9267-9075 Québec – Tax Court of Canada finds that failure to remit GST on reporting a sale to an insolvent purchaser precluded a subsequent bad debt credit
In 2012, a company (“9267”) sold domain names to another corporation (“9210”) that was owned equally by its individual shareholder and an unrelated individual for cash consideration to be paid in instalments. However, it did not file its GST return for that year until 2016, at which time 9210 was insolvent, and most of the purchase price was still owing. The tax so reported was assessed accordingly. Also in 2016, it filed its GST return for its taxation year beginning in 2014 in which it claimed a bad debt deduction for the unpaid GST.
D’Auray J affirmed the denial of the s. 231(1) credit on the basis that 9267 had not satisfied s. 231(1.1), i.e., when it filed its return reporting the 2012 sale, it did not remit GST on that taxable supply. Thus because it only paid the tax on the subsequent assessment rather than on filing the return, it lost the credit.
Furthermore, she found that 9267 had not taken reasonable measures to pursue collection of its debt, including claiming under its security interest, and having its debt included in the debtor claims made against 9210 in connection with the receivership and bankruptcy proceedings, so that she would have denied the credit on this ground as well.
She also found that no credit was available under s. 232(3). She rejected arguments that the purchase contract had been rescinded and further indicated:
What is clear from North Shore is that for the purposes of section 232, a credit or debit note is not sufficient, there must be an amount made available to the buyer under the note.
Here no such note had been issued, let alone one that satisfied the North Shore requirement or that set out the particulars required by Regulation.