Citation: 2011 TCC 101
Date: February 16, 2011
Docket: 2010-2580(GST)I
BETWEEN:
LAND AND SEA ENTERPRISES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
[1]
This appeal is from an
assessment under the Excise Tax Act (the “Act”) for the period May
1, 2004 to April 30, 2005. Following an audit of the Appellant, the Minister of
National Revenue (the “Minister”) denied input tax credits (“ITCs”) in the
amount of $9,358.76. The issue is whether the Appellant is entitled to claim
these ITCs.
[2]
The Appellant
corporation was incorporated in 1991, originally with the name “Troy
Construction Limited”. Its initial activities included diving, pipeline welding
and painting of parking lots and intersections. As the corporate activities
moved toward a focus on farming, the corporation changed its name around
2006 to 2007.
[3]
The Appellant’s sole
officer and shareholder is Kimball Johnston. He testified that, during the
period under appeal, the corporation had commenced the process of transitioning
from its prior ventures to a farming venture with a focus on horses, including
boarding, breeding, selling horses, stud services and raising and training
foals. As a result, the Appellant claims that the costs relating to the claimed
ITCs were incurred during this period while the corporation was transitioning to
the horse operations. In addition to these activities, the Appellant also owned
a fishing boat, which it leased to Mr. Johnston, who used the boat for his own
commercial lobster fishing activities. The lobster license is in the name of
Mr. Johnston. It was also the Appellant’s position that Mr. Johnston acted as
agent for the company when he incurred costs in his personal name.
[4]
The ITCs, which the
Appellant claimed, relate to the following:
(1)
the construction of a
new barn;
(2)
the purchase of a
tractor;
(3)
farm supplies;
(4)
legal account
respecting a land purchase;
(5)
50 per cent of the ITCs
relating to fuel, utilities and phone expenses; and
(6)
50 per cent of the ITCs
relating to meals.
[5]
The Respondent’s
position is that the Appellant is not entitled to the ITCs in respect of the
new barn because, if the Appellant acquired it during this period for
improvement of its capital property, the Appellant did not use the barn in the
course of its commercial activities immediately after it was acquired. In the
alternative, the Respondent argued that the new barn was not for use or supply
in the course of the Appellant’s commercial activities. In respect to the other
items, the Respondent argued that the tractor was not acquired for use
primarily in the Appellant’s commercial activities and that the remaining items
were personal expenditures of Mr. Johnston and his spouse.
[6]
To successfully claim
ITCs, the Appellant must establish that it acquired these items for
consumption, use or supply in the course of its commercial activities pursuant
to subsection 169(1) of the Act. This subsection reads as follows:
169. (1) General rule for [input
tax] credits - Subject to this Part, where a person acquires or imports
property or a service or brings it into a participating province and, during a
reporting period of the person during which the person is a registrant, tax in
respect of the supply, importation or bringing in becomes payable by the person
or is paid by the person without having become payable, the amount determined
by the following formula is an input tax credit of the person in respect of the
property or service for the period:
A × B
where
A is the tax
in respect of the supply, importation or bringing in, as the case may be, that
becomes payable by the person during the reporting period or that is paid by
the person during the period without having become payable; and
B is
(a) where the tax is deemed under subsection
202(4) to have been paid in respect of the property on the last day of a
taxation year of the person, the extent (expressed as a percentage of the total
use of the property in the course of commercial activities and businesses of
the person during that taxation year) to which the person used the property in
the course of commercial activities of the person during that taxation year,
(b) where the property or service is acquired,
imported or brought into the province, as the case may be, by the person for
use in improving capital property of the person, the extent (expressed as a
percentage) to which the person was using the capital property in the course of
commercial activities of the person immediately after the capital property or a
portion thereof was last acquired or imported by the person, and
(c) in any other case, the extent (expressed as
a percentage) to which the person acquired or imported the property or service
or brought it into the participating province, as the case may be, for
consumption, use or supply in the course of commercial activities of the
person.
[7]
Subsection 169(4) of
the Act references the documentation and prescribed information that a
registrant must provide in support of an ITC claim.
Subsection 169(4) of the Act states:
(4)
Required documentation - A registrant may not claim an input tax credit
for a reporting period unless, before filing the return in which the credit is
claimed,
(a) the registrant has obtained sufficient
evidence in such form containing such information as will enable the amount of
the input tax credit to be determined, including any such information as may be
prescribed; and
(b) where the credit is in respect of property
or a service supplied to the registrant in circumstances in which the
registrant is required to report the tax payable in respect of the supply in a
return filed with the Minister under this Part, the registrant has so reported
the tax in a return filed under this Part.
[8]
The prescribed
information is fully set out in the Input Tax Credit Information (GST/HST)
Regulations, (SOR/91-45) (the “Regulations”), section 3.
[9]
Commercial activity is
defined in subsection 123(1) of the Act as follows:
“commercial activity” of a person means
(a) a business carried on by the
person (other than a business carried on without a reasonable expectation of
profit by an individual, a personal trust or a partnership, all of the members
of which are individuals), except to the extent to which the business involves
the making of exempt supplies by the person,
(b) an adventure or concern of the
person in the nature of trade (other than an adventure or concern engaged in
without a reasonable expectation of profit by an individual, a personal trust
or a partnership, all of the members of which are individuals), except to the
extent to which the adventure or concern involves the making of exempt supplies
by the person, and
(c) the making of a supply (other
than an exempt supply) by the person of real property of the person, including
anything done by the person in the course of or in connection with the making
of the supply.
Analysis:
[10]
If the Appellant is to
successfully claim ITCs pursuant to subsection 169(1), three conditions must be
met:
(1)
the claimant/Appellant
must have acquired the supply;
(2)
the Goods and Services
Tax (“GST”) must be payable or was paid by the claimant/Appellant on the
supply; and
(3)
the claimant/Appellant
must have acquired the supply for consumption or use in the course of its
commercial activities.
(General Motors of Canada Ltd. v The Queen, 2008 TCC 117 at paragraph 30, [2008] TCJ No. 80 [General Motors]).
[11]
In addition to
acquiring the supply as a GST registrant, the other two conditions must be met
to qualify for an ITC. My reasons in General Motors followed the
decision in Y.S.I.’s Yacht Sales International Ltd. v The Queen,
2007 TCC 306, [2007] T.C.J. No. 187, in
which Justice Woods, at paragraph 57, concluded that the proper entitlement to
an ITC remains with the person who is liable contractually for payment and not
the person that may have actually paid it. Also, the supply must be for use or
supply in the course of the registrant’s commercial activities.
[12]
The largest amount
which the Appellant is claiming is in respect to the construction of the new
barn. The issue arises in this appeal as to whether the Appellant was involved,
during the period under appeal, in the commercial activity of the various
related horse operations. There is no question, according to the evidence, that
the Appellant is presently engaged in this commercial activity, but was it so
engaged, even on a start-up basis, during the period under appeal? In Gartry
v The Queen, [1994] T.C.J. No. 240,
94 D.T.C. 1947, former Chief Justice Bowman, at page 1949, offered the
following view on determining when a business commences:
…In determining when a business has commenced, it is not
realistic to fix the time either at the moment when money starts being earned
from the trading or manufacturing operation or the provision of services or, at
the other extreme, when the intention to start the business is first formed.
Each case turns on its own facts, but where a taxpayer has taken significant
and essential steps that are necessary to the carrying on of the business it is
fair to conclude that the business has started….
[13]
In Kaye v The Queen,
[1998] T.C.J. No. 265, 98 D.T.C. 1659,
former Chief Justice Bowman again, tackling the issue of whether a business had
been established at a particular time, made the following comments at
paragraphs 4, 5, and 7:
[4]…It is the inherent commerciality of the
enterprise, revealed in its organization, that makes it a business. Subjective
intention to make money, while a factor, is not determinative, although its
absence may militate against the assertion that an activity is a business.
[5]
One cannot view the reasonableness of the expectation of profit in isolation.
One must ask "Would a reasonable person, looking at a particular activity
and applying ordinary standards of commercial common sense, say 'yes, this is a
business'?" In answering this question the hypothetical reasonable person
would look at such things as capitalization, knowledge of the participant and
time spent. He or she would also consider whether the person claiming to be in
business has gone about it in an orderly, businesslike way and in the way that
a business person would normally be expected to do.
…
[7]
Ultimately, it boils down to a common sense appreciation of all of the factors,
in which each is assigned its appropriate weight in the overall context. One
must of course not discount entrepreneurial vision and imagination, but they
are hard to evaluate at the outset. Simply put, if you want to be treated as
carrying on a business, you should act like a businessman.
[14]
It is clear that an
activity may be considered a commercial activity well in advance of the stage
of profitability. It will always be a question of fact. Expenditures giving
rise to ITCs in the start-up phase of a commercial activity may be eligible
provided that there is clear intention to commence a business and that
measurably significant and fundamental steps and actions have been put into
place.
[15]
When I look at the
totality of the evidence, I believe that there were business activities being
conducted in the start-up phase. However, the question is whether, during the
start-up phase, it was the business of the Appellant or of Mr. Johnston. The
Appellant had no legal ownership of any of the horses during this period. The
land upon which the new barn was constructed belonged to Mr. Johnston and his
spouse during this period. While there was a lease agreement in place
respecting a separate shop building, there was no such agreement respecting the
barn during the period under appeal. The majority of the invoices respecting
the construction of the barn are in the name of Kimball Johnston, not the
Appellant.
[16]
Some of the problem
with the Appellant successfully claiming all of the ITCs during this period is
the inability of Mr. Johnston to separate his activities from that of the
Appellant and to maintain proper supporting records. As 100 per cent owner of
the Appellant, he treated his own commercial activities interchangeably with
those of the Appellant corporation, failing to recognize the importance legally
of the Appellant as a separate and distinct entity. Piercing this corporate
veil and treating the corporate entity and its shareholders as one unified
entity will be done only in those rare cases where there exists the clearest of
compelling circumstances. In The Queen v Jennings, [1994] F.C.J. No. 953, 94 D.T.C. 6507, Robertson,
J.A., at page 6508, quoted the Supreme Court of Canada in Kosmopoulos v
Constitution Insurance Co., [1987] 1 S.C.R. 2, where Wilson, J., at pages
10-11, stated:
The law on when a court may disregard [the principle
of separate corporate entities] by "lifting the corporate veil" and
regarding the company as a mere "agent" or "puppet" of its
controlling shareholder or parent corporation follows no consistent principle. The
best that can be said is that the "separate entities" principle is
not enforced when it would yield a result "too flagrantly opposed to
justice, convenience or the interests of the Revenue" ...
There is a persuasive argument that "those who
have chosen the benefits of incorporation must bear the corresponding burdens,
so that if the veil is to be lifted at all that should only be done in the interests
of third parties who would otherwise suffer as a result of that choice"…
Mr. Kosmopoulos was advised by a competent solicitor to incorporate his
business in order to protect his personal assets and there is nothing in the
evidence to indicate that his decision to secure the benefits of incorporation
was not a genuine one. Having chosen to receive the benefits of
incorporation, he should not be allowed to escape its burden. He should not be
permitted to "blow hot and cold" at the same time. [Emphasis
added]
[17]
The importance of the
proper maintenance of documentation respecting ownership is recognized within
the Act and more specifically in the Regulations, where
non-compliance with the prescribed documentary requirements will result in a
denial of ITCs. Mr. Johnston’s explanation, for why many of the invoices for
the barn were in his name, was that he belonged to a small business community
in Prince Edward Island where he is well known and so the names
were used interchangeably on the invoices. However, that does not absolve him
from the requirement to ensure that proper record-keeping is maintained and
that the corporate activities of the Appellant are not intermingled haphazardly
with his own commercial endeavours.
[18]
I must conclude that,
based on the evidence before me, there are no compelling circumstances that
would support a decision to disregard the
well-established legal principle of separate legal corporate identity and to treat
the Appellant and Mr. Johnston as one. Mr. Johnston has a good deal of previous
business experience. The Appellant was first incorporated as Troy Construction
Ltd. in 1991. It was involved in several different business ventures spanning a
fourteen to fifteen year period. Mr. Johnston is personally engaged in the
fishing industry and is himself a GST registrant who presumably has filed
personally for ITCs. Maintenance of proper record-keeping should not be a
foreign concept to
Mr. Johnston. Other than the few invoices that were in the Appellant’s name,
there was no other documentary evidence submitted to support the Appellant’s
contention that it had an interest in the horse operations during this period.
The horses were not transferred to the corporation until 2007. There was no
evidence that the Appellant actually acquired property or services (except for
the limited number of invoices) during this period. When giving evidence
respecting registration of the horses, Mr. Johnston testified as follows:
[Mr. Johnston] A. You can buy a
horse that is in your name, Sir, and it’s registered through the American
Quarter Horse in your name, and I can buy that horse, show it on my books and
resell it and it would be a transaction through my business, but the American
Quarter Horse Association doesn’t require that I put it in my name, as well as
the end user’s name. It’s only if you are showing the horse that the American
Quarter Horse Association requires that it be in your name and you show the
horse.
[Mr.
Omisade] Q. 106 So when you purchased these
horses, was it you and your spouse who purchased these horses?
[Mr. Johnston]
A. I guess it would be me.
(Transcript, page 54, line 16 to page 55,
line 4).
According to his evidence, registration of a horse is
linked to showing that horse, not ownership. He does state that, in respect to
a purchase of a horse, that transaction could or would be shown “on my books”
which I assume meant the Appellant’s books. However, there was no such
documentary evidence presented to suggest that any purchases or sales were
recorded in the Appellant’s records during this period. Mr. Johnston also
testified that he had a shareholder’s loan with respect to these horses but,
again, no documentary evidence was produced to support the existence of such a
loan, nor were cancelled cheques from the Appellant corporation to Mr. Johnston
submitted in respect to reimbursement.
[19]
With respect to the
Appellant’s argument that Mr. Johnston acted as the Appellant’s agent in the
purchase of these items, although such an agency relationship may be
legitimately recognized in some circumstances, I do not believe the appropriate
circumstances exist in this appeal. Mr. Johnston is the sole owner of the
business and it was upon his shoulders to ensure that, if he was acting as the
Appellant’s agent, correct documentation from third parties reflected that the
purchases were for the Appellant’s operations. The Companies Act,
R.S.P.E.I. 1988, c. C-14, section 29 permits corporations to create and pass by-laws
appointing corporate agents. However, no such by-law was submitted into evidence.
[20]
It is clear that the
Appellant corporation was in existence legally during this period. It is also
clear that the business activities of horse breeding, showing and boarding were
underway and in the initial start-up stage. What is not as clear-cut is whether,
during this period, those activities were the business initiatives of the
Appellant or of Mr. Johnston. There was no distinct demarcation between the
Appellant’s activities and Mr. Johnston’s business activities during this
period, although after the audit, it appears that these activities clearly
became those of the Appellant. However, during the period under appeal, the
evidence does not support that these start-up activities were those of the
Appellant. Based on the facts, I am prepared to allow the Appellant to claim
ITCs in respect to the following:
(A) New Barn:
Quality Truss Invoices 9726, 9873 and 9829
(in the amounts of $17,050.45, $192.60 and $588.50, respectively) all invoiced
to Troy Construction Ltd..
In respect to the other invoices, the “statement
of account” dated
April 30, 2005 from Schurman Building Supplies to Troy Construction Ltd.
contains none of the required information pursuant to the Regulations
and, more specifically, contains no description of the supplies as required
pursuant to subparagraph 3(3)(c)(iv) of the Regulations. The remaining
invoices are addressed to
Kimball Johnston, and there is no evidence that the Appellant reimbursed Mr.
Johnston for any of these amounts.
(B)
Tractor:
The Appellant acquired the
tractor in August, 2004. According to
Mr. Johnston, he used the tractor for corporate/commercial activities but also
in his own commercial activities of fishing. As with the new barn, there was no
clear demarcation between these activities and there was a failure to provide
evidence to substantiate the claim for ITCs. He simply gave examples of what
the tractor was used for and summed it up by stating it was employed for
“…whatever else needs to be done around the farm”. (Transcript, page 72, lines
2-3). I remain unconvinced, based on the evidence, that the tractor was
employed “primarily” in the Appellant’s commercial activities pursuant to subsection
199(2) and this is in part due to the intermingling that was occurring during
this period.
(C)
Farm Supplies:
These amounts were incurred in Mr.
Johnston’s name. There is no documentary evidence that the Appellant owned any
horses during this period. In fact, the evidence supports that the horses were not
transferred to the Appellant until 2007. Consequently, these are personal
expenditures of Mr. Johnston.
(D)
Legal Account:
This account is for legal fees incurred by
Mr. Johnston and his spouse for the purchase of property in their names. This
is clearly a personal expenditure.
(E)
Fuel, Utilities,
Phone Expenses:
The utilities and phone expenses are
personal expenditures, as no evidence was produced to support that the amounts
relate solely to the Appellant’s activities. In addition, according to the
evidence of the auditor, the utility amount related to a property located in New Brunswick. The evidence respecting the fuel expenses was that
the Appellant owned a diesel one-ton truck, in addition to the boat, which it
used exclusively and that the Johnstons owned gasoline vehicles. The fuel expenses
were incurred by Mr. Johnston personally, according to VISA statements, and Mr.
Johnston stated that these fuel purchases were all in respect to the diesel
vehicle. Invoices were not provided to the auditor and since the Appellant
claimed 100 per cent of the fuel expenses for the Appellant’s vehicle without
maintaining a log, she allowed 50 per cent of the amount claimed as business
use. Except for Mr. Johnston’s evidence that this vehicle was used solely by
the Appellant, I have neither records (including invoices), nor sufficient
evidence respecting how this vehicle was used on a daily basis. The onus on the
Appellant is that much greater when 100 per cent use, respecting a vehicle, is
claimed as business use and, in addition, where intermingling of personal and
corporate activities has occurred as in this appeal.
(F)
Meals:
The Appellant made no submissions
respecting this item and I am therefore not interfering with the Minister’s
conclusions.
[21]
The appeal is allowed,
without costs, to permit the Appellant to claim ITCs in respect to the full
amount of Invoice Numbers 9726, 9873 and 9829.
Signed at Ottawa, Canada, this 16th day of February 2011.
“Diane Campbell”
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