Citation: 2013 TCC 254
Date: 20130913
Docket: 2008-3719(GST)G
BETWEEN:
ANTHONY M. SPECIALE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Margeson J.
[1]
The Appellant was
assessed by the Minister of National Revenue (the “Minister”) by notice of
assessment number 05DP0326520 dated March 15, 2007, in the amounts of
$59,588.59 net tax, $4,350.32 net interest, and $8,657.07 penalties, in respect
of Goods and Services Tax (“GST”) return for the period of January 1, 2004 through
April 30, 2006.
[2]
The Minister disallowed
$68,990.00 of claimed input tax credits (ITCs).
[3]
The Appellant disputes
the disallowance of these ITCs in this appeal.
Evidence
[4]
Anthony M. Speciale was
educated at the University of Toronto and at Osgoode Hall Law School. He started his present practice in 1976-77 and is still practicing law. His primary
practice is civil litigation. His position was that 715866 Ontario Limited
(“715866”) was responsible for running his law practice as a “bare trustee”.
[5]
The Appellant was the
incorporator of this entity and its sole officer and director as to this day.
The company is in good standing. The shares have been owned by his wife.
[6]
715866 is a Trustee
only. It has no financial statements. The financial statements are filed by his
law practice. 715866 was not a registrant for GST purposes. It had a nil
assessment since its incorporation. The Appellant filed all GST returns and
including all ITCs to which the Appellant and 715866 were entitled for the
relevant taxation years. Starting in 2003, he tried to carry forward income
losses which were subject to GST paid at the rate of 7 percent.
[7]
Canada Revenue Agency
(“CRA”) asked him for a sampling of invoices which he used to make up his claim
for ITCs.
[8]
He then said that any
claim made for the periods prior to 2003 will be excluded.
[9]
He said that the cheque
stub found in Exhibit A-3 as receipt No. 5530 was a typical payment that he
made. Telephone bills were also paid by 715866. He admitted that the Visa
statement found in Exhibit A-3 as number 5541 was both personal and business.
Further, the amounts shown as numbers 5570 (Visa) and 5520 (Rogers) were not
claimed. He gave these documents to CRA, as a sampling of his receipts, at the
audit stage.
[10]
Exhibit R-1 was entered
by consent with the exception of Tab 4. Exhibit A-4 at Tab 20 showed that he
did own vehicles. The costs of the renewal for plates were not claimed. The
cost of the Ford Villager motor vehicle was not claimed. He referred to
the record of cheques, found in Exhibit A-4 at Tab 21, and said that any amount
listed that had a line drawn through it was not being claimed and any
categories scratched out were not claimed.
[11]
The receipts for Ikea
and Costco were for furniture for the office. Exhibit R‑1 at Tab 19
showed cheques written on his general account. The cheque ledgers are available
but were not produced due to solicitor-client privilege and it was argued that
a sampling of the invoices would be sufficient but this position was rejected
by counsel for the Respondent and he argued that general ledgers are not source
documents.
[12]
The Appellant said that
the spreadsheets and information contained in Exhibit R-2 at Tabs 7 and 8
were provided to the Respondent.
[13]
At this time, the
Appellant moved to amend his Notice of Appeal to include the due diligence
argument but it was objected to by the Respondent and this motion was
dismissed.
[14]
The Appellant stated
that all items coloured in yellow, at Tab 23, in Exhibit A-4, should be
added to the list provided by the Respondent as they represent non‑credit
card items.
[15]
Tab 26 of Exhibit A-4
showed amounts reported by the Appellant on his GST returns and on which the
Appellant claimed ITCs. These amounts were disallowed by the Minister who
indicated that the amounts claimed could not be verified even after the
Minister had asked for verification in a telephone call.
[16]
Exhibit A-4 at Tab 30
showed copies of GST returns and calculations of GST completed by the
Appellant. The Appellant said that the returns speak for themselves.
[17]
In cross-examination,
the Appellant stated that during the period November 1, 2000 to April 30,
2006, he was practicing law, primarily at the office of Anthony M. Speciale, in
civil litigation. He had no other income and no other business. His personal
income was as a sole practitioner and he reported it as such during this
period.
[18]
He prepared the GST
returns for the period in question. An untrained person helped on the
ledger. He did not raise the issue of a bare trust in the Notice of Objection.
[19]
The T2 return referred
to in Exhibit R-2 at Tab 21 for 715866 Ontario Limited refers to it as the
Trustee only and therefore the Minister should have known that it was a bare
trustee. However, it was pointed out to him that the amended return found at Tab
11 of Exhibit A-2 did not refer to a bare trustee and the same thing applied to
his T-2 general return for 1998. No mention was made of the numbered company.
[20]
It was pointed out to
him that he initially submitted Visa statements and other credit card statements
as proof of his supplies used within his law practice but they are not being
claimed now.
[21]
It was pointed out to
him that invoice number 5600, a bill from Union Gas was not claimable. Further
invoice number 5592 included no GST.
[22]
The Respondent referred
the Appellant to a large number of receipts or invoices contained in Exhibit
A-3 and pointed out that many of these items were not claimable by the
Appellant, were not identified by him, offered no proof of payment, were issued
to a different entity, contained no indication that they were business related,
related to his home, related to Visa amounts that were not being claimed, that
were personal expenses or that were no longer being claimed.
[23]
The Appellant said that
he did not know why some invoices were addressed to him and some were addressed
to 715866. Further, 715866 reported no income or expenses.
[24]
He did not include the
two entities in his income tax return as he was given tax advice not to do so.
715866 was only a Trustee.
[25]
He said that 715866
entered into the lease.
[26]
The Appellant said that
he claimed the losses in 2001. It was suggested to him that the losses had
nothing to do with the ITCs that he claimed during this process and that the
amounts calculated from the invoices do not match the amounts claimed at Tab 8
of Exhibit R-2 at page 17, the amount shown as GST ITCs at 100 percent
amounts to $2,138.39, whereas the amount claimed by the filing was $6,030.
[27]
It was suggested to the
Appellant that there was no proper evidence before the Court to support these
claims.
[28]
In Exhibit R-2 at Tab
8, page 19, we see items that should not be claimed. At page 20, there are
expenses for personal items that were claimed and should not have been and are
not now being claimed.
[29]
At page 25, the amounts
claimed for Costco and Sam’s Club contain items that were personal.
[30]
At page 26, we see
items of expenditure for automobiles that were claimed at first but not now.
[31]
It was suggested to the
Appellant that at the time of the audit that the documents given were not
complete or correct. The Appellant said that he “had to prepare something”.
[32]
In re-direct, the
Appellant said that 715866 was not set up in an attempt to avoid creditors. He
had liability as a director. He had to sign personal guarantees for the
vehicles.
[33]
The Respondent called
Todd Lichty. He has been with CRA since 2006. He is an acting team leader
in appeals. He was involved with this file, having received it from the audit
division.
[34]
He reviewed the notice
of objection referred to in Exhibit R-1 at Tab 5. The notice was dated
June 13, 2007. The ITCs were denied because of insufficient documentation.
These documents were requested.
[35]
He received a summary
of expenses and the ITCs claimed but no original source documentation was
received.
[36]
This witness completed
the amount in Exhibit R-1 at Tab 4 in order to analyze the ITCs’ listing
submitted by the Appellant and to determine what other documentation was
required. The receipt of this document into evidence was objected to by the
Appellant but it was admitted into evidence. He concluded that the listings and
the cancelled cheques provided by the Appellant were insufficient to enable the
calculation of ITCs. They required source documents.
[37]
The registrant was
Anthony M. Speciale and not 715866. The documents provided raised questions as
to whether the Appellant was the recipient of the supplies. He observed that
the amount of ITCs claimed would be greater than the amount that might be
claimed. He did not take into account credit card payments. He noted that
715866 was not a GST registrant.
[38]
He never saw any
original source documents relevant to the documents contained in Exhibit A-3.
Not all of these documents related to the Appellant and would have raised
concerns even if they had been original documents.
[39]
The document at Tab 15
of Exhibit R-3 outlined the history of the file which was several months old
and there were many delays caused by the Appellant. Many documents were
requested and promised but never came forward.
[40]
Bad debts would not
affect the amount of GST since GST is charged at the time. There are no ITCs on
bad debts.
[41]
He said that he never
indicated to the Appellant that he had made an overpayment. GST is credited at
the time it is paid. You do not incur losses to be applied in a future period.
[42]
715866 may not have
been the recipient of the supplies and therefore may not have been entitled to
the credits even if original source documents had been provided.
[43]
He could not have
allowed the ITCs without the source documents and therefore he never considered
the bare trustee trust agreement.
[44]
With respect to Exhibit
A-4 at Tab 30, this contained the original GST return of the Appellant. He did
not see it except on his computer. He never saw the calculations presented at
pages 2 and 3 of this document before today.
[45]
However, if he had seen
it there would have been serious concerns raised because the amounts referred
to are estimates. ITCs must be based on actual amounts paid and need to be
supported by original source documents.
[46]
In cross-examination,
he was referred to Exhibit A-4 at Tab 30, the GST return, and it was suggested
to him that one may claim ITCs from the past.
[47]
He said that he
reviewed the account and there were several other accounts that were under
review. He was referred to Exhibit A-2 at Tab 14. This was a notice of
assessment dated December 29, 2004, and referred to net capital losses of
$999,301 which could be used to apply to other years. He said that losses do
not matter for the purposes of this case. It comes down to whether the GST was
paid. Section 169 of the Excise Tax Act (the “Act”) requires that
original source documents be provided. There was no need to consider the
question of a bare trustee.
[48]
He said that he
reviewed the summary of GST calculations prepared by the Appellant. He reviewed
only one-quarter since no original source documents were provided.
[49]
In re-direct, he was
referred to the GST return found in Exhibit A-4 at Tab 30, and he said
that there was nothing there about bad debts.
Argument on behalf of the Appellant
[50]
In argument, the
Appellant said that the Court must weigh and consider the evidence and
determine the case on the balance of probabilities.
[51]
Mila (from the office
of the CRA) wrote to him and told him that she might read into evidence pages
64 to 73 of the discovery evidence. She said that the auditor and the
appeals officer would attend court. Mila was not called to give evidence.
Therefore, the Court should draw an unfavourable inference against the
Respondent. Mila had been examined.
[52]
The Appellant’s
evidence was cordial and consistent. He made concessions with respect to the
credit cards and personal payments.
[53]
No damage was done to
the Appellant’s case. His testimony was not refuted. The documents were not
fabricated. The Court should consider the circumstances.
[54]
The Respondent tried to
show that the numbered company was a sham, but the evidence does not support
that conclusion. There was a T-2 return filed for the year 2004. It showed no
income, and that it was acting as a Trustee. It was set up to manage the law
practice as an agent.
[55]
This company had a
leasehold interest. The lease sets out the amount of the rent payable. Monies
come from the practice. 715866 owned vehicles. The T-1 showed up in the tax
returns of the law practice. Who is responsible for the bills and who is the
beneficiary? The Appellant is the person responsible for 715866. The
relationship has been accepted by the Minister in accepting the filings of
715866.
[56]
The auditor did not
know about the relationship between the Appellant and 715866. The Appellant
never said that no documentation would be provided. The Appellant asked
for an extension of time.
[57]
Todd Lichty was never
involved in this type of situation before. Revenue Canada has agreed that the
Appellant is entitled to this type of credit.
[58]
The auditor
concentrated on credit cards and the Appellant’s personal expenses. He only
reviewed one-quarter. This is patently unfair. The Appellant has given evidence
to show what the taxpayer was doing.
[59]
The burden of proof has
been satisfied by the Appellant.
[60]
Cheques were given as a
sample and then the Minister should have gone to the next phase. He merely
ignored the documents. If he did not have enough, he should have looked at the
documents that I provided. By means of these documents, he has eliminated the
GST.
[61]
One is entitled to ask
for input tax credits on the losses. This is what he did. The Appellant has
shown that there are enough input tax credits available and he has shown that
they were enough to eliminate the Minister’s claim. If the Court does not
accept this proposition, then the result is punitive.
[62]
The question of losses
is not a theory. There was over $3,000,000, in losses. Mr. Lichty did not give
the facts enough thought. The Respondent’s best position was that the jury is
still out on the question of losses. The taxpayer should be entitled to
consideration. What more is the taxpayer to do?
[63]
He has given the
Minister photocopies of documents. It is the final person who gets the benefit
of the supply. In this case, the law practice, the Appellant.
[64]
715866 was not set up
as a Trustee for the Appellant. It is not fair to disallow these credits.
[65]
There were no facts
presented to support the presumptions contained in the Amended Reply.
[66]
The Appellant relied
upon Lau v Canada, 2007 TCC 718, [2007] GSTC 171, Davis v Canada,
2004 TCC 662, [2004] GSTC 134, Leowski v Canada, [1996] TCJ No. 829
(QL), [1996] GSTC 55, and Canada v. Merchant Law Group, 2010 FCA
206, [2010] FCJ No. 990 (QL).
[67]
He said that the cases
of Systematix Technology Consultants Inc. v Canada, 2007 FCA 226, [2007]
FCJ No. 836 (QL) and Technogold Imports Inc. v. Canada, [1998] TCJ No.
109 (QL), [1998] GSTC 31, are distinguishable.
[68]
There is enough
evidence here to allow the appeal in full or in part. If allowed in part,
the Court should use the numbers as shown in Exhibit A-4 and then allow 7% of
those numbers. This throws out all credit card amounts.
[69]
The Court could
conclude that there is no tax payable because it can draw down the amount
claimed by the taxpayer.
Argument on
behalf of the Respondent
[70]
The law in this case is
simple. Did the Appellant acquire property between November 2003 and April 30,
2006 under subsection 169(1) of the Excise Tax Act?
[71]
There are elements that
must be satisfied to allow the Appellant any relief.
1. He must be a registrant. He was.
2. The registrant must
acquire a supply or service during the period. This is not in
dispute.
3.
The property or
service must be subject to GST. This is disputed.
4.
The person claiming
must be liable to pay the tax or acquire the credit or pay the GST. This is
disputed.
[72]
The supply must be
consumed in the context of a commercial activity. Here the home office
does not qualify.
[73]
The Appellant cannot
claim roofing expenses and groceries. Those items are not subject to the Input
Tax Credit (“ITC”) rules. Section 169 is simple. It is the only
applicable section. Subsection 169(4) requires a registrant to provide
sufficient information to allow the amount of ITCs to be calculated.
[74]
Depending on the value
of the supply, there is an escalating scale. The more the credit allowable the
more detailed the information that is required. The bulk of the amounts claimed
by the Appellant do not comply with the section. The Appellant could have
gone through the exercise and provided numbers but he did not. The Minister is
not required to do that.
[75]
In Systematix,
the issue was the same as here. Was the documentation sufficient? That case
held that the legislation is mandatory and under section 3, it requires
that persons who have paid GST to suppliers to have valid GST registration
numbers from those suppliers when claiming input tax credits.
[76]
Here the Appellant must
fail. The cancelled cheques are not enough. They do not establish the GST
number of the supplier and the GST paid. The registrant must be liable to pay
the amount. There is a formula under section 169 that must be complied
with. With respect to the bad debt argument, there are many elements that have
to be established to claim the bad debt.
[77]
The amount must be
taxable or zero rated. It must be made for consideration. It must be made to a
recipient who was dealing with the taxpayer at arm’s length. You must ask if
all or part of it only was a bad debt. The amount must be written off in the
supplier’s books not as an ITC. The supplier must claim the bad debt and it
must be reported in the GST return of the supplier.
[78]
The taxpayer must show
in his return where he claimed the amount and then prove that it was not paid.
There is a four-year limitation period. Here there is no evidence of the above.
[79]
The evidence before the
Court is that the Appellant was not claiming a bad debt. He was assigning
numbers to his GST return so that he could claim a refund. The amount of
$6,030.00 referred to in Exhibit A-4 at Tab 30 has not been shown to be a real
number. It was merely an ad hoc number used by the Appellant to claim a refund.
[80]
In Exhibit R-1 at Tab
8, the Appellant has arrived at a figure that is below what he claimed.
Therefore, the number at Tab 30 of Exhibit A-4 is wrong. He merely throws
in a number for his losses. If we were to pull out all of the non‑allowable
items, we would get a lower figure than that claimed by the Appellant at Tab 8
of Exhibit R-1 which was $2,138.39 as the ITC claimed. The Appellant says
that it does not matter. Give me a zero balance. I have losses that have been
denied by the Minister. This appeal should be dismissed.
[81]
On the bare trust
issue, there is no evidence of a trust. 715866 is not the Trustee for the
Appellant. It is not enough to file a return merely saying that it is as a
Trustee only, that does not make it so.
[82]
Lau and Leowski are cases that reflect
on the bare trust argument.
[83]
The Respondent says
that a bare trust is where the Trustee holds property for another. A business
is not property.
[84]
In Leowski,
there was a declaration of trust and there was property involved. It was not a
business.
[85]
In Lau, it was
decided that where partners are dealing with third parties at non-arm’s length
they must be put on notice. Just to put the name Trustee on a return is
insufficient. The Appellant was wrong where he argued that the burden of proof
on him was on a balance of probabilities. He must demolish the Minister’s
presumptions to argue that the Court should draw an adverse inference against
the Respondent on the facts of this case is not reasonable. The Respondent was
not attempting to show that 715866 was a sham.
[86]
There was no evidence
to show that 715866 was the owner of the cars but only plates. The Appellant
has not established that 715866 was operating for his interest. The evidence of
the Trust is vague and evasive. It had no income and no cheques.
[87]
The appeal should be
dismissed and there should be an increased tariff of costs because the Appellant
was guilty of the late filing of documents and made many concessions on the
stand. He is also guilty of undue delay.
[88]
In reply, the Appellant
said that the matter of costs should be for another day.
Analysis and Decision
[89]
In the Appellant’s argument,
he appears to be casting some blame on the person of the auditor and said that
he did not know about the relationship between the Appellant and 715866.
Further, he claimed that the auditor had never been involved in this type of
situation before. Further he said that the auditor only reviewed one-quarter of
the statements and concentrated on personal expenses credit cards.
[90]
However, the Court
found Mr. Lichty to be a straightforward and honest witness. The Court is
satisfied that he knew what he was doing.
[91]
His main concern was
that the Appellant had provided insufficient documents for the credits to be
allowed. He gave the Appellant every opportunity to provide the source
documents to support his claim for ITCs and they were not forthcoming. What he
received from the Appellant was a summary of the expenses and the ITCs claimed
but no original source documents to support the amounts claimed.
[92]
He completed Exhibit
R-1, Tab 4 in order to analyse the ITCs’ listings submitted by the Appellant
and to determine what other documentation was required. He received none. His
conclusions that the cancelled cheques and the listings were inadequate to
enable the calculations to be made appeared to be reasonable. The registrant
was the Appellant and not 715866 and that itself raised questions as to whether
the Appellant was the recipient of the supplies and services.
[93]
Further, he found
documents that were unrelated to the Appellant and that in itself would have
raised concern even if the documents were original documents.
[94]
This witness said that
many delays were caused by the Appellant and many documents that were requested
and promised by the Appellant did not come forward.
[95]
His position was that
the bad debts issue would not help the Appellant because GST is charged at the
time the goods or services are delivered. There was an issue as to whether
715866 was the recipient of some of the supplies and therefore it may not have
been entitled to the credits even if original source documents had been
provided.
[96]
This witness never
considered the bare trustee argument because he could not have allowed the
credits without the original source documents.
[97]
A further concern that
he had was that the amounts claimed were estimates, whereas ITCs must be based
upon actual amounts paid.
[98]
He was adamant that
losses do not matter in this case. It comes down to whether the GST was paid.
With this position in mind, he reviewed only about one‑quarter of the
documents because no original documents were provided.
[99]
Further, he reviewed the
GST return found in Exhibit A-4 at Tab 30 and there was no referral there to
bad debts.
[100]
On the submission put
forward by the Appellant about the Court drawing an unfavourable inference
against the Respondent because a number of CRA employees were not called as
witnesses, the Court finds no merit in this submission and it is rejected. The
Appellant argued that his evidence was candid and consistent, but the Court
finds that his evidence did not address the issue raised by the auditor, which
was the lack of original source documents to support the claim of the
Appellant.
[101]
The Appellant stated
that he never told the auditor that no further documentation would be provided
but it was not and a further extension of time would not have cured that and
even at trial no attempt was made to do so. The Appellant seemed to be
suggesting in argument that once he provided the cheques to the auditor then
the Crown should have gone further to substantiate his claim. The Court rejects
this argument. The Court is satisfied that the auditor did not merely ignore
the documents that were provided, as suggested by the Appellant.
[102]
The Court agrees with
the submissions of the Respondent that the question before the Court is simple.
Did the Appellant acquire property under subsection 196(1) of the Excise Tax
Act between the relevant dates?
[103]
If he did, then there
are certain thresholds that he must meet to gain the relief sought. The
thresholds that the taxpayer did not meet according to the Respondent were:
1. Was the property or
service subject to GST?
2. The Appellant has not
shown that he was the person who paid the tax or acquired the credit or paid
the GST.
3. The Appellant has not
shown that the supply was consumed in the context of a commercial activity.
Many of the items listed by the Appellant were not so consumed.
4. Most significantly
the Appellant must supply sufficient information to allow the amount of the
credit to be calculated.
[104]
The Court accepts the
argument raised by the Respondent that the bulk of the amounts claimed by the
Appellant do not comply with the section. The Court has already commented upon
the weight it gives to the evidence of the auditor in this regard and the
result is that evidence of the Appellant fails to satisfy the Court that he is entitled
to the amounts claimed. As mentioned by the auditor, there was a failure to
provide the source documentation required, and as a result, the Appellant has
failed to meet the burden of proof that is upon him.
[105]
The cancelled cheques
and invoices that the Appellant provided and his calculations by way of
estimate fall far short of providing the degree of proof necessary for him to
be given the credits claimed.
[106]
On the bad debt
argument, the Court is satisfied that the Appellant has failed to prove the existence
of the bad debt claimed in accordance with the requirements of the Act
as indicated by the Respondent in his argument.
[107]
The Court is not
satisfied that the Appellant was actually claiming a bad debt in any event and
as argued by the Respondent, he seemed to be merely assigning numbers to his
GST return so that he could claim a refund.
[108]
The Court is satisfied
on the evidence that the numbers provided by the Appellant are inconsistent and
do not match the amount claimed as a credit (see Exhibit A-4 at Tab 30 and
Exhibit R-2 at Tab 8).
[109]
The Court rejects the
bare trustee argument as having any effect on the outcome of this case. There
is no evidence of a trustee relationship and as argued by the Respondent to use
the name on a return, does not make it a reality.
[110]
The cases that have
been referred to support this conclusion.
[111]
The appeal is dismissed
with costs to the Respondent on a party and party basis.
[112]
The Respondent has
asked for an increased tariff but the Court does not find that to be a proper
result in this case, but it is close.
[113]
The Appellant asks that
costs be addressed on another day, but this position is also rejected.
These
Amended Reasons for Judgment are issued in substitution for the Reasons for
Judgment dated August 13, 2013.
Signed at New
Glasgow, Nova Scotia, this 13th day of September 2013.
"T.E. Margeson"
Email this Content