BETWEEN:
NORTH SHORE POWER GROUP INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bocock J.
I. Introduction
(a) Partial GST and Payment - Generally
[1]
Good and Services Tax (“GST”) is exigible upon
partial payments made to suppliers for goods purchased in advance of the
delivery of such goods. When paid by a purchaser to a supplier of goods, the
purchaser is entitled to deduct the GST paid on the partial payment against the
GST a registrant purchaser otherwise collects from its own customers. These
deductions for GST paid comprise input tax credits (“ITCs”). In turn, where the
partially paid goods are never delivered, the purchaser reverses the claimed
ITCs, by way of adjustments to tax payable (“ITC Reversals”). This increases
the net GST payable, usually in the subsequent reporting period.
[2]
The Appellant, North Shore Power Group Inc.
(“North Shore”), did all of the above in respect of partial payments made by it
for never delivered goods. Additionally, North Shore had issued to it credit
memoranda (“Credit Memos”) by the supplier/vendor, reflecting the value of the
outstanding partial payments related to the undelivered goods. In addition to
the ordered goods never being delivered, the Credit Memos were never honoured.
(b) Inconsistent filing and assessing positions
[3]
Both the respective historical filing and
assessing positions of North Shore and the Minister have been inconsistent. Firstly,
the Minister of National Revenue (the “Minister”) initially characterized the
partial payments as deposits. GST is not exigible on deposits (as opposed to
partial payments). As a result of that characterization, the Minister initially
disallowed all of North Shore’s ITCs totalling $388,412.50. After objection and
representations by North Shore, the Minister revised this characterization. She
allowed the ITCs relating to 8 delivered and completed contracts, but not for 10
contracts representing the undelivered goods.
[4]
Secondly, North Shore, upon receipt of the
Credit Memos, increased its net tax payable (the “ITC Reversals”) by the amount
of the harmonized sales tax (HST) pursuant the Excise Tax Act (the “ETA”).
North Shore asserts this was an error since the Credit Memos were not credit
notes within the meaning of the ETA. The Minister asserts they were.
(c) Issue
[5]
Therefore, the sole issue is whether the Credit
Memos constitute credit notes within the ETA. If they do, then both
parties agree that North Shore’s filing position with respect to the ITC Reversals
and the Minister’s revised reassessments are correct and the appeal must be
dismissed.
II. Some
Additional Facts
[6]
The parties filed a Partial Statement of Agreed
Facts, the following summary of which contains the relevant facts for the
Court’s reasons for judgment. Some additional facts were also obtained at the
trial through testimony.
a) the purchase of solar panels, payments and
ITCs
[7]
North Shore, a wholly owned subsidiary of the
Town of Blind River, Ontario, owns solar, hydraulic and wind energy generating
facilities.
[8]
North Shore entered into 18 contracts (the
“Contracts”) with Menova Energy Inc., (“Menova”) on July 30, 2010 for the
purchase and installation of a series of solar array installations. Commonly, and
within these reasons, these are referred to as “solar panels”.
[9]
Upon signing the Contracts, North Shore paid to
Menova one half of the purchase price, described in the Contracts as the “Down
Payment”, being the sum of $3,376,197.05. This paid sum consisted of $2,987,785.00,
plus $388,412.05 representing the HST of 13%. At the hearing, it was generally conceded
that such paid amounts were in the nature of partial payments and not deposits
(the “Partial Payments”).
[10]
North Shore claimed ITCs of $388,412.05 pursuant
to subsection 169(1) of the ETA in respect of the Partial Payments by
virtue of the formula within subsection 225(1) of the ETA. Accordingly,
it filed its return on that basis for the reporting period ended July 31, 2010.
b) some contracts never fulfilled
[11]
Menova only completed eight of the Contracts for
a total value of $604,780.00 and corresponding HST of $78,621.40. Menova also
failed to remit any HST it collected to the Minister.
[12]
Thereafter, Menova issued documents to North
Shore, each entitled "Credit Memo" (the “Credit Memos”), variously
dated November 24, 2010, April 20, 2011 and April 30, 2011. These Credit Memos
related to the Contracts which were not and never would be supplied (the
“Cancelled Contracts”). On April 25, 2012, a general security agreement was
given by Menova to North Shore as collateral for all indebtedness.
Subsequently, certain sums were received by North Shore as sale proceeds from
the sale of secured collateral.
c) ITC reversals and reinstatements
[13]
For its reporting period ended April 30, 2011,
North Shore recorded an addition to net tax in the amount of $107,954.00 as a
reversal of ITCs previously claimed in respect of the invoices that totalled
$107,954.00, reflecting nine Menova Credit Memos dated April 20, 2011 or April
30, 2011 totalling $107,954.00 (the “First ITC Reversal”). In doing so, North
Shore assumed each Credit Memo was issued pursuant to section 232 of the ETA.
[14]
For its reporting period ended January 31, 2012,
North Shore cancelled the adjustment made in the April 30, 2011 return,
re-claiming an ITC of $107,954.00 (the “First ITC Reinstatement”). This step
was taken on the basis that North Shore determined that the Credit Memos were
uncollectible bad debts. North Shore did so pursuant to section 231 of the ETA.
[15]
Similarly to the First ITC Reversal, within the
reporting period ended January 31, 2012, North Shore recorded an addition to
net tax in the amount of $240,089.00 as a reversal of the ITCs previously
claimed in respect of an invoice, reflecting Menova's document dated November
24, 2010 entitled "Credit Memo" for $240,089.00 (the “Second ITC
Reversal”).
[16]
Similarly to the First ITC Reinstatement, for
its reporting period ended April 30, 2012, North Shore reversed the adjustment
made in the January 31, 2012 return, re-claiming an ITC of $240,089.00 (the
“Second ITC Reinstatement”).
[17]
Ultimately, for its reporting period ended April
30, 2012, North Shore recorded a further reduction of claimed ITCs in the
amount of $39,311.00, previously claimed in respect of the 50% balance payable,
but not paid by North Shore in respect of the 8 completed contracts.
d) North Shore’s subsequent actions and
Minister’s reassessments
[18]
Menova’s non-performance of the Cancelled
Contracts and its non-refund of surplus partial payments made by North Shore to
it for those Cancelled Contracts caused North Shore to take further legal
action. North Shore petitioned Menova into bankruptcy by application on June
29, 2012. Menova was adjudged to be bankrupt by an order of the Ontario
Superior Court of Justice dated July 24, 2012. North Shore filed a proof of claim
in the bankruptcy of Menova claiming the $3,025,302.67 (inclusive of $348,043.00
HST) due under the Cancelled Contracts and Credit Memos. On December 18, 2013, North
Shore received $300,448.00 as a creditor dividend from the bankrupt estate of
Menova.
[19]
The Minister’s reassessment history over the
several reporting periods accounted for the following: the Partial Payment
dispute, the Cancelled Contracts, the ITC Reversals and the ITC Reinstatements.
They may best be summarized as follows:
(i) The original characterization of the
down payments as deposits rather than Partial Payment, the reversal of that
position, firstly, in respect of the completed contracts and later in respect
of the Cancelled Contracts. As such, ITCs were disallowed and later allowed
over several filing periods; and
(ii) The eventual allowance of all the ITC
Reversals on the basis that the Credit Memos fell within the provisions of
section 232 of the ETA; and
(iii) The consistent disallowance of the
First ITC Reinstatement and, subsequently, the Second ITC Reinstatement.
[20]
As a result of these differing positions and
filings occurring over several reporting periods, the assessment history and
sequence appears complicated.
[21]
Ultimately however, this filing and assessment
history may be reduced to the following salient points at the crux of this
appeal:
a)
North Shore ultimately received its claimed ITCs
for the 8 completed contracts;
b) North Shore’s First ITC Reversal and Second ITC Reversal, now
disavowed by North Shore, were accepted by the Minister on the basis of the
Credit Memos and the application of section 232 of the ETA;
c) the ITC Reinstatements, on account of bad debts, were fully
rejected; and
d) as such, North Shore paid $338,412.50 in HST to Menova, but has
been allowed ITCs of only $78,620.00 relating to the 8 completed contracts and
no ITCs for any of the Cancelled Contracts.
III. Legislation
[22]
The following is a summary of excerpts from the
relevant sections of the ETA at issue in this appeal [deletions for
irrelevancy and underlining for emphasis added].
Input Tax Credits
169 (1) Subject
to this Part, where a person acquires … property …, during a reporting period
of the person during which the person is a registrant, tax in respect of the
supply, … becomes payable by the person or …, the amount determined by the
following formula is an input tax credit of the person in respect of the
property …;
Adjustments for Excess Tax Collected
232 (1) Where
a particular person has charged to, or collected from, another person an
amount as or on account of tax under Division II in excess of the
tax under that Division that was collectible by the particular person from the
other person, the particular person may, within two years after the day the
amount was so charged or collected,
(a) where the excess amount was
charged but not collected, adjust the amount of tax charged; and
(b) where the excess amount was
collected, refund or credit the excess amount to that other person.
Adjustment
(2) Where a
particular person has charged to, or collected from, another person tax under
Division II calculated on the consideration or a part thereof for a supply and,
for any reason, the consideration or part is subsequently reduced, the
particular person may, in or within four years after the end of the reporting
period of the particular person in which the consideration was so reduced,
(a) where tax
calculated on the consideration or part was charged but not collected, adjust
the amount of tax charged by subtracting the portion of the tax that was
calculated on the amount by which the consideration or part was so reduced; and
(b) where the tax
calculated on the consideration or part was collected, refund or credit to that
other person the portion of the tax that was calculated on the amount by which
the consideration or part was so reduced.
Credit or debit notes
(3) Where a
particular person adjusts, refunds or credits an amount in favour of,
or to, another person in accordance with subsection (1) or (2), the
following rules apply:
(a) the particular person shall,
within a reasonable time, issue to the other person a credit note,
containing prescribed information, for the amount of the adjustment, refund or credit,
unless the other person issues a debit note, containing prescribed information,
for the amount;
(b) the amount may be deducted in
determining the net tax of the particular person for the reporting period of
the particular person in which the credit note is issued to the other
person or the debit note is received by the particular person, to the extent
that the amount has been included in determining the net tax for the reporting
period or a preceding reporting period of the particular person;
(c) the amount shall be added in
determining the net tax of the other person for the reporting period of the
other person in which the debit note is issued to the particular person or
the credit note is received by the other person, to the extent that the amount
has been included in determining an input tax credit claimed by the other
person in a return filed for a preceding reporting period of the other person;
and
Calculation Formula for Net Tax
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 is the
total of
(a) all amounts
that became collectible and all other amounts collected by the person in the
particular reporting period as or on account of tax under Division II, and
(b) all
amounts that are required under this Part to be added in determining the net
tax of the person for the particular reporting period; and
Deposits
168(9) For the
purposes of this section, a deposit (other than a deposit in respect of
a covering or container in respect of which section 137 applies), whether
refundable or not, given in respect of a supply shall not be considered as
consideration paid for the supply unless and until the supplier applies the
deposit as consideration for the supply.
IV. Issues
and North Shore’s submissions
a)
Deposit vs. Part
Payment
[23]
Within the agreed facts, the parties agreed that
the down payments were part payments and not deposits. Since this is a legal
question determined from the facts, the Court shall quickly deal with this
issue. The parties made no further submissions on the point.
[24]
There can be little dispute the contracts, once
executed, were binding obligations at law for both Menova and North Shore.
There was no payment of earnest money to guarantee the completion of the
contracts. The sizeable partial payments were meant to fund the considerable
costs connected with the solar panels. The Contracts, although describing the
moneys paid as deposits were nonetheless structured as partial payments, half
due on execution and the balance due on delivery. Quite conclusively, through
such characteristics, the sums paid were partial payments.
b) Adjustment to net tax on account of bad debts
[25]
Should the requisite legal and formulistic
requirements of section 232 regarding adjustments to excess tax collected be
fulfilled, then the parties were in agreement, and the Court concurs, that the Minister’s
present assessment of North Shore’s filing position would be correct. Implicit
within this position taken by North Shore, is its abandonment at the hearing of
its subsequent deduction from net tax by virtue of subsection 231(1). The First
and Second ITC Reinstatements constitute these deductions.
[26]
An examination of the foregoing subsection reveals
it applies exclusively to a “supplier”, if after having “made a taxable
supply…for consideration…, it is established that…the consideration and tax
payable…has become a bad debt and the supplier…writes off the bad debt…, the
reporting entity for the supply may…deduct the amount…”. North Shore was
neither a “supplier” nor did it make a “taxable supply”. Factually, North Shore
was a recipient who received a taxable supply. The section is unequivocally, by
virtue of a cursory reading of its text, inapplicable to permit the reduction
to net tax on account of a bad debt incurred by North Shore in such a capacity.
Consequently, for North Shore to succeed, the only remaining ground is for the Court
to find that section 232 does not apply in regards to the Credit Memos.
c) Does section 232 apply regarding Credit Memos?
[27]
North Shore argues that section 232 does not apply
for the following reasons.
a) the “Credit Memos” are not credit notes per se
[28]
North Shore’s counsel submits that the Credit
Memos were not credit notes with the meaning of section 232. Firstly, the
description on the document issued is not the same (namely “credit memos”, not
“credit note”). Additionally, counsel submits there was no effective guarantee
or security issued to ensure payment under the Credit Memos. North Shore’s
filing of the First ITC Reversal and the Second ITC Reversal were errors,
committed formulaically by an accounting person or bookkeeper, without any focussed
deliberation regarding the composite legal requirements within the credit memos
needed to give rise to such a reversal of the ITCs claimed.
b) paragraph 232(1)(a) does not apply to the
facts
[29]
Specifically with respect to paragraph 232(1)(a),
North Shore’s counsel argues that 232(1)(a) applies solely in the instance
where HST is charged, but not collected. In the present appeal, it was both charged
and collected. Therefore, there is no basis to any assessment utilizing this paragraph.
c) paragraph 232(1)(b) may apply, but has not
been engaged
[30]
North Shore’s counsel argues that paragraph
232(1)(b), which does apply where the HST was collected, has embedded within it
the requirement that there be an actual refund or credit. A mere recording of
the credit does not meet the test. Firstly, there was no amount set aside or
provision made by Menova, the debtor, under the Credit Memos, to honour the
credit. The credit was merely notional and had no value. Further there were no
other prospective or subsisting orders against which the credit could be
set-off. This further renders the Credit Memos valueless and outside the ambit
of the paragraph.
d) in any event, public policy should override
this occurrence to prevent abuse
[31]
North Shore’s counsel contends that if the
appeal before the Court is not allowed, that decision will result in easy abuse
of the ITC system by unscrupulous suppliers/vendors on the brink of insolvency.
The process would be simple. Render invoices for partial payment of product one
never intends to supply. Collect the HST as required and pocket it. Issue
credit notes on the eve of bankruptcy. The vendor owes nothing to the extent of
the credit notes (subsection 231(3)(b)) (in the present case the Credit Memos).
There is no loss to the public treasury. The purchaser, who paid the full
amount of the HST on product never received is denied the ITCs (231(3)(c)) and cannot
claim a bad debt under subsection 231(1). In turn, the purchaser, similar to
North Shore, has little recourse against the insolvent supplier who is
permitted to issue notional and valueless credit notes to absolve itself of the
HST obligation by saddling the purchaser with full HST liability. This abuses
the ETA and offends public policy.
V. Analysis
and Conclusions
a) decision
[32]
The Court concurs with North Shore’s counsel
that subsection 232(1)(a) does not apply. However, the Court dismisses the
appeal on the following grounds: the Credit Memos were credit notes within the
meaning of subsection 232(1) and related subsections; the actions of North
Shore itself were determinative and informative to the Minister’s assessment,
and, public policy, while it may be engaged in certain circumstances to
invalidate supplier issued credit notes under section 232, is not offended given
the facts of the present appeal.
b) the Credit Memos were credit notes
[33]
North Shore’s suggestion that the use of the
name “credit memo” and the non-reference within the documents to subsection
232(3) of the ETA somehow disqualify the Credit Memos as credit notes,
is rejected. Firstly, there is no prescribed form or definition for credit
notes within the ETA. Secondly, various definitions for credit notes and
credit memorandum exist without much variation:
Credit Note: (acknowledging sum credited, e.g. for goods returned);
Credit note: a note given by a store etc. in return for goods returned, stating
the value of goods owed to the customer.
Credit
memorandum: A document used by a seller to inform a
buyer that the buyer’s account receivable is being credited (reduced) because
of errors, returns, or allowances.
Credit note: A note issued by a business indicating that a customer is entitled
to be credited by the issuer with a certain amount.
[34]
This consistency, but more importantly consistent
reference to commercial custom, reflects the incorporation within the ETA
of the law merchant and common commercial understanding.
[35]
To add to such common usage of the terms “credit
notes” or “credit memoranda”, notions of securitization, collateral, guarantee
and specific reference to the ETA within the form of such a document, reads
into the ETA a level of complication and intricacy otherwise wisely
rejected. In short, the word “credit” is not disjunctive form either “credit
note” or “credit memo”, but part of the same instrument widely used and
acknowledge between creditors and debtors alike engaged in commerce.
[36]
To that end, the Supreme Court of Canada, has
indicated that credit notes are to be treated as current liabilities or assets,
as the case may be, until they are redeemed or otherwise lapse. In Time
Motors v. MNR, Justice Pidgeon for the Court stated the following:
The fact that the
merchandise to be obtained by virtue of a credit note was not specified does
not mean that appellant’s customer had no enforceable obligation for the
balance due.
Even if the
credit notes were to be considered by themselves they could not be considered
as unenforceable for indefiniteness. It should be noted that Viscount Dunedin’s
dictum in May & Butcher v. The King (Feb. 22, 1929, reported
[1934] 2 K.B. 17):
To be a good contract there must be a
concluded bargain, and a concluded contract is one which settles everything
that is necessary to be settled and leaves nothing to be settled by agreement
between the parties.
was explained in a later decision of the
House of Lords, Hillas & Co. v. Arcos Ltd., [1932] All E.R. 494.
Reversing a judgment of the Court of Appeal based on it Lord Wright said (at
pp. 507–508):
When the learned lord justice speaks
of essential terms not being precisely determined, i.e., by express terms of
the contract, he is, I venture with respect to think, wrong in deducing as a
matter of law that they must, therefore, be determined by a subsequent
contract; he is ignoring, as it seems to me, the legal implication in contracts
of what is reasonable, which runs throughout the whole of modern English law in
relation to business contracts. To take only one instance, in Hoadly v. McLaine,
Tindal C.J. (after quoting older authority), said (10 Bing. at p. 487):
“What is
implied by law is as strong to bind the parties as if it were under their hand.
This is a contract in which the parties are silent as to price, and therefore
leave it to the law to ascertain what the commodity contracted for is
reasonably worth.”
That decision was relied on by Estey, J. in Dawson
v. Helicopter Exploration Co. Ltd., [1955] S.C.R. 868 at 878.
[37]
The Credit Memos were factually sufficient to
provide a clear indication of a credit being established in writing to the
detriment of Menova and to the benefit of North Shore. To suggest the Credit
Memos were ineffective in doing so ignores the referenced authority.
[38]
Quite apart from the authority, it also ignores
the actions of North Shore, who acted consistently and perhaps presciently of
the law in Time Motors. The following acts, which were demonstrable of meaningful
reliance upon the Credit Memos, were undertaken by North Shore who:
(i) filed
and adjusted for the First ITC Reversal and the Second ITC Reversal in its
returns;
(ii) requested and received a general
security agreement to secure debts which included the Credit Memos;
(iii) received
proceeds from the sale of that collateral to reduce the debt reflected by
the Credit Memos; and
(iv) filed
a proof of claim in the bankruptcy of Menova related to the debt evidenced by
the Credit Memos and received a dividend from the estate of
the sum of $300,488.00.
[39]
The foregoing actions undertaken by North Shore,
reliant upon the now disavowed Credit Memos, belie the legal and factual
position that the Credit Memos were invalid, unenforceable or did not represent
a liability of Menova issued under section 232 of the ETA. That reliance
informed the very adjustment and reversal to North Shore’s claimed ITCs which it
now appeals.
[40]
This reliance by North Shore marches along with
the Court’s rejection that public policy is offended in this appeal by the nefarious
and sharp behaviour of an impecunious supplier. This rejection is based upon an
omnipresent fact. In carrying out steps (i) through (iv) above, North Shore,
itself, accepted and acted upon the Credit Memos when issued by Menova and
received by North Shore. If it had repudiated, rejected or disavowed the Credit
Memos upon receipt, the facts would be different.
[41]
The suggestion that the Credit Memos
representing more than $3 million were received and treated by North Shore as
business in the normal course seems contrived, forced and inconsistent. Testimony
by the President confirmed intense, prolonged and heated discussions were held
at the highest levels concerning the Cancelled Contracts, and the moneys paid as
Partial Payments to Menova by North Shore. North Shore was alarmed and very
unhappy with the Cancelled Contracts and the Credit Memos. However, this
reveals it did turn its full attention to the documents. It did not reject,
repudiate or contest them. Instead, it added sums to its HST payable by virtue
of the First ITC Reversal and, subsequently the Second ITC Reversal. If it had
rejected or repudiated the Credit Memos and not filed accordingly, and
thereafter, had the Minister assessed and unilaterally reversed the ITCs, the marshalled
policy public argument would have some sway.
[42]
As it is, the Minister simply did what North
Shore did when it filed. She relied upon on the Credit Memos in assessing North
Shore, but she did so only after North Shore had first reviewed, characterized
and concluded the Credit Memos were credit notes within the provisions and
meaning of subsection 232(1) of the ETA.
VI. Conclusion
[43]
For the reasons stated, the appeal is dismissed on
the basis that the assessment upholding the reversal of ITCs by virtue of the
additions to net tax filed by North Shore for the reporting periods ending
April 30, 2011, January 31, 2012 and April 30, 2012 is correct. Costs are
awarded to the Respondent in accordance with the tariff, subject to
representations in writing by either party within 30 days of the date of this
judgment.
Signed at Ottawa, Canada, this 16th day of January 2017.
“R.S. Bocock”
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