The Tax Court of Canada allowed an appeal, on January 30, 2003, by State Farm Insurance Companies, of GST assessments spanning seven years. The court found that expense allocations between the U.S. head office and its Canadian regional office, constituted exempt financial services under the Excise Tax Act.
State Farm allocates the expenses it incurs at its U.S. head office to run the insurance business to its regional offices. The Canada Customs and Revenue Agency (CCRA) assessed State Farm on these allocations, and imposed GST, claiming the expense allocations related to management or administrative services rendered to Canada and were thus caught by a deeming provision, s. 220 of the Act. Section 220 deems the rendering of a service from a foreign permanent establishment to a Canadian permanent establishment to be a supply of service between arm’s length persons. The value of the consideration for the supply is deemed to be the fair market value of the supply and that consideration is deemed to have been paid by the permanent establishment to which the service was rendered by the other. The CCRA concluded, that the expenses were deductible for income tax purposes.
State Farm’s primary argument was that the supplies in question were composite supplies of exempt financial services. Justice Bowman accepted that argument, finding that the expense allocations were financial in nature, did not bear any relationship to the work actually performed for the Canadian office and were not management or administrative services to the Canadian office as the CCRA assumed.
The judge noted that s. 220 creates a statutory fiction, and it leads one to the “end of the diving board but provides us with no pool into which to jump”. Further, he remarked that parts of a single organism do not render services to each other and a deeming provision that deems those parts to be separate persons does not change that fact. The court concluded that any services that were possibly rendered, related to a supply of financial services, as defined in s. 123(1) of the Act. This finding results in a complete reversal of all GST in respect of expense allocations assessed against State Farm from 1991 to 1997.
Susan Van Der Hout, Sean Aylward and Valerie-Ann Cherneski of Osler, Hoskin & Harcourt LLP acted for State Farm. Marilyn Vardy and John McLaughlin acted for Her Majesty the Queen.