Date: 20010906
Docket: 2000-4321-GST-I
BETWEEN:
PRO-EX TRADING CO. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Edmonton, Alberta on July 23, 2001 and continued on July 25, 2001.
[2] A joint Book of Exhibits containing numerous tabs was submitted and it was agreed by the parties that the documents contained therein were to be considered as exhibits.
[3] The parties also submitted a Statement of Agreed Facts and Issues, which reads as follows:
TCC-2000-4321 (GST) I
IN THE TAX COURT OF CANADA
PRO-EX TRADING CO. INC.
Appellant
AND:
HER MAJESTY THE QUEEN
Respondent
STATEMENT OF AGREED FACTS
AND ISSUES
I AGREED FACTS:
THE PARTIES HERETO HEREBY AGREE that
(a) the following statement of facts shall comprise part of the evidence in this matter
(b) either party may adduce additional documentary, real or vive voce evidence provided it is not inconsistent with the contents hereof, except with leave of the Court in the event of such inconsistency, and
(c) this agreement is subject to anything of which this Honourable Court is entitled to take judicial notice and in fact expressly does so for the determination of the within matter.
1. Pro-Ex Trading Co. Inc. ("Pro-Ex") was incorporated in Alberta and at all material times carried on the business of selling used heavy equipment for the construction and related industries.
2. During the Reassessment period of January 1, 1996 to November 30, 1998, Pro-Ex entered into certain transactions (herein called the "Transaction" or "Transactions"), which are the subject matter of this appeal, with the following third parties:
North American Leasing Corporation (K. Gupta, officer)
Howard Christensen (principal)
Nyco (Rick Nyman, principal)
RELI Leasing Inc. (Mike Lafranchise, President),
(together herein called the "Third Parties").
3. In respect of all Transactions, the respective Third Parties state that they did not claim a GST Input Tax Credit. CCRA has neither audited nor verified this.
4. In respect of all Transactions, the respective Third Parties took title to the equipment and/or equipment parts which was the subject matter of the Transactions as security for repayment of mones [sic] borrowed by Pro-Ex. This agreement as to this fact in each case is not an admission by the Respondent that any transaction was in the nature of a loan rather than a sale to which GST ought to apply.
5. Each of the Third Parties has previously provided through Michael Dickie, on behalf of the Appellant, to CCRA its confirmation of the foregoing and true copies of such confirmations are attached hereto. The confirmations were provided after the Notice of Decision.
II AGREED ISSUES:
THE PARTIES HERETO HEREBY FURTHER AGREE that the issues to be determined herein are:
1. Whether or not the Appellant is responsible for remitting any GST which it may have collected even if such GST was collected erroneously?
2. Whether the Minister is entitled to any such amounts which have not been reassessed in the reassessment under appeal?
3. Subject to Issue 1 and 2 above, whether or not the Transactions, or any of them, constitute a "taxable supply" subject to the application of the Excise Tax Act, in which case the appeal ought to be dismissed in respect of such Transactions, or do not constitute a "taxable supply", but rather something else, such as a financing arrangement with the giving of security, in which case the appeal ought to be allowed in respect of such Transactions.
4. If GST is exigible on all or some of the Transactions as a result of either or both Issue 1 or 3 being resolved in whole or in part in favour of the Minister, whether the assessment of penalties and interest is warranted in respect of such GST.
5. If GST is not exigible on all or some of the Transactions, whether the Appellant, if successful to some degree, is entitled to costs as determined in the discretion of the court.
AGREED to by the Parties hereto by their respective Counsel this 11 day of July 2001
Nichols & Company
Barristers & Solicitors
"Signature"
Neil W. Nichols
Counsel for the Appellant
Deputy Attorney General of Canada
Per proc: "Signature"
Scott McDougall
Tax Law Section
Counsel for Respondent ...
CONFIRMATION OF NO ITC CLAIM
To: Pro-Ex Trading Co. Inc. and To: Canada Customs
Edmonton, AB & Revenue Agency
FAX: 780-459-8181 Goods & Services
Tax Division
Edmonton, Alberta
Re: Lending Transaction with Title Security
Agreements dated - May 1, 1996
April 30, 1997
In the above-noted lending transactions, we hereby confirm that our company has not claimed a GST ("Goods & Services Tax") Input Tax Credit ("ITC") in relation to the transfer of the title to serial numbered equipment and/or equipment parts identified in the Agreements.
We further confirm that title to the equipment and/or equipment parts was taken by ourselves as security for repayment of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 15th day of November, 2000
NORTH AMERICAN LEASING CORPORATION
per:
"Signature"
CONFIRMATION OF NO ITC CLAIM
To: Pro-Ex Trading Co. Inc. and To: Canada Customs
Edmonton, AB & Revenue Agency
FAX: 780-459-8181 Goods & Services
Tax Division
Edmonton, Alberta
Re: Lending Transaction with Title Security
Agreement dated - April 18, 1996 - $13,500
July 18, 1996 - $22,500
In the above-noted lending transactions, I hereby confirm that I have not claimed a GST ("Goods & Services Tax") Input Tax Credit ("ITC") in relation to the transfer of the title to serial numbered equipment and/or equipment parts identified in the Agreements.
I further confirm that title to the equipment and/or equipment parts was taken by myself as security for repayment of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 23rd day of November, 2000
"Signature"
Howard Christensen
CONFIRMATION OF NO ITC CLAIM
To: Pro-Ex Trading Co. Inc. and To: Canada Customs
Edmonton, AB & Revenue Agency
FAX: 780-459-8181 Goods & Services
Tax Division
Edmonton, Alberta
Re: Lending Transaction with Title Security
Agreements dated - April 1, 1996 - $100,000
As Amended
- September 30, 1996 - $125,000
- January 17, 1997
- $175,000
In the above-noted lending transactions, we hereby confirm that our company has not claimed a GST ("Goods & Services Tax") Input Tax Credit ("ITC") in relation to the transfer of the title to serial numbered equipment and/or equipment parts identified in the Agreements.
We further confirm that title to the equipment and/or equipment parts was taken by ourselves as security for repayment of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 21st day of November, 2000
"Signature"
Rick Nyman c.o.b. Nyco
CONFIRMATION OF NO ITC CLAIM
To: Pro-Ex Trading Co. Inc. and To: Canada Customs
Edmonton, AB & Revenue Agency
FAX: 780-459-8181 GST Division;
Edmonton, AB
Re: Lending Transaction with Title Security - $200.000
Agreement dated February 21, 1997 - copy attached
In the above-noted lending transaction, we hereby confirm that our company has not claimed a GST ("Goods & Services Tax") Input Tax Credit ("ITC") in relation to the transfer of the title to serial numbered equipment and/or equipment parts identified in the Agreement.
We further confirm that title to the equipment and/or equipment parts was taken by ourselves as security for repayment of monies borrowed by Pro-Ex Trading Co. Inc.
DATED AT THE CITY OF EDMONTON, ALBERTA this 14 day of November, 2000
RELI LEASING INC.
per:
"Signature"
Mike LaFranchise - President
[4] Called as witnesses were Michael Dickie, a management consultant who in the years in question worked for and with the Appellant, Michael Joseph Coghlen a person who acted as agent on some of the transactions which form the subject of these appeals and the auditor of Canada Customs and Revenue Agency ("CCRA") Mr. Stephen Douglas Harak and David Der the appeals officer on these appeals.
[5] In addition to the Statement of Agreed Facts other relevant facts that came out in the evidence were that at and prior to the time of the transactions the Appellant could not obtain conventional financing from financial institutions such as the Alberta Treasury Board on the security of the heavy equipment which it was dealing in and being short of cash sought out the other parties to the various transactions. Further in respect of the transactions involving North American a commission was paid to Mr. Coghlen for bringing the parties together. Further certain of the transactions contain the personal guarantees of Mr. Sutherland the principal behind the Appellant. Also when the transactions were put together the nominal interest rate was calculated at 24% and the amount advanced represented only fifty percent of the value of the equipment, which secured the particular transaction in question.
[6] The Appellant submits that the transactions in question constituted loans and that the equipment given was given as security for repayment of those loans. Counsel submits further that although some of the bookkeeping and journal records and other documentation of the Appellant indicate reference to GST that in fact no GST was collected on any of the transactions. This was the evidence of Mr. Dickie and is consistent with the attachments to the Statement of Agreed Facts.
[7] Counsel for the Respondent refers repeatedly to the text of the transactions, which on their face indicate sales as opposed to loans, and no reference is made in any of those transactions to a loan, a borrower or a lender. Consequently the transactions represented sales upon which GST was exigible. He further contends that GST being shown on the various books and records must be taken as an indication that GST was actually collected.
Analysis and Decision
[8] Section 165 of the Excise Tax Act ("Act") imposes GST on every recipient of a taxable supply made in Canada at the rate of 7% of the value of the consideration for the supply. Pursuant to subsections 221(1) and 228(2), persons making taxable supplies, are obligated to collect and remit to the Receiver General, the "net tax" for a reporting period.
[9] Under section 165 taxable supplies attract GST. "Taxable supply" is defined in subsection 123(1) to mean "a supply that is made in the course of a commercial activity". The Appellant does not dispute that it is engaged in a commercial activity, as defined in subsection 123(1). "Supply" is defined in subsection 123(1) to mean "subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition". Section 134 provides that "... where ... a person transfers property ... for the purpose of securing payment of [a] debt or performance of [an] obligation, the transfer shall be deemed not to be a supply, ..." Thus, pursuant to section 134, any transfer of property made for the purposes of securing a debt, is excluded from being a "supply", and as a result is ignored for GST purposes. The same applies on a re-transfer.
[10] In Pembina Finance (Alta) Ltd. v. The Queen, [1998] G.S.T.C. 119 (T.C.C.) the only reported case dealing with section 134, Judge Bowie considered an appeal where the taxpayer argued that it did not sell two cranes in question, but rather transferred them for security purposes. The appeal was dismissed because Judge Bowie did not find the taxpayer's principal to be credible, and found his testimony to be "evasive", self-serving", "implausible" and "unreliable, particularly where it [was] in conflict with documentary evidence of those transactions".
[11] In the case at hand, the Appellant argues that the inventory items in question were not sold, but rather were used as collateral to obtain financing. If that is the case, then section 134 of the Act would apply, excluding the transactions from the definition of "supply", and thus rendering them as non-taxable events for purposes of the GST.
[12] The Appellant concedes that the contracts supporting the transactions indicate that they were in fact "sales". However, it is the legal substance of a transaction that is relevant for tax purposes, rather than what label a taxpayer puts on a given transaction. For example, in The Queen v.Placer Dome Inc., 92 DTC 6402 (F.C.A.) Marceau, J. stated at page 6411:
Counsel for the respondent put great emphasis on the statements which appear in Article IV F of the Plan to the effect that the employer's contribution is "on behalf of and as an absolute benefit for (the) member" and that such contribution "shall be regarded as additional compensation paid to (the member)"; they likewise attach much importance to the fact that income taxes for participating employees are withheld not only from their wages but also from the employer's contribution. But, it is the substance of a transaction that must be looked at in order to determine the true legal rights and obligations of the parties. Similarly, it is the commercial and practical nature of the transaction, the true legal rights and obligations flowing from it, that must be looked at to determine its tax implications. As to the amounts withheld and presumably remitted to the Department in the name of the employees, it was a necessary corollary of the employer's assumed position under the Plan, but, of course, it cannot transform the reality of the transaction.
[13] Also, in Continental Bank Leasing Corporation v. The Queen, 98 DTC 6505 (S.C.C.) Justice Bastarache cited with approval the following passage from Orion Finance Ltd. v. Crown Financial Management Ltd., [1996] 2 B.C.L.C. 78 (C.A.) at p. 84, as follows at page 6514:
Once the documents are accepted as genuinely representing the transaction into which the parties have entered, its proper legal categorisation is a matter of construction of the documents. This does not mean that the terms which the parties have adopted are necessarily determinative. The substance of the parties' agreement must be found in the language they have used; but the categorisation of a document is determined by the legal effect which it is intended to have, and if when properly construed the effect of the document as a whole is inconsistent with the terminology which the parties have used, then their ill-chosen language must yield to the substance.
[14] Thus, in the case at hand, in determining the tax effect on the transactions in question under the Act, I must determine the legal substance of the transactions, as evidenced by the intentions of the parties, rather than relying for characterization purposes, on the "labels" placed on the transactions by the parties.
[15] The Respondent also argues that even if the transactions in question were financing transactions, the amounts assessed by the Minister in respect of those transactions were collected by the Appellant as or on account of tax under the Act, and thus the Respondent was correct in assessing the amounts as part of the Appellant's net tax for the relevant period.
[16] Subsection 225(1) defines "net tax" to include "all amounts that become collectible" and "all other amounts collected... as or on account of tax". Thus, under subsection 225(1), all amounts "collected...as tax", even if collected in error, are included in the calculation of "net tax", and pursuant to subsection 228(2), must be remitted to the Receiver General. In the case at hand, all amounts if collected by the Appellant with regards to the transactions in question, were part of the supplier's "net tax" for the relevant period, and remittable to the Receiver General under subsection 228(2).
[17] In my opinion for the following principal reasons I find that the transactions constitute loans and that the equipment given as security was given as security for those loans.
1. The theory of substance over form should govern.
2. The fact that the other parties to the transactions claim no ITCs and the fact that their statements indicate that the transactions were actually loans must be considered. In other words, if the Appellant collected GST these parties would without doubt have made a claim for ITCs related to the GST collected.
3. The financial situation of the Appellant and its need for an infusion of cash as discussed above is a strong indication that what was contemplated was loans and not sales. Commissions were paid to Mr. Coghlen who brought the parties together and stated in evidence that the transactions in question were a form of financing.
[18] The evidence is that the other parties to the transactions had no use for the equipment and were not involved in the ultimate sale thereof. In my opinion the evidence discloses that notwithstanding the bookkeeping and journal entries no GST was actually collected. Moreover certain of the transactions contain the personal guarantee of Sutherland, the principal behind the Appellant which is not consistent with the concept of sale.
[19] In conclusion for the above principal reasons the appeals are allowed. However considering this is an appeal under the Informal Procedure of this Court there shall be no costs.
Signed at Ottawa, Canada, this 6th day of September, 2001.
"T. O'Connor"
J.T.C.C.
COURT FILE NO.: 2000-4321(GST)I
STYLE OF CAUSE: Pro-Ex Trading Co. Inc. v. The Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: July 23 and 25, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge T. O'Connor
DATE OF JUDGMENT: September 6, 2001
APPEARANCES:
Counsel for the Appellant: Neil W. Nichols
Counsel for the Respondent: R. Scott McDougall
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-4321(GST)I
BETWEEN:
PRO-EX TRADING CO. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 23 and July 25, 2001 at Edmonton, Alberta by
the Honourable Judge Terrence O'Connor
Appearances
Counsel for the Appellant: Neil W. Nichols
Counsel for the Respondent: R. Scott McDougall
JUDGMENT
The appeal from the reassessment made under the Excise Tax Act, notice of which is dated July 10, 2000 and bears number 10BT-116927450, is allowed, without costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 6th day of September, 2001.
|
"T. O'Connor" |
J.T.C.C.