|
Citation: 2005TCC92
|
|
Date: 20050213
|
|
Docket: 2002-222(GST)G
|
|
BETWEEN:
|
|
RICHTER & ASSOCIATES INC.
in its capacity as trustee to the bankrupt estate of
CASTOR HOLDINGS LTD.,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Archambault, J.
[1] Richter & Associates Inc., in its capacity
as trustee (Trustee) of the estate of Castor Holdings Ltd. (Estate), is appealing against eight
assessments under the Excise Tax Act (Act) covering the period
from October 1, 1994, to March 31, 2001 (relevant period). The
Minister of National Revenue (Minister) disallowed pursuant to
sections 123, 141.1, 169 and 265 of the Act the input tax credits (ITCs)
totalling $2,474,361.92 for the relevant period. The minister states that the
ITCs were claimed in respect of properties and services which were not acquired
in the course of commercial activities. They were instead acquired (or deemed
to have been acquired) in the course of making exempt supplies (i.e. supplies
of financial services).
Facts
[2] At the outset of the hearing, both parties
filed a written Admission of Facts, which I shall reproduce here:
1. On
March 26, 1992, Richter & Associates Inc. ("Richter") was named, in accordance with the Bankruptcy and
Insolvency Act, interim receiver of Castor Holdings Ltd. ("Castor").
2. Prior
to its bankruptcy, Castor engaged primarily in activities consisting of lending
funds to real estate enterprises, and it was, therefore, a deemed financial
institution under subsection 149(1) of the [Act].
3. Prior
to its bankruptcy, Castor almost exclusively made supplies of financial
services, i.e. "exempt supplies" within the meaning of subsection
123(1) of the [Act].
4. Castor
was registered under section 240 of the [Act].
5. On July
9, 1992, Richter was named trustee to the bankrupt estate of Castor.
6. At the
time of the bankruptcy, Castor's audited financial statements, prepared by
Coopers & Lybrand, reflected that Castor had assets in excess of $1.8
billion.
7. Richter
in its capacity as Trustee (the "Trustee") proceeded to the
liquidation of the assets of the bankrupt Castor. The liquidation was
substantially completed by 1994, and the Trustee had realized an amount of less
than $25 million from all sources.
8. Various Canadian banks,
foreign banks and Canadian corporations (the "Creditors") had loaned
substantial amounts to Castor while relying on the financial statements audited
by Coopers & Lybrand.
9. When it
was determined that Castor had only insignificant assets and that a number of
irregularities were evident, the Creditors initiated approximately 40
separate actions in the Québec Superior Court alleging that Castor's
financial statements had been negligently audited by Coopers & Lybrand
and seeking damages in excess of $1 billion.
10. The Trustee
also initiated an action against Coopers & Lybrand alleging that it had
failed to fulfill its contractual duties as auditor and seeking damages of
$40 million.
11. In 1993 the
Trustee and certain of the Creditors (the "Participating
Creditors"), which had filed claims against Coopers & Lybrand in
excess of approximately $800 million, entered into a Participation Agreement
(the "Participation Agreement") in which it was agreed that the
Trustee, having first hand knowledge of Castor's assets and records, would
make available to the Participating Creditors such expertise and information that may
be relevant to their proceedings against Coopers & Lybrand
(sometimes referred to herein as the "Litigation Support Business").
12. To
fund the Litigation Support Business, each Participating Creditor agreed to
make periodic loans to the Trustee which were
obligatory and calculated by reference to the percentage which each
Participating Creditor's claim was in relation to the total claims of all
participating creditors.
13. The
Participation Agreement provided that the loans advanced to the Trustee would
not bear interest and were repayable by the Trustee at its sole discretion.
14. On
February 10, 1993 the Trustee received authorization from Castor's bankruptcy
inspectors to enter into the Participation Agreement and funding mechanism.
15. During
the period covered by this appeal, i.e. from October 1, 1994 to March 31, 2001,
the Trustee paid GST in the amount of $2,474,361.92 on the
property and services acquired to liquidate the bankrupt estate and to
conduct the Litigation Support Business.
16. The
Trustee claimed input tax credits ("ITCs") in Castor's periodic GST
returns, which the Trustee filed in its capacity as agent for the bankrupt,
the whole in conformity with section 265 of the [Act].
17. Appellant
acknowledges that GST in the amount of approximately $120,000
paid on property and services acquired for use in the liquidation of
Castor's exempt financial assets is ineligible for ITCs and, therefore,
reduces its claims to such extent, i.e. that the amount in dispute is
approximately $2,354,000.00.
18. The
Trustee's claims for ITCs for the period covered by this appeal were disallowed
in eight (8) separate notices of assessment, all of which were duly appealed by
way of notices of objection.
19. In its
letter, dated October 19, 2001, the Ministère du Revenu du Québec (the
"Minister"), as agent for the Minister of National Revenue, confirmed
the earlier notices of assessment which disallowed the Trustee's claims for
ITCs.
20. Generally,
the Minister refused the Trustee's claims for ITCs on the grounds that
the activities of the Appellant constituted exempt supplies (financial
services) and are not in the course of commercial activities in
accordance with sections 123, 141.1, 169 and 265 of the [Act].
[Emphasis added.]
[3] Many additional facts set out by the Estate in
its Notice of Appeal were either denied by counsel for the respondent or counsel
stated that he had no knowledge thereof. Most of these I reproduce here:
3. Castor also made some taxable supplies, and it was
registered under section 240 of the [Act].
14. The Trustee periodically sent requests for loans to the
Participating Creditors requesting payment of their pro rata share of fees and
expenses required to fund the common litigation.
17. It was unanimously resolved by the inspectors that if the
damages ultimately recovered by the Trustee in its action against Coopers
& Lybrand exceeded the total of the fees and expenses required to
fund the common litigation, the loans advanced by the Participating
Creditors would be fully reimbursed.
18. Otherwise, if the Trustee would recover less than the
total of such fees and expenses, the Trustee intended to partially
reimburse the loans with the net funds available. Upon obtaining approval
of the inspectors, the Participating Creditors would be invoiced their pro
rata share of the remaining expenses, plus GST as applicable, with the loan
proceeds previously received by the Trustee being applied against such
invoices.
19. In a June 12, 1995 decision, the Québec Court of Appeal
recognized the legitimacy of the Participation Agreement.
20. Of all the actions initiated against Coopers & Lybrand, the
Honourable Mr. Justice Paul Carrière of the Quebec Superior Court
selected as the test case the action initiated by another Creditor, Peter
N. Widdrington, and not the action which the Trustee had initiated against
Coopers & Lybrand.
21. The Court decided that in the event of a finding of negligence
against Coopers & Lybrand in this test case, the body of evidence
relating thereto would be used in the other actions, thereby limiting the
trials in the other actions to questions regarding quantification of damages
and causation.
22. The other cases against Coopers & Lybrand, including the
Trustee's action, have been held in abeyance pending a decision in the test
case.
23. The trial in the test case against Coopers & Lybrand
commenced in September 1998 and continues to the date of filing of this Notice
of Appeal.
24. The Trustee engaged the lawyers, accountants, forensic
experts and staff (the "Professionals") acting in the test case,
and paid GST on their fees and disbursements.
25. The Trustee engaged these Professionals as the
"recipient" of the supply of their services, not as agent
or mandatary of the Participating Creditors.
26. Richter issued their periodic invoices to the estate of the
bankrupt and charged GST.
27. The Trustee incurred numerous other expenses in connection with
the Litigation Support Business, including costs for leasing premises in the
court, photocopies, expert witnesses, transcripts, staff, and travel, and paid
GST on most of these expenses, as applicable.
28. The fees and expenses incurred by the Trustee to fund the common
litigation were paid for using the proceeds from the loans advanced by the
Participating Creditors..
29. All property and services acquired by the Trustee in connection
with the common litigation were acquired in its capacity as agent of the
bankrupt, as provided by paragraph 265(1)(a) of the [Act], and not as agent for the
Participating Creditors.
[Emphasis added]
[4] With the exception of those facts described in
paragraphs 17 and 18, the above facts have been established to my
satisfaction, either as a result of the testimony of Mr. Manel or by means
of documentary evidence filed at the hearing. With respect to the facts stated
in paragraphs 17 and 18, more analysis is required before concluding that
they have been established. I note that in the Participation Agreement, there
is no statement that, upon obtaining the approval of the inspectors, the
"Participating Creditors would be invoiced their pro rata share of the
remaining expenses, plus GST as applicable, with the loan proceeds previously
received by the Trustee being applied against such invoices". As mentioned
above,
the loans are to be reimbursed at the discretion of the Trustee. However,
Mr. Manel confirmed the Trustee's intention to invoice the different
Participating Creditors for the non-reimbursed portion of the loans used to
finance the litigation, although not all Participating Creditors were aware yet
of the mechanics of this arrangement. But, the largest single creditor of the
Estate, at least is aware. In a letter dated May 4, 2004, that is, just prior to the
hearing herein, Daimler Chrysler Canada Inc. indicated that it had not claimed
any ITCs with respect to the loans made to the Estate. However, when a final invoice
is issued, Daimler Chrysler Canada Inc. intends to claim ITCs for the GST
charged thereon.
[5] According to Mr. Manel, the disbursements
made and expenses incurred by the Estate during the relevant period related
primarily to the Litigation Support Business. "The liquidation [of the
Estate] was substantially completed by 1994 . . ." Given how few assets were
recovered by the Estate, its main hope for obtaining any additional assets
after 1994 lies in the damages it could receive from C&L. As to the
Participating Creditors, given that the disbursements of the Estate already
substantially exceed the value of the assets that it has realized, their main hope for obtaining
compensation for the loss of their investment in Castor is similarly their own direct
claim for damages against C&L.
[6] When asked what the Estate’s profit from
carrying on its Litigation Support Business would be, Mr. Manel replied
that he would describe the Participation Agreements not as a source of profit
for the Estate but as a benefit. He stated that this arrangement allowed the
Estate to finance its own claim against C&L. If the Estate wins, the money
will be used to pay first the costs for the general administration of the
Estate, and the excess, if any, will then be used to reimburse the loans to the
Participating Creditors, and if any assets are then still available, they will
be paid as a dividend to the Estate's creditors.
[7] Until the test case is decided and until the
Estate has a chance to establish its own entitlement to damages from C&L,
we do not know who will ultimately bear the cost of the litigation and to what
extent. However, one thing is clear: there is no way that the Estate could have
pursued its claim in damages against C&L without the loans made by the
Participating Creditors. Given the astronomical amount of
litigation costs involved,,
it is most likely that any additional assets that the Estate may acquire will
not be sufficient to pay these costs through the reimbursement of the
Participating Creditors’ loans and, therefore, the Participating Creditors will
have to bear directly at least a portion, if not a substantial portion, of
these costs.
[8] In conclusion, the Participation Agreement
constituted a funding mechanism to provide the Estate with sufficient funds to
prosecute the actions against C&L, not only for its own benefit but also
for the benefit of the Participating Creditors.
Position of the Minister
[9] The minister's position is concisely described
as follows in paragraphs 79 and 80 of the Respondent’s Reply to the Notice
of Appeal:
79. Since Appellant,
prior to its bankruptcy, made exempt supplies, that is made supplies
otherwise than in the course of commercial activities, any act performed by
the trustee in the administration of the estate of Appellant is deemed
to have been performed, as the case may be, by the trustee as agent of
the Appellant, such as initiating an action against Coopers & Lybrand;
80. Furthermore,
pursuant to paragraph 141.1(3)(b) of the [Act], the action initiated against
Coopers & Lybrand by the trustee, constitutes an act, other than
making a supply, in connection with the termination of an activity that is
not a commercial activity and the trustee, as agent of Appellant, shall be
deemed to have done that thing otherwise than in the course of commercial
activities.
[Emphasis added.]
[10] Further enlightenment can be found in the
memorandum on objection prepared by the Ministère du Revenu du Québec, which is
responsible for administering the Act in Quebec. The appeals officer who
processed the objection cited the following opinion expressed by the Direction
des lois sur les taxes, le recouvrement et l’administration:
… Selon les faits
soumis, nous sommes d'avis que les biens acquis par le syndic dans le
cadre de l'exercice du recours ne le sont que pour la réalisation des actifs
du failli, donc dans le cadre de la cessation de l'activité non
commerciale de Castor, et qu'en conséquence, ils sont réputés avoir été
acquis en dehors du cadre d'une activité commerciale
(alinéa 141.1(3)b) de la Loi). Ainsi, aucun crédit de taxe sur les
intrants ne peut être réclamé par Richter, en sa qualité de syndic de Castor, à
l'égard des biens et des services acquis dans le cadre de l'exercice du recours
contre Coopers et Lybrand.
De plus, selon notre
analyse, nous sommes d'avis qu'en l'espèce, le « support de
litige » offert par Richter ne peut être considéré comme étant une
nouvelle activité du failli.
[Emphasis added.]
[11] Furthermore, the appeals officer also added her own
opinion as follows:
. . . En aucun cas,
le syndic ne peut, aux fins de la LTA, commencer une nouvelle activité
au nom du failli.
Le fait que l'article 32
LFI
n'exige pas que le syndic poursuive les activités du failli n'a pas d'incidence
sur les effets des dispositions de la LTA. Nous ne contestons pas la légalité
du geste posé par le syndic puisque nos conclusions ne portent que sur les
conséquences (ou la qualification) de ce geste en matière de taxes à la
consommation....
[Emphasis added.]
[12] Further on, on page 3 of her report, the
appeals officer states:
Le syndic soutient que
le failli aurait, par son entremise, débuté une nouvelle entreprise soit celle de
la fourniture de services de « support aux litiges » aux créanciers
du failli.
Nous sommes d'avis que
tel n'est pas le cas. Le syndic a pris action ès qualité pour récupérer un
actif dans la faillite dans le cadre de sa gestion des actifs du failli. Il est
partie à l'action. Ainsi, le fait que les autres créanciers lui prêtent des
sommes d'argent ne signifie pas qu'il y a exploitation d'une entreprise.
Ces fonds servent à financer l'action en justice qu'il a intentée.
Le fait que le syndic mette à la disposition
des autres créanciers les opinions comptables et légales qu'il a acquises ne
constitue pas une fourniture en ce qu'il n'y a pas de livraison de biens ni
de prestations de services. . . .
[Emphasis added.]
[13] To distinguish the case of the Estate herein from
that of the appellant in Borrowers' Action Society v. The Queen,
[1996] G.S.T.C. 61, the appeals officer asserts the following:
. . . le syndic ne fait
pas la promotion de poursuites en responsabilité professionnelle, ni n'intente
de telles poursuites au nom d'autres personnes. Le syndic ne tente que de
récupérer des sommes qui pourraient être dues au failli.
[Emphasis added.]
[14] Finally, the appeals officer draws the following
conclusion at pages 3 and 4 of her report:
. . . Cependant, nous
ne croyons pas qu'il y a activité commerciale et contrepartie; les
autres créanciers (que le syndic doit représenter) ne sont pas les
acquéreurs d'une fourniture et ne versent pas une contrepartie mais ils
avancent des fonds au syndic dans leur propre intérêt. De plus, le
présent cas concerne uniquement la demande de l'opposant (non celle du
syndic) et les activités de celui‑ci étaient exonérées.
De plus, si une telle
activité avait été exercée par l'opposant (ce que nous nions), celle‑ci
aurait été réputée être l'activité d'une personne distincte du failli et
aurait été une activité non visée par la faillite. . . .
[Emphasis added.]
The Estate's Position
[15] Counsel for the Estate stated, in his remarks,
that the bankruptcy of Castor constitutes a unique case, being probably the
largest bankruptcy in Canada. In his view, the Estate started carrying on a new
business when it decided to provide litigation support to the Participating
Creditors. The supplies provided by the Estate constituted taxable supplies
because they were so provided in the course of a commercial activity. His reasons
in support of the appeals are outlined in his Notice of Appeal at
paragraphs 50 to 77, which I reproduce here:
D. REASONS IN SUPPORT OF APPEAL
(i) Introduction
50. In
entering into the agreements with the Participating Creditors, it was
explicitly agreed that the Trustee would supply litigation support services
to the Participating Creditors. At such time, the Trustee commenced a new
"commercial activity" which was distinctly different from the exempt
financial activity carried on by Castor prior to its bankruptcy. The
Trustee was, therefore, entitled to claim input tax credits on property and
services it acquired for consumption, use or supply in the course of this new
commercial activity.
(ii) The
Trustee was Engaged in a "Commercial Activity"
51. The
supply of litigation support services to the Participating Creditors
constitutes a "commercial activity" either as a
"business" carried on by the Appellant or an "adventure
or concern in the nature of trade". Both of these activities are
defined as a "commercial activity" in subsection 123(1) of the [Act].
52. The
definition of "business" in subsection 123(1) is clearly broad
enough to comprehend the supply of litigation support services to the
Participating Creditors. "Business" is defined to include
"a profession, calling, trade, manufacture or undertaking of any
kind whatsoever, whether the undertaking is engaged [in] for
profit".
53. The
conclusion that Appellant's Litigation Support Business constitutes a
"business" and a "commercial activity" is supported by
the decision of the Tax Court of Canada in Borrowers' Action Society
v. The Queen, [1996] G.S.T.C. 61. In this case, the court had to decide
whether the appellant made a "taxable supply" to each person who paid
a fee, characterised as a "donation", to participate in a
class action suit instituted against a credit card company. If the class action
suit was successful, each person who advanced funds was entitled to receive a
portion of the award.
54. The
Court had little difficulty in determining that the litigation support
services provided by Borrowers' Action constituted a "business" and a
"commercial activity" on the grounds the taxpayer was engaged in
the business of promoting, instituting and prosecuting a legal action against
credit card companies financed by monies received from individuals who wished
to participate in the litigation.
55. Similar
to the facts in the Borrowers' Action case, the Trustee agreed to
supervise the test case against Coopers & Lybrand and make available expertise
and information to the Participating Creditors as may be relevant to their
proceedings. The Trustee’s Litigation Support Business was financed by loans
made by the Participating Creditors, and the Trustee was authorized by the
inspectors to charge the Participating Creditors for its fees and expenses.
56. Accordingly,
the activities of the Trustee clearly constitute a "business" and a
"commercial activity", not an exempt financial activity as determined
by the Minister.
(iii) The
Trustee’s Inputs Were for Use in a Commercial Activity
57. Considering
that the Appellant's Litigation Support Business constitutes a
"commercial activity" and not an exempt supply of a financial
service, the Trustee was entitled to claim input tax credits with
respect to property and services acquired for consumption, use or supply in the
course of this new commercial activity.
58. In
Appellant's submission, the Minister incorrectly concluded that the
property and services acquired by the Trustee were for use in the
realisation of the assets of the bankrupt and were, therefore, deemed under
paragraph 141.1(3)(b) of the [Act] to have been acquired otherwise than in
the course of commercial activities.
59. To the
contrary, the property and services were acquired for use in the
Trustee's new commercial activity of supplying litigation support
services to the Participating Creditors – an activity which was totally unrelated
to the exempt financial activities previously carried on by Castor.
60. The
Minister also incorrectly determined that the funds loaned by the
Participating Creditors were used to finance the Trustee's litigation
against Coopers & Lybrand. The Trustee's action against Coopers &
Lybrand was held in abeyance pending a decision in the test case, and all
funds loaned by the Participating Creditors were used to fund the
Trustee's Litigation Support Business in connection with the prosecution of
the test case against Coopers & Lybrand.
61. With
respect to the timing of its claims for input tax credits, the Trustee was
not required to collect GST from the Participating Creditors until its action
against Coopers & Lybrand was ultimately decided. It was nevertheless
entitled to claim input tax credits on an ongoing basis.
Paragraph 169(1)(c) of the [Act] provides that a person is entitled to
claim an input tax credit to the extent that a person has acquired
property or services for consumption, use or supply in the course of
commercial activities. As well, subsection 228(3) of the [Act]
provides that a person may claim a net tax refund in a reporting period where
its claims for input tax refunds exceed the GST collectible during a reporting
period.
62. In
Appellant's submission, the Minister's refusal to allow the Trustee's
claims for input tax credits conflicts with the underlying policy of the
[Act] that businesses engaged in commercial activities should be
refunded the GST paid on their inputs even before they make taxable supplies.
63. Further,
the Minister's denial of 100% of the input tax credits is particularly
onerous since the supply of litigation support services to the foreign banks
qualifies for zero‑rating under section 23 of Part V of
Schedule VI to the [Act]. As well, any GST collected from the
Participating Creditors which are Canadian corporations engaged in commercial
activities will be refundable to them through the input tax credit mechanism. Only
the Canadian financial institutions, which account for approximately 20%
of the claims of the Participating Creditors, will have to pay GST
on the Trustee's fees and expenses and be ineligible for input tax credits.
(iv) The
Minister Misinterpreted Section 265 of the [Act]
64. The
Minister refused the claims for input tax credits on the grounds that the
Trustee engaged in an exempt financial activity and not commercial activities.
Accordingly, the Minister concluded that the property and services acquired by
the Trustee were deemed by paragraph 141.1(3)(b) of the [Act] to have been
acquired otherwise than in a commercial activity.
65. In
Appellant's submission, the Minister's conclusion rests primarily on an
erroneous interpretation of section 265 of the Act that the Trustee
in no case could commence a new business in the name of the bankrupt. In
its reasons, the Minister expressed the view that the Trustee's principal
activity as agent of the bankrupt was to continue the exempt business of the
bankrupt exercised at the time of the bankruptcy. In no case could the Trustee,
for purposes of the [Act], commence a new activity in the name of the bankrupt.
66. Preliminarily,
Appellant notes that although Castor was a deemed financial institution, it
carried on both taxable and exempt activities and was a GST
registrant. In such circumstances, the Canada Customs and Revenue Agency has
recognized repeatedly that a financial institution can claim input tax credits
to the extent that property and services are consumed or used in its commercial
activity.
67. Contrary
to the conclusion of the Minister, section 265 does not imply that
the Trustee is restricted to the bankrupt's business, as carried on prior
to the bankruptcy.
68. Paragraph 265(1)(a)
provides that a trustee in bankruptcy is deemed to be an agent of the bankrupt
and that the activities of the trustee in the administration of the estate or
in the carrying on of any business of the bankrupt are deemed to have been made
as agent of the bankrupt.
69. The
Trustee was authorized by the bankruptcy inspectors and the Québec courts to
carry on the new commercial activity of supplying litigation support
services to the Participating Creditors and to request loans from them to fund
the activity. Accordingly, as provided by paragraph 265(1)(a), the Trustee
was carrying on these new activities as agent of the bankrupt in the
administration of the estate.
70. Moreover,
the interpretation of the Minister that the Trustee is restricted to the
business of the bankrupt, as carried on prior to the bankruptcy, conflicts with
section 32 of the Bankruptcy and Insolvency Act which provides that
a Trustee is not required to carry on the business of the bankrupt.
71. As
well, the Trustee was authorized under section 30 of the Bankruptcy and
Insolvency Act to supervise the litigation against Coopers &
Lybrand, to hire solicitors for such purpose and to borrow funds from the
Participating Creditors to fund the litigation.
72. The
Minister also misconstrued section 265 when it stated that if the
Appellant engaged in a new commercial activity, this activity would be
deemed to be the activity of a different person, distinct from the bankrupt,
and claims for the input tax credits would have to be made under another
registration number.
73. This
interpretation ignores the express wording of paragraph 265(1)(e)
which states that "the registration [of the bankrupt] continues in
relation to the activities of the person to which the bankruptcy relates as
though the Trustee in bankruptcy were the registrant in respect of those
activities".
74. In the
present circumstances, the inspectors authorized the Trustee to carry on the
Litigation Support Business, and these activities clearly related to the
bankruptcy of Castor. Therefore, the Trustee was not required under
paragraph 265(1)(f) of the [Act] to obtain a new registration number or
claim input tax credits under another GST number.
75. The
Minister also stated in its reasons that if a new commercial
activity of supplying litigation support services was commenced, it was
carried on by Richter in its own name and not by Richter in its capacity as
Trustee of the bankrupt.
76. This
interpretation is contrary to paragraph 256(1)(a) of the [Act]
which provides that except for supplying its services to the bankrupt, "in
every other respect, the trustee in bankruptcy is deemed to be agent of the
bankrupt and any supply made or received and any act performed by the
trustee in the administration of the estate ... is deemed to have been made,
received or performed, as the case may be, by the trustee as agent of the
bankrupt".
E. CONCLUSION
77. For all
these reasons, Appellant submits that it was engaged in a new commercial
activity when it supplied litigation support services to the Participating
Creditors; that it was entitled to claim input tax credits with respect to
these activities; and that section 265 of the Act did not preclude the
Trustee from carrying on such activities and claiming input tax credits under
the GST registration number of Castor.
[Emphasis
added.]
Analysis
[16] The issue raised by these appeals is a thorny
one. The difficulty results to a great extent from the unusual circumstances
giving rise to them. We have here an arrangement put in place by a trustee in
bankruptcy which involves a major endeavour, that is, the provision of
litigation support services to some of the creditors of the Estate for the
pursuit of their own actions in damages against Castor's auditor. The
difficulty also arises because of the particularities of the Participation
Agreement. The main source (if not the only one) of funding for the prosecution
of the test case against C&L is provided by these creditors in the form of
loans. Actually, all the Ongoing Fees have been financed by the Participating
Creditors. However, we do not know who will ultimately bear the costs of this
very expensive litigation. It is highly likely that a great portion of the
advances by the Participating Creditors will not be reimbursed and that the
non-reimbursed portion will then constitute a consideration for the services
provided by the Estate to these creditors. However, we do not know to what
extent this will be the case. It is also possible that a disproportionate share
of the costs in question could be borne by the Estate should it be successful
in obtaining an award of damages in its own claim against C&L.
[17] To resolve the issue in hand, it is necessary to
begin by looking at the relevant provisions of the Act. First, pursuant to
subsection 225(1) thereof, a registrant is entitled to claim ITCs.
Subsection 169(1) provides the general rule for their computation:
169(1) General rule for credits. Subject to this Part, where a
person acquires or imports property or a service or brings it into a
participating province and, during a reporting period of the person during
which the person is a registrant, tax in respect of the supply, importation or
bringing in becomes payable by the person or is paid by the person without
having become payable, the amount determined by the following formula is
an input tax credit of the person in respect of the property or service for
the period:
A x B
where
A is the tax in
respect of the supply, importation or bringing in, as the case may be, that
becomes payable by the person during the reporting period or that is paid by
the person during the period without having become payable; and
B is
[. . .]
(c) in any other case, the extent (expressed as a
percentage) to which the person acquired or imported the property or
service or brought it into the participating province, as the case may be, for
consumption, use or supply in the course of commercial activities of the person.
[. . .]
[Emphasis added.]
[18] The ITCs can be claimed only to the extent that
the property or service was used or consumed or supplied in the course of a
commercial activity. Therefore, it is important to look at the definition of
"commercial activity" in subsection 123(1) of the Act:
|
« activité
commerciale » Constituent des activités commerciales exercées par
une personne :
a) l'exploitation
d'une entreprise (à l'exception d'une entreprise exploitée sans attente
raisonnable de profit par un particulier, une fiducie personnelle ou une
société de personnes dont l'ensemble des associés sont des particuliers),
sauf dans la mesure où l'entreprise comporte la réalisation par la personne
de fournitures exonérées;
b) les projets à
risque et les affaires de caractère commercial (à l'exception de quelque
projet ou affaire qu'entreprend, sans attente raisonnable de profit, un
particulier, une fiducie personnelle ou une société de personnes dont
l'ensemble des associés sont des particuliers), sauf dans la mesure où le
projet ou l'affaire comporte la réalisation par la personne de fournitures
exonérées;
c) la réalisation de
fournitures (sauf des fournitures exonérées) d'immeubles appartenant à la
personne, y compris les actes qu'elle accomplit dans le cadre ou à l'occasion
des fournitures.
|
"commercial
activity" of a person means
(a)
(a) (a) a business carried on by the
person (other than a business carried on without a reasonable expectation of
profit by an individual, a personal trust or a partnership, all of the
members of which are individuals), except to the extent to which the
business involves the making of exempt supplies by the person,
(b) (b) an adventure or concern of the person
in the nature of trade (other than an adventure or concern engaged in without
a reasonable expectation of profit by an individual, a personal trust or a
partnership, all of the members of which are individuals), except to the
extent to which the adventure or concern involves the making of exempt
supplies by the person, and
(c) (c) the making of a
supply (other than an exempt supply) by the person of real property of the
person, including anything done by the person in the course of or in
connection with the making of the supply;
[Emphasis added.]
|
[19] The word "business" is also defined in
the same subsection:
|
« entreprise »
Sont compris parmi les entreprises les commerces, les industries, les
professions et toutes affaires quelconques avec ou sans but lucratif, ainsi
que les activités exercées de façon régulière ou continue qui comportent la
fourniture de biens par bail, licence ou accord semblable. En sont exclus les
charges et les emplois.
|
"business" includes a profession, calling, trade,
manufacture or undertaking of any kind whatever, whether the
activity or undertaking is engaged in for profit, and any activity
engaged in on a regular or continuous basis that involves the supply of
property by way of lease, licence or similar arrangement, but does not
include an office or employment;
[Emphasis added.]
|
[20] The word "profession" is not defined in
the Act, but the following definition is provided by the U.K. Court of Appeal
in Commissioners of Inland Revenue v. Maxse, [1919] 1 K.B. 647
(C.A.), as cited in the Canadian Goods and Services Tax Reporter
(published by CCH Limited), at paragraph 3115:
. . . an occupation
requiring either purely intellectual skill, or [. . .] manual skill
controlled, as in painting and sculpture, or surgery, by the intellectual skill
of the operator, as distinguished from an occupation which is substantially the
production or sale or arrangements for the production or sale of commodities.
[21] The word "undertaking" has been defined
in James Voorhees Drumheller v. M.N.R., 59 DTC 1177, 1180 (Exch.
Ct.), as embracing ". . . trades, manufactures,
professions, or callings, and any other conceivable kinds of enterprise as
well."
[22] In the Drumheller case, a taxpayer had been brought into a joint
scheme which is described as follows on page 1181:
. . . What they put into the project was almost
entirely personal effort. Indeed, the appellant's contribution was
nothing but his personal efforts, and his rights in the assets (which consisted
principally of the franchise) gained in carrying out the venture represented
his return for what those efforts, carried out as they were in conjunction
with further efforts by Mr. Brook, had produced. . . . each was to do what he
was qualified to do and . . ., in arranging for and attending the testing of
the well, the appellant was doing much the same sort of thing as he customarily
did in carrying out his profession as an engineer. The arranging for testing
of the well, the testing of it, and the supervision of the testing were all
part of the procedure which it was necessary or desirable to carry out to
attain the first objective of the project; that is, to acquire the
franchise, which in itself was a thing of value. . . . the project, so far as
it was their personal project, was substantially that of putting forth the
efforts necessary to obtain the franchise and promote the company. They had no
scheme for operating or even for acquiring a gas distributing system for
themselves. Their personal venture would be completed when the company to be
incorporated came into the picture and purchased what assets had in the
meantime been acquired. . . .
[Emphasis added.]
[23] In the opinion of Justice Thurlow, these activities constituted an
undertaking and the $10,000 received in lieu of what had been promised
initially, that is, a 25% interest in a gas company to be formed and of which
he was to have been appointed manager, constituted income from an undertaking,
rather than capital.
[24] For the purposes of determining whether a business has been
"carried on", reference may be made to Palmer v. The Queen,
73 DTC 5248 (F.C.T.D.), a decision in which Justice Cattanach stated (at
page 5249) that "it is a question of fact whether a series of acts amounts
to carrying on a trade or business. Principal considerations in determining
such an issue of fact are (1) the nature and the frequency of the act, and (2)
the intention of the person concerned."
[25] The same issue was dealt with as well by the Privy Council in American
Leaf Blending Co Sdn Bhds v. Director-General of Inland Revenue, [1978]
3 All ER 1185, also cited in paragraph 3115 of the Canadian Goods and
Services Tax Reporter:
The carrying on of “business”, no
doubt, usually calls for some activity on the part of whoever carries it on,
though, depending on the nature of the business, the activity may be
intermittent with long intervals of quiescence in between.
[26] Certain activities may be deemed to be carried on either in the course
of commercial activities or otherwise than in the course of commercial
activities. One example is where one is involved in the termination of an
activity. The relevant provision is subsection 141.1(3) of the Act, which
provides as follows:
|
141.1(3) Pour
l'application de la présente partie :
a) dans la mesure où
elle accomplit un acte, sauf la réalisation d'une fourniture, à l'occasion de
l'acquisition, de l'établissement, de l'aliénation ou de la cessation d'une
de ses activités commerciales, une personne est réputée avoir accompli l'acte
dans le cadre de ses activités commerciales;
b) dans la mesure où
elle accomplit un acte, sauf la réalisation d'une fourniture, à l'occasion de
l'acquisition, de l'établissement, de l'aliénation ou de la cessation d'une
de ses activités non commerciales, une personne est réputée avoir accompli
l'acte en dehors du cadre d'une activité commerciale.
|
141.1(3) For the purposes of this
Part,
(a) to the extent that
a person does anything (other than make a supply) in connection with the
acquisition, establishment, disposition or termination of a commercial
activity of the person, the person shall be deemed to have done that thing in
the course of commercial activities of the person; and
(b) to the extent that
a person does anything (other than make a supply) in connection with the
acquisition, establishment, disposition or termination of an activity of
the person that is not a commercial activity, the person shall be deemed
to have done that thing otherwise than in the course of commercial
activities.
[Emphasis added.]
|
[27] As we saw above, ITCs are only available to the extent that the
property or service is being consumed, used or supplied in the course of a
commercial activity and not in the course of making exempt supplies. There is
no dispute here that most of the services provided by Castor before its
bankruptcy — i.e., the lending of funds to real estate enterprises —
constituted exempt supplies as defined in Schedule V of the Act.
However, even financial institutions can make taxable supplies in respect of
which there is a requirement to collect GST.
There is no dispute either that the provision of litigation support services
does not constitute an exempt supply. Therefore, if the Litigation Support
Business constitutes a commercial activity of the Estate, the Estate would be
entitled to claim ITCs to the extent that the properties and the services were
acquired in the course of that commercial activity.
[28] When a registrant such as a financial institution provides both taxable
and exempt supplies, the Act does not prescribe any
specific allocation methods for the purpose of determining the qualifying ITCs
to which a registrant is entitled. Instead, pursuant to
subsection 141.01(5), registrants may use any method to allocate the use
of their inputs between the provision of taxable supplies and other activities,
provided the method chosen is fair and reasonable in the circumstances and is
used consistently throughout the fiscal year. Subsection 141.01(5) provides as
follows:
|
141.01(5) Seules des
méthodes justes et raisonnables et suivies tout au long d'un exercice peuvent
être employées par une personne au cours de l'exercice pour déterminer la
mesure dans laquelle :
a) la personne
acquiert, importe ou transfère dans une province participante des biens ou
des services afin d'effectuer une fourniture taxable pour une contrepartie ou
à d'autres fins;
b) des biens ou des
services sont consommés ou utilisés en vue de la réalisation d'une fourniture
taxable pour une contrepartie ou à d'autres fins.
|
141.01(5) The methods used by a
person in a fiscal year to determine
(a) the extent to which
properties or services are acquired, imported or brought into a participating
province by the person for the purpose of making taxable supplies for
consideration or for other purposes, and
(b) the extent to
which the consumption or use of properties or services is for the purpose
of making taxable supplies for consideration or for other purposes,
shall be fair and reasonable and
shall be used consistently by the person throughout the year.
[Emphasis added.]
|
[29] Subsection 141.01(3) should also be cited here:
|
141.01(3) La consommation
ou l'utilisation d'un bien ou d'un service par une personne dans le cadre de
son initiative est réputée, pour l'application de la présente partie, se
faire :
a) dans le cadre des
activités commerciales de la personne, dans la mesure où elle a pour objet la
réalisation, pour une contrepartie, d'une fourniture taxable dans le cadre de
l'initiative;
b) hors du cadre des
activités commerciales de la personne, dans la mesure où elle a pour
objet :
(i) la réalisation, dans le cadre de
l'initiative, d'une fourniture autre qu'une fourniture taxable effectuée pour
une contrepartie,
(ii) une autre fin que la réalisation d'une
fourniture dans le cadre de l'initiative.
|
141.01(3) Where a person consumes
or uses property or a service in the course of an endeavour
of the person, that consumption or use shall, for the purposes of this Part,
be deemed to be
(a) in the course of
commercial activities of the person, to the extent that the consumption or
use is for the purpose of making taxable supplies for consideration in
the course of that endeavour; and
(b) otherwise than in
the course of commercial activities of the person, to the extent that the
consumption or use is
(i) for the purpose of making supplies in the
course of that endeavour that are not taxable supplies made for
consideration, or
(ii) for a purpose other than the making of
supplies in the course of that endeavour.
|
[30] Let us now apply these statutory provisions to the facts of this case.
Although the Respondent's counsel stated there were no issues with respect to
the facts, I believe that at least the inference to be drawn from those facts
does give rise to a dispute between the parties. Essentially, the respondent's
position as expressed by the appeals officer and set out in paragraphs 10
to 14 above, is that the Estate was only involved in collecting money owed to
it.
This description by the appeals officer does not correspond with my
understanding of what took place here.
[31] In my view, it is clear that the Estate was acquiring the services and
properties related to the litigation support activity not only for its own
benefit but also for the benefit of each Participating Creditor. This is clear
when one considers that the Estate entered into Participation Agreement with
the Participating Creditors and was made even clearer when the Quebec Superior
Court justice who is the coordinating judge with respect to over
40 actions brought against C&L decided on February 20, 1998, to
hold the Estate's case in abeyance and to proceed with Mr. Widdrington’s
test case. When the Estate, through the professionals that it has hired,
provides litigation support services for the test case against C&L, it is
providing those services not only to Mr. Widdrington but also to each
Participating Creditor who benefits from the test case. Although the Estate is
not financing the Ongoing Fees, it also is benefiting from the test case.
Pursuant to the Participation Agreement and as a result of having hired these
professionals and acquired properties in the course of the Litigation Support
Business, the Estate will bear some of the costs should it be successful in
collecting any damages from C&L.
[32] The services required to prosecute its own claim and the claims of the
Participating Creditors against C&L constitute an enormous undertaking
which has taken many years of effort and will likely require several more
years. It has cost numerous millions of dollars and will require millions more.
The initial stage required thousands of hours of research in, and analysis of,
Castor's books and records and C&L's working papers. In the next phase, the
examinations for discovery prior to the hearing took up at least 200 days.
The third phase, which started with the commencement of the court hearing in
the test case in September 1998, has necessitated, as of May 2004, over
500 days of testimony. Many more years of hearing are anticipated just to
complete the first stage of the claims against C&L, that is, for the
Superior Court to determine whether C&L was negligent in preparing Castor's
financial statements. Then, if negligence is established, the next stage will
require that each Participating Creditor and the Estate furnish its own proof
of damages. I have no doubt in concluding that the activities carried on by the
Estate in providing the litigation support services to the Participating
Creditors constitute, if not a profession as defined in the Maxse case
(cited above), at least an undertaking as this term is used in the definition
of a "business". Given the nature of these activities and the
continuous involvement required from the Estate in order to provide the
services during the relevant period and that will be required from it in future
years, this undertaking amounts to a business being carried on by the Estate.
[33] The respondent's counsel and agents have adopted here a very narrow
interpretation of what constitutes a business. They claim that the Estate,
through the Trustee, was not allowed under the BIA to carry on such a business
under the BIA. First, I believe that the Trustee, acting as agent for the
Estate, was legally entitled to carry on the undertaking in question. Indeed,
the Trustee was authorized to do so by the inspectors and obtained a legal
opinion stating that it was appropriate pursuant to paragraph 30(1)(e)
of the BIA
for it to enter into the Participation Agreement and to carry on the Litigation
Support Business. As mentioned in note 11 above, the Quebec Court of
Appeal has also recognized, at least indirectly, the legitimacy of the
Participation Agreement.
[34] In any event, I would add that the Act is not to be applied to
transactions that ought to have taken place, nor is it to be applied only to
transactions that could be legally carried out. In my view, the Act ought to be
applied to what has actually taken place. If the Estate's litigation support
services provided to the Participating Creditors constitute a business being
carried on by the Estate, then the activities should be treated as such under
the Act.
[35] Contrary to the position taken by the appeals officer as set out in
paragraph 14 above, I believe that the Participating Creditors were not
simply lending money to the Estate, but were actually entering into an
agreement under which the Estate was to provide them with services for a
contingent fee. The contingency here has to do with whether the Estate will be
able to acquire sufficient assets through its own claim against C&L to pay
for all the services and properties related to the litigation support activity
mainly, if not almost exclusively, from any such assets. So the Participation
Agreement cannot be treated as a simple loan agreement.
[36] First of all, the Participation Agreement stipulates that the Estate is
to provide its expertise and information to the Participating Creditors. This
can be better described as the supply of litigation support services to the
Participating Creditors. To that end, the Estate retained lawyers, accountants
and other professionals. The Trustee itself supplied litigation support
services to the Estate and was paid fees for them. The Estate's mandate was to
provide the litigation support necessary for the preparation of the claims
against C&L and for the prosecution of the common test case — once it
was selected by the Quebec Superior Court — for the benefit of the
Participating Creditors. The Estate was and is required under the Participation
Agreement to "provide [to the Participating Creditors, with its loan
requests] invoices which set out, in reasonable detail, the services rendered
and disbursements incurred" (see note 3 above).
[37] Furthermore, no interest is payable with respect to the loans. These
loans are repayable only at such time as the Trustee determines in its own
discretion that the Estate has sufficient funds for all existing and future
administrative requirements of the Estate. Today, it is fairly obvious that the
Participating Creditors will not, in all likelihood, have their loans fully
refunded and that they will bear at least a portion of the Ongoing Fees. Given
how few assets were available to the Estate, I would suggest in addition that
this likelihood was also foreseeable at the time it entered into the
Participation Agreements.
[38] So the true nature of the arrangement entered into here is the
provision to the Participating Creditors of litigation support services for a
contingent fee that will become payable to the extent that the Estate does not
itself have sufficient funds to pay for those services.
The largest single Participating Creditor expects to receive an invoice once
the Estate's claim is dealt with.
[39] I agree with the respondent's counsel that the Trustee was involved in
terminating the activities of the Estate, since it was hired to liquidate all
the Estate's assets. Given that Castor's main activities involved making exempt
supplies, the activities of the Trustee would be deemed not to be carried on in
the course of commercial activities. Therefore, the costs of the litigation
support services that the Estate enjoyed in prosecuting its own claim against
C&L would not qualify for ITCs. Here the services and properties acquired
by the Estate in the course of the prosecution of the actions against C&L
(or the prosecution of Mr. Widdrington’s test case alone as of
February 1998) were so acquired for the dual purpose of advancing its own
claim against C&L and providing litigation support services to the
Participating Creditors. I would therefore conclude that to the extent that
those services and properties were acquired for the purpose of benefiting the Estate,
the portion thereof acquired for the benefit of the Estate would be considered
not to have been acquired in the course of commercial activities. That portion
of the costs does not qualify for ITCs. Indeed, the Estate has acknowledged in
its Notice of Appeal that it is not entitled to a portion of the ITCs that it
had previously claimed. However, the portion of the services and properties in
question that was acquired for the purpose of prosecuting the claims of the
Participating Creditors would be considered to have been acquired in the course
of commercial activities. The Estate’s supply of its litigation support
services to the Participating Creditors would thus constitute a "taxable
supply". The allocation by the Estate of the use of its inputs between its
taxable supplies and its other activities (exempt supplies) appears to me to be
a fair and reasonable one and it complies with subsection 141.01(5) of the
Act. The fairness and reasonableness of that allocation was not contested by
counsel for the respondent.
[40] Before concluding, I should mention that I do not agree with the
position of the Minister's appeals officer that, should the Litigation Support
Business of the Estate be considered to be a commercial activity, it would have
to be treated as an activity of a separate person. The appeal’s officer relied
on paragraph 265(1)(f) of the Act, which provides as follows:
265(1) For
the purposes of this Part, where on a particular day a person becomes a
bankrupt,
[. . .]
(f) where,
on or after the particular day the person begins to engage in particular
activities to which the bankruptcy does not relate, the particular activities
shall be deemed to be separate from the activities of the person to which the
bankruptcy relates as though the particular activities were activities of a
separate person, and the person may
(i) apply
for, and be granted, registration under Subdivision d of Division V, and
(ii) establish
fiscal periods and establish and make elections respecting reporting periods,
in relation to the particular
activities as though they were the only activities of the person;
[Emphasis added.]
[41] In order for this provision to apply, it is necessary to conclude that
the Litigation Support Business is an activity to which the bankruptcy does not
relate. In his argument, the respondent's counsel did not deal with this issue
and I do not know how it can be said here that the Litigation Support Business
constitutes an activity to which the bankruptcy does not relate. It is clear
that the services and properties related to litigation support services and
properties acquired by the Estate in order to carry on the Litigation Support
Business are also benefiting the Estate in the pursuit of its own legal action
against C&L. The damages it could receive would most likely constitute its
last remaining asset for the Trustee to liquidate before terminating its work.
The Litigation Support Business allows the Estate to pursue the endeavour that
is its legal action. Prima facie, these activities of the Estate
appear to me as activities to which the bankruptcy relates and I do not believe
that paragraph 265(1)(f) applies here. In any event, in my view,
the argument based on that paragraph is nothing more than a red herring, given
that the purpose of the rule set out therein is to determine how GST tax
returns should be filed, for which fiscal period and under which registration
number. Regardless of whether the Estate should have filed its GST return as
the Estate or as a separate person, the respondent's liability to pay the ITCs
to the Estate would not change.
[42] To summarize, the services and properties related to litigation support
were acquired by the Estate both for its own benefit in the liquidation of all
of its assets and for the purpose of providing litigation support services to
the Participating Creditors. The provision of those services constituted the
carrying on of commercial activities. Therefore, to the extent that they relate
to these commercial activities, the Estate is entitled to the ITCs. Given that
the allocation made by the Estate is fair and reasonable, an amount of $120,000
should be deducted from the total ITCs of $2,474,361.92 claimed by the Estate.
The balance of these ITCs, that is, $2,354,362, relates to properties and services
acquired in the course of a commercial activity.
[43] For all these reasons, the Estate's appeals are allowed and the
assessments are referred back to the Minister for reconsideration and
reassessment on the basis that the Estate is entitled to ITCs of $2,354,362,
the whole with costs.
Signed at
Drummondville, Québec, this
13th day of February 2005.
Archambault,
J.
Email this Content