Citation: 2008TCC70
Date: 20080130
Docket: 2007-779(GST)I
BETWEEN:
KIM STEVEN MACKENZIE & CARLA JOANNE MACKENZIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Paris, J.
[1] This is an appeal
from a reassessment under Part IX of the Excise Tax Act whereby the
Minister of National Revenue increased the Appellant partnership's tax payable for
its reporting periods ending between July 1, 2002 and December 31, 2003 by
$10,399.47 and imposed a penalty of $638.44 and interest of $113.14.
[2] The increase in tax
was made up of two components. Firstly, the Minister determined that the
Appellant had failed to collect and remit GST on management fees it received
from two related corporations, Kimbowmac Inc. and Grymus Ymdrech Inc. during
2002 and 2003. Kimbowmac and Grymus were wholly owned by the two partners of the
Appellant partnership. Secondly, the Minister determined that the Appellant was
not entitled to use the Quick Method of accounting for GST pursuant to
section 227 of the Act, as it had done for its reporting periods
commencing October 1, 2002 to December 31, 2003. Under the Quick Method, a
taxpayer remits GST at a rate of only 4% of its taxable supplies but is not
entitled to claim input tax credits. Since the Minister found that the
Appellant was not entitled to use the Quick Method, the Appellant was
reassessed for GST of 7% of its taxable supplies for the relevant periods.
[3] At the hearing, the
Respondent's counsel conceded that the Appellant was, in fact, entitled to use
the Quick Method to calculate its GST payable for the periods in issue. The
Respondent's counsel also conceded that the amount of management fees received
by the Appellant from Kimbowmac during 2002 was $15,682.25 less than the amount
the Minister assumed the Appellant received.
[4] The only issue left
is whether the Appellant was required to collect and remit tax on the remainder
of the management fees it received from Kimbowmac and Grymus from July 1,
2002 to December 31, 2003.
[5] The relevant
assumptions relied upon by the Minister in reassessing are set out in
paragraph 11 of the Reply to Notice of Appeal and read as follows:
. . .
(d) at all relevant
times Kimbowmac, Grymus and the Appellant provided consulting services to the
oil and gas industries;
(e) at all relevant
times the Appellant also provided management services to Kimbowmac and Grymus;
(f) all supplies
made by the Appellant during the Relevant Period were taxable supplies subject
to tax;
. . .
(p) for the
reporting period ending December 31, 2002, the Appellant received consideration
from Kimbowmac for management services in the amount of $62,729.00 on which tax
was collectible;
(q) for the
reporting period ending December 31, 2003 the Appellant received consideration
from Grymus for management services in the amount of $67,045 on which tax was
collectible;
(r) in filing its
returns for December 31, 2002 and December 31, 2003, the Appellant failed to
include the tax collectible on the management fees referred to in subparagraphs
11(p) and 11(q) respectively;
Appellant's
Evidence
[6] Kim Steven
Mackenzie, one of the partners of the Appellant, represented the Appellant and
gave evidence on its behalf. His testimony dealt largely with the manner in
which officers of the Canada Revenue Agency (CRA) had dealt with the Appellant
in the course of the audit of the Appellant and the review of the Appellant's
objection to the reassessment. Mr. Mackenzie believed that the audit was
connected in some way with earlier GST difficulties that the related company
Kimbowmac had encountered in 2002. Mr. Mackenzie felt harassed and badly
treated by the CRA officers he dealt with as the audit and objection process
progressed. He said he did not receive answers to his questions and was
confused why the auditor believed that the Appellant was not entitled to use
the Quick Method to file its GST returns. Mr. Mackenzie felt strongly
that the Appellant was entitled to use this method and was frustrated by the
unresponsiveness of the auditor to his concerns. He was also upset that the
scope of the audit appeared to have widened from what he was originally told
would be covered. He said that he did not receive a clear explanation of the
adjustments made in the reassessment until the summer of 2006 when he spoke
with the appeals officer.
[7] Mr. Mackenzie also
said that he had been misled regularly during the process, but it is not clear
whether this applied to the auditor or appeals officer, or to the collections
officer who later took steps to collect the amounts payable under the
reassessment. According to Mr. Mackenzie, after the Appellant filed its
appeal to this Court in February 2007, it experienced further difficulties with
the CRA. Around the time of the appeal, Mr. Mackenzie called and left a
message for a collections officer advising that the Appellant was appealing the
reassessment and requesting that the CRA hold off on collection action.
However, in May 2007, the CRA sent a requirement to pay to the Appellant's bank
and garnisheed over $12,000 from its account without notice to the Appellant.
[8] Mr. Mackenzie said
that delays in the audit resulted in Kimbowmac and Grymus being unable to claim
input tax credits (ITCs) for the GST the Appellant was now being asked to pay.
Kimbowmac had declared bankruptcy and Grymus had been dissolved.
[9] Mr. Mackenzie testified
that prior to May 1, 2002, Kimbowmac and Grymus distributed their profits
to the Appellant by way of dividends and that no GST was collectible on the
dividends. However, from May 1, 2002 on, Kimbowmac and Grymus paid management
fees to the Appellant. This was done on the advice of the Appellant's accountant.
The accountant failed to advise the Appellant that it was required to collect GST
from Kimbowmac and Grymus on the management fees, and the Appellant did not
charge or collect the GST on the fees.
[10] In
cross-examination, Mr. Mackenzie admitted that the Appellant had provided
services to Kimbowmac and Grymus during the periods in issue and that the
amounts received by the Appellant for those services had been treated as
management fees by all of the parties involved.
[11] Mr. Mackenzie
also testified that the Minister erred in allocating all of the management fees
that were received by the Appellant from Kimbowmac to the final quarter of 2002
and all of the management fees received from Grymus to the final quarter of
2003. He said that the fees were received throughout the year, although he was
unable to say what amounts were received when.
Appellant's Arguments
[12] Mr. Mackenzie
argued that the GST owing by the Appellant had been collected and remitted by
Kimbowmac and Grymus as agent for the Appellant.
[13] Alternatively, he
submitted that Kimbowmac and Grymus were shell corporations used by the
Appellant to earn income, and that it would be appropriate in the circumstances
of this case to consider that the Appellant and the two corporations formed a
single entity for tax purposes. In other words, he asked the Court to disregard
the existence of Kimbowmac and Grymus, and find that their operations were
carried on by their shareholders who were the partners in the Appellant. In
this way, the only GST that would have been required to be remitted was that
collected by Kimbowmac and Grymus on their taxable supplies, which they had
already done, and there would be no supply of management services by the
Appellant to another party.
[14] Mr. Mackenzie
said that this would create a fair result, because the government would not be
out any money. He suggested that the tax that the CRA was attempting to obtain
from the Appellant would have been offset by ITCs that would have been claimed
by the corporations if they had paid GST on the management fees to the Appellant.
Since Kimbowmac and Grymus no longer exist, the government would get a windfall
from the reassessment in issue because it would collect the GST from the
Appellant without having to pay out any ITCs.
[15] In the event that
the Appellant is found liable, Mr. Mackenzie asked that the Court allow
the Appellant to claim ITCs on behalf of Kimbowmac and Grymus.
[16] The Appellant also took
issue with the inclusion of the full amount of the management fees from
Kimbowmac in the Appellant's reporting period ending December 31, 2002 and
the full amount of management fees from Grymus in the Appellant's reporting
period ending December 31, 2003. However, Mr. Mackenzie recognized
that he had not presented any evidence to show when the Appellant received the
amounts.
[17] The Appellant also
raised a number of arguments related to the Canadian Bills of Rights, 1960, c. 44 and the Canadian Charter of
Rights and Freedoms, Part I of the Constitution
Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982,
c. 11.
[18] It was submitted that the garnishee of the Appellant's bank
account, in May 2007 under section 317 of the Act constituted i) an
unreasonable seizure, contrary to section 8 of the Charter, ii)
unusual punishment or treatment contrary to section 12 of the Charter,
iii) breached the Appellant's right, under section 7 of the Charter to
life, liberty and security of the person, and finally iv) breached its right under
section 11 of the Charter and paragraph 2(e) of the Canadian
Bill of Rights to a fair hearing.
[19] It was also
submitted that the imposition of the penalty and interest under
subsection 280(1) of the Act i) amounted to cruel and unusual
punishment or treatment contrary to section 12 of the Charter because
it acted as a deterrent to the Appellant challenging the reassessment, and ii)
was discriminatory within the meaning of section 15 of the Charter
because it had the effect of denying the Appellant equal access to and benefit
of the law.
[20] Next,
Mr. Mackenzie contended that the CRA had discretion in how it administered
the Act, but failed to exercise that discretion properly in this case,
given that, taken collectively, the Appellant and Kimbowmac and Grymus had not
been enriched by the Appellant's failure to collect and remit GST on the
management fees from Kimbowmac and Grymus. He said that the CRA's failure to
exercise its discretion not to enforce the Act amounted to unfairness
towards the Appellant, which amounted to discrimination and a breach of
section 15 of the Charter.
[21] The Appellant
concluded by submitting that the CRA should be made to pay for its malfeasance
in this case, and that the appropriate remedy would be for the Court to allow
the appeal, vacate the reassessment and order the return of the seized funds.
Analysis
Substantive Arguments
[22] The Appellant's
first argument, that Kimbowmac and Grymus were acting as agent of, or trustee
for, the Appellant in collecting and remitting tax on supplies made to third
parties, cannot succeed because there was no evidence presented to show that a
trust or agency agreement existed between the parties or that they carried on
their business in accordance with such an agreement, or that any GST was
collected or remitted by the corporations on behalf of the Appellant. It
appears to me that the Appellant is attempting to recharacterize the
transactions it entered into with the two corporations in order to escape the
tax consequences of those transactions, something which is not permitted in tax
law (Shell Canada Ltd. v. The Queen, [1999] S.C.J. No.30(QL)).
[23] The Appellant’s
alternative argument, that it would be appropriate to disregard the separate
legal existence of Kimbowmac and Grymus with the result that there would be no
taxable supply of services by the Appellant to the corporations and therefore
no tax payable in this case, is equally untenable. In Meredith v. R., [2002]
F.C.J. No. 1007 (QL), the Federal Court of Appeal stated at
paragraph 12 that:
Lifting the corporate veil is contrary to
long‑established principles of corporate law. Absent an allegation that
the corporation constitutes a "sham" or a vehicle for wrongdoing on
the part of putative shareholders, or statutory authorisation to do so, a court
must respect the legal relationships created by a taxpayer (see Salomon v.
Salomon & Co.(1896), [1897] A.C. 22 (U.K. H.L.); Kosmopoulos v.
Constitution Insurance Co., [1987] 1 S.C.R. 2 (S.C.C.)). A court
cannot recharacterize the bona fide relationships on the basis of what
it deems to be the economic realities underlying those relationships (see Continental
Bank of Canada v. R., [1998] 2 S.C.R. 298 (S.C.C.); Shell Canada
Ltd. v. R., [1999] 3 S.C.R. 622 (S.C.C.); Ludmer c. Ministre
du Revenu national, 2001 SCC 62 (S.C.C.) at para. 51).
[24] There was no
evidence before me that Kimbowmac and Grymus were shams or that they were used
for any wrongful purpose by their shareholders (i.e. the partners of the
Appellant), nor has the Appellant shown that there is any other basis for
piercing the corporate veil in this case.
[25] Nor can I accede to
the Appellant's request that it be allowed to claim ITCs on behalf of Kimbowmac
and Grymus. The Appellant itself is not permitted under the Quick Method
of accounting for GST to claim any ITCs, and there is no provision in the Act
that would allow one taxpayer to claim the benefit of another taxpayer's ITCs.
[26] While the Appellant
did not make any substantive arguments concerning the imposition of the penalty
in this case, I am satisfied that the evidence shows that the Appellant
received the management fees in issue and did not collect or remit tax in
respect of those fees. I am also satisfied that the Appellant rendered services
to Kimbowmac and Grymus in exchange for the management fees and that those
services were a taxable supply within the meaning of section 123 of the Act.
The Respondent has therefore met the onus of showing that the penalty was
correctly imposed in this case.
Charter and Bill of Rights
Arguments
[27] I will deal firstly
with the Appellant’s claim that its rights under the Charter and the
Canadian Bill of Rights were breached by the garnishee of its bank account.
[28] It is clear that the
garnishee was an action taken to collect the outstanding tax debt after the
Appellant was reassessed. It is also clear that this Court does not have
jurisdiction to set aside or vacate a reassessment because of alleged wrongful
or abusive conduct by officers of the CRA in the course of collecting debts. To
this effect, the Federal Court of Appeal stated in Moss v. R.,
[2006] F.C.J. No 665 (QL) at paragraph 5:
If unlawful or improper tax collection
actions occur, and are proved, it may be possible to obtain a remedy by
commencing appropriate proceedings in the Federal Court, but as a matter of
law, the Tax Court of Canada has no jurisdiction to set aside or vacate a
reassessment because of such actions. In an appeal from a judgment of the Tax
Court, this Court’s jurisdiction is similarly limited.
[29] Given
that this Court has no jurisdiction over collection matters, it has no
power to grant any remedy sought by
the Appellant concerning the garnishee.
[30] The Appellant’s next
argument is directed at what Mr. Mackenzie described as the Minister’s
unwillingness to exercise discretion not to reassess tax on the management
fees. He alleged that the Minister has this discretion, and the failure to
exercise that discretion when the circumstances of the case warrant amounts to
discrimination under section 15 of the Charter.
[31] The Appellant is not
arguing that any provision of the Act relied upon in the reassessment
offends section 15 of the Charter. The source of his complaint is
the actions taken by the Minister in the course of reassessing. Once again,
this Court does not have jurisdiction to decide a challenge to the Minister’s
actions, as opposed to a challenge of the legislation relied upon in
reassessing. The following comments of this Court in Hardtke v. R.,
2005 TCC 263 are applicable to the case at bar:
Here, the appellant is not arguing that the legislation
itself offends section 15 of the Charter, but maintains rather that
the Minister's actions violate section 15. Accordingly, a subsection 24(1)
remedy cannot be granted by this Court on the grounds of a breach of
section 15 of the Charter by the Minister in his administrative
capacity as tax collector, since the Court does not have jurisdiction over the
subject matter of that portion of the appeal. Therefore, even if a breach did
occur, this Court has no jurisdiction to remedy such a breach.
(at paragraph 20)
[32] Even
if I had jurisdiction to decide this issue, I am not satisfied that the
Appellant has shown that he was the victim of the kind of discrimination
prohibited by the Charter. Firstly, there was no evidence presented to
show that the Appellant was accorded any differential treatment as compared to
other persons in similar circumstances. Mr. Mackenzie’s belief that others may
have been assessed differently at the discretion of the Minister appeared to me
to be speculation. In the absence of proof of differential treatment, it is
impossible to proceed with the section 15 analysis mandated by the Supreme
Court of Canada in Law v. Canada (Minister of Employment and
Immigration), [1999] 1 S.C.R. 497.
[33] The Appellant
also challenged the constitutionality of subsection 280(1) of the Act
which imposes a penalty and interest on unpaid amounts. That provision reads as
follows:
280(1)
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,
computed for the period beginning on the first day following the
day on or before which the amount was required to be remitted or paid and
ending on the day the amount is remitted or paid.
[34] The Appellant
argued firstly that subsection 280(1) allows the Minister to charge a
higher rate of interest on unpaid amounts due by a taxpayer than the rate of
interest paid by the Receiver General on amounts due to a taxpayer, and
resulted in an infringement of his rights under sections 7 and 15 of the Charter.
[35] This argument
cannot succeed since it is untrue that the Act set a different rate of
interest on unpaid amounts due by a taxpayer than on amounts due to a taxpayer for
the periods in appeal.
Under the Act and under the Interest Rate (Excise Tax Act) Regulations
SOR/91-19 (for the periods in appeal prior to July 1, 2003) and the Interest
Rates (Excise Tax Act) Regulations SOR/2006-230 (for the periods in appeal
beginning July 1, 2003) there was no difference between the interest rate
paid on GST refunds or rebates and the rate payable on overdue GST. In each
case, the rate of interest payable is “the prescribed rate” (see subsections 280(1)
and 280(2) of the Act relating to overdue GST and subsections 229(3)
and 230(3) of the Act relating to refunds of GST.) The prescribed rate
of interest for Part IX of the Act was fixed by section 3 of both
of the above-mentioned regulations and the same rate of interest was applicable
to amounts of GST owing and to GST refunds.
I also note that the document relied upon by Mr. Mackenzie to show an
interest rate differential was a Statement of Account relating to
Mr. Mackenzie’s personal income tax.
[36] The Appellant’s
argument that penalties levied under subsection 280(1) constituted cruel
and unusual treatment or punishment, and therefore breached his rights under
section 12 of the Charter must also fail. The test for determining
whether a penalty is cruel or unusual treatment or punishment is whether the
penalty is “grossly disproportionate in the sense that it is so excessive as to
outrage standards of decency” (see R. v. M. (C.A.) [1996], 1
S.C.R. 500. I can see nothing in the imposition of a penalty equal to 6% of the
unpaid amount that would in any sense outrage standards of decency. A penalty
of this magnitude is consistent with a purpose of general deterrence within the
context of a self‑reporting tax system.
[37] The Appellant also
argues that subsection 280(1) of the Act breaches his rights under
section 15 of the Charter because the penalty of 6% is unfair and
coercive. The Appellant failed however to relate the imposition of the penalty
to the right to equality under section 15. Once again he did not suggest
that subsection 280(1) allowed for differential treatment based on a
ground enumerated in section 15 or on an analogous ground. Therefore, the
Appellant did not establish any foundation for this final aspect of his
constitutional challenge of subsection 280(1).
[38] In summary, I am
not satisfied that the Appellant has shown that the reassessment in issue
breaches any of his rights under the Charter or the Canadian Bill of
Rights.
[39] The appeal will be
allowed in part and the reassessment will be referred back to the Minister for
reconsideration and reassessment on the basis of the Respondent’s concessions that
the Appellant was entitled to use the Quick Method of accounting for GST
in the relevant periods, and that the taxable supplies made by the Appellant
for the period ending December 31, 2002 should be reduced by $15,682.25.
Signed at Ottawa, Canada, this 30th
day of January 2008.
“B.Paris”
Email this Content