Citation: 2008TCC96
Date: 20080311
Docket: 2006-1867(GST)I
BETWEEN:
SAND, SURF & SEA LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellant was reassessed under the Excise Tax
Act ("Act") to increase the amount of Harmonized Sales Tax
(“HST”) that was collectible by the Appellant and to decrease the amount of
input tax credits (“ITCs”) to which the Appellant was entitled. The
reassessments relate to 1999, 2000 and 2001.
[2] The total amount of the adjustments to the HST collectible, following
the audit and the consideration of the Notice of Objection, was $11,120.60. The
ITCs were decreased by $20,913.27 for the three years under appeal. Gross
negligence penalties were also assessed in relation to some of the disallowed ITC
amounts. The Appellant filed an appeal in relation to all of the amounts included
in the increase in the HST collectible, the decrease in the ITCs claimed and
the assessment of the gross negligence penalties.
[3] In 1994 the Appellant acquired a beach front property at
Queensland Beach in Nova Scotia. David Moore, who is the President, Director and the
sole shareholder of the Appellant, testified during the hearing. He is also an
RCMP officer. He described the acquisition of the property, the
construction of the building, the plans for the business and the difficulties
with the individual who lived across the street from the property of the
Appellant in general terms as follows:
The ownership of that particular property was purchased by Sand, Surf
& Sea Ltd. to operate in principal as a restaurant and country inn.
The premise behind the purchase and future renovations of this property
in four separate phases was to acquire the property, which was in a derelict
state of repair, make repairs to the property and turn it into a viable
restaurant, take out servicing the beach during a four‑month period
during the summer. And country inn with rooms and eventually private quarters
when I retired from my Government position.
...
From almost the beginning point of the acquiring of this property we ran
into bottlenecks if you will with regard to an individual known to the police
across the street who was a known drug dealer. This individual set his sights
on not only hating the police officer that owned the property but doing
anything in his power to destroy the business, destroy the property and an
ongoing barrage occurred from 1996 until 2003 which resulted in the burning
down of the restaurant by the drug dealer.
[4] David Moore introduced an Exhibit listing numerous damage claims
related to the property from 1996 to 2001. The items listed included various
claims for property damage and stolen items. Included in the list are slashed
tires, smashed out windows on the second storey and bullet holes. The
total amount listed in relation to the damage to the property was approximately
$30,000.
[5] The amounts related to the increase in HST collectible can be
summarized as follows:
|
Conversion of
a portion of the property to residential use in 2000 (15% x $46,571):
|
$6,985.65
|
|
HST on
commercial rent received in 1999 (15 / 115 x $1,500):
|
$195.65
|
|
HST on
commercial rent received in 2000 (15 / 115 x $1,500):
|
$195.65
|
|
HST on void
purchases for 2000:
|
$809.04
|
|
HST on void
purchases for 2001:
|
$932.20
|
|
Adjustment re
1999 sales:
|
$2,001.97
|
|
Total
additional HST collectible:
|
$11,120.16
|
[6] At the commencement of the hearing, the
amounts related to the adjustments to the ITCs could not be easily summarized.
[7] The first day of the hearing was June 29, 2007. During the first day
David Moore acknowledged that errors had been made in the HST returns but
the errors were not quantified. Also during the first day of the hearing three Exhibits
were introduced by the Respondent which showed a list of the ITCs claimed by
the Appellant and the various items that were being denied. The Exhibit for
1999 is 27 pages with approximately 30 entries per page. The Exhibit for
2000 is 32 pages with approximately 30 items per page and the Exhibit for 2001
is 36 pages with approximately 30 items per page. It appears that most of the
items involve less than $10 of HST claimed and in several cases the amount is less
than $1.
[8] The situation at the commencement of the hearing was very similar to
that faced by Justice Bowman in 897366 Ontario Limited v. The Queen, [2000]
T.C.J. No. 117. The situation was described by Justice Bowman as follows:
8 In
GST appeals we have seen too frequently appellants, usually unrepresented,
appear in court with boxes of invoices and take the position that the
Department of National Revenue was uncooperative and failed to consider the
evidence. The Department usually makes similar allegations about the taxpayer
and intones ritually that the taxpayer "failed to keep adequate books and
records". In the result, the court is called on, in effect, to perform an
audit that should have been performed long before the matter came to court.
That is not the function of the court. In cases of this sort, the proper
procedure is that set out in Merchant v. The Queen, 98 D.T.C.
1734 at pages 1735-6:
[7] Where a large number of documents, such as invoices, have to be
proved it is a waste of the court's time to put them in evidence seriatim. The
approach set out in Wigmore on Evidence (3rd Ed.) Vol IV, at s. 1230 commends
itself:
s. 1230(11):...Where a fact could be ascertained only by the inspection
of a large number of documents made up of very numerous detailed statements -
as, the net balance resulting from a year's vouchers of a treasurer or a year's
accounts in a bank-ledger - it is obvious that it would often be practically
out of the question to apply the present principle by requiring the production
of the entire mass of documents and entries to be perused by the jury or read
aloud to them. The convenience of trials demands that other evidence be allowed
to be offered, in the shape of the testimony of a competent witness who has
perused the entire mass and will state summarily the net result. Such a
practice is well‑established to be proper.
[8] This passage was cited with approval by Wakeling, J.A. in Sunnyside
Nursing Home v. Builders Contract Management Ltd. et al., (1990), 75 Sask.
R. 1 at p. 24 (Sask. C.A.) and by MacPherson, J. in R. v. Fichter, Kaufmann
et al., 37 Sask. R. 128 (Sask. Q.B.) at p. 129. I am in respectful
agreement.
[9] The hearing was adjourned after the first day to allow counsel for the
Respondent to meet with the agent for the Appellant to try to resolve as many
of the items as possible to avoid what otherwise would have been a very lengthy
hearing to deal with each individual item that was being denied.
[10] Following the resumption of the hearing, counsel for the Respondent and
the agent for the Appellant were able to resolve a number of the items and the
following is a summary of the adjustments to be made to the ITCs and the
amounts still in issue at the hearing:
Adjustments to the ITCs for 1999:
|
ITCs claimed in the HST return:
|
$12,844.67
|
|
ITCs allowed by audit or appeals:
|
$5,957.96
|
|
ITCs allowed by consent at the hearing:
|
$1,488.43
|
|
ITCs claimed – ITCs allowed:
|
$5,398.28
|
|
Amount conceded by the Appellant at the hearing:
|
$2,324.73
|
|
Amount in issue at the hearing:
|
$3,073.55
|
Adjustments to the ITCs for 2000:
|
ITCs claimed in the HST return:
|
$14,352.77
|
|
ITCs allowed by audit or appeals:
|
$6,596.44
|
|
ITCs allowed by consent at the hearing:
|
$790.17
|
|
ITCs claimed – ITCs allowed:
|
$6,966.16
|
|
Amount conceded by the Appellant at the hearing:
|
$4,982.99
|
|
Amount in issue at the hearing:
|
$1,983.17
|
Adjustments to the ITCs for 2001:
|
ITCs claimed in the HST return:
|
$17,161.17
|
|
ITCs allowed by audit or appeals:
|
$10,890.94
|
|
ITCs allowed by consent at the hearing:
|
$213.69
|
|
ITCs claimed – ITCs allowed:
|
$6,056.54
|
|
Amount conceded by the Appellant at the
hearing:
|
$4,338.13
|
|
Amount in issue at the hearing:
|
$1,718.41
|
Conversion of a Portion of the
Property to Residential
[11] The Appellant was assessed HST for 2000 in relation to a conversion of
a portion of the property to residential use. The Respondent assumed that David Moore
and his family started to use the upstairs portion as a residence in June of
2000. The upstairs part (which is the area in issue) consisted of a staff bathroom,
a sleeping area, two unfinished rooms and a storage area. There was a double
bed and a dresser in the sleeping area. The Appellant stored pamphlets in the
dresser. David Moore would stay overnight on days when he was not on duty with
the RCMP and would arrange for other off-duty police officers or other security
personnel to stay at the property when he could not stay there. He stated that
they were there to protect the property. The only personal effects that David
Moore kept at the property were a change of clothes and shaving supplies.
[12] The portion of the property that was assessed as a residential unit was
22.5% of the total square footage of the property. The Appellant did not lead
any evidence to contradict the calculation of this percentage. The amount used
as the fair market value of the property for the purposes of subsection 191(1)
of the Act (which was also the book value of the property) was $206,982
and therefore the amount that was used as the fair market value of the area
that was determined to be a single unit residential complex was $46,071 or
22.5% of $206,982. The Appellant did not lead any evidence to contradict the
amounts used to calculate the amount of the HST in relation to this matter. The
Appellant's argument was that the property was not being used as a residence in
2000.
[13] Although it is not entirely clear from the evidence, I find that the
second floor of the building was constructed by the Appellant and therefore the
Appellant was the builder of the second floor for the purposes of the Act.
[14] Subsection 191 (1) of the Act provides as follows:
191. (1) For the purposes of this Part, where
(a) the construction or substantial renovation of a
residential complex that is a single unit residential complex or a residential
condominium unit is substantially completed,
(b) the builder of the complex
(i) gives possession of the complex to a particular person under a lease,
licence or similar arrangement (other than an arrangement, under or arising as
a consequence of an agreement of purchase and sale of the complex, for the
possession or occupancy of the complex until ownership of the complex is
transferred to the purchaser under the agreement) entered into for the purpose
of its occupancy by an individual as a place of residence,
(ii) gives possession of the complex to a particular person under an
agreement for
(A) the supply by way of sale of the building or part thereof in which
the residential unit forming part of the complex is located, and
(B) the supply by way of lease of the land forming part of the complex or
the supply of such a lease by way of assignment,
other than an agreement for the supply of a mobile home and a site for
the home in a residential trailer park, or
(iii) where the builder is an individual, occupies the complex as a place
of residence, and
(c) the builder, the particular person or an individual who is a tenant
or licensee of the particular person is the first individual to occupy the
complex as a place of residence after substantial completion of the
construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the construction
or substantial renovation is substantially completed and the time possession of
the complex is so given to the particular person or the complex is so occupied
by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at
the later of those times, tax in respect of the supply calculated on the fair
market value of the complex at the later of those times.
[15] In order for subsection 191(1) of the Act to apply it is
necessary that “the builder of the complex … gives possession of the [single
unit residential] complex to a particular person under a lease, licence or
similar arrangement … entered into for the purpose of its occupancy by an
individual as a place of residence”. (emphasis added)
[16] A “single unit residential complex” is defined in the Act as:
“single unit residential complex” means a residential complex that does
not contain more than one residential unit, but does not include a residential
condominium unit;
[17] A “residential complex” is defined, in part as:
“residential complex” means
(a) that part of a building in which one or more residential units are
located,
…
but does not include a building, or that part of a building, that is a
hotel, a motel, an inn, a boarding house, a lodging house or other similar
premises, or the land and appurtenances attributable to the building or part,
where the building is not described in paragraph (c) and all or substantially
all of the leases, licences or similar arrangements, under which residential
units in the building or part are supplied, provide, or are expected to
provide, for periods of continuous possession or use of less than sixty days;
[18] A “residential unit” is defined in the Act as:
“residential unit” means
(a) a detached house, semi-detached house, rowhouse unit, condominium
unit, mobile home, floating home or apartment,
(b) a suite or room in a hotel, a motel, an inn, a boarding house or a
lodging house or in a residence for students, seniors, individuals with a
disability or other individuals, or
(c) any other similar premises,
or that part thereof that
(d) is occupied by an individual as a place of residence or lodging,
(e) is supplied by way of lease, licence or similar arrangement for the
occupancy thereof as a place of residence or lodging for individuals,
(f) is vacant, but was last occupied or supplied as a place of residence
or lodging for individuals, or
(g) has never been used or occupied for any purpose, but is intended to
be used as a place of residence or lodging for individuals;
[19] Therefore while the use of a part of a building as a place of residence
or lodging will result in that part being a residential unit, the provisions of
subsection 191(1) of the Act only apply if the purpose of the use
is as a place of residence. Giving possession of a single unit residential
complex to an individual as a place of lodging but not as a place of residence
will not result in the application of subsection 191(1) of the Act.
[20] In Thomson v. M.N.R., [1946] S.C.R. 209, Rand J. stated
as follows:
But in the different situations of so-called "permanent residence",
"temporary residence", "ordinary residence",
"principal residence" and the like, the adjectives do not affect the
fact that there is in all cases residence; and that quality is chiefly a matter
of the degree to which a person in mind and fact settles into or maintains or
centralizes his ordinary mode of living with its accessories in social
relations, interests and conveniences at or in the place in question. It may be
limited in time from the outset, or it may be indefinite, or so far as it is thought
of, unlimited. On the lower level, the expressions involving residence
should be distinguished, as I think they are in ordinary speech, from the field
of "stay" or "visit".
(emphasis added)
[21] In the Canadian Oxford Dictionary, second edition, lodging is defined
as “temporary accommodation”.
[22] In this case David Moore and the other off‑duty police officers
would sleep in one of the rooms to protect the property overnight and to try to
catch the perpetrator of the damage to the property in the act of damaging the
property. They occupied the second floor of the property as a place of lodging.
Only minimal personal effects were kept at the property which is consistent
with its use as a place of lodging and not as a place of residence.
[23] The Appellant had a staff of 18 employees. Since all of the staff had
access to all of the upstairs area, this is also consistent with the use of
this area for lodging and not as a residence.
[24] Counsel for the Respondent referred to the decision of Justice Murphy,
in Sand, Surf and Sea Ltd. v. Nova Scotia (Minister of Transportation
and Public Works) (2005), 236 N.S.R. (2d) 201 and to the Factum of the
Appellant filed in the Nova Scotia Court of Appeal when the Appellant appealed
the decision of Justice Murphy. The case before Justice Murphy related to
the attempt by the Appellant to obtain the necessary permits to rebuild the
building after it was destroyed by fire in 2003.
[25] Justice Murphy in that case stated as follows:
4 The
Property is zoned for mixed residential and commercial use. From May until
October each year beginning in 1995 until 2003, SSSL operated a restaurant and
bar in the building, which was known as Moore's Landing, and starting in 2000
the owner of SSSL and his family used the second floor as a summer residence.
[26] Justice Murphy also stated that:
2 The extensive affidavit evidence filed by both parties
established the principal events leading to this application.
[27] Therefore the evidentiary basis for the statement in paragraph 4 of the
decision of Justice Murphy quoted above would be in the Affidavits that were
filed and presumably the Affidavit of David Moore would be the source for this
information.
[28] In paragraph 7 of the Factum filed by the Appellant, in relation to the
appeal from the decision of Justice Murphy, it was stated that:
Between 1995 -- 2003, the Appellant operated Moore's
Landing as a restaurant and bar every year from May through October. Since
2000, David Moore and his family had used the second floor of the building as a
residence during the summer months.
[29] The authority for this statement of facts was the Moore Affidavit,
paragraph 7, which presumably was the same Affidavit that was introduced
in the hearing before Justice Murphy.
[30] The Respondent submitted the Affidavit of David Moore, filed in the
Nova Scotia Supreme Court case referred to above, as an Exhibit. Since
only one Affidavit was filed as an Exhibit by the Respondent, I am assuming
that this was the only Affidavit of David Moore on the issue of whether the
property was occupied as a residence. Paragraph 7 of this Affidavit stated as
follows:
THAT during the years 1995 through 2003,
prior to the fire, the property was used as a restaurant and bar and was
operating from the months of May through to October on a yearly basis.
[31] There is no mention in this Affidavit of the property being used as a
residence by the family. Therefore the basis for the statement that the
property was used as a residence in the Reasons for Judgment of Justice Murphy
and in the Factum is not clear.
[32] David Moore was cross‑examined in relation to the statements made
to the Supreme Court of Nova Scotia and the Nova Scotia Court of Appeal and the
following is the evidence presented during part of this exchange:
Q. But Mr.
Moore, in order for you to satisfy the conditions of the Municipal
Government Act you put before the Nova Scotia Supreme Court and Nova Scotia
Court of Appeal that you did use the premises as residential premises?
A. I did, yes.
Q. So that you
could -- you did? Okay.
A. You never
asked me if I didn’t.
Q. Thank you.
A. You asked
me if my family did. My family also uses it here but it became unbearable for
them. I continued to use it as a residence but I’m looking after the property
and I’m a Director and ---
Q. So your
family did inhabit that residence with you?
A. They were
there for a short period of time but it became very unpleasant to live there so
they ended up going back to the other house. We ended up building another
house closer to the building so we can have an enjoyable life.
Q. Yet
---
A. These are
not under dispute.
Q. Yet in the
audit you told:
“I never
disputed the fact that an assessment on the conversion of the residence you used
had to be made.”
You told the
auditor, you put before that the house was used as residential premises. You
told the Nova Scotia Supreme Court and the Nova Scotia Court of Appeal.
Correct?
A. My
intention for this property is to have the second story be residential quarters
for myself and my family. It’s never been anything but. The fact that I
haven’t been able to get quiet enjoyment of my property is another thing
altogether.
Am I splitting
hairs, no. It’s always been that intent before the Court and you’re looking at
periods of time. Well, the property was purchased in 1995. It burned down in
2003. Throughout that entire period of time I was looking to have that
property be a residential quarters.
Q. Now
Mr. Moore all the documents indicate that you did use it. It doesn’t state you
intended to use it.
A. I
personally used it.
Q. And your
family, that’s what the documents say.
A. It started
out that way but it didn’t end up that way [.]
Q. When did it
end?
A. I’d have to
look at my paperwork to find out. When things became unbearable from a damage
point of view, from threats. We had ---
[33] Previously David Moore had testified in relation to the time that he
and his family spent at the property in 2000 as follows:
Q: Now, I just want to take you back to page 3 of that Reply and
the fact that you lived in the residence -- I just want to flush out what was
going on in 2000 with you and your family. And I apologize for making you
re-live the event but I just want to clarify exactly how much time the family
would be spending at the cottage. Were they there all day long with you?
A: During the day, yes.
Q: During the day. What time at night did they go home?
A: Well, all of the children were employees. And my wife was the
manager. So my -- the wife was there during, let's say from 9:00 a.m. until ten
or eleven. The kids operated -- the younger kids operated the Surf Shop and the
oldest daughter who was 16 or 17 at the time, she was working the take-out so
daytime operation, night-time they all pile into mom's car and go home.
Q: Did they ever use the upstairs portion of the bedroom to watch
T.V., any sorts of daily activities?
A: Well, if they were taking a break from doing their stuff
outside, that's the only place they could go to, so yes, they would use a down
room -- we had a staff bathroom and a down room upstairs so the staff could
take their break upstairs. So --
Q: Was there any portion of the area that the staff wasn't allowed
to use?
A: No, it was wide open.
Q: And yourself, did you -- you spent most of your summer, other
than when you were working, at the Surf Shop?
A: At the restaurant, yes.
Q: Sorry, the restaurant.
A.: Yeah.
Q: And I'll just refer to it as the restaurant, then as opposed to
Surf Shop throughout. And did you have -- did you keep your belongings upstairs
in the bedroom? Like personal belongings?
A.: I [sic] made have had a change of clothes or a shirt or
-- I kept my uniform -- I normally work shift work in uniform and would drive
there at night to be on security at night. And then during the day I'd be in
shorts and T-shirt or uniform. We had a uniform we had to wear, if that's what
you mean. Shaving kit, whatever, yes.
Q: Did your kids ever spend any nights there?
A: No, not once we started getting the threats and once the
Restraining Orders and everything were put in place, not going to happen.
Q: And your wife?
A; She wouldn't have anything to do with it, believe me.
Q: Just to -- I know a lot of the documents you entered were 1996,
1997 and this -- we're dealing with 1999 through 2001 -- similar events?
A: Worse
[34] Since the evidence established that the problems with the neighbour
started in 1996 and that the Restraining Order was followed with criminal
charges against the neighbour in May of 1997, it is not clear when the children
stopped staying at the property but it does appear clear that this was before
2000.
[35] Given the very clear testimony of David Moore during the hearing that
he only stayed at the property overnight to protect the property and that his
wife and children never stayed overnight at the property after the threats
commenced (which was before 2000), I find that the property was not occupied by
David Moore or his family as a residence in 2000. David Moore occupied the property
in 2000 in the same manner as the other off-duty police officers i.e. simply a
place of lodging. As a result the appeal is allowed in relation to the
assessment of additional HST collectible for 2000 that was assessed on the
basis that subsection 191(1) of the Act applied in 2000.
HST on Commercial Rent Received in
1999 and 2000 / HST on Void Purchases for 2000 / HST on Void Purchases for 2001
[36] The Appellant conceded during the hearing that all of the adjustments
for the additional HST collectible in relation to the commercial rent received
in 1999 and 2000 and the adjustments to HST collectible related the void
purchases for 2000 and 2001, were correct and therefore the appeal in
relation to these adjustments is dismissed. The Appellant had received $1,500
in commercial rent in 1999 and 2000 and had not reported any HST collectible in
relation to this rent. The Appellant’s cash register was not treating void
purchases correctly in 2000 and 2001 and the Appellant acknowledged this during
the hearing.
Adjustment
re 1999 sales
[37] The item identified as adjustment re 1999 sales arises as a result of a
review of the cash register tapes by the auditor for the Canada Revenue Agency
and a determination by her that the tapes for certain days were missing. The
auditor then prepared a schedule assuming sales on the days for which there
were no cash register tapes. Included in the list of missing days was September
31 and sales were imputed for that day. However since September 31 is not a
valid day, no sales should have been imputed for that day. As well David Moore
testified that on certain days the cash register tape may not be run on that
day but the cash register tape for the following day would include two days of
sales. A review of the list of the amounts for the cash register tapes confirms
this. As well he indicated that the business would not operate in inclement
weather.
[38] The following table summarizes the possible HST collectible amounts
related to sales for 1999:
|
HST
amount reported by the Appellant:
|
$11,058.14
|
|
HST
as calculated from the cash register tapes:
|
$12,023.62
|
|
HST
as calculated by the auditor, assuming sales on days for which there was no
cash register tape:
|
$13,060.11
|
[39] Given the nature of the business, it seems obvious that the business
would either not operate or would not have very many sales on days of inclement
weather, and therefore as a result I do not find it plausible that sales could
be imputed for each and every day from the June 1 to September 30. However, since
the actual cash register tapes of the Appellant indicate that HST of $12,023.62
was collectible in 1999 that is the amount that should have been used as the HST
collectible on sales in 1999.
[40] Therefore the adjustment that should be made to the amount reassessed in
relation to the 1999 sales is a reduction in the amount reassessed equal to
$13,060.11 - $12,023.62 = $1,036.49.
Adjustments to ITCs for 1999
[41] The adjustments to the ITCs for 1999 that are in issue in this case
relate to two invoices. One invoice is from Newton and Associates for legal fees and the HST payable in
relation to this invoice was $2,405.25. The second invoice is from Fitzsimmons
Investigations and the HST payable in relation to this invoice was $668.30. The
legal fees and the investigation services related to the same set of facts.
David Moore described the events as follows:
On this particular day the individual across the street had sent an
individual over to smash up the property of the corporation. There were chairs
on the beach. And he had indicated to these individuals that I had no right to
keep those chairs on my own property and do as I liked. Three days before there
had been an ongoing issue with this. The manager attempted to deal with it. The
staff attempted to deal with it. I said I would deal with it on my way out.
...
This was in 1998, in August of 1998. What transpired from there was me
having to first go down and warn these individuals that I wasn't particularly
happy with smashing up our property and causing a disturbance for the clients
that were sitting up on the deck by their cursing and swearing.
And followed by not getting any response from the individuals, I ended up
going upstairs and acquiring my badge, going back down and arresting them as a
peace officer for causing a disturbance and damage to property. What ensued
from that point forward was an absolute nightmare.
My own police department failed to respond in three separate calls for
help in assisting a police officer in lawful execution of his duty. In October
of 1998 I was charged by the very same police department for assaulting the
individual on the beach. Suspended with pay, taken before the Courts only to
find that Justice -- pardon me for a minute -- Bill Digby ruled it was a lawful
arrest and the subsequent -- I believe his words verbatim were:
Had this evidence been presented on the trial of the three individuals
that are sitting in the audience they all would have been convicted of causing
the disturbance and causing damage. I was in lawful execution of my duty and
the police were negligent in failing to respond.
[42] The ITCs in relation to the legal fees and investigation services are
related to the charges laid against David Moore, arising from this incident. It
is clear from the evidence that David Moore was trying to protect the property
of the Appellant and that he was found to be in lawful execution of his duties
when this incident occurred. If an arm's-length individual were to have taken
the same actions as David Moore did on that day to protect the Appellant's
property it would seem reasonable that the Appellant would reimburse such
individual for any legal fees or investigative services that related to charges
laid against that individual. David Moore was simply trying to protect the
assets of the Appellant. David Moore would not have incurred these expenditures
as the agent for the Appellant as he was the one who was charged with assault
and therefore these services were acquired for his benefit. However it is
reasonable that the Appellant should reimburse David Moore for these
amounts.
[43] In this appeal, however, the issue is not whether the Appellant should
reimburse David Moore for the cost of these services but whether the Appellant
is entitled to claim an ITC in relation to the HST payable for these services.
[44] Subsection 175(1) of the Act provides as follows:
175.(1) Where an employee of an employer, a member of a partnership or a
volunteer who gives services to a charity or public institution acquires or
imports property or a service or brings it into a participating province for
consumption or use in relation to activities of the employer, partnership,
charity or public institution (each of which is referred to in this subsection
as the “person”), the employee, member or volunteer paid the tax payable in
respect of that acquisition, importation or bringing in and the person
pays an amount to the employee, member or volunteer as a
reimbursement in respect of the property or service, for the purposes
of this Part,
(a) the person is deemed to have received a supply of the property or
service;
(b) any consumption or use of the property or service by the employee,
member or volunteer in relation to activities of the person is deemed to be
consumption or use by the person and not by the employee, member or volunteer;
and
(c) the person is deemed to have paid, at the time the reimbursement is
paid, tax in respect of the supply equal to the amount determined by the
formula
A × B
where
A is the tax paid by the employee, member or volunteer in respect
of the acquisition, importation or bringing into a particular province of the
property or service by the employee, member or volunteer, and
B is the lesser of
(i) the percentage of the cost to the employee, member or volunteer of
the property or service that is reimbursed, and
(ii) the extent (expressed as a percentage) to which the property or
service was acquired, imported or brought into the province, as the case may
be, by the employee, member or volunteer for consumption or use in relation to
activities of the person. (emphasis added)
[45] Since David Moore was charged with assault, he was the person who
incurred the legal fees and investigation services. As noted, these were in
relation to the activities of the Appellant as he was protecting the
Appellant’s property. The problem for the Appellant is that the Appellant did
not reimburse David Moore for these amounts. It is a requirement of subsection
175(1) of the Act that the Appellant, as the employer, must have paid an
amount to David Moore as a reimbursement of the amount he incurred in order for
the Appellant to have been deemed to have received this supply of these
services. When David Moore was asked if the Appellant had reimbursed him for
the amounts incurred in his name, his only response was to produce
documentation showing the guarantee that he had provided for the debts of the
Appellant. I am satisfied that the Appellant did not reimburse David Moore for
these amounts and hence the Appellant cannot rely on subsection 175(1) of the Act.
Therefore the Appellant is not entitled to an ITC in relation to these
legal and investigation services.
Adjustments to ITCs for 2000
[46] The adjustments to the ITCs for 2000 can be summarized in three
categories. There were some small amounts for items purchased at the grocery
store, the Nova Scotia Liquor Commission, and department stores. There is
a group of amounts identified as Delta Halifax and the third category is a
group of receipts for materials that were purchased in relation to the garage
constructed on David Moore's property in Bedford, Nova Scotia.
[47] With respect to the small amounts for items purchased at the grocery
store, the Nova Scotia Liquor Commission, and department stores, David Moore speculated
that these related to the Christmas party and gifts for the staff. However, the
difficulty in this situation is that there was no indication of any notation on
the receipts of the purpose for the purchase of the various items. The receipts
were all for items that could either be used personally or by the Appellant.
When dealing with items that could be either personal items or business items,
it is very important that the Appellant identify on the receipt or in some
other way the commercial purpose for the purchase of the item. Because there
was no such indication on the receipts, David Moore now, more than seven years
after the expenses were incurred, had to speculate on the commercial purpose
for the purchase of the items in dispute. It should also be noted that the Appellant
has conceded that in 2000, of the total amount of $14,352.77 of
ITCs claimed in that year, $4,982.99 (or approximately 35% of the amount claimed) should
not have been claimed. I find that the Appellant has not established that any
adjustments should be made to the ITCs for this group of items from 1999.
[48] There were several items identified as Delta Halifax. These related to
a party at the Delta Halifax sponsored by Serca, which is one of the main
suppliers for the Appellant. The issue in relation to this claim is the
documentation requirements of the Act and the Regulations. David
Moore indicated that the amount payable would have been set out on the
invitation to this event and that he would have the Visa slip for this amount
but he did not produce either document. It is not clear whether the Visa
statement or the invitation would have contained the relevant information in
order for the Appellant to claim an ITC for the larger amounts. The
documentation requirements are set out in subsection 169(4) of the Act
and in the Input Tax Credit Information (GST/HST) Regulations. Subsection
169(4) of the Act provides as follows:
169(4) A registrant may not claim an input tax credit for a reporting
period unless, before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form
containing such information as will enable the amount of the input tax credit
to be determined, including any such information as may be prescribed; and
(b) where the credit is in respect of property or a service supplied to
the registrant in circumstances in which the registrant is required to report
the tax payable in respect of the supply in a return filed with the Minister
under this Part, the registrant has so reported the tax in a return filed under
this Part.
and paragraph 3 of the Input Tax Credit
Information (GST/HST) Regulations provides as follows:
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 name of the supplier or the intermediary in
respect of the supply, or the name under which the supplier or the intermediary
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 name of the supplier or the intermediary in respect of the
supply, or the name under which the supplier or the intermediary does business,
and the registration number assigned under subsection 241(1) of the Act to the
supplier or the intermediary, as the case may be,
(ii) the information set out in subparagraphs (a)(ii) to (iv),
(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) a statement to the effect that tax is included in the amount paid or
payable for each taxable supply,
(B) the total (referred to in this paragraph as the “total tax rate”) of
the rates at which tax was paid or payable in respect of each of the taxable
supplies that is not a zero-rated supply, and
(C) the amount paid or payable for each such supply or the total amount
paid or payable for all such supplies to which the same total tax rate applies,
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 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.
[49] There were five separate HST amounts for the Delta Halifax. Only one
amount ($2.41 of HST payable) would fall within the lowest level of required
documentation. In order to claim the other amounts, the documentation
requirements of either paragraph 3(b) or 3(c) of the Input Tax Credit
Information (GST/HST) Regulations would have to be satisfied. The Appellant
has not been able to establish that it had, before filing its HST return for
2000, the necessary documentation to satisfy the requirements of either
paragraph 3(b) or 3(c) of the Input Tax Credit Information (GST/HST) Regulations.
In relation to the amounts identified as the amounts paid to the Delta
Halifax, I am not satisfied that either the invitation or the Visa statement
would have shown the GST/HST registration number of the supplier. Therefore the
only amount that I will allow will be the claim for $2.41. Since the amount was
paid for food or entertainment, only 50% of the amount paid will be allowed as
an input tax credit.
[50] The remaining amounts for 2000 relate to a three‑bay garage that
was constructed on the lands owned by David Moore in Bedford, Nova
Scotia. This garage is in addition to
the two car garage that is attached to the house. The sole purpose for
constructing the three-bay garage was to have a facility that could be used as
a warehouse and storage facility for the Appellant. The invoices for the
materials were issued in the name of David Moore. The Appellant claimed the ITC
on the supplies used to construct this garage.
[51] In Plan A Leasing Ltd. v. The Queen, [1977] 1 F.C. 73, Gibson J.
of the Federal Court, Trial Division noted that title to land and to a building
erected on the land can be separated:
23 In
law, the title of the lands and the title to the building on such lands can be
conveyed separately when parties have made a special contract to do so. When
parties do so by proper conveyances, they may, as was said in Davy v. Lewis
(supra) at page 30, define and make a law for themselves in respect to such
lands and building. In other words, the usual rule of law that the building is
part of the freehold can be abrogated by a contract of parties. They can
completely sever the right title and interest in the freehold in the building
from the right title and interest in the freehold of the lands on which the
building sits, even though the building continues to be annexed to such lands.
24 This
exception to the rule of common law has obtained since Lord Coke's time. (See
Challis, The Law of Real Property, 3rd edition, page 54). And as is said in
Megarry and Wade, The Law of Real Property, 3rd edition, at page 70:
An owner can, if he wishes, divide his land horizontally or any in other
way. He can dispose of minerals under the surface, or the top floor of a
building, so as to make them separate properties.
25 In
this Court in Rudnikoff v. The Queen (supra) at page 809, Jackett C.J.
said:
However, in my view, while the general rule, both in the common law
provinces and in the Province of Quebec is that a substantial building becomes
a part of the land and belongs to the owner of the land, this situation may be
changed, by contract or otherwise, so that ownership of the building is
separate from ownership of the land and the building would not be a part of the
subject matter of the lease. Such a result would, however, follow only as a
result of clear language and, in my view, in this case, the terms of the
emphyteutic lease are not such as to produce such a result.
[52] However, as noted by the Federal Court, in order to achieve this
objective the parties must have a special contract to do so. There was no
evidence of any contract between the Appellant and David Moore under which the
Appellant would have title to the building. The testimony of David Moore in
this regard was that he and not the Appellant owned the building. He stated as
follows during cross‑examination:
Q. That’s the
allowed. So -- but at the time back in 2000 when you built the property what
was your intention, to treat the property as a commercial premises or to treat
the property as your own personal ownership? Who did you intend to own that
garage?
A. Well, the
garage -- the physical building itself is owned by me but the interior of it is
leased out or used by the corporation for holding all of its ware, the same as
the office. The building ---
Q. Was there
any payments made to yourself, any rent paid by the company?
A. No. And it
wasn’t in a position to do that.
[53] Subsection 169(1) of the Act provides in part as follows:
169. (1) Subject to this Part, where a person acquires or
imports property or a service or brings it into a participating
province and, during a reporting period of the person during which the person
is a registrant, tax in respect of the supply, importation or bringing in
becomes payable by the person or is paid by the person without having become
payable, the amount determined by the following formula is an input tax credit
of the person in respect of the property or service for the period:
(emphasis added)
[54] In order for the Appellant to claim an ITC in relation to the
acquisition of the materials, the Appellant must be the person who acquired the
materials. Since the garage is owned by David Moore and the invoices for the
materials were in his name, it is logical that he and not the Appellant
acquired the materials used in the construction of the garage. The Appellant
has not established that it, and not David Moore, acquired the materials
to construct the garage and hence the Appellant has failed to establish that it
is entitled to any ITCs in relation to the acquisition of the materials used to
construct the garage.
Adjustments to ITCs for 2001
[55] The amounts in dispute in relation to the ITCs for 2001 also can be
categorized as either amounts for items purchased at grocery stores or
department stores that could either be for personal or commercial use and
amounts related to the acquisition of the materials acquired for the construction
of the garage owned by David Moore. As noted above where the receipt is for an
item that could either be for personal or commercial use the Appellant should have
clearly indicated on the receipt or otherwise the commercial purpose for the
item being purchased. Failing to do so has now left David Moore in a situation
where he can only speculate that the amounts were spent on items that were used
in a commercial activity of the Appellant. It should also be noted that the
Appellant has conceded that in 2001, of the total amount of $17,161.17 of ITCs claimed in that year, $4,338.13 (or approximately 25%
of the amount claimed) should not have been claimed. There is also an amount
claimed for bark mulch purchased from Elmsdale Landscaping Limited.
However the delivery address was the home address of David Moore. As a result, no
adjustments will be made to ITCs for 2001 for the items purchased at grocery
stores or department stores or the bark mulch purchased from Elmsdale
Landscaping Limited.
[56] As well, for the reasons noted above, no adjustment will be made in
relation to the reassessment related to the ITCs claimed on the materials used
in the construction of the garage owned by David Moore.
Gross Negligence Penalties
[57] Gross negligence
penalties were also assessed under section 285 of the Act. In 897366 Ontario
Limited v. The Queen, [2000] T.C.J. No. 117 Justice Bowman made the
following comments in relation to the assessment of gross negligence penalties
under the Act:
13….The onus is
upon the Crown to establish these elements and this the Crown has failed
completely to do. Subsection 163(3) of the Income Tax Act specifically
places the burden of proof on the Crown in appeals from penalties imposed under
subsection 163(2). There is no provision in the Excise Tax Act that
corresponds to subsection 163(3) with respect to section 285 penalties,
although the wording in section 285 is virtually identical to that in
subsection 163(2). It would be a remarkable result if the onus of proof lay on
the Crown in one case and on the taxpayers in another.
…
19…The
imposition of penalties under section 285 requires a serious and deliberate
consideration by the taxing authority of the taxpayer's conduct to determine
whether it demonstrates a degree of wilfulness or gross negligence justifying
the penalty. Section 285 is not there to permit assessors to punish taxpayers
for being frustrating or annoying. It cannot be overemphasized that penalties
may only be imposed under section 285 in the clearest of cases, and after an
assiduous scrutiny of the evidence.
[58] I am not
satisfied that the Respondent had satisfied the onus of establishing the facts
on which penalties under section 285 of the Act could be assessed. Many of
the amounts were small, individual items and I am satisfied that the Appellant did
not intentionally or in circumstances amounting to gross negligence claim the
additional ITCs. The Appellant made mistakes but I am satisfied that the
mistakes that were made were inadvertent and cannot justify the assessment of
gross negligence penalties.
[59] As a result, the appeal
in relation to the assessment of the penalties under section 285 of the Act
is allowed and the assessment if these penalties is vacated.
Summary
[60] The appeal is
allowed, in part, without costs, and the matter is referred back to the
Minister of National Revenue for reconsideration and reassessment on the
following basis:
1. The amount reassessed for the
net tax for 1999 is to be reduced by the following amounts:
Adjustment re 1999 Sales: $1,036.49
ITCs allowed by consent at the hearing: $1,488.43
Total reduction in the net tax reassessed for 1999: $2,524.92
2. The amount reassessed for the
net tax for 2000 is to be reduced by the following amounts:
Amount re conversion to residential: $6,985.65
ITCs allowed by consent at the hearing: $790.17
Additional ITC: $1.20
Total reduction in the net tax reassessed
for 2000: $7,777.02
3. The amount reassessed for the
net tax for 2001 is to be reduced by the following amounts:
ITCs allowed by consent at the hearing: $213.69
Total reduction in the net tax reassessed
for 2001: $213.69
4. The penalties assessed pursuant to section 285 of
the Act are vacated.
Signed at Halifax, Nova Scotia, this 11th day of March 2008.
“Wyman W. Webb”
Email this Content