Date: 20010405
Docket: 1999-3212-GST-I; 1999-3213-GST-I
BETWEEN:
482733 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1]
These are appeals by 482733 Ontario Inc. from two assessments
bearing numbers 05DP0013723 and 414149 made by the Minister of
National Revenue (the Minister) on September 23, 1997 and April
29,1998, respectively. Both assessments relate to the period from
December 1, 1995 to December 31, 1996 (the Period) and arise from
the same series of transactions. However, the issue in each
appeal is different and will be dealt with separately.
[2]
The First Assessment:
The Appellant was registered for purposes of Part IX of the
Excise Tax Act (the Act) effective December 1,
1995. During the Period, it reported goods and services tax (GST)
collected in the amount of $65,674.15 and claimed input tax
credits (ITCs) in the amount of $75,748.26 to report net tax
refundable in the amount of $10,674.11 for the Period. In
reassessing the Appellant the Minister disallowed ITCs claimed in
the amount of $62,438.26 and assessed penalties and interest of
$2,828.64 and $1,505.60, respectively. In so doing, the Minister
acted on the basis that:
4(i) the
Appellant claimed ITCs in the amount of $62,438.26 that did not
correspond to a taxable supply taxable at 7%;
4(j) the
supplies of interlining for which the Appellant claimed ITCs in
the amount of $62,438.26 are a 0% taxable supply pursuant to
subsection 1(1) and section 11 of Part VII of Schedule VI of the
Act;
4(k) no tax
was payable or paid by the Appellant on the receipt of the supply
of interlining that is the issue of the denial of ITCs this
appeal;
4(l)
pursuant to section 169(1) of the Act, an input tax credit
is subject to tax having been payable or paid in respect of a
supply; and
4(m) sufficient and
appropriate evidence as required by subsection 169(4) of the
Act and the Input Tax Credit Information
Regulations was not obtained and maintained by the Appellant
in relation to the ITCs claimed and denied.[1]
[3]
Testimony on behalf of the Appellant with respect to this
assessment was given by Howard Winick (Winick). He said that on
December 1, 1995, the Appellant purchased a business known as KM
Delivery Service (KM) from Kay Ann Marks (Marks).[2] KM was in the business of
providing "full management of delivery services" to
four customers each of whom did not wish to become involved in
the setting up of an internal system for that purpose utilizing
their own employees and drivers. The two major customers were
Charles Abel (Abel) and Benjamin Film Labs (Benjamin) and
deliveries for them comprised over 85% of its business. Winick
described Abel as a photo finishing company which had contracted
with KM to deliver their product primarily developed and
undeveloped film to its stores throughout southern Ontario from
Kingston to Windsor. As a general rule, KM picked up the product
at the Abel plant in Toronto. The pickup consisted of large bins
of developed and undeveloped film packaged in separate bags and
identified by Abel with the appropriate store number for delivery
purposes. According to Winick, it was brought to the
Appellant's warehouse for sorting, if necessary,
"routing" the deliveries and making the necessary
arrangements to ship the items as required.[3] When the sorting and organizing was
done, the "product" was turned over to
"independent contractors" or "brokers", i.e.
drivers with their own vehicles,[4] who delivered the product as required. In all
instances, the Appellant was paid by its customers on a per
delivery basis. The delivery services provided to Benjamin were
for all practical purposes identical to that of Abel. The
remaining 15% of KM's business reflected the delivery of
printing supplies and packages for Sears. As was the case with
the photo finishing products, the arrangement required KM to
merely pick up a large bin full of printing supplies, labelled
and addressed for delivery and attend to that service.[5]
[4]
Appellant's position – First
Assessment: The basis
for the Appellant's submission that the Minister erred in
assessing to disallow its claim for ITCs is twofold. First, the
deliveries were made by "brokers" and accordingly, as
carriers they were required to charge GST. Second, there was no
"continuous freight movement" because the Appellant
"in fact became the shipper" and thus there was no
interlining involved. The Appellant also maintains that with
respect to approximately 85% of its business there was a stopover
which on occasion lasted for as long as four or five days. Its
representative argued that following the pickup up of the
"buckets of product with the store codes" at the
clients' premises, they were taken "back to our
warehouse, sorting them and making routes and directing the
carriers where to go". The Appellant relies on the decision
in American Adventures 2000 v. The Queen[6] to support the proposition that
where there is a stopover, there is not a continuous freight
movement and that therefore tax is applicable on each part.
[5]
Statutory
Provisions:
The relevant sections of the Act are:
123(1) In section 121, this Part and
Schedules V to X,
“carrier” means a person who supplies a freight
transportation service within the meaning assigned by subsection
1(1) of Part VII of Schedule VI;
“zero-rated supply” means a supply included in
Schedule VI.
165(3) The tax rate in respect of a
taxable supply that is a zero-rated supply is 0%.
Part VII, Schedule VI – Transportation
Services
1(1) In this
Part,
"continuous freight movement" means the
transportation of tangible personal property by one or more
carriers to a destination specified by the shipper of the
property, where all freight transportation services supplied by
the carriers are supplied as a consequence of instructions given
by the shipper of the property;
"shipper" of tangible personal property means the
person who, in respect of a continuous freight movement or a
continuous outbound freight movement, transfers possession of the
property being shipped to a carrier at the origin of the freight
movement and, for greater certainty, does not include a person
who is a carrier of the property to which the freight movement
relates;
11
A supply of a freight transportation service made by a carrier of
the property being transported to a second carrier of the
property being transported, where the service is part of a
continuous freight movement and the second carrier is neither the
shipper nor the consignee of the property being transported.
[6]
Analysis – First
Assessment:
The Appellant's reliance on the decision in American
Adventures is misplaced. That case dealt with a taxpayer
which was a tour operator and the issue was whether two tours
involving no "stopovers" constituted zero-rated
"continuous journeys".[7] As was observed by the Court in American
Adventures, passenger transportation services that are
included in a tour package can in certain instances form part of
a "continuous journey" and thus be zero-rated for GST
purposes. "Continuous journey" is an exception to the
general rules of applicability of GST to tour packages as
outlined in section 163 of the Act. However, these
concepts have absolutely no application in the Appellant's
case. The definition of "continuous journey" applies
only to a "continuous journey of an individual or
groups of individuals" and is not applicable to a supply of
a freight transportation service as defined in section 11 of Part
VII, Schedule VI of the Act.
[7]
The next question is whether the Appellant is correct in arguing
that it became the shipper and was not interlining. Interlining
describes a process where several carriers participate in the
supply of a freight transportation service in the course of a
continuous freight movement from the shipper's premises to
the customer's premises. I am satisfied that the facts of
this case establish a continuous freight movement involving one
or more carriers to a destination specified by the shipper of the
property. A shipper is clearly defined in the Act and on
the facts in this case, it is clear that Abel, Benjamin and
Sears, respectively, and not the Appellant were the shippers.
Furthermore, in my view, there is equally no doubt that the
Appellant falls squarely within the definition of carrier and was
a person which supplied a freight transportation service within
the meaning assigned by subsection 1(1) of Part VII of Schedule
VI. Accordingly, the Minister was correct in assessing on the
basis that the supply provided to the Appellant by other carriers
that participated in the continuous freight movement was a
zero-rated supply.
[8]
The Second
Assessment:
Upon receipt of the first assessment, the Appellant filed a
notice of objection and concurrently, as an alternative measure,
made application for a rebate of tax paid in error in the amount
of $50,950.10. In assessing to deny the rebate sought, the
Minister made the following assumptions of fact:
(b)
Appellant claimed a rebate of tax paid in error in the amount of
$50,950.10 that did not correspond to a taxable supply taxable at
7%;
(c)
the supply that is the subject of the rebate claim is the supply
of freight transportation services ("interlining");
(d)
the supplies of interlining for which the Appellant claimed a
rebate of tax paid in error in the amount of $50,950.10 are a 0%
taxable supply pursuant to subsection 1(1) and section 11 of Part
VII of Schedule VI to the Act;
(e)
no tax was payable or paid by the Appellant on the receipt of the
supply of interlining that is the issue of the denial of the
rebate in this appeal;
(f)
pursuant to section 261(1) of the Act, a person is only
eligible for a rebate of tax paid in error where the person has
paid an amount of tax that was not payable or remittable by the
person; and
(g)
the Appellant did not pay an amount of tax in the amount of
$50,950.10.[8]
[9]
Appellant's
Evidence: Winick
testified that at the time the Appellant was considering the
purchase of KM as part of the due diligence, it reviewed a number
of matters including goods and services tax returns for KM and
satisfied itself the vendors were up-to-date on all
of the filings. He alleges that the brokers who made deliveries
on behalf of KM were listed on those returns and that excepting
one or two individuals all had GST registration numbers.[9] He said that following
the purchase, KM "continued to operate in exactly the same
manner, with the same personnel, the same drivers, the same
computer program and the same software as had been used by the
previous owners". He produced five sample "payout
sheets" which he said documented the amount each broker was
paid for each two-week period[10] which amount included GST. He also produced
computer printouts with respect to GST paid by the Appellant on
purchases and said that in the system used, the payments to the
brokers by KM were included as a purchase item. Thus, he said,
the total amount of GST reflects the period of time under
assessment and forms the basis for the Appellant's claim for
ITCs on its return.[11] These documents were provided to the Appellant by
Heather Chamberlaine (Chamberlaine). She had been employed
by KM and, according to Winick, following its purchase by the
Appellant she "had a contract of services with our
company" to provide operational services to KM which
involved "part book work, part organization ... helping
sort stuff, helped hiring brokers if we needed them ...
" and included some of the firing. She was also responsible
for attending to all aspects of payment of the
"brokers" for their services.
[10] At the
objection stage the Appellant, in response to a request by
Revenue Canada for confirmation of GST payments by the Appellant
to its brokers, provided the auditor with nine documents
purporting to be invoices issued to KM by eight different
brokers.[12] A
further set of documents was provided by the Appellant to
Respondent's counsel prior to trial purporting to be invoices
for services rendered by a number of other brokers.[13] According to Winick,
these documents are consistent with and support the amounts of
GST paid as shown in the general ledger.[14] He did concede these invoices had
not been provided by the brokers but said they "might have
used our computer program" to generate them.
[11] Evidence
was also adduced from Marilyn Leslie (Leslie), a consultant hired
in August 1995 by the former owners of KM to facilitate the sale
of the business. She testified that its books and records which
had been prepared and maintained by Chamberlaine and Brenda
Turner, a part-time bookkeeper, were made available to her.
KM's GST returns for the period January 1 – June 30,
1995[15] formed
part of these records and she was led to believe by Chamberlaine
that all but two of the "brokers" listed therein had
applied for GST registration. She had seen GST numbers in
individual folders but was unable to verify that in fact they had
registered. With respect to the actual payment of GST to the
brokers, Leslie said she could not attest to the fact that GST
was actually paid to them, had never actually seen the invoices
or payslips, but was led to believe that a portion of their daily
rate reflected GST. The source of her information with respect to
all of these "beliefs" was Chamberlaine. Leslie also
specifically pointed out that she was only aware of what was done
to December 31, 1995 since her contract ended shortly thereafter,
and that although the subsequent format appears to be the same,
she had no way of knowing.
[12]
Respondent's Evidence: George
Choremis is an appeals officer with Revenue Canada. He became
involved in these appeals following the filing of the notices of
objection by the Appellant. As part of the process, he examined
the documents initially provided by the Appellant.[16] Utilizing the
Revenue Canada data base, he attempted to determine whether the
individuals named on the invoices were registered, the date of
registration and the registration number. His review disclosed
the following:
(a)
Masaud Ansari: Two invoices dated December 15 and 31,
1995. The data base established that Ansari both registered and
de-registered on October 31, 1995 and that there was no record of
any subsequent registration. No GST returns for the periods set
out in the invoices had been filed by this individual.
(b)
Ali
Golriz:
The data base disclosed that the GST registration number on an
invoice purportedly issued by Golriz to KM on March 31, 1996
did not exist in the system and was not a valid GST number.
(c)
The remaining six documents in this group purport to be invoices
from Doug Urie (dated Mar/96), Joe Gramueller (Jan/96),
Amir Pourtayyebe (Oct/96), Robert Webster (Nov/96), Douglas
Bell (Mar/96) and Marcy McGuinnes (Feb/96). None of these
invoices were signed. Each document bears a GST registration for
that individual.
Choremis testified the data base established that in each case
the registration number was valid but also established that none
of them had been issued prior to the latter part of May or the
early part of June 1997. In view of the fact that the GST
registration numbers on these documents had not come into
existence until well after the dates indicated on the invoices,
Choremis, by way of letter to Winick, asked for written
confirmation that the Appellant did in fact pay GST or was billed
GST by these individuals. There was no response from the
Appellant. According to Choremis, it was not possible for Urie,
Gramueller, Pourtayyebe, Webster, Bell and McGuinnes to have
provided these invoices on the dates indicated bearing a
registration number which in each case had not been issued.
[13] Evidence
was also adduced by counsel for the Respondent from Mike Mant
(Mant). He had been employed as a full-time driver by KM since it
began to carry on business. At all relevant times, he was paid by
cheque and had never been required to provide KM with invoices.
Mant examined a series of documents covering the period December
1 to December 31, 1995 and January 1 to November 30, 1996[17] which had been
submitted by the Appellant to Revenue Canada. Each purported to
be an invoice from Mant to KM for delivery services for a
specified period and included GST at 7%. All were unsigned. Mant
said he had never seen these documents, had never provided any
invoices to KM and was not being paid GST. He did not dispute
that the GST registration number on these documents was his but
says he signed an application for registration presented to him
by "one of Heather's deputies" in 1995 when KM was
in financial difficulty, its cheques were bouncing and the
payment of wages was being delayed for periods as long as several
weeks. He says he agreed to KM's specific request to do so
"because that was the only way I would get a
paycheque". Mant also examined a document purporting to be
his Affidavit dated September 18, 1997 which states that he
was an independent contractor providing services to KM; that he
was never an employee of KM; that he provided services and
charged KM for them; and that he was aware that he charged and
received GST from KM.[18] Mant testified that he had never seen this document
prior to it being presented to him in Court, that it had not been
prepared by him, that the statements in it were not true and that
the signature was not his.
Appellant's Position
[14] The
Appellant, carrying on a delivery business as KM, subcontracted
services to individual brokers. The Appellant maintains that,
acting on the assumption these individuals were required to
register and collect GST, the amounts it paid to them were
inclusive of GST. The Appellant now says that since this GST was
paid in error, it is entitled to a rebate of the tax pursuant to
section 261 of the Act.
Analysis
[15]
Subsection 261(1) of the Act provides as follows:
261(1) Where a person has paid an
amount
(a)
as or on account of, or
(b)
that was taken into account as,
tax, net tax, penalty, interest or other obligation under this
Part in circumstances where the amount was not payable or
remittable by the person, whether the amount was paid by mistake
or otherwise, the Minister shall, subject to subsections (2) and
(3), pay a rebate of that amount to the person.
The supply that is the subject of the rebate claim in this
appeal is the supply of freight transportation services commonly
referred to as interlining which are zero-rated pursuant to the
provisions of subsection 1(1) and section 11 of Part VII of
Schedule VI to the Act. Accordingly, if the Appellant is
to succeed it is incumbent upon it to establish that the rebate
amounts claimed were paid by mistake to the brokers as or on
account of tax.
[16] It is
incumbent on the Appellant to establish the nature of the
agreement between KM and the brokers and, more specifically, to
establish that the amounts paid to the latter included an amount
paid as or on account of tax. The evidence as a whole suggests
that brokers entered into oral contracts with KM and were paid
for their services primarily on a per diem basis. As well,
at some point of time in 1995 prior to the Appellant's
acquisition of KM, Chamberlaine and the brokers appear to have
discussed the registration issue. There is, however, no credible
evidence before the Court to establish whether the brokers
accepted KM's position that their supply of services was
taxable. The Appellant relies principally on the testimony of
Winick and the documents submitted. However, it is apparent that,
at best, Winick had no more than a limited involvement in the
day-to-day operations of KM. There is no evidence that he
personally negotiated any of the broker contracts. He did not
know how any driver billed for his services but observed that
"Heather would" and he concedes that he knew what they
were paid only "because it's on the pay sheets",
summaries of which he received every two weeks from
Chamberlaine.
[17] The
documents tendered by the Appellant in support of its case are,
in my view, suspect. The first group of invoices[19] was tendered as proof that the
amounts paid to the brokers were inclusive of GST but none of
them could possibly have been prepared prior to May or June 1997
when the registration numbers were first issued. The Appellant
was urged to provide additional information to clear up the
discrepancy, but none was forthcoming. With respect to the second
group of invoices (Exhibit R-1, tabs 10-19) none
appear to have been provided by the brokers. All are unsigned
and, given the testimony of both Winick and Leslie, it is safe to
conclude they had been generated internally, probably by
Chamberlaine or her assistant. What has not been answered is when
this was done. In the absence of any explanation, it is difficult
to accept these documents as adequate proof of the arrangement
with respect to GST alleged by the Appellant to exist between KM
and each broker. Mant, in his testimony (which was not seriously
challenged), contradicted the Appellant's position and raised
additional doubt as to the authenticity of the invoices and
records the Appellant submitted. The Appellant's position
appears to be that because it recorded part of the payments to
the brokers as being on account of GST that is sufficient proof
to entitle the Appellant to the rebate. I am unable to accept
that proposition in the absence of some evidence that an
agreement with the brokers as to GST existed. It must be
remembered that the brokers were not the "person" which
"supplied freight transportation service" and thus were
providing a zero-rated supply. There is no evidence which
would entitle the Court to assume that they were not aware of
this fact.
[18] It should
also be noted that two of the employees that are alleged by the
Appellant to have provided zero-rated services and were
erroneously paid GST were not in fact providing delivery
services. As such, if any GST had been paid to them, it would not
be rebatable in any event. These two were
Heather Chamberlaine who provided operation/managerial
services and Robyn Leslie, the daughter of the witness,
Marilyn Leslie. Both Winick and the Appellant's documents
referred to Robyn Leslie as a broker. This was contradicted by
Marilyn Leslie who said that her company, The Marway Group,
contracted to provide administrative services to one of KM's
clients which service was provided by Robyn. Marway invoiced KM
specifically for that service. Leslie also noted that the
Appellant's invoices[20] which referred to Robyn as providing delivery
services were internal to KM and appear to have been substituted
for the invoices which Marway had submitted.
[19] The
evidence adduced on behalf of the Appellant falls short of
establishing that the amounts paid by KM to its brokers included
GST. The Appellant was aware that its assertion that the amounts
paid to its brokers included GST and the documents it submitted
in support thereof were being called into question. Chamberlaine
was the office manager both prior to and following KM's
acquisition by the Appellant. She attended to its day-to-day
management and was the person who attended to the contractual
arrangements with the brokers. Since Winick himself had no
firsthand knowledge of the arrangements which had been made with
the brokers (particularly any which may have been made prior to
the Appellant's acquisition of KM), it is surprising to say
the least that the only person in a position to do so,
Chamberlaine, was not called to testify. I note that when Leslie
initially indicated a reluctance to testify, Winick served her
with a subpoena. That same avenue was available to the Appellant
with respect to Chamberlaine. In these circumstances, the failure
to call her can only lead to the inference that her testimony
would have been unfavourable to the Appellant.
[20] The
Appellant has failed to meet the onus of establishing its case.
Accordingly, the appeals are dismissed.
Signed at Ottawa, Canada, this 5th day of April, 2001.
"A.A. Sarchuk"
J.T.C.C.
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