REASONS
FOR JUDGMENT
Lamarre A.C.J.
Introduction
[1]
The appellant has appealed from a decision I
rendered on January 14, 2014, to the Federal Court of Appeal. In a
judgment dated October 8, 2014 (2014 FCA 225), the Federal Court of Appeal
referred the matter back to this Court in order for it to again address the
imposition of the penalty under section 285 of the Excise Tax Act (ETA)
and with the application of subsection 298(4), which makes it possible to assess
after the time limit prescribed by the ETA.
[2]
Justice Gauthier, who wrote the Reasons on
behalf of the Federal Court of Appeal, ruled that the appellant’s appeal should
be dismissed except with regard to the penalty and the assessment for the April
2006 to February 2007 taxation period (statute-barred period). Writing
for the entire Court, Justice Gauthier made the following comments:
[10] Kosma-Kare is further
challenging the judge’s conclusions confirming the imposition of a penalty
under section 285 of the Act. It also submits that the respondent did not
meet its burden to establish that it could assess it outside the normal period
under subsection 298(4) of the Act for the April 2006 to February 2007
period.
[11] The judge described
the correct test for disposing of the two issues at paragraph 74 of her
reasons. However, according to Kosma-Kare, she erred in how she applied them.
[12] Her reasons with
respect to the penalty and the application of subsection 298(4) of the Act
are brief (paragraph 76). The judge writes that Kosma‑Kare, despite
the warning it received from the ARQ in 2005, agreed to work with people with
no concern as to whether they had work permits or a social insurance number,
thinking that the blame would be placed on the agencies with which it was
working. According to the judge, this demonstrates complete indifference
towards the Act and amounts to gross negligence. In this regard, she cites the
decision of Justice Strayer in Venne v. Canada (Minister of National
Revenue), [1984] F.C.J. No. 314 (QL), 1984 CarswellNat 210, 84 D.T.C.
6247 (Venne).
[13] First, the respondent
admitted that the Act does not deal with the duty to pay employees minimum wage
any more than it requires them to obtain work permits. Then, contrary to
Justice Strayer’s approach in Venne, the judge did not explain the
link she established between Kosma-Kare’s false statement or omission (the only
issue discussed at the hearing before us was the name and business number of
the supplier or the intermediary Kosma-Kare had to declare under the
Regulations) and the failure to comply with other legislation concerning work
permits and the minimum wage.
[14] This is a palpable and
overriding error since nothing else in the decision justifies the conclusion
that Kosma-Kare committed gross negligence directly related to a false
statement or omission within the meaning of section 285 of the Act.
[15] Similarly, in dealing
with the application of subsection 298(4) of the Act, the judge also
failed to clarify the link she established between Kosma-Kare’s wilful
blindness to the worker’s illegal status and its alleged misrepresentations. At
no time did the judge indicate on what basis Kosma-Kare was aware or should
have been aware, had it not been for its neglect, carelessness or wilful
default, that 9167 and 9199 were not service suppliers or were not acting as
intermediaries under the Regulations.
[16] In the circumstances,
the judge’s two conclusions in this respect must be set aside. The appeal will
therefore be dismissed except with regard to the penalty and the assessment for
the April 2006 to February 2007 taxation period. The matter will be
referred back to the TCC for redetermination of these two issues. Given the
mixed outcome, each party shall bear its own costs.
[3]
Moreover, the Federal Court of Appeal ruled that
the appellant had not made a prima facie case that the Minster’s
assumptions were erroneous (para. 8 of the decision).
[4]
Thus, this Court is only called upon to re‑determine
whether the facts, as shown by the evidence, support a ruling that the penalty
imposed under section 285 of the ETA was warranted and that the Minister was
entitled to make a reassessment for the period from April 1, 2006, to
February 28, 2007, under subsection 298(4) of the ETA. More specifically,
the Court is called upon to explain the link that it established between the
appellant’s false statement or omission regarding suppliers for the purposes of
the GST and its failure to comply with non‑taxation legislation dealing
with work permits and minimum wage.
Appellant’s position
[5]
The appellant submits that the respondent did
not discharge her burden of establishing the factors justifying the penalty
imposed under section 285 as well as the reassessment made under
subsection 298(4) of the ETA.
[6]
In its written submissions, the appellant argued
that it had no obligation to investigate under the ETA and that it is not a [Translation] “tax
police”. Therefore, it did not have to investigate 9167‑4523 Québec Inc.
(9167) and 9199‑9201 Québec Inc. (9199).
[7]
The appellant referred to Airport Auto Ltd.
v. The Queen, 2003 TCC 683, and a Court of Québec case, Systèmes
intérieurs GPBR Inc. c. l’Agence du revenu du Québec, 2013 QCCQ 12689
(on appeal to the Court of Appeal of Québec). Counsel for the appellant also
referred to Pépinière A. Massé Inc. v. The Queen, 2011‑3900(GST)G
(on appeal to the Federal Court of Appeal).
[8]
In addition, the appellant submits that the
interpretation and the application of tax statutes cannot depend on the
morality of a taxpayer’s conduct (see Canadian Imperial Bank of Commerce v. The
Queen, 2013 FCA 122). Thus, it argues that evaluating
a taxpayer’s morality or conduct is irrelevant for ruling on the right to recover
GST as an input tax credit (ITC) and that a discussion of the issue of
morality is also irrelevant as to the application of section 285 and
subsection 298(4) of the ETA.
Respondent’s position
[9]
The respondent submits that
the penalty imposed under section 285 of the ETA is warranted. For the respondent, our Court’s findings
of fact clearly show that the appellant was wilfully blind regarding several clues
that the names on the invoices were false.
[10]
The respondent argues that a
clear link exists between the appellant’s proven wilful blindness and its false
statements, namely, the fact that it produced invoices containing false names
(and registration numbers) of suppliers.
[11]
The respondent submits that
the conditions for applying subsection 298(4) of the ETA are met and that
the assessment for the period from April 1, 2006, to February 28,
2007, is therefore not statute-barred. According to the respondent, the degree of negligence required by
subsection 298(4) of the ETA is lower than the degree of negligence needed to
justify the imposition of the penalty provided for section 285 of the ETA.
Analysis
[12]
Under section 285 of the ETA, a penalty may be
imposed on a person for knowingly, or under circumstances amounting to gross
negligence, making or participating in, assenting to or acquiescing in the
making of a false statement or omission in a return or other document relating
to a reporting period or transaction.
[13]
Since Canada (Attorney
General) v. Villeneuve, 2004 FCA 20, the law is settled: the phrase “gross
negligence” can encompass wilful blindness. In that case,
the Federal Court of Appeal stated the following:
[6] With respect, I think the judge failed to consider the
concept of gross negligence that may result from the wrongdoer’s willful
blindness. Even a wrongful intent, which often takes the form of knowledge of
one or more of the ingredients of the alleged act, may be established through
proof of willful blindness. In such cases the wrongdoer, while he may not have
actual knowledge of the alleged ingredient, will be deemed to have that
knowledge.
[14]
Wilful blindness arises where a person who has
become aware of the need to seek information declines to seek it because he or
she would prefer not to know the truth. The law will impute knowledge to a
taxpayer who, in circumstances that dictate or strongly suggest that an
inquiry should be made with respect to his or her tax situation, refuses or
fails to commence such an inquiry without proper justification (Panini v.
The Queen, 2006 FCA 224, 2006 DTC 6450, paragraphs 42-43).
[15]
In Torres v. The Queen,
2013 TCC 380, this Court concluded, at paragraph 65, that “[k]nowledge of a
false statement can be imputed by wilful blindness”.
[16]
In Lacroix v. The Queen,
2008 FCA 241, the Federal Court of Appeal made the following comments at
paragraph 32:
. . . There may be circumstances where the
Minister would be able to show direct evidence of the taxpayer’s state of mind
at the time the tax return was filed. However, in the vast majority of cases,
the Minister will be limited to undermining the taxpayer’s credibility by either
adducing evidence or cross‑examining the taxpayer. Insofar as the Tax
Court of Canada is satisfied that the taxpayer earned unreported income and did
not provide a credible explanation for the discrepancy between his or her
reported income and his or her net worth, the Minister has discharged the
burden of proof on him within the meaning of subparagraph 152(4)(a)(i)
and subsection 162(3) [sic].
[17]
The Court is called upon to
justify the conclusion that the appellant has committed gross negligence
directly related to a false statement or omission. It must explain the link between the appellant’s false
statement or omission regarding the suppliers’ names and registration numbers that
it gave in order to claim ITCs and the failure to comply with non-taxation
legislation.
[18]
Subsection 169(4) of the ETA
requires that a registrant be able to present sufficient information to claim
ITCs. That information
includes the information prescribed by section 3 of the Input Tax
Credit Information (GST/HST) Regulations (Regulations).
[19]
It is worth recalling the
comments made by the Federal Court of Appeal in Systematix Technology
Consultants Inc. v. Canada, 2007 FCA 226, [2007] F.C.J. No. 836 (QL), where
Justice Sexton stated the following:
[4] We are of the view that the legislation is mandatory in that
it requires persons who have paid GST to suppliers to have valid GST
registration numbers from those suppliers when claiming input tax credits.
[20]
In this case, the appellant
made false statements with respect to the name and registration number of the
supplier or intermediary that it had to declare under the Regulations. The Court must determine whether that misrepresentation
was attributable to gross negligence.
[21]
As was established, all of
the evidence indicates that the appellant did not act in good faith and that it
indirectly participated in an illegal scheme (paragraph 60 of the TCC
judgment). The appellant derived benefits from the scheme in the sense that it
profited from underpaying illegal workers (paragraphs 58 and 69 of the TCC
judgment).
[22]
In my view, the appellant
committed gross negligence in the performance of its obligations under the ETA
because it was wilfully blind.
[23]
Indeed, I believe that the
appellant, in the circumstances, should have been aware of the need for some
inquiry about the suppliers it did business with in order to provide the
information needed and to meet the requirements of the ETA and the Regulations. The evidence adduced in this case shows
the following, among other things: (1) the appellant was not concerned about
the agencies’ name changes (for example, it did not inquire into the existence
of articles of incorporation for the various entities when the agencies’ names
changed, unlike the situation in Pépinière A. Massé, cited by the appellant);
(2) it did not heed the ARQ’s warning; (3) it did not think it important to
sign the contract with Mr. Chioda when he began to do business with it
again in 2008, and signed that agreement only during the ARQ’s audit, two years
after the fact; (4) we add that the appellant was not completely unaware that
9167 and 9199 had neither the capacity nor the legal attributes to act as a
placement agency or as an intermediary (paragraphs 68 and 69 of the TCC
judgment). The appellant failed to act in a way that would enable it to
correctly identify its suppliers and to provide valid registration numbers.
Indeed, the appellant did not act in all innocence.
In my view, the appellant’s conduct exceeds the
threshold of mere negligence.
[24]
In the light of the
foregoing, the appellant’s knowledge that the supplier with which it did
business did not comply with other legislation dealing with work permits and
workers’ wages was an additional serious clue that 9167 and 9199 were not real
placement agencies or the intermediaries of such agencies. Yet, the appellant chose to look the
other way. The workers’ illegal status and the
failure to comply with minimum wage legislation were just some factors among
others that supported a finding that there were irregularities relating to the
suppliers the appellant dealt with.
[25]
In acting that way, the
appellant knew or ought to have known that the information provided in the supporting
documents filed for the purposes of claiming ITCs contained false statements. In that regard, the appellant was indifferent
as to whether the ETA was complied with or not. In
my view, such conduct is sufficient to conclude that there was gross negligence
justifying the imposition of the applicable penalties. The case law is clear: knowledge of a false statement may
be inferred from wilful blindness.
[26]
Similarly, with respect to applying
subsection 298(4) of the ETA, the appellant should have known, had it not been
for its neglect, carelessness or wilful default, that 9167 and 9199 were not
service providers and were not acting as intermediaries under the ETA and the
Regulations. The failure to
comply with other legislation concerning work permits and minimum wage was
another indication that the invoice providers were possibly not real service
providers. The appellant’s conduct shows that
it did not exercise a sufficient degree of due diligence to enable it to
provide the information required by the ETA and the Regulations. The respondent
showed that the appellant made a misrepresentation that was attributable to
neglect, carelessness or wilful default.
[27]
With respect to the
appellant’s argument that it is not obliged to investigate under the ETA, I am
of the view that the situation in this case is different from the situation in
the cases to which it referred. I have concluded in my reasons that the appellant’s good faith was not
established, and I am of the view that it is impossible for me to find that the
appellant was an innocent victim of a false invoicing scheme (as was apparently
the case in Pépinière A. Massé Inc., which is currently on appeal before
the Federal Court of Appeal).
[28]
As stated above, when there
is an issue of gross negligence, the taxpayer’s conduct should be considered,
especially if it must be determined whether the taxpayer was wilfully blind. The particular circumstances of each case
should be taken into account to assess the taxpayer’s conduct. I
reiterate: wilful blindness arises where a person who has become aware of the
need for some inquiry declines to make the inquiry because he or she prefers
not to know the truth. That is precisely what happened in this case. The appellant took no reasonable measures to ensure that it
provided the information required by the ETA and the Regulations, despite the
circumstances. The appellant preferred to
remain ignorant and [Translation] “look
the other way”. No specific duty to
investigate was imposed on the appellant. However,
I consider that, in this case, it became necessary for it to find out the
identity of its suppliers when it knew that the circumstances dictated that it
inquire into the situation in order to fulfill its obligation to provide
accurate information when claiming ITCs under the ETA and the Regulations.
[29]
In regard to the appellant’s
argument on the relevance of the morality of a taxpayer’s conduct in tax
matters, I would reiterate that I did not refer to any immoral conduct by the
appellant in my reasons. I
ruled on the appellant’s conduct in order to establish that it was indifferent
with respect to complying with the ETA. I had to rule on this to establish the
ARQ’s right to assess beyond the normal reassessment period and to impose a
penalty.
[30]
In the light of the
foregoing, I am of the view that the Minister was correct in imposing a penalty
under section 285 and that he was justified in making an assessment after the expiration
of the normal reassessment period under subsection 298(4) of the ETA.
[31]
I thus confirm the decision
that I rendered in my judgment dated January 14, 2014, and the appeal is
dismissed with respect to the two issues that were submitted to me on the basis
of the Federal Court of Appeal’s decision.
Signed at Ottawa, Canada, this 15th
day of July 2015.
“Lucie Lamarre”
Translation certified true
On this 15th day
of December 2015
François Brunet, revisor
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