Citation: 2008TCC296
Date: 20080513
Docket: 2004-1998(GST)G
BETWEEN:
MINISTIC AIR LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie
J.
[1] This appeal is
brought from an assessment for goods and services tax (GST) made on October 8,
2001 for the period between March 1, 2001 and March 31, 2001 (the period). The
appellant Ministic Air Ltd. (Ministic) is a corporation that, during the
relevant time period, was engaged in providing the service of transportation by
air. It filed a GST return under the Excise Tax Act, Part IX, (the Act)
for the period showing GST collectible of $1,227.58, and claiming input tax
credits of $3.00, an adjustment for uncollectible accounts of $170,296.51, and
a net refund claimed of $169,071.93. Following an audit, this refund claim was
refused by the assessment of October 8, 2001. Ministic filed a Notice of
Objection on July 26, 2002. The assessment was confirmed by Notice of Decision
dated February 4, 2004.
[2] The Act
makes provision for a credit for bad debts in section 231(1). In 2001, it read:
231(1) Where a person has made a taxable supply
(other than a zero-rated supply) for consideration to a recipient with whom the
person was dealing at arm’s length, to the extent that it is established that
the consideration and tax payable in respect of the supply have become in whole
or in part a bad debt, the person may, in determining the net tax for the person’s
reporting period in which the bad debt is written off in the person’s books of
account, or for a subsequent reporting period, deduct the amount determined by
the formula
A
× B/C
where
A is the tax in respect of the supply;
B is the total of the consideration, tax and any
amount that can reasonably be attributed to a tax imposed under an Act of
the legislature of a province that is a prescribed tax for the purposes of
section 154 (referred to in this section as “applicable provincial tax”)
remaining unpaid in respect of the supply that was written off as a bad debt;
and
C is the total of the consideration, tax and
applicable provincial tax in respect of the supply.
231(2) [Repealed, 2000, c. 30, s. 58].
231(3) If a person recovers all or part of a
bad debt in respect of which the person has made a deduction under subsection
(1), the person shall, in determining the net tax for the person’s reporting
period in which the bad debt or that part is recovered, add the amount
determined by the formula
A x B/C
where
A is the amount of the bad debt recovered by the
person;
B is the tax payable in respect of the
supply to which the bad debt relate4s; and
C is the total of the consideration, tax and
applicable provincial tax in respect of the supply.
231(4) A person may not claim a deduction under
subsection (1) in respect of an amount that the person has, during a particular
reporting period of the person, written off in its books of account as a bad
debt unless the deduction is claimed in a return under this Division filed by
the person within four years after the day on or before which the return under
this Division for the particular reporting period is required to be filed,
[3] The Notice of
Decision gave two reasons for rejecting Ministic’s claimed refund.
The
information submitted supported that Ministic Air Ltd. had obtained a bank loan.
George Brotherston guaranteed this loan. The bank collected the full amount of
the loan from George Brotherston who then took the position of the bank.
Shortly after that Ministic Air Ltd. transferred its account receivables to
George Brotherston to satisfy their obligation to him.
A bad debt
write off does not include a situation where a corporation voluntarily
transfers its account relievable to another person to satisfy a debt owing to
that person. This action supports that the receivables were still collectable
in March of 2001.
Section 231 of
the ETA is also not available to a corporation where the corporation has
written off an account receivable that pertains to a closely related
corporation.
The required
criteria for an adjustment to the GST under section 231 of the ETA have
not been met, therefore the assessment is confirmed.
An
additional argument advanced by counsel for the respondent at trial is that the
debts in question had not been written off by the appellant either before or
during the period in which the refund claim was made, as subsection 231(1) of
the Act required.
[4] Ministic was
incorporated in October 1981. It operated a passenger, freight and medivac
service between Winnipeg and the Garden Hill Reserve on the shore of Island
Lake in the northeastern part of Manitoba. George Brotherston was its president and a
shareholder until February 1995. After he ceased to be the president, his
shareholding was acquired by the Garden Hill First Nation (Garden Hill), and
from that time forward Garden Hill owned approximately 98% of the shares, and
the Wassagamach First Nation (Wassagamach) owned the remainder.
[5] On August 31
1998, Ministic, in an effort to expand its business, entered into an agreement
with STP Wass Air, which provided service to the St. Theresa Point First Nation
and the Wassagamach First Nation reserves, situate near the Garden Hill Reserve
on the shore of Island Lake. The written agreement is cryptic, but its intent
apparently was to have Ministic provide service to those two First Nations in
conjunction with its service to Garden Hill, with STP Wass Air ticketing
passengers to and from Winnipeg to St. Theresa Point, and the service to be provided by Ministic. Revenues
from this service were placed in a separate account, and expenses related to
the service were paid from that account. Any profit exceeding 20% was to be
paid to STP Wass Air. The service never proved to be profitable, and it was
discontinued in December 2000.
[6] At about the
same time, Ministic created a planning committee whose task was to reorganize
the business in a way that would reduce its costs. Mr. Brotherston was a
participant in this endeavour, and his efforts apparently were instrumental in
effecting some reductions. In spite of this, however, the appellant found
itself heavily indebted to Canada for both GST and source deductions under the Income
Tax Act. By March 2001 that debt amounted to:
|
GST
|
$72,736.75
|
|
Income tax source deductions
|
277,114.63
|
|
TOTAL
|
$349,851.38
|
At
a meeting held on February 26, 2001, Ministic and representatives of the Canada
Revenue Agency (the Agency) agreed, among other things, that in return for
certain accommodations Ministic would pay $70,000 per month towards this debt,
while at the same time paying all the new source deduction and GST obligations
as they fell due. This arrangement was recorded in a letter from Kara Guse,
a Revenue Canada Collections Officer, to Melody Fraser, who described herself
in her evidence as having been the finance manager of Ministic.
[7] Although
well-intentioned, this arrangement never came to fruition. Towards the end of
March 2001, as the result of information received from Mr. Wuttke, who had
until his dismissal in mid-March been the President of Ministic, the officials
of the Agency concluded that Ministic had ceased operations. This information
caused the Agency to take immediate steps to realize on the assets of Ministic.
This it did by obtaining a writ of execution from the Federal Court and placing
it in the hands of the sheriff. This resulted in a seizure of Ministic’s
assets, including the filing cabinets and the financial records of the company
contained in them. The inevitable result of the seizure of the assets was the
discontinuance of Ministic’s operations. It did not resume operations, and was
dissolved in 2003. In 2004 it was revived for the purpose of pursuing this
appeal.
[8] Mr. Nerbas
argued strenuously throughout the hearing of the appeal that the appellant’s
troubles can all be laid at the feet of the Agency, because its actions in
asserting its remedies against the assets were both unjustified and, in the
result, fatal to the company’s business. Most of the appellant’s evidence, and
argument, was directed to that thesis. The evidence before me does not disclose
any wrongful action on the part of the Agency, however. The agreement reached
in February to which I have referred, certainly did not require the Agency to
forego its available remedies in circumstances where it appeared that Ministic
was ceasing to operate. Indeed, that agreement had no legal effect at all. It
merely recorded the accommodation that the Agency was willing to make in an
effort to help Ministic recover from its plight. Ministic gave no consideration
at all for the forbearance it received under the arrangement. It appears from
the evidence that Ministic had in fact ceased, or at least temporarily
suspended, its operations in the latter part of March. Mr. Brotherston and Ms.
Fraser assert that operations were merely suspended temporarily as Ministic
sought to reorganize itself. It is understandable, however, that the major
creditors would take steps to protect their interests when it appeared that the
airline was no longer operating.
[9] More to the
point, perhaps, this Court only has jurisdiction to deal with the question
whether the assessment for GST made in response to the March 31, 2001 return
was correct in fact and in law. That this is so has recently been reaffirmed by
the Federal Court of Appeal in Moss v. Canada, where the following
appears:
3 It appears that the relief requested
for Ms. Moss from the Tax Court was based on the assumption that the Tax Court
could grant Ms. Moss relief on equitable grounds. In that regard, a number of
complaints were made on behalf of Ms. Moss that certain tax collection actions
taken by the tax authorities were unethical, abusive, malicious and punitive.
Those steps included a garnishing order that resulted in the cashing of one or
more insurance policies, described by Mr. Moss as tax exempt polices, in a
manner that precluded the funds from being reinvested in other tax exempt
policies. It was also argued for Ms. Moss that a jeopardy order under section
225.2 of the Income Tax Act was obtained by tax collection officials on
the basis of a misleading affidavit.
4 The judge concluded that she did not
have the legal authority to order the reassessments of Ms. Moss to be vacated
or set aside on the basis of allegations of wrongful or abusive conduct by tax
officials in the collection of tax debts, even if those allegations had been
proved. In our view, she was correct.
5 If unlawful or improper tax
collection actions occur, and are proved, it may be possible to obtain a remedy
by commencing appropriate proceedings in the Federal Court, but as a matter of
law, the Tax Court of Canada has no jurisdiction to set aside or vacate a
reassessment because of such actions. In an appeal from a judgment of the Tax
Court, this Court's jurisdiction is similarly limited.
[10] I turn now to the
March 2001 GST return, the claim for a refund of GST in the amount of
$170,296.51, and the assessment that resulted from it that has given rise to
this appeal. As I said at the outset, the refund claimed by the appellant is
$170,296.51. Remarkably, there is no clear statement anywhere in the Notice of
Appeal or in the documents that were made exhibits at the trial of how the
appellant arrived at that amount. It is only from handwritten notations on the
documents found at tabs 27, 28 and 29 of Exhibit R-1, and from the evidence of
Melody Fraser, that I have been able to reproduce it. It appears to have been
arrived at in this way:
|
Total of appellant’s accounts
|
|
|
receivable over 90 days past
due
|
$1,723,038.13
|
|
Less accounts on which no GST
paid
|
163,660.24
|
|
|
1,559,337.89
|
|
Add total of STP Wass Air
accounts receivable
|
863,246.93
|
|
total of Pim Air
accounts receivable
|
10,182.57
|
|
|
2,432,807.39
|
|
|
x 7%
|
|
TOTAL
|
$170,296.51
|
[11] Counsel for the
respondent advanced a number of reasons why the appellant’s claim to this
refund does not satisfy the requirements of subsection 231(1) of the Act,
and therefore should not succeed.
(i) the debts in question were not established to
be bad debts;
(ii) the debts in question were not written off
in the appellant’s books;
(iii) the receivables were not written off before
or during the period;
(iv) it was not established that GST was remitted
on all the receivables;
(v) the receivables of STP Wass Air and Pim Air
are not the appellant’s;
(vi) the appellant had sold its
accounts receivable to George Brotherston; and
(vii) the largest account was that of a non-arm’s
length party.
[12] It is a question
of fact whether a debt has been established to be uncollectible. It is not
sufficient that the debt has been outstanding for a long period of time. The
taxpayer must have taken reasonable measures to collect the debt, without
success, and have concluded that it is unlikely that it will be paid. In the
present case, there is little evidence as to the actual measures taken by the
appellant to collect any specific debt. The appellant’s evidence was general as
to the unwillingness of its debtors to pay their accounts, particularly those
who were owed money by Garden Hill. They, perhaps understandably, were
unwilling to pay their accounts to a corporation whose shares were almost all
owned by Garden Hill. I do not consider the generalizations that made up the
evidence of Ms. Fraser and Mr. Brotherston on this issue to be sufficient. The
debts must be considered and found to be uncollectible on an individual basis,
and the evidence simply did not demonstrate that that had ever been done.
Instead, Ms. Fraser simply decided at some time after the company ceased
operating that all its receivables should be written off.
[13] Subsection 231(1)
specifically requires the debt to have been written off in the taxpayer’s books
of account before it may form the basis of a claim for a refund of GST. In fact
no such journal entries were ever recorded. The appellant argues that this
requirement cannot apply to it as the books were not available, having been
seized by the sheriff on March 30, 2001. The appellant’s claim was made in its
GST return for the period ending March 31, 2001. It was not suggested that the
appellant formed the conclusion that these debts were uncollectible on March 30th
or the 31st, the only two days within the period that the books were not
available.
[14] Beaubier J. held
in Burkman v. The Queen
that a written note, as opposed to a journal entry, could satisfy the
requirement that the debt must be written off in the books of account, in
circumstances where no ledger existed. I accept that as being correct. It has
long been held by this Court that journal entries are not of themselves
financial events in the life of a business; they simply record those events. Nevertheless, there must be
a precise written statement recording the taxpayer’s decision. It is not enough
to say “the books were not available, so there is no written record of the
write-off”. In the present case, the closest thing there is to a written record
of the decision to write off the debts is a hand-printed memorandum made by Ms.
Fraser on May 14, 2001, and addressed to
whom it may concern. It reads as follows:
Ministic Air
has paid GST on all old STP Wass accounts. The amount is $800,000.00. This
amount would have been written off this year and GST would have become
collectable to Ministic Air.
STP Wass ran
as a separate company but Ministic Air controlled all transactions.
Ministic Air
A/R in the amount of $1,900,000.00 is also to be written off as bad debt and
GST is collectable to Ministic Air.
“Melody
Fraser”
Former
Director of Finance
GST rebate –
2,700,000 x 7% = $189,000.00
Medical services
– 153,000.00 – Revenue Canada seized this amt.
TOTAL
$242,000.00
340,000.00
“G.Brotherston”
It,
together with a fax cover sheet and another hand-printed document, make up the
contents of Tab 4 of the appellant’s Exhibit A-1. I reproduce the latter two
documents as well:
FAX
COVER SHEET
MAY
15 ‘01
TO: Denyse Coté
FAX NO. 984-5434
MESSAGE:
Attached
is summary of tax refund/reclaims on Ministic accounts total plus 153,000
payment is $342,000.00.
Meeting
of Ministic Air shareholders is taking place this morning [Tuesday, May 15 ‘01]
and I expect to receive instructions later today and will advise.
“G.
Nerbas”
(Attachment)
MINISTIC
AIR
ACCOUNTS
1.
STP-Waas – an air operation of Ministic Air
Expenditures of $800,000 subject
to reclaim of GST - 56,000
2.
Accounts Receivable of $1,900,000
as bad debts
Rewrite of GST -
133,000
3.
Medical Services account with Ministic Air
Seized by Canada
Payment to be applied on tax
debt - 153,000
342,000
DEDUCTION FROM
CLAIMED TAX
OWING
IS $342,000.00
NOTE – Two aircraft repossessed –
Dec. 2000, and now in Vanc. As per search
attached. VALUE $1,000,000
[15] There is no doubt
in my mind that these documents were not created to record a business decision,
but in an attempt to create evidence that would support an attempt to recover
the GST claimed. I note, too, that Melody Fraser styled herself “Former
Director of Finance”. It seems doubtful that she even had authority to act at
that time. In any event those documents, alone or collectively, fall far short
of what is required to record a corporate decision to write off the company’s
entire accounts receivable.
[16] One of the
requirements of subsection 231(1) of the Act is that the claim for a
refund must be made in the return for the reporting period in which the debt is
written off, or that for a later reporting period. In the present case, the
claim was made in the return for the reporting period that ended on March 31,
2001. Even if the note of May 14, 2001 were considered to be sufficient
evidence for the write‑off, it could not support this claim for a refund
made in the return for an earlier period. This may seem to be an unduly
technical obstacle to the appellant’s claim, but I am obliged to apply the
statute as it was written by Parliament. It is not open to me to make
exceptions to its provisions on the grounds of some perceived unfairness in its
operation in a particular case: see Chaya v. The Queen. This factor alone is a
complete bar to the appellant’s claim.
[17] Subsection 231(1)
also requires the applicant for a refund to show that the supply in respect of
which the debt was incurred was a taxable supply, and the GST was in fact
reported and remitted in respect of each invoice for which the refund is
claimed. The appellant’s position, as I understand it, is that this requirement
is satisfied by the deduction from the base amount for which the claim is made
of $163,660.24, which is said to be the total of the receivables written off
that relates to exempt supplies, specifically air ambulance services. The
appellant did not produce the invoices to establish this requirement either to
the assessor or to the appeals officer, nor was it proved before me. The
appellant’s approach throughout has been that it is sufficient to say that all
the accounts receivable are written off, and to produce only aggregate numbers
to support the claim. However, this does not satisfy the requirements of the Act.
It is certainly clear on the evidence that the GST on many of the invoices must
have been unpaid at the end of the March 2001 reporting period, as the
appellant owed some $72,700 in unremitted GST at the end of February. That
represents tax on more than one $1 million in taxable supplies. This debt was
ultimately paid, but not until August that year when it was satisfied from the
proceeds of the assets seized in March. However, the claim was made in the
return for the month of March, at which time the GST on those supplies, or at
least a large part of them, remained unpaid.
[18] The appellant
included the accounts receivable of STP Wass Air and Pim Air in the base upon
which it calculated its refund claim. It also included approximately $750,000 owing from Garden Hill. The appellant’s contention
appeared to be that somehow the receivables of STP Wass Air and Pim Air were
its receivables, and it was entitled to a GST refund in respect of them, as a
result of the August 31, 1998 agreement referred to at paragraph 5 above. That
agreement makes no such provision, and Melody Fraser’s explanation of how the
arrangement was carried out in practice was no more illuminating. The evidence
was that the proceeds of ticket sales under the agreement were deposited to a
separate account, but it was not clear who controlled that account, or who
remitted the GST on the ticket sales. It is clear that those two companies were
both registrants under the Act, and in the absence of any clear evidence
to the contrary, I think it is reasonable to conclude that when they sold
tickets they reported and remitted the GST in respect of those tickets. The
evidence before me certainly falls short of establishing either that their
receivables somehow belonged to the appellant, or that the appellant had
remitted GST in respect of tickets sold by those two companies.
[19] Subsection 231(1)
does not permit a refund of GST where the debt written off is owed by a party with
whom the taxpayer did not deal at arm’s length in making the supply. The
appellant’s largest receivable at the time it ceased operations in March 2001
was that of Garden Hill, owner of 98% of the appellant’s shares. It amounted to
about $750,000, or nearly one-third of the claim. The arm’s length issue is
dealt with in the Act in subsections 126(1) and (2):
126(1) For the purposes of this Part, related
persons shall be deemed not to deal with each other at arm’s length and it is a
question of fact whether persons not related to each other were, at any
particular time, dealing with each other at arm’s length.
126(2) Persons are related to each other for
the purposes of this Part if, by reason of subsections 251(2) to (6) of the Income
Tax Act, they are related to each other for the purposes of that Act.
The relevant
part of section 251 of the Income Tax Act reads:
251(2) For the purpose of this Act,
“related persons”, or persons related to each other, are
…
(b) a corporation and
(i) a person who controls the
corporation, if it is controlled by one person,
[20] Mr. Nerbas argues
that these provisions simply raise a rebuttable presumption that the appellant
and Garden Hill did not deal at arm’s length, and that this presumption is
rebutted by the evidence that the appellant’s policy was to provide service to
Garden Hill and its members at the same commercial rates that it charged to all
its other customers. He relies for this proposition on Gray v. Kerslake, a case concerning section
134 of the Insurance Act of Ontario.
In my view, the correct statement of the effect of the verb “to deem” in the
present context is found in Barclay’s Bank Ltd. v. Inland Revenue
Commissioners,
where Viscount Simonds said
that he regarded its primary function, when used in a statute, as being “to
bring in something that would otherwise be excluded”. This meaning was adopted
in the context of the Income Tax Act by Heald J.A. in Hillis and
Hillis v. The Queen.
To the same effect is the following statement made by Dickson J. in giving the
unanimous judgment of the Supreme Court of Canada in The Queen v. Sutherland:
The purpose of
any "deeming" clause is to
impose a meaning, to cause something to be taken to be different from that
which it might have been in the absence of the clause.
[21] There was
conflicting evidence before me as to the beneficial ownership of the
appellant’s accounts receivable. On May 15, 2001, the Board of Directors of
Ministic passed a resolution in the following terms:
After review
and discussion of the options presented, it was moved by Harold Harper,
seconded by Judy Little and unanimously resolved that the Board of Directors of
Ministic Air Ltd. sell all accounts receivable as at March 23, 2001 to George
Brotherston for the sum of $1.
Ms.
Fraser testified under cross-examination that Mr. Brotherston had guaranteed a
bank loan in the amount of $500,000 for Ministic, that the loan had been called
by the bank and Mr. Brotherston was required to honour his guarantee, that the
accounts receivable had been pledged to the bank as security for the loan, and
that was the reason for the May 15 resolution. Mr. Brotherston’s evidence was
that the beneficial ownership of the accounts receivable was not transferred to
him at all. According to his evidence there was no more than a nominal transfer
of the accounts to him so that he could collect them on behalf of Ministic. His
reputation, he said, was such that people who would not pay their accounts to
Ministic would nevertheless pay if they thought that he was the creditor. He
said that he collected about $7,000 after the May 15 resolution, and that he
turned that money over to Ministic.
[22] In the absence of
any corroboration from the members of the Board of Directors of Ministic, I
find Ms. Fraser’s evidence to be more probable. Mr. Brotherston, having
paid the bank pursuant to his guarantee, would have been entitled to the
security held by the bank, which included the accounts receivable. Ms. Fraser
had no personal interest in the outcome of this appeal, and as she assisted Mr.
Brotherston in his efforts to collect the accounts after May 15, it seems
likely that she would be as familiar as he was with the facts. It is also
significant that the resolution was passed the day after Ms. Fraser and Mr.
Brotherston wrote the memorandum that I have reproduced above, purporting to
write off the accounts receivable en bloc. Although I have held that
that memorandum was not effective, it is indicative of an intention that is
quite inconsistent with Mr. Brotherton’s evidence that on the following day
Ministic was taking steps, through him as a trustee, to collect those accounts.
I conclude, therefore, that Ms. Fraser’s evidence on this issue is preferable
to that of Mr. Brotherston, and that the Appellant, if it had a beneficial
interest in the accounts prior to the May 15, 2001 resolution, did not have any
thereafter.
[23] For all the
foregoing reasons, I conclude that the Appellant has failed to satisfy the
requirements of subsection 231(1) of the Act in respect of its claimed
refund, even exclusive of the accounts of Garden Hill and the receivables of
STP Wass Air and Pim Air that it included in its claim.
[24] I have some
sympathy for the position that the appellant finds itself in. It has
undoubtedly been unable to collect a significant amount of money that it was
owed at the time it ceased operations. Much of that was owed to it by its major
shareholder, but there also was a great deal owed by arm’s length parties as
well. The GST paid on the latter accounts could have been recovered if the
appellant had written those debts off in a business-like way, and if it had
claimed the refund after doing so, as the Act requires. However, as I
said earlier, I have no jurisdiction to waive any of the strict requirements of
the Act. The scheme of the Act is complex, and the requirements
that are prerequisite to obtaining a refund were enacted to guard against abuse
and fraud. I am not suggesting that there is any abuse or attempted fraud
involved in this case, but as I pointed out earlier, I have no jurisdiction to
relieve an appellant of the obligation of strict compliance. I must apply the Act
as Parliament wrote it, and I therefore have no alternative but to dismiss the
appeal. The Respondent is entitled to costs.
Signed at Ottawa, Canada, this 13th day of May, 2008.
“E.A. Bowie”
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