Date: 20051215
Docket: A-275-04
Citation: 2005 FCA 425
CORAM: LÉTOURNEAU J.A.
NADON J.A.
PELLETIER J.A.
BETWEEN:
LES VOITURES ORLY INC./
ORLY AUTOMOBILES INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Montréal, Quebec, on December 15, 2005)
LÉTOURNEAU J.A.
[1] The appellant attacks, by way of appeal, a decision of Bowman A.C.J. (as he then was) of the Tax Court of Canada. The learned A.C.J. dismissed the appellant's appeal from a reassessment made by the Minister of National Revenue (Minister) under the Excise Tax Act, R.S.C. 1985, c. C-5 (Act). The issue before the Tax Court was whether the appellant was entitled to claim input tax credits (ITCs) in respect of the Goods and Services Tax (GST) which it says it paid when it bought automobiles that it exported to the United States and Europe.
[2] The Crown's position was that the appellant was engaged in a fraudulent scheme in which it claimed ITC's in respect of GST which it had not paid. The appellant's business consisted of selling vehicles purchased in Canada into the export market in competition with the manufacturers' authorized dealers in those territories. Because of this, the manufacturers black-listed it so that it could not purchase vehicles directly from the manufacturers or from authorized dealers.
[3] The appellant devised a scheme which in its broad lines worked as follows. It would use status Indians to purchase vehicles on its behalf from dealerships, which purchases would be free of GST due to the purchaser's Indian status. The appellant would then create a false invoice which showed it purchasing the vehicle from a secondary seller and paying GST on the purchase price. The appellant would write a cheque for the purchase price shown on the false invoice. The cheque was put in the hands of an accommodation party who would deposit the cheque and obtain a bank draft for the purchase price charged by the dealership. The difference between the real and the false purchase price, i.e. the GST, would be returned to the appellant in cash, less the accommodation party's commission. The status Indian would then use the bank draft to complete the transaction with the dealership and the appellant would take delivery of the vehicle.
[4] Because the appellant was selling into the export market, no GST was payable on its sales. The appellant would claim an ITC in respect of each vehicle sold on the basis of the false invoice which it generated with respect to that vehicle. The amount of the ITC was the amount of GST shown on the invoice. The net result was that the appellant was claiming the return of GST which it had not paid.
[5] The A.C.J., after carefully reviewing in detail the evidence, made a number of findings that we reproduce from paragraph 136 of his decision as well as the considerations upon which these findings are based. These considerations are found in paragraph 137:
[136] The conclusions of fact that I have reached - and I have stated some of them throughout these reasons - are the following:
(a) The vendors shown on the invoices to Orly were not the true vendors of the vehicles and the invoices did not represent genuine transactions. There is simply too much evidence that the signatures were not those of persons whose names appeared on the invoices. Many of the persons who owned or represented companies shown as vendors on the invoices denied selling vehicles to Orly and stated that they did not know Jim Doherty, Shawn McGovern or Bob Robichaud. The respondent did not call representatives of all the persons shown as vendors but it called enough that I would consider it dangerous to rely on the authenticity of any of the invoices. Moreover, I consider it significant that Orly did not call anyone from any of the companies shown as vendors.
(b) The GST shown on the invoices was, albeit a correct mathematical calculation, not intended to be paid as GST. It was intended to be paid into the bank accounts of persons shown as vendors or other third parties.
(c) The bank accounts were simply temporary repositories of the funds shown as the purchase price plus tax. These funds were used to pay dealers the price for vehicles shown on contracts between Indians and the dealers. The rest was paid to Orly or representatives of Orly such as Shawn McGovern or Bob Robichaud, less the amount paid to the numerous persons who made the bank accounts available and engaged in the business at Orly's direction and for Orly's benefit of "exchanging cheques."
(d) The contracts between the dealers and the Indians did not represent genuine transactions. They were simply an accommodation to create the illusion of sales that were exempt from tax under the Indian Act. The Indians never took possession of the vehicles (except Gilles Caron who delivered some to Orly) and did not pay for them. Orly paid for them through the bank accounts into which the funds shown on the invoices as the purchase price plus tax were deposited.
(e) Orly remained in control of the vehicles from the moment they left the dealership to the point at which they were exported or sold domestically.
(f) It was never intended that title to the vehicles would pass from the dealers to the Indians whose names were shown on the dealer contracts. The substance of the transactions was that the dealers were selling to Orly without sales tax being paid.
[137] I base these conclusions upon a number of considerations, some of which I have already mentioned throughout these reasons and some of which are set out below:
(i) Orly's professed complete lack of any interest in the persons to whom it was ostensibly paying millions of dollars or the persons into whose bank accounts it was paying the money goes beyond strange. One might have thought that any car dealer who was buying hundreds of vehicles from a variety of vendors would at least be mildly curious about who the vendors were and where the money was going. The only way in which the apparent lack of curiosity can be rationally explained consistently with common sense, logic and reality is that Orly through its employees or officers, particularly Jim Doherty and Shawn McGovern, knew precisely who these people were - they were simply accommodation parties, some of whom knew how they were being used and some of whom did not. I am not so ingenuous as to think that Orly was oblivious to what was going on in this multi-million dollar scheme - a scheme that was of Orly's own devising.
(ii) The economic viability of at least some of the deals from Orly's point of view depended on Orly keeping the GST and PST and then claiming ITCs in respect of the GST.
(iii) The payment to many of the individuals of a fee for exchanging cheques - a process whereby a cheque would go into the ostensible vendor's bank account or that of some third party, a bank draft or certified cheque would be obtained payable to a dealer in the amount shown on the contract between the dealer and an Indian and the difference, less the fee, would be given in cash or by cheque to the courier - is wholly inconsistent with a normal purchase and sale of vehicles. Indeed, it is bizarre.
(iv) There is absolutely no evidence of any transfer of title to the vehicles from the Indians or the dealers to the various persons shown on the invoices. I have not in this trial seen a single contract of sale, invoice or any other document transferring title to the vendors shown on the invoices to Orly. One would have expected, if the invoices to Orly represented genuine sales by authentic vendors, and given the allegations by the revenue authorities that the invoices are false, that the appellant would have endeavoured to trace the title into the hands of the alleged vendors, who are sometimes called "secondary dealers." There is a hiatus - or perhaps there are several hiatuses - between the licensed dealers and the "secondary dealers." We have contracts between the dealers and the Indians, which do not, in my view, represent genuine legal relationships. The trail disappears there and we pick it up again only when we find the secondary dealers purporting to sell the same vehicles to Orly. The absence of any of the indicia of normal commerciality is inconsistent with the authenticity of the entire structure that the appellant seeks to establish. Essentially the dealers were selling to Orly without GST and the contracts with the Indians and the invoices from the "secondary dealers" to Orly were mere window-dressing.
(v) Even if the testimony of some of the respondent's witnesses was somewhat weak, taken as a whole, the respondent's evidence is a formidable obstacle to my accepting the evidence of Mr. Doherty and Mr. McGovern. We have serious allegations of falsification of documents, of signatures that are not real, and of diversion of funds, ostensibly for GST, back to Orly. Yet no attempt was made in reply to bolster the appellant's claim that the transactions were authentic and that GST was really being paid. I imply no criticism whatever of appellant's counsel. Their presentation of the appellant's case was skilful and professional in the extreme, but they simply did not have the necessary ammunition.
[6] The AC.J.'s analysis of the oral and documentary evidence led him to conclude "that the appellant had not established that the transactions shown on the invoices to Orly represent authentic sales or that the amounts shown as GST on invoices were genuine, or were paid as or represented GST, or were intended to be paid as GST": see paragraph 138 of his decision. In his view, the evidence established that the appellant was involved in a scheme to claim ITCs in respect of GST that it did not pay and did not intend to pay.
[7] The A.C.J. ruled that the penalties imposed on the appellant pursuant to section 285 of the Act were warranted. His views based on the evidence were that the appellant knowingly claimed ITCs to which it was not entitled. Therefore, the appellant failed to live up to the due diligence requirement found in section 280 of the Act.
[8] We are of the view that this appeal must be dismissed.
[9] There was ample and cogent evidence to support the conclusions of the A.C.J. that the appellant did not buy from the alleged retailers the 307 cars in issue, that the appellant did not pay the GST on these vehicles and that the majority of these vehicles were bought from dealers by persons who possessed an Indian status and, therefore, did not pay GST when buying them.
[10] Furthermore, this case involved an assessment of the credibility of witnesses that the A.C.J. had the distinct advantage of seeing and hearing. The hearing lasted 31 days. Fifteen (15) witnesses were heard and the A.C.J. reviewed the 984 documents that were filed by the parties. We are not in a position to, and we will not, second-guess his credibility findings.
Whether the burden of proof shifted to the respondent
[11] The appellant submits that the A.C.J. erred in putting on it the burden of disproving the assumptions of facts and law upon which the Minister relied to make his reassessment. The main reason advanced in support of that submission is that these assumptions were not communicated to the appellant at the time or prior to the time of the assessment. Therefore, the appellant submits, relying upon the authority of Johnstonv. M.N.R., [1948] S.C.R. 486">[1948] S.C.R. 486, that when the Crown relies upon assumptions made and communicated to the taxpayer after the notice of reassessment, it bears the burden of proving them.
[12] In addition, it contends that the shifting of the burden of proof from the appellant to the respondent is warranted by the fact that the respondent's reply to the Amended Notice of Appeal alleges contradictory "factual arguments" which repudiate the assumptions of facts made in the notice of reassessment.
[13] Counsel for the appellant conceded, when answering a question from the panel, that the case of Johnston, supra, does not expressly state that disclosure must be made prior to or at the time of reassessment. As a matter of fact, the case merely stands for the proposition that the Crown must fully disclose to the taxpayer the precise findings of fact and rulings of law which underline the reassessment. It does not establish the specific time-limit advanced by the appellant for doing so.
[14] Rather, the appellant's contention is based on an article by Hugh F. Gibson entitled An Overview of Income Tax Litigation, [1983] C.T.F. 967 in which the author suggests a moment at which disclosure of the assumptions of facts and law must be made, i.e. prior to or at the time of the assessment, failing which, the author says, the burden of proof of the assumptions made after that time shifts to the Crown.
[15] Counsel for the appellant recognizes that there are no cases supporting the position advocated by the author. Indeed, the purpose of the requirement of disclosure is to ensure that the taxpayer can properly and effectively exercise his right to object to the notice of reassessment within the ninety-day period allocated by the Act. It seems to us that, in the vast majority of cases, the appropriate remedy is the seeking and compelling of disclosure. We cannot imagine the taxpayer being refused an extension of the time, as the case may be, to amend a pending appeal or to file an appeal or a notice of objection when disclosure of the assumptions of facts and law has been delayed and, as a result, compliance with the ninety-day time limit is made difficult, if not impossible.
[16] In any event, in this case, disclosure of the assumptions on which the reassessment was based was made on May 22, 1998 in respect of the reassessment dated April 27, 1998. The appellant suffered no prejudice from this delayed disclosure as it was able to file an Amended Notice of Appeal and argue the nullity and voidness of the reassessment on account of the lateness of the disclosure. Moreover, the appellant submitted that it had introduced at the hearing evidence that, prima facie, rebuts the Minister's assumptions. Again this establishes that the appellant was not prejudiced by the fact that the assumptions were communicated to it three weeks after the notice of reassessment.
[17] We agree with the A.C.J. that the allegations of facts contained in the reply to the Amended Notice of Appeal are not misleading to a reasonable person who reads the reply even though the sacrosanct expression ("in assessing the appellant as he did, the Minister acted upon the following assumptions") was not used: see his decision on the preliminary motion made by the appellant, Appeal Book, vol. 40, at page 8280. These factual allegations are the assumptions of facts on which the Minister based the reassessment.
[18] We are satisfied that the appellant's contention that there is a contradiction between paragraphs 31 and 32 of the reply to the Amended Notice of Appeal is without merit. Paragraph 31 states the information that was found in the records maintained by the Société de l'assurance automobile du Québec. While that information appears anomalous in the context of the assumptions made by the Minister because these documents show that the appellant had not purchased many of the cars from the alleged secondary dealers, but rather directly from new car dealerships, it is a fact disclosed in fairness to the appellant.
[19] Paragraph 32 indicates that many new car dealers informed the persons conducting the audit that they had sold the new vehicles in litigation to persons who were status Indians. One hundred and eighty-one (181) contracts were found that indicated the sale of cars to status Indians.
[20] To sum up, we see no merit in the submissions of the appellant that it no longer had the burden of disproving the assumptions made by the Minister. We want to firmly and strongly reassert the principle that the burden of proof put on the taxpayer is not to be lightly, capriciously or casually shifted. There is a very simple and pragmatic reason going back to over 80 years ago as to why the burden is on the taxpayer: see Anderson Logging Co. v. British Columbia, (1925) S.C.R. 45, Pollock v. Canada (Minister of National Revenue) (1993), 161 N.R. 232 (F.C.A.), Vacation Villas of Collingwood Inc. v. Canada (1996) 133 D.L.R. (4th) 374 (F.C.A.), Anchor Pointe Energy Ltd. v. Canada, 2003 FCA 294. It is the taxpayer's business. He knows how and why it is run in a particular fashion rather than in some other ways. He knows and possesses information that the Minister does not. He has information within his reach and under his control. The taxation system is a self-reporting system. Any shifting of the taxpayer's burden to provide and to report information that he knows or controls can compromise the integrity, enforceability and, therefore, the credibility of the system. That being said, we recognize that there are instances where the shifting of the burden may be warranted. This is simply not one of those cases.
[21] The appellant skilfully contends that the Minister has failed to prove that the GST has not been paid for each and every one of the 307 cars in litigation. The Minister, it is alleged, has also failed to prove that in each and every case of a purchase the sums that appeared on the contracts as GST were returned to the appellant. As we just said, the burden was on the appellant to rebut the Minister's assumptions to that effect.
[22] In the course of all these transactions, the appellant made numerous payments to third parties amounting to at least three million dollars. It is astonishing that it could not say or would not know who these third parties were to whom it was giving these substantial sums and paying the GST. It did not call at the hearing any of these third parties. It would not even inquire who these companies were to whom they were paying GST rather than to the alleged vendors or suppliers: see the testimony of Mr. Doherty on behalf of the appellant, Appeal Book. Vol. 44, pages 9062 to 9083. While buying cars from 2844 Québec Inc., it would make the payments to P.G. Auto without knowing who they were, whether they were incorporated, whether there was a connection between it and 2844 Québec Inc., whether P.G. Auto was registered or not for GST purposes: ibidem. It would not even inquire as to who they were and it found nothing odd when eventually required by 2844 Québec Inc. to make payments to a third party other than P.G. Auto: ibidem, at page 9071. It is no wonder that the A.C.J. did no believe Mr. Doherty and Mr. McGovern who testified on behalf of the appellant. At paragraphs 46 and 47 of his decision, the A.C.J. writes:
[46] Before I move on to the evidence of the witnesses called by the respondent I should observe that quite apart from any evidence from the respondent's witnesses that contradicted that of Mr. Doherty or Mr. McGovern, I did not find the evidence of these two appellants' witnesses particularly persuasive. I had the distinct impression that they were holding something back and were giving me the bare minimum that they considered necessary. For example, the transactions involving over 300 vehicles had a value in the millions of dollars. Yet they remained inexplicably ignorant of anything about the vendors to whom they were paying vast sums of money. They did not appear to care where the cars came from or where the money went. I find this, to say the least, implausible. It is explicable only on the hypothesis that Orly knew what was going on at every step of the way and was in control from the moment the vehicle left the car dealer to the point at which it was sold, whether abroad or domestically.
[47] I note, for example, that neither Mr. McGovern nor Mr. Doherty mentioned in their evidence the role that the sales to the Indians played. The Indians were never mentioned. I should have thought that given the serious nature of the allegations in the Reply to the Notice of Appeal and in the other material disclosed by the respondent to the appellant, they would have gone to great lengths to find the representatives of the companies involved and have them testify to establish the authenticity of the impugned transactions. Mr. Doherty said that he did not try because he was not concerned. I am inclined to draw a less favourable inference and that is that the appellant knew that if it had called the persons who, in the result, the respondent called, they would not have supported its case.
[23] These two persons were the only two witnesses brought and produced by the appellant. Much more than that was needed to negate the assumptions made by the Minister.
Whether the appellant is entitled to the ITCs on the GST payable on the purchased cars
[24] The appellant claims that it is entitled to the ITCs payable on the vehicles purchased from franchised car dealers because GST becomes payable when a taxable supply is supplied, irrespective of the parties' intent as to whether or not GST should be paid. It relies upon section 169 of the Act and a decision of the Tax Court in Ventes d'Auto Giordano Inc. v. Her Majesty the Queen, 2001 GTC 358.
[25] Where the cars were sold by the dealers to status Indians, no GST was paid. The invoices of these sales would not show the amount of tax paid or payable in respect of each taxable supply as required by section 3 of the Regulations prescribing the information that a registrant is to obtain before filing a return in which an input tax credit is claimed, SOR/91-45: see for example the invoice of the sale of vehicle no. 6-208 to Entreprises Wawanishgo Inc. where no amount appears as paid or payable GST, Appeal Book, vol. 28, pages 5603 to 5614.. This is a prescribed information that, if missing, disentitles the claimant to the credits. The finding of the A.C.J. was that the vast majority of the cars involved in the litigation were acquired in this fashion.
[26] In addition, we agree with the A.C.J. that where the transaction upon which the claim for ITCs is asserted is a sham and the money purportedly paid as GST is never paid or is rerouted back to the claimant, that claimant cannot base a claim for ITCs on the fact that the tax has become payable. The A.C.J. found on the basis of the evidence that the appellant was involved in a sham of this kind. The Act and the Regulations were devised for bona fide transactions between bona fide businessmen. They were never intended to enable participants in a sham involving fictitious transactions to doubly benefit from it by successfully claiming input credits on a tax payable.
The penalties in respect of the claim for ITCs
[27] We see no reason to intervene in the A.C.J.'s finding that the criteria for imposing penalties were met.
Corrections to be made to the decision of the Tax Court
[28] At the hearing before the Tax Court, the respondent admitted that there were two vehicles (6-368 and 6-388) for which credits in the respective amounts of $2,730.00 and $756.00 ought to be given on the disallowance of ITCs of $41,889.05. The learned A.C.J. allowed the credit of $2,730.00, but a typographical error attributed it to vehicle no. 6-388 instead of vehicle no. 6-368. The second credit was simply overlooked in this long and complex case.
Conclusion
[29] For these reasons, the appeal will be allowed for the limited purpose of reducing the disallowance of ITCs of $41,889.05 to $38,403.05 and adjusting the penalties accordingly. In all other respects, the appeal will be dismissed with costs to the respondent.
"Gilles Létourneau"
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