Date: 19980602
Docket: 96-523-GST-G
BETWEEN:
TWO CARLTON FINANCING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1] The issue in this appeal from an assessment under the
Goods and Services Tax ("GST") provisions of the
Excise Tax Act ("Act") is whether the appellant,
Two Carlton Financing Ltd. ("Carlton"), is entitled to
input tax credits ("ITCs") for the period March 1, 1993
through November 30, 1993 ("period"). The Minister of
National Revenue ("Minister") disallowed the claim for
ITCs on the basis that during the period Carlton was not engaged
in a “commercial activity” within the meaning of
subsection 123(1) of the Act but was engaged in providing
a financial service and its activities constituted "exempt
supplies" within the meaning of the Act. A financial
service is a supply exempt from GST.[1]
[2] In Carlton’s view, it carried on a business
constituting a commercial activity during the period and is
therefore entitled to claim ITCs in respect of goods and services
acquired to carry on that business.
[3] Carlton was incorporated in 1986 to assist individual
limited partners to borrow funds, usually from banks, to invest
in limited partnerships promoted by the principals of Carlton.
Carlton negotiated loans with Canadian banks and collected
interest on the loans from the partners for payment to the
lender. These activities constitute a financial service which is
an exempt supply. The last loan negotiated by Carlton was in 1988
and that loan matured in 1992. By January 1993, said James
Penturn, President of Carlton, the company ceased to have any
business activity. At the same time Carlton no longer carried on
a financial service.
[4] The appellant concedes that prior to 1993, it was not
engaged in a commercial activity for purposes of the Act.
Nevertheless the appellant applied to the Minister for
registration under section 240 of the Act and was
registered effective January 1, 1991.[2]
[5] Carlton's evidence is that on March 1, 1993 it
acquired the business of Blackstone Entertainment Ltd.
("Blackstone"), a person with whom it did not deal at
arm’s length. Up to and including 1988 Blackstone promoted
limited partnerships as vehicles for investment in Canadian film
and television productions and administered and managed the
partnerships on behalf of the general partners. After 1988
Blackstone’s only activity was administration and
management; it was this business, which included a list of
potential investors, that Carlton acquired. Mr. Penturn was the
President of Blackstone at the time of the transfer of the
business.
[6] Mr. Penturn described Blackstone’s business.
Blackstone employed between 12 and 20 people. The company
maintained a data base of about 4,000 investors. It collected
revenue from distributors, distributed revenue to the partners,
provided accounting services and tax information to the partners
and negotiated the resolution of disputes with distributors. Mr.
Penturn estimated Blackstone was providing services to about a
dozen limited partnerships in 1993. There was no written
agreement for Blackstone’s services between Blackstone and
any limited partnership.
[7] Blackstone never reported any taxable supplies. A
management fee paid to Amber Financial Services Ltd.
("Amber"), another corporation with which it did not
deal at arm’s length, was not subject to GST, according to
its erstwhile controller, Mr. Hank Glastra, who is also
controller of the appellant, because it was an inter company
charge.[3] Mr.
Glastra also testified that Blackstone had no income for taxation
years 1988 to 1993 inclusive.
[8] According to Mr. Penturn the reason Blackstone transferred
its business was because Blackstone had incurred financial losses
and he "wanted to protect employees in a clean company ...
and service better the limited partnerships." Carlton,
having ended its previous business activity and having
"virtually" no liabilities, was that "clean
company." Documents providing for the transfer of assets and
liabilities, including assignment of lease and notice to staff,
were prepared and executed by both corporations. Changes to
payroll, Blue Cross and related matters were put into effect. The
notice to staff stated that Carlton would be performing
administrative functions for all the companies in the corporate
group, referred to as the Skyld Group of Companies. The appellant
alleges that a transfer of Blackstone’s business to Carlton
took place on March 1, 1993 and there is no evidence to the
contrary.
[9] The months of March and April, Mr. Penturn declared, are
busy months. Accounting statements for partnerships and income
tax information are sent to the limited partners, reports of
distributors are reviewed to verify all revenues owing to the
partnerships were remitted by the distributors; legal action
against distributors is considered. These services, previously
performed by Blackstone, the appellant claims, were continued by
it as of March 1, 1993.
[10] In providing services, Carlton incurs expenses for
salaries, management fees, rent, courier services, office
supplies and equipment, among other costs.
[11] As I understand the role of Carlton, the appellant
provided services primarily to Mithras Management Ltd.
("Mithras"), the general partner of many of the limited
partnerships promoted by the related group of companies[4]. Mr. Glastra
explained in a letter of March 2, 1994 to a Mr. Savlov of Revenue
Canada: Carlton administers the collection and distribution to
investors of revenues received by Mithras. He explained that
"whenever a distribution is done on behalf of the GP
[General Partner] a set fee is charged by the GP to the limited
partnerships to cover administrative expenses." Mr. Glastra
added that GST is payable on the fee and has been remitted to
Revenue Canada." Any other monies used to run/finance
[Carlton] is advanced from monies still available that were
generated prior to the implementation of the GST." The
evidence suggests that Mithras originally contracted fee
management services with Amber and Amber subcontracted the work
to Carlton. In any event there was no written management
agreement between the companies before November 1994. Amber paid
Carlton an annual fee for management services soon after the year
end. The fee payable to Carlton for the year ending February 28,
1994, which included the period in issue, was $600,000, based on
a monthly fee of $50,000. (Since 1995, the fee has been paid
monthly.)
[12] During the period March 1, 1993 to May 31, 1993 Carlton
did not collect GST. For the period June 1, 1993 to September 30,
1993, it reported no sales or other revenue but made purchases of
$54,422.43. For the last quarter of 1993 Carlton again reported
no sales or revenue and zero purchases. For all these quarterly
periods, input tax credits were claimed.[5] In a letter on May 12, 1995,
Carlton’s accountant, Donald B. Forman, C.A., informed
Revenue Canada that "[d]uring 1993 and prior to November 1,
1994 Carlton had no taxable supplies during the development stage
of the commercial activities."
[13] In March 1993, financial statements were prepared for
Carlton’s 1993 fiscal year, ending February 28, 1993.
(Income tax returns for 1993, including these financial
statements, were sent to Revenue Canada as late as February 10,
1995 by Mr. Glastra.) Assets of Carlton as at February 28, 1993
included cash, money market funds and accounts receivable. There
was also a substantial liability due to affiliated companies. The
bulk of revenue was from interest on deposits. (Only $22,957 of
$164,940 of income was not interest income.) Most of the expenses
were administrative, and a great portion of the administrative
expense was a management fee of $175,000 paid to Amber. There was
no administrative fee paid or payable to Blackstone. (The
comparative information for 1992 also shows that the bulk of an
income was from interest on funds on deposit.)
[14] A document listing changes in Carlton's retained
earnings as at February 28, 1993 was produced. The document
notes that Carlton gave Mr. Savlov a preliminary financial
statement "which was prepared in the middle of adjusting and
finalizing the February 28, 1991 statements." It appears
that the original financial statements for 1994 were made on
March 8, 1994; the balance sheet as at February 28, 1994 states
that the retained earnings for Carlton as at February 28, 1993
was $792,351 and was reduced to $342,243 a year later. One of the
adjustments to retained earnings at the end of 1993 is an
administrative fee of $115,000 charged by Blackstone. A note in
the document listing the changes in retained earnings explain
that "prior to February 28, 1993 Blackstone ... provided the
administrative services that were needed for ... Carlton ... to
fulfil its duties. The administrative fee is based on a
percentage of the expenses incurred by Blackstone. As the role of
the agent for the investors decreased so did the fee
decrease." After adjustments, the retained earnings of
Carlton at the end of the 1993 period is charged to a debit
amount of $144,179.
[15] The "remade" income statement for 1993 of
Carlton (and the comparative information for 1992) shows no
interest income from deposits; all income is from fees. However,
the amount of income in the original and revised statements is
identical.
[16] Carlton’s original financial statements for 1994,
also filed earlier with Revenue Canada, indicate the only source
of income for the year is interest in the amount of $82,802. The
statements were remade on June 23, 1997.[6] According to the remade statement of
income, the only source of income is from consulting and
management fees, the $600,000 charged to Amber. A management fee
of $183,538 payable to PFH Investments Limited is shown as an
expense. The shareholders of PFH Investments Limited are Mr.
Penturn and his sister.
[17] The remade balance sheets as of February 28, 1993 and
1994 and the remade statements of income and retained earnings
for 1993 and 1994 raise questions. The balance sheet as of
February 28, 1993 shows as an asset, an "investment" of
$3,045,633 and the balance sheet as at February 28, 1994 includes
among its assets "Investment-deposit receipts" of
$2,169,552. Yet neither the income statement for 1993 nor that
for 1994 reflect any investment income. Income from both years is
from fees only. I infer that the investments were income
producing - there was no evidence indicating otherwise - and that
the original financial statements are more indicative of the
sources of income than the remade statements.
[18] Mr. Penturn explained the need for the remade statements.
All the companies in the group were behind in maintaining
accounting records and they were trying to put things up-to-date.
At the same time the companies were "doing (their) best to
take care of the limited partners." For some companies,
Mr. Penturn stated, it was only in 1996 and 1997 that tax
returns were filed "for many years back." A chartered
accountant employed by the group had the chore of bringing the
companies up-to-date in their filings.
[19] Several documents in the respondent’s book of
documents have a letterhead of a general partner of a limited
partnership and not of Carlton. The respondent asked me to
conclude that this suggests that the general partner itself, and
not Carlton, provided certain services to the limited partners.
Mr. Penturn explained that all documents for a partnership were
sent out under the letterhead of the general partner but the
information reported on the document, and the document itself,
was prepared by Carlton.
[20] Mr. Penturn conceded that several employees paid by
Carlton may not have been "dedicated" to any one
corporation in the Skyld group.
[21] Mr. Glastra testified that in March 1993 he prepared a
new set of books of account for Carlton to reflect the transfer
of Blackstone’s business. The management fee for services
rendered to Amber in Carlton’s 1994 fiscal year in the
amount of $600,000 was calculated "soon after" the
fiscal year end of Carlton and he said, was paid shortly
thereafter. In cross-examination he acknowledged that no invoice
was sent to Amber and the account was "paid" by a
journal entry, effective February 28, 1994.
[22] Carlton now supplies administrative services, Mr. Glastra
stated. It collects and remits GST. In his view Carlton is doing
nothing different today than it did in March 1993. He conceded
that it was not until February 1995 that Carlton first reported
taxable supplies.
[23] Subsection 123(1) of the Act defines a
"commercial activity" of a person to mean:
(a) a business carried on by the person (other than a business
carried on by an individual or a partnership, all of the members
of which are individuals, without a reasonable expectation of
profit), except to the extent to which the business involves the
making of exempt supplies by the person,
...
[24] A "business" includes:
a profession, 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.
[25] The term "exempt supply" means any supply
described in Schedule V to the Act. Financial services are
included in the definition of exempt supplies.[7]
[26] Carlton submits that it is eligible to claim the input
tax credit as it was engaged in a commercial activity during the
relevant period; it was in the business of providing
"management and administrative services" once it
acquired that business from Blackstone on March 1, 1993. The
appellant says it was not engaged in providing any financial
services since a financial service does not include the provision
of management or administrative services to a corporation,
partnership or trust, the principal activity of which is the
investing of funds on behalf of shareholders, members or other
persons: paragraph 123(1)(q).
[27] What activity was Blackstone carrying on before March 1,
1993? Apparently, if I accept the evidence of Mr. Glastra, it
appears that Blackstone was not carrying on a business that
provided a taxable supply. Blackstone had not collected GST on
any fee it charged for management or administrative services. In
Mr. Glastra's view, the services Blackstone provided to Amber
were exempt from GST. Mr. Glastra did say that Blackstone
did receive ITCs. He also confirmed there was no change in the
nature of the business once the business was transferred from
Blackstone to the appellant. Indeed, as respondent's counsel
submitted, there was paltry evidence as to what activities
Blackstone actually carried on before March 1, 1993.
[28] Therefore, respondent's counsel questioned if
Blackstone did not provide taxable supplies and Blackstone's
business was transferred to the appellant, how can the appellant
be said to have provided taxable supplies in the course of
carrying on same business?
[29] Since Carlton did not report any taxable supplies until
February 1995 and did not collect any GST during the period,
respondent's counsel concluded Carlton was not engaged in any
commercial activity during the period.
[30] Appellant suggests that during the period Carlton was
starting up a business. Its counsel referred to Revenue Canada
Interpretation Bulletin No. IT-364 for the proposition that
a business commences whenever some significant activity is
undertaken that is a regular part of the income earning process
in that type of business or is an essential preliminary to normal
operations. Counsel also referred to Bowman, T.C.C.J. who stated
that:
In determining when a business has commenced, it is not
realistic to fix the time either at the moment when money starts
being earned from the trading or manufacturing operation of the
provision of services or, at the other extreme, when the
intention to start the business is first formed. Each case turns
on its own facts, but where a taxpayer has taken significant and
essential steps that are necessary to the carrying on of the
business it is fair to conclude that the business has started.[8]
[31] Counsel submitted that on March 1, 1993 her client took
significant and essential steps to commence to carry on the
commercial activity of providing administrative and management
services. The appellant acquired the assets of Blackstone and
assumed the latter's liabilities to its employees and
landlord. All Blackstone's assets, as well as the expertise
of the employees, were required for the purpose of carrying on
the commercial activity and the appellant carried on such
commercial activities.
[32] In 1995 Mr. Forman, the appellant's accountant,
advised Revenue Canada that during 1993 and prior to November 1,
1994 Carlton had no taxable supplies. Mr. Forman described this
period as the development stage of the appellant's commercial
activities. Mr. Forman was not called as witness.
[33] I find strange the position of the appellant that during
the 1993 calendar year and the first half of 1994, at least,
Carlton was in the "start up" or
"development" stage of commercial activity. The
appellant led evidence that on March 1, 1993, it acquired
Blackstone's business of providing administrative and
management as a going concern. My understanding is that when
business is transferred as a going concern the business continues
to operate without any interruption.
[34] Thus, if Blackstone's business were transferred as a
going concern, then Carlton commenced operating the business
without interruption on March 1, 1993 and there was no
"start up" or "development" stage insofar as
Carlton is concerned. The business had its "start up"
stage with Blackstone. There was no "development" or
"start up" stage once Carlton acquired Blackstone's
business as a going concern, a business that had clients and
functions to perform in the carrying on of a mature business at
that time. Hence, Carlton ought to have collected GST and be
entitled to ITCs. If on the other hand, no GST was collected, was
it because Carlton had not yet commenced carrying on the business
it purportedly acquired? March and April are busy months for the
business and yet Carlton made no supplies during those months.
Something, somewhere is wrong. If there was an hiatus in the
carrying on of the business by Carlton after February 1, 1993,
then there is no evidence who did carry on the business during
its "busy months", at least. If Carlton did not carry
on the business once it purported to acquire it as a going
concern, then there is no evidence before me to conclude Carlton
intended to carry on the business it purported to acquire within
some reasonable time. If, on the other hand, Carlton did carry on
the business once the business was acquired and things are what
the appellant says they are then a reasonable person would
conclude that Carlton made supplies during its "busy
months" of March and April 1993. That Carlton carried on the
business is not supported by anything I heard at trial.
[35] The definitions of "supply" and "taxable
supply" found in subsection 123(1) of the Act are
broad enough to together encompass virtually all forms of
transactions such as sale, transfer, barter, exchange, licence,
rental, lease, gift or disposition made in the course of a
commercial activity. The definition of "commercial
activity" in subsection 123(1) of the Act does not
expressly require that taxable supplies be made. Nonetheless, it
is difficult to imagine the carrying on of a business without its
activity falling within the scope of a supply.
[36] Practically speaking then, in conducting a business,
except to the extent it involves the making of exempt supplies,
almost all activities will constitute supplies. By definition
such supplies are taxable supplies. In any event, a commercial
activity suggests the business be involved in the making of
supplies by the person carrying on the business that are not
exempt supplies. Since the appellant reported no sales or
revenues during the period, one may reasonably infer that the
appellant was not engaged in commercial activities during the
period and, if so, the appellant cannot be considered eligible
for ITCs in the period.[9]
[37] In accordance with subsection 169(1) of the
Act, ITCs are available where tax on inputs in respect of
a supply becomes payable or is paid by a registrant person.
Recovery of the tax paid is limited to the extent that the inputs
were acquired for consumption, use or supply in the course of
commercial activities of the person. In Nineteen Ninety
Clothing Co. Inc. v. The Queen, [1994] GST C 84 (T.C.C.), at
84-5, Garon, J.T.C.C. said in obiter dicta:
Pursuant to subsection 169(1) of the Act, a person is
only entitled to an input tax credit for the purchase of a
service where the tax in respect of the service is paid or
becomes payable by that person. Speaking generally, the purchaser
of a taxable supply is entitled to an input tax credit and can
recover from the government the tax he has paid to the extent
that this purchaser uses that good or service in the production
of other taxable supplies. [emphasis added]
ITCs are generally unavailable unless the inputs for which the
ITCs are claimed were used in the production of other taxable
supplies.[10]
Carlton did not report any taxable supplies during the period in
issue which, if it were in fact carrying on the business it
purported to acquire immediately on acquisition, supplies would
have been made.
[38] Accordingly, the appellant is not entitled to ITCs during
the period and its appeal is dismissed with costs.
Signed at Ottawa, Canada, this 2nd day of June
1998.
"Gerald J. Rip"
J.T.C.C.
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