Citation: 2008 TCC 280
Date: 20080709
Dockets: 2007-2478(GST)I
2007-2477(GST)I
2007-2476(GST)I
BETWEEN:
ST-ISIDORE ÉCONO CENTRE INC.,
D.H. VENTILATION S.E.N.C.,
FERBLANTERIE ALEXANDRE ENR.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
These are three appeals
against notices of assessment dated March 3, 2006, and bearing the
numbers 03404350, 03404349 and 03404348, for the period from
August 1, 1994, to October 31, 2004 in the case of St-Isidore
Écono Centre Inc. ("St‑Isidore"); the period from May 28, 2004
to September 30, 2005 in the case of D.H. Ventilation S.E.N.C.
("D.H. Ventilation"); and the period from January 1, 2002 to September 30, 2005
in the case of Ferblanterie Alexandre Enr. ("Ferblanterie Alexandre").
[2]
In the notice of
assessment issued to St-Isidore under Part IX of the Excise Tax Act,
R.S.C. 1985, c. E-15, as amended (hereinafter "ETA"), the
following amounts are assessed:
|
[TRANSLATION]
Adjustments to reported net tax:
|
$53,601.70
|
|
Interest
|
$10,422.16
|
|
Penalties
Section 280 of the ETA:
Section 285 of the ETA:
|
$20,476.72
$13,400.43
|
|
Total
|
$97,901.01
|
[3]
In its Notice of
Appeal, St-Isidore contests solely the part of the assessment that pertains to
the input tax credits (ITCs) disallowed in relation to the invoices of D.H. Ventilation ($2,266.25)
and Ferblanterie Alexandre ($7,728.00), and to the interest and penalties
related to the disallowed ITCs.
[4]
In the notice of
assessment issued to D.H. Ventilation, the following amounts are assessed:
|
[TRANSLATION]
Adjustments to
reported net tax (ITCs disallowed on purchases from St-Isidore Écono Centre
Inc. and on services provided to that company):
|
$331.31
|
|
Interest:
|
$80.21
|
|
Penalties:
|
$200.67
|
|
Total
|
$612.19
|
[5]
In the notice of
assessment issued to Ferblanterie Alexandre, the following amounts are
assessed:
|
[TRANSLATION]
Adjustments to reported net tax (GST billed but not remitted, and
ITCs disallowed on invoices from St-Isidore Écono Centre Inc.):
|
$8,236.26
|
|
Interest:
|
$383.34
|
|
Penalties:
Section 280 of the ETA
Section 285 of the ETA
|
$694.42
$2,320.98
|
|
Total
|
$11,635.00
|
[6]
In issuing the notice
of assessment in respect of St-Isidore, the Minister of Revenue of Quebec, in
his capacity as agent of the Minister of National Revenue
("the Minister") relied, among other things, on the following
findings and assumptions, set out in subparagraphs 25(a) to (ff) of the Reply to
the Notice of Appeal:
[TRANSLATION]
(a)
During the period in issue, the Appellant was a
registrant for the purposes of Part IX of the ETA.
(b)
During the period in issue, the Appellant
operated a business engaged in the sale and installation of air conditioning
and heating devices.
(c)
The Appellant's books were audited at the same
time as those of Ferblanterie Alexandre and D.H. Ventilation.
(d)
During the period in issue, Jean-Yves Legault was
the Appellant's majority shareholder.
(e)
During the period in issue, Jean-Yves Legault and
his son Alexandre Legault were the partners of Ferblanterie Alexandre.
(f)
During the period in issue, Jean-Yves Legault was
also one of the four partners of D.H. Ventilation.
(g)
While auditing the Appellant's books, the
Minister's auditor noticed that, in computing its net tax, the Appellant,
starting in 2001, had been claiming undocumented ITCs in connection with
supplies purportedly received from Ferblanterie Alexandre and D.H. Ventilation.
(h)
While auditing Ferblanterie Alexandre, the
auditor noticed that it kept no books of account and reported zero net tax for
the period in issue.
(i)
While auditing the books of D.H. Ventilation,
the auditor noticed that it kept no books of account, and that it only became a
registrant for the purposes of Part IX of the ETA on February 2, 2005.
(j)
During the audit, the Appellant, seeking to
justify the ITCs reported in relation to supplies purportedly received from Ferblanterie
Alexandre and D.H. Ventilation, submitted sales invoices
that it supposedly issued to the two entities: specifically, 38 invoices
issued to D.H. Ventilation, of which 33 (all dated
November 15, 2004) are in an unbroken numerical sequence from 5363 to
5395, and five (dated December 31, 2004) bear the numbers D.H.1 to
D.H.3, D.H.5 and D.H.8; and 33 invoices issued to Ferblanterie Alexandre, 30 of
which are in an unbroken numerical sequence from 5322 to 5351 and three of
which are numbered 5398 to 5400.
(k)
Lastly, following discussions, and in order to
justify the ITC claim in respect of supplies purportedly received from Ferblanterie
Alexandre and D.H. Ventilation, the Appellant submitted purchase
invoices issued by those two entities.
(l)
As for the invoices submitted in connection with
the ITCs claimed on supplies purportedly received from Ferblanterie Alexandre, with
the exception of four invoices prepared by hand, they consist of 30 invoices in
a broken numerical sequence from 246 to 310 (invoice 264 is dated
December 19, 2003, invoice 265 is dated November 3, 2003,
invoice 266 is dated December 19, 2003, and so on) and three invoices
numbered 350 to 352 (invoice 350 is dated March 15, 2005,
invoice 351 is dated July 5, 2004, and invoice 352 is dated
October 3, 2005).
(m)
As for the invoices submitted in connection with
the ITCs claimed on supplies purportedly received from D.H. Ventilation, they
consist of 33 invoices in an unbroken numerical sequence from 201 to 233
(22 invoices dated May 28, 2004, eight dated
June 28, 2004, two dated July 30, 2004, and one bearing no date)
and 13 invoices numbered 250 through 263 (with dates in 2005).
None of these invoices contains a GST number.
(n)
The Respondent disallowed the ITCs claimed by
the Appellant in relation to the supplies purportedly received from Ferblanterie
Alexandre and D.H. Ventilation.
(o)
Her position was that there had been no exchange
of services between the Appellant and these entities, and that this was a
scheme put in place to enable the Appellant to claim ITCs
even though neither Ferblanterie Alexandre nor D.H. Ventilation remitted
the GST that was billed.
(p)
In addition, the Respondent refused to allow the
ITCs claimed in the course of the audit by D.H. Ventilation and Ferblanterie
Alexandre. She did so for the same reason, namely, that there had been no
exchange of services and that the invoices submitted were false.
(q)
None of the aforementioned invoices was paid.
(r)
The invoices issued by Ferblanterie Alexandre and D.H. Ventilation
were entered as accounts payable in the Appellant's books starting in 2001.
(s)
By means of an adjusting entry (#35) dated
July 31, 2004, the Appellant created an account receivable in the
amount of $124,848 in consideration of other purported sales to Ferblanterie
Alexandre and D.H. Ventilation.
(t)
However, it is unlikely that accounts receivable
from 2004 are applicable to accounts payable dating back to 2001.
(u)
The auditor noticed that Ferblanterie Alexandre and
D.H. Ventilation had no employees and that Alexandre Legault was an
employee of the Appellant's.
(v)
The financial statements of Ferblanterie Alexandre
and D.H. Ventilation make no reference to any manufacturing costs,
rent costs or production outlays.
(w)
Ferblanterie Alexandre and D.H. Ventilation
have the same address as the Appellant, which owns the building, tools and
machinery.
(x)
Ferblanterie Alexandre does not make any
contributions to the Commission de la Construction du Québec (CCQ) and does not
report having any employees.
(y)
Although D.H. Ventilation pays a
contribution to the CCQ, it does not report having any employees.
(z)
The bank records of Ferblanterie Alexandre and D.H. Ventilation
disclose very little activity.
(aa)
Payments on the vehicle for which the lease
contract and registration are under the Appellant's name are made from the bank
account of Ferblanterie Alexandre and are taken from bank transfers that come
out of the Appellant's bank account.
(bb)
The vehicle bearing D.H. Ventilation markings
is registered under the Appellant's name.
(cc)
The Minister's auditor therefore disallowed
$9,494.25 in ITCs ($7,228 for Ferblanterie Alexandre and $2,266.25 for
D.H. Ventilation).
(dd)
Lastly, the Respondent assessed a penalty under
section 285 of the ETA because the Appellant failed, for a three-year
period, to pay the Minister the amounts of the discrepancies that it had
recorded in its books of account, and because the value of the unreported
supplies is high and the Appellant participated in a scheme that enabled it to
claim ITCs.
(ee)
At the beginning of the audit, the Appellant's
accountant gave the auditor work sheets that showed a significant discrepancy between
the GST in the books of account and the GST reported.
(ff)
The Appellant's president was aware that these
work sheets existed, but refused to correct the situation.
[7]
In issuing the notice
of reassessment in respect of D.H. Ventilation, the Minister relied, among
other things, on the following findings and assumptions, set out in
subparagraphs 20(a) through (i) and subparagraphs 20(u) and (v) of the Reply to
the Notice of Appeal:
[TRANSLATION]
(a)
The Appellant registered for the purposes of
Part IX of the ETA on February 2, 2005.
(b)
Since the Appellant collected GST — at least
since May 28, 2004 — the Minister amended the registration date and business start date to
coincide with the date on which the Appellant issued its first invoice, that is
to say, May 28, 2004.
(c)
While auditing the Appellant's business, the
Minister's auditor found that the Appellant did not keep any books of account
until February 2005, at which time it became a registrant for the purposes of
Part IX of the ETA and began using an accounting system.
(d)
The Minister's auditor found that, during the
period in issue, the Appellant issued invoices to St-Isidore with GST amounts
on them (hereinafter "the GST billed").
(e)
The Minister's auditor found that the Appellant did
not report any of the GST billed for the quarter ended June 30, 2004
($2,133.25) or the quarter ended September 30, 2004 ($133.00).
(f)
For the quarters ended March 31, 2005, and June
30, 2005, the auditor found that the GST billed was the same as the GST
reported.
(g)
For the quarter ended
September 30, 2005, the auditor noted that GST billed was $2,599.44
but that the GST reported was $4,911.43.
(h)
Consequently, the auditor assessed a negative
amount of $45.74 on account of unpaid tax under section 278 and paragraph 296(1)(b)
of the ETA.
(i)
The Minister disallowed the ITCs claimed, on the
ground that the Appellant did not submit the supporting documents required by
subsection 169(4) of the ETA.
. . .
(u)
The Respondent was of the view that there
was no exchange of services between the Appellant and St-Isidore and that this
was a scheme put in place to enable St‑Isidore to claim ITCs even though
neither the Appellant nor Ferblanterie Alexandre remitted any GST billed.
(v)
She also refused to grant the ITCs claimed by
the Appellant in the course of the audit. She did so for the same reason,
namely, that there was no exchange of services between these entities, and that
the invoices submitted by St‑Isidore were false.
. . .
[8]
In making the notice of
assessment in respect of Ferblanterie Alexandre, the Minister relied, among
other things, on the findings and assumptions set out in subparagraphs 21(a), (h),
(i), (j), (ff), (gg) and (hh) of the Reply to the Notice of Appeal:
(a)
During the period in issue, the Appellant was a
registrant for the purposes of Part IX of the ETA, but filed returns
reporting zero net tax.
. . .
(h)
The Minister's auditor found that, starting on
August 31, 2001, the Appellant issued invoices to St-Isidore on which
it stated a GST amount ("the GST billed").
(i)
The Minister's auditor found that the Appellant
reported no GST billed for the period in issue, because it filed returns where
that amount is reported as zero or where no activity is reported for the
period.
(j)
Consequently, the auditor assessed the Appellant
for $8,305.86 in unpaid tax under section 278 and paragraph 296(1)(b)
of the ETA.
. . .
(ff)
During the audit, the Minister's auditor
therefore disallowed ITCs claimed by the Appellant in connection with the
invoices purportedly issued by St-Isidore.
(gg)
Lastly, the Respondent assessed a penalty
under section 285 of the ETA, because the Appellant had failed to include,
in computing its net tax, the GST that it had stated on its invoices.
(hh)
Moreover, even though the Respondent entered a
GST amount on the invoices submitted to St-Isidore, its returns for the same
periods stated that it had no activity.
. . .
[9]
To put things in simple
terms, this dispute is mainly about the ITCs that St‑Isidore claimed in
respect of GST on supplies purportedly made to it by D.H. Ventilation and Ferblanterie
Alexandre from November 2003 to July 2004, during which period D.H. Ventilation
and Ferblanterie Alexandre remitted no GST to the Minister.
[10]
The audit of St-Isidore's
business began in late January 2005, and a first meeting was held with Daniel
Dupuis, an external accountant who looked after Jean‑Yves Legault's
affairs with the help of a partner. At that first meeting, Mr. Dupuis
gave the auditor worksheets showing GST discrepancies starting in 2002. The
amount of net tax payable was shown on St-Isidore's financial statements.
[11]
Initially, all the ITCs
claimed in relation to the invoices of D.H. Ventilation and Ferblanterie Alexandre
were disallowed because the invoices had not been submitted. The sales
invoices issued by St-Isidore to D.H. Ventilation and Ferblanterie Alexandre
were the first to be submitted, and the invoices for purchases by St-Isidore from
D.H. Ventilation and Ferblanterie Alexandre were submitted later.
[12]
Even though the sales
and purchase invoices had now been submitted, the auditor continued to disallow
the ITCs on the basis that D.H. Ventilation and Ferblanterie Alexandre had
not been engaged in genuine commercial activities. D.H. Ventilation was
not a GST registrant, and Ferblanterie Alexandre filed returns reporting
zero net tax. According to the auditor, the invoices of D.H. Ventilation and
Ferblanterie Alexandre were invoices of convenience, because there were no true
supplies of services or goods between the entities involved.
[13]
For the following
reasons, the auditor determined that neither D.H. Ventilation nor Ferblanterie Alexandre
had been engaged in any true commercial activity:
[TRANSLATION]
(a)
With respect to Ferblanterie Alexandre :
(i)
All of its tax returns had zero balances, and
only one adjustment was done, at the end of the year.
(ii)
It had no accounting journals, except for a
year-end disbursement account.
(iii)
It had no employees, and was not registered for
payroll deductions.
(iv)
It was not registered with the CCQ, and no hours
of labour were reported to the CCQ.
(v)
It paid no rent and had no equipment, and the
only vehicle that it used was registered to St‑Isidore.
(vi)
There were almost no transactions on its bank
account, except an exchange of cheques at year-end.
(b)
With respect to D.H. Ventilation :
(i)
It was not registered for consumption taxes; it
only registered in February 2005.
(ii)
It had no accounting journals, except for a year-end
disbursement account.
(iii)
It was not registered for payroll deductions.
(iv)
It was not registered with the CCQ, and no hours
of labour were reported to the CCQ.
The Appellants' position
[14]
Based on the following
grounds, which are set out in paragraphs 7 to 18 of its Notice of Appeal, St-Isidore
is challenging the validity of the amounts claimed back:
[TRANSLATION]
7. Indeed, the Respondent
improperly failed to take account of the invoices issued by subcontractors of
the Appellant, namely Ferblanterie Alexandre and D.H. Ventilation, which justify
the ITC claims.
8. The division of labour, and the exchange
of business services between the Appellant and the subcontractors, were such
that the Appellant sold contracts to customers.
9. Ferblanterie Alexandre, for its part, made
ventilation ducts for the Appellant on subcontract.
10. D.H. Ventilation installed heating and
air conditioning systems for the Appellant.
11. Thus, services were exchanged between the
three entities as part of their respective commercial activities.
12. The reason that the sectors of activity
were allocated in this way between the Appellant and Ferblanterie
Alexandre , and the Appellant and D.H. Ventilation, was to
facilitate their operations and significantly reduce related financial costs.
13. The Appellant meets the ETA's ITC
entitlement criteria.
14. Indeed, the Appellant was a registrant
throughout the period in issue.
15. The Appellant did pay taxes, and no one
contests this.
16. The services that the subcontractors
supplied to the Appellant were supplied for a commercial activity of the
Appellant's.
17. Lastly, these were expenses for services
that were neither exempt nor zero-rated, and moreover, the purchases were made
from registrants.
18. The subcontractors had the production
capacity necessary to render the services to the Appellant, and they actually
fulfilled the related orders.
[15]
As for D.H. Ventilation
and Ferblanterie Alexandre, they submit that there was an exchange of services
with St-Isidore, and they claim ITCs on purchases from St‑Isidore which
would have the effect of cancelling the amounts that they would otherwise owe.
Both subcontractors allege that they paid taxes on purchases from St‑Isidore
which would have the effect of cancelling the amounts that they would otherwise
owe. Both allege that they paid taxes on purchases from a registrant,
namely St‑Isidore.
Analysis
[16]
The first question for
consideration is whether St-Isidore was eligible for the ITCs claimed in
respect of the invoices of D.H. Ventilation and Ferblanterie Alexandre.
The disallowed ITCs were related to the invoices issued from November 2003 to
July 2004 ("the ITC period").
[17]
The impugned invoices
from D.H. Ventilation are described above at paragraph 6, item (m). None
of them contains a GST registration number. This is because
D.H. Ventilation Inc. did not register for consumption taxes until
February 2005. As a result of this technical problem, St-Isidore automatically
lost the benefit of the ITCs in respect of supplies made by D.H. Ventilation.
The ETA and the Input Tax Credit (GST/HST) Regulations, SOR/91‑45, as
amended ("the Regulations"), are very specific about the information
that must be provided in order to obtain an ITC. Paragraph 169(4)(a) of
the ETA requires 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; and
[18]
Paragraph 3(c) of
the Regulations enunciates the following requirement:
3. Prescribed information −
For the purposes of paragraph 169(4)(a) of the Act, the following
information is prescribed information:
. . .
(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 paragraphs (a)
and (b),
(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.
[19]
Where the total amount
paid or payable shown on the supporting document in respect of the supply
or supplies is $150 or more, the information required by paragraphs 3(a)
and 3(b) must be provided. Subparagraph 3(b)(i) specifically
refers to the registration number assigned under subsection 241(1) of the ETA
to the supplier.
[20]
The courts have had numerous
occasions to rule on these provisions of the ETA and the Regulations, and have
confirmed several times that the requisite information is mandatory (see Systematix
Technology Consultants Inc. v. The Queen, [2007] G.T.C. 1541 (F.C.A.),
[2006] G.T.C. 510 (T.C.C.); Helsi Construction Management Inc. v. The
Queen, [2001] G.T.C. 396; Key Property Management Corp. v. The
Queen, [2004] G.S.T.C. 32 and Davis v. The Queen, [2004]
G.S.T.C. 134). Bédard J. of this Court also had occasion to speak to this
issue, and he made the following comments in Bobby Lee Baker v. The Queen,
2007 TCC 106, at paragraph 28:
28. Subsection 169(4) of
the Act and the Regulations are clear and the courts have adopted the position
that a registrant is not entitled to receive the ITCs claimed before the
required supporting documentation has been filed. In this case, the appellant
did not produce as evidence the required supporting documentation and,
therefore, he was not entitled to receive the ITCs claimed.
[21]
The information
contemplated in section 3 of the Regulations is exhaustive, and the duty
of taxpayers to provide it is an onerous one. In the instant case, St‑Isidore
did not fulfil its duty to produce the supporting documents necessary to obtain
ITCs in respect of the invoices issued by D.H. Ventilation.
[22]
In addition to the
technical considerations, one must determine whether the invoices of D.H. Ventilation
are invoices of convenience, or whether supplies were really made to St‑Isidore.
[23]
D.H. Ventilation,
which has been doing business since 1999, installs ventilation systems. According
to the information provided in Jean‑Yves Legault's income tax
return, the partners in 2004 were Jean‑Yves Legault (33.33%),
Daniel Hébert (33.33%) and Martin Turcotte (33.33%).
[24]
D.H. Ventilation held
a building contractor's permit issued by the Régie du bâtiment du Québec. The
designated employee card was issued to Martin Turcotte, but the primary
competency card holder was Jean‑Yves Legault. The business
filed monthly reports with the CCQ and paid the required fees. The hours
reported to the CCQ were very limited because non-construction-related
residential work was not regulated by the CCQ.
[25]
D.H. Ventilation occupied
separate premises in the building that belonged to Jean‑Yves Legault,
but, according to the balance sheet as at December 31, 2005, and the
Statement of Business Activities attached to Jean‑Yves Legault's 2004
income tax return, the business had no assets in the nature of machinery or
equipment.
[26]
D.H. Ventilation filed
no financial statements and had no books of account during the ITC period. According
to the profit and loss statement for 2004, the only revenues of the business consisted
of $32,375 from St-Isidore. The document entitled [TRANSLATION] "Cash
Receipts and Cash Expenditures", prepared by the external auditor from the 2004
bank statements, shows that the business had few activities in the course of
the year, and that the business was not a profit centre.
[27]
The invoices from Ferblanterie
Alexandre are described above at paragraph 6, item (l). Since the
conditions in the ETA and the Regulations for claiming ITCs are met, the
question whether the invoices were made merely for the sake of accommodation,
or whether services were genuinely rendered by Ferblanterie Alexandre,
becomes an important one to determine.
[28]
Ferblanterie Alexandre,
which was founded in 1999, made ventilation ducts. It has a
building contractor licence issued by the Régie du bâtiment du Québec. During the
ITC period, it had no employees, and Alexandre Legault had no duct‑making
competency card. The only customer of the business was St‑Isidore. Ferblanterie
Alexandre occupied premises in the building owned by Jean‑Yves Legault.
There was no lease with the building's owner. St‑Isidore occupied
premises in the same building along with D.H. Ventilation and did not pay
rent to Jean‑Yves Legault but paid the operating expenses of the
building and then billed Ferblanterie Alexandre and D.H. Ventilation for
their respective shares of the operating expenses. According to the information
contained in Jean‑Yves Legault's income tax returns, Mr. Legault
reported $6,972 in gross rental income in 2004, and $33,972 in gross rental
income in 2005.
[29]
Ferblanterie Alexandre had
practically no equipment or machinery assets ($997 as at December 31, 2005)
and the vehicle that it used was registered under the name St‑Isidore. The
bank statements of the business showed almost no activity, and the document
entitled [TRANSLATION] "Cash Receipts and Cash Disbursements",
prepared by the external accountant, shows no purchases in 2003, aside
from a few miscellaneous items. For 2004, a materials purchase account was
opened with St‑Isidore and another such account was opened with Brock.
[30]
All the GST returns of Ferblanterie
Alexandre for the 2002, 2003 and 2004 years are nil and indicate no commercial
activity, and no year-end adjustments were made. Ferblanterie Alexandre had
no books of account, and only one disbursement account was created, at year-end.
[31]
Mr. Jean‑Yves Legault
testified that the invoices of Ferblanterie Alexandre were paid by cheques
that were deposited into its bank account. Contrary to Mr. Legault's
allegations, the evidence discloses that no cheques from St‑Isidore were
deposited into the bank account of Ferblanterie Alexandre in 2003 or 2004. In St-Isidore's
books, the invoices issued by Ferblanterie Alexandre are listed as accounts
payable from 2001 onward.
[32]
Based on the foregoing,
I find that the Appellants have not shown, on a balance of probabilities, that
the Minister erred in determining that Ferblanterie Alexandre and D.H. Ventilation
did not actually render services to St‑Isidore, and that a scheme had
been put in place to enable St‑Isidore to claim ITCs even though neither Ferblanterie Alexandre
nor D.H. Ventilation were remitting the tax that they were billing, and Ferblanterie
Alexandre was filing GST returns that reported zero balances.
[33]
The following factors
that weigh heavily against the Appellants are worth noting:
(i) The conduct of the Appellants during the audit: they
were extremely reluctant to submit the purchase and sale invoices.
(ii) The laconic invoices, in numeric sequence, that were
tendered in evidence; these invoices were based on the same template and often
bore the same dates.
(iii) The fact that St‑Isidore did not pay the invoices.
(iv) The fact that Ferblanterie Alexandre and D.H. Ventilation
had no operational structure or production capacity.
(v) The fact that neither entity had adequate books of
account.
(vi) The fact that each had just one customer during the ITC
period.
[34]
As Lamarre J. of this
Court so aptly stated in Les Constructions L.J.P. Inc. v. The Queen,
2005 TCC 508, at paragraph 21:
. . . I agree
with counsel for the Respondent, who submits that the appellants would have
needed to provide more substantial additional evidence to counter the
Minister's allegation that the suppliers did not actually make any supplies or
perform any services for the appellants. . . .
[35]
Consequently, I confirm
the Minister's assessment disallowing the ITCs for St‑Isidore.
[36]
The second question to
be considered is whether Ferblanterie Alexandre and D.H. Ventilation are
eligible for the ITCs that each claimed in respect of the invoices issued by St‑Isidore
during the period from January 1, 2002, to September 30, 2005, in the
case of Ferblanterie Alexandre, and from May 28, 2004, to September 30, 2005,
in the case of D.H. Ventilation. In addition, it must be determined
whether Ferblanterie Alexandre is required to remit to the Receiver General
the GST billed but not remitted in respect of St‑Isidore's invoices.
[37]
The impugned invoices issued
by St‑Isidore are described above at paragraph 6, item (j). Of
the 33 invoices issued to D.H. Ventilation, 28 are dated
November 15, 2004, and five are dated December 31, 2004. The 28 invoices dated
November 15, 2004, purport to be for supplies for ventilation jobs. These
invoices are difficult to explain considering the fact that D.H. Ventilation
was unable to tender into evidence the sales invoices issued to its customers
for the installation and for the necessary supplies acquired from St‑Isidore.
This absence of evidence leads me to conclude that the invoices from St‑Isidore
were issued merely for the sake of accommodation. In fact, the invoices were
not paid, and it was simply by means of an adjusting entry that St‑Isidore
created an account receivable of $128,848 in consideration of sales to D.H. Ventilation
and Ferblanterie Alexandre.
[38]
Ten of the
33 invoices issued by St‑Isidore to Ferblanterie Alexandre are
dated November 1, 2004, five are dated November 30, 2004,
and 18 are dated December 15, 2004. The invoices generally purport to
cover materials for [TRANSLATION] "duct jobs",
[TRANSLATION] "A/C jobs", [TRANSLATION] "natural gas
jobs" or [TRANSLATION] "heat pump jobs". They are also difficult
to explain in view of the fact that Ferblanterie Alexandre was unable to tender
in evidence any sales invoices issued to customers other than St‑Isidore — for example, invoices issued to D.H. Ventilation,
which did the installation. If Ferblanterie Alexandre was to manufacture exclusively
for St-Isidore, it could simply have charged the cost of the duct‑making labour.
Much like the invoices issued to D.H. Ventilation, these invoices bear all
the hallmarks of invoices of accommodation. And in fact, they were not paid by St‑Isidore.
[39]
Consequently, I confirm
the Minister's assessments to the extent that they disallow the ITCs claimed by
Ferblanterie Alexandre and D.H. Ventilation.
[40]
As for the question
whether Ferblanterie Alexandre is required to remit, to the Receiver General,
the GST that it billed St‑Isidore but did not collect during the relevant
period, and did not remit to the Receiver General, that question must be
answered in the affirmative. The ETA is very clear about this, and it is
helpful to reproduce the wording of paragraph 225(1)(a) and
subsection 225(2) of the statute:
Net tax
225. (1) Subject to this Subdivision, the
net tax for a particular reporting period of a person is the positive or
negative amount determined by the formula
A - B
where
A is the total of
(a) all amounts that became collectible and all other
amounts collected by the person in the particular reporting period as or on
account of tax under Division II, and
. . .
Restriction
225. (2) An
amount shall not be included in the total for A in the formula set out in
subsection (1) for a reporting period of a person to the extent that that
amount was included in that total for a preceding reporting period of the
person.
[41]
Paragraph 225(1)(a)
of the ETA refers specifically to amounts that became collectible, i.e. tax
billed by the registrant during a given reporting period. Subsection 225(2)
of the ETA seeks to prevent double inclusion in the total for A in
subsection (1) for the reporting period. It does so by specifying that an
amount shall not be included in A if it has already been included in a
preceding reporting period; this is what happens, for example, where a tax
amount was billed in one reporting period but collected in the subsequent one.
[42]
Subsection 278(2) of
the ETA requires every person required to pay or remit tax to pay or remit it
to the Receiver General. It reads:
278. (2) [Place of payment] Every person who is required under
this Part to pay or remit an amount shall, except where the amount is required
under section 221 to be collected by another person, pay or remit the amount to
the Receiver General.
[43]
Lastly, the ETA
provides that the Minister has the power to make an assessment to determine the
amount of a person's unremitted net tax for a reporting period. This power
is conferred on the Minister by paragraph 296(1)(a) of the ETA, which
reads:
296. (1) [Assessment] The Minister may assess
(a) the net tax of a person under Division V for a reporting
period of the person
. . .
and may reassess or make an additional assessment of tax, net tax,
penalty, interest or an amount referred to in paragraph (d) or (e).
[44]
Thus, these provisions
enable the Minister to assess Ferblanterie Alexandre for the tax that it
did not remit for the reporting periods from January 1, 2002, to
September 30, 2005, even though St‑Isidore has no right to the
ITCs in respect of the invoices of Ferblanterie Alexandre, and even if a final
determination is made that Ferblanterie Alexandre was not engaged in commercial
activities and did not make any taxable supplies during the relevant reporting
periods. Where taxes have been overpaid, the ETA provides for adjustment and
reimbursement measures in order to prevent double taxation.
[45]
Several decisions of
this Court, and of the Federal Court of Appeal, have confirmed the
principle that a person who has collected tax, whether it was collectible or
not, must include it in the amount of net tax under subsection 225(1) of
the ETA and remit it to the Receiver General, and that, if the person does not
remit the net tax amounts, a notice of assessment may be issued against the
person.
[46]
In 800537 Ontario
Inc. v. Canada, [2005] G.S.T.C. 165, [2005] F.C.J. No. 1732
(QL), Sexton J.A. adopted, as his own, paragraph 10 of the reasons of Sharlow
J.A. in Gastown Actors Studio Ltd. v. Canada, [2000] G.S.T.C. 108,
[2000] F.C.J. No. 2047:
. . . a taxpayer who has in fact collected GST,
whether for services that are taxable or for services that are later determined
to be exempt supplies, must remit those amounts and is liable to be assessed if
they are not remitted. . . .
[47]
The same
principle applies to GST collectible at the end of a reporting period.
The penalties
[48]
The notices
of assessment dated March 3, 2006, and issued to St-Isidore, Ferblanterie Alexandre and D.H. Ventilation, contain a 6% penalty under
subsection 280(1) of the ETA, which reads:
280. (1) [Penalty and interest] — Subject to this section and
section 281, where a person fails to remit or pay an amount to the Receiver
General when required under this Part, the person shall pay on the amount not
remitted or paid:
(a) a penalty of 6% per year; and
(b) interest at the prescribed rate,
[49]
The Federal Court of
Appeal has already held that nothing prevents a defence of due diligence from
being asserted against a penalty imposed under section 280 of the ETA (see
Canada (Attorney General) v. Consolidated Canadian Contractors Inc., [1999]
1 F.C. 209 (C.A.) and Corporation de l’école polytechnique v. Canada,
2004 FCA 127).
[50]
However, nothing in the
record suggests that the Appellants have shown due diligence or that they took
any measures whatsoever to comply with the ETA. St‑Isidore claimed ITCs
when no taxes were being remitted to the Receiver General by Ferblanterie Alexandre
and D.H. Ventilation. Jean‑Yves Legault, the Appellants'
directing mind, could not have overlooked this situation, which persisted for
several years (2002 to 2005) without any corrective action.
[51]
To closely paraphrase Létourneau
J.A. in Folz Vending Co. v. Canada, 2008 FCA 160, at paragraph 25,
the Appellants were unable to identify an
error in fact which led them to believe on reasonable grounds in a non-existent
state of facts which, if it had existed, would have made their failure to
collect and remit the tax innocent.
[52]
The notices of
assessment against St-Isidore and Ferblanterie Alexandre,
dated March 3, 2006, also contain a 25% penalty under
section 285 of the ETA. The part of section 285 of the ETA that
precedes paragraph (a) reads as follows:
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
. . .
[53]
Since I have already
determined that the invoices of St-Isidore, Ferblanterie Alexandre and D.H. Ventilation
were invoices of accommodation, and that the system put in place was a scheme
enabling St-Isidore to benefit from ITCs even though the GST amounts were not
remitted by Ferblanterie Alexandre or D.H. Ventilation, I have no choice
but to confirm the penalties under section 285 of the ETA.
[54]
The evidence discloses
several facts showing a degree of intent or gross negligence that warrants the
imposition of the penalty:
(a) Jean‑Yves Legault knew that there
were GST discrepancies, because tax liabilities had been posted to the
financial statements of St‑Isidore since 2002.
(b) Ferblanterie Alexandre filed returns
reporting zero net tax while it was billing St‑Isidore for taxable
supplies.
(c) Ferblanterie Alexandre and D.H. Ventilation
kept no books of account.
(d) There was no genuine commercial
activity carried on by Ferblanterie Alexandre and D.H. Ventilation.
(e) The Appellants' invoices went unpaid.
[55]
In view of the
foregoing evidence, I am of the opinion that the Respondent has met her burden
of proof.
[56]
Consequently, the
Appellants' appeal against the penalties under sections 280 and 285 of the
ETA is dismissed.
[57]
For the foregoing
reasons, the Appellants' appeals are dismissed.
Signed at Montréal,
Quebec, this 9th day of July 2008.
"Réal Favreau"
Translation certified true
on this 1st day of October 2008.
Brian McCordick, Translator
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