Citation: 2013 TCC 20
Date: 20130123
Docket: 2010-1608(GST)G
BETWEEN:
QUINCO FINANCIAL INC.
(FORMERLY LANDEX INVESTMENTS),
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Auray J.
[1]
This appeal raises two
principal issues:
A. Residual ITC’s
(i) whether the appellant
was entitled to claim residual Input Tax Credits (“ITCs”) pursuant to
subsection 169(1) of the Excise Tax Act (the “Act”) and whether
paragraph 232(3)(c) of the Act applied to the residual ITCs.
Statuted-Barred Issue
(ii) whether the Minister
of National Revenue (the “Minister”) reassessed the appellant within the
statutory time limit pursuant to subparagraph 298(1)(a)(i) of the Act.
B. Bad Debt Deduction
(i)
whether the appellant
was entitled to deduct its bad debts pursuant to subsection 231(1) of the Act.
[2]
The day before the
trial, I was advised by the appellant that it was conceding the issue dealing
with the deduction of bad debts. Accordingly, the appeal with respect to this
issue is dismissed.
[3]
At trial, the appellant
called one witness: Mr. Brian Spence, Director of Tax for the
appellant. The respondent did not call any witnesses.
[4]
The parties also filed
a Joint Book of Documents and the following Agreed Partial Statement of Facts:
AGREED PARTIAL STATEMENT OF FACTS
For the purposes of this appeal, the parties admit the following
facts and agree that their admission of facts shall have the same effect as if
the facts had been proved formally and accepted by the Court as true. The
parties are free to make submissions with respect to, and are not to be taken
as agreeing to, the degree of relevance or weight to be attributed to these
facts and documents.
The
parties each reserve the right to adduce additional evidence which is relevant
and probative of any issue before the Court and which is not inconsistent with
the facts admitted herein.
Appendices
1, 2, 3 and 5 form part of this Agreed Partial Statement of Facts. Note that
there is no Appendix 4, which has been deliberately omitted by the parties.
Reassessments
Under Appeal
1.
The three goods and services tax (“GST”)
reassessments under appeal, each dated February 16, 2010, are in respect of
input tax credit (“ITC”) claims made by the Appellant in the following
monthly reporting periods:
(a) October 2003 (“First Reassessment”);
(b) November 2003 through February 2004 (“Second
Reassessment”); and
(c) March 2004
and April 2004 (“Third Reassessment”).
Notification
of these reassessments under appeal was given by Notices of Reassessment dated
February 16, 2010.
2.
The reassessments under appeal were made by the
Minister of National Revenue (“Minister”) under Part IX of the Excise
Tax Act (Canada) (“Act”) to give effect to decisions of the Minister
on three objections to previous GST (re)assessments, which are described at
paragraph 18 below. All statutory references herein are to the Act, unless
otherwise indicated.
General Background
3.
On August 27, 2004, the Brick Warehouse
Corporation (“Brick Corp.”) amalgamated with at least one other
corporation to form the Appellant corporation with the name “Landex Investments
Company” which name was subsequently changed to “Quinco Financial Inc.”. The
Appellant was continued under Nova Scotia company law with an effective date of
September 17, 2004, and later was continued under Alberta corporate law with an
effective date of January 22, 2010.
4.
Brick Corp. was registered for GST purposes,
with a monthly reporting period and a fiscal year-end at the end of February.
5.
In the GST/HST returns that it filed for its
reporting periods ending from September 30, 1999 to April 30, 2004, inclusive,
Brick Corp. (a) reported tax collected, (b) claimed ITCs and (c) reported net
tax in the amounts set out in attached Appendix 2.
6.
Brick Corp. filed GST/HST returns for its
monthly reporting periods ending between:
(a) November 1,
2000, and February 28, 2001;
(b) October 1,
2001 and February 28, 2002; and
(c) August 1,
2002 and February 28, 2003.
Each
such period of time is referred to herein as a “Deferral Period”.
7.
Brick Corp. carried on the business of
purchasing furniture, mattresses, electronics and appliances from various
suppliers at the manufacturing and wholesale level, and reselling those
products at retail to customers.
Claimed ITCs
8.
During each Deferral Period, Brick Corp. made
purchases of supplies of property and services (“Supplies”) that were
taxable at 7%, which were invoiced by various suppliers. Brick Corp. recorded
amounts of GST payable to suppliers by it on those Supplies in its general
ledger for each of those Deferral Periods, but did not claim any ITCs on the
GST/HST returns it filed for the monthly reporting periods ending November 30,
2000, December 31, 2000, February 28, 2001, between October 1, 2001 and
February 28, 2002 and between August 1, 2002 and December 31, 2002. The amounts
of ITCs Brick Corp. claimed in its returns for the reporting periods ending
January 31, 2001, January 31, 2003 and February 28, 2003 are described in
Appendix 2.
9.
The amount Brick Corp. claimed as ITCs in its
GST/HST returns filed for the reporting periods ending March 31, 2001, March
31, 2002 and July 31, 2003 are described in Appendix 2.
10. During each of the Deferral Periods, Brick Corp. received credit
notes from, or issued debit notes to (collectively, the “Notes”),
various suppliers for credits on Brick Corp.’s accounts with those suppliers (“Credit
Amounts”). The main reasons for those credits were as follows:
(a) as an incentive “reward” for Brick Corp. achieving a target
level of purchases or sales of the supplier’s products; or
(b) in recognition of Brick Corp.’s use of certain items of its
inventory of the products as floor models or for display purposes at home
shows; or
(c) in recognition of discrepancies, relative to what had been
ordered, in the unit price, quantity or other specification of products
purchased by Brick Corp. from the particular supplier; or
(d) in respect of the purchase price and shipping costs of returned
items, or the cost to Brick Corp. of making minor repairs to items retained by
Brick Corp. where Brick Corp. had purchased the items from the supplier and
subsequently found them to be damaged, defective or not as ordered.
11. On each of the Notes, a Credit Amount was specified and the GST
allocable to the Credit Amount (“GST Credit”) was shown separately as an
additional credit for GST.
12. In each of its GST/HST returns filed for the reporting periods
ending March 31, 2001, March 31, 2002 and July 31, 2003, Brick Corp. claimed
ITCs – which had not previously been claimed – for GST payable by Bricks Corp.
on Supplies it had acquired during the respective Deferral Periods.
13. The ITC amount claimed in respect of each Deferral Period was equal
to the total amount of gross GST originally payable on the relevant Supplies
during the particular Deferral Period, less the GST Credits on the Notes
received or issued.
14. Following advice from their external accountants, Brick Corp.
subsequently decided to claim ITCs in an amount equal to the GST Credits
recorded during the Deferral Periods on those Supplies for which Notes were
received or issued. Brick Corp. then proceeded to claim $3,910,610 as ITCs (“Claimed
ITCs”) in its GST/HST returns for the September 2003, October 2003,
November 2003, December 2003 and February 2004 reporting periods. The Claimed
ITCs had not previously been claimed and were claimed within the four year
period allowed under subsection 225(4).
15. The Supplies were originally acquired exclusively for use or supply
by Brick Corp. in the course of Brick Corp.’s commercial activities.
Deductions for Cardholder Debts
16. Brick Corp. concedes that it is not entitled to any of the bad debt
deductions (“Deductions”) claimed in respect of the Relevant Cardholder
Debts (as defined in the Brick Corp. notice of appeal) in determining its net
tax at any time.
Assessments and Reassessments
17. With the exception of its GST return for the February 2004 reporting
period which was filed late on April 6, 2004, Brick Corp. filed its GST return
for each of the monthly reporting periods in issue as follows:
|
Reporting Periods Ending
|
Dates on Which GST/HST Returns Were Filed by Brick Corp.
|
Due dates for the GST Returns
|
|
31/10/2003
|
28/11/2003
|
01/12/2003
|
|
30/11/2003
|
31/12/2003
|
31/12/2003
|
|
31/12/2003
|
02/02/2004
|
02/02/2004
|
|
31/01/2004
|
09/02/2004
|
01/03/2004
|
|
29/02/2004
|
06/04/2004
|
31/03/2004
|
|
31/03/2004
|
30/04/2004
|
30/04/2004
|
|
30/04/2004
|
31/05/2004
|
31/05/2004
|
18. Brick Corp. was assessed, it objected and was then reassessed as
follows:
|
Monthly Reporting Periods
|
Oct 2003-Feb 2004
|
Nov 2003-Feb 2004
|
Mar 2004-Apr
2004 1
|
|
Assessment
|
Nov 26, 2007
|
Dec 20, 2007
(reassessment)
|
Apr 30, 2008
|
|
Objection Sent
|
Feb 22, 2008
|
Apr 30, 2008
|
June 26, 2008
|
|
Reassessed
|
Feb 16, 2010 (only Oct 2003)
|
Feb 16, 2010
|
Feb 16, 2010
|
The
objections related to the Claimed ITCs issued and the Deductions issue.
______________
1 This assessment, objection and subsequent
reassessment relate to the Deductions issue.
19. By Notice of Assessment dated November 26, 2007, the Minister
assessed the net tax of Brick Corp. for each of its monthly reporting periods
from October 2003 to February 2004, inclusive (“First Assessment”),
increasing net tax in respect of the Claimed ITCs, as described in attached
Appendix 1 (under the “1st audit – adjustments” column) and Appendix
3.
20. By Notice of Reassessment dated December 20, 2007, the Minister
subsequently reassessed Brick Corp. net tax for each of its November 2003 to
February 2004 reporting periods, inclusive (“Second Assessment”) to
increase the net tax previously assessed, by adding back the Deductions Brick
Corp. had claimed with respect to the Cardholder Debt. The adjustments for each
of those reporting periods are described in attached Appendix 3.
21. By Notice of Assessment dated April 30, 2008, the Minister assessed
Brick Corp.’s net tax for its March 2004 and April 2004 reporting periods (“Third
Assessment”), to add back the amount of the Deductions the Appellant had
claimed with respect to the Relevant Cardholder Debts. The adjustments for each
of those two reporting periods are described in attached Appendix 3.
22. The combined effect of the First Assessment, the Second Assessment
and the Third Assessment was to increase Brick Corp.’s net tax for the October
2003 to April 2004 reporting periods by $4,688,996.05 in total, as described in
attached Appendix 1 (under the “total audit adjustments” column).
23. Upon considering the Brick Corp.’s three objections, the Minister
issued three reassessments dated February 16, 2010, which related to the
reporting period ending October 31, 2003 (i.e., the First Reassessment), the
reporting periods ending between November 1, 2003 and February 29, 2004 (i.e.
the Second Reassessment), and the reporting periods ending March 31, 2004 and
April 30, 2004 (i.e. the Third Reassessment), respectively. The February 16,
2010 reassessments reassessed the net tax of Brick Corp. for the reporting
periods at issue as indicated in attached Appendix 3.
24. In issuing the February 16, 2010 reassessments, the Minister
accepted the clarification and additional information provided by Brick Corp.
that supported that some of the Claimed ITCs were deducted in calculating the
net tax reported on the GST return for the reporting period ending one month
before the month in which the adjustment had been made by the November 26, 2007
reassessment and that certain Deductions were unrelated to the Relevant Cardholder
Debts (as defined in the Brick Corp. notice of appeal). The Adjustments made by
the Minister in the Feb 16, 2010 reassessments are set out in Appendix 3.
25. In summary, the Minister allowed the Brick Corp.’s objections in
part to reduce the total original assessments by $681,192.36.
26. For purposes of Brick Corp.’s statute-barred assertion in paragraph
49 of the notice of appeal, the amount in issue relating to the Claimed ITCs
remains the full amount of $3,262,755.
27. Apart from the statute-barred assertion as referred to in paragraph
26 above, for purposes of the substantive issue of whether Brick Corp. is
entitled to claim the Claimed ITCs, Brick Corp. concedes that it is not
entitled to deduct $133,163 of the Claimed ITCs that were disallowed by the
Minister as those amounts relate to marketing or promotional services supplied
by Brick Corp. to certain of the suppliers. Thus, the amount remaining in
dispute under the substantive issue relating to the Claimed ITCs is $3,139,592.
28. Attached as appendix 5 is a “Brick Corp. Timeline Diagram” which
depicts three Deferral Periods, the timing of the claiming of the ITCs for
those three Deferral Periods, and the timing of the subsequent claiming of the
Claimed ITCs, and the reporting periods covered by the assessments and the
reassessments issued by the Minister.
A. Residual ITCs
(i)
whether the appellant
was entitled to claim residual ITCs pursuant to subsection 169(1) of the Act
and whether paragraph 232(3)(c) of the Act applied to the residual ITCs.
[5]
For income tax planning
purposes, the appellant deferred its ITC claims, on property and services it
acquired in the course of its commercial activity, for the following three
periods (the “deferral periods”):
1. from November 2000
through February 2001;
2. from October 2001
through February 2002; and
3. from August 2002
through February 2003.
[6]
In filing its GST/HST
returns (“GST returns”), the appellant claimed its ITCs with respect to the
three deferral periods in the following reporting periods:
- in the period ending March 31, 2001 for the
deferral period from November 2000 through February 2001;
- in the period ending March 31, 2002 for the
deferral period from October 2001 through February 2002; and
- in the period ending July 31, 2003 for the
deferral period from August 2002 through February 2003.
[7]
In filing the above GST
returns, the appellant claimed net ITCs comprised of the total amount of gross
GST originally payable on the relevant supplies less reductions in GST
resulting from credit or debit notes received from the supplier or issued by
the appellant. In what follows I will refer to this claim as “netted ITCs”.
[8]
Although the appellant
was issuing debit notes or receiving credit notes from its suppliers, the
evidence at trial showed that in filing its GST returns, the appellant did not
adjust its net tax pursuant paragraph 232(3)(c) of the Act.
Mr. Spence stated in his testimony that the netted ITC approach used by
the appellant was in error. According to Mr. Spence, the appellant should have
applied paragraph 232(3)(c) of the Act to increase its net tax by the
amounts of GST credited by its suppliers, at least for its non-deferral
periods.
[9]
In October 2002, the
appellant retained KPMG to perform a review of its GST compliance. KPMG advised
the appellant that it was entitled to claim ITCs in respect of the gross GST
originally payable with respect to the invoices dealing with the deferral
period. As was stated by Mr. Spence, the appellant had erroneously netted
its ITCs with respect to the property and services it had acquired during the
deferral periods.
[10]
Accordingly, the
appellant claimed the difference between the netted ITCs and the gross GST
originally payable on the invoices dealing with the deferral period. In what
follows, I will refer to this difference as the “residual ITCs”.
[11]
Residual ITCs were
claimed by the appellant in its GST returns for the following reporting periods
and amounts:
September 2003 $647,855
October 2003 $1,360,945
November 2003 $944,819
December 2003 $689,709
February 2004 $267,282
[12]
The appellant claimed
the residual ITCs within the four year period prescribed by subsection 225(4)
of the Act.
[13]
The residual ITCs are
the subject of this appeal.
[14]
The appellant argued:
- that under subsection 169(1) of the Act,
the amount of the ITC entitlement for GST payable on the supplies in issue was
determined at the time each supplier first issued its invoice. The ITCs are not
subject to subsequent adjustment under any provision of the Act as a result of
a note subsequently being received or issued;
- that the scheme of the Act is such that at
the time a credit note is received or a debit note issued, it must be added
back to the net tax of the registrant under paragraph 232(3)(c) of the
Act to the extent that the registrant has claimed the related ITC in the same
or an earlier period;
- that paragraph 232(3)(c) of the Act
specifically applies to credit and debit notes and is separate and distinct
from subsection 169(1) of the Act, which establishes the ITC entitlement; and
- that paragraph 232(3)(c) of the Act
did not apply in respect of the notes received or issued because the ITCs
relating to the deferral periods had not been claimed by the appellant in a
return filed for the reporting period in which the notes were received or a
preceding reporting period. Since the conditions of paragraph 232(3)(c)
of the Act were not met the appellant was not required to add the GST credit or
debit amounts from the notes to its net tax.
[15]
The respondent argued:
- that the appellant had to pay the
GST to its suppliers on the value of the consideration for the supply under
subsection 165(1) of the Act; if the consideration for the supply was reduced,
the liability of the appellant for this supply would be reduced. The price
reduction portion related to the GST returned to the appellant by the supplier
cannot be claimed as an ITC since the GST was no longer payable on that portion
of the price reduction pursuant to subsections 168(1) and 169 of the Act;
- that the value of the consideration stated
on an original invoice and the associated GST payable do not “crystallize” on
the issuance of the invoice as proposed by the appellant. In light of the
provisions of the Act providing a registrant with four years to claim its ITCs,
it does not make sense to suggest that the GST payable is frozen in time by
virtue of the issuance of the invoices;
- that section 232 of the Act does not apply
in this appeal, because:
·
the appellant in filing
its GST returns claimed netted ITCs for both the non-deferral periods and the
deferral periods by reducing its ITCs by the portion of the GST returned on the
notes. Since the original netted claims were correct, section 232 of the Act
does not apply. The Minister was not required to adjust net tax in the deferral
periods pursuant to section 232 of the Act, since only the entitlement to ITCs
under subsection 169(1) of the Act was engaged by the appellant with respect to
its ITC claim;
·
section 232 of the Act
is a provision that must be invoked by the supplier and not by the recipient
(i.e., the appellant). The purpose of this section is to prescribe the filing
consequences for the recipient if a supplier invokes section 232 of the Act to
claim back remitted GST.
- that the appellant could not claim its
residual ITCs since there was not sufficient evidence to enable the
determination of the ITCs.
Analysis
[16]
Subsection 168(1) and
subsection 152(1) read as follows:
168. (1) Tax
under this Division in respect of a taxable supply is payable by the recipient
on the earlier of the day the consideration for the supply is paid and the day
the consideration for the supply becomes due.
152. (1) For
the purposes of this Part, the consideration, or a part thereof, for a taxable
supply shall be deemed to become due on the earliest of
(a) the earlier of the day the supplier
first issues an invoice in respect of the supply for that consideration or part
and the date of that invoice,
(b) the day the supplier would have, but
for an undue delay, issued an invoice in respect of the supply for that
consideration or part, and
(c) the day the recipient is required to
pay that consideration or part to the supplier pursuant to an agreement in
writing.
[17]
Pursuant to subsection
168(1) of the Act, tax is payable by the recipient on the on the earlier of the
day the consideration for the supply is paid and the day the consideration
becomes due. Pursuant to subsection 152(1) of the Act, the day that the
consideration becomes due is the day the invoice is issued. In this appeal, the
tax on the supplies became payable by the appellant on the day that each
invoice was issued by its suppliers.
[18]
Taking into account
that the tax was payable by the appellant at the time each invoice was issued
by its suppliers, the appellant’s ITC entitlements crystallised at that time,
namely at the time each invoice was issued. This flows from the wording of
subsection 169(1) of the Act. The relevant portion of subsection 169(1)
applicable to this appeal reads as follows:
Subject
to this Part, where a person (the appellant) acquires . . . property or
a service . . . and, during a reporting period of the person (of the
appellant) . . . tax in respect of the supply . . . becomes payable by the
person (by the appellant at the time the invoice is issued by virtue of
subsections 168(1) and 152(1)) . . . the amount determined by the following
formula is an input tax credit of the person (the appellant) in respect
of the property for the period:
A
x B
where
A
is the tax in respect of the supply . . . that becomes payable by the
person (by the appellant at the time the invoice is issued by virtue
of subsections 168(1) and 152(1)) during the reporting period.
[Words in bold added.]
[19]
The interpretation
proposed by the respondent, that the ITC entitlement does not crystallize on
the issuance of the invoice by virtue of subsections 168(1) and 169(1) of the
Act, does not accord with the wording of the provisions.
[20]
I also do not agree with the
respondent’s position that, by virtue of subsections 168(1) and 169(1) of the
Act, an ITC can be reduced by the GST credited or issued by a note. In my view,
except for section 232 of the Act, there are no provisions in the Act that
require a registrant to make an adjustment to an ITC as result of a credit note
or debit note being received or issued.
[21]
The following definitions of the
terms “credit note” and “debit note” found in subsection
123(1) of the Act confirm the application of subsection 232(3) of the Act, when
a credit note is received or a debit note is issued.
“credit note” means a credit note
issued under 232(3)
“debit note” means a debit note issued
under 232(3)
[22]
Once invoked by a
supplier, subsection 232(3) of the Act
sets out what is required from the supplier and the recipient once a credit
note is received or a debit note is issued. Paragraphs 232(3)(b) and
232(3)(c) of the Act read as follows:
(3) Where a particular person adjusts, refunds
or credits an amount in favour of, or to, another person in accordance with
subsection (1) or (2), the following rules apply:
. . .
(b) the amount may be deducted in
determining the net tax of the particular person for the reporting period of
the particular person in which the credit note is issued to the other person or
the debit note is received by the particular person, to the extent that the amount
has been included in determining the net tax for the reporting period or a
preceding reporting period of the particular person;
(c) the amount shall be added in
determining the net tax of the other person for the reporting period of the
other person in which the debit note is issued to the particular person or the
credit note is received by the other person, to the extent that the amount has
been included in determining an input tax credit claimed by the other person in
a return filed for the reporting period or a preceding reporting period of the
other person; and
[23]
Accordingly, if a credit note or a
debit note is issued, under paragraph 232(3)(b) of the Act, the supplier
may deduct from its net tax the amount of tax that it credited to the
recipient. However, pursuant to paragraph 232(3)(c) of the Act, if a
supplier issued a credit note to a recipient or if a debit note is issued, the
recipient must add the amount of tax credited in determining its net tax.
[24]
I agree with the appellant that
subsection 232(3) of the Act would be unnecessary if the respondent’s
interpretation of subsections 168 and 169 of the Act was correct.
[25]
The respondent argued that it is
the supplier who must invoke subsection 232(3) of the Act and not the recipient (in this case, the
appellant). In this appeal, subsection 232(3) of the Act was invoked by the
suppliers when they issued credit notes to the appellant.
[26]
However, additions to net tax will be required pursuant to
paragraph 232(3)(c) of the Act only if the appellant has claimed ITCs in
respect of credited tax in the same, or a preceding, reporting period as the
one in which the credit and debit notes were issued or received.
[27]
In this appeal, paragraph 232(3)(c)
does not apply. It was established in evidence that with respect to the
deferral periods, the appellant did not claim the ITCs in the same, or a
preceding, reporting period as the periods in which the credit or debit notes
were issued or received. No addition to net tax is mandated where an ITC was
claimed after the reporting period in which a debit or credit note was issued
or received.
[28]
The respondent also argued that
the appellant’s interpretation of subsections 168(1), and 169(1) and
paragraph 232(3)(c) does not respect the object and spirit of the Act,
which is to attain tax neutrality as between GST paid to suppliers in the
course of a registrant’s commercial activity and ITCs claimed.
[29]
As I stated earlier, subsection
232(3) of the Act is, in my view, the provision applicable when credit and
debit notes are received or issued.
[30]
The Supreme Court of
Canada stated in the decision of Canada Trustco Mortgage Co. v.
Canada, [2005] 2 S.C.R. 601, that when the words of a provision are
clear and unambiguous the words should be given a dominant role in the
interpretative process, particularly when dealing with provisions that specify
precisely what conditions must be satisfied to achieve a particular result.
Chief Justice McLachlin and Justice Major, writing for an unanimous Court,
stated the following at paragraphs 10 through 12 on principles of statutory
interpretation as they apply to tax legislation:
10 It has been long established as a matter of
statutory interpretation that the words of an Act are to be read in their
entire context and in their grammatical and ordinary sense harmoniously with
the scheme of the Act, the object of the Act, and the intention of Parliament”:
see 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, at
para. 50. The interpretation of a statutory provision must be made
according to a textual, contextual and purposive analysis to find a meaning
that is harmonious with the Act as a whole. When the words of a provision
are precise and unequivocal, the ordinary meaning of the words plays a dominant
role in the interpretive process. On the other hand, where the words can
support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role. The relative effects of ordinary meaning, context and
purpose on the interpretive process may vary, but in all cases the court must
seek to read the provisions of an Act as a harmonious whole.
11 As a result of the Duke of Westminster principle (Commissioners of
Inland Revenue v. Duke of Westminster, [1936] A.C. 1 (H.L.)) that taxpayers
are entitled to arrange their affairs to minimize the amount of tax payable,
Canadian tax legislation received a strict interpretation in an era of more
literal statutory interpretation than the present. There is no doubt today that
all statutes, including the Income Tax Act, must be interpreted in a
textual, contextual and purposive way. However, the particularity and
detail of many tax provisions have often led to an emphasis on textual
interpretation. Where Parliament has specified precisely what conditions must
be satisfied to achieve a particular result, it is reasonable to assume that
Parliament intended that taxpayers would rely on such provisions to achieve the
result they prescribe.
12
The provisions of the Income Tax Act
must be interpreted in order to achieve consistency, predictability and
fairness so that taxpayers may manage their affairs intelligently. As
stated at para. 45 of Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622:
[A]bsent a specific provision to the
contrary, it is not the courts’ role to prevent taxpayers from relying on the
sophisticated structure of their transactions, arranged in such a way that the
particular provisions of the Act are met, on the basis that it would be
inequitable to those taxpayers who have not chosen to structure their
transactions that way.
See also 65302 British Columbia, at
para. 51, per Iacobucci J. citing P. W. Hogg and J. E. Magee, Principles
of Canadian Income Tax Law (2nd ed. 1997), at pp. 475-76:
It would introduce intolerable uncertainty into the
Income Tax Act if clear language in a detailed provision of the Act were to be
qualified by unexpressed exceptions derived from a court’s view of the object
and purpose of the provision.
[31]
In Dowbrands
Canada Inc. v. Canada, [1997] G.S.T.C. 85, Justice McArthur of the Tax Court dealt with a case where, as in the
present appeal, it appeared as though the appellant had received a windfall tax
benefit not contemplated by the object, spirit and purpose of the Act. However,
the wording of the Act allowing the windfall benefit was unambiguous, and
therefore the Court could not resort to applying what may have been a contrary intention
behind the provisions. According to Justice McArthur at paragraph 24:
24 The fact that the
Appellant may not have intended to refund any portion of the GST originally
paid by its customers when it made the rebate payments and subsequently claimed
a windfall tax advantage is of no consequence to this appeal. I think it is
appropriate to quote the SCC in Antosko v. Minister of National Revenue,
Where the words of the section are not
ambiguous, it is not for this Court to find that the appellants should be
disentitled to a deduction because they do not deserve a “windfall” ... In the
absence of a situation of ambiguity, such that the Court must look to the result
of a transaction to assist in ascertaining the intent of Parliament, a
normative assessment of the consequences of the application of a given
provision is within the ambit of the legislature, not the courts.
[Footnotes
omitted].
[32]
The language of paragraph
232(3)(c) of the Act is clear and unambiguous. The condition for an
addition to net tax will be required only to the extent that a registrant has
claimed ITCs in the same or preceding period in which the credit and debit
notes were issued or received.
This was not the case in this appeal.
[33]
The respondent also argued that
the appellant did not meet the requirements of subsection 169(4) of the Act and
related regulations setting out the documentation needed to support a claim for
ITCs. In the respondent’s view, there were deficiencies in
the documentation supporting the ITCs. The respondent further stated that the
appellant’s method to determine its residual ITCs was also deficient. These
arguments were not raised in the respondent’s Reply to the Notice of Appeal.
Accordingly, they ought not to have been raised at trial and cannot be
considered in these Reasons for Judgment.
[34]
The appellant is entitled to claim
its residual ITCs pursuant to subsection 169(1) of the Act. Paragraph 232(3)(c)
of the Act does not apply in this appeal.
[35]
The appeal is therefore allowed
with respect to the residual ITCs
A. Statute-Barred
Issue
(ii) whether the Minister
reassessed the appellant within the statutory time limit pursuant to
subparagraph 298(1)(a)(i) of the Act.
[36]
There were numerous reassessments
but I will only refer to the ones dealing with the residual ITCs.
[37]
The first reassessment is dated
November 26, 2007, denying the residual ITCs claimed by the appellant during
the reporting periods of October 2003, November 2003, December 2003
and February 2004.
[38]
The second
reassessment is dated December 20, 2007, denying the residual ITCs of November
2003, December 2003 and February 2004. It corrected amounts in the preceding
reporting periods.
[39]
There were two other reassessments
in February 2010. They were issued to give effect to decisions of the Minister
on Notices of Objections filed by the appellant in respect of the 2007
reassessments.
[40]
The appellant argued that the
Minister did not reassess within the time limit prescribed by the Act, which
provides that an assessment of net tax of a person for a reporting period of a
person shall not be made more than for years after the later of the date the
person was required to file a return under section 238 of the Act and the date
the return was filed.
[41]
The appellant submitted that it
filed its GST return for the last deferral period by the filing deadline
of March 31, 2003. The returns for all prior deferral periods had also been
filed prior to that date. Accordingly, the Minister could not reassess the
appellant after March 30, 2007. Since the Minister’s earliest reassessments
with respect to the residual ITCs were dated November 26, 2007 and December 20, 2007,
the Minister was outside the time limits to reassess the appellant pursuant to
subparagraph 298(1)(a)(i) of the Act. Accordingly, the appellant should
be entitled to claim residual ITCs in the amount of $3,262,755.
[42]
The respondent stated that the
appellant is not using the correct reporting periods in calculating the four
year time limits for the Minister to reassess. The respondent stated that the
evidence established that when the appellant filed its GST return with respect
to its deferral periods in March 2001, in March 2002 and July 2004, the
appellant claimed netted ITCs. She stated that until the appellant decided to
act upon the advice of KPMG, and claimed the residual ITCs in its GST returns
for the reporting periods of September 2003, October 2003, November 2003,
December 2003, and February 2004, the Minister had no basis to reassess the
appellant. The Minister’s position was and still is that the correct approach
was for the appellant to report the netted ITCs.
[43]
The respondent therefore submitted
that the calculation of the four year time limit to reassess the appellant
under subparagraph 298(1)(a)(i) of the Act began on December 1st,
2003. Pursuant to section to 238 of the Act, the appellant had to file its GST
return for October 2003 by December 1st, 2003. Accordingly, the
Minister had until December 1st, 2007 to reassess the October 2003
reporting period. Therefore, the Minister’s reassessment dated November 26,
2007 was within the time limit to reassess the appellant.
[44]
The appellant argued in the
alternative that, if I were to find that the reassessments
were not statute-barred, and here I quote from its paragraph 44 of its Written
Memorandum:
(i) section 232 was
the only provision that potentially might have applied to require an addition
to net tax in respect of the Notes that were issued or received in the
reporting periods which comprised the Deferral Periods, and (ii) section 232
did not apply in respect of $2,281,753 ($3,129,592 - $847,839) of the Claimed
ITCs because those ITCs were not claimed in the reporting period in which the
Notes were issued or received or an earlier period, and (iii) $981,002
($133,163 + 847,839) of the Claimed ITCs were properly disallowed by the
Minister.
Analysis
[45]
In my opinion, the
Minister was within the four year time limit to reassess the appellant, as
prescribed by subparagraph 298(1)(a)(i)
of the Act. The residual ITCs
were claimed by the appellant in its GST returns for October 2003, November
2003, December 2003 and February 2004, since those were the periods in which
the discrepancy in the net tax arose. The reassessments were valid since the
Minister had until December 1st, 2007 to reassess the appellant for
the October 2003 reporting period. The second reassessment dated December 20,
2007 for the November 2003, December 2003 and February 2004 reporting periods
was also issued within the four year period prescribed by subparagraph 298(1)(a)(i) of the Act.
[46]
The Minister could have
not assessed before the appellant claimed the residual ITCs in October 2003,
November 2003, December 2003 and February 2004. As was stated by the
respondent, prior to these periods the appellant reported and claimed netted
ITCs. The Minister did not have a basis to reassess the appellant.
[47]
In any event, the
appellant conceded that the amount of $133,163 should have not been claimed as
residual ITCs, since this amount related to marketing or promotional services
supplied by the appellant to certain of its suppliers. The appellant also
conceded that an amount of $847,839 should have not been claimed as residual
ITCs, since those ITCs were claimed prior to the issuance or receipt of the
debit or credit notes.
[48]
The Minister was
therefore within the time limits under subparagraph 298(1)(a)(i) of the Act to assess and to deny the amount of
$981,002 ($133,163 + $847,839) since the appellant was not entitled to claim
that amount in calculating its residual ITCs under subsection 169(1) of the
Act.
[49]
Accordingly, in light
of my conclusion that paragraph 232(3)(c) of the Act did not apply to
the residual ITCs, the appellant is entitled to claim as residual ITCs,
pursuant to subsection 169(1) of the Act, the amount of $2,281,753 ($3,262,755
– $981,002).
[50]
With costs in favour of
the appellant.
Signed at Ottawa, Canada, this 23th day of January 2013
“Johanne D’Auray”
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