Date: 19981110
Docket: 97-2195-GST-I
BETWEEN:
PEMBINA FINANCE (ALTA) LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
_______________________________________________________________
Counsel for the Appellant: Horst G. Wolff
Counsel for the Respondent: Margaret McCabe
_______________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Edmonton, Alberta, on
October 23, 1998)
Bowie, J.T.C.C.
[1] This appeal is from an assessment made by the Minister of
National Revenue under the Goods and Services Tax (GST)
provisions found in Part IX of the Excise Tax Act
(the Act). The assessment covers the period between July
1, 1991 and December 31, 1995. In summary, the Appellant was
found liable to pay $134,473.66 broken down as follows:
Adjustments to GST $ 68,541.48
Adjustments to Input Tax Credits $ 25,496.45
Penalty $ 19,962.23
Interest $ 20,473.50
Total $134,473.66
[2] This assessment was made as the result of an audit
performed by Mr. Robert DeGagne of the Edmonton Office of Revenue
Canada between June 1995 and June 1996. Mr. DeGagne gave
evidence, and my impression was of a careful, conscientious
auditor, whose evidence was reliable. I am sure that the audit
was a difficult one for him for a number of reasons; not the
least of those reasons is the state of the books and records of
the Appellant company. Mr. DeGagne was unable to obtain these
books and records for several months after his first request, and
it is clear, too, from the evidence that when he did obtain them
they had not been well maintained.
[3] The Appellant company is in the business of leasing cranes
with operators in and around the City of Edmonton, Alberta. The
principal or sole shareholder is Mr. James Millar. Also included
in the company’s business is purchasing and renovating
cranes for resale, making repairs to cranes, and to some extent
restoring old motor vehicles for resale. Mr. Millar gave
evidence for the Appellant. He did not impress me as being a
particularly forthright witness. Apart from his obvious personal
interest in the result of this appeal, he was at times evasive
under cross-examination, and many of his answers were both
self-serving and implausible. I find his evidence as to the
company’s transactions to be unreliable, particularly where
it is in conflict with documentary evidence in respect of those
transactions. It should be borne in mind, too, that many of the
transactions took place quite a few years ago, and the written
record more likely to be correct than is his memory.
[4] Mr. Millar’s objections to the assessment may be
summarized as follows. First, GST assessed on the sale of two
cranes, one to Pauline Jacobi and one to John Del Limited.
Second, the disallowance of input tax credits claimed in respect
of the purchase of two motor vehicles. Third, the disallowance of
input tax credits claimed in respect of certain other corporate
expenditures, the exact nature of which was not revealed by the
evidence. And fourth, the penalties assessed.
[5] I shall deal with these in turn, but before I do, I should
mention that there were three other items in the assessment,
numbered 065, 068 and 073, to which the Appellant said he took
exception, but as to which he offered no cogent evidence to
contradict Mr. DeGagne’s conclusions. These items total
some $21,000.00 of unpaid tax, or of input tax credit claimed and
unsubstantiated. I find that his vague explanations, such as they
were, fall far short of convincing me that the audit was in error
with respect to any of these items.
[6] I turn now to the four major areas of dispute. In 1991 the
Appellant transferred title to a mobile crane to one Pauline
Jacobi. Mr. DeGagne assessed GST of $5,724.30 on this
transaction. In 1992 the Appellant transferred title to another
mobile crane to a company called John Del Limited. Mr. DeGagne
assessed GST of $5,200.93 on this transaction.
[7] Mr. Millar testified that Ms. Jacobi is the sister-in-law
of his former wife, and that in 1991 he owed her $79,500.00. He
and his company were in difficult financial straits at that time,
and Ms. Jacobi, he said, was concerned about the security of this
loan. According to his evidence, the company therefore conveyed
title to the mobile crane to her as security, and following the
conveyance the company continued to have possession of the crane
and to rent it out as before. He said that no consideration was
given by Ms. Jacobi to the company for the crane, and that in
March, 1995 he repaid the balance outstanding on the loan in the
amount of $53,230.71, following which Ms. Jacobi reconveyed the
crane to the Appellant, again without consideration. He also
testified that no sale of this crane was recorded in the
Appellant’s accounts for the year 1991.
[8] Mr. DeGagne testified that he assessed GST on the
conveyance of this crane because he was informed by the
Appellant’s bookkeeper that the transaction had been a sale
and lease-back arrangement under which Ms. Jacobi purchased
the crane for $79,500.00 and then leased it back to the Appellant
for an initial payment of $3,000.00 and monthly lease payments of
$1,500.00 per month thereafter.
[9] The Appellant’s unaudited financial statements for
its fiscal years ending June 30, 1991 to June 30, 1997 inclusive
were put into evidence. They show a note payable to Ms. Jacobi,
on which a balance of $76,269.00 was owing at June 30, 1990. The
loan was retired by the June 30, 1995 year end. It was
impossible, however, from these statements alone to say whether
or not there was, as Mr. DeGagne believed, a sale and lease-back
of the crane or, as Mr. Millar testified, a conveyance and
re-conveyance without consideration on either occasion to secure
the Jacobi loan.
[10] Exhibit A-4 is a bundle of documents put into evidence by
the Appellant’s counsel. It includes a fax message from a
collection agent to Mr. Millar dated February 22, 1995. That
message confirms that the Appellant
... will be purchasing the crane owned by Jacobi under
the option to purchase which was extended to February 10,
1995.
An attachment to that fax shows the computation of the buy-out
price as $53,230.71, after the application of lease payments of
$3,000.00 on November 20, 1991, and $1,500.00 per month
thereafter, with a payment of $25,000.00 in May 1993. Also
attached as part of this bundle of documents is a bill of sale
between Pauline Jacobi as grantor, and Pembina Finance (Alta.)
Ltd., as grantee, in respect of the crane in question. This bill
of sale refers to a lease agreement dated November 7, 1991
relating to this crane. Also part of the bundle of documents is a
letter from Ms. Jacobi’s lawyer to the Clerk of the
Court of Queen’s Bench which suggests that he was acting
for her on this occasion. Presumably he would have some knowledge
of the nature of the transaction. These documents are more
consistent with there having been a sale and lease-back of the
crane than they are with the Appellant’s oral testimony.
They also are evidence tendered by the Appellant from which he
cannot later resile.
[11] Significantly, the lease agreement referred to in the
bill of sale was not produced, nor was Ms. Jacobi, or her
collection agent, or her lawyer, called to testify. The only
explanation that I was given for this was that Ms. Jacobi’s
mental health precluded calling her. I do not consider this
statement, unsupported as it was by any evidence, to be a
satisfactory explanation. I draw the inference that the lease
agreement and the evidence of Ms. Jacobi, her lawyer or her
collection agent would not have been helpful to the
Appellant’s cause. (See Murray v. Saskatoon, [1952]
2 D.L.R. 499.)
[12] I find that the Appellant sold this crane to Ms. Jacobi
in 1992 for $79,500.00, of which $5,200.93 was the GST
component.
[13] The other conveyance of a crane which is in issue was
made by the Appellant to John Del Limited, a company owned 100%
by Mr. Millar’s ex-wife. This sale took place in 1992. Mr.
Millar’s evidence was that there was no consideration for
this transaction either, and that the conveyance was made only to
secure an amount owing, or to become owing, by him to his wife in
connection with their divorce, which took place at about that
time. He said that following the divorce and payment of her
settlement he acquired ownership of John Del Limited and that he
then had that company convey the crane back to the Appellant,
which later sold it to a buyer in the United States. In short,
his position is that this, too, was not a sale but merely a
conveyance without consideration, to secure an obligation.
[14] This is not consistent with the company’s financial
statements. The Statement of Source and Application of Funds of
the Appellant for its financial year ended June 30, 1992 shows
the sale of an asset for $87,500.00. No other explanation of this
item in the books was offered in evidence, and I conclude that
Mr. DeGagne correctly took it to be the sale of this crane to
John Del Limited for $87,500.00, of which the GST component was
$5,724.30.
[15] I turn next to the motor vehicle purchases. The Appellant
claimed input tax credits in respect of the purchase of two motor
vehicles. One of those is a motor home, which Mr. Millar said he
purchased for the company with the intention of reducing the cost
of travelling to the United States on buying trips. These
trips were made by him to seek out and purchase used cranes for
renovation and resale. According to his evidence, rather than pay
hotel bills he would be able to sleep in this motor home and
thereby save the company money. The Appellant paid $49,500.00 for
the vehicle in September 1993, and in the second quarter of 1994
claimed an input tax credit of $3,468.71 in respect of the GST
paid on it. Mr. Millar testified that he used it on two business
trips, and otherwise it sat in the company’s yard unused
for three years. On cross-examination he expanded its use
to five trips; two to Bonnyville and three to Calgary, which he
said totaled some 1,500 kilometres.
[16] The other vehicle in question was a Chevrolet Corvette,
for which the Appellant paid $29,000.00 in August 1994, and in
respect of which it claimed an input tax credit of $1,966.58 in
the third quarter of 1994. Mr. Millar testified that his
personal car was a 1977 Lincoln, which, because of its age, he
considered to be unreliable for use on business trips that took
him away from the City of Edmonton. He said that the Chevrolet
Corvette was available at a favourable price, and so he bought it
on the company’s behalf so that it would be available for
him to use on business trips. He used it for three or four trips
to Calgary; otherwise, it was left in his garage at home.
[17] Mr. DeGagne took the view that these were not in fact
vehicles bought by the Appellant for use in its business, but
that they were in fact bought for Mr. Millar’s personal
use. I agree. Only Mr. Millar’s evidence supports the
Appellant’s claim to business use, and that evidence does
not convince me. Mr. Millar has been in business for a very long
time. His businesses have had their ups and downs, but he is
certainly not naïve or inexperienced in financial matters. I
do not believe for one moment that he thought that either the
motor home or the Chevrolet Corvette was a rational acquisition
for business use. It may very well be true that they saw little
use, either business or personal, but on the evidence before me I
conclude that he bought them not for the advancement of the
company’s business, but for his own purposes. To the extent
that there was some slight business use made of these assets by
the Appellant, the provisions of section 141 of the Act
apply to deem its use to be entirely personal. Their acquisition
should not be free of the incidence of GST.
[18] Certain other input tax credits were disallowed by Mr.
DeGagne, amounting to somewhat more than $32,000.00. The reason
for the disallowance was that the Appellant company did not have
available for examination, vouchers to authenticate the
expenditures recorded in its synoptic ledgers and giving rise to
these claims. Mr. Millar testified that after discussing the
absence of these receipts with Mr. DeGagne, he spent a great deal
of time, over many months, obtaining duplicates from his
suppliers, and that he had obtained them for virtually all of the
items in question. He then placed them in the company’s
files, only to have his landlord, with whom he was engaged in a
dispute as to the use of the premises, seize all of these records
and truck them away, never to be seen again.
[19] Subsections 169(4) and (5) of the Act require that
a registrant have evidence to substantiate a claim for an input
tax credit. The reason for this requirement is obvious. The
system of providing input tax credits to be set off against tax
otherwise payable is inherently subject to potential abuse,
unless expenditures can be verified by audit. Mr. Millar’s
evidence as a whole did not inspire confidence in me, and without
any corroboration I do not accept his bald and very general
statement that he had obtained vouchers to verify all of these
amounts.
[20] I turn finally to the matter of the penalty assessed. It
was submitted to me in argument by counsel for the Appellant, on
the strength of the judgment of Bowman J. in Pillar Oilfield
Projects Ltd. v. Canada, [1993] G.S.T.C. 49, that the penalty
imposed by subsection 280(1) of the Act is subject to the
Appellant’s right to make out a defence of due diligence.
That decision has been followed by judges of this Court a number
of times. On the two occasions that the issue came before the
Federal Court of Appeal, that Court found it unnecessary to
decide the question. I accept that a defence of due diligence is
open to an Appellant who has been assessed a penalty under this
subsection.[1]
[21] The Appellant’s counsel went on to urge me to
relieve the Appellant of the penalties in this case as, in his
submission, the Appellant had relied on a bookkeeper whom Mr.
Millar had thought was competent, and because it had lost its
records, or some of them, through the actions of its landlord,
which were said to be unjustifiable, and the company therefore
could not be faulted for the errors resulting in its GST returns.
I believe the requirements to make out the due diligence defence
were accurately stated by Bowman J. in Pillar Oilfield,
where he said at paragraph 27,
... innocent good faith in the making of unintentional errors
is not tantamount to due diligence. That defence requires
affirmative proof that all reasonable care was exercised to
ensure that errors not be made.
[22] In my view, this Appellant could not surmount even the
lesser hurdle of innocent good faith. The claims for input tax
credits on the motor vehicles necessarily involve some
animus on the part of Mr. Millar to thwart the provisions
of the Act. The state of the company’s record
keeping, as established by Mr. DeGagne’s evidence, is such
as to negative the theory that innocent errors were made in good
faith. There was no credible evidence given that would tend to
establish that any, far less all, reasonable care was exercised
by this Appellant, either in its record keeping, or in filing
returns under the Act.
[23] The appeal is dismissed.
Signed at Ottawa, Canada, this 10th day of November, 1998.
"E.A. Bowie"
J.T.C.C.
Email this Content