Citation: 2014 TCC 93
Date: 20140326
Docket: 2013-2695(GST)I
BETWEEN:
832866 ONTARIO INC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
[1]
The sole issue in this
appeal from an assessment of Goods and Services Tax ("GST") is
whether the taxpayer "made a misrepresentation that is attributable to the
person's neglect, carelessness or wilful default" within the meaning of
subsection 298(4) of the Excise Tax Act ("Act")
when it made and filed a GST return for the period January 1, 2006 to
March 31, 2006.
[2]
At all relevant times
the corporation was a builder of custom homes. It had been in business for over
20 years. It continues to carry on business under the name and style
"Carriage Hills Construction" although now it is primarily in the
renovation business. It was the appellant's practice to obtain financing to purchase
several lots in a subdivision and then build a model home for prospective
purchasers to view. It did not build on speculation but only when it received
an agreement to purchase a home.
[3]
In 2006, the taxpayer's
shares were owned by Mr. and Mrs. DeMarco, each as to 50%. Mr. DeMarco,
who studied to be a draftman at Ryerson, supervised construction and dealt with
customers and lawyers. Both he and Mrs. DeMarco negotiated contracts with
suppliers. Mr. DeMarco died in April 2011. Mrs. DeMarco scheduled the
trades and attended at the office. She had worked for a management team at Bell Canada for 17 years. Her position at Bell Canada did not entail bookkeeping.
[4]
In 2005 business was
slow. The DeMarcos were having difficulty maintaining the home in which they
resided and a model home owned by the taxpayer. In early 2006, the DeMarcos
chose to sell their home and move with their children into the model home which
had been vacant since completion in 2004. The model home, said
Mrs. DeMarco, was for sale during the time the family lived in it.
[5]
Apparently unknown to
both Mr. and Mrs. DeMarco, once the family moved into the model home the
status of model home would be changed from investment to rental property. The
move, for purposes of the Act, resulted in a self‑supply and GST
became exigible.
[6]
Ms. Sherry Aul,
a GST auditor with the Canada Revenue Agency ("CRA") testified on behalf
of the Crown. The Crown has the onus of proving that the omission of the self‑supply
in the GST return was due to the appellant's "neglect" or
"carelessness". There was no allegation that the omission was due to
"wilful default" or that the appellant committed fraud in the making
or filing of the return.
[7]
In 2010 Ms. Aul
was assigned the appellant's GST file for audit of the period in issue. The sale
of the model home by the appellant to a Mr. and Mrs. Meloche had come to
CRA's attention. An Agreement of Purchase and Sale was signed on
November 12, 2009. The Agreement provided for payment of GST of
$15,988.37. However, a new Agreement between the same parties was signed on
November 28, 2009 omitting any reference to a GST payment.
[8]
In filing the
corporation's GST return on April 20, 2006 for the period ending on
March 31, 2006, Mrs. DeMarco included all sales by the corporation
for the period except for the model home. In reviewing the GST rturn filed by
the appellant Ms. Aul discovered that the change of use of the model home
was not reflected in the company's financial statements.
Mr. Peter Benson, chartered accountant, who prepared "note to
reader" financial statements for the appellant confirmed that the model
home remained on inventory during the time the DeMarcos resided in the model
home.
[9]
In the course of the
audit Ms. Aul interviewed Mr. and Mrs. DeMarco as well as the
appellant's accountant, Mr. Benson. After Mr. DeMarco died she
continued to discuss the audit with Mrs. DeMarco and Mr. Benson and a
member of Mr. Benson's firm, Crista Wilkem. Ms. Aul confirmed
that the DeMarcos resided at the model home from March 1, 2006 to May
2009.
[10]
In a reply to
Ms. Aul's request for information, Mr. Benson, by letter dated
October 11, 2011, informed Ms. Aul that the appellant used the
accounting and bookkeeping services of Dorian Drakos and it was Ms. Drakos
who prepared "all the GST returns during [the] period and the taxpayer had
no reason to believe that they were not being prepared accurately and
correctly." He further stated that "the taxpayer was unaware that any
omission had occurred and was reasonably relying upon the experience of the
bookkeeping accountant, Dorian Drakos."
[11]
Ms. Dorian Drakos
has been a bookkeeper for 27 years. She "probably" started
working for the appellant in late 1990s until May 2005 "when they stopped
calling me." She stated that it was "uncomfortable" working with
the appellant and "did not seek to return." She complained files had
missing notes and papers. The appellant owed a "lot of money" and
"[Mrs. DeMarco] was very angry." Ms. Drakos' work was
mainly to balance bank records and she "never offered advice" on the
treatment of the model homes. She did not work for the appellant in 2006.
[12]
In fact, the
appellant's GST return for the period in issue was prepared by Ms. Nancy Drew,
a self‑employed bookkeeper. Ms. Drew provided service to the
appellant after Ms. Drakos' departure in 2005. Ms. Drew was an
experienced bookkeeper with a myriad of clients but only one client, the
appellant, in the construction business. Ms. Drew insisted she "did
not do taxes". She would attend monthly at the appellant's office which
was located in a room in the DeMarcos' residence at any time, including the
model home.
[13]
Mrs. De Marco
described her work in preparing the GST returns: she would input all invoices
for GST on the software program "Simply Accounting" and make
adjustments. This would be done the first week following the reporting period.
All the information for reporting GST would have been in a folder.
Ms. Drew would "pull the data" for accounting and prepare the
GST return. Mrs. DeMarco would review Ms. Drew's work only if
Ms. Drew had a question and would refer her to their lawyer or accountant.
"Simply Accounting" provided the information for the GST return.
[14]
The appellant used a
software program, "Simply Accounting" to prepare its accounts.
Mrs. DeMarco would have made the original entries. Before preparing the
GST return, Ms. Drew said she would "print off all items during the
period" from the program. She would confirm opening balances and check for
any "glaring entries". She would verify balances and look for any
"upcoming events". She would ask questions. Ms. Drew said she
presented her work to Mrs. DeMarco in an organized way. She acknowledged
that if anything was missing from the ledger, she would not know.
[15]
Ms. Drew could not
recall when she was ever aware if the DeMarco family lived in what was a model
home until "some point" after the move. She had visited the DeMarcos'
previous residence.
[16]
Finally Ms. Drew
agreed that she was not qualified to give tax advice and did not offer such
service.
[17]
Mr. Benson said
that he had informed the DeMarcos that there was a change of use of the model
home when they began using it as a personal residence and that they should pay
rent to the corporation to avoid being assessed a taxable benefit for purposes
of the Income Tax Act. The date Mr. Benson gave this advice is not
in evidence. He did not inform Mr. or Mrs. DeMarco, nor did either of them
query him, of any GST consequences as a result of the change in use.
[18]
Ms. Aul found that
although the DeMarcos reported rent on their personal tax returns, rent was not
included in the corporation's income statements. It appears, Ms. Aul
stated, that the rental was reported as employment income to the DeMarcos or as
a taxable benefit on the basis of a rent of $250 per month to each of Mr. and
Mrs. DeMarco, that is, $500, in 2006. No "T4" statement was
attached to either income tax return.
[19]
In the 2007 income tax
returns, no benefit was reported. In 2008 a benefit of $3,000 was included in
each of Mr. and Mrs. DeMarco's tax return, and in 2009 a "T4"
statement reflecting a benefit was included with each of their tax returns.
[20]
The CRA publishes
guides to assist taxpayers to understand the GST regime. Ms. Aul referred
to the reverse side of a GST return which refers the taxpayer to the guide
called "General Information for GST/HST Registrants" published in
2005 and a guide entitled "GST/HST for the Construction Industry",
also published in 2005. She pointed to the self‑supply rules described on
page 9 of the latter guide. The former guide refers persons in building
real property to the latter guide.
[21]
In cross‑examination
of Ms. Aul, appellant's counsel referred her to the GST return for the
period in issue. Counsel asked Ms. Aul where the amount of the self‑supply
should be placed on the return, at Line 101, total sales and other
revenue, or at Line 105, total amount of other GST/HST to be self‑assessed.
Counsel pointed out that the form did not have a line specifically for
"self‑supplies" and noted that a change of use sale is not the
same as a regular sale. Counsel intimated that the GST return is not as
detailed as a personal income tax return which refers to specific types of
income.
[22]
Mrs. DeMarco says
she is now aware that GST ought to have been paid by the corporation when she
and her family moved into the model home. But she claims she and her husband
were unaware that the move triggered any GST consequence. She also says she was
not neglectful or careless in signing the return on behalf of the corporation
and omitting the value of the home from the return.
[23]
One of
Mrs. DeMarco's duties was to make the necessary entries in the appellant's
journal. She did not make any entry for payments of rent for the model home
during the reporting period. She agreed that if rent was not entered, the
bookkeeper had no way of knowing that rent was paid.
[24]
Mrs. DeMarco was
queried on the sale of the model home to Mr. and Mrs. Meloche and why no
GST was paid. Mrs. De Marco stated Mr. DeMarco, Mr. Benson or
the lawyer would have made a decision not to charge GST. Ms. Aul produced
the solicitor's reporting letter dated January 11, 2010 on the sale to the
Meloches and related documents that were sent to Ms. Aul by facsimile by
Mr. Benson on or about February 1, 2011. In his reporting letter,
Mr. Perry Ambrogio, the appellant's solicitor, refers to the first
agreement to be "inclusive of net GST" but after discussion with the
appellant's accountant it was determined no GST ought to be payable by the
purchaser "since GST would have been payable by the company once you began
to use the dwelling as your family residence". On the facsimile cover page
Mr. Ambrogio states that he "was under the impression that either the
company had already remitted the GST or you would be making arrangements to
remit the GST which ought to have been paid when you began to live in the
house".
[25]
Mrs. DeMarco's
evidence is that she did not ask Mr. Benson for guidance with respect to
GST returns nor did she make any inquiries to the CRA or refer to any of its
publications. She relied on the bookkeeper. Mrs. DeMarco simply signed the
return with amounts recorded by Ms. Drew without any review. She relied on
Ms. Drew to ask questions if anything was missing. She believed all was in
order. (It was not suggested that Mr. DeMarco may have been aware of the
appellant's GST liability.)
[26]
Mr. Benson
testified that it was only in 2009, when the model home was sold, that he
discussed the GST problem with Mr. DeMarco. He believed that the
appellant's lawyer had first raised the issue at time of the Meloche sale with
Mr. DeMarco. He said he "assumed" GST had been paid.
[27]
Paragraph 298(4)(a)
of the Act reads as follows:
|
An assessment
in respect of any matter may be made at any time where the person to be
assessed has, in respect of that matter,
|
Une cotisation
peut être établie à tout moment si la personne visée a :
|
|
(a) made a misrepresentation that is
attributable to the person’s neglect carelessness or wilful default;
|
a) fait une
présentation erronée des faits, par négligence, inattention ou omission
volontaire;
|
[28]
The bulk of reported
cases concerning reassessments made after the normal assessing period are with
respect to subparagaph 152(4)(a)(i) of the Income Tax Act.
Subparagraph 152(4)(a)(i) and paragraph 298(4)(a)
are similar but are not mirror images. Subparagraph 152(4)(a)(i)
permits an assessment of income tax beyond the normal reassessment period in
respect of the year:
|
… only if
|
… que dans les
cas suivants :
|
|
(a) the taxpayer or person filing the
return
|
a) le
contribuable ou la personne produisant la déclaration :
|
|
(i) has made any misrepresentation that is
attributable to neglect, carelessness or wilful default or has committed any
fraud in filing the return or in supplying any information under this Act, or
|
(i) soit a fait une présentation erronée des faits, par
négligence, inattention ou omission volontaire, ou a commis quelque fraude en
produisant la déclaration ou en fournissant quelque renseignement sous le
régime de la présente loi,
|
[29]
Paragraph 298(4)(a)
refers to a misrepresentation in respect of a matter that is the subject of an
assessment, not specifically to a misrepresentation in filing a return. In the
appeal at bar, the "matter" is the misrepresentation by omission of
an amount in a GST return and that is the subject of the assessment. The case
law in respect of subparagraph 152(4)(a)(i) and as it read in
earlier years is authority for interpreting paragraph 298(4)(a) of
the Act.
[30]
Misrepresentation for
purposes of paragraph 298(4)(a) takes place when the return is made
and the misrepresentation is based on neglect, carelessness or wilful default
at that time. And the misrepresentation cannot be erased or otherwise affected
due to any subsequent action or inaction by the taxpayer who made the
misrepresentation. Thus the fact that Mr. DeMarco may have become aware
only in 2009 that GST was payable when the family moved into the model home or
that Mrs. DeMarco may have learned of the appellant's GST liability as
late as February 2011 is of no consequence. The question is what did she
know or should have known as a reasonable person at the time she made and filed
the return.
[31]
In Nesbitt v.
The Queen,
the Federal Court of Appeal dismissed an appeal where the appellant's income
tax return contained an arithmetic error even though the error was evident on
working pages attached to the return. Strayer J.A. held that:
…
one purpose of subsection 152(4) is to promote careful and accurate
completion of income tax returns. Whether or not there is a misrepresentation
through neglect or carelessness in the completion of a return is determinable
at the time the return is filed. A misrepresentation has occurred if there is
an incorrect statement on the return form, at least one that is material to the
purposes of the return and to any future reassessment. …
[32]
Similarly in College
Park Motors Ltd. v. The Queen,
Bowie J. held that even though the taxpayer disclosed his error to the
fisc, the misrepresentation made in the return did not vanish. The taxpayer's
misrepresentation was attributable to the neglect of the taxpayer at time of
filing notwithstanding efforts to remedy his error.
[33]
Mrs. DeMarco's
position is that Ms. Drew prepared the GST return. Mrs. DeMarco had
no knowledge that the appellant made a self‑supply. Ms. DeMarco simply
signed the return without reviewing it and without asking Ms. Drew any
questions. Ms. Drew described herself as a bookkeeper who is not qualified
to give tax advice and did not give tax advice. Mrs. DeMarco testified
that if Ms. Drew had any questions in preparing the appellant's books, she
would refer Ms. Drew to the appellant's accountant or lawyer.
Ms. Drew prepared the appellant's accounts with the help of "Simply
Accounting". However, all initial entries were made by Mrs. DeMarco;
Ms. Drew relied on these entries.
[34]
A leading case
concerning the standard of care required of a taxpayer, once the Minister's
burden is satisfied to establish that a misrepresentation on an income tax
return was not made through neglect or carelessness, is Venne v.
The Queen.
Strayer J., as he then was, explained at paragraph 16:
I
am satisfied that it is sufficient for the Minister, in order to invoke the
power under subparagraph 152(4)(a)(i) of the Act to show that, with
respect to any one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it is shown that
the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation
that is attributable to neglect" must mean, particularly when combined
with other grounds such as "carelessness" or "wilful
default" which refer to a higher degree of negligence or to intentional
misconduct. Unless these words are superfluous in the section, which I am not
able to assume, the term "neglect" involves a lesser standard of
deficiency akin to that used in other fields of law such as the law of tort. …
[35]
The facts before me are
not wholly similar to any of those in the reported cases referred to me by
appellant's counsel. In Aridi v. The Queen, the
taxpayer followed the advice of his accountant after a thorough discussion
before deciding to defer reporting the disposition of half of a property until
the other half was disposed of. The taxpayer was successful.
[36]
In College Park, the
taxpayer was unsuccessful in its appeal because the person who signed the tax
returns, as prepared by the appellant's accountant, failed to review "the
draft returns as carefully as a wise and prudent taxpayer would". Had he
done so he would have read questions on the return relating to a particular tax
(Part 1.3 tax) and would have queried the accountant what that tax was and
would have discovered that the accountant also did not know what the tax was
and inquiries could have been made.
[37]
And in Fukushima v. The Queen,
accountants, who knew what they ought to have included in income, failed to
include in income amounts of work in progress deducted in the previous year
under section 34 of the Income Tax Act. The taxpayer and his
partner did not exercise reasonable care in completing and filing their
respective tax returns which contained a misrepresentation.
[38]
The Federal Court held
that in confused circumstances the error committed by the taxpayer was one which
a normally wise and cautious taxpayer could have committed and did not involve
negligence: Minister of Revenue v. Bisson.
[39]
Mrs. DeMarco was
not a former CRA employee knowledgeable about GST as was the principal of Construction
Daniel Provencher Inc.
nor was she a professional accountant herself. A GST return does not ask many
questions as does an income tax return and her counsel submitted that it is
questionable whether a review of the GST return by Mrs. DeMarco would have
raised any questions. This is not a reason for not taking proper precautions to
at least attempt to ensure the proper making of the return.
[40]
On the other hand,
Mrs. DeMarco did not use the services of a person familiar, if not
professionally qualified, with tax in general or GST in particular. The
appellant had engaged the services of a chartered accountant but she did not
even touch base with him. Nor did she consult with CRA or any of its
publications. It was she who made the initial entries into the software and
journal from which the bookkeeper extrapolated the information to prepare
accounts and the GST return. It was when the original entries were being made
that the misrepresentation was conceived. She simply made the entries and signed
the GST return without review.
[41]
Unlike the taxpayer in Bondfield
Construction Co. (1983) Ltd. v. The Queen, the
appellant, who relied wholly on its accountants, both internal and external,
did not engage "every possible internal and external control to ensure
compliance …" Indeed, she engaged in none. The fact that the move by the
family into the model home was a transaction the DeMarcos and the appellant had
never experienced before in the over the 20 years existence of the
company, or at least since the start of the GST, did not disturb her
sufficiently to ask questions.
[42]
For these reasons, the
appeal is dismissed.
Signed at Ottawa, Canada, this 26th day of March 2014.
"Gerald J. Rip"
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