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Citation: 2004TCC624
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Date: 20040921
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Docket: 2003-4544(GST)I
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BETWEEN:
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PAPER MILL RECYCLING INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
Counsel for the Appellant: Gordon D. Beck
Counsel for the Respondent: John-Paul Hargrove
____________________________________________________________________
REASONS FOR JUDGMENT
(Delivered orally from the Bench at
Edmonton, Alberta, on June 22, 2004)
Miller J.
[1] Paper Mill Recycling Inc. (Paper
Mill) appeals the assessment from the Minister of National
Revenue (the Minister) of its good and services tax (GST)
liability in regards to two issues. First, the assessment of
Paper Mill as a purchaser of supplies for GST of $23,492.68
pursuant to paragraph 296(1)(b) of the Excise Tax
Act. Second, the assessment of Paper Mill for $5,420.27
representing a discrepancy between net tax according to Paper
Mill's monthly filings and net tax calculated by Canada
Revenue Agency (CRA) based on Paper Mill's books and
records.
[2] The facts are as follows: On
September 16, 1998, the directors of Paper Mill passed a
resolution to make a Notice of Intention to file a proposal
pursuant to the Bankruptcy and Insolvency Act. On
September 18, 1998, Paper Mill filed such a Notice with the
Superintendent of Bankruptcies attaching a list of creditors with
debts of approximately $884,838.
[3] On March 15, 1999, the Trustee,
Paul Pope of Deloitte and Touche Inc., reported to the
Superintendent those same liabilities of Paper Mill of
approximately $884,838 as at September 18, 1998. The Trustee gave
the opinion that a proposal by Paper Mill was advantageous to the
creditors as the creditors would receive nothing in the event of
a bankruptcy. The proposal, dated January 15, 1999, offered
payments to creditors of $20,000 from proceeds of the sale of
certain assets plus $90,000 in 36monthly payments of
$2,500 per month.
[4] At the first meeting of creditors
on February 4, 1999, the proposal was approved. A representative
of CRA attended that meeting. The Court of Queen's Bench of
Alberta approved the proposal by Order dated March 23, 1999. The
Deloitte and Touche Trustee prepared a claims register in April
1999, naming creditors who filed claims totalling an amount of
$377,637 and admitting claims in the amount of $309,729.
[5] CRA had claimed approximately
$111,000 and had approximately $45,000 worth of claims admitted
in connection with amounts owing under the Income Tax Act.
The trade creditors' claims included GST.
[6] On March 5, 2001, BDO Dunwoody
Limited filed an election on behalf of Paper Mill to have the
provisions of section 80 of the Income Tax Act apply in
connection with a net debt forgiveness of $405,489. Sometime
thereafter, CRA conducted a GST audit concluding with a Notice of
Reassessment dated January 17, 2003. It is important to note in
their cover letter that CRA stated the following:[1]
The assessment resulting from the forgiveness of debt is in
accordance with paragraph 296(1)(b) of the ETA. This is an
assessment for the tax payable, which was not paid to suppliers.
The assessment is in accordance with CCRA'S
Policy 112R.
In its attached "Statement of Audit Adjustments" CRA
indicated that $13,156 and $10,33 (the $23,492 at issue) was
"GST on Forgiveness of Debt".
[7] In going through the auditor's
working papers, it appears that the GST on forgiveness of debt
was calculated on the basis of seven, one hundred and sevenths of
a taxable amount of $359,102. This figure appears to have been
derived from something called a vendor balance summary of
September 30, 2000; a document whose origin was not established
and on which I attach little weight.
[8] I consequently, likewise attach
little weight to the veracity of the auditor's determination
of a debt forgiveness of $359,102. The auditor did not testify.
It appears, though there is only documentary evidence, that the
auditor attempted to reconcile her figure for forgiveness of debt
to the $405,000 amount raised in BDO Dunwoody's letter.
[9] I am satisfied there was a
forgiveness of some debt and that the most reliable figure was
BDO Dunwoody's letter to CRA indicating $405,000, though no
one from BDO Dunwoody confirmed that figure either. What is more
pertinent, however, in connection with the forgiveness of debt is
the timing of when those debts arose. I find that the debts arose
in connection with GST invoiced to Paper Mill prior to
September 18, 1998, the time of the filing of the Notice of
Intention; that is the date at which Paper Mill's debts were
listed, both for purposes of the Notice of Intention and for the
Trustee's report. Those are the debts in issue. Those are the
debts that have been forgiven. Though there is some confusion as
to the amount of the debt forgiven, as the documentary evidence
is simply not definitive, on balance I am satisfied that whatever
the correct amount might be, it relates to the debts arising in
pre-September 18, 1998 period.
[10] Paper Mill filed its monthly GST
reports for the period December 1998 to January 2002. The
auditor, upon review of Paper Mill's books, concluded that
Paper Mill had underreported its net tax by $5,420. The
Respondent in its reply assumed the following:
16(s) for the reporting periods ending
between December 1, 1998 and September 30, 1999, the
Appellant did not report -$5,148 of the amounts that had been
correctly reported as net tax in its books and records;
...
16(v) for the reporting periods ending
between October 1, 1999 and September 30, 2000, the
Appellant did not report $8,860.36 of the amounts that had been
correctly recorded as net tax in its books and records;
...
16(y) for the reporting periods ending
between October 1, 2001 and January 31, 2002, the Appellant did
not report $1,708 of the amounts that had been correctly recorded
as tax collected/collectible in its books and records.
If you net those three figures together you get to the
$5,420 net tax amount assumed by the Respondent. The
Appellant's external accountant testified that the
company's books were in very poor shape and were not accurate
in reflecting the company's financial position.
[11] This case highlights a peculiarity in
the Excise Tax Act which has previously been identified as
troublesome. I refer to the appropriate application of
paragraph 296(1)(b), and in particular, the comments
made in the case of Carlson & Associates Advertising Ltd.
v. R.[2]
I will return to these shortly. There are twoissues in this
appeal. First, has the Respondent correctly relied on
paragraph 296(1)(b) to assess Paper Mill for a GST
liability? Second, has the Respondent correctly assessed Paper
Mill for underreported net tax for the relevant period?
[12] First, the paragraph 296(1)(b)
matter. Paragraph 296(1)(b) reads:
296(1) The Minister may assess
(a) ...
(b) any tax
payable by a person under Division II, IV or IV.I,
There are twoways in which to view the Minister's
assessment of $23,492. The first is that it is a tax liability
arising on the forgiveness of debt. The Minister's assessment
of January 17, 2003 is sufficiently ambiguous to consider that
interpretation. Certainly, the statement of audit adjustment
states explicitly "GST on Forgiveness of Debt".
[13] In the Respondent's Reply it is
assumed as a fact that the tax of $23,492 became payable after
January 17, 1999, which one could interpret as implying that the
tax became payable as a result of the forgiveness of debt, as it
was not until February 1999 that the creditors approved the
proposal and March that the Court likewise approved the proposal.
Not until then, therefore, was a forgiveness of debt
crystallized. So, in effect, the Respondent's position is the
tax liability arises on the forgiveness of debt; this is an
unacceptable proposition.
[14] I do accept, based on Carlson,
that the Respondent can assess tax payable against a purchaser
pursuant to paragraph 296(1)(b). The tax payable must,
however, arise pursuant to Division II, IV or IV.I. Division IV
and IV.I have no application here, so the tax must arise pursuant
to Division II. There is nothing in Division II imposing a tax on
the forgiveness of debt. Such liability just does not exist. The
Respondent referred me to Policy Statement P112R. This is a CRA
policy as to when to impose paragraph 296(1)(b) and assess
a purchaser who is insolvent or bankrupt in respect of GST not
paid to a supplier. In certain circumstances, that may, indeed,
be the right and only recourse available to CRA, though I would
suggest one to be exercised prudently and delicately given the
obvious outcry of double taxation that an inappropriate use would
evoke. But this Policy in no way supports a position of a tax
liability arising on a forgiveness of debt. The tax liability in
the case of non-payment by a purchaser arises upon an amount for
goods and services becoming payable, in most situations, at the
time of the rendering of an invoice. An approach claiming
liability attaches to a debt forgiveness is not supportable by
the legislation.
[15] The second way to interpret the
Respondent's assessment is that the Minister is really
assessing Paper Mill for GST that it never paid to its trade
creditors. This is a more plausible and defensible approach. The
GST liability is found in Division II in what Mr. Beck called the
motherhood section, section 165. In effect, a recipient of a
supply shall pay tax. Paper Mill was a recipient of a supply. The
Minister can assess under paragraph 296(1)(b). I would
like to say it is that simple but it is not. The interplay of
paragraphs 296(1)(a) and 296(1)(b), and the
obligation of both supplier and recipient in a financial crisis
situation, such as a proposal or assignment, are anything but
simple.
[16] In this particular case, however, the
answer is not complicated as the Minister is simply too late. The
liability in issue is the tax liability arising from invoices
which, I find as a fact, must have been rendered prior to
September 18, 1998. If the Minister wanted to rely on paragraph
296(1)(b) to assess the Appellant, he must have done so
prior to September 18, 2002, due to the workings of
paragraph 298(1)(c) which reads: "an assessment
of a person shall not be made under section 296 in the case of an
assessment of tax payable by the person under Division II, other
than tax referred to in paragraph (b), more than fouryears
after the tax became payable". The Minister assessed in
January 2003. The Minister is out of time.
[17] I need not deal with the
Appellant's argument that the Minister's actions fly in
the face of the spirit or perhaps even the wording itself of the
Bankruptcy and Insolvency Act other than to say, it is a
strong argument. I allow Paper Mill's appeal in connection
with the assessment of $23,492.
[18] I now turn to the issue of the $5,420
discrepancy between the Appellant's monthly filings and the
auditor's finding of the net tax owing for the relevant
period. It is for the Appellant to demolish the Respondent's
assumption that the net tax was underreported by $5,420. The
Appellant relies mainly on the testimony of the company's
accountant, Ms. Beauchemin, that the company's books were in
poor shape, so how could I accept the auditor's reliance on
those books compared to the regular monthly filings, especially
if those filings took place while the company's cash flow was
being monitored by the Trustee. There is no evidence from the
Trustee involved at the time that the GST filings were monitored.
The individual from Deloitte and Touche who testified was not
personally involved with the file. Ms. Beauchemin gave no
evidence of any review of GST filings. No officer or bookkeeper
of the company testified as to the procedure in making the
monthly GST filings.
[19] All I know is that Paper Mill filed
monthly and that their books were in poor shape. On that basis,
the Appellant's counsel urges me to find, on balance, the
Minister's assumption has been demolished. It is not enough
for me to make such a finding. While I have some reservations as
to the auditor's approach vis-à-vis the forgiveness of
debt issue, I have nothing on which to conclude the auditor was
mistaken in finding a $5,420 discrepancy. The Appellant has not
been successful in demolishing the Crown's assumption.
[20] In summary, I allow the appeal and
refer the matter back to the Minister to reduce the amount of the
assessment by $23,492.68.
Signed at Ottawa, Canada, this 21st day of September,
2004.
Miller J.
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