Date: 20010906
Docket: 2000-4321-GST-I
BETWEEN:
PRO-EX TRADING CO. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1]
This appeal was heard at Edmonton, Alberta on July 23, 2001 and
continued on July 25, 2001.
[2] A
joint Book of Exhibits containing numerous tabs was submitted and
it was agreed by the parties that the documents contained therein
were to be considered as exhibits.
[3]
The parties also submitted a Statement of Agreed Facts and
Issues, which reads as follows:
TCC-2000-4321 (GST) I
IN THE TAX COURT OF CANADA
PRO-EX TRADING CO. INC.
Appellant
AND:
HER MAJESTY THE QUEEN
Respondent
STATEMENT OF AGREED FACTS
AND ISSUES
I
AGREED FACTS:
THE PARTIES HERETO HEREBY AGREE that
(a)
the following statement of facts shall comprise part of the
evidence in this matter
(b)
either party may adduce additional documentary, real or vive
voce evidence provided it is not inconsistent with the
contents hereof, except with leave of the Court in the event of
such inconsistency, and
(c)
this agreement is subject to anything of which this Honourable
Court is entitled to take judicial notice and in fact expressly
does so for the determination of the within matter.
1.
Pro-Ex Trading Co. Inc. ("Pro-Ex") was incorporated in
Alberta and at all material times carried on the business of
selling used heavy equipment for the construction and related
industries.
2.
During the Reassessment period of January 1, 1996 to November 30,
1998, Pro-Ex entered into certain transactions (herein called the
"Transaction" or "Transactions"), which are
the subject matter of this appeal, with the following third
parties:
North American Leasing Corporation (K. Gupta, officer)
Howard Christensen (principal)
Nyco (Rick Nyman, principal)
RELI Leasing Inc. (Mike Lafranchise, President),
(together herein called the "Third Parties").
3.
In respect of all Transactions, the respective Third Parties
state that they did not claim a GST Input Tax Credit. CCRA has
neither audited nor verified this.
4.
In respect of all Transactions, the respective Third Parties took
title to the equipment and/or equipment parts which was the
subject matter of the Transactions as security for repayment of
mones [sic] borrowed by Pro-Ex. This agreement as to this fact in
each case is not an admission by the Respondent that any
transaction was in the nature of a loan rather than a sale to
which GST ought to apply.
5.
Each of the Third Parties has previously provided through Michael
Dickie, on behalf of the Appellant, to CCRA its confirmation of
the foregoing and true copies of such confirmations are attached
hereto. The confirmations were provided after the Notice of
Decision.
II
AGREED ISSUES:
THE PARTIES HERETO HEREBY FURTHER AGREE that the issues to be
determined herein are:
1.
Whether or not the Appellant is responsible for remitting any GST
which it may have collected even if such GST was collected
erroneously?
2.
Whether the Minister is entitled to any such amounts which have
not been reassessed in the reassessment under appeal?
3.
Subject to Issue 1 and 2 above, whether or not the Transactions,
or any of them, constitute a "taxable supply" subject
to the application of the Excise Tax Act, in which case the
appeal ought to be dismissed in respect of such Transactions, or
do not constitute a "taxable supply", but rather
something else, such as a financing arrangement with the giving
of security, in which case the appeal ought to be allowed in
respect of such Transactions.
4.
If GST is exigible on all or some of the Transactions as a result
of either or both Issue 1 or 3 being resolved in whole or in part
in favour of the Minister, whether the assessment of penalties
and interest is warranted in respect of such GST.
5.
If GST is not exigible on all or some of the Transactions,
whether the Appellant, if successful to some degree, is entitled
to costs as determined in the discretion of the court.
AGREED to by the Parties hereto by their respective Counsel
this 11 day of July 2001
Nichols & Company
Barristers & Solicitors
"Signature"
Neil W. Nichols
Counsel for the Appellant
Deputy Attorney General of Canada
Per
proc:
"Signature"
Scott McDougall
Tax Law Section
Counsel for Respondent ...
CONFIRMATION OF NO ITC CLAIM
To:
Pro-Ex Trading Co. Inc. and
To: Canada Customs
Edmonton,
AB
& Revenue Agency
FAX:
780-459-8181
Goods & Services
Tax Division
Edmonton, Alberta
Re:
Lending Transaction with Title Security
Agreements dated
-
May 1, 1996
April 30, 1997
In the above-noted lending transactions, we hereby confirm
that our company has not claimed a GST ("Goods &
Services Tax") Input Tax Credit ("ITC") in
relation to the transfer of the title to serial numbered
equipment and/or equipment parts identified in the
Agreements.
We further confirm that title to the equipment and/or
equipment parts was taken by ourselves as security for repayment
of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 15th day of
November, 2000
NORTH AMERICAN LEASING CORPORATION
per:
"Signature"
CONFIRMATION OF NO ITC CLAIM
To:
Pro-Ex Trading Co. Inc. and
To: Canada Customs
Edmonton,
AB
& Revenue Agency
FAX:
780-459-8181
Goods & Services
Tax Division
Edmonton, Alberta
Re:
Lending Transaction with Title Security
Agreement dated
-
April 18, 1996 - $13,500
July 18, 1996 - $22,500
In the above-noted lending transactions, I hereby confirm that
I have not claimed a GST ("Goods & Services Tax")
Input Tax Credit ("ITC") in relation to the transfer of
the title to serial numbered equipment and/or equipment parts
identified in the Agreements.
I further confirm that title to the equipment and/or equipment
parts was taken by myself as security for repayment of monies
borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 23rd day of
November, 2000
"Signature"
Howard Christensen
CONFIRMATION OF NO ITC CLAIM
To:
Pro-Ex Trading Co. Inc. and
To: Canada Customs
Edmonton,
AB
& Revenue Agency
FAX:
780-459-8181
Goods & Services
Tax Division
Edmonton, Alberta
Re:
Lending Transaction with Title Security
Agreements dated
-
April 1, 1996 - $100,000
As Amended
- September 30, 1996 - $125,000
- January 17, 1997
- $175,000
In the above-noted lending transactions, we hereby confirm
that our company has not claimed a GST ("Goods &
Services Tax") Input Tax Credit ("ITC") in
relation to the transfer of the title to serial numbered
equipment and/or equipment parts identified in the
Agreements.
We further confirm that title to the equipment and/or
equipment parts was taken by ourselves as security for repayment
of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 21st day of
November, 2000
"Signature"
Rick Nyman c.o.b. Nyco
CONFIRMATION OF NO ITC CLAIM
To:
Pro-Ex Trading Co. Inc. and
To: Canada Customs
Edmonton,
AB
& Revenue Agency
FAX:
780-459-8181
GST Division;
Edmonton, AB
Re:
Lending Transaction with Title Security - $200.000
Agreement dated February 21, 1997 - copy
attached
In the above-noted lending transaction, we hereby confirm that
our company has not claimed a GST ("Goods & Services
Tax") Input Tax Credit ("ITC") in relation to the
transfer of the title to serial numbered equipment and/or
equipment parts identified in the Agreement.
We further confirm that title to the equipment and/or
equipment parts was taken by ourselves as security for repayment
of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 14 day of
November, 2000
RELI LEASING INC.
per:
"Signature"
Mike LaFranchise - President
[4]
Called as witnesses were Michael Dickie, a management consultant
who in the years in question worked for and with the Appellant,
Michael Joseph Coghlen a person who acted as agent on some of the
transactions which form the subject of these appeals and the
auditor of Canada Customs and Revenue Agency ("CCRA")
Mr. Stephen Douglas Harak and David Der the appeals officer on
these appeals.
[5]
In addition to the Statement of Agreed Facts other relevant facts
that came out in the evidence were that at and prior to the time
of the transactions the Appellant could not obtain conventional
financing from financial institutions such as the Alberta
Treasury Board on the security of the heavy equipment which it
was dealing in and being short of cash sought out the other
parties to the various transactions. Further in respect of the
transactions involving North American a commission was paid to
Mr. Coghlen for bringing the parties together. Further certain of
the transactions contain the personal guarantees of Mr.
Sutherland the principal behind the Appellant. Also when the
transactions were put together the nominal interest rate was
calculated at 24% and the amount advanced represented only fifty
percent of the value of the equipment, which secured the
particular transaction in question.
[6]
The Appellant submits that the transactions in question
constituted loans and that the equipment given was given as
security for repayment of those loans. Counsel submits further
that although some of the bookkeeping and journal records and
other documentation of the Appellant indicate reference to GST
that in fact no GST was collected on any of the transactions.
This was the evidence of Mr. Dickie and is consistent with
the attachments to the Statement of Agreed Facts.
[7]
Counsel for the Respondent refers repeatedly to the text of the
transactions, which on their face indicate sales as opposed to
loans, and no reference is made in any of those transactions to a
loan, a borrower or a lender. Consequently the transactions
represented sales upon which GST was exigible. He further
contends that GST being shown on the various books and records
must be taken as an indication that GST was actually
collected.
Analysis and Decision
[8]
Section 165 of the Excise Tax Act ("Act")
imposes GST on every recipient of a taxable supply made in Canada
at the rate of 7% of the value of the consideration for the
supply. Pursuant to subsections 221(1) and 228(2), persons making
taxable supplies, are obligated to collect and remit to the
Receiver General, the "net tax" for a reporting
period.
[9]
Under section 165 taxable supplies attract GST. "Taxable
supply" is defined in subsection 123(1) to mean "a
supply that is made in the course of a commercial
activity". The Appellant does not dispute that it is
engaged in a commercial activity, as defined in subsection
123(1). "Supply" is defined in subsection 123(1) to
mean "subject to sections 133 and 134, the provision of
property or a service in any manner, including sale, transfer,
barter, exchange, licence, rental, lease, gift or
disposition". Section 134 provides that "...
where ... a person transfers property ... for the
purpose of securing payment of [a] debt or performance of [an]
obligation, the transfer shall be deemed not to be a supply,
..." Thus, pursuant to section 134, any transfer of
property made for the purposes of securing a debt, is excluded
from being a "supply", and as a result is ignored for
GST purposes. The same applies on a re-transfer.
[10] In
Pembina Finance (Alta) Ltd. v. The Queen, [1998]
G.S.T.C. 119 (T.C.C.) the only reported case dealing with section
134, Judge Bowie considered an appeal where the taxpayer argued
that it did not sell two cranes in question, but rather
transferred them for security purposes. The appeal was dismissed
because Judge Bowie did not find the taxpayer's principal
to be credible, and found his testimony to be
"evasive", self-serving",
"implausible" and "unreliable, particularly
where it [was] in conflict with documentary evidence of those
transactions".
[11] In the
case at hand, the Appellant argues that the inventory items in
question were not sold, but rather were used as collateral to
obtain financing. If that is the case, then section 134 of the
Act would apply, excluding the transactions from the
definition of "supply", and thus rendering them as
non-taxable events for purposes of the GST.
[12] The
Appellant concedes that the contracts supporting the transactions
indicate that they were in fact "sales". However, it
is the legal substance of a transaction that is relevant for tax
purposes, rather than what label a taxpayer puts on a given
transaction. For example, in The Queen v.Placer Dome
Inc., 92 DTC 6402 (F.C.A.) Marceau, J. stated at page
6411:
Counsel for the respondent put great emphasis on the
statements which appear in Article IV F of the Plan to the effect
that the employer's contribution is "on behalf of and as
an absolute benefit for (the) member" and that such
contribution "shall be regarded as additional compensation
paid to (the member)"; they likewise attach much importance
to the fact that income taxes for participating employees are
withheld not only from their wages but also from the
employer's contribution. But, it is the substance of a
transaction that must be looked at in order to determine the true
legal rights and obligations of the parties. Similarly, it is the
commercial and practical nature of the transaction, the true
legal rights and obligations flowing from it, that must be looked
at to determine its tax implications. As to the amounts withheld
and presumably remitted to the Department in the name of the
employees, it was a necessary corollary of the employer's
assumed position under the Plan, but, of course, it cannot
transform the reality of the transaction.
[13] Also, in
Continental Bank Leasing Corporation v. The
Queen, 98 DTC 6505 (S.C.C.) Justice Bastarache cited with
approval the following passage from Orion Finance Ltd. v.
Crown Financial Management Ltd., [1996] 2 B.C.L.C. 78
(C.A.) at p. 84, as follows at page 6514:
Once the documents are accepted as genuinely representing the
transaction into which the parties have entered, its proper legal
categorisation is a matter of construction of the documents. This
does not mean that the terms which the parties have
adopted are necessarily determinative. The substance of the
parties' agreement must be found in the language they have
used; but the categorisation of a document is determined by the
legal effect which it is intended to have, and if when properly
construed the effect of the document as a whole is inconsistent
with the terminology which the parties have used, then their
ill-chosen language must yield to the substance.
[14] Thus, in
the case at hand, in determining the tax effect on the
transactions in question under the Act, I must determine
the legal substance of the transactions, as evidenced by the
intentions of the parties, rather than relying for
characterization purposes, on the "labels" placed on
the transactions by the parties.
[15] The
Respondent also argues that even if the transactions in question
were financing transactions, the amounts assessed by the Minister
in respect of those transactions were collected by the Appellant
as or on account of tax under the Act, and thus the
Respondent was correct in assessing the amounts as part of the
Appellant's net tax for the relevant period.
[16]
Subsection 225(1) defines "net tax" to include
"all amounts that become collectible" and "all
other amounts collected... as or on account of tax".
Thus, under subsection 225(1), all amounts
"collected...as tax", even if
collected in error, are included in the calculation of "net
tax", and pursuant to subsection 228(2), must be
remitted to the Receiver General. In the case at hand, all
amounts if collected by the Appellant with regards to the
transactions in question, were part of the supplier's
"net tax" for the relevant period, and remittable to
the Receiver General under subsection 228(2).
[17] In my
opinion for the following principal reasons I find that the
transactions constitute loans and that the equipment given as
security was given as security for those loans.
1.
The theory of substance over form should govern.
2.
The fact that the other parties to the transactions claim no ITCs
and the fact that their statements indicate that the transactions
were actually loans must be considered. In other words, if the
Appellant collected GST these parties would without doubt have
made a claim for ITCs related to the GST collected.
3.
The financial situation of the Appellant and its need for an
infusion of cash as discussed above is a strong indication that
what was contemplated was loans and not sales. Commissions were
paid to Mr. Coghlen who brought the parties together and
stated in evidence that the transactions in question were a form
of financing.
[18] The
evidence is that the other parties to the transactions had no use
for the equipment and were not involved in the ultimate sale
thereof. In my opinion the evidence discloses that
notwithstanding the bookkeeping and journal entries no GST was
actually collected. Moreover certain of the transactions contain
the personal guarantee of Sutherland, the principal behind the
Appellant which is not consistent with the concept of sale.
[19] In
conclusion for the above principal reasons the appeals are
allowed. However considering this is an appeal under the Informal
Procedure of this Court there shall be no costs.
Signed at Ottawa, Canada, this 6th day of September,
2001.
"T. O'Connor"
J.T.C.C.
COURT FILE
NO.:
2000-4321(GST)I
STYLE OF
CAUSE:
Pro-Ex Trading Co. Inc. v. The Queen
PLACE OF
HEARING:
Edmonton, Alberta
DATE OF
HEARING:
July 23 and 25, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge T. O'Connor
DATE OF
JUDGMENT:
September 6, 2001
APPEARANCES:
Counsel for the Appellant: Neil W. Nichols
Counsel for the
Respondent:
R. Scott McDougall
COUNSEL OF RECORD:
For the
Appellant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4321(GST)I
BETWEEN:
PRO-EX TRADING CO. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 23 and July 25, 2001 at
Edmonton, Alberta by
the Honourable Judge Terrence O'Connor
Appearances
Counsel for the
Appellant:
Neil W. Nichols
Counsel for the
Respondent:
R. Scott McDougall
JUDGMENT
The
appeal from the reassessment made under the Excise Tax
Act, notice of which is dated July 10, 2000 and bears number
10BT-116927450, is allowed, without costs, and the reassessment
is referred back to the Minister of National Revenue for
reconsideration and reassessment in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada this 6th day of September,
2001.
J.T.C.C.
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