Citation: 2012 TCC 114
Date: 20120404
Dockets: 2010-1733(GST)G, 2009-3624(GST)G,
2009-3625(GST)G
BETWEEN:
SWS COMMUNICATION INC.,
CENTRE LES VOYAGES MIRACLE INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
I. INTRODUCTION
[1]
The appeals of SWS
Communication Inc. (“SWS”) and
Centre les Voyages Miracle Inc. (“CMI”)
were heard on common evidence at the request of the parties.
[2]
The Minister of Revenu
Québec (the “Minister”), acting on behalf of the Minister of National Revenue,
assessed SWS for its alleged failure to collect goods and services tax (“GST”) in
the amount of approximately $101,164.74 on the supply of telecommunication
services to BMT America LLC (“BMT America”) for the period from May 2006 to
February 2007 and for the month of July 2007.
[3]
The Minister also
assessed CMI for its failure to collect GST in the amount of approximately
$7,399 on the supply of telecommunication services to Convergia Inc.
(“Convergia”) for the period from February 1, 2006 to October 31, 2006.
[4]
The appellant alleges
that the supplies in dispute were zero-rated under section 22.1 of Part V of
Schedule VI of the Excise Tax Act (the “ETA”). Therefore, it denies that
it failed to collect GST.
[5]
In very general terms,
section 22.1 provides for a zero rate of GST in respect of the export of
telecommunication services to a non-resident person who is not a registrant
under the ETA and who acquires the services for use in a telecommunication
business carried on outside of Canada.
[6]
The respondent denies
that section 22.1 is applicable because she believes that BMT America and
Convergia were deemed to be resident in Canada in connection with the receipt
of the supplies because they had permanent establishments in Canada at all relevant times. The respondent relies on subsection 132(2) of the ETA, which
deems a person to be resident in Canada in the circumstances described in that
provision.
II. FACTUAL
BACKGROUND
[7]
The evidence shows that
SWS and CMI, which were incorporated in Canada and based in the Montreal
region, operated as wholesale service providers in the voice over internet
protocol (“VOIP”) telecommunication industry. They negotiated wholesale pricing
arrangements with carriers for the transmission of VOIP communications over the
Internet. In turn, SWS and CMI provided access to these Internet pathways to
other wholesale VOIP service providers at a slight mark-up on their per‑minute
cost.
[8]
SWS called Jeff Wexler
as an expert witness to provide an overview of the technologies and
transmission techniques for the delivery of voice communications over the Internet.
Mr. Wexler also provided insight on how SWS and BMT America did business
together, based on first-hand knowledge of the situation. At all material
times, Mr. Wexler held a 16.66% interest in BMT America and was an
employee in its Montreal office.
[9]
According to the
witness, VOIP refers to communications that are transmitted over the Internet
rather than through traditional phone lines. The first step in a VOIP call is
the conversion of an analog signal to a digital signal consisting of two
separate but related digital packets of information. This occurs at the
origination point of the call. The signal packet of the digital stream (the “Signal
Packet”) contains the instructional information that allows the VOIP call to be
routed through the Internet pathways designated by the VOIP service providers that
are active on the call. The Signal Packet also contains information on the
duration of the call to enable billing. The media packet contains the
digitalized voice or media information (the “Content Packet”). The Content
Packet is often transmitted separately from the Information Packet, along a
more direct pathway to avoid any lag in the communication. On the receiving end,
referred to as the termination point, similar steps occur in reverse order. The
Content Packet is converted from a digital to an analog signal that reproduces
the original voice call.
[10]
According to Mr. Wexler,
in the periods under review SWS granted BMT America the right to direct VOIP
calls over Internet pathways situated outside Canada for which SWS had arranged
transmission rights. These routes were used to transmit VOIP calls originating
in the Southwest and Southeast of the United States to termination points
outside of Canada and the United States.
[11]
Mr. Wexler
acknowledged that he worked out of BMT America’s Montreal office. However, he
explained that BMT America’s principal place of business was the United States, the place of its incorporation. The communication equipment used by BMT
America to transmit VOIP calls was located in the United States. A back-up
server was located in the Montreal office for the completion of VOIP calls only
if the equipment located in the United States failed.
[12]
According to the
witness, the equipment in the United States did not fail and the equipment
located in Canada was not used to complete VOIP calls.
[13]
Mr. Wexler also
explained that the Signal Packet of VOIP calls was switched to SWS from BMT
America’s server located in the United States. No information was transmitted
in the opposite direction from SWS to BMT America.
[14]
The evidence presented
on behalf of CMI was sparse. Documentary evidence shows that Convergia was
incorporated under and governed by the laws of the United States. Invoices presented
in evidence show that Convergia was billed in US dollars for international
VOIP calls terminating outside of Canada.
[15]
Glenn Hart, the Revenu
Québec auditor responsible for issuing the assessments under review, was the
only witness to appear for the respondent. He explained that he interviewed
Mr. Wexler and learned that Mr. Wexler was responsible for
negotiating wholesale price arrangements with Canadian carriers for the
transmission of VOIP calls. He also learned that Mr. Wexler carried on in Montreal some programming activities that were required in order to open Internet pathways
for BMT America’s VOIP communication business. It appears from Mr. Hart’s
testimony and documents drafted by Mr. Hart that he believed he could consider
both BMT America and Convergia as persons resident in Canada if he found or assumed that they had permanent establishments in Canada.
III. ANALYSIS
[16]
These appeals require
me to determine whether the appellants exported zero‑rated
telecommunication services to BMT America and Convergia. Section 22.1
provides for a zero rate of GST for telecommunication services exported in the
circumstances therein stated:
22.1
[Telecommunication service] – A supply of a
telecommunication service where the supply is made, by a registrant who carries
on the business of supplying telecommunication services, to a non-resident
person who is not a registrant and who carries on such a business, but not
including a supply of a telecommunication service where the telecommunication
is emitted and received in Canada.
[Emphasis added.]
[17]
A supply must satisfy
the following conditions to be treated as a zero-rated telecommunication
service:
a.
The supply must be a
telecommunication service;
b.
The supplier must be a GST
registrant that carries on a telecommunication business;
c.
The recipient of the supply
must be a non-resident of Canada that carries on a telecommunication business, provided
it is not a GST registrant; and
d.
The telecommunication must
not be emitted and received in Canada.
[18]
The respondent argues
that all of these conditions are met save one. According to the respondent, BMT
America and Convergia are deemed to be resident in Canada by virtue of
subsection 132(2) of the ETA, which reads as follows:
For the purposes of
this Part, where a non-resident person has a permanent establishment in Canada, the person shall be deemed to be resident in Canada in respect of, but only in respect of, activities
of the person carried on through that establishment.
[19]
It is clear from the
wording of subsection 132(2) that, where a non-resident person has a permanent
establishment in Canada, the person is deemed resident in respect of, but only
in respect of, activities carried on through that permanent establishment. In
other words, a non‑resident person remains a non-resident person except
with respect to the activities carried on through the person’s Canadian
permanent establishment. In my opinion, a service is supplied to the Canadian
permanent establishment of a non-resident person if it is consumed or used in
the activities carried on in Canada through the permanent establishment. In
light of the above, it is not sufficient for the Minister to show or assume that
the recipient of the supply has a permanent establishment in Canada. The Minister must also show or assume that the supply was consumed in the
furtherance of the activities carried on by the permanent establishment. It is
clear from the evidence that the respondent’s representatives failed to
consider whether the services supplied by SWS were made to BMT America’s and
Convergia’s permanent establishments in Canada. No inquiries were made on this
point because the auditor believed that the existence of a permanent
establishment was sufficient in order for BMT America and Convergia to be
deemed resident in Canada. This misconception is reflected in the respondent’s
replies to the appellants’ notices of appeal. In the case of BMT America, the respondent
assumed only the following:
[TRANSLATION]
(g)
the appellant made supplies of telecommunication
services to BMT AMERICA LLC during … the period … in question;
(h)
BMT AMERICA LLC is a
business corporation that was not incorporated in Canada but was nevertheless
not a non-resident person during … the period … in question because its
principal place of business was on Bouchard Boulevard in Montreal (Dorval), in the province of Quebec.
[20]
This assumption is
manifestly incorrect. The Minister would have had to assume that the service
was also supplied for the furtherance of activities carried on by BMT America’s
Canadian permanent establishment.
[21]
A similar limited
assumption is made with respect to Convergia:
[TRANSLATION]
(e)
the appellant made supplies of telecommunication
services to CONVERGIA INC. during the period in question, in particular, prior
to July 1, 2006;
(f)
CONVERGIA INC. is a
business corporation that was not incorporated in Canada but was nevertheless
not a non-resident person during the period in question because its principal
place of business was on Hymus Boulevard in Montreal (Pointe-Claire), in the province of Quebec.
[22]
The particular wording
of these paragraphs of the replies does not represent simple drafting
oversights on the part of the respondent’s counsel. It actually reflects
Mr. Hart’s understanding of subsection 132(2) as demonstrated in a
memorandum which he prepared on February 18, 2008. In that memorandum he concludes
that Convergia and BMT America are resident in Canada because he considers those
entities to have permanent establishments in Canada.
[23]
In light of this, I
must consider whether the appellants bear the onus of proof with respect to the
place of their supplies. In Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, the Supreme Court
of Canada reaffirmed the principle that taxpayers bear the onus of producing evidence
to rebut the facts found or assumed by the Minister in making an assessment. In
M.N.R. v. Pillsbury Holdings, [1964]
C.T.C. 294, Cattanach J. held that a taxpayer may
satisfy its burden by (a) challenging the fact that the Minister did make
the assumptions (b) by establishing that the assumptions are inaccurate,
or (c) by alleging that the assumptions are not sufficient to justify the
assessment, assuming they are true. The case law also establishes that the
Minister’s assumptions must be specifically pleaded in order for the onus to be
shifted to the appellant.
[24]
In Del Valle v. M.N.R.,
[1986] 1 C.T.C. 2288, the appellant succeeded in her
appeal by showing that the factual assumptions made by the Minister were not
sufficient to support the assessment. Judge Sarchuk framed the issue as follows
at page 2290:
. . . In
my view the respondent has failed to allege as a fact an ingredient essential
to the validity of the reassessment. There is no onus on the appellant to
disprove a phantom or non-existent fact or an assumption not made by the
respondent.
While it was possible for the respondent to have alleged further and
other facts the respondent did not choose to do so in this case but simply
relied on the facts assumed at the time of the reassessments. I emphasize that
if the respondent had alleged such further or other facts the onus would have
been on him to establish them. (See Minister of National Revenue v.
Pillsbury Holdings Limited, [1965] 1 Ex. C.R. 678, [1964] C.T.C. 294).
The facts relied upon do not support the reassessments. . . .
[25]
In the case at bar, the
respondent failed to assume and allege that the appellant provided
telecommunication services to BMT America’s and Convergia’s Canadian
establishments for use in a business carried on in Canada. This is an essential
condition for subsection 132(2) to be found to apply. Therefore, the appellants
did not have the burden of showing that the services were not supplied in the furtherance
of activities carried on through BMT America’s and Convergia’s Canadian
establishments.
[26]
I note that the
appellant did lead evidence to show that the appellants’ supplies were made to
non-residents. Mr. Wexler testified that SWS offered BMT America access so
that it could distribute VOIP calls on Internet pathways opened outside of Canada. The equipment in BMT America’s Canadian office was not used to complete the calls.
All signals were routed through servers located in the United States. His evidence was not challenged by the respondent on cross-examination.
[27]
In argument, the
respondent’s counsel suggested that Mr. Wexler was disqualified from
testifying as a factual witness because he was called as an expert. I am
unaware of any rule of evidence that would on the basis of the witness’s
personal knowledge of the facts bar me from considering evidence given by a
credible witness. The respondent could have challenged Mr. Wexler’s expert
evidence on the grounds that he lacked sufficient independence to provide
opinion evidence to the Court. The respondent did not make such a challenge,
accepting Mr. Wexler’s qualifications as an expert notwithstanding the
respondent’s knowledge of Mr. Wexler’s involvement with BMT America.
[28]
As noted earlier, the
evidence presented by CMI regarding its dealings with Convergia was sparse.
However, the invoices show that Convergia was billed in US dollars for VOIP
calls terminating outside Canada. Although the invoices do not provide
information as to the place where the calls were made, it appears reasonable to
assume that these calls also originated outside Canada because the billings
were all in US dollars.
[29]
For all of these
reasons, the appellants’ appeals are allowed and the assessments are referred
back to the Minister for reconsideration and reassessment to take into account the
fact that the supplies made by the appellants to BMT America and Convergia were
zero-rated.
Signed at Vancouver, British Columbia, this 4th day of April 2012.
"Robert J. Hogan"
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