Tax Court Allows Not-For-Profit to Claim Input Tax Credit in Operating Virtual Library
August 2020 Charity & NFP Law Update
Published on August 27, 2020

By Ryan M. Prendergast


The Tax Court of Canada released its decision in Canadian Legal Information Institute v The Queen on July 17, 2020, concerning an appeal by the Canadian Legal Information Institute (“CanLII”) from tax assessments made by the Minister of National Revenue (the “Minister”) under the Excise Tax Act (“ETA”). CanLII, a not-for-profit corporation, operates an online law library with free public access, and claimed input tax credits (“ITCs”) under subsection 169(3) of the ETA.

The Minister denied the ITCs on the basis that CanLII’s service was an exempt supply pursuant to section 10 of Part VI of Schedule V of the ETA because it was provided for no consideration. CanLII, however, argued that it had made a taxable supply, as it received consideration for its services from the Federation of Law Societies of Canada (“FLSC”). The FLSC paid an annual levy to CanLII pursuant a governance agreement. That agreement required CanLII to provide the FLSC with an annual report recommending a 

dollar amount needed for the following year’s operations. The FLSC then had the option to pay this amount, or to pay a different amount to CanLII.

With respect to the ITCs, CanLII incurred operating expenses from various third-party services providers in relation to operating the virtual library including, for example, website operation and maintenance fees, case law access fees, and computer code storage fees. CanLII, as an HST registrant, collected GST on these expenses and then claimed ITCs on them. The court therefore considered whether CanLII could claim these ITCs under subsection 169(3) of the ETA.

The court first determined whether CanLII made a taxable supply in operating its virtual library. Pursuant to subsection 169(3), the court found that CanLII would be entitled to ITCs if it “acquired property or a service for consumption, use or supply in the course of its commercial activities.” The Minister argued that CanLII’s business involved making exempt supplies because all or substantially all of its services were made for no consideration, and that FLSC’s discretionary payments did not constitute consideration, as they were not made pursuant to a legal obligation.

The court stated that “all that would be required in order for a fee to constitute consideration for the taxable supply of the services would be a contractual obligation.” It found that, pursuant to the governance agreement, once the FLSC had determined the annual amount to be paid to CanLII, it was then obligated by operation of law to pay that amount to CanLII for the supply of the virtual library, and that such payment was not discretionary. It also found that a direct link existed between the levy paid by the FLSC and CanLII’s supply of the virtual library. FLSC’s funding was therefore not intended for multiple uses, but rather “to enable CanLII to achieve its sole goal of operating a virtual library in a business like manner”, which included contracting with third-party suppliers. The court found that CanLII’s services had been made in consideration of its commercial activities, and that its supply of services were therefore taxable supplies. It therefore held that CanLII was entitled to claim its ITCs, amounting to $745,690.89 for the assessment periods between April 1, 2013 and June 30, 2015.

This decision demonstrates that courts may apply a broad interpretation to how “consideration” is defined in excise tax matters. Charities and not-for-profits that are HST registrants and receive funding should therefore, with the assistance of professional advice, carefully determine whether that property or service was acquired for consumption, use or supply in the course of commercial activities, as this may constitute consideration for a taxable service and may enable those charities or not-for-profits to claim ITCs.


Read the August 2020 Charity & NFP Law Update