Citation: 2013 TCC 336
Date: 20131024
Dockets: 2010-1499(GST)G
2010-2507(GST)G
BETWEEN:
VIVACONCEPT INTERNATIONAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
The parties have agreed
to file the same evidence in support of both files. The parties have also
agreed on the main facts relevant to both files.
[2]
The agreement pertains
to the following facts:
[Translation]
2010-1499(GST)G / 2010-2507(GST)G
TAX COURT OF CANADA
BETWEEN:
VIVACONCEPT INTERNATIONAL INC.
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AGREEMENT ON THE FACTS
For
the purposes of these appeals, the parties acknowledge that1
1. The appellant is a company incorporated under the Canada
Business Corporations Act, R.S.C. 1985, c. C-44.
2. The appellant’s fiscal year ends on January 31 of each year.
3. The appellant is registered for the purposes of Part IX of
the Excise Tax Act (the Act).
4. The appellant files its net tax returns for the purposes of
the Act on a quarterly basis, namely, for quarters ending on April 30, July 31,
October 31 and January 31.
5. The appellant operates a business whose main activity is
event management.
6. In 2005, International Flora Montréal (Flora) concluded an
agreement with the appellant for it to manage a summer horticulture and gardening
exhibition presented annually at the Parc des écluses located in the Old Port
of Montréal starting in the summer of 2006. The agreement was ratified in a
management contract signed in 2006 (the Management Contract2).
7. The Management Contract provided that management fees in the
amount of $113,500 were payable on a monthly basis to the appellant in
consideration for the services rendered by it.
8. Flora and the appellant are dealing with each other at arm’s
length.
9. The first exhibition took place from June 15 to
October 8, 2006 (the 2006 exhibition).
10. In putting on the 2006 exhibition, Flora used the services of
many businesses, artists and creators working in such fields as landscaping,
architecture, design, horticulture and gardening as well as of various
suppliers in the fields of advertising and marketing (the suppliers).
11. The appellant billed Flora for management fees totalling
$1,769,693.92, including GST and QST, between November 2005 and October 2006. The
GST and QST that applied to those fees were $103,440.44 and $123,467.04
respectively.
12. The invoices issued by the appellant relative to the
management fees for the period from November 2005 to October 2006 have never
been paid by Flora.
13. During the 2006 exhibition, Flora found out that it would not
receive the government grants promised for putting on the 2006 exhibition.
14. Because it did not obtain the government grants it was
promised, Flora experienced significant financial difficulties, as shown by
Flora’s balance sheet and income statement for the fiscal year ending on
October 31, 2006.3
15. Flora was unable to fulfill its obligations towards its
suppliers and the appellant.
16. Flora was considered to be insolvent by its directors in
November 2006.
17. An agreement between Flora and a committee representing its
suppliers was concluded in the fall of 2006 (the Agreement). In a letter dated
February 13, 2007, Flora submitted an offer to its suppliers in accordance
with the Agreement.4
18. The appellant had to submit to the Agreement in order to
prevent Flora’s bankruptcy and to make it possible for an exhibition to be held
in 2007.
19. The GST relative to the debt is in the amount of $103,440.44.
20. The appellant has never been able to collect the debt or the
GST applicable to the debt.
21. The GST applicable to the debt was included in the
determination of the net tax reported to the Minister. More specifically, the
appellant included in the determination of its net tax reported to the Minister
an amount of $83,373.20, and the Minister, in an assessment dated March 25,
2009,5 added the difference within a few hundred dollars, namely, an
amount of $20,430, in determining the appellant’s net tax.
22. In its amended net tax return, filed in April 2008, for the
period ending on January 31, 2007, the appellant deducted, in the determination
of its net tax, an amount of $85,525.84, including $83,373.30 as a deduction
for bad debt.6
23. The deduction for bad debt claimed by the appellant was
disallowed by the Minister on the ground that it was a voluntary reduction of
consideration payable under section 232 of the Act.
24. That final decision was communicated to the appellant around
the end of 2008 through various discussions with, among others, Alain Muguet,
auditor for the Agence du revenu du Québec.
25. The Minister issued a Notice of Assessment dated March 3,
2009,7 confirming the disallowed deduction for bad debt claimed by
the appellant for the period ending January 31, 2007.
26. On January 14, 2009, an agreement to forgive the debt was
signed by the appellant and Flora.8
27. On January 14, 2009, the appellant issued a credit note to
Flora relative to the debt cancelled in its favour.9
28. In its net tax return for the period ending January 31, 2009,
signed on April 20, 2009, the appellant claimed an adjustment in the
amount of $103,440.44.10
29. On August 5, 2009, the Minister determined that the appellant
was not entitled to the adjustment amount requested, which represented the GST charged
but not collected, on the ground that a credit note was not issued to Flora within
a reasonable time.
30. On August 5, 2009, the Minister made an assessment in respect
of the appellant establishing the amount of net tax at $0 and claiming the
following amounts from it:11
|
Adjustments in the calculation of
reported net tax
|
$103,440.44
|
|
Interest on arrears
|
$1,613.54
|
|
Total [amount owing]
|
$105,053.98
|
31. The repayment of $103.440.44 claimed by the appellant in its
tax return for the period ending on January 31, 2009, has never been made by
the Minister.
32. The appellant does not owe the Minister any amounts for the
period ending on January 31, 2009.
33. The Minister is claiming from the appellant the payment of a
total amount of GST billed by the appellant but never paid by Flora in addition
to the payment of an amount of $105,053.98, for which the appellant is not
liable.
Montréal, this 27the day of June 2013.
|
[signature]
|
|
[signature]
|
|
HEENAN
BLAIKIE LLP
Geneviève
Léveillé
Paul Prokos
Counsel for
the appellant
|
|
LARIVIÈRE MEUNIER
Benoît Denis
Counsel for the respondent
|
1 Note that all of the documents listed in this document
can be found in the Joint Book of Documents.
2 Tab 1 – [Translation]
"agreement for management and services between Vivaconcept International
Inc. and International Flora Montréal".
3 Tab 2 – Flora’s [Translation]
"balance sheet" and [Translation]
"income statement".
4 Tab 3 – [Translation]
"letter to Flora’s creditors 2006" sent by Flora on February 13, 2007.
5 Tab 4 – Notice of (Re)Assessment dated March 25, 2009.
6 Tab 5 – Amended net tax return for the period ending
January 31, 2007.
7 Tab 6 – Notice of (Re)Assessment dated March 3, 2009.
8 Tab 7 – Debt write-off agreement, Affidavit.
9 Tab 8 – Credit note.
10 Tab 9 – Net tax return for the period ending January
31, 2009.
11 Tab 10 – Notice of (Re)Assessment dated August 5,
2009.
[3]
The Court has asked the
parties to submit a joint version of the issues. The parties therefore agreed
to word the issues as follows:
[Translation]
2010-1499(GST)G
Is
the appellant entitled to a deduction in the amount of $103,440.44 for bad debt
in determining its net tax for the quarter ending on January 31, 2007, pursuant
to section 231 ETA?
2010-2507(GST)G
Is
the appellant entitled to an adjustment in the amount of $103,440.44 in determining
its net tax for the quarter ending January 31, 2009, pursuant to
subsections 232(2) and 232(3) ETA?
– More specifically, did the appellant remit to Flora (the recipient)
a credit note within a reasonable time?
WITH
COSTS IN ONE CAUSE
The
parties agree that the appellant can be entitled to only one of the adjustments
requested or deductions claimed if it is entitled to one or the other.
|
[signature]
|
|
[signature]
|
|
For the appellant
|
|
For the respondent
|
[4]
Hearing witnesses has made
it possible to establish on a balance of probabilities that the appellant had
taken several steps with the respondent’s representatives to settle matters,
that is, to not have to pay the GST amounts that were not collected. Following
these steps, the appellant believed that it had done everything needed to sort
out its files with the respondent.
[5]
On the basis of the
facts stated above, which have been agreed on, is the appellant entitled to an
adjustment either under section 231 of the Excise Tax Act (ETA) or under
subsections 232(2) and 232(3) of the ETA?
[6]
First, section 231 of
the ETA sets out various criteria, including that of whether the debt is bad.
[7]
Second, section 232 of
the ETA and its application criteria, including that of reasonable time, will
be discussed. The analysis will make it possible to determine whether the
appellant observed the procedure set out in the Act.
Section 231 of the ETA
[8]
Section 231 of the Act contains
several application criteria; only those applicable to this dispute are
relevant.
[9]
First, to obtain the
deduction in subsection 231(1), there must have been a supplier who has made a
taxable supply for consideration to a recipient with whom the supplier was
dealing at arm’s length. These criteria do not pose a problem in this case.
[10]
The conditions or
aspects of the Act pertaining to the dispute are as follows:
(1) All or part of the consideration and tax payable in respect of the
supply has become a bad debt;
(2) The supplier has written off that debt in its books of account;
(3) The tax collectible is included in determining the net tax indicated
in the return that the supplier filed for the period during which the tax
became collectible;
(4) All net tax remittable, if any, as reported in that return is
remitted.
[11]
Finally, the deduction
must be claimed within four years after the day on or before which a return was
required to be filed or the period in which the bad debt was written off, which
is not at issue in this case.
The bad debt
[12]
Regarding the bad debt,
the issue is whether the debt was really bad.
[13]
Rich v. R. seems to be the case that best describes the factors to be taken into
consideration to decide whether a debt is bad. In that case, the issue was
whether the appellant was entitled to an allowable business investment loss. To
decide on the issue, Justice Rothstein lists factors that should, in general,
be taken into account. He specifies that it is the creditor who must decide
which factors to select, while the Court must decide whether the creditor
honestly and reasonably determined the debt to be bad based on the following
factors, among others:
(1)
the history and age of the debt;
(2)
the financial position of the debtor;
(3)
changes in total sales as compared with prior
years;
(4)
the debtor’s cash, accounts receivable and other
current assets at the relevant time and as compared with prior years;
(5)
the debtor’s accounts payable and other current
liabilities at the relevant time and as compared with prior years;
(6)
the general business conditions in the country,
the community of the debtor, and in the debtor’s line of business; and
(7)
the past experience of the taxpayer with writing
off bad debts.
[14]
The future prospects of
the debtor company may also be taken into account, unless they are merely
speculative. A future event may therefore be considered if it is probable that
it will occur and make the debt collectible.
[15]
It seems important to
note that it is unnecessary for the creditor to exhaust all possible measures
of collection. An honest and reasonable assessment is sufficient. It is
not essential to take proactive steps unless there is some evidence to show
that collection on the loan is reasonably possible.
[16]
In Paquin v. R, Justice
Garon specifies that the creditor cannot simply be content with the belief that
his or her debtor has no assets. In that case, the creditor took no steps to
collect the debt because he believed it futile in view of the bankruptcy of the
main partner of the debtor company. He made no attempts to collect the debt
from that partner or from another partner in the company. This was a decision
made on the basis of an incomplete analysis of the situation.
[17]
The evidence therefore
did not show that the debtor had taken reasonable measures to collect the debt.
His mere statement that the debt was bad in view of the principal partner’s
bankruptcy is not sufficient.
Under the doctrine propounded in Rich, we can sum this up by saying that
the creditor’s belief that he would not be paid was unreasonable. Appropriate
measures should therefore have been taken. This should be an objective exercise
that takes into account all of the relevant factors.
[18]
Justice Garon also
cited Ciriello v. Canada,
in which the Court explained that the burden of proof regarding the nature of
the debt is on the creditor whereby the creditor must show that this is not an
intuitive decision but a reasonable one that is warranted by various pieces of
evidence that vary from case to case.
[19]
In short, we can
conclude from these various cases that the creditor will not have to take
proactive steps if he honestly and reasonably believes that repayment is impossible.
This honest and reasonable belief must be based on, among other things, the
factors listed above.
[20]
Consequently, a private
agreement is not enough in itself to warrant the conclusion that a debt is bad.
To conclude that a debt is bad, it is essential that the test is done based on
various relevant factors.
[21]
In this case, does the
evidence with respect to these factors make it possible to conclude that the
debt owed to Vivaconcept was indeed bad?
[22]
The date and creation
of the debt was between November 2005 and October 2006 in view of the
billing from Flora to Vivaconcept. In the fall of 2006, when the agreement with
suppliers was concluded, the debt was almost a year old.
[23]
During that year, no
payments were made:
[Translation]
12. The invoices issued by the appellant relative to the
management fees for the period from November 2005 to October 2006 were never
paid by Flora.
There is no doubt in this case that Flora
was in a precarious situation. It was declared insolvent by its directors and
concluded the agreement with the suppliers in order to avoid bankruptcy and to
be able to put on a new exhibition the following year:
[Translation]
16. Flora was considered to be insolvent by its directors in
November 2006.
17. An agreement between Flora and a committee representing its
suppliers was concluded in the fall of 2006 (the Agreement). In a letter dated
February 13, 2007, Flora submitted an offer to its suppliers in accordance
with the Agreement.4
18. The appellant was obliged to submit to the Agreement in order
to prevent Flora’s bankruptcy and to make it possible for an exhibition to be
held in 2007.
[24]
The facts were
therefore simple and clear: the debtor was completely insolvent; not to accept
that reality would have been simply petty.
[25]
The decision to assume
that it was now a bad debt was wise, reasonable and rational. In addition, the
income statement shows a net loss of -$4,254,985.21 for the period from
November 1, 2005, to October 31, 2006.
[26]
Although the evidence
on the record does not make it possible to analyze every factor separately and
thoroughly, the case seems particular to me in that the facts are not disputed.
This absence of challenge warrants the conclusion that the situation was
obvious at the time, namely, that it was clear and undeniable that the debt had
become uncollectible. In addition, just the facts relative to the failure to
obtain the grant meant that the whole project was doomed to a total failure
with respect to the way in which it was planned and designed.
[27]
I reiterate that Flora’s
field of activity consisted in putting on a seasonal summer activity the revenues
from which were mainly made from the price of admission; yet, even that
component turned out to be completely different than expected.
[28]
The fall had come;
there were no hopes in that regard. Moreover, any legal proceedings instituted
for collection would have resulted in certain bankruptcy of the business, thus
destroying the seed and closing the door for good to any possibility of a
second attempt with reduced, but possible, cooperation of a certain number of
creditors.
[29]
In conclusion to this
part of the file, I find that the appellant was honest, reasonable and
justified in accepting the agreement and in not taking any additional steps to
collect its debt.
[30]
The debt did become bad
within the meaning of the provisions of the Act. I am satisfied that it was a
responsible, wise and completely appropriate decision beyond reproach; any
expense or effort to undertake any steps would have been a sheer waste of money
and energy.
Writing off the debt
[31]
Subsection 231(1) of
the ETA provides that the debt must be written off in the creditor’s books of
account.
[32]
In Ministic Air Ltd
v. The Queen,
Justice Bowie reiterates Judge Beaubier’s holding in Burkman v. The Queen that a
written note can meet the writing off criterion when there is no book of
account. The important thing is that there is a written record of the decision
to write off the debt.
[33]
In Ministic Air,
a memorandum was prepared stating that the debt had been written off. However,
according to Justice Bowie, this document was created not to record a
transaction, but for evidence to support the adjustment request. The
judge also explained that the adjustment request must be made in the period
during which the debt was written off or in a later period. However, Ministic
Air made its request before the write-off note was written. Thus, even if the
note had been sufficient evidence for the write-off, it could not have
supported the request made earlier.
[34]
In Bajan v. The
Queen,
no books of account were filed in evidence, and the company’s accountant did
not testify. In addition, the steps to collect the debt were taken after the
alleged write-off. The only evidence filed regarding the write-off was the
accountant’s letter, which was not very detailed and was written 15 or 16 years
after the events, which was deemed insufficient.
[35]
In McCool v. The
Queen,
Justice Bonner made the following comments:
In my
view a bad debt cannot be considered to have been written off in a person’s
books of account unless and until a notation is made in those books that the
particular debt has been written off. An unrecorded decision will not suffice. A
journal entry ought to be made to clear out each worthless receivable. Otherwise,
subsection 231 . . . would be impossible to enforce.
[36]
In this case, the
adjustment request under subsection 231(1) was made in April 2008, that
is, in the month following the agreement concluded with the suppliers. However,
the written write-off agreement was signed only in January 2009 in order
to comply with the requirement in paragraph 232(3)(a) concerning the
credit note. The January 2009 agreement therefore could not support the
April 2008 request, as per Ministic Air.
[37]
The note on the
write-off is found in the financial report dated January 31, 2007. Although
it seems as if only a part was written off, I believe that this is sufficient
evidence for the write-off since the context makes it possible to confirm that
the debt written off is indeed the debt at issue.
[38]
Although the case law
does not expressly hold that the write-off may be proven by testimony, our
Court noted in Bajan that the fact that the accountant did not testify
prevented it from being able to assess the credibility of the content of his
letter indicating the write-off.
In other words, the letter, which is insufficient by itself, could have been
probative evidence if it had been corroborated by testimony. Let us recall, however,
that the letter in question was written many years after the events.
[39]
Thus, a contemporary
written document recording the decision to write off the debt seems essential
to the application of section 231. The nature of the written document in
question may vary, however, depending on the circumstances. Bajan even
suggests that the written document does not have to be contemporary as long as
it is credible.
[40]
In this case, all of
the facts admitted, the testimony and the written documents filed in support of
the evidence, I am able to find that the balance of probabilities is in favour
of the write-off.
[41]
Subsection 231(1.1)
imposes two additional conditions for the adjustment request for bad debt. First,
the tax collectible for the supply must be included in the determination of the
net tax reported in a return for the reporting period in which the tax became
collectible.
[42]
In Bajan,
Justice Paris deplores the fact that none of the appellant’s files was offered in
evidence making it impossible to determine the GST portion attributable to the
allegedly bad debt.
[43]
Therefore, we must
examine the tax return for the period concerned and ensure that a part or the
entire amount reported is related to the taxable supply. This may be proven by
the company’s documents.
[44]
In the case at bar, it
was admitted by the parties that an amount of $83,373 was reported relative to
the debt at issue, an amount that was then adjusted by the Minister.
[45]
The contract concluded
between Vivaconcept and Flora, the write-off agreement as well as the credit
note also constitute evidence of the debt amount, which makes it possible to
determine the tax amount in respect of the supply.
[46]
In short, there is no
doubt that it is the amount of $103,440.44 that corresponds to the tax on the
bad debt.
[47]
The second condition in
subsection 231(1.1) requires that the total net tax remittable based on the
return for the period during which the tax became collectible be remitted. In
other words, as indicated in Explanatory Notes, ".
. . the . . . reporting entity . . . must also satisfy the requirement to remit
any positive amount of net tax reported in [the] return".
[48]
In Ministic Air,
the claim for the bad debt deduction was made in March 2001. Yet, at that time,
the GST for the supplies recorded in the return still remained unpaid. It was
paid only in August 2001 through the use of assets seized by the Canada Revenue
Agency, which does not satisfy the requirement.
[49]
In short, the positive
amount of net tax relative to the period when the tax on supplies became
collectible must be paid to the Minister before the deduction claim is made. Did
Vivaconcept pay the applicable net tax? The evidence regarding this emerged
from the testimony of Mr. Goulet.
[50]
Just like section 231
of the ETA, subsection 232(2) provides several application criteria. In order
to obtain the desired adjustment, there must be a person who charges or
collects tax calculated on consideration for a supply, and the consideration
must also be reduced in part or in full. The adjustment must be requested in
the period during which the consideration was reduced or within four years
following the end of that period.
[51]
Subsection 232(3) sets
out another condition:
(1) The person who claims the adjustment issues a credit note
to the other person within a reasonable time.
[52]
The adjustment request
may be made within the period when the credit note is issued as long as the
amount for which the deduction is claimed was included in calculating the net
tax in that same period or an earlier period.
[53]
In this case, it is not
disputed that a credit note was issued. Indeed, it was admitted that a valid
credit note was issued on January 14, 2009. The problem lies primarily with the
time period: 23 months passed between the agreement to reduce consideration (in
February 2007) and the issuing of the credit note (January 2009). Determining
whether a time period is reasonable is not essentially an exercise in
mathematics; a myriad of considerations and elements must be assessed on the
basis of the context and of the circumstances.
[54]
At least, that is what
Justice Muldoon specified in Silden v. The Queen. The
issue of a reasonable time must also be assessed on the basis of the obvious objective
of Parliament, which intended that a recipient of the supply may correct or
rectify the situation with regard to the very numerous uncertainties of
business and economic operations.
[55]
It is true that a time
period of 23 months is relatively long. However, the appellant believed that
section 231 was the one that applied in his case; that section does not require
a credit note. It learned only at the end of 2008 that it should have used
section 232 and that it should therefore have issued a credit note to Flora.
[Translation]
24. That final decision was communicated to the appellant around
the end of 2008 through various discussions with, among others, Alain Muguet,
auditor for the Agence du revenu du Québec.
[56]
The credit note was
issued on January 14, 2009, that is, a relatively short time after the
appellant learned that it should have issued one. The adjustment request under
section 232 was then made on April 20, 2009, in its net tax return for the
period ending on January 31, 2009.
[Translation]
28. In its net tax return for the period ending January 31, 2009,
signed on April 20, 2009, the appellant requested an adjustment in the
amount of $103,440.44.10
[57]
The appellant has shown
diligence, particularly if we take into account the provisions in section 231;
the time resulting from the request under section 231 must be taken into
account. The remaining time, namely, that between the Minister’s notice of
disallowance (end of 2008) and the issuance of the credit note (January 2009)
seems quite reasonable to me.
[58]
The appellant has shown
diligence; indeed, citing the provisions in section 231 at first was an unavoidable
step because the appellant could have received satisfaction at that time. Indeed,
the write-off of the debt and the payment of the net tax could have very well
satisfied the appellant in that first step.
[59]
I do not believe that I
am exaggerating when I state that some provisions of the Act are particularly
difficult to understand for those who are subject to them. In this regard, the
respondent’s representatives have some responsibility to make the provisions more
accessible to the general public so that those who are subject to them may
manage their tax obligations properly.
[60]
In this case, there is
no doubt that the appellant acted in good faith and reasonably given the
circumstances. In such a context, I am of the view that, unless there is a
doubt or a certain degree of discomfort regarding the balance of probabilities,
the decision should be in favour of the taxpayer, especially since the blame
directed at it has much more to do with form than with substance.
[61]
In this case, I believe
that the evidence is satisfactory for allowing the appeals; therefore, they are
allowed, with costs to the appellant.
Signed at Ottawa, Canada, this 24th day of October
2013.
"Alain Tardif"
Translation
certified true
on this 11th day
of February 2014.
François Brunet, Revisor
Email this Content