Citation: 2012 TCC 416
Date: 20121128
Docket: 2010-2002(GST)I
BETWEEN:
CONSTRUCTION BIAGIO MAIORINO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Auray J.
[1]
On August 9, 2007, the appellant
was assessed for six (6) periods under Part IX of the Excise Tax Act
(ETA). The assessment covered the years 2003, 2004 and 2005.
[2]
There are three questions
in issue:
- Management fees. The Minister of Revenue Quebec or the Quebec Revenue Agency on behalf of the Minister of National Revenue (Minister)
assessed an amount of $44,023 on account of goods and services tax (GST)
in relation to management fees not reported by the appellant.
- GST collected but not reported. Following a
reconciliation between the appellant’s working papers and the GST returns filed
by the appellant, the Minister assessed an amount of $13,343.27 on account of
GST collected but not reported on taxable supplies. The Minister also added
$10,547.37 as input tax credits. This resulted in a net GST amount of $2,795.90.
A penalty of $698.97 was levied pursuant to section 285 of the ETA.
- GST not collected. The Minister assessed an
amount of $10,874.85 as GST not collected, and therefore not remitted, after
analyzing the taxable supplies reported in the financial statements.
MANAGEMENT FEES
[3]
The Minister assumed
that the appellant acted as manager for the construction contracts and/or
carried out the construction contracts for the following buildings:
|
Date
|
Project
|
Owner
|
Municipal assessment
|
|
2003-08-30
|
2225 des
Laurentides
Laval, QC
|
Concetta Calderone
|
$806,600.00
|
|
2004-05-30
|
2227 des
Laurentides
Laval, QC
|
Concetta Calderone
|
$806,600.00
|
|
2005-06-11
|
8480 Perras Blvd.
Montréal, QC
|
Arcobelli
|
$349,300.00
|
|
2005-06-11
|
8490 Perras Blvd.
Montréal, QC
|
Arcobelli
|
$349,300.00
|
|
2004-01-30
|
9150 Perras Blvd.
Montréal, QC
|
Arcobelli
|
$492,700.00
|
|
|
|
Date
|
Project
|
Owner
|
Renovations established at:
|
|
2004-06-11
|
190 de Pierre-Fontaine
|
Concetta Calderone
|
$68,000.00
|
[4]
In this regard, the Minister
determined that the appellant should have received management fee income equal
to 20% of the buildings’ municipal assessments. Therefore, the Minister
assessed GST on the management fees on account of taxes not collected and not
reported.
|
Project
|
Municipal assessment
|
20% management fee
|
GST collectible
|
|
2225 des Laurentides
Laval, QC
|
$806,600.00
|
$161,320.00
|
$11,292.40
|
|
2227 des Laurentides
Laval, QC
|
$806,600.00
|
$161,320.00
|
$11,292.40
|
|
8480 Boul. Perras
Montréal, QC
|
$349,300.00
|
$69,860.00
|
$4,890.20
|
|
8490 Boul. Perras
Montréal, QC
|
$349,300.00
|
$69,860.00
|
$4,890.20
|
|
9150 Boul. Perras
Montréal, QC
|
$492,700.00
|
$98,540.00
|
$6,897.80
|
|
|
|
Project
|
Renovations established at
|
|
GST collectible
|
|
190 de Pierre-Fontaine
|
$68,000.00
|
x 7% (GST)
|
$4,760.00
|
[5]
The following persons
testified for the appellant:
-
Biagio Maiorino is
the appellant’s director and sole shareholder;
-
Giovanni Maiorino is Biagio
Maiorino’s brother;
-
Concetta Calderone is Giovanni
Maiorino’s spouse and is therefore Biagio Maiorino’s sister-in-law; and
-
Elio Arcobelli is Biagio
Maiorino’s brother-in-law.
[6]
Quebec Revenue Agency’s
(QRA) auditor Charles-André Lussier and QRA’s audit director Michel Pelletier
testified for the respondent.
[7]
Biagio Maiorino lives
at 1700, his father at 1708 and his brother, Giovanni at 1704 Paul Broca Street,
in Laval. The evidence at the hearing discloses that the family is very close.
They see each other almost every day and have dinner together every weekend. At
these meetings, they discuss their projects and give each other advice.
[8]
Biagio and Giovanni’s
father was in the construction industry. The two brothers learned their
father’s trade: Biagio has had a contractor’s licence in his personal capacity
since 1977, and, as for Giovanni, he said at the hearing that he was a building
manager.
[9]
The appellant’s
witnesses gave the same testimony. There were no contradictions even though a
witness exclusion order was issued.
[10]
During the years 2003 and
2004, Biagio Maiorino was the caretaker for the building owned by his
sister-in-law Concetta Calderone. The building was located at 7950 St-Michel Boulevard
in Montréal. It was semi-commercial: the first floor housed a CLSC and a
daycare centre and the other floors were made up of roughly 14 apartments.
[11]
Biagio Maiorino stated
that, in his capacity as caretaker, he looked after rent collection, building
maintenance and any other problems that might arise. He worked 40 hours a
week and was on call 24 hours a day, seven days a week.
[12]
As compensation, Concetta
Calderone and her spouse Giovanni Maiorino testified that they paid all of
Biagio Maiorino’s personal expenses, including mortgage payments, cell phone
bills, heating costs, electrical costs, food expenses and automobile expenses.
[13]
Biagio Maiorino
incorporated the appellant on April 2, 2003 (see Exhibit A‑1).
Concetta Calderone lent Biagio Maiorino the $20,000 that the appellant needed
as security under the laws applied by the Régie du bâtiment du Québec.
[14]
Biagio Maiorino also
took courses in 2003 so that the appellant could obtain a contractor’s licence
from the Régie du bâtiment du Québec. In this regard, the appellant obtained
its contractor’s licence in August 2003.
[15]
The appellant claims
that it received no management fees in relation to the buildings in question.
It argues that it did not act as construction project manager and did not carry
out construction contracts for the buildings in question. In the appellant’s
submission, the 20% management fees that the QRA imposed on the municipal
assessments of the buildings are fictitious. Consequently, the appellant had no
duty to collect and remit GST on amounts that it never received.
[16]
Mr. Biagio Maiorino, on
behalf of the appellant testified that the appellant lent its contractor’s
licence to his brother and his brother-in-law for the construction of their
buildings. He testified that the appellant never asked his relatives to pay for
the use of the licence.
[17]
As for the building
located at 2225 Boulevard des Laurentides, Concetta Calderone and her
spouse testified that since the appellant had not yet obtained its general
contractor’s licence when construction of the building began, she and her spouse
borrowed Arthur Doucet’s contractor’s licence to construct the building.
They allegedly paid $2,000 per month to use Mr. Doucet’s licence. As
soon as the appellant obtained its licence, Biagio Maiorino lent them the
appellant’s licence for no consideration. They allegedly did the same thing for
2227 Boulevard des Laurentides, and for the window replacements at 190
Pierre-Fontaine Street.
[18]
Giovanni Maiorino further
explained that he also had experience in the construction field, and that this
was not his first building. Without the contractor’s licence, he could not
construct the building. He clearly stated that his brother Biagio Maiorino
and/or the appellant were not involved in the construction or renovation of
these buildings.
[19]
However, he said that
during weekend family gatherings, Biagio Maiorino gave him advice as well as
names of subcontractors to contact. In this regard, he also stated that his
brother replaced him on the construction site a few times and when he was sick.
He also said that he occasionally used the appellant’s name when dealing with
suppliers. His brother was known in the construction industry and it was easier
to obtain credit. He added that his spouse Concetta Calderone paid all the
bills related to the construction of the buildings.
[20]
Giovanni Maiorino explained
that it was normal that notices of offence regarding the buildings were made
out to the appellant, since the appellant was the general contractor of record
(see Exhibits I-1 and I-2). He also stated that Concetta Calderone paid for
these notices of offence under the Act respecting occupational health and
safety and the Act respecting labour relations, vocational training and
workforce management in the construction industry.
[21]
As for the buildings
located on Perras Boulevard in Montréal, Elio Arcobelli testified that he
was also very familiar with the construction industry. His father, Vincenzo
Arcobelli, worked as a cement finisher for 25 years. He said that he began
constructing buildings with his father in 1986, well before he knew Biagio
Maiorino.
[22]
He confirmed Biagio
Maiorino’s testimony, stating that he borrowed the appellant’s contractor
licence without compensation. He said that Biagio Maiorino and/or the appellant
never supervised the work or ordered the materials. He said that Biagio
Maiorino’s involvement was limited to giving him advice and names of
contractors to contact.
[23]
The respondent
submitted that Concetta Calderone paid Biagio Maiorino’s personal expenses in
exchange for the services that the appellant rendered in managing the
construction of the buildings or in performing certain construction work. However, Mr.
Lussier of the QRA admitted that he was not aware that Biagio Maiorino had
worked as a caretaker in 2003 and 2004 for the building located at 7950 St-Michel Boulevard in Montréal.
[24]
In this regard, the
respondent did not challenge the testimony given by Biagio Maiorino, Giovanni
Maiorino and Concetta Calderone, that during the years 2003 and 2004, Biagio
Maiorino worked 40 hours per week and as retribution, his personal expenses
were paid (see paragraph 11 and 12 of my reasons).
[25]
The respondent also
stressed that the appellant filed nil GST returns for the years ending March
31, 2003, and March 31, 2004. The appellant argued that it only obtained its
contractor’s licence in August 2003, and therefore needed to become known. As
for 2004, the appellant explained that it was under the impression that it did
not have to file GST returns because its revenues were under $30,000. The appellant
reported $143,854 in revenues for the year ended March 31, 2005; according to
the respondent, it was the audit that led the appellant to report this amount,
an assertion contested by the appellant.
[26]
The respondent further
argued that the notices of offence were issued to the appellant. As explained
by the witnesses, they used the appellant’s licence to build; the notices of
offence therefore had to be issued to the appellant.
[27]
The respondent also
adduced a contract between Vincenzo and Elio Arcobelli as contractor and
Les Constructions Depian Inc. as subcontractor for the building located at 9160
Perras Boulevard (see Exhibit I‑3). According to clause 7 of
Appendix B of the contract, Biagio Maiorino had to approve the extras. The clause
states that “no extra to contract shall be valid unless authorized by written
change order signed by Mr. Biaggio [sic] Maiorino (paid hourly rate per
employee).” However, I note that this contract pertains to a building that is
not part of the assessment for management fees. The assessment pertains to 8480,
8490 and 9150 Perras Boulevard, not 9160 (see Exhibit I-6).
[28]
The respondent tendered
the audit report in evidence (see Exhibit I-7). This report was signed by
Mr. Romain. Mr. Romain did not attend and therefore did not testify at the
hearing, for personal reasons that I am not questioning. Mr. Lussier, as
witness for the QRA, explained that he was involved in the audit but did not
write the audit report. Most of the facts set out in the audit report were not brought
to my attention during the examinations in chief or the cross‑examinations
of the witnesses. Moreover, these facts were not raised in the argument.
Therefore, I cannot accord importance to these factual assertions. I agree with
the respondent that the lending of a contractor’s licence can have
repercussions on the appellant and Biagio Maiorino; the contractor’s licence
can be revoked by the Régie du bâtiment. However, that is not the question to
be decided in this dispute.
[29]
In Hickman Motors
Ltd. v. Canada,
Justice L’Heureux-Dubé of the Supreme Court of Canada made the following
remarks regarding the burden of proof that is borne by the taxpayer with regard
to the assumptions of fact alleged by the Minister in support of his
assessment:
92 It is trite law that in taxation the
standard of proof is the civil balance of probabilities: Dobieco
Ltd. v. Minister of National Revenue, [1966] S.C.R. 95, and that within
balance of probabilities, there can be varying degrees of proof required in
order to discharge the onus, depending on the subject matter: Continental
Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; Pallan
v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at p. 1106. The Minister, in
making assessments, proceeds on assumptions (Bayridge Estates Ltd.
v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on
the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister
of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C.
5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions
made by the Minister but no more: First Fund Genesis Corp. v.
The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This initial onus of
“demolishing” the Minister’s exact assumptions is met where the
appellant makes out at least a prima facie case:
Kamin v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R.,
82 D.T.C. 1679 (T.R.B.). In the case at bar, the appellant adduced evidence
which met not only a prima facie standard, but also, in my
view, even a higher one. In my view, the appellant “demolished” the following
assumptions as follows: (a) the assumption of “two businesses”, by adducing
clear evidence of only one business; (b) the assumption of “no income”, by
adducing clear evidence of income. The law is settled that unchallenged and
uncontradicted evidence “demolishes” the Minister’s assumptions: see for
example MacIsaac v. M.N.R., 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R.,
87 D.T.C. 652 (T.C.C.). As stated above, all of the appellant’s evidence in the
case at bar remained unchallenged and uncontradicted. Accordingly, in my view,
the assumptions of “two businesses” and “no income” have been “demolished”
by the appellant.
94 Where the Minister’s
assumptions have been “demolished” by the appellant, “the onus . . . shifts
to the Minister to rebut the prima facie case” made out by
the appellant and to prove the assumptions: Magilb Development Corp. v. The
Queen, 87 D.T.C. 5012 (F.C.T.D.), at p. 5018. Hence, in the case at
bar, the onus has shifted to the Minister to prove its assumptions that there
are “two businesses” and “no income”.
95 Where the burden has shifted to
the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is
entitled to succeed: see for example MacIsaac, supra,
where the Federal Court of Appeal set aside the judgment of the Trial Division,
on the grounds that (at p. 6381) the “evidence was not challenged or
contradicted and no objection of any kind was taken thereto”. See also Waxstein
v. M.N.R., 80 D.T.C. 1348 (T.R.B.); Roselawn Investments Ltd. v.
M.N.R., 80 D.T.C. 1271 (T.R.B.). Refer also to Zink, supra,
at p. 653, where, even if the evidence contained “gaps in logic, chronology,
and substance”, the taxpayer’s appeal was allowed as the Minister failed to
present any evidence as to the source of income. I note that, in the case at
bar, the evidence contains no such “gaps”. Therefore, in the case at bar, since
the Minister adduced no evidence whatsoever, and no question of credibility was
ever raised by anyone, the appellant is entitled to succeed.
[30]
I analyzed paragraph 5
of the respondent’s Reply to the Notice of Appeal, which sets out the
assumptions of fact on which the minister relied in making the assessment
concerning the management fees. In light of the evidence at the hearing, I am
of the opinion that the appellant has made a prima facie case. Therefore,
the burden of proof has been reversed. The testimony of all the persons
involved was to the same effect. According to that testimony, the appellant
lent out its contractor’s licence and received no money on account of
management fees.
[31]
The respondent did not
adduce evidence based on which it could be concluded on a balance of
probabilities that the appellant received money for lending out its contractor’s
licence. The respondent has not succeeded in impeaching the credibility of the
testimonial evidence given on behalf or the appellant.
[32]
Thus, in light of the
evidence adduced at the hearing, I allow the appeal with respect to the
management fees.
REConciliation - GST
collected but not reported
[33]
In his testimony, QRA
auditor Lussier stated that a reconciliation for the year 2005 was done between
the appellant’s working papers and the GST returns that it filed.
[34]
Mr. Lussier stated that
the appellant’s GST returns underestimated the GST to be remitted. The appellant
reported $5,925 in GST, whereas its own working papers showed $19,268.27
in GST, a discrepancy of $13,343.27. As for the input tax credits, the appellant
reported $4,821 in such credits, whereas its own working papers showed $15,368.37.
The QRA allowed $10,547.37 on account of input tax credits. The appellant was
therefore assessed in the amount of $2,795.90:
$13,343.27 in GST payable
-$10,547.37 input tax credit
$2,795.90
[35]
The QRA also added a
penalty of $698.97 under section 285 of the ETA.
[36]
In my opinion, the appellant
has not succeeded in showing that the QRA did not assess it correctly.
[37]
No evidence, whether
testimonial or documentary, was submitted by the appellant in this regard. For
the purposes of the reconciliation, the QRA relied on working papers prepared
by Biagio Maiorino and remitted to his accountant, Mr. Bastone, C.A., for the purposes of financial statement preparation. In addition, Mr. Lussier
stated that the numbers found in the working papers were confirmed by Mr. Bastone.
[38]
Consequently, I am
dismissing the appeal with respect to this question. I will analyze the penalty
under a separate heading in this judgment.
RISK ANALYSIS - GST NOT COLLECTED ON SUPPLIES REPORTED
IN THE FINANCIAL STATEMENTS
[39]
The QRA also assessed
an amount of $10,874.85 on account of GST not collected on supplies reported in
the financial statements. During the year 2005, the appellant performed work
for a corporation called CRC 2000 Industrielle Inc. (CRC 2000).
Biagio Maiorino is the president of CRC 2000. Biagio Maiorino admitted
that the appellant did not collect GST because he believed that since
CRC 2000 collected GST, the appellant did not have to do so. In the appellant’s
submission, this was a wash transaction — that is to say, it had no tax consequences.
[40]
I do not agree that
this was a wash transaction. Subsection 156(2) of the ETA is clear in this
regard. In order for a transaction to be a wash, the specified members must make
a joint election so that every taxable supply made between them is deemed to
have been made for no consideration.
(2)
Election for nil consideration -- For the purposes
of this Part, if a specified member of a qualifying group elects jointly with
another specified member of the group, every taxable supply made between them
at a time when the election is in effect is deemed to have been made for no
consideration.
[41]
The appellant and CRC
2000 submitted no joint election. The appellant did not even adduce evidence
that it was part of a qualifying group for the purposes of section 156 of the
ETA.
[42]
Consequently, under
subsection 221(1) of the ETA, the appellant had to collect the tax on taxable
supplies billed to CRC 2000, and the amount of that tax was $10,874.85 (see
Exhibit I-6).
[43]
The appeal is therefore
dismissed with respect to this issue.
PENALTIES
[44]
Penalties were levied
under section 280 of the ETA. During the years in issue, section 280 read as
follows:
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.
[45]
At the hearing, the
appellant submitted a memorandum published by the Canada Revenue Agency
regarding the reduction of penalties and interest in “wash transaction”. She
asked that I reduced the interest and penalties levied under section 280 of the
ETA in accordance with this memorandum. I cannot apply an administrative
policy.
[46]
Pursuant to the Act and
the interpretation of section 280 of the ETA by the Courts, I have no authority
to cancel the interest owing under the section. However, in the decision of Canada
v. Consolidated Canadian Contractors Inc., Justice Robertson, in an unanimous judgment
of the Federal Court of Appeal, stated that a taxpayer can mount a due
diligence defence to defeat a penalty levied under section 280 of the ETA. See
also Pillar Oilfield Projects Ltd.
[47]
In the case at bar, Biagio
Maiorino stated that he prepared the GST returns of the appellant with his
spouse. No evidence of due diligence was provided on behalf of the appellant by
Biagio Maiorino, except to say that he did his best and is not a professional
or a manager. The evidence discloses that the appellant’s bookkeeping was
very shoddy. Biagio Maiorino has been doing business in the construction field
for several years, well before the appellant’s incorporation. He was aware of
the appellant’s obligations with respect to the GST. The fact that he did his
best and was not a manager or a GST professional is not a defence of due
diligence. Biagio Maiorino on behalf of the appellant took no positive action
to prevent the failure to remit.
[48]
Chief Justice Bowman as
he then was, stated in Pillar Oilfield Projects Ltd. That “innocent
good faith in the making of unintentional errors is not tantamount to due
diligence. That defence requires affirmative proof. That all reasonable care
was exercised to ensure that errors are not made”.
[49]
Consequently, it is my
opinion that the penalties levied pursuant to section 280 of the ETA must be
maintained.
[50]
A penalty under section
285 of the ETA in the amount of $698.97 was levied. As we have seen, the appellant
reported $5,925 in GST, even though his own working papers showed that the GST
was $19,268.27, a discrepancy of $13,343.27. As for the input tax credits, the appellant
reported $4,821 whereas his own working papers showed input tax credits of
$15,368.37. The QRA allowed $10,547.37 on account of input tax credits. The 25%
penalty was levied on the difference:
25% x ($13,343.27 - $10,547.37) = $698.97
[51]
Section 285 of the ETA
states:
285. False statements or omissions -- Every person who knowingly,
or under circumstances amounting to gross negligence, makes or participates in,
assents to or acquiesces in the making of a false statement or omission in a
return, application, form, certificate, statement, invoice or answer (each of
which is in this section referred to as a “return”) made in respect of a
reporting period or transaction is liable to a penalty of the greater of $250
and 25% of the total of
(a) if
the false statement or omission is relevant to the determination of the net tax
of the person for a reporting period, the amount determined by the formula
A – B
where
A is
the net tax of the person for the period, and
B is
the amount that would be the net tax of the person for the period if the net
tax were determined on the basis of the information provided in the return,
(b) if
the false statement or omission is relevant to the determination of an amount
of tax payable by the person, the amount, if any, by which
(i) that tax payable
exceeds
(ii) the amount that would be the
tax payable by the person if the tax were determined on the basis of the
information provided in the return, and
(c) if the false statement or
omission is relevant to the determination of a rebate under this Part, the
amount, if any, by which
(i) the amount that would be the
rebate payable to the person if the rebate were determined on the basis of the
information provided in the return
exceeds
(ii) the amount of the
rebate payable to the person.
[52]
In Haniff v. The
Queen, 2011 TCC 112, Justice Boyle of this Court explains the
concept of gross negligence at paragraphs 25 and 26 of his reasons, making reference
to the Federal Court’s decision in Venne, [1984] F.C.J. No. 314 (QL) :
24. The
remaining issue is whether the penalties assessed for income tax and GST
purposes were warranted.
25. The classic description of the
circumstances in which so‑called gross negligence penalties are warranted
is set out by the Federal Court of Appeal [sic] in Venne v. The
Queen, 84 DTC 6247:
“Gross negligence” must be taken to
involve greater neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional acting, an
indifference as to whether the law is complied with or not.
[53]
The appellant showed
indifference with respect to his GST obligations. It reported GST amounts
arbitrarily and did not even see fit to reconcile its own working papers with its
GST returns. The monetary discrepancy is significant. In my opinion, the
conduct of the appellant in the case at bar was not merely negligent; it was
tantamount to gross negligence. The penalty of $698.97 is maintained.
[54]
Consequently, the
appeal is allowed with respect to the management fees, but the assessments
related to the other questions in issue, detailed below, are maintained:
- $2,795.50 on account of GST collected
and not reported;
- $10,874.85 on account of GST not collected
on supplies reported in the financial statements;
- the interest and penalties under section
280 of the ETA, except with respect to the management fees; and
- the penalty of $698.97 under section 285 of
the ETA.
No costs are awarded.
Signed at Ottawa, Canada, this 28th day of November 2012.
“Johanne D’Auray”
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