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Citation: 2003TCC201
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Date: 20030404
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Docket: 2002-3335(GST)I
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BETWEEN:
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HEART DROP 2000 DISTRIBUTORS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Miller J.
[1] This is an appeal by way of the
informal procedure by Heart Drop 2000 Distributors Inc. (Heart
Drop), a company established by Mr. Don Wiskin. Heart Drop
was in the business of purchasing heart drops and similar herbal
products from Strauss Herb Co. (formerly Natural Way Herbs) and
selling such products on to the public. Heart Drop was not
charged goods and services tax (GST) on its purchase of products,
nor did it in turn charge GST on the sale of the products, on its
understanding that the products were zero-rated. The Minister of
National Revenue (the Minister) assessed Heart Drop for the
period July 1, 2000 to September 30, 2000 for a GST liability of
$18,205.63 plus penalties and interest on the basis that the
Appellant was liable for the GST on the sale of $278,000 of
product during the period in question. The Minister calculated
the amount owing using the formula 7/107 multiplied by $278,000.
Heart Drop appeals the Minister's assessment on two fronts:
firstly, the Minister's assessment fails to take into account
the Appellant's entitlement to input tax credits (ITCs); and
secondly, the penalties were inapplicable as the Appellant
exercised due diligence in determining its GST liability.
[2] In June 1998, Mr. Wiskin, who was
a contractor in the construction industry, suffered a near fatal
heart attack. He was led to believe he would never work again.
Then, he started taking Strauss' Heart Drops. He more fully
recovered his health than he ever thought possible. Upon visiting
Strauss Herb to thank the manufacturer for this remarkable
recovery, he conceived the idea himself of selling this product.
He determined that Strauss Herb had been in business since 1980.
He felt comfortable with their reputation. He set up Heart Drop
and shifted from buying the product solely for personal use, to
buying the product as a distributor for resale.
[3] In buying the product personally,
Mr. Wiskin had never paid GST. By May 2000, Heart Drop had set up
a network of health food store customers. One of such contacts
suggested that GST might apply to the product. This led
Mr. Wiskin to have his wife, who was also involved in the
business, contact the GST office of Canada Customs and Revenue
Agency (CCRA) in Vancouver. As a result of that call, Heart Drop
continued its approach of neither paying nor charging GST. The
Wiskins believed the product was part of basic groceries, though
they wanted some written confirmation of this position. They went
to Stauss' bookkeeper, who on July 4, 2000, advised them in
writing as follows:[1]
... Talked to the GST technicians and explained the products
we sell and he said that the products are zero rated. That means
that Peter cannot charge GST, it therefore means that we cannot
charge GST when we sell it. ... There are 3 categories in
the GST. Exempt - where you charge no GST because they are
exempt. ...
Then there is zero rated. That means you do not charge GST on
the product but are able to register and get a GST number so that
you can apply for a refund of the GST you pay on your expenses.
This is the category we all fall into that are distributors of
these products.
The 3rd category is GST taxable - which we are not.
...
I was sure of this as after all that is my expertise. I have
been a tax preparer for 25 years and a consultant for 15 of those
years. I did you and Peter the courtesy of verifying the
information as you had raised a doubt in Peter's mind. Now
hopefully you will lay this to rest and get on with the business
at hand. ...
Around this time, July 2000, Strauss Herb terminated Heart
Drop's distributorship. The evidence was unclear as to
whether this was due to Heart Drop's questioning the GST
matter, or because Mr. Wiskin would not endorse the product in a
manner sought by Strauss. It was likely for both reasons, though
the termination was short-lived as the differences were sorted
out. Another distributor remained concerned about the GST issue
and the Wiskins again contacted the GST authorities with CCRA in
October 2000. Mrs. Wiskin indicated that in her call with
Mr. Paraskae at CCRA, she fully described the product. While
Mrs. Wiskin was unclear as to exactly how Mr. Paraskae described
the classification of these types of product, she came away, once
again, from the call satisfied their position was appropriate.
Heart Drop confirmed in writing to CCRA their understanding
following Mr. Paraskae's call. Shortly after, another
distributor contacted the GST office in Calgary. There is no
indication of the result of that inquiry.
[4] By January 2001, Heart Drop
switched from the Strauss product to other products, on which
they charged the GST. Mr. Wiskin acknowledges now that they were
incorrect in their understanding of the status of the product for
GST purposes.
[5] Heart Drop presented accurate
records for the three months in issue, indicating purchases of
$213,482.40 and sales of $278,286. No GST was included. Heart
Drop made all payments by credit card. No GST number appears on
Strauss Herb's invoices.
[6] The Appellant argues, firstly,
that it exercised due diligence in attempting to determine its
GST liability, and that, in relying on Pillar Oilfields
Projects Ltd. v. Canada,[2] due diligence is a defence to this penalty
provision. The due diligence was in contacting government
authorities on at least two occasions, insisting on written
confirmation from the suppliers and relying on what appeared to
be the industry practice.
[7] In connection with the
Appellant's position that it should be entitled to ITCs, the
Appellant argues that to deny the credit is a denial of the very
structure and object of the GST legislation. Just as Heart Drop
is liable for GST deemed to have been paid by its customers, so
too should Strauss be liable for GST deemed to have been paid by
the Appellant, thus entitling the Appellant to the ITCs. The
Appellant described itself and Strauss as businesses providing a
taxable supply, both required to be registered and therefore
registrants for purposes of the calculation of the ITCs.
[8] The Respondent maintains the
Appellant did not do enough to justify a defence of due diligence
on the imposition of the penalty. Relying on the manufacturer is
not sufficient. Calls to the government, after the fact, is
likewise inadequate. These steps should have been taken to
clarify the issue before the business was underway.
[9] With respect to the claim for
ITCs, the Respondent argues that the stringent requirements of
subsection 169(4) of the Excise Tax Act have not been met.
If the requirements are not met, no ITCs are available.
[10] I will deal with the question of the
entitlement to ITCs first. Subsection 169(4) reads as
follows:
169(4) A registrant may not claim an input tax credit
for a reporting period unless, before filing the return in which
the credit is claimed,
(a) the
registrant has obtained sufficient evidence in such form
containing such information as will enable the amount of the
input tax credit to be determined, including any such information
as may be prescribed; and
(b) where the
credit is in respect of property or a service supplied to the
registrant in circumstances in which the registrant is required
to report the tax payable in respect of the supply in a return
filed with the Minister under this Part, the registrant has so
reported the tax in a return filed under this Part.
[11] It is implicit in the provision that
both the supplier and the recipient of product know that
information is required, and that a return is to be filed for the
appropriate determination of ITCs. By this, I do not mean parties
ignorant of the law can rely on such ignorance in avoiding the
law. Neither the Appellant nor Strauss, nor any other taxpayer,
can escape liability by simply stating: "I did not know the
law existed". Indeed, the Appellant is not saying that. The
Appellant is saying that it knew the law existed but honestly
believed that it did not apply to its situation. In reviewing a
provision like this, under these circumstances, the question
should not be centered on a debate as to whether the section is
directory or mandatory, but should be on whether there was an
honest mistake made. How can the law insist the taxpayer pursue a
certain course of action which the taxpayer legitimately believed
it was not required to pursue?
[12] The question then becomes a subjective
- objective test. Subjectively, did Heart Drop honestly believe
the products were zero-rated, and, objectively, was this a
reasonable belief?
[13] Mr. Wiskin was a straightforward,
forceful and most credible witness. His position at trial was
that, while he still believes there might be some uncertainty as
to the status of these products, he accepts CCRA's current
position that the products are not basic groceries. At the
relevant time his clear impression from the supplier, confirmed
in writing, was that these products were zero-rated. He believed
the supplier's bookkeeper. Of the hundreds of distributors,
all but one likewise appear to have accepted this position. With
only a small dissenting concern, Mr. Wiskin still investigated
further with CCRA. His impression was that, while this was not a
crystal clear area, he was doing nothing wrong in handling
purchases and sales as he did. I believe Mr. Wiskin had an honest
belief that Heart Drop was acting in accordance with the
Excise Tax Act.
[14] Was that belief reasonable? The factors
that support a finding that the belief was reasonable are:
(i) Mr. Wiskin never paid GST on the
product when he bought it for personal use;
(ii) the supplier had a
twenty-year history in the industry;
(iii) the supplier's bookkeeper
professed to being knowledgeable in her understanding of GST, and
was adamant verbally and in writing that the product was
zero-rated;
(iv) prior to the period in question,
CCRA confirmed verbally the Appellant's practice, after
having the product described to it, according to the Wiskins;
and
(v) the practice was widely accepted
by distributors in the industry.
[15] The factors that support a finding that
the belief was not reasonable are:
(i) the Appellant sought no
independent professional advice;
(ii) at least one other distributor
expressed a concern regarding the practice; and
(iii) in seeking CCRA's position, the
Wiskins did not describe the product to CCRA as a herbal
medicine.
[16] On balance, I find Mr.
Wiskin's, and thus the Appellant's, honest belief that no
GST was payable on the product was reasonable.
[17] Having made that determination, I
turn back to the issue of whether, under such circumstances,
Heart Drop is entitled to ITCs. Heart Drop is a registrant in
accordance with the definition in the Excise Tax Act. CCRA
has determined that, as a registrant selling product that is
subject to the GST, Heart Drop should have charged and collected
the seven per cent GST. So, CCRA's answer is to pretend that
is exactly what Heart Drop did: of the $278,000 it collected,
approximately $18,000 was GST, which Heart Drop then failed to
remit. What CCRA has not done, however, was pretend that Heart
Drop likewise paid GST on the $213,000 worth of product it
acquired from the supplier. This yields an unfair result to Heart
Drop. And I agree with the Appellant's counsel that it does
fly in the face of the very clear intent of the GST mechanism.
Heart Drop is the middleman. It is not the final consumer. It
should not be taxed as such. If CCRA is going to pretend Heart
Drop really did collect GST, because Heart Drop was acting under
an honest mistake, then CCRA should also pretend that Heart Drop
really did pay GST, based on the same honest mistake.
[18] This is an informal procedure,
where I am quite prepared to go directly to the right result
without getting tied up in the legal niceties of whether a
provision is mandatory or directory. CCRA's position smacks
too much of having its cake and eating it too, to be allowed to
rely on the debatable mandatory nature of subsection 169(4). I
believe, that by assessing as they have, CCRA is acknowledging
that the payment of GST, in this situation, falls outside the
normal rules of collection and remittance of GST. Consequently,
so too can the determination of the ITCs. Where there is an
honest mistake, which can be shown to be reasonable, which
affords the taxpayer no opportunity to meet the so-called
mandatory requirements, the taxpayer should not be hung out to
dry by those requirements. The ITCs should be calculated on the
same basis that the GST liability was calculated: 7/107 of the
acquisition costs of $213,482.40 being a result of $13,966.14
should be deemed to have been paid by Heart Drop. Heart Drop is
entitled to that amount as an ITC.
[19] I wish to be clear that this was
not a matter of lack of documents or information rendering it
impossible to determine the GST liability. The Appellant's
records were clear and complete. It was a simple calculation to
determine what was owed, once it was recognized the product was
not zero-rated.
[20] Given my finding on the first
issue, the amount of penalty would be significantly reduced. I go
further though and reduce the penalty to zero, as I am satisfied
that a due diligence defence is available to the Appellant. The
Appellant took sufficient steps, as already outlined, to
determine its liability. It should not be penalized. The appeal
is allowed and the matter is referred back to the Minister on the
basis that the Appellant is entitled to ITCs of $13,966.14 and
that no penalty is to be imposed.
Signed at Ottawa, Canada, this 4th day of April, 2003.
J.T.C.C.
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