Citation: 2012 TCC 397
Date: 20121109
Docket: 2011-2684(GST)I
BETWEEN:
LES CONSTRUCTIONS MARABELLA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Batiot D.J.
[1]
Mr. Marabella, the
appellant's president and sole shareholder, and Ms. J. Gracioppo, his
spouse and the appellant's accountant, are representing the appellant. Both of
them testified.
[2]
The Notice of Appeal
and the respondent's Reply were in English. The appellant requested that the hearing
be held in French and agreed that these documents not be translated.
[3]
The Minister of Revenue
of Quebec, acting as agent of the Minister of National Revenue, issued a notice
of reassessment dated October 2, 2009, against the appellant, as follows:
CONSTRUCTION MARABELLA
ENDING JANUARY 2006
Adjustments: $1,456.10
Interest: 360.59
Late remitting
penalty: 1.74
TOTAL (JANUARY 2006) $1,818.43
ENDING JULY 2006
Adjustments: $348.07
Interest: 77.21
TOTAL (JULY 2006) $425.28
ENDING OCTOBER 2006
Adjustments: $599.44
Interest: 125.45
TOTAL (OCTOBER 2006) $724.89
ENDING JANUARY 2007
Adjustments: $632.89
Interest: 129.24
TOTAL (JANUARY
2007) $762.13
ENDING OCTOBER 2007
Adjustments: $961.55
Interest on
reimbursement: 0.55
Interest: 101.34
TOTAL (OCTOBER 2007) $1,071.44
(Section 3, Reply to the Notice of Appeal)
[4]
The total
for the five periods at issue, including interest, is $4,796.66. The Goods and Services Tax (GST) totals $3,998.05.
[5]
In section 8 of
her Reply to the Notice of Appeal, the respondent sets out her assumptions and
findings based on invoices from three of the appellant's suppliers: Construction
Lubac Inc., Construction Lido Inc. and Construction Beck Inc. Although these
suppliers are registered for the GST, they were not carrying on any commercial
activity in the area of expertise for which the appellant allegedly hired them
and were not doing business with any subcontractors. They therefore could not
have supplied the work carried out at the various residences the appellant
built or was building during these periods. Furthermore, the individual with
whom the appellant was doing business, Alain Archambault, had no
relationship with these three companies. The appellant therefore appeared to be
involved in a false invoicing scheme and did not provide any details regarding
the employees who were doing the work or any official information from the Commission
de la santé et de la sécurité du travail [Quebec workplace health and safety
board] or confirmation from the Commission de la construction du Québec [Quebec
construction commission] regarding the employees.
[6]
Therefore,
the appellant is liable and must pay the sum of $3,998 plus interest and a
penalty.
[7]
The appellant objects
to this assessment because it received the services requested and paid its
supplier, Alain Archambault, in full and in good faith, in accordance with
his instructions.
FALSE INVOICES
[8]
The respondent filed
evidence, which the appellant did not contradict, proving that these three
companies supplied false invoices on a massive scale (several million dollars
each): they did not have the equipment, staff or administration required to
carry out the work done for the appellant. They issued— or had issued for them—formal
invoices, but these invoices described the work done in very brief terms; the
cheques issued in consideration for the work were cashed at a cheque-cashing business
the same day for a 3% commission, and the money disappeared. No GST was
remitted to the Minister of Revenue of Quebec.
[9]
The respondent has
established that these companies were involved in a false invoicing scheme and
that none of them did in fact provide supplies to the appellant.
[10]
The evidence introduced
at the hearing shows that the work required by the appellant was performed, at
its request, by one Alain Archambault.
[11]
The issue to be
resolved is therefore the following: Did the appellant make a reasonable
mistake of fact or did it take reasonable precautions to comply with the law?
LEGAL CONTEXT
[12]
When a registrant
claims inputs against any amount payable for GST, it must comply with the terms
of the law. The Federal Court of Appeal's ruling in Systematix Technology
Consultants v. Her Majesty the Queen, 2007 FCA 226, at paragraph 4,
is very clear:
We
are of the view that the legislation is mandatory in that it requires persons
who have paid GST to suppliers to have valid GST registration numbers from
those suppliers when claiming input tax credits.
[13]
Subsection 169(4)
of the Excise Tax Act (ETA) states as follows:
A
registrant may not claim an input tax credit for a reporting period unless,
before filing the return in which the credit is claimed,
(a)
the registrant has obtained sufficient evidence in such form containing such
information as will enable the amount of the input tax credit to be determined,
including any such information as may be prescribed; . . .
Input Tax
Credit Information (GST/HST) Regulations, SOR/91-45, subparagraph 3(c)(iii).
For the purposes of
paragraph 169(4)(a) of the Act, the following information is
prescribed [relevant] information:
(a) . . .
(i) . . .
(ii) where an invoice is issued in
respect of the supply or the supplies, the date of the invoice,
. . .
(iv) the total amount paid or
payable for all of the supplies;
(b) . . .
(i) the name of the supplier or the intermediary
in respect of the supply, or the name under which the supplier or the
intermediary does business, and the registration number assigned under
subsection 241(1) of the Act to the supplier or the intermediary, as the
case may be,
. . .
(c) where the
total amount paid or payable shown on the supporting documentation in respect
of the supply or, if the supporting documentation is in respect of more than
one supply, the supplies, is $150 or more,
(i) the information set out
in paragraphs (a) and (b),
(ii) the recipient's name, the name
under which the recipient does business or the name of the recipient's duly
authorized agent or representative,
(iii) the terms of payment, and
(iv) a
description of each supply sufficient to identify it.
[14]
In this case, I gather
from these acts and regulations that, before making a claim, in order to substantiate
it, the appellant must have and submit its supplier's true name and
registration number and must submit its own name, the amount paid or to be
paid, the terms of payment and a description of each supply sufficient to
identify it.
FACTS
[15]
Mr. Marabella is a
small contractor doing business under the name Les Constructions Marabella
Inc., and is registered for GST/QST purposes. His company has no other
employees except perhaps his spouse, Ms. J. Gracioppo, who does the
appellant's accounting and is representing the appellant in this appeal. Each
year, the company builds up to three houses to sell, depending on the economic
situation and the availability of land for construction.
[16]
Mr. Marabella handles
his projects personally, through subcontractors. Each subcontractor works in
its own area of expertise, from preparing the land to laying foundations,
building walls and roofs, installing the plumbing, the wiring and any other
system needed for a residential building. Obviously, this includes installing
the interior walls of the house and garage, which is where Alain Archambault,
a drywall installer and seam caulker, comes in.
[17]
Mr. Marabella needs
to obtain the various services at the right time; each task must be done in a
specific order. He must retain the services of a given subcontractor based on his
own schedule, someone who will do a good job quickly and within the time
allotted.
[18]
Mr. Marabella was
satisfied with the work of Alain Archambault and his crew.
Mr. Archambault had been recommended to him. He also knew that Mr. Archambault
was having problems with the authorities and was short of funds so he paid him
promptly, within four or five days (this short timeframe attracted the
attention of Revenu Québec, hence the audit). He also knew that these invoices
were very short on details and came from different companies that he had never dealt
with. However, he paid the invoices without questioning them because he was
satisfied with the work of Alain Archambault, who presented the invoices
as his own.
[19]
There is nothing before
me that proves or suggests that Mr. Marabella was aware of the dubious
practices identified and proved by the respondent.
[20]
The appellant submits
that it does not have to pay a second time the GST it already remitted to
Mr. Archambault in accordance with the invoices issued and paid
immediately. Indeed, Mr. Marabella makes an emotional plea, asking what he
has done wrong. His frustration—and that of Ms. Gracioppo—with the
respondent's claim is evident.
[21]
On the basis of the
evidence adduced by the appellant, I am satisfied that the work was performed
to its satisfaction by Mr. Archambault, who, with his crew, installed the
drywall delivered, at Mr. Marabella's request, at a specific site, and
that the invoices issued to the appellant represented the work performed.
[22]
We have since learned
that these three companies cashed the cheques immediately at cheque‑cashing
businesses and that the money disappeared. There is no evidence before me that
the appellant was aware of these facts, which were discovered after the cheques
were issued.
[23]
I accept the
appellant's evidence that it was not an accomplice to this fraud.
[24]
But the appellant,
through Mr. Marabella, also knew that Mr. Archambault was having
problems with the authorities, including those responsible for the GST, and it accepted
Mr. Archambault's representations that these invoices issued by the three
companies were in fact his own. Mr. Marbella testified emphatically that
he did business with Mr. Archambault alone and did not know any of the
three companies; he nevertheless paid them large sums of money, right away,
without making any other inquiries.
[25]
Fraudulent activity of
this sort has been considered in a number of judgments. I note here the
judgment of this Court in Comtronic Computer Inc. and Her Majesty the Queen,
2010 TCC 55, in which Justice Patrick Boyle underscores the duty of
an agent under the GST regime to obtain, in accordance with the above‑mentioned
Regulations, a valid registration number for any supplier to which it has paid
GST if it wants to claim that amount as an ITC.
[26]
Justice Boyle was applying
Systematix Technology Consultants Inc., above.
[27]
In this case, it is not
the registration number that is in question but the very identity of the
supplier. Clearly, if it is not a true supplier, its registration number is
invalid in respect of the recipient claiming the ITC. The supplier's name must
match the registration number, and the supplier must in fact be the supplier.
[28]
It was a mistake for
the appellant to accept the representations of Alain Archambault, its
current supplier. It did so without checking to see if they were accurate.
Without such verification, this mistake of fact is unreasonable, especially
given the circumstances that prompted these representations, namely, the
financial problems of the current supplier.
[29]
In Comtronic,
above, at paragraph 29, Justice Boyle acknowledges that imposing such
a duty on an agent can create hardship:
. . .
[T]his strict approach can result in unfairness to a purchaser who pays the GST
in good faith. It leaves Canadian businesses bearing the risk of fraud,
identity theft, and wrongdoing and effectively requires them to put into place
risk management practices in dealing with new and continuing suppliers to
identify supplier information that may require further investigation. A result
such as this may prove harsh and unfair but it is open to Parliament to
legislate such a regime and I am bound to apply that legislation as it has
already been interpreted by the Federal Court of Appeal.
(referring to Systematix, above).
[30]
I note that Mr. Marabella
made this error in good faith. Unfortunately, this is not a defence in
administrative matters, where only due diligence excuses either a reasonable
error of fact, or the taking of reasonable precautions to comply with the Act (Corporation
de l’École Polytechnique v. Canada, 2004 FCA 127, paragraph 28).
[31]
At paragraph 29 of
that same judgment, the Federal Court of Appeal explains the distinction:
. . . The
good faith defence enables a person to be exonerated if he or she has made an
error of fact in good faith, even if the latter was unreasonable, whereas the
due diligence defence requires that the error be reasonable, namely, an error
which a reasonable person would have made in the same circumstances. The due
diligence defence, which requires a reasonable but erroneous belief in a
situation of fact, is thus a higher standard than that of good faith, which
only requires an honest, but equally erroneous, belief.
[32]
It was not reasonable
(or prudent) for the appellant to pay the invoices presented by Mr. Archambault,
its supplier, as he instructed, for work done by other alleged suppliers without
obtaining the former’s registration number and without having done business
with the latter. Knowing that Alain Archambault, its supplier, was having
problems with the GST regime and needed money right away, the appellant should
have protected itself by verifying these representations before paying a
stranger. In the absence of such verification, these mistakes of fact were not
reasonable.
[33]
I note that Mr. Marabella
had complete trust in the suppliers with which he usually did business. He
placed the same trust in Mr. Archambault, a new supplier, who betrayed
that trust. Any business can protect itself by ensuring that the information
prescribed by the legislation appears on its invoices, especially the ones it
has to pay.
[34]
The appeal is
dismissed.
Signed at Montréal, Quebec, this 9th day of November 2012.
"Jean-Louis Batiot"
Translation certified true
on this 30th day of November 2012
Michael Palles, Translator/Language Adviser
Email this Content