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Citation: 2004TCC816
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Date: 20041214
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Docket: 2003-2000(GST)G
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BETWEEN:
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CRANE CANADA INC. PLUMBING DIVISION,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip J.
[1] Crane
Canada Inc. ("Crane") appeals from an assessment of tax levied under
Part IX of the Excise Tax Act ("Act") (Goods and
Services Tax) in which the Minister of National Revenue assessed a penalty in
accordance with section 280 of the Act. Subsection 280(1)
provides that:
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280. (1) Subject to this section and section 281, where a person fails to
remit or pay an amount to the Receiver General when required under this Part,
the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first day
following the day on or before which the amount was required to be remitted
or paid and ending on the day the amount is remitted or paid.
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280.
(1) Sous réserve du présent article et de l'article 281, la personne qui ne
verse pas ou ne paie pas un montant au receveur général dans le délai prévu
par la présente partie est tenue de payer la pénalité et les intérêts
suivants, calculés sur ce montant pour la période commençant le lendemain de
l'expiration du délai et se terminant le jour du versement ou du
paiement :
a)
une pénalité de 6 % par année;
b)
des intérêts au taux réglementaire.
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[2] The
facts are not in issue. No evidence was produced by either party. The appellant
relied on the following facts set out in its Notice of Appeal:
3. The Appellant carries on business as a
manufacturer of plumbing supplies, including toilet tanks (the
"Business").
4. The Appellant is registered under the
subdivision (d) of Division V of Part IX of the Excise Tax Act (Canada)
(the "ETA").
5. The Business is a "commercial
activity" as defined under the ETA.
6. Certain toilet tanks manufactured by the
Appellant at its manufacturing plant in British Colombia [sic] were
alleged to be defective and consumers of such toilet tanks (the "Claimants")
claimed to have suffered damages in connection therewith.
7. The Claimants filed claims under their own
property and casualty insurance policies (the "Insurance Claims")
and/or were parties to a class action proceeding brought against the Appellant
in the Supreme Court of British Columbia (the "Class Action").
8. In connection with the Insurance Claims and
the Class Action, the Appellant entered into claims handling agreements with
various insurers (the "Claims Handling Agreements").
9. Pursuant to the Claims Handling Agreements,
the Appellant agreed to pay the insurers a percentage of the Actual Cash Value
(the "ACV") of the costs of repairs incurred by policy holders of the
insureds.
10. Claimants who required repairs as a result of
an allegedly defective toilet tank contracted directly with the contractor
providing the repairs and the repair contractor invoiced the Claimants.
11. The contractors' repair invoices were either
paid by the Claimant who was then reimbursed by his or her insurance company or
was paid directly by the Claimant's insurance company.
12. Pursuant to the Claims Handling Agreements,
the insurers provided the Appellant with documentation in support of the
percentage of the ACV of the repairs (which was calculated by reference to the
cost of the repair including applicable GST billed by the contractor) for which
the Appellant was liable to pay over to the insurer.
13. The documentation provided by the insurers
to the Appellant clearly identified the portion of the settlement payments
which represented the proportionate GST component of the ACV of the repairs.
14. The Appellant claimed input tax credits
("ITCs") in respect of the GST component of the settlement payments.
[3] The
respondent admitted the facts described in paragraphs 3, 4, 5, 6, 7, and 14 and
admitted the assessment was based on the facts alleged in paragraphs 8, 9,
10, 11, 12 and 13.
[4] The amounts
paid to the insurers, the appellant originally claimed, were related to its
commercial activities, the supply of toilet tanks, and therefore the appellant
was entitled to input tax credits ("ITCs") in respect of the GST
component of the settlement payments. The Minister denied the appellant's claim
to ITCs on the basis that the insurers were not agents of the appellant for
purposes of paying the contractors and therefore the appellant was not the
recipient of property or services for use in its commercial activities.
Appellant's counsel acknowledged that if Crane had paid the contractor
directly, it would have been eligible for the ITCs. Because the amounts were
paid to the insurers by way of damages, Crane was not a recipient and therefore
had no right to ITCs.
[5] The only
issue before me, therefore, is the penalty. The appellant argues it exercised due
diligence and exercised reasonable precautions to avoid making any error in
filing its GST return.
[6] In the
appeal of Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49
soon after the introduction of the GST legislation, Bowman J. (as he then was),
relying on the reasons for judgment of the Supreme Court of Canada in R. v.
Sault Ste. Marie,
held that paragraph 280(1)(a) of the Act creates a strict
liability offence and that the only available defence is one of due diligence.
The taxpayer in Pillar, made a number of errors on its GST returns
and, as a result, was assessed interest and penalties under paragraph 280(1)(a).
The taxpayer appealed the penalties on the basis that errors were made in good
faith and that they were understandable given the novelty of the GST. Bowman J.
stated that due diligence requires "affirmative proof that all reasonable
care was exercised to ensure that errors not be made".
A defence is available when the taxpayer reasonably believed in a mistaken set
of facts which, if true, would render the act or omission innocent, or if he or
she took all reasonable steps to avoid the particular event.
[7] The Federal
Court of Appeal agreed that there is no bar to the defence argument of due
diligence which a person may rely on against charges involving strict liability
being put forward in opposition to administrative penalties: Corporation de
l'Ecole Polytechnique v. Canada, 2004 G.T.C. 1148,
2004 F.C.A. 127.
In Ecole Polytechnique, Décary
and Létourneau JJ.A. review the principles governing the defence of due
diligence at paragraphs 28 to 45 inclusive. Paragraphs 28 to 31 are helpful in
this appeal:
[28] The
due diligence defence allows a person to avoid the imposition of a penalty if
he or she presents evidence that he or she was not negligent. It involves
considering whether the person believed on reasonable grounds in a non-existent
state of facts which, if it had existed, would have made his or her act or
omission innocent, or whether he or she took all reasonable precautions to
avoid the event leading to imposition of the penalty. See The Queen v. Sault
Ste-Marie, [1978] 2 S.C.R. 1299, The Queen v. Chapin, [1979] 2 S.C.R. 121. In
other words, due diligence excuses either a reasonable error of fact, or the
taking of reasonable precautions to comply with the Act.
[29] The
defence of due diligence should not be confused with the defence of good faith,
which applies in the area of criminal liability, requiring proof of intent or
guilty knowledge. The good faith defence enables a person to be exonerated if
he or she has made an error of fact in good faith, even if the latter was
unreasonable, whereas the due diligence defence requires that the error be
reasonable, namely, an error which a reasonable person would have made in the
same circumstances. The due diligence defence, which requires a reasonable but
erroneous belief in a situation of fact, is thus a higher standard than that of
good faith, which only requires an honest, but equally erroneous, belief.
[30] A
person relying on a reasonable mistake of fact must meet a twofold test:
subjective and objective. It will not be sufficient to say that a reasonable
person would have made the same mistake in the circumstances. The person must
first establish that he or she was mistaken as to the factual situation: that
is the subjective test. Clearly, the defence fails if there is no evidence that
the person relying on it was in fact misled and that this mistake led to the
act committed. He or she must then establish that the mistake was reasonable in
the circumstances: that is the objective test.
[31] As
soon as the defence of due diligence accepted for strict liability offences is
raised, the question arises of whether the defence of error of law could also
be relied on to avoid imposition of a penalty. That question does not arise
only in connection with strict liability offences, although with the growth in
regulations and the multiplication of statutory offences the field of strict
liability has proven to be the most fertile for the emergence of this defence.
[8] In its
Notice of Appeal the appellant claimed it committed an error of law in that it
believed, based on a review of the GST legislation and policy statements and/or
GST memoranda published by the tax authorities, that it was entitled to claim
ITCs in respect of the GST component of the settlement payments.
[9] At trial,
appellant's counsel argued that his client committed an error of fact.
Unfortunately no witness was produced to describe the factual error.
There is no evidence that the appellant, or its employees responsible for
filing GST returns, believed on reasonable grounds in the non-existence of
certain facts, which, if they existed, would have made his or her act an
innocent omission, or that the appellant, or its responsible employees, took
all reasonable precautions to avoid the event that led to the imposition of the
penalty.
[10] In any
event, appellant's counsel argued that the appellant was a company who paid GST
as a recipient of supplies and had a right to ITCs. Thus it was normal for the
employee of the appellant who received an invoice to pay money, with the GST
amount on the invoices from the insurers, to do as he or she usually does, that
is, to calculate GST on supplies sold and request an ITC. It is reasonable to
conclude, counsel submitted, that the person erred in fact in thinking the
invoice was related to supply and paid the invoice in the course of the
appellant's normal commercial activities. The appellant's employee innocently followed
accepted procedures.
[11] Counsel
referred to Key Property Management Corporation v. Canada, [2004] G.T.C.
199, 2004TCC210. In Key Property, the taxpayer provided management
services to other corporations, each of which owned and operated rental
properties. The Minister assessed the taxpayer on the basis that it was the
employer of certain caretakers and maintenance personnel engaged to provide
services to the buildings. Penalties were also imposed.
[12] The
Minister's position was that since Key Property supplied the services of
the personnel to the owner companies, it ought, therefore, to have collected
GST from them. The taxpayer's position was that none of these people were its
employees and it did not have to collect GST for their services.
[13] The taxpayer
was successful in part, the superintendents were not employees, the other
workers were. Bowie J. held that the taxpayer was entitled to
additional ITCs. Since Key Property had trained its staff in GST matters, it
had reasonably believed in the correctness of its position and the penalties
imposed under section 280 were deleted.
[14] "An
honest belief that a transaction is not subject to tax, if it is reasonably
held, equals to due diligence", Bowie J. stated.
In the appeal at bar, appellant's counsel argued that his client erred on the
facts; it had good reason to believe that it was paying GST because there was
reference to GST on the invoice. The appellant, he says, made an innocent
mistake of fact: the appellant paid the insurer and not the contractors; the
appellant did not make payment in the capacity of recipient of a supply of
property.
[15] As I
mentioned earlier in these reasons there is a paucity of evidence. I do not
know the practice adopted by the appellant in filing GST returns and claiming
ITCs. I do not know the actions of the persons in charge of filing GST returns
and I do not know the thinking that went on in the minds of the appellant's
employees when they prepared the GST returns and applied for ITCs. The
appellant has not met the subjective and objective tests described in paragraph
30 of Ecole Polytechnique. A mistake was obviously made, but I do
not know if the person who erred was mistaken as to a factual situation or if the
mistake was reasonable in the circumstances.
[16] And even if
the appellant erred in law when it applied for the ITCs, the defence of due
diligence in attempting to understand and comply with the law is of no help. In
Ecole Polytechnique, at paragraph 38, the Federal Court of Appeal
stated that:
[a]part from exceptions, ...
reasonable mistakes of law as to the existence and interpretation of
legislation are not recognized as defences ... to strict liability offences ...
governed by the rules applicable in strict liability.
[17] There are
two exceptions to this rule, the Court of Appeal noted, officially induced
mistakes of law and invincible mistakes of law. Neither exception is present in
this appeal. There is no evidence that the appellant's mistake was not
impossible to avoid nor is there evidence the appellant relied on a mistaken
legal opinion or advice of an official of the Canada Customs and Revenue
Agency, as the tax authority was then named.
[18] The appeal
is dismissed, with costs.
Signed at Ottawa, Canada, this 14th day of December 2004.
Rip
J.
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