Citation: 2014 TCC 36
Date: 20140204
Docket: 2011-1872(GST)G
BETWEEN:
SALAISON LÉVESQUE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
The appellant is
appealing an assessment based on sections 165, 169, 280, 285 and 298 of
the Excise Tax Act (the ETA)
in respect of the periods from August 7, 2006, to August 29, 2009. The
Minister of National Revenue (the Minister) is claiming the amount of $20,430.32,
including interest and penalties.
[2]
The respondent submits
that the appellant was not entitled to claim input tax credits (ITCs) under
subsection 169(4) of the ETA in respect of the amounts paid to Agencies Alina,
Production Plus inc. and Entreprises A. Bustos, alleging that the regulatory
provisions for claiming the ITCs in question were not complied with.
[3]
To begin with, the
respondent’s position is nebulous. On the one hand, she submits that the
disputed invoices are false invoices. On the other hand, she admits that the
work matching the description on those same invoices was indeed performed.
[4]
To reconcile these two
theories, the respondent seems to be arguing that the persons who performed the
work were not the persons who prepared and submitted the invoices to the
appellant.
[5]
To avoid any misinterpretation
of the respondent’s position, it appears pertinent to me to reproduce the
respondent’s submissions as set out in the Reply to the Notice of Appeal at the
following paragraphs:
[translation]
(d) The amount of $12,443.34 was assessed for the disallowed ITCs relating
to the invoices of convenience;
(g) The respondent disallowed the ITCs claimed because she believed that
the subcontractors in question provided invoices of convenience and that the
work was not performed or was not performed by those subcontractors;
(j)
The accommodating subcontractors do not have the
capacities, expertise or material, financial and human resources to provide the
workforce relating to the payments that were made to it;
(n) With the exception of certain invoices, no other evidence showing
that the workforce was subcontracted;
[6]
The respondent contends
that the condition requiring that the supplier’s name be indicated on the
invoices was not met, given that they contain only the names of the Agencies.
[7]
According to the
respondent, the Agencies in question did not have the capacities, expertise or
material, financial and human resources to provide the workforce relating to
the payments that were made to them. Consequently, the respondent argues that
the services were not rendered by the Agencies but by other subcontractors, and
that their names should have been indicated on the invoices instead of the
Agencies’.
[8]
Despite certain
inconsistencies, the burden is on the appellant to show that the invoices
related to the ITCs claimed meet the mandatory requirements prescribed by the Input
Tax Credit Information Regulations (the Regulations) and,
specifically, that there were, in fact, bona fide commercial
transactions between it and the Agencies.
Applicable law
[9]
The following are the
sections of the ETA and the Regulations that are relevant to understanding the
dispute:
165(1) E.T.A. Subject to this Part, every recipient of a taxable
supply made in Canada shall pay to Her Majesty in right of Canada tax
in respect of the supply calculated at the rate of 5% on the value of the
consideration for the supply.
221(1) E.T.A. 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.
169(4)
E.T.A. A
registrant may not claim an input tax credit 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;
S. 3
of the Regulations For
the purposes of paragraph 169(4)(a)
of the Act, the following information is prescribed information:
(a) where the total
amount paid or payable shown on the supporting documentation in respect of the
supply or, if the supporting documentation is in respect of more than one
supply, the supplies, is less than $30,
(i)
the name of the supplier or the intermediary in
respect of the supply, or the name under which the supplier or the
intermediary does business,
(ii)
where an invoice is issued in respect of the
supply or the supplies, the date of the invoice,
. . .
(iv) the total amount paid or payable
for all of the supplies;
(b)
where the total amount paid or payable shown on the
supporting documentation in respect of the supply or, if the supporting
documentation is in respect of more than one supply, the supplies, is $30 or
more and less than $150, where the total
amount paid or payable shown on the supporting documentation in respect of the
supply or, if the supporting documentation is in respect of more than one
supply, the supplies, is $30 or more and less than $150:
(i) the name
of the supplier or the intermediary in respect of the supply, or the name under
which the supplier or the intermediary does business, and the registration
number assigned under subsection 241(1) of the Act to the supplier or the
intermediary, as the case may be,
. . .
(c) where the total amount paid
or payable shown on the supporting documentation in respect of the supply or,
if the supporting documentation is in respect of more than one supply, the
supplies, is $150 or more,
(i) the
information set out in paragraphs (a)
and (b),
(ii) the
recipient’s name, the name under which the
recipient does business or the name of the recipient’s duly authorized agent or
representative,
(iii) the
terms of payment, and
(iv) a
description of each supply sufficient to identify it.
225(1) E.T.A. Subject to this
Subdivision, the net tax for a particular reporting period of a person is
the positive or negative amount determined by the formula
A –
B
where
A is the total of
(a) all amounts that
became collectible and all other amounts collected by the person in the
particular reporting period as or on account of tax under Division II, and
. . .
B is the total of
(a) all amounts each of
which is an input tax credit for the particular reporting period or a
preceding reporting period of the person claimed by the person in the return
under this Division filed by the person for the particular reporting period,
. . .
280(1) E.T.A. Subject to this section and section 281, if a person fails
to remit or pay an amount to the Receiver General when required under
this Part, the person shall pay interest at the prescribed rate on the
amount, computed for the period beginning on the first day following the
day on or before which the amount was required to be remitted or paid and
ending on the day the amount is remitted or paid.
285 E.T.A. Every person who
knowingly, or under circumstances amounting to gross negligence, makes
or participates in, assents to or acquiesces in the making of a false
statement or omission in a return, application, form, certificate,
statement, invoice or answer (each of which is in this section referred to as a
“return” made in respect of a reporting period or transaction is liable to a
penalty of the greater of $250 and 25% of the total of
(a) if the false statement
or omission is relevant to the determination of the net tax of the person for a
reporting period, the amount determined by the formula
A –
B
where
A is the net tax of
the person for the period, and
B is the amount that
would be the net tax of the person for the period if the net tax were determined
on the basis of the information provided in the return,
. . .
298(4) E.T.A. An assessment in
respect of any matter may be made at any time where the person to be assessed
has, in respect of that matter,
(a) made a
misrepresentation that is attributable to the person’s neglect, carelessness or
wilful default;
(b) committed fraud
(i) in making or filing a
return under this Part,
(ii) in making or filing
an application for a rebate under Division VI, or
(iii) in supplying, or
failing to supply, any information under this Part;
…
Facts
[10]
The appellant is a
registrant in accordance with the provisions under Part IX of the ETA.
[11]
The appellant is a
family business, founded in 1967, that specializes in the production of ham
under multiple aspects and presentations. In relation to its operations, it has
a certificate in “Hazard Analysis Critical Control Point – [translation] Method and Principles of
Food Safety Management”. Since its establishment, it has never been the subject
of a food recall even though production is extremely sensitive and vulnerable with
respect to safety. This shows the extent to which the business is alert and
prudent in terms of quality control.
[12]
The appellant’s
products are sold in a number of Canadian supermarkets as well as
internationally. Its annual sales are between $15 and $18 million.
[13]
The appellant’s
business operates year‑round, but there are certain times of the year where
demand is higher, such as major holidays like Christmas and Easter. Since the
products that the appellant processes and sells are perishable, its customers
require very short delivery deadlines sanctioned by substantial penalties for any
delay.
[14]
The appellant’s business
employs around 75 people full time; at peak periods, roughly four per year, the
appellant has to significantly increase its workforce.
[15]
To fill the periodic workforce
shortage, it first tried to recruit the required staff directly by regularly
advertising in newspapers.
[16]
All the initiatives failed,
and the expectations never produced the desired results. To address this
desperate need for a periodic workforce, the appellant had to use employment agencies
whose services it retained or whose offers of service it accepted. The
appellant also indicated that he had used the Internet (Jobboom) and the Yellow
Pages.
[17]
Throughout the periods
at issue, the appellant retained the services of four employment agencies:
Placement Tout Azimut, Alina, Production Plus inc. and Entreprises A. Bustos (the
Agencies).
[18]
The appellant paid the Agencies
the following amounts in total:
|
Period
|
Amount
|
|
2005
|
$83,494
|
|
2006
|
262,778
|
|
2007
|
242,611
|
|
2008
|
188,787
|
|
Total
|
777,767
|
[19]
The appellant retained
the Agencies’ services for the following periods:
|
Name of Agency
|
Period
|
|
Placement
Tout Azimut
|
October
8, 2005, to August 30, 2008
|
|
Alina
|
April
7, 2007, to October 3, 2008
|
|
Production
Plus inc.
|
September
2008 to May 2009
|
|
Entreprises
A. Bustos
|
September
2008 to August 2009
|
[20]
Generally, as for its
operations, the majority of the appellant’s expenditures for the Employment
Agencies were accepted by the respondent.
[21]
The business relationship
with the Agencies unfolded as follows:
(a) One of the appellant’s representatives
contacted the selected employment agency to negotiate the personnel contract: in
particular, the hourly rate and method of payment were discussed (there was a
written contract with Production Plus inc. only);
(b) Once there was an agreement between the
appellant and the Agency, the appellant’s foreman contacted the Agency to
confirm the number of employees required at a given date and time on the
appellant’s business premises (the same day or the following day);
(c) The Agency’s employees (composed
essentially of immigrants) showed up at the appellant’s reception area at the
designated date and time;
(d) They were not asked for their Social
Insurance Number or a piece of identification;
(e) All the workers received mandatory
training on health and safety standards, and they signed a form stating that
they had received this training. This enabled the appellant’s controllers to
follow up on those who had already taken the training and to see who might need
an update;
(f) Agency employees had to punch a time
card when entering and leaving the factory;
(g) Every week, by facsimile or email, the
Agency sent the appellant a list of the employees who had worked the preceding
week, to validate the name and hours worked by each Agency employee;
(h) The Agency subsequently issued an
invoice to the appellant, which was paid by cheque.
[22]
Some cheques issued to
the Agencies were cashed at cheque‑cashing centres; however, they were the
exceptions because most of them transited through the regular process.
[23]
Prior to retaining the
services of an employment Agency, the appellant always verified the accuracy
and truth of the GST registration numbers with the authorities.
[24]
All the Agencies had a
valid GST registration number during the periods at issue except Placement Tout
Azimut, which indicated on its invoices that it would obtain its GST
registration number shortly. Logical and consistent, the appellant then decided
to not pay the taxes on those invoices and moreover did not claim the related
ITCs.
[25]
The appellant did not
verify the Agencies’ status with Quebec’s Registraire des entreprises; it did
not obtain a compliance letter from the CSST in respect of these Agencies. The
appellant never visited the Agencies’ places of business or asked for
references.
[26]
It communicated with
the officers of the Agencies by telephone, facsimile or email. It also met Aristide Bustos
of Entreprises A. Bustos personally.
[27]
The hourly rate charged
by the Agencies was on average $12 an hour for straight time and $18 an hour
for double time (Entreprises A. Bustos: $11 an hour, Placement Tout Azimut: $9.50
an hour, Production Plus inc.: $12 an hour and Alina: $14.25 an hour).
[28]
The hourly wage paid to
the Agencies was substantially the same as the salary the appellant paid to his
own employees.
[29]
The profit margin achieved
by the Agencies was somewhat marginal if we assume that the businesses in
question were paying the minimum wage on the one hand; on the other hand, in
the event that they were complying with the minimum wage, which is highly
unlikely, the businesses obviously diverted the taxes collected for their own benefit,
which enabled them to take advantage of the situation to the detriment of very
vulnerable workers and the state.
[30]
Occasionally, the
appellant recruited some workers from the Agencies who subsequently became
permanent employees.
[31]
During rather summary
audits, the respondent made the following findings:
[Translation]
Placement Tout Azimut inc.
-
This company was created in 2004;
-
The majority shareholder is Youcef Balmed,
who is also President of the company;
-
In each year at issue, he and his company reported
modest incomes;
-
The company had no real place of business beginning
in 2008;
-
The address on the invoices was not the same as
the one on the cheques;
-
The cheques were sometimes dated the day after
the invoice date;
-
The company said that it had not yet obtained a
tax number, but in fact it had one that was valid from December 2, 2004,
to July 1, 2008. The company was doing business with five different
clients and gave its tax number to some but not others;
-
It was impossible for Revenu Québec to trace the
employees reported on the time sheets (no Social Insurance Number);
-
The company did not report most of its income
for the period from 2005 to 2008. Accordingly, it did not report the correct
amount of taxes or wages;
-
Mr. Balmed declared bankruptcy shortly
after the audit of his company began. It was therefore impossible to recover
the money owed to the state either from the company or its director, despite
assessments to that effect;
-
When the person auditing the company contacted the
appellant for clarification on their business relationship and the appellant then
contacted the company to ask what was going on, no Agency employees
subsequently showed up to work.
Entreprises
A. Bustos
-
This company was created in 2007;
-
The majority shareholder is Bustos Aristides,
who is also President of the company;
-
This company was audited as a result of the
appellant’s audit;
-
The company has a place of business;
-
The company did not have a payroll deduction
number and did not report any employees prior to January 2008;
-
The company did not report the correct amount of
wages;
-
The company is registered for taxes but has
almost never filed a tax return;
-
Mr. Bustos told the Revenu Québec auditor
that he had hired his first employee on January 16, 2008;
-
Mr. Bustos also admitted paying his
employees under the table and said that he had no contact information for his
employees, that the appellant had it;
-
Mr. Bustos claimed that the appellant knew
he did not have a payroll deduction number and that that did not bother it;
-
Mr. Bustos contended that the appellant could
contact his agency’s employees directly without going through him;
-
Mr. Bustos said that he would prepare an
invoice based on the hours the appellant sent (it told him who had come to work) and
send it to the appellant by Internet. Then, he would go the same day to the
appellant’s office to obtain the cheque, cashed it to obtain cash and paid his
employees in cash in the appellant’s parking lot or cafeteria;
-
Subsequently, Mr. Bustos could not be found;
-
It was impossible for Revenu Québec to trace
most of the employees declared on the time sheets. Soledad Segoviano Trujillo was
contacted and stated that she had worked for the appellant in 2008. She said
that Mr. Bustos had paid her in cash and that one of the appellant’s officers
was aware of the situation. She also said that the appellant could contact her
directly to go to work;
-
Ms. Trujillo did not report her income from
the agency;
-
Although assessments were issued to the company
and Mr. Bustos for uncollected and unremitted amounts, the respondent was
never able to recover these amounts.
Production Plus inc.
-
A search in the REQ [enterprise register] revealed
four different enterprises using that name;
-
9195-7753 Québec inc. was selected and was
audited prior to the appellant;
-
When the appellant was contacted by the person
auditing the company and subsequently asked the company for its employees’ Social
Insurance Numbers, the company did not return its call, and therefore the
appellant ceased all business dealings with it;
-
The majority shareholder and director of the
company is Mélina Sandoval;
-
The company has a place of business (there was a
waiting room, a secretary‑receptionist in one office and Ms. Sandoval
in another office);
-
The company was collaborating with people whom
the respondent recognized as providers of invoices of convenience;
-
The company was registered for taxes, but its
number was revoked from November 26, 2008, to February 19, 2009,
because it had provided no evidence of commercial activity;
-
It filed its tax returns in 2008 but not in
2009;
-
It reported its salaries in 2008 but not in
2009;
-
The company never reported any income;
-
There was a contract between the company and the
appellant, but the address on the contract is not the same as the one on the invoices;
-
The cheques bear the same date as the invoices;
-
Revenu Québec was unable to trace the employees
reported on the time sheets;
-
The company was assessed for unremitted, uncollected
amounts, but the respondent was unable to recover these amounts from the
company or its director.
Alina
-
This company was created in 2006;
-
The majority shareholder is Ricardo Hernandez,
and he is also the President of the company. Yorge Luna is the
company’s Vice‑President;
-
The company was audited as a result of the appellant’s
audit;
-
The company has a place of business;
-
The company did not declare most of its income
even though it filed returns from 2006 to 2008;
-
It reported its taxes and salaries from 2006 to
2009, but the amounts reported are not consistent with the business income;
-
Invoices issued by the company were paid within
a week;
-
Revenu Québec was unable to trace the employees
reported on the time sheets;
-
The company declared bankruptcy shortly after
the audit began;
-
It was therefore impossible for the respondent
to recover the amounts owed by the company despite having assessed it and its
directors to that effect.
[32]
In the light of these
multiple findings, it appears reasonable to me to conclude that it was obvious
that the businesses were unreliable and dishonest, genuine fraudsters whose
sole objective was to enrich themselves to the detriment of society and
undoubtedly exploiting vulnerable, defenceless persons.
[33]
In such a context, any
information coming from these businesses was neither reliable nor credible;
indeed, the modus operandi required the absence of data, information and
documents. These businesses, by virtue of their approach, had a vested interest
in not having records, documents or other material that could incriminate them.
[34]
It is astonishing and
quite disturbing that the respondent, who has such strong powers, merely
conducted a minimal, superficial audit. It is even more astonishing that the
respondent made such farfetched and outlandish findings that the lack of payroll
and employee records showed or proved that the Agencies actually had no workers
in their employment. Moreover and clearly, the respondent also assumed that the
Agencies in question paid their employees the minimum wage.
[35]
According to the
auditors - and this Court considered very carefully their arguments - the
parasitic businesses under investigation provided credible information regarding
the lack of workers. The respondent assumed that certain data were plausible
and reasonable, data that were entirely dubious and unreliable, in establishing
the bases of the assessments that are the subject of the appeal.
[36]
Instead of pursuing her
investigation and taking certain penal, even criminal actions, the respondent chose
the easy, quick route by attacking the appellant. Moreover, the ETA sets out very
clearly, in subsection 329(1), measures that can delay if not curtail the
enthusiasm of these crooks.
[37]
Realizing that she
could not recover the amounts owed by the Agencies, the respondent decided to
assess the appellant. First, she began by disallowing the business expenses
related to the payments made to the Agencies and subsequently accepted most of
them.
[38]
She then assessed the
appellant for not making source deductions on the assumption that the Agencies’
employees were the appellant’s own employees.
[39]
Later, she acknowledged
that services were indeed rendered to the appellant, and consequently the
assessment was, again, vacated.
[40]
Last, the respondent assessed
the appellant for the reasons set out in the file that is the subject of the appeal,
i.e. failing to remit the appropriate amount of net tax because the ITCs
claimed on the payments made to the Agencies were disallowed, although there
was absolutely nothing in the evidence submitted by either side that showed
collusion between the appellant and the employment agencies in question.
[41]
The business
relationships were normal and entirely consistent with standard practices. This
same evidence did not show anything that could cast doubt on the appellant’s
good faith or even any negligence. In the type of commercial activities that
the appellant engaged in, it was normal, appropriate and wise to proceed as it
did.
[42]
A number of Quebec businesses require the services of employment agencies to meet their workforce
needs, and the demand is increasing.
The respondent is aware of this reality, hence the importance of and even the
urgency for implementing the necessary tools to ensure strict compliance with
the provisions of the ETA.
[43]
Revenu Québec imposes certain
obligations on employment agencies;
the industry was for the most part unregulated, and a number of them took
advantage of the situation to enrich themselves without regard to their tax liabilities.
[44]
The case law regarding
companies doing business with employment agencies identifies four situations
that justify disallowing their ITCs:
- there was no real service provided to the client
company (thus an accommodation invoice was provided which, according to the
traditional definition, implies that the client company did not pay the taxes
on the alleged service received but nonetheless claimed the related ITCs;
- the GST registration number was not indicated on the
invoice, the GST registration number was usurped or the GST registration number
was not valid during the period at issue;
- the invoice did not contain an adequate description of
the supply; and
- the supplier’s name indicated on the invoice was not
correct (for example, because the client company agreed to pay a third party at
the Agency’s direction, and that party was not involved in the supply).
[45]
Any reference to the case
law requires caution but also and above all consideration of the specific facts
of each case and their context. As Justice Archambault stated in Systematix
Technology Consultants Inc. v. The Queen, a case involving a GST
registration number, is not relevant in a case where the name of the supplier
is at issue.
[46]
First, the respondent submits
that the Agencies that the appellant dealt with were not carrying on a
commercial activity given that they did not have the capacities, expertise or
material, financial and human resources to provide the workforce relating to
the payments that were made to them by the appellant.
[47]
This argument is
without merit particularly since the respondent herself recognized that the
Agencies engaged in a commercial activity because prior to assessing the
appellant, she first assessed the Agencies for uncollected, unremitted sales
taxes and unreported income.
[48]
If the employment agencies
in question were not operating a business, why were they initially assessed? In
this regard, counsel for the appellant submits a very pertinent nuance by
stating that there is a clear distinction between the concept of a lack of
resources and that of unreported resources.
[49]
In the light of the
numerous findings made during the audit of the Employment Agencies, it became clear
that they were delinquent businesses whose only objective was to maximize
profits to the detriment of its own employees, by undoubtedly paying them a
ridiculous salary, and of the state by pocketing the QST and GST that had been
paid to them.
[50]
In view of this obvious
state of affairs, why was the respondent not more determined, strict and aggressive?
On the contrary, it assumed, in the absence of records, that their employees
were paid the minimum wage and, which is even more implausible, that there were
simply no employees because there were no records.
[51]
In addition, it is
equally surprising that the respondent initially assessed the Agencies for
unremitted source deductions. Having failed in its attempt to recover the
amounts owed, she then assessed the appellant on the pretext that the employees
in question worked for it.
[52]
On the very face of the
facts, the appellant was assessed essentially because the respondent was unable
to recover the amounts owed from the Agencies.
[53]
The respondent’s
arguments must be consistent. The flagrant lack of consistency means that the
appellant has succeeded in establishing prima facie that the respondent’s
assumptions underlying the assessment were false. She cannot adjust the grounds
for an assessment, based not on actual facts but on the ultimate goal, which
was to recover the assessed amount.
[54]
The respondent’s
evidence regarding her claims that the invoices issued by the Agencies to the
appellant were invoices of convenience because the supplier’s name on the
invoices was not correct does not pass the preponderance test. Indeed, the
respondent herself recognized that the Agencies did in fact make the supplies
to the appellant and not other unidentified subcontractors because she assessed
them for uncollected, unremitted taxes, undeclared income and unremitted source
deductions.
[55]
Accordingly, they are
not invoices of convenience except for the business that prepared them given
that the ultimate goal was to divert the taxes collected from the appellant to
its own profit and benefit. The illegal scheme cannot be imputed directly or
indirectly to the appellant, which, firstly, did not know about it and
secondly, always acted in good faith.
[56]
The respondent’s
argument that it was not the Agencies that made the supplies in question but
unidentified subcontractors of the Agencies does not change my conclusion since
paragraph 3(a) of the Regulations provides that the name on the
invoice can be the name under which the supplier or its intermediary does
business. The respondent cannot therefore argue that the subcontractor that
invoices the work must have performed the work.
[57]
The concept of
intermediary is not defined in the ETA or the Regulations, and there
is no case decided by the Federal Courts on this issue. Justice Lamarre stated
that where the name of the intermediary appears on the invoice, the invoice
must specify that it was acting as such. With respect, regarding this interpretation,
I question this position given that this condition is not in the Regulations;
moreover, in tax matters, taxpayers cannot be required to do more than the obligations
the Act imposes on them.
[58]
The respondent accepted
the business expenses inherent in the payments that the appellant made to the
Agencies; consequently, it is logical to accept the ITCs the appellant claimed
with respect to the tax paid on those same supplies, all of which is in
accordance with Parliament’s objectives.
[59]
Indeed, the impact
analysis that accompanied the Regulations Amending the Input Tax Credit Information Regulations stated that enacting the new regulatory conditions would have a
minor impact because the documents used to support ITC claims would be the same
receipts and invoices currently retained by businesses to support expense
deductions under the Income Tax Act.
[60]
Certainly, the
respondent established very clearly that the Agencies were high‑level tax
offenders in that they did not remit the taxes they collected, maintained no
records and did not keep anything that could be audited in this matter.
[61]
With respect to this
issue, the tax laws on the GST do not contain any specific provision allowing the
tax authorities to hold a business liable for the tax fraud of one of its
suppliers unlike, for example, section 316 of the Act Respecting
Industrial Accidents and Occupational Diseases, which
clearly and specifically provides that a business may be held liable for
contributions to the CSST that were not made by one of its subcontractors.
[62]
If Parliament had
intended that a taxpayer doing business with a delinquent subcontractor would be
held solidarily liable for the amounts the subcontractor owes to the state, it
would have expressly stated that as the legislator did for contributions owed
to the CSST. It is not for the Court to usurp the function of Parliament.
[63]
In the absence of
specific measures, a taxpayer cannot be held responsible for the tax liabilities
not met by a tax partner, unless obviously there has been collusion with that
partner. It seems that the tax authorities have a tendency to assume that a
certain degree of negligence or even a lack of vigilance amounts to collusion. In
other words, the respondent would like to impose a burden or a liability that translates
into a real obligation to inquire or investigate for businesses that deal with
others.
[64]
The primary mission of
a business is to generate revenues that result in profitability, not to act as taxation
police.
[65]
In Orly Automobiles
Inc. v. Canada, the Federal Court of Appeal pointed out that a registrant
cannot claim to be entitled to reimbursement if it knows or cannot ignore the
false statements on the supporting documentation provided by its supplier or if
the registrant has colluded in the fictitious transactions.
[66]
In this case, the
evidence adduced does not support a finding that the appellant was in collusion
with the Agencies. Indeed, the respondent did not question the truthfulness of
the identities on the time sheets or forms signed by the Agencies’ employees stating
that they had received the required training. She essentially noted that the
appellant did not have any information about the workers that the Agencies
referred to it, including their real names, addresses and Social Insurance
Numbers.
[67]
The same evidence shows
that the appellant did not benefit from the failure of the Agencies to satisfy their
tax liabilities. The appellant’s evidence established unquestionably that it
was a very well‑structured business with a reputation and credibility
beyond reproach. Over the years, it became so well‑known that it was
surprising and completely unreasonable to conclude that it had jeopardized such
a reputation through gross carelessness by associating itself with a
questionable scheme.
[68]
The appellant had to
deal with the resources that the employment Agencies sent in order to meet its periodic
workforce needs. It acted normally in the course of business by ensuring that
the GST numbers on the invoices were valid. In addition, it refused to pay the
GST to a business that did not have a valid number.
[69]
Moreover, this approach
is comparable to the one adopted in 9088-2945 Québec Inc. v. The Queen by my
colleague, Justice Paris.
[70]
Despite this, the
respondent maintains that the appellant was not diligent enough; according to the
respondent, if the appellant had been prudent and vigilant, it would have noted
certain irregularities, even falsehoods, in some of the supporting
documentation regarding supplies. This evidence is not persuasive because the
falsehoods that the respondent refers to stem from her perception and her
interpretation; the facts do not support such a conclusion.
[71]
Nothing in the ETA
provides that a business must act as a police officer or investigator to ensure
that the business whose services have been retained complies with the ETA.
[72]
In addition to
verifying the validity of the Agencies’ GST registration numbers and contacting
the Agencies’ officers or directors, the respondent would like the appellant to
have
- verified their legal existence with the REQ;
- gone to the head office of the Agencies to see if
there were actual commercial activities;
- exchanged contract documents with all the Agencies;
- asked all the Agencies’ employees who came to work
for it to provide identification and their Social Insurance Numbers;
- obtained compliance letters from the CSST to
ensure that the hours worked by the Agencies’ employees were reported;
- verified whether the Agencies had vehicles
registered with the Société d’assurance-automobile du Québec (SAAQ);
- analyzed the reverse side of cheques issued as
payment to find out which ones were cashed at cheque‑cashing centres;
- verified that invoices from the same Agency
followed a numerical sequence;
- analyzed the price differences invoiced to
ascertain the [translation]“fake”
Agencies from the [translation] “real”
ones; and
- paid attention to the handwriting on the invoices
to try to detect differences between the invoices from the same Agency.
[73]
Indirectly, the
respondent would like the appellant to do her own work. One of the auditors who
had acted in the appellant’s file and who testified at the hearing, Diane Deluga,
even said that businesses that deal with employment agencies have more
resources and powers than the respondent to ensure that agencies are complying
with the Act and its Regulations.
[74]
The Agence du revenu du
Québec (ARQ) not only has access to the Agencies’ confidential information,
which is not the case for the appellant, but also has numerous resources. Inter
alia, it has sophisticated audit software that enables it to cross‑reference
information contained in various records. It has the tools, staff and technical
and material resources to uncover and sanction fraudsters.
[75]
It also has competent
employees whose work consists essentially in auditing businesses. It cannot
require a simple small or medium‑size, or even a large business, to do
the same thing.
[76]
That would simply not
be realistic and could destabilize the entire financial market especially since
it was shown that the appellant was hiring between 700 and 800 subcontractors
at that time. Moreover, the use of subcontractors is becoming increasingly
common in all fields.
[77]
It is true that the GST
registration number was not on the invoices issued by the Agence Placement Tout
Azimut. At first, the Agency stated that it was in the process of obtaining its
number but it never had it month after month, thus demonstrating a real
problem.
[78]
The respondent criticizes
the appellant for not following up thoroughly. I do not share this position
because it was shown that the appellant had never paid any taxes to that Agency
and that, consequently, it had never claimed the related ITCs. Accordingly, I
do not see how the respondent was prejudiced by this situation given that the
effect was neutral; yes, the appellant did not pay taxes with respect to those
supplies but it would have, in any event, been fully reimbursed for the taxes
it paid if it had paid them. There again, it seems that the tax authorities
want businesses that retain the services of subcontractors to interfere in the
affairs of other businesses.
[79]
The respondent submits
that the appellant should have been suspicious of the Agencies notably because
of the hourly rate charged: the profit may have been quite marginal, assuming that
the Agencies were complying with the Minimum Wage Act, which is
questionable.
[80]
I do not accept this
argument; the definition of commercial activity in section 123 of the ETA
clearly states that, in the case of a business carried on by a corporation, it
is not necessary to prove that there was a reasonable expectation of profit to
find that the corporation was carrying on a commercial activity:
“commercial activity” of a
person means
(a) a business carried on
by the person (other than a business carried on without a reasonable
expectation of profit by an individual, a personal trust or a partnership, all
of the members of which are individuals) . . .
(b) an adventure or concern of the person in the nature of trade
(other than an adventure or concern engaged in without a reasonable expectation
of profit by an individual, a personal trust or a partnership, all of the
members of which are individuals) . . . .
[81]
The respondent faults the
appellant for not calling the employment Agencies’ employees and officers as
witnesses. Indeed, the onus of proof was on the appellant, but the respondent
could have also compelled the same individuals to testify, especially since
their evidence would have shed light on the confusion created by some
allegations in the Reply to the Notice of Appeal. In addition, the auditors
themselves referred to the difficulties, if not the impossibility, of
contacting those persons. There again, the respondent would like to impose on
the appellant an obligation to contact the individuals involved when, despite
her exceptional resources, she was unable to find most of them.
[82]
On the other hand, in
view of the evidence, I am convinced that their contribution or testimony would
not have been reliable or credible. Indeed, it is very surprising that the
auditors believed the information obtained during the audits of the offending
businesses.
[83]
The appellant is a
serious business, and the evidence did not impugn the credibility of the testimony
given by its representatives; it has been recognized that a taxpayer’s credible
testimony may sometimes be sufficient to successfully rebut the accuracy of the
presumption.
[84]
In support of her criticisms
of the appellant’s conduct, the respondent blames the appellant for not
obtaining CSST compliance letters concerning the Employment Agencies; the
appellant’s duty under the Act Respecting Industrial Accidents and
Occupational Diseases is set out in section 316 of the Act is another
matter.
316. The Commission may
demand payment of the assessment due by a contractor from the employer who
retains his services.
In the case of the first paragraph, the
Commission may establish the amount of the assessment according to the
proportion of the price agreed upon for the work corresponding to the cost of
labour, rather than the wages indicated in the statement made according to
section 291.
The employer who has paid the
amount of the assessment is entitled to be reimbursed by the contractor
concerned and the employer may retain the amount due out of the sums that he
owes the contractor.
If an employer proves that he is retaining the
services of a contractor, the Commission may inform the employer whether an
assessment is due by that contractor.
[85]
The appellant dealt
directly with the Agencies’ directors and communicated regularly with them. It
could see that the Agencies were performing the services because their
employees came to its business premises at the designated dates and times. It
paid the taxes owing on the supplies it received. It verified the validity of
their GST registration number, and for the Agency that had not yet obtained
one, it did not pay or claim the corresponding ITCs. All this shows that it was
sufficiently diligent in its relationships with the Agencies; lastly, it had no
ground to believe that they were tax offenders.
[86]
The respondent notes
that the recent case law on disallowing ITCs increases the duty of verification
on the part of companies doing business with employment agencies and that now
it is the taxpayer or the party that contracts out work that must bear the
risks of its subcontractors’ fraud or other unlawful acts; that is an
interpretation that must be nuanced.
[87]
First, it is
appropriate to put the cases that the respondent cites in context. In some cases,
the supplies were not delivered. In that kind of situation, it is completely
normal to disallow a registrant’s ITC claim when it knows very well that it
never paid the GST on the supplies it alleges it received because it was part
of a false invoicing scheme.
[88]
In the instant case,
both parties acknowledge that the services were indeed provided. It follows
that these authorities are not relevant.
[89]
Secondly, it is also
highly relevant to consider two authorities in particular, Systematix
Technology Consultants Inc. v. The Queen and 9088-2945 Québec Inc. v. The
Queen.
These cases address the validity of GST and QST registration numbers; several hypotheses
are possible, such as the number is invalid, it simply does not exist or,
worse, it is a usurped number that was issued in the name of another business.
Through a simple verification with the appropriate authorities, it is possible
to quickly and inexpensively discover this type of irregularity.
[90]
In such a situation, it
appears to me entirely appropriate to disallow a taxpayer’s ITC claim;
moreover, the Federal Court of Appeal in Systematix Technology Consultant
Inc., above, was very clear that these situations do not comply with
subsections 169(4) and 241(1) of the ETA or with the conditions prescribed
by the Regulations:
- no registration number appears on the invoices;
- the invoices contain a registration number that was valid only before
the relevant period because the Minister had revoked it prior to that period;
- the invoices contain a registration number in the supplier’s
name that was valid, but the validity date was subsequent to the relevant
period; and
- the registration number indicated on the invoices is not valid
because it was not in the Minister’s database.
[91]
This is the case where
a taxpayer does business with a subcontractor that appropriated not only the
commercial identity of another company but also its GST registration number; in
such a situation, the taxpayer will not be able to claim the ITCs related to
the supplies it received even if it paid the GST on those supplies.
[92]
Indeed, in that
situation, it cannot be said that the supplier’s name on the invoice is correct
because it was not that company that provided the service. It also cannot be
said that it did business with an authorized intermediary because the subcontractor
that stole its identity was neither its principal nor its agent.
[93]
For this, it would have
at least had to know that the fraudulent subcontractor was using its identity
and its number or that it had engaged in actions suggesting to a bona fide
third party that the subcontractor in question was its representative.
[94]
In the absence of
evidence confirming this situation, one cannot conclude that there was an
apparent mandate, as defined in article 2163 of the Civil Code of
Québec. In my view, that is what Justices Lamarre-Proulx
and Boyle of this Court meant in Ribkoff v. The Queen
and Comtronic Computer Inc. v. The Queen when they stated that the risk of
fraud by subcontractors, in this context, is borne by the taxpayer/company that
contracts out work.
[95]
Lastly, the respondent refers
to certain cases that address the same issue as the one raised herein, which
are favourable to taxpayers. They hold that if the taxpayer verified the employment
agency’s GST registration number and had no reason to believe that the agency
did not have the resources to provide the services received, the taxpayer was
sufficiently diligent to claim the ITCs related to the receipt of these
services.
[96]
The appellant contacted
the Employment Agency and verified that the number on the invoicing was
accurate. In exchange, the Agencies answered the call by directing the number
of employees required to the premises where they performed the work to the
appellant’s satisfaction.
[97]
Nothing in the evidence
supports a finding of bad faith, negligence, carelessness, recklessness or even
imprudence on the appellant’s part.
[98]
Also, it is true that the
ARQ, in one of its interpretation bulletins, stated that a registrant that has
an invoice issued by an accommodator in support of its ITC claim could be
denied the right to its ITC if it was not acting in good faith. The ARQ
generally considers that a registrant “was not acting in good faith
. . . [if] he could not, as a reasonable, diligent and informed
person in his field of activity legitimately believe that the person who issued
the invoice was the true supplier of the property or services acquired by the
registrant”;
there is no such requirement anywhere in the ETA or the Regulations. The ARQ
enacted this, and this body does not have the power to turn administrative
policies into laws.
[99]
We are operating in a
society where the primacy of the rule of law is all‑pervasive. Taxpayers
must be able to rely on statutes and regulations to determine what they can and
must do. In such a context, the role of the courts is to interpret and apply
the statutes and regulations, not to create or enact new ones.
[100]
The business world is
subject to multiple rules and regulations that often have the effect of burdening
the administration and generating enormous costs, all of which directly and
significantly affects productivity but also cost effectiveness.
[101]
To succeed and hope for
growth in a market that transcends borders and where fierce competition is
coming from everywhere, it is absolutely essential and fundamental to reduce operational
costs that do not relate to the purpose of the business.
[102]
This is not a doctrinal
approach but a reality that generally concerns all stakeholders.
[103]
The approach of the
respondent is precisely at odds with this reality: she wants to impose duties that
Parliament did not contemplate on the one hand and, on the other hand, to impose
a heavy and expensive duty to investigate the solvency and reliability of their
suppliers, as well as the legality of their actions.
[104]
The gratuitous mandate
imposed on businesses must be able to count on the structure that has the
expertise, resources and above all the power to support the mission that the
state imposes on businesses.
[105]
The tax authorities
appear to impose duties on their agents that are not set out in the statute.
Moreover, this is an approach that is completely contrary to the rules in the Civil
Code of Québec.
[106]
Certainly, agents have duties,
in particular to act in good faith and to be a good fiduciary with obligations
to account. In return, the principal, i.e. the respondent in this case, also owes
duties to the agents.
[107]
The first duty is
certainly to facilitate the agent’s work especially since the mandate is gratuitous.
[108]
This duty is all the
more important because the principal has the staff and the technical, material
and financial resources to implement, follow up and monitor in a way that
facilitates the work of the agent whose primary focus is operating a business,
not collecting taxes for the state.
[109]
In addition, everyone,
which obviously includes agents, is presumed to be of good faith under article 2805
of the Civil Code of Québec. The tax authorities cannot conclude, on the
basis of speculations and interpretations, that the agent was in bad faith and
assess it on the basis of essentially hypothetical grounds. Bad faith, complicity,
negligence and/or wilful blindness cannot be presumed; they must be proved, and
the burden is on the respondent.
[110]
In this case, the
evidence is that the appellant always acted in good faith and acted properly in
its relationships with the subcontractors.
[111]
In the light of the
answers obtained from the auditors in this case, it seems clear to me that the
respondent would like to force businesses to invest in that direction. If that
is the case, they will have to convince Parliament to adopt provisions imposing
such a burden on businesses.
[112]
The Supreme Court of
Canada has been very clear on this point. For example, in Ludmer v. M.N.R.,
it said that “when interpreting the Income Tax Act courts must be
mindful of their role as distinct from that of Parliament. In the absence of
clear statutory language, judicial innovation is undesirable”. Instead,
promulgating new rules of tax law must be left to Parliament. Accordingly, it
is not for the courts to strengthen the provisions of the statute when it is
open to Parliament to be specific about preventing wrongdoings.
[113]
As stated above, if Parliament
had intended to impose liability on a company that does business with a tax offender
for the tax frauds it committed without the company’s knowledge, it would have
said so expressly, as it did with
respect to CSST contributions.
[114]
Also, the fact that it
strengthened the reporting requirements for employment agencies possibly shows that
this industry was not adequately regulated.
[115]
Lastly, why would Parliament
have enacted rules addressing publicity and opposability in the Act
Respecting the Legal Publicity of Enterprises and
the Business Corporations Act,
which codifies the common law concept of indoor management in Quebec civil law, if it did not want taxpayers to rely on public records?
[116]
If a business were to
be held responsible for its partner’s tax fraud when the business did not
collude with it or have any reason to suspect that it was a tax offender, this would
completely change Canadian taxation principles. Indeed, since small and medium‑size
businesses do not have the resources for an internal auditing and risk
management office, they will no longer want to take the risk of paying taxes to
a Crown agent hoping that it will then remit them to the Crown. Instead, they
will want to self‑assess as is permitted for importation.
[117]
In 2009, the Supreme
Court of Canada clearly explained the nature of the GST:
[10] The GST, which was implemented in
1990 by legislation that amended the ETA (S.C. 1990, c. 45),
replaced the former federal manufacturers’ sales tax. The GST can be
regarded as a value‑added tax. It is collected at every stage of
the manufacturing and marketing of goods and services and is payable by the
recipient, who is regarded as the debtor in respect of the tax liability to the
Crown (s. 165 ETA). However, the supplier is responsible for
collecting and remitting the tax (s.221(1) ETA). The supplier is
deemed to hold the amounts so collected in trust for Her Majesty (s. 222(1) and
(3) ETA) and must periodically file returns and make remittances.
In addition, the Act establishes a system under which input credits can be
claimed, at each step of the marketing and supply of the good, in respect of
the taxes the supplier has had to pay to his or her own suppliers (ss. 141.01
and 169(1) ETA). The ultimate recipient bears the full burden of
the tax (R. Brakel & Associates Ltd., Value‑Added Taxation in
Canada: GST, HST, and QST (2nd ed. 2003), at pp. 2‑3).
This Court has confirmed this as a valid exercise of the Parliament of Canada’s
taxing power (Reference re Goods and Services Tax, 1992 CanLII 69 (SCC),
[1992] 2 S.C.R. 445).
[118]
Accepting or agreeing
with the respondent’s arguments and submissions would have the effect of
denying or disregarding that doctrine of the Supreme Court of Canada.
[119]
When the GST regime was
established, Parliament’s objective was to target the consumer or the final
purchaser of a product as the payer of the GST owed to the state; the GST must
be paid at every stage of the production chain; it is reimbursed when the final
consumer purchases the product.
[120]
It is a tax based on
the [translation] “destination”
versus [translation] “the origin”.
In other words, it is the destination of the goods and services that determines
the imposition of the tax.
[121]
For all these reasons,
I find that the appellant has shown that it provided the ARQ with all the
information prescribed by the ETA and the Regulations in order to be entitled
to the disputed ITCs; it cannot lose those same ITCs simply because it dealt
with employment agencies that proved to be tax offenders. The appeal is
therefore allowed, and the assessment is vacated.
[122]
The appellant submitted
that it wanted to make comments if this Court allowed its appeal. On this
point, there is no doubt that the purpose of such a request was to obtain a
higher amount than what the tariff provides for in a case of this class under
subsection 147(3) of the Tax Court of Canada Rules (General Procedure).
[123]
First, I recognize that
this case has been the subject of unusual interest, which is no doubt reflected
in a greater number of hours than normal; as for the arguments before the
Court, again the work was absolutely impeccable.
[124]
On the respondent’s
side, it is clear that her arguments were based on an interpretation of the case
law that seemed to support her position.
[125]
In such circumstances,
I do not believe that this is a special case that warrants a higher costs award
than what is provided. The award of a lump sum or of any other increase to the
statutory tariff requires circumstances and an exceptional context where the
history of the case shows elements of abuse, frivolousness and/or bad faith.
[126]
In this case, certainly
this judgment exposes the respondent’s approach; on the other hand, that
approach was not frivolous in that her theories were advanced on the basis of the
jurisprudential doctrine.
[127]
For these reasons, I do
not believe that this case warrants an award of costs other than those set out
in the applicable tariff, which are, moreover, awarded to the appellant.
Signed at Ottawa, Canada, this 4th day of
February 2014.
“Alain Tardif”
Translation certified true
on this 12th day of August 2014
François Brunet, Revisor
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