Citation: 2008TCC360
Date: 20080618
Dockets: 2003-4396(GST)G
2004-2187(GST)G
BETWEEN:
JOHN PAUL REXE,
ENGLEBURN SERVICES INC.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1]
These are appeals from a
reassessment of the corporate appellant, Engleburn Services Inc.
(“Engleburn”) dated April 4, 1996, and an assessment of the director of
Engleburn, John Paul Rexe (“Rexe”), dated June 9, 1997, both made under
Part IX of the Excise Tax Act R.S.C. 1985, c. E-15. The appeals
were consolidated by Order of the Court dated December 22, 2004.
[2]
The portion of the Engleburn,
reassessment that is in dispute relates to the denial of notional input tax
credits of $3,902,053.32 which Engleburn had claimed for the period from June
14, 1993 to December 31, 1995. Engleburn is also disputing the imposition of
gross negligence penalties totaling $975,513.33.
[3]
Rexe was the sole director and
shareholder of Engleburn. He was assessed in his capacity as director for the
unpaid liability of Engleburn for GST and interest and penalties totaling
$5,899,636.50.
Issues
[4]
Engleburn claimed the notional
input tax credits in the course of its business of purchasing and reselling
used vehicles which it commenced on June 14, 1993. Engleburn purchased the vast
majority of the vehicles from native vendors operating ostensibly on a reserve.
At the time it filed its GST returns, Engleburn took the position that it was
entitled to notional input tax credits because no GST was paid or payable on
the used vehicles it bought from the native vendors.
[5]
At the hearing of the appeals,
counsel for the Appellants conceded that the native vendors were required to
charge GST on the sales to Engleburn and therefore that Engleburn was not
entitled to the notional input tax credits that it had claimed. However, he
submitted that Engleburn was still entitled to actual input tax credits (equal
to the amount of the notional input tax credits originally claimed) because GST
was included in the purchase price of the vehicles.
[6]
The first issue, then, is whether
Engleburn is entitled under subsection 169(1) of the Act to input
tax credits of $3,902,053.32 for the period in question.
[7]
If it is found that Engleburn was
not entitled to the input tax credits, the second issue is whether Engleburn is
liable for gross negligence penalties under section 285 of the Act
for over claiming the notional input tax credits.
[8]
If Engleburn is liable for GST and
the related penalties, the third issue is whether Rexe, as director of
Engleburn, is liable for those amounts pursuant to section 323 of the Act.
Evidence
[9]
The parties filed a partial
statement of agreed facts and Rexe gave evidence for the Appellants. The Respondent
called Michael Schwarz, Linda Whetung (“Whetung”), and Larry Norman (“Norman”). Schwarz
was the GST auditor who raised the assessments, Whetung is a lawyer in Peterborough
who had done work for Rexe, and Norman was one of the native automobile vendors from whom
Engleburn purchased vehicles.
[10]
Rexe has been a teacher in Peterborough
for many years. He obtained a diploma in education from the University of Toronto, where
he had also taken courses in business, economics and law. He also said that he
had done two years of chartered accountancy in the early 1960s. He has
been involved in municipal politics in Peterborough since 1972 and was a city councilor for a number of
years in the 1980s. In addition to his teaching job, he also ran a consulting
business preparing marketing and business plans, evaluating business proposals
and providing a financial and policy review for at least one government
department.
[11]
Rexe said that he incorporated
Engleburn in 1985 as a shelf company to have available in order to take
advantage of any business opportunity that might present itself as a result of
his consulting work. The company was dormant until June 1993. Just before that
time, his brother, Steve Rexe (“Steve”), lost his job as an automobile
wholesaler with Condie Motors in Napanee and Kingston (“Condie”) and had
decided to go into business himself. Steve approached Rexe for help, and they
decided to use Engleburn to carry on the business of buying and selling used
automobiles, using the name “Rexe Wholesale Automotive.” Rexe prepared a
comprehensive business plan for Engleburn in May 1993 that was used to obtain a
$15,000 startup loan from the CIBC. He also invested $15,000 of his own money.
[12]
Steve and his son, Ryan, handled
the vehicle purchases and sales, and Rexe dealt with administrative matters
including the banking. Rexe used his home address as the company’s mailing
address and he arranged to pay all the bills. Rexe said that, apart from his
administrative duties, his participation in the business was limited to
attending a few vehicle auctions with his brother and driving to certain
locations to pick up or drop off vehicles. He said that he had little time to
devote to the business.
[13]
According to the evidence,
Engleburn intended from the outset to purchase a significant number of vehicles
from native vendors on nearby reserves to claim notional input tax credits in
respect of those purchases. Rexe and his brother got the idea of claiming
notional input tax credits on vehicles purchased from natives after Steve had
seen it done at Condie. Rexe said that the notional input tax credits were
Engleburn’s edge in the business and allowed it to undercut other vehicle
wholesalers. Engleburn allegedly sold the cars that it purchased from the
native dealers for less than it had paid for them, but still made a profit on
each sale as a result of claiming the notional input tax credits.
[14]
It was Rexe’s understanding that
GST was not payable on vehicles purchased from a status Indian where the
purchaser took possession of the vehicle on the reserve. He said that Whetung,
confirmed this position, and that the local GST office told him that there was
no GST payable if he purchased a car from a native on a reserve. He also said
that the sales manager at Condie told him that Condie had obtained three legal
opinions on the point and that Condie had been audited by Revenue Canada and its
claims for notional input tax credits had been allowed. In cross-examination
Rexe said he also discussed notional input tax credits with his accountant at
Grant and Company.
[15]
To protect Engleburn in the event
that his understanding turned out to be incorrect and that GST was required to
be paid, Rexe said that Steve had an agreement with the native vendors
that the purchase price would include GST. In this way the native vendors, and
not Engleburn, would be liable for any GST that was due.
[16]
From June 14, 1993 to December 31,
1995, Engleburn purchased approximately $59 million worth of vehicles from two
native vendors: Jackie Edward Maracle, operating as JEM Auto Sales (“JEM”), and Larry Norman, operating as CTM
Wholesale and Leasing (“CTM”). In Engleburn’s GST returns filed between June
1993 and December 31, 1995 it claimed notional input tax credits totaling over
$3.9 million on these purchases. During this period it resold these
vehicles and collected GST from the purchasers. In filing its GST returns,
Engleburn offset the GST that it had collected with the notional input tax
credits with the result that it made minimal remittances of net GST.
[17]
Rexe testified that he was unaware
of the large volume of business that Engleburn did during the period in
question. According to the business plan Rexe prepared for Engleburn in order
to obtain the CIBC loan, Engleburn’s sales from 1993 to 1998 were projected to
be between $2 and $5 million annually. He could not explain how the volume of
business was so much greater than projected, saying only that he was not there,
and that his brother was doing the buying and selling. He said that all he saw
with respect to the business was the final figures on the GST returns that were
prepared by the accountants. He said that Steve would take all records relating
to vehicle purchases and sales to Engleburn’s accountants, who would prepare
the GST returns and a cheque for the amount owing, and Rexe would simply sign
them. The accountants only performed basic bookkeeping functions for Engleburn
and no financial statements were ever prepared. Rexe testified that Engleburn
intended to purchase vehicles from other sources, but the extent to which this
occurred was not clear from the evidence. It seems that few such vehicles were
purchased by Engleburn.
[18]
Rexe also said he was not aware of
where the money came from to make the purchases and that his brother handled
it. He also said that he was not aware that notional input tax credits were
being claimed on over $50 million worth of purchases until much later and that
he had never seen the invoices for the transactions until years later.
[19]
Engleburn was audited by Revenue Canada for GST
in July 1995. In a letter dated July 28, 1995 the auditor proposed to disallow
the notional input tax credits claimed by Engleburn on used vehicles purchased
from JEM and CMT because both vendors were required by the Act to be
registered and to collect GST on their sales. The amount of notional input tax
credits that had been claimed by Engleburn up to that point was $386,846.46.
[20]
In order to defend Engleburn’s
position, Rexe drafted letters for signature by Maracle and Norman setting out
that the cars purchased from JEM and CTM, respectively, were picked up on
Indian reserves and that the price paid was “the total price.” He said that
Steve had Norman and Maracle sign the letters.
[21]
Engleburn continued to make
purchases from the native vendors and to claim an additional approximately $3.6
million of notional input tax credits. Engleburn was subsequently assessed on
April 4, 1996 to deny all of the $3,902,053.32 of notional input tax credits
claimed for the period between June 14, 1993 and December 31, 1995.
[22]
Norman testified that CTM was a
new business he started in 1993 that brokered cars for sale and for export to
the U.S. He said that Steve purchased cars from him on half a dozen occasions,
but that he had not sold him $53 million worth of cars as claimed by
Engleburn. He said that the signature on the bills of sale for the cars was
not his and pointed out that the Motor Vehicle Dealers Association registration
number shown for him was wrong on a number of bills. He said that he was aware
that other people had used his name and registration number in order to “claim
GST back” but did not elaborate. He said that he did not know if the money paid
by Engleburn for the vehicles went through his bank account because he never
checked, and he did not keep his bank statements.
[23]
Norman confirmed that he was not registered for the GST and
did not charge GST on cars that he sold to Engleburn. He said that he had been
told by his Chief not to register for the GST. However, he said at one point he
had to register in order to claim a refund of tax paid on a car purchased at
auction. Once he received his refund he said he asked Revenue Canada to
de-register him because he was a native operating on a reserve and that Revenue
Canada de-registered him.
[24]
Norman denied that he ever agreed that if GST were payable
on the transaction he would be responsible to pay it. He also denied signing
the letter stating that the price paid by Engleburn to CTM for vehicles was the
“total price”. Norman said that the signature was his but that he had not
signed the letter.
[25]
Whetung testified that she never
gave Rexe advice on GST. She had done legal work for Rexe on a number of
occasions but he was not a regular client. She could recall only one occasion
on which specifically recalled Rexe seeking her advice on a matter involving
natives and GST in a conversation that took place at the counter of her law
firm, when Rexe dropped by for “five minutes.” She recalled that he had a plan
involving cars and natives on a reserve and GST. However, she advised Rexe that
she was not qualified to give an opinion regarding liability for GST. She said
that she would remember if she had given him an opinion, and she was adamant
that she had not done so.
Issue
1: Availability of input tax credits
[26]
Input tax credits may be claimed
under subsection 169(1) of the Act where a registrant acquires or
imports a service or property that is used in the registrant’s business and GST
is paid or payable by the registrant on the supply or importation.
[27]
The relevant portions of subsection
169(1) read as follows:
Subdivision
b
Input tax
credits
169. (1) General
rule for credits — Subject to this Part, where property or a service is
supplied to or imported by a person and, during a reporting period of the
person during which the person is a registrant, tax in respect of the supply or
importation becomes payable by the person or is paid by the person without
having become payable, the input tax credit of the person in respect of the
property or service for the period is the amount determined by the formula
A x B
where
A is the total of all tax in respect of the supply or
importation 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
(a) where
the tax is deemed under subsection 202(4) to have been
paid in
respect of the property on the last day of a taxation year of the person, the
extent (expressed as a percentage of the total use of the property in the
course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,
(b) where the property or service is acquired, imported by the
person for use in improving capital property of the person, the extent
(expressed as a percentage) to which the person was using the capital property
in the course of commercial activities of the person immediately after the
capital property or a portion thereof was last acquired or imported by the
person, and
(c) in any other case, the extent (expressed as a percentage)
to which the person acquired or imported the property or service for
consumption, use or supply in the course of commercial activities of the
person.
[28]
The Respondent’s counsel argued
that there were two reasons why Engleburn was not entitled to any input tax
credits in respect of vehicles purchased from JEM and CTM. Firstly, he said
that Engleburn had not paid GST on any vehicles purchased from those vendors.
Secondly, even if Engleburn had paid GST, Engleburn did not have a GST
registration number for either Maracle or Norman, and that this was fatal to a
claim for input tax credits since it was required to have this information by paragraph
169(4)(a) of the Act and section 3 of the Input Tax Credit
Information Regulations. Those provisions read as follows:
(4)
Required documentation – 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;
. . .
Prescribed Information
3.
For the purposes of paragraph 169(4)(a) of the Act, the
following information is prescribed information:
(a) 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 less than $30,
(i)
the supplier’s name or the name under which the supplier does business,
(ii)
where an invoice is issued in respect of the supply or the supplies, the
date of the invoice,
(iii)
where an invoice is not issued in respect of the supply or the supplies,
the date on which there is tax paid or payable in respect thereof, and
(iv)
the total amount paid or payable for all of the supplies;
(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 and less than $150
(i)
the information set out is paragraph (a),
(ii)
the registration number assigned to the supplier pursuant to section 241
of the Act,
(iii)
where the amount paid or payable for the supply or the supplies does not
include the amount of tax paid or payable in respect thereof,
(A)
the amount of tax paid or payable in respect of each supply or in
respect of all of the supplies, or
(B)
where provincial sales tax is payable in respect of each taxable supply that
is not a zero-rated supply and is not payable in respect of any exempt supply
or zero-rated supply,
(I)
the total of the tax paid or payable under Division II of Part IX of the
Act and the provincial sales tax paid or payable in respect of each taxable
supply, and a statement to the effect that the total in respect of each taxable
supply includes the tax paid or payable under that Division, or
(II)
the total of the tax paid or payable under Division II of Part IX
of the Act and the provincial sales tax paid or payable in respect of all
taxable supplies, and a statement to the effect that the total includes the tax
paid or payable under that Division,
(iv)
where the amount paid or payable for the supply or the supplies includes
the amount of tax paid or payable in respect thereof and one or more supplies
are taxable supplies that are not zero-rated supplies, a statement to the
effect that tax is included in the amount paid or payable for each supply in
respect of which there is tax paid or payable, and
(v)
where the status of two or more supplies is different, an indication of
the status of each taxable supply that is not a zero-rated supply, and
(c) 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 $150 or more,
(i)
the information set out in paragraph (a) and subparagraphs (b)(ii) to
(v),
(ii)
the recipient’s name, the name under which the recipient does business
or the name of the recipient’s duly authorized agent or representative,
(iii)
the terms of payment, and
(iv)
a description of each supply sufficient to identify it.
[29]
The Appellants’ counsel submitted
that Engleburn was entitled to the input tax credits because it had paid GST on
all of its purchases of vehicles from the native vendors, and had sufficient
records available to establish the GST paid on those purchases.
[30]
Counsel referred to invoices
relating to vehicles purchased by Engleburn from JEM Auto Sales, on which the
vendor wrote “all applicable taxes included in price”, or “prices include all
applicable taxes” and to the letters from Norman and Maracle that Engleburn had
obtained after the GST audit that stated that the price paid was the total
price.
[31]
Counsel for the Appellant conceded
that Maracle and Norman did not have GST registration numbers at the time they
sold vehicles to Engleburn, but he argued that the Minister still has
discretion under subsection 169(5) of the Act to allow input tax
credits. Subsection 169(5) gives the Minister the power to exempt a registrant
from the requirements of subsection 169(4) and the prescribed Input Tax
Credit Information Regulations. It
reads as follows:
(5) Exemption
– Where the Minister is satisfied that there are or will be sufficient
records available to establish the particulars of any supply or importation or
of any supply or importation of a specified class and the tax in respect of the
supply or importation paid or payable under the Part, the Minister may
(a) exempt
a specified registrant, a specified class of registrants or registrants
generally from any of the requirements of subsection (4) in respect of that
supply or importation or a supply or importation of that class; and
(b) specify
terms and conditions of the exemption.
[32]
It is clear from the wording of
subsection 169(1) that a registrant may claim an input tax credit in respect of
the supply where GST is paid or payable with respect to the supply.
Given that both the Appellants and the Respondent agree that GST was payable
by Engleburn on its purchases of vehicles from Maracle and Norman, it is not
material whether GST was in fact paid, and it is not necessary to make a
finding in this respect. It is sufficient that Engleburn was required under the
Act to pay GST on the purchases, even if it may not have done so.(see Ventes
D'Autos Giordano Inc. v. R., [2001] G.S.T.C. 37 at paragraph 44, and
Morin v. R., [2004] G.S.T.C. 48, at footnote 1).
[33]
However, I find that Engleburn’s
failure to obtain GST registration numbers for Maracle and Norman as required
by paragraph 169(4)(a) of the Act and paragraph 3(b)(i) of
the Input Tax Credit Information Regulations is fatal to its
claim for the input tax credits. It is now clearly established that the
information requirements in those provisions are mandatory: (see Systematix
Technology Consultants Inc. v. R. [2007] F.C.A. 226 at paragraphs 4 and 5.)
[34]
Also, this Court has no
jurisdiction under subsection 169(5) to grant any relief from the requirements
of subsection 169(4) and the related regulations. Such relief is solely at the
discretion of the Minister, and this Court does not have jurisdiction to compel
the Minister to exercise that discretion in a particular way.
Issue 2: Section 285 penalties
[35]
Section 285 imposes a penalty for false statements or omissions,
made knowingly or in circumstances amounting to gross negligence.
The penalty is equal to 25% of the amount of tax that is under-remitted or of
the excess refund obtained.
[36]
That provision reads as follows:
285. False statements or omissions — Every person who knowingly,
or under circumstances amounting to gross negligence in the carrying out of any
duty or obligation imposed by or under this Part, 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 (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
amount, if any, by which
(a) in
the case of net tax for a period,
(i)
the amount of net tax of the person for the period
exceeds
(ii)
the amount that would be the net tax of the person for the period if the
net tax were determined on the basis of the information provided in the return;
(b) in
the case of tax payable for a period or transaction,
(i) the
amount of tax payable by the person for the period or transaction
exceeds
(ii) the
amount that would be the tax payable by the person for the period or
transaction if the tax were determined on the basis of the information provided
in the return; and
(c) in
the case of an application for rebate,
(i)
the amount that would be the rebate payable to the person if the rebate
were determined on the basis of the information provided in the return
exceeds
(ii) the
amount of the rebate payable to the person.
[37]
It is well settled that the
Respondent has the onus of proving the facts which would justify the imposition
of the penalty: Alex Excavating Inc. v. Canada, [1995]
G.S.T.C. 57; 897366 Ontario Ltd. v. R., [2000]
G.S.T.C. 13. It is also well established that the standard for the
imposition of penalties for gross negligence is a high one. The
classic definition of “gross negligence” for this purpose is
found in Venne v. The Queen, [1984] C.T.C. 223 (F.C.T.D.) at p. 234:
“Gross negligence”
must be taken to involve greater neglect than simply a failure to use
reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference
as to whether the law is complied with or not.
[38]
The question before the Court is
whether Engleburn knowingly, or in circumstances amounting to gross negligence,
claimed notional input tax credits to which it was not entitled on the GST
returns it filed for the periods between June 14, 1993 and December 31,
1995. It was admitted that Engleburn claimed the notional input tax credits on
returns that were prepared by its accountants and signed by Rexe.
[39]
The notional input tax credit
mechanism has since been removed from the Act, but in the years in issue
section 176 deemed GST to have been paid by a registrant where the
registrant had acquired used tangible personal property on which he or she was
not required to pay GST. This enabled the registrant to claim notional
input tax credits in respect of these purchases. Since no GST had in fact been
paid, the input tax credits were referred to as “notional.”
[40]
Section 176 read as follows:
176(1) Acquisition
of used goods – Subject to this Division, where
(a) used
tangible personal property is supplied in Canada by way of sale after 1993 to a
registrant , tax is not payable by the registrant in respect of the supply, and
the property is acquired for the purpose of consumption, use or supply in the
course of commercial activities of the registrant, or
(b) used
tangible personal property is supplied in Canada by way of sale before 1994 to
a registrant, tax is not payable by the registrant in respect of the supply,
and the property is acquired for the purpose of supply in the course of
commercial activities of the registrant,
for the
purposes of this Part, the registrant shall be deemed (except where the supply
is a zero-rated supply or where section 167 applies to the supply) to have
paid, at the time any amount is paid as consideration for the supply, tax in
respect of the supply equal to the tax fraction of that amount.
[41]
The requirement to pay GST is
found in subsection 165(1) of the Act, which provides that every
recipient of a taxable supply made in Canada must pay a tax equal to 7% of the consideration for
the supply. A taxable supply is defined in subsection 123(1) as a supply that
is “made in the course of commercial activity.”
[42]
Engleburn’s claim for notional
input tax credits was based on the position that GST was not payable on any
purchases of property from natives where the property was located on a reserve.
Counsel maintained that Rexe made reasonable efforts to ensure the correctness
of this position prior to claiming the notional input tax credits, seeking
advice from a lawyer and Revenue Canada itself. Counsel argued that the policy of Revenue Canada was that
natives were not required to register for GST or to collect it and that this
policy had been communicated to and relied upon by Engleburn. Since the claims
for the notional input tax credits were consistent with this advice and with
Revenue Canada policy and information received from Condie, it could
not be said that Engleburn knowingly or in circumstances amounting to gross
negligence made any false statements.
[43]
The Respondent submits that
Engleburn was grossly negligent in claiming notional input tax credits without
making any effort to determine whether it was legally entitled to them. Counsel
submits that Rexe was well educated and had extensive business experience and
knew or ought to have known to obtain legal advice on behalf of Engleburn about
how the GST legislation applied, especially since the claims were central to
Engleburn’s business, and the claims were so large. Finally, he says that the
fact that Engleburn continued to claim the notional input tax credits even
after the Revenue Canada auditor advised that they would be disallowed showed
that Rexe and Engleburn had little concern for complying with the Act.
[44]
While I am not satisfied that
Engleburn knew at the time it made claims for the credits that those claims
were false, in my view, it was recklessly indifferent to whether those claims
were legitimate or not. The efforts that were shown to have been made to
determine the legitimacy of the claims were woefully inadequate given the
magnitude of the claims.
[45]
Firstly, the Appellants have not
shown that Revenue Canada ever had a policy exempting natives from registering
for GST. Rexe never said that he received this information in the telephone
call he says he made to the local office in 1993. With respect to that
conversation, Rexe simply testified that he asked if GST was payable if he
bought a car from a native on reserve, and that he was told that no GST would
be payable. No mention was made of a discussion of Revenue Canada policy.
[46]
Norman’s evidence is insufficient as well to show that
Revenue Canada ever had the policy alleged. In general, his testimony was
imprecise and often evasive, and I accord it little weight. He provided few
specifics of his registration and de-registration for GST and I am unable to
read in to his evidence any indication that Revenue Canada had a blanket policy
of exempting all natives on a reserve from collecting GST, even where they were
selling goods to non-natives for use off of a reserve.
[47]
Secondly, I am not satisfied that
Rexe was told by the local Revenue Canada office that GST was not payable on the transactions
Engleburn proposed to engage in with the native vendors. The conversation that
was related by Rexe could at best be described as perfunctory. He admitted in
cross-examination that he did not go into details with the person at Revenue Canada, and did
not indicate how many cars he proposed to buy. It is difficult to understand
why Rexe would not have gone into the details of his plan when speaking with
the officer, and as a result, how he would have thought that the advice was
sufficient basis for claiming notional input tax credits of almost $4 million.
Finally, I note that the conversation was uncorroborated by any other evidence.
[48]
I also do not accept the evidence
of Rexe that he ever obtained legal advice from Whetung concerning Engleburn’s
obligation to pay GST on purchases made from natives operating on reserve.
[49]
Rexe said in his examination-in
chief that Whetung told him that she knew nothing about GST but he said that
Whetung stated that “if there was a conflict between the GST legislation and
the Indian Act, the latter would prevail.” I presume that he took this
to mean that GST would not be payable on the proposed transactions. He also
said that Whetung told him that if the vendors said that GST was included in
the sale price this should be marked on the invoice. This again was denied by
Whetung.
[50]
I prefer the evidence given by
Whetung that she did not give any legal advice to Rexe regarding the GST, even
to the limited extent suggested by him. Her testimony was clear and consistent
and unshaken in cross-examination. Whetung told Rexe that she did not have the
expertise to give an opinion regarding GST payable on purchases of vehicles
from natives on a reserve, and I find it unlikely that a lawyer would give a
client any off the cuff opinion in those circumstances. Even if she had, it is
hard to imagine anyone relying on it, given her explicit lack of expertise in
the area.
[51]
Furthermore, Rexe’s recollection
of the advice purportedly given was vague and confusing, and to a certain
extent contradictory. If Whetung gave him advice that GST was not payable by
Engleburn it is hard to understand why she would have also told him that the
invoices should be marked to show that tax was included in the price paid.
[52]
Rexe admitted that he had no
written opinion or reporting letter from Whetung and made no notes regarding this
discussion, and had no legal bill showing any consultation with her regarding
Engleburn.
[53]
Rexe also said he was told by the
sales manager at Condie, Doug McMillian, that Condie had purchased cars
from native dealers on a reserve and claimed notional input tax credits which
had been allowed after an audit and that Condie had three legal opinions that
said that it was entitled to the notional input tax credits. This evidence,
which was tendered only as proof of what Rexe was told by McMillian, was uncorroborated.
Rexe did not ask for a copy of the opinions and apparently made no notes of the
conversation. The Appellants’ failure to call McMillian as a witness leads me
to draw a negative inference in respect of the evidence he would have given
concerning the alleged discussions with Rexe.
[54]
Rexe’s evidence in
cross-examination that he spoke to Engleburn’s accountant at Grant and Company
about the notional input tax credit matter, was not corroborated either. It is
also inconsistent with evidence that Grant and Company was hired only to
provide bookkeeping services to Engleburn, and performed no audit function.
Furthermore, Rexe did not say what was talked about or whether he even received
an opinion from the accountant. In addition, I draw another negative inference
from the Appellants’ failure to call the accountant.
[55]
Overall I did not find the
evidence of Rexe persuasive. If he had, in fact, got all of the legal advice
from his lawyer and accountant and information from a Revenue Canada official
and from McMillian at Condie that he said he did why then would he have
insisted that the invoices be marked that the sale price included all taxes?
[56]
Other statements Rexe made in his
testimony were hard to accept, too, or were contradictory. For example, he said
that he was unaware that Engleburn was doing up to $500,000 of business a day,
although the funds for the transactions passed through its bank account and
Rexe received the bank statements. He also said he signed the GST returns in
which Engleburn reported revenue of between $10 million and $14 million
for each quarter of 1995. The only explanation he offered was that he was busy
and signed the GST returns in a rush. He had no idea where the money for the
purchases came from, although he handled administrative matters for Engleburn.
At one point he said that he did not instruct the accountant to claim the
notional input tax credits, but said later that he discussed notional input tax
credits with him. At another point he said that when he prepared the business
plan for Engleburn dated May 1993 he knew nothing about notional input tax
credits, yet in earlier testimony he described the credits as Engleburn’s edge
in the business it intended to carry on. May 1993 was also the month in which
he met with Ms. Whetung to obtain GST advice. Later on, he said that he
did not make any reference to the notional input tax credits in the business
plan he prepared the same month because he was in a rush when he wrote it.
[57]
What I take from the evidence is
that from the start of Engleburn’s operations, Rexe knew that its plan to buy
vehicles from native dealers and claim notional input tax credits depended on
GST not being payable on sales by natives made on a reserve. He was also aware
that this could be a contentious issue. This led Rexe to attempt to confirm
with Whetung that GST would not be payable. However, when he was told by
Whetung that she was not qualified to give an opinion on the matter, he did not
take any further action to get a legal opinion. Rexe’s conversation with the
Revenue Canada officer, even if it did take place would not strike me as a
genuine attempt to find out what Revenue’s policy was since little detail was
disclosed by Rexe. Furthermore, the evidence did not show that any legal advice
on the point was sought after Engleburn was advised by the auditor that the
notional input tax credits would be disallowed. It continued to claim the
credits in even larger amounts up to the end of 1995.
[58]
In failing to obtain the requisite
legal advice, the Appellant was in my view indifferent to whether it was
legally required to pay GST on the purchases from JEM and CTM. Engleburn was
therefore indifferent to whether it complied with subsection 176(1) of the Act.
Therefore, I find that Engleburn was grossly negligent in making the claims for
the credits.
Issue
3: Directors’ liability assessment
[59]
The assessment against Rexe was
made under section 323 of the Act which reads as follows:
(1) Liability
of directors —Where a corporation fails to remit an amount of net tax as
required under subsection 228(2), the directors of the corporation at the time
the corporation was required to remit the amount are jointly and severally
liable, together with the corporation, to pay that amount and any interest
thereon or penalties relating thereto.
(2)
Limitations — A director of a corporation is not liable under
subsection (1) unless
(a) a
certificate for the amount of the corporation’s liability referred to in that
subsection has been registered in the Federal Court under section 316 and
execution for that amount has been returned unsatisfied in whole or in part;
(b) the
corporation has commenced liquidation or dissolution proceedings or has been
dissolved and a claim for the amount of the corporation’s liability referred to
in subsection (1) has been proved within six months after the earlier of
the date of commencement of the proceedings and the date of dissolution; or
(c) the
corporation ahs made an assignment or a receiving order has been made against
it under the Bankruptcy and Insolvency Act and a claim for the amount of
the corporation’s liability referred to in subsection (1) has been proved
within six months after the date of the assignment or receiving order.
(3)
Diligence—A director of a corporation is not liable for a failure under
subsection (1) where the director exercised the degree of care, diligence
and skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances.
(4)
Assessment —The Minister may assess any person for any amount payable by
the person under this section and, where the Minister sends a notice of
assessment, sections 296 to 311 apply, with such modifications as the
circumstances require.
(5) Time
limit — An assessment under subsection (4) of any amount payable by a
person who is a director of a corporation shall not be made more than two years
after the person last ceased to be a director of the corporation.
(6) Amount
recoverable — Where execution referred to in paragraph (2)(a) has issued,
the amount recoverable from a director is the amount remaining unsatisfied
after execution.
(7)
Preference —Where a director of a corporation pays an amount in respect of
a corporation’s liability referred to in subsection (1) that is proved in
liquidation, dissolution or bankruptcy proceedings, the director is entitled to
any preference that Her Majesty in right of Canada would have been entitled to
had the amount not been so paid and, where a certificate that relates to the
amount has been registered, the director is entitled to an assignment of the
certificate to the extent of the director’s payment, which assignment the
Minister is empowered to make.
(8)
Contribution — A director who satisfies a claim under this section is
entitled to contribution from the other directors who were liable for the
claim.
[60]
Rexe relies on the defence
available in subsection 323(3). He takes the position that he is not personally
liable for any unremitted and unpaid amounts, because he exercised due care,
diligence and skill to ensure that Engleburn met all of its GST obligations. In
particular, he says that he took reasonable steps to ensure that the notional
input tax credit claims were legitimate and therefore to ensure that Engleburn
remitted the correct amount of GST.
[61]
The Federal Court of Appeal has
held that the “due diligence” test applicable under subsection 227.1(3) of the Income
Tax Act is an “objective-subjective” test (see Soper v. R., [1997] F.C.J. No. 881.). The same
can be said of the due diligence test in section 323(3) of the Act.
Therefore, in determining whether a director has exercised the degree of care,
diligence and skill that a reasonably prudent person would have exercised in
comparable circumstances to prevent a failure to remit GST, the court must take
into account the characteristics of the directors whose conduct is in question,
including their levels of relevant skill, experience and knowledge. The court
must then ask whether, if faced with similar circumstances, a reasonably
prudent person with comparable levels of skill, experience and qualifications
would have acted in the same way as these directors: see Worrell v. R.,
[2000] G.S.T.C. 91 at paragraph
26.
[62]
Rexe is well-educated, intelligent
and experienced in business and he was active in the administration and
management of the affairs of the company. As Engleburn’s only director, it was
incumbent upon him to take adequate steps to ensure that the company’s claims
met the requirements of the Excise Tax Act.
[63]
For the reasons set out above, I
am not satisfied that Rexe did what he said he did to verify Engleburn’s
entitlement to the notional input tax credits. It is not necessary to repeat
those findings. It is sufficient to say that he recognized the need for legal
advice on the point, but failed to obtain any. Any reasonably prudent person
with Rexe’s skill experience and knowledge would have sought and obtained an
assurance from a qualified source that the plan to claim the notional input tax
credits was permitted by the law. The large amounts of the claims and their
importance to the operation of Engleburn’s business further underscore the duty
to seek qualified advice.
[64]
In the result, I find that Rexe
did not act as a reasonably prudent person would have done in similar
circumstances and he cannot avail himself of the due diligence defence in
subsection 323(3).
[65]
Both appeals are therefore
dismissed, with one set of costs to the Respondent.
Signed at Ottawa, Canada, this 18th day of June 2008.
“B. Paris”
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