REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1] These Appeals relate to the disallowance of input tax credits (the “ITCs”) in the total amount of $318,939.86, which had been claimed by Retrocom Limited Partnership (the “LP”) in respect of nine monthly reporting periods (the “Reporting Periods”) from March 1, 2013 to October 31, 2013 and from December 1, 2013 to December 31, 2013.
[2] The only witness called by counsel for the LP was Kimberly Tam, an accountant, who previously worked for the LP as its director of finance, and who, at the time of the trial, was the vice president of corporate planning and new initiatives of SmartCentres Real Estate Investment Trust (“SmartCentres REIT”), which, in 2017, acquired all the outstanding units of Retrocom Real Estate Investment Trust (the “REIT”).
[3] The only witness called by counsel for the Crown was Robert Wolf, who was a trustee of the REIT from 2010 until 2017, when the REIT was sold to SmartCentres REIT.
II. ISSUE
[4] The issue in these Appeals is whether, and to what extent (if any), the LP is entitled to the ITCs, for the Reporting Periods, that were disallowed by the Minister of National Revenue (the “Minister”), as represented by the Canada Revenue Agency (the “CRA”).
III. FACTUAL BACKGROUND
A. Organizational Structure
[5] The supplies that gave rise to the disallowed ITCs occurred over a three‑year period extending from 2011 through 2013. Throughout that time, the LP (which had been established and formed as a limited partnership, under the laws of Ontario, on July 11, 2003) was the subject of, and governed by, an agreement titled “Third Amended and Restated Limited Partnership Agreement,” dated October 31, 2010 (the “LP Agreement”).
[6] As will be explained below, there was a close relationship between the LP and the REIT, which was known as “Retrocom Mid‑Market Real Estate Investment Trust” in 2011, 2012 and early 2013, and which was subsequently known as “Retrocom Real Estate Investment Trust”, after a change of name in April 2013.[4]
[7] Section 5.1 of the LP Agreement provided that the authorized capital of the LP consisted of an unlimited number of Class A Units issuable in series (the “Class A LP Units”) and an unlimited number of non‑voting Class B Units issuable in series (the “Class B LP Units”). The Class A LP Units carried full voting and participating rights. The Class B LP Units were intended to be the economic equivalent of the units of the REIT (the “REIT Units”). Specifically, each Class B LP Unit was entitled to receive distributions equal to the distributions paid by the REIT in respect of a REIT Unit, and each Class B LP Unit was exchangeable into a REIT Unit. Each Class B LP Unit was accompanied by a special voting unit that entitled the holder to vote at meetings of LP Unitholders, but only in respect of matters affecting the rights of the Class B LP Units.
[8] The general partner of the LP was GP Trust, which was a trust formed under the laws of Ontario. The interest of GP Trust in the LP was described as the “General Partnership Interest”; it was a 0.01% voting interest, which was not represented by an issued certificate. The sole beneficiary of GP Trust was 1090992 Alberta Inc., which was a wholly owned subsidiary of the REIT. The sole trustee of GP Trust was 1606906 Ontario Inc. (“160ON”), which was also a wholly owned subsidiary of the REIT.
[9] All of the issued Class A LP Units, representing a 99.99% voting interest in the LP, were held by the REIT.
[10] All of the issued Class B LP Units were held by six limited partnerships that represented a vendor group that had sold a portfolio of properties to the LP in 2008, in exchange for the assumption of mortgages on those properties and the issuance to that group of Class B LP Units.
[11] Under the business and organizational structure chosen by the REIT and the LP:
(a)the LP carried on the business (the “LP’s Business”) of acquiring, managing and leasing income‑producing community‑based retail properties (the “Properties”);
(b)legal title to the Properties was held by the LP;
(c)as funds were required by the LP, the REIT offered REIT Units or debentures (the “Debentures”) to the public, and used the proceeds of those offerings (the “Offerings”) to subscribe for Class A LP Units; and
(d)as the REIT did not have a bank account of its own, the LP issued cheques, drawn on its own chequing account, to make payments on behalf of the REIT.
B. Relevant Agreements and Deeds
(1) LP Agreement
[12] As noted above, the LP was the subject of, and governed by, the LP Agreement. Section 12.1 of the LP Agreement stated that the general partner of the LP (i.e., GP Trust) had “exclusive authority to administer, manage, conduct, control and operate the Business and affairs of the” LP. That provision then went on to state:
No limited partner in its capacity as such shall:
(a) take part in the control or management of the Business of the Partnership or exercise any power in connection therewith;
(b) execute any document on behalf of the Partnership;
(c) represent that it has authority to bind the Partnership;
(d) have any authority to act for, bind or undertake any obligation or responsibility on behalf of the Partnership or any other Partner…. [Emphasis added.]
[13] As indicated by the italicized phrase in the first line of section 12.1 of the LP Agreement, the above restriction on the activities of a limited partner, such as the REIT, applied only to actions taken by a limited partner in its capacity as such. That restriction did not limit actions taken by a limited partner in some other capacity, such as an agent of the LP.
(2) Declarations of Trust
[14] During the Reporting Periods, the REIT was the subject of, and governed by:
(a) the Retrocom Mid‑Market Real Estate Investment Trust Fourth Amended and Restated Declaration of Trust, dated October 31, 2010;
(b) the Retrocom Mid‑Market Real Estate Investment Trust Amendment No. 1 to Fourth Amended and Restated Declaration of Trust, dated April 11, 2013; and
(c) Retrocom Real Estate Investment Trust Fifth Amended and Restated Declaration of Trust, dated August 1, 2013.
(3) Agency Agreements
[15] Over the objection of counsel for the Crown, two agency agreements (the “Agency Agreements”), each between the REIT and the LP, and dated March 29, 2012 and January 1, 2013 respectively, were entered into evidence. The Agency Agreement dated March 29, 2012 (the “2012 Agency Agreement”) appears to have been signed, on behalf of both the REIT and the LP, by Richard Michaeloff, who was then a trustee of the REIT and the president of 160ON, which was the sole trustee of GP Trust, which was the general partner of the LP. The Agency Agreement dated January 1, 2013 (the “2013 Agency Agreement”) appears to have been signed, on behalf of both the REIT and the LP, by Tom Wenner, who was then the chief financial officer of each entity.
(a) 2012 Agency Agreement
[16] In the recitals to the 2012 Agency Agreement, the REIT and the LP acknowledged (among other things) that:
(a) the REIT had issued:
a. 9,832,500 REIT Units, pursuant to an Offering described in a prospectus dated March 8, 2011 (this Offering was defined in the 2012 Agency Agreement, and is referred to in these Reasons, as the “March 2011 Offering”); and
b. $40,000,000 in aggregate principal amount of 5.45% convertible unsecured subordinated debentures of the REIT, pursuant to an Offering described in a prospectus dated June 21, 2011 (this Offering was defined in the 2012 Agency Agreement, and is referred to in these Reasons, as the “June 2011 Offering”);
(b) the REIT had used the proceeds of the March 2011 Offering to purchase Class A LP Units (the “March 2011 Class A LP Units”);
(c) the REIT had used the proceeds of the June 2011 Offering to purchase Class A LP Units (the “June 2011 Class A LP Units”);
(d) the LP had used the proceeds of the issue of the March 2011 Class A LP Units (i) to partially fund the acquisition by the LP of four properties from Calloway Real Estate Investment Trust (the “Calloway Properties”), and (ii) for general partnership purposes;
(e) the LP had used the proceeds of the issue of the June 2011 Class A LP Units (i) to fund redevelopment projects, (ii) to advance funds to the REIT (which were used by the REIT to redeem $20,000,000 in aggregate principal amount of then outstanding 7.50% convertible unsecured subordinated debentures of the REIT, and (iii) for general partnership purposes; and
(f) the REIT had incurred costs and expenses in connection with the March 2011 Offering and the June 2011 Offering (together, the “2011 Offerings”) and other related transactions on behalf of the LP.
[17] Subparagraph 2.1(c) of the 2012 Agency Agreement defined the term “Financing Costs” (which I will call the “2011 Financing Costs”, so as to distinguish those costs from other costs described below) as being the costs and expenses incurred by the REIT as agent of the LP in connection with the 2011 Offerings and other related transactions, including:
(a) commissions (including (i) the fees payable to the Underwriters (as defined in the 2012 Agency Agreement) pursuant to the underwriting agreement dated March 1, 2011 (the “March 2011 Underwriting Agreement”) between the REIT and the Underwriters, in respect of the March 2011 Offering, and (ii) the fees payable to the Underwriters pursuant to the underwriting agreement dated June 14, 2011 (the “June 2011 Underwriting Agreement”) between the REIT and the Underwriters, in respect of the June 2011 Offering, and also including, in each case, other costs and expenses related to raising capital to invest in the REIT);
(b) costs and expenses relating to the negotiation, preparation, execution, delivery and interpretation of any agreements, instruments and offering documents, including the 2012 Agency Agreement (collectively defined in the 2012 Agency Agreement, and in these Reasons, as the “REIT Documents”) created, executed and delivered in respect of the raising of capital;
(c) the fees and expenses of consulting services and other expert or professional services in connection with the REIT Documents; and
(d) costs and expenses paid to obtain the advice of counsel with respect to the transactions contemplated under the REIT Documents.
[18] In paragraph 2.1(a) of the 2012 Agency Agreement, the REIT and the LP agreed that, because the 2011 Offerings had facilitated the LP’s acquisition of certain properties and had been used for general partnership purposes, the 2011 Financing Costs were costs and expenses of the LP and were to be borne and paid by, or on behalf of, the LP.
[19] In paragraph 2.1(b) of the 2012 Agency Agreement, the REIT and the LP agreed that, to the extent that the REIT had paid any 2011 Financing Costs on behalf of the LP, such 2011 Financing Costs were paid by the REIT as agent for the LP, and the LP was to repay and reimburse the REIT for the payment of such 2011 Financing Costs.
(b) 2013 Agency Agreement
[20] In the recitals to the 2013 Agency Agreement, the REIT and the LP acknowledged (among other things) that:
(a) the LP was in the business of acquiring, developing and leasing real property;
(b) the LP had organized its operations such that, when it required financing to pay for acquisitions (the “Acquisitions”) of investment properties, it directed the REIT to undertake offerings (defined above as the “Offerings”) to raise such funds (the “Funds”) from the public;
(c) on the basis that the Funds received by the LP were to be used in the course of the LP’s commercial activities, and specifically to make the Acquisitions, the LP had agreed to pay the expenses related to the Offerings;
(d) the LP had authorized the REIT, as its agent, to enter into the necessary agreements with third parties for services and property necessary for the raising of the Funds;
(e) the LP and the REIT had previously entered into similar agency agreements with respect to specific Acquisitions; and
(f) the LP and the REIT had agreed, effective January 1, 2013, to enter into a more general agency agreement with respect to all Acquisitions and Offerings.
[21] In paragraph 2.1(a) of the 2013 Agency Agreement, the LP appointed the REIT as its agent, effective January 1, 2013, for the purposes of acquiring property and services relating to the Offerings. Further, the LP authorized the REIT to undertake all reasonable expenses (defined in the 2013 Agency Agreement, and in these Reasons, as the “2013 Financing Costs”) “on its behalf …, whether in its own name of in the name of the” LP.
[22] In paragraph 2.1(c) of the 2013 Agency Agreement, the REIT and the LP agreed that the 2013 Financing Costs were costs of the LP and were to be borne and paid by, or on behalf of, the LP.
[23] In paragraph 2.1(d) of the 2013 Agency Agreement, the REIT and the LP agreed that, to the extent that the REIT had paid any 2013 Financing Costs on behalf of the LP, such costs were incurred, and were legally payable, by the LP, and accordingly were paid by the REIT in its capacity as agent for the LP. Accordingly, the LP was to repay and reimburse the REIT for the payment of those previously paid 2013 Financing Costs.
C. Relevant Financings
[24] To raise money to purchase, develop, redevelop or refinance properties, the REIT undertook various public financings (the “Financings”) in 2011, 2012 and 2013, as follows:
(a)On March 15 and 18, 2011, the REIT completed an Offering (defined above as the “March 2011 Offering”) of 9,832,500 REIT Units for gross proceeds of $57.5 million.
(b)On June 28, 2011, the REIT issued $40 million principal amount of 5.45% convertible unsecured subordinated debentures (pursuant to an Offering defined above as the “June 2011 Offering”).
(c)On February 3, 2012, the REIT completed an Offering of 5,175,000 REIT Units for gross proceeds of $29 million.
(d)On November 9, 2012, the REIT completed an Offering of 7,947,500 REIT Units for gross proceeds of $44.5 million.
(e)On May 27, 2013, the REIT completed an Offering (the “2013 Offering”) of 10,959,500 subscription receipts for gross proceeds of $57.5 million. Upon the closing, on June 5, 2013, of an Acquisition of certain properties (the “First Capital Properties”) from First Capital Realty Inc. (“First Capital”), each subscription receipt was exchanged for one REIT Unit plus $0.0375.
(f)In May 2013, in conjunction with the 2013 Offering, the REIT also issued $25 million of debentures by way of the same amended and restated short form prospectus.
D. Subject Expenditures, Services and Invoices
[25] In conjunction with the Financings and certain other transactions, the REIT or the LP retained or engaged the services (the “Services”) of various underwriting, legal, audit, accounting, valuation, design, printing and stock‑transfer professionals. In so doing, the REIT or the LP made various expenditures (the “Expenditures”) in respect of professional and other fees. The REIT or the LP also paid listing fees to the TSX (which fees also formed part of the “Expenditures”).
[26] Over the course of the Reporting Periods (i.e., from March 1, 2013 to October 31, 2013 and from December 1, 2013 to December 31, 2013), the LP claimed ITCs aggregating $525,052.97. The Minister, as represented by the CRA, allowed only $206,113.11 of those ITCs. The CRA disallowed claimed ITCs in the amount of $318,939.86. The disallowed ITCs related to the Expenditures.
[27] At the trial, the primary evidentiary documents in respect of the Expenditures were the invoices (or portions thereof) (collectively, the “Invoices”) that the various suppliers had issued in respect of the particular Services that they had supplied. The Invoices are summarized below, with the Expenditures being categorized (by me) into four groups, as follows:
(1) Expenditures Relating to the REIT and the Financings
[28] The Invoices that related substantially or primarily to the REIT and the Financings are discussed below.
(a) Fasken Invoice No. 560606
[29] On April 18, 2011, the Toronto office of Fasken Martineau DuMoulin LLP (“Fasken”) issued Invoice no. 560606 to the LP, in the amount of $133, 026.71, for professional services in connection with a matter described as “2011 Equity Offering”. The itemized amounts on the Invoice were a professional fee of $115,483.05, disbursements of $2,288.04, and HST of $15,255.62. A handwritten notation on the first page of the Invoice indicates that it related to the March 2011 Offering, which is confirmed by a review of the next 15 pages of the Invoice, which set out a dated description of the legal services provided by various lawyers (and perhaps other timekeepers) at Fasken.
[30] Most of the entries in the above description of Fasken’s services related to the March 2011 Offering; however, a few of the initial entries (on pages 2‑5) referred to the “proposed Calloway transaction” or variations of that phrase. Some of those latter entries (such as “TSXV and MI 61‑101 analysis of Calloway transaction”, “determination of significance of Calloway acquisition under income test”, “significance testing for Calloway transaction”, “review draft Calloway acquisition rider [in the context of the draft prospectus]”, “Review SEDAR disclosure regarding Calloway properties”, and “prepare disclosure regarding Calloway acquisition”) make it clear that those legal services related to the March 2011 Offering.
[31] Nevertheless, I accept that some of Fasken’s initial legal services, on January 3 and 4, 2011, related to the acquisition of the Calloway properties. Based on my review of the Invoice, I have allocated 2% of those legal services to the LP and its commercial activities. This corresponds to HST of $305.11 (i.e., $15,255.62 × 0.02).
(b) Fasken Invoice No. 582365
[32] On July 20, 2011, the Toronto office of Fasken issued Invoice no. 582365 to the LP, in the amount of $106,197.99, for professional services in connection with a matter described as “2011 Debenture Offering”.[27] The itemized amounts on the Invoice were a professional fee of $92,871.90, disbursements of $1,123.24, and HST of $12,202.85. A handwritten notation on the first page of the Invoice indicates that it related to “$40M Conv. Deb. Expensed Transaction Costs” (which was the subject of the June 2011 Offering) , which is confirmed by a review of the next 10 pages of the Invoice, which set out a dated description of the legal services provided by various lawyers and paralegals at Fasken.
[33] Most of the entries in the above description of Fasken’s services related to the June 2011 Offering; however, one entry (on page 3) referred to work done on June 10, 2011 by Martin Fisher‑Haydis in respect of a “significant acquisition”, but the same entry also refers to “discussions … regarding form 44‑101F1 requirements relating to significant acquisitions”, which causes me to think that much of the 3.7 hours worked by Mr. Fisher‑Haydis on that day related to the June 2011 Offering, more so than to an Acquisition.
[34] A second entry (on page 5) refers to 0.8 hour of work by Andrew Teehan described as “Drafted business acquisition report for the Calloway property acquisition”. Based on my review of Invoice no. 261659, I have allocated 1% of the legal services that are the subject of that Invoice to the Acquisition of the Calloway Properties. This corresponds to HST of $122.03 (i.e., $12,202.85 × 0.01).
(c) Fasken Invoice No. 760080
[35] On September 30, 2013, the Toronto office of Fasken issued Invoice no. 760080 to the LP, in the amount of $423,431.70, for professional services in connection with a matter described as “2013 Equity Offering”.[28] The itemized amounts on the Invoice were a professional fee of $366,000.50, disbursements of $8,853.87, HST of $48,396.94, and the British Columbia provincial sales tax (“PST”) of $180.39. A review of the Invoice confirms that most of the described legal services related to the 2013 Offering (as defined in subparagraph 24(e) above).
[36] However, Invoice no. 760080 contained a few entries that related to the Acquisition of the First Capital Properties. For instance, on May 1, 2013, an associate worked on “Correspondence regarding Retrocom acquisition from First Capital”, and a paralegal worked on “new incorporations for June acquisition”. On May 3, 2013, a different paralegal began to work on the incorporation of eight federal corporations that were to be used to acquire some of the First Capital Properties, and a different associate began a “review [of a] purchase and sale agreement” (although a reading of that associate’s complete time entry seems to suggest that he was reviewing the purchase and sale agreement in order to disclose it in the prospectus related to the 2013 Offering). From May 6, 2013 to June 7, 2013 there were numerous time entries, mostly by several paralegals (but a few by associates), who were working on the incorporation and organization of the eight federal corporations, as well as other corporations in Québec, Alberta and British Columbia, which were to be used as nominee corporations in the Acquisition of the First Capital Properties. There were several other time entries, by associates and paralegals, that referred to the “First Capital matter” or the “First Capital acquisition”, or to “Correspondence with Goodmans (who seemed to be lead counsel for the LP in respect of the Acquisition of the First Capital Properties). Notably, one time entry by a partner related to “Numerous emails and telephone calls regarding acquisition and private placement closing”, and a time entry by an associate related to “Correspondence regarding BC notices of change and registrations in Land Titles Office.”
[37] In view of the time entries described in the previous paragraph, as well as other similar time entries in Invoice no. 760080, I have allocated 10% of the legal services that were the subject of that Invoice to the Acquisition of the First Capital Properties. This corresponds to HST of $4,839.69 (i.e., $48,396.94 × 0.10).
(d) KPMG Invoice No. 44045537
[38] On May 6, 2011, the Toronto office of KPMG LLP (“KPMG”) issued Invoice no. 44045537 to the LP, in the amount of $102,773.50. The itemized amounts on the Invoice were a professional fee of $85,000, a CPAB participation fee surcharge (at 2%) of $1,700, an administration fee of $4,250, and HST of $11,823.50. The Invoice contained the following description:
Billing for professional services rendered in connection with the filing of the short form prospectus of Retrocom Mid‑Market Real Estate Investment Trust relating to the sale and issue of trust units as noted in our engagement letter dated February 22, 2011.
[39] Thus, although the above Invoice was addressed to the LP, the Services that were the subject of the Invoice related to the filing by the REIT of its Prospectus (as defined below) in respect of the March 2011 Offering of REIT Units.
(e) KPMG Invoice No. 7000002022
[40] On June 19, 2013, the Toronto office of KPMG issued Invoice no. 7000002022 to the LP, in the amount of $114,864.50.[31] The itemized amounts on the Invoice were a professional fee of $95,000, an administrative surcharge of $4,750, disbursements of $1,900, and HST of $13,214.50. The Invoice contained the following description:
Billing for professional services rendered in connection with the filing of the short form prospectus of Retrocom Mid‑Market Real Estate Investment Trust relating to the sale and issue of subscription receipts and convertible debentures as noted in our engagement letter dated May 2, 2013.[32]
[41] Thus, although the above Invoice was addressed to the LP, the Services that were the subject of the Invoice related to the filing by the REIT of its Prospectus (as defined below) in respect of the 2013 Offering by the REIT of subscription receipts and debentures.
(f) E&Y Invoice CA0189780361
[42] On May 13, 2013, the Toronto office of Ernst & Young LLP (“E&Y”) issued Invoice no. CA0189780361 to the REIT, in the amount of $80,006.83.[33] The itemized amounts on the Invoice were aggregate professional fees and expenses of $70,802.50, and HST of $9,204.33. The description on the Invoice stated:
DESCRIPTION
|
|
CAD
|
Billing for the professional services rendered in connection with the review of Q1 2012 and 2013
|
|
$30,000.00 |
Billing for the professional services rendered in connection with the review of 2011 and work related to the Prospectus
|
|
30,000.00 |
For procedures performed in relation to the amended prospectus
|
|
3,500.00 |
Expenses
|
|
7,302.50
|
|
Subtotal: |
70,802.50 |
|
HST 13% Ontario: |
9,204.33
|
|
|
|
[43] During her direct examination, Ms. Tam explained that the first item in the above description related to E&Y’s review engagement in respect of Q1 2012 and 2013 of the LP’s financial statements, and the second item related to E&Y’s engagement to review the Prospectus for one of the Financings.
[44] Although the second and third items in the above description related to a Financing, based on my understanding that the financial statements of the REIT, the LP and perhaps other entities were consolidated, I am of the view that the first item (which dealt with the consolidated financial statements) related, in part, to the LP and its commercial activities. Accordingly, based on my review of the Invoice, I have allocated 25% of the fees for that item to the LP. This corresponds to HST in the amount of $975 (i.e., $30,000 × 0.25 × 0.13).
(g) TSX Invoice No. INV-100-0059702
[45] On May 31, 2013, TSX Inc. (“TSX”) issued Invoice no. INV‑100‑0059702 to the REIT, in the amount of $158,617.74.[36] The itemized amounts on the Invoice were a fee of $140,369.68, and GST/HST of $18,248.06. The Invoice described the product/service as “Additional Listing Fee — Public Offering — Prospectus Offering and Supplemental Listing of Subscription Receipts and 5.5% Extendible.”
[46] This Invoice related to the REIT and one of the Financings, and not to the LP.
(h) TSX Invoice No. INV-100-0059703
[47] Also on May 31, 2013, TSX issued Invoice no. INV‑100‑0059703 to the REIT, in the amount of $11,300.[37] The itemized amounts on the Invoice were a fee of $10,000, and GST/HST of $1,300. The Invoice described the product/service as “Filing Fee — Prospectus Offering and Supplemental Listing of Subscription Receipts and 5.5% Extendible.”
[48] Like the preceding Invoice, this Invoice related to the REIT and one of the Financings, and not to the LP.
(i) TSX Invoice No. INV-100-0060576
[49] On June 18, 2013, TSX issued Invoice no. INV‑100‑0060576 to the REIT, in the amount of $25,846.21.[38] The itemized amounts on the Invoice were a fee of $22,872.75, and GST/HST of $2,973.46. The Invoice described the product/service as “Additional Listing Fee — Public Offering — Prospectus Offering and Supplemental Listing of Subscription Receipts and 5.5% Extendible.”
[50] Like the preceding two Invoices, this Invoice related to the REIT and one of the Financings, and not to the LP.
(j) TSX Invoice No. INV-100-0063952
[51] On August 31, 2013, TSX issued Invoice no. INV‑100‑0063952 to the REIT, in the amount of $12,084.97.[39] The itemized amounts on the Invoice were a fee of $10,694.68, and GST/HST of $1,390.31. The Invoice described the product/service as “Additional Listing Fee — Private Placement — Acquisition of 2 Properties Co‑owned by SmartCentres and Wal art [sic].”
[52] Notwithstanding that the description on this Invoice referred to an acquisition of two properties, inasmuch as the invoice was for an additional listing fee, it is my view that the Invoice related primarily to the REIT and one of the Financings, and not to the LP.
(k) RR Donnelley Invoice No. 19-53096400
[53] On June 27, 2013, RR Donnelley Canada, a Division of Moore Canada Corporation (“RR Donnelley”) issued Invoice no. 19‑53096400 to the REIT, in the amount of $49,281.17.[41] The itemized amounts on the Invoice were a fee of $39,032.48 for prepressing, printing, binding, distributing, desktop publishing and electronically distributing a Final Prospectus and an Amended Final Prospectus, messenger services and freight charges of $4,595.22, GST of $205.45, PST‑BC of $233.58, HST‑ON of $5,137.42 and QST of $77.02.
[54] As the RR Donnelley Invoice pertained to a Final Prospectus and an Amended Prospectus, it related to the REIT, and not to the LP.
(l) RICOH Invoice No. TOR13060839
[55] On June 27, 2013, RICOH Canada Inc. (“RICOH”) issued Invoice no. TOR13060839 to Fasken, in the amount of $1,105.14. The itemized amounts on the Invoice were total sales of $978, and PST/HST/QST of $127.14. The Invoice related to the preparation of closing books in respect of a Financing.
[56] Even though Ms. Tam indicated that Fasken engaged RICOH on behalf of the LP, I am of the view that the closing books related to the REIT and one of the Financings, and not to the LP.
(m) Aikins Invoice No. 751506
[57] On June 30, 2013, Aikins, MacAulay & Thorvaldson LLP (“Aikins”) issued Invoice no. 751506 to the REIT, in the amount of $3,384.37.[43] The itemized amounts on the Invoice were a fee of $2,700, disbursements of $16.26, service and other charges of $111.50, PST of $189, and GST/HST of $367.61. The Invoice related to professional services in connection with a matter described as “Retrocom Mid‑Market Real Estate Investment Trust — Offering of Subscription Receipts and Debentures”. The itemized Services included reviewing a preliminary prospectus, a final prospectus and an amended and restated prospectus, drafting an opinion and corresponding with the client.
[58] It is my view that the Aikins Invoice related primarily to the REIT and one of the Financings, and not to the LP.
(n) Stewart McKelvey Invoice No. 90316212
[59] On June 30, 2013, the Saint John office of Stewart McKelvey issued Invoice no. 90316212 to Fasken, in the amount of $1,896.37.[44] The itemized amounts on the Invoice were a fee for professional services and other charges of $1,663.75, disbursements of $14.45, and HST of $218.17. The Invoice related a matter described as “Retrocom Mid‑Market Real Estate Investment Trust — Offering”. The Invoice did not itemize the legal services performed by Stewart McKelvey.
[60] It is my view that the Stewart McKelvey Invoice related primarily to the REIT and one of the Financings, and not to the LP.
(o) MLT Invoice No. 534970
[61] On July 15, 2013, the Regina office of MacPherson Leslie & Tyerman LLP (“MLT”) issued Invoice no. 534970 to the REIT, in the amount of $2,389.50.[45] The itemized amounts on the Invoice were a professional fee of $2,025 (with no disbursements), PST of $101.25, and GST/HST of $263.25. The Invoice related to professional services in connection with a matter described as “Offering of 9,530,000 Subscription Receipts and $25,000,000 Aggregate Principal Amount of 5.5% Extendible Convertible Unsecured Subordinated Debentures”. The itemized Services were reviewing a Prospectus, drafting an opinion and corresponding with the client.
[62] It is my view that the MLT Invoice related primarily to the REIT and one of the Financings, and not to the LP.
(p) TD Securities Invoice No. T2013-174
[63] On July 5, 2013, TD Securities issued Invoice no. T2013‑174 to the REIT, in the amount of $95,055.05.[46] The itemized amounts on the Invoice were underwriting syndicate expenses (referencing an invoice issued by Torys LLP (“Torys”)) in the amount of $91,682.10, and out‑of‑pocket expenses in the amount of $3,372.95. The TD Securities Invoice also indicated that Torys’ legal invoice included HST of $10,535.53.
[64] Ms. Tam stated that TD Securities had been the lead underwriter for the 2013 Offering of REIT Units, that Torys had been legal counsel to the underwriters and that the issuer (i.e., the REIT) was responsible for Torys’ fee.
[65] It is my view that the TD Securities Invoice related to the REIT and one of the Financings, and not to the LP.
(2) Other Expenditures Relating to the REIT
[66] Other Invoices that related substantially or primarily to the REIT are discussed below.
(a) Nope Invoices No. 01306 and No. 01309
[67] On February 27, 2013, Nope Advertising & Design (“Nope”) issued Invoice no. 01306 to the REIT, in the amount of $15,639.20. The itemized amounts on the Invoice were a price of $13,840, and HST of $1,799.20. The Invoice showed the job type as “Design”, and it described the subject of the Invoice as “2012 Retrocom Reit [sic] Annual Report Design & Printing (1/2 Payment)”. The amount of the Invoice was paid to Nope by a cheque drawn on the LP’s bank account.
[68] During her direct examination, Ms. Tam confirmed that the Invoice related to the REIT’s 2012 annual report. In response to a question from the LP’s counsel, asking whether Nope’s work was “related to the financings that the REIT was engaged in”, Ms. Tam said that the amount of the Invoice formed some of the LP’s marketing costs that were incurred “in order to just get the names out there, [so] that the general public investors [would] become aware of the investment pieces that will be in matters of such. So it would be required as part of the financing initiative.”
[69] On April 10, 2013, Nope issued Invoice no. 01309 to the LP (notwithstanding that the previous Invoice had been addressed to the REIT), in the amount of $19,594.20. The total price (as it was called in the Invoice) was $17,340.00, allocated as follows:
Job Type
|
Description
|
|
Price
|
DESIGN
|
2012 Retrocom REIT Annual Report Design & Printing (2/2 Final Payment) |
|
$13,840.00
|
PHOTO
|
Photo Shoot/Media Day (March 5 & 6) |
|
$2,000.00
|
DESIGN
|
2012 Quarterly Report Covers |
|
$1,500.00
|
|
|
|
|
The amount of the HST was $2,254.20.
[70] During her direct examination, Ms. Tam described the second Nope Invoice in this manner:
This pertains to the second payment to Nope Advertising related to their providing the work for helping the REIT to compile its annual report and its associated design and printing, as well as some of the photo shoot expenses as related to the management team of the partnership.
[71] Given that the photo shoot and media day Services related to the LP’s management team, I consider those Services to have related to the LP’s commercial activities. As the price of those Services was $2,000.00, the corresponding HST was $260 (i.e., $2,000.00 × 0.13).
[72] When asked by counsel for the LP whether the second Nope Invoice “in any way related to the financing activities that were being carried on by the REIT”, Ms. Tam replied:
That’s correct. The partnership, through the REIT, would need marketing to the costs such as these to be incurred in order to produce the annual report, which goes into public offering documents of raising the financing.
[73] The LP did not put into evidence any agreement, engagement letter, work order or other similar document in respect of the Services provided by Nope. Therefore, I cannot ascertain whether the quarterly report covers related to the REIT or the LP. Given that the initial item in the Invoice related to the REIT’s annual report, I assume that the quarterly report covers also related to the REIT.
[74] Based on the description in Nope’s Invoices, it appears that the Expenditures in respect of the 2012 annual report and 2012 quarterly report covers did not relate to the Acquisitions, the Properties or the LP.
(b) KPMG Invoice No. 44712193
[75] On March 15, 2013, the Toronto office of KPMG issued Invoice no. 44712193 to the LP, in the amount of $17,263.58.[55] The itemized amounts on the Invoice were a professional fee of $14,550, disbursements of $727.50, and HST of $1,986.08. The Invoice indicated that the professional services that were the subject of the Invoice related to the following (together with the fee allocation, disbursements and HST):
Description
|
Note
|
Amount
|
Our review and assistance with the preparation of the calculation of Retrocom Mid‑Market REIT’s 2012 taxable income and CDS reporting;
|
(REIT)
|
$6,000.00
|
Assistance and advice in connection with drafting the Agency Agreement;
|
(LP)
|
2,800.00
|
Review of the income tax disclosure in the October 31, 2012 Short … Prospectus;
|
(LP)
|
450.00
|
Assistance and advice in connection with the Deferred Unit Plan; and
|
(REIT)
|
3,000.00
|
Various discussions in connection with the tax implications of current versus capital expenditures and the implication of a potential asset acquisition with respect to the REIT rules.
|
(LP)
|
2,300.00
|
|
|
14,550.00
|
Disbursements, including secretarial
|
(LP)
|
727.50
|
|
|
15,277.50
|
HST
|
|
1,986.08
|
|
|
|
[76] The second column in the above reproduction of the above KPMG Invoice sets out various handwritten annotations made by someone whose identity is not known to me. Notwithstanding those handwritten annotations, subject to the next paragraph, it is my view that only the second and the fifth entries above (i.e., the drafting of the 2013 Agency Agreement and the potential asset acquisition) related entirely to the LP’s commercial activities. The HST in respect of those two entries was $663 (i.e., ($2,800 + $2,300) × 0.13). The first, third and fourth entries related to the REIT or the Financings.
[77] With respect to the first entry above, Ms. Tam testified that, because the REIT’s financial statements were consolidated, some of the income‑tax‑related services provided by KPMG related to the LP. Based on my review of the Invoice, I have allocated 25% of the fee for the income‑tax‑related services to the LP and its commercial activities, which corresponds to HST in the amount of $195 (i.e., $6,000 × 0.25 × 0.13).
[78] The total of the allocated HST amounts in the preceding two paragraphs is $858 (i.e., $663 + $195).
(c) KPMG Invoice No. 44712223
[79] On March 15, 2013, the Toronto office of KPMG issued Invoice no. 44712223 to the LP, in the amount of $108,154.00.[57] The itemized amounts on the Invoice were a professional fee of $89,450, a CPAB participation fee surcharge (at 2%) of $1,789, disbursements of $4,472.50, and HST of $12,442.50. The subject of the Invoice was described as “Final billing for professional services rendered in connection with the audit of Retrocom Mid‑Market REIT for the year ended December 31, 2012”.
[80] In my view, this Invoice related primarily to the REIT. However, as noted above, Ms Tam stated that the financial statements of the REIT and the LP were consolidated. Based on my review of the Invoice, I have allocated 25% of the fees, surcharge and disbursements to the LP and its commercial activities. This corresponds to HST in the amount of $3,110.62 (i.e., $12,442.50 × 0.25).
(d) KPMG Invoice No. 7000001989
[81] On June 18, 2013, the Toronto office of KPMG issued Invoice no. 7000001989 to the LP, in the amount of $32,343.43.[59] The itemized amounts on the Invoice were a professional fee of $26,750, an administrative surcharge of $1,337.50, disbursements of $535, and HST of $3,720.93. The subject of the Invoice was described as “Billing for professional services rendered in connection with the review of interim financial statements of Retrocom Mid‑Market REIT for the period ended March 31, 2013”.
[82] Like the Invoice discussed immediately above, this Invoice too related primarily to the REIT. However, as the financial statements were consolidated, and based on my review of the Invoice, I allocated 25% of the fees, surcharge and disbursements to the LP and its commercial activities. This corresponds to HST in the amount of $930.23 (i.e., $3,720.93 × 0.25).
(e) KPMG Invoice No. 7000003124
[83] On August 14, 2013, the Toronto office of KPMG issued Invoice no. 7000003124 to the LP, in the amount of $32,343.43.[60] Similar to the Invoice dated June 18, 2013 (i.e., Exhibit A‑11), the itemized items on the Invoice dated August 14, 2013 were a professional fee of $26,750, an administrative surcharge of $1,337.50, disbursements of $535, and HST of $3,720.93. The subject of the Invoice was described as “Billing for professional services rendered in connection with the review of the condensed consolidated interim financial statements of Retrocom REIT for the six months period ended June 30, 2013”.
[84] Like the two Invoices discussed immediately above, this Invoice related primarily to the REIT. However, given that the description of professional services referred to consolidated interim financial statements, I accept that there was a connection to the LP and its commercial activities. As I did above, and based on my review of this Invoice, I have allocated 25% of the fees, surcharge and disbursements to the LP and its commercial activities. This corresponds to HST in the amount of $930.23 (i.e., $3,720.93 × 0.25).
(f) CST Invoice No. DFE 10009582
[85] On June 22, 2013, Canadian Stock Transfer (“CST”) issued Invoice no. DFE 10009582 to the REIT, in the amount of $9,099.73. The itemized amounts on the Invoice were service fees of $2,561, corporate action fees of $5,000, expenses of $391.86, and GST/HST of $1,046.87.
[86] During her direct examination, Ms. Tam stated that CST was the transfer agent for the REIT Units, and that the REIT needed a transfer agent to maintain, as a recurring service, the ledger of the REIT Units that were issued in the course of the Financings.
[87] The CST Invoice related to the REIT, and not to the LP or its commercial activities.
(3) Expenditures Relating to the Acquisitions
[88] The Invoices that related substantially or primarily to the Acquisitions are discussed below.
(a) E&Y Invoice No. CA0189776523
[89] On May 3, 2013, the Toronto office of E&Y issued Invoice no. CA0189776523 to the REIT, in the amount of $81,896.75. The itemized amounts on the Invoice were a professional fee of $65,000, expenses of $7,475, and HST of $9,421.75. The description on the Invoice stated, “Billing for professional services rendered in connection with the audit of the 2012 acquisition carve‑out statements.”
[90] In her direct examination, Ms. Tam explained that, when the LP desired to acquire, from a prospective vendor, a portfolio of properties that was part of a larger group of properties owned by the vendor, the LP engaged an accounting firm to prepare financial statements in respect of the target portfolio of properties, which, for this purpose, was carved out of the vendor’s larger group of properties. This was part of the usual due diligence that the LP undertook when contemplating a possible acquisition.
[91] Ms. Tam also explained that the REIT did not hold title to any of the Properties; rather, title to all of the Properties was held by the LP. Therefore, the services provided by E&Y related to a proposed acquisition by the LP, such that the LP paid the amount of the Invoice to E&Y, even though the Invoice had been addressed to the REIT. Ms. Tam understood that the LP had incurred the expenses.
[92] Based on my review of the E&Y Invoice and my understanding of Ms. Tam’s testimony, it appears that all of the audit services described therein related to an Acquisition or a proposed acquisition of a portfolio of properties by the LP in 2012. The HST in respect thereof was $9,421.75.
(b) Goodmans Invoice No. 606057
[93] On June 28, 2013, Goodmans LLP (“Goodmans”) issued Invoice no. 606057 to the LP, in the amount of $423,431.70. [66] The itemized amounts on the Invoice were a professional fee of $400,000.00, disbursements of $17,942.72, and HST of $54,262.35. The Invoice related to professional services in connection with a matter described as “Proposed purchase of First Capital Realty Inc. Retail Portfolio Properties in BC, AB, ON and QC”. Based on my review of the Invoice, it appears that all of the legal services described therein related to the Acquisition by the LP (or its subsidiaries or affiliates) of the First Capital Properties. As indicated above, the amount of the HST was $54,262.35.
[94] Apparently the Minister has allowed the majority of the ITCs in respect of the HST set out in the Goodmans Invoice. However, it seems that there is a discrepancy that has not yet been resolved.
(4) Expenditure Relating to the Properties — Altus Invoice No. 33887
[95] One Invoice related to the Properties per se. On March 28, 2013, Altus Group Limited (“Altus”) issued Invoice No. 33887 to the LP, in the amount of $183,499.34. The itemized amounts on the Invoice were fees for services of $150,360.00, disbursements of $12,028.80, and HST of $21,110.54. This Invoice is discussed further in paragraphs 103‑104 below.
[96] Based on my review of the Altus engagement letter and this Invoice (as set out below), it is my view that Altus’s Services related to the LP and its commercial activities. As noted above, the amount of the HST was $21,110.54.
IV. ANALYSIS
A. Statutory Provisions
[97] The LP and the Crown (the “Parties”) agree that the requisite conditions for an ITC are set out in subsection 169(1) of the Excise Tax Act (the “ETA”). In the context of these Appeals, in order for the LP to have qualified for the ITCs in respect of the Expenditures, it needed to satisfy the following conditions:
(a) the LP needed to have acquired the Services;
(b) the goods and services tax or the harmonized sales tax (“GST/HST”) needed to have become payable, or to have been paid, by the LP in respect of the supply of the Services; and
(c) the LP needed to have acquired the Services for consumption, use or supply in the course of the LP’s commercial activities.
B. Acquisition of Services
[98] The LP submits that it acquired the Services in one or more of several ways:
(a) The LP acquired the Services directly in its own name.
(b) The LP acquired the Services indirectly, through the intermediary actions of the REIT, acting as the agent of the LP.
(c) The LP was deemed to have acquired the Services, by reason of one or more of several deeming provisions in the ETA.
(1) Direct acquisition
[99] The LP submits that some of the Services, particularly those which were billed directly by a service-provider to the LP, were acquired directly by the LP. Given the close relationship between the LP and the REIT, and given that the LP and the REIT shared the same office premises and had the same mailing address, it is difficult to ascertain whether the name of the recipient shown on a particular invoice or bill was indicative of the entity to which the particular Services were provided, or whether the particular name was inserted merely for convenience, or perhaps by reason of an error or oversight.
[100] The difficulty in determining whether the LP acquired any of the Services directly is compounded by the absence of all but one of the engagement letters or retainer agreements that may have been made in respect of the Services.
[101] The one engagement letter that was put into evidence pertained to Altus, which made a proposal dated September 25, 2012, to provide valuation and consulting services.[71] As stated in that proposal, “The purpose of the [proposed] appraisal [was] to estimate the Fair Value of each of the 33 [or 34] individual properties forming the Retrocom portfolio identified” therein.[72] Altus addressed its proposal to the REIT, notwithstanding that the Properties were owned by the LP. The proposal was signed by Altus’s executive vice president. On November 21, 2012, Altus’s proposal was accepted by the REIT, and the acceptance endorsement at the end of the document was signed by an officer of the REIT.[73]
[102] Altus’s proposal specified that the contemplated “appraisals will function as support for [reporting in accordance with] International Financial Reporting Standards (IFRS).” The same page of the proposal went on to state “that this proposal is to provide valuation and consulting services only and is not to be relied upon, nor is it intended for realty tax assessment purposes.”[74] Later in the proposal, the following statement appears:
The annual appraisal reports can be upgraded to an appraisal suitable for financing within 90 day of the Annual [sic] valuation date with a fee for the initial appraisal (set out in Appendix “C”) being credited towards the fee for the financing appraisal.[75]
[103] On March 28, 2013, Altus sent an Invoice, which described the scope of its services as “Retrocom IFRS 2012 Q4”. There was no indication on the Invoice that the appraisal reports had been upgraded to be suitable for financing. Notably, the Invoice was addressed to the LP, and not the REIT. Thus, it seems that, sometime between writing its proposal and rendering its Invoice, Altus had learned that the owner of the Properties was the LP. The total of the fees and disbursements billed by Altus was $162,388.80, and the amount of the HST charged was $21,110.54.[76]
[104] Given that it was the LP, and not the REIT, that owned the Properties, and in the absence of any evidence indicating that Altus’s appraisals had been upgraded to be suitable for financing purposes, I am of the view that Altus provided its valuation and consulting services to the LP, and not to the REIT, and that it was the LP, and not the REIT, that was liable to pay the consideration for those services.
(2) Agency
[105] As indicated above, the LP submits that the REIT acquired the Services as its agent, by reason of implied agency, by reason of the Agency Agreements, or by reason of the operation of law. The above submissions will be considered below. First, however, it would be helpful to consider more closely the relationship between the REIT and the LP, and the nature of the Services, in order to ascertain which, if any, of the Services were suitable for acquisition by the REIT, in its capacity (if any) as the agent of the LP.
(a) Relationship between the REIT and the LP
[106] As indicated above, throughout 2011, 2012 and 2013, the REIT owned all of the issued Class A LP Units, which represented a 99.99% voting interest in the LP. The other 0.01% voting interest in the LP, which was not represented by an issued certificate, was held by a trust that was controlled by the REIT. One of the essential ingredients of an agency relationship is the principal’s control of the agent’s actions. Given that the REIT held, directly or indirectly, 100% of the voting interests in the LP, in the context of agency, although possible, it would not be expected that the LP would be found to control the REIT’s actions.
[107] The capital of the REIT and the capital of the LP were both represented by units, albeit of a significantly different nature (one entity being a trust and the other being a partnership). When public financing was required, it was the REIT, and not the LP, that went to the market. On the closing of a public offering, the REIT issued its own units or debentures, and not those of the LP, to the members of the public who had subscribed for units or debentures.
[108] The REIT filed, with the applicable securities regulator, an Annual Information Form (an “AIF”) for each of the years that are relevant to these Appeals, i.e., 2011, 2012 and 2013. As well, during that period, the REIT prepared and distributed five Short Form Prospectuses (each, a “Prospectus”) in respect of the Offerings described in paragraph 24 above. Each AIF and each Prospectus contained a “diagram [which] illustrated the organizational structure of the REIT”. Each diagram showed that the Properties were held by the LP, and that the entire voting interest in the LP was held, directly or indirectly, by the REIT. Apart from the organizational documents and a few other brief references, very little was said in the AIFs or the Prospectuses about the LP. While each Prospectus stated that the amount of cash distributions by the REIT “will depend on numerous factors including the operations and assets of” the LP, for the most part each Prospectus used the phrase “the REIT’s properties” (or something similar) to refer to the Properties (even though those properties were actually held by the LP). In other words, the language of the Prospectuses did not suggest that, in 2011, 2012 and 2013, the REIT was acting on behalf of the LP.
[109] Three of the five Prospectuses defined in paragraph 108 above related to Offerings of REIT Units, one of those Prospectuses related to an Offering of 5.45% convertible unsecured subordinated debentures (the “5.45% Debentures”), and the fifth Prospectus related to an Offering of both (i) subscription receipts that were exchangeable (on the fulfilment of certain conditions) for REIT Units, and (ii) 5.50% extendible convertible unsecured subordinated debentures (the “5.50% Debentures”).
[110] None of the Prospectuses related to an offering of LP Units, debentures or other securities of the LP, nor were any of the securities issued under the Prospectuses convertible into, or exchangeable for, LP Units.
[111] Each Prospectus contained a statement of the intended use of the proceeds of the particular Offering. The following such statement was contained in the Prospectus dated March 8, 2011:
The estimated net proceeds of the Offering after deducting the Underwriters’ fee of $2,000,700 and the expenses of the Offering estimated at approximately $400,000, will be $47,616,800, assuming no exercise of the Over‑Allotment Option, or approximately $54,819,320 if the Over‑Allotment Option is exercised in full. The REIT intends to use the net proceeds to repay funds drawn on the REIT’s operating line for the closing of the Counsel Transaction (as hereinafter defined), to partially fund the Proposed Acquisition (as hereinafter defined) and for general trust purposes. [Emphasis added.]
The above statement did not say that the proceeds of that offering belonged to the LP. Rather, the statement suggested or implied that the REIT was the owner of those proceeds, at least to the extent that they were intended for general trust purposes.
[112] Each of the other four Prospectuses also contained a use‑of‑proceeds provision, which began by indicating the amount of the estimated net proceeds of the particular Offering, and then went on to describe the intended use of those proceeds. The last sentence in the use‑of‑proceeds provision in the Prospectus dated June 21, 2011, which related to the offering of the 5.45% Debentures, stated:
The REIT intends to use the net proceeds to redeem the 2005 Debentures on or after July 31, 2011, to fund planned redevelopment projects and for general trust purposes. [Emphasis added.]
The term “2005 Debentures” in the above quotation referred to certain 7.5% convertible unsecured subordinated debentures that had been issued by the REIT (and not the LP) in 2005 and that were due on July 31, 2012.
[113] The last sentence in the use‑of‑proceeds provision in the Prospectus dated January 27, 2012, which related to the offering of 4,500,000 REIT Units, stated:
The REIT intends to use the net proceeds to fund development and re‑development activities, fund future potential acquisitions, and for general trust purposes.[84] [Emphasis added.]
[114] The last sentence in the use‑of‑proceeds provision in the Prospectus dated October 31, 2012, which related to the offering of 7,150,000 REIT Units, stated:
The REIT intends to use the net proceeds to partially fund the Acquisition [of three investment properties described in that Prospectus], to fund development and re‑development activities and for general trust purposes.[85] [Emphasis added.]
[115] The second sentence in the use‑of‑proceeds provision in the Prospectus dated May 13, 2013, which related to the offering of 9,530,000 subscription receipts and the 5.50% Debentures, stated:
The REIT intends to use the net proceeds to partially fund the Acquisition [of twelve investment properties described in that Prospectus].
That Prospectus also stated that the “REIT, through its subsidiary Retrocom Limited Partnership”, had agreed to purchase those twelve properties from First Capital Realty Inc. and certain of its affiliates.
[116] As indicated above, some of the proceeds of the various Offerings were used to fund acquisitions of investment properties or for development and redevelopment activities. Those acquisitions and activities were conducted by the LP, by using, in part, funds raised by the REIT. While that arrangement could suggest that the REIT was acting as the LP’s agent, in actuality, the flow‑of‑fund documents that will be discussed below show that the REIT raised funds in its own right and on its own behalf, and then invested those funds in the LP.
[117] Concerning the ownership of the Properties, the Prospectus dated March 8, 2011 contained the following statement:
Retrocom REIT focuses on owning and acquiring community‑based retail properties in cities across Canada with the objective of producing a geographically diversified portfolio of properties with stable and growing cash flows. The REIT invests primarily in income‑producing community‑based retail properties with strong tenant covenants, stable yields, lower vacancy levels and strong growth potential. The REIT continually reviews its portfolio and acquires additional properties with these characteristics to provide additional cash flow and further enhance the long‑term portfolio value. [Emphasis added.]
Each of the other four Prospectuses contained a similar (but not identical) statement. In drafting a prospectus or other public‑offering document, it is common to describe the issuer and its subsidiaries as a single consolidated entity, which is obviously what was done by the drafters of the Prospectuses. However, it is noteworthy that the Prospectuses, in describing the consolidated entity, referred to the REIT, and not to the LP.
[118] Some of the Prospectuses (to the extent that they are set out in the various exhibits) contained consolidated financial statements. All of those financial statements showed the REIT, and not the LP, as the entity whose holdings were consolidated.
[119] In the Prospectuses, the REIT did not disclose that it was acting as the agent of the LP with respect to the Offering that was the subject of each particular Prospectus.
(iii) Annual Information Forms
[120] Returning to a review of the AIFs, each AIF contained a slightly abbreviated statement similar to that found in the Prospectus dated March 8, 2011 and quoted in paragraph 117 above. As well, the AIF for the year ended December 31, 2011 contained the following statement:
As of December 31, 2011, the REIT owned a portfolio of 32 investment properties located in 8 provinces and the Yukon Territory, one parcel of land for development located in New Brunswick, and an interest in the Joint Venture Property. [Emphasis added.]
I understand that it was on the basis of consolidated accounting that the 2011 AIF described the REIT, and not the LP, as owning the 32 investment properties, the vacant parcel of land and the interest in the joint venture.
[121] Nowhere in any of the three AIFs did the REIT disclose that it was acting as the agent of the LP. Furthermore, the AIF for the year ended December 31, 2012 contained a list of material contracts, which is preceded by the following statement:
The following are the only material contracts, other than contracts entered into in the ordinary course of business, entered into in the most recently completed financial year or before the most recently completed financial year but still in effect, or proposed to be entered into, by the REIT or its subsidiaries:
The list that followed the above statement contained seven agreements, none of which was the Agency Agreement dated March 29, 2012.
[122] The AIF for the year ended December 31, 2013 also contained a list of material contracts, which was preceded by a statement identical to that quoted in the preceding paragraph. The 2013 AIF listed ten material contracts. That list did not contain either the Agency Agreement dated March 29, 2012 or the Agency Agreement dated January 31, 2013.
[123] To conclude this portion of the review of the relationship between the REIT and the LP, as set out in the AIFs and the Prospectuses, there was nothing in any of those documents to suggest that, when the REIT raised money through the Offerings, it was doing so as the agent of the LP.
(iv) Flow‑of‑Funds Documents
[124] In the context of these Appeals, the flow‑of‑funds documents related to the Offerings are highly informative. As an example, I will consider the documents pertaining to the use of the proceeds of the March 15, 2011 offering of 8,550,000 REIT Units. Each of those documents was dated as of March 15, 2011.
[125] The first document in Exhibit R‑10 was a Direction given by the REIT to its solicitors, Fasken. The significant portion of that Direction read as follows:
From monies being held by you in trust on behalf of the undersigned, you are hereby authorized and directed to pay the amounts of:
$50,012,498.25 directly to Retrocom Limited Partnership representing consideration for the subscription by the undersigned for 362,081,435 Class A Units of Retrocom Limited Partnership; and
$5,001.75 directly to GP Trust representing a contribution by the undersigned to GP Trust;…. [Emphasis added.]
The Direction was given by the REIT, and was signed by Richard Michaeloff, in his capacity as a trustee of the REIT.
[126] It is significant that the above Direction stated that Fasken was holding the proceeds of the Offering on behalf of the REIT. If the REIT had raised those proceeds in its capacity as the agent of the LP, one would have expected the Direction to state and acknowledge that the proceeds were held by Faskens on behalf of the LP.
[127] It is also significant that the Direction indicated that the money was paid by the REIT to the LP, as the subscription price for LP Units. It was not a payment that the REIT made to the LP to transfer money that the REIT had obtained in its capacity as the agent of the LP and that already belonged to the LP.
[128] The second document in Exhibit R‑10 was a Subscription by the REIT for 362,081,435 Class A LP Units. The operative portion of the Subscription read as follows:
The undersigned hereby subscribes for 362,081,435 Class A Units of RETROCOM LIMITED PARTNERSHIP and tenders herewith the sum of $50,012,498.25 in full payment of the aggregate price for such Class A Units.
The Subscription was given by the REIT, and was signed by Richard Michaeloff, in his capacity as a trustee of the REIT.
[129] Notably, the Subscription indicated that the $50,012,498.25 was tendered by the REIT to the LP as the subscription price of the Class A LP Units, which is not consistent with the LP’s submission in these Appeals that those funds had been raised by the REIT in its capacity as the agent of the LP.
[130] The third document in Exhibit R‑10 was a Resolution of GP Trust, which was the general partner of the LP. The descriptive caption (or subtitle) of the Resolution was “SUBSCRIPTION FOR UNITS”, and the operative portion of the Resolution read as follows:
RESOLVED THAT:
1. 362,081,435 Class A Units of the Partnership are issued to Retrocom Mid‑Market Real Estate Investment Trust pursuant to the subscription therefor;
2. $50,012,498.25 is determined as the consideration for the issuance of such Class A Units; and
3. the Partnership, having received payment for such Class A Units, such Class A Units are issued as fully paid and non‑assessable.
The Resolution was signed by Richard Michaeloff, in his capacity as the president of 160ON, which was the sole trustee of GP Trust.
[131] The Resolution made it clear that the $50,012,498.25 was received by the LP as a payment of the subscription price for the 362,081,435 Class A LP Units, and not as a payment of money raised by the REIT in its capacity as the agent of the LP.
[132] The underwriters of the March 2011 Offering exercised the over‑allotment option, resulting in the March 18, 2011 over‑allotment issuance of 1,282,500 REIT Units. The last nine documents in Exhibit R‑10 pertain to the use of the proceeds of that over‑allotment issuance, by the REIT, to subscribe for additional Class A LP Units. In particular, the first three documents of that group are a Direction, a Subscription and a Resolution, the substance of which is similar to the substance of the Direction, Subscription and Resolution discussed above.
[133] Exhibits R‑21 through R‑24 contain flow‑of‑funds documents similar to those discussed above, except that a direction to pay was not used in respect of the last four offerings. Like the documents discussed above, those other documents also indicated that the money raised by the REIT in the other Offerings had been raised by the REIT in its own capacity, and not as the agent of the LP.
(b) Agency Principles and Limitations
[134] For the purposes of the ETA, a principal may claim an ITC in respect of the acquisition of a property or a service by an agent on behalf of the principal. Therefore, it is necessary to ascertain whether the REIT was acting as the agent of the LP when the Services were acquired.
[135] Professor Fridman has provided the following definition of “agency”:
Agency is the relationship that exists between two persons when one, called the agent, is considered in law to represent the other, called the principal, in such a way as to be able to affect the principal’s legal position by the making of contracts or the disposition of property.
[136] A fundamental principle, and limitation, in respect of agency, was enunciated by the Federal Court of Appeal, as follows:
An agent cannot have a legal capacity that exceeds that of the principal. A principal can only appoint an agent to make a contract which the principal himself has the capacity to make.
[137] In other words, an agent does not have the legal capacity to do for a principal that which the principal does not have the legal capacity to do itself. In the context of these Appeals, the LP, being a partnership, did not have the legal capacity to issue units of a real estate investment trust (or of any trust, for that matter). Therefore, the LP did not have the capacity to authorize the REIT to undertake, as the LP’s agent, and on behalf of the LP, the Offerings of REIT Units, or, on the closing of those Offerings, to issue, as the agent, and on behalf, of the LP, the REIT Units to members of the public. Rather, the REIT acted in its own capacity and on its own behalf, in issuing the REIT Units to members of the public.
[138] However, as the LP had the legal capacity to own real property (and was the owner of the Properties), the LP had the capacity to appoint the REIT as its agent to acquire, on behalf of the LP, goods or services in respect of the Properties.
(c) Implied Agency
[139] As noted above, the Agency Agreements, dated March 29, 2012 and January 1, 2013 respectively, were presented to the Court during the trial of these Appeals. While the earlier of those two agreements purported to reach back to cover transactions in 2011, if it did not actually have such retroactive effect, or if neither of those agreements had any effect whatsoever, it becomes necessary to ascertain whether there was an implied agency relationship between the LP (as principal) and the REIT (as agent).
[140] An agency relationship may be created impliedly, by the conduct of the parties. In such a situation, the particular court must scrutinize the conduct of the parties to ascertain whether there was an implied intention to create an agency relationship. In undertaking such scrutiny, a key consideration is to determine the level of control that the purported principal exerted over the purported agent.
[141] For the purposes of the examinations for discovery, the LP selected its then Chief Financial Officer, Tom Wenner, as the officer to be examined by the Crown. Near the conclusion of the trial, pursuant to subsection 100(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”), counsel for the Crown read into evidence various excerpts from the examination of Mr. Wenner. In one of those excerpts, Mr. Wenner stated that the agency relationship predated his time at the REIT and the LP, and also predated “the commencement of” the Agency Agreement dated March 29, 2012.
[142] At the trial, after the Crown had completed its Rule 100(1) read‑ins, counsel for the LP requested permission (which was granted, but only partially), under subsection 100(3) of the Rules, to read into evidence other parts of the transcript of the examination for discovery of Mr. Wenner. In one such part, Mr. Wenner stated that the “agency relationship existed from the beginning of the business essentially”, which, according to Mr. Wenner, was in 2002, 2003 or 2004.
[143] Apart from the statements by Mr. Wenner, as referenced in the preceding two paragraphs, neither the Rule 100(1) read‑ins, nor the Rule 100(3) read‑ins, provided any details concerning an agency relationship that predated the first Agency Agreement. Hence, I have not seen evidence of conduct sufficient to support a finding of implied agency.
[144] Ms. Tam described an arrangement, which was already in place in 2008, when she began her employment with the LP, whereby the LP issued its cheques to pay the financing costs incurred by the REIT, and the LP received the proceeds from the financing. The evidence was not clear as to whether this arrangement constituted conduct of the REIT and the LP sufficient to support a finding of implied agency, or whether it was simply an arrangement to facilitate the payment of the REIT’s expenses (because the REIT did not have its own bank account). No flow‑of‑funds documents for financings before 2011 were adduced, so I cannot ascertain the mechanism whereby the proceeds of a pre‑2011 financing by the REIT flowed from the REIT to the LP. If the mechanism was the same as that used in 2011, 2012 and 2013, it would indicate that, before 2011, the REIT raised money in its own capacity, and then used its money to invest in the LP. That would not be consistent with the REIT issuing its units as the agent of the LP. In any event, given that an agent cannot be authorized to do something that its principal does not have the legal capacity to do, a finding of implied agency would not assist the LP.
(d) Ratification
[145] If a purported agent acts on behalf of a purported principal, at a time when the relationship of principal and agent does not exist, the purported principal may subsequently accept and adopt (or ratify) the purported agent’s act. A valid “ratification relates back, and the previously unappointed agent is treated as having been authorized at the time the act in question was performed.”
[146] The conditions that must be satisfied to constitute a valid ratification were enunciated long ago in Firth v. Staines, and were described by Professor Fridman as follows:
The first was that the agent whose act is sought to be ratified must have purported to act for the principal. The second was that, at the time the act was done, the agent must have had a competent principal. The third was that, at the time of the ratification, the principal must have been legally capable of doing the act in question himself.
[147] In discussing the second and third of the above conditions, Professor Fridman made the following comments:
At the time the act was performed by the agent the principal must be qualified in law to act in the way the agent has done….
The act must be one that can be ratified….
… the principal must have the capacity to ratify the contract at the time of the ratification. The act of ratification must take place at a time when the ratifying party might personally have done the act which is being ratified.
[148] While ratification may, in some circumstances, occur by implication, generally “[r]atification must be by a clear, adoptive act.”
[149] There was nothing in the evidence presented at trial that suggested that an agency relationship between the LP (as principal) and the REIT (as agent) arose by ratification. Even if there was a purported ratification, the LP (as a partnership) could not have ratified the issuance of the REIT Units (which were units of a trust).
(e) Agency Agreements
(i) Authenticity, Sham and Legal Effectiveness
[150] A critical issue in this Appeal relates to the two Agency Agreements, each between the REIT and the LP, which were dated March 29, 2012 and January 1, 2013, respectively.
[151] By way of background, during the examination‑for‑discovery process, counsel for the Crown had apparently advised counsel for the LP that the Crown took the position that the Agency Agreements were a sham or were legally ineffective.
[152] On the morning of the first day of the trial, counsel for the LP proposed to put the Agency Agreements into evidence. Counsel for the Crown objected to the admission of those agreements, because the Crown did not accept their authenticity. Counsel for the Crown submitted that Richard Michaeloff and Tom Wenner, the respective signatories of the Agency Agreements, should be called as witnesses to authenticate those agreements.
[153] When I asked why the Crown questioned the authenticity of the Agency Agreements, counsel for the Crown stated:
We believe that those documents are either a sham or legally ineffective documents. That’s our position….
… and that was communicated as part of the discovery, and my friend is aware of that.
[154] During the discussion of the admissibility of the Agency Agreements, I offered to provide counsel for the LP with an adjournment, so that he would have an opportunity to call, as a witness, Mr. Michaeloff or someone else with first‑hand knowledge of the Agency Agreements, to testify as to the authenticity of the Agency Agreements, and to provide evidence to bolster an argument rebutting the Crown’s concern. In particular, I said that, if the Crown was of the view that the Agency Agreements were legally ineffective or shams, “we need to be in a position [to] address that head on.”
[155] I also observed that I had not seen anything in the Amended Amended Reply that raised the sham argument. I asked counsel for the Crown whether his concern was sham, back‑dating or legal ineffectiveness.
[156] In response, counsel for the Crown stated:
Because Your Honour had put a question to me as to the raising of this in the reply, … the agreements were certainly denied. We denied in the reply that those agency agreements were in force or existed, and that during the examination for discovery … the crown was questioned on its position as to what was the issue with those, and so at that point we did advise the Appellant that … we believed that those were sham, or legally ineffective, and that was canvassed by the Appellant, and they were put on notice.
[157] Counsel for the LP then responded as follows:
If I could address those points very quickly, Your Honour. Number one, the examinations for discovery were conducted in 2017, and my friend filed his amended reply in 2019. So what may or may not have been discussed at discovery, it did not find its way into my friend’s amended pleadings. And that is what matters before defining the issues before this court. Nowhere in the pleadings does the Crown allege that the agency agreements were a sham.
Now, if they held that position at an earlier time and then abandoned it, I don’t know. I’m not going to speculate. But the point is there is no allegation of sham stated in the pleadings, and that is a very serious allegation, incidentally. It can’t be just tossed around willy nilly.
Moreover, even if my friend takes a softer approach to the law and says the agreements were not legally effective, that’s an argument he can make in closing. That’s not a basis for objecting to the admission of the agreement. The agreement must come into evidence, and then he can argue about whether it was effective or not effective.
Frankly, the same goes on the issue of sham. The evidence should come in, and then he [may] make arguments as to anything he wishes.
The final thing is, both the witnesses at the discovery -- and incidentally, part of the CRA’s own audit file materials have copies of these agreements, of these agency agreements. So both witnesses spoke to them at discovery. They’re in the CRA’s audit files, and Ms. Tam can also speak to whether they’re in the corporate books and records of the taxpayer.
So I think all of those issues, they relate or they support admitting the document into evidence…. And then what to make of the document afterwards, what is the legal effect of it and so on, is something that ought to be reserved for submissions.[122]
[158] From the above comments, it appears that counsel for the LP was focusing on the process of having the Agency Agreements admitted into evidence, more than on the question of whether the Crown, not having further amended its Amended Amended Reply so as to plead sham, could continue to advance the sham argument. Provided that the Agency Agreements were admitted into evidence, counsel for the LP seemed to be content with having the sham and legal ineffectiveness arguments addressed by the parties in their respective submissions. It should be noted, however, that, on the fourth day of the trial, April 3, 2024, when reminded of the above statement, counsel for the LP stated that he had not intended to make such a concession.
[159] On the second day of the trial, when we were discussing the legal effectiveness of the Agency Agreements, and whether the proper execution of those agreements could be proven, I stated the following to counsel for the LP:
… [I]t appears that the Crown is challenging at least the legal effectiveness of the document [i.e., the Agency Agreement dated March 29, 2012]. I’m not sure whether they’re alleging that the signatures on that document are not those of Mr. Michaeloff. That might be the position that they’re taking, but you may want to think about whether you need to do more to bolster the truth of the execution of the agency agreements. And so we will leave that for you to consider as you carry on in presenting your case.
[160] I subsequently asked counsel for the LP if he proposed to call any other witnesses, apart from Ms. Tam, whereupon the following exchange occurred:
COUNSEL FOR THE LP: No, Your Honour, I had not yet, but I am cognizant of your invitation yesterday morning in which … you said here that perhaps you would allow us time to call another witness if it turned out to be necessary. I’m sorry, let me see – I’m just trying to recall which, what context that was said in.
COURT: I think it was in the context of the Crown’s allegation that the agency agreements were shams or legally ineffective….
COUNSEL FOR THE LP: That is still under consideration and [I] wanted to assess how the remainder of the evidence proceeds. Because as Your Honour may appreciate, there’s no dispute that there was a partnership in this instance, and the ordinary law operates to create an agency for every partner is an agent for the partnership. And not only is that recognized in the Partnerships Act, but it’s also echoed in section 272.1 of the Excise Tax Act. That is by operation of law….
So the starting point, the default position is that the REIT, as a member of the partnership, is by law an agent for the partnership. Again, under [the] Partnerships Act but also reiterated in section 272.1 of the Excise Tax Act. And under common law principles, an agency agreement does not need to be in writing.
But this was an additional piece of evidence, in addition to operation of the law, but also the facts that the partnership did pay for invoices, Ms. Tam is here and [s]he observed that and she testified to that. But you have multiple pieces of evidence before the court relating to the agency relationship.
So it was in that context that we did not anticipate that the court would require even further evidence on this point, but out of an abundance of caution, I do want to give further conversation [sic] to that, and potentially as necessary call a witness and speak to the agency agreements.
[161] Thereafter, we again noted that the sham and legal ineffectiveness arguments had not been pleaded by the Crown, as shown in the following excerpts from the ensuing exchange:
COURT [addressing counsel for the Crown]: … I was trying find in the amended amended reply reference to the Crown’s position that the agency agreements were shams or legally ineffective. Can you point me, please, [to] where that is found in the amended amended reply?
COUNSEL FOR THE CROWN: It’s not, Your Honour….
The way the pleadings work is that … in … the Amended Notice of Appeal, there’s a statement that there’s an agency agreement, and [in the Amended Amended Reply] that statement is denied….
As explained yesterday, in the course of the examination for discovery the Appellant has asked for Respondent’s position on that, and we responded that our position with respect to the … alleged agency agreements was that they were either sham or legally ineffective.
And the Appellant has been put on notice back in 2017, and our position has not changed…. [T]he Appellant has not sought to determine if we still were taking that position. It was clear from the discovery several years ago that that was the position….
And the purpose of the pleading is to put the other side on notice, and during the course of the examination for discovery, the Appellant cannot allege right now that it has been taken by surprise right now, because it has been several years that this was our position.
[162] In concluding the discussion, during the trial, of the authenticity and admissibility of the Agency Agreements, and before indicating to counsel for the Crown that he could continue his cross‑examination of Ms. Tam, I stated the following:
In any event, just to close the circle, I think, [addressing counsel for the LP by name], that in order for you to be in a position to have as much weight on the agency agreements as you would like, there probably should be something done to prove the signatures of Mr. Michaeloff and Mr. Wenner.
[163] Ultimately, counsel for the LP chose not to call any other witnesses.
[164] The Crown did not object to the admission of any of the documents tendered by the LP, other than the two Agency Agreements. Counsel for the Crown insisted that the Agency Agreements be authenticated. When I asked whether the Crown was of the view that the Agency Agreements had been fabricated, or that they had not been signed by Richard Michaeloff and Tom Wenner respectively (i.e., the apparent signatories of the agreements), counsel for the Crown said that the Crown’s position was that those agreements were a sham or legally ineffective. Thus, it appears that the requirement of authentication has become a proxy to challenge the admissibility of agreements that are considered to be a sham or legally ineffective.
[165] A leading treatise on the law of evidence states the following:
When a document is produced at trial, the prerequisite to its admission is authentication…. “This simply means that the trier of fact must be satisfied that the document in issue is what it purports to be.”
[166] The treatise explains the method for authenticating a private document (such as an agreement) as follows:
Proof of a private document when it is produced generally involves two elements: (1) the signature of the person who signed it; and (2) the authority of the person signing it where the document is being proved against a party other than the person signing it…. The court must be satisfied by evidence that it was duly executed….
In the case of documents not requiring formal execution, proof must be tendered as to the origin and authorship of the document. The due execution or authorship of private documents is proved by showing that in the former case it was signed, and, in the latter case, prepared or authored by the person by whom it purports to have been written….
[167] Concerning the method of proving a signature, the treatise states:
… [T]he handwriting or signature of unattested documents may be proved by: (1) the writer; (2) a witness who saw the document being written or signed; (3) an admission of the party against whom the document is tendered; (4) a witness who has a general knowledge of the writing of the person whose signature or handwriting is sought to be proved; (5) a comparison of the disputed document with other documents proved to the satisfaction of the judge to be genuine; or (6) expert evidence. [Emphasis added; footnotes omitted.]
[168] The treatise notes that, before the enactment of “comparison of hands” provisions in the various Evidence Acts, “it was competent for the judge or jury to compare the handwriting of a disputed document with any other document which was in evidence and which was admitted or proven to be the handwriting of the supposed writer [emphasis added].”
[169] The federal “comparison of hands” provision is found in section 8 of the Canada Evidence Act, which reads as follows:
Comparison of a disputed writing with any writing proved to the satisfaction of the court to be genuine shall be permitted to be made by witnesses, and such writings, and the evidence of witnesses respecting those writings, may be submitted to the court and jury as proof of the genuineness or otherwise of the writing in dispute.
[170] The “comparison of hands” provision in Ontario is found in section 57 of the Evidence Act of that province; it reads as follows:
Comparison of a disputed writing with a writing proved to the satisfaction of the court to be genuine shall be permitted to be made by a witness, and such writings and the evidence of witnesses respecting them may be submitted to the court or jury as evidence of the genuineness or otherwise of the writing in dispute.
[171] Although the statutory “comparison of hands” provisions contemplate signature comparisons made by a witness, as noted above, the common law rule provides that such a comparison may also be made by the judge.
[172] On April 25, 2023 (which was the first day of the trial), I was less familiar with the above evidentiary principles than I am now. Consequently, I admitted the two Agency Agreements into evidence on the basis that they formed part of the LP’s business records, and copies of those agreements were found in the LP’s books and records. That evening, when I had an opportunity to study the evidentiary rules more closely, I realized that the Agency Agreements needed to be authenticated.
[173] As I reviewed the relevant rules of evidence, I also learned that, where an unauthenticated document is admitted into evidence, the situation may be remedied, as explained by the Lederman treatise:
It has also been held that an error in receiving a document insufficiently proved may be cured by subsequent evidence in the case, and it is not necessary to again tender the document after the evidence necessary to complete its proof has been disclosed.
[174] On the morning of the second day of the trial, at the commencement of the hearing that day, I reviewed with the parties the principles that I have summarized above, and I explained that the Agency Agreements could be authenticated by comparing the signatures on those agreements with the signatures of the same individuals on other documents that had been proven to my satisfaction to be genuine.
[175] In this regard, the previous afternoon, when cross‑examining Ms. Tam, counsel for the Crown had put into evidence various documents, including two documents that had been signed by Mr. Michaeloff, being the LP Agreement and Amendment No. 1 to the Fourth Amended and Restated Declaration of Trust. I reviewed Mr. Michaeloff’s signatures, as shown on those two exhibits, and compared them with the signatures purporting to be his, as shown on the 2012 Agency Agreement. I observed that all of those signatures were very similar.
[176] Incidentally, on the second day of the trial, counsel for the Crown put into evidence numerous additional documents that had been signed by Mr. Michaeloff. Mr. Michaeloff had signed the documents in his capacity as a trustee of the REIT, the president of 160ON, or the sole director of 160ON, depending on the particular document that was signed. In each instance, there were one or more signature lines, with Mr. Michaeloff’s name typed below the line and his signature above the line. Mr. Michaeloff’s signatures, in each instance, were very similar to the signatures that appeared on the 2012 Agency Agreement.
[177] Based on the foregoing, I am satisfied that the 2012 Agency Agreement has been authenticated.
[178] Turning to the second agreement, the authentication process is not as straight-forward, given that the 2013 Agency Agreement was the only document in evidence that had a signature line with Mr. Wenner’s name below the line and a signature above the line.
[179] Mr. Wenner became the chief financial officer of the REIT and of the LP on October 18, 2011. There are several cheques in evidence that were drawn on the LP’s bank account and that bear a signature similar to those shown on the 2013 Agency Agreement, which Mr. Wenner purportedly signed on behalf of both the REIT and the LP. However, none of those cheques shows a typed or printed name beside the particular signature; therefore, I am not certain that those signatures belonged to Mr. Wenner. Consequently, I do not have a verified signature of Mr. Wenner with which to compare the signatures on the 2013 Agency Agreement.
[180] In view if the foregoing, I am not satisfied that the 2013 Agency Agreement has been authenticated. Therefore, I am not inclined to put much, if any, weight on that agreement. I do not consider this to be an unfair outcome for the LP, given that, during the trial, several opportunities were given to the LP to adduce additional evidence to authenticate the 2013 Agency Agreement.
[181] Furthermore, even if the 2013 Agency Agreement were to have been authenticated, it would not have assisted the LP any more than the 2012 Agency Agreement.
[182] The LP, in its Amended Notice of Appeal, pleaded that the LP and the REIT “were continuously in an agency relationship pursuant to which [the LP] acted as principal and [the REIT] acted as agent.” The LP also pleaded that “On March 29, 2012, [the LP] and [the REIT] formalized their agency relationship by signing and executing an agency agreement with [the LP] as principal and [the REIT] as agent.” The Amended Notice of Appeal does not contain any reference to the 2013 Agency Agreement.
[183] In the Amended Amended Reply (the “Reply”), the Crown denied the facts quoted in the preceding paragraph. However, in that pleading, the Crown made no mention of either the 2012 Agency Agreement or the 2013 Agency Agreement. In particular, in the paragraph of the Reply setting out the facts assumed by the Minister when assessing the LP, the Crown did not plead the facts necessary to support a finding of sham (or legal ineffectiveness). Nor did the Crown, in the Reply, raise sham (or legal ineffectiveness) as a ground on which it relied.
[184] The general rule is that the Crown may not rely on the legal doctrine of sham, without first pleading it, even if that requires the Crown to amend its reply. However, some commentators have suggested that there might be disparate judicial views concerning the need for the Crown specifically to plead the sham doctrine, in order to rely on it.
[185] Notwithstanding the Crown’s failure to plead sham and legal ineffectiveness, rather than take the time to determine whether the Crown’s statement during the examination‑for‑discovery, that it would raise sham and legal ineffectiveness, was sufficient notice to the LP, I have decided to discuss those two arguments, because what I have to say will not prejudice the LP. By so doing, I am not suggesting that there was no need for those two arguments to have been pleaded, nor am I implying that the statement at the examination‑for‑discovery was adequate notice. I will leave those issues for determination on another occasion.
[186] In Cameco, the authorities underlying the doctrine of sham were thoroughly reviewed by Justice Owen, who then summarized the applicable fundamental principles as follows:
It can be seen from the foregoing authorities that a transaction is a sham when the parties to the transaction present the legal rights and obligations of the parties to the transaction in a manner that does not reflect the legal rights and obligations, if any, that the parties intend to create. To be a sham, the factual presentation of the legal rights and obligations of the parties to the sham must be different from what the parties know those legal rights and obligations, if any, to be. The deceit is the factual representation of the existence of legal rights when the parties know those legal rights either do not exist or are different from the representation thereof.
[187] To determine whether there is an element of deceit sufficient to support a finding of sham, a court must consider the intent or state of mind of the parties to the particular transaction. The Minister did not assume that the REIT and the LP intended to misrepresent the nature of the Agency Agreements, nor did the Crown adduce any evidence to show that the REIT and the LP presented the legal rights and obligations arising under the Agency Agreements as being different from what the REIT and the LP knew those legal rights and obligations to be.
[188] In AgraCity, Justice Boyle made the following observation about the nature of the evidence required to support a finding of sham:
Sham is a serious allegation requiring convincing evidence to conclude that a Canadian taxpayer was deceitful on a balance of probabilities. Often this may involve circumstantial evidence. This can be expected to require more [than] the Respondent’s suspicions.
[189] Having considered the evidence, I am satisfied that the REIT and the LP presented the Agency Agreements as creating an agency relationship between them, which is the relationship that the REIT and the LP intended to create. The presentation of the legal rights and obligations under the Agency Agreements corresponded with what the REIT and the LP understood those rights and obligations to be. In other words, the REIT and the LP did not misrepresent the nature of the Agency Agreements.
[190] I am not persuaded that the Agency Agreements were a sham. In fact, I did not see any evidence to even suggest that the sham argument should have been raised.
[191] In concluding the discussion of sham, it might be arguable that the REIT and the LP entered into the Agency Agreements in the hopes of enabling the LP to claim ITCs in respect of the expenses incurred by the REIT. Nevertheless, the following guidance from Cameco is pertinent:
The Appellant’s motivation for these arrangements may have been tax‑related, but a tax motivation does not transform the arrangements among the Appellant [and its affiliates] into a sham.
[192] Thus, regardless of whether the REIT and the LP were motivated by tax considerations, the Agency Agreements were not a sham.
[193] However, notwithstanding that the Crown did not plead sham, and did not prove that the Agency Agreements were a sham, I am not precluded from considering the nature, significance and impact, if any, of those agreements on these Appeals. As the Federal Court of Appeal stated in Dundas, “It is not necessary that the Minister allege a ‘sham’ for the Court to consider the precise legal significance of various instruments.” Rather, I am “entitled to look at the ‘true commercial and practical nature’ of the … transactions.”
[194] In this regard, I reiterate the principle stated by the Federal Court of Appeal, to the effect that an agent’s legal capacity cannot exceed that of the principal. This is a principle that flows from the law of agency, and not from the Agency Agreements themselves. The fact that the REIT and the LP may not have been aware of that legal principle (i.e., that an agent’s capacity cannot exceed that of the principal) does not mean that the REIT and the LP misrepresented the rights and obligations that arose under the Agency Agreements per se.
[195] In the context of the Agency Agreements, as already noted, the Crown did not, in the Reply, plead the facts necessary to support a finding of legal ineffectiveness, nor did the Crown plead legal ineffectiveness as a ground on which it relied. There was no evidence indicating that the Agency Agreements lacked consideration, or were null and void, or otherwise did not exist. In fact, I did not see any evidence to even suggest that the legal ineffectiveness argument should have been raised.
[196] My understanding is that the Agency Agreements satisfied the essential requirements of a contract (such as an intention to create legal relations, offer and acceptance, and consideration).
[197] Based on the evidence and my understanding of the fundamental common law principles of contract law, my conclusion in respect of this issue is that, for the purposes of the ETA and these Appeals, the Agency Agreements were legally effective, in accordance with their terms, subject, however, to the applicable principles of agency law.
[198] In this regard, as noted by the Federal Court of Appeal, “An agent cannot have a legal capacity that exceeds that of the principal.” Accordingly, even though I have found that the Agency Agreements were valid contracts, those agreements cannot authorize the REIT to issue REIT Units on behalf of the LP. But they can authorize the REIT to incur expenditures in respect of the LP’s property (because the LP has the capacity to incur those expenditures itself).
(f) Statutory Partnership Principles Concerning Agency
[199] Counsel for the LP submitted that, under the Ontario Partnerships Act (the “OPA”), every partner in a partnership is an agent of the partnership. In this regard, section 6 of the OPA states:
Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member, bind the firm…. [Emphasis added.]
[200] The statutory acknowledgment of an agency relationship between a firm and every partner thereof applies only for the purpose of the business of the partnership. As indicated above, the LP’s Business was to acquire, develop and lease the Properties. To finance that business, the LP (among other things) issued Class A LP Units to the REIT, in exchange for a subscription price. It was not the business of the LP to issue REIT Units to the public; only the REIT could do that. Thus, the expenses incurred by the REIT, in issuing REIT Units, were incurred by the REIT on its own behalf, and not as agent for, or on behalf of, the LP.
[201] Section 6 of the OPA also states that an act of a partner binds the firm only to the extent that the act is done by the partner for carrying on in the usual way business of the kind carried on by the firm. Similar to the comment made in the preceding paragraph, the kind of business carried on by the LP involved (among other things) issuing Class A LP Units to the REIT to raise funds for the LP’s activities, but it did not include the REIT’s activity of issuing REIT Units to the public to raise funds with which to subscribe for the Class A LP Units.
(3) Statutory Deeming Provisions
[202] Counsel for the LP referred me to section 272.1 of the ETA. Subsection 272.1(1) states:
(1) For the purposes of this Part, anything done by a person as a member of a partnership is deemed to have been done by the partnership in the course of the partnership’s activities and not to have been done by the person. [Emphasis added.]
[203] Subsection 272.1(1) applies in respect of things done by a person as a member of a partnership. However, in this situation, the REIT issued REIT Units and incurred related expenses, in its own right, as a trust, and not in its capacity as a member of the LP. Therefore, subsection 272.1(1) does not assist the LP.
[204] Subsection 272.1(2) of the ETA states:
(2) Despite subsection (1), if property or a service is acquired … by a member of a partnership for consumption, use or supply in the course of activities of the partnership but not on the account of the partnership, the following rules apply:
(a) except as otherwise provided in subsection 175(1), the partnership is deemed
(i) not to have acquired … the property or service, and
(ii) …;
(b) where the member is not an individual, for the purpose of determining an input tax credit … of the member in respect of the property or service …, subsection (1) does not apply to deem the member not to have acquired … the property or service and the member is deemed to be engaged in those activities of the partnership; and
(c) where the member is not an individual and the partnership at any time pays an amount to the member as a reimbursement and is entitled to claim an input tax credit in respect of the property or service in circumstances in which subsection 175(1) applies, any input tax credit in respect of the property or service that the member would, but for this paragraph, be entitled to claim in a return of the member that is filed with the Minister after that time shall be reduced by the amount of the input tax credit that the partnership is entitled to claim.
[205] I do not think that subsection 272.1(2) of the ETA assists the LP in the context of these Appeals.
C. Payment of GST/HST
[206] As noted above, the second of the three conditions stipulated by subsection 169(1) of the ETA, which must be satisfied by a registrant to qualify for an ITC, is that the GST/HST in respect of the particular supply must become payable by the registrant, or must be paid by the registrant without having become payable.
(1) Legal Authorities
[207] Subsection 165(1) of the ETA states that every recipient of a taxable supply made in Canada is required to pay GST on the value of the consideration for the supply. Subsection 123(1) of the ETA defines a recipient of a supply of property or a service as including:
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration.
[208] Hence, if consideration is payable for a supply, whether under an agreement or otherwise, the recipient of the supply is the person who is liable to pay the consideration.
[209] Thus, if there is an agreement between a supplier and a particular person to whom a taxable supply is made in Canada, and if the agreement provides that the particular person is liable to pay the consideration for the supply, it follows that the particular person is (by reason of paragraph (a) of the definition of “recipient”) the recipient of the supply, and the particular person is (by reason of subsection 165(1) of the ETA) the person who is required to pay the GST in respect of the supply. Thus, in this situation the consideration under the agreement and the GST are payable by the same person, i.e., the recipient.
[210] If a supplier makes a taxable supply in a situation where there is not an agreement stipulating who is to pay the consideration for the supply, the person who is liable to pay the consideration is (by reason of paragraph (b) of the definition of “recipient”) the recipient of the supply, and that person is (by reason of subsection 165(1) of the ETA) the person who is required to pay the GST in respect of the supply. Thus, in this situation, as well, the same person, i.e., the recipient, is liable to pay the consideration and is required to pay the GST.
[211] Consequently, sometimes when determining whether a registrant is entitled to an ITC in respect of GST/HST paid in relation to a taxable supply, a court might consider whether the registrant was the recipient of the supply. In other words, did the consideration for the supply become payable by the registrant, or was the consideration paid by the registrant without having become payable? As some of the following cases illustrate, sometimes this inquiry is used in the context of determining whether the registrant acquired the particular property or service, and sometimes the inquiry is used to determine whether GST/HST became payable by, or was paid by, the registrant.
[212] In A & W Trade Marks, which was an appeal under the Court’s informal procedure, Justice Little considered a situation in which a registrant (i.e., A & W Trade Marks Inc.) had paid some of the expenses incurred with respect to an initial public offering (the “IPO”) undertaken by A & W Revenue Royalties Income Fund (the “fund”), which had been established for the purpose of investing in debt and equity securities of the registrant. Justice Little’s written reasons, which were quite brief, did not explain the relationship, if any, between the registrant and the fund. The expenses paid by the registrant related to services and goods provided by several law firms, a bank affiliate and a printing company in respect of the IPO. The issue was whether the registrant was entitled to ITCs in respect of the GST/HST relating to the supply of those services and goods. Justice Little allowed the registrant’s appeal, but given the brevity of his written reasons, those reasons do not assist me in deciding the Appeals that are before me.
[213] In the oft‑cited General Motors case, Justice Campbell succinctly summarized the three conditions that must be satisfied by a person claiming an ITC. Later in her decision, in discussing the meaning of “acquires”, she quoted a statement by David Schlesinger, who cautioned that, “based on the meaning given by the CRA to the word ‘acquires’ and the recent jurisprudence on the meaning of ‘recipient’, the recipient of a supply may not necessarily be the person that ‘acquires’ the supply.
[214] Justice Campbell also noted that a 1997 amendment to the opening portion of subsection 169(1) of the ETA replaced the concept of property or a service being supplied to a person with the concept of a person acquiring property or a service. She then went on to say that she did “not believe that the 1997 amendment replaced the focus on the central determination of [an] appeal of which party is contractually liable to pay GST pursuant to the [applicable] [a]greements.” She also stated that “the bottom line … is that the person who satisfies the requirement at subsection 169(1), and who carries the contractual liability to pay, will be the person entitled to claim ITCs.”
[215] In Garmeco, Justice Valerie Miller stated, “Before [a registrant] can receive the ITCs in issue pursuant to subsection 169(1), it must demonstrate [among other things] that it was contractually liable to pay for the supplies or services and that the supplies or services were acquired for consumption, use or supply in the course of its commercial activities.”
[216] In Price Chopper, Associate Chief Justice Rossiter (as he then was) stated:
17. … the person entitled to claim the ITC must be the recipient of the taxable supply….
19. Contractual liability appears to be paramount in determining eligibility for ITCs….
20. The question comes down to: who is liable to pay under the contract, not who actually pays.
[217] In Telus Communications, Justice Noël (as he then was) stated, “Subsection 169(1) [of the ETA] when read with the definition of the word “recipient” [in subsection 123(1) of the ETA] provides in effect that only the person to whom a supply is made can claim the related ITC.”
(2) Application
[218] As indicated above, in order to determine whether the LP has satisfied the second condition relating to ITC entitlement, I must determine whether the GST/HST in respect of the supplies of the Services was payable or paid (without having become payable) by the LP. In turn, this requires me to determine whether the LP was liable to pay the consideration for the supply of the Services. Apart from the Altus engagement letter and the Invoices, there is no documentary evidence (to which the providers of the Services were a party) to assist me in determining whether it was the REIT or the LP that was liable to pay the consideration for the supply of the Services.
[219] In the absence of such evidence, I cannot make a conclusive determination as to which entity contractually agreed to pay the consideration for the supply of the Services, except with respect to the supply by Altus.
[220] As noted above, the proposal letter by Altus was addressed to the REIT, and it was accepted by the REIT. However, Altus addressed its Invoice to the LP, and it (like all the other Invoices) was paid by the LP. Nevertheless, as explained above, Altus’ proposal pertained to a valuation of the Properties, which was the subject matter of the LP’s Business. Consequently, when the REIT accepted Altus’ proposal, section 6 of the OPA was applicable, with the result that the REIT was then acting as an agent of the LP, and the acceptance by the REIT (as agent) bound the LP.
[221] Similarly, to the extent that other Services have been identified above as pertaining to the LP, the LP’s Business or the Properties, where it was the REIT (rather than the LP) that promised, committed or undertook to pay for those Services, by reason of section 6 of the OPA, the REIT was acting as the agent of the LP, and the REIT’s promise, commitment or undertaking to pay for those Services bound the LP.
D. Consumed or Used in the Course of the LP’s Commercial Activities
[222] The third condition stipulated by subsection 169(1) of the ETA, which must be satisfied by a registrant to qualify for an ITC, is that the registrant must have acquired the Services for consumption or use in the course of the registrant’s commercial activities.
[223] In this regard, in FP Newspapers, it was held that a limited partner’s expenses relating to being publicly listed were not in the course of the activities of the partnership, so ITCs were not available.
[224] The Services relating to the Financings were consumed or used by the REIT, and not the LP, in the course of the Offerings, which were undertaken by the REIT to raise money to enable it to acquire Class A LP Units. It has been recognized that expenses relating to the offering or issuing of securities, for example, expenses for services such as preparing a prospectus for a public issuer, preparing financial statements and annual reports for the purpose of a public offering, listing securities on an exchange, and filing documents on SEDAR, are not incurred in the course of commercial activities.
[225] As indicated above, only the REIT, and not the LP, had the legal capacity to issue REIT Units. Therefore, the LP did not have the capacity to appoint the REIT to issue REIT Units as agent for and on behalf of the LP. Accordingly, any Services that related to the Financings were not acquired by the LP for consumption or use in the course of the LP’s commercial activities.
[226] On the other hand, given that the Properties were acquired, managed and leased by the LP, any Services that related to the Acquisitions or to the Properties were acquired by the LP for consumption or use in the course of the LP’s commercial activities.
V. CONCLUSION
[227] To conclude, I have determined (among other things) that:
(a)The flow-of-funds documents confirm that, when the REIT completed an Offering of REIT Units, the money paid by investors to acquire REIT Units was received by the REIT in its own right and on its own behalf. The REIT then paid that money to the LP to purchase Class A LP Units.
(b)The Agency Agreements were neither shams nor legally ineffective.
(c)By reason of section 6 of the OPA, the REIT (as a partner of the LP) was an agent of the LP for the purpose of the LP’s Business.
(d)Nevertheless, as the LP had the legal capacity to issue units of its own capital only, and did not have the legal capacity to issue REIT Units, the LP did not have the capacity to authorize the REIT, as the agent of the LP, to issue REIT Units for and on behalf of the LP. Therefore, the Expenditures that related to the Financings were incurred by the REIT in its own right and on its own behalf, and not as agent for, and on behalf of, the LP.
(e)To the extent that any of the Services related to the REIT or the Financings, those Services were acquired by the REIT for consumption or use in the course of the REIT’s activities, and were not acquired by the LP for consumption or use in the course of the LP’s commercial activities.
(f)To the extent that any of the Services related to the LP’s Business, the Acquisitions or the Properties, those Services were acquired by the LP (either directly or by its agent, the REIT) for consumption or use in the course of its commercial activities, and the GST/HST in respect of the supply of those Services was payable by the LP or was paid by the LP without having become payable.
[228] Accordingly, I have determined that, in the context of these Appeals, the LP is entitled to ITCs to the extent set out below (but subject to paragraph 229 below):
Fasken Invoice no. 560606 |
$305.11 |
Fasken Invoice no. 582365 |
122.03 |
Fasken Invoice no. 760080 |
4,839.69 |
E&Y Invoice no. CA0189780361 |
975.00 |
Nope Invoice no. 01309 |
260.00 |
KPMG Invoice no. 44712193 |
858.00 |
KPMG Invoice no. 44712223 |
3,110.62 |
KPMG Invoice no. 7000001989 |
930.23 |
KPMG Invoice no. 7000003124 |
930.23 |
E&Y Invoice no. CA0189776523 |
9,421.75 |
Goodmans Invoice no. 606057 |
54,262.35 |
Altus Invoice no. 33887 |
21,110.54
|
|
|
[229] To the extent that any of the above ITCs have already been allowed by the Minister, they are not to be allowed a second time, or otherwise double‑counted.
[230] In conclusion, the Appeals are allowed and the reassessments that are the subject of the Appeals are referred back to the Minister for reconsideration and reassessment, on the basis that the LP is entitled to ITCs in the amount of $97,125.55, subject to the preceding paragraph.
[231] As success is divided, I am not inclined to award costs to, or against, either party.
Signed at Ottawa, Canada, this 11th day of December 2024.
“Don R. Sommerfeldt”
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