Date: 20010727
Docket: 2000-3620-GST-I
BETWEEN:
ANDREW BLANCHARD O/A FOUR PILLAR FINANCIAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
For the Appellant: The Appellant himself
Counsel for the Respondent: Arnold H.
Bornstein
___________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench on June 7,
2001, at Toronto, Ontario)
Bowie J.
[1]
This appeal concerns the Appellant's claim to be entitled to
input tax credits (ITCs) under the provisions of Part IX of the
Excise Tax Act (the Act). In returns filed for the
periods February 15, 1996 to January 31, 1997 (the first period),
and February 1, 1997 to January 31, 1998 (the second period), the
Appellant claimed ITCs of $21,012.99 and $6,147, respectively. By
an assessment made on June 17, 1999, the Minister of National
Revenue (the Minister) allowed ITCs of 2.7% of the amount claimed
for the first period, and allowed no ITCs for the second
period.
[2]
Mr. Blanchard is licensed to sell securities in Ontario. On
September 1, 1993 he entered into an agreement with Financial
Concept Group (FCG) whereby he became the owner, operator and
manager of the Oakville branch of FCG. In that capacity he was
expected to recruit a sales staff, which he did. He and his sales
staff were expected to, and did, sell securities, GICs, insurance
and other such financial products for which they were paid
commission by FCG. Mr. Blanchard was paid commissions on his own
sales, and an override commission on the sales made by his staff.
These staff members, who were called advisors in the evidence,
were not employees of Mr. Blanchard or FCG; they worked in his
branch office, but as independent contractors, according to his
evidence.
[3]
In order to maximize his own income through override commissions,
it was important to Mr. Blanchard to retain his complement of
salespersons, or advisors, in his office. To do this he had to
provide them with office space and an environment that was
conducive to attracting new business. To this end, he rented
office space in Oakville, furnished it, installed telephones, and
provided a receptionist and other administrative staff to operate
the office.
[4]
Another means of attracting potential new business for the
advisors was through an income tax preparation service which the
Appellant established. By advertising in the local newspapers, he
attracted clients to have their income tax returns prepared for
$25. The Appellant, some of his administrative staff, and most of
the advisors provided this service. The advisors were not paid
for giving this service, but their reward lay in the
opportunities to sell the various financial products to the
people whose returns they prepared.
[5]
Another facet of the Appellant's business is the collection
of fees payable annually to the trustees of self-directed
Registered Retirement Savings Plans (RRSPs). These fees have to
be collected each year from the owner of the RRSP. This is a task
which the sales staff do not relish, and they are glad to have
the services of the office administrative staff to assist in it.
Cheques payable to FCG are collected from the clients and
delivered to FCG to be transmitted to the trustees of the
self-directed RRSPs. The funds do not go through the accounts of
Four Pillar Financial.
[6]
Mr. Blanchard's evidence was that if he ceased to provide
these various services and facilities to the sales staff they
would simply go and work elsewhere. Indeed, he said that during
an income tax audit of himself which took place over several
months, many of his salespeople left and went to the Burlington
office of FCG.
[7]
Ms. Pimm was, at the relevant time, the office manager of the
Four Pillar operation, for which she was paid a salary. She was
also a branch manager for mutual funds under a contract with FCG.
She was paid commissions directly by FCG for her work as its
branch manager of mutual funds.
[8]
The essence of Mr. Blanchard's case is that he personally is
the recipient of his commission income from FCG, and that Four
Pillar Financial is a partnership made up of himself, his wife,
and, during 1996, Ms. Pimm. The business of Four Pillar consists
of the tax preparation operation, the collection of RRSP fees,
and providing office facilities, without remuneration, to the
sales staff. The Appellant, his wife and Ms. Pimm have apparently
filed income tax returns on a partnership basis, and there is
evidence before me that the Minister has assessed them on that
basis. However, it is trite that the Minister is not bound to
perpetuate error, and he is not precluded from asserting in this
litigation that the Four Pillar business is not a
partnership.
[9]
The issue before me, then, is whether Four Pillar Financial was,
at the relevant time, a business separate from the business of
Andrew Blanchard personally as the manager of the Oakville Branch
of FCG. If it was, then it was not a financial institution and it
did not provide financial services, with the result that it is
entitled to recover input tax credits under Part IX of the
Act. If, as the Minister contends, there is only one
business, then the nature of that business must be determined
under section 149 of the Act, and the extent of its
entitlement to ITCs, if any, falls to be determined under
sections 169, 141 and 141.01.
[10] Mr.
Blanchard was very definite in his evidence that he could only
receive commissions in his personal capacity, and not as a
partner with unlicensed partners. That made it important, in his
view, to establish that Four Pillar was a partnership, and he
gave evidence accordingly. He also called Ms. Pimm, whose
evidence was that she was a partner during 1996 with a 5%
interest in Four Pillar. She said that she had put $11,000 into
the company at that time, and that she had claimed a loss on her
income tax return in 1996. Mr. Blanchard said in his evidence
that he introduced Ms. Pimm to people as his partner. Mr.
Blanchard's wife did not testify.
[11] Mr.
Blanchard could not produce any written partnership agreement
amongst himself, Ms. Pimm and his wife, or any of them. He did
produce a copy of a business name registration which showed
himself and John B. MacDonald, an accountant, as the partners
carrying on business under the name Four Pillar Financial. The
period covered by the registration is August 25, 1993 to
August 24, 1998. On September 22, 1994, Mr. Blanchard and
Mr. MacDonald signed a Partnership Termination Agreement. No
other document evidencing the existence of a partnership and its
terms was produced.
[12] In the
Notice of Objection dated June 24, 1999, Mr. Blanchard described
himself as "owner" and said this:
I personally operate as a self employed independent
contractor. This is a relationship which many of my fellow
advisors have challenged and is now clearly an accepted
relationship by Revenue Canada.
Four Pillar Financial is a proprietorship that I established
in 1993 to recoup cost via a share in other independent
contractors revenues. The relationship between myself and the
independent contractors is through an understanding between Four
Pillar Financial and Financial Concept Group. In effect I get a
percentage of sales based on a complicated schedule set by
Financial Concept Group.
There is no suggestion anywhere in that document that Four
Pillar Financial was at any time a partnership.
[13] The
Notice of Appeal, which also was prepared by Mr. Blanchard
personally (again describing himself as "owner") says
in part:
4.
In addition to the selling of mutual funds and other securities,
Four Pillar Financial, as noted in Paragraph 1 above, prepares
income tax returns for which it received a fee. As well and of
more importance, Four Pillar Financial, as part of its agency
responsibilities must provide RRSP administrative information to
the clients. In particular, its responsibility is to collect
these fees on an annual basis and turn them over to IPC
Securities Corporation.
5.
Both the preparation of the income tax returns and the RRSP
administration fees are subject to GST, which as [sic] been
collected by Four Pillar Financial. As agent for IPC Securities
Corporation, the entire amount of the fees and GST are turned
over to that company for remittance to the Government. On the
other hand Four Pillar Financial remits any GST applicable to the
income tax preparation, as principal, directly to the
Government.
[14] Aside
from the filing of income tax returns, to which I have referred
already, there is no suggestion by Mr. Blanchard prior to giving
evidence in this appeal that Four Pillar Financial, after
September 22, 1994, was anything other than a proprietorship
owned by him. More important for purposes of this appeal is that
prior to the hearing of the appeal there was no suggestion that
there were two separate businesses being conducted - one
earning commission income on the sale of securities, and one
earning fees for the preparation of income tax returns. In giving
his evidence Mr. Blanchard tried to characterize his commission
income paid to him by FCG, for which he received T-4 slips, as
having been received by him as income personally and then paid
into the partnership, Four Pillar Financial, as a capital
contribution. I do not accept this as an accurate description of
what happened. It is inconsistent with the financial statements
prepared for Four Pillar.
[15] Mr.
Blanchard led evidence from Mr. Simpson, a chartered accountant
who prepared Four Pillar Financial's financial statements
for the years ending December 31, 1996 and 1997. He prepared
the statements as part of a review engagement, from trial
balances printed from the computer records of Four Pillar
and given to him by Mr. Blanchard, and on the basis of
information furnished to him by Mr. Blanchard. He testified that
Four Pillar was a partnership of Andrew Blanchard, Andrea
Blanchard and Monika Pimm. It became clear on cross-examination,
however, that in giving this evidence he was simply repeating
what he had been told by Mr. Blanchard. He also testified on
cross-examination that the financial statements which he had
prepared were not consolidations, although they include both the
income from commissions (direct and override) paid to
Mr. Blanchard by FCG, and the income derived from the
preparation of income tax returns. An examination of the
statements themselves is consistent with that. There is no
mention of consolidation; there is no attribution of expenses
between two sources of income; generally, references to the owner
or proprietor are in the singular (although in at least one place
the word "proprietors" appears with the apostrophe
following the "s"). Although the balance sheets show
the proprietor's equity, as one would expect, they do not
show the capital of the various partners, as one would expect if
the business were really a partnership. Mr. Simpson's
evidence as to the existence of a partnership is simply not
consistent with the statements that he himself prepared.
[16] I do not
accept Mr. Blanchard's evidence that the business was a
partnership, nor that of Ms. Pimm to the same effect. Ms. Pimm
did not appear to me to be dishonest or devious; however, I
believe that she did not properly understand the legal nature and
requirements of a partnership. She likely thought of herself as a
partner in the colloquial sense of the word, as
Mr. Blanchard testified that he introduced her to people as
his partner. Mr. Blanchard, in my view, was less scrupulous
about the accuracy of his testimony. He has given inconsistent
versions of the facts in his Notice of Objection and his Notice
of Appeal, on the one hand, and in his evidence on the other. I
believe that his testimony was shaped by his desire to present
the version of the facts that would best suit his purposes at the
moment.
[17] Given the
total absence of documentary evidence of a partnership agreement,
the fact that Mr. Blanchard did not call his wife to give
evidence is significant. According to his version of the facts,
she was his only partner in 1997. If, as he testified, there was
a partnership with no written agreement, then it would be in the
Appellant's interest to lead evidence of the existence of
an oral agreement and the terms of it from the other partner. The
inference that I draw is that his wife's evidence would not
have been helpful to his case.
[18] I
conclude that in 1996 and 1997 Four Pillar Financial was a sole
proprietorship owned by Andrew Blanchard. From the evidence of
Mr. Blanchard and Ms. Pimm as to the operations, I find that
the earning of commissions, both direct and override, by Mr.
Blanchard, and the earning of fees for income tax preparation
were completely interconnected and interdependent activities.
Although Mr. Blanchard stated in his evidence that the income tax
preparation would have been developed into a profitable business
had it not been for the income tax audit of his affairs, the fact
is that it was created to provide leads for the advisors, and to
keep them in Mr. Blanchard's branch. The same staff
worked on both the FCG business and the income tax preparation.
The same premises and equipment were used. There were no separate
accounts, and no effort has apparently ever been made to allocate
expenses between the two types of income. I conclude that there
was only one business, and that Mr. Blanchard was the proprietor
of it: see Scales v. George Thompson and Company
Limited,[1]
Frankel Corporation v. M.N.R.,[2] and H. A. Roberts Ltd.
v.Canada.[3]
[19] The
result of finding there to be only one business is that the
entitlement to ITCs falls to be determined under sections 169,
141 and 141.01 of the Act. Complex though these are, they
may be summarized this way. Entitlement to ITCs arises only to
the extent that goods and services tax has been paid on property
or services that have been acquired for the purpose of making
taxable supplies for consideration. Financial services are not
taxable supplies. Where property or services have been acquired
for the purpose of making both taxable and non-taxable supplies,
an allocation must be made, and that allocation must be one that
is fair and reasonable, and the same method must be used
consistently. In the case of a person who is not a financial
institution, where substantially all of the property or services
are used in the course of activities other than commercial
activities, then all the consumption or use is deemed to have
taken place in the course of non-commercial activities, and so no
allocation need be made.[4] In the case of a financial institution, an allocation
is required.
[20] In the
present case, Four Pillar was certainly a financial institution
for its 1996 financial year, either under subparagraph
149(1)(a)(iii), because Mr. Blanchard's principal
business was as a salesperson of securities, or under paragraph
149(1)(b) because more than 10% of his income came from
financial revenue, in the form of commissions on the sale of
securities. Paragraph 149(1)(b) had been amended
before the start of Four Pillar's 1997 year, and would no
longer apply, because the total revenue of Four Pillar was less
than $10,000,000. Nevertheless, it remained a financial
institution under subparagraph 149(1)(a)(iii).
[21] That
brings me to the allocation. The assessor testified that she
considered three possible methods of allocation. One method would
trace the actual use of property and services used in the
financial and non-financial activities. This could not be done
because Four Pillar did not have records of the use to support
such an allocation. Another method would apportion according to
the expenditure of time and effort by the business on the
activities. Mr. Blanchard argues for the use of this method
and testified that the majority of the time and effort of him and
his staff went into the tax preparation and collection functions.
I do not accept that evidence. When the income statements are
considered it seems very unlikely. In any event, his evidence on
the point was both vague and uncorroborated, and I would not rely
on it.
[22] The
remaining method is to allocate in proportion to the
contributions to revenue of the commercial and non-commercial
activities. This is what the assessor did, and in my view it is
the only appropriate way to allocate in the present case. For
1996, she allowed ITCs on the basis of 2.7% of the amount
claimed, because the total revenue was $291,464, of which $7,934
was derived from tax preparation and the balance from commissions
and other related sources. For 1997, the total revenue was
$395,271, of which $1,127, or 0.28%, was derived from tax
preparation. Applying the same method of allocation as for the
1996 year, Four Pillar is entitled to ITCs of $17.21 for the
second period.
[23] The
appeal is therefore allowed and the assessment is referred back
to the Minister for reconsideration and reassessment on the basis
that the Appellant is entitled to be credited an additional input
tax credit of $17.21. There will be no order as to costs.
Signed at Ottawa, Canada, this 27th day of July, 2001
"E.A. Bowie"
J.T.C.C.
COURT FILE
NO.:
2000-3620(GST)I
STYLE OF
CAUSE:
Andrew Blanchard o/a Four Pillar Financial and Her Majesty the
Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
March 20 and May 25, 2001
REASONS FOR JUDGMENT BY: The
Honourable Judge E.A. Bowie
DATE OF JUDGMENT: June 7,
2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Arnold Bornstein
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm:
For the Respondent: Morris
Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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