163410 Canada Inc. v. The Queen, docket 97-1752-GST-G

Date: 19980924

Docket: 97-1752-GST-G

BETWEEN:

163410 CANADA INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Delivered orally from the bench at Québec, Quebec on September 23, 1998.)

P.R. DUSSAULT, J.T.C.C.

[1] The appellant is challenging an assessment for the period from January 1, 1992 to December 31, 1995, which was issued on March 22, 1996 and the notice of which bears number 5212813. The only point at issue in connection with this assessment is whether the appellant was entitled to claim input tax credits that were initially allowed in connection with the supply of legal services by the Montréal law firm Heenan Blaikie. The respondent maintained that the appellant was not entitled to claim these credits since it could not be regarded as the "recipient" of such supplies as that term is defined in s. 123(1) of the Excise Tax Act (Part IX, Goods and Services Tax - "the Act"). The amount claimed is $35,755, with interest and penalties.

[2] Paragraphs 5 to 21 of the Notice of Appeal summarize the facts giving rise to the dispute as follows:

[TRANSLATION]

5. In 1990 the appellant was the promoter of a real estate project then known as "Société en commandite Villa de Chicoutimi" (hereinafter referred to as "Villa"), as is set out in greater detail below.

6. Villa was formed on August 7, 1990 to purchase, build and operate a residence for the elderly.

7. The Villa project was to be financed as follows:

(a) Villa would issue partnership shares worth $2,250,000; and

(b) $4,111,400 would be borrowed from Corporation d'hypothèques Midland (hereinafter referred to was "Midland") and the loan would be secured by a first hypothec.

8. Along the way the financing structure was altered as follows:

(a) Villa issued partnership shares worth $2,250,000;

(b) $3,479,400 was borrowed from Midland and the loan was secured by a first hypothec; and

(c) $632,000 was borrowed from the appellant and this loan was secured by a second hypothec.

9. In August 1990 Villa retained the appellant to build the residence for the elderly for a lump sum under a "turnkey" contract.

10. To perform its contract the Appellant itself entered into a construction contract with Les Consultants ALB Inc. to build the residence. Construction of the residence was to be completed by July 1, 1991.

11. Once the work began Midland served as trustee for the money to be used to finance the project, including the $632,000 which was to come from the appellant.

12. Les Consultants ALB Inc. was unable to complete the work by July 1, 1991 and made an assignment of its property in August 1991. When the work stopped Les Consultants ALB Inc. had been paid in full for performance of the work but had failed to pay much of the money owed to its subcontractors. The subcontractors registered construction privileges on the Villa building for a total some $1,900,000. Les Consultants ALB Inc. itself registered a privilege to cover the amounts owed to its subcontractors.

13. These were the circumstances in which, in November 1991, Midland stopped payment, asked the Superior Court to appoint an interim receiver and threatened to repossess the residence for the elderly, on which it had a first hypothec.

14. Negotiations then took place between Villa, the appellant, Midland and the trustee for Les Consultants ALB Inc. to find a solution to save the project.

15. In May 1992 these negotiations resulted in two agreements:

(a) an agreement between Midland and the trustee for Les Consultants ALB Inc. under which Midland undertook to pay the trustee $100,000 in consideration for cancellation of the construction privilege registered by Les Consultants ALB Inc., and to inject an additional amount not to exceed $1,300,000 to settle the claims of the subcontractors in consideration for cancellation of the construction privileges they had registered (this agreement stipulated that the money paid by Midland was paid on behalf of and for the discharge of the appellant);

(b) an agreement between Midland and the appellant under which the appellant undertook to ensure that the $632,000 intended to finance construction of the residence, which had not yet been spent, would be used to complete the construction, correct defects, pay the professional fees of the interim receiver and pay the fees of the law firm Heenan Blaikie to be incurred in resolving the question of the construction privileges and ensuring that the work and the correction of defects were completed.

16. The performance of this last agreement was conditional on the appellant's obtaining a release from Villa and thus on Villa's acknowledging that the appellant had discharged its obligation to deliver to Villa a building free of encumbrances.

17. Villa did in fact give the appellant a release acknowledging that it had discharged its obligation to deliver to Villa a building free of encumbrances.

18. On February 23, 1994 Midland accounted to the appellant for the use of the $632,000 it held in trust, which it had undertaken to use in accordance with their agreement.

19. Following this accounting the appellant claimed ITCs from the respondent in respect of the goods and services tax on the fees for the services rendered by Heenan Blaikie, which had been paid out of the appellant's money held in trust by Midland.

20. The respondent allowed the appellant's claim and reimbursed it the sum of $35,755 as ITCs.

GROUNDS OF APPEAL

21. Although in 1994 she allowed the appellant's ITC claim and reimbursed it the sum of $35,755, the respondent changed her mind and is now refusing to allow the appellant ITCs for the tax paid on the fees paid to the law firm Heenan Blaikie on the ground that the appellant was not the "recipient" of the services rendered by Heenan Blaikie and that the actual recipient was Midland.

[3] The documents entered in evidence, in particular Exhibits A-7, A-9 and A-10, establish beyond question that Midland held $632,000 belonging to the appellant [TRANSLATION] "in trust" and that the appellant was initially supposed to lend this amount to Villa with a second hypothec as security.

[4] As a result of the many difficulties encountered, the appellant agreed under the agreement it signed with Midland on May 12, 1992 that Midland would use the appellant's money to pay certain claims, fees and construction costs, in the order indicated in paragraphs 3 to 11 of the agreement, and that any balance remaining would be returned to the appellant.

[5] According to paragraph 4 of the agreement Heenan Blaikie's fees were to be paid second, after an initial $244,400 was applied to the guarantee for a claim for $274,400 against the appellant by the trustee in bankruptcy of the building contractor Les Consultants ALB Inc. The said paragraph 4 providing for payment of the law firm's fees was worded as follows:

[TRANSLATION]

4. THE BALANCE shall be applied to the payment of past and future fees and disbursements of the firm Heenan Blaikie in connection with any action taken relating to the matter involving, on the one hand, MIDLAND, and on the other hand, 163410, VILLA and/or its subsidiaries, shareholders or directors. Heenan Blaikie shall submit to 163410 a detailed list of the fees and the disbursements so incurred, which shall be established in the same way as if 163410 were a regular client of Heenan Blaikie and as if they had to be paid or reimbursed by MIDLAND.

[6] In view of the terms of this agreement it is clear that Midland was not only to use the appellant's money to pay the specific claims, fees and other expenses mentioned in the order indicated, but was also to account for such use to the appellant. In his testimony Bernard Jolin of the law firm Heenan Blaikie stated that he began rendering legal services to Midland and associated insurance companies in the Villa matter on October 1, 1991. In the negotiations that resulted in the May 12, 1992 agreement between Midland and the appellant, Mr. Jolin represented Midland and Pierre Cimon of the law firm Ogilvy Renault represented the appellant. Mr. Jolin said, and Mr. Cimon confirmed this, that it was Mr. Cimon who required the final sentence of paragraph 4 of the agreement to ensure that Heenan Blaikie's fees would be established on the same basis as if the appellant were a regular client of the firm in the same way as Midland even though the agreement specified that these fees would be paid by the appellant. In actual fact, paragraph 4 specified that Midland would use part of the amount it held in trust to pay directly the fees billed by Heenan Blaikie. The words "as if they had to be paid or reimbursed by Midland" at the end of paragraph 4 leave no doubt that it was the appellant which was actually required to pay the fees billed to Midland by Heenan Blaikie.

[7] Although Mr. Jolin of Heenan Blaikie signed the agreement on behalf of Midland, the law firm is not directly mentioned as a party thereto. However, it is quite clear that paragraph 4 deals with legal services already provided and yet to be provided by his firm in connection with the Villa matter, and that it contains two specific undertakings by the law firm which quite clearly alter the initial agreement of October 1, 1991 concerning the legal services to be provided to Midland, at least as regards payment for those services.

[8] First, although its client was Midland and not the appellant, Heenan Blaikie undertook to [TRANSLATION] "submit to 163410 [the appellant] a detailed list of the fees and the disbursements so incurred". Second, and this point is even more important, the firm agreed to establish its fees [TRANSLATION] "in the same way as if 163410 were a regular client . . . and as if they had to be paid . . . by MIDLAND".

[9] The appellant's funds were thus used by Midland to pay Heenan Blaikie's fees, as is evidenced by the document entitled [TRANSLATION] "Statement of Account" in Exhibit A-10.

[10] I consider that the agreement of May 12, 1992 between Midland and the appellant, to which Heenan Blaikie was also implicitly a party by reason of its undertakings (as clearly set out in paragraph 4 of the agreement), concerns the supply of legal services and alters the initial agreement between Midland and Heenan Blaikie in this regard.

[11] In my opinion paragraph 4 of this agreement of May 12, 1992 is thus an agreement for a supply of legal services under which the appellant, not Midland, is designated as the person who is liable to pay the consideration for the supply. Midland was simply authorized or instructed by the appellant to pay for the services with the appellant's money, which it already held in trust. That being so, the appellant, not Midland, should be regarded as the "recipient" as that term is defined in s. 123(1)(a) of the Act. Consequently, the appellant is entitled to claim input tax credits in connection with the tax paid on the professional fees billed by Heenan Blaikie and paid with the appellant's money. Even if I considered that the agreement was not a contract for the supply of legal services by Heenan Blaikie, I would have to acknowledge that the appellant was still required to pay for those services under paragraph 4 of that agreement, which means that the appellant would still have to be regarded as the recipient of the supply, not under s. 123(1)(a), but under s. 123(1)(b) of the Act. In other words, as the appellant was liable under paragraph 4 of the agreement to pay the consideration for the legal services rendered to Midland, the result is the same whether the May 12, 1992 agreement is considered to be an agreement for the supply of legal services or not.

[12] At the start of the hearing counsel for the respondent raised an additional point of law, namely that the appellant was not entitled to claim the input tax credits for the fees paid by Midland with the appellant's money. He submitted that following the accounting the appellant sued Midland for over $268,000 in damages for non-compliance with the terms of the May 12, 1992 agreement and misuse of the appellant's money (see Exhibit I-1). In particular, the appellant contested certain of Heenan Blaikie's professional fees and the fact that some claims were settled without its authorization or contrary to the May 12, 1992 agreement. In brief, the appellant argued that it should in due course have received a balance from its money held by Midland if Midland had used that money in accordance with the agreement. I would add that in its declaration in the Superior Court (see Exhibit I-1) the appellant reserved [TRANSLATION] "the right to amend the quantum of the claim, in particular to add thereto the tax credits corresponding to the tax amounts paid out of the money held in trust by [Midland]".

[13] This action culminated in an out-of-court settlement by which Midland decided to pay the appellant $25,000 to avoid the nuisance of a trial and the appellant agreed to give Midland a full and final release for any past, present or future claims. Counsel for the respondent maintained that this transaction between Midland and the appellant barred the appellant from claiming any input tax credits in respect of Heenan Blaikie's fees, as that would be prejudicial to Midland, which had itself claimed and obtained those credits. Counsel for the respondent had to amend the Reply to the Notice of Appeal to add this point of law, and counsel for the appellant agreed to this amendment.

[14] I feel that there is no basis for this additional argument. First, a transaction is a contract dealing with litigious rights and has the authority of a final judgment only between the parties (art. 2633 of the Civil Code of Québec; see also art. 2848 on the authority of a final judgment). Although the appellant did reserve rights in this regard in the May 12, 1992 agreement, it cannot of course claim anything further from Midland in respect of the input tax credits relating to Heenan Blaikie's fees. However, its rights vis-à-vis the respondent under the Act are not affected by that transaction. Second, the transaction in no way altered the May 12, 1992 agreement, under which Heenan Blaikie's fees were to be paid with the appellant's money held in trust by Midland. This was in fact done. I repeat that the portion of that agreement relevant to the instant case (paragraph 4) is an agreement for the supply of legal services by Heenan Blaikie. It is clear that under that agreement the appellant was liable to pay for those services, although Midland was instructed to pay for them with the appellant's funds. As I indicated above, the appellant is thus in my opinion the "recipient" of the supply as that term is defined in s. 123(1)(a) of the Act. The appellant is accordingly entitled to claim the input tax credits under s. 169(1) of the Act.

[15] The appeal is allowed and the assessment referred back to the Minister of National Revenue, or his agent Revenu Québec, for reconsideration and reassessment for the period from January 1, 1992 to December 31, 1995 on the basis that the appellant is entitled to claim $35,755 in input tax credits in respect of the professional fees it was liable to pay to the law firm Heenan Blaikie, which were paid with money belonging to it, the whole with adjustment of interest and penalties.

[16] The appellant shall have its costs.

Signed at Ottawa, Canada, September 24, 1998.

"P.R. Dussault"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 26th day of April 1999.

Stephen Balogh, Revisor