Citation: 2008TCC5
Date: 20080310
Docket: 2003-1066(GST)G
BETWEEN:
TELUS COMMUNICATIONS (EDMONTON) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Hershfield J.
I. Introduction
[1] This appeal
concerns supplies paid for by the Appellant pursuant to an assumption of
liabilities made as part of an acquisition by the Appellant of the local
telephone exchange business formerly carried on by Edmonton Telephones
Corporation (Ed Tel) a wholly owned subsidiary of the City of Edmonton. The acquisition was
effective March 10, 1995.
[2] The supplies were
contracted for by Ed Tel and made by suppliers before the acquisition of the
business but had not been paid for at the time of the acquisition. The
Appellant assumed the liability to pay for these supplies and did in fact pay
for them after the acquisition, including the GST payable in respect of them.
The Appellant then claimed input tax credits (ITCs) in respect of such
GST payments.
[3] In a nutshell, the
Respondent says that the Appellant was not the recipient of the supplies and
cannot claim the ITCs notwithstanding that it paid the GST as a party liable to
pay for the supply. The Respondent argues that the Appellant’s liability was to
pay Ed Tel the purchase price of the business acquired and that the assumption
of Ed Tel’s liabilities was in payment of that liability. There was no contractual
privity between the suppliers and the Appellant – the liability was not to the
supplier. Liability to the supplier is argued to be a requirement for the
Appellant to be the recipient of the supplies in respect of which ITCs can be
claimed. As well, there is a secondary issue raised by the Respondent that
relates to asserted invoice deficiencies should I find that the Appellant was the
recipient of the subject supplies.
[4] In a nutshell, the
Appellant argues that it meets the requirements of the relevant provisions of
the Excise Tax Act (GST Portion) (the “Act”) to be treated as the
recipient by virtue of its liability to pay for the supplies. Failing that, the
Appellant argues that it is entitled to a rebate and/or reduction of its net
tax payable having paid GST without a liability under the Act to pay it.
As well, the Appellant takes issue with the assessing methodology employed in
determining the quantum of ITCs denied in respect of small transactions. The
method employed in respect of small transactions, supplies with GST payments of
less than $10,000, was to extrapolate from selected sample invoices paid in a
given month what percentage of ITCs claimed in respect of that month were for
supplies made prior to March 10, 1995. The percentage determined by the
sampling was applied against the entire small transaction ITC claims for the
month and the product of that calculation was the amount of the ITC claim
denied for that month. While the assessment period covered March 1, 1995 to
December 31, 1995, the sampling results obtained did not justify going further
than May, 1995. In the case of large transactions where the ITC claim was over
$10,000, each invoice was examined. Based on such examination there were no ITCs
denied in respect of supplies paid for after May, 1995. That is, the ITC claims
in dispute are only those in respect of which supplies were paid for between March
10, 1995 and the end of May, 1995.
II. The Acquisition
[5] The transactions
that gave rise to these issues are set out in the Partial Agreed Statement of
Facts appended to these Reasons. There were a series of transactions and
transfers completed by way of an arrangement under the Canada Business
Corporations Act (the “Arrangement”); however, that series only distracts
from the central issues before me. Counsel for the parties effectively agreed
that treating the series as if there was a direct acquisition by the Appellant
of the local telephone exchange business formerly carried on by Ed Tel would
produce the same result as tracing the consequences through every step in the
series. That is the approach I will take. I am satisfied that doing so
facilitates the analysis without distorting or prejudicing it.
[6] Taking this
approach, I am satisfied that the following facts can be accepted as setting
the proper framework for my deciding the issues before me. They are:
-
The
Appellant acquired all of the undertaking, property, assets and rights of Ed
Tel, including goodwill, of the local telephone exchange business formerly
carried on by Ed Tel (the “Business”) effective March 10, 1995 (the “Cut-off
Date”) pursuant to the Arrangement;
-
Joint
elections were made under subsection 167(1) of the Act;
-
Prior
to the acquisition, Ed Tel had contracted for supplies in the normal course of
carrying on the Business. All the supplies relevant to this appeal (the
“Supplies”) are those supplies that were so contracted and that were made by
suppliers before the Cut-off Date;
-
None
of the Supplies had been paid for at the time of the acquisition;
-
The purchase
price for the Business acquired was payable on the effective date by the
Appellant by the issuance of shares and debt instruments of the Appellant and by
the assumption of liabilities of the vendor, Ed Tel, including the liability of
Ed Tel to pay for the Supplies;
-
Ed
Tel was not released of its liability to suppliers under the contracts
comprising the Arrangement;
-
There
was no contractual relationship between the suppliers of the Supplies and the
Appellant;
-
Pursuant
to its undertaking, the Appellant paid for the Supplies after March 10, 1995 in
the ordinary course of operating the Business acquired from Ed Tel including
GST invoiced in respect of the Supplies;
-
The
Appellant claimed ITCs in respect of such GST payments.
III. Arguments and
Analysis
The Recipient Issue
[7] I will deal
firstly with the principal position of the Respondent. The Respondent says that
the Appellant is not the “recipient” of the Supplies and therefore cannot claim
ITCs pursuant to subsection 169(1).
[8] Section 123 of the Act
defines “recipient” as follows:
"recipient" – “recipient” of a supply of property or a service means
(a)
where consideration for the supply is payable
under an agreement for the supply, the person who is liable
under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and
consideration is
payable for the supply, the person who is liable
to pay that consideration, and
(c)
where no consideration is
payable for the supply,
(i) in the case of a supply of property by way of
sale, the person to whom
the property is delivered
or made available,
(ii) in the case of a supply of property otherwise
than by way of sale, the person to whom
possession or use of the property is given or
made available, and
(iii) in the case of a supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall
be read as a reference to the recipient of the supply;
[9] ITCs are provided
for in subsection 169(1) of the Act which reads as follows at the
relevant time:
169. (1) General rule for [input tax] credits -- Subject to this Part, where property
or a service is supplied to or imported by a person and, during a reporting period of the
person during which the person is a registrant, tax in respect of the supply or importation
becomes payable by the person or is paid by the person without having become
payable, the input tax credit of the person in respect of the property or service for the period is
the amount determined by the
formula:
A × B
where
A is the total of all tax in respect of the supply or importation that
becomes payable by the person during the reporting period or that is
paid by the person during the period without having become payable; and
B is
(a) where the tax is deemed under
subsection 202(4)
to have been paid in respect of the property on the last day of
a taxation year of the person, the extent (expressed as a percentage of
the total use of the property in the
course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of commercial
activities of the person during that taxation year,
(b) where the property or service is acquired or
imported by the person for use in improving capital property of the person, the
extent (expressed as a percentage) to which the person was using the capital property in the course of
commercial activities of the person immediately after the capital property or a portion
thereof was last acquired or imported
by the person, and
(c)
in any other case, the extent (expressed as a percentage) to which the person
acquired or imported the property or service for consumption,
use or supply in the course of
commercial activities of the person.
[10] The Respondent
argued that only the recipient can claim ITCs even though subsection 169(1) makes
no express reference to a “recipient”. However, the wording of the provision is
to allow an ITC where “property or a service is supplied to or imported by a
person”. The suffix to the definition of “recipient” includes “any reference to
a person to whom a supply is made”. The Supplies in the case at bar were to Ed
Tel so the reference in subsection 169(1) to a person must be read as a reference
to Ed Tel as the recipient.
[11] I agree then with
the conclusion that Ed Tel was a recipient as that term is defined to the
extent that matters. Regardless, Ed Tel meets the ITC requirements of 169(1) as
the person to whom the Supplies were supplied. That is, the express language of
the subject provision confirms that ITCs in respect of a particular taxable
supply transaction were, as the Act read in 1995, available to persons
to whom property was supplied pursuant to that transaction. That was Ed Tel,
not the Appellant, in the case of the transactions providing for the Supplies. The
Appellant acquired the supplies that had been the Supplies made to Ed Tel but
they were, in relation to the Appellant, supplies made under a second
non-taxable transaction, namely the conveyance provided for pursuant to the
Arrangement. Still, accepting that “recipients” per se are entitled to
ITCs under subsection 169(1), I will go on to consider the Appellant’s argument
that it is a “recipient” of the Supplies by virtue of its liability to pay for them
and as such is entitled to the ITCs claimed.
[12] The Appellant argued
that it was a “recipient” of the Supplies as defined in the Act on the
basis that it was, as set out in paragraph (a) of the definition, liable under
an agreement to pay the consideration for the Supplies. In effect, the
Appellant argues either that there is no bar to there being more than one “recipient”
of a supply as the term is defined (since Ed Tel was liable under agreements
with suppliers, it too would be a “recipient”) or that the assumption and
payment of a liability substitutes one recipient for another. Allowing such
construction of the Act would give way to a number of tenuous
possibilities not the least of which would be to allow a non-registered exempt
supplier to transfer ITCs to a registered supplier. Such construction would
also have the effect of blurring or transferring the liability to pay GST under
section 165 and impacting the Crown’s right to collect it under section 296. Such construction then is not, in
general terms, a tenable one in my view. The Crown’s right to collect GST from
the recipient (although secondary to its right to collect from suppliers) is a right that must, as a general
rule, be limited to the person from whom the supplier can enforce payment where
that person is the recipient by virtue of that liability. Further, even if there are two persons
against whom the supplier could enforce payment (say the person acquiring a
supply and that person’s guarantor) it seems there would only be one “recipient”. The “recipient” by
definition is the person liable to pay “that consideration”. That person, in my
view, must be the person making the payment as consideration for the
particular supply to which the term “recipient” relates. The recipient of a
supply is not a person required to pay the supplier an amount equal to the
consideration payable on account of a liability of that person which arose as a
consequence of a separate supply between that person and that recipient.
[13] In any event, where
there is an agreement between a supplier and the person to whom the supply is
made for that person’s benefit (Ed Tel in the case at bar), there is only one
paragraph of the definition of “recipient” that can apply; namely paragraph
(a). I see little room to argue in this case that the agreement referred to in
paragraph (a) of the definition of “recipient” can be any other than that
agreement – the agreement between the supplier and the party or parties
contracting with the supplier for the supply to be made. It cannot be another
agreement such as the assumption agreement in the case at bar.
[14] I note here that this
view is not intended to be conclusive of all circumstances that may arise.
Indeed, different factual circumstances have led this Court to afford
“recipient” status, and status to claim ITCs, to persons who have paid the GST
for supplies made to another even where the other person had, under an
agreement, a liability to pay for those supplies. The Appellant naturally
relies on these cases. However, I am of the view that they can and must be
distinguished.
[15] In 163410 Canada
Inc. v. Canada a bankrupt contractor retained
to construct a seniors’ residence had been paid for work not yet completed and was
indebted to subcontractors. To save the project, fresh money was required. The appellant
was the promoter of the project and arranged with the project lender for the
advance of fresh funds to it for dedicated project purposes. Such funds were
held in trust for the appellant’s use. According to the agreements in place
when the funds were set aside, the project lender’s lawyers were paid out these
set aside funds for services performed both before and after the rescue of the
project was undertaken. Regarding the issue as to whether or not the appellant
was the “recipient” of the legal services, this Court found that because the appellant
was liable to pay for the services out of funds set aside for it, it was the
“recipient”. Although it is suggested at paragraph 11 that this conclusion was
not dependent on the appellant being the law firm’s client, the suggestion at
paragraph 8 is that the Court found and relied on there being an agreement
between the law firm as the supplier and the appellant as the party liable to
pay for the supplies. This distinguishes the case at bar. In the case at bar
there is no agreement between the Appellant and the suppliers. As well, the
Court in 163410 Canada Inc. found that the agreement under which the appellant
paid for the supply was the governing agreement for the purposes of paragraph
(b) of the definition of “recipient” which was to find that there was no other
agreement pursuant to which the law firm could impose a liability for its fees
on the project lender. The Court regarded the rescue agreement as prevailing
over, if not replacing, any such agreement between the law firm and the project
lender so as to, in effect, frustrate the operation of paragraph (a) of the
definition of “recipient”. I can make no such findings in the case at bar.
[16] Another construction
of 163410 Canada Inc. is that in determining the application of
paragraph (a) or (b) of the definition of “recipient”, one does not only look
to the existence of a liability to pay for a supply but rather one must look to
the person who is ultimately liable to pay and who in fact makes the payment.
This was how 163410 Canada Inc. was applied in Immeubles Sansfaçon
Inc. c. R..
At paragraphs 33 and 34 this Court held that the person ultimately liable to
pay was the “recipient” not the person who paid nothing notwithstanding a
liability to pay. This approach was adopted in Bondfield Construction Co.
(1983) Ltd. v. R.
[17] However, the facts
of these cases are distinguishable on the same basis that 163410 Canada Inc.
is distinguishable.
[18] In Bondfield the
appellant incurred a liability for a supply under an agreement with a supplier.
The appellant paid for the supply, but was reimbursed by a third party whose
faulty work created the need for the supply in question. The appellant was
treated as an intermediary or conduit through which the third party incurred
the liability to the supplier. Although there was no privity of contract
between the supplier and the third party, it was the third party’s money that
was spent. The third party was the “recipient”. In the case at bar, it was Ed
Tel’s money that was being spent (its proceeds of disposition from the sale of
the Business). The Appellant was the conduit though which Ed Tel ultimately
paid its suppliers.
[19] In Immeubles Sansfaçon
Inc. the appellant agreed to pay a municipality’s infrastructure costs on a
land development project. The municipality contracted with suppliers who
invoiced the municipality. The municipality passed on the invoices to the appellant.
The municipality in that case was the conduit through which the appellant
became liable and it paid with its money, not money owed to the municipality
for a different supply. The appellant therefore prevailed. In the case at bar,
the Appellant wrote the cheque with Ed Tel’s money and cannot prevail.
[20] The Appellant also
relies on this Court’s decision in Bokrika Inc. v. R.. In that case a municipality
became liable to pay third parties to remedy deficiencies arising under a
contract with the appellant. The appellant’s funds (via the appellant’s line of
credit) were used by the municipality to pay for deficiency remedying supplies.
The appellant was found to be the “recipient” even though it was not a party to
the agreement to make those supplies. Again the municipality was merely the
conduit using the “recipient’s” money. That is the inverse of the events in the
case at bar.
[21] Accordingly, I do
not find these cases, relied on by the Appellant, to be of assistance to
it.
[22] Before turning to
the Appellant’s alternative arguments, I note that the Appellant argued that the
amendment to the Act effective in 1997 helps make its point that a
contractual connection between the supplier and the person to whom the property
was supplied was not required under the provision as it read prior to that
amendment. The Appellant argued that effective April 1, 1997 the input tax
credit provision in subsection 169(1) was tightened by ensuring that only the
person who “acquires” the supply (as opposed to the person to whom the property
was supplied) can get the ITC. The argument is that although the Appellant did
not acquire the supplies, it could still be a recipient as the Act read
at the relevant time. It seems to me that this ignores a requirement in
subsection 169(1) as it read in 1995 that the Supplies had to be supplied to
them. In my view, Ed Tel was both the person who acquired the Supplies and the
person to whom the Supplies were supplied. In any event, I do not find the Appellant’s
argument helpful. That there may have been an anomaly or uncertainty in the Act
prior to the 1997 amendment respecting property brought into a province that
needed to be clarified does not persuade me to accept that amendment as assisting
the Appellant’s argument.
[23] In my view, the sole
“recipient” of the Supplies was Ed Tel. It contracted for the Supplies for its
benefit on its own behalf and paid for them with funds due to it on the sale of
its Business. There is no second, fresh or substituted “recipient”. To find
otherwise would simply run contrary to the scheme of the Act.
[24] Accordingly, the
Appellant cannot prevail in respect of its ITC claims at least in respect as
its argument that it was a “recipient” or a person to whom a supply was made.
The
Extrapolation Methodology Issue
[25] That takes me to
consider the Appellant’s alternative argument relating to the calculation of
the ITCs denied in respect of GST paid on lower dollar value Supplies. That
calculation, relating to approximately 25% of the Supplies (as ultimately
determined), was done by a monthly analysis of a fraction of the lower dollar supply
invoices paid for by the Appellant after the Cut-off Date to determine what
portion of that group of supplies were Supplies (i.e. supplies in respect of
which Ed Tel was the recipient) and then extrapolating the results to arrive at
the portion of the total ITC claims, in respect of that group of supplies, that
were for Supplies. The Appellant objected to this calculation methodology. It
is an arbitrary approach to calculating a tax liability. The Appellant argues
that the calculation and assessment cannot be so arbitrary.
[26] To better respond to
the argument, I will briefly describe the methodology.
[27] The auditor divided
his analysis in two parts. The first part, dealing with about 75% of the ITCs,
related to transactions where, according to the Appellant’s general ledger, the
ITC amount claimed was over $10,000. Considering the entire assessment period
from March 1, 1995 to December 31, 1995 there were approximately 28,500 transactions,
worth approximately $20MM, where GST was paid. About $15MM of these related to individual,
or readily bundled, transactions in respect of which there were ITC claims in
amounts over $10,000. These large transactions were audited individually. There
were 116 such transactions (i.e. 116 invoices to review individually).
[28] The auditing of
individual transactions required recovery of microfiche records of supplier
invoices. Of the 116 transactions reviewed after recovering such records, 13
were in respect of Supplies (i.e. supplies made to Ed Tel) paid for by the
Appellant. Payment for these Supplies, were all made in the months of March and
April. In March, 9 invoices, identified as being in respect of Supplies, were
paid. ITCs were disallowed in respect of these Supplies in the amount of $298,932.
In April, 4 invoice payments were identified as being in respect of Supplies.
These 4 payments gave rise to ITC claims of $1,014,118 all of which were denied.
With respect to May there were no large transaction invoices identified as having
been paid in respect of Supplies. Accordingly, all ITCs claims in respect of
transactions greater than $10,000 and paid for in May were allowed. As well,
all claims in respect of invoices paid after May 1995 were allowed without
further audit.
[29] With respect to smaller
transactions, where ITC claims were less than $10,000, the auditor used a
computer system to randomly select transactions. It was not possible to review
some 28,400 individual supply transactions in this group included in an
electronic data base in respect of which microfiche records would have to be
retrieved. Even looking at March, April and May there were about 8,700 such transactions.
Again, it was felt that it would not be possible to review such number of
transactions. A sample audit was felt to be the only feasible approach. The
approach was to take sufficient samples to derive a 90% confidence level as
determined by the program used. That required selection of only 100 samples.
Doubling the sample would only increase the confidence level by 2%, so 100
samples were audited in the interest of expediency. Microfiche records were
obtained in relation to these 100 transactions and an audit was done in respect
of these transactions in the same way that it was done in the case of large
transactions. The March sample was 34 out of 2,563 transactions in respect of
which ITCs were claimed. 24 of the 34 invoices audited were invoices for
Supplies (i.e. issued to someone other than the Appellant prior to the Cut-off
Date). The
percentage of ITCs claimed (in dollar amounts) in respect of these 24 invoices
relative to the total amount claimed for all 34 invoices was calculated to be
some 86% (the “error percentage”). As a result, 86% of the ITC claims under
$10,000 for the entire month of March were denied. This resulted in $401,830 of
ITCs being denied.
[30] The same methodology
was applied to April and May. In April, 33 transactions were reviewed and 9
were found to be in respect of Supplies. The extrapolation gave rise to
$120,370 in ITCs being denied. The number of invoices for the period was 2,331
and the error percentage was some 25%. For May, there were 33 out of 3,903 transactions
reviewed and only one was found to be in respect of Supplies. That single invoice
had a GST amount of $130.71 which was 2% of the total GST relating to the 33 transactions
reviewed. Applying that percentage error, the ITC amount denied was $13,971. The
auditor concluded that further testing would be unnecessary and he therefore assumed
that beyond May 1995 all the ITCs were properly claimed.
[31] Like the Appellant,
I have questions as to the methodology used: Why not do a second sampling of
another 100 invoices to test the confidence level predicted by the program
used? Why not weigh the sample more to March or do a second sampling for March
of another 34 samples? Why undertake an extrapolation for May when the detailed
audit revealed that there were no Supplies in May and when the further random
samples provided only a single, negligible error? Like the Appellant, I have
reservations in trusting the reliability of the methodology employed; however,
unlike the Appellant I have no burden to bring evidence that does more than simply
raise questions. Clearly, the Canada Revenue Agency (“CRA”) based the
assessment on the assumption that GST in the amount assessed ($1,849,230) was
the amount payable in respect of supplies acquired by Ed Tel. This assumption
gives mathematical certainty to the quantum of Supplies in respect of which the
ITCs were denied. The burden is on the Appellant to disprove this sum which is
to disprove the quantum of Supplies upon which the assumption is based. The
Appellant brought no evidence to disprove the quantum of Supplies in respect of
which the ITCs were denied. It is not enough to simply raise questions as to
the quantum at issue. The assumption as to the quantum at issue must be
disproved or at least brought into doubt by evidence as opposed to rhetorical
argument even where that very argument has some intuitive appeal.
[32] This would likely
have required a comparative analysis using a different methodology or employing
the same program with further random sampling. It may have required expert
evidence. In any event, I draw a negative inference from the fact that the
Appellant called no evidence to rebut the testimony of the auditor who spoke of
the reliability of the computer program and its use in audits as approved by
the Canadian Institute of Chartered Accountants (CICA). I see no reason why the
Appellant could not have employed or scrutinized the program so as to give
evidence of its reliability and adequacy.
[33] Nonetheless, the Appellant
relied on the decision of this Court in Huyen c. R. in arguing that extrapolations cannot
take the place of a complete audit where records are available as they were in
the case at bar. That case, however, did acknowledge at paragraph 10, that the
burden on the Respondent was to proceed according to “reasonable minimal
standards” which allow for a credible conclusion. Such standards will vary with
the circumstances. In the case at bar, the sampling and extrapolations may have
been “minimal” but they were not unreasonable. The approach employed afforded
the CRA a reasonable basis to estimate of the quantum of small transaction Supplies
that were made before the Cut-off Date at least for the purpose of making the
assumption that was in fact made. With one reservation, this is sufficient in
my view to put the burden on the Appellant to adduce evidence to rebut the accuracy
of the estimate produced by the extrapolation methodology employed by the
Respondent. The Appellant failed to meet this burden.
[35] Given my acceptance
of the Respondent’s principal argument, it is not necessary for me to consider
a further argument made by the Respondent; namely that most of the invoices
supporting the ITC claims had information deficiencies so as to warrant denial
of the ITCs claimed. Nonetheless, a brief comment seems in order. The alleged
deficiencies relate to information required to be provided pursuant to subsection
286(1) of the Act and section 3 of the Input
Tax Credit Information Regulations. All but a few of the asserted deficiencies
were in the failure to provide the name of the Appellant as the recipient. If
the Appellant was the recipient by virtue of having paid or being liable to pay
the subject invoices, it strikes me that the supporting documentation made
available to the CRA was sufficient to satisfy the objectives of these Regulations.
My inclination then is to say that if a determination was required as to
whether there were deficiencies under the Input Tax Credit Information Regulations,
my finding would be that the ITCs could not be denied on that basis. The
contracts showing the liability of the Appellant to pay for the Supplies and the
underlying documentation, retrieved from microfiche records submitted as
requested, together, sufficiently document who the asserted recipient was. If
that assertion (that the Appellant was the recipient) had prevailed, the
deficiency argument would in my view have failed. To further support this conclusion, I
note that in cases like Bokrika Inc. (where there was no privity of
contract between the supplier and the “recipient”) it seems likely that the
documentary evidence of the “recipient” that enabled the appellants in those
cases to win their appeals was not found in the invoices or statements issued
by the supplier. It seems reasonable then to suggest that the Respondent’s
argument here should not be given judicial sanction so as to give the Minister
the means to appropriate funds from persons who are, in fact, “recipients” and
who are otherwise entitled to ITCs.
[36] A further point that
merits mention is that at trial the CRA auditor testified that some of the Supplies
may have been exempt supplies as they were made by a municipality or
para-municipality. The suggestion was that this should be another reason to
deny the ITCs claimed. In my view, the possibility that some of the Supplies
were exempt cannot stand as a reason to deny the ITCs claimed. There were no
assumptions made as to exempt supplies. Indeed when asked at the examination
for discovery if there would be exempt supplies in this case, the auditor said
that in the normal course of business there would be none.
[37] It might still be
asked whether the possibility of the Supplies being exempt is a further
reason not to allow the transfer of recipient status in determining
entitlements to ITCs. I think not. In determining whether a supply is exempt,
so as to disentitle ITC claims, it is the supplier’s status and the supplies themselves
that must be examined regardless of who the recipient is. Still, considering the transfer issue
in more general terms, I note that early in the audit it was suggested that Ed
Tel should make the ITC claims. Apparently, this was not of interest to Ed Tel.
This might have been because it had no contractual obligation to the Appellant
to claim the credit and further it likely had nothing to gain having conveyed
the Business to the Appellant. Clearly, a better contractual approach might
have been taken from the outset had the GST issues been properly considered
prior to finalizing the Arrangement. In any event, by the time the Appellant began
pressing the CRA to allow Ed Tel to claim the ITCs, such claims were statute
barred. Unless the rebate provisions apply, this is a roadblock preventing the Appellant
from achieving a result that it might otherwise deserve. After all, as Appellant’s
counsel argued, the Appellant is not the ultimate consumer of the Supplies and
should not suffer the GST. Having paid the GST, it needs the ITCs or it will be
penalized and the treasury (fisc) will be unjustly enriched – the Appellant will
be treated like the ultimate consumer who added no further value to the stream
of consumer supplies. However, the system contemplated by the Act would
not have so penalized the Appellant if it had arranged the transactions in a
way that would, or if it had received the covenants from Ed Tel necessary to, ensure
the correct result. That Ed Tel did not seek the ITCs on a timely basis might
result in a windfall for the fisc is not something a Judge can remedy unless
the terms of the Act provide such a remedy.
The Rebate Issue
[38] This takes me to consider the Appellant’s argument that if it
is not entitled to the ITCs claimed on the basis that it is not the
“recipient”, then it is entitled to a rebate and/or reduction to net tax
pursuant to subsections 261(1) and 296(2.1) in the full amount assessed. These
subsections provide as follows:
261. (1)
Rebate of payment made in error --
Where a person has paid an amount
(a) as or on account of, or
(b) that was taken into account as,
tax, net tax, penalty, interest or other
obligation under this Part in circumstances where the amount was not payable or
remittable by the person, whether the amount was paid by mistake
or otherwise, the Minister shall, subject to
subsections (2) and (3), pay a rebate of that amount to the person.
296 (2.1) Allowance of
unclaimed rebate --
Where, in assessing the net tax of a person for a reporting period of the person that the person was
required to remit under this Part on or before a particular day or any other
amount that became payable by a person under this Part on a particular day, the
Minister determines that
(a) an amount (in this subsection
referred to as the "allowable rebate") would have been payable to the
person as a rebate if it
had been claimed in an application under this Part filed on the particular day,
(b) the allowable rebate
was not claimed by the person in an application
filed before the day notice of the assessment is sent to the person, and
(c) the allowable rebate would be
payable to the person, if it were claimed
in an application under this Part filed on the day the notice of the assessment is sent to the person or would be disallowed
if it were claimed in that application only because the period for claiming the
allowable rebate expired before that day,
the Minister may apply all or
part of the allowable rebate against that net tax or other amount as if the person had, on the
particular day, paid or remitted the amount so applied on
account of that net tax or other amount.
[39] The allowance for
the unclaimed rebate provided for in subsection 296(2.1) simply allows for a
proper rebate claim to be made notwithstanding certain restrictions or deadlines
that are otherwise imposed such as under subsections 261(2) and (3). While it
may be too late for Ed Tel as the recipient eligible to claim the ITC to make that
claim in respect of the Supplies, the Appellant argues that it is not too late for
any other party who has paid GST on the Supplies to claim a rebate of that GST if
that other party was not liable under the Act to make the payment. The
time limitation relief in respect of rebates ensures that the fisc is not
unjustly enriched when a payment is made in error. No such relief is afforded, however,
to recipients such as ED Tel when they are beyond deadlines to apply for ITCs.
[40] The Appellant argues
that the rebate must be allowed not only by virtue of the express language of subsection 261(1) which it argues permits
it, but by virtue of the fact that the fisc will otherwise be unjustly
enriched. The counter argument to the enrichment argument is that the enrichment
arises from the failure of Ed Tel to make a timely ITC claim not from any error
made by the Appellant in paying the liabilities incurred by it on the
acquisition of the Business.
[41] On that basis, the
express language of subsection 261(1) needs to be examined to see whether it meets
the rebate requirements as asserted by the Appellant. Clearly my finding that
the Appellant was not the recipient of the Supplies results in the Appellant
not being liable under section 165 (i.e. under the relevant Part of the Act)
to pay the GST it paid. Clearly then the amount paid by the Appellant on
account of GST was not an amount payable by it under the Act. It
was paid under the terms of the Arrangement which is “otherwise” than being
payable under the Act. Literally read then, the express language of subsection
261(1) must be taken to apply to entitle the Appellant to a rebate of the
amount assessed.
[42] The essence of the Respondent’s
argument is that the subject provision cannot be
read without recognizing that the liability of the “recipient” Ed Tel pursuant
to subsection 165(1) of the Act, was meant to be extinguished by the
payment made by the Appellant. In that respect it must be recognized that the Appellant
made the payment on behalf of Ed Tel. It was the intermediary making the payment,
in law and fact, on behalf of Ed Tel. Clearly the Respondent accepted the
payment from the suppliers who remitted the GST paid by the Appellant as
payment of Ed Tel’s liability under the Act for taxable supplies. Ed Tel
was eligible for ITCs so neither it, nor its intermediary, can claim a rebate.
The GST paid was paid on account of a GST liability payable under the Act.
A rebate cannot be claimed on the basis that such payment was made in “error”.
[43] The difficulty I
have with the Appellant’s argument is that to permit rebates where the liability
of recipients under the Act has been paid by a non-recipient of the
supply who undertook to pay it, would require the Minister to scrutinize the
source of every remittance to ensure that the amount remitted in respect of a
supply would not have to be returned as a rebate before the recipient was
assessed. Failing the exercise of such impossible scrutiny, GST could be
avoided by all recipients of taxable supplies whether or not ITCs were
claimable. That is, the literal construction advanced by the Appellant would
lead to absurd results. That an absurd result does not occur in the case at bar
(because Ed Tel is not the end user of the Supplies and could have received the
ITC had it made a timely claim) does not resolve this inherent difficulty with
the literal construction of the rebate provision urged by the Appellant.
[44] Clearly the
intent of the Arrangement was that Ed Tel would be released of its payment
liability under the Act upon the Appellant making the payment on Ed
Tel’s behalf. The payment made by the Appellant was of a liability under the Act
that the Appellant intended to extinguish. The ITC mechanism provided for in
the Act must be the only route intended by Parliament for such payments
to be reconciled. The ITC claim mechanism set out in subsection 225(1) in
respect of the Supplies was there for Ed Tel to employ by timely reporting. Ed
Tel never made such claim. At the end of day, all that has happened is that Ed
Tel has not cooperated with the Appellant to give it the relief it should have
secured under the Arrangement had it been properly structured.
[45] That, regrettably,
is, in my view, the context in which subsection 261(1) must be construed. The
person referred to in that subsection as the person who made the payment is not
the person who writes the cheque or transfers the funds. It is the person on
whose behalf the payment is made. That, in the case at bar, was Ed Tel. Neither
Ed Tel nor the Appellant are entitled to a rebate.
IV. Conclusion
[46] At this point, I
would normally conclude that for all these Reasons the appeal is dismissed
except for the allowance of $52,355 as referred to above. However, there were
issues that were the subject of the appeal that were resolved in favour of the
Appellant prior to trial. I agreed to incorporate those resolutions into my Judgment.
Accordingly, the terms of my Judgment making reference to the appeal being
allowed is a reference to the following agreed allowances in addition to the
$52,355 amount just referred to:
1. With respect to the
“Imaged Invoices Issue”, the amount of net tax assessed will be reduced
from $199,427 to $99,500.
2. With respect to the
“Miscellaneous Issues”, the amount of net tax assessed will be reduced from
$98,392.86 to $10,785.79. The amount of the reduction ($87,607.07) relates to
the amounts referred to in paragraphs 38(b) and 25(cc) of the Reply to the
Amended Amended Notice of Appeal.
[47] In other respects the appeal is dismissed with costs to
the Respondent.
This
Amended Reasons for Judgment is issued in substitution for the Reasons for Judgment
dated on February 13th, 2008.
Signed at Ottawa, Canada, this 10th day of March,
2008.
"J.E. Hershfield"
2003-1066 (GST)G
TAX COURT OF CANADA
BETWEEN:
TELUS COMMUNICATIONS (EDMONTON) INC.
Appellant,
-and-
HER MAJESTY THE QUEEN
Respondent.
PARTIAL AGREED STATEMENT OF FACTS
The parties, through their respective
solicitors, hereby agree to the following facts and documents provided that the
agreement is made for the purpose of this appeal only and may not be used
against either party on any other occasion or by any other party.
A. BACKGROUND
1. Prior to March 10, 1995, Edmonton Telephones
Corporation (“ETC”) carried on the telecommunications carrier business in Edmonton, including the local telephone exchange business,
the telephone directory business, and the cellular, paging and other
mobile communications businesses. At all material times, ETC
was a wholly owned subsidiary of The City of Edmonton, a municipal
corporation under the laws of the Province of Alberta.
2. ED TEL Inc. (“ETI”) was, at all material times,
a corporation incorporated under the Business Corporations Act of Alberta (“ABCA”). Prior to March 10, 1995, all of the
shares of ETI were held by ETC.
3. ED TEL Communications Inc. (“ETCI”) is a
corporation incorporated under the ABCA. At all material times, all of the
shares of ETCI were held by ETI. ED TEL Communications Inc. was later
renamed TELUS Communications (Edmonton) Inc., which
is the Appellant in the instant matter.
4. ED TEL Directory Inc. (“ETDI”) is a corporation
incorporated under the ABCA. At all material times, all of the shares
of ETDI were held by ETI.
5. ED TEL Mobility Inc. (“ETMI”) is a corporation incorporated
under the ABCA. At all material times, all of the shares of ETMI were
held by ETI.
6. At all material times, the Canadian
Radio-television and Telecommunications Commission (“CRTC”) regulated the
telecommunications business in Canada.
7. Pursuant to a directive of the Governor General
in Council dated October 25, 1994, the CRTC approved the reorganization of
ETC (the “Reorganization”) as follows:
(a) by the
transfer by ETC of its telecommunications assets and related businesses to ETI,
and;
(b) subsequently,
by the transfer by ETI of the telecommunications assets and related businesses
to ETCI, ETDI and ETMI.
A copy of the
Transfer Agreement between ETC and ETI is located at Tab 2 of the Joint Book of
Documents. The Transfer Agreements between ETI and ETCI, ETI and ETDI and ETI
and ETMI are located at Tabs 3, 4 and 5 of the Joint Book of Documents
respectively.
8. The Reorganization was
completed by way of an arrangement made under the Canada Business
Corporations Act and was effective March 10, 1995. A copy of the
Arrangement Agreement is located at Tab 1 of the Joint Book of Documents.
9. After completion of
the Reorganization, the business formerly carried on by ETC were carried on as
follows:
(a) the local
telephone exchange business was carried on by ETCI;
(b) the local
telephone directory business was carried on by ETDI; and
(c) the cellular, paging and other mobile
communications businesses were carried on by ETMI.
10. Immediately following the Reorganization, ETC
sold all of the issued and outstanding shares of ETI to TELUS
Corporation. A copy of the Amended Share Purchase Agreement between
the City of Edmonton, Edmonton Telephone Corporation (ETC)
and TELUS Corporation is located at Tab 6 of the Joint Book of Documents.
11. During the period in issue, the Appellant
calculated and reported net tax for purposes of the Act and filed GST
returns under Part IX of the Act.
12. The Canada Revenue Agency
(“CRA”), formerly the Canada Customs and Revenue Agency undertook an audit
of these returns and such audit gave rise to certain adjustments made by
the Minister which are the subject of dispute in this Appeal, namely:
(a) the
Minister disallowed ITCs claimed by the Appellant in the amount of
$1,849,230.75 (the “ED TEL Cutoff Issue”);
(b) Agreed to
be deleted;
(c) Agreed to
be deleted;
(d) Agreed to
be deleted;
B. ASSESSMENTS IN ISSUE
13. The Minister of
National Revenue (the “Minister”) assessed the Appellant by Notice of
Assessment No. 00000001690 dated October 22, 1999, for the reporting periods
March 1, 1995 to December 31, 1995 for net tax of $14,442,335.78, net interest
of $605,793.00 and penalty of $768,169.55, in respect of GST returns for the
period in issue. In the assessment the Minister made the following adjustments:
(a) Clerical
Error in posting GST paid to General Leger $ 9,909.22
(b) Input tax
credits claimed by registrant on purchases 1,849,230.75
where the
registrant is not the recipient
(c) Input tax
credits claimed by the registrant for which no 68,780.12
supporting
documentation is present
(d) GST
posting variance between the billing system 251,319.33
(“BOA”)
and General Ledger
(e)
Supplies for which the
registrant failed to charge and 98,392.86
report GST
__________
TOTAL $
2,277,632.28
A copy of the Notice of Assessment and
Audit Adjustments are located at Tab 8 and 9 of the Joint Book of Documents.
14. The Appellant files
a Notice of Objection on January 19, 2000 in respect of all issues except the
clerical error issue in the amount of $9,902.22. A copy of the Notice of
Objection is located at Tab 10 of the Joint Book of Documents.
15. The Minister issued
a Notice of Decision to the Appellant in respect of its Notice of Objection
dated January 20, 2000 on May 25, 2000 and on the same date reassessed the
Appellant by Notice of Assessment No. 10BT-116854811 for net tax of
$14,390,443.45, net interest of $363,022.80 and penalty of $449,068.12, in
respect of GST returns for the period in issue. In the reassessment the
Minister made the following adjustments.
(a)
Clerical Error in
posting GST paid to General Ledger $ 9,909.22
(b)
Input tax credits
claimed by the registrant on 1,849,230.75
purchases where the registrant is
not the recipient
(c)
Input tax credits
claimed by the registrant for 68,780.12
which no supporting documentation
is present
(d)
GST posting variance
between the billing system 199,427.00
(“BOA”) and General Ledger
(e)
Supplies for which the
registrant failed to charge 98,392.86
and report GST
__________
TOTAL
$ 2,225,739.95
A copy of the Notice of Decision and Notice of
Reassessment are located at Tab 11 and 12 of the Joint Book of Documents.
16. The Appellant filed a Notice of Objection on
August 22, 2000 in respect of all issues except the clerical issue in the
amount of $9,902.22. A copy of the Notice of Objection is located at Tab
13 of the Joint Book of Documents.
17. By Notice of Decision dated December 9, 2002,
the Minister confirmed the reassessment. A copy of the Notice of Decision
is located at Tab 14 of the Joint Book of Documents.
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