REASONS
FOR JUDGMENT
Hogan J.
[1]
This is an appeal from an assessment by the
Minister of National Revenue (the “Minister”) under Part IX of the Excise
Tax Act (the “Act”) for the reporting periods between January 1, 2007
and December 31, 2009 (the “Relevant Period”).
[2]
In its returns for the Relevant Period, Gutbucket
Inc. (the “Appellant”) reported nil revenue and claimed input tax credits
(“ITCs”) in the following amounts:
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January 1, 2007 – December 31, 2007
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$880.32
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January 1, 2008 – December 31, 2008
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$763.71
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January 1, 2009 – December 31, 2009
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$911.84
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[3]
The Minister reassessed the Appellant, disallowing
the ITCs claimed by the Appellant. Concurrent notices of reassessment were
issued on June 25, 2010.
[4]
In disallowing the Appellant’s ITCs and
determining the Appellant’s net tax for the Relevant Period, the Minister
relied on the assumptions of fact made in paragraph 12 of the Reply to the
Notice of Appeal. In particular, in paragraph 12.e. of the Reply, the
Minister alleges that “. . . the appellant did not obtain
documentation to substantiate the ITCs claimed for the reporting periods and
did not substantiate that it carried on any commercial activity or made any
taxable supplies during the reporting periods”.
[5]
Furthermore, the Minister noted that substantially
all of the ITCs claimed by the Appellant related to hydro, Union Gas and
telephone expenses incurred with respect to real estate owned by the Appellant.
The Minister alleges that the real estate was not used in the course of a
commercial activity, hence the Appellant was not entitled to claim ITCs for GST
paid with respect to the aforementioned expenses.
[6]
In a letter dated February 2, 2012, the Canada Revenue Agency (the
“CRA”) requested that the Appellant provide further information on the
consulting business that it alleged it carried on and in respect of which the
ITCs were claimed. The CRA observed that the Appellant owned two residential
properties located respectively in Guelph and in Waterloo, Ontario. The CRA
also noted that the ITCs summarized in an Excel spreadsheet consisted mostly of
GST paid for maintenance and utility expenses attributable to the Appellant’s real
estate holdings. Joana Almeida, the CRA appeals officer charged with reviewing
the Appellant’s appeal, asked the Appellant to explain how these two properties
were used by the Appellant in the pursuit of its consulting activities.
[7]
The Appellant refused to respond to this letter.
In its Notice of Appeal, the Appellant states that the CRA was not entitled to
this information for the following reasons:
8. CRA is
not entitled to the information requested in its letter dated February 2, 2012.
If the taxpayer generates sales from commercial activity and reports these
sales as income (the taxpayer reported sales of at least $5,000.00 in 2010,
sales in excess of $50,000.00 in 2011, and will report significantly higher
sales in 2012) and if the taxpayer can establish that the ITC’s are not
in connection with exempt supplies (which the taxpayer has established), then
the ITC’s are entitled to be claimed as against the commercial activity of the
taxpayer without CRA improperly denying the ITC’s or without CRA searching for
a specious rationale for denying the ITC’s. It is an untenable position on the
part of CRA to suggest that all GST/HST collected in connection with the
taxpayer’s commercial activity must be paid to CRA but the ITC’s incurred by
the taxpayer should be disregarded.
(Emphasis added.)
[8]
According the CRA’s letter of February 2,
2012, the Appellant had not established to the CRA’s satisfaction that its real
estate was being used in the course of a commercial activity carried on by it. In
light of the Appellant’s refusal to respond to the CRA’s request, Ms. Almeida
confirmed the assessments.
[9]
Sam Sorbara testified on behalf of the
Appellant. He is the sole shareholder of the Appellant and a practising
attorney. He advised the Court that he was unfamiliar with tax litigation. For
this reason, I explained to him that the Appellant bears the burden of
establishing on a prima facie basis that the assumptions of fact made by
the Minister in the Reply to the Notice are: (i) incorrect, or (ii) were
not made by the Minister in assessing the Appellant, or (iii) do not
support the Minister’s assessment.
[10]
Mr. Sorbara testified that the Appellant owned
two properties, one being a condominium located at 413‑5 Father
David Bauer Drive in Waterloo, Ontario. The witness explained that this
property is used by the Appellant to store a rare book collection. Mr. Sorbara
offered the following explanation with respect to the Appellant’s interest in
its rare book collection.
JUSTICE HOGAN:
Okay. And 413 Father David in Waterloo --
MR. SORBARA:
Yes.
JUSTICE HOGAN:
-- what is that? A condominium?
MR. SORBARA:
Gutbucket -- yes, a condominium.
JUSTICE HOGAN:
And what goes on?
MR. SORBARA:
Gutbucket has a rare book collection, which it will eventually sell, and that
condominium is stacked from top to bottom with rare books or collectible books.
JUSTICE HOGAN:
Stuffed top to bottom?
MR. SORBARA:
Yes.
JUSTICE HOGAN:
Have you been just buying the books? Have you sold any books?
MR. SORBARA: I
have sold some on occasion, but right now, it is really the acquisition phase.
It is probably --
JUSTICE HOGAN:
So you are building up an inventory?
MR. SORBARA: Oh,
yes, big inventory. Over 2000 titles.
JUSTICE HOGAN:
And you are saying you are storing these books in that property in question?
MR. SORBARA:
Yes, I am.
JUSTICE HOGAN:
And your intent is what? To buy the books and resell them?
MR. SORBARA:
Yes, eventually. Eventually, yes.
JUSTICE HOGAN:
And when you say -- what type of rare books are you --
MR. SORBARA:
First editions. First editions of literature.
JUSTICE HOGAN:
Give me an example.
MR. SORBARA: A
signed first edition of Ayn Rand's "Atlas Shrugged."
JUSTICE HOGAN:
Okay.
MR. SORBARA: A
title I am sure you know. Everyone likes it.
JUSTICE HOGAN:
The Tea Party likes it in the United States. And these books, you are
collecting them. How long have you been collecting them for?
MR. SORBARA:
Long time, long time. I was buying and selling for a time and then just got
too busy with other things. Now, I am collecting them and then -- you tend to
do better, from a commercial perspective, if you have got a collection as
opposed to just -- I mean, ultimately, you can sell a collection or you can
donate a collection to a library for a very sizable tax break, that kind
of thing.
(Emphasis added.)
[11]
Mr. Sorbara testified that the Appellant’s
second property is located at 363 Westwood Road in Guelph, Ontario. He
claims he stores files in this property and uses it as an office for the
consulting activities that he conducts on behalf of the Appellant. It remains
unclear from Mr. Sorbara’s evidence what area of the condominium is used
for the Appellant’s consulting business.
[12]
Under the Act, ITCs may be claimed under
subsection 169(1) for GST paid with respect to goods or services acquired
for consumption use or supply in the course of a “commercial activity” carried
on by a registrant. A “commercial activity” is defined as including, inter
alia, a “business” and “an adventure . . . in the nature of
trade”.
[13]
The definition of “business’ is found in
subsection 123(1). In addition to its general meaning, business is defined
as including a “. . . profession, calling, trade . . .
or undertaking of any kind whatever”, whether the activity is undertaken for
profit or not. The second part of the expanded definition does not apply to the
matter being considered herein.
[14]
The case law instructs us that, when evaluating
an activity that may be conducted for personal reasons, the Court must apply
objective factors to determine whether the activity is, for example, a hobby,
or whether it constitutes a business.
These factors include the taxpayer’s profit and loss experience in past years,
the taxpayer’s training, the taxpayer’s intended course of action, and the
capability of the venture to show a profit.
This list is not exhaustive.
[15]
The Appellant’s evidence fell well short of the
mark with respect to those factors. Mr. Sorbara’s evidence was limited to
a statement that the Appellant may one day sell the books, or donate them so as
to obtain a large charitable donation credit. The witness did not establish that
the Appellant had a business plan or strategy. He gave no indication as to who the
Appellant’s prospective clients might be. He failed to provide the Court with an
overview of the rare book market. He stated that he had sold books in the past;
however, he did not provide the Court with any information with respect to the
circumstances surrounding the alleged sales. It was unclear from his testimony
who had sold books in the past. Was it the Appellant or Mr. Sorbara? Considering
the evidence as a whole, I believe that the books were likely collected and
kept by the Appellant for the benefit of its shareholder, Mr. Sorbara.
[16]
Before moving on from this issue, I must also
consider the expanded definition of business, which includes “. . . a
profession, calling, trade, manufacture or undertaking of any kind whatever”
(emphasis added), whether engaged in for profit or not. I am satisfied that the
Appellant was not carrying on a profession, calling, trade or manufacture. Do the
Appellant’s rare book activities amount to an “undertaking” within the meaning
of that term? I do not believe so. In J.V. Drumheller v. M.N.R., Thurlow J. defined an
“undertaking” as follows:
I turn now to the Minister's alternative plea that the sum was
profit from a business. Business is defined by the statute in wide terms. It is
not limited to trading or manufacturing but includes, as well, the carrying on
of a profession or vocation. It also includes an undertaking of any kind and an
adventure or concern in the nature of trade but not an office or employment.
The expressions used in this definition are not mutually exclusive, nor are
they all equally broad. Some overlap with others. In particular, the expression
an undertaking of any kind appears to me to be wide enough by itself to embrace
any undertaking of the kinds already mentioned in the definition; that is to
say, trades, manufactures, professions, or callings, and any other
conceivable kinds of enterprise as well.
(Emphasis added.)
[17]
In the context of the expanded definition of a
business, “undertaking” means an enterprise. An enterprise would include both a
for‑profit and not‑for‑profit undertaking. I do not believe
that the term “undertaking” was meant to encompass a hobby carried on by a
corporation for the benefit of its shareholder.
[18]
After hearing the Appellant’s evidence on the nature
of its activities, I adjourned the hearing because the Appellant did not have
copies of the bills and invoices in respect of which the ITCs were claimed. The
matter of proper documentation was in dispute.
[19]
Mr. Sorbara and the Respondent’s
representative agreed to meet to review the invoices and attempt to agree on an
allocation of expenses. Unfortunately, they were unable to come to an
understanding in this regard. When the hearing resumed, I advised
Mr. Sorbara that he should enter the disputed invoices into evidence and
explain how these expenses related to each of the properties. He declined to do
so. I surmise that he believed that the Appellant had established that both
properties were fully used in the pursuit of a commercial activity. Because the
Appellant failed to establish that this was indeed the case, the Court was unable
to determine whether any of the expenses related to the Appellant’s consulting
business. In the end, the Appellant’s appeal must be dismissed because the Appellant
failed to rebut, on a prima facie basis, the Minister’s assumption that
it did not have proper documentation to substantiate its ITC claim and that it did
not use its real estate holdings in the pursuit of a commercial activity.
[20]
For all of these reasons, the appeal is dismissed.
Signed at Ottawa,
Canada, this 22nd day of June 2015.
“Robert J. Hogan”
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