Date: 19990825
Docket: 98-1359(GST)I
BETWEEN:
D & P HOLDINGS LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hamlyn, J.T.C.C.
[1] This is an appeal with respect to
a Notice of Assessment by a registrant under the Excise Tax
Act (the "Act") wherein the Appellant is
alleged to have underreported its Goods and Services Tax
("GST") collectible and overstated its Input Tax
Credits ("ITCs").
[2] By Notice of Assessment numbered
01BA0201256 dated December 11, 1996, the Minister of
National Revenue (the "Minister") advised the Appellant
that he had assessed its GST liability for the period from
June 1, 1991 to August 31, 1996 as follows:
Increase of GST
Collectible
$35,133.84
Plus: Decrease of Input Tax
Credits
$ 7,999.96
Total Net Tax
Adjustments
$43,133.80
Penalty
$ 5,911.07
Interest
$ 4,859.40
Total
Assessment
$53,904.27
APPELLANT'S POSITION
[3] The Appellant's position is
that it was a registrant under the Act whose principal
activity was the provision of commercial rents and the operation
of a parts department of a furniture company.
[4] The Appellant explained the
deficiencies in the reported GST and ITCs were attributable in
part to record destruction beyond the Appellant's control.
Secondly, the Appellant maintained that GST liability in relation
to a property conveyance was not established and thirdly that the
mortgagee of the Appellant's property (Royal Trust) was
responsible for GST during periods when the mortgagee received
attornments of rent or when the mortgagee was in control of the
Appellant's property under seizure or repossession.
RESPONDENT'S POSITION
[5] In assessing the Appellant for the
period from June 1, 1991 to August 31, 1996, the
Minister made the following assumptions of fact:
...
(b) at all relevant
times the Appellant was registered under Part IX of the Excise
Tax Act (the "Act");
(c) the
Appellant's principal activity was the provision of
commercial rents;
(d) the
Appellant's books and records for the said period were
incomplete;
(e) in filing its
quarterly GST returns for the period from June 1, 1991 to
August 31, 1996, the Appellant reported GST Collectible and
Input Tax Credits ("ITC's") as follows:
GST
Collectible:
$26,588.57
Less:
ITC's:
($44,538.15)
Total Net Tax
(Credit):
($17,949.58)
(f) the
Appellant underreported its GST Collectible by the amount of
$35,133.84 for the period from June 1, 1991 to
August 31, 1996;
(g) the Appellant
overstated its ITC's by the amount of $7,999.96 for the
period from June 1, 1991 to August 31, 1996;
(h) the
underreported GST Collectible for $35,133.84 relates to taxable
supplies made by the Appellant, within the meaning of subsection
123(1) of the Act, during the period from June 1, 1991 to
August 31, 1996 and the said amount can be attributed as
follows:
Source/Taxable
Supply
GST Collectible
Discrepancies: Books and
Records
$23,180.59
Automobile Standby
Charge
$ 2,129.30
Automobile Operating
Cost
$ 396.13
Disposal of Real
Property
$ 7,640.70
Commercial rent
revenue
$ 378.80
Commercial rent
recoveries
$ 1,408.32
Total:
$35,133.84
(i) the
Appellant's automobile was utilized 60 per cent for business
purposes and 40 per cent for personal purposes;
(j) during
August, 1992, the Appellant made a taxable supply of real
property to a recipient who was not registered under Part IX of
the Act for consideration in the amount of
$109,152.80;
(k) the Appellant
was required to collect the GST at the rate of 7% on the
consideration amount referred to in the preceding
subparagraph;
(l) during
December, 1995, the Appellant made a taxable supply by way of
rental of real property for consideration in the amount of
$5,411.50;
(m) the Appellant was
required to collect the GST at the rate of 7% on the
consideration amount referred to in the preceding
subparagraph;
(n) during the
period from June 1, 1991 to August 31, 1996, the
Appellant failed to remit GST totalling $1,408.32 on recoveries
and receivables attributable to the provision of commercial rent
by the Appellant; and
(o) the Appellant
did not maintain adequate documentation to support its claim for
the ITC's referred to in subparagraph 5(g) above.
ISSUES
[6] The issues to be decided are:
(a) whether the Appellant's
GST liability was correctly assessed by the Minister; and
(b) whether the Appellant is liable
for the amount assessed in respect of penalty and interest under
subsection 280(1) of the Act.
ANALYSIS
SUFFICIENCY OF APPELLANT'S BOOKS AND
RECORDS
[7] The Notice of Appeal that was
incorporated as part of the viva voce evidence of the
Appellant's agent reads in part as follows:
... [B]ackground information concerning both my companies, one
a furniture company (Ropewalk Enterprises Limited) and the other
(D & P Holdings Limited) the owner of a retail building in
St. John's and a retail building in Grand Falls,
Newfoundland. In the early 1990's, the furniture company was
having major problems.
...
During 1991, 1992, 1993, 1994 and 1995 considerable financial
difficulty continued and the furniture company closed its doors
in 1993/94. ... In 1991/92, I had transferred the parts
department into D & P Holdings Limited but inadvertently
continued to report the parts department sales for RST and GST
purposes through my furniture company. To further complicate
matters, when Royal Trust took possession of the building and I
was forced from my office and the building, they destroyed or
sent to the garbage all the accounting records belonging to the
furniture company which had been in storage. ...
... [T]hat during these financial difficulties, Royal Trust
had their solicitor seize the rent payment from my tenants
including the GST. These cheques were made payable not to D & P
Holdings but to Royal Trust.
[8] The same witness, at the outset of
the hearing as part of the evidence, read a prepared statement,
which in part read:
[T]he Deputy Attorney General states that my books and records
for the period were incomplete. Let me state here that my books
and records were anything but incomplete. My GST returns
were totally accurate; they were calculated as follows:
Because the holding company did not have an RST number, the Parts
Department Retail Sales Tax and GST, both revenue and ITC's,
were submitted on the operating company (Great Eastern Furniture,
operated by Ropewalk Enterprises Ltd.). The discrepancies that
Revenue Canada indicates is a difference between my books and
records and my returns were simply the transfer of the Parts
Department from my operating to my holding company.
Naturally, the GST returns for the holding company would not
balance with my financial statements.
... [T]he financial statements were done some five years later,
and by this time, without my knowledge and/or approval, Royal
Trust Corporation had destroyed all the documentation belonging
to the operating company. The operating company filed all its
records on the first floor of the building, while the holding
company filed its records in my private office on the second
floor of the same building. As the records stored on the first
floor were destroyed without my knowledge and/or approval, as I
have already stated, I could not provide documentary evidence to
disprove Revenue Canada's contention of a discrepancy.
[9] The Appellant also called as a
witness a former employee of the furniture company who stated
that she acted as cashier and did certain office work that
involved the recording of the Retails Sales Tax ("RST")
and GST. She also stated calculations for RST and GST were
prepared once per month. The witness said some of the records
were kept downstairs in the furniture store and some upstairs in
the Appellant's agent's office.
[10] The requirements for the keeping of
books and records for the purposes of GST are set forth in
subsection 286(1). It reads:
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 on such terms
and conditions 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.
[11] The auditor for the Minister in an
audit of the Appellant found by analysis of the financial
statements that the Appellant underreported GST in the sum of
$23,180.59. The auditor concluded the underreporting was
attributed to discrepancies in books and records and in
particular the books and records were incomplete. The balance of
the unreported GST collectible was in relation to automobile
standby charges, operating costs, disposal of real property,
commercial rent revenue and commercial rent recoveries.
[12] The auditor also found that ITCs were
overstated and the overstatements could not be supported by
adequate documentation.
[13] Subsection 169(4) of the
Act reads as follows:
169(4) Required documentation - A registrant may not claim an
input tax credit in respect of a supply of property or a service
for a reporting period unless, before filing the return in which
the credit is claimed,
(a) the registrant has
obtained sufficient evidence in such form containing such
information as will enable the amount of the input tax credit to
be determined, including any such information as may be
prescribed; and
(b) where the property
is real property supplied by way of sale to the registrant in
circumstances in which subsection 221(2) applies, the
registrant has filed the return required to be filed under
subsection 228(4) with respect to the supply.
[14] An ITC is a credit given to registrants
for tax paid or payable on inputs they purchase for use in
commercial activity. Subsection 169(1) governs the
computation of ITCs and subsection 225(1) indicates that
these credits are to be deducted from the GST payable prior to
being remitted to the Receiver General.
[15] Subsection 169(4) outlines the
documentation requirements associated with ITCs. As a result of
this provision, a registrant must provide sufficient evidence to
determine the amount of the ITCs, plus any information prescribed
by regulation. Such prescribed information is outlined in the
Input Tax Credit Information Regulations (the
"Regulation"), section 3.
[16] The Regulation defines
"supporting documentation" as used in section 3 to
include an invoice, a receipt, a credit-card receipt, a debit
note, a book or ledger of account, a written contract or
agreement, any record contained in a computerized or electronic
retrieval or date storage system, and any other document validly
issued or signed by a registrant in respect of a supply made by
the registrant in respect of which there is tax paid or payable.
The Appellant was unable to supply supporting documentation for
the overstated ITCs.
[17] The Appellant chose not to subpoena or
call witnesses from the Royal Trust whose agents were the
apparent active and operating control behind the alleged
destruction of the records of the Appellant and the furniture
company.
[18] The Appellant also chose not to
subpoena or call witnesses from Deloitte & Touche. Deloitte
& Touche allegedly prepared the Appellant's financial
statements and were the advisers behind the parts department
transfer to the Appellant. The Appellant's agent simply
states 'I kept complete records and the discrepancies in GST
and ITCs can be examined by the transfer of the parts department
of the furniture company to the Appellant corporation.'
Nothing more by way of substantive evidence to support this
assertion was tendered.
[19] I also conclude that during the period
under review the financial affairs of the Appellant appeared to
be as described difficult and somewhat chaotic. Finances were a
continuing concern. The records were not all kept in one
office.
[20] The Appellant because of finances had
been through difficult relations with Royal Trust and this
pattern continued. The Appellant knew Royal Trust had distress
rights under the mortgage in the event of non-payment of the
mortgage and such distress rights placed the Appellant's
property at risk.
[21] A necessary incident of books and
record keeping includes the safe keeping and protection of books
and records.
[22] I am not satisfied on the evidence
before the Court that the discrepancies in relation to GST and
ITC can be explained by the alleged destruction of the furniture
company records.
[23] The obligations under
subsection 169(4) and subsection 286(1) of the
Act have not been met.
REMEDIES OF MORTGAGEE UPON DEFAULT
AND CONSEQUENCES THEREOF
[24] The Appellant's witness suggested
on two occasions Royal Trust took control of the rents and
therefore should be responsible for GST remittance.
[25] The first period of time was a period
of attornment of rents.
[26] The second period of time, 1995, was a
period of seizure or repossession.
(I) ATTORNMENT OF RENTS - THE FIRST PERIOD (BEFORE
1995)
[27] Under default of a mortgage, the
mortgagee has the right to possession as an interim measure
pending payment, foreclosure or sale and can require any tenants
of a mortgagor to attorn. The mortgagee in possession may remain
in possession and attorn any rents until payment of the mortgage
is made.[1] Where a
creditor has attorned the rents of a debtor's property, the
debtor is still the supplier of the property.[2]
[28] I conclude, for the first period of
time before 1995, the Appellant remained the supplier when the
rents were attorned. The Appellant was liable to remit the tax on
rent of the commercial property during the period of attornment
of rents.
(II) SEIZURE OR REPOSSESSION - THE SECOND PERIOD
(1995)
[29] Seizure or repossession during the
execution process under the default provisions of the mortgage
deprives the Appellant control over the Appellant's property.
During this period of time, Royal Trust was in control of the
property. According to the evidence, the Appellant was not
assessed for this period of time.
THE SUPPLY OF RENTAL OF REAL PROPERTY IN DECEMBER
1995
[30] The Minister assumed the Appellant made
a taxable supply by way of rental of real property for
consideration in the amount of $5,411.50 on December 1, 1995
and the Appellant was required to collect the GST on the
consideration.
[31] The Appellant's evidence was that
the rents were collected prior to December 1995 by Royal
Trust.
[32] Until November 28, 1995, Royal
Trust, as mortgagee of a mortgage in default, was in control and
managed the subject property.
[33] Exhibit A-1 shows the settlement
between the tenant and Royal Trust for the rents for December.
The rents were to be inclusive of tax.
[34] On November 28, 1995, the
Appellant once again took over the ownership, control and
management of the real property.
[35] Royal Trust, according to the
Appellant's agent, was not prepared to have any adjustments
in the take-over of the property by the Appellant. There was no
accounting to the Appellant by Royal Trust for the GST collected
by Royal Trust with respect to the prepaid rents. The Appellant
accepted this and took over the property, as stated, on
November 28, 1995.
[36] I conclude on the evidence on
December 1, 1995 the Appellant supplied a taxable supply and
was required to collect and remit the GST payable by the
recipient of the taxable supply.
DISPOSITION OF REAL PROPERTY
[37] The Minister assumed the Appellant,
during August 1992, made a taxable supply of real property to a
recipient who was not registered under Part IX of the
Act for consideration in the amount of $109,152.80 net of
tax.
[38] The Appellant's chief witness
stated in the early 1990's when the furniture company was
having problems the Grand Falls, Newfoundland, store was closed
and the building was put up for sale.
[39] The building was disposed of to an
individual by way of an agreement between Royal Trust (the
mortgagee), the Appellant and the purchaser wherein the purchaser
would take over the obligation of the Appellant on the mortgage
as full consideration of the disposition.
[40] The purchaser apparently intended to
open in the property a used furniture outlet. The purchaser was
not a GST registrant at the time of the disposition.
[41] The Appellant did not collect the tax
under Division II payable by the recipient in respect of
purchase.
[42] Under subsection 165(1), the
recipient of a taxable supply is required to pay tax equal to 7%
of the value of the consideration for the supply. Under
section 221, the supplier of a taxable supply is required to
collect the tax payable by the recipient of the supply. The
relevant parts of section 221 read as follows:
(1) Every person who
makes a taxable supply shall, as agent of Her Majesty in right of
Canada, collect the tax under Division II payable by the
recipient in respect of the supply.
(2) A supplier
(other than a prescribed supplier) who makes a taxable supply of
real property by way of sale is not required to collect tax under
Division II payable by the recipient in respect of the
supply where
(a) the supplier is
a non-resident person or is resident in Canada by reason only of
subsection 132(2);
(b) the recipient is
registered under Subdivision d and the supply is not a
supply of a residential complex made to an individual; or
(c) the recipient is
a prescribed recipient.
[43] The Appellant made a taxable supply of
real property in August 1992 to a recipient (the purchaser) who
was not a GST registrant. The Appellant was required to collect
the GST on the consideration. The Appellant underreported GST
collectible of $7,640.70 in the supply of the building in Grand
Falls, Newfoundland.
SUMMARY
[44] From the Respondent's audit the
conclusion is the Appellant underreported GST collectible by the
amount of $35,133.84 and overstated its ITCs by the amount of
$7,999.96 for the period from June 1, 1991 to
August 31, 1996.
[45] The Appellant did not maintain books
and records as required by subsection 286(1).
[46] The Appellant did not maintain adequate
documentation to support the ITCs claimed
(subsection 169(4)).
[47] During December 1995, the Appellant
made a taxable supply of rental of real property for
consideration in the amount of $5,411.50.
[48] The Appellant made a taxable supply of
real property (conveyance of the Grand Falls property in August
1992) to a recipient who was not a GST registrant for
consideration in the amount of $109,152.80 (net of tax).
[49] The balance of the assessment as found
in paragraph (h) of the Minister's assumptions, the
Appellant did not dispute.
PENALTIES AND INTEREST
[50] The Appellant submits:
... [B]ecause of the stated circumstances and because through
no fault of its own, as the court [the law] did give its
permission for Royal Trust to do what it did, there are parts of
the Returns that cannot be supported by documentation. If this
was approved by the courts[the law], how can a taxpayer be held
liable?
Because of the foregoing, I ... question how the company can be
held liable for any outstanding penalties and interest under ...
subsection 280(1) of the Act.
[51] From the evidence of the
Respondent's auditor as well as the foregoing review of
evidence, I cannot conclude the Appellant kept meticulous books.
The financial circumstances and financial affairs for the period
in question were difficult and as I have concluded chaotic.
[52] The Appellant, given the continuing
crisis situation, knew or should have known the property was
subject to seizure, i.e., the books and records were at risk. I
cannot conclude the Appellant exercised reasonable care to ensure
its books and records be preserved.
[53] The Appellant's placing of its
problems in relation to GST and ITCs on records at the doorstep
of Royal Trust or its agents, I find is misplaced.
[54] I cannot conclude the Appellant's
actions meet the test of due diligence in terms of penalties and
interest.
DECISION
[55] The appeal is dismissed.
Signed at Ottawa, Canada, this 25th day of August 1999.
J.T.C.C.
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