Date: 20010308
Docket: 2000-498-GST-I
BETWEEN:
GESTION ALAIN ST-PIERRE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1]
This is an appeal from a notice of assessment dated February 20,
1998, concerning the goods and services tax ("the GST")
for the period from November 1, 1993, to October 31,
1997.
[2]
The appellant is a management company incorporated by
Alain St-Pierre, a pharmacist. Being subject to the
regulations of his professional corporation,
Mr. St-Pierre could not and still cannot practise his
profession by assuming corporate status: he must be personally
accountable for the actions he takes in his professional
practice.
[3]
However, the same is not true for the business activities related
to the practice of his profession, such as the sale of food
products, non-food products, cosmetics, perfumes, and so
on; all those items could and can be sold through a company.
[4]
In actual fact, Alain St-Pierre gained accreditation for the
pharmacy, one part of which was used as the dispensary (the place
where the drugs were sold, which was delimited by a psychological
division) and the other, much larger, part of which was taken up
by the stock of all the other products: food products,
non-food products, over-the-counter drugs,
cosmetics, perfumes, and so on.
[5]
All the financial and business transactions of the pharmacy as a
whole went through the account of
Gestion Alain St-Pierre Inc.; as for Alain
St-Pierre personally, he stated a number of times that he
did not have his own account for the business of the
pharmacy's two components.
[6]
The accountant, Pierre Mercier, explained that he acted as a
public accountant for a number of pharmacies and had built up
valuable expertise in this area over the years. Indeed, the Court
could see that he was very familiar with the accounting and
regulatory aspects of the pharmaceutical field.
[7]
He had a thorough grasp of the appellant's accounting file;
it held no secrets for him. He explained that he had organized
the appellant's accounting in accordance with the statutory
and regulatory requirements of the pharmacists' professional
corporation and had done so using a single bank account, the
appellant's.
[8]
He thus had a specific column under the heading [TRANSLATION]
"lab" in which were entered all
laboratory-related expenses and all were also shown as a
percentage of the same items for the balance of the transactions
related to the pharmacy's purely business activities.
[9]
In this regard, the evidence clearly showed that there was a
definite distinction between the business transactions and the
dispensary or laboratory activities.
[10] At the
end of the company's fiscal year, all the expenses for which
Alain St-Pierre was personally responsible were separated
from those for which Gestion Alain-St-Pierre Inc. assumed
responsibility.
[11] However,
the evidence showed that the appellant's accountant tended to
play down the reality of the two juridical personalities, namely
that of the appellant, Gestion Alain St-Pierre Inc., and that of
Alain St-Pierre himself.
[12] On the
basis that Alain St-Pierre owned all of the company's shares
and was its only director and that the respective work and
energies of Mr. St-Pierre and the company were devoted to
the same pharmacy, the accountant—like his client, Mr.
St-Pierre—seemed to consider the company to be basically an
administrative and accounting requirement.
[13] This
ambiguity also existed in other respects.
Alain St-Pierre was hesitant when he had to answer
questions about insurance, the lease and other agreements with
third parties, since he did not know exactly whether, in a given
case, he himself or the management company was a party, an
intervener or a surety. The accountant testified that it would
have been impossible, or at least very difficult and much more
costly, to make periodic remittances given that the accounting
did not provide for any interruptions during the year. In no way
is that argument a valid one.
[14] When a
taxpayer chooses to organize his or her affairs by incorporating
a management company into them, the taxpayer must accept the
consequences of that choice and above all comply with the
requirements applicable to the chosen means by maintaining
consistency given that two separate juridical personalities are
involved. The argument based on the additional costs resulting
from the existence of the two entities is clearly irrelevant and
cannot be accepted.
[15] Taking
advantage of the benefits and ignoring the inconveniences could
well have effects contrary to those sought, since third parties
will be justified in not taking the corporate status into
account. Owning all the shares, being the sole director and
carrying on businesses involved in more or less the same type of
activity are not excuses for not meeting the fundamental
requirements dictated by the reality of the existence of two
distinct entities that are completely separate from each other,
nor are they a means of evading those requirements.
[16] In the
case at bar, if the accountant and Alain St-Pierre had really
understood that inescapable reality, they would have set up a
structure and above all one or more agreements that had the
effect of separating and dividing up the two entities'
respective areas of activity much more clearly. As a result, it
would have been easier and above all simpler to assess and
analyse each entity's rights and obligations.
[17] Starting
from the premise that Alain St-Pierre and Gestion Alain St-Pierre
Inc. were two separate and distinct entities, the parties could,
and above all should, have prepared one or more agreements to
define and set out each entity's rights and obligations. If
they had done so, it would have been possible to quickly see that
a mandate existed and especially to assess its content. It would
also have been a consequence of such a separation that it would
have been more appropriate to provide for periodic invoices to be
issued for the management fees.
[18] Confusing
the two entities may make it seem unnecessary to conduct certain
transactions on the pretext that doing so has little effect and
entails additional costs. These are in fact the reasons relied on
by the appellant's accountant.
[19] Such an
argument and such reasoning are not valid and are in no way
acceptable to justify or explain the failure to make quarterly
payments under the requirement to account for the taxes payable,
which is why the Court refuses to go along with the arguments put
forward by the appellant, which had to and will have to comply in
this regard with the Excise Tax Act, which provides for
periodic payments.
[20] Moreover,
the appellant made the same mistake in asserting that it was
pointless and unnecessary to consider the management service a
taxable supply because Alain St-Pierre could subsequently
claim the amount of taxes he paid as an input. Once again, to
support such reasoning, the reality of the two separate juridical
personalities would have to be completely disregarded.
[21] What
about the assessment at issue in this appeal? There is no doubt
that the fees billed by the appellant to
Alain St-Pierre were indeed taxable supplies. Does
this mean that such taxable supplies had to include all the
components, which for the years at issue totalled $1,142,199, the
amount on which the assessment was based?
[22] The
evidence showed that the appellant had taken on various
obligations that were Alain St-Pierre's personally in his
capacity as a pharmacist. This is clear from Exhibit A-7. I
consider it useful to reproduce the content of that exhibit:
[TRANSLATION]
Gestion Alain St-Pierre Inc.
for Alain St-Pierre, pharmacist
Breakdown of management services for the pharmacist
$
Taxable
Non-taxable
Year
%
expenses
expenses
Fees
Total
1994
$
63,225 166,360
69,602 299,187
%
21.13
55.61
23.26
100.00
1995
$
64,655 214,481
44,175 323,311
%
20.00
66.34
13.66
100.00
1996
$
82,692 268,190
48,815 399,697
%
20.69
67.10
12.21
100.00
1997
$
97,291 270,353
51,547 419,191
%
23.21
64.49
12.30
100.00
1998
$
110,180 336,719
62,535 299,187
%
21.63
66.10
12.27
100.00
TOTAL
$
418,043
1,256,103
276,674 1,950,820
%
21.43
64.39
14.18
100.00
[23] Counsel
for the appellant argued that the appellant had a tacit mandate
from its sole shareholder, Alain St-Pierre, to carry out certain
transactions. If such a mandate had been expressly agreed on,
there would no doubt have been no dispute and the assessment made
on the basis of the single item would most likely not have led to
litigation.
[24] Absent a
written mandate, can the appellant argue that it acted pursuant
to a tacit mandate?
[25] I
consider it helpful to reproduce articles 2130 and 2132 of the
Civil Code of Québec, which deal with
mandate:
2130 Mandate is a contract by which a person, the mandator,
empowers another person, the mandatary, to represent him in the
performance of a juridical act with a third person, and the
mandatary, by his acceptance, binds himself to the exercise the
power.
The power and, where applicable, the writing evidencing it are
called the power of attorney.
2132 Acceptance of a mandate may be express or tacit. Tacit
acceptance may be inferred from the acts and even from the
silence of the mandatary.
[26] Although
it would have been preferable to have a written mandate that
clearly defined the scope of the parties' rights and
obligations, I do not think that it can be concluded on the
evidence that there was no mandate at all.
[27] The
appellant's raison d'être and fundamental role were
to take on certain responsibilities that normally would have
fallen on Alain St-Pierre personally, and that reality
alone indicates that there was a tacit or at least a presumed
mandate.
[28] In
addition to that reality, there is the fact that the appellant
was to and did in fact receive fees for carrying out the
financial transactions. The payment of fees confirms the
mandate's existence. Finally, the evidence showed that
Alain St-Pierre relied completely and utterly on the
appellant to handle all business and financial transactions and
indicated as well that he had no bank account in his name.
[29] In my
view, these factors are a sufficient basis for finding that there
was indeed a mandate between the appellant and its sole
shareholder, Alain St-Pierre. It was a tacit mandate carried out
for a fee.
[30] What
about the content of that mandate? Once again, a written mandate
would have allowed for clarity and transparency as far as the
content was concerned. Without such a written mandate, the
situation was ambiguous and equivocal, especially since certain
accounting items were confusing—and this was the case even
though the accountant explained that he was obliged to comply
with his professional corporation's instructions on
terminology use. I am referring in particular to the
[TRANSLATION] "Management Fees" item, which, according
to the evidence, did not correspond at all with the content of
that item. Indeed, the evidence showed that that item included
expenses that had nothing to do with the heading used. The terms
employed misled the respondent, since it was possible and
plausible that everything under that item was part of the
management fees, given that the finer points and realities should
normally have been the subject of an express agreement.
[31] As
regards the determination of the content of the mandate between
the appellant and its sole shareholder, Alain St-Pierre, the
evidence showed that Mr. St-Pierre had approached the
respondent's officials to find out what his obligations were.
In reliance on the information obtained, Mr.
St-Pierre—in concert with his accountant—had
personally decided not to register, his argument being that there
were no tax consequences since, if he had registered, he would in
any event have received a refund of the amounts paid. In addition
to those considerations, the appellant indicated that most of the
sales were non-taxable supplies because they involved
drugs.
[32] The
assessment under appeal was made in a very simple way: for the
period at issue, the auditors basically added up the amounts
listed under "Management Fees" and assessed the
appellant on the total thus obtained, adding interest and
penalties. The appellant's accountant would have liked the
auditors to do an in-depth analysis. In other words, he would
have liked the respondent not to take account of what he himself
had described, defined and identified. The accountant advanced an
absurd and totally unacceptable argument in asserting that the
heading or item chosen did not correspond with the content. On
that basis, the accountant argued that the respondent should not
have taken account of the item chosen and should have assessed on
the basis of the content contradicted by the heading.
[33] That
argument is not valid, especially since the accountant himself
was the one who created, as it were, the means chosen.
[34] The
appellant tried unsuccessfully to show the respondent's
analysts and auditors that the item "Management Fees"
included components that had nothing to do with the work and fees
associated with management. In this regard, the appellant greatly
contributed to, encouraged and inspired the respondent's
approach by itself defining and describing the assessed amounts
as management fees.
[35] The
evidence adduced by the appellant therefore sought mainly to
prove that, although things were clearly set out and worded in
the financial statements under the item "Management
Fees", elements were included that had nothing to do with
the heading used in those statements.
[36] In light
of the evidence adduced, it appears that the appellant has partly
discharged its burden of proof by showing on a balance of
probabilities, first, that two of the three components of the
item "Management Fees" were not actually part of that
item, and second, that the appellant had assumed responsibility
for them as part of its tacit mandate.
[37] On the
other hand, it appears that the management fees, which were set
at about 15 percent, were indeed taxable supplies.
[38] As
regards the interest, this Court has no authority to intervene
where the assessment was made correctly. With respect to the
applicable penalties resulting from the impending assessment
arising out of this judgment, there is no reason or evidence that
justifies not assessing them.
[39]
Accordingly, the appeal should be allowed to the extent that only
the actual management fees constituted taxable supplies.
[40] For these
reasons, the appeal is allowed to the extent that only the actual
management fees constituted taxable supplies. As for the
applicable penalty on the supplies determined to be taxable by
this judgment, it was fully justified. The same is true of the
interest.
Signed at Ottawa, Canada, this 8th day of March 2001.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 23rd day of July
2001.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
2000-498(GST)I
BETWEEN:
GESTION ALAIN ST-PIERRE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 18, 2000, at
Québec, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the
Appellant:
Pierre Hémond
Counsel for the
Respondent:
Louis Cliche
JUDGMENT
The appeal from the assessment made under Part IX of the
Excise Tax Act, notice of which is dated February 20, 1998
and bears number 7214044, for the period from November 1, 1993 to
October 31, 1997, is allowed in accordance with the attached
Reasons for Judgment.
Signed at Ottawa, Canada, this 8th day of March 2001.
J.T.C.C.
Translation certified true
on this 23rd day of July 2001.
Erich Klein, Revisor
Email this Content