Citation: 2014 TCC 121
Date: 20140428
Dockets: 2012-3223(GST)I
2013-2538(GST)I
BETWEEN:
2253787 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2013-2538(GST)I
AND BETWEEN:
2266504 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED CONSOLIDATED REASONS FOR JUDGMENT
Bocock J.
I. Introduction
[1]
The Appellants are two
private companies incorporated for a single purpose: to commercially engage in
the process of leapfrogging the staged continental releases of the iconic Apple
iPhone 4 and iPhone 4s in 2010 and 2011, respectively. This “gray market” for
such heavily marketed and prolific communication products is created by a
multi-national corporation’s desire to sell its product to perceived lucrative
and proprietary markets in advance of releasing the product for sale into perceived
cutthroat and less proprietary markets. More simply, it is the temporary
prohibition of the sale of a product to certain defined markets.
[2]
Wily entrepreneurs such
as Mr. Cao, the principal of the two Appellants, circumvent this regional
launch management through a series of micro-managed purchases of product in the
protective market (Canada) followed by the expedited unmonitored export of the
product into the prohibited market for its subsequent re-sale (in this case
Hong Kong). In doing so, the gray marketeers reap enhanced profits associated
with selling the product first in the prohibited market and at the same time violating
the spirit and intent of the original equipment manufacturer (in this case
Apple Inc).
[3]
In the present matter,
and although the process differed slightly between 2010 and 2011 as a result of
immaterial changes to Apple’s sales policy in Canada, the method followed by
the Appellants was refined, organized and lithe. Mr. Cao engaged friends,
relatives, acquaintances and loosely retained contractors (the “initial
buyers”) to acquire one or two iPhones each day from an Apple store in Canada. Each initial buyer would be reimbursed for the sale price, HST and paid a fee provided
Mr. Cao had received proof of payment, the phones and verified that the
required encoding on the device was compatible (or able to be circumvented) for
use in Hong Kong. The iPhones were then immediately sent by courier to Hong Kong and re-sold by the Appellants as the re-seller.
II. Issues Under Appeal
[4]
The Appellants were
reassessed by the Minister who disallowed the Input Tax Credit (ITCs) claimed
under the Excise Tax Act, RSC 1985, c. E-15 (the “ETA”) by the
Appellants on the iPhone purchases made by the initial buyers from Apple. The Minister
asserts that the Appellants did not incur the HST on those initial purchases as
a buyer. Further, no legal relationship of agency existed to allow the
Appellants to claim the ITCs incurred by the initial buyers.
[5]
As a secondary and
alternative ground for denying the ITCs, even if agency did exist, the Minister
disallowed the ITCs claimed on the basis that there was insufficient documentation
to evidence the incurrence of such ITCs by the Appellants.
[6]
As a further basis for the
denial of a portion of the ITCs, the Respondent alleges that some of the ITCs
claimed by the Appellant, 2253787 Ontario Inc., were incurred prior to it
becoming a registrant under the ETA.
[7]
The Appellants appeal
on the basis that an agency existed between the initial buyers and themselves, that
there is sufficient documentation to warrant claiming the ITCs, and lastly, that
the ITCs claimed by 2253787 during the period prior to registration qualify by
virtue of certain pre-registrant grandparenting provisions under section 171(1)
of the ETA.
III. Relevant Statutory Provisions
[8]
Unless exempt for a
reason specified, the ETA provides that a person making a supply is
required to collect, account for and remit tax on that supply. This is embodied
in section 133 of the ETA which provides.
133. For the purposes of this Part, where an
agreement is entered into to provide property or a service,
(a) the entering
into of the agreement shall be deemed to be a supply of the property or service
made at the time the agreement is entered into; and
(b) the provision,
if any, of property or a service under the agreement shall be deemed to be part
of the supply referred to in paragraph (a) and not a separate supply.
[9]
Statutorily relevant to
the Appellants’ assertions of the agency relationship between the
initial buyer and the Appellants is subsection 177(1) which provides:
177. (1) Where
(a) a person (in
this subsection referred to as the “principal”) makes a supply (other than an
exempt or zero-rated supply) of tangible personal property to a recipient
(otherwise than by auction),
(b) the principal
is not required to collect tax in respect of the supply except as provided in
this subsection, and
(c) a registrant
(in this subsection referred to as the “agent”), in the course of a commercial
activity of the agent, acts as agent in making the supply on behalf of the
principal,
the following
rules apply:
(d) where the
principal is a registrant and the property was last used, or acquired for
consumption or use, by the principal in an endeavour of the principal, within
the meaning of subsection 141.01(1), and the principal and agent jointly elect
in writing, the supply of the property to the recipient is deemed to be a
taxable supply for the following purposes:
(i) all purposes
of this Part, other than determining whether the principal may claim an input
tax credit in respect of property or services acquired or imported by the
principal for consumption or use in making the supply to the recipient, and
(ii) the purpose
of determining whether the principal may claim an input tax credit in respect
of services supplied by the agent relating to the supply of the property to the
recipient, and
(e) in any other
case, the supply of the property to the recipient is deemed, for the purposes
of this Part, to be a taxable supply made by the agent and not by the principal
and the agent is deemed, for the purposes of this Part other than section 180,
not to have made a supply to the principal of services relating to the supply
of the property to the recipient.
[10]
Subsections 169(1) and
169(4) of the Excise Tax Act (“ETA”) provide as follows:
169. (1) 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: […]
169. (4) A registrant
may not claim an input tax credit for a reporting period unless,
before filing the return in which the credit is claimed,
(a) the registrant has obtained
sufficient evidence in such form containing such information as will
enable the amount of the input tax credit to be determined, including any such
information as may be prescribed; and
(b) where the credit is in respect of
property or a service supplied to the registrant in circumstances in which the
registrant is required to report the tax payable in respect of the supply in a
return filed with the Minister under this Part, the registrant has so reported
the tax in a return filed under this Part.
[11]
Subsection 169(1) and
169(4), as underlined above for emphasis, are relevant to the claim by the
Appellants as to sufficient documentary evidence reflecting the ITCs incurred
in acquiring the iPhones from the initial seller, Apple.
[12]
Relevant to the issue
of documentation, subsection 3(c) of ITC Information (GST/HST) Regulations
SOR/91-45 provides as follows:
3. (c) where the total
amount paid or payable shown on the supporting documentation in respect of
the supply or, if the supporting documentation is in respect of more than one
supply, the supplies, is $150 or more,
(i) the information set out in paragraphs (a) and (b),
(ii) the recipient’s name, the name under which the
recipient does business or the name of the recipient’s duly authorized agent or
representative,
(iii) the terms of payment, and
(iv) a description of each supply sufficient to identify
it.
[13]
The following statutory provision
is relied upon by the Appellant 2253787 Ontario Inc. for its claim of ITCs
relevant to its “pre-registrant” period during which it claims it was a “smaller
supplier”:
171. (1) Where at
any time a person becomes a registrant and immediately before that time the
person was a small supplier, for the purpose of determining an input tax
credit of the person, the person shall be deemed
(a) to have received, at that time,
a supply by way of sale of each property of the person that was held
immediately before that time for consumption, use or supply in the course of
commercial activities of the person; and
(b) to have paid, at that time, tax
in respect of the supply equal to the basic tax content of the property at that
time.
IV. Analysis
a) Did the legal
relationship of agency exist?
[14]
The parties agree that
in the absence of a legal relationship of agency, whereunder the initial buyers
acted solely as a conduit for the Appellants, the Appellant would have no right
to claim any of the ITCs because the legal requirements of subsection 177(1)
would not have been met.
[15]
It is long established
law that the underlying components which enable a finding of agency are the
consent of both principal and agent, the subsisting authority from the
principal to agent allowing the agent to affect the rights or obligations of
the principal as if it had entered the contract itself and the principal’s
control of the agent’s actions: Royal Securities Corporation Ltd. v.
Montreal Trust [1967 OR 137]. In respect of the first component and the
third component, there is no need to explore further; it is upon the second
ground where the appellants slip in fact and fail at law.
[16]
It is a plain and
unequivocal term within both the Apple Retail Store Purchase Policies and the Sale and Refund Policy that purchase is limited to end users and re-sale and export is expressly
prohibited. As a specific example, the Sale and Refund Policy states:
“Canadian Sales to End-Users Only
The Apple Store will only sell and ship product within the boundaries
of Canada. No Shipments can be made to P.O. Box addresses outside Canada. Products purchased at the Apple Store may not be exported.”
“Sales to End – Users Only
The Apple Store sells and ships to end-user customers only. You may
not purchase for resale. Apple reserves the right to refuse or cancel your
order if Apple suspects you are purchasing for resale”
[17]
The third party seller,
Apple, has expressly prohibited its primary sale for subsequent re-sale and/or
export. Had the alleged agency been disclosed at the outset, Apple would have refused
to make the sale. If and when the agency became apparent, Apple would have invalidated
the sale, warranty and its obligations under these voidable provisions. For
agency to exist, it is mandatory that the agent have the ability to affect the
principal’s legal position by entering into contracts on the principal’s behalf;
a principal cannot appoint an agent to engage in a contractual entreaty into which
the principal has no legal capacity or authority to enter: 1524994 Ontario
Ltd. v. Canada, 2007 FCA 74 at paragraph 18.
[18]
Ironically, only by
using the initial buyers as pawns could the Appellants actually accomplish
their main business purpose: the circumvention of Apple’s prohibited sale to
resellers and exporters.
[19]
The main goal was
achieved. The coincident goal is not. The relationship of agency, utilized
but concealed to dupe the initial seller to contract with the initial buyer,
cannot now be revealed post facto in order to inject the notion
of a different “principal” buyer and obviate the need for the initial buyer to
register for HST and properly claim the ITCs. Agency requires a consistent,
clear and documented factual basis for those who view and rely upon it; a story
with alternative endings serving different purposes at varying times does not
meet that demand. The non-disclosure to one third party (Apple) of one of
reality for a main purpose cannot be set aside, when suitable, and re-characterized
to another reality for a different third party (the Minister): 1524994
Ontario, supra at paragraph 20.
[20]
On this basis, the Court
finds that no agency existed given the required necessity of concealment to the
initial seller, with whom, without such a concealment, a legal relationship
could not have been created or maintained affecting the rights and obligations of
the purported principal. Without that legal foundation block, subsection 177(1)
of the ETA has not been satisfied since based upon the actions of the
Appellants no agency could be maintained at law.
[21]
The Appellants
contends that such a constituent component is no longer
required because the doctrine of agency has been adopted, but modified by the ETA
and related policy pronouncements. This argument is not supportable by
legal authority. The necessarily and deliberately undisclosed purported agency,
the fact the initial seller Apple intended to contract solely and exclusively
with an initial Canadian buyer, the absolute prohibition against the initial
buyer’s re-sale to the Appellants, the inability of the initial buyer to bind
the Appellants because of that prohibition rendering the contract unenforceable
and the fact the initial buyers’ moneys were used to acquire the goods erode to
dust the basic foundation of the second tenet of agency whether at law in or in
statute and policy.
[22]
This tenet is included as
section 2 of the CRA’s GST/HST Policy Statement P-182R: “Authority of the Agent
to Affect the Principal’s Legal Position” which provides (underlining added):
2. Authority of
the Agent to Affect the Principal’s Legal Position
{……}
The most common
example of the ability of the agent to affect the legal position of the
principal is where the agent is authorized to enter into contracts with third
parties on the principal.s behalf. For instance, suppose A asks B to negotiate
and purchase some equipment from a third person (C). B signs the contract
with C, but A is identified in the contract as the purchaser of the equipment.
In this case, B has bound A to the terms of the contract. In other words,
B’s actions have caused A to acquire the same rights and be subject to the same
obligations as if A had signed the contract. […..]
The ability of Apple to avoid the contract,
precisely because of the concealed goal of the party initiating the
relationship, precludes the creation of a binding legal relationship: R v.
Glengary Bingo Association, 1999 GTC 7101 at paragraph 33. In the absence
of agency, the ITCs claimed are not those incurred by the Appellants, but
rather by the initial buyers; the Appellants cannot claim the ITCs of third
party.
b) Sufficiency of
Documentary Evidence to Claim ITCs.
[23]
Given the finding
above, although the issue of satisfactory documentation regarding the ITCs is
moot, the Court notes that many names and other requisite information related
to a sizeable number of the initial buyers are simply fictitious, unreliable or
missing. It is factually impossible for this Court to determine which
transactions actually have proper information supporting the ITCs. This is perhaps
more surprising given that the Appellants claim agency existed whereby one
might expect more fulsome and thorough record keeping to support such an
elaborate business and legal structure: Systematix Technology Consultants
Inc. v. Canada, 207 FCA 226 and Calistar Construction Services Ltd. v. R
(2004 TCC 451).
[24]
On the evidence before
the Court, a percentage of well less than half of the transactions
for which ITCs are claimed prima facie meet the minimum standards of
record keeping necessary to factually ascertain and legally allow an ITC. However,
as noted, this is moot because of the absence of an agency arrangement.
c) Pre-Registrant ITCs.
[25]
As to the issue of the
small supplier pre-registrant ITCs for 2253787 Ontario Inc., this argument also
fails for the following reasons:
i)
there was no evidence
adduced regarding the precise period during which 2253787 Ontario Inc. was
actually alleged to have been a small supplier;
ii)
such a period would
likely have been quite short given the immediately sizeable value of goods
supplied once purchasing commenced; and,
iii)
the statutory provisions
require goods to be held during the period a pre-registrant was actually a
small supplier, which factually did not occur or occurred for such a brief time
that any calculation would be de minimus, even if, such evidence had
been adduced which it was not.
[26]
For the reasons stated,
the appeals are dismissed. Costs are awarded to the Respondent in accordance
with the applicable tariff, unless further written submissions on
costs are requested by the parties.
These Amended Consolidated Reasons for
Judgment are issued in substitution of the Reasons for Judgment dated April 28,
2014 in order to correct the minor typographical errors underscored on paragraphs
7, 9, 11, 13, 19, 21, 24 and 26 hereof.
Signed at Toronto, Ontario, this 18th
day of June, 2014.
“R.S. Bocock”
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