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Citation: 2004TCC258
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Date: 20040621
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Docket: 2001-3385(GST)G
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BETWEEN:
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800537 ONTARIO 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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REASONS FOR JUDGMENT
BOWMAN, A.C.J.
[1] This appeal is from an assessment
made under the Goods and Service Tax provisions of the Excise
Tax Act ("ETA") for the period January 1, 1995 to
December 31, 1996.
[2] The following outline of the facts
is taken from a partial Agreed Statement of Facts ("ASF"). Apart
from this statement, there are many facts that are in
dispute.
[3] The appellant carried on business
as an automobile dealership in Cambridge, Ontario under the name
of Acura West ("AW"). In 1995 and 1996 Mr. Gregory Leon
was its president and general manager, and was as well a 50%
shareholder. Acura West was registered for the Goods and Services
Tax ("GST") in 1990 and was required to file GST returns
monthly.
[4] In 1995 and 1996, AW sold
automobiles to two United States corporations, Auto Enterprises
Inc. ("AE") in Clawson, Michigan and World Imports USA Inc.
("WI"). AW sold 108 (or 104) automobiles to AE. There is some
dispute whether four vehicles were sold directly to AE by AW or
whether they were sold through a chain of domestic corporations.
I shall deal with these four transactions (the "Nordren"
transactions) later in these reasons. AW sold 18 vehicles to
WI.
[5] WI is located in New York State.
It imports cars from Canada for resale in the United States
and Europe. Its president is Claus Lukner. The other person
with whom Mr. Leon dealt at WI was Jake Sydorowicz.
[6] AE is a car dealer that has
imported cars from Canada for resale in the United States for 18
years. It is owned and operated by Bill Luther and
Phil Trupiano, who were responsible for purchasing and
administration, respectively.
[7] Mr. Leon met Mr. Lukner
and Mr. Sydorowicz of WI at a car auction in Toronto in 1994
where they expressed an interest in purchasing cars from AW,
particularly sports utility vehicles that were in high demand in
the United States. Mr. Sydorowicz introduced
Mr. Leon to AE and suggested that AE would be able to
purchase a greater volume of vehicles from AW than WI.
[8] The vehicles that were sold to the
American purchasers were in short supply in the United States
whereas they were more readily available in Canada. Moreover the
prices were better in Canada. Canadian car manufacturers imposed
restrictions on their dealers preventing them from selling to the
United States. Therefore the sales were made through dealers
such as AW to circumvent the restrictions.
[9] Mr. Leon negotiated the sale
price of the vehicles by telephone and fax. Once a price was
agreed upon he would purchase the vehicle.
[10] Paragraphs 15, 16, 17 and 18 of the ASF
read: (footnotes omitted)
15. Once the sale price was agreed upon,
Mr. Leon manually completed two Acura West pre-printed
three-copy sales forms. On one sales form, he recorded the words
"USA EXPORT" in the box labelled GST on subtotal (hereafter the
"USA EXPORT form"). On the other sales form, Mr. Leon
recorded an amount in the box labelled GST on subtotal (hereafter
the "GST form"). For example, the two forms prepared for a 1997
Ford F-350 Crew 4X4 bearing vehicle identification number
1FTJW36F7VEA18067 and attached as Appendix "A" hereto show
the following details:
USA
EXPORT
GST Form
Form
Total Sale
Price
$40,862.50
$38,185.00
Administration
fee
$
65.00
$65.00
Net
Difference
$40,927.50
$38,250.00
GST on
Sub-Total
USA
EXPORT
$2,677.50
__________________________
Balance
Due
$40,927.50
$40,927.50
Final Balance
Due
$40,927.50
$40,927.50
16. In addition to amounts related to the
sale price, Mr. Leon recorded the same basic information on
each of the two forms:
a) name, address, telephone number and GST # of
the dealer (pre-printed);
b) name and address of the purchaser in the
United States;
c) year, make, model name, serial number,
colour, and in some cases the distance travelled of the car.
17. In the Vendor's Acceptance Box on the
USA EXPORT form:
a) Mr. Leon signed and dated as a
representative of Acura
West; and,
b) Acura West's dealer and sales
registration number were
recorded.
18. On the GST form, Mr. Leon
stamped "Acura West, 759 Wonderland Road North" in the
Vendor's Acceptance Box.
Appendix A to the ASF reproduces as an example two invoices,
one with GST and one without. They are as follows:
[11] It is common ground that the export of
vehicles from Canada to the United States purchasers is a
zero-rated supply. The Canadian exporter has no obligation to
collect GST from the foreign purchasers. If it does in fact
collect GST from the purchasers they are entitled to apply for a
refund. For reasons that I shall develop more fully below, it is
in my view equally clear that a Canadian vendor who makes a
zero-rated supply to a foreign purchaser but who
nonetheless collects GST from that purchaser has an obligation to
remit the amount of GST collected to the Government of
Canada.
[12] The narrow issue is whether the
contract of sale is represented by the USA Export form, as
alleged by the appellant, or the GST form, as alleged by the
Minister. The controversy will be apparent from the difference in
the statements made by AW and the American purchasers, as set out
in paragraphs 19 to 23 of the ASF.
19. Mr. Leon advised CCRA that he prepared
the GST form at the request of the American purchasers to
facilitate importation of the vehicles and avoid delays at the
Canada-USA border, and that the vehicles could be impounded by US
Customs for up to 90 days without proper documentation
evidencing the amount of GST otherwise payable. In fact, the GST
form was not needed for customs clearance purposes. (See
paragraphs 25 to 30)
20. Mr. Leon faxed a copy of the GST
form to the American purchasers. Mr. Leon advised CCRA that
he forwarded the yellow copies of the USA EXPORT form and the
white copy of the GST form to World Imports and Auto Enterprises
together with the proof of ownership, warranty, instruction
manuals and keys in the cars when they were shipped. The white
top copy and pink copy of the USA EXPORT form were placed with
Acura West's business records. The yellow and pink copies of the
GST form were kept in Mr. Leon's office.
21. The American purchasers advised CCRA
that:
a) they were not aware of and did not
receive the yellow copies of the USA EXPORT form from Acura
West;
b) the only form they received was the GST
form; and,
c) they never requested from Greg Leon
or Acura West any form for customs clearance purposes as
described above.
22. The USA EXPORT forms became part of the
sales files in Acura West's business records. Acura West's sales
records indicated that no GST was collected on the sales to the
American purchasers. Using the sales records, an employee of
Acura West prepared and filed GST returns for the relevant
periods. Acura West did not report nor remit any amounts as or on
account of GST in respect of the sales to the American
purchasers.
23. Acura West calculated its revenues for
income tax reporting purposes based on the sale price recorded in
the USA EXPORT form.
[13] WI and AE paid for the vehicles
by bank draft and wire transfer respectively. AW did not release
the vehicles to the purchasers until it received payment. The
purchasers paid the cost of transporting the vehicles to the
United States. Most vehicles sold to WI were delivered to a
lot in Ontario by AW for pick up by a common carrier. Some were
picked up at the business premises of AW. AE hired Pinder
Transport, a common carrier, to haul the vehicles to the United
States.
[14] AW's position is that the GST
form was prepared at the request of the purchasers to facilitate
moving the vehicles across the border to the United States
but that it did not represent the contract of sale between the
parties. Rather, the position of AW is that the true contract of
sale was evidenced by the USA Export form.
[15] As stated above in
paragraph 21 of the ASF, the American purchasers said that
they never received the USA Export form and that the only form
they received was the GST form (which Mr. Leon called a
"border pass").
[16] Paragraphs 25 to 34 of the ASF
read as follows:
25. Cars are not a controlled commodity when
exported from Canada and no documentation is required and no
checks are made by Canada Customs when cars are exported from
Canada.
26. Pinder Transport did not use or require
any forms prepared by Acura West documenting the transactions
with the American purchasers at any time during the shipment of
the cars. Acura West released the vehicles to Pinder Transport at
Acura West's dealership in London, Ontario for delivery to the
purchaser, Auto Enterprises, at its business in Clawson,
Michigan. At the time the vehicles were picked up, Pinder
Transport provided Acura West with copies of transportation
invoices listing each car by its vehicle identification number
and showing the destination of the shipment as Auto Enterprises
in Clawson, Michigan. The drivers for Pinder Transport completed
an inward freight manifest, but otherwise received all the
necessary US Customs documentation to facilitate importation of
the cars into the United States from Auto Enterprises'
customs broker.
27. All of the cars were exported to the
United States without modification or alteration, forthwith
following pick-up by or release to the individual drivers, the
attendant at the Toronto Auto Auction or Pinder Transport. Acura
West had no involvement with the cars after they were picked up
or released.
28. Auto Enterprises used a customs broker
to facilitate importation of the cars into the
United States. The bookkeeper of Auto Enterprises used the
information in the "Net Difference" box of the faxed copies of
the GST forms to prepare pro forma invoices and DOT bonds, which
were then forwarded to the customs broker when the cars were
being shipped. The customs broker used this information to
prepare the necessary US Customs declarations.
29. The US Customs declaration requires a
statement of the value of the goods being imported before tax
together with a pro forma invoice verifying the declared
value. US Customs is not interested in whether or not GST has
been charged or collected in a sale by a Canadian vendor to a US
purchaser.
30. Other federal and state documentation
concerning the importation of cars into the US was also prepared
and submitted to US Customs by or on behalf of the American
purchasers.
GST Rebate Applications
31. World Imports and Auto Enterprises on a
monthly basis prepared and submitted General Applications for
Rebates of Goods and Services Tax. The Applications included the
cars purchased from Acura West between January 1995 and
December 1996 and attached the white copy of the GST forms
received from Acura West. CCRA issued rebates to the American
purchasers for these amounts.
32. World Imports and Auto Enterprises also
purchased cars from other Canadian automobile dealers and
received invoices from them recording GST. They submitted rebate
applications for the GST recorded on these invoices. The
preference of World Imports and Auto Enterprises was to purchase
cars from Canadian automobile dealers on a GST-free basis.
33. The American purchasers did not request
nor receive from Acura West any refund or credit in respect of
any of the amounts recorded in the box labeled GST on
subtotal.
34. In support of its December 1996
rebate claim, Auto Enterprises provided to CCRA a purchase
invoice from another Canadian vendor (Nordren) with respect to
four cars which Acura West's records indicate that it sold to
Auto Enterprises. Acura West deposited a cheque from All Star
Auto in respect of the sale of these four cars.
[17] Attached to the ASF is a profit
calculation for AW and AE.
[18] The profit calculations are based
upon two conflicting hypotheses. The first is that the price on
the invoice is without GST, the second is that it is with GST or,
to put it differently, the first is that the USA Export form
governs, and the second is that the GST form governs.
[19] If we use the example in the form
reproduced above, if the USA Export form governs, the price
(including the administration fee of $65.00) is $40,927.50. This
amount would enter into AW's income and form part of the
calculation of its profit. It would also form part of the
purchaser's cost. If the GST form governs, only $38,250.00 would
enter into AW's income and would form part of the purchaser's
cost.
[20] It is self-evident that the
higher price on the USA Export form would increase AW's profit
and reduce AE's profit, whereas the lower price on the GST form
would reduce AW's profit and increase AE's profit. The
differences are fairly dramatic as is obvious from an examination
of Appendix B to the ASF. Exhibits A-4 and A-5
contain essentially the same information but with additional
information. Although the parties agree substantially on the
profit calculations they differ on two points:
(a) AW's profit is calculated using a $150 "lot
park" fee which is a flat amount charged against every vehicle to
cover incidental costs (such for example as repairing a dent or
scratch to the vehicle). CCRA does not admit that this is a cost.
I do not propose to decide this minor issue in this case in the
absence of further evidence and argument. Presumably if the $150
flat fee were disallowed the actual incidental costs would be
deductible and the overall impact on AW's bottom line might be
minimal.
(b) CCRA takes the position that AE's expenses should
be increased by expenses for transportation, speedometer
replacement (from kilometres to miles), brokerage and custom
fees, file fees and warranty insurance. CCRA may have a point,
but I am not in a position to decide the issue in the absence of
further evidence.
[21] These differences do not alter the
broad picture that the calculations are intended to convey. In
general, if the USA Export form is used AW's profit per vehicle
run from about CDN$1,500.00 to $3,000.00 or $4,000.00 and AE's
profits run from a few hundred to upwards of US$1,500.00 with
losses on 39 vehicles. AW's average profit for 1995 and 1996
using the USA Export form is CDN$2,882.00 and AE's average profit
is US$310.00.
[22] If the GST form is used, AW's average
profit for 1995 and 1996 is CDN$684.00 and AE's is US$1,918.00.
The average percentage profit for 1995 and 1996 if the USA Export
form is used is 8.92% for AW and .89% for AE. If the GST form is
used AW's average percentage profit is 2.54% and AE's is
8.94%.
[23] What does all this prove? It proves
that if the sales price from AW to AE is 7% higher, AW's profit
is higher and AE's profit is correspondingly lower. If the price
is 7% lower but GST is charged, AW must hand the GST over to the
government and AE can claim a refund of it. The effect on their
respective profits is obvious. One countervailing effect of the
higher profits earned by AW as the result of treating the USA
Export form as representing the true contract is that a higher
amount is subjected to income tax. This point is of course
irrelevant and in any event had little immediate impact on AW
since it had loss carry-forwards in 1995 and 1996.
[24] The conclusion that the appellant asks
me to draw from the comparison of the profits under the two
hypotheses is that AW would not have engaged in the enterprise of
exporting vehicles to the United States for what the appellant
sees as the relatively meagre profits produced by the
respondent's position under which about 7% of the bottom-line
amount charged is remitted to the government. I do not think that
this consideration can weigh very heavily in the determination
that must be made here. What the contract is between a vendor and
a purchaser is something that requires a consensus between both
parties. I could as readily have concluded that AE or WI would
not have engaged in an enterprise that produced the rather small
profit margin set out above that would result from the
appellant's position. Indeed if I compare AW's and AE's profits
using the two hypotheses, as set out in Appendix B to the ASF and
Exhibits A-4 and A-5, I think that the profit calculation for
both parties is more commercially realistic if we use the GST
form hypothesis than if we use the USA Export form hypothesis. I
say this for two reasons. The return to AE using the USA Export
form hypothesis (.89%) is unrealistically low. It is clear from
the evidence of Mr. Luther and Mr. Trupiano that AE was
aiming at a profit of $1,000 to $2,000 per vehicle and would not
have paid the price on the US export form.
[25] Mr. Paul Antony was called by
the respondent. He carried on the business of purchasing
automobiles and exporting them to the United States. He
testified that his profit was no less than $300 to $400 per
vehicle but on average it was $750 to $800 per vehicle. This is
in line with AW's profit using the GST form hypothesis. The
$1,500 to $3,000 profit per vehicle which Mr. Leon said he
was aiming for was, according to Mr. Antony, simply not
available. In other words, the profits to AW using the GST form
hypothesis were within the industry norm for this type of
business.
[26] I should mention briefly the evidence
of the experts. The appellant called three experts:
Mr. Michael Fenberg, Mr. James Hoare and
Mr. Dennis DesRosiers. Mr. Fenberg testified on
the profitability of the transactions for both the vendors and
the purchasers.
[27] Mr. Hoare is a chartered
accountant and a principal in a forensic accounting firm in
London, Ontario. In his testimony, he compared the gross profit
of AW and AE on the two hypotheses of sales with and without GST
based on Mr. Fenberg's analysis. In addition, he commented
on the income tax implications to AW of selling the automobiles
to purchasers in the United States with and without GST.
Mr. DesRosiers described himself as an automotive analyst.
His expertise lay more in the field of economics than accounting.
His testimony had to do with the economic position of AW in the
cross-border trade in automobiles.
[28] He expressed the view that AW was in a
strong negotiating position in relation to the American
purchasers and could command the sort of mark-up and profit
margin at which Mr. Leon said he was aiming. This conclusion
is not supported by the evidence of the American purchasers or of
Mr. Antony. Essentially, Mr. DesRosiers's evidence was
intended to support the reasonableness of the conclusions
expressed by the expert accounting witnesses which, in turn, was
intended to support Mr. Leon's assertion that the real
contract between AW and the American purchasers was without GST
because only that would achieve the profits that he expected to
achieve.
[29] I do not question the expertise or
experience of these witnesses although I think it is unrealistic
to believe that the American purchasers would agree to a deal
that would shift the profit so dramatically in favour of the
Canadian vendors. That aside, I find this type of evidence of
marginal relevance, at best. It is intended to support the
plausibility of the assertion of the appellant of commercial
goals which, in turn, was intended to bolster the position that
the GST free hypothesis was more likely. Evidence of this sort
does very little to tip the scales in either direction.
[30] Before dealing with other questions of
evidence there are a couple of matters that should be dealt with
at this point. It is clear that the appellant provided the
American purchasers with the GST form which indicated a lower
sales price but one to which GST was added to bring it up to the
same figure as that shown as the purchase price on the USA Export
form. The purchasers used the GST forms to claim a rebate from
the Government of Canada of the amounts shown as GST on the
invoices and, obviously, the Government of Canada relied upon
them in paying the rebates. It strikes me that this would have
formed a strong case for a plea of estoppel: a statement of fact
made by one person upon which another person has relied and acted
upon to his or her detriment. The traditional definitions of
estoppel by conduct are too well-known to bear repetition.
Equally well established, however, is the principle that
estoppels must be specifically pleaded. (See Odgers: On High
Court Pleading and Practice, Twenty-Third Edition, 229). No
allegation of estoppel was pleaded or mentioned in argument and
so I shall not mention the point further.
[31] The parties have agreed that the
following are the issues to be determined:
a) In determining
its net tax under section 225 of the ETA, did Acura
West fail to include amounts collected as or on account of GST in
respect of its car sales to World Imports and Auto Enterprises?
This question will be decided by determining if Acura West
charged its American purchasers an amount as or on account of GST
as part of the total sale price for the cars sold to them during
1995 and 1996. Otherwise, the parties agree that the transactions
in issue are zero-rated or not taxable.
b) If the Court determines
that the answer is in the affirmative, was Acura West obliged to
remit the amounts even if the supplies were zero-rated? The
parties agree that the amounts were not reported or remitted to
the Minister as required by sections 225 and 228 of the
ETA.
c) If the Court
answers either question in the negative, the parties agree that
the appeal should be allowed.
d) Was the imposition of
penalties and interest under section 280 ETA and
penalties under section 285 ETA justified in the
circumstances?
[32] The appellant's position on the first
point is that since it is acknowledged that the supplies in issue
were zero-rated, regardless of whether the agreements
between AW and the American purchasers did or did not include
GST, there was no "tax payable" to be included in AW's net tax
under section 225 of the ETA. Therefore, the Minister
had no power to assess under section 296. Counsel for the
appellant made the same argument at the opening of trial. I
declined to deal with the matter at so early a stage but informed
counsel that he was free to argue the point when the evidence was
in.
[33] Subsection 225(1), in English and
French reads:
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225.(1) Net tax - Subject to this Subdivision,
the net tax for a particular reporting period of a person
is the positive or negative amount determined by the
formula
A - B
where
A is the total of
(a) all amounts that became collectible and all other
amounts collected by the person in the particular reporting
period as or on account of tax under Division II, and
(b) all amounts that are required under this Part to be
added in determining the net tax of the person for the
particular reporting period; and
B is the total of
(a) all amounts each of which is an input tax credit for
the particular reporting period or a preceding reporting
period of the person claimed by the person in the return
under this Division filed by the person for the particular
reporting period, and
(b) all amounts each of which is an amount that may be
deducted by the person under this Part in determining the
net tax of the person for the particular reporting period
and that is claimed by the person in the return under this
Division filed by the person for the particular reporting
period.
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225.(1) Taxe nette - Sous réserve des
autres dispositions de la présente sous-section, la
taxe nette pour une période de déclaration
donnée d'une personne correspond au montant,
positif ou négatif, obtenu par la formule
suivante :
A - B
où :
A représente le total des montants
suivants :
a) les montants devenus percevables et les autres montants
perçus par la personne au cours de la période
donnée au titre de la taxe prévue à la
section II;
b) les montants à ajouter aux termes de la
présente partie dans le calcul de la taxe nette de
la personne pour la période donnée;
B le total des montants suivants :
a) l'ensemble des montants dont chacun
représente un crédit de taxe sur les intrants
pour la période donnée ou une période
de déclaration antérieure de la personne, que
celle-ci a demandé dans la déclaration
produite en application de la présente section pour
la période donnée;
b) l'ensemble des montants dont chacun
représente un montant que la personne peut
déduire en application de la présente partie
dans le calcul de sa taxe nette pour la période
donnée et qu'elle a indiqué dans la
déclaration produite en application de la
présente section pour cette période.
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Subsection 296(1), in English and French reads:
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296.(1) Assessments - The Minister may assess
(a) the net tax of a person under Division V for a
reporting period of the person,
(b) any tax payable
by a person under Division II, IV or IV.1,
(c) any penalty or interest payable by a person under
this Part,
(d) any amount
payable by a person under any of paragraphs 228(2.1)(b) and
(2.3)(d) and section 230.1, and
(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).
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296.(1) Cotisation - Le ministre peut
établir une cotisation, une nouvelle cotisation ou
une cotisation supplémentaire pour
déterminer :
a) la taxe nette
d'une personne, prévue à la section V,
pour une période de déclaration;
b) la taxe payable par
une personne en application des sections II, IV ou
IV.1;
c) les
pénalités et intérêts payables
par une personne en application de la présente
partie;
d) un montant payable par
une personne en application des alinéas 228(2.1)b)
ou (2.3)d) ou de l'article 230.1;
e) un montant qu'une
personne est tenue de payer ou de verser en vertu du
paragraphe 177(1.1) ou des sous-sections a ou b.1 de la
section VII.
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[34] Counsel developed the argument as
follows. Subsection 165(1) imposes an obligation on a
recipient of taxable supplies made in Canada to pay tax.
Subsection 165(3) sets the tax on zero-rated supplies
at 0%. Under subsection 221(1) a person who makes a taxable
supply is obliged to collect the tax payable by the recipient.
The definition of "tax" in subsection 123(1) is the "tax payable"
under Part IX of the ETA. Under section 296, (set out
above) the Minister may assess only the "tax payable". Amounts
other than assessed "tax payable" may be the subject of an action
by the Minister in the Federal Court.
[35] Counsel further argues that since the
obligation to pay and collect tax is limited to "tax payable" if
no tax is payable, because the supply is zero-rated, there
is no obligation to collect or remit tax.
[36] Counsel relies upon a number of cases
in this court in support of his position. In Ladas v.
Canada, [2000] T.C.J. No. 499 (T.C.C.), it was held that
there is no obligation to charge GST on zero-rated goods. I
agree. Pro-Ex Trading Co. v. Canada, [2001],
T.C.J. No. 598 (T.C.C.), holds that if there is no GST
payable there is no obligation to remit even if the parties
record payment of GST. That case did not, however, involve the
supply of anything, taxable or not taxable. It involved the
provision of security for loans.
[37] In 2955-4201 Québec
Inc. v. Canada, [2002], G.S.T.C. 39, (T.C.C.), all of the
assets of an auto dealership were sold and an election under
subsection 167(1) was filed so that no GST was payable. The
price erroneously included an amount of GST paid by the vendor.
The purchaser then claimed an ITC for that amount, or a rebate.
No GST was payable or paid to the government. The court held that
the purchaser could not look to the Minister for the amount paid
to the vendor in error.
[38] I do not think that that case or the
other cases referred to by counsel for the appellant bear
directly on the question here. Here, at least on one of the two
conflicting theories about the invoices, AW was charging GST on
the sale of automobiles to the American purchasers, who have
claimed and received rebates based on the GST forms. The Minister
has now assessed to recover the GST shown on those invoices which
he paid to the purchasers. None of the cases involved this
particular fact situation. If I conclude on the evidence that the
"real" transaction between AW and the American purchasers was
reflected in the GST form (the "border pass") it would follow
that an amount was collected "as or on account of tax" and that
amount must enter into the computation of net tax in the formula
A - B and the amount arrived at with that formula is the amount
that the Minister is entitled to assess under section 296.
[39] Counsel for the appellant contends that
since "tax" means "tax payable" and no tax is payable on
zero-rated supplies, any amount collected, whatever it may
be called by one or both parties, cannot be as or on account of
tax. With respect, I think that this interpretation is unduly
technical and leads to an unrealistic result. In the course of
argument I put to counsel a couple of hypothetical fact
situations to determine where that position might lead. Suppose a
supplier mistakenly charges a purchaser for GST on a zero-rated
supply, is the supplier entitled to keep the additional 7%? Is
the purchaser entitled to apply for and receive a rebate under
section 261 or is the purchaser left to pursue his remedies
against the vendor? If the Minister gives a rebate to the
purchaser of the tax collected, may the Minister assess the
supplier to recover the amount collected in error or must he sue
in the Federal Court as the appellant suggests? The second
hypothetical question that I put to counsel was where a supplier
mistakenly charges 9% for GST rather than 7%. Is the supplier
entitled to keep the additional 2%? Is the Minister's only means
to recover the amount an action in the Federal Court?
[39] These questions answer themselves. VAT
systems similar to Canada's GST regime are in place all over the
world. Obviously, no system is perfect but ours seems to work
reasonably well. It is inconceivable that where something as
commonplace as the collection of too much tax by a supplier
occurs there is no relatively simple remedy within the system.
The short answer is that if the supplier calls an amount that is
collected tax, the Minister is entitled to treat it as tax for
the purposes of assessing net tax. Even if there were any doubt
on this point - and I do not think there is - I would be guided
by the words of Cameron J. in Trans-Canada
Investment Corporation Ltd. v. M.N.R., [1953] Ex.C.R. 292
(aff'd 1956 S.C.R. 49) where he said at p. 299:
I agree that it is possible to interpret the
language of the section as requiring that the dividend must have
been received directly from the paying corporation. But in my
view, there is another interpretation that may be put upon it, an
interpretation which I think is more consonant with the intention
of Parliament as I deem it to be from the language itself.
In Caledonian Railway v. North British
Railway, (1881) 6 A.C. 114, Lord Selborne said at p. 122:
The more literal
construction of a statute ought not to prevail if it is opposed
to the intentions of the Legislature as apparent by the statute,
and if the words are sufficiently flexible to admit of some other
construction by which the intention can be better
effectuated.
Again, in Shannon Realties v. St. Michel,
[1924] A.C. 192, it was stated that if the words used are
ambiguous, the Court should choose an interpretation which will
be consistent with the smooth working of the system which the
statute purports to be regulating.
[40] Similarly, Cartwright J. (as he
then was) in Highway Sawmills Limited v. M.N.R., [1966]
S.C.R. 284 at 293, said:
The answer to the question what tax is payable in
any given circumstances depends, of course, upon the words of the
legislation imposing it. Where the meaning of those words is
difficult to ascertain it may be of assistance to consider which
of two constructions contended for brings about a result which
conforms to the apparent scheme of the legislation.
[41] In my view if the GST form or "border
pass" represents the true legal relationship between the parties,
the Minister has the power under section 296 to assess the
appellant for net tax taking into account the amounts shown on
that document as GST even though the transaction was not taxable.
This view is consistent with that expressed in Gastown Actors'
Studio Ltd. v. R., [2000] G.S.T.C. 108. It is also
consistent with the plain meaning of the words "as or on account
of tax under Division II" (au titre de la taxe prévue
à la section II). It is consistent as well with common
sense, with the obvious intention of Parliament and with the
smooth working of the system. The position that when a supplier
collects too much GST it can keep it and can be forced to hand it
over only if the Minister obtains judgment in the Federal Court,
when we have a perfectly workable and efficient assessment
régime within the ETA itself, appears to me, with
respect, to place an artificial and unnecessary restriction on
the system.
[42] The second preliminary point relates to
litigation in the states of Michigan and New York. It
appears that following the issuance of the assessments involved
here, AW sued AE in Michigan and WI in New York. A Michigan jury
granted judgment in the US$317,366 in favour of AW against AE.
This amount was the tax, interest and penalties assessed against
AW by the CCRA.
[43] Also, with respect to the 18 vehicles
sold by AW to WI, a similar action was brought by AW against WI
and a settlement was reached whereby WI was to pay AW US$37,500,
an amount which included the GST, penalties and interest assessed
against AW.
[44] Counsel for the appellant argues that
these judgments constitute a binding determination as between AW
and AE or AW and WI that the contract between them did not
include GST and that the Tax Court of Canada should give effect
to those determinations. The contention is that since it has been
determined in a forum that is appropriate to make binding
determinations as between the parties, the tax consequences as
determined in this court should be consistent with the judgments
in the courts of Michigan and New York.
[45] This raises an interesting question.
AW's lawsuits against AE and WI were premised on the position
that its damages were the GST, interest and penalties that it had
to pay under the assessments. If it has recovered from the
American purchasers as damages the full amount it had to pay
under the assessments, why is it pursuing its appeal in this
court? If, on the other hand, it is successful in this court and
the assessments are vacated, has the very basis of its actions
against the American purchasers not disappeared? Just what
success in this court might do to its United States
litigation is something upon which I need not speculate, nor am I
required to resolve the seemingly contradictory positions.
[46] I do not propose to treat the judgments
in Michigan and New York as determining anything that is of
assistance in this case. After the case in this court closed,
counsel for the appellant very properly advised the court that by
a court order dated May 21, 2004, United States
District Judge Patrick J. Duggan of the United States
District Court, Eastern District of Michigan, Southern Division,
granted AE's motion for a new trial. That order may be subject to
further review. Even if it were relevant, I cannot look to the
Michigan jury verdict as a final and binding determination of the
rights of the parties.
[47] The New York judgment is equally
unhelpful. It is a settlement. Litigants settle cases for a
variety of reasons, usually to avoid the expense and uncertainty
of litigation. Settlements of this sort do not represent a
determination of legal rights as between the litigants.
[48] I could write considerably more on this
point but it would serve no purpose. The effect of a foreign jury
verdict on a question that this court has to decide is a matter
best left to another day. It is sufficient to say that I do not
find the United States judgments of any assistance to me in
deciding this case.
[49] I turn then to the next question. The
parties have set it out in their ASF as follows:
a) In determining its Net Tax under section 225 of the
ETA, did Acura West fail to include amounts collected as
or on account of GST in respect of its car sales to World Imports
and Auto Enterprises? This question will be decided by
determining if Acura West charged its American purchasers an
amount as or on account of GST as part of the total sale price
for the cars sold to them during 1995 and 1996. Otherwise, the
parties agree that the transactions in issue are zero-rated
or not taxable.15
15 CCRA is not prepared to admit this with respect
to the four "Nordren" cars (VIN#s 18072-18075) or VIN #
43191 which Acura West sold to Oxford Dodge in London, Ontario.
Acura West acknowledges thru a bookkeeping error at Acura West
VIN #43191 sold to Oxford Dodge was a taxable supply.)
[50] Put slightly differently, which invoice
represents the real transaction between the parties: the GST form
or the USA Export form? The former calculates GST on a lower
amount, whereas the latter shows no GST. The total amount payable
is the same on both.
[51] We can start from one solid and
irrefutable fact: AW provided AE and WI with the GST forms.
Mr. Leon testified that he provided the GST form (the
"border pass") to the purchasers solely to facilitate crossing
the border and avoid lengthy delays. It is admitted that the GST
forms were not used and were not needed in crossing the border.
This admission is supported by the evidence of the drivers for
Pinder Transport who transported the vehicles to the
United States.
[52] There are, therefore, two hypotheses:
The first is that Mr. Leon provided the purchasers with only
the GST forms, both by fax and the original white copies by
courier. AE acknowledges this although neither Mr. Luther
nor Mr. Trupiano saw the original white copy of the GST
form. The yellow and pink copies of the GST form were kept by
Mr. Leon.
[53] The second hypothesis is that in
addition to the faxed and original white copies of the GST forms,
Mr. Leon also sent the purchasers the yellow copies of the
USA Export forms in the vehicle, along with the keys, ownership
and manual and other documents.
[54] Mr. Leon testified that he sent
the USA Export forms in the vehicles with the ownership as well
as the white copy of the GST form. This is denied by the
witnesses from AE and WI. On balance, I think the preponderance
of the evidence establishes that the ownership and the original
white copies of the GST forms were sent by courier to the
purchasers. I do not think that it has been established that the
USA Export forms were ever provided to the purchasers.
[55] On the documents in Mr. Leon's
possession were "negotiation notes" referring to AW's profit
margin of 7%. Some of them purport to be addressed to "Bill"
(presumably Bill Luther of AE). The wording of these notes seems
artificial and contrived. Samples are collected in
paragraph 30 of the appellant's written argument, as
follows:
|
Exhibit A-3
Joint Book of
Documents
|
VIN
#
|
Page
#
|
Notation
|
|
Volume IV
|
43560
|
81
|
"35663.00 + 7% profit"
|
|
|
46038
|
152
|
"our base cost as agreed plus my 7 pts
mark-up - no GST per export agreement"
|
|
|
47075
|
179
|
"send to Bill with our 7% margin as agreed profit"
|
|
|
88448
|
228
|
"Bill 22,200 to you as cost - give me my 7 pts profit
and we're ok"
|
|
|
88452
|
278
|
"Bill we need $500 over margin plus 7% to do
business"
|
|
Volume V
|
93834
|
8
|
"Bill, $1000 on top for cost base then I need our 7%
profit on top"
|
|
|
09571
|
85
|
"Bill how's 42500 cost to you plus my 7 pts profit"
|
|
|
10404
|
110
|
"Take cost base @ 2700 over plus 7 pts profit margin as
agreed"
|
|
|
30593
|
155
|
"Bill, make cost on my end 38300 to you - plus our mark
up as agreed (7%)
|
|
Volume VI
|
18074
|
82
|
"Add to our cost 37800 to you our usual 7 pts
profit unless you feel generous today?"
|
[56] If the existing deal was 7% over some
figure such as cost, margin, or "base cost", why keep repeating
the figures? I find these notes self-serving. There is nothing on
them to indicate they were faxed to AE, the usual method of
communicating a negotiation of price. No response is evident on
any documents. Mr. Luther and Mr. Trupiano deny
receiving these notes. Even where the negotiating notes appear in
a document in AW's file and the same document is in AE's file,
the notes are not on AE's copy.
[57] An appellant who takes on the task of
establishing that a document that it has itself prepared with the
intention that it be acted upon by the customs officials is false
has a very heavy burden. It was never made clear whether it was
the US or Canadian customs officers whom it was intended to
induce to believe that GST had been paid. As it happens, the
customs officials were not misled because they did not see the
documents. If the GST forms or border passes were false, the only
people misled were the officials of CCRA who paid the rebates to
the US purchasers. It is, I might say, a little dangerous to set
up two contradictory sets of documents and allege that one is
false and is to be used only to show to one group of government
officials. It can hardly come as a surprise if the persons to
whom the documents are given use them for a different purpose and
show them to a different group of government officials, the CCRA,
to obtain a rebate.
[58] I found the evidence of Mr. Luther
and Mr. Trupiano credible. They testified that they did not
receive the invoices showing no GST payable. Moreover, as stated
above, the respective profits of AW and AE appear to me to be
more realistic if the contract between the parties was that the
purchasers were paying GST (for which they could claim a rebate).
I do not think they would have entered into these transactions
with AW on the basis that the full price was that set out in the
USA Export forms which Mr. Leon gave to AW's accounting
department.
[59] On the question whether an American
purchaser would pay GST or not, I found Mr. Antony's
evidence instructive. He said:
Q. Now, when you sold cars to US
wholesalers, did you sell GST in or zero rated?
A. We did both ways.
Q. And what would cause you to pick
one as opposed to the other?
A. If somebody wanted to pay us GST,
we would reduce the price or our margin, reduce our margin on the
car because you're not financing a GST refund. By that I mean
that your GST comes back to you once every month or once every
quarter, depending upon how you file or I guess yearly. And if
you're filing monthly even and you're exporting volumes of cars,
your refund can be at times a million dollars a month. So the
more people paying you your GST, the more dollars you have to
spin to buy more cars. So, therefore, if we charge GST on the car
and we're paid GST, we would take less of a margin. If we're
financing the GST refund for ourselves, we would charge
accordingly.
JUSTICE BOWMAN: I'm going to ask you to run that by me
again because it's important enough I want to make sure I got my
notes straight on it. You're talking about exports, are you?
THE WITNESS: Yes.
JUSTICE BOWMAN: And if somebody from the
United States-
THE WITNESS: Yes.
JUSTICE BOWMAN: -- wanted to pay you GST.
THE WITNESS: Yes.
JUSTICE BOWMAN: You would charge them GST.
THE WITNESS: Mm-hmm.
JUSTICE BOWMAN: And you would then reduce your margin,
by which you mean reduce your price prior to GST, right?
THE WITNESS: Reduce the price, yes, reduce our
profit.
JUSTICE BOWMAN: Now, if, on the other hand, they didn't
want to pay GST, then the price would be a little higher, would
it?
THE WITNESS: Yes.
[60] I have concluded that the invoices
showing that GST was charged are prima facie evidence that
the contract between the parties was that GST would be charged
and that prima facie case has not been rebutted.
[61] Had there been some evidence by way of
letters, faxes, or e-mails that the parties had agreed that the
GST form (or "border pass") was to be used for the limited
purpose of getting the vehicles across the border, I might have
conceivably have had to reconsider my conclusion. There is,
however, none. The evidence all points in the opposite
direction.
[62] Let us consider for a moment the
possibility that Mr. Leon in fact sent both the GST form and
the USA Export form to the American purchasers. This is not a
conclusion that, on the evidence, I am prepared to accept, but if
I did, I would still have to decide, on a balance of
probabilities, which document it was more likely represented the
true relationship between the parties. Certainly the GST form is
more favourable to the purchasers as is evident both from the
profit calculation and from the fact that they based their rebate
claims on it. If this case were removed entirely from the Tax
Court of Canada and I were faced solely with the task of deciding
between the conflicting positions of AW on the one hand and AE
and WI on the other, without the intervention of the Minister of
National Revenue, how would I decide? First, there is no clear
extrinsic evidence that the parties had agreed that the USA
Export form represented the real relationship between the
parties. Moreover, industry practice sheds no clear light.
Sometimes, GST is charged American purchasers on zero-rated
goods, sometimes it is not. Therefore, if it can be said that the
production of two contradictory documents results in an
ambiguity, I considered whether under the
contra proferentem rule ambiguity must be resolved
against the person who prepared the documents and put them
forward. In this case it is AW and it would follow that the real
contractual relationship between the parties is that set out in
the GST document. I have concluded, however, that the
contra proferentem rule is of no assistance. Neither
document, considered individually, is ambiguous. The uncertainty
arises only when the two documents are looked at together. I
would be reluctant to base a conclusion on an ancient Latin
maxim, contra proferentem,in these circumstances.
Latin maxims are an aid to construction when all else fails and I
think the better view is that the contra proferentem
rule applies only where the ambiguity is evident in a single
contract and not where there are two contradictory documents. I
prefer to base my conclusion on the view that, even if both forms
were sent to the purchasers, it is highly implausible that they
would have agreed that the higher price, without GST (the USA
Export form) was what they were paying.
[63] The Nordren transactions differ
somewhat from the others in that there is a question whether AW
sold four vehicles directly to AE or whether they were sold to a
domestic corporation and ultimately to AE. The position of AW is
that four Ford F-350 crew cabs were sold and it was paid
for them by AE in October 1997. The appellant's position has the
virtue of relative simplicity. Again, we have the "border passes"
with GST and the "sales invoices" (or USA Export forms) without
GST. Also, we have a manufacturer's invoice on AW's files with
the note "Hi Bill 41837 with all mark-up in - is it okay Greg."
The same document is found on AE's file without the notation.
[64] The respondent's position is more
complex and involves a series of transactions some of which are
difficult to explain or to fit into the picture. These
transactions included a payment to AW by All Star Auto of the
purchase price of the four vehicles. Four other entities are
involved - All Star Auto, Oakville Motors, Fulton Auto and
Nordren Auto Sales. No one has explained satisfactorily the
reason for the involvement or interposition of these other
domestic entities. However, whether they form part of the chain
between AW and AE or not, the result is the same. If we ignore
the intermediate entities and treat the sale as directly from AW
to AE we have a sale pursuant to a form in which GST is charged
which AW did not remit to the Receiver General. If we have a sale
by AW to the first entity in the chain without GST being charged
or remitted, in such case the Minister was entitled to assess AW
for the GST.
[65] My conclusion is, therefore, that the
Minister was entitled to assess AW for the unremitted GST shown
on the GST forms. The answers to the questions set out in
paragraphs (a) and (b) of the issues to be decided in paragraph
36 of the ASF are yes in both cases.
[66] So far as the penalties and interest
under section 280 and the penalties under section 285 are
concerned, I think they were justified. There was a deliberate
deception in using the border passes for one purpose and the USA
Export forms for the purposes of the GST returns. This production
of two contradictory forms is in my view at least gross
negligence.
[67] I have recently had to consider
penalties under section 285 (ETA) and 163(2) of the
Income Tax Act. In Orly Automobiles Inc. v. The
Queen, Docket 98-431(GST)G dated May 4, 2004,
and in Klotz v. The Queen, 2004 DTC 2236, I
quoted from the decision of this Court in Urpesz v. The
Queen, [2001] 3 C.T.C. 2256 at 2559 to 2661
As it happens, the authorities on this branch of the law are
legion. One might start with the numerous pages under
subsection 163(2) of the Act in the CCH Canadian Tax
Reporter or the DeBoo Canada Tax Service. A recent case is
Farm Business Consultants Inc. v. The Queen,
96 DTC 6085, in which the Federal Court of Appeal
upheld a decision of this court (95 DTC 200). At
pages 205-6 this court said:
I am cognizant of the fact that
subparagraph 152(4)(a)(i) has as its purpose the
opening up of returns for statute-barred years where items of
income, for a wide variety of reasons, are omitted or misstated,
whereas subsection 163(2) is a penal provision and that in
applying it if there is doubt as to the type of conduct to which
the misrepresentation is attributable the benefit of that doubt
should be given to the taxpayer. In Udell v. M.N.R., 70
DTC 6019 Cattanach, J. said at page 6025:
There is no doubt that section 56(2) is a penal
section. In construing a penal section there is the unimpeachable
authority of Lord Esher in Tuck & Sons v. Priester,
(1887) 19 Q.B.D. 629, to the effect that if the words of a penal
section are capable of an interpretation that would, and one that
would not, inflict the penalty, the latter must prevail. He said
at page 638:
We must be very careful in construing that section because it
imposes a penalty. If there is a reasonable interpretation which
will avoid the penalty in any particular case, we must adopt that
construction.
and at page 6026:
I take it to be a clear rule of construction that
in the imposition of a tax or a duty, and still more of a penalty
if there be any fair and reasonable doubt the statute is to be
construed so as to give the party sought to be charged the
benefit of the doubt.
See also Holley v.
M.N.R., 89 DTC 366 at 369; De Graaf v. The Queen, 85
DTC 5280.
A court must be extremely
cautious in sanctioning the imposition of penalties under
subsection 163(2). Conduct that warrants reopening a
statute-barred year does not automatically justify a penalty and
the routine imposition of penalties by the Minister is to be
discouraged. Conduct of the type contemplated in paragraph
152(4)(a)(i) may in some circumstances also be used as the
basis of a penalty under subsection 163(2), which involves the
penalizing of conduct that requires a higher degree of
reprehensibility. In such a case a court must, even in applying a
civil standard of proof, scrutinize the evidence with great care
and look for a higher degree of probability than would be
expected where allegations of a less serious nature are sought to
be established.3 Moreover, where a penalty is imposed
under subsection 163(2) although a civil standard of proof is
required, if a taxpayer's conduct is consistent with two
viable and reasonable hypotheses, one justifying the penalty and
one not, the benefit of the doubt must be given to the taxpayer
and the penalty must be deleted.4 I think that in this
case the required degree of probability has been established by
the respondent, and that no hypothesis that is inconsistent with
that advanced by the respondent is sustainable on the basis of
the evidence adduced.
_________________
3 Cf.
Continental Insurance Co. v. Dalton Cartage Co., [1982] 1
S.C.R. 164; 131 D.L.R. (3d) 599; 25 C.P.C. 72, per Laskin, C.J.C.
at 168-171; D.L.R. 562-564; C.P.C. 75-77; Bater v. Bater,
[1950] 2 All E.R. 458 at 459; Pallan et al. v. M.N.R., 90
DTC 1102 at 1106; W. Tatarchuk Estate v. M.N.R., [1993] 1
C.T.C. 2440 at 2443.
4 This is not
simply an extrapolation from the rule in Hodge's Case
(1838) 2 Lewin 227; 168 E.R. 1136, applicable in criminal matters
such, for example, as section 239 of the Income Tax Act
where proof beyond reasonable doubt is required. It is merely an
application of the principle that a penalty may be imposed only
where the evidence clearly warrants it. If the evidence is
consistent with both the state of mind justifying a penalty under
subsection 163(2) and the absence thereof - I hesitate to use the
words innocence or guilt in these circumstances - it would mean
that the Crown's onus had not been satisfied.
I have obtained great assistance in this matter from two
decisions of Strayer J. in Venne v. The Queen,
84 DTC 6247 and De Graaf v. The Queen,
85 DTC 5280. None of the cases I have mentioned were
referred to by counsel.
At page 6256 in the Venne decision Strayer J.
said:
With respect to the
possibility of gross negligence, I have with some difficulty come
to the conclusion that this has not been established either.
"Gross negligence" must be taken to involve greater
neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional
acting, an indifference as to whether the law is complied with or
not. I do not find that high degree of negligence in connection
with the misstatements of business income. To be sure, the
plaintiff did not exercise the care of a reasonable man and, as I
have noted earlier, should have at least reviewed his tax returns
before signing them. A reasonable man in doing so, having regard
to other information available to him, would have been led to
believe that something was amiss and would have pursued the
matter further with his bookkeeper.
[68] It is not possible to find, on the
evidence, an hypothesis that is inconsistent with the position
advanced by the respondent. Based on the principles enunciated in
the cases cited in the passage quoted above, I think the
respondent has met the relatively heavy onus of justifying the
penalty under section 285. The answer to the question in
clause (d) of paragraph 36 of the ASF is therefore
yes.
[69] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 21st day of June
2004.
Bowman, A.C.J.
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