Citation: 2007TCC379
Date: 20070914
Docket: 2003-4367(GST)I
BETWEEN:
VERT-DURE PLUS (1991) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1] Vert‑Dure
Plus (1991) inc. (Vert‑Dure) is appealing from an assessment established
under the Excise Tax Act (the Act or ETA) by the Ministère du Revenu du
Québec (MRQ) as an agent of the Minister of National Revenue (Minister). This
assessment dated March 13, 1998, targets the period of October 1, 1991, to
December 31, 1996 (relevant period). The MRQ audit led to the following
adjustments: goods and services tax (GST) overpaid, $4,277.22; reduction of
input tax credits (ITC), $7,106.34; leading to a net tax due of $2,829.12. The
Minister required interest of $1,168.41 and imposed a penalty of $1,343.19
under section 280 of the Act.
[2] At first, the
appeal by Vert‑Dure was heard at the same time as the appeals by
Bernard Desrosiers and the companies Les Gazons du Bas St‑Laurent
inc. (Gazons) and Les Pelouses de l’Est inc. (Pelouses) (other appeals). Each
of these appeals must be handled separately, but the evidence presented in one
of the cases could be used in the others. Unfortunately, the hearing and the
management of these appeals became very time-consuming. First, the notice of
appeal by Vert‑Dure, undated but produced in court December 2, 2003, was
prepared by a lawyer, Louis Sirois. In this notice, Vert‑Dure claims
that it had the right to ask for the cancellation of the assessment for the
reasons mentioned in the notice of objection. One of these reasons states that
Mr. Desrosiers experienced "intense emotional stress" caused by
family problems, which would explain that he was unable to provide the relevant
documents requested by the MRQ auditor. It also mentions a major fire that
occurred in July 1995, which destroyed many documents, and a theft that
occurred in September 1996 in the administrative offices, which led to the
disappearance of many others. It states that [translation]
"Mr. Desrosiers will work…to provide [the auditor] with the required
information." Moreover, the MRQ is criticized for not having taken into
consideration the [translation]
"vocation of the individuals and corporations in question," namely
farmers or forestry workers. It claims that the revenue and expenses are
attributable to agricultural or forestry activities. Lastly, it make the
statement [translation]
"since the company was no longer in operation," Vert‑Dure
having terminated its activities in 1992.
[3] Then, there was a
change of counsel and the response to the Reply to the Notice of Appeal signed
by Jean Dury. The following statements are from paragraphs 28, 29 and
30 of this response:
[translation]
28. The only
issue in question is based on paragraph 306 (b) of Part IX of
the ETA that states an appellant may appeal to the Tax Court of Canada to
vacate an assessment if one hundred and eighty days have elapsed after the
filing of the notice of objection and the Minister has not notified the
person that the Minister has vacated or confirmed the assessment or has
reassessed. Whereas the legal deadline is six months, it has now been 88 months
and the MRQ has not rendered a decision on the notice of objection filed by the
Appellant;
29. The preceding is
the core of the dispute and not an assumed confirmation that the
Appellant had to pay additional GST ITC in the amount of $2,829.12 when
these amounts were never reimbursed. In addition to having paid GST CTI to
its suppliers, the Appellant would pay the MRQ twice for the same amount plus
penalties and interest;
30. It
denies paragraph 13 of the Respondent's reply. The only provision on which
the Appellant relied is paragraph 306(b) of Part IX of the Excise
tax Act. The entire case is limited to this paragraph.
[Emphasis added.]
However, it challenges the right of
the Ministère to vacate GST remittances claimed for periods subsequent to the
cancellation date of Vert-Dure's GST registration, because no operations were
carried out after the end of 1991 (paragraph 23 of the Response): [translation] "the Appellant has
the right to claim that the ITC amount of $4,277.22 should be reimbursed."
[4] Lastly, in his
submissions, counsel for Vert‑Dure asks that in addition to vacating the
assessment and obtaining an order requiring the Ministère to reimburse CTI in
the amount of $4,277.22 to Vert-Dure, the Ministère cease all tax collection
measures with financial institutions and any other third party and it be
ordered to return to Vert-Dure [translation]
"all amounts in compensation the Ministère would have earned from the
reimbursement amounts due to [Vert-Dure] by third parties, plus interest."
[5] The appeal hearing
for Vert-Dure and other appeals began on November 1, 2005, and lasted three
days without much progress: only the appeals of Vert‑Dure and Mr.
Desrosiers were addressed, and only partially. Since the amount for Vert-Dure
was only $2,829.12, and its accountant did not understand the adjustments the
Ministère made to the ITC, or the calculation of interest, the amount of which
seemed astronomical, I granted a three-month timeframe for Vert-Dure and the
other appellants to obtain the necessary specifications and even to negotiate a
settlement, if only partial.
[6] All these
expectations were in vain. Nothing was accomplished during the stay. Because
Mr. Desrosiers was unavailable during the summer period and the accountant had
health complications, the Court could not resume the appeal hearing for
Vert-Dure before February 13, 2007, and this resumption in Montreal only lasted
one day. A recovery agent from the Ministère presented a statement of account
for Vert-Dure, submitted as Exhibit I-3, which included calculations justifying
an unpaid balance of $21,631.24 to December 13, 2005. According to the agent's explanations,
part of the significant accumulation of interest and penalties comes from a
$3,427.06 payment Vert-Dure made by NSF check on November 5, 1991.
Additionally, the recovery agent explained that many adjustments made to the
assessment were to vacate the GST amounts that the Ministère may been
calculated as being required according to Vert-Dure's tax reports, in
particular regarding the quarter ending in March 1994 (the above-mentioned
$4,277.22), and that in its assessment, the auditor in her assessment waived
the taxes payable by Vert-Dure in the circumstances described above. Even
though the Court does not have jurisdiction to handle recovery issues or in
particular, to order the Ministère to "cease all tax collection measures
with financial institutions and any other third party," the statement of
account submitted to evidence was produced for the purpose of clarifying
Vert-Dure and its advisors. However, the only issues the Court may consider are
those raised by the assessment itself, namely the issues regarding the
adjustments made to the March 13, 1998, assessment.
[7] Considering the
many delays that interrupted the hearing of this an the other appeals, I
decided to first finish the hearing of the Vert-Dure appeal (which concluded in
Rimouski on April 23, 24 and 25, 2007), in order to be able to render a
decision in this case, in the hope that it would encourage more efficiency in
the other appeals, the hearings of which cannot be held before November because
of Mr. Desrosiers' unavailability.
Factual background
[8] Vert‑Dure
operated a lawn-maintenance company in the Sainte-Flavie region in the Lower
St. Lawrence during part of the relevant period. It was incorporated under Part
IA of the Companies Act on April 18, 1991. As of September 15, 1994, its
founder, Mr. Desrosiers, was the only shareholder with more than 100% of the
shares, the administrator, president and secretary (Exhibit I-2). Vert‑Dure
had been registered for the purposes of the Act since April 18, 1991, when its
commercial activities started.
[9] Vert‑Dure
produced its GST returns on a quarterly basis. The Ministère's auditor showed
that only the computerized statements with the production dates of the GST
returns were available, because the GST returns produced by Vert-Dure had been
destroyed.
According to these statements, the first return was produced July 31, 1991, for
the quarter ending June 30, 1991. The statement for the one ending September
30, 1991 was produced November 5, 1991. Then, Vert-Dure stopped regularly
filing its GST returns. It was only on November 4, 1994 that the
returns were filed for the quarters ending December 31, 1991, and
March 31, 1992, respectively. The following return was only filed on
December 22, 1995, and that was for the quarter ending March 31, 1994.
The last GST return was filed on January 22, 1997; it was to amend prior
returns, namely those for the quarters ending December 31, 1991, and March 31,
1992,
but also included the initial GST returns for the quarters from September 1992
to December 1996, excluding that ending March 31, 1994, for which a return was
filed on December 22, 1995.
Contrary to Vert-Dure's claims, it is clear it was negligent, at the very
least, regarding filing a return for the period ending December 31, 1991,
because it had $457.13 ($577.41 - $120.28) of net GST to remit and it only
filed its return on November 4, 1994.
[10] As for Mr.
Desrosiers, he denies that Vert-Dure filed GST returns for the quarters later
than 1991, because its activities had ceased from January 1992 following
seizures of its bank account, equipment and client accounts. In support of this
claim, Vert‑Dure produced certain bank statements from the Caisse
populaire for 1993 and 1994,
which seem to show only deposits by Mr. Desrosiers to reimburse a $30,000
loan he had taken out to [translation]
"purchase the Vert-Dure Plus inc. division and the Herbus franchise."
The loan was granted by the Caisse populaire Desjardins de Mont‑Joli on
July 11, 1991. Attached to a June 27, 1996, letter that the Business Services
Advisor wrote to Mr. Desrosiers was a photocopy of banking operations for these
two years; the advisor reminded him that on December 6, 1994, they had agreed
to [translation] "transfer
the balance of loans for $32,357.83 to his personal name." (See Exhibit
A-31 in Bernard Desrosier's file, pages 50, 53 and 54). As a result, according
to Mr. Desrosiers, he did not have to file a GST report after Vert-Dure ceased
its activities.
[11] However, the
accounting firm Mallette Maheu produced the financial statements as of November
2, 1994, that indicated a 12-month fiscal year ending December 31, 1992
(whereas the 1991 fiscal year only had eight months) (Exhibit A-3). The income
statements for the 1992 fiscal year show gross sales of $100, sales costs of
$14,326, operation fees of $45,569, and a net loss of $59,795. Among the
operation fees there are bad debts of $3,239. Additionally, the house balance
sheet of December 31, 1992, that Mallette Maheu provided to the Ministère on
September 6, 1996, shows tax debts of GST payable for $4,213.34 payable and
provincial sales tax of $63.88, for a total of $4,277.22. This amount corresponds to the amount
indicated in the TST report for the quarter ending March 31, 1994, produced
December 22, 1995.
Moreover, a closing statement dated January 1, 1993, was prepared internally.
[12] During her
testimony, the Ministère's auditor explained that she had begun her audit on
May 2, 1997, when she tried to contact Mr. Desrosiers by phone. Since the phone
line was not in service, she sent a registered letter on
May 20, 1997, which was returned because the addressee had refused
it.
[13] On July 2, 1997, Mr.
Desrosiers signed an application form to cancel or modify a registration
because of the [translation]
"closure since December 31, 1991." This form is incomplete because
there is no indication in part C, "Request." It seems the form had
been completed by that of September 8, 1997, which included, at the section
"Request," July 31, 1992, as the date the cancellation or
modification of the registration came into effect.
[14] On August 4, 1997,
the auditor contacted Guy Tremblay, a representative of Vert-Dure, to arrange a
meeting on August 18, 1997. This meeting was postponed to September 15, 1997.
In her letter, the auditor had asked that relevant documentation be prepared to
allow her to carry out her audit.
[15] Before the September
15 meeting, the auditor was informed that the documents required were not
available. However, she insisted on proceeding using what they had. During the
meeting, she was given certain accounting books for Mr. Desrosiers' business
and for some of his companies, including Pelouses and Gazons. The auditor
confirmed that she was never given documentation regarding Vert-Dure despite
many requests on her part. The only document provided for Vert-Dure that she
could consult was a document sent by Mallette Maheu to another auditor at the
Ministère one year earlier, on September 6, 1996, before her own audit. It was
a house balance sheet for December 31, 1992, and excerpts from the general
ledger, including accounts 255 and 256 showing the GST and QST payable. A few
weeks later, on November 1, 1996, the same accounting firm provided another
auditor with another excerpt from the general ledger, the account 113
indicating the GST and QST receivable for the fiscal year ending December 31,
1992.
Analysis
[16] During the audit,
the auditor gave retroactive effect to the application to cancel the
registration, from July 31, 1992. It then cancelled the $4,277.22 declared as
GST to remit regarding the quarter ending March 31, 1994. Again, this amount
appeared in the report received by the Ministère on December 22, 1995 and the
adjustment is to Vert-Dure's advantage. (See Exhibits I-1 and I-7).
[17] The adjustments she
made to the ITC can be summarized as follows:
|
$5,533.74
|
ITC refused for the period following the
"cancellation of the registration"
|
|
$1,293.11
|
ITC refused
for lack of supporting documents
|
|
$279.49
|
ITC for
insurance premiums (exempt supply) refused
|
|
$7,106.34
|
|
[19] As for the $1,293.11
adjustment, it targets the quarter ending December 31, 1991, and the ITC were
refused by the auditor because Vert-Dure did not provide any supporting
documents with the prescribed information, including a valid GST number. Lastly, the auditor refused the ITC of
$279.49 requested by Vert-Dure for insurance premiums for the quarter ending
June 30, 1992. At the hearing, Mr. Desrosiers and his accountant,
Bernard Brosseau, claimed that they never asked for this ITC amount
because it is an exempt supply. However, the auditor showed that the amount had
actually been requested for the quarter ending June 30, 1992, as Exhibit I‑7
showed and the analysis of account 113 (GST receivable) from Vert-Dure's
general ledger (Exhibit I‑5). This is an excerpt from that account:
|
03-10-92
|
Banque Nationale (master)
|
506
|
J92
|
5.34
|
−
|
1,580.94
|
|
04-10-92
|
Société Des Postes Canada
|
507bnc
|
J121
|
12.25
|
−
|
1,593.19
|
|
04-20-92
|
Québec-Téléphone
|
Bcn
|
J122
|
13.14
|
−
|
1,606.33
|
|
05-10-92
|
Groupe Presse Bellavance
|
122916
|
J152
|
1.72
|
−
|
1,608.05
|
|
06-01-92
|
A S H O Q
|
4785
|
J161
|
−
|
56.00
|
1,552.05
|
|
06-01-92
|
Les Assur Kau Deschamplain
|
Ver0893
|
J165
|
179.05
|
−
|
1,731.10
|
|
06-01-92
|
Les Assur Kau Deschamplain
|
71407
|
J166
|
46.89
|
−
|
1,777.99
|
|
06-01-92
|
Les Assur Kau Deschamplain
|
71406
|
J167
|
53.55
|
−
|
1,831.54
|
[20] The gap between the
debit balance of this account at the end of the quarter ending June 30, 1992,
at $1,831.54 and that at the end of the preceding quarter, at the end of March
1992, at $1,580.94 is $250.60, the ITC amount on the GST report for the
quarter ending June 30, 1992, as shown in Exhibit I-7. Among the ITC for
supplies that appear in account 113 are those for insurance. As a result, I
find that, contrary to the statements by Mr. Desrosiers and his accountant, the
ITC of $279.49 ($179.05 + $46.89 + $53.55) were in fact requested by
Vert‑Dure for the insurance benefits and the auditor rightly refused
them.
Paragraph 306(b) of the Act
[21] In its supplemental
arguments (written notes) submitted to the Court
on May 10, 2007, Vert‑Dure again
states that [translation] "the
sole reason for the appeals by each and every one of the four appellants is
the lack of response by the Minister of Revenue of Québec to the notice of
objection filed around June 13, 1998
to which a response should have been presented within 180 days, paragraph 306(b)
of the Act." Vert‑Dure adds, [translation],
"for us, it is a question of principle that the minister did not reply
within the required deadlines set out at paragraph 306(b) and this goes
for the four cases before Archambault J."
[22] The core of the arguments presented by Vert‑Dure
to have the assessment vacated is essentially that, following the challenge,
the assessment was not amended within the mandatory period and that, when this
period expired, it could address the Court to have the assessment vacated. This
position must be qualified. This right is a right to appeal to
the Court not a right to necessarily have the assessment vacated
by the Court.
[23] Section 306 of the Act states:
306.
Appeal – A person who has filed a notice of objection to an assessment
under this Subdivision may appeal to the Tax Court to have the assessment
vacated or a reassessment made after either
(a) the Minister has
confirmed the assessment or has reassessed, or
(b) one hundred and
eighty days have elapsed after the filing of the notice of objection and the
Minister has not notified the person that the Minister has vacated or confirmed
the assessment or has reassessed,
but no appeal under this
section may be instituted after the expiration of ninety days after the day
notice is sent to the person under section 301 that the Minister has confirmed
the assessment or has reassessed.
[Emphasis added.]
[24] It is important to first point out that section
306 gives the person who filed a notice of objection the opportunity to have
the assessment vacated or to have a reassessment, therefore not
necessarily a vacation. Paragraphs 306 (a) and (b) are only
conditions for carrying out the right to appeal before the Court. To appeal, in
addition to having produced a notice of objection, either the assessment must
have been confirmed by the Minister or 180 days must have elapsed after the
filing of the notice of opposition.
Once these conditions have been met, the Court may decide to grant either a
vacation or a reassessment when such a result is justified, otherwise the
appeal is simply dismissed, in accordance with the provisions of
subsection 309(1) of the Act, which states:
309. (1) The Tax Court
may dispose of an appeal from an assessment by
(a) dismissing it; or
(b) allowing it and
(i) vacating the
assessment, or
(ii) referring the
assessment back to the Minister for reconsideration and reassessment.
[25] Even if Mr. Desrosiers claims the opposite,
Vert-Dure's argument is similar to the one he raised when he presented the
pre-trial motion to have his own assessment vacated before Angers J. However,
this argument was dismissed by the judge in an order rendered December 23,
2003. In Desrosiers v. The Queen, 2003 TCC 859, Angers J.
stated at paragraphs 14 and 15:
14 Since Stollar, there have been
other decisions dealing with the same issue, including Ginsberg v. Canada,
[1996] 3 F.C. 334, in which the Federal Court of Appeal found that a breach of
the duty to assess tax with "all due dispatch" does not mean that the
assessment will be vacated. The same reasoning applies in this case, even
though the provisions of the Act are at issue here. In this case, the Minister
had already made an assessment; it is only the Minister's consideration of the
objection that must be made with all due dispatch.
15 Another distinction in this case is
that the Appellant has the right to appeal to this Court if 180 days have
elapsed after the filing of the Notice of Objection and the Minister has not
notified the person that the Minister has vacated or confirmed the assessment
or has reassessed. Thus, the Appellant is permitted to advance his case and
be heard on the merits without waiting until the Minister has considered the
Appellant's Notice of Objection. Finally, application of the provisions set
out in section 299 of the Act will preclude the assessment under appeal in this
case from being vacated.
[26] Vert-Dure claims this order is not valid
because the judge misunderstood the reason Mr. Desrosiers requested the
assessment be vacated: his request was based on paragraph 306(b), not
subsection 301(3),
of the Act. Moreover, Vert‑Dure claims that Angers J. relied on decisions
it and the other appellants did not recall citing.
[27] First, the judge
using decisions they do not recall citing is not decisive. A judge is not
required to limit his analysis of the law on decisions the parties presented.
Next, it must be clear that paragraph 306(b) of the Act grants the right to address the Court
directly in cases where confirmation from the Minister is slow in coming,
whereas subsection 301(3) of the Act states the principle underlying
paragraph 306(b), the duty of the Minister to act with all due
dispatch to review the assessment after reception of the objection and then to
vacate or allow it, or make a reassessment.
[28] It is the duty to
all due dispatch that forces the Minister to render a decision on the objection
in the 180 days following the objection, and when Vert-Dure relies on paragraph 306(b) instead of
subsection 301(3) of the Act, it is still claiming that the Minister did
not act with due dispatch. Angers J. merely restated this principle. He rightly
dismissed it, stating these two provisions and section 299 of the Act, the application
to vacate by Mr. Desrosiers and, in my opinion, his reasons apply to the appeal
by Vert‑Dure.
[29] It must also be noted that Gauthier J. had the
same interpretation in Angell v. Canada (Minister of National
Revenue) 2006 FC 1097. This decision addressed subsection 165(3) and
paragraph 169(1)(b) of the Income Tax Act (ITA), which are
provisions similar to subsection 301(3) and paragraph 306(b) of the
Act. Gauthier J. stated:
48 Once taxpayers have been assessed,
they have two ways in which to challenge the merits of the assessment.
They must first request an administrative review by filing a notice
of objection. Ninety (90) days after the notice of objection has been
filed, whether or not the administrative review has been completed,
taxpayers may request a judicial review of the assessment by filing a notice of
appeal with the TCC.
49 In enacting paragraph 169(1)(b)
of the Act and section 18.5 of the Federal Courts Act, Parliament
gave the TCC exclusive jurisdiction to consider the merits of assessments (Walker
v. Canada, [2005] F.C.J. No. 1952 (FCA) (QL); Addison &
Leyen, supra, at paragraph 48). Once made, a decision by the
Minister with regard to an objection is not subject to judicial review (Webster
v. Canada, 2003 FCT 296, [2003] F.C.J. No. 1569 (CA) (QL), at
paragraph 20).
50 Although Parliament specifically
indicates that the Minister must deal with notices of objection with due
dispatch, the Act does not stipulate any specific consequences for failure
to do so (Addison & Leyen, supra, at paragraph 41).
51 Although taxpayers may appeal to
the TCC on the merits of an assessment, the TCC may not take into
account a failure by the Minister to comply with the obligation set out in
subsection 165(3) of the Act in considering the merits of the assessment,
or a decision by the Minister with regard to an objection (Addison &
Leyen, supra, at paragraph 44).
52 Before the Minister makes a decision,
the Federal Court has jurisdiction to review the lawfulness of the
administrative review process under section 18.1 of the Federal Courts
Act. It may issue a writ of mandamus in order to force the Minister
to make a decision, or issue a declaration that the Minister has failed to
comply with the obligation to exercise due dispatch. In this regard, in Hillier
v. Canada, 2001 FCA 197 (CA), the Federal Court of Appeal stated
that the Minister may be required to take such a failure into account if a
request to waive penalties and interest is made to the Minister under
subsection 220(3.1) of the Act (see also Cole v. Canada (Attorney
General), [footnote omitted] 2005 FC 1445,
[2005] F.C.J. 1764 (QL); and Addison & Leyen, supra,
at paragraph 41). In this context, declaratory relief could be useful for
the taxpayers.
53 The Federal Court retains
jurisdiction to review other reviewable errors or failures to comply with the
Minister’s obligation to act fairly (see, for example, Scott Slipp Nissan
Ltd. v. Canada (Attorney General), 2004 FC 1096,
[2004] F.C.J. No. 1327 (QL)).
54 However, even though the Federal Court
has jurisdiction to review the lawfulness of this administrative process, vacating
an assessment or a reassessment is not an appropriate remedy for undue delay in
dealing with an objection (Bolton v. The Queen,
[1996] 200 N.R. 303 (FCA); James v. Canada (Minister of
National Revenue-MNR), [2000] F.C.J. No. 2135 (CA) (QL),
particularly paragraphs 11 to 21). From these decisions and from Addison
& Leyen, supra, it appears that this situation is mainly due to
the fact that Parliament has given taxpayers the tools they need to monitor
the time periods within which the Minister is obliged to act; these tools
include an appeal to the TCC and an application for mandamus.
55 From these decisions, the Court
understands that, if taxpayers decide that it is important for them to obtain
an administrative decision, they have an opportunity to wait for more than
90 days before appealing to the TCC. However, in that case they must
ensure that this delay in exercising their right of appeal does not cause them
undue harm. As well, in this regard taxpayers are in a better position than the
Minister, since normally they have available all the information they need to
determine whether a delay can cause harm. In such cases, since it is taxpayers
who manage these remedies, they may apply for mandamus or simply appeal to the TCC
under paragraph 169(1)(a) of the Act.
56 Thus, the statutory scheme allows for
considerable flexibility. In addition to the remedies noted above, ordinary law
also gives taxpayers the option of claiming damages, which may be equal to the
amount of their assessment, when the Minister’s conduct constitutes abuse of
power (see Obonsawin v. Canada, 2004 TCC 3,
[2004] T.C.J. No. 68 (QL)).
…
74 According to the applicants, even though they clearly had the right
to appeal under paragraph 169(1)(b) of the Act and the right to
apply for mandamus well before 1998, the Court must, in determining
the consequences of the Minister’s failure, take into account, not these
rights, but rather the fact that, at the time the applicants finally decided to
exercise their right of appeal, it was too late because this remedy had become
theoretical, and they were never able to contest the merits of their
assessments.
75 If the Court were to adopt this reasoning,
it would have to conclude that Parliament wanted to ensure that taxpayers who
acted with due dispatch when confronted with the same failure by the Minister
would necessarily have to debate the merits of their assessment before
obtaining vacation of their assessments, while taxpayers who remained passive
and did not make use of the tools available to them under the Act [footnote
omitted] could obtain vacation of their assessments regardless of their merits
and could thus deprive their fellow citizens of their contribution to the tax
burden.
76 In the Court’s opinion, it is plain and
obvious that such a conclusion is illogical. The Court cannot, on the
basis of the facts put forward by the applicants, decline to apply the Federal
Court of Appeal case law that is binding upon it.
[Emphasis added.]
[30] It is also important
to note what the Federal Court of Appeal wrote in Bolton, per Gauthier
J.:
2 The
single issue raised is the alleged failure of the Minister to reconsider the
Appellant's assessment "with all due dispatch" after receipt of a
notice of objection as required by paragraph 165(3)(a) of the Income Tax
Act, S.C. 1970-71-72, c. 63 as amended to 1985.
165(3) Duties of
Minister -- Upon receipt of a notice of objection under this section, the
Minister shall,
(a) with all due
dispatch reconsider the assessment and vacate, confirm or vary the assessment
or reassess, or
...
and he shall
thereupon notify the taxpayer of his action by registered mail.
3 In the case of The Queen v.
Ginsberg (Court file A-242-94) decided last week, we held that Parliament
did not intend that the Minister's failure to examine a return and assess tax
"with all due dispatch", as required by subsection 152(1)1, did not deprive him of the
statutory power to issue an assessment. The reasoning in that case applies with
even greater force here:
Parliament clearly did not intend that the Minister's failure to reconsider an
assessment with all due dispatch should have the effect of vacating such
assessment. If the Minister does not act, the taxpayer's recourse is to
appeal pursuant to s. 169.
[Emphasis added.]
[31] It is clear from the comments by Madame Justice
Gauthier in Angell and those by the Federal Court of Appeal in Bolton
that having the Court vacate an assessment is not an appropriate remedy
when there is failure to reply to a notice of objection within the 180-day
deadline.
The remedy in such a case is simple: under the Act, taxpayers may address the
Court and ask it to decide on the validity of the arguments the taxpayers raise
against their assessments, and may do so without waiting for the Minister's
reply to their objection. Another recourse is to file a motion for mandamus
before the Federal Court of Canada.
Sections 288 and 289 of the Act
[32] Even if Vert‑Dure claimed that the only
reason for its appeal was the Minister's failure to reply to its notice of
objection within 180 days, it then presented a series of arguments based on the
behaviour of the auditor in charge of the case. Its main complaint is that the
auditor communicated directly with the Caisse populaire de Mont-Joli and the
accounting firm Mallette Maheu for documents or information used to establish
its assessment. In doing so, she exceeded her auditing powers.
[33] This position is elaborated upon in Vert-Dure's
written notes. First, it states that the auditor's identification card,
produced as Exhibit I‑10, states she is:
[translation]
… person authorized to carry out the
powers and duties set out at subsections 288(1) and (2) and 291(1)...except for
the power of certification set out at subsection 291(1)…
[34] Therefore, according to Vert‑Dure, the
auditor's powers were limited to the indications at sections 288 and 289 of the
Act. Vert-Dure then states:
[translation]
However, subsections 288(1) and 288(2) do not include the power
to enter premises other than the place of a business under tax audit,
operated by a person subject to the tax, or to communicate with third
parties by phone, fax or other.
Auditor Claire Desjardins admitted in
her testimony that she communicated by phone with the Caisse populaire de Mont‑Joli
and the accounting firm Mallette Maheu, and in the "Appellant's
submissions," at Exhibit A-1, pages 95 to 103, we filed fax communications
with various suppliers.
All the information provided by a third party can therefore not be
used by the auditor in the preparation of the
notice of assessment and the effects of the auditor's actions could lead to
the vacation of the assessments. (See our written arguments in the factum
submitted to you on the application of sections 288 and 289 ETA).
We submit that the auditor exceeded the power conferred on
her under section 288 of the ETA. In our opinion, it is reasonable to
find that the auditor should have used the additional remedies set out
in the ETA, namely the letters of requirement Parliament included in section
289 of the ETA.
Thus, the Ministry's conduct is a flagrant and unacceptable
violation of the Appellant's rights discrediting the administration of
justice, a gross miscarriage of justice.
[Emphasis
added.]
[35] At the hearing, Vert‑Dure again stated that
if the auditor had wanted the information or documents in the possession of a
third party, she should have sent a notice in accordance with section 289 of
the Act. By neglecting to send this notice, she exceeded her auditing powers
when she communicated with the Caisse populaire de Mont‑Joli to ask for
Mr. Desrosiers' statements of account. Mr. Desrosiers also claimed that
this phone call to the Caisse populaire damaged his reputation.
[36] First, Vert-Dure seems to have misunderstood the
interpretation of sections 288 and 289 of the Act. These two provisions address
different situations. Section 288 states the scope of the Minister's auditing
powers in terms of the GST. This section states:
288.(1) Inspections – An authorized
person may, at all reasonable times, for any purpose related to the
administration or enforcement of this Part, inspect, audit or examine the
documents, property or processes of a person that may be relevant in
determining the obligations of that or any other person under this Part or the
amount of any rebate or refund to which that or any other person is entitled
and, for those purposes, the authorized person may
(a) subject to subsection
(2), enter any premises or place where any business or commercial activity is
carried on, any property is kept, anything is done in connection with any
business or commercial activity or any documents are or should be kept; and
(b) require the owner or
manager of the property, business or commercial activity and any other person
on the premises or in the place to give to the authorized person all reasonable
assistance and to answer all proper questions relating to the administration or
enforcement of this Part and, for that purpose, require the owner or manager to
attend at the premises or place with the authorized person.
(2) Where any premises or
place referred to in paragraph (1)(a) is a dwelling-house, an authorized person
may not enter that dwelling-house without the consent of the occupant, except
under the authority of a warrant issued under subsection (3).
…
[37] For our purposes, only subsection 288(1) of
the Act is relevant because it is not a case of entering a residential house.
This provision specifies that during an audit, an authorized person,
either an auditor for the Minister (Ms. Desjardins), may inspect
a person's documents (those of the Caisse populaire) to determine the tax
liability of that person (the Caisse) or another person (Vert‑Dure).
This authorized person (Ms. Desjardins) may also enter a place where
a business (that of the Caisse), or commercial activity (that of the
Caisse) is carried on, or property is kept (for example, the
money Vert-Dure deposited at the Caisse), anything is done in connection
with a
business (that of the Caisse or Vert-Dure) or a commercial
activity (that of the Caisse or Vert-Dure) or any
documents are or should be (for example, a copy of the document confirming
the loan by the Caisse to Vert-Dure). This authorized person (Ms.
Desjardins) may also require the owner or manager of the property,
business or commercial activity (for example, the director of the Caisse) and
any other person on the premises (for example, the head of loans) to provide reasonable
assistance and answer all questions relating to the application or
execution of Part IX of the Act (for example, provide her with a copy of bank
statements). In my opinion, the request for assistance can be made either over
the phone or by letter. This is exactly what Ms. Desjardins did when she
contacted the Caisse populaire de Mont‑Joli for the bank statements for
Vert-Dure. This subsection does not, in any way, require that prior notice must
be sent in order to do so, contrary to section 289 of the Act, which
states:
289. (1) Requirement to
present documents or information – Despite any other provision of this Part, the
Minister may, subject to subsection (2), for any purpose related to the
administration or enforcement of this Part, including the collection of any
amount payable or remittable under this Part by any person, by notice served
personally or by registered or certified mail, require that any person
provide the Minister, within such reasonable time as is stipulated in the
notice, with:
(a) any information or
additional information, including a return under this Part; or
(b) any document.
(2) The
Minister shall not impose on any person (in this section referred to as
a “third party”) a requirement under subsection (1) to provide information or
any document relating to one or more unnamed persons unless the Minister
first obtains the authorization of a judge under subsection (3).
(3) On ex parte application by the Minister, a judge
may, subject to such conditions as the judge considers appropriate, authorize
the Minister to impose on a third party a requirement under subsection (1)...
[Emphasis added.]
[38] These provisions apply despite the other
provisions of "this Part" (namely Part IX regarding GST). It is
therefore a power added to those described elsewhere, in particular at
subsection 288(1) of the Act. Subsection 289(1) aims to clarify
situations where the taxpayer or the third party fail to comply with the
Minister's request to provide documents or information. Vert‑Dure seems
to have confused sections 288 and 289 in terms of their use and the
conditions for each.
[39] In other words, section 288 of the Act
confers on the Minister, acting through an authorized representative, the
general power to address a third party to obtain documents or information in
their possession, whereas section 289 of the Act is a tool at the
Minister's availability when a third party or the taxpayers themselves, in
possession of documents or information that could be useful for the audit in
question, do no comply with requests for information (see, among others, Lapointe
v. Canada, 2003 CFPI 102). It is a type of official compliance
letter from the Minister to provide information, otherwise there could be
penalties (section 326 ETA). In addition, Ms. Desjardins was not
authorized to carry out the power described at section 289 of the Act;
therefore, she herself was not required to present a letter of requirement
under this section, contrary to the claims by Vert‑Dure.
[40] Very few decisions deal with the audit powers the
Minister holds under sections 288 and 289 of the Act; however, the similar
provisions in the ITA, sections 231.1 and 231.2, have been the subject of
many decisions that clarify the scope of audit powers.
[41] It is relevant to cite the Supreme Court of Canada
decision in R. v. Jarvis, [2002] 3 S.C.R. 757, where the basis of
sections 231.1 and 231.2 of the ITA is explained:
51 It follows from the tax scheme's basic
self-assessment and self-reporting characteristics that the success of its administration
depends primarily upon taxpayer forthrightness. As Cory J. stated in Knox
Contracting, supra, at p. 350: "The entire system of levying and
collecting income tax is dependent upon the integrity of the taxpayer in
reporting and assessing income. If the system is to work, the returns must be
honestly completed." It is therefore not surprising that the Act
exhibits a concern to limit the possibility that a taxpayer may attempt
"to take advantage of the self-reporting system in order to avoid paying
his or her full share of the tax burden by violating the rules set forth in
the Act" (McKinlay Transport, supra, at p. 637). The nature of the tax
collection scheme, however, creates an obstacle in this regard:
Often it will be impossible to determine from
the face of the return whether any impropriety has occurred in its preparation.
A spot check or a system of random monitoring may be the only way in
which the integrity of the tax system may be maintained.
(McKinlay Transport, supra,
at p. 648)
Accordingly, "the Minister of National
Revenue must be given broad powers in supervising this regulatory scheme to
audit taxpayers' returns and inspect all records which may be relevant to the
preparation of these returns" (ibid.).
52 The sections within Part XV of the ITA
provide the Minister with "Administration and Enforcement" powers.
They also impose reciprocal obligations upon taxpayers: for example, in
furtherance of the overall reporting and verification scheme, s. 230(1) of the
ITA requires all taxpayers, for various specified periods of time, to maintain
books and records of account at their place of business or residence in Canada.
These documents must be kept "in such form and containing such information
as will enable the taxes payable under [the ITA] or the taxes or other amounts
that should have been deducted, withheld or collected to be determined".
53 The provisions that are central to the
instant appeal vest the Minister with extensive powers that may be used
"for any purpose related to the administration or enforcement" of the
ITA. Section 231.1(1) continues the inspection power that was
introduced in An Act to amend the Income War Tax Act, S.C. 1944, c. 43, s. 11. Paragraph
(a) allows a person authorized by the Minister to "inspect, audit or
examine" a wide array of documents, reaching beyond those that the ITA
otherwise requires the taxpayer to prepare and maintain. In the course of the
inspection, audit or examination, para. (c) provides that the authorized person
may enter into any premises or place that is not a dwelling-house; furthermore,
para. (d) imposes a correlative duty upon persons at the premises or place to
provide "all reasonable assistance and to answer all proper questions
relating to the administration or enforcement of this Act". (Section
231.1(2) requires that, absent the occupant's consent, a judicial warrant be
obtained for entry into a dwelling-house).
54 The requirement power in s.
231.2(1) boasts an even longer pedigree: its origins are found in s. 8 of
the original Income War Tax Act, 1917. By this power, the Minister may
compel any person to produce any information or any document. Again, the
scope of this power "reaches beyond the strict filing and maintenance
requirements of the Act" (McKinlay Transport, supra, at p. 642, per Wilson
J.).
[Emphasis added.]
[42] It is clear that section 288 of the Act
creates its own system that applies when the Minister, through an auditor,
wishes to obtain information or documents in the possession of a third party.
Section 289 of the Act provides an additional tool, particularly when there
is non-compliance. If the Caisse populaire had refused to provide the account
statements requested, the Minister could have sent a letter of requirement
under section 289 of the Act.
[43] Vert‑Dure cited Lionel Bergeron v.
Deputy Minister of Revenue of Quebec, 165‑02‑000187-903,
by Justice Guy Tremblay of the Court of Quebec. It seems to use the
findings of this decision to support its claim that the assessments in question
should be vacated on the ground that the auditor overstepped her audit powers.
In this case, the judge had to determine whether the authorization obtained by
the auditor to carry out the audit was in accordance with the powers set out at
section 38 of the Act respecting the Ministère du Revenu (AMR), which, to a certain extent, resembles section 288 of the
Act.
[44] I do not believe this decision supports
Vert-Dure's position because the issue was whether the Deputy Minister had the
power to authorize the auditor to "oblige the owner…of the business…to
give him reasonable assistance in his audit," whereas section 38 AMR does
not grant such a power. Here, subsection 288(1) of the Act recognizes such
a power for the Ministère's auditors for the purposes of the Act.
[45] I believe the auditor acted within the scope of
the powers conferred on her under section 288 of the Act when she communicated
directly with the Caisse populaire and asked a clerk to provide her with
information. As for the documents provided to the Minstère by the accounting
firm before the start of the audit, the evidence does not show the
circumstances under which they were provided. However, I do not have reason to
believe it was done in violation of the provisions of the Act.
[46] Moreover, I do not have jurisdiction over the
actions of the Minister and his agents to decide on the validity of an
assessment. This has been noted by the Federal Court of Appeal justices in Main
Rehabilitation Co. v. Canada, 2004 FCA 403:
7 As the Tax Court Judge
properly notes in her reasons, although the Tax Court has authority to stay
proceedings that are an abuse of its own process (see for instance Yacyshyn
v. Canada, 1999 D.T.C. 5133 (F.C.A.)), Courts have consistently held that the
actions of the CCRA cannot be taken into account in an appeal against
assessments.
8 This is because what is in issue in an
appeal pursuant to section 169 is the validity of the assessment and not the
process by which it is established (see for instance the Queen v. the
Consumers’ Gas Company Ltd. 87 D.T.C. 5008 (F.C.A.) at p. 5012). Put
another way, the question is not whether the CCRA officials exercised their
powers properly, but whether the amounts assessed can be shown to be properly
owing under the Act (Ludco Enterprises Ltd. v. R. [1996] 3 C.T.C. 74
(F.C.A.) at p. 84).
[Emphasis added.]
[47] To conclude, I find
that the auditor did not overstep her powers and her actions do not at all
justify vacating the assessment in question.
Limitation period
[48] In its reply, Vert‑Dure
also claimed that the Ministère could not make amendments to 1991 because the
assessment was out of time. According to paragraph 298(1)(a) of the
Act,
the limitation period is reached four years after the latest date of the
date section 238 required the person to file a return for that period, and the day
the return was filed. As for the adjustment for the oldest assessment
period, that ending December 31, 1991, for which the Minister refused the
$1,293.11 in ITC, the GST claim by Vert-Dure was not produced until November 4,
1994. As a result, on March 13, 1998, the date of the assessment in question,
fewer than four years had passed. As for the assessment period ending in June
1992, for which there was a $279.49 adjustment, the return was not filed until
January 22, 1997; as a result, the assessment was clearly established within
the limitation period. The same goes for the $5,533 adjustment to the ITC that
resulted from the cancellation of the registration, since the returns were
filed on December 22, 1995, or January 22, 1997, making the assessment date
well within the expiration of the limitation period. And since the GST claim
was not produced until December 22, 1995, for the quarter ending March 31,
1994, the same conclusion can be reached for the adjustment resulting from the
cancellation of the $4,277.22 in GST that could have been required of
Vert-Dure, but which was cancelled by the Ministère following the retroactive
cancellation of the registration. At any rate, it was an adjustment that was to
Vert-Dure's benefit. As a result, the argument based on the limitation period
is not valid.
Penalties
[49] In its written
arguments, Vert-Dure raises the issue of applying the penalty. The only penalty
that the Minister applied in this case was that set out at section 280 of the
Act.
In Corp. de l'École Polytechnique v. Canada, 2004 FCA 127,
2004 G.T.C. 1148, [2004] G.S.T.C. 102, 325 N.R. 64, [2004] G.S.T.C. 39, the
Federal Court of Appeal recognized that the due diligence defence allowed a
person to avoid imposition of this penalty:
28 The due diligence defence allows a person to avoid the imposition of
a penalty if he or she presents evidence that he or she was not negligent.
It involves considering whether the person believed on reasonable grounds in a
non-existent state of facts which, if it had existed, would have made his or
her act or omission innocent, or whether he or she took all reasonable
precautions to avoid the event leading to imposition of the penalty. See The
Queen v. Sault Ste-Marie, [1978] 2 S.C.R. 1299; The Queen v.
Chapin, [1979] 2 S.C.R. 121. In other words, due diligence
excuses either a reasonable error of fact, or the taking of reasonable
precautions to comply with the Act.
29 The defence of due diligence should not be confused with the defence
of good faith, which applies in the area of
criminal liability, requiring proof of intent or guilty knowledge. The good
faith defence enables a person to be exonerated if he or she has made an error
of fact in good faith, even if the latter was unreasonable, whereas the due
diligence defence requires that the error be reasonable, namely, an error
which a reasonable person would have made in the same circumstances. The due
diligence defence, which requires a reasonable but erroneous belief in a
situation of fact, is thus a higher standard than that of good faith,
which only requires an honest, but equally erroneous, belief.
[Emphasis added.]
[50] The ground raised by
Vert-Dure is: [translation]
"we respected the various deadlines but there were circumstances outside
our control, such as the drop in gross sales in the fall of 1991." In my opinion, these circumstances
are not a valid means for a due diligence defence. The same can be said for the
refusal by the Caisse populaire to honour the NSF check. The evidence does not
establish in any way that Vert‑Dure committed a reasonable error of fact
or that it took reasonable precautions to respect the Act.
[51] Before terminating
these reasons, two other comments need to be made. One of the reasons I have
for making this decision before concluding the hearing of the other appeals,
for Mr. Desrosiers, Pelouses and Gazon, was that it would allow for a decision
to be made on the validity of the arguments presented by Vert‑Dure and
the other appellants, namely those based on sections 306, 309, 288 and 289 of
the Act. In my opinion, Mr. Desrosiers and the advising accountant,
Mr. Brosseau, invested too much energy in these issues, to the point of
obsession in handling the four appeals. Even though I tried to refocus Mr.
Desrosiers on the adjustments the assessments targeted, he insisted on
presenting the unfounded general application arguments aimed at obtaining the
vacation of the assessment on the ground that the Minister did not reply within
the 180 days of the filing of the notice of objection and on the ground that
the auditor overstepped her powers during the audit. On many occasions, I
encouraged Mr. Desrosiers to provide circumstantial evidence to compensate
for the lack of documentary evidence on the $1,293.11 in ITC claimed for the
quarter ending December 31, 1991, which he claims to have lost during a fire in
July 1995. Although he stated on a number of occasions that he would provide
such evidence, Mr. Desrosiers, as representative of Vert-Dure, did no such
thing. The Court therefore has no evidence allowing it to acknowledge
Vert-Dure's right to these ITC. I would restate here that in order for a right
to ITC to exist, under subsection 169(4) of the Act, before the registrant
produces its GST return, it must have the necessary documentary evidence
containing the information prescribed by regulation. The fact that Vert-Dure
did not have these at the time of the hearing of its appeal does not mean they
did not exist when the CTI application was filed, but unfortunately for Vert‑Dure,
Mr. Desrosiers did not present any evidence leading me to find that the
conditions required under subsection 169(4) of the Act, leading to the
right to ITC, were met.
[52] I would add,
however, that it is odd that the ITC application was made on January 22, 1997,
one and a half years after the fire, and four months after an alleged theft at
the administrative offices of Vert‑Dure. It is of note that the theft was
claimed in the taxpayer's notice of objection, but not established by the
evidence before the Court. The question is how could an amended GST application
be filed on January 22, 1997, for the quarter ending December 31, 1991, when at
that time the documentary evidence was needed and Vert-Dure never was able to
provide these documents during the audit that began on May 2, 1997?
If the data had been provided by the accounting firm, why were they never
submitted to evidence during the hearing?
[53] In conclusion, Vert‑Dure was not able to
show that the Minister's assessment was not valid. As a result, the appeal by
Vert‑Dure is dismissed.
Signed at Georgeville, Quebec, this 14th day of
September 2007.
"Pierre Archambault"
on this 2nd day of November 2007
Elizabeth Tan, Translator
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