Citation: 2006TCC388
Date: 20060705
Docket: 2005-2236(GST)I
BETWEEN:
TACHI LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1] By notice of assessment dated July 28, 2004, the Minister of National Revenue ("Minister") disallowed input tax credits ("ITCs") in the amount of $2,564.55 claimed by the appellant for the period from January 1, 2000, to December 31, 2003. The facts as presented by Cyrus Driver, the sole shareholder and officer of the appellant are well summarized in paragraph 3 of the statement of facts and reasons appended to the Notice of Appeal, as follows:
• Cyrus Driver is the sole shareholder and the only officer of Tachi.
• The owner/manager of Tachi Limited ('Tachi'), Mr. Cyrus Driver ('Driver') migrated to Canada during 1994 and started investigating the possibility of starting a new restaurant concept involving multiple units. The Appellant was admitted to Canada as a 'business immigrant'.
• Driver was involved in one business or the other since age 17 and has operated restaurants in India and subsequently opened a restaurant in Saudi Arabia ('KSA'). This restaurant known as the 'Grill' has been in operation since 1985. This highly acclaimed restaurant started with six employees in a 650 square foot premises and now operates with 30 employees in a 10,000 square foot facility. It should be noted that the ownership and business arrangements in KSA are unique to that country and is not described in this appeal.
• The purpose of migrating to Canada was to expand upon the successful concept from KSA, transfer the technology and start multiple locations under the name 'Tachi'.
• Driver expected the project to take about 4 to 5 years. However, the period was extended due to factors beyond the Appellant's control. The main factors and issues that extended the start-up phase are:
• Partnership problems of Driver in KSA and resulting financial problems.
• September 11, 2001 and its economic consequences in KSA to Grill which was supposed to provide the bulk of the funds for Canadian investments.
• Gulf War Two.
• Continuing unrest in KSA, terrorist attacks, departure of western personnel from KSA and drop in business at Grill and Driver was forced to stay back in KSA to revitalize the Grill.
• As of December 31, 2003, Driver had invested $339,347 in Tachi.
• The Appellant 'capitalized' the expenses for accounting purposes under the Generally Accepted Accounting Principles ('GAAP') for better matching of cost and future revenue.
• The Appellant conducted extensive research and feasibility studies and is in the final stages of opening the first unit of the multiple units planned.
[2] The respondent disallowed the ITCs claimed on the basis that the appellant, who has been registered for goods and services tax ("GST") purposes since July 21, 1997, has been claiming ITCs since 1998 but has never made any taxable supply.
[3] The respondent submits that the appellant is not engaged on a regular or continuous basis in an activity involving the supply of property or a service for a consideration, as the respondent claims it is required in order for a person to be considered as carrying on a business or a commercial activity.
[4] To be able to claim ITCs, the appellant must establish that it acquired property or a service for consumption, use or supply in the course of commercial activities pursuant to subsection 169(1) of the Excise Tax Act ("ETA"), which reads as follows:
169.1(1) Subject to this Part, where a person acquires or imports property or a service or brings it into a participating province and, during a reporting period of the person during which the person is a registrant, tax in respect of the supply, importation or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period:
A x B
where
A is the tax in respect of the supply, importation or bringing in, as the case may be, that becomes payable by the person during the reporting period or that is paid by the person during the period without having become payable; and
B is
(a) where the tax is deemed under subsection 202(4) to have been paid in respect of the property on the last day of a taxation year of the person, the extent (expressed as a percentage of the total use of the property in the course of commercial activities and businesses of the person during that taxation year) to which the person used the property in the course of commercial activities of the person during that taxation year,
(b) where the property or service is acquired, imported or brought into the province, as the case may be, by the person for use in improving capital property of the person, the extent (expressed as a percentage) to which the person was using the capital property in the course of commercial activities of the person immediately after the capital property or a portion thereof was last acquired or imported by the person, and
(c) in any other case, the extent (expressed as a percentage) to which the person acquired or imported the property or service or brought it into the participating province, as the case may be, for consumption, use or supply in the course of commercial activities of the person.
[5] The expression "commercial activity" is defined in subsection 123(1) of the ETA as follows:
123.(1) In section 121, this Part and Schedules V to X,
"commercial activity" of a person means
(a) a business carried on by the person (other than a business carried on without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the business involves the making of exempt supplies by the person,
(b) an adventure or concern of the person in the nature of trade (other than an adventure or concern engaged in without a reasonable expectation of profit by an individual, a personal trust or a partnership, all of the members of which are individuals), except to the extent to which the adventure or concern involves the making of exempt supplies by the person, and
(c) the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.
And "business" is also defined in subsection 123(1), as follows:
"business" includes a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment.
[6] The requirement of being engaged in an activity on a regular or continuous basis applies only to an activity that involves the supply of property by way of lease, licence or similar arrangement.
[7] According to the definition of business, an undertaking of any kind whatever, whether or not it is engaged in for profit, may qualify as a business. There is no requirement that the business be carried on with a reasonable expectation of profit when it is a corporation that is carrying it on.
[8] In the present case, Mr. Driver testified that by the end of 2003 he had invested $340,000 in the appellant's operations. This represents expenditures for research and for feasibility studies, with a view not only to eventually opening a chain of restaurants in Ottawa and Toronto, but also to launching a new concept focusing on nutrition and health and involving working with the Heart and Stroke Foundation (see feasibility studies in Exhibit A-1). The appellant had one employee in Canadawhile he was travelling back and forth to Saudi Arabia to take care of his well-known restaurant over there.
[9] Upon his arrival in Canadain 1994, Mr. Driver had planned a five-year time frame for opening the first restaurant using the new concept he had in mind. Because of the war in the Middle East and all the problems related to terrorism in that area, his plans were postponed. Mr. Driver's business in Saudi Arabia brought in less money for financing his operations in Canada, and he could not be present in Canadaas much as he wished. Although the appellant has not rented any premises as yet, Mr. Driver said that he truly believes that he should be able to start operating his first restaurant in Canadawithin the next eight months.
[10] The amount of ITCs claimed is less than $3,000 and is related to office expenses such as postage and advertising (see the audit report, Exhibit R-3, page I1). The appellant has not declared any income nor has it claimed any expenses for income tax purposes for the period at issue. It did, however, prepare for each fiscal year an unaudited balance sheet in which all Mr. Driver's investments in the appellant were capitalized (see Exhibit A-1).
[11] The appellant relies on policy P-167R of the Canada Revenue Agency ("CRA"), which enumerates some factors to be considered in determining whether an activity qualifies as an undertaking or a business within the meaning assigned to those terms in the ETA. Those factors are whether:
(1) the activity is serious and earnestly pursued;
(2) the activity is actively pursued with reasonable and recognizable continuity;
(3) the activity is conducted in a sound manner using recognized business principles and records are maintained to that effect;
(4) the supplies, if any, are of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them;
(5) the activity facilitates or promotes the making of supplies;
(6) the activity supports other activities which are directed towards earning revenue.
[12] For the CRA, an "undertaking" is restricted to activities that have some connection with, or similarity to, an undertaking that would be carried out in a business-like manner with profit as its objective. The CRA recognizes, however, in its policy, that the presence of as few as two of the factors mentioned above may be sufficient to allow one to determine that there is an undertaking.
[13] The respondent relies on the case of Two Carlton Financing Ltd. v. Canada, [1998] T.C.J. No. 447 (QL), in which Judge Rip stated the following:
¶ 35 . . . The definition of "commercial activity" in subsection 123(1) of the Act does not expressly require that taxable supplies be made. Nonetheless, it is difficult to imagine the carrying on of a business without its activity falling within the scope of a supply.
¶ 36 Practically speaking then, in conducting a business, except to the extent it involves the making of exempt supplies, almost all activities will constitute supplies. By definition such supplies are taxable supplies. In any event, a commercial activity suggests the business be involved in the making of supplies by the person carrying on the business that are not exempt supplies. Since the appellant reported no sales or revenues during the period, one may reasonably infer that the appellant was not engaged in commercial activities during the period and, if so, the appellant cannot be considered eligible for ITCs in the period. [See Note 9 below]
__________________________
Note 9: I do not think it is necessary that in a "start up" of a business, for example, any supplies need be made in order to be eligilible [sic] for ITCs. The expenditures giving rise to the ITCs should be made with the intent of carrying on a commercial activity or in the course of a commercial activity. There are also circumstances in which no GST is paid or payable and yet entitlement to ITCs remains (for example, where taxable supplies are deemed zero-rated pursuant to a section 156 election).
[14] The Minister is of the view that the start-up period cannot last forever. The appellant was granted ITCs for the first two years (1998 and 1999), and in the respondent's submission that is enough. For that assertion, counsel for the respondent relies on Watt v. Canada, [1997] F.C.J. No. 1237 (FCA) (QL). In Watt, however, the question was whether the taxpayer had a reasonable expectation of profit in a business for which she sought to deduct losses. That is not a requirement here, as in GST matters the term "business" encompasses any undertaking of any kind whatever, whether or not the activity or undertaking is engaged in for profit.
[15] On the evidence before me, I am satisfied that although years have passed without it yet having operated a restaurant in Canada, the appellant has demonstrated that it did thorough research and carried out thorough marketing and feasibility studies for a new restaurant concept, and that it maintained good records in that regard, so that the activity can be considered as having been serious and earnestly pursued. I am satisfied with the explanations given by Mr. Driver for delaying the opening of the first restaurant. According to his testimony, he is on the verge of accomplishing what he has been working toward for so long.
[16] I find that the definition of business in subsection 123(1) of the ETA is wide enough to encompass the activity pursued by the appellant. The amounts claimed are very reasonable compared to the investments made. It is the commercial nature of the taxpayer's activity which must be evaluated, not the taxpayer's business acumen (see Stewart v. Canada, [2002] S.C.J. No. 46 (QL), paragraph 55).
[17] The appeal is therefore allowed, with costs, and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the appellant is eligible to receive input tax credits in the amount of $2,564.55 for the period at issue pursuant to section 169 of the ETA. The penalty and interest assessed are cancelled.
Signed at Ottawa, Canada, this 5th day of July 2006.
"Lucie Lamarre"
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