Citation: 2006TCC136
Date: 20060317
Docket: 2005-760(GST)I
BETWEEN:
3092-8949 QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Dussault J.
[1] This is an appeal from an assessment made under Part IX of the Excise Tax Act (the "Act") for the period from June 1 to 30, 2003. By that assessment, the Minister of National Revenue (the "Minister") disallowed the Appellant, which does business under the name Lanaco, the deduction of an amount of $14,280.55 in respect of bad debts in computing its net tax for the period in issue.
[2] In making that assessment, the Minister relied on the findings and assumptions of fact stated in subparagraphs 5(a) to (i) of the Reply to the Notice of Appeal. Those subparagraphs read as follows:
[TRANSLATION]
(a) the Appellant is a GST registrant;
(b) on May 10, 2001, the Appellant instituted an appeal before this Court, in the case bearing number 2001-1724(GST)I, from a GST assessment for the period from February 1, 1996, to November 30, 1998; by that assessment, the Minister claimed from the Appellant GST not collected on the sale of motor vehicles;
(c) on April 11, 2003, the Appellant discontinued its appeal pursuant to an agreement entered into with the Minister that same day;
(d) following the agreement entered into, the Appellant agreed to be reassessed with respect to GST not collected on 14 motor vehicles the prices of which had totalled $234,660.00;
(e) in filing its GST return for the period from June 1 to 30, 2003, the Appellant claimed input tax credits ("ITC") of $14,280.55 in GST for bad debts;
(f) the amount of $14,280.55 represented the GST on the aforementioned 14 motor vehicles;
(g) for the period from June 1 to 30, 2003, the Appellant had no bad debts, since it had received payment of the 14 vehicles of which it had made the supply by sale;
(h) furthermore, following the agreement entered into, the GST payable, in the amount of $14,280.55, represented the GST included in the amount of $234,660.00, which is referred to above and which was paid in full to the Appellant;
(i) the ITCs for bad debts were accordingly determined as follows:
* $30,652.18 X 0/$234,660 = 0
* GST ($14,280.55) + QST ($16,371.63)
[3] Subparagraph (g) was denied in part since the Appellant had received payment of the consideration for the vehicles sold, but not of the applicable taxes, that is the goods and services tax ("GST") and the Quebec sales tax ("QST"). Subparagraphs (h) and (i) were denied.
[4] Jean-Pierre Forest testified for the Appellant. Benoît Létourneau, an investigator with Revenu Québec ("Ministry"), and Alain Therrien, an objections officer at that same Ministry, testified for the Respondent.
[5] Mr. Forest is the Appellant's accountant. In his testimony, he explained that the dispute between the Appellant and the Ministry initially concerned the sales of 43 vehicles for which the Appellant had not claimed GST or QST because, in its view, they were sales to a dealer for export. In an agreement entered into on April 11, 2003, the Ministry agreed to stop claiming the tax on the sales of 25 vehicles, and the Appellant agreed to be reassessed in respect of the sales of 14 vehicles, an assessment that would be conducted "based on the amounts determined for the vehicles concerned" on the list appended to the agreement (Exhibit A-1, Schedule 18). However, for the purposes of the GST and QST, the department considered that the selling price of the vehicles received by the Appellant, which had not claimed payment of the taxes, included the GST and QST. This method involved determining a fictitious selling price equal to approximately 86.94 percent of the actual selling price, thus reducing the amount of tax payable. Clearly, although this method of calculating the taxes favoured the Appellant and was accepted by it when the agreement was signed, Mr. Forest nevertheless emphasized its artificial nature, since the result was that the Appellant would then have sold the vehicles for less than the cost price (Exhibit A-6). Whatever the case may be, the agreement was signed by the two parties, the Appellant discontinued its appeal and was reassessed for an amount of GST of $14,280.55 determined in accordance with the described method, and did not dispute the reassessment, which it moreover paid, together with penalties and interest.
[6] However, as regards the vehicles for which the Appellant agreed, under the agreement, to be reassessed by the described method, it had paragraph 4, which reads as follows, added to the agreement:
[TRANSLATION]
4. As to the vehicles in groups 1, 3 and 11, 3092-8949 Québec Inc. reserves the opportunity to exercise its supplier right under section 224 of the E.T.A., which section allows it to bill the actual recipient (Monaco Motors according to Quebec's Deputy Minister of Revenue).
[7] According to Mr. Forest, despite the method used to compute the taxes, the Ministry was well aware that those taxes had not been paid by the purchasers of the 14 vehicles, since the Appellant had not sought payment, and it thus authorized the Appellant to collect from Monaco Motors (the actual buyer, according to the Ministry) under section 224 of the Act, the GST that it had agreed to pay under the agreement. And yet, Mr. Forest said, the Ministry's auditor, Serge Bouchard, had already known since August 2000 that 9041-0952 Québec Inc., doing business under the name Monaco Motors, had filed for bankruptcy on July 14, 2000 (Exhibit A-5, page 3).
[8] Mr. Forest explained that, following the agreement of April 11, 2003, the Appellant tried to collect the taxes from Monaco Motors or from corporations of the same group by sending the bill for taxes that it was required to remit. A single letter, undated, but the envelope of which is postmarked April 20, 2005, was filed in evidence on this point (Exhibit A-2). That letter was returned to the Appellant. However, Mr. Forest stated that other similar letters had previously been sent.
[9] Mr. Forest also filed in evidence a document providing information obtained from the Registraire des entreprises (the CIDREQ system) showing that 9041-0952 Québec Inc. had been automatically struck from the list on May 4, 2001 (Exhibit A-3). I note that the document was not obtained until January 28, 2006. Another document, obtained through a search conducted at the Office of the Superintendent of Bankruptcy Canada, states that the same corporation filed for bankruptcy on July 13, 2000 (Exhibit A-4). That document states that the search was done on January 30, 2006, the day before the hearing of the instant case. However, it may be seen that it was on a return form dated June 17, 2003, that the Appellant claimed the deduction for the bad GST debt here in issue, and the obvious question arises as to what actual steps the Appellant took at the relevant time to collect the taxes that it was to pay following the agreement of April 11, 2003, and the reassessment that was to follow.
[10] Lastly, I note that Mr. Forest also filed in evidence a document from U.S. Customs obtained by an American lawyer acting for the Appellant (Exhibit A-7). According to that document, 10 of the 14 vehicles that are the subject of the assessment made following the agreement of April 11, 2003, were exported to the United States. As that assessment is not here in issue, I do not see the relevance of that document.
[11] Benoît Létourneau is an investigator at the Ministry. In his testimony, he described the investigation into the Appellant's activities, which involved the sale of vehicles either to Indians or for export. More particularly with regard to the agreement of April 11, 2003, he stated that it was the Appellant that had requested the addition of paragraph 4 cited above and that there had never been any question of it claiming (as bad debts) the taxes that it had not collected. Furthermore, according to him, the billing of the taxes of 9041-0952 Québec Inc. (Monaco Motors) (Exhibit A-2) was never brought to his attention before the hearing of the instant case. As to the way in which the tax was calculated on the sale of the 14 vehicles for which the Appellant had agreed to be reassessed in accordance with the agreement of April 11, 2003, Mr. Létourneau explained that he considered that the taxes were included in the selling price, that that method resulted in a lower assessment and that the Appellant had never objected to it.
[12] Alain Therrien is an objections officer. In his testimony, he described discussions with counsel for the Appellant concerning the application of subsection 231(1) of the Act concerning bad debts. He said he had proposed the Appellant a GST adjustment equal to $1,865.38, considering that, despite the agreement of April 11, 2003, the taxes were not included in the consideration of $234,660 paid for the 14 vehicles that were the subject of the reassessment made following the agreement (Exhibit I-3). Thus, with respect to the GST, the proposed adjustment of $1,865.38 is the result of the application of the formula stated in subsection 231(1) of the Act, using the following amounts:
$14,280.55 x $30,652.18
$234,660
[13] That adjustment was rejected by the Appellant, which claimed an adjustment equal to the total amount of GST, that is $14,280.55.
[14] Counsel for the Appellant contends that, by paragraph 4 of the agreement of April 11, 2003, the department allowed the Appellant to collect from the actual recipient the GST in respect of the sales of the 14 vehicles for which it had agreed to be assessed. As the Appellant was unable to do so as a result of the bankruptcy of 9041-0952 Québec Inc. (Monaco Motors), its debt, for the purposes of subsection 231(1) of the Act, is equal to the amount of the invoice (Exhibit A-2), and it is thus an amount equal to 100 percent of the GST, that is $14,280.55, that may be considered as a bad debt under section 231.
[15] Counsel for the Respondent stated that the agreement and subsequent assessment were based on the assumption that the selling price of the 14 vehicles, that is the total amount of $234,660, included the taxes, which favoured the Appellant and which it accepted. In his view, as the total amount of $234,660 had been paid and that amount included the taxes, the Appellant could not claim that an amount of tax remained unpaid for the purposes of subsection 231(1) of the Act.
[16] Furthermore, as the Appellant had received full payment for the vehicles sold, counsel for the Respondent contended that no debt had been written off its accounting records. He referred on this point to the decision in Jilly Creations Inc. v. Canada, [2005] T.C.J. No. 61 (QL), at paragraph 39.
[17] Furthermore, in his opinion, in paragraph 40 of that same decision, Lamarre Proulx J. stated another condition for the application of subsection 231(1) of the Act, which is:
... that the supplier have reported the tax collectible in a return filed for the reporting period in which the tax became collectible and have remitted all net tax reported in that return.
[18] Lamarre Proulx J. referred to the decision in Equinox Realty Ltd. v. Canada, [1997] T.C.J. No. 1210 (QL), at paragraph 7, where Mogan J. dismissed an appeal on the ground that this basic condition had not been satisfied. According to counsel for the Respondent, that condition had not been satisfied either by the Appellant in the instant case, as a result of which it could not receive an adjustment in the circumstances.
[19] Lastly, counsel for the Respondent contended that there was no relationship between section 224 and subsection 231(1) of the Act.
Analysis
[20] First, one comment should be made on section 224 of the Act. As its title indicates, this provision grants a supplier a right to bring an action against a recipient for the GST that the supplier is required to collect. Every supplier that has met the stated conditions may exercise this right without requiring any permission whatever from the Minister. In that sense, paragraph 4 of the agreement of April 11, 2003, seems pointless, since the Act itself grants the right, provided the supplier meets the stated requirements. However, that is not the point for determination in the instant case.
[21] The Appellant claimed in computing its net tax for the period from June 1 to 30, 2003, a deduction of $14,280.55 under subsection 231(1) of the Act, which provides for an adjustment in the case of bad debts. That provision reads as follows:
231.(1) Bad debts - Where a person has made a taxable supply (other than a zero-rated supply) for consideration to a recipient with whom the person was dealing at arm's length, to the extent that it is established that the consideration and tax payable in respect of the supply have become in whole or in part a bad debt, the person may, in determining the net tax for the person's reporting period in which the bad debt is written off in the person's books of account or for a subsequent reporting period, deduct the amount determined by the formula
A × B/C
where
A is the tax payable in respect of the supply,
B is the total of the consideration, tax and any amount that can reasonably be attributed to a tax imposed under an Act of the legislature of a province that is a prescribed tax for the purposes of section 154 (referred to in this section as "applicable provincial tax") remaining unpaid in respect of the supply that was written off as a bad debt, and
C is the total of the consideration, tax and applicable provincial tax payable in respect of the supply,
provided the person reports the tax collectible in respect of the supply in the person's return under this Division for the reporting period in which the tax became collectible and remits all net tax, if any, remittable as reported in that return.
[22] I find that the Appellant is entitled to no adjustment under this provision because the conditions stated therein were not satisfied.
[23] First, there is no evidence that the Appellant wrote off in its books of account, during the period from June 1 to 30, 2003, any debt whatever relating to the sales of the 14 vehicles for which it agreed to be reassessed for the applicable taxes, including the GST, under the agreement of April 11, 2003. Furthermore, the evidence adduced is to the effect that, in April 2005, it tried again to collect the taxes established by the assessment (Exhibit A-2) from 9041-0952 Québec Inc. (Monaco Motors) and from the corporations or businesses of the same group.
[24] Second, the Appellant never stated the GST collectible in respect of the supply by sale of the 14 vehicles in a return for the reporting period in which the GST became collectible, and it clearly did not pay all net tax payable as reported in such a return.
[25] Third, subsection 231(1) requires, for its application, that all or part of both the consideration and the tax payable in respect of a supply has become a bad debt. That is clearly not the case here since the total amount of only the consideration of each sale was paid to the Appellant.
[26] In Ciriello v. Canada, [2000] T.C.J. No. 829 (QL), Rip J. of this Court described these last two conditions in the following terms at paragraph 3 of his decision:
... For R & V to receive a refund or adjustment of tax, subsection 231(1) of the Act requires that not only must the taxpayer have made a taxable supply in the course of a commercial activity and for consideration, but also that the taxpayer have filed a return accounting for and remitting tax under Division II in respect of that supply; finally, the consideration and tax must have become a bad debt. ...
[27] As to the condition that both the consideration and tax must have become, in whole or in part, a bad debt, reference may be made to the following comment by David M. Sherman in Canada GST Service, Toronto, Thomson Carswell, Binder C4, at page 231-108C:
What if only the GST remains unpaid? This may happen, for example, where a customer refuses to pay the GST on a purchase. Clearly the deduction under section 231 cannot equal the GST. At most, it will be the GST portion (typically 7/107) of the unpaid amount. Even this deduction may not be available, however, since subsection 231(1) requires that the "consideration and tax" have become in whole or in part a bad debt. If only the tax is a bad debt, then technically no deduction is available. In practice it may be possible to consider the amount paid as simply 100/107 of the total, so that, from the supplier's point of view, 7/107 of the combined "consideration and tax" has become a bad debt.
[28] While the solution proposed by Mr. Sherman may seem acceptable, provided however that the applicable QST is also taken into consideration, it must nevertheless be considered that the GST is not already included in the consideration, which in this instance was paid in full.
[29] However, as counsel for the Respondent contends, it must be considered, in the instant case, that the GST is included in the consideration of $234,660 received by the Appellant for the sales of the 14 vehicles for which it agreed to be reassessed under the agreement of April 11, 2003. First, under the agreement, the assessment was to be made on that basis, and in fact was. The GST thus calculated and claimed in the assessment amounted to $14,280.55. That is the amount that the Appellant paid, that it billed to 9041-0952 Québec Inc. and to the other corporations and businesses of the same group and, lastly, for which it claimed the bad debt deduction. The GST cannot be considered as both being included in the consideration for all these purposes and not being included with respect to the application of subsection 231(1) of the Act.
[30] The fact that the Appellant did not satisfy one of the three stated conditions rendered subsection 231(1) of the Act inapplicable. It is all the more inapplicable if the Appellant met none of those conditions.
[31] Having regard to the above, the appeal is dismissed.
Signed at Ottawa, Canada, this 17th day of March 2006.
"P.R. Dussault"
Translation certified true
on this 15th day of August 2006.
Monica F. Chamberlain, Reviser
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