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Citation: 2003TCC185
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Date: 20030331
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Docket: 2002-2186(GST)I
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BETWEEN:
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DAVID D. HAGGART,
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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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REASONS FOR JUDGMENT
Little, J.
A. FACTS:
[1] Haggart Construction Ltd.
("Construction") was incorporated under the Company
Act of the Province of Alberta on December 31, 1979.
[2] The Appellant owned 99% of the
shares of Construction and his wife owned 1% of the shares of
Construction.
[3] Construction was involved in
several phases of the construction industry in Fort McMurray,
Alberta.
[4] Construction obtained a loan (the
"Loan") from the Canadian Imperial Bank of Commerce
("CIBC"). On April 15, 1989 officials of CIBC called
the Loan by demanding payment.
[5] Prior to 1991 the Appellant and
Construction commenced a court action (the "Court
Action") in the Court of Queen's Bench of Alberta
against the CIBC. In the Court Action the Appellant and
Construction claimed damages for:
(i) loss of income;
(ii) loss of future income;
(iii) loss of investment;
(iv) punitive damages; and
(v) defamation, in respect of
the wrongfully calling of a bank loan by CIBC in 1989 which had
the effect of forcing Construction out of business
[6] As a result of the Court Action
the Appellant and Construction received Judgment from the Court
in 1998 which ordered that the CIBC pay the following amounts to
the Appellant and Construction:
(i) $463,200.00 as damages
for loss of income for the years 1989 to 1999;
(ii) $18,500.00
representing damages suffered as the result of a forced sale of
investment assets;
(iii) $20,000.00 as punitive
damages; and
(iv) $368,566.22 in accrued
interest under the Judgment Interest Act of Alberta.
[7] The Plaintiffs were also awarded
costs.
[8] CIBC filed a Notice of Appeal to
the Alberta Court of Appeal but they abandoned their appeal.
[9] Although Construction was forced
to discontinue its business in 1989 the Appellant continued to
carry on business in the construction industry. From 1990 to 1996
the Appellant worked in the construction industry in British
Columbia. From 1997 to 2000 the Appellant worked as a sole
proprietor in the construction industry in Fort McMurray,
Alberta.
[10] The Appellant was a registrant under
the Excise Tax Act (the "Act") effective
March 7, 1996.
[11] In January 2000 and April 2000 the
Appellant filed his Goods and Services Tax ("GST")
returns for the reporting periods from April 1, 1996 to March 31,
2000, reporting GST of $24,226.36, claiming input tax credits of
$46,474.51 and claiming net refunds of $22,248.15. The Minister
disallowed input tax credits of $26,193.24 that were claimed by
the Appellant. The input tax credits that were disallowed were
claimed with respect to the legal fees paid by the Appellant in
connection with the Court Action commenced by the Appellant and
Construction against the CIBC. The input tax credits apply
specifically for the period 1996 to 2000.
B. ISSUE
[12] Is the Appellant entitled to claim
input tax credits of $26,193.24?
C. ANALYSIS
[13] On the 28th day of March 2002 Mr. Ron
H. Brass, Appeals Team Leader of the Canada Customs and Revenue
Agency (the "CCRA") sent a Notice of Decision to the
Appellant. The Notice of Decision contained the following
statement:
Based on a review of the evidence provided, it is the
Agency's position that the legal fees were not acquired for
the "consumption, use or supply in the course of your
commercial activities", as required by subsection 169(1).
The legal fees were acquired in respect of a court action which
resulted in you receiving a damage award which is not considered
to be consideration for a supply and thus not part of your
commercial activity.
[14] Mr. Larry Myres, C.A., the agent for
the Appellant, maintained that the GST, paid on the legal fees,
are claimable as input tax credits since they relate to services
acquired for commercial purposes in the recovery of lost business
income.
[15] Michael Taylor, counsel for the
Respondent, argued that the Appellant was not eligible for input
tax credits for the following reasons:
1. The Court Action was not commenced
in the course of commercial activities but was a claim for
compensation.
2. If the Court Action is found to be
commenced in the course of commercial activities, when the Court
Action was commenced the commercial activities were not those of
the Appellant but were those of Construction which is a separate
legal entity.
3. If the Court Action were commenced
in the course of commercial activities and if you find them to be
commercial activities of the Appellant, the Minister's
position is that no input tax credits can be claimed because the
legal services were not acquired for the purpose of making
taxable supplies for consideration.
[16] In support of Point 3 above, Mr. Taylor
referred to a number of Court decisions. In Two Carlton
Financing Ltd. v. Canada, [1998] T.C.J. No. 447, Judge Rip
said at paragraph 37:
In accordance with subsection 169(1) of the Act, ITCs are
available where tax on inputs in respect of a supply becomes
payable or is paid by a registrant person. Recovery of the tax
paid is limited to the extent that the inputs were acquired for
consumption, use or supply in the course of commercial activities
of the person.
[17] Judge Rip then quoted a decision of
Judge Garon (now Chief Judge) in Nineteen Ninety Clothing Co.
Inc. v. The Queen, [1994] G.S.T.C. 89 (T.C.C.), at 89-5 where
Judge Garon said:
... the purchaser of a taxable supply is entitled to an input
tax credit and can recover from the government the tax he has
paid to the extent that this purchaser uses that good or service
in the production of other taxable supplies.
[18] In Two Carlton Financing Ltd.
Judge Rip also said at paragraph 37:
ITCs are generally unavailable unless the inputs for which the
ITCs are claimed were used in the production of other taxable
supplies.
(Note: In this situation, Mr. Haggart did not produce
"other taxable supplies". As a result of the Court
Action (for which input tax credits were claimed on the legal
fees paid) Mr. Haggart obtained or received
"damages").
[19] Counsel for the Respondent also
referred to Blanchard (c.o.b. Four Pillar Financial) v.
Canada, [2001] T.C.J. No. 484. In that case Judge Bowie said
at paragraph 19:
The result of finding there to be only one business is that
the entitlement to ITCs falls to be determined under sections
169, 141 and 141.01 of the Act. Complex though these are, they
may be summarized this way. Entitlement to ITCs arises only to
the extent that goods and services tax has been paid on property
or services that have been acquired for the purpose of making
taxable supplies for consideration.
[20] While it does not have the force of law
I believe that is useful to quote from a Ruling released by the
CCRA on March 14, 1996 (See No. 96 GT1 447). The Ruling dealt
with the question of whether a registrant under the Act (a
self employed selling agent) could claim input tax credits on the
GST paid re. legal fees incurred when he commenced a lawsuit
following an automobile accident. (Note - the agent was awarded
general damages in the lawsuit.)
[21] In the Ruling the following explanation
is provided:
Pursuant to subsection 169(1) of the Excise Tax Act
(Act), a GST-registrant is generally entitled to claim back, as
an ITC, the GST paid or payable on personal property and services
(for example, legal services) based on the extent to which the
property or service is acquired for consumption, use or supply in
the course of the registrant's commercial activities.
Further, subsection 141.01(2) of the Act clarifies that the
acquisition of a particular property or service by a person is
considered to be for consumption or use in the course of the
person's commercial activities to the extent the property or
service is acquired for the purpose of making taxable
supplies. (emphasis added)
Therefore, in order for you to be eligible to claim an ITC for
the GST paid on the legal services, the legal services must be
acquired by you for the purpose of making some GST-taxable
supply. Under the circumstances you have presented, there is no
evidence to link the acquisition of the legal services to any
GST-taxable supply (either of property or a service) that you
have made, or intend to make.
As a result, our position is that you are not entitled to
claim any amount of the GST paid on the legal services as an
ITC.
[22] In considering the application of
section 169 of the Act, I do not believe it could be said
that the Appellant commenced the Court Action or paid the legal
fees for the purpose of making or producing taxable
supplies.
[23] I have therefore concluded that the
Appellant does not qualify for input tax credits with respect to
the GST that he paid on the legal fees.
[24] The appeal is dismissed, without
costs.
Signed at Vancouver, British Columbia, this 31st day of March
2003.
J.T.C.C.
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