REASONS
FOR JUDGMENT
Ouimet J.
I. Introduction
[1]
This is an appeal under the Excise Tax Act
(“ETA”) from an assessment by the Minister of National Revenue (the “Minister”)
that denied, pursuant to section 169 of the ETA, the claim of 630413NB Inc.
(the “Appellant”) for input tax credits (“ITCs”) relating to legal fees paid
between July 1, 2008 and March 30, 2011.
[2]
The amounts of ITCs disallowed by the Minister
are set out in the table below:
|
Period in Issue
|
ITCs
|
Assessment Date
|
|
Claimed
|
Disallowed
|
Allowed
|
|
Jul 1 – Sep 30, 2008
|
$9,062.16
|
$8,347.60
|
$714.56
|
April 17, 2013
|
|
Oct 1 – Dec 31, 2008
|
$3,137.53
|
$2,707.07
|
$430.46
|
April 10, 2013
|
|
Jan 1 – Mar 30, 2009
|
$1,107.17
|
$674.70
|
$432.47
|
April 10, 2013
|
|
Apr 1 – Jun 30, 2009
|
$2,266.03
|
$1,867.06
|
$398.97
|
April 10, 2013
|
|
Jul 1 – Sep 30, 2009
|
$670.65
|
$575.22
|
$95.43
|
April 10, 2013
|
|
Oct 1 – Dec 31, 2009
|
$5,252.19
|
$1,490.05
|
$3,762.14
|
April 10, 2013
|
|
Apr 1 – June 30, 2010
|
$13,237.12
|
$13,039.00
|
$198.12
|
April 10, 2013
|
|
Jan 1 – Mar 30, 2011
|
$1,137.08
|
$1,032.10
|
$104.98
|
April 9, 2013
|
|
|
|
|
|
|
[3]
All of the ITCs disallowed by the Minister are
in respect of GST/HST paid by the Appellant on legal fees. The table below
contains further details on the legal fees for which ITCs were disallowed by
the Minister:
|
Period
|
Date
|
Paid to
|
GST/HST
|
|
Jul 1 – Sep 30, 2008
|
Jul 22, 2008
|
Murphy, Murphy and Mollins
|
$7,800.00
|
|
Sep 9, 2008
|
Murphy, Murphy and Mollins
|
$547.60
|
|
Oct 1 – Dec 31, 2008
|
Nov 14, 2008
|
Anderson Sinclair
|
$2,018.07
|
|
Nov 27, 2008
|
Murphy, Murphy and Mollins
|
$689.00
|
|
Jan 1 – Mar 30, 2009
|
Feb 17, 2009
|
Murphy, Murphy and Mollins
|
$674.70
|
|
Apr 1 – Jun 30, 2009
|
May 4, 2009
|
Anderson Sinclair
|
$1,300.00
|
|
Jun 22, 2009
|
Murphy, Murphy and Mollins
|
$567.06
|
|
Jul 1 – Sep 30, 2009
|
Sep 10, 2009
|
Anderson Sinclair
|
$575.22
|
|
Oct 1 – Dec 31, 2009
|
Nov 5, 2009
|
Anderson Sinclair
|
$1,300.00
|
|
Dec 31, 2009
|
Murphy, Murphy and Mollins
|
$190.05
|
|
Apr 1 – June 30, 2010
|
May 20, 2010
|
Anderson Sinclair
|
$13,039.00
|
|
Jan 1 – Mar 30, 2011
|
Mar 24, 2011
|
McGrath Boyd
|
$1,032.10
|
|
|
II.
Issue
[4]
The issue raised in this appeal is the
following:
Whether
the Minister properly disallowed the ITCs claimed by the Appellant in relation
to the legal fees paid during the periods at issue.
III.
The Relevant Legislative Provisions
[5]
The key applicable provisions of the ETA are:
Division I — Interpretation
123.(1) Definitions — In section 121,
this Part and Schedules V to X,
“business” includes a profession,
calling, trade, manufacture or undertaking of any kind whatever, whether the
activity or undertaking is engaged in for profit, and any activity engaged in
on a regular or continuous basis that involves the supply of property by way of
lease, licence or similar arrangement, but does not include an office or
employment;
“commercial activity” of a person means
(a) a business
carried on by the person (other than a business carried on without a reasonable
expectation of profit by an individual, a personal trust or a partnership, all
of the members of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person,
(b) an adventure
or concern of the person in the nature of trade (other than an adventure or
concern engaged in without a reasonable expectation of profit by an individual,
a personal trust or a partnership, all of the members of which are
individuals), except to the extent to which the adventure or concern involves
the making of exempt supplies by the person, and
(c) the making of
a supply (other than an exempt supply) by the person of real property of the person,
including anything done by the person in the course of or in connection with
the making of the supply;
“recipient” of a supply of property or a
service means
(a) where
consideration for the supply is payable under an agreement for the supply, the
person who is liable under the agreement to pay that consideration,
(b) where
paragraph (a) does not apply and consideration is payable for the
supply, the person who is liable to pay that consideration, and
(c) where no
consideration is payable for the supply,
(i) in the case of a
supply of property by way of sale, the person to whom the property is delivered
or made available,
(ii) in the case of a
supply of property otherwise than by way of sale, the person to whom possession
or use of the property is given or made available, and
(iii) in the case of a
supply of a service, the person to whom the service is rendered,
and any reference to a person to whom a supply is made shall be read
as a reference to the recipient of the supply;
“supply” means, subject to sections 133
and 134, the provision of property or a service in any manner, including sale,
transfer, barter, exchange, licence, rental, lease, gift or disposition;
Subdivision b — Input tax credits
169. (1) General rule for credits — Subject
to this Part, where a person acquires or imports property or a service or
brings it into a participating province and, during a reporting period of the
person during which the person is a registrant, tax in respect of the supply,
importation or bringing in becomes payable by the person or is paid by the
person without having become payable, the amount determined by the following
formula is an input tax credit of the person in respect of the property or
service for the period:
A × B
where
A is
the tax in respect of the supply, importation or bringing in, as the case may
be, that becomes payable by the person during the reporting period or that is
paid by the person during the period without having become payable; and
B is
(a) where the tax
is deemed under subsection 202(4) to have been paid in respect of the property
on the last day of a taxation year of the person, the extent (expressed as a
percentage of the total use of the property in the course of commercial
activities and businesses of the person during that taxation year) to which the
person used the property in the course of commercial activities of the person
during that taxation year,
(b) where the
property or service is acquired, imported or brought into the province, as the
case may be, by the person for use in improving capital property of the person,
the extent (expressed as a percentage) to which the person was using the
capital property in the course of commercial activities of the person
immediately after the capital property or a portion thereof was last acquired
or imported by the person, and
(c) in any other
case, the extent (expressed as a percentage) to which the person acquired or
imported the property or service or brought it into the participating province,
as the case may be, for consumption, use or supply in the course of
commercial activities of the person.
[My emphasis.]
IV.
The Relevant Facts
[6]
William Charles West (“Mr. West”) and Paul
Gagnon (“Mr. Gagnon”) testified at trial for the Appellant. The Respondent
did not produce any witnesses.
A. Context
[7]
In 1995, Mr. West began operating a
Peruvian lottery business; he also had lottery businesses in New Brunswick. The New Brunswick businesses
were incorporated as 047438NB Inc. and 055455NB Inc. (together, the “NB Corporations”).
The Peruvian businesses are referred to as Loterias del Peru S.A. (“LDP”) and
World Lottery Consultants Corporation (“WLCC”) (together, the “Peruvian
Corporations”).
[8]
Mr. West controlled the shareholdings of
the NB Corporations. The NB Corporations controlled the shareholdings of LDP. It is unclear from the
evidence if the NB Corporations also controlled the shareholdings of WLCC, but WLCC
was controlled by Mr. West.
[9]
In 1999, the accountant of the NB Corporations
left and Mr. Gagnon, an accountant and a long-time friend of Mr. West,
was hired through an accounting company called PG2 to look after the NB
Corporations' books.
At that time, there were financial irregularities at the Peruvian Corporations.
Mr. Gagnon’s mandate eventually also included providing help with the Peruvian
Corporations' accounting, which he did until 2001.[4] Mr. West also hired
a lawyer to help him with the Peruvian Corporations' financial irregularities. While
doing so, the lawyer allegedly gained control of the Peruvian Corporations by
acquiring all the shares of those corporations. Mr. West testified that he
filed a legal action against the lawyer for breach of trust and breach of
fiduciary duty and sought the remedy of disgorgement of the shares. The file number
of the action was M/C/0835/01.[5]
[10]
According to Mr. West, in February 2007, a
decision was rendered in M/C/0835/01 that ordered the return of the shares to Mr. West.[6]
Once control of the Peruvian Corporations was regained, an accounting was
required as the business was in disarray.[7]
[11]
In 2007, the Appellant was involved in
the business of management consulting, accounting, and marketing, and its sole
shareholder and director was Mr. Gagnon.[8]
On September 14, 2007, Mr. Gagnon was hired by WLCC through the Appellant,
and an agency agreement was signed between the Appellant and WLCC. The
Appellant was hired to locate various pieces of equipment, to collect on loans
and accounts receivable, to restructure various assets and debts, and to
reorganize the Peruvian Corporations.[9]
In exchange for its services, the Appellant would receive 10% of the money it
recovered.[10]
Mr. Gagnon also indicated that the Appellant was involved in M/C/0835/01.
The nature and the extent of the involvement of the Appellant in the M/C/0835/01 case are unclear from the evidence.
[12]
According to Mr. Gagnon, the Appellant
declared as income the 10% it received under the agency agreement signed with
WLCC. The Appellant did not file as evidence any of its financial records. Mr.
Gagnon also said that the remaining 90% of the funds was returned to the
Peruvian Corporations and that the Appellant was allowed to use some of them (the
exact amounts were not mentioned by Mr. Gagnon during his testimony) to pay the
legal fees relating to M/C/0835/01 and the other actions that would eventually
be assigned to the Appellant in 2008.[12]
[13]
Mr. West testified that, in 2008, his corporations had exhausted
their finances and that he decided to play his last card. He executed
assignment agreements giving the Appellant the right to any proceeds from four
different legal actions in which he or the NB Corporations were still involved.[13] According
to the agreements, the Appellant was to pay all of the legal fees and costs and
would be entitled to all proceeds from the assigned actions. According to Mr. Gagnon,
the Appellant gained full rights and control over the legal proceedings,
including full control over strategy, decisions regarding the proceedings, and
settlement.[14]
[14]
The assignment agreement created an additional task for the
Appellant, namely, helping to resolve the legal disputes.[15] According to Mr. Gagnon, the amount
of $200,000 received as a settlement in one of the legal actions assigned to
the Appellant was declared as income by the Appellant and used to pay the legal
fees.[16]
B. First Assignment:
M/C/0402/07
[15]
The first assignment agreement was signed on May 7, 2008 and
concerned court file No. M/C/0402/07.[17]
The Appellant paid $1,000 to Mr. West, the assignor, for this assignment.
The legal action was instituted on June 15, 2007 and it involved Mr. West.
It was discontinued on March 10, 2010.[18]
C. Second Assignment: M/C/0835/01,
M/C/0720/04, and M/C/0042/05
[16]
A second assignment agreement was signed on May 28, 2008 and
concerned the cases numbered M/C/0835/01, M/C/0720/04, and M/C/0042/05.[19] The Appellant paid
$3,000 to Mr. West, the assignor, for the assignment.
[17]
With respect to M/C/0835/01, the action was brought on September 5,
2001 and involved Mr. West. A judgment was rendered on February 21, 2007.[20] The remedy of
disgorgement of the Peruvian Corporations shares was granted.
[18]
With respect to M/C/0720/04, the action was brought on August 13,
2004 and involved the NB Corporations.[21]
A judgment was rendered on
November 24, 2015, the neutral citation being 2015 NBQB 231. Costs in the
amount of $56,875 per defendant, plus disbursements, were awarded against the
NB Corporations.[22]
Mr. West paid part of these costs with a security deposit
he had provided to his lawyers.
[19]
Two decisions on motions were also rendered in M/C/0720/04 and
they were submitted in evidence. The first decision was rendered on January 16,
2014.[24]
In that decision, the court quoted an affidavit sworn on December 12, 2013
by Mr. West, in which Mr. West states the following:
I instructed the plaintiffs'
solicitors of record to set this case down for trial. Attached and marked as
Exhibit "A" is letter of my solicitors, Murphy, Murphy &
Mollins, April 4, 2013, in which my solicitor estimates 10 days for the trial of
this action.
[20]
The second decision was rendered on May 28, 2014.[26] In it, an affidavit sworn on
March 14, 2014 by Mr. West is quoted. Mr. West states the following
in that affidavit:
1. I am a director of both Plaintiffs and have at all times during
the course of this litigation represented the Plaintiffs and have been solely
responsible for giving instructions to counsel.
[21]
With respect to M/C/0042/05, the action was instituted on January 12,
2005 and involved 047438NB Inc. It was discontinued on May 26, 2010. [28]
V.
Analysis
[22]
Generally speaking, a business carrying on a commercial activity
can claim ITCs. Three conditions must be met in order for a person to be entitled
to claim ITCs pursuant to subsection 169(1). They are as follows:
1)
the claimant must have acquired the supply;
2)
the goods and services tax ("GST")
must be payable or have been paid by the claimant on the supply; and
3)
the claimant must have acquired the supply for
consumption or use in the course of its commercial activities.[29]
[23]
The first two conditions of subsection 169 of the ETA were not at
issue in this case; only the third condition was. The third condition refers to
commercial activities. The term “commercial activity” is defined in subsection
123(1) of the ETA. Pursuant to the relevant portion of the definition, a
person’s commercial activity includes a business carried on by the person with
a reasonable expectation of profit.
[24]
To be entitled to claim ITCs for the legal services paid for during
the period at issue, the Appellant must prove to this Court, on the balance of
probabilities, that it acquired the legal services in the course of one of its
commercial activities. The Appellant must also prove, on the balance of
probabilities, that it carried on the commercial activity with a reasonable
expectation of profit.
[25]
According to the evidence, the Appellant carried on several commercial
activities. Prior to 2007, the Appellant was involved in the business of
management consulting, accounting, and marketing.[30] It is not clear from the
evidence if these commercial activities were still ongoing during the relevant
period. In 2007, prior to the assignment agreements being signed, the Appellant
was engaged in three distinct commercial activities. The first activity
consisted in developing software for LDP.[31]
The second activity consisted in collecting receivables and loans, locating
various pieces of equipment, restructuring various assets and debts, and reorganizing
the Peruvian Corporations as an agent of WLCC.[32]
The third activity consisted in taking control of legal proceedings in which
either Mr. West or the NB Corporations were involved, pursuant to the two assignment
agreements dated May 7 and May 28, 2008.[33]
[26]
The Appellant argued that the legal services were acquired and
used in the course of the third commercial activity. Therefore, I must firstly
determine whether the Appellant was engaged in a commercial activity that
consisted in controlling the legal proceedings assigned to the Appellant.
[27]
In Kaye v The Queen,
this Court expressed the following view on the issue of whether a business is
being conducted:
[4] . . . It is the inherent commerciality of the enterprise,
revealed in its organization, that makes it a business. Subjective intention to
make money, while a factor, is not determinative, although its absence may
militate against the assertion that an activity is a business.
[5] One cannot view the reasonableness of the expectation of
profit in isolation. One must ask "Would a reasonable person, looking at a
particular activity and applying ordinary standards of commercial common sense,
say 'yes, this is a business'?" In answering this question the hypothetical
reasonable person would look at such things as capitalization, knowledge of the
participant and time spent. He or she would also consider whether the person
claiming to be in business has gone about it in an orderly, businesslike way
and in the way that a business person would normally be expected to do.
. . .
[7] Ultimately,
it boils down to a common sense appreciation of all of the factors, in which
each is assigned its appropriate weight in the overall context. One must of
course not discount entrepreneurial vision and imagination, but they are hard
to evaluate at the outset. Simply put, if you want to be treated as carrying on
a business, you should act like a businessman.
[28]
I agree with this view. Whether an activity may be
considered a commercial activity is a question of fact. On the evidence before
me and on the balance of probabilities, I believe that the Appellant did
not carry on a business with respect to a commercial activity that consisted in
controlling legal proceedings. I come to this conclusion for the following
reasons:
1- There
is no evidence that, prior to the assignment agreements being signed, the
Appellant had any experience with legal proceedings or their management. I was
not provided with any evidence of the Appellant’s knowledge of the costs associated
with the preparation of a trial or with actually going to trial. I was not presented
with any evidence of the Appellant’s knowledge of the potential financial
outcome of any legal proceedings, including the legal actions assigned to the
Appellant. Mr. Gagnon testified that the Appellant was only involved in
the business of management consulting, accounting, and marketing prior to the
assignments being signed. Mr. Gagnon is not a lawyer; there is no evidence
that he or the Appellant had ever been involved in a legal action prior to the
assignments being signed; and there is no evidence of any business plan or of any
financial projections having been done for this alleged commercial activity.
2- The
files assigned to the Appellant involved Mr. West or the NB Corporations.
The extent of the Appellant’s knowledge of Mr. West's or the NB Corporations' businesses
was not submitted in evidence.
3- According
to Mr. West the M/C/0835/01 file had been resolved by February 21, 2007,
approximately 15 months before the file was assigned to the Appellant. While
related proceedings remained outstanding, they were separate and distinct
actions. There was no evidence submitted to show that any commercial activity was
possible in relation to M/C/0835/01.
4- With
respect to M/C/0720/04, Mr. West had control over this legal proceeding,
as stated in his affidavits dated December 12, 2013 and March 14, 2014. This
is in contradiction with the testimony of Mr. Gagnon and also with what is
stated in the Appellant’s Pre-hearing Brief. The Appellant states in its brief
that “Neither Mr. West, nor his numbered companies retained any financial
interest or decision making abilities with respect to the Assigned Actions.” Besides Mr. West and Mr. Gagnon,
no other witness testified as to whether Mr. West or the Appellant was
controlling the proceedings. Any lawyer who had been instructed respecting the
legal actions assigned to the Appellant could have testified on the matter, but
none did.
5- M/C/0042/05
was discontinued on May 26, 2010. According to Mr. West, that case resulted
in a settlement of a couple of hundred thousand dollars. Mr. West was
present in the lawyer’s office when discussions concerning the actions were
taking place, which further indicates his involvement in the legal proceedings
assigned to the Appellant.
Apart from the testimony of Mr. Gagnon and
Mr. West, the Appellant did not submit any evidence that a settlement (amount) was
received or any evidence that a settlement was reached. I believe
that a person in the business of controlling legal proceedings would keep detailed
records concerning such things.
6- Mr. West
paid the costs awarded by a court decision in the M/C/0720/04 case. Neither Mr.
Gagnon nor Mr. West were able to provide an explanation as to why the
Appellant was not the one who paid the entire amount of those costs even though
it was required to do so pursuant to the assignment agreement. This is also in contradiction
with facts set out in the Appellant’s Pre-hearing Brief, in which the Appellant
states: “Neither Mr. West, nor his numbered companies retained any
financial interest . . . with respect to the Assigned Actions.”
7- With
respect to the M/C/0402/07 and M/C/0042/05 actions, Mr. Gagnon testified
that these were settled in the course of the Appellant’s commercial activities.
Yet the Appellant was unable to provide any documentation to support any
settlement. Furthermore, Mr. Gagnon stated that the settlement amount was
reported in the Appellant's income, but no financial statements or tax returns
were presented to this Court. I believe that a person in the business of
controlling legal proceedings would have also kept detailed records concerning such
things.
[29]
Mr. Gagnon testified that the Appellant's business
consisted in controlling legal proceedings and involved paying the legal fees
and costs associated with those proceedings in the hope of being rewarded by
obtaining favourable court
decisions or settlements. I believe it would not have made any commercial
sense for the Appellant to get involved in a business that, according to the
evidence, it knew nothing about. The evidence is that prior to 2007 the
Appellant was involved in the business of management consulting, accounting,
and marketing: nothing remotely close to controlling/managing legal actions. As
previously mentioned, no evidence was adduced regarding the Appellant's
knowledge of Mr. West or the NB Corporations or of the subject matter of the
legal actions assigned to the Appellant.
[30]
I believe that it would make no commercial sense
to go into a business/commercial activity without having made proper financial
projections and drawn up a business plan. I believe that a person in the
business of controlling legal proceedings would keep detailed records
concerning settlements and also keep proper financial and accounting documentation.
With the exception of an invoice
from Anderson Sinclair dated May 20, 2010 and the assignment agreements, no
documents showing that a commercial activity was potentially being conducted were
submitted in evidence.
[31]
I believe that it would not have made any commercial sense for
the Appellant to sign an assignment agreement giving it control of a legal
action that had already been resolved. Nor would it have made any commercial
sense for the Appellant to give back the control of the legal proceedings to
Mr. West while paying the legal fees and costs associated with those
proceedings, unless there was a commercial/business reason for doing so. At
trial, I was not provided with any explanation for such conduct by the
Appellant and that conduct was in contradiction with the terms of the assignment
agreements.
[32]
Finally, it would have made no commercial sense for the Appellant
to let Mr. West pay the costs awarded by a court decision in relation to
one of the assigned proceedings unless there was a commercial/business reason
for so doing, and none was suggested to me at trial. Clearly, this was also inconsistent
with the terms of the assignment agreements.
[33]
In light of the above, I conclude, on the balance of
probabilities, that the Appellant did not carry on a business that consisted in
controlling legal proceedings, including making decisions regarding strategy
and settlement. On the basis of the facts and reasons set out in paragraphs 29
to 33 above, I believe that the Appellant did not act in the way that a
business person would normally be expected to act in conducting such a business.
On the basis of those facts and reasons, I also believe that a reasonable
person, applying ordinary standards of commercial common sense, would not
conclude that the Appellant was carrying on a business that consisted in controlling
legal proceedings.
[34]
Having concluded that the Appellant was not
carrying on a commercial activity, it is not necessary for me to determine
whether there was a commercial activity that was carried on with a
reasonable expectation of profit.
[35]
For these reasons, the appeal is dismissed.
Signed at Ottawa,
Canada, this 23rd day of June 2016.
“Sylvain Ouimet”
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