|
Citation: 2003TCC327
|
|
Date: 20030509
|
|
Docket: 2000-482(GST)G
|
|
BETWEEN:
|
|
9004-5733 QUÉBEC INC.,
|
|
Appellant
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre
Proulx, J.T.C.C.
[1] This is an appeal
of two assessments made under the
Excise Tax Act (the "Act") covering two periods, namely
from June 16, 1995, to September 30, 1998, for an amount of
$2,592.80 and the other from April 1, 1998, to
June 30, 1998, for an amount of $2,086.38. Penalties and
interest are not included for either time period.
[2] There are
two issues in this case. The first involves consideration for rental
building management services given by the Appellant to its sole
shareholder/owner of those rental buildings. The second issue is to determine whether the Appellant
is entitled to an input tax credit for two motor vehicles.
[3] It was admitted
that the Appellant was incorporated on April 18, 1994, that all
shares belong to Mr. Alain Déziel
and that, accordingly, the Appellant and the latter are related persons within
the meaning of the Act. It was also admitted that the Appellant's
activities involve the management of rental buildings belonging to
Mr. Déziel.
[4] Counsel for the
Appellant first asked auditor Ms. Louise Langlois to explain the reasons for those
assessments.
[5] The auditor
reported that she tried to reach Mr. Déziel via telephone on October 20, 1998. Towards
the end of the day, she received a call to the effect that Ms. Marie‑France Beaudoin
would answer her questions regarding the Appellant. Among other things,
Ms. Beaudoin reported that Mr. Déziel had requested her services that
same day.
[6] At the time of the
audit, Ms. Langlois found that the Appellant's invoices for management
services rendered to Mr. Déziel
indicated an amount only and no description of services rendered. She asked for
details regarding the basis for these invoices. Ms. Beaudoin answered that
the invoices were based on Mr. Déziel's liquid assets.
[7] The auditor
computed the expenditures incurred by the Appellant. She did not add any profit
margin. On that basis, she established the consideration for management
services, which is higher than what had been paid; the additional tax owing on
these amounts was $1,794.39.
[8] According to
Exhibit I‑3, the
"Submission of Objection" in a letter dated April 19, 1999,
written by Mr. Déziel to the auditor, he states that capital expenditures
such as the purchase of computer equipment and office furniture should not be
accounted for when computing management costs. He did not reiterate this point
during his testimony at the hearing. He suggested that the invoice amounts had
been based on the time spent working for the Appellant.
[9] Mr. Déziel also explained that an
accountant had advised him to use the corporate form for management services.
[10] The auditor said
that she met Mr. Déziel for the first time on November 12, 1998. Mr. Déziel was accompanied by Ms. Beaudoin and
Mr. Raynald Gagnon, the Appellant's external accountant. The auditor
argues that there was never any question that the invoices were based on the
hours Mr. Déziel spent working for the Appellant.
[11] With regard to the vehicles
required by the Appellant, the auditor asked to see the log books for the
vehicles. Ms. Beaudoin told him that there were none. The auditor found
invoices related to vehicles from garages located in Florida, New York and
North Carolina.
[12] According to
Exhibit I‑1, a 1991 Chevrolet S‑10 was purchased on
September 30, 1995,
a 1994 Pontiac Grand Am was leased on July 17, 1995,
and a 1998 Jeep Cherokee was purchased on June 18, 1998.
The Appellant owned the vehicles. According to information from the Société de
l'assurance automobile du Québec provided by the auditor, Mr. Déziel has
owned a Corvette since July 4, 1996.
[13] The auditor
explained that the rental buildings are located very close to the Applicant's
head office and in one of the rental buildings, there is a concierge who takes
care of renting and the collection of cheques. She explained that she received
no documentary evidence that would substantiate commercial use greater
than 50% for the vehicles in question.
[14] During his testimony,
Mr. Déziel affirmed that the Appellant used these vehicles for management
services and that he himself
made minimal use of them for personal reasons. He provided no record accounting
for mileage and destinations.
Submissions, analysis and
conclusion
[15] Counsel for the
Appellant argued that the Respondent did not have an expert determine the fair
market value of those services and
that the Appellant's determination was the same as that of the Respondent. With
regard to the vehicles, she referred to Mr. Déziel's testimony. In terms
of penalties, she argues that the Appellant exercised due diligence because its
primary shareholder, Mr. Déziel, had followed an accountant's advice.
[16] Counsel for the
Respondent argued that the Appellant had changed versions several times
regarding the basis of invoicing and that it was up to the Appellant to provide
evidence of the fair market value for services rendered. With regard to
mileage, the Appellant did not keep any records. There was no element of due
diligence in the evidence.
[17] Subsection 155(1) of the Act reads as follows:
Non‑arm's
length supplies
155.(1) For the purposes
of this Part, where a supply of property or a service is made between persons
not dealing with each other at arm's length for no consideration or for
consideration less than the fair market value of the property or service at the
time the supply is made, and the recipient of the supply is not a registrant
who is acquiring the property or service for consumption, use or supply exclusively
in the course of commercial activities of the recipient,
(a) if
no consideration is paid for the supply, the supply shall be deemed to be made
for consideration, paid at that time, of a value equal to the fair market value
of the property or service at that time; and
(b) if
consideration is paid for the supply, the value of the consideration shall be
deemed to be equal to the fair market value of the property or service at that
time.
[18] This subsection
stipulates that a supply of a service that is made for consideration less than
the fair market value shall be deemed equal to the fair market value where the
supplier and recipient of the service are not dealing with each other at arm's
length or where the recipient of the supply is not a registrant acquiring the
property or service for consumption, use or supply in the course of the
recipient's commercial activities.
[19] Both parties admit
the existence of the two circumstances mentioned. The non‑arm's
length relationship is not in question and Mr. Déziel's leasing activities
are exempt. These are, therefore, not commercial activities.
[20] Therefore, one must
determine the fair market value of the management services rendered to
Mr. Déziel. The
definition of fair market value in subsection 123(1) of the Act
reads as follows:
"fair market value" of
property or a service supplied to a person means the fair market value of the
property or service without reference to any tax excluded by section 154
from the consideration for the supply; . . .
[21] Reading this
definition is of no help in understanding this legal concept. Therefore, the
usual legal meaning must be given to this expression. In the Dictionnaire de droit québécois et canadien,
Hubert Reid, (1994) W&L, "fair market value" is defined as follows:
[TRANSLATION]
The
highest possible price obtainable on the free market, where parties to a
transaction are well‑informed, prudent and independent of one another and
are not forced to conclude the transaction.
[22] These words are the
same as those used by Cattanach, J. in Henderson Estate and Bank
of New York v. M.N.R., 73 DTC 5471, at page 5476.
[23] Policy Statement P‑165
explains that there are three procedures or approaches that are generally used
to assess this value: the cost approach, the direct comparison approach and the
income approach. It is true that the policy statement involves buildings. There
may be different approaches for assessing the fair market value of services.
Therefore, it is interesting to read Information Circular 87‑2R
entitled International Transfer Pricing and Interpretation
Bulletin IT 468R entitled: Management or Administration Fees Paid
to Non‑Residents.
[24] However, I do not
wish to elaborate further on methods for assessing the fair market value of
services as I have had no specific evidence from either side on the matter.
[25] Neither the
Respondent nor the Appellant provided expert evidence; and in fact, the burden
of proof fell on the Appellant. Of the two proposals, I must therefore choose
that which appears to be, reasonably, more representative of the fair market
value of services.
[26] The auditor chose
the cost approach. I am of the opinion that this approach is appropriate and
reasonable. She did not even account for a usual margin of profit. The cost
method is appropriate and reasonable so long as the only purpose of a business
is to render building management services and that those buildings all belong
to a single shareholder. The proposed computing of fair market value by
Mr. Déziel based on hours
that he worked for the Appellant, in my mind, only accounts for part of the
Appellant's costs. One would have to explain how this could reasonably
determine the fair market value of the management services rendered. With
respect, I do not understand the logic of the proposal.
[27] With regard to the
input tax credit ("ITC") for vehicles, subsection 199(2) of the Act stipulates that a
registrant may claim an ITC relative to the tax payable by the registrant in
respect of the acquisition of tangible personal property to be used as an asset
if the property is acquired for use primarily in the registrant's commercial
activities. The Minister of National Revenue interprets "primarily"
as more than 50%.
[28] Subsection 199(2)
of the Act reads as follows:
(2) Acquisition
of capital personal property — Where a registrant acquires or imports
personal property or brings it into a participating province for use as capital
property,
(a) the
tax payable by the registrant in respect of the acquisition, importation or
bringing in of the property shall not be included in determining an input tax
credit of the registrant for any reporting period unless the property was
acquired, imported or brought in; and
(b) where
the registrant acquires, imports or brings in the property for use primarily in
commercial activities of the registrant, the registrant is deemed, for the
purposes of this Part, to have acquired, imported or brought in the property,
as the case may be, for use exclusively in commercial activities of the registrant.
[29] Section 286 of the Act also requires
the keeping of records:
286(1) Keeping
books and records — Every person who carries on a business or is engaged in
a commercial activity in Canada, every person who is required under this Part
to file a return and every person who makes an application for a rebate or
refund shall keep records in English or in French in Canada, or at such other
place and containing such information as the Minister may specify in writing,
in such form and containing such information as will enable the determination
of the person's liabilities and obligations under this Part or the amount of
any rebate or refund to which the person is entitled.
[30] I have no evidence
of the ratio of mileage for business purposes to the total mileage, which would
allow me to conclude that the vehicles were used primarily for the Appellant's
business. A simple affirmation of minimal use for purposes other than business
cannot suffice.
[31] With regard to the
due diligence defence, I do not find any elements of that diligence in this
case. The Appellant was incorporated on an accountant's recommendation. This
does not pose a problem. However, was the invoicing method discussed with the
accountant? There is no evidence in this respect: whether this was done or what
the accountant said. Those statements would also have to be proven. With regard
to the Appellant's vehicles for which it claimed input tax credits, there is no
proof either of due diligence. No appropriate records or valid documentation were
kept, which would have been used to prove the primary use of those vehicles by
the Appellant.
[32] Consequently, the appeal is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 9th day
of May 2003.
J.T.C.C.
Email this Content