Citation: 2010 TCC 415
Date: 20100910
Docket: 2008-3200(GST)G
BETWEEN:
SOCIÉTÉ EN COMMANDITE SIGMA-LAMAQUE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1]
The appellant filed
a goods and services tax (GST) return for the period of November 2004 in which
it claimed an amount of $543,080.21 as GST paid in error, within the meaning of
subsection 261(1) of the Excise Tax Act (ETA), as well as an input tax
credit (ITC) for the same period in the amount of $472,379.67 for the GST deemed
to have been paid, within the meaning of subsection 169(1) and section 182 of
the ETA (see tax return for a total amount of $1,015,566.30, representing the
sum of the two amounts mentioned above as well as a small amount related to
other expenses, with the explanatory schedule of calculations, Exhibit A‑1,
tab 6, pages 205‑206).
[2]
In an assessment dated
July 9, 2008, the Minister of Revenue of Quebec, acting on behalf of the Minister
of National Revenue (Minister), allowed ITCs only for an amount of $37,344.95
and refused to reimburse any of the so-called tax paid in error (see Reply to
the Notice of Appeal, paragraphs 57, 68 and 69).
[3]
The appellant is
challenging the assessment on the ground that it is entitled to all the ITCs
claimed, as well as to a rebate of the tax paid in error.
Facts
[4]
On June 20, 2002, the
appellant and a company called "Les Services Financiers Caterpillar
Limitée" (Caterpillar) signed a lease agreement (lease) for
eight units of heavy equipment (Exhibit A‑1, tab 1). Under this lease,
Caterpillar (the lessor) agreed to lease the appellant (the lessee)
two hydraulic shovels and six trucks for a 60-month term, at the end of which the
appellant had the option of buying all of the units at a predetermined price of
US$1,618,328.80 (plus applicable taxes). The amount financed, 100% of the
purchase price at the time of the signature, was US$8,517,520.
[5]
For the duration of the
lease, the appellant agreed to pay Caterpillar rent on each unit in instalments
and according to the payment periods set out in each annex of the lease,
including all of the applicable federal and provincial taxes on the payments
(article 2.2 of the lease and the related annexes, Exhibit A‑1, tab 1,
page 9 and pages 26 to 68.12). Moreover, article 2.3 of the
lease provided that the obligations of both the lessor and the lessee could not
be affected by, among other things, insolvency or any bankruptcy proceeding by
or against the lessee. Thus, any payment or other amount payable by the lessee under
the lease was payable under any circumstances in accordance with the payments
set out in the annexes (Exhibit A‑1, tab 1, page 10). Under article 4.6
of the lease, the units remained movable property of the lessor, and article 4.7
provided that as long as the lessee was not in default on the payment, the
lessee had the right of possession and use of the units for the duration of the
lease, without impediment from the lessor. Under article 8.1, paragraph (e),
the lessee was in default if he stopped operating its business or filed a
proposal or gave notice of intent to file a proposal or brought proceedings
under any law regarding bankruptcy, reorganization, insolvency or making
arrangements. In the event of a default, the lessor could terminate the lease by
written notice to the lessee, who still remained liable under the lease. The
lessor then had the discretion to declare immediately payable the current value
of the balance due with respect to the units and recover any additional damages
and expenses incurred by the lessor because of the lessee's default and require
that the lessee return the units to the lessor (article 8.2). The lessor could
then sell the units and the proceeds of the sale could be used, among other
things, to pay the amount owing by the lessee, as well as the current value of the
balance owing, as liquidated damages (article 8.3).
[6]
Furthermore, article 13
provided that the lessor retained title to, and ownership of, the units as a
guarantee of the lessee's obligations and that the lessee's rights to peaceful
enjoyment and use of the units existed as long as the lessee was not in default.
The lease was governed by the laws of the province of Quebec (article 16).
[7]
The appellant (the
lessee) had agreed to obtain and remit to Caterpillar (the lessor) an irrevocable letter of guarantee in an amount of US$425,876 by which the lessor could, at any time if
the lessee failed to respect its obligations, demand payment of this letter of
guarantee (article 1.4 of the lease). This irrevocable letter of guarantee was issued by National Bank of Canada (Exhibit
A‑1, tab 2).
[8]
On October 1, 2003, the
appellant ceased its operations, and on January 15, 2004, filed a
notice of intention to make a proposal to its creditors under the Bankruptcy
and Insolvency Act (the BIA) (Exhibit A-1, tab 3, pages 82‑84).
[9]
On February 12, 2004,
Caterpillar, through its lawyers, asked the appellant to pay the amounts owing
to it and return the units (Exhibit A-1, tab 3, pages 83‑84),
and filed a requisition for a
writ of seizure before judgment
with the Superior Court of Quebec, on February 26, 2004 (Exhibit A‑1,
tab 3, pages 85 and following).
[10]
The appellant's
proposal, for which Raymond Chabot Inc. acted as trustee, was filed on June 7, 2004
(Exhibit A‑1, tab 3, pages 95 and following). By this proposal, the
appellant planned to sell all of its assets, through the trustee, to
Century Mining Corporation (Century) for approximately $25,826,416.
Century agreed to pay the appellant's creditors in cash or shares of Century, according
to the creditor's choice, up to a certain amount.
[11]
As for Caterpillar, it
made a first claim, for an amount of CAN$8,999,068.24 (Exhibit A‑1, tab 4,
pages 136-138). This claim was based on the balance of the monthly
payments set out in the annexes of the lease, to which was added the GST and QST
that would have been collected if the appellant had met its obligations under
the lease until it ended. This was clearly explained by Emmanuel Phaneuf, the
trustee in bankruptcy, with supporting documents.
[12]
Following this first
claim, Caterpillar cashed the letter of guarantee from the National Bank of
Canada for an amount of CAN$570,844.19 and sold the units that it had
taken back from the appellant to a company called Acton Construction Inc. (Acton),
for which Caterpillar received the net proceeds of the sale of CAN$7,560,597.42.
Caterpillar then filed an amended claim with the appellant's trustee, reducing
the initial amount claimed by the amount received from the bank on the letter
of guarantee and from Acton on the proceeds of the sale of the units. The amount
of the amended claim was now CAN$867,626.63 (Exhibit A‑1, tab 4,
pages 141‑142). Caterpillar apparently was paid by the trustee in
shares of Century and cash (Exhibit A‑1, tab 4, page 126 and page 129).
[13]
The trustee did not
intervene in the sale of the units by Caterpillar to Acton, and the sale was
made through an agent, who received a commission on the proceeds of the sale.
Acton paid GST on the purchase of the units (Exhibit A‑1, tab 5, pages 182-192).
[14]
Guylaine Dallaire, C.A., tax expert, testified as to why the
appellant had claimed an amount of GST paid in error. In her opinion,
Caterpillar was asking for the unpaid rent in addition to the GST and QST. However,
Caterpillar had taken possession of the equipment and the appellant was no
longer running a business. The amount claimed by Caterpillar was based on the
amount of rent that the appellant would have paid if it had completed the term of
the lease, but in reality, the claim was made in a context of a breach of
contract, and consequently no GST was payable. Now, the amount claimed by
Caterpillar included CAN$543,080.21 in GST, which is the amount that the
appellant is claiming from the Minister as GST paid in error within the meaning
of subsection 261(1) of the ETA.
[15]
Moreover, after
subtracting the GST paid in error, Ms. Dallaire considered the application
of section 182 of the ETA whereby a tax is deemed to be paid when an
amount is paid following the breach of a contract. This tax is deemed to be
included in the amount paid and corresponds to the amount claimed by the
appellant of CAN$472,379.67, which is also in dispute. Section 182 of the ETA
reads as follows:
Forfeiture,
extinguished debt, etc.
182. (1) For the purposes of this Part, where
at any time, as a consequence of the breach, modification or termination after
1990 of an agreement for the making of a taxable supply (other than a
zero-rated supply) of property or a service in Canada by a registrant to a
person, an amount is paid or forfeited to the registrant otherwise than as consideration
for the supply, or a debt or other obligation of the registrant is reduced
or extinguished without payment on account of the debt or obligation,
(a)
the person is deemed to have paid, at that time, an amount of consideration
for the supply equal to the amount determined by the formula
(A/B) × C
where
A is 100%,
B is
(i) if tax under subsection 165(2) was payable in respect of the
supply, the total of 100%, the rate set out in subsection 165(1) and the tax
rate for the participating province in which the supply was made, and
(ii) in any other case, the total of 100% and the rate set out in
subsection 165(1), and
C is the amount paid, forfeited or extinguished,
or by which the debt or obligation was reduced, as the case may be; and
(b)
the registrant is deemed to have collected, and the person is deemed to have
paid, at that time, all tax in respect of the supply that is calculated on that
consideration, which is deemed to be equal to
(i)
where tax under subsection 165(2) was payable in respect of the supply, the
total of the tax under that subsection and under subsection 165(1) calculated
on that consideration, and
(ii)
in any other case, tax under subsection 165(1) calculated on that
consideration.
[Emphasis
added.]
[16]
The Minister accepted
that the amount recovered by Caterpillar from the National Bank of Canada on
the letter of guarantee was subject to section 182. The Minister thus granted ITCs
to the appellant on this part only, and that is why ITCs of CAN$37,344.95 were
allowed in the assessment of July 9, 2008.
[17]
However, the Minister refused
to apply section 182 to the amount received by Caterpillar from Acton following
the sale of the units that had been leased. According to the Minister, the
amount paid by Acton apparently was not paid in the context of the breach of
the lease, but in the context of a sale of equipment between Caterpillar and Acton.
In regards to the tax paid in error, the Minister also refused to pay this
amount on the grounds that the appellant had not actually paid this tax.
Appellant's Submissions
[18]
The heart of the
dispute rests, according to counsel for the appellant, in the fact that Caterpillar's
claim was calculated erroneously. Indeed, Caterpillar should not have included GST
and QST in its proof of claim because there was no longer a taxable supply. Considering
the amount received on the letter of guarantee and the net proceeds of the sale
received from Acton, Caterpillar was fully compensated for the amounts owed to
it under the lease. In fact, the balance indicated in the amended claim of CAN$867,626.63,
corresponds to the sales taxes (GST and QST) claimed by Caterpillar. In other
words, if Caterpillar had not included these taxes in its claim, the appellant's
debt to it would have been fully paid by the letter of guarantee and the net
proceeds of the sale received from Acton. Hence, the appellant submits that it
paid these taxes (including the GST) in error, because these taxes were added
to the amount of the creditors' claims, for which Caterpillar received money
and shares from Century, the company that took over all of the appellant's
assets in exchange for assuming the debts owed to its creditors.
[19]
As for the tax deemed
paid under section 182 of the ETA, the appellant submits that it is not
necessary for its application that the appellant paid an amount to Caterpillar.
What counts is that Caterpillar was paid following the breach of the lease, and,
in this context, the GST is deemed to be included in the payment. As evidence
that the amount received from Acton was paid in the context of the breach of
the lease, the appellant argues that this amount reduced the appellant's debt towards
Caterpillar. Caterpillar had released the appellant. Regardless, the appellant
submits that the opening words in fine of subsection 182(1) (182 in
fine) applies since Caterpillar's obligation towards the appellant to
provide it with the equipment was set aside by the seizure. According to the
appellant, the value attributable to its use of Caterpillar's equipment was
quantified at CAN$7,560,597.42 under the amended claim. Accordingly, by
selling the units to Acton, Caterpillar deprived the appellant of its right to
full enjoyment in accordance with the lease, and thus reduced to CAN$7,560,597.42
its obligation under article 4.7 of the lease.
[20]
The appellant thus submits
that it had the right to claim ITCs on this deemed tax, which it estimates to
be CAN$472,379.67 (Exhibit A‑1, tab 6, p. 206).
Respondent's submissions
[21]
Regarding the
application of section 182 of the ETA, the respondent submits that Acton's
payment to Caterpillar was made for the sale of equipment, for which Acton paid
the GST. This payment was not made because of the breach of the lease, which is
evident because the trustee was not involved in the transaction. Section 182
does not apply when the payment is made in consideration of a supply, which is
the case here.
[22]
As for section 182 in
fine, the respondent submits that this applies to cases where the
registrant (Caterpillar) would have had a debt towards the appellant and the
appellant would have waived its debt following its non performance of its
obligations under the lease. According to the respondent, Caterpillar no longer
had any obligation towards the appellant once the appellant was in default, as Caterpillar
had the right, under the terms of the lease, to take back its units, which
belonged to it in any case.
[23]
As for the tax paid in
error, the respondent submits that there is no evidence that tax was paid.
There is no invoice to prove it. Moreover, there is no indication or
documentation that states that the shares of Century and the cash payment to Caterpillar
by the trustee was tax paid in error. This is purely the interpretation of the
appellant who, in performing certain calculations, considered that this could
be the case. The respondent submits that the evidence does not demonstrate that
the appellant actually paid the tax that it claims to have paid in error. This
cannot be deduced as the appellant is trying to do. The fact that the damages
claimed by Caterpillar were calculated in a certain way does not lead to the deduction,
after the fact, that the GST had to have been collected.
Analysis
[24]
The other relevant
provisions of the ETA read as follows:
General
rule for credits
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.
...
Rebate of payment made in error
261. (1) Where a person has paid an amount
(a) as or on account of, or
(b) that was taken into account as,
tax, net
tax, penalty, interest or other obligation under this Part in circumstances
where the amount was not payable or remittable by the person, whether the
amount was paid by mistake or otherwise, the Minister shall, subject to
subsections (2) and (3), pay a rebate of that amount to the person.
I – Rebate of GST
payment made in error: subsection 261(1) of the ETA
[25]
There does not seem to
be any dispute that the appellant did not have to pay GST on the amount of
Caterpillar's claim to the trustee in bankruptcy. Although the objections
officer admitted in his memorandum that Caterpillar had determined the current
value of the balance owing by the appellant as damages on the basis of the
amount of rent to be paid monthly, including the GST and QST, he was of the opinion
that there was no taxable supply provided to the appellant for which there
would have been taxes applicable under the ETA (see Memorandum on Objection, Exhibit A‑1, tab 13, page 240).
[26]
Accordingly, the
stumbling block does not lie in the fact that there was no tax payable, but in
the fact that the respondent does not acknowledge that the tax was paid, whereas
the appellant says that it paid this tax in error. Indeed, to be eligible for a
rebate, the appellant must establish that it actually paid this tax that should
not have been paid.
[27]
The appellant submits
that it paid it because the GST was included in determining the amount of Caterpillar's
claim, which it received in return for cash and shares of Century, who had acquired
all of the appellant's assets by assuming its debt.
[28]
Regardless whether
Caterpillar remitted the GST to the government (which it should have done if it
had really collected it),
that does not change the appellant's right to a rebate, if it can in fact prove
that it paid this tax in error to the supplier (Caterpillar here). As long as
it can prove that Caterpillar collected this tax in error and that it paid it, the
appellant is entitled to be reimbursed. Moreover, if Caterpillar had actually
remitted this tax to the government, it is not Caterpillar who could claim a rebate,
because it only remitted an amount collected as tax and paid by the appellant.
(See McDonell v. R, [2005] G.S.T.C. 134, at paragraphs 21‑34)
[29]
With regards to whether
Caterpillar collected the GST in error, I would tend to agree. Article 8.5
of the lease, which applies in case of default, reads as follows:
[Translation]
8.5
Remedies under this agreement for benefit of the
lessor should not be considered exclusive but cumulative and should be added to
any other remedy open to it at law or in equity; provided, however, that the
lessor shall not be authorized to recover an amount in damages higher than the
amount …that it could have earned over time from the full execution of the
lessee's obligations under the lease, including any fees, expenses and costs
incurred by the lessor to exercise its rights under this lease and any charges related
to a late payment, as provided in clause 2.2 of this agreement.
[30]
Thus, the lessor
(Caterpillar) was not authorized to recover an amount in damages higher than
the amount that it could have earned from the complete execution, over time, of
the obligations of the lessee (the appellant) under the lease. It seems clear
to me that these damages could not include GST since, had this tax been
collected normally, it would have been remitted to the government. In other
words, the GST cannot be added to the amount that Caterpillar could have earned
or received as profit if the lease had been executed in full.
[31]
The question raised now
is whether the appellant actually paid the GST that it is claiming under
subsection 261(1) of the ETA. The appellant cites the following articles of
the Civil Code of Québec (CCQ):
1553. Payment means not only the turning over of a sum of money in
satisfaction of an obligation, but also the actual performance of whatever
forms the object of the obligation.
1554. Every payment presupposes an obligation; what has been paid
where there is no obligation may be recovered.
Recovery is not
admitted, however, in the case of natural obligations that have been
voluntarily paid.
1555. Payment may be made by any person, even if he is a third
person with respect to the obligation; the creditor may be put in default by
the offer of a third person to perform the obligation in the name of the
debtor, provided the offer is made for the benefit of the debtor and not merely
to change creditors.
A creditor may
not be compelled to take payment from a third person, however, if he has an
interest in having the obligation performed by the debtor personally.
1556. A valid payment may only be made by a person having a right in
the thing due which entitles him to give it in payment.
However, payment
of a sum of money or of any other thing due that is consumed by use may not be
recovered against a creditor who has used it in good faith, even though it was
made by a person who was not authorized to make it.
...
1567. The
expenses attending payment are borne by the debtor.
1568. A debtor who pays his debt is entitled to an
acquittance and to the turning over of the original title of the obligation.
...
1604. Where
the creditor does not avail himself of the right to force the specific
performance of the contractual obligation of the debtor in cases which admit of
it, he is entitled either to the resolution of the contract, or to its
resiliation in the case of a contract of successive performance.
...
1607. The
creditor is entitled to damages for bodily, moral or material injury which is
an immediate and direct consequence of the debtor's default.
1608. The
obligation of the debtor to pay damages to the creditor is neither reduced nor
altered by the fact that the creditor receives a prestation from a third
person, as a result of the injury he has sustained, except so far as the third
person is subrogated to the rights of the creditor.
...
1611. The
damages due to the creditor compensate for the amount of the loss he has
sustained and the profit of which he has been deprived.
...
1613. In contractual matters, the debtor is liable only for damages
that were foreseen or foreseeable at the time the obligation was contracted,...
...
1622. A penal
clause is one by which the parties assess the anticipated damages by
stipulating that the debtor will suffer a penalty if he fails to perform his
obligation.
A creditor has the right to avail himself of a penal
clause instead of enforcing, in cases which admit of it, the specific
performance of the obligation; but in no case may he exact both the performance
and the penalty, unless the penalty has been stipulated for mere delay in the
performance of the obligation.
[32]
In this case,
Caterpillar made a claim for damages, calculated in accordance with the monthly
rent to be paid, to which it added the taxes to be collected. Everyone agrees
that no tax should have been collected on the damages claimed. However, Caterpillar
included this tax in the overall amount of the claim for which it received
shares of Century and cash, and it gave full release to the appellant from its
debts. Moreover, it seems as if the fees, expenses and costs incurred by Caterpillar
to exercise its rights under the lease and all of the charges related to the
late payments were considered separately under the heading "Repossession
Costs" (Exhibit A-1, tab 4, page 142).
[33]
In my view, the
appellant was right to submit that it paid this tax. If it had not been for
these amounts of tax that Caterpillar used to establish the amount of its
claim, Century, through the trustee, would not have had to pay Caterpillar in shares
and cash. This is clear from the evidence that shows that, without the amount
added for the taxes, Caterpillar had been fully compensated by the letter of
guarantee and the proceeds of the sale of the units to Acton.
Caterpillar enriched itself at the expense of the appellant, who transferred
its assets to Century, who then, by assuming the appellant's debts, enabled Caterpillar
to profit by giving it, through the trustee, cash and shares for a value
equivalent to the total amount of the tax added in the claim. Then Caterpillar gave
the appellant full release, thus recognizing that the appellant had paid its
debt. Now, this debt paid in cash and shares of Century by the trustee
corresponded to the GST and QST added to the amount of rent still to be
collected by Caterpillar. Caterpillar was not justified in collecting this tax
because it did not provide any taxable supply. Thus, I conclude that the
appellant was entitled to the rebate claimed under subsection 261(1) of the ETA.
II – Tax deemed paid: section 182 of the
ETA
[34]
The English version of
the introductory passage of subsection 182(1) of the ETA reads as follows:
Forfeiture, extinguished debt, etc.
182.(1) For the
purposes of this Part, where at any time, as a consequence of the breach,
modification or termination after 1990 of an agreement for the making of a
taxable supply (other than a zero-rated supply) of property or a service in
Canada by a registrant to a person, an amount is paid or
forfeited to the registrant otherwise than as consideration for the supply,
or a debt or other obligation of the registrant is reduced or extinguished
without payment on account of the debt or obligation,
[Emphasis
added.]
[35]
The Supreme Court of
Canada has propounded the general principles of interpretation, inter alia, in Canada
Trustco Mortgage Co. v. Canada, [2005] 2 S.C.R. 601, at page 610,
paragraph 10:
5.1 General Principles of Interpretation
It has been long established as a
matter of statutory interpretation that “the words of an Act are to be read in
their entire context and in their grammatical and ordinary sense harmoniously
with the scheme of the Act, the object of the Act, and the intention of
Parliament”: see 65302 British Columbia Ltd. v. Canada, [1999] 3
S.C.R. 804, at para. 50. The interpretation of a statutory provision must
be made according to a textual, contextual and purposive analysis to find a
meaning that is harmonious with the Act as a whole. When the words of a
provision are precise and unequivocal, the ordinary meaning of the words play a
dominant role in the interpretive process. On the other hand, where the words
can support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role. The relative effects of ordinary meaning, context and
purpose on the interpretive process may vary, but in all cases the court must
seek to read the provisions of an Act as a harmonious whole.
...
[36]
In view of the
language of the Act, section 182 of the ETA applies first if "as a
consequence of" (or "par suite" in the French version) the
breach of an agreement for the making of a taxable supply in Canada by a
registrant to a person, an amount is paid to the registrant otherwise than as
consideration for the supply. If the words of the Act are applied in the
present context, as a consequence of the breach of the lease of units from Caterpillar
to the appellant, an amount would have had to be paid to Caterpillar otherwise
than as consideration for these units.
[37]
In view of the wording
of the Act, I do not think that this part of section 182 of the ETA can be said
to apply to Acton's payment. Indeed, according to the Act,
it is true that anyone can pay the registrant (in this case, Caterpillar), but
on the condition that this payment is not made as consideration for the supply (the
units, in the case before us). By buying the units seized by Caterpillar, Acton
paid Caterpillar the asking price for disposing of these units. Acton paid the GST
itself when it bought these units. Although it was in consequence of the breach
of the lease that Caterpillar seized the units in question, Acton acquired
these units in a completely independent context, not in itself related to the
breach of the lease. Acton paid Caterpillar in consideration for the units it
acquired as part of its business operations.
[38]
The fact that the
payment Caterpillar received from Acton reduced the
appellant's debt to Caterpillar does not, in my view, change the fact that
section 182 does not apply. The debt was reduced in application of article 8.3
of the lease. If someone tied to the appellant, or having an interest in the
extinguishment of the appellant's debt, or obliged to make the payment, as was
the case with the National Bank, had paid the amount owed by the appellant under
the lease, section 182 could be used to claim that there was a deemed tax.
[39]
From what I understand,
section 182 applies to cases where the payment is an economic substitute of the
amount that should have been paid under the agreement (the lease in this case), whereby the
supplier who received the payment is required to remit to the government the
tax deemed to be included, which can then be claimed as an ITC. That is why
section 182 excludes any payment made as consideration for the supply,
since in that case, the GST is payable in addition to this payment and remitted
to the government by the registrant who collected it. Indeed, it would be illogical,
in my view, for a tax to be deemed included in Acton's
payment, when Acton should have paid this tax separately. If
the submission of the appellant were accepted, at the end of the day the tax would
be counted twice on the same supply for the same period. According to the
appellant's reasoning, since its debt consisting of residual rent to be paid
was reduced by the amount equivalent to the proceeds of the sale of the units
to Acton, Caterpillar should also remit to the government, in addition to the
tax collected from Acton, a deemed tax on the use that the appellant would have
made of these units had the lease not ended. This certainly could not be the intention
of Parliament. By accepting to release the appellant, Caterpillar acknowledged
having been compensated otherwise for the amount that it should have received
under the lease, since Acton provided this amount. However, Acton paid the GST when
acquiring these units, in a commercial activity. In my view, there cannot have
been payment to the registrant (Caterpillar) otherwise than as consideration
for the supply.
[40]
As for the appellant's argument
that section 182 in fine should apply on the grounds that an obligation of
Caterpillar would have been set aside without payment because of the seizure of
the units, I cannot agree.
[41]
Articles 1842 and 1850 CCQ
describe the lease as follows:
1842. Leasing is a contract by which a
person, the lessor, puts movable property at the disposal of another person,
the lessee, for a fixed term and in return for payment.
The lessor acquires the property that is the subject
of the leasing from a third person, at the demand and in accordance with the
instructions of the lessee.
Leasing may be entered into for business purposes
only.
...
1850. Upon termination of the contract of
leasing, the lessee is bound to return the property to the lessor unless, where
applicable, he has availed himself of the option to acquire it given to him by
the contract.
[42]
Under the lease,
Caterpillar was bound to allow the appellant to possess and use the units, as
long as the appellant made its payments. The lease agreement provided that, in
the event of default, Caterpillar had the right to terminate the lease and resume
possession of the units, which, moreover, always belonged to it (articles 4.6
and 8.2 of the lease). The right of the lessee (the appellant) to the enjoyment
and use of the units ended in the event of default (article 13 of the lease). As
a result, there could no longer be an obligation to put the units at the
disposal of the appellant once the appellant was in default.
[43]
In the context of article
1373 CCQ, the obligation is [Translation] "a legal relationship between two or
more persons by which one person,
called the debtor, is bound to render a prestation to another person, called
the creditor, and which consists in doing or not doing something, subject to a legal compulsion". Furthermore, article 1671 CCQ provides
that an obligation may be extinguished by release. In the context of article 1687
CCQ, release of a debt is [Translation] "the conventional act by which the creditor completely or partially
releases his debtor from his obligation".
[44]
Thus, a release or
reduction of the obligation without payment cannot be claimed here, because Caterpillar's
obligation towards the appellant simply no longer existed because the appellant
was in default. The appellant could no longer exercise any legal action against
Caterpillar. Caterpillar did not owe anything to the appellant and had no
obligation to the appellant once it was in default. The appellant, no longer
having right to the enjoyment and use of the units, could not extinguish with
respect to Caterpillar an obligation it did not have.
[45]
I conclude from this
that the appellant did not demonstrate that there was extinguishment without
payment as regards Caterpillar.
[46]
Furthermore, the
explanatory notes for Bill C-70 (S.C. 1997, c. 10), reproduced in Taxes
à la consommation, Législation annotée 2008, 17th edition (CCH), under the
heading, [Translation] "Archives
of explanatory notes", at pages 394 and 395, state the following:
[from the Explanatory Notes
published by Finance Canada, July 1997]
Bill C-70-HST (S.C. 1997, v. 10): Section
182 deals with the situation where, as a consequence of the breach, modification
or cancellation of an agreement for the making of a taxable supply by a
registrant, amounts are paid or forfeited by a person to the registrant
otherwise than as consideration for the supply. The section also deals with situations
where a debt or other obligation of a registrant to a person is reduced or
extinguished without payment on account of the debt or obligation. In both
cases, the registrant is treated as having made a taxable supply to the other
person and as having collected tax on the amount paid, forfeited, reduced or
extinguished. The person paying or forfeiting the amount is deemed to have paid
tax and, if a registrant, may be entitled to an input tax credit for that tax.
...
This amendment comes into force on April 1, 1997.
[from the Explanatory Notes
published by Finance Canada, December 1996]
Bill C-70 (S.C. 1997, c. 10): Section
182 deals with the situation where, as a consequence of the breach,
modification or cancellation of an agreement for the making of a taxable
supply, amounts are paid or forfeited by a person to a registrant otherwise
than as consideration for the supply. The section also deals with situations
where a debt or other obligation of a registrant to a person is reduced or
extinguished without payment on account of the debt or obligation. In both
cases, the registrant is treated as having made a taxable supply to the other
person and as having collected tax equal to 7/107ths of the amount paid,
forfeited, reduced or extinguished. The person paying or forfeiting the amount
is deemed to have paid tax and, if a registrant, may be entitled to an input
tax credit for that tax.
... That section applies tax to any amount that is paid or forfeited
or by which a debt or other obligation is reduced or extinguished as a
consequence of a breach, modification or termination of an agreement for a
taxable supply.
The amendment to the GST application rules ensures that section 182
applies with respect to such amounts paid, forfeited, reduced or extinguished after
1990, despite when the agreement for the supply was entered into. This
application rule is not necessary under the existing legislation because
existing subsection 182(1) deems a new supply to be made and the transitional rules
for the GST specify that the tax applies to any supply deemed to have been
made. In contrast, amended subsection 182(1) treats the amount paid or
forfeited, or by which a debt or obligation is reduced or extinguished, as
consideration for the original supply.
This amendment comes into force on April 24, 1996.
[47]
Accordingly, Parliament
refers to, among other things, the amounts applied to reduce or extinguish a
debt or another obligation as a consequence of the breach or termination of an
agreement for the making of a taxable supply. In this case, as a consequence of
the breach of the lease agreement, the lessor, Caterpillar, had no obligation to
put the equipment at the disposal of the lessee, the appellant. On the contrary,
Caterpillar now had the right to retake possession of its units that were
subject to the lease and the appellant no longer had any right to these units.
Thus, an amount of CAN$7,560,597.42 cannot be said to be applied to reduce
or extinguish Caterpillar's obligation to put this equipment at the disposal of
the appellant, as the appellant argues.
[48]
Last, for the
above-mentioned reasons, and after reading these explanatory notes, I cannot
conceive that Parliament intended that the tax would be deemed included when
this tax was paid separately by Acton.
[49]
In Johns-Manville
Canada Inc. v. R., 1985 CarswellNat at 666, [1985] 2 S.C.R. 46 a Supreme
Court case, Mr. Justice Estey cited a passage from Regent Oil Co. v. Strick
regarding "common sense":
21. This discussion of authorities takes one full
circle to the words of Lord Reid in Regent Oil Co. v. Strick, [1966] A.C. 295, at p. 313:
So it is not surprising that no one test or principle or
rule of thumb is paramount. The question is ultimately a question of law for
the court, but it is a question which must be answered in the light of all the
circumstances which it is reasonable to take into account, and the weight
which must be given to a particular circumstance in a particular case must
depend rather on common sense than on strict application of any single legal
principle.
(Emphasis added.)
[50]
I accept the respondent's
submission: section 182 in fine would be applicable in the event
that Caterpillar itself would have had an already existent debt or independent
obligation towards the appellant, for which there would have been compensation following
the appellant's breach of the agreement. That is not the case here.
[51]
For these reasons, I
would allow the appeal to allow the rebate of the tax paid in error in the
amount of $543,080.21, within the meaning of subsection 261(1) of the ETA. However,
the assessment does not change with respect to the ITCs claimed on the deemed
tax, within the meaning of subsection 169(1) and section 182 of the ETA.
The respondent does not have to pay ITCs beyond the amount allowed in the
assessment of July 9, 2008. Each party shall bear their own costs.
Signed at
Ottawa, Canada, this 10th day of September 2010.
"Lucie Lamarre"
Translation certified true
On this 24th day of November 2010
François Brunet, Revisor
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