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Citation: 2004TCC209
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Date: 20040329
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Dockets: 2003-1049(GST)I
2003-1045(GST)I
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BETWEEN:
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CHARLES BEAUPRÉ,
DIMENSION J.M.M. INC.,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Angers J.
[1] The Appellants are appealing from
the assessments made by the Minister of National Revenue (the
"Minister"), dated March 26, 2001, number 22460, with respect to
the Goods and Services Tax (GST) for the period beginning January
1 and ended October 31, 1997, in the case of the Appellant
Charles Beaupré, number 22459 with respect to the GST for
the period beginning November 1, 1997, and ended December 31,
2000, in the case of the Appellant Dimension J.M.M. Inc.
[2] Further to a GST audit, the
Minister assessed the Appellants for the amounts of $7,045.44 in
duties, $748.72 in penalties, and $662.16 in interest, calculated
on March 15, 2001, in the case of the Appellant Dimension J.M.M.
Inc., and for the amounts of $1,557.28 in duties, $306.40 in
penalties, and $303.47 in interest, calculated on March 14, 2001,
in the case of the Appellant Charles Beaupré. The
amounts assessed are not at issue in this case. This is to
determine whether the Appellants correctly calculated the GST
amount to collect in a sale involving a trade-in in the course of
their business activities. In the case of the Appellant
Charles Beaupré, it must also be determined whether the
assessment against him is valid, because it is addressed to a
person who is not required to collect and remit the tax under the
Excise Tax Act (the "Act").
[3] On October 15, 1996, the Appellant
Charles Beaupré and Olivier Erbetta, his partner,
registered a general partnership with the Inspector General of
Financial Institutions of Quebec under the business name of
"Dimension J.M.M." The company sells video games. They each
invested equal amounts in the company and were equal
partners. They operated their business as a partnership
until August 1997, when they incorporated the business as
Dimension J.M.M. Inc., the Appellant. They held an equal
number of shares in the company. The Appellant Charles
Beaupré then bought Olivier Erbetta's shares, making him
the sole shareholder of the company.
[4] Charles Beaupré is a video
game enthusiast. Before starting his own business, he was
the manager of a similar business. He gained experience and
became familiar with policies on the return and exchange of
goods. He introduced similar policies in his own business
to deal with potential client dissatisfaction. It was,
therefore, possible to return a video game purchased from the
business and receive a credit equal to the purchase price before
taxes. Where the merchandise was returned within a week of
purchase, $15.00 would be deducted from the purchase price; an
additional $5.00 would be deducted for each subsequent
week. The credit could only be used toward the purchase of
another item sold by his business. Mr. Beaupré
claims that the majority of clients do not return video games and
that the exchange policy applies to approximately 10% of sales.
The exchange policy is reviewed with clients at the time of
purchase. It was used by the partnership and by the
Appellant Dimension J.M.M. Inc. during all the periods at
issue. Occasionally, an item not purchased from the general
partnership or the Appellant Dimension J.M.M. Inc. is accepted,
but this percentage is very low.
[5] The Appellant filed sample
invoices into evidence. The three invoices, issued to the
same client, illustrate how the exchange policy is applied when a
client returns goods and how the applicable taxes are
calculated. The first invoice is for the purchase of a
video game. The invoice shows the selling price of $79.99,
plus the GST and QST, and the purchase date. The next day,
the client returns the game and is given a credit note of
$65.00. As an incentive, the client is told how much money
will be saved in GST and QST when the $65.00 credit note is
applied to a new purchase. The third invoice shows a
purchase made by the same client the day after the credit note
was issued. The $65.00 credit note is applied to the $79.99
purchase, for a balance of $14.99. The GST and QST are then
applied to this $14.99 balance. The present case calls into
question the way in which the exchange policy, as detailed in the
above example, is applied and the way in which the applicable
taxes are calculated. The Respondent filed a sample invoice
showing a similar way in which the client's credit note is
applied to the purchase and how the general partnership and the
Appellant Dimension J.M.M. Inc. calculated the taxes. The
Respondent is not contesting the way in which taxes are
calculated for simultaneous transactions, that is, where the
credit note is applied to a purchase at the same time the
exchanged good is returned. Rather, the Respondent is
challenging the way in which taxes are calculated where the
client returns a game and the resulting credit note is used
only for a future purchase. According to the
Respondent, in this situation, the GST should be calculated on
the price of the item prior to the application of the credit
note.
[6] The applicable legislative
provision in this case is subsection 153(4) of the Act, which
defines the value of the consideration for the supply made by a
supplier when it accepts used tangible personal property in
consideration for the supply. The provision reads as
follows:
(4) Used tangible personal
property trade-ins
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Where, at the time a supplier makes a supply of tangible
personal property to a recipient, the supplier accepts, in
full or partial consideration for the supply, other
property (in this subsection and subsection (5) referred to
as the "trade-in") that
(a) is used tangible personal property or a
leasehold interest therein, and
(b) is acquired for consumption, use or supply in
the course of a commercial activity of the supplier,
and the recipient is not required to collect tax in
respect of the supply of the trade-in, the value of the
consideration for the supply made by the supplier is
deemed, for the purposes of this Part, to be equal to the
amount, if any, by which the value of the consideration for
that supply (as otherwise determined under this Part)
exceeds
(c) except where paragraph (d) applies, the
amount credited to the recipient in respect of the
trade-in, and
(d) where the supplier and the recipient are not
dealing with each other at arm's length at the time the
supply is made and the amount credited to the recipient in
respect of the trade-in exceeds the fair market value of
the trade-in at the time ownership thereof is transferred
to the supplier, that fair market value.
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[7] Counsel for the Appellants argues
that the calculation of the GST carried out by his clients
complies with the provisions of the subsection at issue. In
the alternative, he submits that the exchange policy is an
integral part of the verbal agreement between the Appellants and
their clients, thus entitling the Appellants to an adjustment of
tax during the periods at issue. He also submits that, in
the case of the Appellant Charles Beaupré, the assessment
at issue is unlawful, because it is addressed to a person who is
not required by the Act to collect and remit the tax.
[8] Counsel for the Respondent submits
that, to benefit from the provisions of subsection 153(4) of the
Act, the transactions must be simultaneous, that is, each new
purchase takes place at the same time as the exchange of the used
tangible personal property. Where the exchange does not
occur at the same time, it is no longer an exchange of used
tangible personal property, but rather the application of a
credit note, and, consequently, the GST must be calculated on the
selling price of the supply prior to the application of the
credit. With respect to whether the assessment of the
Appellant Charles Beaupré is compliant with the Act,
counsel for the Respondent relies on subsections 272.1(5) and
299(2) and paragraph 296(1)(e) of the Act.
[9] Subsection 153(4) of the Act
stipulates that the tax is not calculated on the value of used
tangible personal property where the following conditions have
been met:
1 - A supplier makes a supply of tangible personal
property.
2 - The supplier accepts, in full or partial consideration for
the supply, other property [...] that is used tangible
personal property or a leasehold interest therein, and is
acquired for consumption, use or supply in the course of a
commercial activity of the supplier.
3 - The recipient is not required to collect tax in respect of
the supply of the trade-in.
[10] According to the Explanatory Notes to
Bill C-70, published in July 1997 by the Minister of Finance, the
purpose of subsection 153(4) of the Act is to prevent tax
cascading when a used good, for which no input tax credit was
claimed, is accepted as a trade-in by a supplier and is
subsequently resold on a taxable basis. To meet this
objective, there must be a supply of tangible personal property
and the acceptance, by the supplier, at the time he supplies the
tangible personal property, of a consideration comprised of used
tangible personal property in exchange. Used tangible
personal property is defined in the Act as follows:
"Used tangible personal property" means tangible
personal property that has been used in Canada;
[11] Can a credit note issued upon the
return of used tangible personal property be applied, in whole or
in part, to future purchases of tangible personal property in
such a way that the supplier is not required to collect the GST
on the value of the credit note? In my view, the wording of
subsection 153(4) does not allow it, because the exchange must
take place at the time the supplier supplies the tangible
personal property. Issuing a credit note defers the supply
of tangible personal property for which used tangible personal
property is accepted, such that the exchange does not take place
at the time prescribed by subsection 153(4), namely, at the time
the tangible personal property is supplied. This is the
position taken by the Canada Customs and Revenue Agency in its
Technical Information Bulletin
B-084, which explains that the rule governing sales with
trade-ins is not applicable where the supplier offers a credit
note instead of used tangible personal property in consideration
for the trade-in. The excerpt follows:
The trade-in approach does not apply where a supplier offers a
person a credit note or coupon for the value of used tangible
personal property (or a leasehold interest therein) credited as a
trade-in allowance where the coupon or note is applied in full or
in part against unspecified future deliveries of tangible
personal property.
[12] This does not mean, however, that
subsection 153(4) would not be applicable in a situation where
the property purchased must be delivered at a later date or in a
situation in which the used tangible personal property is traded
in with a view to purchasing other property in the future.
In this case, even though the credit note refers to used tangible
personal property accepted in exchange, the potential purchase of
tangible personal property against which this trade-in (or
credit) would be applied has not taken place. Subsection
153(4) cannot, therefore, be applicable in these
circumstances.
[13] In this case, I do not feel that the
exchange policy established between the clients and the
Appellants entitles the Appellants to an adjustment of GST for
the period at issue, as maintained by counsel for the
Appellants. The application of subsection 153(4) is based
on the interpretation of this subsection, not on the contractual
agreements concluded between the Appellants and their
clients. The Court is not required to consider the
interpretation of subsection 153(4) made by the Appellants and
their clients in their contractual agreements.
[14] The issue as to whether an assessment
is valid because it was addressed to a person who is not required
to collect and remit the GST has been dealt with by this Court in
Decaire v. Canada [1999] T.C.J. No. 699, Marach v.
Canada [2003] T.C.J. No. 45, Janelle v. Canada [2002]
T.C.J. No. 216, and Saucier v. Canada [2003] T.C.J. No.
741. This issue arises because the Act includes a
partnership in its definition of "person." It stipulates,
therefore, that a partnership that is not a corporation is
required to register in order to apply the provisions of the
Act. In this case, the person registered for the purposes
of the Act was "Dimension J.M.M," a general partnership. In
this case, the Appellant Charles Beaupré is a partner, not
the registrant, within the meaning of the Act. According to
counsel for the Appellant, where he is not required to collect
and remit the GST in accordance with the Act, he could not,
consequently, be assessed as a partner.
[15] In Janelle, Tardif J. analyzed
in detail the issue as to whether a partner can be assessed, even
though the general partnership or partnership was not
assessed. He correctly concluded that a partner can be
assessed under subsection 272.1(5) and paragraph
296(1)(e). The decision in Décaire was
rendered before section 272.1 was enacted. In
Saucier, I pointed out that subsections 299(2), 299(4),
and 299(5) of the Act seemed to indicate a concern to protect
against the consequences of potential errors in an assessment by
making it valid and enforceable.
[16] Subsection 272.1(5) and paragraph
296(1)(e) read as follows:
Joint and several liability
(5) A partnership and each member or former member (each of
which is referred to in this subsection as the
"member") of the partnership (other than a member who
is a limited partner and is not a general partner) are jointly
and severally liable for
(a) the payment or remittance of all amounts that
become payable or remittable by the partnership under this Part
before or during the period during which the member is a member
of the partnership or, where the member was a member of the
partnership at the time the partnership was dissolved, after the
dissolution of the partnership, except that
(i) the member is liable for the payment or remittance of
amounts that become payable or remittable before the period only
to the extent of the property and money that is regarded as
property or money of the partnership under the relevant laws of
general application in force in a province relating to
partnerships, and
(ii) the payment or remittance by the partnership or by any
member thereof of an amount in respect of the liability
discharges the joint liability to the extent of that amount;
and
(b) all other obligations under this Part that arose
before or during that period for which the partnership is liable
or, where the member was a member of the partnership at the time
the partnership was dissolved, the obligations that arose upon or
as a consequence of the dissolution.
296. (1) The Minister may assess:
[. . .]
(e) any amount which a person is liable to pay or remit
under subsection 177(1.1) or Subdivision a or b.1 of Division
VII,
and may reassess or make an additional assessment of tax, net
tax, penalty, interest or an amount referred to in paragraph
(d) or (e).
[17] For these reasons, I conclude that the
assessments against the Appellants in this case are
well-founded.
[18] The appeals are dismissed without
costs.
Signed at Edmundston, New Brunswick, this 29th day
of March 2004.
Angers J.
Translation certified true on this 30th day of
November 2004.
Colette Dupuis-Beaulne, Translator
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