Citation: 2007TCC306
Date: 20070523
Docket: 2005-1469(GST)G
BETWEEN:
Y.S.I.’s YACHT SALES INTERNATIONAL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This is an appeal by Y.S.I.’s Yacht Sales
International Ltd. (“YSI”) in respect of an assessment under the Excise Tax
Act for the period from October 1 to December 31, 2002. The dispute
involves input tax credits (ITCs) in the amount of $106,761.54 in respect of
goods and services purchased by YSI in connection with the construction of a
luxury yacht.
[2] The Crown put forth two arguments in
support of the assessment. First, it submits that YSI does not qualify for ITCs
because it purchased the goods and services in an agency capacity.
Alternatively, even if there was no agency relationship, the Crown submits that
the ITCs should not be allowed because the goods and services tax (GST) was not
payable by YSI.
[3] For the reasons below, I conclude that the appeal should be
allowed.
Factual
background
[4] YSI is a British Columbia company that provides services as a yacht broker and
project and fleet manager. The corporation is managed by Sandy Huntingford, and
he and his wife are its only employees. YSI is a GST registrant.
[5] Palmer Yacht Sales Ltd. (“Palmer”) was
at the relevant time a British
Columbia company that carried
on a business of building and reconstructing yachts. Paul Palmer was its
principal.
[6] Platinum Premier Corporation Limited
(“Platinum”) is a company governed by the laws of Gibraltar. The shares of that
company are beneficially owned by Tatiana Golovina, a resident of England who is married to a Texan by the name of Mike Sims.
[7] In 1997, Palmer purchased a salvaged
commercial vessel in Alaska for US$1,000. Palmer’s intention was to
transport the vessel, the “Zopilote,” to Vancouver and reconstruct it.
[8] Palmer retained YSI (a) to assist Palmer in
arranging financing for the reconstruction work, and (b) to find a buyer for
the finished product, which would become a luxury yacht.
[9] As a result of YSI’s efforts, in September
1999 Palmer entered into an agreement with Platinum to reconstruct and sell the
vessel to Platinum for a lump sum purchase price of $3,000,000. The yacht was
to be acquired by Platinum for the personal use of Ms. Golovina and Mr. Sims.
[10] The reconstruction
work did not go smoothly, and after about six months the relationship between Palmer and the principals of
Platinum had irretrievably broken down.
[11] Mr. Huntingford, who had experience in the
boat building industry, stepped into the breach and offered his assistance to Platinum
in completing the project without Palmer’s involvement. For this purpose, YSI
sent a memo to Mr. Sims dated March 1, 2000, which outlined the terms of a
proposal under which YSI would oversee the project and use its wholesale accounts
to purchase the necessary materials and equipment at a discount.
[12] The memo, which was drafted by Mr.
Huntingford without the assistance of a lawyer, provided that YSI would carry
out the following:
-
manage the project;
-
provide timely reports
to Mr. Sims;
-
prepare budgets;
-
contract with a marina
for a construction shed;
-
request pricing from
suppliers and negotiate with suppliers to obtain the best price;
-
purchase materials and
equipment using YSI’s wholesale accounts;
-
assist with design,
secure interior designers, seek proposals;
-
pay suppliers;
-
liaise with insurance
underwriters;
-
liaise with Platinum’s
lawyer;
-
arrange with surveyors
to inspect the yacht on a monthly basis;
-
manage the activities
of Platinum’s captain relating to the construction;
-
deal with Platinum’s
bank to ensure necessary funding is in place to meet obligations;
-
apply for GST rebates;
-
act as a liaison
between Platinum and Palmer to recover materials and equipment belonging to
Platinum and to obtain paperwork to transfer title from Palmer to Platinum;
-
arrange for sea-trials;
-
deal with the Ship’s
Registry in Vancouver upon export; and
-
any other tasks that
may be assigned or requested by Platinum.
[13] YSI was to be paid $50 per hour for its
services and a mark up of five percent was to be charged when goods were
purchased through YSI’s wholesale accounts.
[14] The principals of
Platinum had no previous experience with boats and they accepted YSI’s
proposal, which basically handed over complete management of the project to
YSI.
[15] To complete the disengagement of Palmer,
Platinum and Palmer entered into an agreement on or about May 1, 2000
which was titled “Yacht Delivery Agreement.” Under the agreement, Platinum was
to pay the remainder of the $3,000,000 purchase price to Palmer, and Platinum
was to take possession of the Zopilote in order to complete the construction
work. Title was to remain with Palmer until the closing, however, which was to
take place in international waters when the yacht was ready for sailing.
[16] After Palmer gave up
possession, YSI purchased the material
and equipment necessary to complete the reconstruction. YSI’s wholesale
accounts were used to make purchases with over 230 suppliers at substantial
discounts. YSI also used its provincial sales tax registration to claim the
resale exemption under the British
Columbia legislation.
[17] Payment for the goods was usually effected
by cheques drawn on a Canadian bank account set up by Ms. Golovina. Almost all
of the cheques were co-signed by Mr. Huntingford and by the Zopilote’s
captain, who was employed by Mr. Sims.
[18] After Palmer had exited from the scene
(except for holding title to the vessel), the construction work was undertaken
by the captain and subcontractors, under Mr. Huntingford’s supervision.
[19] The Zopilote was competed and ready for sea
trials approximately one year later, and a formal passing of title from Palmer
to Platinum took place in July 2001. The closing occurred in international
waters, with Ms. Golovina representing Platinum and Mr. Huntingford
representing Palmer, with whom Mr. Huntingford continued to have business
dealings.
[20] Platinum’s original arrangement with Palmer
was structured to take advantage of the zero-rating of exported goods under the
Excise Tax Act. It was explained to me by counsel that exports are
generally zero-rated, which enables a non-resident to purchase goods on a
tax-exempt basis and it also enables the seller to receive ITCs on its inputs. The
result in this case is that the original arrangement with Palmer would not
attract any GST.
[21] After YSI took over management of the
project, Mr. Huntingford assumed that the transaction would continue to be a zero-rated
export. However, he was concerned about a potential GST exposure to YSI if the
deal with Platinum fell through and the Zopilote was not exported. He did not
seek professional advice with respect to this concern but he did have an
informal conversation with an auditor from the Canada Revenue Agency (the
"CRA") who was conducting a GST audit of Palmer at the time.
[22] Mr. Huntingford decided to control the
perceived GST exposure by having Platinum claim a GST rebate after the Zopilote
had been exported. The CRA auditor recommended to him that he keep all receipts,
which he did. Mr. Huntingford testified that he thought that this minimized
YSI’s exposure to GST. His evidence on this point was detailed and I accept his
explanation for why Platinum, and not YSI, claimed the GST refund.
[23] In 2002, Mr. Huntingford prepared a GST rebate
application on behalf of Platinum, and provided to the CRA auditor all the
relevant invoices for materials and goods which YSI had purchased.
[24] Platinum’s application had a potential
problem because the invoices were in YSI’s name. The auditor asked Mr.
Huntingford to provide the agreement which set out the arrangement between YSI
and Platinum. In response, Mr. Huntingford prepared a letter which was executed
by Ms. Golovina on behalf of Platinum. The letter states that YSI was engaged
to act as Platinum’s agent during the construction of the vessel, and that as
part of the agency arrangement YSI was to procure materials and equipment for
the construction.
[25] The CRA auditor then
sought an internal ruling concerning
the rebate application and the claim was ultimately disallowed.
[26] Upon being notified of the rejection, Mr.
Huntingford sought legal advice from the law firm of Fasken Martineau DuMoulin
LLP. Pursuant to their advice, Platinum did not object to the disallowance of
Platinum’s rebate application and YSI claimed the ITCs that are at issue in
this appeal.
[27] By notice of assessment issued to YSI dated
January 21, 2004, ITCs in the amount of $106,761.54 were disallowed.
Analysis
[28] As a preliminary matter, I note that the
question of YSI’s ITC entitlement does not address what could be considered a
more fundamental issue in this series of transactions, and that is whether the
supply to Platinum is taxable or whether it is zero-rated. The GST is a tax that
is generally imposed at the consumer level, and the consumer in this case is
Platinum. Intermediaries such as YSI are not in the usual case subject to tax
on their inputs. However, the tax consequences to Platinum are not at issue
before me, and the parties did not address it, except to patiently answer my
questions in that regard.
[29] The question, then, is whether YSI is
entitled to recover by way of ITCs the GST payable in respect of invoices
issued to it in connection with the construction of the Zopilote.
[30] The general scheme of the ITC legislation
is to allow registrants under the Excise Tax Act to recover GST payable
by them in respect of property and services acquired for their use in
commercial activities.
[31] Excerpts from the relevant statutory
provision, s. 169(1) of the Excise Tax Act, provide:
169. Subject to this Part, where a person
acquires or imports property or a service or brings it into a
participating province and, during a reporting period of the person during
which the person is a registrant, tax in respect of the supply, importation
or bringing in becomes payable by the person or is paid by the person
without having become payable, the amount determined by the following formula
is an input tax credit of the person in respect of the property or service for
the period:
A × B
where
A is the tax in respect of the supply,
importation or bringing in, as the case may be, 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
[
… ]
(c) in any other
case, the extent (expressed as a percentage) to which the person acquired
or imported the property or service or brought it into the participating
province, as the case may be, for consumption, use or supply in the course
of commercial activities of the person.
(Emphasis added.)
[32] The underlined text above makes clear the
two issues in this appeal:
(a) Did YSI acquire goods and services from
suppliers for consumption, use or supply in the course of its commercial
activities?
and
(b) Was GST payable by YSI?
Issue 1 – Was
there an acquisition in the course of commercial activities?
[33] The Crown argues that YSI acted in an agency
capacity when it entered into agreements to acquire materials and equipment
used in the construction of the Zopilote. It follows, the Crown suggests, that
YSI did not acquire goods or services for consumption, use or supply in the
course of its own commercial activities, as required by clause (c) of s. 169(1).
[34] The question, then, is whether YSI’s
agreements with suppliers were entered into YSI, as agent on Platinum’s behalf,
or whether the goods and services were purchased by YSI, on its own account.
[35] Whether YSI acquired goods and services on
its own behalf or on behalf of Platinum depends on the parties’ mutual
intention: Bowstead and Reynolds on Agency, 17th edition, at s.
1-011. Accordingly, the essential question is whether Platinum agreed to be
bound by YSI’s agreements with suppliers.
[36] While there is some
evidence to support either position, I have concluded that Platinum and YSI did
not intend an agency relationship.
[37] In my view, the
clearest expression of the parties’ intentions is found in the agreement
between YSI and Platinum, which is embodied in Mr. Huntingford’s memo to Mr.
Sims, dated March 1, 2000. The arrangement was never formalized in a written
agreement but the terms in the memo were verbally agreed upon.
[38] The memo, which was written without the
assistance of a lawyer, essentially provided that YSI would contract with
suppliers, and that YSI would charge Platinum a five percent mark up to the
extent that YSI’s wholesale accounts were used.
[39] I have concluded
that these terms do not, in any way, suggest that YSI would purchase goods and
services in an agency capacity. Rather, in my view, they are more indicative of
a buyer-seller relationship. There
is nothing on the face of the memo that would lead me to believe that the
parties intended otherwise.
[40] Counsel for the
Crown suggests that, despite the terms of the memo, other factors point to an
intention to form an agency relationship. I do not agree. In my view, none of
the factors, which I will detail further below, allow me to infer any other
intention between the parties.
[41] First, the Crown makes
reference to Ms. Golovina’s letter, written as part of Platinum’s rebate
application. However, this self-serving document was written at the prompting
of the CRA auditor to enable the application to be processed. I am not
convinced that it reflected the parties’ actual intentions at the time the
agreement was entered into and performed. Accordingly, I have not given the
letter any weight.
[42] As well, the Crown
points to the fact that the rebate application was made by Platinum and not
YSI. However, Mr. Huntingford is not a lawyer, nor did he not impress me as
being sophisticated in accounting or legal matters. I am unwilling to infer
that the application, submitted well after the agreement was entered into,
demonstrates any intention on the part of YSI or Platinum as to their legal
relationship.
[43] Further, the Crown argues that the broad range of tasks
that YSI agreed to perform in connection with the project was also suggestive
of agency, as well as the fact that Platinum appeared to have overall control. With respect, the other
tasks are not relevant to the characterization of the agreements with
suppliers. Regardless of the nature of the other tasks, they do not support
finding an intention contrary to what I have concluded above. The same can be
said regarding control. The extent to which Platinum had overall control of the
project is not relevant to whether Platinum agreed to be bound by YSI’s
agreements with suppliers.
[44] The Crown also referred to the fact that Mr.
Huntingford did not report a purchase and resale of goods in YSI’s financial
statements or tax returns. Once again, I note that Mr. Huntingford is not a
lawyer or accountant. I cannot conclude that his failure to adequately record
his current accounts implies anything about the nature of the legal
relationship between YSI and Platinum.
[45] Lastly, the Crown submits that I should make a
negative inference from the fact that the appellant did not call the principals
of Platinum, or any of the other persons involved, to testify.
[46] I am sympathetic to this argument as it
relates to the principals of Platinum because Ms. Golovina signed a letter
confirming an agency relationship. On the other hand, Platinum’s principals are not Canadian residents and
there was some suggestion that it may have been difficult to obtain their
testimony. Counsel for the appellant stated in argument that he had tried
unsuccessfully to reach them.
[47] In all the
circumstances, I decline to draw a negative inference. I am not convinced that the testimony of either Ms. Golovina
or Mr. Sims would be of assistance, given that it is highly unlikely that these
individuals understood the technical distinction between agency and a purchase
for resale when Platinum agreed to Mr. Huntingford’s proposal.
[48] The Crown argued that Platinum’s principals
could provide relevant testimony regarding the nature of the control that they
had over YSI. I do not think that this factor has any relevance in determining
whether Platinum intended to be directly bound by the contracts with suppliers.
[49] For all of these reasons, I find that the
nature of the relationship is defined by the memo dated March 1, 2000 and that
this document supports YSI’s position. It follows that YSI was not acting in an
agency capacity when it purchased goods and services. Rather, it acquired goods
and services for supply in the course of its own commercial activities.
Issue 2 - Was GST payable
by YSI?
[50] Section 169(1)
stipulates that an ITC is only available to the person by whom GST is payable. The Crown suggests that, even if YSI entered
into the agreements with suppliers on its own behalf, the GST was payable by
Platinum and not YSI.
[51] The starting point for the analysis is the general
charging provision in s. 165, which provides that the GST is “payable” by a “recipient”
of a supply. The relevant question, then, is whether YSI is a recipient.
[52] The term “recipient” is defined in s.
123(1) as follows:
"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;
(Emphasis added.)
[53] The Crown submits
that, although YSI is liable
for the consideration under the agreements with suppliers, Platinum is the
person that is ultimately liable for that consideration.
[54] The Crown’s position
is based on the fact that Platinum made funds available in a Canadian bank
account that could be used to satisfy YSI’s obligation to suppliers.
[55] The Crown suggested that its position was
supported by the following decisions: 163410 Canada Inc. v. The Queen, [1998]
G.S.T.C. 116 (T.C.C.); Immeubles Sansfacon Inc. v. The Queen, [2001]
G.S.T.C. 10 (T.C.C.); Bondfield Construction Co. (1983) Ltd. v. The Queen, [2005]
G.S.T.C. 110 (T.C.C.); and Bokrika Inc. v. The Queen, [2006] G.S.T.C. 78
(T.C.C.).
[56] I do not agree with
the Crown’s submission. In my view, YSI is the only person that is liable for
the consideration under the agreements with suppliers. Mr. Huntingford
testified that he requested that Platinum
provide a source of funds up front so that he would not have to chase Platinum
when YSI needed money to pay its suppliers. This banking arrangement was
nothing more than a funding mechanism, which is entirely consistent with YSI
purchasing for purpose of a resupply to Platinum.
[57] The bottom line is
this: A person is not a recipient under the Excise Tax Act unless they
are liable to pay the consideration under the agreement. In this case, Platinum was not liable to
pay the consideration under the agreements with suppliers.
[58] The cases referred
to above are all distinguishable on their facts and it is not necessary to review
them in detail. None of the cases suggest that, in a purchase and resale
arrangement, a buyer under the second sale is liable for GST that was payable
on the first sale.
[59] For this reason, I
find that YSI was a “recipient” as that term is defined in s. 123, and
accordingly that YSI was liable to pay the GST in respect of its agreements
with suppliers.
Conclusion
[60] For the above
reasons, I conclude that YSI
is entitled to ITCs in respect of goods and services purchased by it in the
course of the construction of the Zopilote. The appeal is allowed, with costs.
Signed at Ottawa, Canada this
23rd day of May 2007.
Woods
J.
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