Citation: 2012
TCC 381
Date: 20121106
Docket: 2011-3459(GST)I
BETWEEN:
CHARLES TOUPIN,
Appellant,
and
HER MAJESTY THE QUEEN
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Batiot
D.J.
[1]
On
November 3, 2011, Charles Toupin appealed a notice of assessment
concerning the goods and services tax (GST) issued against him on
December 15, 2012, for the period from April 1 to June 30, 2010,
under the Excise Tax Act, R.S.C. 1985, c. E-15 (ETA). At issue is
the disallowance of the deduction of a certain input tax credit (ITC)
for the above-mentioned quarterly statement.
[2]
The
ITC in question, of $3,424.44 (out of a total of $16,412.00 ($6,681.27 and $9,730.73))
is the GST assessed on two invoices for professional services that his lawyer
provided to him and to his father until February 28, 2010, and
March 31, 2010, respectively, therefore prior to the period at issue.
[3]
The
appellant submits that, as a registrant under the ETA, he is entitled to deduct
this amount from any other amounts that he must remit; the fees in question were
not paid exclusively to obtain a remedy for the situation concerning his and
his father’s investments, but he was encouraged by the new law firm, which, by
sending him several professional mandates on which he collected GST, enabled
him to pursue his notarial practice and finance his legal action.
[4]
The
respondent submits that these professional fees, for bringing an action before
the Superior Court of Québec to obtain a civil remedy, constitute a personal
expense incurred by the appellant as an investor, and not “in the course of [his]
commercial activities” (ETA, paragraph 169(1)(c)) as a notary;
this GST can therefore not be claimed as an ITC.
[5]
An
explanation is required.
[6]
Having
been a lawyer and then a student, in 2005 the appellant became a self-employed
notary. He took advantage of the contacts he had made as a lawyer with the firm
Melouche Séguin (later Melouche Tourpin) to obtain mandates from the new firm Jarry
Bazinet, two lawyers who had left the same firm shortly after him.
[7]
The
appellant is and was then an informed investor. He and his father purchased
some speculative shares. Business disputes between them as shareholders, on one
side, and his former employer, Mr. Seguin of Melouche Séguin, on the other
side, led to legal action being taken against the latter. The law firm Davies
Ward Phillips & Vineberg, acting on behalf of the appellant and his father,
obtained a judgment in their favour from the Superior Court of Québec
(currently under appeal).
[8]
The
judgment, penned by the Honourable Justice Louis Lacoursière and filed as
evidence by the appellant, reveals that the appellant, his father (two of the
five original investors) and one intervener have claimed 800,000 shares from Mr. Seguin,
the defendant, that are being held by a mis-en-cause who alleged that he had
exercised a purchase option against the father and son, who, in any case, were
merely nominal shareholders for the defendant. The lengthy judgment describes
the complex facts and finds in favour of the appellant and his father.
[9]
It
should be noted that the appellant’s father was a friend of the defendant and
that they and been co-investors since 1997. The appellant joined them later the
same year, investing $20,000 in the Junior Capital Pool Company Wild Grizzly, listed
on the Alberta Stock Exchange. Each investor received 400,000 shares.
[10]
Questions
later arose regarding the date of signature of the option agreement and the
exercise of those options, hence the dispute in question, the legal fees and
the resulting GST. The appellant, Mr. Toupin, is claiming a portion of
that amount as an ITC, against the GST that he was required to remit to Revenu
Québec, received from his own clients. Part of that clientele was referred to
him by the firm Jarry Bazinet.
[11]
Mr. Toupin
argues that his business dealings with the firm Jarry Bazinet are connected,
not completely but significantly, to the success of his practice, and that one
aspect of this connection was the handling of his dispute with Mr. Seguin,
and Jarry Bazinet’s interest therein.
[12]
François Barette,
counsel for the appellant, submits the following in his clear and precise
submissions:
[translation]
1. Paragraph 169(1)(c) allows an
input tax credit to “the extent (expressed as a percentage) to which the person
acquired the . . . service . . . for
consumption, use or supply in the course of commercial activities of the
person”.
2. Subsection 169(1) of the Excise Tax
Act does not require that use be exclusively commercial: Midland
Hutterian Brethren v. Canada, 2000 CanLII 16725 (FCA) at paragraph 25 (Midland).
That case involved the deductibility of GST on the purchase of work cloth used to
make work clothes.
3. The test set out in that subsection to determine
whether an ITC can be used is more liberal that the test for deductibility
under the Income Tax Act: Hleck, Kanuka, Thuringer v. Her Majesty the
Queen, 94 DTC 1968, at page 7 (Hleck). The purchase, and the
GST paid thereon, of an airplane ticket for the spouse of a lawyer attending a
business meeting is an expenditure made in the course of the firm’s business
activities.
4. The purpose of the commercial activity
need not be exclusively “making taxable supplies to qualify for the ITCs”: BJ
Services Co. Canada v. R., 2002 CarswellNat 5064, [2002] G.S.T.C. 124, 2003
G.T.C. 513 (Tax Court of Canada (General Procedure)), (BJ Services).
[13]
Justice Malone,
in Midland, considered whether the GST paid on the cloth for work
clothes for all the members of the religious community in question could be
written off as an ITC. The practice was to purchase two grades of cloth, the
best for the clothing worn by members during religious services, and the other,
more durable, for daily wear. The members—a small percentage of the
community—who participated in the daily farm chores wore it as well, hence the
claim of 50% of the GST “incurred on the work cloth” (paragraph 6).
[14]
The community
supplied all of its members with “shelter, education, food and clothing”. In
exchange, the members worked without monetary compensation (paragraph 3).
[15]
Justice Malone
held, on the basis of the evidence filed, that “[o]nce an item is found to be
acquired and used in connection with the commercial activities of a GST
registrant and that item directly or indirectly contributes to the production
of articles or the provision of services that are taxable, then an ITC is
available using the formula in that subsection” (paragraph 25). He held
immediately prior that “the supplies must contribute to the production of
articles or the provision of services that are taxable” (paragraph 24).
[16]
In
this case, the fees that the appellant collects and pays are taxable. The issue
is whether those that he pays to his law firm fall within his commercial
activities, within the meaning of paragraph 169(1)(c).
[17]
Justice Bell,
in Hleck, held that the GST paid on the airplane ticket of the spouse of
a partner in a law firm could be used as an ITC, since the test is less strict
than the one imposed by the Income Tax Act, given the lawyer’s
professional obligations to attend certain conferences and the clear need to
have his wife accompany him for social and professional reasons: “In this instance, despite an element of
personal enjoyment, the expense was made and the airline ticket was acquired
and used in the course of the commercial activity of the Appellant.”
[18]
In
this case, the appellant paid fees to his own lawyer to bring an action on his
behalf, as an investor who has suffered a prejudice, on September 25,
2003—the dispute originated before he established his notarial practice in
2005—with respect to a claim for shares that should have taken place earlier.
He wishes to deduct these from the GST that he receives from his own notarial
clients. His litigation is not an expense incurred “in the course of [his]
commercial activities” as a notary.
[19]
Justice Miller,
in BJ Services, holds that the “legislation, case law and GST policies
do not support the Respondent’s position that a taxpayer only gets ITCs if it
can show that the purpose of inputs is in connection with making taxable
supplies” (paragraph 77).
[20]
In
that case, the appellant, a company operating in the business of oilfield
services and faced with a hostile takeover bid, received advice from RBC
Dominion Securities Inc., Simmons & Company International, of Texas, and
the law firm Blake Cassels & Graydon. Following their advice, the appellant
secured another bid from a “white knight”. The first purchaser outbid the
second and ended up purchasing all of the shares, but at a higher price than
that originally offered. At issue in that appeal was the significant GST paid
by the appellant to RBC and Blake of $914,765 and $15,750 respectively (Simmons
was not a GST registrant).
[21]
Because
the purpose of these expenses was to protect shareholder interests, at worst
the appellant would have been forced to pass on these GST expenses only to its
own clients, and probably not to the shareholders, who in fact benefited from
these expenses.
[22]
Justice Miller,
at paragraph 67, held that a “company that makes a supply that is neither an
exempt supply nor taxable supply can still be seen as doing so in the course of
a commercial activity, provided that supply is not purely of a non-commercial
or personal nature”.
[23]
In
this case, the appellant testified that the firm Jarry Bazinet had an interest
in the action that he undertook against their former common colleague and that
the firm sent him between $10,000 and $30,000 of notarial work each year. Messrs. Jarry
and Bazinet did not testify to confirm this arrangement.
[24]
I
accept that there are good relations between the appellant and Jarry Bazinet,
business relations that seem to be mutually beneficial, as a law
firm and notary office. However, this does not include investments that the
appellant made independently prior to becoming a notary.
[25]
The
appellant pays legal fees to pursue and protect his interests as an investor;
these expenses are not incurred “in the course of [his] commercial activities”
as a notary. Therefore they are personal. The appeal is dismissed.
Signed at Montréal, Quebec, this 6th
day of November 2012.
“Jean-Louis Batiot”
Translation certified true
On this 19th day of December 2012
Francie Gow, BCL, LLB
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