Citation: 2009 TCC 521
Date: 20091016
Docket: 2008-3169(GST)I
BETWEEN:
JOSEPH P. BAJAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris J.
[1] The Appellant was
assessed under section 323 of the Excise Tax Act as a director of J.P.
Bajan Construction Ltd. (“Bajan Construction”) for goods and services tax which
the company failed to remit, along with interest and penalties, in all
totalling $35,476.89. The issues in appeal are:
(i) whether
the Appellant is able to challenge the amount of the company’s GST liability;
and if so,
(ii) whether
the amount of GST, interest and penalty owing by the company at the date of the
assessment made against the Appellant was less than $35,476.89.
[2] The question of
whether a director who has been assessed under section 323 of the Act can
challenge the assessment on the basis that the underlying corporate GST
assessment is incorrect has been considered a number of times by this Court
with varying results. In my view, in light of the decision of the Federal Court
of Appeal in Gaucher v. The Queen,
it is open to a director to challenge the underlying corporate assessment. The
Court’s statements at paragraphs 7 to 9 of that decision appear equally
applicable to directors’ liability assessments:
7 When the Minister issues
a derivative assessment under subsection 160(1), a special statutory
provision is invoked entitling the Minister to seek payment from a second
person for the tax assessed against the primary tax payer. That second person
must have a full right of defense to challenge the assessment made against her,
including an attack on the primary assessment on which the second person's
assessment is based.
8 This view has been
expressed by Judges of the Tax Court. See, for example, Acton v. The Queen (1994), per Bowman T.C.C.J.; Ramey
v. The Queen (1993), per Bowman
T.C.C.J.; Thorsteinson v. M.N.R. (1980)
per Taylor T.C.C.J. While the contrary view was expressed in Schafer
(A.) v. Canada, [1998] (appeal
dismissed for delay (August 30, 1999 F.C.A.), I am of the respectful opinion
that such view is in error. It seems to me that this approach fails to
appreciate that what is at issue are two separate assessments between the
Minister and two different taxpayers. Once the assessment against the primary
taxpayer is finalized, either because the primary taxpayer does not appeal the
assessment, or the assessment is confirmed by the Tax Court (or a higher court
if further appealed), that assessment is final and binding between the primary
taxpayer and the Minister. An assessment issued under subsection 160(1)
against a secondary taxpayer cannot affect the assessment between the Minister
and the primary taxpayer.
9
By the
same token, since the secondary taxpayer was not a party in the proceedings
between the Minister and the primary taxpayer, she is not bound by the
assessment against the primary taxpayer. The secondary taxpayer is entitled to
raise any defense that the primary taxpayer could have raised against the
primary assessment. The result may be that the assessment against the secondary
taxpayer is quashed or is found to be for a lesser amount than the assessment
against the primary taxpayer. That, of course, will have no effect on the
assessment against the primary tax payer against whom the primary assessment
was final and binding.
[3] It also appears to me that this position has been
implicitly accepted by the Federal Court of Appeal in Abrametz v. The Queen. There, the taxpayer had been assessed
under section 323 of the Excise Tax Act, and in his appeal of the
assessment to this Court, had argued that the amount of the corporation’s GST
liability was less than what had been assessed. This Court found that it was
open to the taxpayer to challenge the amount of the corporation’s GST
liability, but that the taxpayer had not shown that the amount assessed against
the corporation was incorrect. The Federal Court of Appeal reversed that
decision, and held that the evidence showed that the corporation’s liability was
less than the amount it had been assessed, and referred the matter back to the
Minister for reassessment of the taxpayer on that basis. Inherent in this
decision is that a taxpayer-director is able to attack the amount of the
underlying corporate liability in an appeal of a directors’ liability
assessment.
[4] I turn then to the evidence presented by Mr.
Bajan concerning the GST liability of Bajan Construction. At the end of August
1992, the company began work on a large construction job referred to as the Newport
Project. Mr. Bajan said that the general contractor of the property, Harbour
Construction Ltd., got into trouble and stopped paying Bajan Construction and
the company stopped work for Harbour on May 27, 1993. The company filed a builder’s lien for
$265,728.43 against the property in June 1993. The company’s subcontractors
also filed liens for amounts the company owed them. The claims were ultimately
settled in June 1995. The company received $175,000 from Harbour Construction,
and out of those monies, paid $104,685.37 to its subcontractors. It also paid
$20,895.24 to the British Columbia Employment Standards office to pay out
claims of its employees for unpaid wages. There was also a provision in the
settlement that Bajan Construction would receive another $35,000 if Harbour
were able to acquire certain property related to the Newport Project.
[5] Mr. Bajan testified that Bajan Construction had
included the entire $265,728.43 amount owed to it by Harbour Construction as
taxable supplies as in its GST returns filed for its reporting periods in 1992
and 1993, and that the GST in respect of those supplies had been reported on
and remitted with those returns.
[6] Mr. Bajan also testified that he recalled that
Bajan Construction had written off the amount owing by Harbour Construction in
1993 or 1994 as a bad debt (i.e. prior to the settlement.) This was supported
by a letter
from the accountant who had prepared the income tax returns for the company for
those years (and for the years up to 1998). The accountant wrote:
That in approximately year 1993 or 1994 the company wrote of loses [sic]
(bad debt) related to the Newport project.
That the company applied for an income tax refund associated with those
losses.
[7] Mr. Bajan also
testified that Bajan Construction never claimed any deduction under subsection
231(1) of the Excise Tax Act in the calculation of its net tax payable
to reflect the bad debt it incurred on the Newport Project. Subsection 231(1)
“allows relief from remitting GST that has been filed but is uncollectible
because the account is written off as a bad debt.” Mr. Bajan says that the amount of GST
owing by Bajan Construction should be reduced to take into account its
entitlement to the subsection 231(1) deduction for the GST component of the
$265, 728.43 it was owed by Harbour.
[8] Mr. Bajan admitted
that the deduction under subsection 231(1) would be partially offset by the tax
in respect of that portion of the bad debt that it recovered from Harbour in
June 1995, which is required to be included in net tax payable by virtue of subsection
231(3) of the Act.
[9] Finally, Mr. Bajan
said that the company would have been entitled to input tax credits for the GST
component of the amounts it paid out of the settlement to its subcontractors
because those amounts were consideration for taxable supplies and included GST.
Analysis
[10] I will deal firstly
with the claim that Bajan Construction was entitled to a deduction from net tax
under subsection 231(1). That section 231 reads as follows:
231(1) If a supplier has made a taxable supply (other than a
zero-rated supply) for consideration to a recipient with whom the supplier was
dealing at arm’s length, it is established that all or a part of the total of
the consideration and tax payable in respect of
the supply has become a bad debt and the supplier at any time writes off the
bad debt in the supplier’s books of account, the reporting entity for the
supply may, in determining the reporting entity’s net tax
for the reporting period that includes that time or for a subsequent reporting
period, deduct the amount determined by the formula
A × B/C
where
A is the tax in respect of the supply;
B is the total of the consideration,
tax and applicable provincial tax remaining unpaid
in respect of the supply that was written off at that time as a bad debt; and
C is the total of the consideration,
tax and applicable provincial tax in respect of the supply.
231(1.1) A reporting entity is
not entitled to deduct an amount under subsection (1) in respect of a supply
unless
(a) the tax
collectible in respect of the supply is included in determining the amount of
net tax reported in the reporting entity’s return under this Division for the
reporting period in which the tax became collectible; and
(b) all net tax
remittable, if any, as reported in that return is remitted.
231(2) …
231(3) If all or part of a bad debt in
respect of which a person has made a deduction under this section is recovered
at any time, the person shall, in determining the person’s net tax for the
reporting period that includes that time, add the amount determined by the
formula
A × B/C
where
A is the amount of the bad debt recovered at that time;
B is the tax in respect of the supply to which the bad debt
relates;
and
C is the total of the consideration, tax and applicable provincial tax in
respect of the supply.
231(4) A person may not claim a
deduction under this section in respect of a bad debt relating to a supply
unless the deduction is claimed in a return under this Division filed within
four years after the day on or before which a return of the person was required
to be filed for the reporting period in which the supplier has written off the
bad debt in its books of account.
Subsection 231(1) sets out as conditions
for the deduction is that (i) all or part of the consideration and tax payable
in respect of a supply that has become a bad debt; and (ii) that the debt must
be written off in the supplier’s books of account. On the whole of the
evidence, I am not satisfied that Mr. Bajan has shown these conditions were met
by Bajan Construction in this case in respect of the debt of $265,728.43.
[11] Firstly, contrary to
the evidence of Mr. Bajan and despite the letter of his accountant, it does not
appear that the company considered the amount owing by Harbour Construction as
a bad debt prior to the settlement reached in June 1995. In a letter dated
November 10, 1999
that Bajan Construction received from its lawyers, reference is made to the
company’s builder’s lien claim. According to that letter, Bajan Construction
and its subcontractors were actively proceeding with the builder’s lien litigation
right up until the time of the settlement. An examination for discovery in the
matter was scheduled to begin April 19, 1995 and a trial date had been set. The letter also indicates that as late
as 1999, Bajan Construction was seeking advice on the possibility of pursuing
Harbour for the additional payment of $35,000 provided for in the June 1995
settlement agreement.
[12] In light of these
efforts being made to collect the amount owing, I am not satisfied that Bajan
Construction considered the $265,728.43 as a bad debt. I am also not satisfied
on a balance of probabilities that Bajan Construction wrote off the $265.728.43
owing by Harbour in its books and records. The Appellant did not present any
records of the company showing that the amount was ever written off, and, given
the Appellant’s failure to call his accountant as a witness and given the steps
being taken in 1995 and later years to collect the debt, I attach little weight
to the statements in the accountant’s letter regarding the write-off. In any
event, those statements are lacking in detail, and were made 15 to 16 years
after the fact without the benefit of reviewing any of the company’s files.
[13] The Respondent also
submitted that the Appellant had not shown that two further requirements in
subsection 231(1.1) had been met by the company, namely, that the GST on the
total supplies made by the company on the Newport Project had been reported on
the company’s GST returns and that all net tax owing on those returns had been
remitted.
[14] Unfortunately, Mr.
Bajan had no company records or GST returns relating to periods in question,
nor did he have any record of the amounts that Bajan Construction had billed to
Harbour Construction or that Harbour Construction had paid to the company for
work that was done. While electronic printouts of Bajan Construction’s GST
returns for 1992 and 1993 were produced by the Respondent, it is not possible,
given the lack of records from the company, to determine what portion of the
taxable supplies and GST reported on those returns related to the Newport
Project. I find therefore that the Appellant has failed to show that the
company reported and remitted the GST in respect of the taxable supplies made
to Harbour Construction which formed the basis of its builder’s lien claim.
[15] Likewise, the Appellant’s
position that the company’s GST liability should be reduced by the amount of
input tax credits it failed to claim on the payments out of the builder’s lien settlement
to its subcontractors cannot succeed. There is simply not enough evidence
before the Court to show how the amounts due by the company to the
subcontractors were accounted for by the company. Were these amounts invoiced
to the company when the work was done? If so, the GST would have become payable
at that time and the company would have been able to claim an input tax credit
for the GST payable at that time. Mr.
Bajan was unable to say whether the company’s ITCs claimed by the company on
its returns for the periods ending between August 1, 1992 and April 30, 1993
included any ITCs in respect of the work done by the subcontractors that was
included in their builder’s lien claims. Subsection 225(3) of the Act precludes
a taxpayer from claiming an ITC in its GST return if the amount was claimed or
included in an ITC for a preceding reporting period, and the Appellant has
failed to show that the ITCs to which he now says the company is entitled were
not previously claimed
[16] Also, as pointed out by
counsel for the Respondent, Mr. Bajan has not provided the documentation
required by subsection 169(4) of the Act, and by the Input Tax Credit
Information Regulations in respect of the ITCs to which he says the company
is entitled.
[17] I would also note that
the amount claimed included an amount in respect of the payment made by the
company out of the settlement proceeds to the Employment Standard office in
respect of unpaid wages of the company’s employees. Such a payment would not
have included any GST component since wages do not attract GST.
[18] For the above reasons,
the appeal is dismissed.
Signed at Ottawa, Canada, this 16th day of October, 2009.
‘‘Brent Paris’’
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