BETWEEN:
and
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Appeal heard on February 2, 2007, at Edmonton, Alberta
Before: The Honourable Justice B. Paris
Appearances:
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JUDGMENT
The appeal from the reassessment made under the Excise Tax Act which bears number 10BT-GB0425-1175-8423 and is dated November 18th, 2005 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 19th day of March 2007.
BETWEEN:
WESTBOROUGH PLACE INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] The Appellant is appealing a reassessment dated January 23, 2004 made under Part IX of the Excise Tax Act (the "Act"), by which the Minister of National Revenue (the "Minister") made certain adjustments to the GST payable as reported by the Appellant for the periods ending between July 1, 2000 and February 28, 2003. As part of those adjustments, the Minister disallowed input tax credits ("ITCs") of $41,361 on the basis that the Appellant failed to obtain the documentation required by subsection 169(4) of the Act to support the claim.
[2] The Appellant alleges that it met the supporting documentation requirements of subsection 169(4) and is entitled to the ITCs as claimed.
Facts
[3] The Appellant was incorporated to act as a trustee to hold certain real property on behalf of its two equal shareholders, Parkside Homes Ltd. ("Parkside"), and Baywood Property Management ("Baywood"), and to manage the development and sale of the property.
[4] Parkside and Baywood entered into a Joint Venture agreement with the Appellant and Winalta Ltd. on July 31, 2000 to develop a subdivision on the property the "Westborough Lands" - in Fort McMurray, Alberta. Parkside and Baywood agreed to acquire the Westborough Lands and to register title to the lands in the name of the Appellant as trustee, with Parkside and Baywood, each having an equal undivided interest in the Lands. Paragraph 4.01 of the agreement provided that:
The affairs of the Co-Owners relating to the Westborough Lands and the purchase Agreement shall be managed by the Trustee and the Trustee shall proceed to acquire the Westborough Lands, subdivide, service, develop and market the Westborough Lands all for the benefit of the Co-Owners.
In the same agreement, Winalta agreed to supply manufactured homes to be installed on the Westborough Lands lots.
[5] On August 1, 2000, Winalta entered into an agreement ("Services Agreement") with Pethridge Holdings Inc. ("Pethridge"), an unrelated company, by which Pethridge agreed to market homes on the Westborough Lands in return for fees of $2,500 for each home it sold.
[6] Over the next two and a half years Pethridge marketed and sold the homes and was paid commissions, although those commissions were paid by the Appellant rather than Winalta.
[7] Bernie Walsh, the manager of the Appellant and principal of Parkside, testified that the Appellant was responsible under the Joint Venture agreement for marketing the homes. He stated that upon the recommendation of Winalta, the Appellant hired Pethridge to market the units. He said that the Services Agreement with Pethridge was entered into by Winalta rather than by the Appellant because Winalta was more familiar with the marketing side of the business and because Winalta had recommended using Pethridge. Mr. Walsh testified that he considered the Appellant to be bound by the Services Agreement between Winalta and Pethridge and confirmed that the Appellant had paid the commissions to Pethridge. His evidence was not contradicted in cross-examination and I find it to be credible.
[8] Up to the beginning of September 2002 Pethridge had not been charging the Appellant GST on the commissions. At that point, Pethridge sent a memo to the Appellant's bookkeeper indicating that it wished to collect GST on the commissions that it had already received. Pethridge issued an invoice dated September 30, 2002 to the Appellant for GST of $39,641 payable on past commissions of $566,300. Although no GST number for Pethridge was shown on the invoice, Pethridge had provided a GST number by fax to the Appellant on September 11, 2002.
[9] Pethridge had also sent the Appellant an invoice on September 16, 2002 for the use of a van. Pethridge charged GST of $247.05 on that invoice. Pethridge sent two other invoices, both dated January 17, 2003, for commissions of $22,500 and GST of $1,575 on the sale of nine homes. The latter two invoices showed the GST number that Pethridge provided to the Appellant on September 11, 2002.
[10] All of the GST charged by Pethridge to the Appellant was paid upon receipt of these invoices. The Appellant's bookkeeper, Carol Marsh, testified that when she received the September 30, 2002 invoice she confirmed from the Appellant's accounting records that the amount of commissions previously paid to Pethridge was $566,300.00. She also produced a copy of a spreadsheet maintained by the Appellant during the period which listed the sale of each of the Westborough Lands homes. The spreadsheet listed unit numbers corresponding to each home for sale and showed the amount of the payment in respect of each unit made to Pethridge. Ms. Marsh said that these amounts were paid to Pethridge between the late fall of 2000 and the fall of 2002. The total of the commissions shown on the spreadsheet was $566,300.
[11] Ms. Marsh also testified that she called the Business Window Service at the Canada Revenue Agency ("CRA") in the spring of 2005, during the appeal process, and was told that the GST number she had for Pethridge was valid.
[12] Candy Ng, a GST appeals officer at the CRA, handled the Appellant's objection to the reassessment in issue. She stated that the ITCs of $39,641 (for the GST paid on the past commissions of $566,300) were denied at the audit stage because there was no GST number shown on the September 30, 2002 invoice from Pethridge. She did not explain why the ITCs in respect of the GST shown on the January 17, 2003 invoices were disallowed.
[13] At the objection stage, Ms. Ng concluded that the original GST number provided by Pethridge to the Appellant on September 11, 2002 was invalid. She obtained this information from a review of certain CRA computer files pertaining to Pethridge. Printouts of the files were entered as an exhibit. According to Ms. Ng, the printouts showed that on December 23, 2005, the Minister closed Pethridge's GST account and de-registered its GST number, retroactive to June 30, 2001.
[14] Ms. Ng also referred to a printout of the records of certain telephone calls made or received by the CRA concerning Pethridge. Ms. Ng said that she looked at the log of all telephone calls recorded for Pethridge in CRA's records and did not recall seeing any record of a call from Ms. Marsh in the spring of 2005. The complete log of telephone calls concerning Pethridge was not produced, however.
[15] Ms. Ng confirmed the reassessments against the Appellant on the basis that the GST number provided by Pethridge was invalid at the time the invoices described above were issued. She also said that she determined that the invoices from Pethridge did not provide sufficient details of the supplies made by Pethridge to the Appellant.
Issues
[16] Paragraph 169(4)(a) of the Act sets out the requirements for claiming ITCs under the Act:
(4) Required documentation -- 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; . . .
[17] Section 3 of the Input Tax Credit Information (GST/HST) Regulations (the "Regulations") prescribes the information required by paragraph 169(4)(a) for claiming ITCs. The relevant parts of that provision read:
3. For the purposes of paragraph 169(4)(a) of the Act, the following information is prescribed information:
(a) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is less than $30,
(i) the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business,
(ii) where an invoice is issued in respect of the supply or the supplies, the date of the invoice,
(iii) where an invoice is not issued in respect of the supply or the supplies, the date on which there is tax paid or payable in respect thereof, and
(iv) the total amount paid or payable for all of the supplies;
(b) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is $30 or more and less than $150,
(i) the name of the supplier or the intermediary in respect of the supply, or the name under which the supplier or the intermediary does business, and the registration number assigned under subsection 241(1) of the Act to the supplier or the intermediary, as the case may be,
(ii) the information set out in subparagraph (a)(ii) to (iv),
(iii) where the amount paid or payable for the supply or the supplies does not include the amount of tax paid or payable in respect thereof,
(A) the amount of tax paid or payable in respect of each supply or in respect of all of the supplies, . . .
. . .
(c) where the total amount paid or payable shown on the supporting documentation in respect of the supply or, if the supporting documentation is in respect of more than one supply, the supplies, is $150 or more,
(i) the information set out in paragraph (a) and (b),
(ii) the recipient's name, the name under which the recipient does business or the name of the recipient's duly authorized agent or representative,
(iii) the terms of payment, and
(iv) a description of each supply sufficient to identify it.
[emphasis added]
[18] As the total amount paid for each of the supplies in issue was greater than $150, the prescribed information for claiming the ITCs is set out in paragraph 3(c) of the Regulations. The Appellant is required to have obtained this information at the time it applied for the ITC's.
[19] In this appeal, the Respondent says that the Appellant failed to obtain a registration number assigned under section 241(1) of the Act to Pethridge, and a description of each supply sufficient to identify it.
[20] On the first point, the Respondent alleges that the GST registration number obtained by the Appellant from Pethridge prior to claiming the ITCs was invalid because it had been cancelled retroactive to June 30, 2001, and therefore did not meet the requirements of section 3 of the Regulations.
[21] On the second point, the Respondent argues that the supporting documentation obtained by the Appellant prior to claiming the ITCs did not contain a description sufficient to identify each supply made by Pethridge. Counsel pointed out that the September 30, 2002 invoice simply states "GST amount regarding Westborough Place on $566,300", without giving a description of the supply or supplies or the date of the supply or supplies. The two invoices dated January 17, 2003 show unit numbers, customer names and amounts ($2,500) in respect of each customer along with a serial number and model number, but the Respondent says that the nature of the supply made by Pethridge to the Appellant is not evident. No submission was made with respect to the September 16, 2002 invoice.
[22] The Appellant argues that the CRA's own records show that the GST number for Pethridge was not canceled until December 23, 2005 and that it was valid up until that time. The Appellant says that the Minister was not entitled to cancel the GST number retroactively to June 30, 2001 because Pethridge was conducting business up to late 2003, and required the registration GST number at least until then. He refers to subsection 242(1) of the Act, dealing with the cancellation of GST registrations.
242(1) Cancellation [of registration] -- The Minister may, after giving a person who is registered under this Subdivision reasonable written notice, cancel the registration of the person if the Minister is satisfied that the registration is not required for the purposes of this Part. [emphasis added]
[23] The Appellant also contends that at the time it requested the ITCs it had documentation in its possession in addition to the invoices to make out a sufficient description of each supply made by Pethridge. It argues that the Services Agreement between Pethridge and Winalta showed that Pethridge was providing marketing and sale services for the Westborough Lands, and the Joint Venture agreement showed that the Appellant was responsible for arranging these services. In addition the spreadsheet prepared by the Appellant showed the particular sales made by Pethridge and the commission earned on each sale.
Analysis
[24] Since the assumption that the Appellant had not obtained a valid GST number for Pethridge was not made by the Minister until confirmation stage and was not made at the reassessment stage in this case, the onus falls on the Respondent to prove the invalidity of the GST number. Even if the Minister had made such an assumption at the reassessment stage, I would still have held that the Respondent bore the onus of proof in the matter because the validity of the GST registration number is a matter within the knowledge of the Minister, and is not something generally within the knowledge of a taxpayer. This therefore would be an exception to the general rule regarding the onus of proof in tax cases. (See Redash Trading Inc. v. The Queen, [2004] GSTC 82 and Calistar Construction Services Ltd v. The Queen, [2004] GSTC 88 (at paragraph 8)).
[25] In this case I am not convinced that the Respondent has shown, on the balance of probabilities, that the GST number assigned to Pethridge was invalid at the point the Appellant sent in its GST returns claiming the relevant ITCs.
[26] The witness presented by the Respondent, Ms. Ng, did not have anything to do with the de-registration of Pethridge and did not work in the GST registration area of the CRA. Her knowledge of events was limited to what she found in certain CRA computer files and there was no evidence led that she took any steps to certify the accuracy of the information shown in those files.
[27] The following evidence leads me to question either the accuracy of the information in the printouts, or the ability of Ms. Ng to interpret that information.
[28] According to Ms. Ng's review of the file printouts, the CRA received a call from a person by the name of Shaun Hodgson in relation to Pethridge's GST account on April 10, 2002. The record of the call read:
"Client states he sold the business but wishes to keep account open as he might be opening a new business"
[29] It appears to me that this entry could well relate to another GST account since elsewhere in the printout, Arlene Roth, a director of Pethridge, is shown as the sole contact person for Pethridge. Mr. Hodgson is not shown as a contact and his name does not appear anywhere else in the printouts. Furthermore, Pethridge did not cease business in 2002, but carried on business with the Appellant continuously up to early 2003.
[30] Ms. Ng also said that she did not recall seeing any record of a call from Ms. Marsh in the log of telephone calls received by the CRA Business Window Service concerning the Pethridge GST account. However, Ms. Marsh's evidence that she made such a call in early 2005 was not contradicted, and one would expect it to have appeared in the log when Ms. Ng made the printouts in January 2007.
[31] Even if the computer records presented in Court were accurate there was no evidence led to show that it was reasonable for the Minister to conclude that Pethridge's registration was not required for the purpose of the Act after June 30, 2001 and therefore that the Minister was entitled to de-register Pethridge retroactively to June 30, 2001. The evidence showed that Pethridge, in fact, was still carrying on business and collecting GST as late as 2003, and therefore that it was required to be registered for the purposes of the Act at least until that point. The fact that Pethridge was carrying on business after 2001 was known to the CRA in late 2004 when Ms. Ng was conducting her review of the Appellant's objection. In this light it is hard to understand how the Respondent can take the position that the purported retroactive de-registration of Pethridge was reasonable or justified or that the Minister could have been satisfied that the registration was not required after June 30, 2001 within the meaning of subsection 242(1) of the Act.
[32] The next question to be decided is whether all of the supporting documentation obtained by the Appellant contained a description of each supply provided by Pethridge sufficient to identify it. (Counsel for the Respondent conceded that the required information could be contained collectively in more than one document).
[33] The definition of "supporting documentation" in the Regulations reads as follows:
"supporting documentation" means the form in which information prescribed by section 3 is contained, and includes
(a) an invoice,
(d) a debit note,
(e) a book or ledger of account,
(f) a written contract or agreement,
(g) any record contained in a computerized or electronic retrieval or data storage system, and
(h) any other document validly issued or signed by a registrant in respect of a supply made by the registrant in respect of which there is tax paid or payable;
[34] The definition of a "supporting documentation" is not exhaustive, as is seen by the use of the word "includes" before the listing of the various types of documents in paragraphs (a) to (h). However, the reference in paragraph (h) to "any other document validly issued or signed by the registrant [...]" demonstrates that in order to qualify as supporting document, it must originate from or be signed by the registrant.
[35] Therefore, the spreadsheet prepared by the Appellant' bookkeepers to record the sales made by Pethridge and the commissions paid to it does not qualify as supporting documentation within the meaning of the Regulations, and the information therein cannot be taken into account in assessing whether the Appellant had information sufficient to identify each supply made by Pethridge.
[36] On the other hand, I am of the view that the Services Agreement between Winalta and Pethridge constitutes supporting documentation in this case. Although the Appellant did not explicitly argue that Winalta was acting as the Appellant's agent when it entered into the agreement with Pethridge, I think that this is the only logical conclusion that can be drawn from the evidence. Winalta and Pethridge signed the Services Agreement on August 1, 2000, the day after Winalta signed the Joint Venture agreement. Under the Joint Venture agreement the Appellant was solely responsible for marketing the homes in the Westborough Lands project. Winalta would have known that the Services Agreement dealt with matters for which the Appellant was responsible. Also, the Appellant made all the payments to Pethridge that were required under the Services Agreement, in furtherance of its obligation under the Joint Venture agreement to market the homes. The payments to Pethridge were made at the rates set out in the Services Agreement. Finally, it was Mr. Walsh's evidence that the Appellant considered itself to be bound by the terms of that agreement. Overall it is reasonable to conclude that the Appellant consented to Winalta acting as its agent in entering into the agreement with Pethridge and that the agreement affected the Appellant's legal relations. The nature of the relationship between the Appellant and Winalta in this regard falls within the definition of "agency" found in Bowstead and Reynolds on Agency (16th edn. 1999):
[...] the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties and the other of whom similarly consents so to act or so acts.
[37] The fact that the Appellant may have subsequently decided to deal directly with Pethridge is not inconsistent with Winalta having acted initially as the Appellant's agent for the purpose of entering into the Services Agreement.
[38] The Services Agreement therefore is a "document validly issued or signed by a registrant (Pethridge) in respect of a supply made by the registrant in respect of which there is tax paid" as set out in paragraph (h) of the definition of "supporting documentation" set out earlier in these reasons.
[39] I also accept that the memo forwarded by Pethridge to the Appellant in early September 2002 setting out that GST was payable on the commissions, and the memo showing Pethridge's GST number were both supporting documents provided by Pethridge to the Appellant in respect of the supplies made by Pethridge.
[40] Finally, it is evident that the invoices themselves issued to the Appellant by Pethridge were also supporting documentation within the meaning of the ITC information Regulations.
[41] I find that all of the supporting documentation taken together provided a description of each supply made by Pethridge to the Appellant sufficient to identify the supply. The supporting documentation shows that Pethridge supplied sales and marketing services to the Appellant relating to the Westborough Lands subdivision for the consideration set out in the Services Agreement. It is also clear that the supplies made by Pethridge were the marketing and sale of units in the project. This, to me, is a sufficient identification of each supply made by Pethridge.
[42] The remaining invoices contain more extensive information concerning the supplies made by Pethridge than the September 30, 2002 invoices, and for that reason I find that they also contain a description of each supply sufficient to identify it.
[43] For all these reasons the appeal is allowed. Because the amount in dispute in the appeal is greater than $7,000, no costs are awarded.
Signed at Ottawa, Canada, this 19th day of March 2007.
"Brent Paris"
Paris J.
COURT FILE NO.: 2006-476(GST)I
STYLE OF CAUSE: WESTBOROUGH PLACE INC. AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Edmonton , Alberta
DATE OF HEARING: February 2, 2007
REASONS FOR JUDGMENT BY: The Honourable Justice B. Paris
DATE OF JUDGMENT: March 19, 2007
APPEARANCES:
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Counsel for the Appellant: |
Gordon D. Beck |
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Counsel for the Respondent: |
Chang Du |
COUNSEL OF RECORD:
Firm: MacPherson Leslie & Tyerman LLP
Edmonton, Alberta
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada