REASONS FOR JUDGMENT
Lamarre J.
[1]
These are appeals from
assessments made by the Deputy Minister of Revenue of Quebec (Minister) under
Part IX of the Excise Tax Act (ETA), in which he disallowed input tax
credits (ITCs) that each of the seven appellants claimed for reporting periods
between July 20, 2002, and March 31, 2004 (periods at issue), as the case may
be. Penalties and interest as
well as additional penalties under section 285 of the ETA were also assessed.
According to the documents appended to the Notices of
Appeal, the assessment amounts are as follows:
|
Appellants
|
ITCs claimed and disallowed
|
Interest and penalties
|
Penalties under s. 285 ETA
|
Periods at issue
|
Shareholders
|
|
9114-4766 Québec inc
|
$1,349.82
|
$135.17
|
$547.50
|
From 2002-09-10 to
2004-01-31
|
Jean Renaud
|
|
9113-4882 Québec inc
|
$1,349.82
|
$135.44
|
$547.50
|
From 2002-09-10 to
2004-01-31
|
Pauline Leroux
|
|
9114-4782 Québec inc
|
$1,342.81
|
$192.86
|
$547.50
|
From 2002-09-05 to
2003-10-31
|
Yvon Gagné
|
|
9114-9658 Québec inc
|
|
|
|
From 2002-09-10 to
2004-03-31
|
Johanne Huot
|
|
9113-4056 Québec inc
|
$1,349.82
|
$164.81
|
$547.50
|
From 2002-09-10 to
2004-01-31
|
Éliane
Vaillancourt
|
|
9114-4790 Québec inc
|
$1,200.47
|
$40.26
|
$297.50
|
From 2002-07-20 to
2003-08-31
|
Guyleine
Champoux
|
|
9114-5862 Québec inc
|
$1,343.36
|
$98.38
|
$547.50
|
From 2002-09-10 to
2004-03-31
|
Christine Hamel
|
[2]
The respondent disallowed
the ITCs on the ground that, during the periods at issue, the appellants were
not engaged in any commercial activity within the meaning of subsection 123(1)
of the ETA.
[3]
The appeals were heard on
common evidence under the informal procedure. Several
witnesses were heard and numerous exhibits were filed.
Facts
Preliminary remarks
[4]
In brief, the appellants
each acquired an [Translation] "e-commerce
solution" with the goal of operating a Web site enabling them to sell
subscriptions to a financial simulation service. The main issue is whether the appellants are entitled to
deduct ITCs relative to the Goods and Services Tax (GST), which they paid when
they bought the e-commerce solution.
[5]
Guyleine Champoux, Christine
Hamel, Éliane Vaillancourt, Johanne Huot, Pauline Leroux and Yvon Gagné
testified for the appellants. Each
of these people is a shareholder and director of his or her own corporation,
each of which is an appellant in this case. Jean Renaud
and Steve Renaud, shareholders and directors of the companies that
supplied the e-commerce solutions, as well as Michel Blouin, external
accountant for some of the appellants, also testified for the appellants.
[6]
The respondent called as
witnesses, among others, Pierre Martel, Objections Officer for the Agence du
Revenu du Québec (ARQ) working on this file; Larry Morneau, ARQ investigator assigned to the
appellants' file; and Francine Denis and Marc Corriveau, who had also
taken part in the investigation of the appellants.
[7]
Before I set out the facts disclosed
by the evidence, some preliminary remarks should be made. The main witness called by the appellants
is also the appellants' representative, namely, Jean Renaud. During the
relevant periods, he was the directing mind of the appellants. In 2010, he also became a shareholder and director of one
of the corporate appellants, 9114-4766 Québec inc., which had been originally
incorporated in 2002 by someone named Clément Corriveau, who was not called as
witness. Jean Renaud was also the shareholder and director of one of the two corporations
that had developed the e-commerce solution.
[8]
To understand the dispute,
it would be helpful to provide a brief historical background on how the
appellants acquired their e-commerce solution. It is worth describing the events that took place from 2001
to 2005.
[9]
Jean Renaud is the instigator
of the entire project that led to the incorporation of the appellants. In his testimony, he explained that he
wanted to provide an online service that enabled individuals to improve their knowledge
about personal finances. According to his testimony,
the contemplated service consisted in providing a tool that would make it
possible to make a detailed financial simulation, which would be located in the
paid part of the Web site. A free part of the
Web site had to provide the user with financial information and the possibility
of creating a budget. For Jean Renaud this was
an innovative project that he had designed because of the significant growth of
the Internet at that time. He began to talk
about the project with his brother Steve, who worked in information technology.
He said that the need to hire programmers made his
project very costly. His strategy was to
design the service and then to find a way to distribute it.
[10]
Jean Renaud's business plan was
that several independent corporations would provide the same financial
simulation service on their own Web sites. Jean Renaud testified that, for the success of the
project, the distribution of the service was just as important to him as its
design. He said that he had tried to establish a network of people geographically
spread out all over Quebec, who would be able to attract a diverse clientele.
At the outset, there were 17 companies like
those of the appellants who were asked to sell the financial simulation service
once the e-commerce solution was designed. The
other companies did not appeal the assessments.
Tax credit for the
integration of e-commerce solutions
[11]
The appellants were
incorporated at the beginning of the 2000s, when the Quebec government
introduced a tax credit for the integration of eligible e‑commerce
solutions (provincial tax credit) with the goal of refunding part of the
expenses incurred by a company as part of implementing an electronic solution
such as a transactional Web site. To be eligible for the provincial tax credit, a company had
to show that it operated a business in Quebec, among other things. It was a refundable credit, which was available only for a two-year
period.
[12]
The evidence in its entirety
shows that the funding for Jean Renaud's project had to mainly be obtained
through this provincial government assistance. All of the companies involved in the project had to receive
the provincial tax credit to make it possible to develop the e-commerce
solution and then ensure its proper maintenance. Ultimately, all the provincial tax credits claimed were disallowed,
which prevented the project from becoming reality.
Designing the e-commerce solution: Expert-conseil inc. and
Netweb inc.
[13]
The e-commerce solution
acquired by each of the appellants was designed by the corporations owned by
Jean Renaud and his brother Steve Renaud. Each appellant purchased the same e-commerce solution.
[14]
The e-commerce solution
consisted of a transactional Web site using the Internet. Each appellant's Web site had to enable
subscribers to plan their personal finances. Before
being able to access the service, the client had to obtain a user name and
password.
[15]
The design of the e-commerce
solution was comprised of two components. The first was to develop the
solution's content, that is, the financial planning function. That part was the
design of what was called the financial simulation [Translation] "software". The second component was to integrate the software into the
Web site. That part involved computer
programming work to make the service available on the Internet.
[16]
Expert-conseil inc. (Expert-conseil)
was incorporated on July 20, 2001, under the Companies Act, Part 1A
(R.S.Q., c. C-38) (Companies Act). Its president and principal shareholder was Jean Renaud.
Expert-conseil had the task of developing the content
of the financial simulation software and the Web sites.
[17]
Netweb inc. (Netweb) was
also incorporated on July 20, 2001, under the Companies Act. Its president and sole shareholder was Steve Renaud. Netweb was mandated to program the software and the Web
sites. It also had to take care of managing
and hosting the Web sites.
[18]
On August 20, 2001,
Expert-conseil and Netweb billed each other for designing a Web site. Expert-conseil claimed $100,000 (before
tax) for 1,000 hours of work done, among other things, with regard to the
content of the software and the Web sites (Exhibit I-22). Netweb also claimed
$100,000 (before tax) for 1,000 hours of work mainly for programming (Exhibit
I-24).
[19]
Expert-conseil and Netweb
each claimed the maximum amount of $40,000 that could be claimed for the
provincial tax credit for their respective fiscal years ending on August 31,
2001. The Minister disallowed
the claims on the ground that the proof of payments needed to obtain the credit
was not provided.
[20]
Expert-conseil and Netweb
concluded a similar agreement in 2002, but this time made cheque payments in
order to be able to provide the proof needed to get the provincial tax credit. On March 24, 2002, Expert-conseil billed
$85,000 (before tax) for work done on the content of the Web site
(Exhibit I‑26), and Netweb billed $105,000 (before tax) for
programming the software and a database (Exhibit I-27).
[21]
Between April and August
2002, a series of cheques exchanged between Expert-conseil and Netweb were used
to pay the amounts owed on the invoices dated March 24, 2002.
[22]
Netweb claimed the
provincial tax credit for its fiscal year ending on August 31, 2002.
Expert-conseil did not claim the provincial tax credit for its fiscal year
ending on August 31, 2002.
The appellants’ acquisition of the e-commerce solution
[23]
The appellants were
incorporated in February and March 2002 under Part 1A of the Companies
Act. During the periods
at issue, they were registered for the purposes of Part IX of the ETA.
[24]
The appellants' role was
intended to be limited to promoting a financial planning service, which would be
provided on each one's own Web site. The appellant's shareholders testified that it was
Jean Renaud who urged them each to create a corporation. They said that he offered them a [Translation] "turnkey" service, where he would be
responsible for all aspects of starting the businesses.
[25]
In fact, all that
Expert-conseil did was sell a limited-time licence to the appellants through
Jean Renaud for the operation of the financial planning software integrated
into their Web sites. Under
this licence, the appellants could sell subscriptions to their respective Web
sites so that potential clients could use them to do their financial planning
online. They would pay royalties to
Expert-conseil for the subscriptions they sold. The
licence was renewable at Expert-conseil's discretion only.
[26]
It was mentioned several
times in the testimony that the "turnkey" service provided by Jean
Renaud also included management and accounting for the appellants. The
appellants' shareholders stated that they had no knowledge of accounting or
information technology. Their
strength was being socially active and having a vast contact network to which
they could promote the financial planning service available on their Web sites.
[27]
The appellants' witnesses
stated that they knew that several companies were providing the same service
and added that they had agreed that the service should be provided to each
one's own clients.
[28]
Jean Renaud presented his
business plan to the appellants as a project that required little investment. A large part of the funding was supposed to
come from government assistance granted by means of the provincial tax credit.
Each appellant was expected to claim the provincial
tax credit on the ground of purchasing the e-commerce solution. The amount of the provincial tax credit that each appellant
wanted to receive was $26,000. However, to be
entitled to the credit, the expenses related to implementing the e-commerce
solution had to have been incurred by a company before October 1, 2002, as long
as a written contract had been concluded before April 1, 2002. By March 31, 2003 at the latest, the e‑commerce
solution also had to comply with all of the conditions allowing it to be
recognized as such (Exhibit A-11).
[29]
In March 2002, the appellants
all concluded contracts through which they acquired the e-commerce solution
from Expert-conseil (tab 5 of Exhibits I‑1, I‑3, I‑4,
I-6, I-9, I-11 and I-12). According
to the agreement, the appellants each acquired a Web site as well as an
operating licence for the financial simulation software for $65,000. The contract provided that, as consideration, Expert-conseil
acquired exclusive rights to advertise on the appellants' Web pages for
$45,000.
[30]
The amounts initially set
out in the written contracts were $80,000 for the e‑commerce solution and
$60,000 for the exclusive advertising rights. It was filed in evidence that these amounts were changed by
verbal agreements. Apparently, the amounts
were reduced because it was decided that the secure transactional module of the
Web sites would not be designed by Expert-conseil.
[31]
According to the testimony
of the appellants' representatives, the transactions with Expert-conseil were originally
supposed to be made without monetary payments. They described the situation as an exchange of services or
[Translation] "barter".
However, this practice was not accepted when Expert‑conseil
and Netweb claimed the provincial tax credit in 2001. Invoices were thus produced and payments made.
[32]
The invoices related to the
March 2002 contracts were filed in evidence (tab 6 of Exhibits I‑1,
I-3, I-4, I-6, I-9, I-11 and I-12). Invoices dated September 10 or 15,
2002, show that the appellants sold advertising rights to Expert-conseil for
$45,000 and functionality tests and comments for $3,000. Invoices dated September 15, 2002,
show that Expert-conseil sold to the appellants the [Translation] "Internet version of the application
software" (the e‑commerce solution) for $65,000.
[33]
The invoices put in evidence
were all designed based on the same template. Invoices were paid in the following chronological order:
-
Expert-conseil paid the
appellants $51,761.25 after tax, representing the $45,000 cost of exclusive
advertising rights.
-
The appellants then each
paid Expert-conseil the same amount of $51,761.25 for part of the application
software. The balance to be
paid for the software was then $23,005 for each appellant;
-
In April and July 2004,
Expert-conseil paid the appellants $3,450.75, representing the cost of $3,000
plus tax for the functionality tests and comments.
-
In April and July 2004,
Expert-conseil made loans of $18,000 or $20,000 as the case may be, to the
appellants to enable them to finish paying off the e‑commerce solution.
-
In April and July 2004, the
appellants each paid $23,005 to Expert-conseil, representing the unpaid balance
for their e-commerce solutions.
-
The witnesses' evidence disclosed
that the loans made by Expert-conseil were never repaid by the appellants.
[34]
Because it was initially
planned that the appellants and Expert-conseil would proceed through an
exchange of services, not through monetary payments, the appellants did not
have tax numbers when invoices were established in September 2002. The
majority of the appellants were registered for GST/HST purposes retroactive to
September 2002 (tab 2, Exhibits I-3, I-4, I-6, I-9, I-11 and I‑12). Only appellant 9114-4790 Québec Inc. was
registered before September 2002 (tab 2, Exhibit I‑1). In
addition, the appellants' bank accounts were not immediately opened.
[35]
On September 15, 2003,
Expert-conseil presented to some of the appellants an invoice for $1,000 in
fees (before tax) for accounting work. On September 15, 2003, Netweb also presented to the
appellants an invoice of $1,000 (before tax) for hosting fees. These invoices were never paid by the appellants concerned.
Some of the appellants claimed ITCs relative to these
services.
[36]
The testimony revealed that
Jean Renaud asked an accounting firm to prepare some of the appellants’ first
income tax and GST returns, first financial statements and initial provincial
tax credit application. The
accounting firm also prepared the objections when the provincial tax credit was
disallowed to those appellants. Because of the
"turnkey" service provided by Expert-conseil, Jean Renaud then
filled out these documents for the other appellants based on the work done by
the accounting firm. Jean Renaud said that a
great deal of effort was put forward in objecting to the Minister's refusal to
allow the appellants’ claim of the provincial tax credit.
[37]
It is also apparent from the
testimony that Jean Renaud prepared the invoices presented by the appellants,
because of the start-up service that he provided to them. He also explained that the appellants'
mailing address was that of Expert‑conseil because of the "turnkey"
service. He said that it was a question of
functionality. The testimony of the
investigator, Larry Morneau, indeed shows that tax refund cheques payable to
the appellants were sent to the address of Expert‑conseil and Netweb.
Cheques were sometimes deposited in the appellants'
bank account by Jean Renaud or given directly to the appellants.
[38]
In the financial statements,
the appellants' products are advertising and functionality tests and comments
sold to Expert-conseil and amounts claimed as the provincial tax credit, while
their expenses are mainly management fees paid to Expert-conseil, hosting fees
paid to Netweb and [Translation] "incorporation"
fees. During the periods at
issue, the appellants had no income from the operation of their Web sites. The loan
amounts from Expert‑conseil appear in the appellants' financial
statements under [Translation] "accounts
payable".
[39]
A paper copy of the software
and of one company’s Web site was filed (Exhibit A-2). In light of the testimony, it is unclear whether the design
of the e‑commerce solution was entirely completed at any time during the
periods at issue. The appellants’ witnesses claim that the e-commerce solution
became operational in 2003. Furthermore, it is
clear from the testimony that the appellants' Web sites were practically
identical.
[40]
In reality, the appellants
never began to promote their financial planning service because their Web sites
were never live. In
explaining why the project never got off the ground, the witnesses stated that
they were waiting for funding. Guyleine Champoux
and Christine Hamel also said that they were waiting for Jean Renaud's
consent to launch their activities. The
appellants' witnesses said that the provincial tax credit was essential to
ensuring the technical maintenance of the service and to resolving potential IT
problems. The appellants' witnesses also cited the risk to their reputation should
there be defects in the service provided. According to them, it was wise to
delay the project launch in order to have adequate financial resources to face
potential problems. The provincial tax credit
had to be used to pay the appellants' suppliers, namely, Expert-conseil and
Netweb, who could maintain the service.
[41]
In addition, it is evident
from the testimony that the appellants' shareholders and directors personally
invested little to no money in their corporations. In cross‑examination, Ms. Champoux stated in
this regard that she had paid $50 or $100 for her business. It is worth noting that none of the appellants'
representatives seemed interested in investing more in the project. For example, Mr. Gagné stated, in cross‑examination,
that he did not want to invest any money because he wanted to invest in
projects that would generate money more quickly and would involve less risk
(Transcript of 15-10-2014, at pages 142-143).
[42]
The witnesses for the
appellants maintained that they had had several meetings during which Jean
Renaud explained the financial simulation service to them, informed them about
the development of the software and presented various documents to them
relative to the corporations that had to be signed. They have also said that business cards with their Web
addresses were created to promote their financial simulation service in the
future (Exhibit A-5). Even though no income was earned from operating the Web
sites and even though none of them really invested any money in the project, the
appellants’ shareholders and directors told the Court that their intention was
to earn income and to give added value to their businesses.
[43]
Pierre Martel, an ARQ
objections officer, began receiving files related to the appellants in the fall
of 2003. He stated that, at
the outset, it was Notices of Objection concerning eligibility for the
provincial tax credit. He said that the
Minister claimed that there was no operation of a business, which was necessary
to be entitled to that tax measure. He said
that he was unable to make an informed decision because of a lack of
information and decided to request a supplementary audit.
[44]
In 2004, the special
investigations division told Pierre Martel that it was taking the files for
investigation purposes. He
said that he had suspended the objection files, but added that, during the
investigation, other assessments and other Notices of Objection were made.
[45]
Larry Morneau, the ARQ
auditor assigned to the appellants' file, explained that the investigation
mostly focused on the existence of a scheme devised to illegally obtain the
provincial tax credit. He
maintained that the ITC claims were incidental to the main investigation.
[46]
On January 26 and 27, 2005,
search warrants were executed as part of the investigation. The search warrants were executed at the
homes of the appellants' representatives as well as at Expert-conseil’s and
Netweb's establishments. They made it possible to obtain the accounting records
of Expert-Conseil, purchase and sale invoices and the server containing each
appellant's Web site. After the seizures, it was impossible for the appellants
to access the Web sites. The shareholders and
directors of the appellants all made statements during the searches.
[47]
In her testimony, Guyleine
Champoux alleged, inter alia, being threatened and intimidated by the
respondent's representatives when her home was searched. She stated that the statement made at the
time of the search was made out of fear. Her
spouse, Yvon Gagné, corroborated that version of events. Between June and August 2005, the shareholders and
directors of the appellants wrote a letter to the Minister explaining the purpose
of each of their companies.
[48]
Counsel for the respondent
also discussed the issue of the searches and seizures that took place on
January 26 and 27, 2005. Francine Denis
and Marc Corriveau, officers responsible for the searches, stated in their
testimony that no intimidation had taken place.
[49]
Larry Morneau testified that
his investigation resulted in criminal charges being laid against Jean Renaud
for participating in the offence of making false statements in the appellants'
income tax returns. On May 8,
2013, Jean Renaud pleaded guilty to the following amended charge:
[Translation]
Prescribed, acquiesced in or participated in the performance by the
corporation Expert‑Conseil inc. and performed or failed to perform something with a
view to aiding the corporations:
Netweb inc., [all of the corporate appellants as well as other corporations are
listed] . . . , to commit the following offence: . . . , between November 13,
2001, and September 6, 2004, made false or misleading statements or
participated in, assented to or acquiesced in making them on corporate income
tax return forms CO-17 filed for all these corporations with the Ministère du Revenu du Québec under the Taxation
Act, (R.S.Q c. I-3), thus committing an offence set out in paragraph 62(a)
of the Act respecting the Ministère du Revenu, (R.S.Q. c. M-31); . . .
[Respondent's motion record, October 25, 2013, Exhibit B, page 17, Exhibit
I-18, pages 26 and 27.]
[50]
Jean Renaud gave his version
of the facts. He explained
that he had entered a guilty plea thinking that there was no element of intent
in the offence to which he was pleading guilty. He
also wanted to avoid a long and exhausting trial. In cross‑examination, Jean Renaud acknowledged that
he had pleaded guilty to the offence.
[51]
In his testimony, Larry
Morneau commented on a worksheet (Exhibit I‑34) that he had prepared
for the purposes of the investigation. The worksheet provided a [Translation]
"summary table" of the scheme. Mr. Morneau
concluded that all of the bank transactions constituted a financial arrangement
making it possible to obtain the proof of payments needed to support the tax
credit claims. Mr. Morneau indicated that
all the money did was go in and out of the appellants' bank accounts, and that
they made no external cash contributions. He
stated that the purpose of the scheme was that the money end up in the bank
account of Expert-conseil.
[52]
Mr. Morneau concluded that
Jean Renaud wanted to mislead the Minister in providing false documents, which
led him to believe that the appellants had commercial activities allowing them
to claim, among other things, the ITCs that are at issue here.
Appellants'
arguments
[53]
The appellants maintain that
they were engaged in a commercial activity entitling them to ITCs during the
periods at issue. They stated
that they had begun operating a business when preliminary steps were taken.
According to them, the acquisition of the e-commerce
solution and the sale of advertising rights were preliminaries essential to
their normal operations.
[54]
The Notices of Appeal refer
to Interpretation Bulletin IT-364 of the Canada Revenue Agency in order to
allege that "a business commences whenever some significant activity is
undertaken that is a regular part of the income‑earning process in that
type of business or is an essential preliminary to normal operations".
[55]
Jean Renaud maintained that
obtaining the provincial tax credit was never the appellants’ purpose indicating that it was simply a form of
funding.
Respondent’s
arguments
[56]
The respondent submits that the
appellants were not engaged in any commercial activity and that they are not
entitled to the ITCs claimed.
[57]
According to the respondent,
the situation is analogous to that in Orly Automobiles Inc. v. The Queen,
2004 TCC 86, [2004] G.S.T.C. 57 (affirmed by the Federal Court of Appeal
(F.C.A.), 2005 FCA 425, [2005] G.S.T.C. 200), where a sham was put in place in
order to receive ITCs. The respondent alleges that the appellants were involved
in a scheme by which they gave the illusion that they had commercial activity,
with the sole purpose of unduly receiving tax credits, including the ITCs that
are the subject of these appeals.
[58]
The respondent alleges that
no evidence was filed with respect to the intention of appellant 9114-4766
Québec inc. to operate a business during the periods at issue. That is the corporation
acquired by Jean Renaud in 2010, whose shareholder at the time was not called
as witness. Counsel for the
respondent also asked the Court to draw a negative inference from the absence
of the original shareholder and director of appellant 9113-4882 Québec inc.,
who had sold her company to Pauline Leroux during the periods at issue, and
who, according to the respondent, was the only relevant witness to present the
business's original intentions.
[59]
Finally, the respondent
considers that the penalties imposed are justified because the appellants
clearly and directly participated in the scheme. According to the respondent,
the appellants allowed the money to circulate between the corporations and
ultimately to return to Jean Renaud.
Analysis
[60]
It must be determined
whether, during the periods at issue, the appellants were engaged in a
commercial activity entitling them to ITCs.
[61]
The existence of commercial
activity is necessary to be entitled to an ITC based on the formula set out in
subsection 169(1) of the ETA, which reads as follows:
169. (1) General rule for credits — Subject to this Part, where a person acquires
or imports property or a service or brings it into a participating province
and, during a reporting period of the person during which the person is a
registrant, tax in respect of the supply, importation or bringing in becomes
payable by the person or is paid by the person without having become payable,
the amount determined by the following formula is an input tax credit of the
person in respect of the property or service for the period:
A × B
where
A is the tax in respect of the supply, importation or
bringing in, as the case may be, that becomes payable by the person during the
reporting period or that is paid by the person during the period without having
become payable; and
B
is
(a) where the tax
is deemed under subsection 202(4) to have been paid in respect of the property
on the last day of a taxation year of the person, the extent (expressed as a
percentage of the total use of the property in the course of commercial activities
and businesses of the person during that taxation year) to which the person
used the property in the course of commercial activities of the person during
that taxation year,
(b) where the
property or service is acquired, imported or brought into the province, as the
case may be, by the person for use in improving capital property of the person,
the extent (expressed as a percentage) to which the person was using the
capital property in the course of commercial activities of the person
immediately after the capital property or a portion thereof was last acquired
or imported by the person, and
(c) in any other
case, the extent (expressed as a percentage) to which the person acquired or
imported the property or service or brought it into the participating province,
as the case may be, for consumption, use or supply in the course of commercial
activities of the person.
[62]
The expression
"commercial activity" is defined as follows in subsection 123(1)
of the ETA:
123. (1) Definitions — In section 121, this Part and Schedules V to
X,
. . .
“commercial activity” of a person means
(a)
a business carried on by the person (other than a business carried on without a
reasonable expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except to the extent
to which the business involves the making of exempt supplies by the person,
(b)
an adventure or concern of the person in the nature of trade (other than an
adventure or concern engaged in without a reasonable expectation of profit by
an individual, a personal trust or a partnership, all of the members of which
are individuals), except to the extent to which the adventure or concern
involves the making of exempt supplies by the person, and
(c)
the making of a supply (other than an exempt supply) by the person of real
property of the person, including anything done by the person in the course of
or in connection with the making of the supply.
[63]
In this case, during the
periods at issue, the appellants were in the process of starting up their
business. It must therefore
be determined whether they had commercial activity during that period even
though they had not yet begun their normal operation.
[64]
Gartry v. Canada, [1994] T.C.J. No. 240 (QL), 94 DTC 1947, deals
with the issue of whether a taxpayer has begun operating a business. In that decision, Judge Bowman made the
following comments at paragraph 16 (QL):
. . . In determining when a business has commenced, it is not realistic
to fix the time either at the moment when money starts being earned from the
trading or manufacturing operation or the provision of services or, at the
other extreme, when the intention to start the business is first formed. Each
case turns on its own facts, but where a taxpayer has taken significant and
essential steps that are necessary to the carrying on of the business it is
fair to conclude that the business has started. . . .
[65]
In Kaye v. Canada,
[1998] T.C.J. No. 265 (QL), 98 DTC 1659, Judge Bowman summarized the
analysis for determining when a business had been started as follows at
paragraphs 4, 5 and 7:
4 . . . It is the inherent
commerciality of the enterprise, revealed in its organization, that makes it a
business. Subjective intention to make money, while a factor, is not determinative,
although its absence may militate against the assertion that an activity is a
business.
5 One cannot view the reasonableness
of the expectation of profit in isolation. One must ask "Would a
reasonable person, looking at a particular activity and applying ordinary
standards of commercial common sense, say 'yes, this is a business'?" In
answering this question the hypothetical reasonable person would look at such
things as capitalization, knowledge of the participant and time spent. He or she
would also consider whether the person claiming to be in business has gone
about it in an orderly, businesslike way and in the way that a business person
would normally be expected to do.
. . .
7 Ultimately, it boils down to a common sense appreciation of
all of the factors, in which each is assigned its appropriate weight in the
overall context. One must of course not discount entrepreneurial vision and
imagination, but they are hard to evaluate at the outset. Simply put, if you
want to be treated as carrying on a business, you should act like a
businessman.
[66]
After referring to the above
observations made by Judge Bowman in Gartry and Kaye, supra,
Justice Campbell of this Court stated the following in Land and Sea
Enterprises Ltd. v.
The Queen, 2011 TCC 101:
[14] It is clear that an activity may be considered a
commercial activity well in advance of the stage of profitability. It will
always be a question of fact. Expenditures giving rise to ITCs in the start-up
phase of a commercial activity may be eligible provided that there is clear
intention to commence a business and that measurably significant and
fundamental steps and actions have been put into place.
[67]
In this case, the appellants
did not satisfy me that they were engaged in a commercial activity under the
ETA.
[68]
The appellants base their
ITC claims for the periods at issue on their preliminary activities, which
consisted only in the acquisition of the e‑commerce solution and the sale
of advertising rights.
[69]
The e-commerce solution is
no doubt the asset that should have enabled the appellants to have commercial
activity. Michel Blouin, the
accountant for some of the appellants, also indicated in his testimony that the
acquisition of the e‑commerce solution was for him the essential
preliminary that made it possible to operate the businesses and to justify the
provincial tax credit claims and, for the purposes of this case, the ITC
claims.
[70]
Thus, even though the
appellants' witnesses claim that the software and the Web sites were completed,
the e-commerce solution was never implemented by the appellants' supplier,
Expert-conseil. The reason
that was given to justify the fact that none of the Web sites was launched was
the lack of funding, which prevented the appellants from being able to maintain
the service that they wanted to provide.
[71]
The appellants remained at
the preliminary stage and never began operating their businesses and generating
revenue from the sale of subscriptions to their Web sites because, among other
things, they never wanted to personally invest in the project. The financial feasibility of a project is
a fundamental step in creating a business. In
this case, the appellants incurred practically no financial risk and did not
want to incur any. The appellants were at the
stage where they needed to find the funding necessary to breathe life into
their project. To do so, they were counting
only on government assistance in the end. They
were still at the stage of organizing the businesses they were planning to
operate and were not at that point financed so that they could one day earn
income from them.
[72]
In addition, it is clear
from the testimony that the appellants were mandated to promote the financial
planning service that was supposed to be provided on their Web sites through
their own knowledge networks. The appellants' directors had no knowledge in
information technology or in financial simulation. The appellants' witnesses stated that they had concluded a
"turnkey" agreement based on which Expert‑conseil took charge
of all aspects of starting up the businesses. While waiting for their
e-commerce solution to be implemented, the appellants played a very passive
role. Developing the software was their
suppliers' activity. During the periods at
issue, the appellants' shareholders and directors committed very little time to
the project, and their involvement in it was very minimal.
[73]
In sum, they contributed
little to no money to their companies and put forth no serious or relatively
sustained effort in their companies. Other than the mention of some meetings with Jean Renaud,
there was no evidence establishing that they really put an effort into the
companies' activities. The few bank transactions,
the accounting, the purchase of the e-commerce solution and the sale of
advertising rights were done by Jean Renaud. Moreover,
the only sale made by the appellants, namely, the sale of the advertising
rights to Expert‑conseil, was done early and seems to have been
orchestrated mainly with the aim of financing the acquisition of the e-commerce
solution. In addition, the
loans granted by Expert‑conseil to pay for part of the e-commerce
solution were never repaid by the appellants.
[74]
Even though the appellants'
witnesses intended to promote the service when it was ready to be sold, I am of
the view that their activities were still at the preparatory stage and that the
measures essential to the claim that the appellants had started operating a
business and therefore engaging in a commercial activity were not seriously
implemented.
[75]
Accordingly, I conclude that
the Minister was correct in disallowing the ITCs for the periods at issue.
Penalty
under section 285 of the ETA
[76]
The second issue to dispose
of in these appeals is whether the Minister was correct in imposing penalties
under section 285 of the ETA.
[77]
It is for the respondent to
prove the facts needed in order to establish that the appellants, knowingly or
under circumstances amounting to gross negligence, made or participated in,
assented to or acquiesced in the making of a false statement in a return or
other document made in respect of a reporting period or transaction.
[78]
In 897366 Ontario Ltd. v. Canada, [2000] T.C.J. No. 117
(QL), [2000] G.S.T.C. 13, Judge Bowman indicated at paragraph 19 that penalties
under section 285 of the ETA may only be imposed “in
the clearest of cases, and after an assiduous scrutiny of the evidence”.
[79]
The penalty for false statements or omissions
set out in section 285 of the ETA is analogous to that set out in subsection 163(2)
of the Income Tax Act. In Farm Business Consultants Inc. v. Canada,
[1994] T.C.J. No. 760 (QL), 95 DTC 200 (affirmed by the F.C.A., [1996] F.C.J.
No. 82 (QL), 96 DTC 6085), Judge Bowman stated the following at paragraph 27:
. . . 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. . . .
[80]
Counsel for the respondent alleged that the
appellants participated in a scheme designed by Jean Renaud by signing the
various documents prepared by him. In addition, counsel for the respondent
relied, inter alia, on Raposo v. The Queen, 2013 TCC 265, to
highlight the consequence in civil matters of pleading guilty in a criminal
case. That decision states that a criminal conviction
is prima facie proof of the facts underlying the conviction. In that decision, Justice Paris examined the impact of a
guilty plea on a penalty for gross negligence and treated the taxpayer’s
conviction as prima facie proof of gross negligence.
[81]
In light of the evidence heard, I am,
nonetheless, not satisfied that the Minister has shown that penalties should have
been imposed.
[82]
Unlike in Raposo, supra, there was
no evidence that has sufficiently shown, in my view, that the appellants
intended to participate in making false statements and that they had exercised
a high degree of negligence amounting to gross negligence.
[83]
It is true that Jean Renaud pleaded guilty
respecting a charge related to this case. He played an important role in the
entire project. The appellants’ participation at the time when the false
statements were allegedly made, namely, before Jean Renaud’s guilty plea,
should be assessed. The appellants did not have much knowledge in accounting
and tax matters. They had a great deal of trust in Jean Renaud, who has a
university education in these fields and let him take care of preparing
invoices, financial statements, provincial tax credits and tax refund claims.
In his testimony, Jean Renaud stated that the supplier Expert‑conseil
paid the taxes collected from the appellants to the government.
[84]
It seems to me from the testimony that the
appellants did have some desire to start a business. The project appeared
possible to the appellants because of the actions taken by Jean Renaud. The
appellants believed in the project even though it was still at the formative
stage.
[85]
In this case, although the appellants had no
commercial activity, software and Web sites were being developed. The
appellants believed that they were acquiring real supplies, which would become
essential to their business.
[86]
I also acknowledge that the individuals who had
founded the corporations later acquired by Jean Renaud and his mother, Pauline
Leroux, did not testify. However, with regard to penalties, the onus is on the
respondent to make out a case for gross negligence. Considering the testimony
of the appellants’ other witnesses, the respondent did not satisfy me that the
situation was different for those two other people when they had incorporated
their companies.
[87]
For all of these reasons, the appeals are
allowed and the assessments at issue are referred back to the Minister with the
sole purpose of deleting the penalties.
Signed at Ottawa, Canada, this 2nd day
of February 2015.
“Lucie Lamarre”
Translation certified true
On this 24th day
of July 2015
Margarita Gorbounova, Translator
Email this Content