Date: 20000328
Docket:
1999-2041(GST)I
BETWEEN:
741521
ONTARIO INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip,
J.T.C.C.
[1] 741521
Ontario Inc., carrying on business as "Metro Printing and Litho"
("Metro"), has appealed assessments of tax issued under Part IX
(Goods and Services Tax) of the Excise Tax Act ("Act")
for the periods August 1, 1995 to October 31, 1995, November 1, 1995 to
January 31, 1996 and February 1, 1996 to April 30, 1996.
[2] The
issue before me is whether consideration and Goods and Services Tax
("GST") payable in respect of taxable supplies the appellant made to
several recipients were in whole or in part a bad debt within the meaning of
subsection 231(1) of the Act and if the appellant is entitled to input
tax credits in the amount of $21,515.46 which the Minister of National Revenue
("Minister") denied for the period from August 1, 1995 to
October 31, 1995. Adjustments made by the Minister for the subsequent
periods were $2,821.06 and $158.43 respectively.
[3] The
circumstances surrounding these appeals are distressing.
[4] The
appellant carries on the printing business in the Toronto area. The shareholders of the appellant are Tom Pateras and Mrs. Pateras.
Mr. Pateras is president.
[5] In
about 1987 the appellant began a relationship with one Joseph Cheng, a
printing broker. Apparently printers are rather specialized and Mr. Cheng
would put people requiring specific printing services together with a
particular printer whose specialty the person (customer) requires.
Mr. Pateras determined whether a customer brought to him by Cheng was
credit worthy or not. Metro set the prices and delivery schedules. Metro
invoiced the customer and paid Mr. Cheng a commission.
[6] Mr.
Pateras did not deal with the customers; this was Mr. Cheng's job.
Mr. Pateras believed that as long as the customer was being serviced by
Mr. Cheng and was paying on time there was no need to have contacts with
the customer. If Mr. Pateras had a problem with a customer he would deal
directly with Mr. Cheng. Mr. Cheng was the person who met the
customers, determined their needs, provided Metro's price quotations and
scheduled production and delivery; all this was done in consultation with
Mr. Pateras.
[7] Mr. Pateras
had great faith in Mr. Cheng. As the years progressed their relationship
grew and Mr. Pateras depended more and more on Mr. Cheng.
Mr. Pateras gave him authority to deliver invoices to customers, collect
the invoiced amounts and to make deposits of these amounts into the appellant's
bank account.
[8] In
fact, Cheng took over the administration of the appellant. Mr. Cheng
wanted more control over invoices and "we let him have that control"
said Mr. Pateras. Mr. Pateras indicated that there were so many codes
with respect to printing jobs and since Mr. Cheng knew the codes, it was
easier for Mr. Cheng to take care of the administration. He also needed
Mr. Cheng to help service the accounts.
[9] It
appears that Cheng felt at home at Metro. His customers would frequently
telephone him at the appellant's office. Mr. Pateras would take messages
for Mr. Cheng or direct the call to Mr. Cheng's cell phone.
[10] Mr. Cheng was not an employee of the appellant. He was not paid
anything to collect and deposit funds.
[11] In the second half of 1989 Mr. Cheng caused a corporation, 857411
Ontario Inc. ("Ontario") to be incorporated and on
September 11, 1989 he caused that corporation to register the name "Metro
Printing and Litho Consulting". Mr. Cheng appears to have been the
sole director of Ontario. He also caused Ontario to open a bank
account with the Royal Bank of Canada.
[12] During the preparation of the appellant's financial statements for the
year ended October 31, 1995 the appellant's accountants were unable to
reconcile the accounts. They determined that approximately $100,000.00 was
missing from the appellant's income. Mr. Pateras was advised of the
discrepancies and he mentioned this to Mr. Cheng. In the meantime the appellant's
accountants began their investigation. They eventually concluded that
Mr. Cheng was collecting money from customers on the basis of the
appellant's invoices and depositing the money into Ontario's bank account at the Royal Bank of Canada. Apparently the customers would issue a cheque payable to Metro Printing
and/or Metro Printing and Litho and this would be sufficient for Ontario's
banker to accept these cheques for the benefit of Ontario.
[13] During the time Mr. Cheng was collecting cheques for Metro
Mr. Pateras never actually checked his bank account. Since Metro's bills
were being paid, he assumed the money was going into its own bank account. If a
bill had not been paid then Mr. Pateras complained to Mr. Cheng, Mr.
Cheng would withdraw funds from Ontario's bank account
for deposit to Metro's account.
[14] Mr. Cheng, if anything, was not meek. Once he was advised that
$100,000.00 was missing from the appellant's bank account, he caused the
appellant to bill over $200,000.00 over the next two months, which amounts he
collected and deposited into Ontario's bank
account.
[15] In all, according to Mr. Pateras, Mr. Cheng absconded with
approximately $500,000. Eventually Mr. Cheng was found out and prosecuted. He
was sentenced to nine months in prison.
[16] The appellant's position is that since Cheng received payment from the
customers, the appellant was unable to collect the amounts it ought to have
received and therefore the debts were bad debts. The appellant says it did not
deal with the customers, that the customers were Mr. Cheng's. The
appellant says that it made taxable supplies in the normal course of business
to Ontario and it was Ontario that supplied goods to the customers. Therefore there was a
debtor-creditor relationship between the appellant and Ontario and since
Ontario was unable to make payment for the supplies, the debt from Ontario to
the appellant is bad and the collection of the GST with respect to the bad
debts is also bad and therefore not payable.
[17] While I have utmost sympathy for the situation the appellant and its
shareholders find themselves in I cannot accept the fiction that either
Mr. Cheng or Ontario were recipients of the supplies from the
appellant. The appellant made out invoices to various customers. The appellant
permitted Mr. Cheng to deliver the invoices and to collect the amounts
invoiced. The appellant authorized Mr. Cheng to make deposits to its bank
account. The appellant empowered Mr. Cheng to deal with customers.
[18] Professor Fridman describes agency as a relationship that exists
between two persons when one, called the agent, is considered in law to
represent the other, called the principal, in such a way as to be able
to affect a principal's legal position in respect of strangers to the
relationship by the making of contracts or the disposition of property.
[19] An agent may act gratuitously and even in the absence of contract,
because there is no consideration, the agent is still obliged to exercise care
in the handling of his principal's affairs.
Professor Fridman cites Scrutton, L.J. in Lloyds Bank Ltd. v. Chartered Bank
of India, Australia & China to the effect that:
A third party dealing in good faith
with an agent within his ostensible authority is not prejudiced by the fact
that as between the principal and his agent, the agent is using his authority
for his own benefit and not for that of the principal.
[20] The fact, therefore, that an agent violates the authority given to him
by the principal and acts in a manner detrimental to the interests of the
principal does not affect the right of a third party acting in good faith who
has dealt with the agent. The principal cannot repudiate the agency if it
causes injury to third parties.
[21] Mr. Cheng was agent of the appellant in dealing with the
customers in the normal course of the appellant's business. Mr. Cheng
misappropriated or embezzled money from the appellant. When he collected money
from the customers, the customers were paying him on the basis that he was a
representative or agent of the appellant. These customers paid the appellant
for goods provided, and services rendered, by the appellant. The debts could
not be said to be bad because the debtors paid them in good faith to the person
who was the appellant's representative. The money was collected by Metro.
Metro's inability to secure the amounts collected on its behalf by its agent is
not, as far as I am aware, a bad debt.
[22] The appeals are dismissed.
Signed at Ottawa,
Canada, this 28th day of March 2000.
J.T.C.C.
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