Tax Court of Canada Judgments

Date: 20010124

Docket: 98-1936-GST-G

BETWEEN:

9000-6560 QUÉBEC INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Archambault, J.T.C.C.

[1] Between 1995 and 1997, a vehicle smuggling ring (smuggling ring) plagued Quebec. It operated using a scheme that enabled the person or persons who had devised it to collect the goods and services tax (GST) on vehicle purchases without remitting it to the tax authorities[1] or made it possible for input tax credits (ITCs) to be claimed without GST having been paid on purchases.

[2] Briefly, the scheme used by the smuggling ring, as I understand it,[2] worked as follows. A car dealer sold a luxury vehicle, notably a Jeep Grand Cherokee worth about $40,000, to a native person. Since the sale was made to a native person on an Indian reserve, no tax was paid by that person because section 87 of the Indian Act applied. The native person transferred the vehicle to a numbered company without collecting the GST or the Quebec sales tax (QST) (sales taxes).[3] That numbered company in turn transferred the vehicle to an exporting firm, collecting the sales taxes but not remitting them to the tax authorities.[4] The exporting firm then resold the vehicle outside Canada and obtained an ITC in repayment of the GST it had paid when purchasing the vehicle from the numbered company.

[3] Although the Minister must know which businesses have collected sales taxes but not remitted them, he seems to be unable to recover those taxes for reasons that were not explained but that can easily be imagined: they have, in all likelihood, vanished into thin air. However, the dealers leading off this series of transactions are well established and still carrying on their activities. It was to them that the Minister sent notices of assessment claiming the amount of GST that, in his view, they should have collected when they sold the vehicles to the native persons.

[4] At the present time, there are apparently about 80 car dealers in Quebec that have received such assessments. One of them is 9000-6560 Québec Inc. (Chrysler St-Jovite). The Minister assessed Chrysler St-Jovite on August 7, 1997, for $206,253.20 for the period starting on June 1, 1996, and ending on May 31, 1997 (relevant period). During his audit, the Minister determined that Chrysler St-Jovite had sold 95 vehicles (95 vehicles) to native persons without collecting the GST in accordance with subsection 221(1) of the Act. That subsection reads as follows:

221(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax under Division II payable by the recipient in respect of the supply.

[5] In his Reply to the Notice of Appeal, the Minister—contrary to his usual practice—did not state the facts on which he had relied in making his assessment. However, he described his position as follows:

[TRANSLATION]

12. With regard to all of these transactions, the respondent submits that the appellant, contrary to what it claims in its Notice of Appeal, did not sell the motor vehicles to Indians who were entitled to a tax exemption under section 87 of the Indian Act (R.S.C., c. I-5).

13. The appellant, which is part of a huge motor vehicle smuggling ring, made sales to Indians (real or fictitious) who were only mandataries or prête-noms for a non-native third party, and it apparently did so for the sole purpose of avoiding collection of the GST (and the Quebec sales tax, incidentally).

14. The appellant knew very well that the Indians were not acting on their own behalf, since the transactions were initiated by the third-party purchasers, who "ordered" the vehicles from the appellant to be delivered to Indian mandataries or prête-noms.

15. The deception reached such a level that, during an audit on the appellant's premises, a representative of the respondent personally observed—entirely by chance—the receipt of a facsimile of an alleged Indian’s identification card, which facsimile was, however, sent by the real purchaser, 150151 Canada Inc. operating as General Auto Leasing.

16. To his[5] astonishment, the respondent also noted that a large number of telephone calls had been made between the appellant and General Auto Leasing during the audit period even though there had apparently been no transactions between those two parties during that period.

17. Moreover, the appellant cannot claim with any seriousness that it did not know that the vehicles were not actually being sold to the alleged Indians, since, inter alia, in a number of cases the instrument used to pay for the vehicles referred directly to the real purchaser, 9044-6964 Québec Inc.

18. As well, in several other cases, the respondent found on General Auto Leasing's premises the data sheets from the appellant for vehicles allegedly sold to Indians.

19. In a number of cases, the respondent also noted that General Auto Leasing had purchased vehicles on dates prior to the dates on which the appellant claims to have sold the same vehicles to Indians!

20. In addition, the appellant gave the respondent several alleged acknowledgements of receipt of a vehicle by an Indian on a reserve that had clearly been altered (names obliterated).

21. Moreover, without limiting the generality of the foregoing, for a very large number of transactions, the appellant also failed to provide the respondent with valid proof that the vehicles had been delivered on a reserve.

22. To top it all off, the appellant's president, Louis Duchesneau, clearly admitted in the presence of one of the respondent's representatives that his company had to get involved in the smuggling to ensure its financial survival.

[6] Although paragraph 21 may suggest that the Minister made his assessment on the assumption that certain sales may not have met the conditions set out in section 87 of the Indian Act—in that, inter alia, no proof was provided that the vehicles had been delivered on a reserve—the auditor confirmed during his testimony that his assessment was not based on that fact. He assumed that all of the sales had been made on reserves and the vehicles delivered there. It should be added that the evidence adduced by Chrysler St-Jovite confirms that all the sales contracts for the 95 vehicles were signed on a reserve and all the vehicles delivered there.

[7] Basically, therefore, the Minister’s argument is that Chrysler St-Jovite should have collected the GST when selling the 95 vehicles because the sales were not really made to native persons: although native persons signed the sales contracts, they were acting as mandataries or prête-noms for non-native third parties. In the alternative, counsel for the respondent argued that section 274 of the Act, that is, the general anti-avoidance rule (GAAR), is applicable here. He submitted that Chrysler St-Jovite was part of and actively involved in the smuggling ring, that it engaged in the smuggling expressly for the purpose of avoiding the collection of the GST and thereby receiving a benefit: that of reducing the amount of its net tax payable as determined under section 225 of the Act.

Facts

Chrysler St-Jovite's version

[8] Chrysler St-Jovite has been operating a Chrysler dealership since the end of 1994. The president of that corporation, Louis Duchesneau, owns 50 percent of a holding company that holds all the shares of Chrysler St-Jovite. The other 50 percent is owned by a third party.

[9] In October 1996, Mr. Duchesneau received a call from an Alain Boivin, who wanted to meet him on Rue Ferrier in Montréal. Mr. Duchesneau did not know Mr. Boivin. During the meeting, Mr. Boivin, who was about 70 years old, offered to send buyers to Chrysler St-Jovite in return for a commission of $100 per vehicle, and Mr. Duchesneau agreed. Mr. Boivin did not just send customers to Chrysler St-Jovite but also negotiated the purchase price for them. Mr. Duchesneau stated that he did not know whether Mr. Boivin was acting on behalf of General Auto Leasing (GAL), a company of which he said he had no knowledge. In support of that assertion, Chrysler St-Jovite filed three cheques totalling $2,215 payable to Alain Boivin. The cheques are dated January 24, 1997, January 31, 1997, and February 28, 1997.

[10] Mr. Boivin normally contacted one of Chrysler St-Jovite's salespersons, a Mr. Forget, to negotiate the purchase price for the vehicles, which were almost always Jeep Grand Cherokees. The invoice from Chrysler Canada Limited (Chrysler Canada) for the vehicle sold to Chrysler St-Jovite was generally given to Mr. Boivin. It consisted of a data sheet describing the vehicle, including its registration number. It should be noted that, on four or five occasions, native persons went to Chrysler St-Jovite's garage themselves to choose their vehicles.

[11] Before delivering the vehicle to a native person on a reserve, Chrysler St-Jovite obtained a copy of the person's certificate of Indian status and often a copy of that person's driver's licence. On a number of occasions, Chrysler St-Jovite's delivery person took a photograph of the native person with the vehicle when it was delivered on the reserve. Upon returning to the garage, the delivery person gave Ms. Léveillée or someone else in the accounting department the photograph, the certified cheque or bank draft given to him by the native person and, in many cases, a credit card slip for the gasoline purchased on or near the reserve when the vehicle was delivered. That slip constituted proof that the vehicle had actually been delivered on a reserve. The employee in the accounting department then drew up a receipt, which was also placed in the sales file put together with respect to the native purchaser.

[12] In addition to the documents provided by the delivery person, that file contained, of course, the sales contract for the vehicle, Chrysler Canada's invoice or, if the vehicle was from another[6] dealer, that dealer's invoice, a status report confirming the name of the vehicle’s purchaser to Chrysler Canada so that the manufacturer could send such things as recall notices, and a copy of the purchaser’s certificate of Indian status and driver's licence.

[13] That administrative practice followed for the sale of vehicles to native persons complied with the instructions given by representatives of the Minister to Mr. Duchesneau and Ms. Léveillée, who was at that time Chrysler St-Jovite's controller, in a number of telephone conversations. Chrysler St-Jovite called to check this regularly, every three or four weeks. The instructions were always the same, namely that Chrysler St-Jovite had to keep on file a copy of the native purchaser's certificate of Indian status and provide proof that the vehicle had been delivered on a reserve. Those instructions are moreover consistent with technical information bulletin B-039R of November 25, 1993, which is entitled GST Administrative Policy – Application of GST to Indians.

[14] Chrysler St-Jovite's policy was never to deliver a vehicle to a customer without being paid by certified cheque or bank draft, except in highly exceptional circumstances: for example, in the case of a longtime customer where there was almost no risk of the customer defaulting on payment. For the 95 vehicles in question, Chrysler St-Jovite always obtained a certified cheque or bank draft; otherwise, the delivery person would have left with the vehicle.

[15] The employees in the accounting department were the ones who looked after cashing the certified cheques and bank drafts. In general, Mr. Duchesneau did not see them. He therefore did not know that some of the bank drafts had been issued at the request of numbered companies, including 9044-6964 Québec Inc. (9044).

[16] Mr. Duchesneau said that he stopped doing business with Mr. Boivin in early 1997. The native purchasers were thereafter sent to him by one Alain Picard, resident of the Kahnawake reserve who ran a used car sales business. Mr. Duchesneau said that he preferred dealing with Mr. Picard because he could obtain a better price for his vehicles. Since the number of Grand Cherokees he could sell was limited, he preferred to sell them to the native persons sent to him by Mr. Picard. The number of vehicles sold to customers sent to him by Mr. Boivin was 20 or 25; all the others were sold through Mr. Picard.

[17] Mr. Duchesneau maintained that he did not know that the natives were reselling the vehicles. As far as he knew, they were the real purchasers of the vehicles, and he was not at all aware of the existence of a vehicle smuggling ring. He said, of course, that he was not part of any such ring. He said that he did not learn of GAL's role in the smuggling ring until a meeting with representatives of the Minister at the end of May 1997.

[18] At that meeting, Mr. Duchesneau was shown a table depicting the smuggling ring. Chrysler St-Jovite's name did not appear in the table. Nor was Mr. Duchesneau accused of fraud. On the contrary, it was acknowledged that he was not one of those who had devised the scheme. In his testimony, Mr. Boulay, the Minister's auditor, did not contradict this version of the facts given by Mr. Duchesneau. Moreover, Chrysler St-Jovite continued selling to native persons even after Mr. Boulay's audit began on April 21, 1997. Mr. Duchesneau even showed Mr. Boulay two vehicles that he was preparing to deliver on a reserve.

Respondent's version

[19] Mr. Boulay was the main witness for the respondent. He first contacted Chrysler St-Jovite on April 21, 1997. Previously, during an audit of an exporting firm, he had noticed that a number of the exported vehicles had gone through native persons' hands and that several of them had been purchased from Chrysler St-Jovite. In addition, Mr. Boulay knew that the previous year, 1995, the Minister had made assessments against dealers that had sold vehicles to native persons as part of the operations of smuggling rings.

[20] Between April 24 and May 1, 1997, Mr. Boulay went to Chrysler St-Jovite's place of business three times and examined its accounting records. He also noted that the ITCs claimed by Chrysler St-Jovite were higher than the amounts of GST collected by that dealer. Since his audit concerned the period from August 1996 to April 1997, he drew up a list of the sales to native persons for which Chrysler St-Jovite had not collected any GST.

[21] Mr. Boulay went back to the Department with that list and consulted the computerized data of the Société de l'assurance-automobile du Québec (SAAQ) to determine what had happened to the vehicles sold to the native persons. Three exhibit books containing 104 exhibits in all were filed by counsel for the respondent. All of the documentary evidence gathered by Mr. Boulay can be found therein, including the documents relating to each of the 95 vehicles involved.

[22] Those documents generally include for each vehicle the sales contract between Chrysler St-Jovite and the native person, a copy of the native person's certificate of Indian status and driver's licence and a computerized statement from the SAAQ containing the vehicle's registration history. Using those computerized statements, the auditor was able to prepare 84 diagrams showing the transfer of ownership of 84 of the 95 vehicles. Those diagrams were produced in Court as an aide-mémoire.

[23] A representative of the SAAQ testified to explain the data found in the SAAQ's computerized statements. She told the Court that the date given as the purchase date corresponds to the date on which the vehicle is registered with the SAAQ and not necessarily the date on which ownership of the vehicle is transferred. Since several transfers may occur on the same day, the SAAQ is able to determine the order of the transfers on a given day based on the holder's signing of the registration certificate over to the new purchaser of the vehicle.

[24] The documents gathered by the auditor also include some cheques and bank drafts that he was able to obtain from the companies described as resellers in his diagrams.

[25] An analysis of the diagrams shows that the vehicles sold by Chrysler St-Jovite were part of simple series of transactions in some cases and of much more complex series in others. As an example of a simple series of transactions, I will describe the case of the vehicle sold by Chrysler St-Jovite to Ms. McComber on October 24, 1996 (Exhibit I-5). In describing the transfers among the following persons in chronological order,[7] I indicate the amount and the date of the sale[8] in parentheses where that information is available: (1) Chrysler Canada (26/09/96, $40,863[9]), (2) Chrysler St-Jovite (24/10/96, $42,163), (3) Margaret McComber, (4) 9037-1550 Québec Inc., (5) 2911639 Canada Inc. (25/10/96, $38,700, $44,100.59 tax included, (6) 150151 Canada Inc. (General Auto Leasing or GAL) (28/10/96, $40,500, $46,151.78 tax included),[10] (7) 2727234 Canada Inc.[11] (United Auto).

[26] The more complex series of transactions include a series that began with a sale on April 15, 1997 by Chrysler St-Jovite to Bobbi-Jo Ganley (Exhibit I-74), a native person from Kahnawake. In this example, there were 10 transfers of the same vehicle, three of which were to different native persons. The list of the parties involved in the transfers, in chronological order,[12] with the date[13] and the amount involved shown in parentheses where that information is available, is as follows: (1) Chrysler St-Jovite (15/04/97, $41,626), (2) Bobbi-Jo Ganley, (3) 9015-2372 Québec Inc. (Auto Classic) (14/04/97, $41,000, $46,721.55 tax included), (4) 3288943 Canada Inc. (Auto Stolz) (14/04/97, $42,000), (5) Tina McComber (native), (6) Auto Classic, (7) Sauvé Plymouth Chrysler (15/04/97, $41,750), (8) Christin Norton (native), (9) Auto Classic, (10) S.D. Auto and (11) 3347923 Canada Inc.[14]

[27] The disturbing facts revealed by the auditor's analysis of the documents in Exhibit I-74 include the cheque for $46,721.55 made out by Auto Stolz to Auto Classic, which is dated April 11, 1997, or four days before the date of the sale by Chrysler St-Jovite to Bobbi-Jo Ganley. Moreover, the sales contract between Auto Classic and Auto Stolz is dated April 14, or one day before the date of the sale by Chrysler St-Jovite to Bobbi-Jo Ganley. The sales contract between Sauvé Plymouth and Christin Norton—which is dated April 15, 1997—shows a delivery date of April 14, 1997. Sauvé Plymouth's receipt for $41,750 is also dated April 14, 1997.

[28] It should be noted that the respondent's evidence does not show that all of the 95 vehicles were resold by the native persons. According to the SAAQ's data, Donald McComber and Christin Norton still own their vehicles (see Exhibits I-96 and I-97). There is also no evidence that the vehicles described in Exhibits I-42, I-53 and I-59 were resold by the native persons. As regards the last two cases, the auditor admitted that he was unable to obtain any information from the SAAQ.

[29] A number of the documents provided by the auditor show that the money used to pay Chrysler St-Jovite came from GAL. In particular, the documents in Exhibit I-35 show that GAL issued a certified cheque for $44,100.59 to 9044 on January 29, 1997, and that 9044 had a bank draft issued to Chrysler St-Jovite the same day even though 9044 was the third transferee after Chrysler St-Jovite.[15] Moreover, according to a United Auto worksheet, the date on which the vehicle was sold by GAL to United Auto was January 27, 1997, or the day before the sale by Chrysler St-Jovite to Ms. Morris. According to the same document, United Auto's purchase price was $39,800, or less than the $41,626 paid by Ms. Morris on January 28, 1997.[16]

[30] Mr. Boulay said that he told Mr. Duchesneau to be careful when he sold high-end vehicles that were paid for through bank drafts. That warning was apparently given on April 24 or 25, 1997. On May 1, 1997, while finishing his audit in the administrative offices of another dealership garage owned by Mr. Duchesneau, Mr. Boulay read a facsimile from [TRANSLATION] "Alain to France" by means of which the sender, Alain, sent a copy of a certificate of Indian status and driver's licence. Mr. Boulay said that he asked Mr. Duchesneau to explain to him why he was receiving certificates of Indian status by fax from GAL when the vehicles sold to native persons were purchased subsequently by GAL.[17] Mr. Duchesneau allegedly told him that he had no choice but to make sales to native persons, for otherwise he could lose his garage.

[31] According to Mr. Boulay, Mr. Duchesneau was aware that the vehicles were not staying in the native persons' hands but did not want to know what happened afterwards. He said that Mr. Duchesneau told him the following anecdote: at one point, when making a delivery, one of his delivery persons had asked what the native persons did with the vehicles. Mr. Duchesneau was subsequently "advised" by telephone not to send that delivery person any more because his safety could not be guaranteed.

[32] When asked at the end of his testimony to summarize the facts in support of his assessment, Mr. Boulay mentioned the following points:

The vehicles purchased by the native persons were generally transferred again the same day or shortly thereafter, in the days that followed.

(ii) Several vehicles were transferred by Chrysler St-Jovite to the same person.

Inter alia, there were four sales to Mr. Iseequin: December 5, 1996, December 20, 1996, January 29, 1997, and April 29, 1997 (Exhibits I-19, I-23, I-34 and I-89). There were four sales to Michael Desgagnés: February 11, 1997, March 20, 1997, April 22, 1997, and May 1, 1997 (Exhibits I-37, I-58, I-80 and I-92). There were also four sales to Wendy Morris: October 30, 1996, January 21, 1997, January 28, 1997, and April 8, 1997 (Exhibits I-7, I-27, I-35 and I-70). According to the auditor, some 20 native persons acquired more than one vehicle from Chrysler St-Jovite. Chrysler St-Jovite therefore had to be aware that those persons were acting as prête-noms.

(iii) The fact that Chrysler St-Jovite, which was located in Saint-Jovite north of Montréal, was selling to native persons living on the Kahnawake reserve south of Montréal had to be another indication that those persons could not be acting on their own behalf and that Chrysler St-Jovite must have known of the smuggling ring's existence.

(iv) According to the auditor, all the dealers must have been aware of the problem in the summer of 1996 because the Minister had started making assessments against some of them. That knowledge could have come from the CCAQ.

(v) The fact that Chrysler St-Jovite agreed to deliver the vehicles described in Exhibits I-30 to I-33 even though payment was made the following day was an indication that it knew it would be paid and that it was part of the smuggling ring.

(vi) The close contact between Chrysler St-Jovite and GAL, as shown by GAL's telephone statements, and the fact that GAL had the manufacturer's invoices, show that Chrysler St-Jovite was heavily involved in the smuggling ring.

(vii) Obviously, the very large number (95) of sales of luxury vehicles in such a short time should have told Mr. Duchesneau that there was something suspicious going on.

[33] On cross-examination, Mr. Boulay admitted that he had not considered the possibility that the native persons purchased their vehicles in order to resell them as part of a well-established business or an adventure in the nature of trade.

Chrysler St-Jovite's explanations

[34] In support of his argument that Chrysler St-Jovite was really doing business with native persons and not with such persons acting as prête-noms for someone else, Mr. Duchesneau filed the sales files put together for a number of native persons, including that of André Cataford, to whom Chrysler St-Jovite reimbursed $485 that he had overpaid. Mr. Duchesneau said that Chrysler St-Jovite's salespersons received commissions on the sales they made to native persons.

[35] With regard to the fact that four vehicles, namely those described in Exhibits I-30 to I-33, may have been delivered without payment being made on delivery, Mr. Duchesneau reaffirmed that no vehicles had been delivered without payment being made either before or at the time of delivery. He explained that the independent transportation company that delivered the vehicles in question may have dated its invoice January 28 even though the delivery did not actually occur until the following day, January 29. It should also be noted that the four vehicles were transported on the same trailer.

[36] As regards the fact that Chrysler St-Jovite allegedly sold a number of vehicles to the same native person, Mr. Duchesneau stated that he had not noticed this during the relevant period. His counsel told him of it the day before the hearing.

[37] Mr. Duchesneau affirmed that he did not remember discussing with Mr. Boulay the facsimile sent by Mr. Boivin that had been intercepted by Mr. Boulay. He learned of its existence when one of his employees told him about it. He said that he did not notice at the time that General Auto Leasing's name was on the document. It should be noted that that name does not appear either under "From" or in the body of the document but is found only in the space reserved for the modem transmission data at the top of the facsimile.

The CCAQ's efforts

[38] Jacques Béchard, the CCAQ's president and chief executive officer, also testified to describe the efforts made by that association, starting in the summer of 1996, with respect to the problems created by the smuggling ring. In a letter dated June 13, 1996 to Bertrand Croteau, assistant deputy minister and director general at the Quebec Department of Revenue (Quebec department), Mr. Béchard described the CCAQ as an organization representing some 860 car dealers, that is, more than 90 percent of all dealers in the province of Quebec. He reminded Mr. Croteau that the CCAQ regularly approached the Quebec department to ensure that its members were complying with their tax obligations.

[39] Mr. Béchard also informed Mr. Croteau that the Minister had sent five dealers that were CCAQ members proposed assessments related to a problem with the GST not being collected on sales of vehicles to native persons.

[40] The association made many approaches to senior officials in the Quebec department, to the Quebec Minister of Revenue and the Quebec Minister of Finance and even to the Premier of Quebec. Similar approaches were made to a federal minister, Marcel Massé, as well as to the office of the Minister of National Revenue and senior officials in his department.

[41] The purpose of these efforts was twofold: first, to convince the Minister not to act on the proposed assessments against some of its members, and second, to find a solution which would end the smuggling ring's abuses. Basically, the solution put forward by the CCAQ involved amending the Act or changing administrative practices in such a way that all dealers would be required to collect the GST when selling vehicles to native persons, and—as was the case at the provincial level before the GST was introduced in 1991—those native persons would be able to obtain a refund of the GST by applying to the Minister.

[42] On February 11, 1997, Jacques Béchard sent all the dealers that had received proposed assessments concerning sales to native persons a note summarizing the meetings with the Quebec department. He stated the following in that note:

[TRANSLATION]

We pointed out to them [the tax authorities] that our members should not have to pay the price for abuses committed by native or other persons who deal in vehicles without car dealers knowing about it. We therefore asked the department not to act on the proposed assessments and we also asked it to change the rules for the future, for instance, by recommending to dealers that they charge tax on sales to native persons and at the same time provide them with a tax refund application form, as was done before 1992.

[43] It was not until July 1997 that the CCAQ clearly informed its members of the precise nature of the problem presented by the smuggling ring. In an article entitled [translation] "The problem of vehicle sales to native persons: the Department of Revenue is going after the wrong people, the CCAQ exposes the injustice", the scheme was described as involving [TRANSLATION] "scams and fraudulent tax practices". The article also stated that the loss of revenues for the federal and Quebec tax authorities as a result of the smuggling ring amounted to about $25 million over 18 months, or $12.5 million for each level of government.

[44] Mr. Duchesneau said that he did not become a member of the CCAQ until January 1997 and did not receive any information from it about the smuggling ring. It was not until his meeting at the Minister's office on May 25, 1997, that he learned of its existence. I note that the last sales covered by the assessment occurred on May 8, 1997.

[45] Despite all its efforts and initiatives, the CCAQ did not attain its two objectives. Not only did the Minister not cancel his proposed assessments of the five dealers, but about 80 Quebec car dealers received notices of assessment for failing to collect the GST on sales of vehicles to native persons. Moreover, the Canadian government rejected the request to amend the Act or to change its administrative practices regarding non-collection of the GST on the sale of vehicles to native persons.

[46] An explanation for the government's refusal can be found in a letter written to Mr. Béchard on May 20, 1997, by the Deputy Minister of National Revenue. On page 2 of that letter, the Deputy Minister stated the following:

[TRANSLATION]

In your letter, you suggest some changes to the Department's administrative policy concerning sales to Indian customers, particularly in the case of sales of motor vehicles. In this regard, I would like to point out that section 87 of the Indian Act provides the legal basis for exempting Indians from certain forms of taxation. The exemption privileges associated with that provision are protected under the Constitution Act, 1982, and may not be invalidated by any other Act of Parliament. Specifically, purchases of personal property of an Indian or Indian band situated on a reserve and the interest of an Indian or Indian band in reserve lands or designated lands are tax-exempt under the Indian Act.

The purpose of the Department's administrative policies is to ensure that this tax exemption is protected. Purchases made by individual Indians off-reserve may be GST-exempt if the goods are delivered to a reserve by the vendor or the vendor's agent. The Indian purchaser does not have to be resident on a reserve to obtain this tax exemption.

[47] Exasperated by the inaction of the tax authorities, the CCAQ issued a news release on December 4, 1998, announcing its members' decision to stop delivering vehicles on reserves. Vehicles sold to native persons would be delivered at the dealer's place of business and both taxes would be collected. The news release reads as follows:

[TRANSLATION]

NEWS RELEASE

Trafficking in vehicles purchased tax-free by aboriginals -

CCAQ forced to act in the face of government

inaction and indeed negligence

Québec, December 4, 1998 - On November 23, 1998, J.A. Gérald Drolet and Jacques Béchard, respectively chairman of the board and president and CEO of the Corporation des concessionnaires d'automobiles du Québec (CCAQ), held a press conference to bring to the public's attention the issue of the export trafficking of new cars purchased tax-free by native persons and resold to individuals or companies who are in collusion with them. Those native persons are abusing their status by this conduct, and it is the dealers who are paying the price.

Rather than pursuing those who are actually guilty, the Government of Quebec has been engaged for nearly 30 months now in a veritable "witch hunt" against the dealers, 70 of which have unfairly received notices of assessment from the Quebec tax authorities, who want to recover more than $5 million in taxes not collected on sales of vehicles to native persons.

From the outset, the Corporation has suggested simple, effective solutions to put an end to this deplorable situation. For example, it suggested that sales of vehicles to native persons be taxable and that it be up to them to claim a refund from the Department of Revenue, as was the case before 1991.

The Corporation also suggested that the Department of Revenue issue each native person a certificate confirming to the dealer that that person is exempt from the GST and the QST on the purchase of a vehicle. Finally, it asked the government to resolve this problem, which has gone on for too long already, before the end of November.

Since the government continues to take pleasure in acting to the detriment of the province's taxpayers as a whole, the Corporation, pursuant to its ultimatum, has sent its 860 member dealers a letter recommending that, each time they sell a vehicle to a native person, they deliver it at their place of business and collect both taxes.

The CCAQ deplores the governments' inaction and indeed negligence in this matter. Through this recommendation to its members, it is proving once again that dealers are very eager to comply to the letter with the various statutes that govern them.

Respondent's argument

[48] Counsel for the respondent argued that Chrysler St-Jovite did not sell its 95 vehicles to native persons. Rather, the native persons acted as prête-noms or mandataries for non-native third parties. Chrysler St-Jovite was therefore required to collect the GST under subsection 221(1) of the Act. In the alternative, counsel for the respondent argued that section 274 applies because Chrysler St-Jovite received a tax benefit, namely the reduction of its net tax as determined under section 225 of the Act. Moreover, counsel maintained that Chrysler St-Jovite [TRANSLATION] "was knowingly involved in a scheme to sell [vehicles] without collecting the GST". In his view, Chrysler St-Jovite [TRANSLATION] "knew that the said vehicles were not really being sold to Indians, as the Indians were merely intermediaries or prête-noms" (page 7 of the respondent's submissions). His conclusion at page 8 of his submissions is as follows:

[TRANSLATION]

The scheme in which the applicant was involved was known to it from the outset, even before the first sale to an Indian. The evidence has shown collusion among the participants in the said scheme, the sole purpose of which was tax avoidance and the consequent reduction of the applicant's net tax, thus violating the provisions of the Excise Tax Act.

Chrysler St-Jovite's position

[49] Counsel for Chrysler St-Jovite argued that the onus is on the respondent to prove the correctness of the Minister's assessment. He argued that the respondent, in her Reply to the Notice of Appeal, failed to state the facts on which the Minister had relied in making his assessment, contrary to paragraph 49(1)(d) of the Tax Court of Canada Rules (General Procedure). He also referred to the principles respecting the burden of proof stated in the case law, inter alia in Brewster v. The Queen, 76 DTC 6046, at page 6049. According to those principles, the taxpayer's obligation is limited to demolishing the facts on which the Minister relied in making his assessment and the Minister may raise new facts to support his assessment but bears the burden of proving those facts.

[50] On the merits of the case, counsel argued that Chrysler St-Jovite complied with the instructions it received from the Minister concerning the collection or non-collection of the GST. He noted that, according to technical information bulletin B-039R and the verbal instructions obtained by Chrysler St-Jovite's employees, Chrysler St-Jovite was not obliged to collect the GST when it made a sale to a native person and the vehicle was delivered on a reserve. Here, the evidence shows that all the vehicles sold to natives by Chrysler St-Jovite were delivered on reserves.

[51] As far as Chrysler St-Jovite was concerned, the real purchaser was the native person and this person was not acting as a mandatary or prête-nom for a non-native third party. According to counsel, there is nothing in the evidence that could enable the Court to conclude otherwise. In any event, even if the native person had acted as a mandatary, Chrysler St-Jovite was entitled to act as if the native person were the true purchaser of the vehicle since it was not aware of the existence of the contract of mandate.

[52] Furthermore, Chrysler St-Jovite had no obligation to investigate and determine how the native person used the vehicle purchased from it.

[53] With regard to the respondent's alternative argument concerning the application of section 274 of the Act, counsel submitted that the three elements essential to its application, namely the obtaining of a tax benefit, the existence of an avoidance transaction and a misuse of, or an abuse having regard to, the provisions of Part IX of the Act, are not present here. Chrysler St-Jovite did not receive any tax benefit. Counsel stated the following at page 3 of his submissions:

[TRANSLATION]

When a sale is made to an Indian and the conditions set out in section 87 of the Indian Act are met, the Appellant does not have to collect the tax or remit it to the Minister. The Appellant derives no benefit from not collecting the tax and not including it in determining its net tax. If we were to determine who derives a benefit from the tax not being collected, we would have to conclude that the Indians do. However, we could not characterize that benefit as a tax benefit for the purposes of the Excise Tax Act, since it is a benefit authorized by the Indian Act, which takes precedence over the Excise Tax Act.

[54] If there is no tax benefit, there cannot be any avoidance transaction. The only transactions undertaken or arranged by Chrysler St-Jovite, namely the sales to native persons, were undertaken or arranged primarily for bona fide purposes, [TRANSLATION] "that is, commercial purposes accomplished in the normal course of operating its business" (page 5 of his submissions). Finally, there was no misuse or abuse of the Act because Chrysler St-Jovite complied with the Act and with the Indian Act.

Analysis

[55] The first question to be decided is where the burden of proof lies. Who in this case bears the burden of proving or demolishing the facts supporting the assessment? The fundamental rule on burden of proof is that the onus is generally on the taxpayer to demolish the facts on which the Minister relied in making his assessment. There are a number of judgments that have laid down and applied this rule. They include two decisions by the Supreme Court of Canada: Johnston v. M.N.R., 3 DTC 1182, at page 1183, and Hickman Motors Limited v. Canada, [1997] 2 S.C.R. 336, at page 378 (97 DTC 5363, at page 5376). It hardly needs to be pointed out that, if the onus is on the taxpayer to demolish the facts on which the Minister relied in making the assessment, it is important that the respondent disclose those facts to the taxpayer. The following was stated by Bastarache J. in Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358, at page 367, para. 13 (98 DTC 6501, at page 6505, para. 32):

Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge that assessment. Here, it is not clear that there is the proper factual basis to support a reassessment on the basis proposed by the appellant.

[56] Moreover, as noted by Hugessen J.A., then a Federal Court of Appeal judge, in Pollock v. The Queen, 94 DTC 6050 (F.C.A.), the facts assumed by the Minister must be set out in the Minister's pleadings. Hugessen J.A. stated the following on this point at page 6053:

It is, of course, the general rule that every party to litigation in this Court must plead the facts upon which he relies in such a way as to put his opponent fairly on notice of the case he has to meet. Where a party's pleadings are so inadequate as to disclose no case at all he runs the risk of having them struck out and of loosing [sic] for that reason. . . .

The special position of the assumptions made by the Minister in taxation litigation is another matter altogether. It is founded on the very nature of a self-reporting and self-assessing system in which the authorities are obliged to rely, as a rule, on the disclosures made to them by the taxpayer himself as to facts and matters which are peculiarly within his own knowledge. When assessing, the Minister may have to assume certain matters to be different from or additions to what the taxpayer has disclosed. While the Minister's assumptions, if any, are generally made in the pleadings, that is not always the case and we have seen, in this very record, an example of the taxpayer taking pains to demolish assumptions which the Minister had not pleaded. Where pleaded, however, assumptions have the effect of reversing the burden of proof and of casting on the taxpayer the onus of disproving that which the Minister has assumed. Unpleaded assumptions, of course, cannot have that effect and are therefore, in my view, of no consequence to us here. . . .

Where, however, the Minister has pleaded no assumptions, or where some or all of the pleaded assumptions have been successfully rebutted, it remains open to the Minister, as defendant, to establish the correctness of his assessment if he can. In undertaking this task, the Minister bears the ordinary burden of any party to a lawsuit, namely to prove the facts which support his position unless those facts have already been put in evidence by his opponent. This is settled law.

[Emphasis added.]

[57] Here, the respondent did not state in her Reply to the Notice of Appeal the facts on which the Minister relied in making his assessment.[18] She merely put forward factual arguments, in particular those set out in paragraphs 12 et seq. of the Reply: [TRANSLATION] "the respondent submits that . . .". In the circumstances, I believe that the onus was on the respondent to prove the facts supporting the Minister's assessment. She did not benefit from any presumptions of fact, and Chrysler St-Jovite therefore did not have any facts to demolish. However, once the Minister adduced his evidence of the facts that could support his assessment, Chrysler St-Jovite had to adduce rebuttal evidence. Let us therefore examine both parties' evidence.

Obligation to collect: subsection 221(1) of the Act

[58] The respondent's main argument is that the native persons were acting as prête-noms for non-native third parties and that Chrysler St-Jovite knew this or ought to have known it. First of all, it should be noted that the Minister's auditor was unable to say on behalf of which alleged mandators the native persons could have been acting as prête-noms or mandataries. All of the respondent's evidence concerning the existence of contracts of mandate or prête-nom is merely circumstantial.

[59] The best evidence to prove that such mandates existed would have been the testimony of the parties to such an alleged contract, namely the native persons to whom Chrysler St-Jovite transferred its 95 vehicles and the persons on behalf of whom they allegedly purchased the vehicles. Unfortunately, the respondent did not see fit or was unable to call those persons to testify: no explanation of their absence was given by her witnesses or counsel.[19] Yet the respondent had two reasons to summon them. First, the burden of proof in this regard was on her. As well, even if that had not been the case, she had to expect that the presence of those persons would be necessary to refute Mr. Duchesneau's testimony that he did not know whether the natives were acting as prête-noms for non-native third parties.

[60] Mr. Duchesneau testified at the hearing and stated under oath that at no time was he aware that the native persons were acting as prête-noms or mandataries for non-native third parties. Mr. Duchesneau struck me as a credible witness, and I have no reason to believe that he lied. It should also be noted that the entries in the SAAQ's records are not inconsistent with Chrysler St-Jovite's claim that the native persons were acting on their own behalf. On the contrary, the native persons appear in those records as the first purchasers of the vehicles sold by Chrysler St-Jovite. Moreover, in his diagrams, the Minister's auditor described the transfers to the native persons as "sales" and the intermediaries that subsequently acquired the vehicles as "resellers".

[61] The fact that Chrysler St-Jovite paid Mr. Boivin and Mr. Picard commissions supports its claim that it was genuinely doing business with the native persons and that those two men were acting merely as brokers. It seems to me that, if Chrysler St-Jovite had been involved in the smuggling ring's scheme, it would not have had to pay commissions to find buyers. Of course, it is not impossible that Chrysler St-Jovite secretly received some of the amounts of GST that were collected and not remitted to the tax authorities. However, there is no evidence of this.

[62] The circumstantial evidence on which the respondent is relying to defend her assessment is abundant, and I have described it above. I will comment only on that evidence that I consider the most important. Generally speaking, it shows that something underhanded was going on. It is clear that, in the vast majority of cases, the intention of the native persons was not to keep the vehicles they purchased but to resell them quickly to numbered companies. It is clear that someone orchestrated that vehicle purchasing and reselling scheme not to avoid but to evade the sales taxes owed to the tax authorities. The evidence shows that, even before a vehicle was purchased by a native person, the necessary payment arrangements for the vehicle had been made and it was known through which intermediaries the vehicle would pass. In several cases, there are one or more downstream sales contracts between those intermediaries in which the date of sale is prior to the date of the sale from Chrysler St-Jovite to the native person! However, the evidence adduced by the respondent has not been able to show that Chrysler St-Jovite (or one of its officers) was one of those who devised the scheme or that it participated in the smuggling ring with full knowledge of the fraud.

[63] In particular, the fact that a third party may have become involved to negotiate for the native persons and advance them the money needed to pay the purchase price is not inconsistent with the fact that the true purchasers of the vehicles sold by Chrysler St-Jovite were indeed those native persons. Purchasers turn to lenders to finance the purchase of vehicles all the time.

[64] The presence on GAL's premises of a number of sales contracts between the manufacturer and the dealer is not conclusive either. Mr. Duchesneau admitted that it was common practice to provide that contract to certain potential purchasers who demanded it for the purpose of negotiating the sale price of a vehicle. In addition, the fact that a native person purchased more than one vehicle does not mean that it could not be a juridical fact that the native persons purchased the vehicles on their own behalf.

[65] Not only do I believe Mr. Duchesneau's statement that he thought the natives were acting on their own behalf, but I have every reason to believe that they were not acting as prête-noms in these transactions. As counsel for the respondent admitted, it was essential that a sale to a native person be interposed between a dealer and a numbered company in order for the scheme to succeed. It was important that the vehicle be sold by the dealer tax-free under section 87 of the Indian Act. To achieve that result, the sale had to truly be made to a native person and not to such a person acting as a mandatary for a non-native person. Section 87 reads as follows:

87. (1) Notwithstanding any other Act of Parliament or any Act of the legislature of a province, but subject to section 83, the following property is exempt from taxation, namely,

(a) the interest of an Indian or a band in reserve lands or surrendered lands; and

(b) the personal property of an Indian or a band situated on a reserve.

(2) No Indian or band is subject to taxation in respect of the ownership, occupation, possession or use of any property mentioned in paragraph (1)(a) or (b) or is otherwise subject to taxation in respect of any such property.

(3) No succession duty, inheritance tax or estate duty is payable on the death of any Indian in respect of any property mentioned in paragraphs (1)(a) or (b) or the succession thereto if the property passes to an Indian, nor shall any such property be taken into account in determining the duty payable under the Dominion Succession Duty Act, chapter 89 of the Revised Statutes of Canada, 1952, or the tax payable under the Estate Tax Act, chapter E-9 of the Revised Statutes of Canada, 1970, on or in respect of other property passing to an Indian.

[66] As I interpret this section, a native person is entitled to the tax exemption if the vehicle is situated on a reserve at the time of the sale. The exemption does not depend on the use subsequently made of the vehicle by the native person. Nothing prevents a native person from purchasing a vehicle on a reserve for the purpose of reselling it to someone else. This was also the interpretation adopted by the Deputy Minister of National Revenue in his letter of May 20, 1997:

[TRANSLATION]

On the other hand, sole proprietorships and partnerships owned by Indians [that engage in commercial activities] are treated the same way as individual Indians. They are not required to pay the GST on purchases made on a reserve or purchases made off a reserve[20] that are delivered to a reserve.

[67] Moreover, native persons carrying on a business with annual sales of more than $30,000 must register for the GST and collect it when supplying their goods and services, except in the case of GST-exempt supplies, such as those made on a reserve to a native person. This interpretation also corresponds with that set out in technical information bulletin B-039R.

[68] Finally, the interpretation I am adopting is consistent with that stated by the Supreme Court of Canada in Union of New Brunswick Indians, supra. In paragraph 35 of that decision, McLachlin J. (as she then was) stated the following:

The location of property after the sale and the imposition of tax is irrelevant. This means that goods purchased off-reserve attract tax, while goods purchased on-reserve are exempt, regardless of where the purchaser may intend to use them.

[Emphasis added.]

[69] McLachlin J. added the following in paragraph 43:

In contrast, the "point of sale" test allows Indians living off-reserve to purchase goods tax-free on reserves regardless of where the goods are ultimately used.

[70] In the next paragraph, she recognized that:

In addition, the "point of sale" test is beneficial to on-reserve Indians in many parts of Canada. First, it provides an incentive for Indians to establish their own retail outlets on reserves and gives a competitive edge to reserve businesses, thereby increasing economic activity and employment.

[71] As I see it, this analysis shows that a native person is entitled to the exemption provided for in section 87 of the Indian Act whether that person purchases the property for personal use—even off a reserve—or purchases it on a reserve for the purpose of reselling it as part of a business. Of course, if a native person runs a business on a reserve or elsewhere, that person must—as stated by the Deputy Minister of National Revenue and as indicated in the technical information bulletin—register and collect the GST when selling goods to non-natives. It seems to me that, under subsection 221(1) of the Act, the native persons who purchased vehicles from Chrysler St-Jovite to resell them at a profit had to collect the GST when they resold them (see also subsection 148(2) of the Act) and remit it to the Minister. The sale of a single vehicle exceeds $30,000, the level beyond which a supplier is no longer a small supplier and is required to register. If those native persons had collected the GST, I do not think that the Minister would have assessed Chrysler St-Jovite for failing to collect it.

[72] In my view, not only has the respondent not been able to prove—as she was required to—that the native persons were acting as mandataries for non-natives, but in all likelihood the natives were acting as true purchasers on their own behalf in the transactions. Since the respondent has failed to discharge her burden of proof in this regard and as Chrysler St-Jovite has proved that it was really doing business with the native persons, I conclude that Chrysler St-Jovite was not required to collect the GST when it sold the 95 vehicles or to add any amount in respect of those vehicles in determining its net tax under section 225 of the Act.

GAAR: section 274 of the Act

[73] The alternative argument made by counsel for the respondent, which concerns the application of the GAAR set out in section 274 of the Act, remains be dealt with. That section reads as follows:

274. (1) Definitions—In this section,

"tax benefit" means a reduction, an avoidance or a deferral of tax or other amount payable under this Part or an increase in a refund or rebate of tax or other amount under this Part;

. . .

(2) General anti-avoidance provision—Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that include that transaction.

(3) Avoidance transaction—An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result directly or indirectly in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) Provision not applicable—For greater certainty, subsection (2) does not apply in respect of a transaction where it may reasonably be considered that the transaction would not result, directly or indirectly, in a misuse of the provisions of this Part or in an abuse having regard to the provisions of this Part (other than this section) read as a whole.

. . .

[Emphasis added.]

[74] Before applying these provisions to the facts of this appeal, it must first be pointed out that the onus was on the respondent to prove the facts essential to their application, the reasons for this being the same as have been stated above. Moreover, the respondent is relying mainly on the same facts as those that must exist for subsection 221(1) of the Act to apply. Counsel for the respondent argued that the native persons who purchased the vehicles from Chrysler St-Jovite were acting as prête-noms for non-natives and not on their own behalf. He further argued that Chrysler St-Jovite knew that the native persons were acting as prête-noms for non-native third parties and knowingly participated in the smuggling ring scheme.

[75] In my opinion, section 274 of the Act is of no assistance to the respondent's case. First of all, it must be noted that the respondent is basically reproaching Chrysler St-Jovite for not collecting the GST when it sold its vehicles to native persons. If the respondent had succeeded in proving that Chrysler St-Jovite had in fact sold its vehicles not to native persons but to the alleged mandators of those persons, subsection 221(1) of the Act would have been the applicable provision. Chrysler St-Jovite would then have been required to collect the GST, since the non-native mandators would not have been entitled to the tax exemption provided for in section 87 of the Indian Act. It would not have been necessary to have recourse to section 274 of the Act.

[76] It should also be noted that that section applies only to a tax benefit that a taxpayer might obtain "but for this section [274]". So if Chrysler St-Jovite had sold to non-natives, as the respondent is mistakenly arguing, it would have been required to collect the GST under subsection 221(1) of the Act and to include the amount so collected in determining its net tax under section 225 of the Act. Chrysler St-Jovite could not have received any tax benefit whatsoever.

[77] Having found that the respondent has failed to show that Chrysler St-Jovite sold vehicles to non-native persons, and having accepted Chrysler St-Jovite's evidence that it genuinely sold to native persons who were entitled to the exemption provided for in section 87 of the Indian Act, it follows that Chrysler St-Jovite quite simply complied with subsection 221(1) of the Act, which requires it to collect only the tax "payable" by the recipient. Here, the native persons did not have to pay any tax. Chrysler St-Jovite accordingly did not have to collect any tax, as I concluded above.

[78] Having determined that the respondent has failed to show not only that Chrysler St-Jovite sold its vehicles to non-native persons but also that that company was part of the smuggling ring, it is an easy matter to conclude that none of the three conditions necessary for section 274 of the Act to apply has been met. First of all, the sales made by Chrysler St-Jovite were made primarily for bona fide purposes, namely commercial purposes accomplished in the normal course of operating its business. Second, it did not receive any tax benefit as that term is defined in section 274 of the Act. Accordingly, there was no misuse or abuse of the provisions of Part IX of the Act read as a whole. On the contrary, applying section 274 of the Act to the facts of this appeal would be an abuse and a violation of that section.

[79] If there was a tax benefit, it was rather the native person who received it, by virtue of section 87 of the Indian Act. In itself, that is not an inappropriate tax benefit, since it is consistent with the purpose of the Indian Act as that Act has been interpreted by the Supreme Court of Canada. The undue tax benefit was obtained by a non-native person, in all likelihood with the participation—questionable, to say the least—of native persons. The fact that the latter did not collect the GST when they resold the vehicles, as I believe they were required to do, enabled one or more numbered companies to shamelessly abuse the Canadian tax system. Unfortunately, the evidence did not make it possible to identify with certainty which company or companies obtained those fraudulent benefits. However, it is my view that, by assessing Chrysler St-Jovite, the Minister is going after the wrong party.

[80] For all these reasons, Chrysler St-Jovite's appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that, in determining its net tax under section 225 of the Act, Chrysler St-Jovite was not required to add any amount of tax that had become collectible in respect of the sale of the 95 vehicles to the native persons. Chrysler St-Jovite is entitled to its costs.

Signed at Ottawa, Canada, this 24th day of January 2001.

"Pierre Archambault"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 23rd day of February 2001.

Erich Klein, Revisor

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