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Citation: 2004TCC210
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Date: 20040312
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Docket: 2001-880(GST)G
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BETWEEN:
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KEY PROPERTY MANAGEMENT CORPORATION,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Bowie J.
[1] This appeal is from an assessment
for goods and services tax (GST) under Part IX of the Excise
Tax Act (the "Act")[1] covering the period between
October 1, 1991 and September 30, 1996. The Appellant (Key)
is a corporation created to provide management services to 30 or
more other corporations (the owner companies), each of which is
the owner and operator of a revenue producing property. All the
shares of Key, and of each of the owner companies, are owned by
Mr. Anthony Graat; his is the controlling mind of each of them.
The principal issue in the appeal concerns certain caretakers and
maintenance personnel who are engaged to provide services to the
buildings. The Minister of National Revenue (the Minister) has
assessed the Appellant on the assumption that Key is the employer
of these individuals, and that it supplies their services to the
owner companies, and is therefore liable to collect GST from them
in respect of those services and remit it to the Receiver
General. The Appellant's position is that the owner companies
employ these people under contracts of service, and that GST is
therefore not exigible. The Appellant also argues, in the
alternative, that if it is the employer of the superintendents
then the assessment overstates the value of the services it
provided to the owner corporations because it includes the value
of the free accommodation that the owner companies provided to
them. There was also a similar issue with respect to the
employment of Robert Morrison, who performed services for
another of Mr. Graat's companies called Ayerswood Development
Corporation (Ayerswood). At the opening of the trial, I was
advised by counsel that the parties had agreed that Mr. Morrison
was an employee of Ayerswood, and that the appeal should
therefore succeed at least to the extent of the tax assessed on
his services, together with the associated interest and
penalties. The other issues concern some minor claims for input
tax credits that the Minister rejected, and penalties under
subsection 280(1) of the Act that were applied in respect
of the tax in dispute.
the employment issue
[2] Most of the buildings with which
these appeals are concerned are residential; a few are
commercial. The precise number of buildings is not clear from the
evidence, but it is at least thirty. Key was created in order to
centralize the management and accounting functions for all
of them, and also for Ayerswood, which is the construction
company owned by Mr. Graat. Mr. Trent Krauel is
Vice-President, Finance and Administration of Key, and he holds
the same position in respect of the owner companies as well. He
was the only witness. It is clear from his evidence that all the
major decisions in respect of the management of all these
companies, and many of the minor ones as well, are made by Mr.
Graat, whom he described as being a hands-on type of executive.
Mr. Krauel is responsible for seeing that Mr. Graat's
policies, and his decisions, are carried out. He described Key as
being the banking company for the group. It collects the rents,
pays the bills, including taxes and mortgages for each of the
owner companies. It administers the payrolls of all the
companies. The accounting functions are carried out on Key's
computer, with separate books and records being maintained there
for each corporation. In addition to Mr. Krauel, Key employs a
senior property manager, three other property managers and an
administrative and clerical staff of about eight people.
[3] Each apartment building in the
group has a superintendent, or more usually a couple who share
the duties of the superintendent. They are paid a salary, and
also are provided with an apartment in the building free of
charge. These apartments were included in the design of the
buildings specifically to be the residence of the
superintendents. The superintendents' duties involve cleaning
and minor maintenance, collecting rents and obtaining tenants for
vacant apartments. If these people are employed by Key, then the
services that they perform are services that Key provides to the
various owner companies in commercial transactions, and so they
are subject to GST, which Key is obliged to collect and remit.
If, on the other hand, they are employees of the owner companies
then their services are not subject to GST. None of this is in
dispute. The Appellant's position is that it acted only as
agent of the owner companies when it recruited, hired and
supervised these individuals. This is disputed by the Respondent,
who takes the position that Key entered into the contracts of
employment as principal and not as agent. The parties each
take precisely the same position in respect of the employment of
a small group of maintenance employees who perform more difficult
or specialized repairs to the buildings and their mechanical
equipment. The only significant difference between the two groups
of workers for purposes of this appeal is that the
superintendents do all their work in and about the one building
for which they are responsible, while the maintenance workers go
from building to building, at the direction of the Key property
managers, depending upon where there is a need for their services
from time to time.
[4] The Minister's assessment is
predicated upon the assumption that the Appellant was acting as
principal when it entered into contracts of employment with the
building superintendents and the maintenance workers. The
Appellant has the onus of displacing this assumption and showing
that the owner companies were the true employers. The evidence
that the Appellant relies on is the Management Agency Agreement
that was entered into between each of the owner companies and
Key, the accounting records maintained by Key for itself and for
the owner companies, and the testimony of Mr. Krauel concerning
these. Dealing first with the accounting records, it is not
in dispute that Key paid the salaries of all the members of both
groups of employees, and remitted the required withholdings and
contributions for income tax, employment insurance premiums and
Canada Pension Plan contributions for each of them, in the first
instance. The exhibits, and Mr. Krauel's testimony, satisfy
me that Key recovered from each of the owner companies all of the
salary and the associated payroll costs referable to their
superintendents. It is clear, too, that the costs of the
apartments occupied by the building superintendents were borne in
full by the owner companies. The accounting was somewhat
more complex in relation to the maintenance employees, as they
typically worked at several different buildings, and therefore
for the benefit of several different owner companies, each day.
Nevertheless, they kept logs of their time, and, by journal
entries made by Key based on those logs, their payroll and
related expenses were apportioned each month among the various
owner companies for whom they had done work, according to the
ratio of their time spent working for each of them.
[5] The Appellant put into evidence a
document dated October 1, 1990 which is described as a Management
Agency Agreement (the Agreement) between Wrenlon Developments
Limited, one of the owner companies, and Key Property Management
Corporation. It was executed on behalf of both Key and Wrenlon by
Mr. Graat. The parties agreed that there were written contracts
in identical terms between the Appellant and each of the other
owner companies, and of course it is this agreement that governed
the relationship between the Appellant and each of the owner
companies during the period covered by the assessment under
appeal. Under these agreements the Appellant, as agent of the
owner companies, contracted to do virtually everything that an
owner of rental property must do, including renting the units,
collecting the rents, paying all the bills, including mortgages,
taxes, utilities and services of all kinds, and entering into
contracts on behalf of the owner companies for such services as
snow removal, landscaping, building maintenance and repairs. Key
also provided all the accounting, record-keeping and
banking functions required to carry on business. The owner
companies paid Key a fee for these services of 2½% of the
gross monthly billings to tenants, together with an additional
amount in respect of commercial space. Mr. Krauel said in his
evidence that before 1990 the companies used a very simple form
of management agreement, and that it was the advent of GST, among
other things, that caused the organization to revise the form of
agreement that it used. He said:
A. When GST came on
we had numerous discussions with our accountants and the issue of
agency came up, and that there was the potential that if we
didn't make an effort to document our agency relationships
that Revenue Canada would in fact make the claims that we're
here today, and that is that Key Property was in fact the
employer and providing a service for these other companies, as
opposed to Key Property was merely a convenience and an agent for
the owners.
Q. And that is the
reason why the agreement was put in place?
A. That is the
reason why the document that we had traditionally was
redrafted.
And so I would say today it is - - it's an effort to document
the agency relationship as well as satisfy the concerns of an
insurer when we have a slip and
fall.
(Transcript, page 16)
[6] The Agreement is a lengthy one,
and much of it is not relevant to the issues that I have to
decide. The following are those parts of it that might be thought
to shed some light on the issue "who employed the
superintendents and the maintenance workers?".
THIS MANAGEMENT AGENCY AGREEMENT made this 1st day of October,
1990,
B E T W E E N:
WRENLON DEVELOMENTS LIMITED
a company incorporated under the laws of the Province of
Ontario and having its head office at the City of London, in the
County of Middlesex,
hereinafter called "Owner"
OF THE FIRST PART
- and -
KEY PROEPRTY MANAGEMENT CORPORATION
a company incorporated under the laws of the Province of
Ontario and having its head office at the City of London, in the
county of Middlesex,
hereinafter called "the Agent"
OF THE SECOND PART
WHEREAS the Agent has represented to the Owner that it is
engaged in the business of real property management and has
acquired expert knowledge in this field;
AND WHEREAS the Owner, acting upon the representations
aforesaid and placing a special reliance, trust and confidence in
the ability and expertise of the Agent with respect to the
business of real property management, desires to place the
management of those premises municipally known as 955 Wonderland
Road, London, Ontario (hereinafter called "the
Premises") in the care of the Agent in accordance with the
provisions hereof;
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT, in consideration
of the Fee herein provided for and the mutual covenants contained
herein, THE PARTIES HERETO AGREE AS FOLLOWS:
PART 1: DEFINITIONS
1.01 In this Agreement the capitalized
terms are defined terms and shall have the following
meanings:
...
(c)
"Landlord" means the Owner, or the Agent if, as and
when directed by the Owner to enter into Leases with Tenants;
PART 2: APPOINTMENT OF THE AGENT
2.01 The Owner hereby appoints the
Agent as its exclusive agent, and the Agent hereby accepts such
agency appointment, to manage and administer the Premises on
behalf for the Owner in accordance with the provisions
hereof.
PART 4: FEE
4.01 In additional (sic) to
other amounts stipulated in Part 5 of this Agreement to be paid
or reimbursed to the Agent by the owner, for the professional
management agency services performed by the Agent under this
Agreement, the Owner shall pay to the Agent, by way of
remuneration, a monthly net Fee equal to two and a half
(2½%) percent of gross monthly billings to Tenants,
including, without limitation, minimum rents, additional rents,
recharges, adjustments and utility and service charges (plus any
applicable taxes) with respect to the Premises. The Owner shall
pay to the Agent the monthly Fee on the last business day of each
month of the Term of this Agreement.
4.02 For any and all commercial
leasing services performed by the Agent under this Agreement, and
unless otherwise mutually agreed upon, the Owner shall pay to the
Agent a Leasing Fee Commission equal to the greater of 15% of the
average year's net rent or $2.00 for each square foot of area
leased by the Agent on the Owner's behalf. The Owner shall
pay to the Agent the Leasing Fee Commission as stated herein on
the earliest of the day the area leased by the Agent is occupied
by the Tenant or the day the Lease is executed by both Landlord
and Tenant or the Lease Commencement Date as contemplated by the
Agreement to Lease.
PART 5: DUTIES OF THE AGENT
5.20 The Agent shall, upon demand;
(a) where
applicable, administer the payroll (based on salary scales and
wage structures dictated or approved by the Owner) for all
employees of either the Owner or the Landlord provided for herein
and/or in budgets approved by the Owner including, without
limitation, the preparation of all payroll documents, entering
payroll accounts in proper books of entry, disbursing payroll
funds, making necessary deductions for income taxes, unemployment
insurance hospital insurance and pension plans and other
deductions authorized by or required to be made by virtue of any
governmental regulations or otherwise in respect of the payment
of such employees (and remitting the same) and preparing or
having prepared and filing or having filed all necessary
government returns relating to the aforementioned deduction, it
being agreed and understood that the Agent shall have the sole
right to hire and discharge as the Agent may see fit;
(b) establish and
maintain suitable records and systems to handle and shall handle
all billings to Tenants, including without limitation common area
maintenance and operating expense re-charges and adjustments,
heating and air conditioning and other utility or service
charges, supervision, realty taxes, and any other payments which,
by the terms of a Tenant's Lease or other enforceable
contract are to be collected as a part of or in addition to rents
or otherwise on a periodic or intermittent basis;
(c) in accordance
with the provisions hereof, handle all banking necessary and/or
desirable for the due performance of it accounting and
administrative functions hereunder and for the receipt and
disbursement of all monies of either the Owner or the Landlord
required to be attended to by the Agent under this Agreement.
5.21 The Agent shall be
responsible for cash balances held by the Agent for the account
of either the Owner or the Landlord from time to time during the
course of each month and from month to month during the Term of
this Agreement.
5.22 The Agent acknowledges that
all monies received by the Agent pursuant to any of the
obligations provided for herein or otherwise for the account of
either the Owner or the Landlord shall be received by the Agent
and held by the Agent for the benefit of the Owner. All such
monies will be accounted for and will be disbursed as provided
for herein or otherwise at the direction and for the benefit of
the Owner or remitted to or to the direction of the Owner in
accordance herewith.
5.35
(a) the Agent shall,
subject to the approval of the Owner, contract, purchase or
otherwise arrange for all personnel and labour required for the
operation and maintenance of the Premises, and the Agent shall
use its best efforts to ensure that Common Areas and equipment
are operated, maintained and kept in repair in conformity with
the Landlord's obligations to the Tenants of the
Premises;
(b) the Agent shall
contract, purchase or otherwise arrange for the making of all
repairs to the Premises that are the Landlord's
responsibility and for alterations and redecoration which may
become necessary or desirable in keeping with the policies from
time to time established by either the Owner or the Landlord, and
shall use its best efforts to cause all things to be done with
respect to the Premises and that the Agent shall deem necessary
to comply with any and all regulations of any governmental
authority having jurisdiction over the Premises.
(c) the Agent shall
contract, purchase or otherwise arrange for the Common Areas of
the Premises to be kept clean and reasonably free from snow and
ice and for any landscaping and other amenities on the Premises
to be maintained, repaired or replaced as required.
(d) the Agent shall
generally contract, purchase or otherwise arrange for all things
necessary for the proper and efficient management, operation,
maintenance and repair of the Premises and for the performance of
every other act whatsoever in or abut the Premises to carry out
the intent of this Agreement. Major expenditures shall be
referred to the Owner for prior approval.
5.36 At the expense of the Owner, the
Agent shall recommend adequate security for the physical
protection for the Premises.
5.37 The Agent shall contract,
purchase or otherwise arrange for all services, materials and
supplies required in performance of its duties and
responsibilities hereunder, including, without limitation, all
stationery, invoices, accounting books, general office supplies
and equipment, and all indoor and outdoor cleaning and
maintenance materials, equipment and supplies. All costs of such
services, materials, equipment and supplies shall be paid for or
reimbursed to the Agent by the Owner in accordance with the
budget prepared by the Agent and approved by the Owner.
5.38 Any major contact for services,
materials, equipment or supplies shall be approved by the
Owner.
5.39 Notwithstanding that major
expenditures shall be referred to the Owner for prior approval,
in the event that any work is of an emergency nature or action is
urgently required at times when the authorized representatives of
the Owner cannot be reasonably located for the purpose of giving
approval or failure to do any work or take any action might
expose either the Owner or the Landlord or the Agent in its
capacity as manager to penalties or other liability, the Agent is
hereby duly authorized and instructed to institute whatever
reasonable action is deemed urgently necessary for the protection
and preservation of the Premises or to protect the Owner, the
Landlord and/or the Agent from exposure to any penalty or
liability whatsoever.
5.40 With the intent that the monthly
Fee stipulated in Part 4 of this Agreement shall be fully net to
the Agent, the Owner shall (a) reimburse to the Agent all costs
and expenses whatsoever, howsoever or whensoever suffered or
incurred by the Agent hereunder on a monthly basis as provided
herein, or (b) where the Agent acts as Landlord, authorize the
Agent to recharge (and use its best efforts to collect from) its
Tenants proportionately so much of such otherwise reimbursable
costs and expenses as may be permitted under the provisions of
the respective Leases.
[7] A careful reading of these
provisions leads me to conclude that they are not necessarily
inconsistent with the position of either the Appellant or the
Respondent. Key could have fulfilled its obligations to the owner
companies in respect of the provision of the range of services
provided by the superintendents, and by the maintenance workers,
by hiring its own employees and providing services, or by hiring
and supervising employees of the owner companies as their agent.
If it did the former, then it would have been entitled to recover
from the owner the full amount of the salary and other payroll
costs related to those employees, under paragraph 5.40 of the
Agreement. If it did the latter, then it would have been required
under paragraph 5.20 to pay the salary out of the funds of
the owner company that it held under the Agreement, and to
administer the payroll and make the remittances for payroll
deductions as agent of the owner. Counsel for the Respondent
suggested in argument that if Key were intended to have the
authority under the Agreement to hire employees for the owner
companies as their agent, then paragraph 5.38 would have included
contracts of employment among those major contracts that require
specific approval of the owner. However, it would be equally
logical to infer that if Key were not intended to have the
authority to hire superintendents as employees of the owners then
there would not be any reason to provide for it to administer a
payroll for the owner companies. There is nothing in the evidence
to suggest that the owner companies had any employees other than
the superintendents. In short, the written contract does not
resolve the issue.
[8] The other evidence that the
Respondent relies on consists of three letters written on the
letterhead of Key and signed on behalf of Key by three different
property managers in its employ. They are all written to confirm
terms of employment that had previously been agreed upon orally.
The attachments to the letters include an agreement as to salary
in one case and a rent increase notice in the case of a
superintendent who was being moved from one building to another.
None of these documents would reveal to the reader that the
employment contract in question is not with Key, but with another
company whose name does not appear anywhere in the letter or the
attachment. Like the Agreement, these documents are not
inconsistent with either theory of the case. An agent may
contract on behalf of a principal whose existence is not revealed
to the other party.[2] I was not referred to any authority that excepts
contracts of employment from this general principle, nor have I
been able to find any.
[10] Nor do I find much assistance in the
extracts from the Appellant's accounting records that were
entered into evidence. Mr. Krauel explained in his evidence that
the Appellant ran the payrolls for all Mr. Graat's companies
because it was much more cost effective than having each of them
do it separately. The payroll cost of each company was then
charged to it by a journal entry. I do not consider this evidence
to negate the possibility of the employees being employees of the
owner companies. Whether the Appellant was paying the
superintendents as agent of the owners from the funds it held on
their behalf, or paying them as their employer and then
recovering the cost from the funds of those owner companies that
it held on their account under the Agreement, exactly the same
financial result would be arrived at.
[11] The manner in which the notional rent
for the apartments occupied by the superintendents is recorded in
the accounts does lend some support to the Appellant's case,
however. For each building, a notional rent was established for
the apartment assigned for occupation by the superintendent. The
superintendents paid no rent, but their right of occupancy formed
part of their remuneration. This was recorded each month in the
books of account of each owner company by a credit to the rental
revenue account and a debit to the superintendent expense
account. As Ms. Woodyard quite correctly pointed out in argument,
the right of occupancy of those apartments was a right of the
owners of the buildings, not of the Appellant, and it passed
directly from the owner companies to their superintendents. The
Minister's assessment was based on the theory that that right
of occupancy was bartered to the Appellant as part of the
consideration for services of the superintendents that the
Appellant provided to them, and was then provided to the
superintendents by the Appellant. I can find nothing in the
evidence to support that theory, however.
[12] The remaining evidence on this issue is
the testimony of Mr. Krauel. He said that in the fall of 1990
when preparing for the introduction of the GST, one of the
concerns of the Graat group of companies was to ensure that the
superintendents were employed by the owner companies and not by
the Appellant, so that there would not be a taxable transaction
for services of the superintendents between the Appellant and the
owner companies and that the Agreement was written with that
consideration in mind. My understanding of his evidence was that
he and the group's accountants drafted the document, which
may explain why it leaves as much doubt as it does on this issue.
Nevertheless, Mr. Krauel is the Executive Vice-President of each
of the corporations. He is in a position to know what they
intended, his evidence on that point was clear, and it was not
shaken on cross-examination. I conclude that the superintendents
were employed by the owner companies, and that the Minister was
wrong to assess GST on the basis that the Appellant provided
their services to the owner companies. As a result, the issue as
to barter of the right to occupy the superintendents'
apartments does not arise.
[13] I turn now to the issue of the
employment of the maintenance workers. I do not consider their
situation to be at all akin to that of the superintendents. The
superintendents each have a defined job for one owner
corporation. There is no uncertainty as to where they will work
or what they will do in any given time period; their jobs have
continuity. I am not prepared to accept that the Appellant, as
agent, engaged each of the maintenance workers as a less than
full-time employee of each thirty or more owner corporations, in
circumstances where neither the agent nor the principals could
say with any certainty at the beginning of any given week which
company would employ the worker during that week, or when, or for
how long. There is simply too much uncertainty about all of these
matters to characterize the relationship between the workers and
the various owners as thirty or more separate contracts of
employment. The Minister was correct to assess the Appellant in
respect of the provision of the services of the maintenance
workers to the owner companies.
the input tax credit issue
[14] The required conditions precedent to
claiming ITCs under the Act are set out in paragraph
169(4)(a):
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;
The information prescribed is found in the Input Tax Credit
Information (GST/HST) Regulations[3] (the Regulations). The amount
of information that a registrant must obtain in support of a
claim for an ITC under these Regulations increases as the
consideration for the supply increases, and the requirements at
each level are quite specific. Counsel for the Appellant seemed
to take the position that the oral evidence of Mr. Krauel should
be an adequate substitute for compliance with the specific
requirements of the Act and the Regulations. I
reject any such proposition. It is well known that any value
added system of taxation is potentially vulnerable to abuse, and
that one of the most vulnerable aspects is in connection with
claims for input tax credits. The whole purpose of paragraph
169(4)(a) and the Regulations is to protect the
consolidated revenue fund against both fraudulent and innocent
incursions. They cannot succeed in that purpose unless they are
considered to be mandatory requirements and strictly enforced.
The result of viewing them as merely directory would not simply
be inconvenient, it would be a serious breach of the integrity of
the statutory scheme.[4]
[15] In assessing, the auditor made ten
adjustments to the input tax credits claimed by the Appellant.
One of those was in favour of the taxpayer, and so is not in
issue. Two others were not addressed at all in either the
evidence or the argument at trial. The other seven fall into four
categories.
[16] First are three amounts claimed as ITCs
in respect of three payments made by the Appellant to the Toronto
law firm Gardner, Roberts. That firm was acting for the
plaintiffs in a class action in respect of a matter as to which
Mr. Graat's group of companies had a sympathetic interest.
Mr. Graat agreed to contribute to the cost of the class action,
and three cheques were issued by the Appellant, payable to
"Gardner, Roberts in trust" for that purpose. There is
no evidence before me of any account being rendered to either Mr.
Graat personally or the Appellant. The ITC was set up in the
Appellant's books simply by a journal voucher for 7/107 times
the amount of each cheque. The cheques were presumably in the
nature of a retainer. Without an account from the firm there is
no record of a commercial transaction, and certainly nothing to
suggest that Gardner, Roberts had remitted GST of 7/107 of the
amount of each cheque to the Receiver General for Canada. As
there is no evidence of any transaction in respect of these three
payments, it follows that the required information about the
transactions was not obtained. The Appellant's claim for ITCs
on these amounts fails.
[17] Two claims are in respect of GST paid
for legal services provided by Cassels, Brock and Blackwood to
Mr. Graat. The accounts appear to have been paid by the Appellant
as his agent, or as agent of one or more of his companies. The
auditor rejected the claims with the notation "not in
respect of commercial activity". The firm's accounts
were entered into evidence, and they quite obviously are in
respect of commercial activity. No other reason to deny the ITC
was advanced by counsel in argument. The Appellant is entitled to
the ITCs claimed.
[18] The next ITC claim rejected was in
respect of $472.50 paid for GST in connection with accounting
services provided by Mary Krauel, C.A. for which she billed
$6,750 to Ayerswood. The auditor's note says simply "not
the recipient of the supply". Mr. Krauel testified that the
work his wife did under this invoice was in fact done for the
Appellant and charged to the Appellant as an expense. It was work
in connection with a claim being pursued by Ayersworth against a
supplier, but work that the Appellant was obliged to do for
Ayersworth under its management agreement. It was simply an error
on Ms. Krauel's part that the account was addressed to
Ayersworth instead of Key. The extent of the error was simply to
address the account to the principal with whom Key had contracted
to do the work that it subcontracted to her. The Appellant is
entitled to this ITC.
[19] The final ITC claim in dispute is for
$1,225. It relates to the settlement of a dispute between the
Appellant and I.S.C. Realty Ltd. as to brokerage fees. The
Appellant paid $18,725 to I.S.C. to settle this dispute and
obtain a release from it of the claim. The auditor's note
against this item is "insufficient documentation". The
release and the cheque requisition appear to contain all the
information that the Regulations require. I was not
referred in argument to any specific deficiency. The Appellant is
entitled to this ITC.
[20] In summary, then, the Appellant is
entitled to the following additional ITCs:
Cassels Brock account of 21 October, 1991
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$203.00
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Cassels Brock account of 25 May, 1992
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15.59
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Mary Krauel, C.A. account of 18 January, 1993
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472.50
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I.C.S. Realty Ltd. - 18 November, 1993
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1,225.00
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$1,906.09
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penalties
[21] The Minister assessed penalties under
subsection 280(1) of the Act in respect of all the
additional tax assessed. Although that subsection is written in
absolute terms, it is now well settled that a due diligence
defence is available to the taxpayer. The additional items of tax
that will remain payable following this judgment are those in
respect of the services of the maintenance workers whom
I have found to be employees of the Appellant, and about
$700 in respect of the net disallowed ITCs.
[22] In Heart Drop 2000 Distributors Inc.
v. The Queen,[5] Miller J. considered the availability of
the due diligence defence in circumstances where the Appellant
did not collect and remit tax on certain transactions because it
believed that the supplies in question were zero-rated. He
concluded that when considering the penalty aspect of the case
the relevant inquiry is as to whether the Appellant made an
honest mistake. He asked the question, rhetorically, "How
can the law insist the taxpayer pursue a certain course of action
which the taxpayer legitimately believed it was not required to
pursue?". I agree with this approach to subsection 280(1).
An honest belief that a transaction is not subject to tax, if it
is reasonably held, equates to due diligence.
[23] Mr. Krauel testified that the intention
of the companies was to create a relationship of employer and
employee between the maintenance workers and the various members
of the corporate group for whom they did work. They wrote the
form of contract with that object in mind. I have no doubt that
he believed that it had accomplished what was intended. Was this
belief reasonably held? I think it was. The question whether the
Appellant or the owner companies employed these individuals is
one of law. So far as I can tell from the evidence before me, the
Minister raised this with the Appellant for the first time in a
letter dated November 19, 1993 from Mr. Turgeon, the auditor, to
Mr. Krauel. The paragraphs relevant to this issue read as
follows:
In addition, we found that Key Property Management Corporation
was making charges to related persons for various labour services
in connection with the operation of their residential and
commercial rental properties. The services provided included
property supervision, marketing and maintenance. The charges for
same were being made exempt of tax, in error.
You are required to collect GST at the rate of 7% calculated
on the amount charged for the supply of labour services provided
exclusively in the operation of commercial properties. The
registrant acquiring such services is eligible for an input tax
credit for the GST so charged.
With respect to labour services supplied in the operation of
residential properties, you are required to collect tax at the
rate of 7% calculated on the fair market value of those services.
The registrant acquiring such services is NOT eligible for an
input tax credit for the GST so charged.
...
The issues and concerns described above represent only the
major findings of our recent audits. Other findings were detailed
in the Statements of Audit Adjustments and working papers
provided to you at the time of audit. Also, please be aware that
the above comments are based upon an interpretation of the
current GST legislation and administrative procedures; any
changes to that legislation or those procedures may change the
validity of the information provided or the comments made.
You should also be aware that an interpretation does not
constitute a ruling. Consequently, the above comments are not to
be considered binding upon the Department of National Revenue in
respect of any particular situation.
If you should have any questions with respect to the above or
any other GST matters, please contact this office.
Sincerely,
"D. Turgeon"
CMA, Excise Auditor.
[24] Clearly, the parties disagreed as to
exigibility of tax on the cost of the maintenance workers. It is
suggested that, at minimum, the Appellant was bound at this point
to take legal advice. I do not agree. The disagreement was not
one that was susceptible of resolution simply by taking advice.
It is a matter of record in the Court that in November 1993, the
Minister assessed the Appellant for GST for the period January 1,
1991 to September 30, 1991, that the assessment was appealed, and
that the appeal was settled by the parties in March 2000.[6] This appeal represents
the first opportunity since then for judicial resolution of what
is clearly a genuine dispute as to the application of the
Act to these facts. Although the Appellant has succeeded
only in part on the labour issue, there is nothing in the
evidence from which I could conclude that it was not reasonable
for it to believe in the correctness of its position with respect
to the maintenance workers as well as the superintendents. It has
brought the matter on for resolution by the Court without delay.
This satisfies the requirements of due diligence.
[25] Evidently the Appellant made some
claims for ITCs to which it was not entitled. In the context of
the volume of business carried on by the Appellant, and
considering the extent to which the Appellant has succeeded here
in respect of ITCs that the Minister disallowed, they are far
from egregious as to either their nature or their quantum. The
evidence shows that the Appellant took appropriate steps to train
its staff and to provide them with a manual to guide them in
recording and reporting transactions properly for purposes of the
Act. The few errors made were made in spite of due
diligence on the Appellant's part, not for lack of it.
[26] The appeal is allowed. The assessment
is referred back to the Minister for reconsideration and
reassessment on the basis that:
(i) Mr. Robert Morrison is an
employee of Ayerswood Development Corporation;
(ii) the superintendents are all
employees of the owner companies;
(iii) the maintenance workers are all
employees of the Appellant;
(iv) the Appellant is entitled to
additional input tax credits in the amount of $1,906.09; and
(v) the Appellant is not liable to a
penalty under section 280 of the Act.
If the parties are unable to agree as to costs, I shall hear
submissions on a date to be fixed by the Registrar.
Signed at Ottawa, Canada, this 12th day of March, 2004.
J.T.C.C.
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