Bell was denied favourable goods and services tax (“GST”) treatment of its purchase of electricity, which was determined to be a single supply for the purpose of claiming input tax credits (“ITCs”) under the Excise Tax Act, RSC 1985, c E-15 [ETA]. In Bell Telephone Company of Canada v. Canada, 2025 FCA 27 [Bell Canada], The Federal Court of Appeal (“FCA”) upheld the Minister’s assessments of Bell. These assessments recaptured an excessive amount of ITCs claimed in respect of the provincial portion of the tax the appellant paid on the consideration for the supply of electricity by local distribution companies (“Local Distributors”) pursuant to s 236.01(2) of Part IX of the ETA.
Background
The ETA taxes consumption in the form of GST, which arises on any “taxable supply” as defined under s 123(1) made within the relevant period. GST is meant to be borne by the final consumer of a product or service provided in the course of commercial activity. To promote efficiency and avoid double taxation, s 169(1) of the ETA permits registrants to claim ITCs on the taxes paid on inputs used in producing a supply. The registrant uses ITCs to reduce the amount of GST remitted to the government by the amount of tax already remitted to the government at an earlier stage in the supply chain. This scheme operates so that the registrant only remits the net tax which is owed at that stage of the supply chain pursuant to s 225(1) of the ETA (Bell Canada, para 8).
The Government of Ontario and the Government of Canada agreed to harmonize the 5% GST and 8% provincial sales tax (“PST”) together, to form a 13% harmonized sales tax (“HST”). Parliament enacted s. 236.01 of the ETA to recapture the ITCs claimed by large businesses on the 8% PST portion of the HST on specific property or services, including the supply of electricity pursuant to the New Harmonized Value-added Tax Systems Regulations, No 2, SOR/2010-151 (Bell Canada, para 9).
Bell, a GST registrant, was engaged in commercial activities relating to telecommunications equipment and services. Bell entered into electricity supply contracts with Local Distributors in the course of its commercial activities. The Local Distributors itemized the various charges related to the supply of electricity as: “Electricity, Delivery, Regulatory charges, and Debt retirement charge” in accordance with O Reg 275/04: Information on Invoices to Low-volume Consumers of Electricity [Invoice Regulations]. Bell claimed that the recapture of ITCs under s. 236.01 only applied to the “Electricity” charges and that the portion of the ITCs that related to the “Delivery” and “Regulatory” charges did not fall under s. 236.01 (Bell Canada, paras 8-10).
Judicial History
In Bell Telephone Company of Canada v. The King, 2023 TCC 45 [TCC Decision], D’Arcy J. of the Tax Court of Canada (“TCC”) concluded that the provisions at issue required a determination on whether the Local Distributors made a single supply of multiple constituent elements which included electricity, or multiple supplies of separate goods/services. D’Arcy J. followed the test in O.A. Brown Ltd. v. Canada, [1995] GSTC 40 [O.A. Brown] adopted by the Supreme Court of Canada in City (Calgary) v Canada, 2012 SCC 20 [City of Calgary] to make a factual determination as to whether the alleged separate supply is “…in substance and reality…an integral part, integrant, or component of the overall supply” (Bell Canada, para 11).
D’Arcy J. concluded that in applying the O.A Brown test to the record, the “Delivery” and “Regulatory” services were components of the overall supply of electricity, and as a result constituted a single supply (TCC Decision, para 123).
Issues on Appeal
- Did the judge err in law by applying the O.A. Brown test to determine the nature of the supply?
- Did the judge commit a palpable and overriding error in his application of the O.A. Brown test to the facts? (Bell Canada, para 17).
Decision
Boivin J.A. wrote for a unanimous court, which dismissed the appeal and held that the TCC correctly identified the O.A. Brown test as the applicable test and did not err in its application to the purchase of electricity from Local Distributors (Bell Canada, paras 30, 41, 43).
The Applicability of the O.A. Brown Test
The O.A. Brown test was created to ascertain whether certain itemized costs related to the temporary care of livestock after its sale formed part of the supply of livestock, or were to be considered separate supplies. In that case, the TCC found that there was only a single supply of livestock and the taxpayer itemizing the charges did not change the true nature of the supply – the relevant question is whether the alleged separate supply could be omitted from the overall supply (Bell Canada, paras 19-21).
Bell argued that the TCC did not undertake a proper interpretation of the relevant statute before resorting to applying the O.A. Brown test. Boivin J.A. rejected Bell’s argument, and held that the TCC considered the relevant statutory and regulatory provisions relating to the recapture of ITCs and Ontario’s electricity market. The ETA’s broad definitions within the provisions necessitated the application of the O.A. Brown test (Bell Canada, paras 22-23).
Further, Boivin J.A. rejected Bell’s argument that the Court should follow the FCA’s approach in Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation, 2023 FCA 76 [Davis Dentistry]. In Davis Dentistry the FCA upheld the TCC’s determination that the O.A. Brown test was not applicable for the purposes of determining the tax treatment of orthodontic services. The Federal Court of Appeal held that Parliament had clear legislative intent to override the O.A. Brown test with respect to the tax treatment of orthodontic services under the ETA (Bell Canada, paras 25-27).
Boivin J.A. distinguished Bell Canada from Davis Dentistry as the Invoice Regulations which separated the supplies of “Electricity”, “Delivery”, and “Regulatory” charges on an invoice were outside of the ETA and did not provide for distinct tax treatments. On the other hand, the ETA and its Schedules separated the various orthodontic supplies at issue in Davis Dentistry and explicitly provided different tax treatments for each. Thus, the TCC did not err in resorting to the O.A. Brown test to properly characterize the nature of the supply in light of the broad definitions within the statute (Bell Canada, paras 26-28, 30).
The Application of the O.A. Brown Test to the Facts
Boivin J.A. held that the TCC did not make a palpable or overriding error in applying the O.A. Brown test to the facts of Bell Canada (Bell Canada, para 41).
The Local Distributors structured the invoice in accordance with the Invoice Regulations and was not a reflection of what the Local Distributors believed was being supplied. There were various discrepancies in the invoices which made it impossible to definitively determine what was being supplied under the various itemized charges. The TCC rightfully determined that there was insufficient evidence to support a determination that the charges were separate supplies, including in instances where the invoice did not list any charges for electricity (Bell Canada, paras 32-35).
Boivin J.A. noted that the TCC considered whether it was possible to purchase “Electricity” from a retailer and separately purchase “Delivery” and “Regulatory” services from Local Distributors, but found that such a possibility was inconsequential for the supply at issue (Bell Canada, paras 40-41).
Analysis
Bell Canada demonstrates that a taxpayer’s decision to list the itemization of charges related to a supply does not in itself separate a single supply into multiple smaller supplies. Both the TCC and FCA affirmed the application of the O.A. Brown test in circumstances where there is no clear indication from Parliament that certain components of a supply should be treated distinctly for tax purposes. In Bell Canada, the Invoice Regulations which treated “Electricity”, “Regulatory”, and “Delivery” services differently were not related to the ETA and did not provide for a distinct tax treatment for each component. Thus the court must resort to the O.A. Brown test to determine whether the components were a single or separate supply.
The O.A. Brown test looks at the nature of the transaction in both “substance and reality” which creates an inherently fact-driven determination of whether a purchase was for a single or multiple supplies. The TCC applied the test in a similar manner as the Supreme Court of Canada in City of Calgary, where “preparatory” work required to make a supply was not considered to be a separate supply. The supply of “Delivery” or “Regulatory” services are incidental to the supply of electricity, especially where there is only a single supplier.
Overall, the taxpayer attempted to avoid recapture of the ITCs by treating the itemized charges as piecemeal supplies as reflected on the invoice rather than based on the substance or reality of the transaction. Bell was receiving electricity from Local Distributors. There was no separate receipt of “Delivery” or “Regulatory” services from a third party to which those expenses related. Both courts determined that such an arrangement only constituted a single taxable supply.
A taxpayer must demonstrate that the itemized charges represent separate transactions which are not incidental to one another, but are merely performed by the same party. The courts appear to imply from O.A. Brown, City of Calgary, and Bell Canada, that additional charges which necessarily arise from the undertaking in the process of providing the original supply will be treated as a single supply.
To separate a supply into multiple smaller supplies, the taxpayer must be able to show that the supplies can, or are, made independently from one another. If preparatory or ancillary work is required to make a supply, it is likely that both the work and the final supply will be treated as components of a single supply. If two supplies are frequently bundled but do not enable each other, there may be multiple smaller supplies. The distinction is especially important where a supply is subject to recapture such as in Bell Canada, or where a supply attracts a different tax treatment such as a zero-rated or exempt supply.
