period in respect of property or a service:

(1) 50% for a charity or a qualifying non-profit organization, unless it is a selected public service body;

(2) 40% for a municipality;

(3) 30% for a school authority, a public college or a university;

(4) 19% for a hospital authority.

This section does not apply to tax payable in respect of a prescribed property or service.

Compensation

Compensation in respect of a printed book

24. Where a person pays tax in respect of a supply of a book or in respect of a book brought into Québec by the person, the person is entitled to compensation in an amount equal to that tax.

The supplier shall pay to that person the amount of the compensation and the supplier may deduct the amount of the compensation from the amount the supplier is required to remit to the Minister under section 30.

Such compensations are deemed to be repayments for the purposes of the Act respecting the Ministère du Revenu (R.S.Q., chapter M-31).

This section refers to a printed book or its updating, identified by an International Standard Book Number (ISBN) issued in accordance with the international book numbering system, or a talking book or the carrier thereof, acquired by a person because of a visual handicap.

TAX COLLECTION AND REMITTANCE

Registration

Required registration

25. Every person who is engaged in a commercial activity in Québec shall, before the day the person first makes, otherwise than as a small supplier, a taxable supply in Québec in the course of that activity, apply to the Minister to be registered.

The following persons are not required to apply for registration pursuant to the first paragraph:

(1) a person who is a small supplier;

(2) a person whose only commercial activity is making supplies of immovables by way of sale otherwise than in the course of a business; and

(3) a non-resident person who does not carry on any business in Québec.

Optional registration

26. Notwithstanding the second paragraph of section 25, any person who is engaged in a commercial activity in Québec may apply to the Minister to be registered.

Any person not resident in Québec who in the ordinary course of carrying on business outside Québec regularly solicits orders for the supply of corporeal movable property for delivery in Québec may also apply to be registered.

Notwithstanding the first paragraph, no person who is a small supplier may make an application to be registered under that paragraph unless he applies to the Minister of National Revenue to be registered under subsection 3 of section 240 of the Excise Tax Act (Statutes of Canada).

Registration by the Minister

27. The Minister may register any person applying to be registered and, for that purpose, the Minister, or any person he authorizes, shall assign a registration number to the person and notify the person in writing by way of a registration certificate of the registration number and the effective date of the registration.

The registration certificate shall be kept at the principal place of business of its holder in Québec and may not be transferred.

Collection

Mandatary of the Minister

28. Every person who makes a taxable supply other than a supply referred to in section 5 shall, as mandatary of the Minister, collect the tax payable by the recipient under section 2 in respect of the supply.

Remittance

Determination of net tax

Net tax of a registrant

29. The net tax for a particular reporting period of a registrant is the positive or negative amount determined by the formula

A - B.

For the purposes of this formula,

(1) A is the total of

(a) all amounts that became collectible and all other amounts collected by the registrant in the particular reporting period as or on account of tax under section 2, and

(b) all amounts that are required under this document to be added in determining the net tax of the registrant for the particular reporting period;

(2) B is the total of

(a) all amounts each of which is an input tax refund for the particular reporting period or a preceding reporting period of the registrant claimed by the registrant in the return under this document filed by the registrant for the particular reporting period, and

(b) all amounts each of which is an amount that may be deducted by the registrant under this document in determining the net tax of the registrant for the particular reporting period and that is claimed by the registrant in the return under this document filed by the registrant for the particular reporting period.

Net tax remittance or refund

Net tax of a registrant

30. Every registrant who is required to file a return under this document shall in the return calculate his net tax for the reporting period for which the return is required to be filed.

Where the net tax for a reporting period of a registrant is a positive amount, the registrant shall remit that amount to the Minister on or before the day on or before which the return for that period is required to be filed.

Where the net tax for a reporting period of a registrant is a negative amount, the registrant may claim in the return for that reporting period that amount as a net tax refund for the period, payable to the registrant by the Minister.

Payment of net tax refund

31. Where a net tax refund payable to a registrant is claimed in a return filed under this document by the registrant, the Minister shall pay the refund to the person with all due dispatch after the return is filed.

Input tax refund

Food, beverages and entertainment

32. Where sections 421.1 to 421.4 of the Taxation Act (R.S.Q., chapter I‑3) apply, or would apply if the registrant were a taxpayer under that Act, in respect of a supply of food, beverages or entertainment to, or any allowance in respect of such a supply paid by, a registrant in a taxation year of the registrant, x % of the total of all amounts, each of which is an input tax refund in respect of such a supply that the registrant may claim during that taxation year, shall be added in determining the net tax

(1) where the registrant ceases in or at the end of that taxation year to be registered, for the last reporting period of the registrant in that taxation year;

(2) where the reporting period of the registrant is the calendar year, for the calendar year in which the taxation year ends; and

(3) in any other case, for the reporting period of the registrant that begins immediately after the end of that taxation year.

Reporting period and return

Reporting period

Reporting period

33. The reporting period of a registrant or of a person who is not a registrant is a calendar month.

Notwithstanding the first paragraph, a registrant whose accounting period is not the calendar month may use a reporting period corresponding to that period, where the following conditions are met:

(1) the accounting system of the registrant comprises twelve periods;

(2) the periods end within seven days prior or subsequent to the last day of a particular calendar month;

(3) the periods comprise no fewer than 28 days and no more than 35 days.

A reporting period referred to in the second paragraph is deemed to end on the last day of the particular calendar month.

Return

Filing by a registrant

34. Every registrant shall file a return with the Minister for each reporting period of the registrant within one month after the end of that reporting period.

Taxable supply made outside Québec

35. Every person who is liable to pay tax under section 4 (in this section referred to as the "taxpayer") shall prepare a return for the reporting period of the person in which the tax becomes payable.

Every taxpayer shall file the return with and as prescribed by the Minister and remit the amount of tax under section 4 that became payable in the reporting period to which the return relates to the Minister not later than the day that is one month after the end of that reporting period.

Remittance of tax

36. Every person who is liable to pay tax under section 2 in respect of a supply referred to in section 5 shall, at the time of the supply, remit to the Minister or a prescribed person the tax payable in respect of the supply.

Both questions referred were answered in the affirmative.

Solicitor for the intervener the Attorney General of Canada: John C. Tait, Ottawa.

Solicitors for the intervener the Attorney General of Quebec: Monique Rousseau, Alain Gingras and Jean‑François Jobin, Québec.

Solicitor appointed by the Court as amicus curiae: Wilfrid Lefebvre, Montréal.

[^1]: Supplies described in sections 93 to 172 of the Act respecting the Québec sales tax and amending various fiscal legislation (S.Q. 1991, c. 67).

[^2]: Supplies described in sections 173 to 198 of the Act mentioned in footnote 1.