Locator of Missing Heirs Inc. v. R., [1997] 2 CTC 346

Robertson J A.:

This is an application for judicial review of a decision of the Tax Court of Canada holding that the appellant taxpayer was not exempt from the obligation to collect and remit the Goods and Services Tax (“GST”) in accordance with the provisions of the Excise Tax Act (hereafter the “Act”). It was also held that the taxpayer had failed to establish that it exercised “due diligence” in ascertaining its legal obligations and, therefore, was required to pay the six percent penalty prescribed by section 280 of the Act. Three issues arise for our consideration. The first two focus on whether the “supply” offered by the taxpayer falls within certain GST-exempt categories outlined in the Act. These issues were not raised before Judge Bowman of the Tax Court. The third issue draws attention to his influential decision in Pillar Oilfield Projects Ltd. v. R., [1993] G.S.T.C. 49 (T.C.C.), which established the right of a taxpayer to plead “due diligence” as a defence to the imposition of a section 280 penalty.

For a number of years the taxpayer has been involved in the innovative business of finding missing heirs to property of deceased persons. In a “typical” situation the taxpayer would identify companies that had become dormant or had merged with other companies. In the latter case, the taxpayer would then ascertain the names of shareholders who had died before exchanging their original shares for shares in the amalgamated company. The taxpayer would next search the records of probate courts to determine whether there were heirs who had not claimed their share of an estate. Once such heirs were identified the owner of the corporate taxpayer, Mr. Howes, would contact them and suggest that their lawyer get in touch with him. The lawyer would act as intermediary between the taxpayer and the heirs. Through this intermediary the taxpayer would negotiate a fee based on a percentage of the value of the property. Many of the heirs were non-residents of Canada.

In May of 1991 the taxpayer sought advice from its lawyer as to whether it was exempt from the requirement to collect and remit the tax in question. The lawyer responded as follows: “I have not decided yet whether what you do is [exempt]; but my first impression is that it is.” The taxpayer did not pursue the matter further with its lawyer after being advised that it would cost in the vicinity of $4000 to obtain a more comprehensive opinion. Nor did the taxpayer request a ruling on its GST liability until October of 1993. Ultimately, the Minister of National Revenue made an assessment under Part IX of the Act for the period from 1 January 1991 to 31 May 1994. That assessment included approximately $29,000 as owing for unremitted GST, accrued interest of $3,500 and a six percent penalty of approximately of $3,500, for a total of $36,000. The taxpayer appealed the assessment to the Tax Court under the informal procedure.

Section 240 of the Act requires a supplier of a taxable supply in Canada to be registered under the Act unless that person is a “small supplier” within the meaning of section 148 (under $30,000 in sales). The taxpayer does not fall within that exempt category and, therefore, is subject to the Act unless engaged in a business dealing with an “exempt supply” such as a “financial service”. The latter term is defined in subsection 123(1). Paragraph 123(l)(d) of that definition provides in relevant part that financial service means “the ... transfer of ownership ... of a financial instrument”. In turn, financial instrument is defined in subsection 123(1) so as to include an “equity security”, which is itself defined in pertinent part as “a share of the capital stock of a corporation...”.

In the Tax Court, the taxpayer argued that its business activities fell within paragraph 123(l)(d) of the Act, but the argument was rejected on the basis that the activities described in that provision relate to those whose business is to effect transfers of ownership from an estate to an heir (e.g., trust companies, banks, other financial institutions and solicitors). Having reached that conclusion it was unnecessary to address the Minister’s argument that if the services of the taxpayer qualify as a financial service then they also constitute a “prescribed service”. Pursuant to paragraph 123(l)(t) a financial service is deemed not to include a prescribed service, in which case the services no longer fall within the category of exempt supply. [There is yet an exception to this exception which I need not explain].

Before the Tax Court, the taxpayer raised two issues which Judge Bowman disposed of handily: see generally [1995] G.S.T.C. 63 (T.C.C.) (T.C.C.). The remaining issue was whether the defence of due diligence had been made out. After concluding that the defence is not restricted to questions of fact, as opposed to law, Judge Bowman ruled against the taxpayer. On the evidence, the taxpayer was aware of its potential legal problem and could not rely on its lawyer’s letter of 15 May 1991. That letter did not constitute an opinion that the services were exempt. Moreover, the taxpayer did not seek a ruling from the Department of National Revenue until October of 1993. Accordingly, the penalty was upheld and the taxpayer’s appeal dismissed.

In pursuing the judicial review application, the taxpayer retained counsel who wisely abandoned the argument that the services offered by the taxpayer fall within paragraph 123(l)(d) of the definition of financial service in the Act. It is now argued that Judge Bowman erred in failing to hold that the services in question fall within other paragraphs of that definition. The relevant provisions of subsection 123(1) read as follows:

“financial service” means

(d) the issue, granting, allotment, acceptance, endorsement, renewal, processing, variation, transfer of ownership or repayment of a financial instrument,

(e) the provision, variation, release or receipt of a guarantee, an acceptance or an indemnity in respect of a financial instrument,

(f) the payment or receipt of money as dividends (other than patronage dividends), interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument,

(1) the agreeing to provide, or the arranging for, a service referred to in any of paragraphs (a) to (1)...

Relying jointly on paragraphs 123(l)(d) and (1), the taxpayer maintains that it “arranges” for the transfer of ownership of a financial instrument (shares), as opposed to actually effecting a transfer of such as contemplated by paragraph 123(l)(d). Similarly, the taxpayer argues that its services include arranging for the payment of dividends as contemplated by paragraphs 123(l)(f) and (1), when taken together. Finally, the taxpayer relies on the fact that it is often required to provide a transferor (financial institution) with an indemnity bond before the latter will transfer the shares to an heir, in which case paragraph 123(l)(e) is applicable. In other instances the taxpayer will arrange for the heir himself to execute a bond in order to satisfy transfer requirements. In such cases, it is submitted that the taxpayer comes within paragraphs 123(l)(e) and (1), taken in tandem, and concerning the arranging for provision of an indemnity in respect of a financial instrument.

In the alternative, the taxpayer maintains that Judge Bowman erred in failing to consider whether the services provided to non-residents are “zero- rated” pursuant to section 7 of Part V of Schedule VI to the Act. The rate of tax in respect of a taxable supply that is zero-rated is 0%. Section 7 reads as follows:

7. A supply of a service made to a non-resident person, other than an individual, or to a non-resident individual who is outside Canada at all times when the individual has contact with the supplier in relation to the supply, but not including a supply of

(a) a service that is primarily for consumption, use or enjoyment in Canada;

(b) an advisory, consulting or professional service;

(c) a postal service;

(d) a service in respect of real property situated in Canada;

(e) a service in respect of tangible personal property that is situated in Canada at the time the service is performed;

(f) a service of acting as an agent of the non-resident person or individual; or

(g) a transportation service.

The taxpayer argues that during the assessment period it provided a “significant portion” of its services to non-residents. These non-residents are said to consist “almost entirely” of individuals who were outside Canada at all times when the individual had contact with the supplier (the taxpayer) in relation to the supply. Moreover, it is submitted that none of the exemptions listed above in section 7 apply to the service provided by the taxpayer to non-residents. I propose to deal with the zero-rated argument before turning to consider whether the services performed by the taxpayer constitute a financial service within the meaning of subsection 123(1) of the Act. However, first I feel compelled to comment briefly on the futility of raising issues on an application for judicial review which were not advanced in the court below and which are fact-driven.

It must be recognized that the taxpayer elected to appeal under the informal procedure on the basis that its services are GST-exempt and, therefore, it is not required to register as a supplier under the Act. The taxpayer also chose not to retain legal counsel to plead before the Tax Court, nor did it attempt to argue or show that some, but not all, of the services provided were tax-exempt. The transcript clearly reveals that Mr. Howes lacked the training to pursue the type of legal arguments raised on this application and that he failed to adduce the evidence necessary to arrive at certain findings of fact that would have had to have been made by the Tax Court Judge in order to properly advance some of the arguments now before this Court. On judicial review it is not the role of this Court to make findings of fact but rather to determine whether a decision was rendered on the basis of an “erroneous finding of fact ... made in a perverse or Capricious manner...”.

With respect to the zero-rated argument, I am of the view that it must fail for the simple reason that there is no factual basis on which the taxpayer can ground its legal submissions on this issue. In the present case the taxpayer did not raise the zero-rated argument before the Tax Court and, more importantly, led no specific evidence respecting the non-resident status of its clients. At best, Judge Bowman was able to extract from Mr. Howes the statement that between “a third and a half” of the services were to nonresidents. Above all else there is no evidence on the record to show that the taxpayer can bring itself within the exceptions listed under section 7 of Part V of Schedule VI: see in particular subsection 7(f). [I am ignoring altogether the fact that not all of the services rendered by the taxpayer involved intangible property such as corporate shares. I

This leads me to consider the taxpayer’s argument that its business constitutes the supply of a financial service other than the kind identified in paragraph 123(l)(d) of the Act. The essence of the taxpayer’s submission is that it “arranges” for the provision of financial services identified in paragraphs 123(l)(d), (e), and (f), as contemplated by paragraph 123(1)(1). Once again, there is a factual vacuum as to the precise nature of the services rendered by the taxpayer to the heirs. For example, it is unclear what role was played by the lawyers who acted as intermediaries. The extent to which the taxpayer was called on to arrange for the execution of an indemnity bond by an heir or was required to execute such a bond on an heir’s behalf is also unresolved. Leaving these concerns aside, it is apparent that the taxpayer’s argument is flawed in another material respect. In effect, the taxpayer is arguing that if, in the course of providing a taxable supply, it offers an exempt supply then the entire supply must be deemed exempt, and this is true no matter how insignificant be the exempt portion. In my opinion, section 138 of the Act disposes of the taxpayer’s argument:

138. For the purposes of this Part, where

(a) a particular property or service is supplied together with any other property or service for a single consideration, and

(b) it may reasonably be regarded that the provision of the other property or service is incidental to the provision of the particular property or Service,

the other property or service shall be deemed to form part of the particular property or service so supplied.

In short, section 138 provides that a supply that is incidental to another supply is treated as part of that other supply: see also section 139 which was not cited in argument but which applies specifically to financial services in mixed supply. In the present case, pursuant to section 138, it would have been incumbent upon the Tax Court Judge to determine whether, for example, the indemnity services provided by the taxpayer were incidental to the service of locating property and heirs. The converse question highlights the weakness in the taxpayer’s argument: is the service of locating property and heirs incidental to the indemnity services provided by the taxpayer? The answer to that question, in my view, is self-evident.

Finally, the taxpayer suggests that there is but a single supply and therefore there is no need to consider whether one supply is incidental to another. If that were so, then I would be at a loss to understand how the taxpayer’s business could be described accurately, for example, as arranging for the transfer of ownership of corporate shares without marginalizing both the research efforts undertaken by the taxpayer and the significance of its corporate name “Locator of Missing Heirs Inc.”. The analogy that the taxpayer is akin to a stockbroker who undertakes research on behalf of his or her clients is, in my view, simply not persuasive. Lastly, I should point out that no reasonable heir would agree to pay as much as 30% of the value of shares as consideration for services rendered in facilitating their transfer: see Tax Court Transcript, Application Record at 32 and 54.

Having determined that Judge Bowman did not err in concluding that the services provided by the taxpayer are not tax-exempt, it remains to be decided whether he erred in concluding that the taxpayer did not satisfy the requirements of the due diligence defence so as to avoid the six percent penalty imposed automatically under section 280 of the Act. In my respectful view it is unrealistic to take issue with Judge Bowman’s findings. Contrary to what the taxpayer asserts in its submissions, the effect of the Tax Court’s ruling is not tantamount to requiring the taxpayer, in retrospect, to have incurred excessive fees for a more comprehensive legal opinion. Rather, my understanding of Judge Bowman’s reasons simply places on the taxpayer an obligation to have sought a ruling from the Department in a more timely fashion. In rejecting this particular argument I do not wish to leave the impression that the right to invoke the due diligence defence is a matter of settled law in the Federal Court. Though I need not express an opinion on the issue it may be helpful for purposes of future litigation to sketch out the objections to such a defence as raised by the Minister in this and other cases of which I am aware: e.g., Canada (Attorney General) v. 770373 Ontario Ltd., (January 23, 1997), Doc. A-203-96 (Fed. C.A.)

Advocates of the due diligence defence in the context of section 280 of the Act rely heavily upon the Supreme Court’s decision in R. v. Sault Ste. Marie (City), [1978] 2 S.C.R. 1299 (S.C.C.). In that case, the City of Sault Ste. Marie was charged with a water pollution offence under The Ontario Water Resources Commission Act. The Court thus had to consider the nature of liability for a “public welfare offence” which is not criminal per se but which is contrary to the public interest. Writing for the Court, Dickson J. (as he then was) set out a three-pronged framework for classification of offences which recognized (first) criminal offences requiring a mental element, (second) offences of strict liability which need not entail a mental element but for which a defence of reasonable care is available, and (third) offences of absolute liability for which no such defence exists since Parliament has stated clearly that guilt follows simply from proof of commission of the prohibited act. It was held that the Ontario environmental legislation created a strict liability offence for which a defence of due diligence was available.

By process of extrapolation from the Sault Ste. Marie (City) case, taxpayers seek to import a due diligence defence into section 280 of the Act. According to the Minister, however, that type of analysis fails to accord sufficient weight to the fact that in Sault Ste. Marie (City) the penalty for conviction under the provincial social welfare statute ranged from a fine to imprisonment depending on whether a first-time or repeat offender was involved. In other words, any reasoning by analogy is said to be flawed because cases under the Excise Tax Act, unlike Sault Ste. Marie (City), cannot reasonably be characterized as quasi-criminal prosecutions pursuant to public interest legislation.

The Minister is also quick to point out that in the context of the Customs Act this Court has refused to accord a defence of reasonable care to an importer whose goods have been seized and forfeited in light of an erroneous declaration: see Letarte v. R.., [1981] 2 F.C. 76 (Fed. C.A.). That case was followed by Denault J. in Time Data Recorder International Ltd. v. Minister of National Revenue, (1993), 66 F.T.R. 253 (Fed. T.D.), aff’d (April 21, 1997), Doc. A-518-93 (Fed. C.A.), although he went on to state that even if it had accepted that a defence of due diligence was available, it was not made out in that case (at 260). After the trial decision in Time Data was rendered, however, Judge Bowman emerged as a forceful advocate of the existence of a due diligence defence in the context of section 280 of the Excise Tax Act: see Pillar Oilfield Projects Ltd., supra. In that case, he rejected the proposition that either the Time Data case or the Letarte case precludes a due diligence defence to a penalty under section 280. The two earlier cases were distinguished on the basis that they were decided under a different statute than the one under consideration in Pillar Oilfield. The Minister challenges this line of reasoning on the ground that Judge Bowman did not explain the significance of the distinction. In other words it is asked whether the distinction drawn is valid.

Yet a further objection to the availability of a due diligence defence in the context of section 280 rests on the fact that the Act specifically provides for such a defence in another provision, namely, section 323 which concerns the liability of corporate directors in cases where there has been a failure to remit GST. The implication, of course, is that if Parliament granted the right to raise the due diligence defence in section 323 it can therefore be presumed that it intended that the defence would not be available in conjunction with section 280 which is silent on the matter. In light of the decision of this Court in Nassau Walnut Investments Inc. v. R., (1996), 97 D.T.C. 5051 (Fed. C.A.), the Minister concedes that section 323 is not determinative of the issue. Rather, that provision raises a rebuttable inference as to Parliament’s intent in respect of section 280. It is the taxpayer’s duty to rebut the inference that a defence of reasonable «are is not available in relation to the latter provision. Finally, the Minister maintains that the due diligence defence frustrates the purpose of section 280, which is to serve as an impetus for the timely collection of amounts owing (trust funds) to the Receiver General under Part IX of the Act.

I am confident that the due diligence issue will resurface in this Court and that the Minister’s objections will be addressed fully. For present purposes I need only express the opinion, and I so conclude, that this judicial review application should be dismissed.

Application dismissed.