Citation: 2009 TCC 95
Date: 20090212
Docket: 2006-3672(GST)I
BETWEEN:
JACK PAUWELS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Mogan D.J.
[1] This appeal is from
an assessment issued under the goods and services tax (“GST”) provisions of the
Excise Tax Act, R.S.C. 1985, chapter E-15. The period under appeal is
January 1, 2001 to December 31, 2004 covering four calendar years. At the
commencement of the hearing, the parties filed a Joint Book of Documents
containing 33 distinct documents each marked with a tab. Upon consent, the
documents were entered as exhibits numbered 1 to 33, respectively.
[2] Exhibits 1, 8, 15
and 23 are the Appellant’s T1 General income tax returns for the taxation years
2001, 2002, 2003 and 2004, respectively. In each of those four taxation years,
the Appellant reported at line 166 an amount identified on the return as
“commission income”. The four amounts were within the range of $147,000 to
$187,000. Because the amounts were so clearly identified on the income tax
returns as “commission income”, the Canada Revenue Agency (“CRA”) has assessed
GST on those amounts as commissions received for services rendered.
[3] The Appellant
claims that he received no commissions at all in the period under appeal. He
states that (i) he had a contract with a particular travel agency; (ii) as a
person with an academic background, he would plan and promote tours to foreign
locations of educational interest; (iii) the agency would provide all travel
arrangements for persons going on the tours; (iv) he would frequently conduct
the tour himself; and (v) he and the agency would share 50-50 as partners any
profit or loss realized on each tour. The Appellant’s basic claim is that the
amounts identified as “commission income” on his income tax returns were, in fact,
an accumulation of his share of net profits from the tours which he and the
agency operated in partnership during a particular year.
[4] In business
language, the issue is whether the Appellant was a commission salesman required
to collect and remit GST on his commissions earned, or whether he was a partner
in various transactions (i.e. tours) sharing a profit or loss depending on the
circumstances of each transaction.
[5] In statutory
language, the issue is determined by the GST legislation.
Subsection 123(1) contains many definitions but the following two are
basic:
123(1) In
section 121, this Part and Schedules V to X,
“supply” means, subject to sections 133
and 134, the provision of property or a service in any manner, including sale,
transfer, barter, exchange, license, rental, lease, gift or disposition;
“taxable supply” means a
supply that is made in the course of a commercial activity;
165(1) Subject to this Part, every recipient of a taxable
supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 7%
on the value of the consideration for the supply.
221(1) Every person who makes a taxable supply shall, as
agent of Her Majesty in right of Canada, collect the tax under Division II
payable by the recipient in respect of the supply.
Having regard to the above GST legislation, the issue is
whether the amounts in question were paid to the Appellant in respect of
taxable supplies made to the travel agency.
[6] The evidence and argument were presented on the basis
that, if the amounts in question were received by the Appellant as a partner of
the travel agency, there would be no obligation to collect or remit GST on such
amounts. Conversely, if the amounts in question were received by the Appellant
as commissions for services provided to the travel agency, he ought to have
collected and remitted GST on such amounts.
The Evidence
[7] The Appellant came to Canada from Belgium in 1969 at the age of 23. He is an
historian. Since coming to Canada, he has earned
a Ph.D. in history from York University, and
an M.A. and Ph.D. in political science from the University of Toronto. Over a period of years, he has taught history as a
teaching assistant at the following five Ontario universities: York, Toronto, Guelph,
Waterloo and Western. In circumstances
described below, he stopped teaching around 1990. He has written six history
books on subjects including World War II and the History of NATO Countries.
Most of his writing has been done since 1990.
[8] The Appellant’s brother, Norbert Pauwels, had started
a travel agency in Brantford, Ontario under the name “Pauwels Travel Bureau Limited”, herein
referred to as the “Travel Bureau”. During the 1970s, while the Appellant was a
student and teaching assistant, he worked part-time on salary for the Travel
Bureau. In the 1980s, the Appellant started to plan and organize tours to
foreign places of historical interest where he could be his own travel guide. Because
he had no license to operate as a travel agency, the Appellant asked his
brother to have the Travel Bureau provide all travel arrangements for persons
going on the tours which the Appellant was planning.
[9] The Appellant used his position as a teaching
assistant (history) to solicit students, teachers and others who might be
interested in seeing places of historical interest. He speaks English, Italian,
Spanish and Flemish (some Dutch and German). He also knows some Greek and Latin.
With his language skills, he can frequently be his own tour guide. He does not
plan any trips to the U.K. or Israel because
there are too many others offering trips/tours to those two countries. Also, he
does not plan any trips to destinations which offer only sand, surf and palm
trees. He is interested only in educational or cultural tours.
[10] When the Appellant started to plan and organize his own
tours in the 1980s, and asked his brother to have the Travel Bureau provide all
travel arrangements; he and his brother agreed that each tour would be a separate
venture or profit centre; and that the Appellant and the Travel Bureau would
share 50-50 the profit or loss resulting from each tour. Although there is no
written partnership agreement between the Appellant and the Travel Bureau, there
is an abundance of oral and documentary evidence to prove the 50‑50 sharing
of profit or loss. I will describe that evidence below starting at paragraph 16.
[11] During the 1970s and 1980s, the Appellant was working
either on graduate degrees or as a teaching assistant at various Ontario universities. In the 1980s, as a
sideline, he started to organize two or three historical tours each year using
his brother’s company, Travel Bureau, to provide travel arrangements. That is when
the 50-50 profit sharing started between the Appellant and Travel Bureau. At
the same time, he was developing a clientele among colleges, schools and persons
interested in historical tours.
[12] In 1990, the Appellant’s brother (Norbert) died. Norbert’s
widow, Bertha, did not have enough experience to manage Travel Bureau; and
their daughter, Sandra, was too young to manage it. Some Ontario universities were reducing staff
around 1990 and so the Appellant stopped teaching. He became more involved in
the operation of Travel Bureau but he did not acquire any ownership of it; nor
was he an officer or director of the company.
[13] Before 1990, the Appellant organized and conducted only
two or three tours per year. After 1990, when he had stopped teaching, the Appellant
organized and conducted six or seven tours per year. Also, he was expanding his
clientele among colleges and schools in Ontario; and he developed more contacts with hotels and bus lines in foreign
countries. From and after 1999, he has been organizing about 20 tours per year but
conducting only some of them. At all relevant times from the early 1980s until
2004 (the last calendar year under appeal), the Appellant has had the same
50-50 profit-sharing agreement with Travel Bureau. That agreement was not
affected by Norbert’s death in 1990 even though the Appellant became more
involved in Travel Bureau in the early 1990s.
[14] There were three witnesses who testified on behalf of
the Appellant: the Appellant himself, William Hyde and Sandra Pauwels. Mr. Hyde
is a chartered accountant in private practice who has prepared the corporate
financial statement (accountants’ comments) for the Travel Bureau since 1982.
He also prepares Travel Bureau’s statements for the International Association
of Travel Agents (“IATA”) and for the Travel Industry Council of Ontario
(“TICO”). Mr. Hyde has been preparing the Appellant’s income tax returns since
1991.
[15] Sandra Pauwels is now employed by Travel Bureau as its
manager. She started working there as a student in retail travel around 1983.
She attended a community college to study Tourism and Travel and then went back
to work for Travel Bureau until she had enough experience to become manager.
[16] Exhibit 21 is a three-page document which the Appellant
reviewed in Court. It shows how the 50-50 profit-sharing works. Each of the Appellant’s
tours has a separate account in the books and records of Travel Bureau because
each such tour is regarded as a profit centre. Exhibit 21 is the account for a
tour identified as “European Primavera”. It shows revenue of $123,599.46 and
expenses of $94,794.63 leaving a profit of $28,804.83. The profit is adjusted
down by $623.70 for a cash expense incurred by the Appellant (identified in the
documents as “Jack”) leaving a net profit of $28,181.13.
[17] The net profit in Exhibit 21 is allocated $14,090.57 to
the Appellant and the same amount to Travel Bureau as at June 30, 2003. Exhibit
16 is the Appellant’s own summary of his revenue for 2003. Under the heading
“Tour Commissions”, halfway down the list is an item “Primavera Bay of Biscay”
with the amount $14,090.57. This amount is the Appellant’s 50% profit from the
tour in Exhibit 21. The so-called “tour commissions” in Exhibit 16 have a total
of $169,551.09 less losses of $1,664.45 leaving a net amount of $167,886.64. The
Appellant has added book royalties and lecture fees of $2,300 for total revenue
of $170,186.64 in 2003.
[18] Exhibit 15 is a copy of the Appellant’s 2003 income tax
return. On page 2 of Exhibit 15, after line 130, there are five different kinds
of “self-employment income”: business, professional, commission, farming and
fishing. The Appellant has entered the amount $170,186.64 on line 166 as
“commission income” even though it contains small amounts of book royalties
($2,000) and lecture fees ($300). Counsel for the Respondent in
cross-examination and argument has seized upon line 166 as an admission by the Appellant
as to the character of his income. I have reservations on that point.
[19] In evidence, the Appellant pointed out that he shared
50-50 both the profits and the losses from tours which he organized. In Exhibit
16, the Appellant has listed four tour losses in the aggregate amount of
$1,664.45. A loss could occur in a number of ways but, frequently, it would be the
result of forfeited deposits. The Travel Bureau is required to pay a deposit to
reserve airline seats or hotel rooms. If an individual person drops out at the
last minute, or if there is political turmoil and the tour has to be cancelled,
all or part of the deposits may be forfeited. The Appellant is required to pay
50% of any such forfeiture on a trip that he has organized.
[20] The advertisements for the Appellant’s tours are in the
name Travel Bureau and do not disclose its 50-50 agreement with him. Only
Travel Bureau is licensed to operate as a travel agency and is a member of both
IATA and TICO. In special circumstances, the 50-50 agreement with Travel Bureau
would be adjusted. The Appellant gave two examples of this in Exhibit 2 which
is a list of his revenue for 2001. First, Exhibit 2 shows revenue of $5,636.89
from a tour identified as “Isabel Wilkes Italy Tour”. The Appellant explained
that any profit on an Isabel Wilkes tour would be split three ways: one-third to
him; one-third to Travel Bureau; and one-third to Michael Quinn who was not
otherwise identified. Second, Exhibit 2 shows revenue of $5,000 from a tour
identified as “Waterways of Russia”. The Appellant stated that his $5,000
amount was less than 50% of the profit because his contribution to this tour
was less than his normal contribution. He volunteered to receive the flat
amount of $5,000 being less than 50%.
[21] The second page of Exhibit 2 shows certain expenses
incurred by the Appellant in connection with the tours he organized in 2001. The
items printed in bold letters are amounts he shared 50-50 with Travel Bureau.
The items printed not in bold were paid 100% by himself. The last item was a
student language prize which he paid alone at a local school (near Brantford), but he paid it in the name of
Travel Bureau. He also paid Travel Bureau’s membership in the Toronto Belgian
Community Association.
[22] Exhibit 9 is a list of the Appellant’s revenues for
2002. Most of the amounts under the heading “Tour Commissions” are his 50% share
of profits under his agreement with Travel Bureau. Two amounts, however, are
flat payments of $5,000 with respect to tours called “Allen Toff Spain” and “Tunisia”. The Appellant volunteered to
receive these two flat amounts, less than his normal 50% because his
contribution to these two tours was less than normal. Also, his amount
$6,073.80 from the Isabel Wilkes France Tour was only one-third of the profit
because Michael Quinn received one-third.
[23] Exhibit 9 also shows the kind of losses, under the
50-50 agreement, which the Appellant is required to absorb. There are five loss
items totaling $3,471.20 and three of them are the result of cancelled tours.
Subtracting the five loss items from the 22 profitable tours left the Appellant
with “net commissions” of $155,470.32. The Appellant stated that the word
“commission” rolls off the tongue easily in the travel business because it
covers so many kinds of compensation.
[24] Under cross-examination, the Appellant acknowledged
that he prepared the “Revenue” documents himself at Exhibits 2, 9, 16 and 24
using the word “commission” to describe his net business income. He also
attached to his income tax returns a CRA form T2124 “Statement of Business
Activities” in order to show expenses which he paid himself but could not
charge to his 50-50 agreement with Travel Bureau. Each form T2124 did not show
the Appellant as having a partner in his business activities. In my view, it
was not relevant or necessary to show his 50-50 agreement with Travel Bureau on
the CRA forms T2124 because those forms were attached to the Appellant’s income
tax returns to show only his business expenses independent of Travel Bureau.
[25] Still under cross-examination, the Appellant described
each of his tours as an entity by itself. He referred to an ad hoc 50-50
partnership for each of his tours but emphasized that he was not an ongoing
50-50 partner of Travel Bureau in its business. His tours were advertised and
operated under the name Travel Bureau because it was a licensed travel agency
and a member of IATA and TICO. At the same time, his tours would never occur if
he did not have the academic contacts to solicit students, teachers, schools
and colleges who were interested in tours of historical interest. His
profession as a history teacher was the cornerstone of his tour ventures with
Travel Bureau.
[26] Mr. Hyde, the accountant, confirmed that Travel Bureau
set up a separate account for each of the Appellant’s tours; and that each tour
was regarded as a separate profit centre The Appellant maintained an open account
with Travel Bureau. His half share of profit from each of his tours was credited
to his open account. Similarly, a loss shown on any of his tours was divided;
and one-half was debited to his open account. From time to time, depending on
the credit balance in his account, Travel Bureau would issue a cheque to the Appellant.
[27] Mr. Hyde used Exhibit 32 as a good example of the Appellant’s
50‑50 agreement with Travel Bureau. A tour named “Oppel Sicily” showed a profit of $22,163.57 in
June 2004. That amount was divided 50-50 and $11,081.79 was credited to the Appellant’s
open account (Exhibit 33) with Travel Bureau. Also, in Exhibit 24, the Appellant
listed the same amount in his summary of 2004 revenue. Exhibit 24 shows only
one loss of $150 from a tour named “McGill Spain”. That loss of $150 can be seen in the trial balance
(Exhibit 28) of the Appellant’s open account for the period July 1, 2003 to
June 30, 2004. The amount $150 is a debit entry (May 13) on page 3 of Exhibit
28; and the “Oppel Sicily” profit of $11,081.79 is a credit
entry (June 24) on page 4.
[28] Mr. Hyde discussed Exhibit 17, the Statement of Income
and Retained Earnings of Travel Bureau for its fiscal periods ending June 30,
2003 and 2004. The 2004 revenue of $350,707 called “commissions” would include
all amounts allocated to Travel Bureau from its 50-50 tour agreement with the Appellant;
plus regular commissions from retail sales. Mr. Hyde said that “commission” is
a generic term used in the travel industry on a fast and loose basis.
[29] On page 2 of the Appellant’s income tax returns
(Exhibits 1, 8, 15 and 23), the Appellant’s self-employment income could have
been entered on line 162 as “business income” just as easily as on line 166 as
“commission income”. Mr. Hyde was more concerned to know that the income
tax returns made full disclosure of all amounts to determine net income. He identified
his letter of November 8, 2005 to CRA (Exhibit 29) concerning the Appellant,
and protesting that the Appellant made no application for GST registration. He
also stated that the GST returns shown at Exhibit 30 for the years under appeal
were filed under protest and were all late filed on November 8, 2005.
[30] Sandra Pauwels was the third witness to testify. She is
the current manager of Travel Bureau and described its two divisions: retail
and group travel. The retail division is primarily walk-in trade. The retail
staff are all on a base salary plus commissions. They would never be charged
back if a client complained and was compensated. In other words, the retail
staff are not at risk. Ms. Pauwels referred to Exhibit 14 as an example of a
tour that lost money when the Appellant (identified as “Jack”) had one-half of
the loss allocated to him.
[31] She said that the Appellant was valuable to Travel
Bureau because of his extensive education in history and his clients like the
Royal Ontario Museum, Art Gallery of Ontario,
and the alumni of various Ontario
universities. He could easily promote a tour with his historical knowledge and
academic clients. Ms. Pauwels said that, each summer, Travel Bureau has a
big picnic for its clients (up to 300 guests) and that the Appellant always
paid one-half of the cost because of his 50‑50 agreement with respect to
the tours he organized.
[32] Travel Bureau’s statement of income for 2001 and 2000
(Exhibit 3) was referred to Sandra Pauwels. She explained that the expense
called “commissions” ($6,469) was a total of amounts paid to third parties who
referred business, whereas commissions paid to employees are called “salaries”
($288,722). The amounts of profit allocated to the Appellant from his various tours
do not appear as “expenses” in Exhibit 3 because they are from profit centers
outside Travel Bureau’s ordinary business. Its share of profit from tours organized
by the Appellant is included in “commissions” ($482,380).
[33] Since 2001, Travel Bureau has developed agreements with
about eight other persons who organize tours like the Appellant. The agreement with
each such person is on a 50-50 basis like its agreement with the Appellant. Ms Pauwels
said that if Travel Bureau registered for GST its 50-50 agreement with the Appellant,
then it would have to register for GST its similar agreements with about eight
other persons.
[34] The testimony of William Hyde and Sandra Pauwels
corroborated the Appellant’s testimony; and the testimony of all three was, in substance,
corroborated by documentary exhibits. Even apart from the documents, the
evidence of all three witnesses was highly credible. The Respondent did not
call any witness.
Analysis
[35] In paragraph 7 of
the Reply to the Notice of Appeal, a significant fact assumed by the Minister
of National Revenue when making the assessment under appeal is stated as
follows:
7(a) at all material
times, the Appellant was a commissioned salesman for Pauwels Travel Bureau
Limited.
In paragraphs 4, 5 and 6 above, the
issue in this appeal is expressed as to whether the Appellant received the
amounts in question as commissions for services provided to Travel Bureau. For
the reasons set out below, I find that the Appellant was not, at any material
time, a commissioned salesman for Travel Bureau. On the positive side, I find
that the Appellant and Travel Bureau had a partnership with respect to the
historical and cultural tours which the Appellant organized.
[36] In argument, counsel
for both parties cited relevant case law in support of their respective
positions but, in my view, this case is determined primarily on its facts. The
relevant provisions of the Ontario Partnerships Act are as follows:
2. Partnership is
the relation that subsists between persons carrying on a business in common
with a view to profit, …
3. In determining
whether a partnership does or does not exist, regard shall be had to the
following rules:
1. …
2. …
3. The receipt by
a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but the receipt of such a share or
payment, contingent on or varying with the profits of a business, does not of
itself make him a partner in the business, and in particular,
(a) …
[37] An examination of
Exhibits 2, 9, 16 and 24 shows that the Appellant and Travel Bureau operated a significant
number of tours in each of the four calendar years under appeal. Set out in the
table below are the number of profitable tours and loss tours operated in each
year. Within the “loss tours” I have omitted small amounts forfeited as
deposits with respect to tours that never got off the ground.
|
|
No of Profit Tours
|
No. of Loss Tours
|
|
2001
|
16
|
nil
|
|
2002
|
22
|
2
|
|
2003
|
25
|
2
|
|
2004
|
31
|
nil
|
[38] The Appellant’s
share of profits each year from the tours shown in the table in paragraph 37
was in the range of $147,000 to $187,000. A similar amount of profit from the
same tours was earned by Travel Bureau. The number of tours operated by the Appellant
and Travel Bureau together, and the amount of profits derived from those tours
are very strong evidence that the Appellant and Travel Bureau were operating a
business in the period under appeal.
[39] The Appellant and
Sandra Pauwels testified under oath that they (the Appellant and Travel Bureau)
shared the profits from their business on a 50-50 basis. Numerous documentary
exhibits proved the 50-50 share of profits. Evidence from the Appellant’s three
witnesses, both oral and documentary, was not contradicted. And, as already
noted, they were very credible witnesses. With respect to the historical and
cultural tours organized by the Appellant, I find that he and Travel Bureau were
carrying on a business in common with a view to profit. In other words, I find
that there was a partnership.
[40] The prima facie evidence
of partnership which flows from profit-sharing (referred to in section 3 of the
Ontario Partnerships Act)
runs in favour of the Appellant. Also, his share of profit was not contingent
on there being a profit. Indeed, he shared in the losses.
[41] In my view, it is
unfortunate that the Appellant reported his share of profits as “commission
income” on line 166 of his income tax returns. Those amounts should have been
reported as “business income” on line 162. It appears to me that the persons at
CRA who issued the assessment under appeal were blinded by the word
“commission” in line 166. The appeal is allowed.
Signed at Ottawa, Canada, this 12th day of February, 2009.
“M.A. Mogan”
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