Citation: 2010 TCC 55
Date: 20100128
Docket: 2008-398(GST)G
BETWEEN:
COMTRONIC
COMPUTER INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Boyle J.
[1]
The primary issue in
this Goods and Services Tax (“GST”) appeal is whether the appellant Comtronic
Computer Inc. (“Comtronic”) is entitled to input tax credits (“ITCs”) in
respect of inputs where the GST registration number of the supplier shown on
the invoice was not that of the supplier but was a validly issued number
belonging to someone else. This appears to have involved a degree of what is
commonly called identity theft. The question arises whether it is the Canadian
purchaser or the Canadian government that bears the risk of supplier wrongdoing
in such circumstances.
[2]
If Comtronic is not
successful on the primary issue, the secondary related issue is whether
Comtronic can maintain a successful due diligence defence to the section 280
penalties assessed.
I. Facts
[3]
The parties filed an
Agreed Partial Statement of Facts. In addition the Controller of Comtronic, a Vice-President
of Comtronic, and the auditor from the “ministère du Revenu du Québec” (the
“MRQ”) testified.
[4]
Comtronic is in the
business of wholesaling computer parts and custom computer assembly. Its head
office is in the Toronto area and it has branches in a number of cities across Canada including Montreal. Its customers include several
major Canadian retailers as well as some Canadian school boards. Its annual
revenues in the years in question, 2003 to 2005, were in the $65 million range.
It buys the large majority of its parts inventory from non-Canadian sources. In
the years in question it bought about 15 percent of its parts inventory from
Canadian suppliers. Its annual expenses on inventory were in the $60 million
range.
[5]
It has been determined
that the invoices issued by five suppliers to Comtronic showed GST registration
numbers that, while validly issued and current registration numbers, had been
issued to persons other than the suppliers. This appears to be a case of
wrongdoing on the suppliers’ part. There has been no suggestion that Comtronic
was complicit or aware in any way of any supplier wrongdoing. It is agreed that
Comtronic paid for these supplies together with GST and received them.
Apparently the GST collected from Comtronic was never remitted by the
suppliers. It is noted that by operation of law, the GST paid by Comtronic and
received by the suppliers was received by the suppliers as the Crown’s agent.
[6]
From the sampling of
invoices put in evidence, it appears that the GST paid by Comtronic was in the
$1,500 to $2,000 range per invoice in question. The total amount of GST paid to
these five suppliers over the three years in question aggregated almost
$500,000.
[7]
Comtronic had its
annual financial statements audited. As part of its ongoing relationship with
its accountant, the Controller of Comtronic, Mr. Lau, would sit down at
least annually with the accountant to discuss changes to tax and related requirements
in order to be kept up to date.
[8]
The Controller had a
system in place for GST compliance. One of his staff would prepare the necessary
filings, in this case the recurring GST filings for GST collected and ITCs, for
his review. As part of his review and before signing off to be filed and paid,
he would typically check four or five invoices to confirm the data was correct.
[9]
The Comtronic Vice-President
responsible for, among other things, purchasing, Mr. Tse, had a system in
place to ensure centralized purchasing from Toronto.
He would sign off on all invoices for payment only upon delivery and a physical
count by him or, for purchases delivered to a branch location, his designate at
that branch. Comtronic always paid by cheque whether the invoice was COD or had
payment terms.
[10]
The Vice-President
responsible for purchasing dealt with the same individual as contact person for
each of these five suppliers, a Mr. Leung. The five suppliers, as
described in the invoices to Comtronic are: Supertech Systems, RMD and RMD
Inc., Greeno Trading, Rapid Memory Distribution and PC-Broker. The Vice‑President
had known Mr. Leung since 2000 when the company Mr. Leung had been
working for, RMD International Trading, was a Comtronic customer in Toronto. The Vice-President had been the sales representative
at Comtronic responsible for the RMD International Trading account.
[11]
Mr. Leung
initially contacted Mr. Tse at Comtronic from Montreal with a view to selling central processing units in 2002 or 2003. The
pricing was satisfactory to Mr. Tse. He knew Mr. Leung and believed
he would be reliable especially on timing. Mr. Tse began doing business
with Mr. Leung in 2003 believing he was still at RMD International
Trading.
[12]
When the initial
invoice was received from Supertech Systems, Mr. Tse questioned Mr. Leung
who explained he no longer worked for RMD International Trading but now worked
for a different company.
[13]
The Supertech Systems
invoices were issued between March 2003 and August 2003. They showed Supertech
Systems as the supplier, showed a Montreal address on
rue Saint‑Urbain and showed a GST registration number (as well as a
Quebec Sales Tax (“QST”) registration number). As it turned out, the GST
registration number was that of a third-party corporation. It also turned out
that the trade name Supertech Systems was registered in Quebec to a different
third-party corporation. It is not known whether these two were related to each
other but it does not appear from the evidence that Mr. Leung had any
legitimate connection to either corporation.
[14]
From September/October
2003 to September 2004 Comtronic purchase orders placed through Mr. Leung
were invoiced by RMD (or, at times, RMD Inc.) and Greeno Trading. When
questioned about the RMD and RMD Inc. invoices by Mr. Tse upon receipt,
Mr. Leung assured him there were no worries, it was the same company as
Supertech Systems at the same address and phone number and there had just been
a change of trade name.
[15]
The RMD invoice in
evidence shows a Montreal address on Rue Tait and showed the same
GST and QST registration numbers as on the Supertech Systems invoices. The RMD
Inc. invoices used the same Saint‑Urbain address as Supertech Systems as
well as the same registration numbers.
[16]
The Greeno Trading
invoices in evidence showed the same address on Tait as did the RMD invoice and
again showed the same GST and QST registration numbers as did Supertech
Systems, RMD and RMD Inc. invoices. Again Mr. Tse testified that Mr. Leung
assured him this was just a different trade name and there was no cause for
worry. It turns out that the trade name Greeno Trading is registered in Quebec to
an individual other than Mr. Leung and it does not appear from the
evidence that Mr. Leung had any legitimate connection to that individual.
[17]
From November 2004 to
September 2005 orders by Comtronic through Mr. Leung were invoiced by
Rapid Memory Distribution. The Rapid Memory Distribution invoices in evidence
show a Quebec City address on Boulevard Charest and show
different GST and QST registration numbers than the prior invoices. Again, it
turns out that the GST registration number was not that of Rapid Memory
Distribution but had been issued to an entity called Eve Informatique. The Boulevard
Charest address was also that of Eve Informatique. There was little explanation
in evidence of Eve Informatique other than that it was also a supplier to
Comtronic during the final quarter of 2004 and that Comtronic was allowed its ITCs
in respect of its purchases from Eve Informatique.
[18]
From July 2005 to
November 2005 orders placed by Comtronic through Mr. Leung were invoiced
by PC Broker. The PC‑Broker invoices showed a Montreal address on Boulevard René‑Lévesque and showed
unique GST and QST registration numbers. Again, it turned out that those
registration numbers were not issued to PC‑Broker but to a third‑party
corporation that does not appear on the evidence to be legitimately related to
Mr. Leung.
[19]
Mr. Tse had
Comtronic stop dealing with Mr. Leung once problems with the MRQ came to
light at Comtronic’s Montreal branch.
[20]
Upon discovery of the
MRQ concerns, Mr. Leung initially assured Mr. Tse there was no
problem that could not be straightened out. However, the following week
Mr. Leung no longer answered or returned Mr. Tse’s calls. No one told
me what became of Mr. Leung or the status of any collection proceedings
against Mr. Leung and his supplier businesses for the GST collected from
Comtronic that was not remitted to the Canada Revenue Agency (“CRA”). Comtronic’s
evidence was that it has tried to reach Mr. Leung but has been unable to
do so. The respondent was silent as to its knowledge of Mr. Leung’s
whereabouts or financial or business situation. I did not even receive direct
evidence that the amounts of GST paid by Comtronic remain uncollected from
Mr. Leung and his supplier businesses.
[21]
The MRQ auditor
testified that in the years in question the CRA did not maintain its website on
which Canadian purchasers could confirm GST registrants’ names and registration
numbers. The CRA started such a site in 2006. The MRQ had set up a similar
website in 2002 but that did not provide any information on GST registration
numbers nor did it list any trade names used by the QST registrant. While I did
not hear any evidence on the point, the respondent’s counsel in argument did draw
my attention to certain publications that indicate the CRA was able to provide
some information on GST registrants and registration numbers by telephone in
the years in question. I will return to that below.
[22]
Comtronic’s Controller
testified that, prior to being told by the MRQ auditor in this matter, he was
unaware of any requirement that GST registration numbers must be checked with the
CRA in order to qualify for ITCs.
II. Legislation
[23]
The relevant portions
of the GST legislation are paragraph 169(4)(a) of the Excise Tax
Act (the “Act”) and section 3 of the Input Tax Credit
Information (GST/HST) Regulations (the “Regulations”) thereunder.
The relevant portions of those read as follows:
[Excise Tax Act]
|
169(4) A
registrant may not claim an input tax credit for a reporting period unless,
before filing the return in which the credit is claimed,
(a) the
registrant has obtained sufficient evidence in such form containing such
information as will enable the amount of the input tax credit to be
determined, including any such information as may be prescribed; and
|
169(4)
L’inscrit peut demander un crédit de taxe sur les intrants pour une période
de déclaration si, avant de produire la déclaration à cette fin :
a) il obtient les renseignements suffisants pour établir le montant
du crédit, y compris les renseignements visés par règlement;
|
[Input Tax
Credit Information (GST/HST) Regulations]
|
3. For the purposes of
paragraph 169(4)(a) of the Act, the following information is
prescribed information:
. . .
(b) where the total
amount paid or payable shown on the supporting documentation in respect of
the supply or, if the supporting documentation is in respect of more than one
supply, the supplies, is $30 or more and less than $150,
(i) the name
of the supplier or the intermediary in respect of the supply, or the name
under which the supplier or the intermediary does business, and the
registration number assigned under subsection 241(1) of the Act to the
supplier or the intermediary, as the case may be,
. . .
(c) where the total
amount paid or payable shown on the supporting documentation in respect of
the supply or, if the supporting documentation is in respect of more than one
supply, the supplies, is $150 or more,
(i) the
information set out in paragraphs (a) and (b),
(ii) the
recipient’s name, the name under which the recipient does business or the
name of the recipient’s duly authorized agent or representative,
(iii) the
terms of payment, and
(iv) a
description of each supply sufficient to identify it.
|
3. Les
renseignements visés à l’alinéa 169(4)a) de la Loi, sont les suivants
:
[…]
b) lorsque le montant total payé ou payable, selon la pièce
justificative, à l’égard d’une ou de plusieurs fournitures est de 30 $ ou
plus et de moins de 150 $ :
(i) le nom ou le nom commercial du fournisseur ou de l’intermédiaire
et le numéro d’inscription attribué, conformément au paragraphe 241(1) de la Loi,
au fournisseur ou à l’intermédiaire, selon le cas,
[…]
c) lorsque le montant total payé ou payable, selon la pièce
justificative, à l’égard d’une ou de plusieurs fournitures est de 150 $ ou
plus :
(i) les renseignements visés aux alinéas a) et b),
(ii) soit le nom de l’acquéreur ou son nom commercial, soit le nom de
son mandataire ou de son représentant autorisé,
(iii) les modalités de paiement,
(iv) une description suffisante pour identifier chaque fourniture.
|
[Excise Tax Act]
|
280(1) Subject to this section and section 281, where a
person fails to remit or pay an amount to the Receiver General when required
under this Part, the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first
day following the day on or before which the amount was required to be
remitted or paid and ending on the day the amount is remitted or paid.
|
280(1) Sous réserve du présent article et de
l’article 281, la personne qui ne verse pas ou ne paie pas un montant au
receveur général dans le délai prévu par la présente partie est tenue de
payer la pénalité et les intérêts suivants, calculés sur ce montant pour la
période commençant le lendemain de l’expiration du délai et se terminant le
jour du versement ou du paiement :
a) une pénalité de
6 % par année;
b) des intérêts au
taux réglementaire.
|
III. Analysis
[24]
Subsection 169(4)
is clear that an ITC cannot be claimed unless the claimant has obtained
prescribed information. Section 3 of the Regulations is clear that
the prescribed information must include the name of the supplier or the name
under which the supplier does business, and the registration number assigned
to the supplier.
[25]
The Federal Court of
Appeal in Systematix Technology Consultants Inc. v. Canada,
2007 FCA 226, [2007] G.S.T.C. 74, had occasion to consider this very
issue in circumstances where an ITC claim had been made in similarly
unfortunate circumstances where, for various reasons, the suppliers did not
have valid GST registration numbers. The Court of Appeal wrote:
4 We are of the view that the legislation is mandatory
in that it requires persons who have paid GST to suppliers to have valid
GST registration numbers from those suppliers when claiming input tax
credits.
[Emphasis added.]
[26]
Given the wording of
paragraph 169(4)(a), as well as the Reasons for Judgment of Archambault
J. in the Tax Court ( 2006 TCC 277, [2006] G.S.T.C. 120) with which the
Federal Court of Appeal agreed, I take the court’s reference to “valid GST
registration numbers from those suppliers” to mean GST registration numbers
validly assigned to those suppliers.
[27]
The Court of Appeal
went on in Systematix to quote approvingly from Key Property
Management Corp. v. The Queen, 2004 TCC 210, [2004] G.S.T.C. 32,
wherein Bowie J. wrote that paragraph 169(4)(a) and section 3 of
the Regulations cannot succeed in their purpose of protecting the fisc
against both fraudulent and innocent incursions unless they are considered to
be mandatory requirements and strictly enforced. The Federal Court of Appeal
emphasized the words “unless they are considered to be mandatory requirements
and strictly enforced”.
[28]
The Federal Court of
Appeal also quoted approvingly from Davis v. The Queen, 2004 TCC 662,
[2004] G.S.T.C. 134, wherein Campbell J. wrote that, given the very
specific way in which these provisions are worded, they are clearly mandatory
and cannot be sidestepped.
[29]
In this case I am bound
to follow the Federal Court of Appeal’s decision in Systematix. I should
note, however, that (as noted by Archambault J. of this Court in deciding the Systematix
case at first instance) this strict approach can result in unfairness to a
purchaser who pays the GST in good faith. It leaves Canadian businesses bearing
the risk of fraud, identity theft, and wrongdoing and effectively requires them
to put into place risk management practices in dealing with new and continuing
suppliers to identify supplier information that may require further
investigation. A result such as this may prove harsh and unfair but it is open
to Parliament to legislate such a regime and I am bound to apply that
legislation as it has already been interpreted by the Federal Court of Appeal.
[30]
Whether it is the
purchaser or the fisc that should bear the risk of supplier identity theft and
wrongdoing in GST collection and remittance matters is a valid policy question
to be debated. However, in circumstances such as those before me, the Federal
Court of Appeal has ruled that Parliament has already turned its mind to this
question. The Tax Court cannot reopen the question.
[31]
Counsel for the
appellant sought to distinguish Systematix on the basis that it is clear
from the facts described in Archambault J.’s trial judgment that Systematix
involved valid registration numbers that had previously been revoked by the CRA,
valid registration numbers issued after the relevant period, and invalid
registration numbers that had never been issued to anyone. He also argued that Archambault
J. did not disagree with or overrule this Court’s earlier decision in Joseph
Ribkoff Inc. v. The Queen, 2003 TCC 397,
[2003] G.S.T.C. 162, but instead distinguished it, and that the Ribkoff
decision would be more directly on point with the appellant’s case.
[32]
It is not at all clear
that the Systematix supplier registration number issues were materially
different than those involved in this case. In paragraph 5 of his Reasons,
Archambault J. writes that one of the supplier invoices involved a registration
number that was only valid in a prior period and had also only ever been issued
to a person other than the Systematix supplier. It is also not clear to me that
the Ribkoff facts are necessarily more similar to those of Comtronic. The
primary issue in Ribkoff was the fact that the invoicing suppliers, who
were with one exception all registered with GST numbers, did not themselves
provide the services but subcontracted them.
[33]
With respect to both of
the appellant’s arguments, I am unable to see how the broad wording of the relevant
provisions and the interpretation thereof by the Federal Court of Appeal that the
wording is mandatory and should be strictly enforced, and which requires that
the ITC claimant have the registration number assigned to the supplier, should
result in any different outcome in this case. Similarly, while Archambault J. at
trial in Systematix did distinguish Ribkoff and the Federal Court
of Appeal found no error on the part of the trial judge, I cannot discern how
this Court’s approach in Ribkoff and other earlier cases survive the
Federal Court of Appeal’s decision in Systematix.
IV. Due Diligence
[34]
In Corporation de l’École
Polytechnique v. Canada, 2004 FCA 127, [2004] G.S.T.C. 102, the
Federal Court of Appeal described the due diligence defence to a section 280
penalty as follows:
27 This
Court has held that there is no bar to the defence argument of due diligence,
which a person may rely on against charges involving strict liability, being
put forward in opposition to administrative penalties. In particular, it has
held that section 280 of the Excise Tax Act, by its wording and content,
gives rise to that defence: Canada (A.G.) v. Consolidated Canadian
Contractors Inc., [1999] 1 F.C. 209 (F.C.A.). It may be worth reviewing the
principles governing the defence of due diligence before applying them to the
facts of the case at bar.
28 The
due diligence defence allows a person to avoid the imposition of a penalty if
he or she presents evidence that he or she was not negligent. It involves
considering whether the person believed on reasonable grounds in a non-existent
state of facts which, if it had existed, would have made his or her act or
omission innocent, or whether he or she took all reasonable precautions to
avoid the event leading to imposition of the penalty. See The Queen v. Sault
Ste-Marie, [1978] 2 S.C.R. 1299; The Queen v. Chapin, [1979] 2
S.C.R. 121. In other words, due diligence excuses either a reasonable error of
fact, or the taking of reasonable precautions to comply with the Act.
29 The
defence of due diligence should not be confused with the defence of good faith,
which applies in the area of criminal liability, requiring proof of intent or
guilty knowledge. The good faith defence enables a person to be exonerated if
he or she has made an error of fact in good faith, even if the latter was
unreasonable, whereas the due diligence defence requires that the error be
reasonable, namely, an error which a reasonable person would have made in the
same circumstances. The due diligence defence, which requires a reasonable but
erroneous belief in a situation of fact, is thus a higher standard than that of
good faith, which only requires an honest, but equally erroneous, belief.
30 A
person relying on a reasonable mistake of fact must meet a twofold test:
subjective and objective. It will not be sufficient to say that a reasonable
person would have made the same mistake in the circumstances. The person must
first establish that he or she was mistaken as to the factual situation: that
is the subjective test. Clearly, the defence fails if there is no evidence that
the person relying on it was in fact misled and that this mistake led to the
act committed. He or she must then establish that the mistake was reasonable in
the circumstances: that is the objective test.
31 As
soon as the defence of due diligence accepted for strict liability offences is
raised, the question arises of whether the defence of error of law could also
be relied on to avoid imposition of a penalty. That question does not arise
only in connection with strict liability offences, although with the growth in
regulations and the multiplication of statutory offences the field of strict
liability has proven to be the most fertile for the emergence of this defence.
. . .
38 This
brief review of the legislation and case law leads to the following conclusion.
Apart from exceptions, mistakes in good faith and reasonable mistakes of law as
to the existence and interpretation of legislation are not recognized as
defences to criminal offences, nor to strict liability offences or prosecutions
governed by the rules applicable in strict liability. However, two exceptions
to the principle should be noted: officially induced mistake of law and
invincible mistake of law.
[35]
I take from these words of the Federal
Court of Appeal that:
1. in order to establish a due
diligence defence to a penalty an appellant must show he either (a) made a
reasonable error in his or her understanding of the facts, or (b) took
reasonable precautions to avoid the event leading to the penalty, and
2. subject to very limited
exceptions, mistakes of law as to the existence or interpretation of
legislation are not recognized as an excuse or defence to a section 280
penalty. The exceptions are officially induced mistake of law and invincible
mistake of law involving a defect in the promulgation or publication of the
law.
[36]
With respect to the
appellant’s position that it exercised due diligence to avoid its failure to
have its suppliers’ registration numbers, I am not persuaded on the facts of
this case. Firstly, I note that Comtronic in fact did nothing to verify or
confirm the registration numbers printed on the invoices. These particular
circumstances are not such that I am inclined to think that doing nothing to
try to avoid the risk of failure to have correct registration numbers is
sufficient. Mr. Leung had resurfaced in Montreal after a few years since being known to Comtronic in Toronto.
Mr. Tse was not told by Mr. Leung that he was no longer at RMD
International Trading until after the Supertech Systems invoices were issued.
Nonetheless, later invoices came from entities described as RMD and RMD Inc. as
well as Rapid Memory Distribution. While it may be reasonable to accept that a
corporate entity operates under different trade names from the same address and
with the same registration numbers, the re-emergence of RMD invoices after Mr. Leung
said he had left RMD, combined with the fact that he only told Mr. Tse he
left RMD when Mr. Leung questioned the Supertech Systems invoices and not
when he reintroduced himself after several years to Mr. Tse, warranted further
inquiry without which Comtronic’s mistaken understanding of the facts was not
reasonable.
[37]
Comtronic cannot be excused from
its section 280 penalty based upon the fact that it did not know the law
required it to be responsible for the validity of suppliers’ registration
numbers; that was a mistake of law.
[38]
While there was not an online
verification system available to purchasers in the years in question maintained
by the CRA for purposes of confirming supplier names and registration numbers,
there was a CRA telephone inquiry service for this purpose. The MRQ did operate
an online internet confirmation service throughout the years in question which,
had it been consulted as regards the QST registration numbers shown on these
five suppliers’ invoices, would have turned up the problem. I am not satisfied,
in these circumstances, that Comtronic’s mistaken understanding or assumption
as to the valid registration of these suppliers was reasonable, and, since it
did not actively take any precautions to ensure these suppliers had valid
registration numbers, it cannot be said to have taken reasonable precautions to
ensure compliance or avoid the failure. This is not to say that failure to
actively take additional precautions will always preclude an appellant that
accepted the registration number on an invoice at face value from being
considered to have taken reasonable precautions to comply with the GST
legislation.
[39]
The appeal is dismissed,
with costs.
Signed at Montreal, Quebec, this 28th day of January 2010.
"Patrick Boyle"
Email this Content