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Reference: 2004TCC597
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Date: 20040902
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Docket: 2001-4222(GST)G
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BETWEEN:
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CLAUDE PAQUIN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
GaronC.J.
[1] This is an appeal from an assessment dated August 30, 2001, for the period from July 1, 1994, to December 31, 1999. This assessment was issued under Part IX of the Excise Tax Act regarding the goods and services tax.
[2] The four issues in this appeal are as follows:
1. Were the interest and penalties related to the deemed sale of the rental buildings located at 6385 and 6275 Marion Street in Trois-Rivières calculated correctly?
2. Was the Minister of National Revenue right to disallow the input tax credit concerning a debt the appellant considered bad?
3. Was the Minister of National Revenue entitled to disallow the input tax credit related to a trailer purchased by the appellant?
4. Was the Minister of National Revenue entitled to not take into account a credit of $3,000.00 granted by the appellant to Construction D.M. Turcotte inc.?
[3] The appellant operated a housing construction and renovation business and was also the owner of some rental buildings. He did business under the corporate name Les entreprises Claude Paquin enr.
First issue - calculation of interest and penalties
[4] With regard to the first issue, it was not challenged that the appellant had completed the construction in 1994 of the first four-unit building, located at 6385 Marion Street in Trois-Rivières, and in May 1995 of the second four-unit building at 6275 Marion Street in Trois-Rivières.
[5] The appellant should have mentioned the tax for the first building, 6385 Marion Street, in his quarterly return for the period ending on September 30, 1994, but he mentioned it in his return for the period ending on December 31, 1994.
[6] The appellant should have mentioned the tax for the second building, 6275 Marion Street, in his quarterly return for the period ending on June 30, 1995. The appellant mentioned the tax for this building only two years later in his return for the period ending on June 30, 1997.
[7] The appellant should have calculated the net tax for each of these buildings in the return for the period that included the date when the construction of each building was completed, in accordance with subsection 228(1) of the Excise Tax Act. According to subsection 238(1), except in the cases set out in paragraph a) of this subsection, which do not apply in this case, the registrant shall file a return with the Minister within one month after the end of the reporting period.
[8] The appellant's obligations regarding the content of the return required by section 228 and regarding the filing of this return with the Minister, which is referred to in section 238, stem from the application of subsection 191(3) of the Excise Tax Act, which substantially establishes that the taxpayer needs to self-assess at the time of his deemed sale of a multiple unit residential complex.
[9] Essentially, the appellant claimed that the respondent should take into account the input tax credit he is entitled to when calculating the interest and penalties as of the time the goods and services tax became payable with respect to each of the buildings.
[10] When making the assessment under appeal, the Minister calculated the interest and penalties on the amount of the tax in question as of the time the appellant remitted the net tax in respect to each of the buildings. This decision by the Minister is clearly the result of Ms. Lyne Lauzon's testimony and Exhibit I-1, tab 5, on the detailed calculation of GST penalties and interest for the audit period from 1994/07/01 to 1999/12/31.
[11] The Minister's position may be expressed in more concrete terms. The Minister is of the opinion that the interest and penalties related to the goods and services must be calculated on the amount of this tax without taking into account the input tax credit for the period preceding the time when the appellant remitted the net tax in respect of each building. According to the Minister, for the 6385 Marion Street building, the interest and penalties on the amount of the 7% goods and services tax should have started being calculated within one month after the end of the reporting period, whereas the interest and penalties on the net tax amount takes the input tax credit into account only at the time when the appellant remitted the net tax amount with respect to that building. For the 6275 Marion Street building, the interest and penalties imposed on the appellant take the input tax credit into account only as of the time the appellant remitted the tax two years later.
[12] Therefore, there is reason to review the applicable provisions of the Act that are relevant to the goods and services tax to determine the legislative intent in the case where a taxpayer files late with the Minister the return that mentions his input tax credit claim and also is late remitting his net tax for a particular transaction.
[13] Subsection 165(1) imposes on the recipient of a taxable supply a tax at the rate of 7% on the value of the consideration for the supply. Subsection 221(1) imposes on the person who makes a taxable supply the obligation to collect the tax payable by the recipient. As I have already stated, subsection 228(1) establishes that every person who is required to file a return shall calculate his net tax for the reporting period for which the return is required to be filed. Subsection 228(2) states that, where the net tax for a reporting period of a person is a positive amount, the person in question shall remit that amount to the Receiver General. This calculation of the net tax must be established in accordance with section 225.
[14] Section 225 establishes that the net tax for a particular reporting period of a person is composed of amounts that became collectible and amounts collected by the person in the particular reporting period in accordance with paragraph a) of point A of the formula mentioned in subsection 225(1) as well as some other amounts described in paragraph b) of point A of the formula, less the amounts representing input tax credit that are claimed by the person in the return filed for the particular reporting period, according to what is specified in paragraph a) of point B of the formula mentioned in the same subsection and some other amounts referred to in paragraph b) of the formula.
[15] Therefore, it is necessary to analyze the scope of paragraph a) of point B of the formula in question that deals specifically with input tax credit. The paragraph reads as follows:
225(1) Subject to this Subdivision, the net tax for a particular reporting period of a person is the positive or negative amount determined by the formula
A - B
where
A . . .
(a) . . .
(b) . . .
B is the total of
(a) all amounts each of which is an input tax credit for the particular reporting period or a preceding reporting period of the person claimed by the person in the return under this Division filed by the person for the particular reporting period, and
(b). . .
[16] Paragraph a) of point B specifically sets out the case where an amount that represents an input tax credit and is related to a preceding period may be claimed within a particular period that is later. The juxtaposition of the mention of the particular period and the preceding period in paragraph a) of point B of the above-mentioned formula does not seem to leave any doubt that the legislative intent was to allow a taxpayer to claim input tax credit in a return subsequent to the period during which these credits could have first been claimed. This was the conclusion of Archambault J. of this Court in Metro Exteriors Ltd. v. Canada, (T.C.C.) [1995] G.S.T.C. 62. This provision from paragraph a) of point B is completed by subsection 225(4), which establishes deadlines of four years or two years, depending on the circumstances, to claim input tax credit.
[17] The above indicates that this right to input tax credit does not exist until it is claimed. The legislation does not set out that this right is retroactive to the period when it could have been validly claimed by the taxpayer in his return for a preceding period. Furthermore, it is not set out in the legislation that, when calculating the interest and penalties on the net tax payable, the amounts representing input tax credit must be taken into account as of the time this credit could have been validly claimed. In this respect, I am referring in particular to section 280 of the Excise Tax Act.
[18] Therefore, it follows that the Minister had rightly calculated the interest and penalties on the amount of the tax at the rate of 7% as of the time it became collectible by applying sections 191, 228, and 238. In addition, when calculating the interest and penalties on the amount of the net tax, the Minister could take into account amounts representing input tax credit only as of the time the right to input tax credit arose. For this case, that time began when the return claiming the input tax credit was filed and the net tax was remitted.
[19] With regard to the first issue, I conclude that the Minister's assessment was well-founded with respect to the calculation of the interest and penalties.
Second issue - bad debt
[20] First I will address the issue of whether a bad debt of $10,716.39 exists.
[21] It was established that the appellant had done some work for Construction D.M.B. s.e.n.c.[1] in 1994, 1995, and 1996 that consisted of application of aggregate, a type of surfacing. During that same period, the appellant obtained his materials from the Centre de briques de la Mauricie inc., a company owned at least in part[2] by Mr. Milette's wife, Ms. Dorice Bouchard Milette. The parties involved had adopted the practice of setting off the accounts receivable of the appellant's company with the accounts payable by the appellant to the Centre de briques de la Mauricie inc.
[22] According to Exhibit A-11, Construction D.M.B. s.e.n.c. owed the appellant $14,716.39 on February 28, 1995, and the appellant owed nothing at that time to the Centre de briques de la Mauricie inc. The appellant testified that, after February 28, 1995, he had received $4,000.00 from Construction D.M.B. s.e.n.c. at an unspecified time. The appellant's debt had then been reduced to $10,716.39.
[23] The appellant maintained that this debt was bad because Mr. Denis Milette had declared bankruptcy. This statement was supported by a document (Exhibit A-8) dated October 15, 1998, from the trustee in bankruptcy that showed that Mr. Denis Milette had done business under the corporate name Construction D.M.B. s.e.n.c. and was bankrupt.
[24] The appellant maintained that he had not taken any steps to collect his debt because, in his opinion, it was futile since Mr. Milette had no assets. However, during the examination for discovery, the appellant acknowledged that, for a period of time, Ms. Dorice Bouchard Milette had been a partner of Construction D.M.B. s.e.n.c. According to the documentation filed under Exhibit I-6, at the beginning, in 1994, Ms. Dorice Bouchard Milette had been one of the two members of the partnership Construction D.M.B. s.e.n.c. She had also been a member of that company in 1995 and 1996, according to the annual returns for those years dated April 18, 1995, and September 13, 1996,[3] respectively. However, a correction form dated August 19, 1996, showed that she had allegedly ceased to be a member of the company. Nevertheless, the appellant's debt dated back to February 28, 1995, according to Exhibit A-11, which was referred to in paragraph 22 of these Reasons.
[25] The appellant had also not attempted to collect the amount at issue from Ms. Dorice Bouchard Milette. He had not known whether Ms. Dorice Bouchard Milette was solvent at the time in question. He also explained that he had not entered into a contract with Ms. Dorice Bouchard Milette, and he had not thought he could attempt to collect the amount from her.
[26] From all of the evidence, it was not established that the appellant had taken reasonable measures to attempt to collect the debt amounting to $10,716.39. For the appellant's company, this debt was a substantial amount. He had not taken any measures at that time against Mr. Milette. He had also not taken any steps to collect the debt from Ms. Dorice Bouchard Milette. His simple statement that the debt in question was bad was not sufficient with regard to the provisions of section 231 of the Excise Tax Act. In fact, the appellant did absolutely nothing to collect the amount owing to him.
[27] In support of this conclusion that it had not been established that the appellant's debt was bad, I would like to refer to Davies v. Canada, [1998] T.C.J. No. 432 (Q.L.), para. 18, where Hamlyn J. of this court refused to allow input tax credit with regard to a bad debt because the appellant had not taken the appropriate measures to collect the debt. The Court understands appropriate measures to mean legal redress action, not simply letters or electronic calls. The Court stated the following:
[18] In particular, the Appellant did little to attempt to collect the debt. He made a few phone calls and wrote letters while at the same time the Appellant carried on his franchise operation and recorded his liabilities (royalties) owed to the franchisor as they were incurred on the books of his business. He made no attempt to take legal redress action nor did he seek settlement from those monies owed to him by the franchisor against those monies owed by him to the franchisor. I find the evidence is weak, that the Appellant took no reasonable steps to determine if the debts were uncollectible and unrecoverable, and as such has not met the onus the debts were bad.
[28] In Ciriello v. Canada, [2000] T.C.J. No. 829 (Q.L.), para. 3, Rip J. of this court did not allow input tax credit for bad debts. Rip J. explained that the onus was on the appellant, who had to convince the Court of the uncollectible nature of the debt. He explained his thinking as follows:
3 Mr. Ciriello also claims that the Minister did not give credit to R & V for bad debts. No evidence was led by the appellant with respect to the bad debts. For R & V to receive a refund or adjustment of tax subsection 231(1) of the Act requires that not only must the taxpayer have made a taxable supply in the course of a commercial activity and for consideration, but also that the taxpayer have filed a return accounting for and remitting tax under Division II in respect of that supply; finally, the consideration and tax must have become a bad debt. There is no evidence to satisfy the requirements of the statute for an adjustment of tax.
[29] Therefore, I conclude that the appellant did not show that the debt of $10,716.39 was a bad debt.
Third issue - input tax credit for the trailer
[30] I now come to the third issue, which deals with the input tax credit for a trailer purchased by the appellant in 1997.
[31] The evidence establishes that, in July 1994, the appellant had purchased a 34-foot trailer, a 1992 model, for $23,360.70 and used it from time to time on the construction sites. The trailer had been exchanged for a 39-foot trailer on March 18, 1997. With regard to the exchange, the value of the second trailer had been established at $56,101.57 while the value of the first trailer had been set at $21,000.00. It was with respect to the second trailer that the Minister had refused to grant the appellant the input tax credit in the amount of $2,457.11.
[32] The respondent's refusal is based on subsection 170(2) of the Excise Tax Act, particularly on the fact that the use of the property of such quality, nature, or cost is unreasonable in the circumstances, having regard to the nature of the commercial activities of the appellant.
[33] The evidence established the following facts:
a) The appellant had sales of $119,137.00 for the financial year ended on December 31, 1995, according to Exhibit A-2.
b) He did not challenge the statement that his trailer had hardwood floors, an air conditioning unit, a washing machine, a dryer, a television, a VCR, a microwave, and a bedroom.
c) The appellant had used the trailer during the warm season, for four or five months per year, for contracts carried out in Trois-Rivières or in the immediate vicinity. This trailer had been used outside the region, for example at La Tuque, six to eight weeks per year for a period of three years. The appellant had used the trailer in the winter if he was doing construction for rental buildings, but there was no evidence that he had built any rental buildings after 1997. The employees had occasionally stayed in the trailer, and they had been able to have lunch there.
d) The appellant maintained that he had made only limited use of the trailer for personal purposes during the period at issue. He established the percentage of personal use at 20% of the total use of the trailer during his examination for discovery, an examination that was included in the record of the evidence for this case with the parties' consent.
e) The appellant retired in 2002, and since that time, he has been using the trailer for personal purposes.
[34] With regard to all of the evidence, I have come to the conclusion that the trailer was used primarily for the purposes of the appellant's business during the years at issue. I see no reason why I should not accept the appellant's testimony that 20% of the trailer's total use was for personal use. As for whether there is reason to apply subsection 170(2) of the Excise Tax Act, considering the quality, nature, and cost of the appellant's commercial activities as well as the nature of these activities, I am of the opinion that the use of a trailer purchased at the above-mentioned price did not exceed the reasonable limits, even though the appellant's sales were rather modest for the financial year ending on December 31, 1995. There was evidence of sales for the appellant's business only during the period at issue, not for the years following 1995. The appellant provided detailed explanations of the use of the trailer during the years at issue, and these explanations were credible.
[35] Therefore, I conclude that the appellant was entitled to the input tax credit for the second trailer, but having regard to the provisions of sections 169 and 170 of the Excise Tax Act, the personal use of this property, which I have established at 20% of the total use, must be taken into account.
Fourth issue - credit granted by the appellant to Construction D.M. Turcotte inc.
[36] The fourth issue I am to deal with concerns the Minister's refusal to consider an adjustment for an amount of $3,000.00 regarding an account payable to the appellant by Construction D.M. Turcotte inc. for application of aggregate on some houses Construction D.M. Turcotte inc. built. The consideration required by the appellant for the supply of goods and services was $9,534.67, including GST and QST, as was indicated on the invoice dated May 21, 1996, addressed to Construction D.M. Turcotte inc.
[37] According to the appellant, Construction D.M. Turcotte inc. had required that he make an adjustment of $3,000.00 to the invoice owing to an error in calculating the number of linear feet for the front, which he had taken into account in this document. The appellant's acceptance of this reduction also seemed to have been dictated by business reasons of a promotional nature.
[38] The appellant also agreed, under these circumstances, to reduce his invoice by $3,000.00. This reduction is set out in Exhibit I-1, tab 7, dated May 21, 1996. It was acknowledged that the entries shown in the last part of this exhibit were not made by the appellant; they had been made by a representative of Construction D.M. Turcotte inc. Everything was supported by a slip dated that same day, May 21, 1996, indicating the deposit of a cheque in the amount of $6,275.43 from Construction D.M. Turcotte inc. to the appellant's account at the Caisse populaire de St-Philippe in Trois-Rivières. In my view, this documentation substantially satisfies the provisions of section 232 of the Excise Tax Act.
[39] The appellant's version concerning the credit granted to Construction D.M. Turcotte inc. is credible, and under these circumstances, I accept it.
[40] Therefore, with regard to this issue, I conclude that the appellant is entitled to the input tax credit.
[41] For these reasons, the appeal is allowed, and the assessment is referred back to the Minister for reconsideration and reassessment according to the indications given in these Reasons.
[42] The award of costs issue in this file will be discussed with the counsel for the parties during a teleconference that will take place before the end of September 2004 at a time that is suitable for all involved. A court official will contact the parties in this respect in the near future.
Signed at Ottawa, Canada, this 2nd day of September 2004.
Garon C.J.
Certified true translation
Colette Beaulne
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