Tax Court of Canada Judgments

Date: 20011221

Docket: 2001-1081-GST-I

BETWEEN:

403015 B.C. LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Sarchuk J.

[1]            This is an appeal by 403015 B.C. Ltd. (the Appellant) from an assessment dated August 3, 1999 by virtue of which the Minister of National Revenue (the Minister) assessed the Appellant a total amount of $126,994.78.[1] The Appellant was also assessed the gross negligence penalty of $13,085.02 under section 285 of the Excise Tax Act (the Act) in respect of the eleven properties which were sold before December 31, 1998.[2]

[2]            In so reassessing the Appellant, the Minister relied on the following assumptions of fact:

(i)             the Appellant registered under Part IX of the Excise Tax Act effective January 1, 1991, and was assigned GST registration number 131579609;

(ii)            the Appellant is involved in real property development;

(iii)           the Appellant is required to file GST on a quarterly basis;

(iv)           for the Assessment Period, the Appellant claimed within the time required ITCs of $222,324.60 as set out in the attached schedule "A";

(v)            ITCs of $14,479.90 were disallowed as the Appellant failed to provide sufficient documentation as required by the Act;

(vi)           for the Assessment Period, the Appellant reported NIL sales and NIL GST collected as set out in the attached schedule "A";[3]

(vii)          during the Assessment Period, the Appellant sold the Properties on which GST was collected;

(viii)         the Appellant was assessed GST of $146,376.99 on the unreported sales of the Properties and was allowed the related GST New Housing Rebate of $53,091.70;

(ix)            the Appellant did not remit GST in respect of the sales of the Properties;

(x)             on the GST returns filed by the Appellant and signed by its principal, Bruce Rosengren, NIL GST was shown as collected in respect of the sales of the Properties;

[3]            It is not disputed that when contacted by the auditor, the Appellant submitted all GST payable excepting the amount assessed as penalty under section 285 of the Act which, as previously noted, is the subject of this appeal.

[4]            The position of the Appellant was advanced by its president, Lloyd Bruce Rosengren. During 1998 and 1999, the Appellant was in the business of constructing and selling condominium units in Langley, BC. Rosengren said this was the first condominium project that the Appellant had been involved in. It had retained Mr. Glen Laughlin and, according to Rosengren, as the Appellant's conveyancing solicitor, was required to pay GST

"out of the disbursements of each sale. I had permission to do this from my lender, which I had negotiated prior to the sales and had them send Mr. Laughlin's office a copy of the commitment letter and authorization to do so".[4]

Rosengren contends that these documents contain a provision that the net GST may be paid out of the proceeds of each sale and that his solicitors should have and did in fact pay the GST to the lender as instructed and the ultimate proceeds of the sales were not released or paid to the Appellant for the purposes of remitting the GST.

[5]            Evidence was adduced on behalf of the Respondent from Glen Arthur Laughlin. He is a member of the law firm Kane, Shannon & Weiler and had been retained by the Appellant to handle all the necessary conveyancing with respect to the condominiums in issue. He testified that the Appellant had not provided him with any instructions with respect to GST collected from the condominium sales. More specifically, he does not recall receiving any instructions with respect to remitting the GST (to Revenue Canada) and his review of the files and his notes failed to disclose any record of such a conversation with Rosengren or any other form of instruction to that effect. He observed that it would have been "unique to his situation so I would normally make a note to that - to that effect". He further observed that he has never remitted or reported GST on behalf of a client in similar transactions and noted that it is something that a conveyancing solicitor would not be able to do since he would not have all of the relevant information with respect to input tax credits, etc. He maintains that if Rosengren had given such instructions, those instructions would have appeared on the "authority to pay document since that document re: disbursement that the solicitor makes is set out for the client's approval because it's his money that we are spending".

Relevant Statutory Provisions

[6]            Section 285 of the Act provides that:

285           Every person who knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Part, makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return, application, form, certificate, statement, invoice or answer (in this section referred to as a "return") made in respect of a reporting period or transaction is liable to a penalty of ...

This requires that an omission or false statement in a return be made knowingly or in circumstances amounting to gross negligence. It is the Respondent's responsibility to establish these elements.

Analysis

[7]            Evidence was adduced on behalf of the Respondent from Colleen Joan Browne, an auditor with Revenue Canada. The Appellant's file initially came to the attention of Revenue Canada because the input tax credits were so high and no sales whatsoever had been reported. An investigation disclosed that there had in fact been sales as a result of which the Appellant's representative was called in order to set up an audit. The representative was advised of the results of the investigation and shortly thereafter Rosengren, on behalf of the Appellant, attended at the Revenue Canada offices and paid the GST on all the properties in issue. The evidence before the Court further established that Rosengren had been filing the GST returns for the Appellant since its inception. It was audited in 1993 and assessed a negligence penalty for failing to pay GST on the transfer of certain property. Rosengren conceded that at the time of that audit, he had been advised by a representative of Revenue Canada by way of letter which "broadly instructed how GST on - on a corporately constructed dwelling should be handled". The evidence also establishes that the Appellant filed GST returns for the quarters ending September 30, 1998, December 31, 1998 and March 31, 1999 and reported no sales when in fact, the Appellant had made 19 sales during these quarters and had received GST refunds totalling $24,918.03 after filing the false returns. Furthermore, in the course of Rosengren's examination of the Appellant's former solicitor, it became apparent that the Appellant had financial difficulties with respect to construction costs during the period of time when the failure to remit occurred.

[8]            The Appellant's position is that it was the responsibility of its solicitor to remit the GST for each respective unit from the amounts received in payment from the purchaser upon closing. In fact, Rosengren insisted that such instructions had been given to the company solicitor, Laughlin. Having heard and observed both in the course of their testimony, I accept that of Laughlin and find that no request had been made by Rosengren to have Laughlin or his firm remit or report the GST collected from the sales. There is nothing in writing to indicate that such instructions had been given. Furthermore, as Laughlin noted, this would have been a rather unique request and would not normally have been a practice of his firm and if acceded to, such a request would have been documented. I am satisfied that Mr. Laughlin on behalf of the Appellant paid out the funds to the lender in accordance with the terms set out in the agreement and in the letters that were sent to the solicitors by the lender and then as instructed, remitted the balance including the builder's lien holdback to the Appellant. Furthermore, an examination of the vendor's statements of adjustments, the authority to pay and the trust account printouts indicate that the GST was not remitted and that the Appellant was receiving in excess of the amounts that were agreed upon between itself and the lender. This fact should clearly have been evident to the Appellant.

[9]            The fact that the Appellant amended its returns immediately upon being apprised of the audit does not serve to mitigate against the penalty levied under section 285 of the Act. On the evidence as a whole, I am satisfied that the Appellant's failure to report the sales and remit the tax was not an inadvertent error but rather was done knowingly. The Appellant obtained a substantial advantage as a result of the failure to report the sales since as Rosengren conceded, the mortgage was discharged at an earlier date and as a result, the Appellant was required to pay less interest to the lender. In addition, the Appellant had the benefit of significant refunds that it received by failing to report any sales while claiming significant input tax credits in those same three quarters.

[10]          This appeal is dismissed.

Signed at Ottawa, Canada, this 21st day of December, 2001.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 2001-1081(GST)I

STYLE OF CAUSE:                                               403015 B.C. Ltd. and

                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           October 10, 2001

REASONS FOR JUDGMENT BY:                      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       December 21, 2001

APPEARANCES:

Agent for the Appellant:                     Lloyd Bruce Rosengren

Counsel for the Respondent:              Kristy Foreman Gear

COUNSEL OF RECORD:

For the Appellant:                

Name:                                N/A

Firm:                 

For the Respondent:                             Morris Rosenberg

                                                                Deputy Attorney General of Canada

                                                                                Ottawa, Canada

2001-1081(GST)I

BETWEEN:

403015 B.C. LTD.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on October 10, 2001, at Vancouver, British Columbia, by

the Honourable Judge A.A. Sarchuk

Appearances

Agent for the Appellant:                       Lloyd Bruce Rosengren

Counsel for the Respondent:                Kristy Foreman Gear

JUDGMENT

          The appeal from the assessment of tax made under the Excise Tax Act, notice of which is dated August 3, 1999 and bears number 00000000248 is dismissed.

Signed at Ottawa, Canada, this 21st day of December, 2001.

"A.A. Sarchuk"

J.T.C.C.

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