Hayworth Equipment Sales (1983) Ltd. v. The Queen, docket 95-4095-GST-G

Date: 19980211

Docket: 95-4095-GST-G

BETWEEN:

HAYWORTH EQUIPMENT SALES (1983) LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard at Edmonton, Alberta on February 2, 3 and 4, 1998. The Appellant called its director, Elmer Schmidek. The Respondent called its auditor, Alan Osborn, and its appeals auditor, Donald Sager.

[2] The parties filed the following Agreed Statement of Facts at the opening of the hearing:

STATEMENT OF AGREED FACTS

For the purposes of this appeal, the parties, by their respective counsel admit the following facts. The parties agree that these admissions shall have the same effect as if the facts had been formally proven. The parties each reserve the right to add additional evidence that is relevant and probative of any issue before the Court that is not inconsistent with the facts submitted herein.

1. The Appellant is in the business of selling new and used heavy-duty equipment and has been a registrant for the purposes of the Excise Tax Act since January 1, 1991 under registration number 123319139.

2. The Appellant accepts equipment on a consignment basis from various consignors and sells various items of heavy-duty equipment on behalf of consignors.

3. The Appellant acquires title to all consigned equipment from consignors immediately prior to the resale of that equipment to third parties by the Appellant.

4. The Appellant also purchases used equipment for resale in its commercial activities.

5. The equipment purchased by the Appellant or acquired by the Appellant for sale on consignment is acquired by the Appellant for the purpose of supply in the course of its commercial activities.

6. By Notice of Assessment 10103853, dated March 25, 1994, for the period January 1, 1991 to December 31, 1993, the Minister of National Revenue (the "Minister") assessed the Appellant in the amount of $244,336.90 in net tax, together with interest and a penalty in the amounts of $23,395.08 and $23,648.76, respectively.

7. The Appellant objected to Notice of Assessment 10103853 by Notice of Objection dated June 16, 1994.

8. The Minister partly allowed the objection to the assessment by his Notice of Decision ALB0012926, dated September 29, 1995.

[3] The Appellant filed an amended Notice of Appeal on February 2, 1998, sections C and D of which read:

C. MATERIAL FACTS RELIED ON

1. The Appellant is in the business of selling new and used heavy duty equipment and has been a GST Registrant since January 1, 1991.

2. The Appellant accepts equipment on a consignment basis from various consignors.

3. Throughout the Reassessment Period, the Appellant sold various items of heavy duty equipment on behalf of consignors. In each case, the equipment was purchased by the Appellant for a previously determined price (the "consignment price") immediately prior to resale by the Appellant to the ultimate purchaser.

4. The Appellant sought to recover the tax fraction of the consignment price on the basis that the equipment was acquired by the Appellant for use in its commercial activities.

5. The Minister has denied the Appellant a recovery of the tax fraction of the consignment price on the basis that some of the consignors were GST Registrants required to remit GST on the consignment price who appear to have failed to do so.

6. The Minister has denied the appellant a recovery of GST as an input tax credit when the Minister subsequently determined certain of the consignors to be GST Registrants on the basis that the Appellant cannot provide documentation as required by the Minister to support a claim for an input tax credit.

D. ISSUES TO BE DECIDED

1. Whether the Appellant was entitled to claim notional input tax credits on used equipment acquired by the Appellant for resale.

2. Whether the Appellant was entitled to claim input tax credits on used equipment acquired for resale from GST registrants.

3. Whether the Appellant demonstrated due diligence in connection with determining its GST obligations such that the Minister's assessment of penalties is in error.

All of section C is correct.

[4] The Respondent's assumptions read:

8. In assessing the Appellant, the Minister made the following assumptions of fact:

(a) the Appellant has been a registrant for the purposes of the Act since January 1, 1991 under registration number 123319139;

(b) the Appellant was engaged in the sale of new and used heavy duty trucks and trailers;

(c) the Appellant failed to meet the conditions necessary under either of sections 169 or 176 of the Act as the case may be, in respect of the ITCs disallowed by the Minister as set out in Schedule "A";

(d) the Appellant added phrases such as "GST included" to invoices previously issued by third parties who did not charge the Appellant GST;

(e) the Appellant made at least 39 duplicate claims for ITCs amounting to $41,779.92 as set out in Schedule A; and

(f) at the time the Appellant claimed the ITCs which were disallowed on certain of the amounts set out in Schedule "A", the Appellant failed to have the supporting documentation containing the prescribed information as required by subsection 169(4) of the Act.

[5] Assumptions 8(a) and 8(b) are correct. Assumption 8(d) is correct in part. The words "GST included" were added by the Appellant to Bills of Sale or other documents, which were not invoices or documents signed by the third party vendors. The Appellant made a number of duplicate claims for ITCs. Assumption 8(f) is correct.

[6] The parties filed Exhibit AR-2 which is a replica of Schedule "A" to the Assumptions of the Respondent. Exhibit AR-2 categorizes and highlights the particulars of Schedule A which remained in dispute between the parties at the time of trial. The categories are:

A $31,394.56 - Notional input tax credits ("NITCs") claimed by the Appellant and denied by the Respondent.

B $17,102.34 - Amounts described as being "claimable" by the Respondent before a stated date, but which were not allowed by the Respondent when the Appellant first claimed them.

C $15,521.15 - Amounts that relate to equipment purchased by the Appellant from Chem-Tech Oilfield Services Ltd. ("C-T") which was owned by the same husband and wife as owned the Appellant.

D $4,587.35 - Amounts denied for other reasons.

E $1,700.53 - Amounts claimed by the Appellant as input tax credits ("ITCs") but denied because GST registration was not available at the time of the ITC claim.

[7] The Appellant is an Alberta corporation which carries on business at Spruce Grove, a suburb of Edmonton. It is owned by Elmer and Doreen Schmidek, who are husband and wife. Mr. Schmidek is 65. He has been in the heavy equipment sales business for most of his life and he manages the Appellant. Mrs. Schmidek ("Doreen") was the bookkeeper of the Appellant at all material times. In all of the agreements identified where handwriting was used to insert words such as "GST included" after documents were drawn, all or part of these additions were in Doreen's handwriting. Two insertions were printed by hand and were not identified. Some were typed.

[8] Doreen did not testify. However, the Respondent's auditor, Allan Osborn, dealt with Doreen throughout his audit which extended intermittently from August, 1993 until March 1994. During that period, Mr. Osborn asked Mrs. Schmidek if the Appellant had ever paid GST out to any of the third parties to the agreements in question and she said "No". Mr. Osborn also described the following conversation with Mrs. Schmidek in his cross-examination:

A Yeah, I told you I did. I discussed that issue with Doreen and I said, I have -- I'm getting -- like asked her what she had and I said I've got this document that shows this on it, and she said -- that's when she told me she added it after the fact.

Q Okay. You didn't speak to Elmer about it?

A No. Doreen had told me --

Q And Doreen's position was, and Elmer's position was that it was GST in, that didn't change?

A That it was GST included?

Q Yes

A Doreen had told me that if they buy something they claim the GST back, whether they -- whether it's charged to them or whether they take it as just GST included.

[9] The Appellant sells second hand trucks and heavy equipment. All of the agreements in question are with C-T or with individuals or small corporations in rural Alberta and Saskatchewan. In respect to all of the agreements except C-T's, Mr. Schmidek testified that the Appellant entered into consignment agreements with the owners to sell the equipment. None of these agreements referred to or described GST. When a sale was arranged the Appellant signed a Bill of Sale form with the consignor whereby the Appellant purchased the equipment from the consignor for a named price. Then the Appellant sold the equipment to a third party, the purchaser. The Appellant then paid the consignor and sent two copies of the Bill of Sale out to the consignor with its cheque. It asked the consignor to sign one copy and return it. None of the Bills of Sale exhibited in court was a copy signed and returned by a consignor. Mr. Schmidek testified that the Bill of Sale form was drawn by the Appellant's lawyer and the procedure was adopted to protect the Appellant from disputes with consignors. Paragraph 3 of the Statement of Agreed Facts adopted these occurrences as transfers of title.

[10] The C-T Bills of Sale (Category C) contrast sharply with the other Bills of Sale. They all state GST included in the same print as the documents and within the printed line of the bodies of the documents. They are also executed by both parties to the documents. No consignment agreements executed by C-T were in evidence.

[11] None of the documents signed by consignors had the words "GST included" in the price, or similar words, when they were executed by the consignors. Mr. Schmidek testified that it was understood by the consignors when they signed deals with the Appellant that GST was included in the price. Mr. Osborn testified that during his audit at the Appellant's premises, he heard one of the Appellant's salesmen tell a customer respecting a proposed consignment that the Appellant would take care of the GST. This testimony was not refuted by the Appellant. All of the non-C-T agreements have the words "GST included" or similar phrases inserted in handwriting or varying print. Based on the foregoing facts, Mr. Schmidek's testimony is not accepted.

[12] Mr. Schmidek testified that Doreen inserted the words "GST included" or equivalent into the various agreements to remind herself of this for posting purposes. The evidence contradicts this. Many of the document copies obtained by Alan Osborn at the time of audit did not have these words. When Mr. Sager went out months later to audit the Appellant's objection Doreen gave him copies of documents that Mr. Osborn had received previously. However, some of the new copies had additional words on them. Doreen never let either Revenue Canada officer see the originals and the originals were not submitted to the Court.

[13] As a consequence of all of the foregoing conflicts with Mr. Schmidek's testimony, where Mr. Schmidek's testimony conflicts with other evidence before the Court, Mr. Schmidek is not believed. Much was made of the fact that Mr. Schmidek has a grade 9 education. He testified in Court for four and one-half hours. Mr. Schmidek is a mature, shrewd and successful used industrial equipment trader in a very competitive business which consists of constant dealing with others for a profit. This Court has no doubt that Mr. Schmidek and Doreen knew and understood the GST system and, in particular, the fact that ITCs and NITCs could be claimed for money or credit for money from the government on account of deals by the Appellant.

[14] The Court finds that the Appellant was purchasing equipment from consignors without paying GST in respect to the non C-T agreements in dispute. The consignors did not agree that GST was included in the sales prices. Doreen Schmidek did not refute Mr. Osborn's description of her statements to him.

[15] In particular, and by the categories described in Exhibit AR-2, the Court finds:

[16] Category A - $31,394.56

Each of the disputed assessments in this category is established as correct by the evidence for the reasons contained in the Reply excepting those assessments described in Exhibits A-7, A-26 and A-40. These three are subject to the following reviews -

A-7 Mr. Osborn testified concerning this and referred to stock number 5607 whereas AR-2 refers to the stock number as 5707.

A-26 This was a Rymut Trucking Ltd. ("Rymut") consignment. The Respondent deregistered Rymut retroactive to January 1, 1991. The date of supply was May 7, 1993. Rymut was not registered then. The Appellant did not show a GST number for Rymut. On the Respondent's records, Rymut did not have one on May 7, 1993.

A-40 This consignment supply occurred November 1, 1993. The consignor, Thomas McGregor, was deregistered on March 31, 1993. Thus, Thomas McGregor had no GST number on the supply date.

Finally, respecting Category A, the Court finds in particular that Meyer's Transport Ltd. (Exhibit A-30) was registered on the date of supply and this assessment is correct.

[17] Subsection 165(1) of the Excise Tax Act ("ETA") reads:

165(1) Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.

In each of items A-7, A-26 and A-40, the Appellant was a recipient of a taxable supply. It never paid GST on those items or any other items according to Doreen. None of these consignors agreed that GST was included in the sales prices.

[18] The appeals are dismissed as to all of the disputed assessments in Category A.

[19] Category B - $17,102.34

These amounts were claimed by the Appellant based on insufficient documentation or material. At a later date, during the objection period, the claims were established with satisfactory documentation. Revenue Canada ruled that they could be claimed by the Appellant in its subsequent quarterly returns which could then be filed until a stated date.

[20] This ruling appears to be correct. Subsection 169(4) and the Regulations applicable to claims by the Appellant require that the GST number of the supplier be in the supporting documentation of the Appellant's claim for an ITC. It was not. Therefore the Appellant must submit a new and proper claim with the correct supporting documentation. Until those claims are properly submitted the Appellant is not entitled to any of these ITCs.

[21] These appeals are dismissed.

[22] Category C - $15,521.15

This category arises from purchases by the Appellant from C-T.

[23] In May, 1990, Mr. and Mrs. Schmidek incorporated Chem-Tech Oilfield Services Ltd. (C-T), with a Mr. Frank as a co-shareholder. C-T purchased new Peterbilt trucks from a Prince George supplier. On December 30, 1990, C-T ceased doing business. On January 21, 1991, Mr. and Mrs. Schmidek formed Chem Tech Oilfield Inc. and took over C-T's operation. However, the trucks remained under C-T's name and Mr. Frank was out of the operation. In April or May, 1991, Chem Tech Oilfield Inc. changed its name to "CMA Carriers". There was not enough work for the business and the Appellant sold the trucks. Elmer Schmidek signed the Appellant's Bill of Sale forms for the Appellant and "Chem Tech Oilfield" respecting each truck. Each of these bills of sale uses the form's print to specify "GST included" respecting each price. The Appellant was assessed for GST respecting its purchase of these trucks. There is no evidence that C-T, Chem Tech Oilfield Inc. or CMA Carriers ever had a GST number or that the Appellant ever gave a supplier's GST number from any of them in support of its claim for an ITC. Nor is there any evidence that the Appellant ever paid the supplier anything for the supply or the GST thereon. No input tax was ever claimed on the trucks by any of C-T, Chem Tech Oilfield Inc. or "CMA Carriers". The Bills of Sale are dated from February 4 to December 29, 1992.

[24] The Appellant was assessed for GST on the trucks. The Appellant's position is that it never purchased anything.

[25] The Appellant's own Bill of Sale forms are executed and are quite specific. The Appellant purchased each truck for a specified price, GST included, and both parties executed the bills of sale. They are the only bills of sale in evidence respecting these trucks. No others were alleged to exist. The bills of sale were executed for the Appellant's benefit. The Appellant must also accept the obligations which arise from them. These appeals are dismissed.

[26] Category D - $4,587.35

These claims by the Appellant were denied for miscellaneous reasons which relate specifically to each claim. They will be dealt with by Exhibit number.

D-1 This ITC claim was disallowed on the basis that there was a trade in with no GST number submitted on it. GST was only reported on the net after the trade in. Therefore, the Appellant's claim on the entire transaction was properly disallowed. This appeal is dismissed.

D-2 The Appellant's bill of sale with the supplier Bruce Prestidge shows $150 GST paid. Bruce Prestidge reported $150 GST. The Appellant's ITC claim is for $1,233.14. However, it is not substantiated by the Appellant's own agreement. The Appellant paid out Prestidge's finance company and Mr. Schmidek testified that the payout included GST, but there is no substantiation of this and in particular, no substantiation from the finance company of this. For this reason, this appeal is dismissed.

D-3 The Appellant purchased a 1994 Chevrolet pick-up truck at a fleet discount for Mr. Schmidek who could not get a fleet discount. Two days later Mr. Schmidek paid the identical purchase price and tax to the Appellant. He licensed the truck. The Appellant did not. The Appellant applied for an ITC on this transaction. The transaction was not entered on the Appellant's books.

Based upon Mr. Schmidek's testimony, the Appellant purchased this truck as a trustee for Mr. Schmidek. Mr. Schmidek paid exactly the same amount to the Appellant. He uses the truck personally and charges the Appellant mileage for his business use.

The Appellant is not entitled to an ITC respecting this claim. It is dismissed.

D-4 On July 17, 1992 the Appellant purchased a 1992 Pontiac Sunbird car. Mr. Schmidek testified that it was for business use and to get parts. Doreen used it to go to the bank. Mr. Schmidek admitted that on a few occasions Doreen took it home overnight. About one year later the Sunbird was given to their daughter who was going to university in Lethbridge. It was never given a stock number by the Appellant. While Mr. Osborn audited the Appellant he saw Doreen using it personally. No log of the vehicle was kept.

The Appellant's claim for an ITC respecting the Sunbird was classified by the MNR as capital property which was the subject of more than 50% personal use. Mr. Schmidek's testimony by itself is not accepted. No log of the vehicle was kept by the Appellant. Mr. Osborn saw personal use of the vehicle which warranted the assessment. The appellant has not met its onus. The appeal is dismissed.

[27] Category E - $1,700.53

These ITC claims were not allowed because the Appellant did not provide the suppliers' GST numbers in its supporting documents with the claims. As already stated in this judgment, the supplier's GST number is a requirement to support the claim of the Appellant. The appeals under this category are dismissed.

[28] The Appellant has appealed penalties levied on the basis that the Appellant demonstrated due diligence.

[29] Mr. Schmidek testified that his dealings with suppliers were that GST was included in the supply price. The Appellant's own documents do not verify that testimony. The Appellant did not prove that it attempted to get any GST numbers by telephoning the Respondent to confirm GST registration. Doreen allegedly mailed copies of the bills of sale to suppliers for signature and return, but there is no satisfactory evidence that those bills of sale then included the words "GST included" on them. The only signed ones were the C-T agreements which have already been described and which are quite different from the others.

[30] Mr. Schmidek's testimony respecting his alleged conversation with suppliers is not believed. The evidence indicates that the words "GST included" or equivalent were inserted after posting and not before where there is any evidence other than Mr. Schmidek's testimony.

[31] The evidence before the Court is that the Appellant simply claimed input tax credits or notional input tax credits on every deal. Mr. Osborn's description of Doreen's statement verifies that the Appellant did this deliberately and without any care or caution as to whether it was in any way entitled to such a claim. On the evidence before the Court, the Appellant treated these claims as add-ons to any profits it might otherwise make on these transactions. The appeal of the penalties is dismissed.

[32] The appeals are dismissed in their entirety. The Respondent is awarded party and party costs.

Signed at Ottawa, Canada this 11th day of February 1998.

"D.W. Beaubier"

J.T.C.C.