Citation:
2014 TCC 171
Date: 20140605
Docket: 2013-3119(GST)I
BETWEEN:
Academy of Applied
Pharmaceutical Sciences,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from a Goods and Services
Tax/Harmonized Sales Tax (“GST/HST”) assessment dated
January 15, 2013, under Part IX of the Excise Tax Act (the
“Act”) for the period July 1, 2010 to June 30, 2012. By
this assessment, the Canada Revenue Agency (the “CRA”) disallowed the
Appellant’s claim for Input Tax Credits (“ITCs”) in the approximate amount of
$30,000.
[2]
A Notice of Objection was filed on
January 23, 2013. The Notice of Objection was disallowed and on
July 19, 2013, the CRA confirmed the re-assessment. Hence the appeal
to this Court.
Factual Context
[3]
The Appellant, the Academy of Applied Pharmaceutical Sciences, was at all material times a GST/HST registrant. The Appellant
is a post-graduate training college for persons who are seeking a career in
pharmaceutics. The Appellant also provides continuing education programmes for
the pharmaceutical industry.
[4]
The Academy has two kinds of programmes:
1)
The Diploma Programme on pharmaceutical science
which is GST/HST exempt, and
2)
The Workshop Programme which provides continuing
education in the form of conferences on new trends in pharmaceutical sciences.
The Workshop Programme is subject to GST/HST.
[5]
Laleh Bighash is a founder and the director of
the Academy of Pharmaceutical Sciences. She provided the background of this
litigation.
[6]
In June 2008, Ms. Sherrie Yu, an auditor
with the CRA, conducted an audit of the Appellant’s net tax liability for the
GST (the precursor to the HST) for the period of January 1, 2007 to
December 31, 2007. At the end of the audit, Ms. Yu was of the
view that improvements to the record-keeping system of the Appellant were
required in order to meet the requirements of the Act. It was determined that
the Appellant did track income from the Diploma Programme (GST exempt)
separately from income from the Workshop Programme (taxable) as it should.
However, the Appellant did not track related expenses separately. According to
the audit, the Appellant claimed ITCs on all expenses incurred regardless of
whether the expenses were claimed in order to earn exempt or taxable income. In
order to correct this situation, it was necessary to identify which expenses
related to earning which type of income; taxable or exempt. Some of the expenses
were incurred to earn mixed income (eg. shared expenses such as for office
lease costs, marketing, utilities and administration, and classroom costs used
for both the Certificate Programme and the Workshop Programmes, etc.). Ms. Yu
discussed with Ms. Bighash and her bookkeeper what would be a reasonable
percentage basis to apportion mixed expenses as between taxable and exempt
earnings in order to calculate allowable ITCs. It was determined that a
reasonable percentage for the period under review, given the state of the
Appellant’s books, would be 50% of mixed expenses, or business inputs, to be
allocated to commercial activity. It is the position of Ms. Bighash that it was
Ms. Yu who had suggested the allocation of 50% of mixed expenses to
commercial activity. Ms. Yu prepared an audit report together with a
Statement of Audit Adjustment dated June 27, 2008 (Exhibit A-1). This was
addressed to the Appellant to the attention of Ms. Bighash. In this report, Ms. Yu
made the following recommendations to improve record-keeping:
a)
Segregate taxable income from exempt income;
b)
Segregate expenses related to earning taxable
income, expenses related to earning exempt income, and expenses related to
earning mixed taxable and exempt income;
c)
ITCs may be claimed to the extent that purchases
and expenses are for consumption, use or supply in providing taxable goods and
services.
[7]
At the conclusion of this audit, Ms. Yu
applied an allocation of 50% of mixed expenses to be attributed to the
provision of taxable commercial activity for the period of
January 1, 2007 to December 31, 2007. Ms. Bighash
testified that Ms. Yu advised the Appellant that on a go-forward basis,
the Appellant could use this same allocation of 50% of mixed expenses as being
related to taxable commercial activity for the purposes of claiming ITCs. The
Appellant looked upon Ms. Yu as a person in a position of authority with
the CRA who could provide authoritative direction and guidance. The Appellant
therefore applied an allocation of 50% on a go-forward basis to the mixed
expenses for the years following this audit including the years here under
review. Ms. Bighash takes the position that Ms. Yu never mentioned in
any of her discussions that the Appellant had to revisit the percentage
apportionment on a yearly basis. Ms. Bighash
explains that the operations of the Appellant did not fundamentally change
since 2007 and so she felt that the 50% allocation would be acceptable just as
it was for the 2007 period.
[8]
In November 2012, another audit was conducted by
Mr. Dunstan Egbert of the CRA dealing with the period of
January 1, 2008, to June 30, 2012. After having completed
the audit, Mr. Egbert advised that a 50% allocation was simply not
reasonable in the circumstances for the period under review. Mr. Egbert determined
that no more than 11% should have been allocated to mixed expenses for the
period of January 1, 2010 to December 31, 2010. He also
determined that no more than 14% of the mixed expenses incurred by the
Appellant in the period from January 1, 2011 to
June 30, 2012, related to the provision of taxable supplies.
Mr. Egbert recommended that the Appellant re-examine and re-evaluate the
apportionment every year.
[9]
The Appellant has no issue with the
reasonableness of the 14% apportionment to mixed expenses for the period July 1, 2010
to June 30, 2012. However, the Appellant feels that it is terribly
unfair that an official from the CRA told them that 50% was acceptable only to
have this allocation changed after a second audit. The Appellant feels that it
is being penalized for relying on the expertise of an auditor from the CRA.
[10]
In cross-examination, Ms. Bighash agrees
that the Appellant mechanically applied an allocation of 50% for the period
under review. The Appellant never did consider whether or not that percentage
actually reflected the reality of the Appellant’s business operations.
Theory of the Appellant
[11]
Essentially, the Appellant is invoking the
doctrines of estoppel and officially induced error. The Appellant takes the
position that Ms. Yu, an official of the CRA, had suggested that moving forward
the Academy could use an apportionment of 50% of mixed expenses. At no point
did Ms. Yu suggest that they should re-examine the apportionment on a
yearly basis. The Academy viewed Ms. Yu as being an expert in the field
and relied on her expertise and her suggestions. It would be unfair and
inequitable to allow the Minister of National Revenue (the “Minister”) to now
change her/his mind and renege on the position taken by one of its auditors.
[12]
The Appellant submits that the appeal should
therefore be allowed.
Theory of the Respondent
[13]
The CRA takes the position that there was no
evidence that the Appellant was instructed or authorized by a CRA official to
use an allocation factor of 50% on a go-forward basis. The Appellant was
obliged by law to establish a percentage allocation that was fair and
reasonable. The allocation of 14% of mixed expenses was reasonable in all the
circumstances and any representation made by Ms. Yu, if indeed any was in fact
made, are not binding on the Minister. The doctrines of estoppel and officially
induced error are simply not available to the Appellant.
[14]
The Respondent therefore submits that the appeal
should be dismissed.
Legislative Provisions
[15]
The relevant provisions of the Excise Tax Act,
R.S.C., 1985, c E-15 are as follows:
S.
169(1) 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.
S. 141.01 (5) Subject to section 141.02, the methods used by a person in a fiscal year to determine
(a) the extent to which properties or
services are acquired, imported or brought into a participating province by the
person for the purpose of making taxable supplies for consideration or for
other purposes, and
(b) the extent to which the consumption or
use of properties or services is for the purpose of making taxable supplies for
consideration or for other purposes,
shall be fair and reasonable and shall be used consistently by the person throughout
the year.
Analysis
[16]
Section 169(1) of the Act sets out the general
rule for determining a registrant’s eligibility to claim ITCs. Where property
or a service is acquired or imported for consumption, use or supply by a
registrant, the registrant is entitled to claim an ITC equal to the fraction of
the tax paid or payable on the acquisition or importation that represents the
extent to which the property of service is for consumption, use or supply in a
commercial activity of the registrant.
[17]
Section 141.01 of the Act requires the
registrant to apportion the use of inputs based on the extent to which the
inputs are consumed or used, or acquired, imported or brought into a particular
province for consumption or use, for the purpose of making taxable supplies for
consideration or for other purposes. This apportionment is relevant to the
determination of ITCs. Subsection 141.01(5) of the Act provides that the method
used by a person to apportion inputs must be fair and reasonable and used
consistently throughout the year.
[18]
A reading of the letter of Ms. Yu dated
June 27, 2008 and the documents appended thereto (Exhibit A-1) does
indicate that, for the period then under review, the auditor accepted that 50%
of the ITCs claimed on mixed expenses were related to commercial activity or
taxable supplies. Ms. Yu’s letter clearly indicates that expenses related
to earning taxable income should be segregated from expenses related to earning
tax exempt income and that ITCs could only be claimed to the extent that the
expenses were incurred for consumption, use or supply in providing taxable
goods and services. Although a 50% allocation was used for purposes of that
initial audit, the letter makes no mention that the Appellant was instructed or
authorized to use an allocation factor of 50% on a go-forward basis.
[19]
The Appellant argues that it relied to its
detriment on the representation made by Ms. Yu that a 50% allocation of mixed
expenses could be used on a go‑forward basis. Ms. Yu did not come to
court to testify that she in fact made this representation. However, for purposes
of my decision, I will assume that such a representation has been made. The law
is clear that any such representation made by a CRA official is not binding on
the Minister. In fact the Minister her/himself is not even bound by a position
which s/he has taken in the past.
[20]
In Wenger’s Ltd. v. M.N.R., [1992] 2
C.T.C. 2479, one of the issues was whether the Minister was bound by an earlier
decision to vacate an appeal based on the same issue back in 1974. Justice Rip,
now Chief Justice of this Court, observed at paragraph 93 of his reasons for
decision:
93 By
consenting to judgment in 1974 the Minister did not make any undertaking to
Wenger’s as to any procedure it would follow in the future. Indeed, the
Minister’s act of assessing tax is not a procedural matter; it is the very
essence of the Act. Any agreement by the Minister not to tax what the Act
requires to be taxed would be a dereliction of his duty to enforce the Act. If,
in prior years, he held a different view of the facts, he is entitled to change
his mind. As Cattanach, J. stated in Admiral Investments Ltd. v.
Minister of National Revenue, [1967] 2 Ex. C. R. 308, [1967] C.T.C.
165, 67 D.T.C. 5114, at page 174 (D.T.C. 5120):
. . . the fact that a concession may
have been made to a taxpayer in one year, does not, in the absence of any
statutory provisions to the contrary, preclude the Minister from taking a
different view of the facts in a later year when he has more complete data on
the subject matter. … An assessment is conclusive as between the parties only
in relation to the assessment for the year in which it was made.
[My emphasis.]
[21]
In Panar v. R., 2001 G.T.C. 400 (TCC),
Justice Sarchuk had the following to say about the doctrine of estoppel as it
applies to tax law:
17 Although
it is clear that the Appellant acted to her detriment as a result of the
representations made by Revenue Canada employees as to the relevant provisions
of the Act, she cannot succeed. Issue estoppel has been considered in a number
of cases and the principle which can be taken therefrom is that no
representation involving an interpretation of law by a servant or officer of
the Crown can bind it. In Minister of National Revenue v. Inland
Industries Ltd., [(1971), 72 D.T.C. 6013 (S.C.C.), at 6017] the Supreme
Court of Canada considered certain sections of the Income Tax Act respecting
the deductibility of past service contributions to a pension plan initially
accepted by the Department of National Revenue for registration but with
respect of which deductions were later refused. Pigeon J. speaking for the
Court effectively disposed of any question of an estoppel by stating:
. . .
However, it seems clear to me that the Minister cannot be bound by an approval
given when the conditions prescribed by law were not met.
This
principle was applied in Minister of National Revenue v. Stickel
[(1972), 72 D.T.C. 6178 (Fed. T.D.), at 6185] by Cattanach J. who stated:
In short,
estoppel is subject to the one general rule that it cannot override the law of
the land.
18 The
rationale for the principle expressed in these cases was succinctly summarized
by Bowman J. in Goldstein v. R. [(1995), 96 D.T.C. 1029 (T.C.C.), at
1034]:
It is
sometimes said that estoppel does not lie against the Crown. The statement is
not accurate and seems to stem from a misapplication of the term estoppel. The
principle of estoppel binds the Crown, as do other principles of law. Estoppel
in pais, as it applies to the Crown, involves representations of fact made by
officials of the Crown and relied on by the subject to his or her detriment.
The doctrine has no application where a particular interpretation of a statute
has been communicated to a subject by an official of the government, relied
upon by that subject to his or her detriment and then withdrawn or changed by the
government. In such a case a taxpayer sometimes seeks to invoke the doctrine of
estoppel. It is inappropriate to do so not because such representations give
rise to an estoppel that does not bind the Crown, but rather, because no
estoppel can arise where such representations are not in accordance with the
law. Although estoppel is now a principle of substantive law it had its origins
in the law of evidence and as such relates to representations of fact. It has
no role to play where questions of interpretation of the law are involved,
because estoppels cannot override the law.
[My emphasis.]
[22]
In Denhaan v. R., 2008 TCC 126, a husband
and wife operated a business that was a GST registrant under the Act. The
Minister assessed the husband’s income for 1997 and 1998 on the basis that he
was operating a sole proprietorship. The husband appealed but then abandoned
the appeal. The Minister later assessed the wife for GST liability of the
business in 2002 and 2003 on the basis that she was a partner in the business.
The wife appealed arguing that the Minister was estopped by principles of
equity from taking a position with respect to the wife that was at variance
with the position that the Minister took with respect to the husband. Justice
Bowie of this Court, in dismissing the appeal, stated as follows:
12 The
appellant’s argument really comes down to this; the Minister, having assessed
Mr. Denhaan for income tax on the basis that he was not in partnership with the
appellant in 1997 and 1998, is barred by equity from assessing the appellant on
an inconsistent basis under the ETA for 2002 and 2003. There are several
reasons why that argument cannot prevail. First, even if it were established
that there was no partnership in 1997 and 1998, that is not inconsistent with
the position that there was a partnership in the later years. The appellant
gave evidence to the effect that the manner in which the business of HTC was
conducted did not change between those two time periods. If that evidence is
accepted, and there is no reason not to accept it, it simply means that one
assessment or the other was wrong. It is trite that the Minister, if he makes a
mistake in assessing, is not bound to perpetuate the error in the future
[citations omitted].
. . .
14 My jurisdiction is limited to considering the correctness
of the assessment appealed from on the basis of the facts established by the
evidence before me and the provisions of the ETA. I have no jurisdiction to
grant a remedy based upon the position that the Minister may have taken in
another case in the past. That principle has been stated and restated
repeatedly by this Court, and by the Federal Court of Appeal . . . .
[23]
Thus we see that the doctrine of estoppel is
very limited in its application to tax law.
[24]
I also must consider a doctrine that is very
much related to the principle of estoppel, that of officially induced error.
This principle ties in with the argument that the Appellant was induced into a
course of conduct that was to its detriment as a result of erroneous advice
given by Ms. Yu, an official with the CRA. I am of the view that the doctrine
of officially induced error is simply not applicable to cases of appeals of tax
assessments. In the case of Brenda G. Klassen v. The Queen, 2007 FCA
339, Justice Noël of the Federal Court of Appeal definitively stated that such
is in fact the case. Justice Noël stated at paragraph 27:
[27] Finally, I see
no basis in the appellant’s contention that the assessment should be varied
based on an officially induced error. It is trite law that the relief granted
by the courts in an appeal against a reassessment under ITA must be based on
the law. If in fact the appellant was misled through negligence, some other
remedy may be available. However, no relief can be granted on this basis in the
context of a tax appeal.
[25]
In addition, the learned author David Sherman in
his work Canada GST Service – Sherman, Carswell, Toronto, arrives
at the same conclusion. The author states:
In a criminal law
context (such as a trial on charges for evasion of GST), one could likely rely
on “officially induced error of law” as a defence. See R. v. Jorgensen,
[1995] 4 S.C.R. 55 (S.C.C.). This does not apply to appeals of tax assessments,
however.
[26]
Therefore, just like the equitable doctrine of
estoppel, the doctrine of officially induced error also is not available as a
remedy in tax appeals.
[27]
The Appellant has not demonstrated a rational
basis for using a 50% allocation factor to claim ITCs for the period here under
review other than by saying that the CRA accepted it in the past. There is no
rational basis for using an allocation rate related to a prior period. The
ratio of tax exempt earnings to taxable earnings is susceptible of easy
determination so long as proper bookkeeping procedures are in place. The ratio can
vary greatly from one period to another and so the need for re-evaluation of
this ratio is self-evident.
[28]
It is clear that the Appellant provided both
exempt and taxable services and supplies in the course of its business. It is
also abundantly clear that the Appellant is not entitled to claim any ITC
pursuant to section 169(1) of the Act, for HST that became payable or paid on
services and property used to make exempt supplies as the appellant did not
acquire those supplies in the course of a commercial activity. Pursuant to section
141.01(5) of the Act, the method used by a registrant during a fiscal year to
determine the extent to which the property and services it acquired are for the
purpose of making taxable supplies must be fair and reasonable. It was not fair
and reasonable for the Appellant to use a number that a representative of CRA
used in a past audit and then apply it arbitrarily to future years without
determining if it bore any relationship to the business reality of the
registrant. An Appellant can’t just pick a number out of the air, it has to be
based on some semblance of reality based not on what they may have been told by
an official of the CRA but rather on the basis of their operations, such as for
example, revenue data related to exempt and taxable incomes.
[29]
Whatever representations may have been made by
Ms. Yu, these were representations concerning the operation of the law and
not representations of fact. Any representations purportedly made by Ms. Yu
are not binding on the Minister and the Minister can re-assess the Appellant
subject to any limitation period. This does not relieve the Appellant of its obligation
to accurately report liabilities pursuant to the Act. It does not relieve the
Appellant of its obligation to allocate mixed expenses as between exempt and
taxable supplies or commercial activities in a fair and reasonable way that has
some basis in the Appellant’s business operations.
Conclusion
[30]
In conclusion, I find that:
a) Neither
the equitable doctrines of estopped or officially induced error are available
to the Appellant in the circumstances of this case on the basis that Ms. Yu may
have suggested that an allocation ratio for mixed expenses of 50% could be used
on a go-forward basis. There is nothing in law to prevent the Minister from
re-assessing the GST/HST liability of the Appellant for the period here under
review.
b) The
Appellant has not demonstrated on a balance of probabilities that the
percentage of expenses incurred by the Appellant attributable to taxable supplies
and commercial activity of the Appellant of 11% and 14% for the period January 1, 2010
to December 31, 2010, and the period January 1 2011 to June 30, 2012,
respectively was not fair or reasonable and not reflective of the Appellant’s
business activity.
[31]
The Appellant also argues that the CRA acted in
a very heavy handed manner in that collection proceedings were begun even
before the Appellant received a Notice of Confirmation that the Appellant’s
Objection would be disallowed. If that is true, then I agree that that is
unfair. However, that is not something that I have the jurisdiction to deal
with on this appeal.
[32]
For all of the foregoing reasons, this appeal is
dismissed.
Signed at Kingston, Ontario, this 5th day of June 2014.
"Rommel G. Masse"
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