Citation: 2010TCC75
Date: 20100217
Docket: 2008-3758(GST)I
BETWEEN:
614730 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] These appeals relate to various claims under the Excise
Tax Act (“Act”) for input tax credits (“ITCs”) in five consecutive
quarterly reporting periods. All of the ITCs that were claimed were denied. The
reporting periods and the amounts claimed are as follows:
|
Reporting Period
|
ITCs Claimed
|
Date of Notice of Assessment
|
|
1. July 1, 2006 to September 30, 2006
|
$1,060.23
|
January 10, 2007
|
|
2. October 1, 2006 to December 31, 2006
|
$2,653.50
|
February 27, 2007
|
|
3. January 1, 2007 to March 31, 2007
|
$840.09
|
January 29, 2008
|
|
4. April 1, 2007 to June 30, 2007
|
$50.00
|
September 19, 2007
|
|
5. July 1, 2007 to September 30, 2007
|
$120.95
|
February 4, 2008
|
|
Total:
|
$4,724.77
|
|
[2] The Appellant submitted a Schedule during the hearing that reorganized
the ITCs by the type of expenditure related to the ITCs. The ITCs claimed can
be grouped together as follows:
ITCs Related to the Insurance Litigation
|
Reporting Period
|
Description
|
Amount of ITCs Claimed
|
|
1. July 1, 2006 to September 30, 2006
|
Legal Fees
|
$969.08
|
|
1. July 1, 2006 to September 30, 2006
|
Disbursements
|
$56.83
|
|
2. October 1, 2006 to December 31, 2006
|
Legal Fees
|
$2,169.70
|
|
2. October 1, 2006 to December 31, 2006
|
Disbursements
|
$122.20
|
|
2. October 1, 2006 to December 31, 2006
|
Legal Fees
|
$179.22
|
|
2. October 1, 2006 to December 31, 2006
|
Disbursements
|
$8.19
|
|
2. October 1, 2006 to December 31, 2006
|
Engineering report
|
$70.00
|
|
Total:
|
|
$3,575.22
|
ITCs Related to the Roof Problem
|
Reporting Period
|
Description
|
Amount of ITCs Claimed
|
|
2. October 1, 2006 to December 31, 2006
|
Refinancing
|
$21.00
|
|
3. January 1, 2007 to March 31, 2007
|
Legal Fees
|
$123.72
|
|
3. January 1, 2007 to March 31, 2007
|
Legal Fees
|
$37.10
|
|
3. January 1, 2007 to March 31, 2007
|
Legal Fees
|
$70.00
|
|
3. January 1, 2007 to March 31, 2007
|
Legal Fees
|
$140.00
|
|
3. January 1, 2007 to March 31, 2007
|
Engineering report
|
$266.28
|
|
5. July 1, 2007 to September 30, 2007
|
Legal Fees
|
$35.00
|
|
Total:
|
|
$693.10
|
ITCs Related to the GST Appeal
|
Reporting Period
|
Description
|
Amount of ITCs Claimed
|
|
3. January 1, 2007 to March 31, 2007
|
Legal Fees
|
$35.00
|
ITCs Related to Accounting Fees
|
Reporting Period
|
Amount of ITCs Claimed
|
|
2. October 1, 2006 to December 31, 2006
|
$42.00
|
|
5. July 1, 2007 to September 30, 2007
|
$34.50
|
|
Total:
|
$76.50
|
ITCs Related the Use of the Automobile and Office
Expenses
|
Description
|
Amount of ITCs Claimed
|
|
Use of the automobile
|
$207.05
|
|
Office Expenses
|
$138.13
|
|
Total:
|
$345.18
|
[3] Subsection 169(1) of the Act provides that ITCs may be claimed
in relation to tax paid on a property or a service that is acquired by a
person, to the extent that such property or service is acquired for the
consumption, use or supply in the course of commercial activities of that
person. This subsection provides as follows:
169. (1) 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 × 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
(a) where the tax is deemed under subsection 202(4) to have been paid in
respect of the property on the last day of a taxation year of the person, the
extent (expressed as a percentage of the total use of the property in the
course of commercial activities and businesses of the person during that
taxation year) to which the person used the property in the course of
commercial activities of the person during that taxation year,
(b) where the property or service is acquired, imported or brought into
the province, as the case may be, by the person for use in improving capital
property of the person, the extent (expressed as a percentage) to which the
person was using the capital property in the course of commercial activities of
the person immediately after the capital property or a portion thereof was last
acquired or imported by the person, and
(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)
[4] “Commercial activity” is defined in section 123 of the Act as
follows:
“commercial activity” of a person means
(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) 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) 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;
[5] Section 141.01 of the Act
provides, in part, that:
141.01 (1) In this section, “endeavour” of a person means
(a) a business of the person;
(b) an adventure or concern in the nature of trade of the person; or
(c) the making of a 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.
(1.1) In subsections (1.2), (2) and (3), “consideration” does not include
nominal consideration.
…
(2) Where a person acquires or imports property or a service or brings it
into a participating province for consumption or use in the course of an
endeavour of the person, the person shall, for the purposes of this Part, be
deemed to have acquired or imported the property or service or brought it into
the province, as the case may be,
(a) for consumption or use in the course of commercial activities of the
person, to the extent that the property or service is acquired, imported or
brought into the province by the person for the purpose of making taxable
supplies for consideration in the course of that endeavour; and
(b) for consumption or use otherwise than in the course of commercial
activities of the person, to the extent that the property or service is
acquired, imported or brought into the province by the person
(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.
[6] “Taxable supply”, “supply” and
“property” are defined in section 123 of the Act as follows:
“taxable supply” means a supply that is made in the
course of a commercial activity;
“supply” means, subject to sections 133 and 134, the
provision of property or a service in any manner, including sale, transfer,
barter, exchange, licence, rental, lease, gift or disposition;
“property” means any property, whether real or
personal, movable or immovable, tangible or intangible, corporeal or
incorporeal, and includes a right or interest of any kind, a share and a chose
in action, but does not include money;
The result of these provisions is
that a property or service must be acquired for the purpose of selling or
leasing (or otherwise supplying) property or services for consideration in the
course of commercial activities in order for the amount payable under the Act
in relation to the acquisition of such property or services to be eligible to
be claimed as an ITC.
[7] In Blanchard o/a Four Pillar
Financial v. The Queen, [2001] T.C.J. No. 484, [2001] G.S.T.C.
94, Justice Bowie described the interaction of sections 169 and 141.01 of the Act
as follows:
19 The result of finding there to be only one business is that
the entitlement to ITCs falls to be determined under sections 169, 141 and
141.01 of the Act. Complex though these are, they may be summarized this way.
Entitlement to ITCs arises only to the extent that goods and services tax has
been paid on property or services that have been acquired for the purpose of
making taxable supplies for consideration.
[8] Subsection 141.1(3) of the Act provides that activities related
to the termination of a commercial activity will be included as part of
commercial activities. This subsection provides as follows:
(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.
[9] The Appellant was incorporated in 1985. Sam Crupi (the President of the
Appellant) stated that the Appellant was formed to locate, buy, renovate and
sell properties. The Appellant bought two properties – the property located at 577 Gladstone Avenue, Ottawa in 1985 and the property located at 187 Percy Street
in Ottawa in either 1986 or 1987. Sam Crupi also referred to a third property, located
at 569 Gladstone Avenue, but this property was acquired in his own name. He
indicated that this property was adjacent to the property located at 577 Gladstone Avenue and when it was acquired (which was in 1986 or 1987) he was advised to
acquire it personally.
[10] The property located at 577
Gladstone Avenue was a commercial
property that was leased to another person to operate a garage. The property
located at 187 Percy Street was a residential complex that was leased to various
tenants as a place of residence. The property located at 569 Gladstone Avenue (which is the property that was owned personally by Sam Crupi) was a
mixed commercial and residential property.
[11] The property located at 187 Percy
Street was sold in 2000. In October
2001, the property located at 577
Gladstone Avenue was destroyed by fire.
The estimated cost of rebuilding the structure to 10,000 square feet (which was
the size of the building before the fire) was approximately $1 million. The
insurance company paid the Appellant $364,000. A smaller building was
constructed on the land and this property was sold in 2005. As well, the
property located at 569 Gladstone Avenue (which Sam Crupi owned personally) was sold in 2005
shortly before the property located at 577
Gladstone Avenue was sold.
ITCs Related to the Insurance Litigation
[12] The Appellant is not satisfied with the amount that the insurance
company paid in relation to its fire loss claim. As a result, the Appellant has
commenced an action against the insurance company and the legal fees,
disbursements and the costs incurred in obtaining the engineering report relate
to this law suit. If the Appellant should receive any additional amount from
the insurance company as a result of the lawsuit, GST will not be payable in
relation to such amount.
[13] “Financial service” is defined in section 123 of the Act, in part,
as follows:
“financial service” means
…
(f.1) the payment or receipt of an amount in full or partial satisfaction
of a claim arising under an insurance policy,
[14] The supply of a financial service is an exempt supply
and therefore is not a supply made in the course of a commercial activity.
Although the receipt of an amount under an insurance policy is included in the
definition of financial services, it seems to me that the payment of money by
the insurance company would not, in any event, be a supply of property, since “property”,
for the purposes of the Act, excludes money. If the payment of money is
not a supply, it is not an exempt supply, nor is it a taxable supply. In any
event it is clear that any additional amount that the Appellant might receive
from the insurance company under its insurance policy as a result of this
litigation would not be taxable under the Act.
[15] The issue in this appeal is whether the Appellant is entitled to the ITCs
that it claimed. Therefore, the issue is whether the Appellant was acquiring
the property and services related to the insurance litigation for the purpose
of making taxable supplies of the Appellant. Since the Appellant will
only “supply” either property or services for the purposes of the Act if
the Appellant provides such property or services, it is difficult to determine
how the receipt of an amount under an insurance policy would result in the
Appellant supplying anything. The only possible property that the Appellant
might be considered to supply as consideration for any additional amount that
it might receive under the insurance policy would be its chose in action
against the insurance company for such additional amount. If the Appellant is
unsuccessful, then it would presumably not have a chose in action and hence
would not have any property that would be provided.
[16] Therefore there are two possible scenarios. One possible scenario is
that the Appellant will not be providing any property or any service in
relation to the insurance litigation and hence will not be making any supply of
any property or service in relation to this litigation. As a result, the
properties and services acquired by the Appellant in relation to the insurance
litigation would be acquired “for a purpose other than the making of supplies”
and hence, as a result of the provisions of paragraph 141.01(2)(b) of
the Act, the Appellant will be deemed to have acquired these properties
and services for consumption or use otherwise than in the course of commercial
activities and no ITCs could be claimed for any part of the GST paid in
relation to the acquisition of these properties or services.
[17] The other possible scenario is that the Appellant provided (or will be
providing) its chose in action against the insurance company. However, it seems
to me that since this chose in action is a right to receive an additional
amount under the insurance policy, that the intention of Parliament must have
been that the provision of such a chose in action would be an exempt supply of
a financial service since the definition of financial service specifically
includes the receipt of an amount under an insurance policy and this chose in
action would be the property that would be supplied for this amount received
from the insurance company. The supply of the chose in action would not be a
taxable supply (since it would be an exempt supply). Therefore, as a result of
the provisions of paragraph 141.01(2)(b) of the Act, the
Appellant will be deemed to have acquired the properties and services that were
acquired in relation to the insurance litigation, for consumption or use
otherwise than in the course of commercial activities and no ITCs could be
claimed for any part of the GST paid in relation to the acquisition of these
properties or services. The final result is the same regardless of which scenario
is correct.
[18] It therefore seems clear that the acquisition of the property and
services related to the insurance litigation were not acquired for the purpose
of making any taxable supply and therefore would not be acquired for
consumption or use in the course of a commercial activity as a result of the
provisions of subsection 141.01(2) of the Act.
[19] However, this is not the basis on which the Appellant was assessed. Paragraphs
14 to 19 of the Reply are as follows:
14. In determining the appellant’s GST
liability, the Minister made the following assumptions of fact:
a)
the appellant was incorporated on April 23, 1985;
b)
the appellant was registered for GST effective January 1, 1991;
c)
the appellant was a quarterly filer and has a year-end of March 31;
d)
the appellant was in the commercial rental business;
e)
the appellant owned a property located at 577 Gladstone in Ottawa (the
“property”);
f)
the property was the only one owned by the appellant;
g)
on October 16, 2001 the property was destroyed by fire;
h)
the property was rebuilt after the fire;
i)
the property was sold in November 2005;
j)
after the sale of the property, the appellant was not engaged in any
business relating to commercial activities;
k)
after the sale of the property, the appellant’s sole business was
holding mortgage investments;
l)
after the sale of the property, the appellant’s sole revenue was
investment income;
m)
during the period from July 1, 2006 to September 30, 2007, the appellant
claimed ITCs in the amount of $4,724.77;
n)
legal fees were incurred to defend the appellant against legal action
filed by suppliers that were involved in reconstructing the property;
o)
the ITCs were related to legal fees incurred by the appellant and
described in paragraph n) above; and
p)
the legal fees and other expenses were not incurred for services for use
or supply in the course of the appellant’s commercial activities.
15. The Minister also relies on the following facts:
a)
during the period January 1, 2002 to December 31, 2005 the appellant
received $32,374 in ITCs relating to the cost of rebuilding the property;
b)
a portion of the legal fees incurred by the appellant after the sale of
the property related to recovering insurance proceeds associated to [sic]
the fire at the property;
c)
the ITCs claimed in relation to the legal fees described in paragraph 14
n) above amount to $672 during the period of July 1, 2006 to September 30,
2007;
d)
the ITCs claimed in relation to the legal fees described in paragraph 15
b) above amount to $3,616 during the period of July 1, 2006 to September 30,
2007; and
e)
the remaining $437 in ITCs claimed relate to expenses such as accounting
fees, automobile, office and supplies;
B. ISSUE TO BE DECIDED
16. The issue to be decided is whether the
appellant is entitled to the $4,724.77 claimed in input tax credits.
C. STATUTORY PROVISIONS, GROUNDS
RELIED ON AND RELIEF SOUGHT
17.
He relies on sections 123, 141 and 169 of the Excise Tax Act
(“Act”).
18.
He submits that the ITCs paid of $4,724.77 was not to acquire a property
or service for consumption, use or supply in the course of commercial
activities of the appellant and therefore the Minister properly disallowed the
ITCs pursuant to paragraph 169(1)(c) of the Act.
19.
He requests that the appeal be dismissed.
[20] There is no reference in the Reply to section 141.01 of the Act
(which is not the same section as section 141) nor is there any reference to
the language used in this section which limits ITCs by limiting the properties
or services that are acquired for consumption or use in commercial activities
to those properties or services that are acquired for the purpose of making
taxable supplies for consideration (and only to the extent that such properties
or services are so acquired). The only language used in the Reply to describe
the basis for the assessment is the language used in section 169 of the Act
(which is one of the three sections that are listed) which limits properties or
services acquired to properties or services acquired for consumption, use or
supply in the course of commercial activities (and only to the extent that such
properties or services are so acquired). There is also no reference to the
definition of “financial service” anywhere in the Reply and, in particular, no
reference to paragraph (f.1) of this definition which provides that the receipt
of an amount as part of a claim under an insurance policy will be an exempt
supply. There is also no reference to the definition of property (which
excludes money) or to any argument that, if the Appellant is supplying anything
as a result of acquiring the properties and services related to the insurance
litigation, it will be supplying a chose in action which would be an exempt
supply.
[21] Since the Appellant was assessed on the basis that it did not “acquire
a property or service for consumption, use or supply in the course of
commercial activities of the appellant”, in order to qualify for the ITCs the
Appellant simply needs to show that the property or service was acquired for
consumption, use or supply in the course of a commercial activity of the
Appellant. If section 141.01 of the Act would have formed the basis for
the assessment, then the Appellant would have to show how the property or
services were acquired for the purpose of making taxable supplies and not just
that they were acquired for consumption, use or supply in the course of
commercial activities of the Appellant. Subsection 141.1(3) of the Act
broadens the scope of what is considered to be in the course of commercial activities
to anything done in connection with the acquisition, establishment, disposition
or termination of a commercial activity.
[22] In order for me to deny the Appellant’s claim based on the provisions
of section 141.01 of the Act, I would have to deny the ITCs on a basis
that is different from the basis on which the Appellant was assessed. In Pedwell v. The Queen, 2000 DTC 6405,
[2000] 3 C.T.C. 246, Justice Rothstein, writing on behalf of the Federal Court
of Appeal, stated as follows:
15 While the parties
referred to a number of older authorities on the issue, Continental Bank of
Canada now makes it clear (subject to subsection 152(9) which applies to
appeals disposed of after June 17, 1999 and is not relevant here in any event)
that the Minister is bound by his basis of assessment. While this case does not
involve the Minister advancing a different basis of assessment, I think
the principle in Continental Bank of Canada is applicable to a judicial
determination on a basis different from that in the notice of reassessment.
16 First, if
the Crown is not able to change the basis of reassessment after a limitation
period expires, the Tax Court is not in any different position. The same
prejudice to the taxpayer results - the deprivation of the benefit of the
limitation period. It is not open to that Court or indeed this Court, to
construct its own basis of assessment when that has not been the basis of the
Minister's reassessment of the taxpayer.
17 Second,
while it is open to the Minister to change the basis of assessment before the
limitation period expires, where he does not do so, in my respectful opinion,
the Tax Court Judge is bound by the assessment at issue before the Court.
Fairness requires that the taxpayer be given a reasonable opportunity to
contest a new basis of assessment. If the Tax Court Judge decides on a basis of
assessment not at issue during the court proceedings, the taxpayer is deprived
of that opportunity.
18 Here, on
his own motion, the Tax Court Judge, in his decision and after the completion
of the evidence and argument directed to the Minister's basis of assessment,
changed the basis of that assessment without the appellant having the
opportunity to address the change. This is clear because the Tax Court judgment
allowed the appellant's appeal, i.e. found that there was no appropriation of
property which was the basis of the Minister's assessment, but then referred
the matter back to the Minister to reassess on the basis that the Euler
proceeds and the Landpark deposit were appropriated. What has taken place is
tantamount to allowing the Minister to appeal his own reassessment.
19 I do not
say that the Minister cannot assess in the alternative. However, that was not
done here.
[23] Therefore I cannot change the basis of the assessment. There is no
reference to section 141.01 of the Act in the Reply nor did counsel for
the Respondent make any direct reference to this section in her argument.
Counsel for the Respondent relied on the decisions of this Court and the Court
of Appeal in Haggart v. The Queen, (2003 G.T.C. 739, [2003]
G.S.T.C. 71 and 2003 FCA 446, 2004 G.T.C. 1057, [2003] G.S.T.C. 174). In Haggart,
Haggart Construction Ltd. had been carrying on business in Fort McMurray,
Alberta until its bank called its loan. Mr. Haggart and his company
commenced a court action against the bank and were successful in receiving
damages. The issue in that case was whether Mr. Haggart (who had continued to
carry on the business as a sole proprietor after the company was forced to
cease carrying on business) could claim ITCs in relation to the GST paid on the
legal fees incurred in relation to the court action against the bank.
[24] Justice Little of this Court, in his decision in Haggart, stated
that:
15 Michael Taylor, counsel for the Respondent, argued that the Appellant
was not eligible for input tax credits for the following reasons:
1. The Court Action was not commenced in the course of commercial
activities but was a claim for compensation.
2. If the Court Action is found to be commenced in the course of
commercial activities, when the Court Action was commenced the commercial
activities were not those of the Appellant but were those of Construction which
is a separate legal entity.
3. If the Court Action were commenced in the course of commercial
activities and if you find them to be commercial activities of the Appellant,
the Minister's position is that no input tax credits can be claimed because the
legal services were not acquired for the purpose of making taxable supplies for
consideration.
[25] Although there is no reference to any sections of the Act, since
the language used in the third paragraph above is “because the legal services
were not acquired for the purpose of making taxable supplies for consideration”,
it seems clear that the Respondent in that case was, at least for one of the
basis of assessment, relying on the provisions of subsection 141.01(2) of the Act
since the words “for the purpose of making taxable supplies for consideration”
are found in this subsection and not in subsection 169(1) of the Act.
[26] Justice Little referred to a number of decisions that supported the
third point raised by Mr. Taylor, which would have been based on subsection
141.01(2) of the Act. In dismissing the appeal, Justice Little stated
that:
22 In considering the application of section 169 of the Act, I do not
believe it could be said that the Appellant commenced the Court Action or paid
the legal fees for the purpose of making or producing taxable supplies.
(emphasis added by Justice Little)
[27] It seems clear that because Justice Little placed emphasis on the words
“for the purpose of making or producing taxable supplies” that he was relying
on the provisions of subsection 141.01(2) of the Act to limit property
or services acquired for consumption or use in the course of commercial
activities to those acquired for the purpose of making taxable supplies, which
is the limitation imposed by subsection 141.01(2) of the Act.
[28] In dismissing the appeal from the decision of Justice Little, the
Federal Court of Appeal stated that:
2 Although the Applicant restarted his business as a sole proprietorship,
he has not established a connection, direct or indirect, between the purchase
of the legal services and any ongoing supply of taxable services. Hence, the
legal services were not purchased “in the course of commercial activities” of
the Applicant for the purpose of subsection 169(1) of the Excise Tax Act,
R.S.C. 1985, c. E-15, and, if subsection 140.01(2)* applies, the services were
not purchased “for the purpose of making taxable supplies in the course of that
endeavour”.
3 This conclusion is further supported by the fact that, in upholding the
award of damages made to the Applicant at trial, the Alberta Court of Appeal
stated that the damages were more accurately characterized as compensation for
the total destruction of the business, rather than for loss of profit: Haggart
Construction Ltd. v. Canadian Imperial Bank of Commerce, 1999 ABCA 180
(Alta. C.A.) at para. 5.
4 It is also clear that the basis of the award made by the Alberta courts
was the tort committed by the bank in 1989 when it wrongfully called in the
loan to the company. The subsequent ongoing loss of business income suffered by
Mr. Haggart and/or his company was simply the measure of the damages flowing
from the 1989 tort.
5 For these reasons the application will be dismissed with costs.
[29] The footnote reference was added by the publishers of the decision to
note that the reference to subsection 140.01(2)
should have been to subsection 141.01(2) of the Act. It is not
clear why the Federal Court of Appeal stated “if subsection [141.01(2)]
applies”. The basis for dismissing the appeal was that:
Although the Applicant restarted his business as a sole proprietorship,
he has not established a connection, direct or indirect, between the purchase
of the legal services and any ongoing supply of taxable services. Hence, the
legal services were not purchased “in the course of commercial activities” of
the Applicant for the purpose of subsection 169(1) of the Excise Tax Act
[30] The requirement imposed by subsection 141.01(2) of the Act was
an alternate basis for dismissing the appeal, if that section applied.
[31] At the commencement of the hearing, counsel for the Respondent brought
a motion to amend the Reply. Most of the amendments related to deletions of
assumptions but the Respondent did want to add a new basis. The Respondent was seeking
to add the following to the end of paragraph 18:
In the alternative, the appellant engaged in “financial services”.
Therefore, the ITCs were not connected to the production of taxable supplies.
[32] The proposed amendments did not include a reference to section 141.01
of the Act. When I indicated that if the Reply were to be amended to
reflect this new basis for the assessment, the hearing would have to be
adjourned to allow the Appellant time to understand this new basis (the
definition of financial service is not a simple short definition) and to
prepare for this new basis, counsel for the Respondent withdrew her request to
amend the Reply. In any event, the proposed amendments did not include any
reference to section 141.01 of the Act or any reference to any argument
that the property and services acquired in relation to the insurance litigation
were not acquired for the purpose of making taxable supplies for consideration.
There was also no explanation of how the Appellant was engaged in financial
services and counsel for the Respondent acknowledged that the proposed argument
related to these amendments was not based on paragraph (f.1) of the definition
of “financial service”.
[33] As a result, it seems to me that I have to determine whether the
Appellant can succeed as a result of the basis on which the Appellant was
assessed. The basis for the assessment of the Appellant (which is the same
basis for the denial of all of the ITCs) was that the property and services
acquired in relation to the insurance litigation were not acquired for
consumption, use or supply in the course of commercial activities of the
Appellant.
[34] It appears that the assumption in paragraph 14 j) of the Reply was
particularly important in assessing the Appellant. This assumption was that:
j)
after the sale of the property, the appellant was not engaged in any
business relating to commercial activities;
[35] The argument raised by counsel for the Respondent was that if there was
no business, there could be no commercial activity. However, commercial
activity, is defined in section 123 of the Act as follows:
“commercial activity” of a person means
(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) 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) 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)
[36] The making of a supply (which would include a lease or sale) of real
property (provided that it is not an exempt supply) will be a commercial
activity regardless of whether that supply was part of an activity that could
qualify as a business. As well activities that relate to the termination of
a commercial activity will be included as part of commercial activities. Subsection
141.1(3) of the Act provides as follows:
(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)
[37] Counsel for the Respondent argued that she had not been able to contact
the representative of the Appellant and therefore was unable to determine his
basis for the Appellant’s claims for ITCs. The agent for the Appellant is not a
lawyer and the provisions of the Act are complex. It also appears to me
that the Respondent knew that the property had been a commercial rental
property (see paragraph 14 d) of the Reply), the property had been destroyed by
fire (see paragraph 14 g) of the Reply), a new building was constructed (see
paragraph 14 h) of the Reply) and the Appellant was incurring legal fees to try
to recover an amount under the insurance policy (see paragraph 15 b)
of the Reply. It seems to me that with this knowledge the Respondent should have
reviewed the definitions of “commercial activity” (including paragraph (c) of
this definition) and “financial service” and the provisions of sections 141.1
and 141.01 of the Act.
[38] It is not clear whether the property was leased after it was rebuilt or
whether it was sold before it was leased. However, it does seem to me that the
commercial activity of leasing the property was terminated by the fire as the
fire destroyed the property. It also seems to me that the activities related to
the attempt to collect the amount under the insurance policy were done in
connection with the termination of that activity as the fire was the cause of
the termination of that activity. There is also a connection between the
insurance litigation and the commercial activity of selling the property as the
insurance proceeds would be used to rebuild the structure (or to now repay the
amounts borrowed to rebuild the structure).
[39] The Appellant was not assessed on the basis that the property and
services that it acquired in relation to the insurance litigation were acquired
by it for the purpose of receiving an additional amount under its insurance
policy (which would not be a taxable supply for the purposes of the Act and
in relation to which the Appellant would not be making any taxable supply for
the purposes of the Act) and therefore were not acquired by the
Appellant for the purpose of making taxable supplies (as required by
subsection 141.01(2) of the Act) as outlined above. If this would
have been the basis of the assessment of the Appellant or an alternative basis
of assessment, the Respondent would have been successful. The failure of the
Respondent to deny the ITCs on this basis, or as an alternative basis, means
that the Appellant will succeed in this case.
[40] As a result the appeals, in relation to the claim for ITCs for GST
incurred in relation to the property and services acquired in relation to the
insurance litigation, are allowed except that the GST in relation to the amount
paid for the engineering report should be $65.42 instead of $70. The Appellant
had received an invoice from the engineer for $2,615.44 (including GST) for his
report. The Appellant disputed the amount of the bill and a settlement was
reached. The Appellant paid $1,000 in total in full settlement of the claim by
the engineer for his work. The $1,000 included GST and therefore the amount of
GST that was included in the $1,000 amount was 7 / 107 x $1,000 = $65.42, not
7% of $1,000 since the GST was not paid in addition to the $1,000 but was paid
as part of the $1,000.
ITCs Related to the Roof Problem
[41] When the new building was constructed at 577 Gladstone Avenue after the
fire, the Appellant had problems with the roof. Sam Crupi stated that the roof
was leaking so he refused to make the final payment to the roofing contractor.
As a result, the roofing contractor filed a lien against the property. The
costs incurred in relation to the roofing problem are the legal fees and
engineering fees related to the problems with the leaking roof and the lien
that had been filed. It seems to me that these expenditures were for properties
and services that were connected to the commercial activity of selling the
property located at 577 Gladstone Avenue (which was clearly a commercial and not a residential
property). The lien would have to be removed if the property was to be sold.
The properties and services acquired by the Appellant in relation to the roof
problem were acquired by the Appellant for consumption or use in the course of
a commercial activity. Therefore the ITCs related to the acquisition of
property and services related to the roofing problem are allowed.
ITCs Related to the GST Appeal
[42] It seems to me that these would relate to the commercial activities of
the Appellant to the same extent as the Appellant is successful in this appeal,
since the basis of the assessment was limited to section 169 of the Act.
The amount claimed is only $35 and since as noted below, the Appellant is
entitled to approximately 90% of the ITCs claimed, the Appellant will be
allowed $31.50.
ITCs Related to Accounting Fees
[43] It appears that the accounting fees related to the preparation of the
income tax returns and financial statements for the company. The only source of
income for the Appellant during the period under appeal was investment income.
The Appellant’s argument was that the Appellant was involved in the commercial
activity of locating, buying, renovating and selling properties. However, in
the almost 25 years since the Appellant was incorporated, the Appellant only
acquired two properties and one of these was a residential property (the
leasing or sale of which would have been an exempt supply). The Appellant has
not, other than as noted above in relation to the commercial activity related
to the property located at 577 Gladstone
Avenue, established that the Appellant
was carrying on any commercial activity during the period under appeal.
[44] The Appellant has failed to establish the extent to which the
accounting services were acquired in connection with the commercial activity
related to the property located at 577
Gladstone Avenue and therefore the
Appellant cannot succeed in relation to this claim.
ITCs Related to the Use of the Automobile and Office
Expenses
[45] Sam Crupi stated that these ITCs relate to automobile expenses and
office expenses incurred in relation to the real estate activities of the
Appellant. These activities, as described by Sam Crupi, were the location,
purchase, renovation and sale of properties. Since, as noted above, the
Appellant, in almost 25 years, only acquired two properties (which were
acquired in 1985 and in either 1986 or 1987) and since one of these two
properties was a residential complex, the Appellant has failed to establish
that the Appellant was carrying on an ongoing commercial activity. No
connection was established between the acquisition of the properties and
services related to the automobile and the office and the commercial activity
related to the property located at 577
Gladstone Avenue. As a result the
Appellant cannot succeed in relation to this claim.
Conclusion
[46] The appeals are allowed, without costs, and the matter is referred back
to the Minister of National Revenue for reconsideration and reassessment on the
basis that the Appellant is entitled to claim the following input tax credits:
|
Reporting Period
|
Item
|
Amount of ITCs Allowed
|
|
1. July 1, 2006 to September 30, 2006
|
Insurance Litigation
|
$969.08
|
|
1. July 1, 2006 to September 30, 2006
|
Insurance Litigation
|
$56.83
|
|
Total for the First Reporting Period:
|
|
$1,025.91
|
|
|
|
|
|
2. October 1, 2006 to December 31, 2006
|
Insurance Litigation
|
$2,169.70
|
|
2. October 1, 2006 to December 31, 2006
|
Insurance Litigation
|
$122.20
|
|
2. October 1, 2006 to December 31, 2006
|
Insurance Litigation
|
$179.22
|
|
2. October 1, 2006 to December 31, 2006
|
Insurance Litigation
|
$8.19
|
|
2. October 1, 2006 to December 31, 2006
|
Insurance Litigation
|
$65.42
|
|
2. October 1, 2006 to December 31, 2006
|
Roof Problem
|
$21.00
|
|
Total for the Second Reporting Period:
|
|
$2,565.73
|
|
|
|
|
|
3. January 1, 2007 to March 31, 2007
|
Roof Problem
|
$123.72
|
|
3. January 1, 2007 to March 31, 2007
|
Roof Problem
|
$37.10
|
|
3. January 1, 2007 to March 31, 2007
|
Roof Problem
|
$70.00
|
|
3. January 1, 2007 to March 31, 2007
|
Roof Problem
|
$140.00
|
|
3. January 1, 2007 to March 31, 2007
|
Roof Problem
|
$266.28
|
|
3. January 1, 2007 to March 31, 2007
|
GST Appeal
|
$31.50
|
|
Total for the Third Reporting Period:
|
|
$668.60
|
|
|
|
|
|
5. July 1, 2007 to September 30, 2007
|
Roof Problem
|
$35.00
|
|
Total for the Fifth Reporting Period:
|
|
$35.00
|
|
|
|
|
|
Total ITCs allowed:
|
|
$4,295.24
|
[47] The appeal under
the Excise Tax Act from the notice of assessment dated September 19,
2007 is dismissed, without costs.
Signed at Halifax, Nova Scotia, this 17th day of February 2010.
“Wyman W. Webb”
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