[OFFICIAL ENGLISH TRANSLATION]
Date: 19980630
Docket: 97-2016(IT)I
BETWEEN:
VIATEUR CHÉNARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] These are appeals under the
informal procedure from reassessments made by the Minister of
National Revenue ("the Minister") under
section 253 of the Excise Tax Act ("the
Act") for the 1992, 1993 and 1994 taxation years.
[2] Section 253 provides that,
where the goods and services tax is payable by an individual who
is an employee of a registrant or a member of a partnership that
is a registrant, that individual is entitled to a
rebate-calculated using the formula set out in the section-for
the tax paid in connection with expenses that are deductible in
computing the individual's income from the partnership.
[3] The rebate provided for in
section 253 is for expenses incurred by the individual to
earn income from his or her employment or from the partnership,
expenses for which the individual has not been reimbursed by the
employer or the partnership and which are deductible in computing
the individual's employment or partnership income under the
Income Tax Act.
[4] Subsection 253(5) of the
Act provides that, where an individual files an
application for a rebate under section 253, assessments of
the amount of the rebate and appeals, if any, are governed by the
provisions of the Income Tax Act.
[5] This appeal involves a partner,
and I will no longer refer to anyone other than an individual who
is a partner. The issue is whether the expenses for which the
appellant is claiming a tax rebate were incurred to earn income
from the partnership.
[6] The facts on which the Minister
relied in making his reassessments are set out in paragraph 5 of
the Reply to the Notice of Appeal (the "Reply") as
follows:
[TRANSLATION]
a. during the
taxation years at issue, the appellant claimed the employee and
partner goods and services tax rebate on the basis of the
following amounts:
1992
1993
1994
Net expenses eligible
for the
rebate
$21,088.38
$22,292.73
$22,463.62
Rebate
claimed
$1,379.61
$1,458.40
$1,469.58
b. during the
taxation years at issue, the appellant and his wife owned
50 percent of a franchise in Phyto Centre de Lévis
Enrg. ("the partnership");
c. during the
taxation years at issue, the appellant, through the partnership,
provided services to Titrex International Ltée for which
he received discounts and/or management fees;
d. during the
taxation years at issue, the partnership was not a business
registered for GST purposes;
e. moreover,
the expenses on which the claim is based are the
partnership's expenses;
f. the
employee and partner goods and services tax rebate was adjusted
to nil under section 240 and subsection 253(1) of the
Excise Tax Act for the 1992, 1993 and 1994 taxation
years.
[7] With respect to
subparagraph 5(b) of the Reply, counsel for the respondent
told the Court that, in view of explanations given by the
appellant the morning of the hearing, that subparagraph should
state that the appellant and his wife and/or other partners owned
25 to 50 percent.
[8] With respect to subparagraph 5(d)
of the Reply, based once again on the explanations given the same
morning, counsel for the respondent accepted that the partnership
had changed its name by removing the abbreviation
"Enrg". There was indeed a partnership called Phyto
Centre de Lévis that was a registrant in 1992 and 1993. In
1994, it was dissolved and converted into a corporation.
[9] The statement in subparagraph 5(e)
of the Reply was explained by Thérèse Racine,
an auditor for Revenue Canada. She explained that, according to
an administrative agreement with Customs and Excise officials,
the input tax credit will be granted to the partnership for the
expenses incurred by it. The individual rebate under
section 253 will be granted for certain expenses incurred by
the partners themselves, such as food and car expenses. That is
the way subparagraph 5(d) of the Reply must be read, since,
for section 253 to apply, the expenses for which a tax
rebate is claimed must have been incurred to earn income as a
partner.
[10] At the start of the hearing, counsel
for the respondent made certain admissions. After hearing the
appellant's testimony, she wondered whether those admissions
were accurate given that the expenses in question were incurred
to earn commission income as a self-employed worker and not
as a partner. In any event, she put the admissions down in
writing. They are as follows:
[TRANSLATION]
In light of the facts she learned before the hearing, the
respondent was prepared to admit that the appellant could claim a
GST rebate for certain expenses. She told the Court so as soon as
the hearing began.
The respondent therefore admitted that the appellant could
claim a GST rebate for the following expenses:
1992
70% of oil and gasoline
expenses:
$1,770.09
70% of maintenance and repair
expenses:
$1,486.10
70% of capital cost
allowance:
$3,237.50
Total expenses and capital
cost allowance eligible for
the GST
rebate:
$6,493.69
1993
70% of gasoline
expenses:
$1,351.79
70% of maintenance and repair
expenses:
$977.95
70% of capital cost
allowance:
$3,481.84
Total expenses and capital
cost allowance eligible for
the GST
rebate:
$5,811.58
[11] The appellant is the
vice-principal of a school, and in 1992, his employment
income was $57,037.11. He told the Court that in 1990, the
partnership Phyto Centre de Lévis had purchased, for
$25,000, a franchise from Les Produits Naturels Titrex
International Limitée ("Titrex") to distribute
plant-based products. He said that Phyto Centre de
Lévis had a receptionist for a short period of time in
1993 but that otherwise the partners took turns handling
reception duties. The centre was open three days a week from 5:00
p.m. to 10:00 p.m. so that the partners could recruit
salespersons and the products could be distributed. The
salespersons and partners came to the centre to stock up and then
sold the products to the public. The centre was not open to the
public.
[12] The partnership's expenses amounted
to $11,156 in 1992, as shown by Exhibit I-1. According
to the appellant's testimony at page 36 of the
transcript, those were the only expenses that had to be shared by
the partners.
[13] As the appellant explained, the
partners could each personally, depending on how motivated they
were, incur the expenses they considered useful to earn
"royalties" paid by Titrex. Those "royalties"
were not shared by the other partners, and the expenses were not
reimbursed by the partnership. The appellant received a
commission of five percent on the sales made by the salespersons
he had recruited and on those he made himself. Those amounts were
paid to him monthly and had nothing to do with his share in the
partnership.
[14] The appellant earned $14,969.37 in
"royalties" from Titrex in 1992. However, his expenses
amounted to $21,088.38. In addition to those expenses, Phtyo
Centre de Lévis had $11,156 in expenses for the same year.
The partnership's profit was $597.41. It was divided between
the four partners, who each received $149.35. The final result of
the appellant's businesses in 1992 was a loss of $7,052.53,
which was deducted from his employment income.
[15] The partnership's expenses and
income were divided among the partners. The expenses incurred by
the appellant were not shared by the other partners, nor did they
share in his "royalties".
[16] The appellant drew the Court's
attention to article 5 of the partners' agreement, which
reads as follows:
[TRANSLATION]
Art. 5 DUTY OF PARTNER
To remain a full member of the partnership, each partner shall
maintain a minimum monthly volume of 500 sales points at all
times. If that obligation is not met by a partner, the
partner's share of the income normally divided equally among
the partners shall be withdrawn from the partner and
redistributed among the other partners for as long as the partner
is in default. This situation does not make the partner any less
liable to pay the phyto-centre's monthly expenses.
[17] He therefore argued that the expenses
he incurred personally were expenses to maintain his status as a
partner and thus to earn income as a partner.
[18] Counsel for the respondent argued that
the expenses in question were incurred for the business of a
commission salesperson and not for the business of a member of a
partnership that was a registrant.
[19] As a supplier of services, a
self-employed worker may be a registrant, but this was not the
case of the appellant; this situation obviously involves
provisions of the Act other than the provision concerning
the tax rebate for a member of a partnership that is a
registrant. That rebate is provided for in section 253 of
the Act, set out below.
[20] Section 253 of the Act reads as
follows:
253. (1) Where
(a) a musical
instrument, motor vehicle, aircraft or any other property or a
service is or would, but for subsection 272.1(1), be
regarded as having been acquired, imported or brought
into a participating province by an individual who is
(i) a member of a partnership that is a
registrant, or
(ii) an employee of a registrant (other than a listed
financial institution),
(a.1) in the case of an
individual who is a member of a partnership, the instrument,
vehicle, aircraft or other property or service acquired,
imported or brought into a participating province was not
acquired or imported by the individual on the account of the
partnership,
(b) the
individual has paid the tax (in this subsection referred to
as the "tax paid by the individual") payable in
respect of the acquisition or importation of the property
or service, or the bringing into a participating province of
the property, as the case may be, and
(c) in the
case of an acquisition, importation or bringing into a
participating province, of a musical instrument, the individual
is not entitled to claim an input tax credit in respect of the
instrument,
the Minister shall, subject to subsections (2) and (3), pay
a rebate in respect of the property or service to the
individual for each calendar year equal to the amount
determined by the formula
A X (B-C)
where
A is
(a) where the
tax paid by the individual includes only tax imposed under
subsection 165(1) or section 212 or 218, 7/107,
(b) where the
tax paid by the individual does not include any tax imposed under
any of those provisions, 8/108, and
(c) in any
other case, 15/115;
B is
an amount equal to
(a) the
capital cost allowance in respect of the instrument, vehicle or
aircraft,
(b) the
amount in respect of the acquisition and importation of
the other property imported by the individual (not
exceeding the total of the value of that property determined
under section 215 and the tax calculated on it), or
(c) the
amount in respect of
(i) the supply by way of lease, licence or similar arrangement
of the instrument, vehicle or aircraft,
(ii) the supply of the service, or
(iii) the supply in Canada of the other property,
as the
case may be, that was deducted under the Income Tax
Act in computing the individual's income
for the year from an office or employment or from the
partnership, as the case may be, and in respect of which
the individual did not receive an allowance from a person,
other than an allowance in respect of which the person certifies,
in prescribed form containing prescribed information, that, at
the time the allowance was paid, the person did not consider
(d) the allowance
to be a reasonable allowance for the purposes of subparagraph
6(1)(b)(v), (vi), (vii) or (vii.1) of that Act, or
(e) where
that person is a partnership of which the individual is a member,
that the allowance would be a reasonable allowance for the
purposes of subparagraph 6(1)(b)(v), (vi), (vii) or
(vii.1) of that Act if the individual were an employee of that
partnership at that time.
C is the total
of all amounts that the individual received or is entitled to
receive from the individual's employer or the partnership, as
the case may be, as a reimbursement in respect of the amount that
was so deducted.
253(2) Restriction on rebate to partner
- The rebate in respect of property or a
service payable under subsection (1) for a calendar year to an
individual who is a member of a partnership shall not exceed the
amount that would be an input tax credit of the partnership in
respect of the property or service for the last reporting period
of the partnership in its last fiscal year ending in that
calendar year if ...
...
253(3) Application for rebate - A rebate for a calendar
year shall not be paid under subsection (1) to an individual
unless, within four years after the end of the year, the
individual files an application for the rebate in prescribed form
containing prescribed information with the Minister with a return
of the individual's income under Part I of the Income Tax
Act.
253(5) Administration of rebates - Where an individual
files an application for a rebate under this section,
(a)
subsections 160.1(1) and 164(3), (3.1) and (4) of the Income
Tax Act apply, with such modifications as the
circumstances require, for the purposes of calculating interest
on the rebate or any overpayment of the rebate as if the rebate
or the overpayment were a refund of tax paid under Part I of that
Act or an overpayment of such a refund, as the case may be, and,
for those purposes, subsection 280(1) does not apply to the
rebate; and
(b) sections
165 to 167 and Division J of Part I of the Income Tax Act
apply, with such modifications as the circumstances require, to
objections to and appeals from an assessment of the amount of the
rebate as if it were an assessment of tax payable under Part I of
that Act, and sections 301 to 311 do not apply to the
assessment.
(Emphasis added.)
[21] Subsection 253(1) of the Act
requires that the consideration for the supply of the property or
service be deductible in computing the individual's income
from the partnership. In other words, the expense must be
deductible by the individual in computing his or her income from
the partnership. Here, however, the evidence clearly showed that
the expenses were incurred not to earn income from the
partnership but to earn income as a self-employed worker.
This is clear from the fact that the substantial expenses and
"royalty" income were not divided among the partners.
If it has the meaning the appellant has given it, Article 5
of the partners' agreement to which the appellant referred
does not alter the nature of the expenses. The expenses relate
not to the partnership's business but to the appellant's.
For 1994, there is the additional reason that the appellant was
not a member of a partnership that was a registrant but, rather,
was a shareholder given that the partnership had been abandoned
and a corporation had been formed.
[22] For 1992 and 1993, the appeals are
allowed so that the Minister can reassess the appellant on the
basis of the admissions referred to in paragraph 10 of these
Reasons. For 1994, the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of June 1998.
J.T.C.C.
Email this Content