Citation: 2005TCC515
Date:20051011
Docket: 2004-3127(GST)I
BETWEEN:
CORNERSTONE SECURITIES CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
O'Connor, J.
[1] The following extracts from the Notice of Appeal ("Notice") and the Reply to the Notice of Appeal ("Reply") adequately describe the issues in this appeal.
Notice
1. The Appellant Corporation, incorporated under the laws of the Province of Ontario, carries on business in Canada and the United States as a financial services firm and is a dealer registered under the Securities Act (Ontario).
[The Minister denies that the Appellant is a financial services firm.]
2. On April 30, 2004, the Minister through the Toronto North Tax Services Office issued a Notice of Decision relating to the Goods and Services Tax Assessment dated July 18, 2003. The Notice of Decision confirmed the Minister's GST assessment in the amount of $19,919.20 and a recapture assessment under Section 236 of the Excise Tax Act in the amount of $466.17.
3. The Appellant disputes the calculation by the Minister of the audit adjustment and reconciliation in the amount of $20,385.37 as set out in the Minister's Notice of Decision dated April 30, 2004.
...
5. By a letter dated April 15, 2004, the Appellant's accountants, Zeifman & Company, Chartered Accountants, Toronto, Ontario, provided the Minister with additional written confirmation that the amounts upon which the Minister is calculating the GST assessment are amounts exempt from the provisions of the Excise Tax Act, ...
[The Minister admits the letter of April 15, 2004 was sent but does not admit the facts alleged therein].
...
9. Without any further communication, the Minister issued the Notice of Decision on April 30, 2004.
10. The Appellant states, and the fact is, that the amounts upon which the Minister is assessing GST are exempt under Schedule V and all ancillary provisions of the Excise Tax Act and that the Minister erred in reassessing the Appellant for these amounts.
...
15. The Appellant further disputes the recapture of [input] tax credits under Section 236 of the Excise Tax Act in the amount of $466.17.
...
Reply
In reply to the Notice of Assessment dated July 18, 2003 (the "Assessment") for the period from February 1, 2001 to January 31, 2002 (the "Period"), the Deputy Attorney General of Canada says:
1. He admits the facts stated in paragraph 2 of the Notice of Appeal.
...
4. With regards to the facts stated in paragraph 15 of the Notice of Appeal, he admits that the Minister assessed the Appellant for the recapture of input tax credits ("ITC") in the amount of $ 466.17 pursuant to sections 169 and 236 of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act").
...
8. In so reassessing the Appellant, and in confirming the Assessment, the Minister made the following assumptions of fact:
(a) the Appellant operated a business consultant and was registered for purposes of Part IX of the Act during the Period;
...
(k) the Minister used the Appellant's available book and records to determine that the Appellant failed to report 7% taxable supplies in the amount of $ 284,560.00 for the Period;
(l) the Appellant failed to report and remit GST in the amount of $ 19,919.20 on unreported 7% taxable supplies of $ 284,560.00 during the Period; and
(m) the Appellant failed to properly recapture ITC taken in relation to meals and entertainment during the Period as required and therefore claimed ITC in the amount of $ 466.17 to which it was not entitled.
...
12. He respectfully submits that the unreported supplies ... were not zero rated supplies or exempt supplies under the Act.
13. He respectfully submits that the Appellant failed to report 7% taxable supplies in the amount of $ 284,560.00 and GST in the amount of $ 19,919.20 as required during the Period and respectfully submits that the Minister properly assessed the Appellant the additional GST pursuant to sections 123, 165, 169, 221, 225, 228, 286, 296 and 299 of the Act.
14. He respectfully submits that the Minister properly denied the Appellant ITC in the amount of $ 466.17 pursuant to sections 169, 236 and 296 of the Act.
15. He respectfully submits that the Appellant did not act with due diligence under Part IX of the Act.
Appellant's Position
[2] The Appellant's position as presented by its representative, Gerald S. Fields appears to be that the services in respect of which GST in the amount of $19,919.20 was charged were either zero rated or alternatively were exempt financial services. The Appellant also stated that some or perhaps all of the fees in question were contingent on the success of the deals being completed and appears to argue that this would render the services not subject to GST. I will analyze these positions later under "Analysis and Conclusion".
[3] The Appellant's representative submitted as Exhibits A-5 and A-9 documents which indicate that the supplies made by the Appellant to the three companies named in the pleadings earned certain amounts in the nature of monthly work fees and certain fees based on whether the transactions undertaken proved successful, (the "success fees"). Exhibit A-4 is a letter from one of the three companies stating the services were carried in the United States for entities located in the United States.
[4] The Parties acknowledged that the only disputes between them related to the GST uncollected on success fees totalling $19,919.20 and the input tax credit of $466.17. Any GST related to monthly work fees was collected and remitted.
[5] Counsel for the Respondent contends that none of the three companies were non-residents having addresses in Canada and moreover as parts of the services were rendered in Canadathe entirety of the services are deemed rendered in Canadaand therefore not provided to a non-resident.
Minister's Position
[6] The Minister's position is demonstrated by quoting certain extracts from counsel's oral argument.
...
the Minister submits ... that the unreported supplies ... were not zero-rated supplies or exempt supplies.
The payments received from these three corporations were either commissions or a finder's fee or something other than financial services or professional consulting or advisory services.
It was, the Respondent agrees, payments for closing the transaction. That's accepted. As a result, the Appellant failed to report 7 per cent taxable supplies in the amount of $284,560 of that amount, and GST in the amount of $19,919.20.
The Minister properly assessed the Appellant the additional GST and the failure-to-remit penalty, and further, the Minister submits that he properly denied the Appellant ... an input tax credit in the amount of $466.17.
...
Subsection 165(1) of the Excise Tax Act provides that every recipient of a taxable supply made in Canada shall pay GST on the taxable supply.
... Subsection 221(1), ... provides that every person who makes a taxable supply shall, as agent of her Majesty in Right of Canada, collect the tax payable by the recipient in respect of the supply.
...
Well, it's either a financial service or it's some sort of professional, advisory, or consulting fee that was provided to a non-resident. ...
So under Schedule V, we're looking at financial services aspect of it, and ... the only way the Appellant can get out of ... the Excise Tax Act, ... you have to get into Schedule V, ... The only way he can get into Schedule V is if what they were doing was a financial service.
...
They're not providing financial services. The success fees are for something else. ...
... the only other way that the Appellant can win in this appeal is if the GST was zero-rated, and that's by way of Schedule VI. ...
Schedule VI is zero-rated supplies, and ... -- so it's Schedule VI, and then Part V, exports, and then Section 23.
...
If the Appellant can fit itself in here, then GST is zero-rated, which means zero per cent, ... ? But the Appellant can't fit itself in here, because the success fees are not payments received for professional, advisory, or consulting services.
...
But I would say in the alternative -- I would say first, it's not a professional, advisory, or consulting service. But if it was, ... it's not to a non-resident.
...
And that is Subsection 142(1) of the Excise Tax Act. And that provides, ...
"For the purposes of this Part, subject to sections 143, 144 and 179, a supply shall be deemed to be made in Canada if..."
And then if you go down to paragraph (g):
"In the case of a supply of any other service, the service is, or is to be, performed in whole or in part in Canada."
... even if the services provided by the Appellant to the three corporations were partially provided in -- outside of Canada, in the U.S., only part of the services need to be provided in Ontario for -- for there to be -- for it to be deemed that the service is being made in Canada, and that thereby Schedule VI, Part V, exports cannot apply. It's not a service being provided to a non-resident.
...
and now I'm just quickly going to go through the input tax credits. And the Minister takes the position that the Appellant claimed twice as much input tax credit that it should have claimed.
... Subsection 236(1), which ... basically provides that 50 per cent of the total GST paid for meals and entertainment can be recaptured. In other words, if the Appellant spends $100 in GST ... . By operation of 236(1) they'll get half of that GST back.
Now, the GST paid ... by the Appellant for 2001 for all promotions was $1,864.69. That's for all, like, the $30,000 amount that was spent on promotions. But according to the handwritten notes that -- on the document at tab 15 of the Respondent's book of documents, which was a copy of the general ledger, there's a handwritten note that says half of this ...
So that's -- half of it is for meals, so half of the $30,000 in promotions that was spent is for meals. That means half the GST that was spent was for meals, and half of $1,864.69 is $932.34, ...
...
So that's the amount, the $932.34, that's the amount that was spent on -- that was paid in GST for all the meals. That's the total amount.
And then by operation of Subsection 236(1), you cut that in half. They just didn't cut it in half. That's all that happened.
So that's why they claimed $466.17 too much in input tax credit, ...
[7] Counsel referred to Subsection 228(2) which requires that the GST collected be remitted to the Receiver General; and to other sections indicating that the three corporations in question were the recipients of the supply, the definition of a taxable supply being a supply made in the course of a commercial activity defined as a business carried on except to the extent to which the business involves the making of exempt supplies.
Relevant Law
[8] The following summarizes the applicable provisions of the Excise Tax Act:
165(1) Imposition of goods and services tax - Subject to this Part, every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7% on the value of the consideration for the supply.
...
(3) Zero-rated supply - The tax rate in respect of a taxable supply that is a zero-rated supply is 0%.
...
221.(1) Collection of tax - Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.
...
228(1) Calculation of net tax - Every person who is required to file a return under this Division shall, in the return, calculate the net tax of the person for the reporting period for which the return is required to be filed, except ...
(2) Remittance - Where the net tax for a reporting period of a person is a positive amount, the person shall, ... remit that amount to the Receiver General.
...
123(1) Definitions - ...
"commercial activity" of a person means
(a) a business carried on by the person ... except to the extent to which the business involves the making of exempt supplies by the person.
(b) an adventure or concern of the person in the nature of trade ... except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and ...
"commercial service", in respect of tangible personal property, means any service in respect of the property other than
...
(b) a financial service;
...
"exempt supply" means a supply included in Schedule V;
"export" means export from Canada;
...
"financial service" means
(a) the exchange, payment, issue, receipt or transfer of money, whether effected by the
...
[The definition lists numerous other examples of financial instruments, insurance policies and other services but does not cover the services provided by the Appellant.]
...
"service" means anything other than
(a) property,
(b) money, and
(c) anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person;
...
"zero-rated supply" means a supply included in Schedule VI.
...
142.(1) [Place of supply] General rule - in Canada - For the purposes of this Part, subject to sections 143, 144 and 179, a supply shall be deemed to be made in Canada if
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(g) in the case of a supply of any other service, the service is, or is to be, performed in whole or in part in Canada.
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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,
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.
...
SCHEDULE V - EXEMPT SUPPLIES
[Included in the list of exempt supplies under Part VII of Schedule V is a supply of a financial service not included in Part IX of Schedule VI and said Part IX of Schedule VI includes under the heading "Financial Services" the following namely "A supply of a financial service ... made by a financial institution to a non-resident person..."].
[9] Schedule VI, Part V includes as one of the Zero Rated Supplies the following:
23. [Professional, advisory or consulting service] - A supply of an advisory, professional or consulting service made to a non-resident person, but not including ... [not applicable]
Analysis and Conclusion
[10] In my opinion none of the provisions of the Excise Tax Act apply to exempt the Appellant from collecting and remitting the GST in question, namely $19,919.20.
[11] The Appellant's services did not qualify as financial services. Moreover, they were not for professional, advisory or consulting services and even if they were they were not rendered to a non-resident. All three recipient corporations had addresses in Canadaand no satisfactory evidence has been presented to establish they were non-resident; moreover even if they were shown to be non-residents the services were rendered partly in Canada and therefore are deemed to be provided in Canada.
[12] With respect to the input tax credit issue of $446.17, the effect of Section 169 and Section 236 of the Act is to reduce the credit to 1/2 of the GST spent on meals with the result that the Appellant cannot claim the entire GST on meals of $932.34 and can only claim 1/2 of the amount, namely $466.17. As stated by David M. Sherman in the 2003 Edition of Practitioner's Goods and Services Tax at page 470, "In simple terms, 236 limits input tax credits for business meals and entertainment to 50% of the GST paid, by adding 50% back to net tax (remittable each period). The theory is that the other 50% represents personal rather than business consumption." Although the Period in question is February 1, 2001 to January 31, 2002, this comment holds true for said Period.
[13] As to the penalty, an abundance of jurisprudence makes it clear that this Court can determine a penalty to be inapplicable in various reasonable circumstances. In the present case the Appellant relied on advice from its accountant and certainly appeared to be in good faith in its decision that it was not liable for the GST in issue and that it did not err in its treatment of the ITC claim. Also it paid the GST on the "work fees" portion of its services. Morever, counsel for the Minister certainly did not push the penalty aspect either at the evidence or argument stages of the hearing except the statement as to inadequate books and records. Consequently I have determined there shall be no penalty.
[14] Therefore the appeal is dismissed, provided however that there shall be no penalty.
Signed at Ottawa, Canada, this 11th day of October, 2005.
"T. O'Connor"
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