Citation: 2007TCC17
Date: 20070207
Docket: 2005-3149(GST)I
BETWEEN:
173122 CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal
from an assessment, notice of which is dated June 3, 2005, and bears No. PACT-0240
LO, and pertains to the period from April 1, 2001, to April 30, 2004.
[2] The issue to be
determined is whether the Appellant was engaged in a commercial activity during
the period covered by the assessment, and, if so, whether it was entitled to
input tax credits (“ITCs”) in the amount of $5,096.12.
[3] The Appellant was
represented by Danièle Léger. A major player in the management of the
Appellant's affairs and an erudite person who was clearly on top of all the
information in the file, Ms. Léger explained the circumstances that led
the business, founded in the mid‑1990s, to its undoing.
[4] Initially, the
business owned a single truck. In 2001, the business was growing fast and it
seemed as though the sky was limit; the business owned roughly 10 trucks
and the future looked promising.
[5] In early 2001, the
insurance broker in charge of renewing the civil liability insurance policies
on the trucks apparently neglected to keep track of the matter, and, as a
result, the company had to cease operations in March 2001, because it was
unable to comply with the numerous statutory and regulatory requirements,
including the requirement to have appropriate insurance coverage.
[6] Since it was no
longer able to do any transportation, the company quickly lost its income
source and the lenders subsequently recalled their lines of credit and realized
their guarantees.
[7] After the events of
March 2001, the Appellant fought for its survival. It sued the insurance
broker. Having lost almost all of its assets, it was able to retain only a
small pickup truck, which it used in an attempt to rebuild the business through
various initiatives. However, it did not keep a log of the distances driven.
[8] The Appellant's
agent and her spouse were very determined and refused to throw in the towel.
They devoted themselves entirely to searching for new activities that would
draw on their expertise in the transportation field. But hope was the only
fruit that these various attempts bore.
[9] Throughout this
lengthy period, the Appellant made a whole series of requests; it considered
various investment projects and had several meetings, including meetings with
lawyers aimed at obtaining compensation for the loss caused by the carelessness
and negligence of the broker responsible for renewing the insurance policies.
[10] The Appellant argued
that it is entitled to the ITCs that it claimed for the period from
April 1, 2001 to April 30, 2004. The Respondent, for her part, maintained
that commercial activities were no longer being engaged in at that time.
[11] In order to make and
confirm the assessment under appeal, the Respondent relied on certain facts
listed in paragraph 13 of the Reply to the Notice of Appeal, which reads
as follows:
[translation]
(b) The
Appellant operated a business that transported goods by truck ("trucking
business").
(c) The Appellant
ceased operating its business on or about March 31, 2001.
(d) Following an
audit, the Minister disallowed ITCs claimed by the Appellant and assessed the
Appellant accordingly on June 7, 2004.
(e) During the
objection process, the Appellant provided the Minister with additional
information and documents.
(f) After analyzing
this additional information and documentation, the Minister noted that, based
on the Appellant's accounting books, the Appellant, until August 2002, entered
supplies that had been purchased while the trucking business was still being
operated (that is to say, before March 31, 2001), and that the
supplies were related to the business.
(g) Thus, the Minister
granted the Appellant the ITCs for the period from April 1, 2001 to
August 31, 2002, for all supplies related to the periods during which its
trucking business was operating, provided they were related to the said
business, hence the assessment of June 3, 2005, which constitutes the
decision concerning the objection.
(h) Aside from the
supplies made in the course of its trucking business, the Appellant
reported no taxable supplies during the period at issue.
(i) Aside from the
trucking, the Minister determined that the Appellant carried on no other
commercial activity during the period at issue.
(j) Consequently,
the Minister disallowed all the ITCs claimed by the Appellant in respect of
supplies other than those acquired in the course of its trucking business.
(k) The
Appellant did not show that the supplies for which it is claiming ITCs were
purchased for consumption, use or supply in a commercial activity.
(l) Moreover,
based on an analysis of the ITCs claimed, the Minister noted that certain ITCs
were claimed on purchases of purely personal supplies.
(m) Consequently,
the Appellant owes the Minister the amount of the adjustments to its net
reported tax for the period at issue.
[12] The facts set out in
subparagraphs (b), (d), (e), (f), (h) and (j) were admitted, and the other
facts were denied.
[13] At the Court's
request, the parties produced notes in support of their respective positions.
[14] The Appellant is
claiming ITCs even though, during the period from April 1, 2001 to April 30, 2004, it
made no supplies, except to receive and report $1,091.96 as income during the
period ending December 31, 2002, income which does not appear to have anything to do with
supplies related to the transportation of goods.
[15] Following an audit,
the Minister of National Revenue ("the Minister") disallowed the
ITCs on the grounds that he determined that the Appellant had ceased all
commercial activity on April 1, 2001. The disputed ITCs amounted to
$12,269.90 at the time of this determination.
[16] Further to a
challenge raised following a notice of objection, the file was reviewed. The
Respondent then changed the date on which commercial activity ceased to August 30, 2002, and consequently,
allowed $7,252.06 worth of additional ITCs. Thus, this appeal is about the
difference, that is to say, $5,017.84 in ITCs that were disallowed for the
period from September 1, 2002 to April 30, 2004.
[17] I must state from
the outset that, even if I come to the conclusion that the Appellant continued
to carry on business during the period under appeal, its claim will not
automatically succeed.
[18] Entitlement to ITCs
requires more than a commercial activity within the meaning of sections 169 and
123 of the Excise Tax Act (the “Act"). All claimants must retain documentation
supporting their claims within the meaning of subsection 169(4) and
section 286 of the Act, and must be able to provide it.
[19] In the case at bar, Ms. Léger
submitted essentially oral explanations in support of her ITC claim. She did not
submit any supporting documentation, and she primarily insisted that she and
her spouse did everything they could to stay in the trucking business.
[20] It is not easy to
determine when a commercial enterprise begins and when it ends. The beginning
does not always coincide with the date of creation of the legal entity that
forms the business, and the end is not always when the commercial activities cease.
Certain activities may extend the true end of a business that has ceased to
carry on the activities related to its vocation; for example, a business might
collect debts or sell accumulated inventory after its manufacturing has ceased.
[21] In this regard, the
Honourable Justice Rip, in Two Carlton Financing Ltd. v. Her
Majesty the Queen, [1998] T.C.J. No. 447, docket 96‑523(GST)G,
2000 G.T.C. 4020, wrote as follows:
29 Since Carlton did not
report any taxable supplies until February 1995 and did not collect any GST
during the period, respondent's counsel concluded Carlton was not engaged in
any commercial activity during the period.
30. Appellant
suggests that during the period Carlton was starting up a business. Its counsel
referred to Revenue Canada Interpretation Bulletin No. IT-364 for the
proposition that a business commences whenever some significant activity is
undertaken that is a regular part of the income earning process in that type of
business or is an essential preliminary to normal operations. Counsel also
referred to Bowman, T.C.C.J. who stated that:
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 of 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.
[22] Further on in the
same judgment, our colleague, in a discussion of considerations that are of
great relevance to the case at bar, stated as follows:
35. . . . The
definition of "commercial activity" in subsection 123(1) of the Act
does not expressly require that taxable supplies be made. Nonetheless, it is
difficult to imagine the carrying on of a business without its activity falling
within the scope of a supply.
36. . . . Since the
appellant reported no sales or revenues during the period, one may reasonably
infer that the appellant was not engaged in commercial activities during the
period and, if so, the appellant cannot be considered eligible for ITCs in the
period.
37. . . . ITCs are
generally unavailable unless the inputs for which the ITCs are claimed were
used in the production of other taxable supplies. Carlton did not report any taxable supplies during the period in issue
which, if it were in fact carrying on the business it purported to acquire
immediately on acquisition, supplies would have been made.
[23] It is not easy to
determine a precise moment or date because there can be grey or transitional
areas.
[24] In the case at bar,
the Respondent interpreted the facts in a very broad and even advantageous way,
both with respect to eligibility for the ITCs and with respect to the period.
[25] In support of her
submissions, the Respondent cited some very relevant decisions. In Strachan v.
The Queen, [1993] G.S.T.C. 72, No. 98‑1914(GST)I, the
Court set out certain principles that are very much on point:
[23] Immediate profit
is not required, however, certain things must happen in the start-up period.
Although every business is entitled to a grace period for start-up costs, it
still must be shown that the business is "structured, organized, manned,
financed and planned in such a way as to be found to be reasonably capable at
that time of yielding a profit in due course." When the business criteria
are present the length of time to lead to profitability is a direct function of
the endeavour in question.
. . .
[24] There is a strong personal
element in that the site of the activity is also the personal residence of the
Appellant.
[25] . . . [T]he Appellant in this
case was still in her training and development stage. I conclude there was
insufficient supportive criteria to justify a conclusion of commercial activity
within the meaning of the Act.
. . .
[28] . . . in relation to the dog biscuit endeavours, the
project was in its embryo development stage and did not have a reasonable
expectation of profit or the indicia of commercial viability.
[29] I conclude for the assessment period there was no
commercial activity conducted on the premises.
[26] In Janitsch v. The Queen, 2004 GTC
326, No. 202‑3892(GST)I, the Appellant was a visual artist. Before
analyzing the facts, the Court stated in passing, at paragraph 7, that "because
of the statutory definition, the Stewart decision does not affect GST
appeals."
[27] Although the
Appellant made a sale (albeit its only sale), the Court determined that its
work could not be considered a commercial activity.
[28] In Haberdan Construction Inc. v. The
Queen, 1999 GTC 3249, No. 98‑85(GST)I, the appellant had
not reported any sales or collected any GST, and the Appellant attributed this
to the bankruptcy of its customers and its inability to collect from them. The
Court held:
[7] The Appellant has the burden
of proof of establishing his case and regrettably the Appellant has been unable
to do so. This may have resulted from the bankruptcy of the Appellant's
customers and his inability to collect but it would appear that since there
were no sales there was no commercial activity carried on.
[29] Lastly, in Hegerat v. The Queen,
2000 GTC 629, No. 98-2863(GST)I, the Appellant designed and
promoted products. In its analysis, the Court stated, inter alia, as
follows:
[15] It seems to me that he has gone to these lengths to
establish the fact that everything about his apartment is deductible for either
income tax purposes or can be used for input tax credits for goods and services
tax because it is just as much a place of business as if he owned a factory and
it were the factory. . . .
[17] On the main issue, the disallowance of the input tax
credits in the amount of $713.97 as shown in Exhibit R-2, I find that the
Appellant's case is hopeless. He cannot possibly succeed against the
Minister's disallowance of those tax credits for the following reasons. In the
goods and services tax legislation, the definition of commercial activity in
section 123 contains the following words:
123(1) Commercial activity of a person means
(a) a business carried on by the person (other than a business
carried on by an individual ... without a reasonable expectation of profit)
except to the extent that ...
As I read that definition, a commercial activity of a person means a
business carried on by the person other than a business carried on by an
individual without a reasonable expectation of profit. If there is no
reasonable expectation of profit from an activity which purports to be a
business, then it is not a business for purposes of commercial activity and,
therefore, not a business in respect of which input tax credits can be claimed.
[18] That raises the question whether this activity of
invention, design and product development is an activity with a reasonable expectation
of profit. I find that it is not. It is an activity in respect of which there
is no revenue. There is no question that the Appellant has an intense interest
in it, and he is imaginative, to say the least, and dedicated to the idea of
bringing better mouse traps to the market but, without any revenue at all,
without any sales, I find it hard to visualize this activity as a business. If
I could compare it to a mine, the Appellant is like a person who has discovered
an ore body and is working at it before producing an ounce of ore. The Appellant
is working at the development of ideas without an idea which he can yet take to
market.
[30] That decision was
affirmed by the Federal Court of Appeal on the issue of the ITCs disallowed by reason of the
absence of commercial activity: 2000 GTC 4117, No. A‑477‑98.
[31] In the case at bar,
the Appellant had to bear the disastrous consequences of certain people's
negligence and carelessness to the point of losing, according to its
explanations, the vast majority of the assets that enabled it to engage in
commercial activities related to the transportation of goods.
[32] Very courageously,
several initiatives were taken in order to revive the business. Hope, optimism
and determination are remarkable qualities, but they are not, in and of
themselves, sufficient to constitute the foundation of commercial activity
within the meaning of the Act.
[33] In its written submissions,
the Appellant seeks the following relief:
[translation]
·
That the seizure of our bank account be revoked.
·
That our GST/QST registration be reactivated.
·
That your decision be made to apply to the QST
as well . . .
·
That I be reimbursed the taxes to which I
consider myself entitled, plus interest.
[34] In an appeal under section 306 of the Act, the
Court can only vacate or vary the assessment. Consequently, the Court cannot
grant any of the relief sought by the Appellant.
[35] As for the QST, our Court has no
jurisdiction, because such jurisdiction is vested exclusively in the Court of
Quebec under sections 93.1.10 and 93.2 of the Act respecting the Ministère
du Revenu, R.S.Q., c. M‑31.
[36] After disallowing the ITCs for the period
from April 1, 2001 to April 30, 2004, the Respondent revised the
file and allowed the ITCs up to August 31, 2002.
[37] For the remainder of the period—that is, from September 1, 2002
to April 30, 2004—the ITC must be disallowed by reason of the
absence of commercial activity.
[38] In addition, even if
the Appellant had succeeded in showing the existence of genuine commercial
activities, I would still have had to dismiss the appeal, because the evidence
submitted, evidence that was based on essentially oral explanations, is
insufficient to justify the reimbursement of the ITCs.
[39] Although this matter
elicits sympathy and although Ms. Léger devoted a great deal of energy to
her preparation, I cannot dispose of this appeal based on sympathy.
[40] Essentially, I must
apply the law pertaining to the assessment that gave rise to this appeal. Based
on the evidence submitted by each of the parties, that assessment was correctly
made.
[41] Having reviewed all
the documents submitted by the Appellant, I find that the Appellant was no
longer engaged in a commercial activity within the meaning of the Act; consequently,
the appeal must be dismissed.
Signed at Ottawa, Canada, this
7th day of February 2007.
"Alain Tardif"
Translation certified true
on this 20th day of August 2007
Mavis Cavanaugh, Reviser
Email this Content