Citation: 2009TCC591
Date: 20091118
Docket: 2008-2819(GST)I
BETWEEN:
FORESTECH INDUSTRIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The issue in this appeal is
whether the Appellant has satisfied the documentation requirements of
subsection 169(4) of the Excise Tax Act (the “ETA”) in relation
to the various input tax credits (“ITCs”) that the Appellant claimed in filing
its GST returns for the 29 reporting periods of the Appellant that ended during
the period from February 1, 1996 to April 30, 2003 (the “Period”). All of the
GST returns for these reporting periods were filed on August 18, 2005.
[2]
The Appellant was in the business
of logging and building logging roads in or around the sunshine coast of British Columbia.
The Appellant had four or five rock trucks from 1996 to 2000 or 2001. The
Appellant also had two or three excavators. The business of the Appellant
included trucking until 2000 or 2001 when the trucks were sold.
[3]
The Appellant did not file either
its income tax returns or its GST returns on a timely basis. The accountant for
the Appellant prepared the Appellant’s income tax returns for its 1996 to 2003
taxation years in 2005 and all of these were filed in 2005, before the GST
returns for the reporting periods of the Appellant that ended during the Period
were prepared.
[4]
The financial statements for the
Appellant for its taxations years ending
April 30, 1996 to and
including April 30, 2003 indicated the following amounts as its profit (or
loss) for each of these years:
|
Taxation Year
|
Revenue
|
Expenses
|
Profit (Loss)
|
|
1996
|
$31,696
|
$35,406
|
($3,710)
|
|
1997
|
$348,476
|
$348,476
|
0
|
|
1998
|
$361,487
|
$361,026
|
$461
|
|
1999
|
$445,541
|
$445,541
|
0
|
|
2000
|
$444,157
|
$444,157
|
0
|
|
2001
|
$329,261
|
$329,261
|
0
|
|
2002
|
$86,852
|
$86,852
|
0
|
|
2003
|
$484,252
|
$484,252
|
0
|
[5]
The accountant for the Appellant
stated that the reason why the expenses were exactly equal to the revenue for
several years was that he only claimed depreciation in an amount equal to the
amount of the profit that would have been realized if no depreciation would
have been claimed. Therefore only a portion of the depreciation that otherwise
could have been claimed was actually claimed to reduce the profit to nil. Since
capital cost allowance (“CCA”) is a discretionary deduction and a taxpayer is
entitled to claim an amount not exceeding the applicable percentage of the
unappreciated capital cost of the assets of the appropriate class, a taxpayer has the right
to claim only a portion (or none) of the CCA that the taxpayer would otherwise
be entitled to claim.
[6]
In preparing the income tax
returns for the taxation years from 1996 to 2003 the accountant determined the
expenses that had been incurred by reviewing the bank statements and canceled
cheques. The accountant indicated that he had received various documents from
the Appellant prior to preparing the income tax returns which would have
included various invoices and other documents. These documents were returned to
Wendy Smith (one of the two shareholders of the Appellant) following the
completion of the income tax returns.
[7]
After the income tax returns for
these taxation years were filed the accountant then prepared the GST returns
for the reporting periods of the Appellant that ended during the Period based
on the expenses as reported in the financial statements and the capital outlays
of the Appellant. The accountant stated that in calculating the amount of GST
that was payable by the Appellant he did not include any amount for expenses in
relation to which no GST would be payable (for example insurance premiums,
salaries or wages). No GST was included in relation to depreciation since the
GST payable in relation to the capital assets would have been included when the
GST was payable in relation to the acquisition of the capital assets, not when
depreciation was claimed. He also calculated the GST based on the cost
excluding provincial sales tax on those expenditures in relation to which
provincial sales tax was also applicable. The accountant also did not include GST
in relation to amounts payable to vendors whom the accountant knew were not
registered for GST purposes. Since the accountant practiced in the area he was
not only familiar with the various persons who were providing goods and
services to the Appellant but he was also the accountant for some of the major
suppliers of goods and services to the Appellant.
[8]
The total amount claimed as ITCs
for all of the reporting periods under appeal was $152,534.15. The Appellant,
based on the GST returns that were filed, was claiming a refund for each
reporting period except the last reporting period. The Appellant’s customers
included the Province of British Columbia and native bands who did not pay GST in relation to
the services provided to them. The total net refund as claimed for all 29
reporting periods was $7,001.07. When the GST returns were initially assessed
on July 14, 2006, input tax credits in the aggregate amount of $139,491.46 were
disallowed and therefore instead of receiving a refund of $7,001.07 for the entire
Period, the Appellant received a bill for $132,490.39 plus penalties and
interest. The initial assessment denied over 91% of the input tax credits that
had been claimed.
[9]
By notice of reassessment dated
June 2, 2008, additional ITCs of $9,790.04 were allowed and during the course
of the hearing the Respondent acknowledged that additional ITCs of $6,513.65
would be allowed. The revised amount of ITCs that have been denied is
$123,187.77, which is approximately 81% of the ITCs claimed by the Appellant.
[10]
A registrant is entitled to claim
input tax credits as provided in section 169 of the ETA. Subsection
169(1) of the ETA provides, in general, that a registrant is entitled to
an ITC based on the tax that is payable under the ETA in relation to
goods and services acquired by the registrant for consumption, use or supply in
commercial activities of the registrant and the extent to which such goods or
services were acquired for consumption, use or supply in the course of
commercial activities of the registrant. Subsection 169(4) of the ETA
imposes an additional documentation requirement that must be met in order to
claim an ITC.
[11]
In this case counsel for the
Respondent suggested during closing argument that the Respondent was not
accepting that the Appellant had incurred the expenses as claimed in its income
tax returns and hence was not accepting that these expenses had been incurred
for the purposes of the ETA. However, the Reply provides in part as
follows:
A. STATEMENT OF FACTS
…
2. With
respect to the facts alleged in the second unnumbered paragraph of the Notice
of Appeal:
a) he
states that the Minister of National Revenue (the “Minister”) disallowed Input
Tax Credits (“ITCs”) based on insufficient documentation to support the
Appellant's claim with respect to the Period;
…
7. In
determining the Appellant's liability for GST for the Period, the Minister made
the following assumptions of fact:
f)
at all material times, the Appellant provided supplies that were taxable
at the standard rate of 7% during the Period;
…
h) the Appellant arbitrarily
claimed ITCs for the Period based on its bank statements;
…
j) the Appellant did not
substantiate ITCs claimed of $129,701.42 with respect to its commercial
activities for the Period.
B. ISSUES TO BE DECIDED
8. The
issue is whether the Appellant was correctly denied ITCs claimed of $129,701.42
for the Period.
D. GROUNDS
RELIED ON AND RELIEF SOUGHT
10. He
respectfully submits that the Minister properly assessed the Appellant for net
GST, interest and penalties under sections 280, 296, and 298 of the Act
as the Appellant understated net tax by $129,701.42 respecting the Period.
11. He further submits that the Minister correctly disallowed ITCs
claimed of $129,701.42 on the basis that the amounts claimed were not
substantiated by supporting documentation, as required by subsection 169(4) of
the Act and the Input Tax Credit Information Regulations.
[12]
It seems to me that the only basis
for the denial of the ITCs was that the Respondent is alleging that the
Appellant did not comply with the documentation requirements of subsection
169(4) of the ETA. No assumptions were made that the Appellant did not
acquire the goods and services, in relation to which GST of $129,701.42 was
payable, for consumption or use in commercial activities of the Appellant or
that the amount of GST payable in relation to these goods and services was less
than $129,701.42.
[13]
Justice Rothstein, when he was a
Justice of the Federal Court of Appeal, in The Queen v. Anchor Pointe
Energy Ltd. 2003 DTC 5512 stated that:
[23] The pleading
of assumptions gives the Crown the powerful tool of shifting the onus to the
taxpayer to demolish the Minister's assumptions. The facts pleaded as
assumptions must be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[14]
If the Minister had assessed (or
reassessed) on the basis that the Appellant did not acquire the goods and
services in relation to which the Appellant claimed the ITCs, then the Minister
should have clearly stated this in the Reply. As well, since the auditor had
reviewed the financial statements of the Appellant, it would seem logical that
if the Minister would have had any concerns that the expenses as claimed had
not been incurred, then the Minister would have reassessed the Appellant under
the Income Tax Act to deny such expenses. Failing to do so, seems to me,
to suggest that the Minister has accepted that the expenses as claimed by the
Appellant were incurred by the Appellant.
[15]
Therefore, in my opinion, the
Respondent cannot, in closing arguments, raise the issue of whether the
expenses had been incurred by the Appellant for its taxation years from 1996 to
2003 and whether the Appellant had acquired the goods and services related to
these expenses for consumption or use in its commercial activities. In any
event, I am satisfied, based on the testimony of James Smith (the other
shareholder of the Appellant) and the accountant that, on a balance of
probabilities, the Appellant incurred the expenses as claimed for its taxation
years from 1996 to 2003 and that the Appellant had acquired the goods and
services related to these expenses for consumption or use in its commercial
activities. I am also satisfied that the Appellant acquired the capital assets,
in relation to which GST was payable and claimed as an ITC, for use in its
commercial activities.
[16]
The only issue in this appeal is
whether the Appellant has satisfied the documentation requirements of
subsection 169(4) of the ETA and the related regulations. Subsection
169(4) of the ETA provides, in part, as follows:
(4) A registrant may not claim an
input tax credit for a reporting period unless, before filing the return in
which the credit is claimed,
(a) the
registrant has obtained sufficient evidence in such form containing such
information as will enable the amount of the input tax credit to be determined,
including any such information as may be prescribed; and
[17]
The documentation requirements of
subsection 169(4) of the ETA and the Input Tax Credit Information
Regulations are mandatory (Systematix Technology Consultants Inc. v.
The Queen 2007 FCA 226, [2007] GSTC 74).
[18]
However, it seems to me that it is
important to examine what this subsection actually requires. In particular, the
subsection requires that the required documents must be obtained “before filing
the return in which the credit is claimed”.
[19]
In Sikora v. The Queen 2005
TCC 261, [2005] G.S.T.C. 90, Justice McArthur made the following comments:
11 To offset the rigid
enforcement of obtaining the "prescribed information", there is an
argument to be made that the phrase in subsection 169(4) "the registrant
has obtained sufficient evidence" could be interpreted as follows: as long
as the taxpayer has the information at the time the return is filed then that
is sufficient without the necessity of presenting "any such information as
may be prescribed".
12 The respected GST
author David Sherman supports this approach, stating the following in an
editorial comment after the decision in Owraki v. The Queen,
[1 [2004] G.S.T.C. 1, at
pages 1-5 and 1-6.]
...
Subsection 169(4) is often thought to require the registrant to produce the
document on audit or at the Tax Court hearing. However, as I have noted in previous
editorial comments, this is not technically what it requires. It requires only
that the registrant have the documentary evidence at the time of filing the
GST return. If a witness is credible, the Court can conclude that the
registrant had the documents at some point before filing the return, even if
they are no longer available. This position was accepted by the CCRA in a
Consent Judgment before the Tax Court when I presented this point to the
Department of Justice: see David Sherman, "Input Tax Credits Without
Documentation -- Sometimes the Impossible is Possible". GST &
Commodity Tax (Carswell), Vol. XIII, No. 9 (November 1999) pp. 65-67.
Owraki
was precisely such a case. The Appellants had a believable tale of having left
a briefcase, with all their financial records and supporting documents, in a
taxi in Iran. The Court accepted this evidence and concluded that the required
documentation for subsection 169(4) had been available at the time.
See also Dosanjh,
[2004] G.S.T.C. 47, where Justice Miller applied the same approach. It is
refreshing to see the Court taking this direction.
13 I
do not disagree with this approach, but the Appellant has not established that
he had the documentary evidence at the time of filing the return. He did not
accept the suggestion that it would be in his best interest to adjourn the
hearing to present his documentation.
[20]
In a subsequent commentary, David
Sherman corrected his comment that the person must have the required
documentation at the time of filing the GST return. He noted that the
subsection only requires that the necessary documentation must have been
obtained prior to filing the GST return.
[21]
In Dosanjh v. The Queen
2004 TCC 285, [2004] G.S.T.C. 47, Justice C. Miller stated that:
1. …. Apart from 2001, the
Minister did not allow Mr. Dosanjh any ITCs, reasoning that Mr. Dosanjh had not
sought any, and that he had not provided appropriate documents in prescribed
form to be entitled to claim any ITCs. At the outset, I wish to indicate my
concern with an approach that would rely on a taxpayer's reported income to assess
GST, yet completely ignore the taxpayer's reported expenses for purposes of
determining reasonable ITCs. The result is harsh. I do not suggest taxpayers
can blatantly ignore the rules -- obviously not. I do suggest however that
taxpayers might expect an element of reasonableness in the manner in which
their objections are handled, especially given "reasonableness" is a
concept sprinkled liberally throughout our tax legislation.
…
12 I
do not construe subsection 169(4) as a requirement for a taxpayer to have to
produce prescribed information to CCRA. It only requires that the "the
registrant has obtained [sic] sufficent evidence ...". The
requirement is for Mr. Dosanjh to have, at some point prior to claiming ITCs,
the necessary evidence. CCRA did not find fault with the expenses for income
tax purposes, and I accept Mr. Dosanjh's evidence that he incurred those
expenses. We are not talking about quantum -- we are only talking about whether
Mr. Dosanjh has satisfied the obligation to have obtained the necessary
prescribed information.
[22]
It is therefore necessary that the
Appellant must have obtained the required documentation at some time prior to
filing its GST returns in 2005. The documentation was not available at the time
of the audit and it appears that it was not available when the GST returns were
prepared and filed. The ITCs were calculated based on the expenses claimed and
the capital assets acquired, taking into account only the expenses on which GST
would be payable, the provincial sales tax that would be payable in relation to
certain expenditures and the vendors that were not registered for the purposes
of the ETA.
[23]
James Smith and the accountant for
the Appellant testified during the hearing. The shareholders of the Appellant
were married to each other but Wendy Smith left James Smith in May 2005. The
breakdown of the marriage was acrimonious. It appears that both individuals
moved out of the premises in which they were living in 2005. As well, in 2005,
his son died. Amidst this upheaval in their personal lives, it appears that the
various invoices and other documentation that they had in relation to the GST
payable for goods and services that were acquired by the Appellant during the
Period, were misplaced.
[24]
Wendy Smith did not testify at the
hearing. With the consent of the Respondent, her affidavit was filed. In this
affidavit Wendy Smith stated in part as follows:
7. Due
to my association in this matter, I can verify that during the period from 1996
to 2003, the company ([sic] Foretech Industries Ltd.) received purchase
invoices with GST charged and paid those invoices, and those invoices and other
records were given to David Bennington in order to prepare financial statements
and T2 tax returns. I can therefore verify those invoices were in existence as
of June of 2005.
[25]
In addition to the affidavit of
Wendy Smith the Appellant also filed copies of various cheques that were
written in 2000, 2001 and 2002. Several of these cheques referred to either
invoice numbers or account numbers on the front of the cheques. The cheques
were payable to various suppliers of goods and services to the Appellant. There
is no indication in this case that any suppliers were paid in cash. It appears
that all payments were made by cheque.
[26]
In Lesnick v. The
Queen 2008TCC522, I reviewed the decisions of the Supreme Court of Canada
in The Continental Insurance Company
v. Dalton Cartage Company Limited, [1982] 1 S.C.R. 164, and Hickman Motors Limited v.
The Queen, [1997] 2 S.C.R. 336, and of the House of Lords in the cases of In
re Doherty, [2008] UKHL 33, and In re B (Children), [2008] UKHL
35. The conclusion that I reached based on these decisions was that:
16.
It seems to me that these cases are consistent and the issue in a civil
case (which will include the current appeal) will be whether the evidence as
presented is sufficient to satisfy the trier of fact, on a balance of
probabilities, that the person who has the burden of proof has established what
is required of him or her. In analyzing the proof or evidence that has been
presented, the probability or improbability of the event that is in issue is a
factor that can be taken into account in this analysis. The more improbable the
event the stronger the evidence that would be required. Conversely it would
also seem to me that a person may be able to establish, on a balance of
probabilities, that a highly probable event occurred based on weaker evidence
than would be required to establish that an improbable event had occurred.
[27]
The Input Tax Credit
Information (GST/HST) Regulations provide, in general, that an invoice
issued by a supplier in respect of a taxable supply of goods or services will
satisfy the documentation requirements if it contains the following
information:
(a)
For supplies of less
than $30:
(i)
the name of the
supplier;
(ii)
the date of the
invoice;
(iii)
the total amount
payable;
(b)
For supplies of $30 or
more and less than $150:
(i)
the name and
registration number of the supplier;
(ii)
the information
referred to in (a)(ii) and (iii) above;
(iii)
the amount payable
under the ETA shown separately (with provincial sales tax, if applicable,
also being shown separately); and
(c)
For supplies of $150 or
more:
(i)
the information
referred to above;
(ii)
the recipient’s name;
(iii)
the terms of payment;
and
(iv)
a description of the
supply sufficient to identify it.
[28]
It seems to me that the
information described above is information that one would typically expect to
find in an invoice issued by a supplier. It also seems to me that it is a
highly probable event that suppliers, who were to be paid by cheque, would have
issued invoices that contained the information described above, before being
paid. Therefore I find that it was more likely than not that
the Appellant would have received an invoice from its suppliers prior to paying
such suppliers and that such invoice would have contained the required
information as set out above.
[29]
Counsel for the Respondent argued
that even if the Appellant had the required documentation prior to filing its
GST returns the Appellant should still not be entitled to its ITCs because it
did not prepare its GST returns using the required documentation. The method by
which the GST payable was determined was based on the financial statements that
had been prepared. However it seems to me that it should not matter how the amount
of ITCs are determined provided that the amount is correct. It seems to me that
in order for a registrant to claim an ITC:
1.
The amount of tax payable under
the ETA by the registrant for goods or services acquired by the
registrant for consumption, use or supply in commercial activities of the
registrant has to be determined; and
2. The registrant must have obtained
the required documentation prior to filing his, hers, or its return under the ETA
in which the ITC is claimed.
[30]
The fact that the registrant may
determine its ITCs based on documentation other than the required documentation
should not result in the registrant losing its ITCs if the registrant can
establish that the amount determined is correct and that the registrant had the
required documentation (even though the registrant did not use such
documentation in preparing its returns). Based on the position of counsel for
the Respondent, if a registrant were to receive invoices from a supplier that
complied with the documentation requirements and also monthly, quarterly or
annual summaries that did not satisfy the documentation requirements and the
registrant were to prepare its GST returns based on the monthly, quarterly or
annual summaries, counsel for the Respondent would presumably take the position
that such registrant would not be entitled to any ITCs if the invoices were
lost because the ITCs were determined by using the monthly, quarterly or annual
summaries that would not satisfy the documentation requirements. It does not
seem to me that this should be the correct result. If the registrant can
establish that the ITCs as claimed were correct in the amount as claimed then
it should not matter how that amount was determined so long as the registrant
had obtained the required documentation at some point prior to filing the GST
returns.
[31]
The Appellant, in this case, has
satisfied the onus on it to establish that it did have the required
documentation at some point prior to filing its GST returns. As a result the
appeal is allowed, with 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 the ITCs as claimed by the Appellant in its GST
returns that it filed for the reporting periods ending during the Period from
February 1, 1996 to April 30, 2003.
Signed at Winnipeg, Manitoba, this 18th day of November 2009.
“Wyman W. Webb”
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