Docket: 2005-2982(GST)G
BETWEEN:
SPORT COLLECTION PARIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal
heard on June 28 and June 29, 2006, at Montréal, Quebec
Before: The Honourable
Justice Lucie Lamarre
Appearances:
|
Counsel for the Appellant:
|
Louis-Frédérick Côté and Josée Massicotte
|
|
Counsel for the Respondent:
|
Denis Émond
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under
Part IX of the Excise Tax Act ("ETA"), notice of which is
dated December 23, 2004, and bears the number 0311010536, for the period from
December 1, 2000, to November 30, 2003, is allowed, with costs,
and the assessment is referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant is entitled to
its $736,524.90 input tax credit claim in accordance with section 169 of
the ETA. The penalty and interest are accordingly
cancelled.
Signed at Ottawa, Canada, this 12th day of July 2006.
"Lucie Lamarre"
Translation
certified true
on this 29th day
of January 2008.
François Brunet,
Revisor
Citation: 2006TCC394
Date: 20060712
Docket: 2005-2982(GST)G
BETWEEN:
SPORT COLLECTION PARIS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1] In an assessment
under Part IX of the Excise Tax Act ("ETA"), the Minister of
National Revenue ("the Minister") disallowed input tax credits (ITCs)
in the amount of $736,524.90 and imposed penalties and interest for the
period from December 1, 2000, to November 30, 2003.
[2] The Minister
disallowed the ITCs on the basis that the tax on which the Appellant had
claimed the ITCs was paid to subcontractors which, in the Minister's
determination, had issued invoices of convenience, either because they did not
have the production capacity necessary to render the services requested, or
because they were not acting as intermediaries (see subparagraph 24(d) of the
Reply to the Notice of Appeal).
[3] The Appellant
operates a business that designs and manufactures women's clothing. It
purchases fabrics and subcontracts the garment‑making. During the period
in issue, the Appellant did business with 80 different subcontractors.
The Minister is contesting the invoices of 26 of these 80 subcontractors.
[4] The Minister does
acknowledge that the garments were made and that the subcontractors returned
the merchandise to the Appellant in accordance with the Appellant's
specifications. The Minister also acknowledges that the Appellant paid each
contractor the tax on the agreed‑upon cost for making the garments.
In addition, the Minister acknowledges that the Appellant did not receive
any rebate on the tax thereby paid.
[5] The Respondent
submits that the Appellant is not entitled to its ITCs because the
garment-making services were rendered by persons other than the subcontractors
that issued the invoices. The evidence does suggest that most of the 26
subcontractors did not remit the tax that they collected to the government.
In some cases, it would appear that the subcontractors contracted out to
other subcontractors, which did not remit the tax to the government.
[6] While the Minister
does not claim to have evidence that the Appellant colluded with the 26
subcontractors in question, he submits that the Appellant showed a type of
wilful blindness by agreeing to subcontract with the subcontractors without
really inquiring about whether they remitted the tax that they collected to the
government. The Minister submits that the tax that these subcontractors
collected from the Appellant was used in order to pay employees under the
table, and that the Appellant is responsible for this because it did not show
that these subcontractors actually rendered the invoiced services or acted as
intermediaries for the purpose of collecting the Goods and Services Tax (GST).
For these reasons, the Minister submits that the Appellant is not entitled to
its ITCs. Counsel for the Respondent submits that since the Minister was not a party
to the contract between the Appellant and the subcontractors, it is unable to
establish that the Appellant was truly not privy to the subcontractors' scheme.
He submits that the Appellant had an obligation to summon the subcontractors in
question to testify in Court in order to prove that the Appellant was in
perfectly good faith when it awarded them the garment-making contracts in
question and paid them the tax. He submits that the Appellant has not
proven that it knew each and every one of the subcontractors and that it
actually entered into contracts with them. He submits that the Appellant must
prove that the subcontractors were genuinely engaged in commercial activities.
[7] In my opinion, the
Appellant has amply demonstrated that it contracted with the 80 subcontractors,
including the 26 subcontractors in issue, proceeding in the same manner in each
instance.
[8] I have heard the
testimony of Phil Cohen, who controls the Appellant, and the testimony of
production employees (who determined the pricing and chose the contractors),
administrative employees, and employees who were responsible for controlling
the quality of the garments during the period in question. All of these
witnesses explained the Appellant's method for subcontracting garment-making.
The Appellant, through its employees, demanded high-quality work from its
subcontractors, and insisted that the work be done on time and at a reasonable
price.
[9] The Appellant made
sure that it obtained the corporate subcontractors' certificates of
incorporation, as well as each subcontractor's declarations of registration. In
addition, every month, it checked that each subcontractor had a GST and Quebec
Sales Tax (QST) registration number. All of this was shown by supporting
documents. In fact, Revenu Québec sent the Appellant letters confirming the
validity of the subcontractors' GST and QST numbers. That is all the Appellant
could do, because any information concerning a supplier's payment of taxes is
confidential and cannot be disclosed to the Appellant. This is confirmed by the
audit report tendered as Exhibit A‑1, tab 4, page 6.
[10] Sometimes, when the
Appellant got wind that not all tax remittances were being made, it even made
cheques payable to the subcontractors and the Ministère du Revenu du Québec
jointly. The person who controls the Appellant also confirmed that certain
precautions were taken. For example, lists of subcontractors including their
addresses and telephone numbers were drawn up and updated regularly (roughly
once or twice a year). The old lists became obsolete when the new lists
containing the changes were issued.
[11] The employees responsible
for product quality control went to the subcontractors’ places of business.
They examined and approved the finishing work. It appears that the
subcontractors contracted out the seaming, but the Appellant's employees were
unable to verify this. The finished garments were delivered to the Appellant
after its employees approved them.
[12] France Lamontagne,
the Revenu Québec auditor, acknowledged that the Appellant's bookkeeping was
proper and acceptable. She acknowledged that the Appellant received no rebates
on the tax paid, and that she had no evidence on file that the Appellant was in
bad faith or was aware that it was doing business with phoney businesses. Her
audit report alludes to several other audit files of which she has no personal
knowledge. No one else testified for the Respondent. Counsel for the Respondent
did not impeach the credibility of any of the Appellant's witnesses on cross‑examination,
and he asked them few or no questions. The auditor did not question the
Appellant's employees during her audit.
[13] The facts of this
case are similar to those in Joseph Ribkoff Inc. v. R., [2003]
G.S.T.C. 104 (T.C.C.) where Lamarre Proulx J. stated as follows,
at paragraphs 100-101:
100 The appellant paid the tax on
services to Her Majesty's agent. These were valid corporations. It was their
conduct that was illegal. I am of the opinion that it is not up to the
appellant to bear the economic burden of the deception organized by Her
Majesty's agents on the basis of the decision of this court in Manke (supra)
[[1998] T.C.J. No. 759 (T.C.C.), at paragraph 19], which refers
to other decisions and to the decision I rendered in Centre de la Cité
Pointe Claire v. Her Majesty the Queen, [2001] T.C.J. No. 674,
[2001] G.S.T.C. 199 (Fr.), [2003] G.S.T.C. 76 (Eng.) (T.C.C. [Informal Procedure]), a decision to
which counsel for the appellant referred me.
101 If there had been knowledge,
connivance or collusion on the part of the appellant, as the investigators had
initially thought, the decision would be completely different. The agreement on
the facts is clear: there is no evidence of knowledge, connivance or collusion
between the appellant and these companies.
[14] In the editorial
comment that follows this decision, David Sherman stated:
In my view, this is the correct decision.
If a supplier is GST-registered, provides real service and issues an invoice
with a valid registration number, and the purchaser pays the GST, the purchaser
should not have to worry about whether the supplier is remitting the GST. The
entire GST system is invoice‑driven, specifically so that purchasers need
not worry about whether suppliers are filing and remitting their net tax. It
would do violence to the GST system, and interfere with the orderly conduct of
business, to require purchasers to investigate whether vendors are remitting
GST, or whether vendors are subcontracting their work to others.
[15] In Orly
Automobiles Inc. v. Canada, 2005 FCA 425, the Federal Court of Appeal stated
as follows, at paragraph 26:
[26] In addition, we agree with the
A.C.J. that where the transaction upon which the claim for ITCs is asserted is
a sham and the money purportedly paid as GST is never paid or is rerouted back
to the claimant, that claimant cannot base a claim for ITCs on the fact that
the tax has become payable. The A.C.J. found on the basis of the evidence that
the appellant was involved in a sham of this kind. The Act and the Regulations
were devised for bona fide transactions between bona fide
businessmen. They were never intended to enable participants in a sham
involving fictitious transactions to doubly benefit from it by successfully
claiming input credits on a tax payable.
[16] The Federal Court of
Appeal has impliedly acknowledged that, in the absence of evidence of
connivance or collusion, or sham transactions in which the tax said to be
payable is redirected to the claimant, the person who has paid the tax is
entitled to the ITCs.
[17] In the instant case,
the Appellant has shown that the subcontractors fulfilled the orders because
the finished products were approved by and delivered to the Appellant.
Employees of the Appellant went to the subcontractors' places of business to
verify and control the finish of the products. The Respondent's cross‑examination
did not cast doubt on these facts. There is nothing to suggest that the
Appellant demanded that subcontractors personally perform their work.
An independent business would have every right to sub-subcontract,
provided its contract with the Appellant did not prevent it from doing so. The
Respondent did not contradict these points. The Minister's reasons for
assessment allege no fraud or collusion. In fact, the auditor conceded that she
was unable to obtain evidence in this regard. In my opinion, the Appellant has
succeeded in showing, on a balance of probabilities (the requisite standard of
proof in civil cases) that it paid the tax in good faith to the 26
subcontractors just as it did with all 80 subcontractors with which it did
business, and that it is therefore entitled to the ITCs for this tax.
[18] The appeal is
allowed, with costs, and the assessment is referred back to the Minister for
reconsideration and reassessment on the basis that the Appellant is entitled to
the ITCs claimed in the amount of $736,524.90, since it has complied with all
the conditions set out in section 169 of the ETA. The penalty and interest imposed
in the assessment under appeal are accordingly cancelled.
Signed at Ottawa, Canada, this
12th day of July 2006.
"Lucie Lamarre"
Translation
certified true
on this 29th day
of January 2008.
François Brunet,
Revisor
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