Citation:
2007TCC407
Date: 20070803
Docket:
2003-2120(GST)G
BETWEEN:
2870258 CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
(Delivered orally from the bench on
May 1, 2007, at Montréal, Quebec, and amended for
clarification and precision.)
Archambault J.
[1] 2870258 Canada Inc. ("Manco") is
appealing from an assessment made by the Ministère du Revenu du Québec ("the MRQ")
as an agent of the Minister of National Revenue ("the Minister")
under the Excise Tax Act, R.S.C. 1985, c. E‑15 ("the Act"
or "the ETA"). The Minister disallowed an input
tax credit (ITC) of $70,000, claimed by Manco for the period from June 1
to August 31, 1988, in respect of property that belonged,
at a certain time, to Solma Electroplating Ltd. ("Solma")
or Empire Electroplating Works Ltd. ("Empire").
In addition, the Minister imposed a penalty of $17,500 under
section 285 of the ETA.
[2] The assessment was made by the Minister on the
basis of the following factual assumptions:
[TRANSLATION]
(a) The facts admitted to above.
(b) The Appellant is
a registrant for the purposes of Part IX of the ETA.
(admitted)
(c) The Appellant
operates a metal plating business. (admitted)
(d) Mr. Ron Di Pasquale
was the Appellant's president at all times relevant to this dispute. (admitted)
(e) Mr. Michele Mangione
was the Appellant's director of production at all times relevant to this
dispute. (admitted)
(f) Mr. Michele Mangione
was also the president of 9044-2435 Québec Inc. at all times relevant to this
dispute. (admitted)
(g) Mr. Maurice
Faille, Michel Faille's father, was a director of 9044‑2435 Québec
Inc. at all times relevant to this dispute. (admitted)
(h) Mr. Michel Faille
was an officer of Seahawk Financial Services Ltd. and of Seahawk Investments
Ltd. at all times relevant to this dispute. (admitted)
(i) The Appellant
was the recipient of the supply, by way of sale, of the assets of the
bankruptcy of Solma Electroplating Ltd. on or about January 8, 1997,
from Friedman & Friedman Inc., trustees in bankruptcy, in consideration of
$15,000, plus GST in the amount of $1,050 (7% of $15,000) and QST in the amount
of $1.043.25 ($15,000 x 1.07 x 6.5%). (denied)
(j) Mr. Ron Di
Pasquale, on behalf of the Appellant and in his capacity as president thereof,
signed the contract reflecting the supply, received by the Appellant, of the
said assets of the bankruptcy of Solma Electroplating Ltd. (admitted)
(k) The Appellant was
the owner of the said assets from the time that this supply was received from
the trustee in bankruptcy on or about January 8, 1997, until and
including the period in issue. (denied)
(l) 9044-2435 Québec
Inc. received a supply, by way of sale, of the assets of the bankruptcy of
Empire Electroplating Works Ltd. on March 7, 1997, from Schwartz
Levitsky Feldman Inc., trustees in bankruptcy, in consideration of $35,000,
plus GST in the amount of $2,450 (7% of $35,000) and QST in the amount of
$2,434.25 ($35,000 x 1.07 x 6.5%). (admitted)
(m) This supply was
pursuant to an offer to purchase the said assets for $35,000 plus GST and QST.
9044-2435 Québec Inc. submitted that offer to the trustee in bankruptcy on January 31, 1997, along with a deposit consisting of 20% of the total
amount, that is to say, $7,976.85 (20% of
$35,000 x 1.07 x 1.065). (admitted)
(n) Mr. Michele
Mangione, on behalf of 9044‑2435 Québec Inc. and in his
capacity as president thereof, signed the offer of purchase and the contract
reflecting the supply of the said assets of the bankruptcy of
Empire Electroplating Works Ltd. (admitted)
(o) The Appellant
paid the deposit by means of a cheque co-signed by Mr. Michele Mangione as
drawer.
(p) In its accounting
books, the Appellant stated that it acquired the assets of the bankruptcy of
Empire Electroplating Works Ltd. for $7,976.85. (admitted)
(q) From the time
that the said assets were supplied by the trustee in bankruptcy until and
including the period in issue, the Appellant's own books stated that it was the
owner of the assets. (denied)
(r) Among the total
ITCs that it claimed in computing its net tax for the period in issue,
the Appellant claimed $70,000 in respect of its receipt of the supply of
the two aforementioned bankruptcies in issue in consideration of $1,000,000
from a supplier named Seahawk Financial Services Ltd. (admitted)
(s) The Minister
refused to allow this ITC claimed by the Appellant in computing the Appellant's
net tax for the period in issue. (admitted)
(t) The voucher that
the Appellant submitted to the Minister in support of its $70,000 ITC claim while the Appellant's net tax return was
being considered was issued by Seahawk Investments Ltd., not Seahawk
Financial Services Ltd., the alleged supplier referred to in the Notice of
Appeal. (denied)
(u) Seahawk
Investments Ltd. did not directly or indirectly receive from the trustees in
bankruptcy the supply, by way of sale, of the assets of the bankruptcies of
Solma Electroplating Ltd. and Empire Electroplating Works Ltd. (denied)
(v) Seahawk
Investments Ltd. did not supply to the Appellant, by way of sale, the assets of
the two bankruptcies in issue in consideration of $1,000,000. (denied)
(w) Seahawk
Investments Ltd. ceased all commercial activities in 1995. (no knowledge)
(x) On July 17, 1997,
the registration of Seahawk Investments Ltd. for the purposes of the Act
respecting the legal publicity of sole proprietorships, partnerships and legal
persons, R.S.Q., c. P-45, was struck off ex officio by the
Inspecteur général des institutions financières pursuant to section 50 of that
Act, and that striking‑off entailed the dissolution of the corporation
under that section. (admitted)
(y) As for Seahawk
Financial Services Ltd., it did not directly or indirectly receive from the
trustees in bankruptcy the supply, by way of sale, of the assets of the
bankruptcies of Solma Electroplating Ltd. and Empire Electroplating
Works Ltd. (denied)
(z) Seahawk Financial
Services Ltd. did [not] supply to the Appellant, by way of sale, the assets of
the two bankruptcies in issue in consideration of $1,000,000. (denied)
(aa) There is no
voucher from Seahawk Financial Services Ltd. in support of the $70,000 ITC
claim, even though that corporation is the one from which the Appellant claims,
in its Notice of Appeal, to have received the supply of the assets in issue in
consideration of $1,000,000. (denied)
(bb) The voucher which
the Appellant submitted to the Minister in support of the $70,000 ITC claim when its net tax return was being considered,
and which was issued by Seahawk Investments Ltd., is a fraudulent or false
document. (denied)
(cc) All documents
related to this purported supply of the assets in issue, of which the Appellant
is the recipient, whether from Seahawk Financial Services Ltd. or Seahawk
Investments Ltd., are false or fraudulent documents obtained as a result of a
fraud committed by one of those corporations or by the Appellant. (denied)
(dd) The Appellant
participated in a scheme one of the purposes of which was to unduly add a
$70,000 ITC in computing its net tax for the period in issue. (denied).
(ee) The voucher for
the $70,000 ITC claim is an invoice of convenience,
intended, among other things, to artificially create a negative net tax balance
and seek a refund thereof for the period in issue, as opposed to the positive
balance that would have been payable to the Receiver General (read "the Minister").
(denied).
(ff) Thus, the
Appellant is liable to the Minister for the amount of the adjustment to the net
tax that it reported for the period in issue, and for the net interest and the
penalties. (denied)
Factual background
[3] Manco was incorporated
in November 1992 and began operating its plating business in December 1992. It
acquired its assets following the bankruptcy of Manco TGV, a corporation
belonging to Mr. Mangione and formed in 1988. Mr. Mangione was Manco's
director of production throughout the period in issue.
Since Mr. Mangione had 18 years of experience in the metal plating
business, Ron Di Pasquale apparently wanted to attract his family's
interest in Manco. Three of Mr. Mangione's children are the equal
shareholders of 2961‑9525 Québec Inc., which holds 50% of Manco, and
Mr. Di Pasquale, through 3178331 Canada Inc., holds the other 50% of
Manco (Exhibit A‑1, tab 15, page 11). Before founding Manco
TGV, Mr. Mangione held 50% of the shares of Solma, another metal plating
company, from 1974 to 1988.
[4] Solma had financial troubles in 1996, as shown
by the application for an extension of the deadline for filing a proposal with
the official receiver, submitted pursuant to the Bankruptcy and Insolvency
Act (Exhibit A‑1, tab 5, page 1). The application
states that Solma wanted to get such an extension because it was in discussions
with a potential investor that would inject new funds into Solma; the investor
in question was Seahawk Financial Services Ltd. ("Seahawk"). Seahawk was
incorporated on July 19, 1993 (Exhibit A‑1, tab 23).
Its articles of incorporation state that it was founded by Seahawk Investments
Ltd. ("Seahawk Investments") and that the president of Seahawk
Investments is Michel Faille. Seahawk Investments was incorporated on
August 14, 1992. According to the notice concerning the
membership of the board of directors, a notice received by the Inspecteur
général des institutions financières on August 14, 1992, Michel Faille
was its director. According to the testimony of Sylvain Vinet, the MRQ's
investigator, Seahawk Investments was struck off ex officio by
the Inspecteur général des institutions financières in July 1997 and its GST
number has been revoked since July 31, 1995. As for Seahawk, it was never assigned a
GST number, and, what is more, there is no trace of that corporation in CIDREQ.
[5] In 1997, Frank Di Pasquale,
one of Mr. Di Pasquale's brothers, was the president of Empire,
another metal plating business, which was also in financial difficulty. Before
going bankrupt, it had labour relations problems with its employees, as
evidenced by the 1996 strike. Ron Di Pasquale even intervened to help
Empire in certain dealings with the MRQ.
[6] According to Ron Di Pasquale's
testimony, Mr. Faille, acting on behalf of Seahawk, contacted
Mr. Mangione to encourage him to operate Solma. Ron Di Pasquale
personally met Mr. Faille through Mr. Mangione.
Mr. Di Pasquale feared that Mr. Faille would become one of Manco's
competitors.
Mr. Di Pasquale said that, in order not to lose Mr. Mangione's services, Manco wished to acquire the
assets of the two bankrupt corporations, namely Solma and Empire ("the
bankruptcy assets") but its financial health was precarious and it was not
able to finance that acquisition. Thus, Manco allegedly turned to Seahawk,
which would act as an intermediary in the purchase of these assets. An
agreement was allegedly reached on January 6, 1997, between Manco,
Seahawk and 9044‑2435 Québec Inc. ("2435"), as represented
by its president, Mr. Mangione. 2435 was a corporation that belonged to
Mr. Faille's father, Maurice Faille, who, in all likelihood, was just
acting as a frontman for his son. Maurice Faille was also a director of
2435. In the agreement,
Seahawk granted Manco a purchase and rental option in respect of the assets
once owned by Solma. According to Mr. Di Pasquale, this agreement was
drafted by Mr. Faille or one of his representatives. The
agreement (Exhibit A‑1, tab 6) provides as follows:
[TRANSLATION]
THIS AGREEMENT DATED JANUARY 6, 1997
Between: 2870258
Canada INC., doing business as Manco Domplex, 8895 Crescent 3,
Anjou, QC, duly represented by its president Mr. Ron Di Pasquale,
hereinafter MANCO.
And: 9044‑2435
QUÉBEC INC., duly represented by its president Mr. Michele Mangione,
hereinafter QUÉBEC INC.
And: SEAHAWK
FINANCIAL SERVICES LTD., 505 De Maisonneuve West, Suite 904, Montréal, QC, hereinafter SEAHAWK.
Preamble:
Whereas
MANCO
is engaged in the business of plating metals of all kinds;
Whereas QUÉBEC INC. wishes to purchase the
position of the Caisse populaire St‑Albert‑Le‑Grand in the
matter of the bankruptcy of SOLMA ELECTROPLATING LTD.;
Whereas SEAHAWK wishes to be reassigned
the assignment of claims between Caisse populaire St‑Albert‑Le‑Grand
and QUÉBEC INC.;
And whereas SEAHAWK wishes to grant MANCO
an option to purchase and/or lease the equipment that once belonged to SOLMA.
It is agreed that:
1. The preamble forms
an integral part hereof.
2. In
order to pay off the professional fees owed to FRIEDMAN & FRIEDMAN in
connection with the SOLMA bankruptcy, MANCO agrees to acquire the SOLMA
assets directly from FRIEDMAN & FRIEDMAN for approximately $15,000.
3. Since
MANCO does not have the necessary working capital or borrowing capacity
to purchase the SOLMA assets and buy back the Caisse populaire's position, it
shall sign an agreement with SEAHAWK, under which it shall commit itself
to purchase and/or lease all the SOLMA equipment from SEAHAWK.
4. QUÉBEC
INC., shall proceed to buy back the Caisse populaire's interest (± $500,000) so that it can be assigned the rights to the SOLMA equipment,
and shall release MANCO when it acquires the equipment from
FRIEDMAN & FRIEDMAN.
5. QUÉBEC
INC. shall assign, to SEAHAWK, its rights in the SOLMA assets under
the assignment of claim that it shall obtain from the Caisse populaire St‑Albert‑Le‑Grand.
6. SEAHAWK
shall grant MANCO an option to purchase the SOLMA equipment for a total
of $750,000. MANCO shall have until December 31, 1997, to exercise that
option. If the option shall not have been exercised, MANCO shall pay SEAHAWK
rent of $10,000 per month for the lease of the equipment, retroactive to
January 1, 1997.
On the date that the option
expires, SEAHAWK shall reserve the right to sell all the SOLMA assets to
the highest bidder should MANCO not exercise its option. In addition, MANCO
shall defray all costs necessary for the restoration of the SOLMA equipment to
perfect condition, and carry out the necessary repairs and defray all costs
related to the transaction.
. . .
[7] Two days later, that is to say, on
January 8, 1997, the trustee of the Solma bankruptcy transferred the
Solma assets to Manco, including inventory and equipment, for a total of
$15,000, plus taxes, for a total of $17,093.25. This amount of $17,093.25 was
entered entirely under [TRANSLATION] "Machinery and Equipment" in
Manco's accounting records.
[8] On January 31, 1997, 2435 made an offer to the trustee in the
Empire bankruptcy to purchase Empire's equipment for $35,000, plus taxes,
for a total of $39,884.25. Attached to that offer was a cheque in the amount of
$7,976.85, which consisted of 20% of the offer amount, and the balance was to
be payable on February 7, 1997. This cheque was made by Manco on
January 31, 1997, and another cheque, in the amount of $31.907.40,
was made by Michel Faille, likely on behalf of one of his corporations, on
February 13, 1997 (Exhibit A‑1, tab 11, second
sheet). On February 3, 1997, three days after this offer was
submitted, Manco and Seahawk entered into the following agreement:
[TRANSLATION]
. . .
PREAMBLE
Whereas Manco Domplex
is engaged in the business of plating metals of all kinds;
Whereas Seahawk
acquired all the capital assets of the Solma and Empire companies, which had been engaged
in the business of plating metals of all kinds;
Whereas Manco wishes to obtain an
option to acquire the capital assets that once belonged to Solma and Empire
and are now owned by Seahawk;
And whereas Seahawk wishes to grant
an option to Manco Domplex,
IT IS AGREED THAT:
1. The preamble
forms an integral part hereof.
2. Seahawk
grants Manco Domplex an option to acquire all the capital assets of Solma,
with the exception of the building, for a fixed price of seven hundred and
fifty thousand dollars ($750,000).
Manco Domplex will have until December 31, 1997, to exercise
its option. If the option is not exercised, Manco Domplex shall pay
Seahawk ten thousand dollars ($10,000) per month as rent for the said
equipment, retroactive to January 1, 1997.
Seahawk reserves the exclusive right to sell all the
equipment to the highest bidder if Manco has not exercised its option by
the expiry date.
Manco Domplex shall defray all the costs necessary to restore the Solma
equipment to perfect condition, carry out the necessary repairs and defray all
the costs related to the transaction.
3. Seahawk
grants Manco Domplex an option to acquire all the capital assets of Empire,
with the exception of the building, for a fixed price of two hundred and fifty
thousand dollars ($250,000).
Manco Domplex shall have until December 31, 1997, to exercise its
option. If the option is not exercised, Manco Domplex shall pay Seahawk
four thousand dollars ($4,000) per month as rent for the said equipment,
retroactive to February 1, 1997.
Seahawk reserves the exclusive right to sell all the
equipment to the highest bidder if Manco has not exercised its option by
the expiry date.
Manco Domplex shall defray all costs necessary to make the Empire
premises leasable and to return the Empire equipment in perfect condition.
Furthermore, Manco shall make all the necessary repairs and defray all costs
related to the transaction.
. . .
[9] The contract of sale between the trustee of the
Empire bankruptcy and 2435 (Exhibit A‑1, tab 14), giving effect
to the offer of January 31, 1997, was signed on March 7, 1997.
[10] On May 21, 1997, Manco retained the services
of Ronald Schiller, a chartered accountant, whom Mr. Faille had
introduced to Mr. Di Pasquale. Mr. Schiller's mandate was to
help Manco obtain the necessary funding to exercise the options granted to it
by Seahawk for the purchase of the bankruptcy assets. Mr. Schiller
prepared a business plan, and submitted it in November 1997
(Exhibit A‑1, tab 15). At page 15 of the document,
Mr. Schiller wrote:
[TRANSLATION]
The management took a big
gamble when they entered into the agreements with Seahawk. However, as shown by
the actual results as at September 30, 1997, that gamble paid off. Sales and profits have
increased dramatically.
They must now buy back the options held by
Seahawk and purchase all the equipment definitively.
As shown by the financial forecasts for
1998 and 1999, the project as a whole will enable Manco to increase its sales
and net profit while ensuring that it has the necessary funds for debt service.
Earlier on in
the document, at page 13, he had written:
[TRANSLATION]
Manco's sales grew by 66% from 1994 to 1995
and by 33% from 1995 to 1996. Although management might have settled for those
high rates, the economic climate has made a phenomenal 77% growth rate possible
for the year 1996‑97 (based on current results after 10 months of
operation and on sales projections for the last two months of Manco's fiscal
year.)
[11] According to Mr. Di Pasquale, Manco
took possession of the Solma assets in January 1997, and took possession
of the Empire assets in mid‑February 1997 because the owner of the
building in which the Empire assets were located was in a state of panic.
Mr. Schiller paints the same picture at page 14 of his business plan.
Thanks Mr. Schiller's efforts, financing was obtained from the TD Bank. To
this end, Manco obtained a $1,200,000 loan guarantee from the Société de
développement industriel du Québec ("SDI"), as confirmed by a letter
dated June 29, 1998 (Exhibit A‑1, tab 19). SDI had asked the Ministère de l'Industrie,
du Commerce, de la Science et de la Technologie (MICST) for a sectoral opinion
on December 9, 1997. In its opinion of January 28, 1998, the MICST's chemical and materials
industries directorate expressed a favourable view of Manco's project and
recommended that SDI grant the loan guarantee applied for (Exhibit A‑1,
tab 16). The description of the financing package states that it includes
$750,000 for the acquisition of Solma and $250,000 for the acquisition of
Empire. The opinion states that [TRANSLATION] "Manco would like to
acquire the plating equipment that belonged to Solma and Empire, two companies
that went bankrupt last year, in order to increase its production capacity so
that it can become more competitive." (Exhibit A‑1,
tab 16, page 2, under the heading [TRANSLATION] "The Company").
The report goes on to say the following at page 3, under the heading [TRANSLATION]
"The Company's Capacity": "[I]t can be seen that the company is
in somewhat fragile financial health. This means that it could experience
difficulty if the sales forecasts are not attained." Lastly, the factors
justifying the recommendation include, at page 4, "the acquisition of
plating equipment that is still in good condition for a relatively low price"
and the fact that "in recent years, Manco‑Domplex has become
one of the largest industrial plating subcontractors in Quebec."
[12] Alejandro Morales of SDI testified at the
hearing and confirmed that it is standard practice to visit a company that will
be getting a loan guarantee. According to Ron Di Pasquale,
Mr. Morales and an MICST representative did indeed visit Manco's
facilities. The loan guarantee offer attached to Mr. Morales's letter
dated June 29, 1998, specified that the $1,200,000 loan was to be
used exclusively to finance the plan to acquire machinery and equipment
($1,000,000), make leasehold improvements ($200,000) and set up a $400,000 working
capital, for a total of $1,600,000. SDI was to provide a $1,200,000 loan
guarantee, and a Québec Business Investment Company (QBIC) was to invest
$400,000. SDI's commitment was conditional upon a $350,000 line of credit
being obtained, and upon a written confirmation by Manco's external auditor
that a QBIC would be investing $400,000. In a letter dated April 9, 1999,
Frank Bruzzese confirmed to the SDI that Manco had issued 1,500 Class A
shares to SPEQ Placage Montréal Inc. [a QBIC] for a total consideration of
$400,000 (Exhibit A‑1, tab 21). Mr. Di Pasquale said
that the QBIC in question was founded on November 30, 1998.
[13] In July 1998, Mr. Di Pasquale called
Mr. Faille to notify him that he was ready to finalize the acquisition of
the bankruptcy assets, and that the TD Bank needed an invoice in order to
advance the money. The invoice in question (Exhibit A‑1, tab 20)
was issued by Seahawk Investments to Manco on July 9, 1998. It
describes the assets as [TRANSLATION] "Machinery, equipment and
facilities, as set out in the appendices hereto, which form an integral part of
this invoice" and specifies the price, namely $1,000,000, plus GST in the
amount of $70,000 and QST in the amount of $80,250, for a total of $1,150,250.
The invoice also provides GST and QST registration numbers.
Mr. Di Pasquale confirmed that no new agreement was made between
Manco and Seahawk Investments. He claims that the assets were transferred
in accordance with the agreement of February 3, 1998, under which Seahawk granted Manco an
option for $1,000,000. At the hearing, when Mr. Di Pasquale's lawyer pointed
out to him that Seahawk on the invoice was not the same entity, he replied that
Mr. Faille had told him that it was [TRANSLATION] "the same
thing."
[14] Later, on August 5, 1998, the TD Bank
issued two $575,125 bank drafts payable to Seahawk Investments. The drafts,
which totalled $1,150,250, were endorsed by Michel Faille for "Seahawk"
— there is no
specification as to whether this was a reference to Seahawk or Seahawk
Investments — and
the Royal Bank of Canada guaranteed the endorsement. Jacqueline Bastien,
the account director at TD Bank, testified in order to offer the two bank
drafts and the resolution that the Royal Bank gave her in connection with
its guarantee of the endorsement. However, the resolution was issued to
Seahawk, not Seahawk Investments (Exhibit A‑2).
[15] When Mr. Bruzzese recorded the cost of the
bankruptcy assets in Manco's accounting records as $1,000,000, he was relying
on the invoice from Seahawk Investments and on the verifications that he
presumed the TD Bank had done before it financed the acquisition. He was told
that the $17,093 for the acquisition of the Solma assets were just a down
payment.
[16] Manco claimed the $70,000 ITC in its GST return dated
September 28, 1998 (Exhibit I‑1). Normand O'Reilly,
the Minister's auditor, contacted Manco the following month to obtain the
documents relevant to this claim. On November 25, 1998, he paid a visit to Manco's place of
business in order to have a look at its equipment. He obtained the serial
numbers of four items of property chosen at random, and, according to
Mr. Di Pasquale, these numbers were not consistent with the numbers
set out in the appendices to the invoice of July 9, 1998. Mr. O'Reilly
disallowed the ITCs because he was not certain who had sold the bankruptcy
assets. It
must be added that Mr. O'Reilly did not ask to check the more important
equipment serial numbers in the plant. Mr. Di Pasquale said that
these serial numbers were located on filters and other property of that kind.
Apparently, there were no serial numbers on the more important equipment.
[17] The MRQ was not content merely to disallow Manco's
ITC claim; it also decided to conduct an investigation
to determine whether a criminal prosecution was warranted. It entrusted this
task to Mr. Vinet in May 1999. After checking with the trustees of
the Solma and Empire bankruptcies, Mr. Vinet determined that the purchaser
of the Solma assets was Manco, which paid $15,000; that the purchaser of the
Empire assets was 2435; and that the Solma assets had been entered solely under
the heading [TRANSLATION] "Machinery and Equipment" into Manco's
account #1560; that the $1,000,000 invoice had been issued by
Seahawk Investments, not Seahawk; that Seahawk Investments was struck off
in July 1997; that its GST registration number had been deleted since
July 31, 1995; that Seahawk never obtained a GST registration number;
and that there was no evidence regarding ownership title to the assets. Based
on these facts, he determined that Manco filed a false statement in order to
unduly obtain an ITC, and criminal prosecutions were commenced against Manco
and its two directing minds, Michele Mangione and
Renaldo Di Pasquale.
[18] Madam Justice Céline Lacerte‑Lamontagne
rendered her decision on December 4, 2003, after a three-day trial in which only
the Crown called witnesses. The main witnesses were Mr. O'Reilly, the
auditor, and Mr. Vinet, the investigator. Madam Justice Lacerte-Lamontagne
held that the Crown had failed to meet its burden to prove all constituent
elements of the offences beyond a reasonable doubt. Consequently, Manco and
Messrs. Di Pasquale and Mangione were acquitted. The Crown
appealed, and the Honourable Mr. Justice Jean‑Guy Boilard of
the Superior Court dismissed the appeal.
[19] In his
testimony before me, Mr. Vinet confirmed that he obtained all the
documents that he had requested from Manco, and that, according to his
recollection, Manco's representatives had cooperated with him.
[20] Lastly, it must be mentioned that, on
October 13, 2004, Mr. Faille pleaded guilty to the charge of participating in the making, by Manco, of false or
misleading statements for the period from June 1, 1998 to
September 30, 1998, and of permitting Manco to unduly obtain a
$70,000 ITC, thereby committing offences under subsections 327(1) and
329(1) of the Act (Exhibit I‑13). In his testimony before this
Court, Mr. Faille explained that he pleaded guilty without familiarizing
himself with the charges, simply to limit his legal fees. However, he
acknowledged that he did not remit the $70,000 in GST or the $80,250 in QST,
purportedly because he had been harassed by the tax authorities for many
years.
Analysis
[21] The Minister's position is that the $1,000,000
invoice is false, and that Manco did not genuinely receive the bankruptcy
assets from Seahawk for that amount. In the
Minister's submission, the true acquisition occurred earlier, when Manco
acquired the Solma assets directly for $15,000, and I presume that the Minister
is arguing that the Empire assets were acquired in a similar manner for
$35,000.
[22] In my opinion, the evidence as a whole favours
Manco's position that it acquired the bankruptcy assets for $1,000,000. First of
all, the testimony of Mr. Di Pasquale and Mr. Faille has shown
that the game plan was essentially to acquire these assets through the interposition of Seahawk, once the $1,000,000 in financing was
in place.
[23] Although this approach leaves a lot to be desired,
the purchase contract between the Solma bankruptcy and Manco merely sought to
give the bankruptcy enough money to pay off the trustee's fees.
Mr. Faille, the apparent mastermind of the whole scheme, drafted the
contracts quite carelessly; some of them, such as the contract for the purchase
of the Solma assets, do not adequately reflect reality. I believe that the
true agreement between Manco and Seahawk was that the
bankruptcy assets were to be acquired by Manco through Mr. Faille and/or one of his numerous dummy
corporations, and that the true consideration for these assets was indeed to be
$1,000,000.
[24] The facts that support this finding are as
follows. From the beginning, before the Solma assets were even sold by the
trustee to Manco, there was an agreement dated January 6, 1997, by which [TRANSLATION] "Seahawk [grants] Manco an option to purchase the Solma
equipment for . . . $750,000." A few days later, that is to
say, on February 3, 1997, Seahawk granted a similar option in
respect of the Empire assets, [TRANSLATION] "with the exception of
the building, for . . . $250,000." In my view, these agreements
more plausibly reflect the reality of the transactions that the parties were
contemplating. As well, a feasibility study was done by Mr. Schiller, and
resulted in the recommendation that a $1.2 million loan be obtained from the TD
Bank. There was also proof that payment of the invoice issued by Seahawk
Investments was made on August 5, 1998, by means of two bank drafts
for $575,125 each, totalling $1,150,250. In addition to the foregoing evidence,
there was a guarantee provided by the SDI with the approval of the MICST. Thus,
based on the evidence as a whole, I find that Manco did indeed acquire the
bankruptcy assets for $1,000,000 through Mr. Faille.
[25] However, in order to be entitled to an ITC in
respect of these assets, certain conditions must be met, including these set
out in paragraph 169(4)(a) of the Act,
which provides:
169(4) A registrant may not
claim an input tax credit for a reporting period unless, before filing the
return in which the credit is claimed,
(a) the registrant
has obtained sufficient evidence in such form containing such information as
will enable the amount of the input tax credit to be determined, including any
such information as may be prescribed; and
. . .
[26] Subparagraph 3(b)(i) of the Input Tax Credit Information (GST/HST) Regulations ("the
Regulations") provides:
3. For the purposes of paragraph 169(4)(a)
of the Act, the following information is prescribed information:
. . .
(b) where the total amount paid or payable shown on the
supporting documentation in respect of the supply or, if the supporting
documentation is in respect of more than one supply, the supplies, is $30 or
more . . . :
(i) the name of the supplier or the
intermediary in respect of the supply, or the name under which the supplier or
the intermediary does business, and the registration number assigned under
subsection 241(1) of the Act to the supplier or the intermediary, as the
case may be,
[Emphasis added.]
[27] The evidence in the case at bar has shown that the
invoice submitted in support of the ITC claim contained a
GST registration number, but that the number had been revoked one year before
the transfer of the bankruptcy assets by Seahawk
Investments. In Systematix Technology Consultants Inc. v. The Queen,
2006 TCC 277, I had to decide a case similar to the case at bar. At
paragraph 5 of that decision, I wrote:
In the second category, the invoices do
provide a registration number but the number was not valid at the relevant
time. This category can be divided into three subcategories. In the first of
these, a valid registration number appears but only for a period prior to the
relevant period. . .
[28] Following my analysis, at paragraph 15 of my
decision, of the meaning of the words in subparagraph 3(b)(i) of the
Regulations, that is to say, the question whether the invoice has to provide a
registration number attributed in accordance with subsection 241(1) of the Act,
I held that the absence of a valid registration number at the relevant time precludes
a business from being entitled to an ITC.
[29] I am aware that Systematix is being appealed
from before the Federal Court of Appeal, but, unfortunately, at the time
that I rendered my decision in the case at bar, the Federal Court of Appeal had
not yet decided the merits of that appeal. Thus, for
the time being, I adopt the same interpretation that I adopted there.
[30] Naturally, the other basis upon which the ITC
could be disallowed was that, at the relevant time, Seahawk
Investments had been dissolved and had no legal existence. After the parties'
oral submissions, I suspended the hearing of this appeal, which took place from
October 16 to October 20, 2006,
in order to enable the parties to settle not only this dispute, but also the
disputes in the related taxation files. Unfortunately, the parties were unable
to achieve such a settlement. However, the suspension enabled Manco to obtain a
ruling that revoked the striking of Seahawk Investment's corporate
registration. Since I also allowed new evidence to be submitted, a facsimile of
that ruling (Exhibit A‑8) was tendered in evidence by counsel for
Manco at the hearing on May 1, 2007. But counsel for the
Respondent submits that, in view of section 57 of the Act respecting
the legal publicity of sole proprietorships, partnerships and legal persons,
reproduced below, that retroactive ruling cannot be set up against the
Respondent:
57. Subject to the rights
acquired by any person or group, the registration of a registrant is deemed
to have never been struck off and the legal person constituted in Québec is
deemed to have never been dissolved.
[Emphasis added.]
[31] Indeed, counsel for the Respondent submits that the
Minister had "acquired rights" because more than four years had
elapsed since the acquisition of the bankruptcy assets, and the Minister could
invoke the expiration of the limitation period. Thus, at the
relevant time, namely the time that the GST return was filed, the supplier (Seahawk Investments)
no longer existed. Under these circumstances, he submits, Manco could not
obtain the ITC. In my opinion,
it is unnecessary to decide this issue given my finding that a GST registration
number is required in order to be entitled to an ITC.
[32] The Minister imposed a penalty under section 285
of the Act, which provides:
285. False statements or omissions − Every person who knowingly,
or under circumstances amounting to gross negligence, makes or participates
in, assents to or acquiesces in the making of a false statement or omission in
a return, application, form, certificate, statement, invoice or answer
(each of which is in this section referred to as a "return") made in
respect of a reporting period or transaction is liable to a penalty of the
greater of $250 and 25% of the total of
. . .
[Emphasis
added.]
[33] The onus was on the Minister to show that Manco
knowingly, or in circumstances amounting to gross negligence, made a false
statement in its net tax return for the relevant period. Naturally, if I had
been satisfied that the acquisition of the bankruptcy assets for $1,000,000 was
merely a sham and had no economic substance, the Minister's burden would have
been lighter. However, since I have determined, based on the evidence as a
whole, that the equipment was genuinely acquired for $1,000,000 (though one cannot be certain who the true seller of that equipment
was) and since I have no reason to believe that Manco was aware that Seahawk
had no valid GST registration number, I rule that it would be entirely
unwarranted to impose a penalty on Manco under the circumstances.
[34] In addition, Mr. Faille
testified that he decided not to remit the $70,000 in GST to the MRQ without
consulting with or notifying anyone. Consequently, there is no evidence that
Manco and its representatives were involved in the failure to remit. He also
confirmed that there was no reason to believe that Manco was aware of his plan
to avoid remitting, to the MRQ, the GST that Manco had paid upon acquiring the
bankruptcy assets.
[35] For all these reasons, Manco's appeal is allowed,
and the assessment is referred back to the Minister for reconsideration and
reassessment on the basis that the penalty imposed under section 285 of
the Act must be cancelled, without costs in view of the circumstances.
Signed at Vancouver, British
Columbia, this 3rd day of August 2007.
"Pierre Archambault"
Translation certified true
on this 20th day of February 2008.
François
Brunet, Revisor
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