Citation: 2009 TCC 180
Date: 20090504
Dockets: 2006-3036(GST)G,
2006-3037(GST)G,
2006-3038(GST)G, 2006-3039(GST)G,
2006-3040(GST)G, 2006-3041(GST)G,
2006-3042(GST)G, 2006-3043(GST)G,
2006-3044(GST)G
BETWEEN:
ROCKPORT DEVELOPMENTS INC., PINE GLEN
SUPPLY LTD.,
GOLDSBORO CONTRACTING LTD., C M J STORAGE LTD.,
ASA CONSTRUCTION COMPANY LTD.,
M R MARTIN CONSTRUCTION INC., THE BEND ELECTRIC LTD.,
CODIAC DRILLING & BORING LTD.,
ROBINSON CONSTRUCTION COMPANY LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
The present appeals
concern reassessments of tax under the Excise Tax Act (the "Act")
by the Minister of National Revenue (the “Minister”) for taxation periods from
January 1, 2001 to either December 31, 2003 or March 31, 2004, as the case may
be. Rockport Developments Inc. (Rockport), Pine Glen Supply Ltd. (Pine Glen),
Goldsboro Contracting Ltd. (Goldsboro), C M J Storage Ltd. (CMJ), ASA
Construction Company Ltd. (ASA), M R Martin Construction Inc. (Martin), The
Bend Electric Ltd. (Bend), Codiac Drilling & Boring Ltd. (Codiac) and
Robinson Construction Company Ltd. (Robinson), collectively referred to as the
appellants are appealing the Minister’s decision to assess, and to make
adjustments to the reporting and remittance of, Goods and Services Tax (GST)
and Harmonized Sales Tax (HST) for the aforementioned periods.
[2]
Robinson entered into a
contract with MRM Technical Group Inc. (now Exelon), an American firm which had
obtained a contract with Enbridge Gas New Brunswick Inc. (Enbridge) for the
development of a natural gas distribution system in New Brunswick. Robinson subcontracted some of the work and services
to its affiliated companies, namely the other appellants.
[3]
Robinson was involved
in the provision of construction labour and administrative services; Pine Glen
provided non-unionized labourers to Robinson, 031781 NB Ltd., CMJ, Codiac and Exelon;
Goldsboro provided construction labour and administrative services; CMJ was
involved in the rental of commercial properties; ASA provided pipe fitting and
welding services; Martin was involved in drilling for water and sewer lines;
Bend provided labour services; and Codiac was involved in drilling for water
and sewer lines.
[4]
Due to Enbridge’s
inability to obtain the necessary permits, there were delays of up to four months
beyond the required start date, which resulted in a substantial increase in
equipment lease and labour costs. As well, late design changes were made by
Enbridge, which resulted in extra costs for the various appellants,
particularly Robinson.
[5]
Robinson submitted
these extra costs to Exelon, which in turn presented them to Enbridge. Payment
of many of these extra costs was refused and, as a result, Robinson filed a
statement of claim against Exelon and Enbridge seeking payment. The claim was
for 3.25 million dollars plus costs but it was eventually settled for $545,000.
As a result, and due, obviously, to the significant reduction in the claim amount,
the other appellants, who were subcontractors for Robinson were unable to
receive payment for services rendered.
[6]
By notices of
reassessment and further notices of reassessment, the net tax amount was
confirmed but the Minister waived pursuant to subsections 281.1(1) and 281.1(2)
of the Excise Tax Act (the "Act") all penalties
and interest in excess of 4% of the tax not properly collected. The following
are the assessments under appeal:
|
Taxation Period
|
Net Tax
$
|
Interest
$
|
Penalty
$
|
Total
$
|
|
January 1, 2001 to December 31, 2003
|
|
|
|
|
|
Goldsboro
|
23,790.21
|
122.44
|
1,273.80
|
25,186.45
|
|
Martin
|
122,816.39
|
1,737.10
|
8,043.73
|
132,597.22
|
|
Pine Glen
|
23,954.62
|
0.00
|
1,092.40
|
25,047.02
|
|
Robinson
|
101,849.11
|
17,722.18
|
40,564.43
|
160,135.72
|
|
Rockport
|
35,413.32
|
12.00
|
1,642.49
|
37,067.31
|
|
January 1, 2001 to March 31, 2004
|
|
|
|
|
|
ASA
|
36,185.08
|
209.85
|
525.94
|
36,920.87
|
|
Bend
|
60,322.44
|
213.36
|
2,380.96
|
62,916.76
|
|
CMJ
|
39,408.01
|
(531.52)
|
1,941.21
|
40,817.70
|
|
Codiac
|
225,773.15
|
(649.83)
|
6,211.06
|
231,334.38
|
[7]
All appellants were GST
registrants who filed returns on a quarterly basis. The corporate structure of
the appellants is reproduced below. The relationship between the shareholders
is as follows: Jim Martin and Connie Martin are married; Jim is the son of
George and Shirley Martin; and Jim and Kim Martin are siblings.
[8]
At the beginning of the
trial, many of the points in dispute were admitted by the appellants. Following
are the issues raised in each appellant’s appeal with an indication of what is
still being disputed.
ASA
[9]
In computing its net
tax for the quarterly period ending March 31, 2004, ASA deducted an amount of
$14,088.05 representing the HST component of a receivable from Robinson for
services rendered to Robinson by ASA, and Robinson claimed input tax credits (ITCs)
in the same amount on account of the HST charged by ASA.
[10]
The issue is whether
ASA was entitled to an adjustment to net tax in relation to a bad debt arising
from supplies made to Robinson.
Bend
[11]
Bend charged Robinson $60,032 for labour
services for each of the periods ending December 31, 2001 and December 31, 2003,
and deducted from its net tax the amount of $9,004.87 for each period on
account of tax payable on a bad debt. In addition, Bend
did not collect HST totalling $36,426.03 with respect to services provided to
and received by Robinson, Codiac, 031781 NB Ltd. and Martin. Bend also overcollected HST in the amount of $788.42 and
overstated its ITC entitlement by $2,626.81.
[12]
The issues are:
a)
whether Bend is entitled to a net tax adjustment in relation to a
bad debt arising from supplies made to Robinson;
b)
whether Bend was required to collect HST on the supply of services
to the above-mentioned companies;
c)
whether Bend overcollected an amount of HST of $788.42 and whether
it overclaimed ITCs in the amount of $2,626.81.
Bend has informed the Court that paragraph c) above
is no longer in dispute.
CMJ
[13]
CMJ under-reported HST
by $12,833.36 with respect to transactions involving Bend, 031781 NB Ltd.,
Cross Creek Mini Homes Ltd. and Pine Glen and under-reported an additional
$76,668.59 in HST that should have been collected. CMJ received commercial
rental income but did not collect HST of $691.48 thereon, and failed to claim ITCs
in the amount of $54,946.12.
[14]
The issues with regard
to CMJ are:
a)
whether CMJ was
required to collect HST in the amount of $12,833.36 as a result of the supply
of services to the above-mentioned companies whose shareholders are Jim,
George, Connie and Shirley Martin;
b)
whether CMJ under-reported
additional HST in the amount of $76,668.59;
c)
whether CMJ failed to report
HST in the amount of $691.48 with respect to commercial rental income ?
d)
whether CMJ is entitled
to ITCs in excess of the amount allowed by the Minister.
CMJ has informed the Court that paragraphs b), c) and
d) above are no longer in dispute.
Codiac
[15]
Codiac under-reported
HST collectible by amounts of $40,361.09 and $1,444.82. It also, during the
period under appeal, understated its ITC entitlement by $74,730.45. Codiac
defaulted on lease payments to TD Asset Finance Corp., John Deere and G.E.
Capital (the lessors). Demand letters were sent to Codiac for payment of the
outstanding amounts, which did not include HST. The appellant paid the amounts
to the lessors and claimed ITCs in the amount of $103,344.59, but no such HST
amount had been paid. Finally, Codiac did not report HST in the amount of
$471.40 collectible with respect to a taxable benefit relating to an automobile
it provided to David Ross, an employee of Codiac.
[16]
The issues with regard
to Codiac are:
a)
whether Codiac underreported
HST in the amount of $41,805.91;
b)
whether Codiac is
entitled to ITCs in excess of the amount allowed by the Minister;
c)
whether Codiac is
entitled to ITCs in the amount of $103,344.59 with respect to payments made to
the lessors;
d)
whether Codiac under-reported
HST collectible in the amount of $471.40 with respect to the automobile benefit.
Codiac has informed the Court that paragraphs a), c)
and d) above are no longer in dispute.
Goldsboro
[17]
Goldsboro claimed a bad debt expense of $424.66 involving
Robinson and Codiac. It also provided services to 031781 NB Ltd., Codiac and
Martin between December 31, 2001 and December 31, 2003. The total taxable
amount of those services was $114,661.77, on which $17,199.27 in HST was payable,
but none was collected.
[18]
In addition, Goldsboro was required to collect an additional HST amount of
$5,256.83 and overclaimed ITCs in the amount of $910.
[19]
The issues with regard
to Goldsboro are:
a)
whether Goldsboro is entitled to an adjustment to net tax in relation
to a bad debt expense of $426.66 arising from supplies made to Robinson and
Codiac;
b)
whether Goldsboro was required to collect HST in the amount of
$17,199.27 on the supply of services to the Martin Group;
c)
whether Goldsboro was required to collect additional HST in the amount
of $5,256.83;
d)
whether Goldsboro overclaimed additional ITCs in the amount of $910.
Goldsboro has informed the Court that paragraphs c) and d) above are no longer in
dispute.
Martin
[20]
During the period under
appeal, Martin did not collect $102,791.92 in HST with respect to services it
provided to various companies. It also failed to collect additional HST of
$90,795.82. Martin underclaimed its ITCs by $78,365.68, but ITCs relating to
payments made to CitiCapital for leased drilling equipment were overstated by
$15,480.54.
[21]
The issues in Martin
are:
a)
whether Martin was
required to collect HST in the amount of $102,791.92 with respect to services
provided to the Martin Group;
b)
whether Martin was
required to collect an additional amount of HST of $90,795.82 during the period
under appeal;
c)
whether Martin was
entitled to ITCs in excess of the amount allowed by the Minister.
Martin has informed the Court that paragraphs b) and
c) above are no longer in dispute.
Pine Glen
[22]
Pine Glen under-reported
$23,411.91 in HST in relation to services provided to Robinson, 031781 NB Ltd.,
CMJ, Martin and Codiac, and overstated ITCs by a total of $541.36 .
[23]
The issues in Pine Glen
are:
a)
whether Pine Glen under-reported
HST collectible by the amount of $23,411.91 with respect to transactions
involving the Martin Group;
b)
whether Pine Glen
overstated its ITC entitlement by $541.36.
Pine Glen has informed the Court that paragraph b) above
is no longer in dispute.
Robinson
[24]
Robinson commenced its
lawsuit against Exelon and Enbridge in January 2002. Exelon counterclaimed
against Robinson for work not performed by the latter or not provided for in
the contract. Exelon, on February 7, 2002, issued a request to Robinson for a
refund of $1,431,037.60 ($1,244,380.52 + 15% HST of $186,657.08) with respect
to payments made to Robinson by Exelon and not billable to Enbridge. In
December 2003, Robinson claimed an ITC of $186,657.08 relating to the request
for refund made by Exelon, but did not pay any amount pursuant to that request.
[25]
In addition, Robinson
deducted for the period ending December 31, 2003, $440,984.14 worth of HST on
amounts that were not paid by Exelon. The HST component of bad debts for the
period ending December 31, 2003 was $369,897.18 ($440,984.14 – (545,000 x
15/115)), $545,000 being the settlement amount.
[26]
Robinson also wrote off
as the HST component of a bad debt an amount of $35,958.87 relating to an amount
not paid by Codiac and an amount of $2,159.30 relating to an amount not paid by
Marco Electric Ltd. (Marco). During the period under appeal, Jim Martin owned 50%
of the shares of Marco and the other 50% were owned by a person related to Jim Martin
as defined in the Income Tax Act.
[27]
Robinson also over-reported
HST by $679,115.03 and overstated its entitlement to ITCs by $176,163.93.
Finally, Robinson did not include in its February 2002 return HST of $554 collectible
with respect to a taxable benefit relating to an automobile provided to David
Ross, an employee of Robinson.
[28]
The issues with regard
to Robinson are:
a)
whether Robinson is
entitled to ITCs in the amount of $186,657.08 relating to a refund request made
by Exelon;
b)
whether Robinson is
entitled to deduct from net tax an amount in excess of the $369,897.18 allowed
by the Minister in relation to bad debt;
c)
whether Robinson is
entitled to deduct from net tax amounts of $35,958.87 and $2,159.30 owed to it
by Codiac and Marco respectively;
d)
whether Robinson is
entitled to claim ITCs in excess of the amount allowed by the Minister with
respect to the period under appeal;
e)
whether Robinson under-reported
HST in the amount of $554 collectible for the period ending February 28, 2002.
Robinson has informed the Court that paragraphs a), d)
and e) are no longer in dispute. As for paragraph b), Robinson agrees with the
amount of $369,897.18 but argues that the amount is not a bad debt.
[29]
Robinson, in its notice
of appeal, sought a face-to-face meeting with representatives of Justice Canada
to resolve these issues and requested that the interest and penalties be
overturned, that a guide be provided for taxpayers to help them understand how
penalties are applied, and finally, that there be a global settlement with the
Canada Revenue Agency covering all the related companies. The Court has no
jurisdiction to grant those kinds of relief.
Rockport
[30]
Rockport claimed a
deduction from net tax in respect of bad debt expenses in the amount of
$2,007.94 involving Robinson and Codiac . In addition, Rockport did not collect
HST in the amount of $27,814.81 on services rendered to Codiac, 031781 NB Ltd. and
Martin. It also under-reported HST in the amount of $3,281.85 which should have
been collected, and overstated its ITCs by $2,310.47.
[31]
The issues with regard
to Rockport are:
a)
whether Rockport is
entitled to a net tax adjustment in the amount of $2,007.94 in relation to bad
debt expenses arising from the provision of services to Robinson and Codiac;
b)
whether Rockport was
required to collect HST in the amount of $27,814.81 on the supply of services
to the Martin Group;
c)
whether Rockport was
required to collect additional HST in the amount of $3,281.85;
d)
whether Rockport
overstated its entitlement to ITCs by $2,310.47.
Rockport has informed the Court that paragraphs c) and
d) above are no longer in dispute, thus leaving a) and b).
[32]
The construction project
was known as the Enbridge/New Brunswick gas distribution project and Exelon was
awarded four of the seven contracts the project required in both Moncton and Fredericton. The arrangement Robinson had with Exelon was that
the latter was to assist in training and provide the rental of specialized
tools and Robinson was hired as a subcontractor to do construction work. Once
the training was completed, Exelon was only involved in the paperwork. The services
were paid for on a per-unit-of-construction basis pursuant to the Exelon/Enbridge prime contract. Exelon kept 10% of the payment as compensation
for training services and equipment rental and Robinson was paid the remaining
90%. According to James Martin, Robinson was to be paid weekly, as it was not
financially capable of covering the costs of such a project, and Exelon was
comfortable with that arrangement.
[33]
Robinson made progress payment
every week and submitted them to Exelon. A representative from Exelon was present
on a weekly basis and served as liaison with Enbridge. The project was delayed
for lack of proper permits, and Enbridge and Exelon were very demanding.
Robinson was expected to begin work on all four contracts or projects at the
same time (two in Fredericton and two in Moncton),
with the result that there was a lot of standby time.
[34]
The project finally got
underway in September of 2000 and many people were put to work. Payment
certificates were being forwarded but disputes arose regarding some
measurements and not all payments were being made. In addition to the 10% kept
by Exelon, a further 15% was kept as holdback. By December 2000, Robinson’s
expenditures were up to two million dollars and it did not have the financial
means to cover this amount. Suppliers were not being paid and Robinson was
being sued by them. It nevertheless completed the work during the winter and
spring of 2001 and began the process of suing Exelon and Enbridge for payment.
At that point, Robinson had payment certificates totalling the $3.25 million it
eventually sued for.
[35]
During construction,
Robinson’s employees doubled in number, with over 100 skilled workers being
employed. The regular bookkeeper had left the year before and was replaced by
James Martin’s sister. The demands on her were overwhelming and David Ross was
hired in December 2000. The situation for the appellants was, in James Martin’s
own words, "disorganized at best".
[36]
David Ross is a
chartered accountant. His main responsibilities when hired consisted of
collecting major accounts and maintaining good relations with the bank,
suppliers and key customers. He quickly became aware of the difficulties Robinson
was experiencing with Enbridge, which was refusing to accept certain extra
costs. A meeting was held in Fredericton on December 13, 2000 with a representative
from each of Enbridge and Exelon to review the major issues such as delays and
the extra winter costs caused by the delays in starting work on the project.
Enbridge was pushing for the work to proceed quickly and said it would discuss these
outstanding issues later.
[37]
In order for Robinson
to be paid by Exelon, Enbridge had to approve and sign the Daily Progress
Report (DPR) that Exelon produced using Robinson’s payment claim sheets.
Enbridge also requested that Robinson provide invoices so that Enbridge could
claim ITCs. The payment claims were reviewed by one Brad Olsen of Exelon and if
approved by him they were forwarded to Enbridge.
[38]
In January, Exelon
began returning claim packages to Robinson insisting on changes or chargebacks
that actually came from Enbridge. They were, in fact, reductions in approved
quantities. According to Mr. Ross, the amounts charged for the provision of
services were those listed on a price agreement sheet and the claims submitted
by Kim Martin on behalf of Robinson were made accordingly. Exelon would
add its 10% to the pricing and submit the claim to Enbridge. Enbridge replied
to Exelon, and Exelon to Robinson. Mr. Ross found that the way in which things
were done was rather unique in that Enbridge did not rely on independent
professionals such as engineers in reviewing the billings. If Enbridge
disagreed with a claim, it would put it aside to be dealt with later. Enbridge,
he found, was very difficult to deal with.
[39]
The other appellants
all became affected financially as a result. Some were operating construction
companies, some were satellite manpower companies offering special skills, and
others, such as Codiac, were hired as subcontractors for specific purposes such
as reducing the risk associated with horizontal directional drilling. All these
appellants were billing Robinson for their services as independent entities,
and as the project moved along all the appellants encountered serious cash flow
problems and had difficulties remitting the tax on those billings. They were able
to partially resolve that problem in that one of the appellants would bill
Robinson. Robinson would claim the ITC on that billing. The local tax office
would call Robinson saying it had a tax refund cheque for Robinson but that
there were also taxes payable by one of the other appellants. The local tax
office used Robinson's refund cheque to pay the other appellants’ tax owing. In
other words, Robinson was using its ITCs to pay the other appellants' tax.
[40]
In early 2001, Mr. Ross
recognized the financial difficulties which the non-payment of HST by the
appellants caused with respect to the payment of operating expenses by Robinson
and suggested as a solution that Exelon be viewed as the only customer for all
the appellants and that Robinson ultimately bill Exelon. The process was
changed immediately in that some of the appellants stopped billing Robinson for
their work so that the HST did not need to be reported and remitted by them.
The assessments against these appellants now reflect the unremitted HST, but
the appellants are arguing that the corresponding ITCs should be considered in
the calculation of net tax for assessment purposes. In other words, the
question is whether the auditor should have credited input tax credits to these
appellants. It is the respondent’s position that since none of the appellants
charged or paid tax on the supplies made to the recipients, ITCs cannot be credited
to the recipients of the supplies in calculating net tax. The respondent also raised
the fact that the appellants are not closely related corporations.
[41]
The facts and
circumstances of these appeals give rise to three main issues, which are as
follows:
1. In the appellant
Robinson’s appeal, there is no dispute that tax is due and owing. The question
is: when did the tax become payable? Robinson submits that the invoice was
created in 2005 at the time of the settlement. The respondent submits that it
was created in 2001. The answer to this question will affect the amount of
interest and the penalty that can be assessed against the appellant Robinson.
2. Can Goldsboro,
Robinson, Rockport, ASA and Bend be allowed a deduction for bad debt
pursuant to section 231 of the Act? Should they be considered to be related
pursuant to subparagraphs 251(2)(c)(ii) and (iii) of the Income Tax
Act and as such to be dealing with each other at arm’s length?
3. Are the appellants Goldsboro, Martin, Pine Glen, Rockport, Bend and Codiac closely related and should the auditor
have allowed them ITCs?
[42]
Issue number one has to
do with the unpaid extra charges and other charges based on the daily progress
reports that Enbridge had put aside to be dealt with later. Invoices for these items
were actually prepared when it became necessary for Robinson to crystallize its
claim against Enbridge and Exelon so that a notice of lien could be filed.
Robinson had filed a mechanic’s lien to collect what it was owed, but had to
abandon that avenue since a lien could not be had on public property. The
procedure was then reduced to a regular action for non-payment. A list of the
outstanding invoices is found in Exhibit A-3.
[43]
According to Robinson’s
general ledger entries for December 31, 2003, the debt had not been
written off as of that date and was still on the books as accrued settlement
receivables because Robinson felt that some of this money was recoverable.
Entries were made by Mr. Ross to indicate the debt had been written off, but as
an effort to recover was ongoing, the amounts owed were also termed receivables
for the purposes of the claim of lien. The auditor concluded that the amounts
were not written off since they still appeared in the books as receivables and
therefore are not considered a bad debt.
[44]
The ITC in respect of
the settlement amount receivable was eventually allowed by Appeals, but at the
time of the audit the claim was still before the courts. The issue is therefore
not the amount of the ITC but the interest and penalty amounts that accrued on
the ITC, and they depend on when the actual value of the bad debt can be
ascertained or, put differently, on whether the consideration for the taxable
supply was due at the time of the settlement or at the time the daily progress reports
and so-called invoices were made.
[45]
The respondent’s
position is that the invoices are all listed in Exhibit A-3 and identified as being
outstanding invoices as of September 28, 2001. In addition, they were listed in
Robinson’s books and records and, accordingly, the tax was due and payable on
the day these invoices were issued.
[46]
The appellants’
position is that a request or application for payment is not an invoice as
contemplated in subsection 152(1) of the Act, for that request must
first be approved by the recipient for an invoice to be created. The appellants
therefore argue that the invoice for the services and materials provided to
both Enbridge and Exelon was only created in 2005 when the settlement was reached.
That is the moment in time that there was actual approval. They further submit
that the mere creation of a document to quantify one’s claim of lien does not
constitute an invoice as contemplated in subsection 152(1).
[47]
The date of the invoice
determines tax liability. In that regard, sections 152 and 168 of the Act
are of assistance. Section 182 may also be of assistance in this fact situation
because the court settlement establishes the value of the consideration and the
date on which it was determined.
[48]
Subsections 152(1) and
168(1) read as follows
152.(1) When consideration due – For the
purposes of this Part, the consideration, or a part thereof, for a taxable
supply shall be deemed to become due on the earliest of
(a) the earlier of the day the supplier first issues an
invoice in respect of the supply for that consideration or part and the
date of that invoice,
(b) the day the supplier would have, but for an undue delay,
issued an invoice in respect of the supply for that consideration or part, and
(c) the day the recipient is required to pay that
consideration or part to the supplier pursuant to an agreement in writing.
. . .
[Emphasis added.]
168.(1) General rule – Tax under this
Division in respect of a taxable supply is payable by the recipient on the
earlier of the day the consideration for the supply is paid and the day the
consideration for the supply becomes due.
[49]
Subsection 123(1) of
the Act defines an invoice as follows:
“invoice” includes a statement of
account, a bill and any other similar record, regardless of its form or
characteristics, and a cash register slip or receipt.
[50]
Tax liability is
determined by the date on which the consideration is due. Subsection 152(1)
establishes when the consideration is due. It should therefore follow that subsection
152(1) assumes that a valid and an agreed upon consideration exists such that,
if the value of the consideration is contested or disputed, the consideration cannot
be said to be valid and agreed upon. In the present fact situation, the so-called
invoices all represent extra charges and other charges based on the daily
progress reports that Enbridge and Exelon refused to recognize and accept for
all kinds of, reasons including their not having been approved by Enbridge. All
these requests for payment were specifically set aside by Enbridge to be dealt
with at a later date. The refusal of Enbridge and Exelon to pay these extra
charges and other expenses forced Robinson to file a claim for lien under the New Brunswick Mechanics' Lien Act, and invoices were prepared in order for Robinson to
meet the requirements of that Act and be able to quantify its claim. Only those
contested amounts were not paid by Enbridge and Exelon, and this was on a
contract whose value was almost 12 million dollars.
[51]
In the settlement
agreement dated April 29, 2005, the appellants, Exelon and Enbridge agreed that
Exelon would pay Robinson the sum of $545,000 "in full settlement" of
all amounts allegedly owing to Robinson by Exelon. The parties agreed that the
work had been completed and the only remaining issue was putting a pecuniary
value on that supply. The preamble to that 2005 agreement states that the work
under the contracts has been completed and that a dispute has arisen between
Robinson and Exelon as to the amounts owed to Robinson for work performed under
the contracts. It therefore follows, in my opinion, that although invoices may
have been tendered to Exelon, the exact value of the consideration had not been
determined prior to this second agreement. The value of the consideration was
in dispute from the time the requests for payment were made and the invoices
were issued. It was therefore impossible to establish the tax owing until the
exact amount of the consideration was ascertained, which is what the settlement
agreement did.
[52]
In Douglas (K.S.) v.
Canada, [1996] G.S.T.C. 39, Judge Hamlyn's view on the effect of subsection
168(1) and subsection 168(6) is that until the final amount is ascertained and
as long as contractual disputes remain unresolved, ITCs cannot be claimed. Paragraph
168(6)(b) reiterates that the tax becomes payable on the day the
consideration becomes ascertainable. As long as there is any uncertainty by reason
of a contractual dispute, tax cannot be payable because the amount owing under
the contract has not been determined. Section 168(6) reads as follows:
Value not ascertainable — Where under subsection (3) or (5) tax is payable on a
day and the value of the consideration,
or any part thereof, for the taxable supply is not
ascertainable on that day,
(a) tax calculated on
the value of the consideration or part, as the case may be, that is
ascertainable on that day is payable on that day; and
(b) tax calculated on the value of the consideration
or part, as the case may be, that is not ascertainable on that day is payable
on the day the value becomes ascertainable.
[53]
It is fair to say that
it is not the legislator's intention to collect tax under the Act on an
amount of consideration which has been subsequently reduced. Paragraph 232(2)
of the Act appears to address this issue.
Adjustment [reduction of consideration] — Where a particular person has charged to,
or collected from, another person tax under Division II
calculated on the consideration or a
part thereof for a supply and, for any
reason, the consideration or part
is subsequently reduced, the particular person may, in or
within four years after the end of the reporting period of
the particular person in which the consideration was so
reduced,
(a) where
tax calculated on the consideration or part
was charged but not collected, adjust the amount of tax charged by
subtracting the portion of the tax that was
calculated on the amount by which the consideration or part
was so reduced; and
(b) where the tax calculated on the consideration or part
was collected, refund or credit to that other person the portion of
the tax that was
calculated on the amount by which the consideration or part
was so reduced.
[54]
The agreement of April
2005 makes it clear that the value of the consideration had not been agreed
upon prior to that time. It is clear from the evidence that the amount of the
consideration was disputed by the parties from the moment work began and the
alleged invoices were issued. The value of the consideration on which tax was
collectible under the contract between Robinson and Exelon was ascertained on
April 29, 2005 by an agreement in writing as contemplated in paragraph
152(1)(c) of the Act, and was therefore due and payable on that
day.
Bad Debts
As we know from the evidence, Robinson subcontracted
work under its contract with Exelon to other companies of the Martin Group, and
sometimes companies within the Martin Group provided services to other
companies within the Group. It has also been established and admitted by the
parties that the appellants are in fact related, as shown by the share ownership
and structure described at paragraph 7 of these reasons. Once it is established
that the appellants are related, subsection 126(1) of the Act,
which states that related persons shall be deemed not to deal with each other
at arm's length, comes into play.
[55]
The appellants
Robinson, Bend, Rockport, Goldsboro and ASA sought to deduct from their net
tax the HST component of the bad debts owed them by other members of the
related group. The respondent's position — and I believe it to be right — is
that the deduction is not available to these appellants because a deduction for
bad debt is only available in the case of a supplier and a recipient who deal with
each other at arm's length. Subsection 231(1) of the Act reads as follows:
Bad debt —
deduction from net tax — If a supplier has made a taxable supply (other
than a zero-rated supply) for consideration to a recipient with whom
the supplier was dealing
at arm's length, it is
established that all or a part of the total of the consideration and tax payable in respect
of the supply has become a bad debt and the supplier at any time
writes off the bad debt in the supplier's books of
account, the reporting entity for
the supply may, in determining the reporting entity's net
tax for the reporting period that
includes that time or for a subsequent reporting period,
deduct the amount determined by
the formula
A x B/C
where
A is the tax in respect of the supply;
B is the total of the consideration, tax and applicable
provincial tax remaining unpaid
in respect of the supply that was written off at that
time as a bad debt; and
C is the total of the consideration, tax and applicable
provincial tax in respect of the supply.
[56]
By reason of the
application of these legislative provisions, the appellants Robinson, Bend, Rockport, Goldsboro and ASA are
unable to deduct the tax portion of the bad debt in the calculation of their
net tax for the reporting period under appeal.
Closely-related Corporations
[57]
The appellants were
assessed on the general basis found in paragraph 168(1)(c) of the Act.
Subsections 168(2) and (3) provide exceptions to this general rule. Subsection
168(2) provides for the payment of tax where there is partial consideration. In
such a case, tax is due on the part of the consideration paid or becoming due on
a particular day, and the amount of taxes determined by reference to the value
of the partial consideration. Subsection 168(3) requires that in certain
situations the full amount of tax owing be remitted when the supply has been substantially
completed.
[58]
Another exception with
regard to the remittance of tax is found in section 156 of the Act,
which provides for an election by any pair of closely-related corporations (and
certain partnerships) to have certain transactions take place without GST. The
purpose is to provide the kind of relief that the appellants were after when
they began having cash flow problems shortly after the work on the project
began and they were providing services to one another. Subsection 156(2)
provides for zero-rating of certain transactions conducted within a group. This
zero-rating is achieved by deeming the taxable supply to have been made for no
consideration. The election is limited to "specified members" of a
"qualifying group". Subsection 156(1) of the Act defines a
"qualifying group" as consisting of corporations that are closely
related as defined in subsection 128(1) of the Act, 90% ownership within
the same corporate group being generally required.
[59]
The corporate structure
of the appellants herein does not meet the definition of closely-related
corporations and therefore the election in section 156 of the Act was
not available to the appellants. Neither Goldsboro, nor Martin, nor Pine Glen, nor
Rockport, nor Bend, nor CMJ, nor Codiac could rely on section
156 of the Act, which would have allowed their transactions to take
place without the HST being levied. I cannot leave this issue without
commenting on the fact that the respondent has considered the transactions
between the appellants as wash transactions in order to reduce the interest and
penalty amounts assessed under section 280 of the Act. Wash transactions
occur notably between closely-related groups or associated persons. According
to memorandum 16-3-1 in the GST/HST Memoranda Series, the following conditions
have to be met:
Conditions to be met
11. The CCRA will consider
waiving or cancelling the portion of the penalty and interest that is in excess
of 4% of the tax not collected in a wash transaction where the following
conditions are satisfied:
(a) it must be demonstrated that
the taxable supply in question was made to a registrant who would have been
entitled to a full ITC if the tax had been correctly applied, or to a
federal department, or to a participating provincial government entity;
(b) the supplier must
not have been previously assessed for the same mistake and must have a
satisfactory history of voluntary compliance;
(c) the supplier must have
remedied the situation to ensure that tax is collected on future supplies
of a similar nature; and
(d) the supplier must not have
been negligent or careless in the conduct of its affairs to ensure that tax
is collected on all taxable supplies.
[Emphasis added.]
[60]
The Minister was
satisfied that these conditions were met. The appellants exercised due
diligence in all of the circumstances of these appeals. It is to be noted as
well that none of the appellants ever defaulted in their HST reporting, and had
it not been for the transactions between them in relation to the Enbridge
project and had it not been for the corporate structure existing at the time, the
audit would have given different results.
Input Tax Credits
[61]
The evidence has
established clearly that the auditor did not allow a corresponding ITC for the
other appellants against whom tax was assessed because the purpose of the audit
was to calculate the net tax of the particular appellant being audited and not
the net tax of the related appellants as a group. In other words, the auditor,
in assessing unreported net tax of one appellant, did not give any
consideration to the corresponding ITC in assessing the appellant that was the recipient
of the supply. This situation was created either because some of the invoices issued
by one appellant to another did not account for HST or because no invoices were
actually prepared by one appellant (supplier) and then sent by that appellant
to another appellant. Things were done this way in order to reduce cash
withdrawals and maintain cash flow at a respectable level. These circumstances
could have been avoided had the appellants been a closely-related group having
duly made an election under section 156 of the Act. Since such is not
the case and since some of the invoices did not account for HST, Robinson did
not have the proper documentation for claiming an ITC with respect to those
invoices and, in particular with respect to its dealings with Bend. The respondent agrees, though, that upon
reassessment, a registrant could submit a claim for ITCs, as long as the HST has
been reported and paid by the claimant. The auditor acknowledged that he did
not inform the newly assessed companies that some of them could now claim ITCs.
That information could have reduced the amount owed by Robinson substantially,
had the appellants acted on it.
[62]
That being said,
subsection 296(2) of the Act also imposes on the Minister an obligation
to take into consideration the allowable tax credits in assessing the net tax
of a person for a particular reporting period, provided the following condition
is met, namely: that there is sufficient information to allow the ITC.
[63]
In 1997, subsection
296(2) was amended to read that the Minister shall (instead of may) take
into account an ITC in assessing the net tax for a reporting period, as if the
person assessed had claimed the allowable credit in a return filed for the
period. The Technical Notes (July 1997) dealing with this amendment state that
this requirement persists "even if the limitation period for claiming the
credit has expired".
[64]
Subsection 169(5) of
the Act allows the Minister some discretion in waiving the documentary
requirements of subsection 169(4). The books and records of each appellant
provided more than sufficient evidence to permit the auditor to assess each
appellant with regard to HST owing. It seems completely appropriate in these
circumstances that this same evidence should be sufficient to place all the
appellants within subsection 169(5), which reads as follows:
Exemption [from documentation requirement] — Where
the Minister is satisfied that there are or will be sufficient records
available to establish the particulars of any supply or importation or of any
supply or importation of a specified class and the tax in respect of the supply
or importation paid or payable under this Part, the Minister may
(a) exempt a specified registrant,
a specified class of registrants or registrants generally from any of the
requirements of subsection (4) in respect of that supply or importation or a
supply or importation of that class; and
(b) specify terms and conditions of
the exemption.
[65]
In addition, GST
Memorandum 400-1-2 (Input Tax Credits series) on Documentary Requirements states
the following regarding a registrant's inability to satisfy the documentary
requirements and the consequences thereof:
Exemptions
Inability to Meet Subsection 169(4) Requirements
32. If registrants
are unable to fulfil the documentary and information requirements pursuant to
subsection 169(4), or they are unable to obtain the information required prior
to filing a return in the period in which the ITC is claimed, registrants will
be required to determine whether these taxable supplies fall under the ministerial
discretionary exemptions established pursuant to subsection 169(5).
33. Pursuant to subsection 169(5), the Minister is given discretionary
power in certain circumstances to exempt a specified registrant, a specified
class of registrants or registrants in general from the statutory and
regulatory documentary and information requirements of subsection 169(4), or
any provision thereof, in respect of a taxable supply or a class of taxable
supplies.
34. This provision also permits the Minister to specify the
terms and conditions of the exemption.
35.
At this
time, ministerial discretionary exemptions for all registrants, generally, from
the application of paragraph 169(4)(a), ITC documentary and information
requirements, include:
(a) unvouchered cash payments
made to coin- and/or dollar- bill-operated machines;
(b) computerized records;
(c) contractual agreements;
[Emphasis added.]
[66]
Given that the
respondent made a number of assumptions in reassessing the appellants for tax
owing, and assumed in particular that the appellants were related and that they
were associated persons under the wash provision, and given that, for all
intents and purposes, they were all assessed as a group and treated as such for
collection purposes in the early days of the project, I find that the
circumstances are such as to warrant the Minister's being obliged to calculate
the net tax of each appellant by taking into consideration the ITCs of the
other appellants. If the information obtained was sufficient for the auditor to
assess the appellants' taxes, that same information has to be sufficient to
establish ITCs for those same appellants. That, I believe, was Parliament's intent
in enacting subsection 296(2). The Memorandum (fairness) and subsection 169(5)
provide for an exemption from the documentation requirement.
[67]
Contractual agreements were
the foundation of the services provided between the various appellants in the
construction businesses they were in, and regard must be had in particular to
the fact that all these agreements that gave rise to the assessments were in
relation to Robinson's contract with Exelon and Enbridge. The Memorandum
specifically recognizes that:
Contractual Agreements
45. Given the extensive use of contractual agreements
covering supplies of goods and/or services over a fixed period of time between
registrants, the particulars of these taxable supplies and the tax paid or
payable on them may not necessarily be available in such a manner as to permit
registrants to comply with the ITC documentary and information requirements
established pursuant to paragraph 169(4)(a).
46. In cases
where the contractual agreement by itself, or combined with related supporting
documentation issued pursuant to the governing contract, can and does meet the
statutory and regulatory requirements under paragraph 169(4)(a), such
supporting documentation must be obtained by the registrant prior to the filing
of a return.
47. However, if the registrant is unable to meet these
requirements prior to the filing of a return in which such an ITC is claimed,
or if the said documentation fails to satisfy the requirements under subsection
169(4), the Minister will exempt registrants, generally, from the requirements
of subsection 169(4).
48. This exemption will
apply when a registrant maintains proper books and records, including the
contractual agreement and all related documentation issued pursuant to the
governing contract, and these books and records capture the following:
(a)
sufficient information to identify the supplier's name or trading
name;
(b)
the supplier's
registration number;
(c)
sufficient information to identify the reporting period when the GST
in respect of the supply was paid or became payable and the amount of GST paid
or payable;
(d)
sufficient information to identify the name or trading name of the
recipient of the supply (or that of the recipient's duly authorized agent or
representative); and
(e)
sufficient information to identify the nature of the supply.
[Emphasis
added.]
[68]
The intent is clearly
and explicitly to afford ITCs to registrants who are unable to meet the
documentary requirements of subsection 169(4). That subsection read together
with the imperative wording of subsection 296(2), it makes it difficult to
ignore the fact that the ITC entitlement had to be taken into account during
the net tax audit conducted with respect to all of the appellants. I reiterate
the fact that if there was sufficient information in the books and records to allow
the Minister to assess, then there is enough to determine and allow the ITCs.
[69]
I do recognize the
fact that this Court has no jurisdiction with regard to the exercise of the
Minister's discretion, but I cannot disregard subsection 296(2), in which the
legislator has chosen to impose an obligation to take into consideration
eligible ITCs. In addition, GST/HST News No. 52 expressly addresses the element
of fairness now expected in net tax audits, specifically with regard to
consideration of possible ITCs. The relevant passages read as follows:
Auditing for GST net tax – It's a matter of fairness
The “audit to net tax” principle ensures that the entitlements and
obligations of a GST/HST registrant under audit are given proper consideration.
After all, it’s a matter of fairness.
Generally, a registrant has a four-year time limit (two years in the
case of a specified person) in which to claim an input tax credit (ITC). In
reporting the net tax for a reporting period, the registrant may include the
ITCs that became available in that period and any unclaimed ITCs from the previous
four years (or in the case of a specified person, two years).
. . .
In assessing a registrant’s net tax for a reporting period under
audit, the CRA is required to take into account any ITCs that the registrant
did not claim for that reporting period even if the normal time limit for
claiming these ITCs has expired. These unclaimed ITCs must be for tax that
became payable during the particular reporting period under audit.
[Emphasis
added.]
[70]
There is no doubt that
until the change in the wording of subsection 296(2) became law, the Minister
had full discretion with regard to whether or not ITCs would be considered in a
net tax audit. Subsection 169(5) of the Act, the aforementioned Memorandum
concerning documentary requirements and fairness, subsection 296(2) of the Act,
and the fact that the information available was sufficient to conduct a full audit
of the group of related appellants and to assess the HST they owed, lead me to
the conclusion that ITCs should have been considered in making the HST
assessments for all the appellants notwithstanding the strict requirements of
subsection 169(4) of the Act.
[71]
The respondent argued
that to be expected to consider ITCs for all the appellants in this case would
mean that, in other net tax audits, the Minister, in order to determine
eligible ITCs for one registrant, would need to determine the net tax of all
the parties with whom the registrants concerned had had dealings. I agree with
the respondent on that point, but the facts of this case offer a clearly
different perspective in that the appellants are related and are an associated
group. They were audited simultaneously so that the Minister was in possession
of all the information necessary to take into account the ITCS. That fact was
confirmed by Mr. Leblanc's testimony. He chose not to consider the ITCs, but
subsection 296(2) says he should have done otherwise.
[72]
The appeals are allowed
in part and the reassessments are referred back to the Minister of National
Revenue for reconsideration and reassessment in accordance with these reasons.
The appellants are entitled to 60% of their costs on one set of costs.
Signed at Edmundston, New Brunswick, this 4th
day of May 2009.
"François Angers"
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