Date: 19980527
Docket: 96-2148-GST-I
BETWEEN:
920866 ONTARIO LIMITED, o/a STEVENSON CONSTRUCTION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] The issue in this appeal is whether the Appellant may be
excused from paying a penalty levied under section 280 of the
Excise Tax Act which is part of the legislation enacting
the goods and services tax (“GST”). The Appellant has
elected the informal procedure.
[2] The shares of the Appellant are owned by Delores
Stevenson. The shares of Huron Forest Inc. (“Huron
Forest”) are owned by Delores’ husband. Huron Forest
is engaged in the logging business. The fees or premiums payable
under the Ontario Worker’s Compensation Plan are high for a
logging operation because of the higher risk of injury to
employees engaged in that operation. The Appellant corporation
was formed only for the purpose of employing those individuals
not directly engaged in the logging operation who might otherwise
have been employed by Huron Forest. For example, the Appellant
employed the cook, mechanic, bulldozer operator, bookkeeper
(Delores) and maintenance person. The services of these persons
employed by the Appellant were made available to Huron Forest on
the condition that Huron Forest would reimburse the Appellant for
its payroll. In the words of Delores, the Appellant “is a
payroll company for Huron Forest”.
[3] The primary purpose for incorporating the Appellant was
achieved because Huron Forest paid the higher fees or premiums
under the Worker’s Compensation Plan for only those
employees engaged in logging while the Appellant paid lower fees
or premiums for the other non-logging employees.
[4] Each month, Huron Forest paid to the Appellant (in its
capacity as a “payroll company”) an amount sufficient
to reimburse the Appellant for the cost of its payroll. The
Appellant never thought of registering for GST because it had no
equipment or other assets, no business operation, and no public
customers. If the Appellant had registered for GST and charged
GST to Huron Forest for its “payroll” services, any
amount of GST paid by Huron Forest to the Appellant would have
been recovered by Huron Forest as an input tax credit.
[5] The fact is, however, that the Appellant was obliged to
register for GST purposes and should have charged GST to Huron
Forest with respect to its payroll services. In the spring of
1995, Revenue Canada performed an audit on the Appellant and
assessed GST of $28,062.59 plus interest of $3,085.39 plus
penalty of $3,414.98 for the period from April 1, 1992 to
December 31, 1994. The Appellant accepted its liability to pay
the GST of $28,062.59 because the affiliated company (Huron
Forest) would obtain an input tax credit for that amount. In
other words, it would be a “wash transaction” for tax
purposes. The Appellant objected, however, to the assessment of
the interest and penalties.
[6] In response to the Appellant’s objection, the
Minister of National Revenue cancelled the interest of $3,085.39
and cancelled the penalty of $3,414.98 but substituted a reduced
penalty of 4% of the tax alone. The reduced penalty was $1,122.50
(being precisely 4% of $28,062.59). The only issue in this appeal
is the Appellant’s obligation to pay that reduced
penalty.
[7] The relevant provisions of the GST legislation are as
follows:
280(1) Subject to this section and section 281, where a person
fails to remit or pay an amount to the Receiver General when
required under this Part, the person shall pay on the amount not
remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate,
computed for the period beginning on the first day following
the day on or before which the amount was required to be remitted
or paid and ending on the day the amount is remitted or paid.
281.1(1) The Minister may waive or cancel interest payable by
a person under section 280.
(2) The Minister may waive or cancel penalties payable
by a person under section 280.
It can be seen from subsection 280(1) that the penalty of
“6% per year” and the interest at a “prescribed
rate” is computed for a defined period of time. In other
words, the penalty and interest would increase until “the
day the amount is remitted or paid”. The Minister has
exercised her discretion under section 281.1 to waive all of the
interest but only part of the penalty. See Exhibit R-3. The
remaining penalty is a flat 4% of the tax and is not computed
with respect to a period of time.
[8] Counsel for the Respondent provided to the Court a
Bulletin (B-074 - November 28, 1994) published by Revenue Canada
entitled Guidelines for the Reduction of Penalty and Interest in
“Wash Transactions” Situations. The relevant parts of
that Bulletin are as follows:
Where there is a “wash transaction”, the Minister
will consider waiving or cancelling the portion of the penalty
and interest, payable at the time of assessment, that is in
excess of 4% of the tax not properly collected by the
supplier.
Where it is determined that the penalty and interest will be
reduced to 4% of the tax not collected, the Minister will first
waive or cancel all or a portion of the interest. In most cases,
the remaining 4% will be penalty which is payable in addition to
the amount assessed to account for the GST not properly
charged.
...
In all circumstances where the Minister is considering whether
to waive or cancel penalty and interest, the Minister retains the
right to either waive or cancel only a portion of the penalty and
interest, or all or a portion of one or the other.
The waiver of penalty and interest in excess of 4% of the tax
not properly charged in a “wash transaction” will
normally be considered automatically by the Minister during the
audit process. The Minister may also consider requests that are
made after a notice of assessment has been issued.
[9] In my opinion, the Minister has a discretion in section
281.1 when considering whether to waive all or part of any
interest or penalty that has been assessed. There is no evidence
or any other indication which leads me to think that the Minister
has not exercised her discretion in an appropriate manner. The
Minister’s decision to reduce the penalty to a flat amount
computed as 4% of the tax appears to be within the discretion
granted in section 281.1. Accordingly, I would uphold the
assessment; order the Appellant to pay the penalty of $1,122.50;
and dismiss the appeal.
Signed at Ottawa, Canada, this 27th day of May, 1998.
"M.A. Mogan"
J.T.C.C.
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