BETWEEN:
and
____________________________________________________________________
Appeal heard on December 12, 2005, at Toronto, Ontario,
By: The Honourable Justice C.H. McArthur
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the assessment of tax made under the Excise Tax Act, notice of which is dated April 10, 2000 and bears number 04BP-116138397, for the period April 1, 1994 to October 31, 1997, is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant was entitled to claim additional input tax credits with respect to the construction of the Stoney Creek subdivision.
Signed at Ottawa, Canada, this 22nd day of June 2006.
BETWEEN:
BOKRIKA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant appeals the reassessment of the Minister of National Revenue under the Excise Tax Act, in the amount of $21,864.20, for the period of April 1, 1994 to October 31, 1997. The issue is whether the Appellant is entitled to input tax credits it claimed in the amount of $32,470.47 during the period, pursuant to subsection 169(1) of the Act, as a result of construction costs of a subdivision at Stoney Creek, Ontario.
[2] In reassessing the Appellant, the Minister relied on the following assumptions of fact:
(a) the Appellant was a registrant under Part IX of the Excise Tax Act (the "Act") affective January 1, 1991;
(b) at all relevant times, the Appellant had a business year end of October 31 for GST purposes;
(c) at all relevant times, the Appellant was required to file GST returns on a quarterly basis;
(d) the Appellant's main business is the construction of new residential houses;
(e) in or around 1991, the Appellant provided Letters of Credit to the City of Stoney Creek to cover the costs of the uncompleted work on the construction of the Stoney Creek subdivision;
(f) the Appellant requested additional ITC in the amount of $32,470.47 with respect to the construction of the Stoney Creek subdivision;
(g) of the said ITC, indicated in subparagraph 9(e) above, an amount of $301.44 was paid by the Appellant;
(h) of the said ITC, indicated in subparagraph 9(e) above, an amount of $32,169.03 was paid by the City of Stoney Creek; and
(i) the Appellant is not entitled to claim ITC with respect to expenses paid by the City of Stoney Creek.
[3] Bozidar (Bob) Nikolic, who took over the affairs of his late father, including responsibility for the Appellant, and his wife Svetlana Nikolic, testified on behalf of the Appellant. There were no witnesses for the Respondent.
[4] Mr. Nikolic testified that the Appellant was his father's corporation and that it had entered into an agreement with the City of Stoney Creek whereby it would prepare a subdivision for the purposes of construction of residential housing. More specifically, the Appellant was to complete the installation of sewers, water, hydro and gas services, telephone lines, paving, sidewalks, planting of trees and sodding of the boulevards. The Appellant would then sell the completed lots to builders who would construct homes. In addition, land was to be given to Stoney Creek for park purposes. Mr. Nikolic testified that this subdivision development involved approximately $6,000,000.[1]
[5] He further testified that his function with respect to the subdivision project, which began in 1987, was to negotiate and administer the construction and complete all paperwork, including dealing with the Bank for Letters of Credit, the City of Stoney Creek, and various contractors.
[6] Pursuant to the subdivision agreement, the Appellant provided a Letter of Credit as a performance bond, from which the City of Stoney Creek could draw on if the Appellant failed to complete its work in accordance with the terms of the agreement. The City drew approximately $900,000 from this Letter of Credit. Each time it was invoiced by a supplier for work performed in the subdivision, including GST, the City would draw on the Appellant's Line of Credit to pay those costs and, in turn, issue an invoice to the Appellant including its cost, as well as 3% of GST it could not recover as a municipality.[2]
[7] Both parties agreed that these funds were ultimately paid by Stoney Creek to contractors and suppliers to complete work on the subdivision that the Appellant had failed to complete. While the Appellant takes the position that these funds were used to purchase goods and services that are eligible for input tax credits in the Appellant's hands, the Respondent argues that they were actually paid to Stoney Creek because the Appellant breached the subdivision agreement. Furthermore, the Respondent appears to have taken the position that the Appellant can only claim ITCs that were incurred during the relevant period of reassessment, namely April 1, 1994 to October 31, 1997.
[8] Mr. Nikolic testified that these expenses are documented in the various invoices found at Tab 1 of Exhibit A-3. However, he appeared to be unsure as to what those invoices totaled and, in fact, he appeared to have no knowledge or memory of most of the Appellant's previous GST remittances, or whether any had actually been filed before the period in issue. In general, however, I found Mr. Nikolic to be a credible witness and that any deficiencies in his record-keeping did not stem from intentional actions on his part, but rather from mistakes.
[9] Mrs. Nikolic testified that she kept the books for the Appellant. Beyond that, her testimony was of little assistance, as neither counsel questioned her with respect to the ITCs in question.
[10] At the outset of the trial, the Respondent took the position that this appeal was instituted without the authority of the Appellant, and that as a result it was not properly before this Court and, therefore, should be quashed. The Respondent argued that since Mr. Nikolic claimed that after July 1995, the Appellant had no directors, shareholders, officers or employees, and further, that he himself was not a director or officer, that he had no standing to litigate this appeal.
[11] Counsel for the Appellant submitted that Mr. Nikolic was a de facto director who had authority to both institute and litigate this appeal, he was involved in the goings on of the Appellant, both before and after his father's passing in 1995, and that as such, he acted as a director. Also, counsel indicated that from the testimony of Mr. Nikolic, he had initially claimed that he thought he was a director.
[12] While Mr. Nikolic may have testified that he was not a director or officer, he nonetheless held himself out as an authorized representative of the Corporation, both in his communication with Canada Revenue Agency, as well as with the City of Stoney Greek. After his father's death in 1995, he handled the Appellant's paperwork and dealings with CRA during the audit, and generally held himself out as the person in charge.
[13] Throughout the period of time that the City of Stoney Creek was drawing down the Letter of Credit of the Appellant, Mr. Nikolic continued to communicate with the City on behalf of the Appellant, and many of the invoices were addressed to his attention at the address of the Appellant.[3] To any party dealing with the Appellant, it would have appeared that Mr. Nikolic had the authority to contract, negotiate and make representation on behalf of the Appellant.
[14] While it is not necessary to determine whether Mr. Nikolic was a director of the Appellant, I have no difficulty in concluding that he was. In The Queen v. Corsano,[4] the Federal Court of Appeal canvassed the issue of who is liable as a director for a corporation's failure to remit, and stated:
Subsection 227.1(1) of the Act imposes liability on all the directors of a corporation who have failed to remit to Revenue Canada the sums due. The word "directors" in the said subsection is unrestricted and unqualified. It is a basic rule of legislative drafting, based on the corresponding rule of interpretation which conditions drafting, that the use of a generic word without restrictions or qualifications conveys the legislator's intention that the word be given a broad meaning. Here, by using the word "directors" without qualifications in subsection 227.1(1), Parliament intended the word to cover all types of directors known to the law in company law, including, amongst others, de jure and de facto directors.
[15] Mr. Nikolic handled all correspondence on behalf of the corporation, including signing the GST remittance form. He also attended discoveries and testified at trial, claiming on both occasions, to be an authorized representative of the Appellant. Furthermore, on Examination for Discovery, Mr. Nikolic testified that he believed that he was a director of the Appellant, and undertook to determine who the directors, if any, were. While his father was alive, Mr. Nikolic was intimately involved with the day-to-day operations of the Appellant, and continued in that role after his father passed away. Since Mr. Nikolic testified at an additional Examination for Discovery that the Appellant had no directors, officers, employees or shareholders after his father passed away, the only reasonable explanation for the actions he took on behalf of the Appellant is that he was its de facto director.
[16] As mentioned above, the issue in this appeal is whether the Appellant is entitled to the ITCs claimed with respect to the expenses incurred for the completion of the subdivision, which had been paid by the City of Stoney Creek with funds from the Appellant's Letter of Credit. To properly address this issue, it is necessary to review the relevant provisions of the Act, and specifically former versions of subsections 123(1) and 169(1), as well as the present versions of subsections 123(1), 169(1), 225(4) and 225(4.1).
[17] Initially, the Act defined "recipient" as follows:[5]
123(1) In section 121, this Part and Schedules V to X,
"recipient", in respect of a supply, means the person who pays or agrees to pay consideration for the supply or, if no consideration is or is to be paid for the supply, the person to whom the supply is made;
In 1993, an amended definition was introduced, which is still in force today, and it states:[6]
123(1) In section 121, this Part and Schedules V to X,
"recipient" of a supply of property or a service means
(a) where consideration for the supply is payable under an agreement for the supply, the person who is liable under the agreement to pay that consideration,
(b) where paragraph (a) does not apply and consideration is payable for the supply, the person who is liable to pay that consideration ...
and any reference to a person to whom a supply is made shall be read as a reference to the recipient of the supply.
Subsection 169(1) with respect to input tax credits for the period to April 1, 1997 read as follows:
169(1) Subject to this Part, where property or a service is supplied to or imported by a person and, ... tax in respect of the supply or importation becomes payable by the person or is paid by the person without having become payable, the input tax credit of the person in respect of the property or service ... is the amount determined by the formula ...
After April 1, 1997, that subsection read as follows:
169(1) Subject to this Part, where a person acquires or imports property or a service or brings it into a participating province and, ... tax in respect of the supply, importation or bringing in becomes payable by the person or is paid by the person without having become payable, the amount determined by the following formula is an input tax credit of the person in respect of the property or service for the period: ...
The limitation period for ITC claims is provided in subsections 225(4), which reads:
225(4) An input tax credit of a person for a particular reporting period of the person shall not be claimed by the person unless it is claimed in a return under this Division filed by the person on or before the day that is
(a) where the person is a specified person during the particular reporting period,
...
(iii) in any other case, the day on or before which the return under this Division is required to be filed for the last reporting period of the person that ends within two years after the end of the person's fiscal year that includes the particular reporting period;
(b) where the person is not a specified person during the particular reporting period, the day on or before which the return under this Division is required to be filed for the last reporting period of the person that ends within four years after the end of the particular reporting period; or
225(4.1) For the purposes of subsection (4), a person is a "specified person" during a reporting period of the person if
(a) ...
(b) the person's threshold amounts, determined in accordance with subsection 249(1), exceed $6 million for both the particular fiscal year of the person that includes the reporting period and the person's previous fiscal year,
unless, in the case of a person who is not a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) during the reporting period, the person is a charity during the reporting period or all or substantially all of the supplies made by the person during either of the person's two fiscal years immediately preceding the particular fiscal year (other than supplies of financial services) are taxable supplies.
[18] In Bondfield Construction Co. (1983) Ltd. v. Canada,[7] where a second subcontractor was retained by Bondfield to correct the deficient work of the first subcontractor, Bondfield charged the first subcontractor for the amount it paid the second subcontractor. The Court denied Bondfield the ITCs because it was not the recipient of the supply. The Court held that by passing on the charge, Bondfield made the first subcontractor liable to pay the second subcontractor's invoice, and as such was the "recipient" of the supply for the purposes of calculating ITCs. In her decision, Justice Campbell accurately summarized who is entitled to claim the ITCs under subsection 169(1) as follows:
Under subsection 169(1), the person entitled to claim the ITC is the person to whom the supply is made; and under subsection 123(1) that person is deemed to be the "recipient". Accordingly, for the purposes of the Excise Tax Act, it is the recipient of the supply who is entitled to claim the ITC. Who, then, was the recipient in the present case? In both subsections 123(1) and 169(1) the focus is on: who is liable to pay for the supply (and thus the tax on that supply)? The language of these provisions and just simple logic dictate that the intent of subsections 123(1) and 169(1) is to allocate the ITC to the person who actually paid the GST on the supply.
[19] I apply the above reasoning to the present appeal because the facts are very similar to those in Bondfield. In both cases, a third party was hired to perform remedial work which was paid for by the original contracting purchaser (in this case Stoney Creek), and then charged back to the original contracting supplier (in this case the Appellant). Even if the Respondent was correct in its assertion that the payments made by the Appellant to Stoney Creek were for contract breach, that is immaterial since those payments went to other suppliers for taxable supplies that resulted in ITCs in the hands of the Appellant.
[20] The evidence before me indicates, as it did in Bondfield, that Stoney Creek entered into agreements for the remedial work directly with the new suppliers. Does that mean that Stoney Creek becomes the recipient of the supply under subsection 123(1)? Justice Campbell posed that question in Bondfield, and I agree with her conclusion that "we must determine who was 'ultimately' liable to pay for the supply".
[21] Stoney Creek was not liable to pay the amounts it was charged by third parties to complete the work on the subdivision. At all times, the City knew that it could draw on the Appellant's Letter of Credit and proceeded to do so. In fact, it sent invoices to the Appellant to account for all the funds it used, and in that respect the relationship between Stoney Creek and the Appellant was similar to that of an agent and its principal.
[22] The Respondent further submitted that even if the Appellant was eligible for the ITCs in question, it should only receive those ITCs that correspond to expenses incurred within the period being reassessed, namely April 1, 1994 to October 31, 1997. While I agree with the Respondent that ITCs cannot be claimed for expenses incurred after October 31, 1997, I disagree with respect to the period before April 1, 1994. Subsection 225(4) of the Act outlines the limitation period for ITC claims, and states that that period is two years for a "specified person" and four years for most others. Based on the limited facts before me, I find that the Appellant was not a "specified person" under subsection 225(4.1) of the Act, and as such its limitation period to claim ITCs is governed by subparagraph 225(4)(a)(iii).
[23] Finally, the Respondent submitted that the Appellant should not be eligible to receive ITCs as it appears that it claimed them for the period November 1, 1997 to January 31, 1998, which is not within the period being reassessed by the Minister. While subsection 225(3) of the Act generally restricts a registrant from claiming ITCs which have already been claimed during a preceding reporting period, the Act contains a similar restriction with respect to future reporting periods. In this case, meanwhile, whether the ITCs in question were claimed in a period after the Appellant was reassessed is immaterial since those ITCs do not appear to have been paid by the Minister.
[24] Based on the documents and evidence before me, I find that the Appellant was ultimately responsible for the payment of the taxable supplies outlined in the invoices at Tab 1 of Exhibit A-3, and as such is entitled to claim the corresponding ITCs. Furthermore, the Appellant is entitled to the ITCs associated with invoices between the date determined pursuant to subsection 225(4) and October 31, 1997. For invoices dated after October 31, 1997, however, they must be claimed in their respective reporting periods.
[25] This appeal is allowed and the assessment referred back to the Minister for reconsideration and reassessment on the basis that the Appellant was entitled to ITCs as claimed, with respect to the construction of the Stoney Creek subdivision.
Signed at Ottawa , Canada, this 22nd day of June 2006.
"C.H. McArthur"
McArthur J.
COURT FILE NO.: 2000-3495(GST)G
STYLE OF CAUSE: BOKRIKA INC. AND
HER MAJESTY THE QUEEN
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: December 12, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice C.H. McArthur
DATE OF JUDGMENT: June 22, 2006
APPEARANCES:
|
Counsel for the Appellant: |
Ronald B. Moldaver, Q.C. |
|
Counsel for the Respondent: |
Bobby Sood |
COUNSEL OF RECORD:
Name: Ronald B. Moldaver, Q.C.
Firm: Traub Moldaver
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada