Citation: 2009 TCC 281
Date: 20090526
Docket: 2008-1491(GST)G
BETWEEN:
HOME DEPOT OF CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1]
Home Depot of Canada
Inc. (“Home Depot”) collects and remits GST for the Government of Canada. Since
2005, it has contracted out its GST compliance requirements to Deloitte Tax LLP
(“Deloitte Tax”), a U.S.-based organization in the business of completing and
remitting sales tax forms and payments for major organizations across North
America. With two exceptions, Home Depot has filed on a timely basis and
remitted a great deal of money. The two exceptions are the November 2005 filing
(due at the end of December) and the January 2006 filing (due at the end of
February). Due to a clerical error, Deloitte Tax sent the returns and
remittances to the Canada Revenue Agency at an incorrect address. When this was
discovered in March and September respectively, Home Depot immediately took
steps to file and pay and did so in late March and in late September 2006.
The Minister assessed late filing penalties pursuant to subsection 280(1)
of the Excise Tax Act in the amounts of $77,097.76 and $326,223.74 for
the periods in question. Home Depot claims that it exercised due diligence and
should be relieved of any penalty. I agree with Home Depot.
Facts
[2]
Home Depot entered into
an agreement in December 2004 with Deloitte Tax for Deloitte Tax to provide sales
tax compliance services. According to Mr. Tomala, Senior Director of Sales
Tax Compliance Services for Deloitte Tax (now Thompson Reuters), Deloitte Tax
is the largest North American provider of such services with 160 major
corporate clients, including 20 Canadian clients. It files 730 returns per
month alone for Home Depot (including eight in Canada).
Deloitte Tax has approximately 80 people, working in five teams, each team with
a senior manager, a couple of additional managers, some clerks and other staff.
In 2005‑2006, the staff was trained on the job by use of a buddy
system and by monthly meetings. Deloitte Tax also had a reference manual.
[3]
Mr. Tomala described
how Deloitte Tax had to convince Home Depot that it had the processes,
capabilities and controls to do the job. Deloitte Tax guaranteed Home Depot
that if Home Depot provided all the required data on a timely basis, Deloitte
Tax would be responsible for any penalty or interest if returns were filed
late, due to their error. Home Depot signed on.
[4]
Mr. Tomala testified
that, as Home Depot was such a significant and important customer, he assigned
the most experienced team to the task. Deloitte Tax started in early 2005
filing returns on behalf of Home Depot.
[5]
According to Mr.
Tomala, Deloitte Tax is a very process-driven business. They have processes to
obtain the raw data from their clients, summarize it and, where possible, get
it into their software programs, they generate returns, advise the clients of
their proposed filings and necessary remittances, prepare the delivery slip,
set a mid-month internal timeline for submission and deliver the returns and
cheques by overnight delivery to Canadian authorities. There are some
distinctions between the U.S. and Canada
filings. First, the U.S. forms can be completed by computer, while
Canadian forms are completed manually. Also, Canadian remittances are by cheque
while most U.S. remittances are done electronically.
Deloitte Tax has a reference manual setting out the processes, though it
appears to be more geared to the U.S. processes, which for the most part are the
same.
[6]
To ensure Home Depot
GST returns were filed on a timely basis, if Deloitte Tax did not
receive Canada Revenue Agency pre-printed forms, a staff member would copy a
previously completed form, with the numbers whited out. Several copies would be
made for future use. The Canada Revenue Agency form is a two-page form, but
only the first page needs to be filled in, so only the first page is copied. At
the bottom of the first page there is typed in an address of Home Depot’s
Canadian lawyers: B-11 Sales Tax, 2400 ‑ 250 Yonge Street, Toronto, Ontario. According to
Mr. Tomala, on many of the U.S. forms the address for remittance is
normally found in this spot on the form. On the Canadian form, the address for
remittance is found on the reverse or second page.
[7]
Deloitte Tax has an
internal document that follows the returns through the process and is checked
by a staff member indicating that the various steps in the process have been
completed. With respect to the November filings due at the end of December,
this internal form indicated the remittance amount was due December 13th
(an internal requirement to allow sufficient time to file), the returns were in
fact completed December 13th and DHL Express (“DHL”) slips for
mailing were also completed. The DHL slip is Deloitte Tax’s proof of timely
filing. The DHL slip was addressed to Canada Customs Revenue Agency at the
Toronto address cited earlier. Deloitte Tax had
asked DHL for pre-printed delivery slips with the correct addresses but DHL
would not accommodate them. Deloitte Tax’s internal form summarized the amounts
owing for each of the Canadian jurisdictions. The amount for the Canadian
remittance for November was $4,904,740.29 (January’s amount was $9,527,344).
[8]
Home Depot produced
copies of the uncashed cheques for those amounts dated December 9, 2005, and
February 20, 2006, respectively.
[9]
Home Depot was made
aware in early March of the missing November remittance and forwarded a
replacement cheque which CRA received in early April. In August and September 2006,
a CRA trust accounts examiner, Ms. Metella, was asked by Collections to
examine Home Depot accounts. There were some concerns with respect to
amounts being posted to the wrong account. Ms. Metella discovered returns with
dates missing and incorrect postings by CRA. She also determined that January’s
filing and remittance was missing. Home Depot replaced that payment by the end
of September.
[10]
Since these errors, Deloitte
Tax instituted a second level review of returns by a senior manager, including
a comparison of the delivery slip to the correct address. As well as the
internal return tracking checklist, a vendor code has been added with the
Canadian remittance mailing addresses.
Analysis
[11]
For the period in
question, section 280 of the Excise Tax Act read as follows:
280(1)
Subject to this section and section 281, where a person fails to remit or pay
an amount to the Receiver General when required under this Part, the person
shall pay on the amount not remitted or paid
(a) a
penalty of 6% per year, and
(b)
interest at the prescribed rate,
computed for the period beginning on the first
day following the day on or before which the amount was required to be remitted
or paid and ending on the day the amount is remitted or paid.
[12]
Can Home Depot avail
itself of the due diligence defence? The Respondent argues that the
jurisprudence relating to the development of the due diligence defence in tax
matters supports a narrow, restrictive use of the term. The Respondent
relies in large measure on comments of the Federal Court of Appeal in the 1998
decision of Canada (Attorney General) v. Consolidated Canadian Contractors
Inc.,
to the effect that the defence is available in situations of uncertainty as to
the correct amount to be paid on a timely basis. This approach appears to have
been captured in the Government’s Policy Statement P-237 dated July 28, 2008, which states:
Making a determination of due diligence
…
The CRA may accept a due diligence defence in a situation where a
person remits or pays an amount that is less than the amount actually owed
where that amount was arrived at after having made an incorrect assumption
based on genuine uncertainty regarding the application of the ETA. In addition,
in a situation where a person is a recipient who fails to report and remit the
tax on a self-assessment situation and this failure can be attributed to an
incorrect assumption based on genuine uncertainty over the application of the
ETA, a due diligence defence may be accepted by the CRA. Also, the CRA may
accept a due diligence defence where a person believed on reasonable grounds in
a non-existent fact situation, which if it had existed, would have made the
person’s actions or omission innocent; that is, the person relied on a
reasonable but erroneous belief in a fact situation. In any case, for a person
to be duly diligent it must be clearly evident that despite making an incorrect
assumption, or having an erroneous belief in a fact situation, all reasonable
care has been taken to the best of the person’s ability in ensuring that the
correct amount was remitted or paid, and the return filed, when required.
Limitations on the application of due diligence
…
Late payment or remittance
The CRA would not generally accept a due diligence defence where the
correct amount was paid or remitted after the due date. In particular, where
the CRA determines that a person has complied with the obligation to collect
the correct amount as required but has failed to remit this amount when
required, the person’s due diligence defence would not be accepted. It is the
CRA’s position that a person who has failed to take reasonable care to ensure
that the correct amount was paid or remitted by its due date, has not exercised
due diligence.
[13]
Indeed, the latter
wording is the wording cited in the Notice of Confirmation sent to Home Depot.
I do not agree that the jurisprudence is as restrictive as suggested by the
Respondent. In the 2004 Federal Court of Appeal decision of Corporation de
l’École Polytechnique v. Canada,
the Court stated:
27 This Court has held that there is no bar to the defence
argument of due diligence, which a person may rely on against charges involving
strict liability, being put forward in opposition to administrative penalties.
In particular, it has held that section 280 of the Excise Tax Act, by
its wording and content, gives rise to that defence: Canada (A.G.) v.
Consolidated Canadian Contractors Inc., [1999] 1 F.C. 209 (F.C.A.). It
may be worth reviewing the principles governing the defence of due diligence
before applying them to the facts of the case at bar.
28 The due diligence defence allows a person to avoid the
imposition of a penalty if he or she presents evidence that he or she was not
negligent. It involves considering whether the person believed on reasonable
grounds in a non-existent state of facts which, if it had existed, would have
made his or her act or omission innocent, or whether he or she took all
reasonable precautions to avoid the event leading to imposition of the penalty.
See The Queen v. Sault Ste. Marie, [1978] 2 S.C.R. 1299; The Queen. v. Chapin, [1979] 2
S.C.R. 121. In other words, due diligence excuses
either a reasonable error of fact, or the taking of reasonable precautions to
comply with the Act.
29 The defence of due diligence should not be confused with
the defence of good faith, which applies in the area of criminal liability,
requiring proof of intent or guilty knowledge. The good faith defence enables a
person to be exonerated if he or she has made an error of fact in good faith,
even if the latter was unreasonable, whereas the due diligence defence requires
that the error be reasonable, namely, an error which a reasonable person would
have made in the same circumstances. The due diligence defence, which requires
a reasonable but erroneous belief in a situation of fact, is thus a higher
standard than that of good faith, which only requires an honest, but equally
erroneous, belief.
[14]
The defence of due
diligence is not to be limited to only those situations where there is a
disagreement as to amount. It is available for consideration in cases such as
this, where there has been an error. The questions to be addressed are whether:
(i) there was a reasonable error of
fact; or
(ii) Home Depot took reasonable
precautions to comply with the Act.
[15]
Both sides agree that
it is not a matter of just reviewing Home Depot’s actions, but to answer those
questions, I must consider the actions of Deloitte Tax. This approach was made
clear in former Chief Justice Bowman’s statement in Roberts v. Canada:
9 Here it is true the appellant hired bookkeepers for one
of the periods in question and paid them what appears to me to be excessive
amounts for their incompetence and inaction. This might justify an action by
the appellant against them, but it does not amount to due diligence. The
accountants are after all the appellant’s agents and the appellant is
responsible of what they did or failed to do. In the same way as the exercise
of due diligence on the part of a taxpayer’s accountants or bookkeepers would
be attributed to the taxpayer and would justify the removal of a penalty, so
too does the absence of due diligence on the part of the taxpayer’s accountants
or bookkeepers disentitle him or her to the relief envisaged by the Pillar
Oilfield case.
[16]
I am satisfied that in
choosing Deloitte Tax, an organization devoted to handling sales tax returns,
Home Depot acted prudently and reasonably. It had to be convinced, and it was,
that Deloitte Tax was capable of handling the significant requirements demanded
by the Excise Tax Act. It is, however, the behaviour of Deloitte Tax
that must be subjected to closer scrutiny.
[17]
The Respondent argues
that in considering the question of what reasonable precautions were taken, the
issue must be narrowed to ask were reasonable precautions taken to ensure the
remittance was mailed or delivered to the correct address. The Appellant argues
that the proper question is the broader question ‑ were reasonable
precautions taken to remit an amount to the Receiver General when required,
tracking the language of section 280; in effect, to comply with the Act.
I favour the latter approach but recognize the delivery of the cheque as an
integral element to ensure compliance, so that step must be reviewed, but in
the context of the overall system instituted by Deloitte Tax.
[18]
Mr. Tomala certainly
satisfied me that Deloitte Tax, as a process-driven organization, specializing
in accurately completing sales tax returns and ensuring timely remittances, had
processes and policies in place that far exceeded what any reasonable person
might expect. Let us not lose sight of who is the reasonable person in this
case that requires the reasonable precautions. It is the Government of Canada.
The Government of Canada has established a sales tax system which legislates
that Home Depot must collect and remit the sales tax for the Government of
Canada. So, what does Home Depot do? It contracts out its obligation to a reputable
organization, paying for this service, so it can meet the Government of
Canada’s requirements. Deloitte Tax has set up an elaborate process of
collecting the raw data, summarizing it, creating a monthly calendar, creating
a checklist that follows the return through each step, setting an internal
deadline two weeks ahead of the due date, and requisitioning funds by that
date. It also has an internal training system including an extensive reference
manual. Further, in Home Depot’s case, it puts its most experienced team
on the job, given Home Depot files 730 returns a month and is a significant
customer. This was no fly-by-night operation. This is a well-oiled sales tax
remitting machine. But what happened? A staff member addressed the return to
the Canada Revenue Agency at the wrong address.
[19]
The Respondent argues
that notwithstanding all its procedures and systems, Deloitte Tax did not
specifically address the Canadian situation, and given the Canadian returns
were ultimately completed manually, it was foreseeable this error would occur.
Specifically, the Respondent identifies the following areas as indicative of a
lack of reasonable precautions:
- a manual completion of the return and the
DHL mailing slip with no managerial review;
- no process to ensure double-sided copying
of the CRA form;
- no rigid adherence to the reference
manual but development of unofficial practices; and
- allowing three different staff members to
fill out the forms.
I will address each of these concerns.
Manual Completion without Managerial Review
[20]
There was no suggestion
the determination of tax owing, by accumulating and summarizing data from Home
Depot, was incorrectly done. The concern pointed out by the Respondent was the
incorrect address and, on one form indicating there were 31 days in November.
To suggest that a managerial review is required for addressing and dating seems
insignificant compared to ensuring the calculation of the correct tax owing and
obtaining a cheque for that amount on a timely basis. The Deloitte Tax system
did have an address for the Canada Revenue Agency, but the staff relied upon
the address on the front of the previous form, which happened to be positioned
in the same place where the U.S. form identifies a U.S.
office for remittances. The staff simply made a mistake. Deloitte Tax has now
instituted a second level review of the process. I put this concern in the
category of seeking perfection as opposed to simply acting reasonably. There
must be a recognition that even in the best system, there is room for human
error. Because Deloitte Tax has taken this corrective measure is no reason for
any suggestion that the lack of such a measure is illustrative of lack of due
diligence.
Double-sided Copying
[21]
Yes, if a staff person
had copied the reverse side of the CRA form, the correct CRA address would
have appeared. But to suggest the lack of a process or procedure for copying
both sides of a document is the lack of a reasonable precaution is unwarranted.
That is unnecessary overkill. The staff person copied the portion of the form
that required completing. That is a reasonable thing to do. It is not
reasonable to strip employees of every last scrap of discretion in as simple a
task as copying and mailing a form.
Unofficial Practices
[22]
The Respondent suggests
that unofficial practices developed outside the framework provided by the
reference manual. This is not surprising in connection with the Canadian
returns as they were not as computer-friendly in many respects as the U.S. returns. The manual relies heavily on processing data
electronically. Mr. Tomala was clear, however, that the manual was reviewed on
an ongoing basis to keep it current. It is helpful to reproduce the part of the
manual
dealing with copies and mailing to get a flavour of the detail covered:
COPIES
After the checks have been signed, copies need to be made. Two sets
of the returns are needed: one set for the client and another for Deloitte’s
files. If the checks were prepared by Deloitte, only one copy is necessary for
the file. If the checks were done by the client, a second set should be made to
send to them.
When making copies, pay close attention to the forms as they are fed
through the copier.
·
Make sure the feeder pulls only one page at a
time
·
Forms smaller than the standard 8½ x 11 will
need to be placed on the glass by hand
·
Watch for double sided forms to make certain
both sides are copied
Sign and date the return checklist after the copies are made and
placed in the appropriate bins (usually located on top of the file cabinet
where the returns are filed).
MAILING
After the copies are done, the returns and applicable payments can
be put in envelopes (“stuffed”). For EFT and $0.00 returns, blank white
envelopes are used with a label for the mailing address and the return address
is stamped. Window envelopes are used for returns with a check, so that both
the mailing and return address from the check shows through.
There are six items that should be checked before putting the checks
and returns in envelopes:
1)
The date on the check matches the date on the
return
2)
The payee on the check matches the payee on the
return
3)
The address on the check matches the address on
the return
4)
The amount of the check matches the amount on
the return
5)
The client name in the memo is correct
6)
Both the return and check are signed
When putting the returns in envelopes, the order should be kept the
same (alphabetically by state). Make sure the mailing address is clearly
visible through the window of the envelope.
Once all returns are stuffed, they are ready for postage. The date
on the postage meter needs to be changed to the due date of the returns. Be
sure to change the date back to the current date once finished. All
envelopes containing more than two or three pages need to be weighed to ensure
the proper postage amount. The postage machine can be set to seal the
envelopes as the postage is stamped. However each envelope needs to be checked
to make sure it is actually sealed.
[23]
I fail to see what
closer adherence to the manual in this case would have prevented this
particular clerical error. The clerk checked the address on the front of the
return: unfortunately it was the wrong address.
The Use of Three Staff Members
[24]
Finally, the Respondent
argues that allowing three different people to fill out forms and address and
have them delivered along with the cheques is increasing the risk of error, and
therefore, does not meet the requirement of taking reasonable precautions. I
disagree. This is not a complicated task, requiring years of training. More
than adequate training was in place. The team dealing with the Home Depot
account was the most senior, experienced team. Checklists were in place to
follow the returns. The actual physical addressing and delivery of a return did
not require a single specialist in that skill. Having two or three clerks “trained”
in addressing envelopes does not make it reasonably foreseeable one of them is
more likely to make this type of error.
[25]
Even taken
cumulatively, the suggested lack of safeguards does not outweigh the overall
care and attention of Deloitte Tax in fulfilling its obligation to Home Depot
and others to file returns on a timely basis. It had expertise, systems,
manuals, ongoing reviews and processes that I find were not just reasonable,
but quite extraordinary in ensuring they provided a quality service that would
continue to attract Fortune 500 clients.
[26]
The Respondent goes on
to argue that if I find Home Depot did, through its agent, exercise due
diligence with respect to the November filing, then its actions in not
discovering the error for a couple of months shows a lack of diligence such
that the second failure is not saved by a defence of due diligence. The
Respondent suggested, though there is no evidence to this effect, that Home
Depot could not have done bank reconciliations or have paid any attention to
them if they did, or they would have readily discovered an uncashed several
million dollar cheque. And, had they found out sooner, they would have taken
the corrective measures so that the second error would not have occurred.
[27]
The second error
occurred approximately two months after the first. In response to an
undertaking from discovery,
Home Depot indicated:
Uncashed cheques are monitored through the accounting and treasury
functions of Home Depot of Canada and Home Depot U.S. as the amount of the cheque stays on as a liability on the
financial statements. This is consistent with good treasury practices in the
industry. Specific inquiries are made in cases where suppliers assert not having
received payment. Home Depot also advises that there is a review process of
uncashed amounts if an escheat issue were to arise. …
[28]
It was also pointed out
that on the cheque itself there was a notation “void after 90 days”. I do
not see how the lack of inquiry into a two-month old cheque is such a failure
to exercise due diligence that makes the second clerical error any more
reasonably foreseeable. Even if I found Home Depot somehow did not act with due
diligence in tracking the uncashed cheque, which I do not (as the only evidence
I have in that regard is that the practice was to monitor such items), I find
there is too remote a connection between that “failure” and the clerical error.
I conclude that the level of due diligence exercised in connection with
the second error is sufficient to relieve Home Depot of any penalty.
Conclusion
[29]
It is easy to be
critical of behaviour after an error has been committed. In considering
whether a taxpayer acted with due diligence to minimize the possibility of error,
one can always find something else the taxpayer might have done. But that is
not the test. The test is whether what the taxpayer in fact did was sufficient
reasonable precaution – not that the taxpayer did not hold the hand of the
employee throughout every single task no matter how menial, though Deloitte Tax
went a long way to doing exactly that. I have been convinced Home Depot took
all reasonable precautions and can rely on the defence of due diligence.
[30]
I cannot leave this
matter without expressing some concern regarding the Government’s approach to
this penalty provision. I am presuming the matter is before me because Home
Depot had no success with their fairness application, again, presumably, as
Government officials exercised their discretion to decline such a request. At
some point, at some level, someone must look at the trees and see the forest.
Here is a corporate taxpayer remitting millions of dollars monthly to the
Government and paying experts to do so, so it can meet, as a good corporate citizen
should, the collection obligations imposed upon it by the Government. A clerk
mistakenly addresses two remittances. Once Home Depot discovers its error it
immediately re-remits. It pays interest. What does the Canada Revenue Agency
do? It imposes a half-million dollar penalty and then pursues the matter
through the litigation process to a trial. I am not suggesting this is
egregious behaviour by the CRA officials that might warrant solicitor-client
costs, but I am saying that a step back for a balanced look by a CRA official
exercising a good dose of commercial common sense should not have resulted in
relentless pursuit of a half-million dollar penalty. Yes, the Act
stipulates taxpayers are to be penalized for remitting late, but do not bite
the hand that feeds you when the hand tries so diligently to ensure you get
every mouthful.
[31]
The appeal is allowed,
with costs. The assessment of penalties is vacated.
Signed at Ottawa, Canada, this 26th day of May 2009.
“Campbell J. Miller”
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