Docket: 2001-880(GST)G

BETWEEN:

KEY PROPERTY MANAGEMENT CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on April 24, 2003, at Toronto, Ontario,

By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellants:	David C. Nathanson, Q.C. and Adrienne K. Woodyard
Counsel for the Respondent:	Peter M. Kremer, Q.C. and Rosemary Fincham

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated December 7, 2000 and bears number 08BP-115823411, for the period October 1, 1991 to September 30, 1996, is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(i)       Mr. Robert Morrison is an employee of Ayerswood Development Corporation;

(ii)       the superintendents are all employees of the owner companies;

(iii)      the maintenance workers are all employees of the Appellant;

(iv)      the Appellant is entitled to additional input tax credits in the amount of $1,906.09; and

(v)      the Appellant is not liable to a penalty under section 280 of the Act.

Signed at Ottawa, Canada, this 12th day of March, 2004.

"E.A. Bowie"

J.T.C.C.

Citation: 2004TCC210

Date: 20040312

Docket: 2001-880(GST)G

BETWEEN:

KEY PROPERTY MANAGEMENT CORPORATION,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowie J.

[1]      This appeal is from an assessment for goods and services tax (GST) under Part IX of the Excise Tax Act (the "Act")[1] covering the period between October 1, 1991 and September 30, 1996. The Appellant (Key) is a corporation created to provide management services to 30 or more other corporations (the owner companies), each of which is the owner and operator of a revenue producing property. All the shares of Key, and of each of the owner companies, are owned by Mr. Anthony Graat; his is the controlling mind of each of them. The principal issue in the appeal concerns certain caretakers and maintenance personnel who are engaged to provide services to the buildings. The Minister of National Revenue (the Minister) has assessed the Appellant on the assumption that Key is the employer of these individuals, and that it supplies their services to the owner companies, and is therefore liable to collect GST from them in respect of those services and remit it to the Receiver General. The Appellant's position is that the owner companies employ these people under contracts of service, and that GST is therefore not exigible. The Appellant also argues, in the alternative, that if it is the employer of the superintendents then the assessment overstates the value of the services it provided to the owner corporations because it includes the value of the free accommodation that the owner companies provided to them. There was also a similar issue with respect to the employment of Robert Morrison, who performed services for another of Mr. Graat's companies called Ayerswood Development Corporation (Ayerswood). At the opening of the trial, I was advised by counsel that the parties had agreed that Mr. Morrison was an employee of Ayerswood, and that the appeal should therefore succeed at least to the extent of the tax assessed on his services, together with the associated interest and penalties. The other issues concern some minor claims for input tax credits that the Minister rejected, and penalties under subsection 280(1) of the Act that were applied in respect of the tax in dispute.

the employment issue

[2]      Most of the buildings with which these appeals are concerned are residential; a few are commercial. The precise number of buildings is not clear from the evidence, but it is at least thirty. Key was created in order to centralize the management and accounting functions for all of them, and also for Ayerswood, which is the construction company owned by Mr. Graat. Mr. Trent Krauel is Vice-President, Finance and Administration of Key, and he holds the same position in respect of the owner companies as well. He was the only witness. It is clear from his evidence that all the major decisions in respect of the management of all these companies, and many of the minor ones as well, are made by Mr. Graat, whom he described as being a hands-on type of executive. Mr. Krauel is responsible for seeing that Mr. Graat's policies, and his decisions, are carried out. He described Key as being the banking company for the group. It collects the rents, pays the bills, including taxes and mortgages for each of the owner companies. It administers the payrolls of all the companies. The accounting functions are carried out on Key's computer, with separate books and records being maintained there for each corporation. In addition to Mr. Krauel, Key employs a senior property manager, three other property managers and an administrative and clerical staff of about eight people.

[3]      Each apartment building in the group has a superintendent, or more usually a couple who share the duties of the superintendent. They are paid a salary, and also are provided with an apartment in the building free of charge. These apartments were included in the design of the buildings specifically to be the residence of the superintendents. The superintendents' duties involve cleaning and minor maintenance, collecting rents and obtaining tenants for vacant apartments. If these people are employed by Key, then the services that they perform are services that Key provides to the various owner companies in commercial transactions, and so they are subject to GST, which Key is obliged to collect and remit. If, on the other hand, they are employees of the owner companies then their services are not subject to GST. None of this is in dispute. The Appellant's position is that it acted only as agent of the owner companies when it recruited, hired and supervised these individuals. This is disputed by the Respondent, who takes the position that Key entered into the contracts of employment as principal and not as agent. The parties each take precisely the same position in respect of the employment of a small group of maintenance employees who perform more difficult or specialized repairs to the buildings and their mechanical equipment. The only significant difference between the two groups of workers for purposes of this appeal is that the superintendents do all their work in and about the one building for which they are responsible, while the maintenance workers go from building to building, at the direction of the Key property managers, depending upon where there is a need for their services from time to time.

[4]      The Minister's assessment is predicated upon the assumption that the Appellant was acting as principal when it entered into contracts of employment with the building superintendents and the maintenance workers. The Appellant has the onus of displacing this assumption and showing that the owner companies were the true employers. The evidence that the Appellant relies on is the Management Agency Agreement that was entered into between each of the owner companies and Key, the accounting records maintained by Key for itself and for the owner companies, and the testimony of Mr. Krauel concerning these. Dealing first with the accounting records, it is not in dispute that Key paid the salaries of all the members of both groups of employees, and remitted the required withholdings and contributions for income tax, employment insurance premiums and Canada Pension Plan contributions for each of them, in the first instance. The exhibits, and Mr. Krauel's testimony, satisfy me that Key recovered from each of the owner companies all of the salary and the associated payroll costs referable to their superintendents. It is clear, too, that the costs of the apartments occupied by the building superintendents were borne in full by the owner companies. The accounting was somewhat more complex in relation to the maintenance employees, as they typically worked at several different buildings, and therefore for the benefit of several different owner companies, each day. Nevertheless, they kept logs of their time, and, by journal entries made by Key based on those logs, their payroll and related expenses were apportioned each month among the various owner companies for whom they had done work, according to the ratio of their time spent working for each of them.

[5]      The Appellant put into evidence a document dated October 1, 1990 which is described as a Management Agency Agreement (the Agreement) between Wrenlon Developments Limited, one of the owner companies, and Key Property Management Corporation. It was executed on behalf of both Key and Wrenlon by Mr. Graat. The parties agreed that there were written contracts in identical terms between the Appellant and each of the other owner companies, and of course it is this agreement that governed the relationship between the Appellant and each of the owner companies during the period covered by the assessment under appeal. Under these agreements the Appellant, as agent of the owner companies, contracted to do virtually everything that an owner of rental property must do, including renting the units, collecting the rents, paying all the bills, including mortgages, taxes, utilities and services of all kinds, and entering into contracts on behalf of the owner companies for such services as snow removal, landscaping, building maintenance and repairs. Key also provided all the accounting, record-keeping and banking functions required to carry on business. The owner companies paid Key a fee for these services of 2½% of the gross monthly billings to tenants, together with an additional amount in respect of commercial space. Mr. Krauel said in his evidence that before 1990 the companies used a very simple form of management agreement, and that it was the advent of GST, among other things, that caused the organization to revise the form of agreement that it used. He said:

A.         When GST came on we had numerous discussions with our accountants and the issue of agency came up, and that there was the potential that if we didn't make an effort to document our agency relationships that Revenue Canada would in fact make the claims that we're here today, and that is that Key Property was in fact the employer and providing a service for these other companies, as opposed to Key Property was merely a convenience and an agent for the owners.

Q.         And that is the reason why the agreement was put in place?

A.         That is the reason why the document that we had traditionally was redrafted.

            And so I would say today it is - - it's an effort to document the agency relationship as well as satisfy the concerns of an insurer when we have a slip and fall.                                                               (Transcript, page 16)

[6]      The Agreement is a lengthy one, and much of it is not relevant to the issues that I have to decide. The following are those parts of it that might be thought to shed some light on the issue "who employed the superintendents and the maintenance workers?".

THIS MANAGEMENT AGENCY AGREEMENT made this 1st day of October, 1990,

B E T W E E N:

WRENLON DEVELOMENTS LIMITED

a company incorporated under the laws of the Province of Ontario and having its head office at the City of London, in the County of Middlesex,

hereinafter called "Owner"

OF THE FIRST PART

- and -

KEY PROEPRTY MANAGEMENT CORPORATION

a company incorporated under the laws of the Province of Ontario and having its head office at the City of London, in the county of Middlesex,

hereinafter called "the Agent"

OF THE SECOND PART

WHEREAS the Agent has represented to the Owner that it is engaged in the business of real property management and has acquired expert knowledge in this field;

AND WHEREAS the Owner, acting upon the representations aforesaid and placing a special reliance, trust and confidence in the ability and expertise of the Agent with respect to the business of real property management, desires to place the management of those premises municipally known as 955 Wonderland Road, London, Ontario (hereinafter called "the Premises") in the care of the Agent in accordance with the provisions hereof;

NOW THEREFORE THIS AGREEMENT WITNESSETH THAT, in consideration of the Fee herein provided for and the mutual covenants contained herein, THE PARTIES HERETO AGREE AS FOLLOWS:

PART 1: DEFINITIONS

1.01      In this Agreement the capitalized terms are defined terms and shall have the following meanings:

...

(c)         "Landlord" means the Owner, or the Agent if, as and when directed by the Owner to enter into Leases with Tenants;

PART 2: APPOINTMENT OF THE AGENT

2.01      The Owner hereby appoints the Agent as its exclusive agent, and the Agent hereby accepts such agency appointment, to manage and administer the Premises on behalf for the Owner in accordance with the provisions hereof.

PART 4: FEE

4.01      In additional (sic) to other amounts stipulated in Part 5 of this Agreement to be paid or reimbursed to the Agent by the owner, for the professional management agency services performed by the Agent under this Agreement, the Owner shall pay to the Agent, by way of remuneration, a monthly net Fee equal to two and a half (2½%) percent of gross monthly billings to Tenants, including, without limitation, minimum rents, additional rents, recharges, adjustments and utility and service charges (plus any applicable taxes) with respect to the Premises. The Owner shall pay to the Agent the monthly Fee on the last business day of each month of the Term of this Agreement.

4.02      For any and all commercial leasing services performed by the Agent under this Agreement, and unless otherwise mutually agreed upon, the Owner shall pay to the Agent a Leasing Fee Commission equal to the greater of 15% of the average year's net rent or $2.00 for each square foot of area leased by the Agent on the Owner's behalf. The Owner shall pay to the Agent the Leasing Fee Commission as stated herein on the earliest of the day the area leased by the Agent is occupied by the Tenant or the day the Lease is executed by both Landlord and Tenant or the Lease Commencement Date as contemplated by the Agreement to Lease.

PART 5: DUTIES OF THE AGENT

5.20      The Agent shall, upon demand;

(a)         where applicable, administer the payroll (based on salary scales and wage structures dictated or approved by the Owner) for all employees of either the Owner or the Landlord provided for herein and/or in budgets approved by the Owner including, without limitation, the preparation of all payroll documents, entering payroll accounts in proper books of entry, disbursing payroll funds, making necessary deductions for income taxes, unemployment insurance hospital insurance and pension plans and other deductions authorized by or required to be made by virtue of any governmental regulations or otherwise in respect of the payment of such employees (and remitting the same) and preparing or having prepared and filing or having filed all necessary government returns relating to the aforementioned deduction, it being agreed and understood that the Agent shall have the sole right to hire and discharge as the Agent may see fit;

(b)         establish and maintain suitable records and systems to handle and shall handle all billings to Tenants, including without limitation common area maintenance and operating expense re-charges and adjustments, heating and air conditioning and other utility or service charges, supervision, realty taxes, and any other payments which, by the terms of a Tenant's Lease or other enforceable contract are to be collected as a part of or in addition to rents or otherwise on a periodic or intermittent basis;

(c)         in accordance with the provisions hereof, handle all banking necessary and/or desirable for the due performance of it accounting and administrative functions hereunder and for the receipt and disbursement of all monies of either the Owner or the Landlord required to be attended to by the Agent under this Agreement.

5.21       The Agent shall be responsible for cash balances held by the Agent for the account of either the Owner or the Landlord from time to time during the course of each month and from month to month during the Term of this Agreement.

5.22       The Agent acknowledges that all monies received by the Agent pursuant to any of the obligations provided for herein or otherwise for the account of either the Owner or the Landlord shall be received by the Agent and held by the Agent for the benefit of the Owner. All such monies will be accounted for and will be disbursed as provided for herein or otherwise at the direction and for the benefit of the Owner or remitted to or to the direction of the Owner in accordance herewith.

5.35      (a)         the Agent shall, subject to the approval of the Owner, contract, purchase or otherwise arrange for all personnel and labour required for the operation and maintenance of the Premises, and the Agent shall use its best efforts to ensure that Common Areas and equipment are operated, maintained and kept in repair in conformity with the Landlord's obligations to the Tenants of the Premises;

(b)         the Agent shall contract, purchase or otherwise arrange for the making of all repairs to the Premises that are the Landlord's responsibility and for alterations and redecoration which may become necessary or desirable in keeping with the policies from time to time established by either the Owner or the Landlord, and shall use its best efforts to cause all things to be done with respect to the Premises and that the Agent shall deem necessary to comply with any and all regulations of any governmental authority having jurisdiction over the Premises.

(c)         the Agent shall contract, purchase or otherwise arrange for the Common Areas of the Premises to be kept clean and reasonably free from snow and ice and for any landscaping and other amenities on the Premises to be maintained, repaired or replaced as required.

(d)         the Agent shall generally contract, purchase or otherwise arrange for all things necessary for the proper and efficient management, operation, maintenance and repair of the Premises and for the performance of every other act whatsoever in or abut the Premises to carry out the intent of this Agreement. Major expenditures shall be referred to the Owner for prior approval.

5.36      At the expense of the Owner, the Agent shall recommend adequate security for the physical protection for the Premises.

5.37      The Agent shall contract, purchase or otherwise arrange for all services, materials and supplies required in performance of its duties and responsibilities hereunder, including, without limitation, all stationery, invoices, accounting books, general office supplies and equipment, and all indoor and outdoor cleaning and maintenance materials, equipment and supplies. All costs of such services, materials, equipment and supplies shall be paid for or reimbursed to the Agent by the Owner in accordance with the budget prepared by the Agent and approved by the Owner.

5.38      Any major contact for services, materials, equipment or supplies shall be approved by the Owner.

5.39      Notwithstanding that major expenditures shall be referred to the Owner for prior approval, in the event that any work is of an emergency nature or action is urgently required at times when the authorized representatives of the Owner cannot be reasonably located for the purpose of giving approval or failure to do any work or take any action might expose either the Owner or the Landlord or the Agent in its capacity as manager to penalties or other liability, the Agent is hereby duly authorized and instructed to institute whatever reasonable action is deemed urgently necessary for the protection and preservation of the Premises or to protect the Owner, the Landlord and/or the Agent from exposure to any penalty or liability whatsoever.

5.40      With the intent that the monthly Fee stipulated in Part 4 of this Agreement shall be fully net to the Agent, the Owner shall (a) reimburse to the Agent all costs and expenses whatsoever, howsoever or whensoever suffered or incurred by the Agent hereunder on a monthly basis as provided herein, or (b) where the Agent acts as Landlord, authorize the Agent to recharge (and use its best efforts to collect from) its Tenants proportionately so much of such otherwise reimbursable costs and expenses as may be permitted under the provisions of the respective Leases.

[7]      A careful reading of these provisions leads me to conclude that they are not necessarily inconsistent with the position of either the Appellant or the Respondent. Key could have fulfilled its obligations to the owner companies in respect of the provision of the range of services provided by the superintendents, and by the maintenance workers, by hiring its own employees and providing services, or by hiring and supervising employees of the owner companies as their agent. If it did the former, then it would have been entitled to recover from the owner the full amount of the salary and other payroll costs related to those employees, under paragraph 5.40 of the Agreement. If it did the latter, then it would have been required under paragraph 5.20 to pay the salary out of the funds of the owner company that it held under the Agreement, and to administer the payroll and make the remittances for payroll deductions as agent of the owner. Counsel for the Respondent suggested in argument that if Key were intended to have the authority under the Agreement to hire employees for the owner companies as their agent, then paragraph 5.38 would have included contracts of employment among those major contracts that require specific approval of the owner. However, it would be equally logical to infer that if Key were not intended to have the authority to hire superintendents as employees of the owners then there would not be any reason to provide for it to administer a payroll for the owner companies. There is nothing in the evidence to suggest that the owner companies had any employees other than the superintendents. In short, the written contract does not resolve the issue.

[8]      The other evidence that the Respondent relies on consists of three letters written on the letterhead of Key and signed on behalf of Key by three different property managers in its employ. They are all written to confirm terms of employment that had previously been agreed upon orally. The attachments to the letters include an agreement as to salary in one case and a rent increase notice in the case of a superintendent who was being moved from one building to another. None of these documents would reveal to the reader that the employment contract in question is not with Key, but with another company whose name does not appear anywhere in the letter or the attachment. Like the Agreement, these documents are not inconsistent with either theory of the case. An agent may contract on behalf of a principal whose existence is not revealed to the other party.[2] I was not referred to any authority that excepts contracts of employment from this general principle, nor have I been able to find any.

         

[10]     Nor do I find much assistance in the extracts from the Appellant's accounting records that were entered into evidence. Mr. Krauel explained in his evidence that the Appellant ran the payrolls for all Mr. Graat's companies because it was much more cost effective than having each of them do it separately. The payroll cost of each company was then charged to it by a journal entry. I do not consider this evidence to negate the possibility of the employees being employees of the owner companies. Whether the Appellant was paying the superintendents as agent of the owners from the funds it held on their behalf, or paying them as their employer and then recovering the cost from the funds of those owner companies that it held on their account under the Agreement, exactly the same financial result would be arrived at.

[11]     The manner in which the notional rent for the apartments occupied by the superintendents is recorded in the accounts does lend some support to the Appellant's case, however. For each building, a notional rent was established for the apartment assigned for occupation by the superintendent. The superintendents paid no rent, but their right of occupancy formed part of their remuneration. This was recorded each month in the books of account of each owner company by a credit to the rental revenue account and a debit to the superintendent expense account. As Ms. Woodyard quite correctly pointed out in argument, the right of occupancy of those apartments was a right of the owners of the buildings, not of the Appellant, and it passed directly from the owner companies to their superintendents. The Minister's assessment was based on the theory that that right of occupancy was bartered to the Appellant as part of the consideration for services of the superintendents that the Appellant provided to them, and was then provided to the superintendents by the Appellant. I can find nothing in the evidence to support that theory, however.

[12]     The remaining evidence on this issue is the testimony of Mr. Krauel. He said that in the fall of 1990 when preparing for the introduction of the GST, one of the concerns of the Graat group of companies was to ensure that the superintendents were employed by the owner companies and not by the Appellant, so that there would not be a taxable transaction for services of the superintendents between the Appellant and the owner companies and that the Agreement was written with that consideration in mind. My understanding of his evidence was that he and the group's accountants drafted the document, which may explain why it leaves as much doubt as it does on this issue. Nevertheless, Mr. Krauel is the Executive Vice-President of each of the corporations. He is in a position to know what they intended, his evidence on that point was clear, and it was not shaken on cross-examination. I conclude that the superintendents were employed by the owner companies, and that the Minister was wrong to assess GST on the basis that the Appellant provided their services to the owner companies. As a result, the issue as to barter of the right to occupy the superintendents' apartments does not arise.

[13]     I turn now to the issue of the employment of the maintenance workers. I do not consider their situation to be at all akin to that of the superintendents. The superintendents each have a defined job for one owner corporation. There is no uncertainty as to where they will work or what they will do in any given time period; their jobs have continuity. I am not prepared to accept that the Appellant, as agent, engaged each of the maintenance workers as a less than full-time employee of each thirty or more owner corporations, in circumstances where neither the agent nor the principals could say with any certainty at the beginning of any given week which company would employ the worker during that week, or when, or for how long. There is simply too much uncertainty about all of these matters to characterize the relationship between the workers and the various owners as thirty or more separate contracts of employment. The Minister was correct to assess the Appellant in respect of the provision of the services of the maintenance workers to the owner companies.

the input tax credit issue

[14]     The required conditions precedent to claiming ITCs under the Act are set out in paragraph 169(4)(a):

169(4) A registrant may not claim an input tax credit for a reporting period unless, before filing the return in which the credit is claimed,

(a)         the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed;

The information prescribed is found in the Input Tax Credit Information (GST/HST) Regulations[3] (the Regulations). The amount of information that a registrant must obtain in support of a claim for an ITC under these Regulations increases as the consideration for the supply increases, and the requirements at each level are quite specific. Counsel for the Appellant seemed to take the position that the oral evidence of Mr. Krauel should be an adequate substitute for compliance with the specific requirements of the Act and the Regulations. I reject any such proposition. It is well known that any value added system of taxation is potentially vulnerable to abuse, and that one of the most vulnerable aspects is in connection with claims for input tax credits. The whole purpose of paragraph 169(4)(a) and the Regulations is to protect the consolidated revenue fund against both fraudulent and innocent incursions. They cannot succeed in that purpose unless they are considered to be mandatory requirements and strictly enforced. The result of viewing them as merely directory would not simply be inconvenient, it would be a serious breach of the integrity of the statutory scheme.[4]

[15]     In assessing, the auditor made ten adjustments to the input tax credits claimed by the Appellant. One of those was in favour of the taxpayer, and so is not in issue. Two others were not addressed at all in either the evidence or the argument at trial. The other seven fall into four categories.

[16]     First are three amounts claimed as ITCs in respect of three payments made by the Appellant to the Toronto law firm Gardner, Roberts. That firm was acting for the plaintiffs in a class action in respect of a matter as to which Mr. Graat's group of companies had a sympathetic interest. Mr. Graat agreed to contribute to the cost of the class action, and three cheques were issued by the Appellant, payable to "Gardner, Roberts in trust" for that purpose. There is no evidence before me of any account being rendered to either Mr. Graat personally or the Appellant. The ITC was set up in the Appellant's books simply by a journal voucher for 7/107 times the amount of each cheque. The cheques were presumably in the nature of a retainer. Without an account from the firm there is no record of a commercial transaction, and certainly nothing to suggest that Gardner, Roberts had remitted GST of 7/107 of the amount of each cheque to the Receiver General for Canada. As there is no evidence of any transaction in respect of these three payments, it follows that the required information about the transactions was not obtained. The Appellant's claim for ITCs on these amounts fails.

[17]     Two claims are in respect of GST paid for legal services provided by Cassels, Brock and Blackwood to Mr. Graat. The accounts appear to have been paid by the Appellant as his agent, or as agent of one or more of his companies. The auditor rejected the claims with the notation "not in respect of commercial activity". The firm's accounts were entered into evidence, and they quite obviously are in respect of commercial activity. No other reason to deny the ITC was advanced by counsel in argument. The Appellant is entitled to the ITCs claimed.

[18]     The next ITC claim rejected was in respect of $472.50 paid for GST in connection with accounting services provided by Mary Krauel, C.A. for which she billed $6,750 to Ayerswood. The auditor's note says simply "not the recipient of the supply". Mr. Krauel testified that the work his wife did under this invoice was in fact done for the Appellant and charged to the Appellant as an expense. It was work in connection with a claim being pursued by Ayersworth against a supplier, but work that the Appellant was obliged to do for Ayersworth under its management agreement. It was simply an error on Ms. Krauel's part that the account was addressed to Ayersworth instead of Key. The extent of the error was simply to address the account to the principal with whom Key had contracted to do the work that it subcontracted to her. The Appellant is entitled to this ITC.

[19]     The final ITC claim in dispute is for $1,225. It relates to the settlement of a dispute between the Appellant and I.S.C. Realty Ltd. as to brokerage fees. The Appellant paid $18,725 to I.S.C. to settle this dispute and obtain a release from it of the claim. The auditor's note against this item is "insufficient documentation". The release and the cheque requisition appear to contain all the information that the Regulations require. I was not referred in argument to any specific deficiency. The Appellant is entitled to this ITC.

[20]     In summary, then, the Appellant is entitled to the following additional ITCs:

Cassels Brock account of 21 October, 1991	$203.00
Cassels Brock account of 25 May, 1992	15.59
Mary Krauel, C.A. account of 18 January, 1993	472.50
I.C.S. Realty Ltd. - 18 November, 1993	1,225.00
	$1,906.09

penalties

[21]     The Minister assessed penalties under subsection 280(1) of the Act in respect of all the additional tax assessed. Although that subsection is written in absolute terms, it is now well settled that a due diligence defence is available to the taxpayer. The additional items of tax that will remain payable following this judgment are those in respect of the services of the maintenance workers whom I have found to be employees of the Appellant, and about $700 in respect of the net disallowed ITCs.

[22]     In Heart Drop 2000 Distributors Inc. v. The Queen,[5] Miller J. considered the availability of the due diligence defence in circumstances where the Appellant did not collect and remit tax on certain transactions because it believed that the supplies in question were zero-rated. He concluded that when considering the penalty aspect of the case the relevant inquiry is as to whether the Appellant made an honest mistake. He asked the question, rhetorically, "How can the law insist the taxpayer pursue a certain course of action which the taxpayer legitimately believed it was not required to pursue?". I agree with this approach to subsection 280(1). An honest belief that a transaction is not subject to tax, if it is reasonably held, equates to due diligence.

[23]     Mr. Krauel testified that the intention of the companies was to create a relationship of employer and employee between the maintenance workers and the various members of the corporate group for whom they did work. They wrote the form of contract with that object in mind. I have no doubt that he believed that it had accomplished what was intended. Was this belief reasonably held? I think it was. The question whether the Appellant or the owner companies employed these individuals is one of law. So far as I can tell from the evidence before me, the Minister raised this with the Appellant for the first time in a letter dated November 19, 1993 from Mr. Turgeon, the auditor, to Mr. Krauel. The paragraphs relevant to this issue read as follows:

In addition, we found that Key Property Management Corporation was making charges to related persons for various labour services in connection with the operation of their residential and commercial rental properties. The services provided included property supervision, marketing and maintenance. The charges for same were being made exempt of tax, in error.

You are required to collect GST at the rate of 7% calculated on the amount charged for the supply of labour services provided exclusively in the operation of commercial properties. The registrant acquiring such services is eligible for an input tax credit for the GST so charged.

With respect to labour services supplied in the operation of residential properties, you are required to collect tax at the rate of 7% calculated on the fair market value of those services. The registrant acquiring such services is NOT eligible for an input tax credit for the GST so charged.

...

The issues and concerns described above represent only the major findings of our recent audits. Other findings were detailed in the Statements of Audit Adjustments and working papers provided to you at the time of audit. Also, please be aware that the above comments are based upon an interpretation of the current GST legislation and administrative procedures; any changes to that legislation or those procedures may change the validity of the information provided or the comments made.

You should also be aware that an interpretation does not constitute a ruling. Consequently, the above comments are not to be considered binding upon the Department of National Revenue in respect of any particular situation.

If you should have any questions with respect to the above or any other GST matters, please contact this office.

Sincerely,

"D. Turgeon"

CMA, Excise Auditor.

[24]     Clearly, the parties disagreed as to exigibility of tax on the cost of the maintenance workers. It is suggested that, at minimum, the Appellant was bound at this point to take legal advice. I do not agree. The disagreement was not one that was susceptible of resolution simply by taking advice. It is a matter of record in the Court that in November 1993, the Minister assessed the Appellant for GST for the period January 1, 1991 to September 30, 1991, that the assessment was appealed, and that the appeal was settled by the parties in March 2000.[6] This appeal represents the first opportunity since then for judicial resolution of what is clearly a genuine dispute as to the application of the Act to these facts. Although the Appellant has succeeded only in part on the labour issue, there is nothing in the evidence from which I could conclude that it was not reasonable for it to believe in the correctness of its position with respect to the maintenance workers as well as the superintendents. It has brought the matter on for resolution by the Court without delay. This satisfies the requirements of due diligence.

[25]     Evidently the Appellant made some claims for ITCs to which it was not entitled. In the context of the volume of business carried on by the Appellant, and considering the extent to which the Appellant has succeeded here in respect of ITCs that the Minister disallowed, they are far from egregious as to either their nature or their quantum. The evidence shows that the Appellant took appropriate steps to train its staff and to provide them with a manual to guide them in recording and reporting transactions properly for purposes of the Act. The few errors made were made in spite of due diligence on the Appellant's part, not for lack of it.

[26]     The appeal is allowed. The assessment is referred back to the Minister for reconsideration and reassessment on the basis that:

(i)       Mr. Robert Morrison is an employee of Ayerswood Development Corporation;

(ii)       the superintendents are all employees of the owner companies;

(iii)      the maintenance workers are all employees of the Appellant;

(iv)      the Appellant is entitled to additional input tax credits in the amount of $1,906.09; and

(v)      the Appellant is not liable to a penalty under section 280 of the Act.

If the parties are unable to agree as to costs, I shall hear submissions on a date to be fixed by the Registrar.

Signed at Ottawa, Canada, this 12th day of March, 2004.

"E.A. Bowie"

J.T.C.C.

CITATION:

2004TCC210

COURT FILE NO.:

2001-880(GST)G

STYLE OF CAUSE:

Key Property Management Corporation and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

April 24, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:

March 12, 2004

APPEARANCES:

Counsel for the Appellant:

David C. Nathanson, Q.C. and Adrienne K. Woodyard

Counsel for the Respondent:

Peter M. Kremer, Q.C. and Rosemary Fincham

COUNSEL OF RECORD:

For the Appellant:

Name:

David C. Nathanson, Q.C.

Firm:

McDonald & Hayden

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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