Citation: 2008TCC451
Date: 20080814
Docket: 2007-3982(GST)I
BETWEEN:
PRICE CHOPPER CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, A.C.J.
A. Introduction
[1] This appeal by
Price Chopper Canada Inc. (“PC Canada”) is in relation to an assessment by
Canada Revenue Agency (“CRA”) on May 20, 2005, with respect to GST for the
period September 30, 1998 to August 31, 2003. The Appellant asserts that it is
entitled to Input Tax Credits (“ITCs”) in the amount of approximately $112,698.06
for GST it paid on purchases of domestic and imported supplies. The issues on
the appeal are who is the recipient of the supplies and who is the importer of
the supplies, where applicable, under the terms of the Excise Tax Act (“ETA”)
and the Customs Act.
B. Facts
[2] The Appellant was
in the business of taking orders for wristbands, manufacturing and processing
the orders and then delivering the finished wristband product. The wristbands
were primarily made up of two items; paper and adhesive and the printing on the
paper.
[3] The Appellant had
no office or physical address in Canada, other than a mailing address at its accountant’s office.
The Appellant’s principal shareholder, Nyla Sooknarine, resides in Orlando, Florida, and she is a
sole shareholder of the Appellant. Besides suppliers, there are other companies
which the Appellant does business with, most principally, Price Chopper Inc.
(“PC USA”) of which Nyla Sooknarine,
owns 10%.
[4] Typically, PC
Canada, would place a purchase order for supplies with Unisource Canada, Inc.
(“Unisource”), which would be delivered over a period of time directly to the
printing service, SBS Imprinting Service (“SBS”), located in London, Ontario. The
invoices and orders from Unisource were addressed to PC Canada at an address in
Florida. Orders for adhesive would
be placed by PC Canada to Ludlow Technical Products (“Ludlow”) in the United States and this product would
be delivered over a period of time to SBS. On occasion, Cariflex (1994) Limited
(“Cariflex”) provided supplies to PC Canada from Trinidad and Tobago.
[5] At trial, invoices
were not produced with respect to the adhesive products from Ludlow. Canadek Declarations showed
the importer as PC Canada but it was in care of SBS and the invoices were in
the same form whether the product was provided by Ludlow or Cariflex. Invoicing was in US
dollars as were the Canadek Declarations. Canadek Declarations were used to have
the supplies from Ludlow and Cariflex clear customs. The importer on the Canada Customs documents
was shown as Price Chopper Canada Inc. whether the products were shipped by
Cariflex or Ludlow.
[6] The Appellant used Link
Customs Services Ltd. (“Link”) to look after the supplies once they arrived at the
U.S. border. Link would
arrange for the supplies to be imported into Canada and then invoice PC Canada for the
duty, GST, and their services accordingly. For the period in question, the
bills from Link went to PC Canada at an address in Florida. The wristbands when processed or
manufactured were invariably shipped to PC Canada or PC USA both at the same
address in the United States or to the address of PC Canada in Florida, that is 2721 Forsyth Road, Suite 210, Winter Park, Florida, 32792. The Appellant
asserts there were loans from PC USA to PC Canada or monies owing by PC USA to PC Canada and as
such, PC USA
was directed to pay the accounts of PC Canada suppliers.
[7] When PC Canada’s
business was established in 1998, Nyla Sooknarine wrote a note to her
accountant to explain about how PC Canada operated. In her note, the operations
were basically described as follows: PC USA would order and pay for all
materials for the wristbands, that is the glue from Ludlow and the paper from
Unisourse, both of which would be sent to SBS, Link would clear all the
shipments into Canada and then invoice PC Canada. Some are paid by PC Canada
and the rest, payable in US funds, are paid by PC USA. They also had supplies from Trinidad going to SBS and GST
was charged on those shipments. The invoices from Unisource were billed with
GST. The adhesive from Ludlow comes from the USA and Link pays the GST for imports
into Canada and then bills PC
Canada. The finished goods as wristbands are shipped back to the United States
via Link to PC USA
or to others as custom orders. PC USA wires the money to SBS for the printing; some are paid by
PC Canada on personal cheques.
[8] CRA in conducting
an audit on ITCs was provided little documentation. Bank statements were used
to recreate a summary of expenses which was compared to the General Ledger
provided by the Appellant’s accountant. There were significant differences
between the sales figures provided for GST purposes and those on the income tax
returns. ITCs were allowed where the cheque was matched with an invoice. It was
noted that most of the invoices were for PC Canada but issued to the address
of PC USA. CRA was of the view
that PC USA would order paper supplies from a Canadian source, i.e.
Unisource, and glue from a USA source Ludlow, and had the supplies sent to SBS for printing. GST was
paid on the supplies by PC Canada when Link invoiced PC Canada for the GST
and its brokerage fees. PC Canada paid Link but the Minister opines that PC
Canada was not the importer and as such not eligible for ITCs. PC Canada paid
the GST because PC USA
was not the registrant and therefore was not entitled to claim the ITCs. Since
the work was done in Canada and therefore product exported to a consignee in
the USA who received the goods
in the USA, they would pay the GST
even though PC Canada is the importer on record. PC Canada did not take
possession of the goods. They were not the recipient of the supplies therefore
they could not claim ITCs. PC Canada was not the purchaser of the goods. If PC
USA was registered they could claim the ITCs; absent that registration, they
could pass on this entitlement to SBS, providing they had the proper U.S. documentation. The goods
were invoiced according to the CRA auditor’s appreciation of the documents he
had seen, to PC USA and paid for by PC USA. Of the $112,698.06 in ITCs not
allowed about 80% related to imports. Most of the sales were not recorded in
PC Canada’s records. Almost all the supplies were ordered and paid for by
PC USA. Numerous attempts to
obtain additional information or particulars from the Appellant by the
Respondent, were to no avail. There was no response to inquiries with respect
to the location of the permanent address of the Appellant’s establishment in Canada or elsewhere. The PC
Canada corporate tax account and importer account were closed in September
2001, yet in 2003 the Appellant reported revenue in a GST return but did not
report any corporate income or importer income since its account was closed.
[9] CRA was of the view
that PC USA was the importer because:
(1)
The
invoice for the supplies was from PC USA.
(2)
The
supplies were ordered by PC USA.
(3)
Payments
were made by PC USA.
(4)
There
was no paper trail to PC Canada except for the fact they were shown on the
customs documents (Canadek Declarations) as the importer.
(5)
There
were alternatives that PC USA could have employed to obtain the ITCs.
C. Issues
[10] There are two issues
to be considered by the Court:
1.
Was
the Appellant the recipient on the purchase of domestic supplies?
2.
Was
the Appellant the importer of imported supplies?
D. Law and Analysis
(i) Statutory
Provisions
[11] The liability to
pay the GST on supplies purchased in Canada is imposed by subsection 165(1) of the ETA,
which reads as follows for the years under appeal:
165. (1)
Imposition of goods and services tax - Subject to this Part, every recipient
of a taxable supply made in Canada shall pay to Her Majesty in right of Canada
tax in respect of the supply calculated at the rate of 7% on the value of the
consideration for the supply. [Emphasis Added].
[12] The liability to
pay the GST on supplies imported from outside Canada is imposed by section 212
of the ETA, which reads as follows for the years under appeal:
212. Imposition
of goods and services tax - Subject to this Part, every person who is
liable under the Customs Act to pay duty on imported goods, or who would
be so liable if the goods were subject to duty, shall pay to Her Majesty in
right of Canada tax on the goods calculated at the rate of 7% on the value of
the goods.
[13] The ability to
claim an ITC is granted by subsection 169(1) of the ETA, which reads as
follows for the years under appeal:
169. (1) General
rule for [input tax] credits - Subject to this Part, where a person
acquires or imports property or a service or brings it into a participating
province and, during a reporting period of the person during which the person
is a registrant, tax in respect of the supply, importation or bringing in
becomes payable by the person or is paid by the person without having become
payable, the amount determined by the following formula is an input tax credit
of the person in respect of the property or service for the period:
A
x B
Where
A is the tax in respect of the supply, importation
or bringing in, as the case may be, that becomes payable by the person
during the reporting period or that is paid by the person during the
period without having become payable; and
B is
[…]
(c) in any
other case, the extent (expressed as a percentage) to which the person acquired
or imported the property or service or brought it into the participating
province, as the case may be, for consumption, use or supply in the course of
commercial activities of the person.
[14] For the purposes
of interpreting subsection 169(1), the following definitions from subsection
123(1) of the ETA are relevant:
123. (1) Definitions
- In section 121, this Part and Schedules V to X,
[…]
"commercial
activity" of a person means
(a) a business
carried on by the person (other than a business carried on without a reasonable
expectation of profit by an individual, a personal trust or a partnership, all
of the members of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person, […]
"recipient"
of a supply of property or a service means
(a) where
consideration for the supply is payable under an agreement for the supply, the
person who is liable under the agreement to pay that consideration,
[…]
and any
reference to a person to whom a supply is made shall be read as a reference to
the recipient of the supply;
(ii) Recipient
of Supply
[15] The prerequisites to
claiming an ITC are provided in subsection 169(1) of the ETA. In
considering the eligibility of an ITC claimant, Justice Campbell summarized the
requirements inherent to subsection 169(1) in General Motors of Canada Limited
v. R., [2008] G.S.T.C. 41 (T.C.C.) at paragraph 30.
(1) The claimant (GMCL)
must have acquired the supply (the Investment Management Services);
(2) The GST must be
payable or was paid by the claimant (GMCL) on the supply (the Investment
Management Services);
(3) The claimant (GMCL)
must have acquired the supply (the Investment Management Services) for consumption
or use in the course of its commercial activity.
(1) Acquisition of the Supply
[16] Neither party’s
pleadings addressed the first requirement, that the claimant must have acquired
the supply. This question can be answered from the evidence at trial. PC Canada
asserts that it acquired the supply, however, the evidence with respect to acquisition
is somewhat weak. According to evidence at trial, the only thing PC Canada did
was receive an invoice from Link for brokerage fees and the GST on the items
which were imported from the USA. The remainder of the evidence reveals that:
a) PC USA ordered
the paper for the wristbands from Unisource.
b) PC USA ordered
the adhesive from Ludlow.
c)
PC USA
arranged for these supplies to be shipped from the US directly to the printer, SBS in London, Ontario.
d)
PC USA was invoiced for these
supplies.
e)
PC USA paid these invoices in
most instances.
Although it was suggested that
there was some sort of loan or borrowing relationship between PC USA and PC Canada, it was
very skimpy at best and there was no documentation or record of any nature to
establish such a relationship or how this relationship operated. The director
and sole shareholder of PC Canada clearly enunciated to PC Canada’s accountant,
(Exhibit R-1), as to how the transactions for the supplies worked. PC Canada never
laid a hand on any of the imported materials; or on any of the materials which
were eventually manufactured. The manufacturing of wristbands was completed at
SBS; these were then shipped directly to the ultimate buyer. Based on the
evidence, it has not been established by the Appellant that it acquired the
supply in question.
(2) Payable or Paid by the
Claimant
(i) Domestic
Supplies
[17] Subsection 169(1)
permits ITCs to be claimed when the GST was payable by a claimant. For domestic
supplies GST is imposed by subsection 165(1) of the ETA which states
that every recipient of a taxable supply must pay GST. Therefore, the person
entitled to claim the ITC must be the recipient of the taxable supply.
[18] The definition of “recipient”
in subsection 123(1) of the ETA states that the recipient of a taxable
supply is the person liable to pay under the agreement for the supply. While
the Appellant had pleaded it was liable under the supply agreement to pay the
suppliers, the Respondent in denying this allegation stated that PC USA was the
recipient of such supplies, and that PC USA was liable to pay the suppliers
under the various suppliers contract.
[19] Contractual
liability appears to be paramount in determining eligibility for ITCs. In Y.S.I.’s
Yacht Sales International Ltd. v. R., [2007] G.S.T.C. 59 (T.C.C.), Justice
Woods at paragraph 57 stated as follows:
… A person is not a recipient under the Excise
Tax Act unless they are liable to pay the consideration under the
agreement.
Also, I would note the following
comment by Justice Hershfield in West Windsor Urgent Care Centre Inc. v. R.,
[2005] G.S.T.C. 179 (T.C.C.) at paragraph 26 when he stated in part as follows:
The definition of “recipient” clearly
establishes a hierarchy for determining the recipient of a supply of a service.
Liability to pay for the supply will govern where there is consideration
payable. The person who receives the supply is the recipient only where
there is no consideration payable.
[20] The question comes
down to: who is liable to pay under the contract, not who actually pays. From
the evidence I conclude that the liability to pay under the contract belonged
to PC USA. PC USA placed the order for
the supplies, paper from Unisource and glue from Ludlow; PC USA was invoiced and according
to the evidence provided by the Respondent, actually paid most of the invoices.
It was suggested by the Appellant that it was owed money by PC USA and this money was
offset by PC USA
paying the various invoices but this assertion was not consistent with the
evidence presented; very little evidence was presented on this point by the
Appellant. There was little, if any, documentation to substantiate this
assertion. A major reason for the disallowance of the ITCs was that the audit
had revealed that invoices from the suppliers were issued to PC USA as opposed to PC Canada.
This evidence coupled with the testimony of the sole shareholder and director
of PC Canada can certainly justify the position of CRA with regard to the real
nature of the enterprise of PC Canada in terms of ITC eligibility.
[21] I was not
particularly impressed by the evidence adduced by the Appellant. Although the
Appellant through its primary witness, Jefferson Sooknarine, produced a number
of documents, most of these were irrelevant in establishing its position. Mr.
Sooknarine on many instances was vague; his presentation and evidence was
rambling and misdirected. The Appellant’s documents did not substantiate the
ITC claims, notwithstanding numerous requests of the Respondent. The evidence
of a witness for the Respondent, Cameron Brent Wilton, a Certified
Management Accountant and auditor, was direct, concise and dealt with the specific
issues before the Court. Based on the evidence presented at trial, I do not
believe PC Canada was liable to pay the consideration for the domestic supplies
– that liability rested with PC USA.
(ii) Import
Supplies
[22] In dealing with
imported supplies, the question is not whether the Appellant was the recipient
of the supplies but rather the inquiry begins from the proposition that ITCs
may be claimed by a person by whom the GST becomes payable. Section 212 of the ETA
makes it clear that GST is paid on import supplies by the person who is liable
to pay any import duties under the Customs Act. The focus therefore
shifts to the Customs Act in determining the liability for import
duties. Although the Appellant argues in its pleadings of section 32 of the Customs
Act, for the proposition that either the owner or the importer of the goods
may account for them and pay the required duties, section 32 of the Customs
Act does not create liability to pay import duties but merely expresses the
requirements for having import goods “released”. Liability for import duties is
generally created by subsection 18(2) which reads as follows:
Liability of person reporting goods short landed -- Subject to subsections (3) and 20(2.1), any
person who reports goods under section 12, and any person for whom that person
acts as agent or employee while so reporting, are jointly and severally or
solidarily liable for all duties levied on the goods unless one or the other of
them proves, within the time that may be prescribed, that the duties have been
paid or that the goods
(a) were
destroyed or lost prior to report or destroyed after report but prior to
receipt in a place referred to in paragraph (c) or by a person referred
to in paragraph (d);
(b) did
not leave the place outside Canada from which they were to have been exported;
(c) have
been received in a customs office, sufferance warehouse, bonded warehouse or
duty free shop;
(d) have
been received by a person who transports or causes to be transported within Canada
goods in accordance with subsection 20(1);
(e) have
been exported; or
(f) have
been released.
[23] Subsections 18(3)
and 18(20)2.1 of the Customs Act are not relevant to this appeal.
Subsection 18(2) of the Customs Act creates liability for two persons:
the person who reported the goods and the person who engaged the reporter of
the goods as employee or agent. The Customs Act along with the reporting
of imported goods regulations seems to be rather permissive as to who may
report goods to the nearest customs office.
[24] In the case at bar,
Link was used to import the goods into Canada. They paid the brokerage fees and
the GST and then they invoiced PC Canada for the brokerage fees and the GST and
this was apparently paid by PC Canada albeit PC Canada never had an office
or location in Canada; it was paid by PC Canada out of the same address in the USA, frequently used by PC USA.
[25] The Appellant takes
the position that it is the importer of the supplies in question, because it
appears as such on the declaration documents. This is an erroneous assumption.
Link was simply used as a vehicle to arrange the importation of the supplies
and as indicated earlier on the evidence, the supplies were in fact ordered by
PC USA; shipped at the direction of PC USA; invoiced to PC USA; shipped to SBS with
the finished product being shipped directly to PC USA or to others who had
ordered the finished products. Almost all supplies were paid for by PC USA. On those facts alone
the importer was PC USA
and not PC Canada.
[26] In answering the
first two prerequisites for claiming ITCs in the negative, I need not address
the third question, that is, whether the Appellant acquired the supply for
consumption or use in the course of its commercial activity. I am not sure what
commercial activity PC Canada was involved in, other then to have a post office
box and shuffle paper from point A to point B. It did not order the supplies;
it did not pay for the supplies; it did not ship the supplies; all it did was
lend its name as importer on the declaration documents and pay for the
brokerage fees and the GST and really, that was the end of the matter. It did
some direct shipping with respect to domestic orders but these were by far the
significant minority with respect to ITCs claimed. I highly question the extent
of its commercial activity. Although the Appellant may have been involved in
commercial activity, it certainly was not to the extent alleged by the Appellant’s
primary witness, Mr. Sooknarine.
[27] I believe the
Appellant incorrectly sought these ITCs. The Respondent’s witness, Mr. Wilton, stated
quite clearly that there was a method by which the ITCs could be recovered on
imports but it required a different process, one not followed by the Appellant.
On the whole of the evidence, I find as a fact that the Appellant was not the
recipient or the importer of the supplies in question, therefore is not
entitled to the ITCs claimed except what was allowed by CRA. I would suggest
the Appellant discuss with CRA the method by which the ITCs can be claimed.
[28] The appeal is
dismissed with costs in favour of the Respondent.
Signed at Ottawa, Canada, this 14th day of August, 2008.
"E. P. Rossiter"
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