Citation: 2003CCI130
Date: 20051122
Docket: 2005-1224(GST)I
BETWEEN:
BERNARD SIMARD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
__________________________________________________________________
REASONS FOR JUDGMENT
Angers J.
[1] This is an appeal from two assessments made by the Minister of National Revenue ("the Minister") pursuant to Part IX of the Excise Tax Act ("the Act") for the periods from July 1, 1999 to March 31, 2003 and from April 1, 2003 to June 30, 2003. The Minister assessed the appellant for net tax in the amount of $40,457.25 plus interest in the amount of $4,689.05, and net tax in the amount of $1,084.25 plus interest in the amount of $15.22, for these periods respectively.
[2] The assessments at issue are the result of a 2003 audit of the appellant having to do with changes in use of his buildings in November 1999 and October 2002 and with self-supply of additions to multiple unit residential complexes in October 2002 and June 2003. A waiver of limitation period was signed by the appellant. The appellant has not contested this aspect of the assessment, but has claimed a refund of the Goods and Services Tax ("the GST") that he states he paid in error and that the Minister refuses to refund to him.
[3] In 1982, the appellant acquired a building to Cacouna, a small community of approximately 1,100 inhabitants located 10 kilometres from Rivière-du-Loup. This building, referred to as "the south building", included a bar, a reception hall and an old motel. In 1992, the appellant added more motel rooms, a convenience store and a restaurant, and decided to close the reception hall. The motel rooms were then rented on a short-term basis during the summer months and on a long-term basis during the nine other months of the year. As well, the appellant caused to be constructed a multiple unit residential complex referred to as "the north building" including four 3½-room units and eight 1½-room units. In 1996, he added to the north building a third storey including ten 1½-room units.
[4] In the fall of 2002, the appellant redeveloped the south building by moving the bar from the basement to the first storey and replacing the restaurant, the convenience store and a gas station with two 3½-room units. He added to the north building a three-storey addition including three 3½-room units and nine 1½-room units, first rented in October 2002.
[5] In the spring of 2003, the appellant added to the south building a third storey including nine 2½-room units, first rented on June 15, 2003. At the time of the 2003 audit, then, the appellant owned two buildings including 45 units, one of them occupied by himself, a bar and a hairdressing salon.
[6] According to the appellant, starting in 1999 he began renting units on a long-term basis (for 30 days or more) or for an entire year. From 2000 to 2002, motel room rentals were quite minimal. The reception duties were performed by himself or by his spouse, who operated the hairdressing salon. The percentage of rentals made to tourists, that is, short-term rather than long-term rentals, was 2%. The appellant published advertisements for long-term rentals and occasionally had leases signed. The average duration of long-term occupancy was seven months.
[7] In the case of rentals to tourists, the GST was charged on the rental rate, as was the Quebecsales tax ("the QST"). In the case of long-term rentals, there was no reference to the GST or the QST in either the appellant's advertisements or the sample leases adduced. Long-term rentals are a tax-exempt supply, but the appellant stated that he was under the impression that he had to remit the GST and the QST because he was operating a motel. Indeed, that is what he did until September 16, 2003 when, to his surprise, the auditor told him that long-term rentals are a tax-exempt supply.
[8] The appellant testified that he remitted the GST and the QST on both types of rental even before the periods at issue, and had been doing so at the time of a 1997 audit. That audit had mainly to do with income from video poker machines that the appellant had installed in his establishments. Although at issue were apparently a change in use of the motel and self-assessment, the appellant does not recall those discussions. With regard to the change in use, the auditor did not state that self-assessment was required. As well, the appellant received from the Quebec Minister of Revenue a notice to registrant for the period from September 1 to November 30, 1996 stating that his business was in compliance with the provisions of the Act respecting the Québec sales tax. The appellant stated that the then auditor never told him to stop paying both taxes on long-term rentals. He stated that it was only at the time of the 2003 audit that he learned that self-assessment was required and that he was not required to remit these taxes on long-term rentals, that is, rentals for 30 days or more.
[9] The appellant explained that during the same period he owned an apartment building in Rivière-du-Loup, referred to as the "Bisson building", for which he never collected or remitted either of the two taxes. Indeed, in his summary journal (at Tab 7 of Exhibit I-1) it can be seen that neither of the two taxes was calculated on the monthly income from that building. On the other hand, under the heading "motel" are listed monthly income amounts from the two buildings concerned, including short- and long-term rentals, on which the appellant calculated both taxes for remittance. According to the appellant, because he considered that he continued to operate the business as a motel, he felt that he was required to remit both taxes even though he did not charge the taxes on long-term rentals. Thus the GST amounts corresponding to the appellant's quarterly remittances are shown. The same journal also shows income from the hairdressing salon, tips and the video poker machines, as well as other entries. It must be admitted that this bookkeeping leaves something to be desired.
[10] After learning from the auditor that he was not required to calculate the two taxes on income from long-term rentals, the appellant did not change his rental rates. Instead, he was pleased to learn that his own income would increase.
[11] Gervais Grandmaison was the auditor of the appellant's file for the periods at issue. He met with the appellant in May 2003; it was at that time that the issue of the taxes on rentals for 30 days or more arose. Mr. Grandmaison was the one who told the appellant to stop paying the taxes on these rentals. He acknowledged that the appellant had been surprised to learn this information.
[12] This audit had to do with several points, particularly changes in use and the required self-assessment. With regard to the taxes on the rentals listed under the heading "motel", the auditor relied on the appellant's summary journal, which uses the cash basis of accounting. The amounts recorded in the journal correspond to the quarterly remittances. With regard to the Input Tax Credit (ITC), the auditor redid the calculations and disallowed the ITCs claimed by the appellant starting on July 1, 1999.
[13] According to Mr. Grandmaison, the percentage of short-term rentals, that is, 2%, is more acceptable for 2001, 2002 and 2003 than for 1999 and 2000, during which short-term rentals were more frequent. What is certain, according to Mr. Grandmaison, is that this percentage cannot be applied to the appellant's income; he indicated that, given the appellant's bookkeeping, the percentage of short-term rentals and thus the exact amount of tax paid in error cannot be determined on the basis of income. Under cross-examination, the appellant insisted that he had always calculated this percentage on the basis of income, not on the basis of number of rentals.
[14] The respondent has acknowledged that the GST on the long-term rentals was collected and remitted by the appellant in error. The respondent has argued that it is not the appellant but the long-term tenants who are entitled to a refund of the tax paid in error, since they are the ones who paid it. In Reference re Quebec Sales Tax, [1994] 2 S.C.R. 715, the Supreme Court of Canada noted that registrants do not pay the tax or bear the burden; they merely function as tax collectors transferring the revenues to the government.
[15] The appellant, on the other hand, has argued that the GST was not collected from his long-term tenants. The rental rates were never set in order to collect the GST; instead, he remitted the GST from his own funds because he believed he was required to pay it.
[16] The issue of who is entitled to a refund of GST collected and remitted in error, and particularly the issue of whether in certain circumstances a registrant whose role is limited to collecting and remitting the GST may apply for a refund of it, has been the subject of numerous decisions. The legislative provision allowing for rebate of payment made in error is found in subsection 261(1) of the Act:
Rebate of payment made in error - Where a person has paid an amount
(a) as on account of, or
(b) that was taken into account as,
tax, net tax, penalty, interest or other obligation under this Part in circumstances where the amount was not payable or remittable by the person, whether the amount was paid by mistake or otherwise, the Minister shall, subject to subsections (2) and (3), pay a rebate of that amount to the person.
[17] In a recent decision in LorraineMcDonell v. The Queen,2005 TCC 301, Bowman C. J. details the issue of whether a registrant who collects the GST from a purchaser in error and remits it to the tax authorities is entitled to a refund. His analysis reviews a number of decisions by this Court, some of which have been upheld by the Federal Court of Appeal, and which are not necessarily compatible. He reaches the following conclusion, which in my opinion accurately summarizes the interpretation that may be given to section 261. He also takes the liberty of describing two situations in which a refund claim by a registrant may be allowed. His conclusion and comments are found at paragraphs 35 and 36 of the decision:
I do not think that it is necessary in this case to decide whether there can never be circumstances in which a supplier could successfully assert a claim for a refund of tax under section 261. It is sufficient to say that in my view where a supplier collects an amount as GST from a recipient of a supply in circumstances in which GST was not exigible and remits it to the government (as it must: see ITA Travel Agency Ltd. v. Canada, [2001] G.S.T.C. 5) it is the recipient, not the supplier who is entitled to claim the refund under section 261. I do not intend these reasons to be taken as saying that a supplier can never claim a refund under section 261. At least two situations occur to me where a claim by a supplier might be considered:
(a) where a supplier does not collect GST from a recipient in respect of an exempt or zero-rated supply and then, erroneously, remits from its own funds an amount as GST to the government.
(b) where a supplier collects, rightly or wrongly, GST from a recipient and then by mistake remits to the government more than was collected.
I need not answer the questions raised by these two hypothetical situations but I do not think that for the supplier to be entitled to claim a refund of the amount paid under example (a) or the excess over the amount collected under example (b) does violence to either the scheme of the Act or the wording of section 261.
[18] In my opinion, the present case is one that corresponds to the situation described in paragraph (a) of the decision by Bowman C. J. If a registrant establishes on a balance of probabilities that the registrant has not collected the GST from a purchaser, if a tax-exempt supply is involved, and if the registrant remits to the tax authorities, in error, an amount as GST that is taken from the registrant's own funds, the registrant will be entitled to a refund of the GST that the registrant paid in error.
[19] In the present case, the parties have acknowledged that the appellant paid the GST on the income listed under the heading "motel" and that part of this amount includes GST on tax-exempt supplies. The respondent has argued that the GST was collected, while the appellant has stated the opposite. In support of his claim, the appellant has noted advertisements that make no mention of the GST, as well as leases identifying the rental rate on a monthly basis with no mention that the GST is included in the rental rate or is to be added. If we rely on the appellant's summary table under the heading [translation] "rentals, Bisson building" (the building he owned in Rivière-du-Loup), in which he did not calculate the GST to be remitted to the tax authorities, the appellant knew that the rental of residential units was a tax-exempt supply. He has explained his error by stating that he misunderstood because he operated a motel with two types of rental; since he operated the business as a motel and the 1997 audit had not pointed out this error, he continued this practice until 2003 when, to his surprise, he learned that he did not have to do so. The long-term rental rates still did not change after 2003 since they had never been set depending on the GST. Even though the error continued for a number of years, it was nevertheless an error. It is also plausible that tenants paid the monthly amount as rent alone, since the leases and rental agreements make no mention of the GST.
[20] In my opinion, the appellant is entitled to a refund of the GST he paid in error but did not collect during the periods at issue, found under the heading "motel" in his summary journal. The difficulty lies, however, in determining the amount of the refund. In my opinion, the 98% and 2% percentages of long- and short-term rentals respectively cannot be used to establish the percentage of the GST remitted by the appellant on those rentals on the basis of income. The appellant's bookkeeping does not distinguish between income from the two types of rental, thus eliminating one sure way of establishing the amount of the refund. As well, short-term rentals during the short summer season could undoubtedly generate as much income as a long-term rental throughout the year.
[21] In his testimony, the auditor did not appear to agree that the 98% and 2% percentages of long- and short-term rentals respectively are applicable to 1999 and 2000. That said, the Reply to the Notice of Appeal admits the truth of paragraph 11 of the Notice of Appeal, which states that from 1999 to date the appellant's rentals have been made up of 98% long-term and barely 2% short-term rentals. This statement also confirms that the appellant was mistaken in testifying that these percentages are calculated on the basis of income, not on the basis of number of rentals.
[22] The appellant adduced a table listing his rental income under the heading "motel" for 1999 to 2003, as well as the amount of GST remitted to the tax authorities on this rental income. The total rental income was $203,339 and the total GST remitted was $14,233.73. However, the periods at issue cover only four years, from July 1, 1999 to June 30, 2003. Since the appellant did not provide a monthly breakdown of his income from the motel for the periods at issue, it is impossible to calculate the exact amount of income during these periods. One full year must therefore be subtracted from these totals; in order to do so, I shall subtract from these amounts annual averages of the total income and GST calculated. These averages amount to $40,667.80 in income and $2,846,75 in GST. After these amounts have been subtracted, the total income for the periods at issue would be $162,671.20 and the GST remitted would be $11,386.98.
[23] I must now subtract from the amount of GST remitted a percentage representing the GST collected and remitted by the appellant on the rentals that constitute a taxable supply. In the circumstances, given the impossibility of accurately determining this percentage, it will be arbitrary. Since the percentage of taxable rentals is quite minimal and the annual income from them may be equivalent to the annual income from a non-taxable rental, I consider it reasonable to allow a refund equivalent to 42 out of 43 units, that is, 97.67% of the GST paid, or $11,121.66 for the periods at issue. The appeal is allowed and the assessments are referred back to the Minister for reconsideration and reassessment in accordance with these Reasons for Judgment.
Signed at Ottawa, Ontario, this 29th day of November, 2005.
"François Angers"
Angers J.
Translation certified true
on this 5th day of January 2006.
Carol Edgar, Translator
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